Contents

Marketplace Lending

Holding steady

Partnerships, ABS to help marketplace lending stabilise

The marketplace lending sector endured several tests to its model at the start of 2016, but managed to regain investor confidence by year-end, reflected in a resurgence of MPL ABS issuance. While 2017 could be defined by consolidation, partnerships and greater securitisation activity, questions remain over true lender status, regulatory oversight and how firms will adapt in a rising interest rate environment.

Amid a global slowdown at the start of 2016, marketplace lending suffered reputational damage from the proposed downgrade on the C notes of Prosper's CHAI securitisations and the Lending Club debacle. This caused investors to pull back and regulatory scrutiny to ramp up.

Ram Alhuwhalia, ceo of PeerIQ, notes that a lot has changed. "Since then, fortunately there have been many positive developments - including the US Treasury report, which was largely very positive on the sector, stating that MPL was helping expand access to consumers and wider areas of the credit spectrum. We then had the first triple-A rated student loan deal from SoFi rated by Moody's. After that, we saw a consumer loan deal from SoFi and this was followed by Marlette, a Jeffries deal of Lending Club loans, and Avant then followed close behind," he says.

He points out that the boost in securitisation activity seen in 2H16 was positive for the sector, with October being the largest ever month in terms of issuance of MPL ABS, with over US$1bn issued. The first rated securitisation of Lending Club loans also arrived at the end of the year, marking a turnaround in investor sentiment for the firm.

Alhuwhalia believes that 2017 will see more of the same. "We estimate about 50% growth in ABS issuance next year. Virtually every major platform generally accepts securitisation as a key pillar to their funding strategies and are developing repeat, standardised, issuance programmes. Over 50% of loans are now funded via securitisation," he says.

Vincent Basulto, partner at Richards Kibbe & Orbe, also points out that in terms of MPL deals completed, the first rated Lending Club deal - as well as being a signifier of renewed confidence in the platform - has significance for the unresolved debate following the Madden-Midland case. He says: "I actually expect a resolution on this in 2017 and I think it will be favorable one way or the other towards marketplace lending."

He adds: "Equally, platforms are addressing Madden and if you look, for example, at the latest LendingClub deal, just over 9% of loans were originated in states that are directly affected by Madden. This clearly shows LendingClub thinks a future outcome will be in its favour and that they think the Madden case isn't in its way."

In terms of legislation, uncertainty still abounds about which agency will regulate the sector, although this might not be a totally negative development. Alhuwhalia observes: "More recently, the Fed acknowledged that marketplace lending is expanding access to credit. The SEC held a FinTech forum that also was constructive on non-bank lending and its role in capital formation. Now there is a question about jurisdiction and who will regulate the space, which isn't necessarily a bad thing."

Furthermore, Basulto believes that the regulatory pendulum could be swinging back the other way. He says: "Regulatory uncertainty will continue, but it may now be in the other direction from the angle of what regulation will be repealed, not what new regulations will be put in place. Dodd-Frank could be rolled back to an extent and if this - along with the related risk retention rules - is rolled back, then that could be a real boost for marketplace loan ABS in 2017 and ahead. Securitisation is expensive, especially for small platforms; if it can be made more affordable, which the elimination of risk retention or other reductions of Dodd Frank might do, then that would only be a positive thing for marketplace loan ABS."

This year could also see platforms further evolve towards becoming balance sheet lenders enter into bank partnerships or perhaps even become banks. In the UK, one of the largest platforms, Zopa, has applied for a banking license - although other platforms have not yet indicated similar intentions.

Semir Desai, co-founder and director of Funding Circle, says that the banking model would not be something that would work for the firm. "We've not got any plans to apply to become a bank. We believe our model is a more efficient way to get funding to small businesses. It is working well, without the need to become a balance sheet lender or take depository funding."

He continues: "Banks are quite rightly required to hold certain levels of regulatory capital. We do not take deposits and the duration of the loans we make is perfectly matched."

Desai does, however, believe that the sector could shrink, with fewer players being involved. He says: "In terms of the rest of the sector, we expect liquidity to become concentrated with a smaller number of platforms."

In the US, the OCC has indicated it will start allowing firms to apply for bank licenses, although Basulto doesn't believe that this would be the right move for marketplace lending firms. "Marketplace lenders have a whole set of different advantages and disadvantages. I think it could prove very difficult and challenging for many platforms to become banks. Equally, if guidance improves for marketplace lenders it might obviate the need for them to become banks," he says.

Alhuwhalia adds that the OCC charter does not solve online lenders' biggest challenge. He says: "The only real advantage of the OCC charter is that it offers pre-emption from state usury laws and instead comply with federal ones. The charter does not grant license for a FinTech to take deposits. The OCC bank charter will not address the number one issue for marketplace lenders - liquidity and stable capital access."

He agrees, however, that globally partnerships will become more common. "I expect to see many more bank and non-bank partnerships, and a focus on data integrity, risk management and investor confidence to win over these highly regulated, compliance-oriented funding partners."

Basulto concurs that partnerships will be likely and that they could benefit both sides. He says: "What we might see instead is the development of more partnerships between platforms and banks. Platforms could benefit from the capital advantages of partnering with a bank, while not needing to fully transform. Some of the larger platforms might benefit from branching out into banking models, those that have the scale, but otherwise the smaller ones might not benefit so much."

Whichever route firms take, 2017 will be defined by platforms honing in on stable, reliable sources of capital funding, with securitisation playing a major role, according to Alhuwhalia. He concludes: "The focus for 2017 will continue to be platforms seeking to find low-cost, stable funding sources. Platforms are starting to realise that the end buyer of the loans are the most important customers and these are ultimately buyers of the securitised loans, especially when they have now realised that securitisation is such an important source of capital for firms."

RB

Secondary markets

Euro secondary sporadic

Activity remains sporadic across the European securitisation secondary market.

ABS/MBS continues to be as quiet as it was into year-end with only a few flash BWICs and patchy bilateral trading in major names being seen over the past week. However, positive sentiment and pent-up demand mean that spreads remain flat to slightly narrower in the year so far.

CLOs have seen more activity since the start of the year than ABS/MBS, but levels are still off last year's opening sessions. Nevertheless, a strong buying bias has seen secondary spreads tighten in 2017, most strongly in 2.0 mezz. However, a 24 line euro CLO BWIC yesterday did yield 15 DNTs, though it's not yet clear whether that was a result of a lack of bids, unfortunate timing (with many European investors only returning to their desks post-holidays yesterday) or overly optimistic reserves.

There is currently only one European BWIC on the schedule for today - a 1.0 mezz CLO list due at 15:00 London time. The five line €16.7m auction comprises: CELF 2005-2X D, EUROC V-X E, OCI 2007-1X E, STRAW 2007-1X C and WODST I E.

None of the bonds has traded on PriceABS in the past three months.

Secondary markets

US CLOs picking up

Activity in the US CLO secondary market is beginning to pick-up for 2017.

"Today looks like we're finally going to get busy," says one trader. "Everyone is now back at their desks, dealt with year-end marks and so on and secondary supply is starting to build."

The trader continues: "Action today is lower down the capital stack with close to 30 double-Bs from two sellers and some large equity pieces from another. Given the tightening we've seen so far this year away from BWICs and the widespread desire to buy in assets these lists should all trade well with good double-B names now around the mid to low 600s DM."

At the same time, there is also a small collection of Trups CDO first pays in for the bid today. "Supply in the Trups CDO market is always welcome, but given current levels of demand they're likely to trade very well too," says the trader.

As noted above there are three BWICs on the US CLO calendar for today so far. The chunkiest is a four line equity auction due at 10:00 New York time.

The $46+m list comprises: OFSBS 2013-5A SUB, SHACK 2012-2A INC, SNDPT 2013-2A SUB and ZCCP 2015-1A SUB. Only SNDPT 2013-2A SUB has covered on PriceABS in the past three months - last doing so at M60S on 13 December.

The Trups CDO auction is due at 10:30 and involves three tranches now one line item has traded ahead (TRAP 2004-7A A1 covering in the mid-80s). Now totalling $63.71m of original face the remaining line items are: ALESC 9A A1, TRAP 2005-9A A1 and USCAP 2006-5A A1.

None of the bonds has covered on PriceABS in the past three months.

Secondary markets

Euro CLOs start strongly

The European CLO secondary market has had a busy start to 2017 backed by strong price moves.

"Since the start of the year CLOs have shifted materially tighter across the board," says one trader. "That move is predominately a reflection of improving levels in other asset classes and most noticeable in triple- to single-Bs."

The trader continues: "We've done quite a lot of flow business for the month already, predominantly in 2.0s. Meanwhile, 1.0s have straight-line rallied to close to par across the capital structure, with the exception of some distressed double-Bs."

Secondary has been the main focus so far this year, but there is increasing attention being given to primary. "New issues will be limited because of the current scarcity of loans, though that should pick up a bit in February," the trader says. "So refis will dominate primary for now and there's still plenty left to be done with a huge swathe of 2013/4 deals able to refi that haven't been touched yet."

There is currently one European CLO BWIC on today's schedule - a three line €7.5m double-B list due at 14:30 London time. It consists of: AVOCA 10X ER, OHECP 2016-5X E and SPAUL 6X D.

Only AVOCA 10X ER has covered on PriceABS in the past three months - at 99.25 on 10 January having traded early off a list due on 11 January.

Secondary markets

US CLOs on the up

Activity and prices are on the up in the US CLO secondary market this week.

"There's very a positive tone and everyone is bidding up paper," says one trader. "That's particularly the case in double-Bs, but there is strength across the capital structure."

The trader continues: "People are looking to test the strength of the bid, which appears to be a deep one. As a result, there have been a lot of BWICs announced in the last 24 hours or so, but they're trading very well."

Consequently, the trader adds: "Secondary prints are well inside where primary left off at the end of last year. So when new issuance comes back the expectation is that it will be much tighter than previously too."

There are nine BWICs on the US CLO calendar for today so far. The largest is a ten line $36.145m double-B list due at 10:30 New York time. It comprises: AVERY 2013-2A E, AVERY 2014-5A E, AVOCE 2014-1A D, BABSN 2014-IIA E, BALLY 2014-1A D, BSP 2014-VA E, HLA 2014-3A E1, HLA 2014-3A E2, OCT17 2013-1A E and STCR 2015-1X E.

Only BALLY 2014-1A D has covered on PriceABS in the past three months - at 87H on 9 December.

Fair value credential introduced

A new credential intended to enhance the quality, consistency and transparency of fair value measurement results in financial reporting has been launched. The Certified in Entity and Intangible Valuations (CEIV) credential is a result of collaboration between the American Institute of CPAs (AICPA), the American Society of Appraisers (ASA) and the Royal Institution of Chartered Surveyors (RICS).

Certified Public Accountants (CPAs), along with other financial professionals, are now able to undertake training requirements for the CEIV credential and they will be able to take the associated exam in the near future. Financial professionals who obtain the credential will be required to follow uniform guidance on how much documentation is necessary to support their fair value measurement results in company financial statements for entity and intangible asset valuations.

"Holding the CEIV credential ensures that those conducting fair value measurement have the necessary training, qualifications, experience and expertise to perform this type of work," says Eva Simpson, senior technical manager, Association of International Certified Professional Accountants.

The guidance associated with the CEIV credential defines the level of documentation needed to make it easier for investors, auditors and regulators to understand how fair value measurement is used to determine values of businesses and intangible assets. The credential also requires regular monitoring of credential holders to ensure they are following the guidance properly.

The credential is aimed at a wide spectrum of market participants, including valuation firms, accountants and auditors. MBAs, mathematicians, economists, engineers and other finance professionals who meet the specified requirements will also be able to obtain the credential.

"Auditors and regulators have sometimes found it difficult to see how certain values in financial statements were determined using fair value measurement," says Susan Coffey, Association of International Certified Professional Accountants' evp for public practice. "The uniform guidance provided by the CEIV credential should make it easier for all parties to understand how fair value measurement was used to develop those values."

The ultimate aim of the CEIV credential is to enhance the consistency of valuation processes across global markets. While the CEIV is limited to valuation of businesses, business interests and intangible assets, AICPA has confirmed that it is working on a separate fair value credential that will focus specifically on financial instruments.

"Financial reporting is now a global function and there will be demand, both domestically and internationally, for the CEIV credential," says Simpson. "The uniform guidance and quality monitoring offered by the CEIV credential is unparalleled in the marketplace and valuation profession. It will ensure the consistency, quality and transparency of the work in fair value measurement undertaken by CEIV credential holders."

To obtain the CEIV credential, financial professionals must meet rigorous eligibility requirements determined by the three organisations in collaboration with other organisations that contributed to its development, including The Appraisal Foundation and the International Valuation Standards Council.

AC

Structured Finance

SCI Start the Week - 9 January

A look at the major activity in structured finance over the past seven days.

Pipeline
The first week of the year brought a return to life for the pipeline. There were two new ABS announced, as well as three RMBS.

¥40bn Driver Japan Six and US$810.39m Hyundai Auto Lease Securitization Trust 2017-A were the ABS. The RMBS were RUB7.4bn Mortgage Agent Vozrozhdenie 5, SapphireOne Mortgages 2016-3 (reoffer) and US$343.3m Sequoia Mortgage Trust 2017-1.

Editor's picks
Macy's, Sears closures affect CMBS: Macy's has revealed a list of 68 stores that it will close in the near term, while Sears has announced it will close 150 Sears and K-Mart stores. There are CMBS implications for both...
Slew of risk transfer trades close: A handful of capital relief trades closed in late December, including an unusual deal referencing a portfolio of auto loans. While this transaction was unfunded, the other deals involved the issuance of credit-linked notes...
NAIC designations for actual loss CAS: The NAIC has assigned designations to all of Fannie Mae's CAS risk transfer transactions for its 2016 filing year, except for two. It is the first time that actual loss CAS deals have received NAIC designations...
Cash versus synthetic weighed: Balance sheet securitisations - whereby balance sheet relief is achieved via true sale - are gaining traction in Europe (SCI 25 August 2016). The different motivations for executing a cash versus a synthetic capital relief trade were discussed recently at SCI's Capital Relief Trades Seminar...

Deal news
• Deutsche Bank is considering whether to exercise its option, as issuer, to redeem the Craft 2013-1 and Craft 2013-2 securities prior to their scheduled maturity date. Craft 2013-1 comprises US$840m floating rate notes due 2022 and Craft 2013-2 comprises €150m floating rate notes due 2022.
• Trustees of Arena 2012-I are seeking investor consent for early redemption of the A2 tranche. The bonds were publicly placed and pay a relatively high coupon of three-month Euribor plus 115bp (see SCI's new issuance database).
• Opus Bank has securitised US$509m of its multifamily loans through a Freddie Mac-sponsored 'Q-deal' securitisation. One class of Freddie-guaranteed notes was issued and purchased by Opus.
• Freddie Mac last month issued one last ACIS transaction of 2016. It was the second ACIS not linked to STACR debt note bonds and attracted a record number of reinsurers.

Regulatory update
• A meeting of the Basel Committee group of central bank governors and heads of supervision (GHOS), originally planned for early January, has been postponed. The Committee says that more time is needed to finalise the Basel 3 framework's final calibration, before the GHOS can review the package of proposals, although it expects to complete this work "in the near future".
• Securitisation of European SME loans would not necessarily lead to lower credit standards, according to the BIS. In a recent paper, analysts at the bank also suggest that while risk retention rules might be necessary for larger transactions due to the presence of moral hazard, such retention rules aren't necessary for smaller firms.

Capital Relief Trades

Green SRT emerging

The final panel at SCI's recent Capital Relief Trades Seminar struck an optimistic note regarding developments in new jurisdictions and asset classes. Indeed, 'green' lending is emerging as a consideration for some investors in the sector.

The European landscape as a whole has witnessed a boost in capital relief trade activity. According to Molly Whitehouse, vp at Mariner Investment Group, there has been an "uptick in issuance in Spain, France, the UK and Eastern Europe, with new players coming to the market, not just banks. Increasingly, tier one domestic lenders are recycling capital in core markets."

In terms of the Iberian region, Juan Carlos Martorell from Mizuho noted that SME loans are good candidates, reflecting the balance sheet of Iberian banks. Among those SME loans, he highlighted microloans and small and medium companies (with €1m-€10m loans) because of their higher RWAs.

Self-employed loans, auto loans and middle market loans are also gaining traction.

"Portfolios are very granular and there is complexity in populating the data. It requires deep credit analysis to understand the historical ODFs and LGDs, cure rates, expected loss projections etc," Martorell stated.

As to what an investor looks at when seeking new issuers, Whitehouse pointed to the underlying asset pools, bank motives (whether they have risk transfer or capital motivations) and the fact that IRB banks are in a better position to achieve a good rating. Meanwhile, Aidan McKeown of Magnetar stressed capital efficiency.

The panel concluded with a discussion of emerging new asset classes. Whitehouse highlighted 'green' SRT, whereby concepts like ESG and impact investing are integrated into SRT.

"Although today it may seem to be primarily of academic interest, the opportunity to incorporate conditionality and additionality - as they do in multilateral development lending - could be really catalytic for important climate investments," she explained. "Finding the right balance of requirements and incentives between banks and investors - this is the process of discovery that is happening right now."

In this vein, Mariner has explored incorporating conventional fossil fuel loans into portfolios, allowing banks to free up capital around their 'brown' legacy loan portfolios providing some of the capital can be redeployed into green lending.

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Capital Relief Trades

Record SRT deal launched

Further details have emerged about Grafton CLO 2016-1, Santander's largest post-crisis corporate loan significant risk transfer deal and its second largest synthetic securitisation (SCI 3 January). The £1.25bn six-year CLN has a three-year replenishment period and provides protection for the first 8% of losses in the underlying portfolio.

The deal is cash-collateralised. Steve Gandy, md at Santander Global Corporate Banking, notes: "Without cash collateral, we would be exposed to the counterparty risk of investors. So, in this case, we asked them to invest in cash. As a result, with cash collateral, we don't have to hold regulatory capital against the counterparty risk of the investors."

On the other hand, investors - confirmed as European asset managers - had the opportunity to invest in tradable securities, which explains why the deal was structured as a CLN and listed. At the same time, Gandy says: "Asset managers find it convenient to get exposure to the corporate loan market, since corporates don't usually allow them to participate in their revolving loan facilities and they generally don't have access to the loan syndication market."

Approximately 85% of the initial portfolio is concentrated in the UK, with the remainder split between the EU (13%), Switzerland (2%) and Australia (0.3%). The top five industries represented in the portfolio are business services (14%), retail (10%), beverage, food and tobacco (10%), hotel, gaming and leisure (6%) and construction and building (6%).

Rated by Moody's, the deal comprises four tranches: £962.5 of notes in relation to the 23%-100% senior tranche (rated Aaa); £118.75m of notes in relation to the 13.5%-23% tranche (Aa3); £68.75m of notes in relation to the 8%-13.5% tranche (Baa3) and £100m of first loss notes in relation to the 0%-8% tranche.

Pricing could not be disclosed, although the range has been confirmed in the very low double-digits.

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CLOs

Rated warehouses proliferating

CLO-like warehouse transactions are emerging as variations on traditional warehouse financing of CLOs (SCI 19 May 2016). Also called rated warehouses, they are structured to meet specific investor and arranger needs, while retaining many characteristics of the broadly syndicated loan or SME CLOs that they finance.

"Warehouse transactions are similar in purpose, but different in structure to typical warehouses. Like traditional unrated facilities, a warehouse transaction allows a CLO manager to acquire assets prior to closing of a conventional CLO, providing ramp-upflexibility," Moody's explains.

The agency adds: "Furthermore, warehouse transactions retain some of the structural protections of typical CLOs, incorporating features such as collateral quality and coverage tests, as well as concentration limits. Unlike traditional warehouses, the senior - and sometimes mezzanine - loans or notes of warehouse transactions are publicly rated, at the request of the lenders/noteholders."

Warehouse transactions accommodate the needs of arrangers that lack a traditional warehouse financing programme or investors that require ratings on their investments to meet regulatory requirements. Buyers of warehouse notes are attracted to the risk-return and maturity profiles of these structures, but are not necessarily interested in conventional CLO debt.

Moody's notes that unlike traditional CLOs, most warehouse transactions have a two-tranche capital structure: one class of rated notes and one class of subordinated notes. Several warehouse transactions have, however, issued a mezzanine class as well.

The agency has typically rated the senior notes in the A1-A3 range, largely reflecting their relatively undiversified portfolios compared to those of traditional CLOs. To the extent it has rated the mezzanine notes, it has assigned ratings in the Baa1-Baa3 range.

Warehouse transactions also differ from typical CLOs in that they require the subordinated noteholders to make a minimum cash contribution to the transaction, prior to any draws on the more senior notes. If the portfolio's par amount falls below this minimum, the manager may not draw again on the more senior notes until the minimum is met.

Warehouse notes typically take the form of delayed-draw instruments, with provisions for additional issuance, providing a minimum amount of subordination - based on the concept of a minimum advance rate - is maintained. The delayed-draw feature allows the manager to issue debt only as assets are acquired, helping to reduce negative carry and thereby maintaining excess spread.

Some warehouse transactions offer collateral quality and portfolio limitations that are similar to those of conventional CLOs, whereas others allow for assets with relatively low ratings or recovery rate assumptions, or less diversification. Weaker credit quality covenants allow warehouse transactions to initially acquire assets that are less creditworthy, with the expectation that the fully ramped-up portfolio will be of higher quality.

The typical weighted average life test for a warehouse transaction is normally shorter than that of a conventional CLO, appealing to investors seeking a shorter exposure to risk. Indeed, the expected life for a warehouse transaction is about one year, as the parties involved expect the deal to be redeemed upon the closing of the traditional CLO.

Moody's says that to date a majority of warehouse transactions have rolled into conventional CLOs after having been outstanding for around one year. Several middle-market warehouses have been outstanding for longer than one year, but less than two years.

Nevertheless, transactions typically include features that allow them to continue as a long-term warehouse, in case market disruption or other unexpected delays prevent them from becoming conventional CLOs. To facilitate the continuation of the transaction as a warehouse, they include effective-date features typically defined as a date falling after the expected pricing date of the conventional CLO.

Noteholders in a warehouse transaction may impose additional criteria, as is often true of a corporate loan. For example, in some cases, sales require the consent of the noteholders. In addition, most warehouse transactions cannot release proceeds to subordinated noteholders until the target CLO is effective.

CS

CLOs

Spread optimism highlighted

With US CLO new issue triple-A spreads currently in the Libor plus 140bp-160bp range, respondents to JPMorgan's Q1 CLO survey appear optimistic on spreads for 2017. Many (42%) expect spreads to be in the Libor plus 120bp-130bp range by the end of the year.

Only 6% of respondents believe that triple-A spreads will be wider by the end of the year, while 60% believe they will be tighter than Libor plus 130bp. Just less than a quarter (20%) of respondents agree with JPMorgan CLO analysts' view that triple-A spreads will end the year at Libor plus 135bp.

Triple-A, double-B and equity tranches are viewed as offering the best relative value for new issue investors, according to the survey. Secondary US CLO investors agreed with double-B and triple-A, but are less optimistic on equity.

Meanwhile, the leading relative value tranche for European primary CLOs is the equity tranche, while it is the triple-A tranche for European secondary investors.

The JPMorgan analysts note that the ratio of buyers to sellers dropped to 14x this quarter, although the number of investors looking to add risk remains very high. On the whole, cash balances seem to have declined from the last quarter, indicating that respondents have been putting money to work buying bonds.

Finally, when polled about which US leveraged loan sectors are most concerning in 2017, respondents highlighted retail (81.8%), healthcare (51.5%), technology (36.4%) and energy (30.3%). When asked a similar question in April 2016 (excluding energy and mining), less than half of respondents chose retail.

CS

CMBS

Co-working exposure gauged

Co-working is expected to play an increasingly significant role in commercial real estate, posing challenges to underwriting and valuation standards for the CMBS market. Morningstar Credit Ratings notes that while loans with exposure to co-working currently account for a small portion of the US CMBS universe, their share could rise as the business evolves.

Co-working companies lease roughly 1.2 million square-feet backing just 1.2% of the US$130.91bn in outstanding US CMBS office loans, as of December 2016, according to Morningstar. This compares to the 845.7 million square-feet of leasable office space that secures these loans.

The agency believes that growth in co-working will occur "in fits and starts", as factors including unpredictable revenue streams, lack of long-term commitments and economic uncertainty play a role. Additionally, fixed costs can be high because co-working providers usually rent their space upfront and must build out the space and amenities before they can lease space to tenants. Furthermore, lack of barriers to entry and a fragmented customer base can create volatility.

To protect investors from increased cashflow volatility, Morningstar suggests that underwriting and valuation standards must evolve. Lenders may have to seek additional security in CMBS loans that are backed by co-working spaces to account for this volatility.

"In this regard, identifying organic demand is critical. A building with a co-working company as a tenant may have strong leased occupancy, but that may not paint an accurate picture of how much that space is being used," it adds.

To gauge demand, the agency examines the property's historical occupancy and occupancy within the collateral's market. If these rates are lower, then it would assume for underwriting purposes that less space may be used than what current leased occupancy rates would otherwise suggest. Likewise, it may temper its occupancy expectations in areas showing signs of a bubble, where demand is outpacing supply and rents are rising.

Morningstar notes that most co-working companies are too small to be among the five largest tenants at a property backing a CMBS loan. However, it found six that are one of the five largest tenants for CMBS collateral, the largest of which is Regus.

Regus leases more than 545,000 square-feet in 27 properties securing US$867.8m in US CMBS loans. But tenant risk appears to be low, as it has more than 20% of the gross leasable area at just one property, which backs a US$5.7m loan.

In terms of growth in the broader co-working market, many corporate tenants that signed inexpensive 10-year leases after the financial crisis may face a potentially higher price tag when it's time for renewal. As of December 2016, Morningstar found that leases on 189.7 million square-feet of office space - which back US$66.47bn in CMBS - expire through year-end 2018. If just 1% switched to co-working, the amount of co-working space in CMBS would double.

"As companies of all sizes are tightening expenses and space, we expect co-working to expand because of enduring trends that are shaping workplaces," the agency observes. "We also do not believe co-working threatens the traditional landlord business model. Rather, shared workplace offerings can be an important part of a landlord strategy to attract and retain tenants."

Nevertheless, co-working has yet to be tested in a downturn. "A bear market would suppress office space demand from freelancers and small businesses that have short-term leases and larger businesses that have sizable leases with co-working providers. Operators that focus on membership diversity are likely to have more stability through the next economic downturn," Morningstar concludes.

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NPLs

Italian comeback?

Scope Ratings expects a "slow, unsteady comeback" for public securitisations of Italian non-performing loan ABS in 2017. The agency says that their return "can help improve Italian banks' balance sheets, which will allow them to refocus on retail and corporate lending."

Bank of Italy figures show that the stock of Italian gross NPLs fell by €4bn to €356bn in the first six months of 2016. The reduction was more pronounced net of provisions, falling by €6bn to €191bn. In June 2016, the ratio of NPLs gross of provisions to total customer loans was 17.7, about 0.4 percentage points lower than in December 2015.

In a new report, Scope suggests that the securitisation of NPL portfolios in Italy will be "slow and limited to a few deals", which are expected to be delayed until 2H17, when the Italian government implements further actions to support NPL ABS. In the meantime, the agency expects private sales of NPL portfolios to private equity investors to continue. Banca IFIS estimates that the gross book value of portfolio sales totalled €20bn in 2015 and by October 2016.

Better performing banks will be able to absorb write-offs required to meet foreign investors' bidding prices and use tax incentives introduced by the previous government to spur the offloading of NPL portfolios. Equally, foreign private equity investors will continue to be drawn to the potentially high returns on NPL portfolios.

However, the rate of expansion of the asset class will depend on additional GDP growth and government initiatives. In particular, if there is an uptick in economic growth and new schemes to replace current government initiatives, then investor sentiment regarding NPL recovery timing and amount will help narrow the bid-offer gap.

The latter has been the main obstacle to NPL portfolio securitisation, particularly for real estate secured portfolios, due to banks' reluctance to take additional write-offs. The gap is widened by accounting rules. International accounting principles require banks to accrue in their annual accounts the indirect costs of managing NPLs, whereas potential purchasers can deduct them immediately from the actual value of the bad debt, consequently reducing the purchase price.

Also, to comply with IAS/IFRS accounting principles, banks must discount future cashflows with the assets' original effective interest rate. Investors, on the other hand, can use the investment's expected return - which, in the case of private equity funds, is presumably a significantly higher value.

A further limitation is that portfolios for sale often comprise a mix of secured and unsecured loans, making them less attractive to investors interested in secured rather than unsecured loans and vice versa.
GDP growth affects the performance of SMEs (the largest class of obligors) and property prices, and thus has a direct impact on NPL recovery rates. Recovery rates for various types of recovery strategies (out of court settlements, bankruptcy proceedings, arrangement with creditors and foreclosures) have been in decline over the last five years. This has coincided with very low levels of economic growth.

The government's initiatives have encouraged banks to sell their NPL assets while increasing liquidity in the market, but the current initiatives are fraught with their own issues. The effects of the Italian guarantee scheme of GACS, for instance, have been mixed.

To date, only Banca Popolare di Bari has issued a €150m securitisation (SCI passim). The junior tranche had to be offered at a significant discount, suggesting that GACS has not yet managed to bridge the bid-offer gap.

The Atlante funds, on the other hand, have limited resources and their portfolio managers are targeting returns in the upper single-digits, well below the below the 18%-22% levels sought by private equity funds. Consequently, Scope expects more mezzanine and junior tranches to be sold at a discount in order to attract private equity funds.

Alternatively, NPL portfolios may be transferred to securitisation vehicles. In order to attract investors, price transfers could also happen at lower prices than the 30% of gross book value achieved by Banca Popolare di Bari.

SP

RMBS

FHA snips MIP

The FHA will reduce the annual mortgage insurance premium (MIP) most borrowers must pay for 30-year mortgages by 25bp for loans up to US$625,000 and by 45bp for larger loans. The new premium rates will affect most new mortgages with a closing/disbursement date on or after 27 January.

The ongoing MIP was reduced by 15bp for 15-year FHA mortgages with loan size up to US$625,000 and by 45bp for loans above that. Wells Fargo RMBS analysts note that the MIP remains unchanged for grandfathered MIP programme for loans that were originated before 31 May 2009. They note that the MIP cut is particularly steep for jumbo mortgages and so is probably focused on borrowers living on the coasts.

With Trump set to replace Obama in the White House, the Wells Fargo analysts believe there is a chance that the new administration could reverse the announcement, in a way similar to the reversal of g-fee increases by Mel Watt when he was appointed FHFA director and undid the work of previous director Ed Demarco. The analysts comment that this uncertainty creates some operational risk for the originators as well.

They note: "Normally, the MIP levels are tied to the FHA case number. So even if MIP changes are reversed, as long as borrowers get a case number while the new MIP is effective, they are guaranteed that MIP when they close a mortgage. Borrowers with a case number obtained while the old MIP was effective are not contractually guaranteed this new MIP."

JL

RMBS

Dutch non-conforming refi readied

Morgan Stanley is in the market with the €157.7m Delft 2017, a Dutch non-conforming RMBS backed by loans originated by Lehman Brothers subsidiary ELQ Portefeuille I. The portfolio in its entirety is currently securitised in EMF-NL 2008-1.

On the closing date, EMF-NL 2008-1 will sell the portfolio to Morgan Stanley Principal Funding. In turn, Morgan Stanley Principal Funding will sell the portfolio to Delft 2017.

The portfolio consists of loans secured by mortgages on residential properties located in the Netherlands extended to 820 borrowers. The average seasoning of the pool is nine years, which Moody's notes is significantly higher than in typical Dutch RMBS transactions. A portion (17.8%) of the pool is in arrears at the cut-off date, of which 10.6% is in 30-days plus arrears.

The majority (99.7%) of the mortgages have been advanced on an interest-only basis and 80% of them mature in 2037. There are 36.6% borrowers with adverse credit history recorded in the Dutch credit bureau.

Provisionally rated by DBRS, Moody's and S&P, the transaction comprises: €98.95m AAA/Aaa/AAA rated class A notes, €19.01m AA/Aa1/AA class Bs, €7.4m A/Aa3/A class Cs, €7.4m BBB/A3/A- class Ds, €9.04m BB (low)/Ba2/BBB- class Es and €14.02m unrated class Zs. The seller is offering all tranches and will retain a vertical slice of 5% of tranches A to E to comply with US and EU risk retention requirements, according to Rabobank credit analysts. Coupons on the A-E tranches have been preliminarily set and so the deal is expected to be priced via discount margin.

The deal contains a FORD in January 2020. The option can be exercised by the residual noteholders or the portfolio can be auctioned.

"In the short run, the prepayment rate is likely to be low, as the majority of borrowers is currently in negative equity," the Rabobank analysts note. "If house prices appreciate further, this share could drop and could - in our view - trigger an increase in prepayments, as the originator is no longer active."

Investor meetings are scheduled to take place until the end of this week and pricing is expected next week.

CS

Capital Relief Trades

A nebulous concept

Challenges in defining the cost of capital highlighted

The challenges in defining the cost of capital were discussed extensively at SCI's recent Capital Relief Trades Seminar. Panellists agreed that it is a nebulous concept.

"The most naïve view one usually starts with is that the cost of capital is effectively the coupon of the first year divided by the capital relief," said Jeremy Bradley, director at Lloyds. "Yet the problem with this is that it does not capture the full benefits of a transaction and ignores what happens in the years post-closing. The main challenge is to find a metric that captures the future view of portfolios and transaction benefits for a five- to seven-year period."

The next step in the pre-transaction capital analysis is to understand the likely cost of the transaction, which requires an estimate of how investors will look at the transaction, given the asymmetry of information. Gauging investors' risk assessment and value analysis ensures time is only spent on transactions with a realistic chance of achieving cost of capital hurdle rates. In fact, cost of capital should be considered across different scenarios and even as a distribution taking into account the appropriate risk factors.

"Transparent pricing/trading is also extremely helpful," Bradley added. "That allows us to work out what we think investors want to be paid on new trades. Using our optimisation tools, we can then identify before marketing transactions a fairly tight range of feasible outcomes in terms of level and tranching."

According to Mathias Korn, head of financial solutions at Caplantic, the cost of capital should not reflect market assumptions. It is "impossible to say to investors if the expected loss on average is tiny (10bp), but for accounting purposes it is important to know, since there is a difference between 10bp and 20bp per year from a cost of capital perspective. Yet from an accounting point of view, selection of portfolio is crucial to show investors that the transaction is stable and that the assumptions are consistent and possible."

Structural features are also important for RWA management. Korn stated that all transactions should have a replenishment feature, so the bank can avoid additional costs in issuing the next transaction and can keep the current transaction more efficient. Additionally, the thickness of the tranches is important, since if there is a mezzanine piece and it is possible to use certain excess spread, then the excess spread can lower the first loss retention.

However, transactions are not all about RWAs and effective risk transfer is critical, according to Bradley. "If the transaction is driven by a desire to release risk limits, some features would not be particularly helpful; for example, retained first loss or excess spread covering losses."

Nevertheless, everything seems to be about RWAs when it comes to how to price the equity factor into the model. On this issue, stated Bradley, Lloyds maintains a balance sheet model, with a targeted amount of gearing at different levels in the capital stack.

"What is important is the denominator (RWAs). The treasury, in turn, projects the balance sheet through time and discounts it back to today," he explained.

SP

Structured Finance

Product development exec returns

David Heilbrunn has joined Churchill Asset Management as senior md and head of product development and capital raising. He will report to Ken Kencel, president and ceo of Churchill.

Heilbrunn has more than 25 years of experience in investment management, previously serving as an md with Fifth Street Asset Management, The Carlyle Group, Churchill Financial Group, Bear Stearns and JPMorgan. In this newly-created role at Churchill, he will be responsible for all product development and equity and debt capital raising, including managing the firm's various financing activities and growing CLO business. He will work closely with and support the broader TIAA institutional and retail business development teams in coordinating the firm's overall structuring and capital raising efforts.

Structured Finance

Rating agency swipes ABS vet

Morningstar Credit Ratings has hired Norman Last as director of business development for ABS ratings services. He will head the agency's business development strategy for non-real estate ABS and CLOs.

Last will be based in Morningstar's New York office and will report to the firm's coo Joe Petro. Most recently, he was md and head of ABS at Scotiabank, where he managed the firm's multi-seller ABCP programme Liberty Street Funding. Before that, he was svp and md of ABS ratings at Duff & Phelps.

Structured Finance

CMBS head promoted

DBRS has appointed Christian Aufsatz to a new role as md, head of European structured finance. He will also remain head of European CMBS. Based in London, he will be responsible for managing the ratings business for new securitisations and surveillance of outstanding structured finance transactions.

Aufsatz joined DBRS in 2015 as head of European CMBS and has 15 years of experience in European structured finance, having worked previously with Barclays as head of European securitised products strategy, and for Moody's structured finance group in London. He will report to Claire Mezzanotte, group md, head of global structured finance.

Structured Finance

Exchange offer prepped

Tikehau Capital is set to reorganise its shareholding structure and governance, as well as those of its consolidated subsidiaries, in order to prepare for a new phase of development. As part of this initiative, the firm - which holds 58.8% of the share capital and 59.8% of the voting rights of Salvepar - has filed a principal proposed simplified public exchange offer, together with an alternative simplified public cash offer, targeting the shares and the cash option bonds convertible into new ordinary shares and/or exchangeable for existing ordinary shares of the company. The aim is to enable Tikehau Capital to become a listed investment and asset management company, with €1.5bn shareholders' equity and €9.6bn assets under management.

Salvepar shareholders representing 39.1% of the share capital have committed to tender their shares to the offer. Furthermore, Tikehau Capital - which is guaranteed to hold more than 95% of the share capital and voting rights of Salvepar at the end of the offer - intends to enforce a squeeze-out for the remaining shares at the same price as the cash offer.

The offer is subject to review by the AMF, which will evaluate its compliance with applicable laws and regulations.

Tikehau Capital has appointed BNP Paribas and Crédit Agricole as financial advisors.

Structured Finance

Investment chief named

Semper Capital Management has promoted Zach Cooper from deputy cio to cio, replacing Jay Menozzi, who has retired from the industry. Cooper will continue as one of the firm's senior portfolio managers. He has over 20 years of structured credit investment experience, having previously worked at Treesdale Partners, PrinceRidge, Highland Financial and Deutsche Bank.

Structured Finance

Credit strategy head hired

BGC Partners has hired Arran Rowsell as head of credit strategy in London. Rowsell will report to Tony Warner, executive md and head of BGC's brokerage business in London.

Rowsell will oversee the coordination of credit strategy across BGC Partners, Mint Partners and RP Martin in the UK. Most recently, he worked as a head of flow credit trading for several major sell‐side US and European banks, including Commerzbank, Barclays and Credit Suisse. Before that, he worked in credit trading at Goldman Sachs and Lehman Brothers.

Structured Finance

Carlyle promotes structured pro

The Carlyle Group has promoted 62 professionals to senior positions, including 13 new partners. Among these new partners is Justin Plouffe, who - along with Ronnie Jaber - has been named structured credit fund co-head.

Plouffe is based in New York. He joined the company 10 years ago and was previously an attorney at Ropes & Gray.

Jaber is also based in New York and has been at the firm just a few months less than Plouffe. He was previously head of structured loans at Morgan Stanley and head of high yield structured products trading at Bank of America Merrill Lynch.

Structured Finance

Firm boosts SF sales team

StormHarbour has hired Christos Danias as md of credit sales for ABS and CLOs. He joins from Cantor Fitzgerald, where he was md of structured credit for Europe, also focusing on ABS and CLO sales and trading. Prior to Cantor Fitzgerald, Danias was head of CDOs, Europe for BNP Paribas and before that worked in CDOs for Credit Suisse.

Structured Finance

Firm nabs credit vet

Ares Management has hired Scott Graves as a partner in the firm's private equity group, based in Los Angeles. Graves will lead the Ares special situations funds platform as portfolio manager and head of distressed.

Graves' primary responsibilities will include overseeing investments within the special situations strategy and expanding Ares' distressed capabilities across the firm. Additionally, he will serve as a member of the Ares special situations and ACOF investment committees.

Graves joins from Oaktree Capital Management, where he worked for 15 years in a number of roles, including senior executive and investment professional. His last role at Oaktree was head of credit strategies and portfolio manager of multi-strategy credit.

Structured Finance

Montagu buys into investment firm

Montagu Private Equity has acquired shares in Universal-Investment from the company's owners, following the approval of the relevant authorities (SCI 15 September 2016). Financial terms of the deal have not been disclosed.

Universal-Investment Group has its head office in Frankfurt and subsidiaries and holdings in Luxembourg and Austria. The firm's independent business model will remain unchanged.

Montagu Private Equity says it will invest in the continued development of Universal-Investment's business model, employees and technological platform. It says its goal is to expand the company's position "as a one-stop shop master fund provider for all asset classes".

CDO

CDO charges partially overturned

The US SEC has partially overturned a decision penalising Wing Chau and his former firm Harding Advisory, which found Chau and Harding committed fraud in the selection of assets for two CDOs - Octans I CDO and Norma CDO I. Disgorgement and penalties previously imposed by a judge for Norma were upheld, but charges regarding Octans were dismissed.

The SEC alleged in 2013 that Chau and Harding made misrepresentations, misled investors and breached fiduciary duties (SCI 21 October 2013). Chau subsequently launched a federal suit of his own, alleging that the SEC's schedule restricted his ability to produce exculpatory evidence. But the SEC has found Chau's arguments and constitutional objections "to be without merit".

Chau is barred from the industry for five years. Harding and Chau must pay disgorgement of US$5.776m, plus prejudgement interest, jointly and severally. The investment adviser must also pay two civil penalties totalling US$850,000 and Chau must pay penalties totalling US$170,000.

CLOs

Bank settles risk reporting charges

BNY Mellon has agreed to pay the US SEC a US$6.6m penalty to settle CLO-related charges. The SEC accused BNY Mellon of miscalculating its risk-based capital ratios and risk-weighted assets reported to investors.

The SEC found that BNY Mellon deviated from regulatory capital rules by excluding from its calculations around US$14bn in CLO assets that the firm consolidated onto its balance sheet in 2010. BNY Mellon never obtained approval from the Federal Reserve to exclude these assets.

The miscalculations and lack of adequate internal accounting controls led to risk-weighted assets being understated and risk-based capital ratios being overstated in quarterly and annual reports from 3Q10 to 1Q14, says the SEC. Without admitting or denying the charges, BNY Mellon has consented to an SEC order finding that it violated internal controls and recordkeeping provisions of the federal securities laws.

Insurance-linked securities

Aeolus acquisition closed

Elliott Management Corp funds Elliott Associates and Elliott International have acquired a controlling interest in Aeolus Capital Management and its affiliated entities (SCI 2 November 2016). Elliott acquired its controlling interest from Aeolus founder Peter Appel and Allied World Assurance Company, an investor in Aeolus since December 2012.

Appel has retained a significant minority interest in Aeolus and will serve as its non-executive chairman. Allied World has also retained a minority interest and will continue to be a substantial capital provider to the investor vehicles managed by Aeolus.

The Aeolus management team - led by Andrew Bernstein, Chris Grasso, Trevor Jones and Frank Fischer - will continue in their current roles and retain their entire equity ownership interest in the business.

Risk Management

Bank hires derivatives head

Mizuho International has hired Borja Rivas as md, head of derivatives risk solutions EMEA. He will be responsible for leading the development of the Mizuho International derivatives risk solutions offering in EMEA within its fixed income business.

Most recently, Rivas was head of HSBC's capital financing Iberia unit. Prior to this, he worked for eight years at UBS in its debt capital markets and derivatives business in Spain, Portugal and Scandinavia.

Risk Management

Blockchain partnerships inked

The DTCC has selected IBM, in partnership with Axoni and R3, to provide a distributed ledger technology (DLT) framework to drive further improvements in derivatives post-trade lifecycle events. The firms will work together to re-platform DTCC's trade information warehouse (TIW), building a derivatives distributed ledger solution for post-trade processing based on existing TIW capabilities and interfaces with technology providers and market participants.

The new framework has been chosen to help enable DTCC and its clients to further streamline, automate and reduce the cost of derivatives processing across the industry by eliminating the need for disjointed, redundant processing capabilities and the associated reconciliation costs. The solution has been developed with input and guidance from a number of market participants - including Barclays, Citi, Credit Suisse, Deutsche Bank, JPMorgan, UBS and Wells Fargo - and market infrastructure providers IHS Markit and Intercontinental Exchange.

The framework will be deployed in phases, with the goal of establishing a permissioned distributed ledger network for derivatives, governed by industry-owned DTCC, with peer nodes at participating firms. IBM will lead the initiative, Axoni will provide distributed ledger infrastructure and smart contract applications and R3 will act as an advisor.

Development is expected to begin in January 2017 and build on Axoni's AxCore distributed ledger protocol, which will be submitted to Hyperledger when the solution goes live, which is anticipated in early 2018.

Structured Finance

Japan, China outlooks stable

Moody's outlook for the performance of assets backing consumer-related ABS and RMBS in Japan is stable, with defaults and delinquencies to remain low and the credit quality of loans backing new deals expected to be strong. The credit quality of new ABS and RMBS in China should also be good, although there are grounds for concern.

For Japanese ABS, low unemployment should support performance of assets backing outstanding ABS. Defaults for auto loans, instalment sales receivables and credit card receivables backing Japanese ABS should remain around current low levels. The credit quality of loans backing new ABS deals will also be strong, due to Japan's strong job market conditions, moderate economic growth and the good underwriting standards of lenders.

The strong job market will also underpin low delinquencies and defaults for RMBS. Prepayment rates are expected to remain high, which is credit positive for outstanding Japanese RMBS. Additionally, the credit quality of mortgages backing new RMBS will be strong, despite high housing prices.

The credit quality of collateral in Chinese ABS deals is also expected to be good. For auto loan ABS, captive finance companies will continue to apply tight lending criteria and average LTVs will be low at around 60%-65%.

New deals are expected to be fully amortising with terms of two or three years. They are mainly expected to have static portfolios, but some will have revolving portfolios. Only two of 36 Chinese auto ABS deals issued since 2014 have had revolving portfolios.

The credit quality of new Chinese RMBS deals should be good, but Moody's warns that there are also risks forming in the housing market. LTVs should remain low and there should be long loan seasoning, although newer mortgages originated during a period of sharply rising house prices will pose some risk.

Moody's notes that average property prices are up 10.4% across China and 30.9% in first-tier cities over the year to October 2016. Such mortgages are more likely to be included in RMBS issued beyond 2017 because loans backing newly-issued Chinese RMBS typically have seasoning of three to five years.

The rating agency expects both delinquencies and cumulative defaults to remain low. Issuance volumes should be steady.

The Chinese CLO market should see an improvement in loan quality, due to tighter underwriting standards, although concentration risk will remain. Banks have tightened underwriting policies and new deals are going to be backed by a relatively small number of loans. Moody's expects new deals to typically be backed by fewer than 100 loans.

Structured Finance

Aussie auto outlook negative

The performance of assets backing Australian auto ABS is negative, while the performance of mortgage assets backing Australian RMBS is stable, according to Moody's in a 2017 outlook. The rating agency adds that mortgage delinquencies may increase, but only moderately and from low levels, while auto ABS will generally see higher losses and delinquencies through 2017.

Moody's says that several factors support mortgage performance, including stronger economic conditions in states with service industry-oriented economies and low interest rates. Stresses on mortgage performance, however, include weaker economic conditions in states reliant on mining, as well as rising underemployment, weak wage growth and less favourable housing market conditions.

Mortgage losses should nevertheless remain low, due to increasing home equity, thanks to house price growth and deleveraging. However, Moody's notes that the credit quality of mortgages backing new Australian RMBS will be weaker, due to a larger proportion of riskier mortgages originated since 2013 being included in pools.

The agency adds that Australian mortgages originated since 2013 are riskier because house price growth has significantly outpaced wages growth, driving up household debt. Mortgages have also been underwritten at historically low interest rates and there is a large proportion of risker housing investment and interest-only loans.

Meanwhile, the outlook for the performance of assets backing Australian auto ABS is negative, with delinquencies, defaults and losses set to increase in 2017. Moody's notes that mining regions will weigh on ABS performance, with 2016 seeing a marked rise in delinquencies.

The agency expects new Australian auto ABS deals to be riskier, due to a higher number of deals being backed by a higher share of consumer auto loans and leases. Consumer auto loans and leases tend to have higher delinquencies and defaults, while the share of business and employer-linked financing assets in auto ABS - such as chattel mortgages and novated leases - has declined.

An added risk factor in the Australian auto ABS sector is the increasing competition and growing number of non-bank lenders, according to Moody's. The agency concludes that while non-bank lenders are subject to the same legislation as banks, they can offer a riskier rage of auto loan products.

CLOs

Dual-compliant vehicle launched

GoldenTree Asset Management has closed on US$600m in commitments for GoldenTree Loan Management (GLM), after being oversubscribed. GLM was established to invest in and manage CLOs that are intended to be compliant with both US and European risk retention regulations.

While the vehicle was created to address the global regulatory landscape, GoldenTree believes it will also improve the execution of CLOs, by substantially enhancing returns for the equity held by GLM. The vehicle's structure enables GLM to take on additional responsibilities that simplify the role of the banks, leveraging their core competencies and driving significant efficiencies in the execution of CLOs. GLM will seek to invest in the equity and junior mezzanine tranches of the CLOs it manages.

GLM has a diverse global investor base and includes more than 20 participants from the US, Europe and Asia Pacific. The investor base is further diversified across investor type, with participation from insurance companies, corporate and public pension funds, sovereign wealth funds and family offices.

GLM will have access to GoldenTree's credit expertise and infrastructure through service agreements. Between them, GLM and GoldenTree have investment teams comprising 49 individuals covering over 25 industries.

CMBS

CMBS defaults, delinquencies diverge

The 12-month rolling loan maturity default rate for European CMBS rated by S&P increased from 21.8% to 22.2% in December. The overall senior loan delinquency rate decreased from 54.7% to 53.7%.

The delinquency rate for continental European senior loans decreased from 67.9% to 67.1%. The rate for UK loans decreased from 34% to 32.7%.

CMBS

Rare mod for 2014 loan

The US$8.7m Black Gold Suites Hotel Portfolio loan, securitised in COMM 2014-UBS6, has been modified. The loan was sent to special servicing early last year.

The modification provides some rate relief, under which the borrowers will pay 2% for the next few months, 3.5% for a year after that and 5.6% thereafter. The loan will also become an interest-only note.

The loan is backed by two North Dakota hotels and was underwritten in 2014 at an LTV of 29.7% and DSCR of over 3x. DSCR for full-year 2014 was 4.47x and it was still 2.33x for the 12 months up to the end of September 2015. Since securitisation, the loan has amortised to US$850,000.

The loan had been delinquent for almost a year, but was current as of the January remittance report. Trepp notes that the fact that the modification did not come with a bifurcation could be considered to be a "win". The value of the collateral was US$32m at securitisation and US$7.5m, as of spring 2016.

CMBS

FVO purchases jump

Fitch reports a significant increase in the number of defaulted US CMBS loan purchases through fair value options (FVOs) since it last examined such activity in 2011. In the five-year period beginning in 2012, 79 FVOs were exercised, versus the 11 FVOs exercised in the 10-year period that the agency previously studied from 2001 to 2011.

Fitch found that the 2006 and 2007 vintages experienced the highest volume of FVOs exercised, accounting for 57% and 22% of the total number of purchase options respectively. Loans on multifamily properties were the most prevalent asset class (accounting for 34% of the total), followed by office (25%), retail (19%) and hotels (10%).

The agency notes that the concentration in the 2006 vintage and multifamily properties is largely driven by small balance transactions that historically performed poorly with high default rates. In Fitch's study, 96% of purchase options on multifamily properties were in small balance CMBS transactions and 60% of the 2006 vintage transactions were small balance transactions.

On average, FVO prices represented a 43% discount to the outstanding balance of the loan. Multifamily and office properties were consistent with the average discount of 47% and 42% respectively, while retail properties received on average a discount of 37%. The average FVO discount is slightly lower than the cumulative average loss severity of 46.6% for all resolutions observed in Fitch's most recent CMBS loss study.

In most cases, the agency found that FVOs were exercised by the controlling class representative (CCR). Of the 79 FVOs, 65 were exercised by the CCR (31 by affiliate CCRs and 34 by third-party CCRs), 13 were exercised by affiliates of the special servicer and only one was exercised by the special servicer.

Usually a third-party confirms the fair value price. However, Fitch noted 13 instances in which a third-party confirmation was not required. In each of these cases, the PSA did not require price confirmation if the FVO was exercised by a third-party CCR.

CMBS

CMBS pay-offs continue slide

The percentage of US CMBS loans that paid off on their balloon date slid sharply in December to just 58.4%, says Trepp. The November level had been 66.8% and December's reading is the lowest level posted since July.

The December total also undershoots the 12-month moving average, which is 66.2%. By loan count, rather than balance, 66.8% of loans paid off last month and on that basis the pay-off rate was seven points lower than in December and compares to a rolling average of 70.2%.

CMBS

Sub debt raises CMBS defaults

The more subordinate debt US CMBS senior loans carry, the more likely they are to default, especially for multifamily and retail properties, according to Fitch. In a recent analysis of over 24,000 CMBS 1.0 conduit loans issued between 2003 and 2008, approximately 1,000 (4%) had subordinated debt at the time of issuance and these were 60% more likely to default than senior loans without subordinated debt.

Equally, about 5% of CMBS 2.0 senior loans have subordinate debt in place and defaults have been "substantially higher" for these - a trend the rating agency expects to continue. Fitch also finds the default rate for loans with subordinate debt secured by multifamily properties was nearly double on the 309 multifamily loans with subordinate debt at 34.6%, compared to 18.5% on the 4,891 multifamily loans without subordinate debt. The same trend holds true for the default rate on retail loans with subordinate debt, which came in at nearly 37%, compared to 22.8% for those retail loans without subordinate debt.

Furthermore, senior CMBS loans with mezzanine debt had higher losses than those with subordinate mortgage debt and while the 34.5% default rate on senior loans with subordinate non-mortgage debt was slightly better than the 36.7% default rate for senior loans with subordinate mortgage debt, losses painted a different picture. Realised losses on the 443 loans with subordinate non-mortgage debt totalled 6.5%, compared to 5.2% for the 558 loans with subordinate mortgage debt.

Fitch senior director Ryan Frank comments: "Despite the reduced rights of non-mortgage subordinate debt, this so called 'rescue equity' does not appear to be helping senior loan performance in practice."

Insurance-linked securities

Tradewynd bonds affirmed

Fitch has affirmed the Tradewynd Re Series 2014-1 class 3A and 3B notes, which are expected to mature on 8 January 2018, at double-B minus and single-B respectively. The agency confirms that no reported covered events exceeded the initial attachment levels of the notes within the annual risk period from 1 January 2016 through 31 December. All interest was paid when due and there was no reduction in the original principal amount.

On 7 December 2016, Risk Management Solutions - acting as the reset agent - determined the modelled annual attachment probabilities of the class 3A and class 3B notes to be 1.62% and 3.54% for the final annual risk period that commences on 1 January 2017 through 31 December. These probabilities correspond to implied ratings of double-B minus and single-B respectively, according to Fitch. The prior attachment probabilities were 1.60% and 3.67% respectively.

The variable risk interest spreads will increase to 5.40% from the last year's 5.31% for the class 3A notes, while the class 3B notes will decrease to 7.43% from last year's 7.45%. The reset formula reflects the updated sensitivity case annual modelled expected losses to 1.47% (from 1.42%) for the class 3A notes and 2.68% (from 2.69%) for the class 3B notes.

The attachment and exhaustion levels remain unchanged at US$4.5bn and US$5.5bn for the class 3A notes and US$3bn and US$4.5bn for the class 3B notes.

The notes are exposed primarily to named storm and earthquake peril losses in the North American region, as reported by various insurance subsidiaries or affiliates of AIG.

RMBS

STACR designations assigned

All but six Freddie Mac STACR credit risk transfer bonds have received NAIC 1 designations for the 2016 filing year. The STACR 2015-HQA2, 2016-HQA1, 2016-DNA2 and 2016-DNA3 M3 tranches received NAIC 2 designations, while the STACR 2016-HQA2 and 2016-HQA3 M3s received NAIC 3 designations. All Fannie Mae CAS RMBS, except two, have also been assigned NAIC designations (SCI 6 January).