Contents

ABS

Heavy burden

Student loan servicing under the spotlight

Average US student debt levels have now swelled to a record US$30,000 plus, sparking concern that the US economy could be negatively affected by constrained home ownership and long-term consumption growth. At the same time, high-profile legal cases relating to the difficulty of debtors to discharge their debt through bankruptcy and the recent CFPB versus Navient case suggest that student debt could be pushed further under the spotlight.

Joe Cioffi, partner at Davis & Gilbert, says that while the discharging of debt through bankruptcy isn't a major concern yet, the focus on student debt as a general economic concern is increasing. "There have been cases that have received attention, like the Murphy case in the First Circuit, where the issue was ultimately settled and there are others where the debt has been discharged. I think too there is more pressure building to recognise the issue of student debt, but there's not yet a trend of growing leniency," he observes.

Cioffi points out that the ease with which a debtor can discharge the debt might not be the main issue, as such. "I wouldn't call dischargeability an actual issue just yet. There has been increased focus recently, however, on the 'undue hardship' standard, which has to be proved to get discharge through bankruptcy. That standard doesn't make a great deal of sense anymore."

He continues: "It made more sense when it was used as a safeguard against early discharge back when the law allowed student loans to be dischargeable or dischargeable after a certain point. This is now perceived to be almost impossible, although some courts have issued some favourable opinions for borrowers. In general, it's very difficult for people to qualify."

However, the ongoing court case between the CFPB and Navient could potentially add weight to the case of student debtors, who might want to use bankruptcy to deal with their debt burden. The CFPB last week announced that it is suing Navient for "systematically and illegally failing borrowers at every stage of repayment". The Bureau is seeking to recover significant relief for borrowers harmed by what it terms as illegal servicing failures.

Illinois Attorney General Lisa Madigan also filed a lawsuit last week against Navient and its subsidiaries Navient Solutions, Pioneer Credit Recovery, General Revenue Corp and Sallie Mae Bank, alleging widespread abuses across all aspects of its business. Cioffi suggests that these cases raise worrying comparisons with mortgage servicers that found themselves unable to cope in the 2008 financial crisis.

"Delinquencies in student loans may now expose issues with servicer operations and if the Navient claims gain traction, we could find servicers are exacerbating borrower problems through their conduct," he explains.

For its part, Navient says the allegations of the Illinois Attorney General and CFPB are unfounded and the timing of these lawsuits "reflects their political motivations". The firm says it welcomes clear and well-designed guidelines that all parties can follow; instead, the suits improperly seek to impose penalties based on new servicing standards applied retroactively and against only one servicer.

Navient adds that the regulator-asserted standards are inconsistent with Department of Education regulations and will harm student loan borrowers, including through higher defaults. Further, the firm points to its well-established track-record of helping student loan borrowers succeed in repayment.

In terms of the knock-on effect on student loan ABS, cases like the CFPB versus Navient are unlikely to help the sector's fortunes. Cioffi says: "There is the potential for future downgrades...there is the issue down the line that we could see more lawsuits like the Navient one come to light and particularly servicers could see more lawsuits against them."

He believes that Parent Plus loans could also be a cause for concern, as focus grows on the plight of parents in their 60s or above lumbered with a mountain of immovable debt. This could potentially lead to "ABS with less Parent Plus loans, or none at all".

For the time being, however, it's likely that there will be at least increased scrutiny from investors and growing concerns about the underlying collateral. Similarly, cases like the Navient one could lead to a "cooling off period by ABS issuers/investors, as they wait to see how it plays out," Cioffi concludes.

RB

Secondary markets

Euro secondary still seeks supply

Demand continues to outstrip supply in the European securitisation secondary market.

Tone remains positive across the board and investor appetite is still strong in every sector. However, there continues to be next to no supply via BWICs or new issuance. Consequently, when auctions do appear they trade exceptionally well and are keeping spreads flat to slightly tighter.

There is currently one BWIC on the European schedule for today - a two line double-B CLO auction due at 15:00 London time. It involves €4m AVOCA V-X E and €7.5m JUBIL VII-X E. Only the latter has covered on PriceABS in the past three months - at 97.5 on 19 January.

Secondary markets

Autos lead US ABS

The auto sector is currently leading the way in the US ABS secondary market.

Overall, ABS secondary spreads continued to edge in last week and into this, particularly at the top of the stack. Autos are seeing similar moves but are doing so despite accounting for the majority of secondary supply and dominating the new issue pipeline.

Rotation activity is likely to mean that auto BWIC volumes will not significantly abate this week, which might generate some pricing softness as trading fatigue grows. However, tone for now is positive across the board, with subprime demand in particular bolstered by a flurry of recent rating upgrades in the sector.

Today's auto BWIC calendar is already building with a seven line list kicking things off at 9:00 New York time. The $41.9+m auction comprises: AFIN 2014-1 A4, CARMX 2014-2 A4, CARMX 2015-3 A3, HALST 2015-A A4, HART 2014-A B, HART 2015-A A4 and HDMOT 2014-1 A4.

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

Secondary markets

Euro CLOs BWIC focused

The European CLO secondary market is currently focusing on BWICs.

"Levels on BWIC have been very strong in both 1.0 and 2.0 bonds and regardless of where they are in the capital stack," says one trader. "However, we're not seeing very much flow away from BWICs and there aren't many customers looking to engage outside of auctions."

The trader continues: "Some BWICs are trading inside dealer offer levels, which makes the lack of flow business all the more surprising especially given the continuing strong performance of CLOs more broadly. It's hard to say whether the current BWIC activity is dealer- or account-driven, but the strong levels are certainly being sustained by the lack of new issuance so far this year."

One new CLO is due to price this week, but it will take much higher primary volumes to properly ascertain whether the current strong levels are justified. "It seems many people are sceptical that dealer offers are in the right place, so are likely to continue to focus on BWICs for now," the trader adds.

There are currently two BWICs on the European CLO schedule for today. Both are due at 15:00 London time.

One is a two line double-B and equity mix involving €6m HARVT 11X E and €23.256m HARVT 11X SUB. The other is a single €12.5m piece of LAUR 2X SUB.

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

Secondary markets

US CLO mezz pauses

US CLO secondary market mezz rally is pausing for breath this week so far.

"Superficially it's still very active with a lot of paper coming in for the bid, but the volume of non-investment grade paper is half of what it was last week," says one trader. "Investment grade guys are still buying, but below that spreads are pretty much flat on the week as everyone there is taking a breather."

The trader continues: "Mezz BWIC volumes climbed so high last week that there was a general realisation the rally had moved too far too fast especially in the single- and double-B space. We've seen a lot more DNTs this week - now around the 30-40% level."

Nevertheless the trader remains positive about the middle of the stack. "There are still opportunities in mezz, but it's more on a name by name basis now. Equally, there's less likely to be as much paper circulating as a lot of it is now in stronger hands."

Meanwhile, in the equity space the trader expects to see more pieces in for the bid, though unlikely to generate a strong tightening trend. "The re-sets in the loan market means a real boost in allocations and therefore pre-payments in CLOs. So, investors are looking to take profit on their equity holdings to take advantage of the existing collateral."

However, the trader doesn't envisage a major reversal will emerge any time soon. "Overall, CLO secondary spreads are currently moving sideways and provided there are no macro issues we'll continue to trade in a range for a while, especially with only light new issuance volume."

There are currently eight BWICs on the US CLO calendar for today. The chunkiest of those remaining is a $71.59m equity list due at 13:00 New York time.

The five line auction comprises: CVPC 2015-3A SUB, GALXY 2012-14A SUBA, GALXY 2013-15A SUBA, LONGF 2013-1A SUB and NEND 2013-1A SUB. Only GALXY 2012-14A SUBA has covered on PriceABS in the past three months - at MH50S on 21 December.

Structured Finance

SCI Start the Week - 23 January

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

Pipeline
There was a clear skew towards auto ABS additions for the pipeline last week. As well as five of these deals, there was also a CMBS added.

That CMBS was US$1.261bn FREMF 2017-K61. The auto ABS were: US$1.116bn Ally Auto Receivables Trust 2017-1; US$1.135bn CarMax Auto Owner Trust 2017-1; US$1bn Drive Auto Receivables Trust 2017-A; US$750.2m Enterprise Fleet Financing Series 2017-1; and US$750m GMF Floorplan Owner Revolving Trust Series 2017-1.

Pricings
There was more variety to the week's prints. At the last count there were five ABS, two ILS, two CMBS and four CLOs.

The ABS were: US$750m Citibank Credit Card Issuance Trust 2017-A1; US$1.75bn Citibank Credit Card Issuance Trust 2017-A2; US$1.672bn Ford Credit Auto Owner Trust 2017-A; US$477.1m SoFi Consumer Loan Program 2017-1; and US$123m SolarCity 2017-A.

US$525m Galilei Re Series 2017-1 and US$200m Vitality Re VIII accounted for the ILS. The RMBS were US$1.351bn CAS 2017-C01 and €157.7m Delft 2017.

Lastly, the CLOs were: US$497m Carlyle Global Market Strategies CLO 2014-2R; €307m Phoenix Park CLO 2014-1R; US$410m Sound Point CLO 2014-3R; and US$527.63m Venture CDO 2017-26.

Editor's picks
Net negative: Privatisation of Fannie Mae and Freddie Mac could have widespread negative consequences for the US RMBS and CMBS markets, as well as on availability of credit for the housing market. Encouraging private label issuance to step in as the GSEs scale back remains a significant challenge...
Varied approaches: The horizontal retention piece of a securitisation could be considered the very definition of a Level 3 asset: rarely traded - if ever - with very limited market information. Subject to fair value assessment before and after a deal closes, market participants are taking a number of different valuation approaches to such assets, with no single method yet considered to be best practice...
Duration risk: The December interest rate hike in the US reflected the increasing health of the economy, but it also created issues for the US Fed's large book of MBS, which make up US$1.7trn of its balance sheet. Indeed, rising rates bring the spectre of duration risk for certain fixed rate assets, such as Fannie Mae 30-year mortgage pools...
Cautious optimism: The secondary market for capital relief trades has been growing alongside issuance of syndicated deals, which account for approximately 50% of CRT volume. In spite of a number of hurdles, market participants remain positive about the future of secondary trading in the sector...
CLO test ahead: The second session in a row of high BWIC volumes looks set to test the depth of the US CLO mezz rally seen so far in 2017. "It's another busy day in 2.0 mezz, which should truly test the market," says one trader. "We're sensing a little bit of exhaustion from buyers in 2.0 single- and double-Bs and saw a fair amount of DNTs yesterday..."

Deal news
• The US CMBS 2.0 market has seen its biggest loss to date, following the liquidation of the US$48.9m Hudson Valley Mall loan - securitised in CFCRE 2011-C1 - at an 80.4% severity on the US$52.4m original balance. The loss forced full write-downs on the NR, G and F classes, while the triple-B minus rated E tranche absorbed a US$7.2m hit.
• Further details have emerged of Deutsche Bank's recent capital relief trade, Gate 2016-1 (SCI 3 January). The €95m six-year bilateral CLN pays three-month Euribor plus 12.75% and references a €1bn portfolio of German SMEs.
• Fitch highlights Delft 2017 (SCI 12 January), which it hasn't rated, as an example of an RMBS that could expose investors to the strength and liquidity of housing and lending markets in a concentrated period near bond maturity. The agency says that such concentrated refinancing risk in portfolios of high LTV ratio interest-only mortgage loans can result in rating caps for RMBS.

Regulatory update
• The US Department of Justice, 21 states and the District of Columbia have reached a nearly US$864m settlement agreement with Moody's, Moody's Analytics and their parent Moody's Corporation. The settlement resolves allegations arising from Moody's role in providing credit ratings for legacy RMBS and CDOs, including pending state court lawsuits in Connecticut, Mississippi and South Carolina, as well as potential claims by the Justice Department.
• Société Générale has agreed to pay a US$50m civil penalty to the US Department of Justice to resolve claims under the Financial Institutions Reform Recovery and Enforcement Act related to its activities in connection with the marketing, sale and issuance of an RMBS dubbed SG Mortgage Securities Trust 2006-OPT2. As part of the agreement, the bank has acknowledged in writing that it made false representations to prospective investors in SG 2006-OPT2, which suffered significant losses.
• The US Environmental Protection Agency (EPA) has issued a notice of violation of the Clean Air Act to Fiat Chrysler because of the installation and use of engine management software to manipulate diesel emissions. Moody's notes that this is credit negative for some US auto ABS.

CMBS

L-shaped retention debuts

Citi and Deutsche Bank are in the market with CD 2017-CD3, the first conduit CMBS to comply with the US risk retention rules by employing an 'L-shaped' structure. The US$1.3bn deal - rated by Fitch, KBRA and Moody's - is collateralised by 52 commercial mortgage loans secured by 59 properties.

On the securitisation closing date, affiliates of the transaction sponsors will each retain a portion of an eligible vertical interest (the VRR interest tranche) that comprises 1.9% of the principal amount of all interests in the issuing entity and a third party will purchase certificates comprising 3.1% of the fair value of the interests, representing an eligible horizontal retained interest (HRR certificates, consisting of a portion of the class E, F and G tranches). KKR Real Estate Credit Opportunity Partners Aggregator I is the retaining third-party purchaser.

The properties in the collateral pool are located in 25 states, with two state exposures that each represents more than 10% of the pool balance - New York (accounting for 31.3%) and California (19.6%). KBRA notes that the pool has exposure to all the major property types, including three that each represent more than 10% of the pool balance: office (52%), retail (20.2%) and lodging (15.7%).

The loans have principal balances ranging from US$3.3m to US$100m for the largest loan in the pool - 229 West 43rd Street Retail Condo (7.5%). The five largest loans - which also include 1384 Broadway (6.6%), 85 Tenth Avenue (5.6%), Medical Centre of Santa Monica (5.3%) and Prudential Plaza (5.3%) - represent 30.4% of the initial pool balance, while the top 10 loans represent 52.5%.

Moody's points out that the trust benefits from two loans, totalling US$135m (or 10.2% of the pool balance), that are assigned an investment grade structured credit assessment (SCA). The 85 Tenth Avenue loan is assigned an SCA of a1, while the Hilton Hawaiian Village loan (4.5%) is assigned a SCA of aa3.

However, Fitch notes that 16 loans representing 51.1% of the pool are full-term interest-only and 16 loans representing 27.1% of the pool are partial interest-only. In comparison, the agency says that Fitch-rated transactions in 2016 had an average full-term interest-only percentage of 33.3% and a partial interest-only percentage of 33.3%. The pool is scheduled to amortise by 6.9% of the initial pool balance prior to maturity, well below the average of 10.4% for other Fitch-rated transactions.

The other CMBS that is being marketed currently is the US$365m MSC 2017-PRME, a single-borrower transaction secured by five Marriott hotel properties and sponsored by Ashford Hospitality Prime. Loan proceeds refinanced prior existing debt of US$335.5m that was securitised across three loans in three conduit CMBS - WBCMT 2007-C31, WBCMT 2007-C32 and WBCMT 2007-C33. Morgan Stanley will retain an eligible vertical interest that is expected to have an aggregate certificate balance of US$18.25m at closing.

CS

RMBS

CRT variances examined

Fannie Mae's latest risk-sharing RMBS - the US$1.4bn CAS 2017-C01 - offered class 1B1 bonds are no longer first-loss portions of the capital structure and instead feature 50bp of credit support, in the form of another subordinate B tranche that it retained. In a new study, Wells Fargo structured product analysts suggest that the move is reflective of how credit enhancement levels have varied in credit risk transfer deals over the past few years and the different ways in which the GSEs have approached the sector.

The Wells Fargo study shows that Fannie's CAS programme has tended to exhibit less structural variance in terms of credit enhancement and has traditionally sold less risk through the CRT market than Freddie Mac's STACR programme. For the 'regular' LTV collateral (defined as LTV ratios of 60%-80%), CAS has only sold risk at loss levels of 4% and below, while STACR has sold risk as high as 5.85%.

STACR's introduction of first-loss risk and actual loss transactions has been accompanied by increases in enhancement or changes in the make-up of collateral. "This strategy has allowed STACR to issue risk at more consistent spread levels compared to CAS. Fannie seems to have taken an alternative approach with CAS, favouring consistency in deal structure, even if that means that bonds may price slightly wider during times of market volatility or if it makes programmatic changes," the Wells Fargo analysts note.

In its first actual loss transaction - STACR 2015-DNA1 - Freddie increased the seasoning of the pool to 29 months, compared to seven months in the prior fixed severity deal. In the following transaction, the average seasoning of the pool returned to its normal range of 6-12 months, but credit enhancement increased on the M1, M2 and M3 transactions by 125bp, 25bp and 50bp respectively. The higher enhancement levels for the M1 and M2 tranches persisted in the following deal, before settling into a slightly lower range for deals issued in 2016.

CRT deals with high-LTV (80%-97% LTVs) reference collateral exhibit trends in credit enhancement similar to their regular-LTV counterparts. Fannie was the first to sell high-LTV backed bonds - with CAS 2014-C02 - in May 2014 and Freddie followed in August of that year.

Initially, CAS issued both regular-LTV and high-LTV tranches from the same deal. However, beginning in mid-2016 with CAS 2016-C02, Fannie began issuing deals that feature a single LTV reference group and has since then alternated between regular- and high-LTV collateral for each deal that it issues.

Freddie has always used separate deals to issue high-LTV deals (with the 'HQ' moniker), which feature thicker tranches, with M1 detachment points as high as 6.5%. The average credit support for HQ M1 bonds has been 4.5%, compared to 3.9% for the regular-LTV ('DN') M1s. However, the first loss tranches are around 1% thick, meaning that the additional support comes primarily from thicker M3 and M2 classes.

The Wells Fargo research notes that high-LTV CAS deals feature only marginally thicker credit enhancement than their regular-LTV counterparts, at 2.75% and 2.4% respectively. This differential has been shrinking over time, with enhancement levels between the LTV cohorts for 2016 deals appearing nearly identical.

The average difference in M1 enhancement between STACR DN and HQ deals is about 60bp, although this differential has also been shrinking over time.

In a normal environment, the largest determinant of how quickly a tranche builds credit enhancement is the prepayment speed of the underlying collateral. The CRT deals issued in 2015 had reference collateral with some of the highest average mortgage rates, which has led to a rapid build in enhancement. In CAS 2015-C01, for example, prepayments were so fast that the M1 tranche paid off by December 2016.

CS

RMBS

Rate rises threaten RMBS performance

Increased default risk for US RMBS is a potential result of the reduced mortgage prepayments expected to follow the Federal Reserve's decision to raise interest rates. Mortgages with LTVs under 60% and interest rates under 6% could see the biggest drop in prepayments.

Morningstar Credit Ratings estimates the concentration of borrowers in this most highly affected group to be 2.5x higher in post-crisis transactions. Therefore, post-crisis originations with a higher concentration of low interest rate, low LTV mortgages are expected to see a disproportionately large reduction in prepayments.

"We expect approximately US$164.77bn of private-label mortgages, which represents nearly a third of the non-agency universe, are likely to see their prepayments cut in half if the rate refinancing incentives disappear," says Morningstar. "Reduced payments increase the weighted average life of bonds in RMBS because the loans remain in the securitised mortgage pools longer."

The Fed raised its benchmark overnight lending rate from the 0.25%-0.5% to the 0.5%-0.75% range last month, with more increases expected this year. Rapid prepayments, driven by a benign interest rate environment, have shielded RMBS investors from defaults as deals have accelerated payments to bondholders and reduced bond duration. With interest rates now rising, Morningstar believes prepayments could be cut to a fraction of their recent levels and increase default risk in RMBS transactions.

The rating agency estimates two-thirds of post-crisis originations have mark-to-market LTVs below 60%, compared with only a third of pre-crisis deals. Historical data indicates that borrowers with such low LTVs are likely to prepay less often as the refinance incentives disappear.

"By our calculation, over 96% of the post-crisis RMBS originations have mortgage interest rates below 6%, with a Morningstar mark-to-market LTV below 80%. By contrast, only half of the pre-crisis population falls into this category. Based on our analysis of historical prepayment trends, these borrowers will prepay less often if there is no benefit to refinancing," Morningstar says.

Post-crisis originations should see a greater reduction in mortgage prepayments because more of them were originated with lower LTVs. However, the rating agency notes that post-crisis originations make up only 5.6% of the outstanding private label population and the impact on the non-agency sector may be muted.

The impact on agency RMBS could be greater than on non-agency. Morningstar says US$65bn of the recent STACR and CAS originations have LTVs of 65% or lower and interest rates below 6%, with the impact of rising mortgage rates appearing particularly pronounced.

JL

RMBS

Dutch market strengthening

The recent STORM 2017-I involved the sale of the largest publicly distributed senior Dutch RMBS tranche since the financial crisis, at €2bn (see SCI's primary issuance database). The deal, amid a number of other credit positives, suggests that the Dutch RMBS market could be poised for growth in 2017.

JPMorgan European securitisation analysts point out that the Netherlands has enjoyed a broader economic recovery, whereby Dutch GDP has seen consistent growth for the last two years, along with falling unemployment (which stood at 5.7% in November, down from 8% in early 2014). These factors have boosted house prices: quarter-on-quarter house price appreciation in 3Q16 of 3% was the highest in over ten years, although house prices in the Netherlands still remain 10% below the pre-crisis peak in 2008.

A sustained recovery in house sales towards pre-crisis levels, together with improvements in embedded equity has resulted in broadly improving CPRs for existing Dutch RMBS transactions. The JPMorgan analysts add that low mortgage rates have further encouraged borrowers to refinance, although some regulatory changes may hamper this, such as the removal of tax deductibility for interest-only mortgages.

The analysts suggest that the current CPR rates can be maintained and even increase, given the strong fundamentals in the housing market and low interest rates, although eventual rate hikes by the ECB could affect prepayment speeds.

The strength of the Dutch RMBS market is underscored by improving mortgage arrears, with 90-plus day delinquencies down to 0.3% in September 2016 from a peak of 0.8% two years ago. While defaults have doubled during this time and stand at 1%, losses remain very low at 0.2%, as of 3Q16.

RB

Structured Finance

CMBS pro named president

ReadyCap Commercial has named Anuj Gupta as president, responsible for loan originations, affinity relationships, capital markets, credit and asset management. He has played an active role in the firm since 2013 and will now join the executive management team full-time.

Gupta has more than 20 years of experience in commercial real estate lending, having previously led CRE capital markets and new origination loan pricing for Waterfall Asset Management and ReadyCap, while also playing an integral role in the launch and growth of the bridge and conventional real estate lending platforms. Before joining Waterfall, he co-led the US$5bn Public-Private Investment Fund joint venture between GE Capital and Angelo Gordon formed to purchase CMBS and RMBS securities. He was also head of GE Real Estate's CMBS group in New York, where he oversaw the origination and securitisation of over US$3.7bn of mortgage loans.

Structured Finance

Distressed team beefs up

Michael Carley has joined BTIG as a director of fixed income credit, focused on illiquid markets across high yield, distressed debt, loans, trade claims and private equities. Based in New York, he will report to Drew Doscher, md and head of fixed income credit at BTIG.

Carley was previously a member of the distressed debt trading group at Jefferies, which was led by Doscher (SCI 16 January). Carley began his career in distressed debt as a research analyst within Imperial Capital's capital structure group.

BTIG says it plans to hire further seasoned fixed income credit professionals as it expands its fixed income credit group.

Structured Finance

WestLB spin-off acquired

Mount Street is set to acquire EAA Portfolio Advisors (EPA) from Erste Abwicklungsanstalt (EAA), which was created at end-2009 under the German Financial Market Stabilisation Fund Act to manage the assets of WestLB. The €200bn portfolio comprised a diverse range of complex non-performing loan, ABS, leveraged credit, asset finance and structured finance assets.

EPA has reduced the outstanding balance of the portfolio to approximately €29bn over the past seven years, while remaining ahead of the plan agreed with EAA and its stakeholders. EAA's shareholders include the German state of North-Rhine Westphalia and its savings banks associations.

Mount Street will take over EPA - including its approximately 90 employees at offices in London, Düsseldorf, New York and Madrid - following regulatory approval, which is expected in 1H17. The platform transfer and management contract is the largest of its kind ever completed in Europe.

The acquisition will bring Mount Street's total AUM to over €55bn, while the addition of EPA's credit portfolio management team allows the firm to diversify its product offering beyond its existing activities in loan and bond servicing. EPA provides surveillance and management products, from modelling and valuation of single positions to restructuring and exit strategies.

The selection of Mount Street by EAA follows a rigorous selection process spanning more than six months.

Structured Finance

Leveraged finance pro appointed

MUFG has boosted its EMEA investment banking leveraged finance team with the appointment of Stuart Randell as executive director and head of portfolio management. He will be based in London and report to Nick Atkinson.

Randell was previously a director in PwC's debt and capital advisory team and has also worked at ING Bank in structured acquisition finance and leveraged finance. Previous roles included stints at Credit Agricole, Barclays and Mercer.

Anders Maehre has also joined the team. He was previously at PwC with Randell and joins Mitsubishi as a director for non-investment grade corporate origination.

Risk Management

Legal services platform launched

Fieldfisher has launched Condor Alternative Legal Solutions, a multi-product alternative legal services platform that offers a flexible range of lower cost technology-efficient and process-efficient services. The platform is led by ceo Christopher Georgiou, who was previously head of the securities and derivatives group at Ashurst, alongside derivatives partners Guy Usher and Luke Whitmore.

Condor will initially focus on the derivatives and securities financing markets, with services aimed at banks, custodians, asset managers, insurers and corporate treasurers. The initial range of services includes: a trading documentation unit; data extraction and analytics solutions; and large-scale documentation project delivery.

Georgiou comments: "Our variation margin managed service - a comprehensive offering, which helps clients implement the new requirement to exchange variation margin for non-centrally cleared derivatives - has garnered a lot of interest. We've already secured engagements from global investment banks on this and other regulatory developments."

In the future, Fieldfisher plans to expand its range of services beyond financial services and to offer Condor to clients across all sectors of the firm.

RMBS

Representations claims resolved

Société Générale has agreed to pay a US$50m civil penalty to the US Department of Justice to resolve claims under the Financial Institutions Reform Recovery and Enforcement Act related to its activities in connection with the marketing, sale and issuance of an RMBS dubbed SG Mortgage Securities Trust 2006-OPT2. As part of the agreement, the bank has acknowledged in writing that it made false representations to prospective investors in SG 2006-OPT2, which suffered significant losses.

For example, SG acknowledges that it falsely represented to investors that the loans underlying SG 2006-OPT2 were originated generally in accordance with the loan originator's underwriting guidelines. However, the third-party due diligence vendor for the deal determined that almost 40% of the loans it reviewed were underwritten outside of guidelines and lacked adequate compensating factors to make the loans eligible for securitisation. Likewise, the bank represented to investors that at the time of origination no loan in SG 2006-OPT2 had a loan-to-value or combined loan-to-value ratio of more than 100% - a representation that it now acknowledges was false.

SG has agreed to fully cooperate with any ongoing investigations related to the conduct covered by the agreement.

RMBS

Extra RMBS cash set aside

RBS is setting aside a further £3.1bn provision for various investigations and litigation matters relating to its issuance and underwriting of US RMBS. The extra £3.1bn takes the total aggregate of provisions to £6.7bn.

The bank says that it continues to cooperate with the US Department of Justice in its civil and criminal investigations of RMBS matters, and RBS considers it appropriate to take this provision now in relation to those investigations, as well as other RMBS litigation matters. The bank notes that the duration of these investigations and litigations remains uncertain and that it does not know whether settlements for all or any of these matters will be reached.

RBS also notes that further substantial additional provisions and costs may be recognised. Depending on the final outcome, it warns that other adverse consequences may occur.

"Putting our legacy litigation issues behind us, including those relating to RMBS, remains a key part of our strategy. It is our priority to seek the best outcome for our shareholders, customers and employees," says RBS ceo Ross McEwan.

The further £3.1bn provision would have reduced RBS' tangible net asset value per share at 30 September 2016 by 27p to 311p and the bank's 3Q16 CET1 capital ratio by 135bp to 13.6%. The provision does not directly impact the distributable reserves of RBS Group.

ABS

NZ group turns to ABS

New Zealand's largest vehicle seller, Turners, has established a NZ$150m securitisation programme that will securitise the group's consumer loan portfolio. The programme will be implemented next month and the first receivable sales transactions are scheduled to occur in March.

Turners believes the programme will provide an improved funding structure, committed two-year term capital and improved pricing. It also provides the scalability to accommodate future growth strategies.

The programme has been arranged by the Bank of New Zealand and structured to accommodate the finance receivables originated by the group's Dorchester Finance, Oxford Finance and Southern Finance businesses, as well as the receivables generated via the recently established MTF Partnership Channel.

"The securitisation programme has been a core funding strategy for our business for some time now and we are pleased to have received credit approval for the programme, with the improvements to structure, security and pricing this achieves," says Turners ceo Todd Hunter.

He adds: "The high quality of our consumer loan portfolio has directly enabled us to achieve commercial terms with the Bank of New Zealand that accommodate the majority of the Turners Group receivables and provides committed funding to the group at a competitive rate, with the structure able to accommodate future growth opportunities."

ABS

Demonetisation hits collections

Demonetisation appears to have had a negative impact on Indian auto loan repayments, based on collection reports from Fitch-rated securitisation transactions. Small auto-loan borrowers have been affected the most.

Demonetisation is likely to have had a detrimental effect on the income and cashflows of commercial vehicle operators, which could continue to feed through into repayments in the next few months. However, Fitch says its rated Indian ABS transactions have sufficient external credit enhancement to cover the likely short-term impact and it does not expect ratings to be affected.

Collections of Fitch-rated ABS transactions dropped by an average of around 100bp in November 2016 (the first month of demonetisation) to 101.5%, from 102.5% in October. Fitch has received December 2016 collection data for around 40% of its rated transactions, which points to a further average drop of 60bp.

Borrowers were initially permitted to use demonetised notes for loan repayments, which helped in managing collections in November. However, demonetisation has disrupted economic activity - particularly in the informal sector - and is likely to have hit borrowers' incomes. It is possible that collections will fall further in early 2017 and Fitch believes it could take at least another two to three months before collections return to normal.

The cash shortage has affected used-vehicle operators - which generally have weaker credit profiles - more than new-vehicle borrowers. Pools backed predominantly by used-vehicle loans saw an average drop in collections of 130bp in November 2016.

Those with a higher concentration of light and small commercial vehicles - which also have relatively weaker borrower credit profiles, compared with medium and heavy vehicle owners - also dropped significantly, by almost 200bp.

The collection of pools securitised in 2016 fell by an average 120bp, compared with 80bp for pools securitised before 2016. More seasoned pools are on average likely to have more experienced borrowers, with a stronger ability to meet their repayments and higher equity than those in less seasoned pools, leading to a greater willingness to pay.

Only four transactions made any utilisation of credit enhancement in November 2016. All Fitch-rated transactions are currently able to withstand a 30% drop in collections for a minimum of eight months and an average of 22 months.

Structured Finance

High prepays for SBOLT

Moody's reports that the performance of Small Business Origination Loan Trust 2016-1, the first European securitisation of marketplace loans, has so far largely been in line with its initial expectations. Indeed, the transaction's sponsor - Funding Circle - has had to provide minimal support, repurchasing just 0.33% of loans.

"Loan-level defaults are in line with our expectations, at 2.20% of the original loan count and 1.82% of original value, given the relatively short weighted average life of 1.9 years. The prepayment rate is high, causing quick deleveraging and a subsequent increase in credit enhancement for the class A notes, to 47.6% from 34.0% at closing," says Monica Curti, a vp at Moody's.

The prepayment rates have been 18.67% for October, 20.95% for November and 19.90% for December 2016. As a result, SBOLT 2016-1 has deleveraged by 27.5% to £93.6m, from its initial £129.2m.

Moody's suggests that the high level of prepayments is likely a result of the absence of prepayment fees, the fixed-rate nature of the securitised term loans at a time of decreasing spreads and interest rates, and organic cash generation in the underlying businesses. Although the weighted-average interest rate has remained 9.6% since closing, the percentage of loans with an interest rate below 8% has declined to 3.9% of the current portfolio from 5.2% of the closing portfolio, without an increase in the highest buckets.

As of December, 60 loans have defaulted, representing 2.20% of the portfolio, 1.82% of original balance and 18.2% of Moody's 10% lifetime cumulative default assumption for the deal. The majority of the defaults are due to an insolvency of the borrower without first being classified in arrears or renegotiated.

Total delinquencies stand at 0.40% of the performing portfolio, as of December 2016, and two-month delinquencies stand at 0.05%. Nevertheless, the deal has been carrying an uncured principal deficiency ledger balance on the unrated class Z notes since the June 2016 reporting date.

Structured Finance

Placed issuance up

€59bn of securitised product was issued in Europe in 4Q16, an increase of 26.9% from 3Q16 (€46.5bn) and a decrease of 19% from 4Q15 (€72.8bn), according to AFME figures. Of this, €31.1bn was placed (representing 52.7%), compared to €21.5bn placed the previous quarter (46.2%) and €15.7bn placed in 4Q15 (21.6%). Placed securitisation grew by 16% in 2016, compared to 2015's totals.

The annual increase in volume was driven by CLOs (up by 52% year-on-year) and RMBS (up by 59%). Activity in other sub-asset classes also grew at double-digits: consumer ABS was up by 11% year-on-year; lease ABS was up by 16%; and SME ABS by 30%.

AFME notes that strong CLO issuance was also behind the increase in placed product in the last quarter of the year, with volume up by 45% quarter-on-quarter. In fact, 4Q16 placed volume was the highest for a quarter since 3Q10 - contrasting with 1Q16, which was the lowest quarter since 2011.

CLOs

CLO 2.0s face less EOD value risk

European CLO 2.0 transactions face less event of default-driven market value risk than CLO 1.0s, says Moody's. None of the European 2.0 deals the agency rated in 2016 have mezzanine or junior OC EOD triggers, which had been common among CLO 1.0s.

CLO 2.0s rated by Moody's typically require exclusively the initial senior most outstanding notes' OC, rather than the outstanding most senior class, to fall below a certain threshold to trigger an EOD. That reduces the risk of EOD and investors' exposure to market value risk amid a subsequent liquidation of collateral, as the deal can no longer trigger an OC-based EOD once the initial senior-most class has paid down.

EODs are rare, but the recent example of Leveraged Finance Europe Capital III and a broader analysis of OC trigger utilisation levels shows that CLO 1.0s are at heightened risk of tripping mezzanine or junior note OC-based EOD triggers as they age. EODs typically allow for the acceleration of CLOs' note payments and the liquidation of its collateral, exposing mezzanine and junior note investors to market value risk and potentially leading to losses.

As well as differences in the attachment of OC EOD triggers to a transaction's capital structure, the OC EOD trigger calculation itself is different for CLO 1.0 and CLO 2.0 deals. CLO 2.0s have stopped applying certain collateral haircuts to the numerator of the fraction, which results in OC EOD trigger calculations no longer running in sync with standard OC tests because the latter still have collateral haircuts in place.

CLOs

CLO refinancings tallied

US CLO issuance finished 2016 markedly lower year-over-year, with US$63.5bn from across 136 deals, Fitch notes in its latest Global CLO Market Trends Quarterly publication. This represents a 32% decline from US$93.1bn from across 177 CLOs in 2015.

The agency reports 43 US CLOs totalling over US$21.6bn coming to the market in 4Q16. "November saw the highest volume of CLO issuance, with 18 new deals totalling over US$9bn coming to market," comments Fitch md Derek Miller.

Unsurprisingly, the advent of the new risk retention rules led to a flurry of CLO refinancings and resets last quarter, with 50 US CLOs refinancing liabilities of over US$23.6bn on top of the US$21.6bn in new deals issued during the quarter.

Fitch expects the first few months of 2017 to be noteworthy as the market attempts to ascertain what new CLOs will look like with risk retention rules now in play. New CLOs have begun including additional qualifiers in offering documents regarding risk retention compliance, along with greater disclosure of the asset manager's method of compliance.

"We expect the CLO asset manager to take prudent steps to ensure compliance with risk retention rules, though it is too early to tell which risk retention structures will prevail over others," says Miller.

CMBS

Land Securities tap prepped

Land Securities Capital Markets is expected to issue two additional classes of notes, the proceeds of which will be used to purchase a portion of the existing class A3, A4, A5 and A10 notes. Provisionally rated double-A by Fitch, the new class A12 and A13 notes will be issued under the SPV's £6bn multi-currency issuance programme, with which they will rank pari passu.

The issuance is not expected to increase the effective leverage of the security group. Indeed, the overall strength of the property assets held in the security group, coupled with low leverage support the high investment grade ratings on the notes. The expected ratings also reflect a robust covenant regime that reduces borrower flexibility if performance measures are breached, according to Fitch.

The portfolio enjoys high occupancy, a diverse and good quality tenant base, a weighted average lease length of almost nine years and near prime overall asset quality.

The LSCM notes have a mechanism intended to provision for upcoming maturities commencing just 12 months prior to bond maturity. Consequently, Fitch notes that reliance on the sponsor's propensity to repay debt becomes an additional consideration beyond the pure real estate recoveries expected from the portfolio.

"We would expect the sponsor's motivation to secure refinancing to increase two years ahead of bond maturity when its coupon steps up," the agency says.

Since Fitch's last rating action on the CMBS in August, the security group portfolio market value has grown to £12.96bn from £12.57bn, despite the disposal of seven properties over the same period. The agency projects single-B recoveries of £8bn, which incorporates its view that valuations - particularly for London offices - are considerably above the level that it would consider sustainable over the long term.

Risk Management

Euro OTC credit terms to tighten

Credit terms offered to all types of counterparty will tighten in the three months between December 2016 and February 2017, expects the ECB. A December survey by the central bank found credit terms and conditions for euro-denominated securities and OTC derivatives markets had become less favourable for banks, dealers and hedge funds.

For the provision of finance collateralised by euro-denominated securities, survey respondents told the ECB that credit terms, such as maximum funding amount, maximum funding maturity and haircuts, were essentially unchanged in the three months from the start of September to the end of November. There was a suggestion of less favourable financing rates offered to clients using government, sub-national and supranational bonds as collateral.

The liquidity and functioning of markets for the underlying collateral had also deteriorated for all types of government, sub-national and supranational bond, continuing the significant deterioration in liquidity and functioning reported by survey respondents since mid-2015.

Initial margin requirements have increased for all types of non-centrally cleared euro-denominated OTC derivatives contract, partially because of new requirements to exchange initial margin. Survey respondents also noted less favourable conditions in relation to margin call practices, acceptable collateral, covenants and triggers, and other documentation features.

Banks reported a decrease in their market-making activities for debt securities and derivatives over the past year. Respondents' confidence in their ability to act as a market-maker in times of stress was relatively strong for derivatives, government bonds and covered bonds, but much weaker for the other asset classes covered by the survey.

RMBS

Weak pools blunt Countrywide boost

The positive credit effects of the US$7.35bn settlement proceeds distributed to outstanding Countrywide RMBS trusts last June (SCI 19 May 2016) have been muted by increasing pool losses and rising shares of seriously delinquent loans, says Moody's. The rating agency notes that the influx of cash to the Countrywide deals was not large enough to significantly affect the transactions' credit profiles going forward.

The US$7.35bn of settlement proceeds that have been distributed to RMBS trusts rated by Moody's account for only 9.6% of the rating agency's projection of those trusts' lifetime losses. The majority have delinquency pipelines greater than 10% of current balance.

The distributions were credit positive for a limited number of bonds. Around 7% of subprime, Alt-A, option ARM and prime jumbo bonds recorded more than a 10% increase in credit enhancement. Approximately 19% were upgraded.

Nearly 61% of Countrywide deals had no subordinate bonds prior to the settlement and only 14 deals had subordinate tranches written up from zero. That meant that the recoveries, even those as large as 30% of the May pool balance, did not offset the depletion of credit enhancement or losses already incurred for those bonds.

Moody's notes that bonds from deals with low settlement shares still benefited due to waterfall features, while the credit profile of bonds from deals with large settlement shares but weak pool performance remain unchanged. The impact on recoveries clearly depended more on underlying pool performance and transaction-specific waterfall features than purely on the settlement amount.

For example, CWALT 2004-28CB received around US$4.7m in settlement funds, representing less than 10% of its May 2016 current balance. But the 1A1 tranche - with a shifting interest structure - primarily benefited because it had senior sequential priority to other senior bonds when the settlement funds were distributed, with a tranche factor of roughly 2% of original balance. At distribution, the structure also still had mezzanine support from the class M tranche, which was written up further by the recoveries.

RMBS

Decree may impact RMBS

Following recent court decisions, the Spanish government has announced a Royal Decree 1-2017, which requires banks to identify mortgage loans where the presence and operation of interest rate floor clauses were not originated with sufficient transparency. Fitch expects the move to clarify any impact on RMBS transactions.

Banks will now propose and agree settlements with affected mortgage borrowers, with loan reviews and settlements to be completed in three months via a consensual, out-of-court process, with borrowers registering their claims at bank branches. The rating agency notes that the risk of mortgage borrowers seeking compensation from SPVs relating to historical interest payments affected by rate floors is remote and very unlikely to have rating implications, as SPVs are not responsible for mortgage origination. Fitch suggests that a more direct risk could come from the impact on transactions' future cashflows, as income to the SPV could reduce through nullification of existing rate floors.

Fitch has conducted a preliminary assessment of RMBS transactions' exposure to rate floors and suggests that the cashflows of a small proportion, unlikely more than ten Fitch-rated deals, could be affected. The rating agency concludes that it might take three or four months to see the impact on cashflows of the Royal Decree, but that a full assessment of the impact on transactions will depend on the proportion of underlying loans affected, how banks seek to compensate borrowers and whether borrowers accept these proposals and the presence and nature of any interest rate swaps in deals.

RMBS

Non-prime issuance 'to double'

Fitch suggests that 2017 could be a watershed year, with a more large-scale return of new US non-prime RMBS. The agency projects a two-fold increase in issuance and a more rapid growth trajectory longer term.

Over the last 18 months, 10 non-prime RMBS deals totalling over US$1bn from five issuers have come to the market. "Growth in US non-prime RMBS is expected as an increase in interest rates will redirect some lender focus from prime refinances to non-prime, and successful securitisations provide visibility and incentives for potential issuers," comments Fitch md Grant Bailey. "But legislative, regulatory and market changes will limit non-prime RMBS to a very small share of the total US mortgage market."

The agency notes that a number of pre-crisis risks have been mitigated, although the credit behaviour of the borrowers remains a primary uncertainty. "Early non-prime RMBS performance has been very good, though borrowers in these programmes are expected to default at higher rates and will be more vulnerable to economic stress than prime borrowers," says Bailey. "What's more, limited performance history for borrowers with recent major credit events, plus the lack of precedent on how courts will interpret the ATR rule adds uncertainty to projections."

Fitch says that a triple-A rating will not be initially attainable for some issuers due to a limited track record. Specifically, multi-originator conduit programmes that were developed recently and consist of originators that the agency is not familiar with will face hurdles to achieving triple-A ratings until a greater track record is established and it has developed greater knowledge of the underlying originators.

RMBS

CA bringing RMBS 'first'

Credit Agricole has mandated its first public French RMBS (see SCI's pipeline). It is Credit Agricole's first public securitisation of French home loans and is the first pure funding transaction since the financial crisis.

The €1.136bn FCT Credit Agricole Habitat 2017 transaction is a securitisation of prime mortgage loans. Rabobank credit analysts note that the timing of the deal is a surprise, considering Credit Agricole raised €2.5bn in covered bond funding as recently as Tuesday.

"As the issuer's covered bond funding is clearly skewed to longer maturities, RMBS as a funding tool seems to be preferred for shorter-dated funding. The WAL is calculated following a CPR assumption of 5% and exercise of the call option in March 2022," note the Rabobank analysts.

The RMBS is backed by prime French residential home loans. The provisional pool is static, with a weighted average seasoning of four years and weighted average indexed LTV of 77.55%. Direct first-lien mortgages compose 41% of the pool balance, while 51% are guaranteed by CAMCA and 8% guaranteed by Credit Logement.

The analysts note that the guaranteed loans are specific to the French market, providing an alternative to classical mortgages. The loan is guaranteed by a credit institution or insurance company, rather than being secured directly by a property, and the credit risk is mutualised.

Credit Agricole did issue a €10bn deal in 2015. However, that was fully retained.