Contents

NPLs

Repurchase plan

Italian bridge banks complete resolution process

Nuova Banca delle Marche has completed the NPL repurchases from its securitisations in accordance with the Italian state's resolution plan. The €74.3m sale proceeds from this latest repurchase will be used to repay the Marche Mutui 4 RMBS notes on the next interest payment date in February.

Four small lenders were placed under special administration with the Bank of Italy, after they were rescued from bankruptcy in November 2015. CariFerrara and Banca Etruria have already repurchased their NPLs under the resolution plan. The other bank placed under administration is CariChieti, whose RMBS - Creso 2 - did not have any bad loans, as of 30 September 2015.

€302.56m bad loans from 11 out of 13 of the four lenders' outstanding SME ABS and RMBS transactions (with a total pool balance of €2.62bn) have now been repurchased for €279.86m, according to Moody's figures. Each bank, except CariFerrara, repurchased the loans at par.

The resolution plan only applies to transactions where the underlying loans were not derecognised from the seller's balance sheet. No bad loans were repurchased from Marche Mutui Società per la Carolarizzazione because a derecognition of the underlying loans from the seller's balance sheet had already been made when the transaction closed in 2003.

The repurchases have been executed in anticipation of the sale of the resulting Chieti, Etruria and Marche 'good banks' to UBI Banca. Under the resolution plan, the NPLs had previously been placed into a single separate unit - with shareholders and subordinated debt holders incurring some losses - and the banks were then restructured, recapitalised and put on sale. Popolare Emilia Romagna is believed to be considering acquiring CariFerrara.

The affected securitisations received cash payments, in turn, which were distributed to noteholders on scheduled IPDs. David Bergman, vp at Moody's, notes that investors in the deals will be positively impacted, since "there will be cash in the transaction and the notes will be paid in advance". Senior noteholders are expected to benefit the most from the repurchases.

For example, senior noteholders were completely reimbursed only a few months after the restructuring of Etruria Securitisation SPV was completed in January 2016. Moreover, the credit enhancement of the mezzanine notes increased considerably to 51% in August 2016 from 38.7% in May 2016, thanks to the repurchase proceeds.

The sale of the banks, however, highlights how resolution costs can inflate after the point of resolution, according to a recent report from Fitch. The agency stresses how the Italian banking sector will have to expense an extra €1.5bn for the four local banks.

"They were valued at just above €1.4bn in the National Resolution Fund accounts at end-2015, but this value will be written down close to zero. For the three banks being sold, there will be further costs to cover non-performing exposures that have emerged since their resolution, staff redundancies and branch closures ahead of the transfer to UBI," states the report.

Italian banks had already paid €3.6bn upon the resolution of the four banks in 2015, with most of the cost falling on the largest banks.

SP

RMBS

Boosting liquidity

First post-crisis Irish NPL RMBS profiled

Lone Star's Irish non-conforming RMBS, which it privately-placed in November (SCI 29 November 2016), was notable for its mixed pool of performing and non-performing mortgages. The €536.5m European Residential Loan Securitisation 2016-1 - Ireland's first post-crisis NPL RMBS - is expected to pave the way for further such mixed-pool issuances.

The collateral comprises a rare mix of performing (accounting for 33.2% of the pool) and non-performing loans (63%) extended primarily to individual borrowers in Ireland. The €557.93m (gross book value) portfolio, which was originated by Irish Nationwide Building Society, consists of 2,872 loans secured by mortgages on residential secured and unsecured loans.

Rated by DBRS, Moody's and S&P, the liability structure comprises: €272.3m A/A2/A rated class A notes (which priced at one-month Euribor plus 150bp); €12.3m BBB/Baa3/BBB class Bs (plus 300bp); €12.3m BB/Baa3/BB class Cs (plus 400bp). The €199.6m class Ds (6%) and €40m class Ps are unrated and will be retained by the seller. Morgan Stanley is arranger and lead manager on the deal.

In assessing the portfolio characteristics, Moody's divided the collateral into non-performing and performing loans, applying its standard NPL methodology. The approach assesses the timing of the future cashflows and value of the property upon sale on the non-performing loan portion of the pool. The MILAN framework was used to assess the performing collateral through the estimation of expected losses.

In particular, Moody's determines a number representing the credit enhancement that would be required for the performing portion of the pool to obtain a rating consistent with Aaa under highly stressed conditions. This MILAN CE number is produced by using a loan-by-loan model, which analyses each loan in the pool individually and - based on individual characteristics, such as LTV or other identified drivers of risk - produces a benchmark CE number. MILAN CE for the performing portion of the pool is 33%, which is above the average for other Irish RMBS transactions rated by the rating agency.

According to Steve Becker, analyst at Moody's, interest due on the class B and C notes depends on the average six-month pay rate of the underlying borrowers, which is used to calculate the PDL of the respective tranches. If the PDL is equal to or exceeds 10% of the respective outstanding amount, payments to the class B and C notes are deferred, which accelerates payments for the senior notes.

The structure, as Becker elaborates, possesses rare features that enhance liquidity protections. "RMBS NPL securitisations involving mixed portfolios of performing and non-performing loans are rare," he confirms.

This renders the structure "quite beneficial", as the performing portion of the pool provides liquidity through its ongoing cashflows, which will compensate for the period when there are no cashflows from the NPL portfolio. This point is particularly relevant, he adds, given that most of the NPLs are subject to uncertain and lengthy legal proceedings over foreclosures.

Other features of the deal include an interest rate cap, an unusual occurrence for a performing RMBS. In this case, the interest rate cap agreement stipulates that HSBC - the interest rate cap provider - is obliged to make payments to the issuer on each interest payment date if one-month Euribor exceeds 1%.

Liquidity is further boosted through a general reserve fund and an option by the seller to sell a portion of the assets. The reserve fund is equal to 3% of the class A, B and C note balance and is dedicated to paying interest on these three classes of notes and senior fees only (subject to the PDL conditions on classes B and C). During the life of the transaction the reserve fund can only be used for liquidity purposes and not to cover credit losses.

In terms of selling part of the collateral, Becker suggests that "there could be a scenario where the issuer sells all the performing loans, taking liquidity out of the structure. As mitigation, it can only sell assets at a minimum sales price and must fund a liquidity reserve."

Monthly mortgage payments are converted into euros at the spot rate, although exposure to sterling represents less than 1% of the pool. Other issues include the granularity of the portfolio.

"It is less granular compared to what we have seen in Ireland, given higher average loan ventures. In this case, you have higher LTVs; higher than 100% for many of them. This implies negative equity," Becker states.

The weighted average LTV for the secured portion of the portfolio is about 91%, with a weighted average indexed LTV of approximately 104%.

SP

NPLs

Bridging the gap

Neutralising NPL valuation discrepancies addressed

Achieving valuations that satisfy both sellers and investors has been a major sticking point in many recent European non-performing loan transactions. This has been most notable in Italy, where the wide bid/ask gap has hindered sales of NPLs to SPVs for securitisation purposes. The EBA's latest proposals seek to address this valuation discrepancy by purchasing the loans from banks at 'real economic value', rather than market price.

Highlighting that Europe's €1trn of NPLs was "urgent and actionable", the EBA this week put forward several corrective actions to counteract the NPL market's current failures. These include the availability of consistent data, better transparency of current NPL deals and overcoming market illiquidity issues by providing price clearing at real economic value. The EBA also proposed a state-funded, pan-EU asset management company (AMC) - or bad bank - that could buy banks' NPLs at 'real economic value', rather than market price, with a view to selling the loans within three years into the secondary market.

Valuation transparency within the NPL market is much needed: in a recent report, Scope Ratings highlights that outright sales of NPL portfolios to private equity investors are currently depriving the market of valuable information on prices, recoveries and servicer performance. The rating agency also notes that a lack of a well-established market is helping to maintain a liquidity premium, which can result in heavily discounted transfer prices for banks upon the sale and larger write-off of NPLs.

Scope also suggests the creation of a state-sponsored platform or asset management company to purchase NPLs from troubled banks at, or close to, market prices. The state-sponsored vehicle could, the agency suggests, securitise NPLs over time to avoid an oversupply of NPL ABS and provide the market with frequent and transparent information on transfer prices, recoveries and servicer performance.

According to Guillaume Jolivet, md and head of structured finance ratings at Scope, reforms establishing a framework that can provide market participants with reasonable confidence in their estimates of recovery rates for NPLs might be as important as a direct support to portfolio sales or purchase programmes. He explains that a key aspect of assessing NPL credit risk is in understanding the challenges and mechanics for collecting claims on NPLs - a process that can be uncertain.

"It not only depends on the performance of a skilled or experienced servicer, who is responsible for collecting the money due, but also on a judicial procedure and legal regime which enables the eventual collection. The more unpredictable the economy of the jurisdiction, the more difficult and uncertain recovery will be," he says.

He continues: "In other words, an under-developed economy may make it impossible to identify income. Hence, improvement in the track record of courts and clarity of legal process can help the predictability in NPL performance and therefore contribute to more appetite for NPL ABS."

While a number of European NPL ABS are in the pipeline, issuance is not expected to pick up until the latter part of 2017. "The securitisation of NPLs will ultimately come down to what banks can realistically afford to do," says Paul Burdell, ceo at LCM Partners. "Many Italian banks seemingly can't afford to take the hit that the pricing gap implies they would have to incur on their NPL portfolios. The banks may therefore need higher incentives to sell - it is not going to be simple."

However, Burdell also notes that the spread crisis is forcing investors to look further afield for yield. "The benefit to us is that there's now an even larger investor base that is educated as to the benefits of investing in NPLs: even if the spreads aren't right for them today, at some point they will be. Widening the willing audience that is prepared to look at a new asset class has to be a good thing."

LCM's approach for valuing portfolios of NPLs is technically the same in all jurisdictions, says Burdell, but the approach has to be tailored to take into account country-specific traits. "For each portfolio that we buy, we have a standard approach for valuation purposes. But data protection laws and collection methods will vary from country to country," he explains.

He adds: "This, combined with how we manage our customers, means that the specifics of the process will differ between jurisdictions. The tools that are used in a recovery process will be different as well. Detailed country-specific knowledge is essential to get this right."

Some countries have more creditor-friendly frameworks than others. The UK and the Netherlands are examples of jurisdictions where the processes are relatively straightforward and predictable. Burdell contrasts this with Italy, where repossession of property can take more than six years to complete.

"It is elements such as these that must be taken into account when calculating expected returns on a portfolio," he observes.

The due diligence process, where the NPL portfolio is audited against the bank's database, is also deemed fairly standard across different jurisdictions. "However, we have to take into account the method we will use to manage that portfolio, which will be directly attributable to the returns we're going to make," says Burdell. "Some countries that you may expect to be lax in how data protection is interpreted are really stiff, while others you may expect to be stiff are more lax."

The use of geographical sensitivities also applies to assessing the credit risk of NPL ABS. According to Jolivet, it is possible to apply the same analytical framework for different countries, but it is critical to reflect specificities of the jurisdiction at stake. Challenges lie with valuing the collateral: for example, most NPL portfolio sales in Italy to date have involved either credit card or other unsecured loan assets.

"When it comes to secured loans, there might be an increased asymmetry of views between the originating bank and potential buyers regarding the uncertainties about risks, such as timing of recovery process involving court judgement, rather than due to available data about a pool at stake," says Jolivet.

He adds: "There may also be asymmetry of information regarding underlying assets securing certain loans. But, in general, when portfolios of NPLs are sold, potential investors usually have access to loan data with all the information from the originating bank."

As highlighted by the EBA's recent report, Italy is not the only country in Europe to retain a high proportion of NPL stock. Ten countries in Europe currently have an NPL ratio of above 10%.

Bain Capital Credit has recently purchased several portfolios of NPLs in Spain. However, unlike in Italy, the bid/ask gap is less of an issue in the jurisdiction and bilateral trades are seemingly less complicated.

"There has been a convergence of several positive factors," says Fabio Longo, md at Bain Capital Credit. "These include positive macro and positive political environment, which play into the value of the underlying collateral."

He continues: "Spanish banks have been heavily recapitalised and are able to transact at market prices. They have proven themselves to be a reliable counterparty. A good infrastructure of NPL advisors has been developed and the bankruptcy process has been improved. All of these make it a fertile ground for us to explore."

The Spanish market has been trading NPL portfolios of circa €30bn on a fairly regular basis over the past three to four years, indicating that the bid-ask is close. "NPL valuation is not a pure science," says Longo. "As well as a bottom-up asset-by-asset evaluation, we have a number of factors that allows us to top-down predict the portfolios we buy: composition, geographical location, the status of insolvency and the type of collateral, for example."

He concludes: "The matrix is the same in any country, but it's important to apply the correct geographical overlay."

AC

CLOs

US CLOs still strong

The US CLO secondary market continues to see strong demand.

"There are a lot of refis out in the market, but the bid is still strong for secondary bonds," says one trader. "At the same time, there's dealer research out there saying that the arb isn't great for new issues, so primary supply could remain limited."

Consequently, the trader adds: "Selling is continuing to be met with real demand. The only potential restriction on that carrying on is that deals can run up quickly towards par, but once they go beyond around 97 there are less interested buyers in those bonds that would then have only limited or even negative yield before first call."

There are ten BWICs on the US CLO calendar for today so far. They mainly revolve around double-Bs and equity, but the longest of those remaining is a five line triple-A list due at 14:00 New York time.

It involves $2.5m each of: BLUEM 2012-1A A, BLUEM 2013-4A A, GALXY 2013-15A A, LCM 16A A and OCT12 2012-1A AR. None of the bonds has covered with a price on PriceABS in the past three months.

Secondary markets

Euro secondary sluggish

Activity across the European securitisation secondary market remains sluggish.

After a small pick-up in activity on Wednesday and Thursday, last week closed with volumes easing and has opened this in similar fashion thanks to a combination of wider market volatility and month-end. Nevertheless, sentiment remains positive across securitisation secondary and BWICs when they do appear continue to trade strongly, which is still holding spreads firm.

There is currently only one BWIC on today's European schedule - a single €4m line of ORWPK 1X SUB due at 15:00 London time. The CLO last covered on PriceABS at L80S on 3 November 2016.

Secondary markets

US CLOs slow

It looks set to be a slow couple of days in the US CLO secondary market.

The slowdown seen at the end of last week is carrying over in to this and around month-end. BWIC volumes have dropped considerably over the past few sessions and tomorrow's schedule currently looks little different. There are still some flurries of bilateral trading, but most appear to be inter-dealer book tidying.

At the same time, little pricing information emerged from Friday and yesterday's BWICs with a high proportion of DNTs or no colour released. Consequently, secondary spreads are little moved on the week.

Today's US CLO auction calendar involves three lists so far. The largest is a four line $13m double-B and equity mix.

Due at 10:00 New York time it consists of: CGMS 2015-2A D, MAGNE 2014-8A SUB, OAKC 2014-10A E and WINDR 2014-1A E. Two of the bonds have covered on PriceABS in the past three months, last doing so as follows: MAGNE 2014-8A SUB at L70S on 16 December; and OAKC 2014-10A E at 97.26 on 13 January.

Secondary markets

Euro ABS/MBS rising

Volumes and pricing levels are rising in the European ABS/MBS secondary market this week.

"In the first few weeks of the year there was very little client selling, but that's changing and it's been getting busier this week," says one trader. "We saw some Italian auctions Monday and Tuesday, Spanish yesterday and it's primarily Spanish and Portuguese today."

Nevertheless, the trader adds: "Tone remains resilient with bonds trading off the lists this week in line with or slightly above market. Everyone is still looking for paper and the Street appears light, so for now any selling will likely continue to be easily digested."

There are currently four BWICs on the European ABS/MBS schedule for today. The largest is a Spanish and Portuguese mix due at 14:30 London time.

The €278.4m nine line list comprises: BBVAR 2007-1 A2, BFTH 6 B, BVA 1 B, DOURM 3 A, TDA 20 A1, TDAC 3 A, TDAC 5 A, TDAC 8 A and TDCAM 4 A2. Two of the bonds have covered on PriceABS in the past three months - TDA 20 A1 at 98.401 on 19 December and TDCAM 4 A2 at 99.72 on 21 December.

In addition, there is a 30 line Spanish OWIC due by 11:00 today. It involves up to €50m each of: AYTCH II A, AYTGH VIII A2, BCJAF 8 A, BCJAF 9 A2, BCJAM 2 A, BFTH 10 A2, BFTH 11 A2, BFTH 13 A2, BFTH 6 A, BVA 2 A, BVA 3 A2, CLAB 2006-1 A, COMP 2012-3 A, COMP 2016-1 A, HIPO HIPO-6 A, KUTXH 1 A, KUTXH 2 A, PENED 1 A, PRADO 1 A, PRADO 3 A, RHIPG I A, RHIPO 6 A, RHIPO 7 A1, RHIPO 8 A2A, RHIPO 9 A2, SHIPO 2 A, TDA 29 A2, TDAC 4 A, TDAI 2 A and TDAI 3 A.

Structured Finance

SCI Start the Week - 30 January

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

Pipeline
Additions to the pipeline started to pick up pace last week. There were seven ABS and eight RMBS as well as a CMBS.

The ABS were: €549.1m Bumper 8; US$400m Exeter Automobile Receivables Trust 2017-1; US$410m Falcon Aerospace; US$529m Master Credit Card Trust II Series 2017-1; US$585m SMB Private Education Loan Trust 2017-A; US$420m State Board of Regents of the State of Utah Series 2017-1; and US$561m SoFi Professional Loan Program 2017-A.

The RMBS were: Apollo Series Trust 2017-1; €1.136bn FCT Credit Agricole Habitat 2017; FCT Elide 2017-01; US$1bn Invitation Homes; US$400m NRZ Advance Receivables Trust 2015-ON1 Series 2017-T1; REDS Trust Series 2017-1; US$742m STACR 2017-DNA1; and US$300m Station Place Securitization Trust 2017-1.

The CMBS was US$977m BAML Commercial Mortgage Trust 2017-BNK3.

Pricings
ABS accounted for the majority - nine out of 15 - of the week's prints. There was also an RMBS, three CMBS and two CLOs.

The 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; US$301.52m Flagship Credit Auto Trust 2017-1; US$750m GMF Floorplan Owner Revolving Trust Series 2017-1; US$529m Master Credit Card Trust II Series 2017-1; US$139m Mosaic Solar Loans 2017-1; and US$267.83m OneMain Direct Auto Receivables Trust 2017-1.

€1.16bn Claris RMBS 2017 was the RMBS, while the CMBS were US$1.3bn CD 2017-CD3, US$1.261bn FREMF 2017-K61 and US$365m Morgan Stanley Capital I Trust 2017-PRME. The CLOs were US$350m Allegro CLO 2014-1R and US$198m OFSI Fund 2013-5R.

Editor's picks
Heavy burden: 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...
Aligned interests: US funds continue to storm the Spanish NPL market for investment opportunities. They appear to be capitalising on funding structures and operational processes that match the asset characteristics of the large non-core disposal programmes seen in the country...
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...
US CLO mezz pauses: The 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..."
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...

Deal news
• 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.
• 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.
• Credit Agricole has mandated its first public French RMBS - €1.136bn FCT Credit Agricole Habitat 2017 (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.
• 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.
• 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.

Regulatory update
• 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.
• 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.
• 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.

Structured Finance

Securitisation prospects polled

Fiscal policy uncertainty is the top concern cited by respondents to Morgan Stanley's 1Q17 global securitised products investor survey, accounting for 28% of the responses. Nevertheless, half of those polled expect their allocation to securitised products to stay in line with their current allocation, while 36% expect to increase their allocation, compared with 37% in 3Q16.

The Morgan Stanley survey suggests that concerns about central bank/monetary policy have subsided, with just 12% of respondents noting that this is their primary concern, down from 40% in 3Q16. Geopolitical unrest was cited by 20% as their top concern, double that of respondents in 3Q16.

Consumer ABS and CLO seniors have the highest concentration of overweights among investors for the second survey in a row, with CLO mezz, UK RMBS and CLO equity trailing closely behind. Investors were most neutral on European CMBS, while they were most underweight on US agency MBS and legacy US CMBS dupers.

In terms of CLO relative value, most respondents prefer to be higher up the capital structure, with 34% seeing the most value in triple- and double-A and 22% in single-A and triple-B tranches. A large share also sees value in double- and single-B tranches backed by clean portfolios at higher prices.

Among European ABS-focused investors, 35% prefer US ABS to European ABS, while 29% see better opportunities in the non-ISIN space. A smaller share of investors appears to prefer ECB eligible/non-eligible European ABS, at 24% and 12% respectively.

With risk retention coming into effect on 24 December, investors were polled about their views on how the rule would affect the credit quality of new issue CMBS and CLO deals. Among CMBS-focused investors, 49% believe that the rule will have a positive effect, while 35% believe it will only have a marginal effect. For CLO-focused investors, those figures are 37% and 55% respectively.

Morgan Stanley also asked about investors' preferred structural solution for risk retention. The largest share of CMBS-focused investors cited the vertical strip at 47%, while 32% preferred the horizontal strip and 21% preferred a hybrid L-shaped strip. For CLO-focused investors, votes were largely split among the vertical and horizontal choices (43% and 41% respectively).

Rate expectations have shifted higher since the last survey, with almost 80% of respondents expecting rates to be higher in six months (from 70% in the previous survey). Of the respondents, 74% expect home prices to increase in 2017 (down from 81% in 2016 surveys), while 47% expect commercial real estate prices to be flat and 24% expect prices to decline.

Finally, respondents were polled about when the Fed will stop reinvesting paydowns. Some 74% of respondents believe reinvestments will end in the next 12 to 18 months. Only 9% believe this is a distant concern.

CS

Structured Finance

Direct lending vet recruited

HIG Capital has appointed Kenneth Borton as md of WhiteHorse Capital, based in London. He has over 17 years of experience in direct lending, structured finance and special situations.

Borton was previously an md at Citi, with responsibility for the credit opportunities business in EMEA. He managed over US$500m of direct lending transactions across sectors and throughout the region.

Structured Finance

Academy adds structured products pair

Academy Securities has made two additions to its structured products group, poaching Steve Kenney and Pierce Derkac from CapRok Capital. They will focus on multiple asset classes within structured products, including RMBS, CMBS, ABS, CDOs and CLOs.

Kenney and Derkac join as svps. Kenney was a senior member of the sales and trading team within securitised products and special situations at CapRok, while Derkac was part of the fixed income sales and trading team, primarily focusing on structured products.

Academy Securities is a disabled veteran-owned investment bank. Chance Mims, chairman and ceo at Academy, says the additions of Kenney and Derkac can directly help the firm to achieve its internal goal of military veterans representing 50% of its workforce.

Structured Finance

Portfolio company chief named

BlueMountain Capital Management has hired Jon Weber as head of portfolio company management to lead the firm's portfolio company operations. He will advise the management and boards of BlueMountain portfolio companies and be responsible for leading the operational oversight, governance and value enhancement of those investments.

Weber will work closely with portfolio managers engaged in BlueMountain's private capital and opportunistic investments effort, reporting to ceo and co-cio Andrew Feldstein and co-cio Derek Smith. Weber previously headed similar efforts at Anchorage Capital Group, Goldman Sachs special situations group and Icahn Enterprises. Before that, he was an investment banker at JPMorgan and Morgan Stanley, as well as an attorney at Weil, Gotshal & Manges.

CLOs

Carlyle appoints senior consultant

The Carlyle Group has named Craig Farr as a senior consultant with the global credit group. He will help Carlyle to develop new strategic initiatives and partnerships across the group's credit platform, including structured credit and distressed credit.

Farr was previously global head of capital markets and credit at KKR. He has also worked at Citigroup and at Salomon Brothers and has been a director of Vanbridge Holdings since 2016.

CMBS

Origination platform acquired

Walker & Dunlop has acquired Deerwood Real Estate Capital's loan origination platform, which specialises in sourcing debt and equity for all commercial real estate asset classes. Sixteen of the firm's commercial loan originators are expected to join Walker & Dunlop's capital markets group, including Deerwood co-founders David Rosenberg and Abe Katz.

"Deerwood marks another fantastic acquisition of talented loan originators in a highly strategic market, as Walker & Dunlop continues its dramatic growth towards becoming the premier commercial real estate finance company in the US," comments Walker & Dunlop chairman and ceo Willy Walker. "Deerwood's long-standing track record of delivering exceptional results for its clients in the greater New York region is what made this acquisition so attractive."

In the past 12 months, Deerwood has closed over US$1.5bn in loan origination volume.

Insurance-linked securities

OTPP promotes ILS leader

Ontario Teachers' Pension Plan has promoted Gillian Brown to md for credit, ILS and equity products. She is responsible for the fund's credit and equity indexing portfolios, as well as ILS.

Brown has been with Ontario Teachers' since 1995. She reports to capital markets senior md Ziad Hindo.

Insurance-linked securities

LCP board bolstered

Ly Lam has been appointed to the management board of Leadenhall Capital Partners as a representative of MS Amlin. She joined MS Amlin in October as head of strategy for reinsurance, reporting to global md of reinsurance James Few. Previously, Lam was coo of Markel CATco.

RMBS

Global MBS fund launches

PIMCO has launched a global MBS fund. GIS Mortgage Opportunities Fund is an absolute-return oriented, securitised asset-focused fund designed to capitalise on dislocations across agency RMBS, non-agency RMBS and CMBS markets.

PIMCO says the fund has the ability to allocate across all subsectors of the global securitised market and seeks to efficiently manage interest rate and credit risk across different macroeconomic environments. The fund has a benchmark-agnostic structure allowing for dynamic allocation across global securitised markets.

ABS

New VW settlement 'credit positive'

Volkswagen has received final approval from a US federal court for a US$1.2bn cash settlement with the 652 authorised dealers in the US affected by the company's diesel-emissions scandal. Moody's believes this is credit positive for the outstanding US auto dealer floorplan ABS issued by VW's indirect subsidiary, VW Credit.

Volkswagen received approval for another US$14.7bn settlement late last year (SCI 1 November 2016). The latest settlement, given final approval yesterday, requires the company to repurchase all affected vehicles in dealer inventory for which no fix is available.

The settlement is credit positive because dealers can benefit not only from cash payouts and inventory repurchases, but will also continue to receive manufacturer incentive payments for 12 months and can defer their capital improvement obligations. Moody's says the settlement provisions will boost payment rates in US floorplan ABS as a result of the repurchase or sale of affected inventory from dealers' lots as well as the improvement in the financial health of the dealers.

ABS

FFELP ABS changes tracked

Of 37 S&P-rated FFELP student loan ABS bonds maturing within the next five years, two appear sensitive to potential decreases in principal payment rates, says the rating agency. Of the 37 classes of ABS maturing in the next five years, six have maturities within the next year.

S&P's FFELP maturity tracker covers classes maturing in the near term and its primary analysis focuses on performance history over the past year. The rating agency's previous tracker report showed 81% of sequential and pro rata classes could withstand an immediate principal payment haircut of greater than 30%, but that has now fallen to 60% of classes.

S&P calculates the cushion between estimated months until repayment and months until legal maturity, with a smaller cushion indicating that a class is more sensitive to decreases in bond amortisation levels. Of the 37 ABS, 17 have a cushion of over one year, while around a third have a cushion of six months or less. The last tracker report showed only 7% of bonds with a cushion of six months or less.

As a result of declining principal payment haircuts, S&P has downgraded the A4 class from SLC Student Loan Trust 2008-2 to single-A. The two bonds the rating agency considers to still be sensitive to potential decreases in principal rates are the A5 class from SLM Student Loan Trust 2006-3 and the A3 class from SLM Student Loan Trust 2008-3, which have both been placed on credit watch with negative implications.

Structured Finance

SFR operators change tack

Single-family rental (SFR) transactions are benefitting from an improvement in sponsors' business models and strategies, says Moody's. Sponsors have moved away from the bulk purchases in depressed markets that started their businesses to strategies which improve the quality of the properties backing their transactions.

"With the US housing market recovering from the financial crisis and the inventory of distressed homes shrinking, sponsors of SFR transactions have been transitioning from the bulk purchase of single-family homes to more strategic purchases in markets with higher rental yield, while also selling low-yielding properties," says Moody's analyst Padma Rajagopal. "The quality of their portfolios has improved as a result."

SFR operators are increasingly acquiring properties on a one-by-one basis and through multiple listing service sales. Unlike auctions, these sales allow the borrower to assess a home's condition, resulting in lower future unexpected rehabilitation costs.

Moody's notes that whereas SFR operators spent around US$100m a month on acquisitions in 2013, they now spend US$20m-US$30m a month. Sponsors are also investing more in technology and property management infrastructure, improving their cost management and operating efficiency.

Meanwhile, Fannie Mae's recently announced foray into institutional SFR financing (SCI 31 January) could diversify the range of financing available to SFR operators, improving their liquidity.

Structured Finance

Multifamily risk-sharing debuts

Freddie Mac has priced its first offering of multifamily aggregation risk transfer certificates. The US$1bn FMPRE 2017-KT01 is backed by multifamily mortgage loans that are awaiting sale into K-Series securitisations.

KT certificates are designed to transfer to certain investors a portion of the credit risk associated with eligible multifamily mortgage loans prior to sale into K-Series CMBS. On the settlement date - which is expected to be 16 February - Freddie Mac will sell eligible mortgage loans to the KT trust and during a 32-month revolving period it will repurchase them for sale into K-Series securitisations and replace them with additional eligible loans.

The transaction comprises US$900m class A notes (which priced at one-month Libor plus 32bp), US$50m class Bs, US$30m class Cs and US$20m class Ds. Only the 3.02-year class A notes were offered.

Freddie Mac will guarantee timely payment of interest, reimbursement of realised losses and ultimate repayment of principal on the class A notes, but will not guarantee the class B, C or D notes. The GSE purchased the class D notes and a portion of the class As.

Barclays and Wells Fargo were lead managers and bookrunners on the deal. Academy Securities and JPMorgan were co-managers.

Structured Finance

APRA consults on reporting revisions

APRA released the final version of its updated Prudential Standard APS 120 last November (SCI 10 November 2016) and has now launched a consultation on revisions to associated reporting requirements for securitisation. These reporting requirements are expected to take effect from 1 January 2018.

Authorised deposit-taking institutions are currently required to report their securitisation activities under three reporting standards and APRA proposes streamlining statistical reporting for securitisation activities, to ensure they capture the most meaningful data and are aligned with the revised APS 120. In doing so, APRA is proposing to consolidate the three current reporting standards into two.

The first of these two, Draft ARS 120.0, would replace ARS 120.0 and ARS 120.1. This is because ARS 120.0 and ARS 120.1 would no longer need to be split, considering the removal of the IRB approach from the revised APS 120.

"One of APRA's objectives in reviewing APS 120 was to arrive at a simplified prudential framework for securitisation. As a result, a number of items that were previously reported under ARS120.0 and ARS120.1 have been removed from the reporting framework," says APRA.

The second streamlined reporting standard, Draft ARS 120.1, would be a renumbering of the current ARS 120.2. All banks would report their securitisation activities under ARS 120.1, including reporting structure type, holdings of own senior securities and clearer requirements for the reporting of self-securitisation.

In regard to the reporting of facilities, minor changes have also been made to reduce the number of categories of facilities reported. A new section is proposed to capture additional data on self-securitisation, which will be excluded from all other reporting items in the Draft ARS120.1.

APRA is also proposing minor amendments to the securitisation deconsolidation principle to align with the revised APS 120. It notes that this will require updates to all ADI reporting standards; however, it is proposed that this be undertaken as and when these standards are next reviewed.

Additionally, APRA proposes to amend Reporting Standard ARS 110.0 Capital Adequacy to reflect the amalgamation of the current ARS120.0 and ARS120.1, so that ADIs are no longer required to separately report securitisation exposures under the standardised or IRB approach. These changes to ARS 110.0 will also be effective from 1 January 2018.

Structured Finance

Disclosure recommendations released

SFIG has published the first edition in a series of papers aimed at supporting the responsible growth of securitisation in the marketplace lending sector. These green papers are a product of the association's marketplace lending committee best practices initiative and are released with the aim of stimulating further debate and discussion.

SFIG's marketplace lending committee currently includes 250 individuals, representing more than 70 member institutions. The initiative has established five work streams related to marketplace lending: disclosure and reporting; representations and warranties; regulatory; operational considerations; and enforcement.

This first edition green paper is the work of the disclosure and reporting work stream, which is tasked with publishing recommended best practices for data disclosure of underlying asset pool collateral. The three components of this scope of work are: loan level data disclosure; pool level data disclosure; and ongoing performance reporting.

The paper includes recommendations for loan level data disclosure. This recommended disclosure package is specific to securitisations of unsecured consumer loans originated by marketplace lenders.

CDS

Avaya bankruptcy determined

ISDA's Americas Credit Derivatives Determinations Committee has resolved that a bankruptcy credit event occurred in respect of Avaya Inc. The company announced on 19 January that it had filed voluntary petitions under chapter 11 of the US Bankruptcy Code. The DC is set to reconvene today (31 January) to discuss whether to hold an auction in respect of the entity.

CLOs

First Euro CLO brings innovation

The first new issue European CLO of the year, St Paul's CLO VII, has priced. The €414m deal was arranged by Deutsche Bank for ICG, with the bank noting that a structural novelty in certain tranches enables investors to take a rates view.

The class B3 and C2 notes of the CLO do not have Euribor floor protection to begin with, but have a coupon of three-month Euribor plus 180bp and plus 262bp respectively until April 2019. After that date, the tranche coupons change to plus 163bp (which is the same as the B1 notes) and plus 245bp (which is the same as the C1 notes), each with a 0% Euribor floor.

Every other tranche has a 0% Euribor floor for life. Deutsche Bank European securitisation analysts note that this effectively means investors in the B3 and C2 tranches benefit, compared to B1 and C1 noteholders, if three-month Euribor over the next two years increases by more than is priced in by the forward swap curve - although if that does not occur, they risk being paid a cumulative lower coupon until April 2019.

CLOs

CLOIE pay-downs pick up

The total amount of CLOs paid down in the JPMorgan Collateralized Loan Obligation Index (CLOIE) since the December rebalance through 31 January was US$16.98bn in par outstanding, split between US$2.69bn and US$14.28bn of pre-crisis and post-crisis CLOs. The post-crisis CLOIE added US$16.3bn across 170 tranches from 38 deals at the January rebalance.

CLOIE total returns for the month were 0.33% and 0.71% for pre-crisis and post-crisis indices. The top performing post-crisis tranches in January were single-B, double-B and triple-B, which returned 10.92%, 5.13% and 2.49% respectively.

Post-crisis single-Bs had their best monthly performance since March 2016. The top performing pre-crisis tranche was double-B, which returned 0.79%.

CMBS

CMBS liquidation volume rockets

US CMBS liquidation volume jumped in January to US$1.4bn, according to Trepp, crossing the US$1bn mark for the first time in 12 months. January's figure is more than double the US$595.3m total from December.

January saw 99 loans averaging US$14.6m disposed. Loss severity also climbed over 14 percentage points to 57.83%, driven by heavy losses on several large retail and office dispositions. Ten conduit loans, including one B-note backed by a suburban office in California, with a combined outstanding balance of US$227.5m closed out with 100% or more in losses.

Top of that list in terms of loan size and realised loss is the US$115m Marley Station loan, which was paid off with a 91.95% loss severity (see SCI's CMBS loan events database). Other large loans included the US$50.6m 33 Washington note and US$43.6m One Old Country Road. The US$62.6m HAS Memphis Industrial Portfolio also took on a 100% loss in January.

CMBS

Land Securities tender completed

Land Securities has confirmed it will accept for purchase an aggregate principal amount of CMBS notes across three series equal to £634.68m at a cash cost of £759.1m as part of its tender offer. At the same time, the firm will issue a £400m seven-year bond (paying a coupon of 1.974%) and a £300m 12-year bond (2.399%) under its Land Securities Capital Markets programme (SCI 27 January).

Martin Greenslade, cfo of Land Securities, comments: "These are the first new bonds to be issued out of our secured debt structure since 2007. We are pleased with the level of investor interest, as we consider how we finance a future phase of net investment."

Land Securities last week launched separate invitations to holders of Land Securities Capital Markets class A3, A4, A5 and A10 notes to tender their securities for purchase for cash. The new issuance will finance the buyback of the notes.

The firm will accept for purchase £206.12m class A3 (at a price of 113.98), £163.37m class A4 (124.45) and £265.19m class A10 notes (120.99), but no class A5 notes. Settlement is expected on 8 February.

As at 30 September 2016, the pro forma impact of the tender offer and new issuance includes: the extension of the group's weighted average maturity of debt by 0.6 years; an LTV increase of 0.8 percentage points; lower adjusted diluted net assets by circa £124.4m; and a net interest saving for the year to March 2018 on the tendered bonds, taking into account the cost of the new issuance, of circa £17.3m.

The firm says the purpose of the offers is to provide liquidity to noteholders and proactively manage its balance sheet.

CMBS

CRE market to 'remain favourable'

CRE Finance Council's latest annual member survey suggests that the US commercial real estate market should remain favourable in 2017, with the pace of economic growth rising, interest rates incrementally higher, new construction relatively low, and ample availability of capital and credit. However, CMBS spreads are expected to remain volatile, due mainly to external factors such as contagion from other asset classes and geopolitical trends.

CRE Finance Council executive director Lisa Pendergast notes: "Though there is some concern that we are nearing the peak of the current US real estate cycle, valuations are generally holding with ample credit available for new loans and refinancings of maturing quality loans. The dynamism of the commercial real estate finance market continues to be impressive, with CMBS issuers adjusting to new risk-retention requirements that took effect on 24 December 2016 and portfolio lenders, private equity and a new generation of other lenders stepping in to fill gaps and enable opportunity in the investment marketplace."

The majority (84%) of respondents believe that CMBS issuance will total between US$50bn and US$100bn in 2017, with a plurality predicting issuance for the year in the US$75bn-US$100bn range. Most of those polled expect bank balance-sheet lending volume to hold steady in 2017 relative to 2016, with insurers and CMBS conduits increasing their volume over the prior year. Some 72% believe that 50%-75% of CMBS loans maturing in 2017 will pay off or be refinanced in full and on schedule.

Multifamily lending is likely to be the most constricted in 2017, due to oversupply of multifamily units in some markets, with construction lending expected to be down mainly due to higher bank capital requirements for construction loans. Retail, office and industrial property markets are seen by the majority of responders to still be in the middle of their real estate cycles, with hotel and multifamily property markets at their peaks.

Meanwhile, incrementally rising interest rates are viewed as influential but tolerable by survey participants, especially if they accompany a stronger economy. Rising interest rates are anticipated to result in slightly higher borrowing costs, with capitalisation rates generally expected to rise as interest rates increase.

CMBS

Surprise delinquency dip

The Trepp US CMBS delinquency rate fell modestly in January to 5.18%, a drop of 5bp from December. The rate is now 86bp higher than the year-ago level.

Trepp notes that last month's dip comes as a bit of a surprise, given the volume of loans from the 2007 vintage coming due this year. "We will now watch to see whether this is indeed a blip or an inflection point," the firm says. "One thing that would push the rate lower is a quickened pace of loan resolutions for notes in default. If that were to take place, the reading could certainly hold steady or continue to fall."

The percentage of loans that are seriously delinquent is now 5.01%, 7bp lower for the month. Excluding defeased loans, the overall 30-day delinquency rate is 5.40%, down by 6bp from December.

Almost US$2bn in loans became newly delinquent in January, putting 45bp of upward pressure on the delinquency rate. A sizable portion of these loans had been current, but are now classed as non-performing loans that are beyond the maturity date.

Offsetting the rise in delinquent assets were loans that were previously delinquent but paid off with a loss or at par, totalling about US$1.8bn. Removing these assets from the numerator of the delinquency calculation helped move the rate down by 40bp. Just over US$700m in loans were cured last month, which helped push delinquencies lower by another 16bp.

CMBS

Loan drops level off

KBRA has examined how the composition of US CMBS conduit pools changed over the course of the rating process based on an analysis of the 2013 through 2016 vintages. The results show that overall transactions continued to experience meaningful pool changes during the rating process last year.

Nearly a quarter of the transaction balance (24.3%) changed last year, due to loan drops, additions and balance updates, according to KBRA. Although this percentage is in line with 2015 (24.5%), the two years are markedly different in a number of respects, most notably issuance levels.

"Market turbulence may have caused the percentage of loan drops to level off in 2016 by contributing to improved loan credit quality, resulting in fewer B-buyer kick-outs. Additionally, during 2016, pools containing a larger percentage of funded loans - which are typically less susceptible to being dropped - were observed at the time of preliminary feedback," the agency notes.

The study shows that the frequency of funded and unfunded drops declined year-over-year for industrial properties and increased for lodging properties, while the frequency of funded drops increased for lodging and retail properties but declined for non-bank originated loans. Further, fewer dropped loans were ultimately securitised in subsequent transactions. To the extent a dropped loan was subsequently securitised, a longer passage of time between the initial loan drop and the subsequent securitisation was observed.

In 2015, the loan seller with the highest frequency of drops was a non-bank, whereas the loan seller with the lowest was a bank. In 2016, bank entities accounted for both the highest and lowest frequency of drops.

KBRA notes that there was significant movement among the top 10 loan sellers with the highest frequency of drops; only three remained on the list from the prior year. However, non-banks accounted for seven of the top 10, compared to eight in the prior year.

Similar to the prior year, the data suggests that on a weighted average basis, non-bank drops were more leveraged than bank drops. Additionally, the weighted average KLTV for the dropped loans (103.2%) was meaningfully higher than the overall figure for KBRA-rated 2016 vintage conduits (98.1%).

Meanwhile, secondary market loans appeared to be more leveraged that tertiary market loans, with a slightly higher KLTV and lower KBRA debt yield. Tier 2A markets (representing the 18th to 50th largest MSAs) accounted for approximately 75% of the drops, with North - Central New Jersey (13.3%), Milwaukee (9.6%), Charlotte (6.5%), Detroit (6.1%) and St. Louis (5.4%) comprising the top five.

Insurance-linked securities

ILS 'difficult to understand'

A recent Clear Path Analysis survey of 100 institutional asset allocators finds that 22% are very likely to start investing in insurance-linked securities in the next 12 months. However, many respondents believe that catastrophe bonds remain difficult to understand, with 50% of plan representatives stating that "getting trustees comfortable with the asset class" is the biggest impediment they face to making allocations to the sector.

Adam Beatty, md with Nephila Advisors, suggests in the survey report - entitled 'Insurance Linked Securities - Asset Owner Insight' - that it can be difficult for investors to discern true risk-adjusted performance and whether a manager is delivering good value for the downside risk they are taking on. Considering the increasing role multi-asset fund managers could play, he adds: "We do feel that over time more of the investor community will find the asset class attractive and so we might expect to see some broadening out into the larger asset managers, perhaps adding it as part of a multi-asset portfolio of investments for their clients."

Indeed, 64% of pension plans polled stated that greater inclusion in multi-asset funds would prompt greater interest. The survey also suggests that 78% of pension plans believe further recommendations by own consultants is a key trigger to initial or further allocations, underlining the crucial role advisors continue to play in alternatives allocations.

Almost 80% of asset allocators expect 3% or less of their overall asset allocations in the next 12 months to be to ILS. However, for investors that are already active in the market, 32% intend to allocate more than 3% of their overall allocations to ILS over the next 12 months.

Of the respondents, 72% say that there isn't a need for more standalone ILS managers to allocate too. Further, size and reputation of asset managers appears to be a low priority among asset owners, scoring an average of '2' out of '5' in importance.

The average survey respondent expects 4%-6% on their returns over the next 12 months, which is broadly similar to previous years and indicates a low level of expectation among investors that new ILS risks will emerge in the market and offer higher returns.

Niklaus Hilti, head of insurance-linked strategies at Credit Suisse, offers an explanation as to why. "Market participants can buy reinsurance at a relatively low cost, so why should there be a push for innovation? Innovation occurs when there is some pain, which means it becomes very expensive to transfer risk."

Hilti points to life risk as one area where greater innovation in risk packaging for capital markets could occur. He comments: "Life risk, in the long run, can only be profitable if investment returns are higher in the future than they are at the moment. This already creates a certain pressure on insurers to offset at least part of the risk that they hold."

Insurance-linked securities

UK ILS consultation launched

The UK FCA has launched a consultation on proposed changes to its Handbook to reflect the new regulatory framework for ILS. The consultation is open until mid-March, with a policy statement expected in 2Q17.

HM Treasury proposed a new regulated activity of insurance risk transformation last November, as part of an effort to design a new framework to attract ILS business to the UK (SCI 24 November 2016). The FCA's consultation paper therefore sets out its proposals for the changes required to incorporate the new regulated activity of insurance risk transformation, including changes to the application provisions of parts of the FCA Handbook to incorporate ILS, some addition rules the FCA proposes to create for ILS business, proposals for fees for the registration of protected cell companies and a number of consequential changes.

RMBS

Split B tranches placed

Freddie Mac has priced the US$802m STACR Series 2017-DNA1, its first low-LTV risk-sharing RMBS of the year. The GSE has followed Fannie Mae's recent structural enhancement to its CAS programme in issuing a split B tranche (SCI 26 January).

However, unlike Fannie - which retained the subordinate B tranche issued by CAS 2017-C01 - Freddie's class B2 notes were publicly placed, albeit the GSE retained "a significant portion" of the first loss. The M1, M2, B1 and B2 classes printed at one-month Libor plus 120bp, 325bp, 495bp and 1,000bp respectively.

STACR 2017-DNA1 has a reference pool of single-family mortgages with an unpaid principal balance of approximately US$33.9bn, consisting of a subset of fixed-rate single-family mortgages with an original term of 241-360 months that were acquired by Freddie Mac between 1 April 2016 and 30 June 2016. The loans have LTVs ranging from 60% to 80%.

Barclays and Goldman Sachs were co-lead managers and joint bookrunners on the transaction.

Separately, six additional STACR tranches have received NAIC designations for the 2016 filing year, meaning that all of Freddie's 2016 STACR notes have received top NAIC designations (SCI 9 January). The STACR 2016-DNA4 M1 and M2, as well as 2016-HQA4 M1 and M2 notes now carry a NAIC 1 designation. The 2016-DNA4 M3s carry a NAIC 2 designation, while the 2016-HQA4 M3s carry a NAIC 3 designation.

RMBS

FNMA loan to pay down SFR deals

Invitation Homes last week filed a preliminary prospectus with the US SEC in which it notes that it has secured a US$1bn 10-year loan commitment from Fannie Mae and Wells Fargo and that it will use these proceeds to pay down all or a portion of the loans backing a pair of single-family rental securitisations. Moody's says this loan commitment is credit positive for Invitation Homes' remaining outstanding SFR transactions, and the SFR market more broadly.

The Fannie Mae loan will be securitised and backed by a pool of SFR properties and comes amid a larger capital raise for Invitation Homes which also includes an expected IPO and a US$2.5bn credit facility from a group of lenders. Combining short-term private-label securitisation financing with long-term GSE-backed funding diversifies Invitation Homes' funding sources and shores up its liquidity.

Invitation Homes will pay down Invitation Homes 2014-SFR1 in full and also US$275m of Invitation Homes 2014-SFR².

Under the terms of the Fannie Mae loan, Invitation Homes will have to adhere to certain underwriting standards for the SFR properties collateralising the loan. The specific underwriting standards are not currently available, but will include LTV and DSCR requirements.

"Fannie Mae's entrance into institutional single-family rental financing lends support to the market's long-term sustainability, reducing operational uncertainty in the single-family rental business model and lending support to the viability of the business. Separately, single-family rental operators have taken several steps to improve operational efficiencies and economies of scale through more targeted purchases of individual homes in specific markets and investments in technology and property management infrastructure," says Moody's.

RMBS

More MSRs for New Residential

New Residential Investment Corp is set to acquire US$97bn unpaid principal balance of mortgage servicing rights and related servicer advances from CitiMortgage, for approximately US$950m and US$32m respectively, through its subsidiary New Residential Mortgage. The acquisition of the MSRs is expected to close in 1Q17 and Citi will continue to subservice the portfolio on behalf of New Residential.

New Residential also acquired MSRs and related servicer advances with a total unpaid principal balance of around US$82.1bn for an aggregate purchase price of approximately US$572.5m and US$68.2m respectively in 4Q16. This included purchases from Ditech Financial, Walter Capital Opportunity, and FirstKey Mortgage. It also agreed to purchase US$72bn in MSRs from PHH Mortgage Corporation, with the latter expected to close in 2Q17 (SCI 3 January).