Contents

NPLs

Leveraging NPL disposals

UniCredit is expected to use leverage in its planned €17.7bn NPL securitisation, dubbed Project Fino, in an attempt to bridge the bid/ask gap on the asset valuations with investors PIMCO and Fortress (SCI 14 December 2016). The first phase of the transaction - in which it will sell at least a 20% vertical tranche of the portfolio - will be executed this year, with the second phase (full disposal) taking place by the end of 2019.

"Any deal of this size always has leverage, since investors need the leverage to finance the portfolio," says one source. "There are two deals; the first is backed by large real estate loans, while the second is backed by secured and unsecured loans."

UniCredit is believed to be underwriting the senior tranche in both deals and is expected to retain a small portion of the equity in one, while the investor will take the equity in the second. "It is just a way for the bank to finance the purchase price of the portfolio by underwriting the senior notes of the SPV," the source says. He adds that PIMCO and Fortress are able to "cherry pick" the assets, due to the €30bn write-down that UniCredit's NPL portfolio had been subjected to.

The lender recently announced a net loss of €11.8bn for 2016, due to €12.2bn in one-off charges in 4Q16. The latter consists of €8.1bn in loan loss provisions, along with €4.1bn of impairments and other general provisions, as the bank clears up its balance sheet. The annual loss brings UniCredit's CET1 ratio down to 8%, which is 2% below the ECB's minimum threshold.

To address the NPL challenge, as part of its 2016-2019 strategic plan, UniCredit has announced targets and strategies that include raising the CET1 ratio from 10.8% in 2016 to 12.5% in 2019 by strengthening the capital base through its recent €13bn rights issue, along with agreed disposals in Pekao, Pioneer and Fineco. The lender aims to decrease its group gross NPE ratio from 15.1% in 2016 to 8.4% in 2019, with group net NPE ratio decreasing from 7.9% in 2016 to 4% at the end of 2019.

In the same announcement, UniCredit points to further actions - such as the strengthening of its processes - to further reduce the risk profile of the NPE portfolio from origination and monitoring to workout. For example, with regard to commercial banking in Italy, the underwriting process has been centralised for selected portfolios (including real estate and project finance) and the focus on investment grade customers is increasing.

Separately, UniCredit sold a €110m portfolio of Slovenian non-performing secured and unsecured loans granted to corporate and private individual customers to B2 Kapital in December.

SP

Structured Finance

Risk retention trends emerging

Different retention strategies have emerged for US CLOs and CMBS leading up to and since the implementation of risk retention rules on 24 December 2016, with varying benefits also arising, such as a perception of increased quality in such deals. For the broader ABS market, however, approaches are still taking shape.

There are five main strategies for risk retention: a vertical piece, a horizontal piece, a combination of both (also known as L-shaped), a cash reserve account or a seller interest for revolving pools of assets. While all achieve the same objective of retaining 5% of the credit risk represented in a securitisation, the various approaches can have different pros and cons in terms of asset class and in relation to various stakeholders within any given transaction.

If retaining a horizontal strip, for example, a securitisation sponsor is required to retain 5% of the fair value of the ABS interest - although including a cash reserve account can also satisfy all or a portion of the risk retention obligation in this structure. However, while a fair value analysis is required for the horizontal option, a vertical strip doesn't need to be fair valued.

Jan Stewart, partner at Mayer Brown, anticipates some variation in risk retention structure to emerge across asset classes. "Over the last month, we've seen examples of all risk-retention structures being used, but the prevailing trends are still being determined by asset class. Typically, we expect auto ABS issuers to use both horizontal and vertical strips; equipment ABS issuers to use horizontal strips and eligible reserve accounts; and credit card and floorplan ABS sponsors to choose the seller's interest. The requirement to disclose fair value and the assumptions used to derive the valuation mean that some sponsors will naturally choose the vertical over the horizontal option."

Indeed, challenges around determining and disclosing fair value are emerging (SCI 19 January). "Some sponsors are looking to their underwriters to provide assumptions, but underwriters are concerned about establishing their due diligence under the securities laws and potential conflicts of interest," Stewart observes. "Others are exploring whether rating agency assumptions can be used. Ultimately, sponsors should consider multiple data points to come up with their own calculations."

Similarly, there are tensions regarding underwriting coverage. Underwriters are increasingly requiring representations regarding a sponsor's retention strategy on the date of the underwriting agreement and the date of closing; some are even asking for forward-looking covenants. But most are taking a tailored approach, given that market standards continue to develop as more deals are done.

Eric Reilly, partner at Mayer Brown, notes that if the party holding the retained interest needs financing, such financing must to be on a full recourse basis - yet there is no express guidance as to what qualifies. Questions being asked by industry participants include how many assets does an SPV borrower have to own for the financing to qualify as full recourse and whether a guarantee counts as an asset.

Two main risk retention structures have emerged for CLOs. One is the majority-owned affiliate (MOA), where CLO managers raise capital from third-party investors through a CLO manager-created MOA to finance the purchase of risk retention securities, with the MOA being consolidated by the CLO manager for accounting purposes. The other is the capitalised manager vehicle (CMV), where a CLO manager raises capital from third-party investors through a CLO manager-created CMV to finance the purchase of risk retention securities. The CMV becomes the primary asset manager and can then hire the CLO manager as a sub-manager, which doesn't have to consolidate the CLO.

Tracy Chen, portfolio manager and head of structured credit at Brandywine Global, says she has observed trends emerging for different asset classes, but suggests that a consensus relating to the benefits of each is pending. "So far, I have seen different risk retention-compliant approaches, with the main difference so far seen in CMBS and CLOs. In CMBS, it's mostly been a vertical approach and there is a lack of consensus about whether this is better or worse for investors. With CLOs, we're mostly seeing a horizontal approach," she comments.

More specifically for CMBS, she adds that while the vertical approach is being more commonly used, investors sometimes prefer the L shape. "With CMBS, they get favourable capital treatment with a vertical approach, but some investors have suggested that a vertical approach doesn't provide enough skin in the game. Some investors have suggested that the L shape solves this issue, but leads to a higher coupon, which in turn can lead to adversely-selected collateral," Chen comments.

The retention of the horizontal strip by a B-piece buyer is an option unique to CMBS, although the qualifying criteria are stringent. Under the risk retention rules, no more than two B-piece buyers can hold a single strip and they must each be pari passu, pay by cash at closing, conduct diligence reviews of each loan and have strictly limited affiliations with the other parties to the transaction.

Another challenge is that B-piece buyers have historically purchased less than 5% of the transactions and haven't always retained all of it - hence the introduction of the L-shape structure, whereby the B-piece buyer can purchase some of the risk and the sponsor can retain the rest. But the five-year holding period nevertheless remains difficult for B-piece buyers in the L-shape structure.

"The vertical structure has been used the most so far, given the favourable capital treatment of the vertical structure, disclosure issues around fair value requirements for horizontal structures, indemnification issues in horizontal structures and disclosure of the price paid by the B-piece buyer in horizontal structures," Reilly confirms. "The vertical strip can also be shared by originators in a multi-seller deal, with a portion of the risk retention obligation allocated to any originator that has originated at least 20% of the pool. Whether an originator qualifies as the 'retaining sponsor' depends on several factors, including its level of involvement in terms of underwriting, the ability to reject assets and the amount of assets it has contributed to the transaction."

In relation to CLOs, Chen notes that investors are seeing more obvious benefits from the horizontal approach, which has been more commonly utilised this year. "So far, we've seen the horizontal approach more commonly used and investors like this as it makes them feel the CLO issuer/manager is more aligned with the interests of the investor. With CLOs, issuers just look for term financing and so don't care much about capital treatment."

She adds that this approach brings benefits not just to investors, but to managers also. "In the horizontal approach, the manager takes the entire equity tranche and they can refinance or call the whole deal. Equally, when the CLO manager takes the whole equity piece, it's much easier to place the deal."

For RMBS, the risk retention rules were introduced in the sector at the start of 2015 and many sponsors have chosen to employ vertical risk retention - often with recourse financing. Some sponsors have used the horizontal option, especially where the size of the most subordinated tranches exceeded 5%.

Reilly indicates that implementation of the rules doesn't appear to have affected bond prices significantly to date, in terms of tiering between the type of risk retention employed. However, some investors may believe that the horizontal strip is the best option because the sponsor retains 5% of the absolute bottom of the capital structure.

In terms of investor reaction to risk retention-compliant deals, Chen suggests: "Investors definitely welcome the trend of more information and greater alignment of interest between issuers and investors." She adds that spreads of these deals have been tighter so far than previous non-compliant deals.

Indeed, risk retention-compliant deals appear to have a perceived quality and so are commanding tighter spreads. Triple-B minus CMBS tranches, in particular, have a perceived 'risk retention quality', which has expanded investor sponsorship and these buyers are paying for a combination of liquidity and quality.

In general, Chen says that it will take time for investors to feel comfortable with risk retention-compliant deals and states that this might be an experimental first phase. She comments: "I think the first batch of risk retention-compliant deals are a pricing exercise and we'll see a tiering method imposed. We need to do more relative value studies to work out how to price risk retention-compliant deals, but that can only happen once more are issued - at the moment, there are too few to do a proper comparison and so it's hard to price such deals."

The L-shape method - which saw its CMBS debut in January in the form of the US$1.3bn CD 2017-CD3 - can make pricing comparisons difficult, particularly in terms of the yield on the B-piece of a vertical risk retention deal and the B-piece on an L-shaped deal. In general, because the B-piece in a vertical risk retention deal is not part of the risk retention requirement and can be financed or traded at any time, it should trade at a lower yield. An L-shaped B-piece, however, cannot be traded and so should theoretically trade at a higher yield.

Chen notes that while there is a certain risk retention quality perceived in these deals, lower quality issuers might still try to enter the market, so more time to compare risk retention structures is vital. She concludes: "Risk retention gives investors some confidence in collateral, but we still think that lower quality issuers might try to issue risk retention-compliant deals and so again this increases the importance of getting familiar with relative value of these deals."

RB

Secondary markets

Euro secondary patchy

Activity in the European securitisation secondary market continues to be patchy.

Friday saw a relatively quiet session after a pick-up over the previous two days, but yesterday saw a flurry of activity and a couple of BWICs that traded strongly. Focus in ABS/MBS continues to surround peripheral paper, while CLOs remain most interested in lower mezz. Overall, sentiment is still positive despite jittery broader markets and secondary spreads are keeping tight.

There is currently one BWIC on the European schedule for today - an RMBS mix due at 11:00 London time. The four line €72.1m list comprises: CAJAM 2007-3 A2, FSTNT 12 B, LUSI 1 A and TDA 20 A2.

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

Secondary markets

US ABS rolls on

Strong volumes and demand for paper is rolling on across the US ABS secondary market.

The rally throughout the stack and in all ABS sectors seen in January has continued into this month. Appetite for paper appears undiminished though the pace of spread narrowing has reduced in some areas over the past week or so as recent tights are reached.

Nevertheless investor demand remains extremely strong for longer dated and higher yielding bonds. As a result, both prime and subprime autos in particular continue to benefit and have edged in still further across the capital structure since this time last week.

After a quieter than of late session yesterday, expected BWIC volume is healthy with the pipeline building throughout the week ahead. For today, first up is a small subprime auto collection due at 9:30 New York time.

The circa $600k current face list comprises: DRIVE 2017-AA A3, DTAOT 2016-4A A, EART 2015-3A A, FCAT 2015-3 A, FCAT 2016-3 A2 and FCAT 2016-4 A1. None of the bonds has appeared on PriceABS before.

Secondary markets

Euro ABS/MBS lighter

Volumes in the European ABS/MBS secondary market are lighter than last week.

"Secondary activity has slowed down again this week thanks mainly to there being a few relatively complicated new deals marketing and occupying a lot of attention," says one trader. "At the same time, the latest Towd Point priced tight for what it was, so there's plenty of appetite still out there."

The trader continues: "Overall, secondary tone remains strong and spreads tight. However, concerns over lack of supply mean there is less incentive to sell than there otherwise would be at these levels."

Technicals are likely to continue to support the market, the trader suggests. "On the buy-side the ECB is potentially a particpant and there are plenty of investors with post-New Year new money to put to work. So, with a still anaemic new issue calendar secondary demand is likely to remain."

There are currently two BWICs on the European ABS/MBS schedule for today. Both are due at 14:00 London time.

There is an eight line 53.732m euro and sterling RMBS mix comprising: LGATE 2008-W1X A2B, MFD 2008-1 A1, PMF 2014-1 B, RMACS 2006-NS1X M1C, RMACS 2006-NS3X M1C, RMS 28 C, VIRGL 1 A and WARW 2 B. None of the bonds has covered on PriceABS in the past three months.

In addition there is a single €5.2m line of LUSI 5 A. The bond hasn't appeared on PriceABS in the past three months.

Secondary markets

US CLOs focus on equity

The bottom of the stack has been the main focus for US CLO secondary market this week.

"It's a snow day in New York today, so it could be pretty quiet with a few lists being cancelled," says one trader. "But so far this week we've seen a lot more equity than anything else - it has accounted for about half the line items in for the bid."

The trader continues: "That's unsurprising given that the repricing going on in the loan market has caused equity softening. However, volumes haven't been as high as they might be as there's still a reluctance to sell-down in what is an overall positive CLO environment."

Indeed, the trader reports "The rest of the stack remains firm, but there is a noticeable lack of paper especially in double- and single-As. Hopefully, increasing new issuance will spark growth in secondary activity as rotation trades kick in."

There are currently three BWICs on the US CLO calendar for today. The largest is a two line single- and triple-A combination due at 12:00 New York time - $17.5m of GWOLF 2013-1A B and $171.5m of KVK 2013-2A A. Neither of the bonds has covered on PriceABS in the past three months.

ABS

Canadian auto ABS announced

Bank of Nova Scotia is in the market with its second Canadian auto receivables ABS, the US$752.68m Securitized Term Auto Receivables Trust 2017-1. The transaction is backed by 37,664 prime-quality retail instalment auto loan contracts secured by cars, SUVs and light-duty trucks.

Provisionally rated by Moody's and S&P, the transaction comprises US$110m P-1/A-1+ rated class A1 notes, US$175m Aaa/AAA class A2As, US$157m Aaa/AAA class A2Bs, US$157m Aaa/AAA class A3s and US$58m Aaa/AAA class A4s. There are also two unrated tranches: C$24.8m class Bs and C$21.24m class Cs.

Moody's notes that the securitised pool benefits from a large proportion (68%) of subvented loans, with a weighted average APR of 2.43%. "The relatively low APR is attributable to the large percentage of loans originated under low-rate incentive programmes, which are generally limited to the higher quality borrowers who purchase new vehicles. The low interest rates tend to attract high quality borrowers, who may otherwise purchase a vehicle with cash. The presence of these loans should have a positive impact on overall pool performance," the agency observes.

Additionally, it points out that the SSTRT 2017-1 portfolio has a weighted average original term of 63 months, which is lower than other recent Canadian public transactions. The receivables are also highly seasoned at 17 months.

However, the proportion of loans for the purchase of used vehicles in the pool is 28.23%. While the representation of used vehicle loans in this transaction is in line with most US deals Moody's has rated, it is significantly greater than in the publicly rated Canadian deals, which typically consist of well over 95% new vehicle loans.

In terms of geographic mix, exposure to the assets is concentrated in Ontario (at 45.47%), followed by Alberta (14.53%), British Columbia (12.04%), Nova Scotia (7.29%) and Newfoundland and Labrador (6.64%).

Lead underwriters on the transaction are Scotiabank, Barclays, Citi and JPMorgan.

CS

ABS

TGI Friday's taps market

TGI Friday's is in the market with a US$450m whole business securitisation. Dubbed TGIF Funding, the transaction is backed by royalties from 849 franchise locations and 54 company-operated restaurants.

The deal comprises US$50m class A1 notes and US$400m class A2 notes, both provisionally rated BBB/BBB- by KBRA and S&P. Barclays is sole structuring advisor and book-runner, while FTI Consulting is back-up manager.

The TGIF restaurant network included 903 locations with annual system-wide sales of approximately US$2.5bn, as of 26 September 2016. The transaction securitises royalties from approximately 94% of TGIF's franchise locations and 6% of its company-operated restaurants. Approximately 52.4% of the restaurant locations are within the US, while the remainder are from locations across 56 other countries.

The collateral includes existing and future franchise agreements, existing and future company-operated restaurant royalties, license agreements, existing and future intellectual property and related revenues. The proceeds from the offered notes will be used to refinance the company's existing debt, as well as provide a distribution to shareholders.

KBRA notes that the portfolio represents a highly franchised system with high geographic diversification, which typically results in a more stable stream of recurring royalty cashflows. The average franchisee tenure in the TGIF system is approximately 14 years and the average franchisee operates approximately 12 restaurants.

As of September 2016, the top ten domestic franchisees operate approximately 78.2% of all domestic locations and approximately 41% of the overall restaurant base. "Although there are risks associated with relying heavily on a small number of franchisees, large franchisees are typically more financially stable and may help motivate other franchisees in implementing new ideas and initiatives," the rating agency observes.

While international royalties will be paid in US dollars, they will be converted at the then current exchange rate, which KBRA says may be subject to a strong dollar upon conversion. However, with the TGIF locations spread across a number of foreign countries, the royalties collected should provide some diversity and a natural hedge against a potential strengthening of the US dollar versus any one or group of currencies.

CS

ABS

Mariner makes market debut

Mariner Finance has hit the market with an inaugural US$225m consumer finance securitisation. Dubbed Mariner Finance Issuance Trust 2017-A, the transaction comprises 89,914 non-prime/subprime secured and unsecured consumer loans.

Provisionally rated by KBRA and S&P, the ABS comprises US$189m AA-/BBB+ class A notes,  US$19.8m A/NR class Bs and US$16.2m BBB/NR class Cs. Mariner is both servicer and sponsor of the transaction, while Wells Fargo and Goldman Sachs are lead managers.

S&P highlights the 42.9% credit support through subordination, overcollateralisation, reserve account and excess spread as rationale for its rating of the senior notes. The agency also notes that a large portion of the loan pool includes loans with smaller balances and shorter original terms. The transaction has a revolving period, in which the loan composition can change, prompting it to consider the worst-case pool allowed by the transaction's limits.

As part of S&P's other key considerations is that, having been in business since 2002, Mariner has exhibited relatively strong credit performance on its consumer loan portfolio, even through the recent recession. The firm has also been profitable every year since 2002. The agency notes too that Wells Fargo as back-up servicer, a firm experienced in this role, can mitigate the risk of servicing disruption.

However, the transaction falls short of a higher rating than triple-B plus on the A notes because of factors such as Mariner's decentralised branch network. Many customers repay their loans in branch, so potential closures could lead to disruption of payments and impede collateral performance.

S&P also points to further deal weaknesses in the limited performance data for Mariner South and Pioneer (acquired in 2014 and 2015 respectively), the firm's reliance on loan growth - which depends on an external liquidity facility - and geographic concentration within Mariner's existing pool of loans.

RB

ABS

Punch purchase proceeds

Patron Capital has purchased 63.31 million of ordinary shares in Punch Taverns at 180 pence per share through Vine Acquisitions, the bidco set up with Heineken UK to acquire Punch Securitisation A (SCI 22 December 2016). The shares became available after Emerald Investment Partners withdrew its rival offer for the pub operator last week.

The share purchase represents approximately 28.5% of the existing issued ordinary share capital of Punch and was funded by a £120.05m bridge loan from Heineken. Prior to the purchase, Glenview, Avenue Capital and Warwick Capital Partners, as well as the Punch directors who hold shares in the pub operator entered into irrevocable undertakings with Vine Acquisitions in respect of their entire holdings of Punch shares. These shareholders represent approximately 52.3% of Punch's ordinary share capital.

Punch is financed through two whole business securitisations: Punch A, representing £786m of gross debt secured against 1,895 pubs; and Punch B, representing £565.6m of gross debt secured against 1,329 pubs.

The takeover is being implemented via a scheme of arrangement, with Vine's offer funded by: £64.2m indirect capital contributions from Patron Fund V; a £33.5m bridge loan from Heineken; and £305m disposal proceeds from the sale of the Punch A group. Heineken will fund its purchase of the Punch A group from a mixture of existing cash on its balance sheet and funds to be made available under an existing revolving credit facility and a new £340m facility from Nomura.

A shareholder meeting is convened for 10 February to approve the scheme and court approval is expected within 14 days after that. All Punch shares will then be transferred to the bidco.

A £300,000 slice of Punch Taverns Finance A A1 appeared on BWIC at 11:00 London time this morning. The bond covered at 127.5.

CS

ABS

DOE findings 'mixed' for SLABS

The US Department of Education's (DOE) determination that more than 800 career-training programmes are failing gainful employment accountability standards is credit negative for outstanding ABS backed by private student loans, says Moody's. By contrast, it is actually credit positive for future securitisations.

The gainful employment accountability standards evaluate borrowers' ability to service their student debt. Career-training programmes which repeatedly fail to meet these standards could lose access to federal funding, which would likely lead to programme closures and could even lead to school closures, thus resulting in an increase in defaults among in-school borrowers.

DOE data shows 98% of failing programmes were offered by for-profit institutions. Outstanding private student loan ABS would only be slightly negatively affected as borrowers who are currently attending for-profit schools represent only a small portion of the securitised collateral.

Closing down programmes which saddle graduates with large amounts of debt would leave future securitisations with a smaller exposure to for-profit school loans. As borrowers at for-profit schools default at significantly higher rates than borrowers at non-profit schools, the credit quality of loans in future pools would improve, which is credit positive for future securitisations.

"Loans to borrowers who are attending or have attended for-profit institutions are significantly riskier, on average, as compared with loans to borrowers attending not-for-profit schools. Default rate expectation for for-profit loans can be more than twice as high as that for not-for-profit loans, owing to factors such as low program completion and graduation rates or low incomes relative to the cost of attendance," observes Moody's.

Programme closures should not have much of an impact on FFELP ABS because the 97% guarantee provided by the DOE provides substantial loss protection. Furthermore, the closure of the FFELP programme in June 2010 means outstanding FFELP student loan ABS are highly seasoned with minimal exposure to in-school borrowers.

However, Moody's notes that it is not clear that the DOE will continue to use adherence to the gainful employment standards to grant access to federal funding. There have been indications that lawmakers would like to eliminate the relevant regulation through legislation.

"The 2016 elections, which granted Republicans control over both houses of Congress and the presidency, have introduced greater uncertainty over whether failure to adhere to the gainful employment accountability standards will result in loss of federal funding and the likely closure of affected programs," says the rating agency.

Virginia Foxx, the new chairwoman of the House Committee on Education and the Workforce, announced after the election that the gainful employment rule is in the committee's sights. She previously introduced a bill to repeal the gainful employment rule in 2015.

"Furthermore, it is unclear whether the Trump administration will abandon or scale back the gainful employment regulation. At a 17 January confirmation hearing, the incoming DOE Secretary Betsy DeVos said that the new administration would review the rule," notes Moody's.

JL

Structured Finance

SCI Start the Week - 6 February

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

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Pipeline
Last week's pipeline additions were once more split between ABS and RMBS. There were six of the former and five of the latter.

The ABS were: C$400m BMW Canada Auto Trust 2017-1; US$419.789m California Republic Auto Receivables Trust 2017-1; US$435.54m DT Auto Owner Trust 2017-1; US$490.34m GreatAmerica Leasing Receivables Funding Series 2017-1; US$411m Prop 2017-1; and SSTRT 2017-1.

The RMBS were: US$266m Bayview Opportunity Master Fund IVb Trust 2017-CRT1; US$348m Sequoia Mortgage Trust 2017-2; Torrens 2017-1; £1.65bn Towd Point 2017-Auburn 11; and US$2.076bn Towd Point Mortgage Trust 2017-1.

Pricings
There was a long list of freshly priced deals. As well as seven ABS prints there were also four RMBS, two CMBS and 11 CLOs - with these significantly boosted by refinancings.

The ABS were: £525m Bumper 8; US$500m Chase Issuance Trust 2017-1; US$400m Exeter Automobile Receivables Trust 2017-1; US$380m Falcon Aerospace; US$772m SMB Private Education Loan Trust 2017-A; US$561m SoFi Professional Loan Program 2017-A; and US$420m State Board of Regents of the State of Utah Series 2017-1.

The RMBS were: €3.2bn BPCE Master Home Loans 2017-1; €1.811bn FCT Elide 2017-01; US$400m NRZ Advance Receivables Trust 2015-ON1 Series 2017-T1; and US$802m STACR 2017-DNA1. The CMBS were US$977m BAML Commercial Mortgage Trust 2017-BNK3 and US$350m GSMS 2017-485L.

Lastly, the CLOs were: US$478.5m Atlas CLO 2014-6R; €369m CGMSE CLO 2013-1R; US$816m CIFC Funding 2017-I; €280.25m Dryden Leveraged Loan 2014-32R; US$503.9m GoldenTree Loan Opportunities 2014-8R; US$395m Limerock CLO 2014-3R; €324.9m Newhaven CLO 2014-1R; US$664.3m Sound Point CLO 2017-1; US$336.5m Steele Creek 2014-1R; €414m St Paul's CLO VII; and US$612m THL Credit Wind River CLO 2017-1.

Editor's picks
Bridging the gap: 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...
New worlds: The Latin American structured finance markets are changing, with significant shifts in Argentina and Brazil, as well as changes in the Mexican market. Regulatory initiatives are opening up new possibilities, with deal structures adapting and new markets on the horizon...
Repurchase plan: 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...
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..."

Deal news
• 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 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.
• 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.
• 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).
• 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.

Regulatory update
• 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.
• 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.
• 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.

Structured Finance

Regulatory divergence on the cards?

President Trump continues to assert his desire to roll back regulation imposed after the financial crisis and dismantling the Dodd-Frank Act is high on his agenda. There are concerns that should it be repealed - either as a whole or in part - greater divergence could occur between the US and European securitisation markets, giving the US a competitive advantage.

Any dismantling of Dodd-Frank needs to be approved by Congress, which should serve to slow any changes. Regardless, it is believed that as the US President has advocated a strategy of growth, securitisation will likely grow alongside any financial expansion - particularly if the risk retention elements of Dodd-Frank are rolled back.

Simon Collingridge, strategic delivery director at Clayton Euro Risk, comments: "Relaxing of reforms in the US, such as the risk retention rules, would likely be negative for securitisation in Europe. It would most likely lead to greater US issuance and therefore widen the gap between the US and Europe and could be negative for securitisation in Europe generally, at least in the short term."

On the other hand, Europe could look to the US as a model of deregulation, depending on how it fares. "One thing that could happen, speculatively, is that should the US pursue and enjoy a relaxation of reforms that then benefits its securitisation industry, Europe might look to that and see it as an encouragement to loosen its own regulation. It could even look to the US as a model for relaxation of regulations. Equally, European investors could benefit from greater US issuance to invest in - however, hampered as they are by regulations, they may struggle as it could remain not cost-effective," adds Collingridge.

Additionally, Brexit could boost the UK's securitisation industry by releasing it from stringent European regulations. Regardless, if Europe wants to hold a leading position in the securitisation sector, issuance volume needs to increase - with a large domestic market, US investors are comfortable investing exclusively in US-issued paper.

Collingridge concludes: "US investors don't hugely want European issuance - they have a big domestic market and an investor base that likes to invest domestically. More issuance from the US domestic market will therefore only exacerbate this and encourage them to invest more in US paper. Again, the knock-on for securitisation in Europe would therefore not be positive."

RB

Structured Finance

Distressed vet heads new credit platform

BC Partners has recruited Ted Goldthorpe to lead its new credit platform, BC Partners Credit. The firm will pursue a strategy that identifies attractive opportunities in any market environment and across sectors, including stressed/distressed debt, asset-based lending and structured finance.

Previously president of Apollo Investment Corporation, Goldthorpe has been hired as a managing partner to launch and oversee BC Partners Credit, based in New York. BC Partners will launch the business within its existing structure, providing the firm with the ability to deliver an integrated offering and attractive new opportunities for its limited partners.

Raymond Svider, managing partner at BC Partners, comments: "BC Partners Credit is highly synergistic with our private equity business and will enable us to leverage our deal flow and sector knowledge to invest across the capital structure to the benefit of our LPs. We believe that there are significant opportunities in credit and it's important that we have the right team in place to execute on that vision."

Goldthorpe joined Apollo in 2012 and - as senior portfolio manager - oversaw the firm's US opportunistic business that grew dramatically under his tenure, before rising to cio of Apollo Investment Management. From 1999 to 2012, he was employed by Goldman Sachs, where he ran the bank loan and distressed investing desk, after serving as an md in the special situations group, running both its middle market private equity business and the Canadian business.

BC Partners Credit will be supported by a team of disciplined and experienced credit professionals. Matthias Ederer (formerly a partner at Wingspan Investment Management) and Henry Wang (formerly a partner at Stonerise Capital Partners) will be joining BC Partners Credit as partners. The pair previously worked with Goldthorpe at Goldman Sachs.

CS

Structured Finance

Liquid alternatives firm formed

Pacific Alternative Asset Management Company (PAAMCO) has entered into a strategic transaction to create a new liquid alternatives investment firm by combining with KKR Prisma. The new entity, which will operate under the brand PAAMCO Prisma Holdings, could be expected to invest in structured credit products.

Under the terms of the agreement, the entire businesses of both PAAMCO and KKR Prisma will be contributed to a newly formed company that will operate independently from KKR, with KKR retaining a 39.9% stake as a long-term strategic partner. The new company will have over US$30bn of assets under management or advisement and the ability to fulfil a broad range of liquid alternatives needs, including constructing customised hedge fund portfolios.

The Prisma and PAAMCO brands and funds will continue to exist side-by-side in their current separate form, while benefitting from operational scale and access to a broader suite of investment solutions. The new business will be led by co-ceos Jane Buchan (co-founder and ceo of PAAMCO) and Girish Reddy (co-founder of KKR Prisma).

As part of the transaction, the combined entity is expected to enhance alignment with investors by re-equitising the management team and retiring PAAMCO's existing minority owner. The business will be majority employee-owned, with employees of PAAMCO and KKR Prisma owning 60.1%.

Subject to the satisfaction of customary closing conditions, the transaction is expected to close in 2Q17. KKR was advised by Simpson Thacher & Bartlett, while PAAMCO was advised by Moelis & Company and K&L Gates.

CS

Structured Finance

Individual arbitration for Bethune case

The US District Court for the Southern District of New York last week ruled in favour of Lending Club in a putative class-action lawsuit alleging that the marketplace lender partnered with Utah-based WebBank to avoid the application of New York state interest rate limitations (SCI 6 May 2016). Moody's notes that the ruling is credit positive for ABS backed by consumer loans originated by online lenders that use a partner-bank origination model because a violation of usury laws could result in such loans being void or unenforceable, in whole or in part.

The Bethune vs LendingClub Corporation et al case asserted that defendants Lending Club, WebBank and Steel Partners Holdings violated state usury laws, the New York Consumer Protection Act and the Racketeer Influenced and Corrupt Organizations Act by entering into usurious loan agreements with the plaintiff and others. The defendants filed a motion to compel arbitration on an individual basis and stay the case, pending the outcome of the arbitration.

The court decision to grant the defendants' motion consequently represents a step towards the resolution of the case by arbitration on an individual basis, rather than in court on a class-action basis. The judge found that enforceability of a clause in the loan agreement of the plaintiff (Ronald Bethune, a New York resident) calling for arbitration to be used for dispute resolution was itself a matter of arbitration and that the arbitration should be pursued on an individual basis, rather than on a class basis.

In particular, the court found that because the loan agreement was clear on the matter and the plaintiff challenged the contract as a whole as "unconscionable", rather than only the arbitration provision, the question of whether the dispute should be arbitrated should be decided by an arbitrator. The court ruled to compel arbitration on an individual basis at the request of the defendants because the plaintiff did not challenge that request.

While Lending Club loans have not backed any ABS that Moody's has rated to date, similar legal risks exist for securitisations backed by loans from other marketplace lenders. The agency notes that the language in the arbitration clause at issue in the Bethune case is also found in the loan agreements of other marketplace lenders, including Prosper Marketplace.

"Forcing such disputes into individual arbitrations would likely reduce the number of borrowers whose loan rates are challenged under state usury laws, because a single class-action case can cover all similarly situated borrowers. In contrast, individuals would need to take affirmative steps to challenge their loans and face upfront costs that could dissuade them," Moody's observes.

The agency adds: "Arbitration on an individual basis would also require fewer resources and, potentially, attention for a lender than a class-action suit. Therefore, this legal path is also credit positive for ABS backed by a marketplace lender's loans because removing risks to a company's financial strength reduces the odds of servicing disruptions and other potential operational risks."

The ruling did not address the substance of the Bethune lawsuit's usury law claims and can be appealed to the US Second Circuit Court of Appeals. The suit - which was filed in April 2016 - is believed to be the first case that involved a plaintiff suing a consumer marketplace lender over whether their loans are exempt from state usury limits.

CS

CLOs

Healthcare reforms spur CLO concerns

Healthcare reforms in the US could have a dramatic effect on US CLO valuations, prompting some investors to reduce their exposure to healthcare names across their CLO investments. The healthcare sector is the second largest within US CLOs, accounting for an average 11.8% exposure in post-crisis deals, meaning that President Trump's intention to replace the Affordable Healthcare Act (ACA) and curb drug price rises could impact performance.

JPMorgan CLO analysts suggest that hospitals will be a potential loser if the ACA is repealed, with the hit to revenues estimated at about 100bp. Further, they believe that it will become more difficult for hospitals to improve revenues and EBITDA over the next two years because discarding ACA will "reduce the number of insured and increase co-pays and deductibles."

Investors also appear concerned about the price of drugs in the event of an ACA repeal, although JPMorgan's pharma equity analysts see "limited potential for meaningful drug price reform", as a Trump presidency should result in less government involvement in healthcare. Nevertheless, the sector is unable to bounce back due to a rebound in the price of what it sells, like the energy sector can with the price of oil.

The 2015 and 2016 CLO vintages have the highest average exposure to healthcare at 12.4% and the 2012 vintage the lowest at 10.8% exposure, according to JPMorgan figures. There are only nine healthcare borrowers in the top 50 exposures in US CLOs, representing US$11.5bn in post-crisis CLO collateral.

In terms of performance, the healthcare loan sector has seen total returns of 7.71% versus a broader loan market average of 9.78%. However, since the presidential election, healthcare has shown 2.07% returns - just underperforming the wider loan market, which may give some insight into how the market is pricing policy.

RB

CMBS

CMBS loans exposed to EO bankruptcy

Eastern Outfitters' chapter 11 bankruptcy filing could affect eight CMBS loans with a combined balance of US$134.1m. The largest exposure is the US$25.2m Blackstone Retail Loan securitised in WFCG 2015-BXRP, although strong occupancy for all affected properties is expected to mitigate the risk of default.

Morningstar Credit Ratings believes Eastern Outfitters may be counting on a buyer to take over many of its stores. The company's chapter 11 filing shows it has discussed a stalking horse bidder arrangement with Sports Direct International.

The largest CMBS exposure comes from the Bob's Stores outlet in the Naugatuck Valley Shopping Center in Waterbury, Connecticut, where the US$25.2m portion of the Blackstone Retail Portfolio loan accounts for 4.1% of the WFCG 2015-BXRP single-loan deal. Bob's Stores is the third-largest tenant, accounting for 10.5% of the property's gross leasable area, but the collateral is expected to withstand Bob's loss. The loan is current and had a DSCR of 4.26x for the first nine months of 2016 with 89% occupancy.

Also affected is the US$24m Avon Marketplace loan which accounts for 2% of MSBAM 2013-C12. Eastern Mountain Sports maintains two leases at the Hartford, Connecticut, property and accounts for 18.2% of the collateral's space. The latest DSCR was 2.11x on 100% occupancy as of September 2016 and Morningstar projects a 1.77x DSCR without Eastern Mountain Sports.

The US$23.9m Newington Commons loan is 1.7% of JPMBB 2014-C26. Bob's is the second-largest collateral tenant, accounting for 26% of the shopping centre on a lease that expired in January. The rating agency says default risk is low because it projects a healthy DSCR of 1.66x if the retailer rejects its lease. The loan is current and had a DSCR of 2.02x for the first nine months of 2016 on 100% occupancy.

Also affected are the US$18m Shops at the Pond loan in MSBAM 2014-C17, the US$14.85m Monmouth Plaza loan in MSBAM 2014-C16 and the US$14m Gateway Plaza I loan in GFCM 2003-1, each of which has 100% occupancy and DSCRs between 1.73x and 2.27x. The US$10.2m 200 Glen Cove Road loan in BSCMS 2005-PWR9 has a DSCR of 1.77x and occupancy of 95%, while the US$3.8m Linens 'N Things loan in BSCMS 2004-PWR3 has a DSCR of 1.51x and 100% occupancy.

The BSCMS 2004-PWR3 CMBS is also backed by the US$32.36m Great Northern Mall loan. While that loan is unaffected by the Eastern Outfitters bankruptcy, it is affected by the expected closure of the Macy's store at that location, as noted in SCI's CMBS loan events database last month (see SCI's CMBS loan events database).

Eastern Outfitters is owned by Versa Capital Management. It acquired Eastern Outfitters' subsidiaries Bob's Stores and Eastern Mountain Sports from Vestis Retail Group after an April 2016 chapter 11 bankruptcy filing. Vestis also closed down Sports Chalet at that time (SCI 20 April 2016).

Other sporting goods retailers have also recently filed for bankruptcy. Golfsmith did so in 3Q16 (SCI 20 September 2016) and Sports Authority did so in 1Q16 (SCI 8 March 2016).

JL

Insurance-linked securities

'Atypical' ILS issuance tallied

At 20 transactions, 2016 saw the fewest number of catastrophe bonds brought to the market since 2009, according to Swiss Re's latest ILS Market Update. However, average deal size grew by nearly 20% on 2015 to approximately US$300m on "atypical" new issuance patterns (see SCI's primary issuance database).

For the first time, volumes in Q3 (at US$925m) were larger than in Q2 - which is typically the busiest quarter of the year due to the US wind season - but Q4 posted even larger volumes (US$2.12bn). The increase in bond size was especially prevalent in the second-half, as the final notional of the tranches issued during this period were upsized by approximately 60% on average from their original target notional. With a final total of US$5.9bn, ILS issuance therefore slightly outpaced maturities and was able to maintain the overall market size at around the record level of US$24.1bn set in 2014.

Due to the drastic downtick in issuance in the middle of the year, the secondary market was bid up quite substantially, though sellers were somewhat scarce. Much of the trading occurred during the heaviest issuance months, with a particular focus on short-dated paper.

"The glut of capital from both maturing bonds and fresh capital injections to investors, combined with rumours of dry new issue pipelines during the second half led to spreads tightening to around the record levels set in 2014," Swiss Re observes. "A fair amount of sponsors did not renew their bond programmes in 2016, allowing the ones that did to capitalise on the favourable spread environment and increased demand, leading to upsizing of issuances and a larger than expected Q4."

Issuance in 2016 was once again dominated by US wind and earthquake deals, with each of the two perils contributing to over half the year's volumes. Diversifying perils included Canada earthquake, Europe windstorm, Japan typhoon and earthquake, Australia cyclone and earthquake, extreme morbidity and motor third-party liability (SCI 6 February).

Meanwhile, the risk/return profile of bonds issued last year also continued to trend upwards. Weighted average expected loss and weighted average spread for bonds issued in 2016 were approximately 2.85% and 5.60% respectively, compared to approximately 2.15% and 4.95% in 2015.

ILS spreads in 2H16 finished relatively flat to where they began, maintaining the historically tight levels achieved during the supply shortage in Q2. Nevertheless, cat bonds generically currently trade at a slight premium to comparably-rated corporate bonds. Double-B rated cat bonds on average offer 0.75% additional spread than double-B rated corporate bonds, while single-B rated cat bonds on average offer 0.53% more spread.

CS

RMBS

Second shelf brings non-prime deal

Invictus Residential Pooler is in the market with its debut securitisation (see SCI's pipeline). Following preliminary ratings from S&P, Kroll Bond Rating Agency and Morningstar Credit Ratings, it is the second shelf to issue a rated transaction backed by non-prime mortgages since the financial crisis.

The other shelf to have issued rated transactions backed by non-prime mortgages since the crisis is Caliber Home Loans' COLT shelf. There were three COLT transactions in 2016.

Invictus' US$145.017m RMBS, Verus Securitization Trust 2017-1, is primarily collateralised by fixed- and adjustable-rate non-qualified mortgage (non-QM) loans. These are secured by first lien loans on one-to-four family residential properties, planned-unit developments, and condominiums.

The mortgage pool initially consists of 289 mortgage loans with a principal balance of approximately US$145m as of the cut-off date. S&P notes that the collateral is weaker than the rating agency would expect for an archetypical prime pool, but is generally in line with expectations for a non-prime residential mortgage pool.

By balance, fewer than 40% of the loans have full documentation and income was only verified on 62.1%. There are 115 loans with prior credit events and non-QM loans account for 79.2% of the total pool, with not a single mortgage loan originated under qualified mortgage safe harbour rules. There is also significant geographic concentration, with more than half the pool concentrated in California and more than 10% in Florida.

The US$87.3m A1 notes have been rated triple-A by all three rating agencies, while the US$16.459m A2 notes have been rated double-A by S&P and Kroll, and double-A plus by Morningstar. The US$22.26m A3 notes have been rated single-A by S&P and Kroll, and double-A minus by Morningstar.

The US$6.889m B1 notes have been rated triple-B by S&P and Kroll, and triple-B plus by Morningstar, while the US$4.495m B2 notes have been rated double-B by S&P and Kroll, and double-B plus by Morningstar. The US$3.045m B3 notes have been rated single-B plus by S&P, and single-B by Kroll and Morningstar. The US$4.569m B4 notes are not rated.

JL