Contents

CMBS

Shifting dynamics spur CMBS prepays

The €1bn Woba loan was successfully prepaid in full this week, confirming growing speculation that the Taurus 2013-GMF1 CMBS' days were numbered. Far from being an isolated incident, the move illustrates how broken the relationship between CMBS and other debt capital markets has become.

The Woba loan formed the collateral of the TAURS 2013-GMF1 German multifamily CMBS transaction. Bank of America Merrill Lynch European securitisation analysts raised the prospect back in December of Vonovia choosing to prepay the CMBS.

Vonovia chose to fully prepay GRF 2013-2 two years ahead of its November 2018 expected maturity date, accepting a €9.5m prepayment fee in the process, and raised €1bn by issuing an eight-year bond at the same time. This month, the TAURS 2013-GMF1 CMBS was subject to a prepayment fee of 1.5%, equating to a repayment price on the notes of 100.27% of par, plus accrued interest.

"The decision to prepay the Woba loan and the TAURS 2013-GMF1 transaction really underlines how disconnected from other debt capital markets CMBS has now become. We have reached the remarkable situation where it is cheaper to refinance in the corporate bond market than in the securitisation market," says Conor Downey, partner, Paul Hastings.

He continues: "The nature of securitisation should result in CMBS having a higher credit quality than corporate bonds, but there is a lot of uncertainty in the market - not least because of regulatory developments, but also because of a comparative lack of investors. When CMBS transactions such as TAURS 2013-GMF1 were issued four or five years ago, the CMBS spreads were relatively high."

With market dynamics as they are, prepaying could make sense for many other CMBS loans, although a number of factors will come into play. However, Downey notes that while certain loans might appear to be candidates to prepay, it is unclear whether the borrowers could obtain the same leverage in the current market.

"The likes of Deutsche Annington and Woba kept faith with securitisation as a way to diversify funding strategies, but the decision to prepay is a demonstration of just how disrupted the market has become. CMBS is clearly not a sufficiently competitive option in the current market," says Downey.

He continues: "STS is supposed to change this and to revive the European securitisation market. However, STS may be dead in the water before it even gets started."

To understand why, it helps to look at the RMBS market. The convention there has become to have step-ups in coupon after three years, which has brought the expected life of deals down now to under three years.

Whereas costs would previously amortise over a decade or so, the shortened lifespan makes STS compliance costs suddenly quite critical. These STS compliance costs are likely to be significant, so these deals may find they are unable to comply with STS even if they want to.

This is all for a market intended to benefit from STS. In the meantime, CMBS appears to be falling out of favour in Europe, as bond issuance becomes the preferred option.

"Deutsche Annington has chosen to go to the high yield bond market rather than reissue CMBS, while Land Securities also recently redeemed long-dated bonds out of their structure [SCI 2 February]. There are clearly dislocations between different parts of the capital markets to be taken advantage of, but CMBS is not being chosen as the tool to do that," says Downey.

He concludes: "These multifamily deals really constituted the bulk of post-credit crunch CMBS issuance, but with the likes of Chiswick Park and Merry Hill, along now with Woba, we are seeing the largest CMBS being redeemed and withdrawn from the CMBS market."

JL

Secondary markets

Euro secondary unchanged

Activity in the European securitisation secondary market is little changed from that seen in recent weeks.

Flows remain light across all sectors as sellers remain largely absent amid continuing positive market sentiment. The few BWICs that do crop up are still met with very strong demand and secondary spreads are consequently holding tight.

There is currently one BWIC on the European schedule for today. At 14:00 London time there is a 16 line 70.22m euro- and sterling-denominated mix of UK non-conforming RMBS.

The list comprises: EHMU 2007-2 M1, ESAIL 2006-1X B1A, ESAIL 2007-6NCX A3A, KMS 2007-1X M1A, LGATE 2008-W1X BB, MFD 2008-1 A3, MORGT 2014-1 C1, SLT 1 B, SLT 1 C, SLT 1 D, SLT 2 B, SLT 2 D, SPS 2006-1X B1C, TRINI 2015-1X B, WARW 1 B and WARW 1 C. Only WARW 1 B and WARW 1 C have covered on PriceABS in the past three months - at 97.477 on 8 February and 95.33 on 16 November, respectively.

Secondary markets

US ABS tightens

US ABS secondary market spreads keep tightening despite continued supply.

Appetite for paper in secondary remains strong across the majority of ABS sectors and even any uptick in primary issuance is having little impact. For example, the announcement of two new sizeable American Express deals saw credit card spreads continue to tighten in both fixed and floating.

Further, the growing cards issuance pipeline brought more sellers to market generating increasing BWIC volumes in the sector over the end of last week and in to this. Nevertheless, the supply is being easily absorbed with bonds in for the bid trading in line with market expectations.

In addition to cards, autos and stranded assets continue to lead the way in testing recent tights, but other sectors are not lagging far behind. Overall, healthy secondary ABS activity looks set to continue for now at least as cash-rich investors hold sway.

The visible US ABS BWIC calendar for today is currently relatively, though starting to build quickly as today wears on. For now, one of the highlights is a three line subprime auto list due at 13:00 New York time.

The $14.5m auction involves: DTAOT 2016-1A D, DTAOT 2016-2A D and FCAT 2016-1 C. None of the bonds has covered on PriceABS in the past three months, but are currently being talked between LM100s and VH100s.

Secondary markets

Euro ABS/MBS drifts

The European ABS/MBS secondary market appears to be drifting along this week.

Trading activity continues to be patchy with overall volumes very light and supply remains limited across all ABS/MBS sectors. Market tone is still strong and as a result secondary spreads are broadly unmoved over the past three sessions. Any major change is unlikely over the next few trading days given that they surround the US public holiday on Monday.

There is currently one BWIC on the European ABS/MBS schedule for today - a single £283+m slice of PARGN 11X A1 due at 15:00 London time. The UK buy-to-let tranche has not appeared on PriceABS before.

Secondary markets

US CLOs ease up

Activity in the US CLO secondary market looks to be easing up ahead of the President's day weekend.

In a strong start to the week in BWIC volume terms, the bottom of the stack saw some stepping off as the percentage of DNTs for equity and weaker mezz names picked up on Tuesday. However, yesterday saw a return to the high levels of bonds traded seen of late as the buying bias continued to prevail, albeit with only about half of the previous day's total face value in for the bid and a far greater focus towards investment grade paper.

Today sees a further drop in face value on BWIC as the market decelerates towards the long weekend with under $120m across six lists. The chunkiest piece up for auction among the lists remaining is a $15m single piece of MAGNE 2014-8A BR due at 11:00 New York time.

The double-A tranche has not appeared on PriceABS before.

ABS

Farm forecast is ABS 'credit positive'

US farm net cash income is predicted to rise 1.8% to US$93.5bn this year, ending three consecutive years of annual declines. This forecast by the US Department of Agriculture (USDA) is credit positive for US ABS tied to agricultural equipment loans, particularly transactions issued by John Deere Capital Corporation and CNH Industrial Capital, reckons Moody's.

Delinquencies among underlying loans have been pushed up by negative pressure on farm profits and they are expected to remain elevated, but stabilisation in the farm sector's interest coverage around historically average levels would limit further performance deterioration. The recent period of weakness follows a strong stretch from 2011 to 2014, when farm incomes were boosted by high grain prices following the recession.

Agricultural equipment obligors are by and large continuing to meet their debt obligations, thanks to modest debt burdens and the low interest rate environment, which is limiting any deterioration in the collateral for equipment ABS. Furthermore, principal payments on the underlying loans are increasing credit enhancement for senior ABS tranches, which increases their ability to withstand higher defaults.

However, despite predicting a rise in net cash farm income, the USDA expects earnings as measured by net farm income to decline. Moody's says the cash flow-based measure is more relevant to farmers' ability to meet their obligations.

"The main cause of the difference between the two USDA forecasts is the timing of revenue recognition from crop inventories; the net cash income measure includes those amounts upon the receipt of cash from sales instead of while crops are still in inventory. Thus, a forecasted decline in inventories will lower net farm income in 2017, but not cash income. Lower inventories would signal a potential headwind for cash income next year, but other profit drivers may change in unexpected, and potentially positive, ways," notes the rating agency.

JL

ABS

Credit card issuance on a roll

American Express has returned to the ABS market after an 18-month absence with a pair of credit card securitisations accounting for US$1.15bn of paper. The move comes after approximately US$5.5bn was placed by four other credit card issuers in January (see SCI's primary issuance database).

Both the US$571.4m American Express Credit Account Master Trust Series 2017-1 and US$574.8m Series 2017-2 deals comprise class A and B certificates (provisionally rated AAA/Aaa and A+/Aa3 respectively by Fitch and Moody's), as well as class 1 (BBB+/Baa2) and 2 notes (unrated). As of December 2016, 90% of the trust receivables are tied to card accounts that American Express Centurion Bank and American Express Bank FSB originated at least five years ago.

The assets of the AECAMT trust are mostly prime receivables from two distinct sub-portfolios: American Express credit cards (including Optima, Blue and co-branded credit cards with Delta Airlines, Hilton and Starwood Hotels); and the POT portfolio (consisting of credit lines extended to charge card members for travel-related expenditures originated by Centurion and FSB. In June 2016, American Express added approximately 1.8 million accounts to AECAMT, following the end of the co-branding relationship with Costco.

Moody's notes that while the account additions have shown higher principal payment rates than the overall trust, they have shown lower principal payment rates than the Costco co-brand accounts that were removed. Currently, the largest co-branding arrangement is with Delta Air Lines: as of December 2016, these receivables accounted for approximately 20% of the assets in the trust.

The agency says that transaction strengths include low risk of portfolio shutdown, an experienced servicer, the seller's demonstrated commitment to the programme, strong collateral performance expected following portfolio shutdown and a highly seasoned portfolio. Challenges include the large portion of the portfolio composed of cards with no credit limit, concentration and contract risks associated with co-branding relationships, and regulatory and legal uncertainty.

Lead underwriters on both transactions are Barclays, RBC, MUFG and Wells Fargo.

Meanwhile, RBC is in the market with its latest cross-border credit card ABS - Golden Credit Card Trust series 2017-1 - via Bank of America Merrill Lynch, Citi, JPMorgan and TD Securities. The deal is expected to comprise a US dollar-denominated class A tranche (provisionally rated AAA/AAA/Aaa by DBRS, Fitch and Moody's) and Canadian dollar-denominated class B (A (high)/A/NR) and C notes (BBB (high)/BBB+/NR).

Fitch notes that GCCT receivables totalled approximately C$11.6bn, as of 31 December 2016. The accounts designated for the custodial pool had an average balance of C$1,223, as of the same period, with 62.20% of total receivables outstanding seasoned by 10 years or more. The accounts are geographically diversified, consistent with the Canadian population: Ontario, British Columbia, Alberta and Quebec account for 84.02% of the outstanding receivables in the custodial pool.

S&P projects at least US$40bn in new credit card ABS issuance for full-year 2017, including cross-border transactions from Canadian and UK banks, as well as new non-prime card lenders entering the market. "As economic and consumer sentiments improve, competition among card issuers is expected to remain intense in 2017, particularly for prime accounts," the agency observes.

CS

ABS

CPACE partnership to leverage ABS

Renovate America and Greenworks Lending have formed a national partnership to offer commercial PACE financing through the HERO securitisation programme in Missouri, allowing both firms to leverage considerable synergies. The two firms plan to expand their CPACE partnership to all states where the HERO programme operates, including California and Florida, later this year.

"This partnership enables us to better serve and support the efforts of more than 500 cities and counties to improve the efficiency of the commercial building sector," comments Renovate America ceo and founder JP McNeill. "Greenworks Lending shares our goals of empowering owners to invest in their properties in a way that boosts sustainability and, ultimately, value."

Renovate America says that because of the limited synergies between CPACE and residential PACE processes and tools, it made more sense to partner than to build its own CPACE programme from scratch. Indeed, by partnering with Greenworks Lending on CPACE, the firm can: continue to focus on RPACE; offer a vetted CPACE product to contractors, owners and public partners; benefit from the experience, process and best practices developed by the Greenworks team from over five years of funding CPACE projects at both Greenworks and the Connecticut Green Bank; and immediately access a dedicated CPACE team of 20 people, with expertise in originating, underwriting and funding CPACE transactions.

Greenworks Lending currently offers CPACE in Connecticut, Maryland, Rhode Island, Ohio, Texas and the District of Columbia. The HERO programme has been approved in nearly 450 California cities and counties and in more than 200 Missouri cities and counties.

One barrier to entry in terms of expanding the programme to other states is statutory. PACE financing must first be authorised by legislation at the state level and it then is up to individual cities and counties to make PACE available to local property owners.

Nevertheless, CPACE investment has doubled every year since its inception in 2009 and continues to accelerate - with 380% growth in 4Q16, compared to the same period of 2015, according to PACENation. In states that have adopted PACE legislation, the number of buildings that could be eligible for CPACE financing is around 1.5 million.

With CPACE, the owner repays the financing over time through an additional, voluntary assessment on their property taxes over a term of up to 25 years, depending on the jurisdiction. This structure allows most building owners to see immediate cashflow from the improvements and secures the repayment to the property rather than the owner. Payments may be passed along to tenants where appropriate and interest on the payments may also be tax-deductible.

Greenworks Lending ceo and co-founder Jessica Bailey, says: "PACE lending is uniquely important for businesses because it lowers key barriers that discourage building owners from adopting smart energy improvements. Partnering with the company that has driven the massive growth in the PACE industry will allow us to bring commercial PACE to more businesses throughout the country."

Renovate America expects to include CPACE assets in an upcoming securitisation. The firm says it believes investors will welcome the diversity that CPACE provides.

Separately, Renovate America recently completed a US$100m credit facility with Credit Suisse that will enable it to expand Benji - its unsecured consumer home-improvement lending product - to all 50 states. Benji can only be used to finance home improvements, from energy and efficiency upgrades to kitchen and bathroom projects.

CS

Structured Finance

SCI Start the Week - 13 February

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

Pipeline
The recent trend of ABS and RMBS dominating pipeline additions continued last week. There were seven ABS and four RMBS added to the list along with a single CMBS.

The ABS were: US$664.45m Ally Master Owner Revolving Trust Series 2017-1; US$953.78m AmeriCredit Automobile Receivables Trust 2017-1; US$225m First Investors Auto Owner Trust 2017-1; A$251.75m Flexi ABS Trust 2017-1; US$189m Mariner Finance Issuance Trust 2017-A; US$311.4m SCF Equipment Leasing 2017-1; and US$724.06m Volvo Financial Equipment Series 2017-I.

US$1bn JPMMT 2017-1, Pepper 18, US$682.5m STACR 2017-HQA1 and US$145m Verus Securitization Trust 2017-1 accounted for the RMBS. The CMBS was US$750m BBCMS Mortgage Trust 2017-C1.

Pricings
Recent patterns also held true for completed issuance. As well as eight ABS prints and four RMBS, there were a dozen CLOs - 10 of which were refinancings.

The ABS were: US$419.789m California Republic Auto Receivables Trust 2017-1; ¥60bn Driver Japan Six; US$435.54m DT Auto Owner Trust 2017-1; US$493.17m GreatAmerica Leasing Receivables Funding Series 2017-1; US$1bn Navient Student Loan Trust 2017-1; US$300m Prop 2017-1; US$$750m SSTRT 2017-1; and US$220.78m Sutton Park Structured Settlements 2017-1.

The RMBS were A$1bn REDS Trust Series 2017-1, US$300m Station Place Securitization Trust 2017-1, £1bn Towd Point 2017-Auburn 11 and US$2.076bn Towd Point Mortgage Trust 2017-1.

The CLOs were: €770m Alchera 2017; US$385.75m Apidos CLO 2014-19R; US$656m CIFC Funding 2014-2R; US$435.25m Eaton Vance CLO 2014-1R; US$322.5m Flatiron CLO 2014-1R; US$327.92m Harborview CLO 2014-7R; US$363.5m Nelder Grove CLO 2014-1R; US$415m Northwoods Capital 2014-14R; US$435m OZLM 2014-9R; US$684.4m Race Point CLO 2013-8R; €367m St Pauls CLO 2014-2R; and US$506.2m Woodmont Trust 2017-1.

Editor's picks
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...
Horse Capital leading the way?: The recently-issued Horse Capital I catastrophe bond is further evidence of the ILS market continuing to push boundaries. However, it is not only the underlying risks that are changing, given the noticeable shift towards 'cat bond-lite' structures...
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...
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..."
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...

Deal news
• 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.
• 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.
• 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.
• 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.
• 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.
• 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.

Regulatory update
• 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 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.

Structured Finance

Positive start for Aussie issuance

Bank of Queensland last week priced its upsized A$1bn Series 2017-1 REDS Trust prime RMBS, the first Australian securitisation to hit the market in 2017, with the senior tranche seeing significant demand. Four transactions from the jurisdiction remain in the pipeline, including a non-conforming RMBS and a consumer ABS (see SCI's pipeline).

Rated by Fitch and S&P, the REDS deal comprises: A$920m AAA/AAA class A1 notes (that priced at one-month BBSW plus 113bp); A$37.5m AAA/AAA class A2s (plus 170bp); A$17m NR/AAA class ABs (plus 205bp); A$15m NR/AA class Bs (250bp); A$9.4m NR/A class Cs (345bp); and A$1.1m unrated class Ds (600bp). This compares to guidance for the class A1 to C notes of one-month BBSW plus 115bp-120bp, 170bp-180bp, 205bp area, 250bp area and 345bp area respectively. The class A1 and A2 notes have WALs of 2.8 and 3.5 years respectively, while the remaining tranches have WALs of 7.2 years.

The RMBS was initially sized at A$500m, with the class A1 notes accounting for A$460m of this total. NAB was lead manager on the deal.

Meanwhile, Suncorp-Metway is in the market with another prime RMBS - the A$550m Apollo Series 2017-1 Trust. At the cut-off date of 8 January 2017, the pool consisted of 1,963 loans with an average borrower balance of A$280,212. Loans with loan-to-value ratios exceeding 80% account for 14.5% of the portfolio, while interest-only loans make up 20.1%, according to Fitch.

The other RMBS in the pipeline are Pepper Homeloans' non-conforming deal - Pepper Residential Securities Trust No 18 - and Bendigo and Adelaide Bank's Torrens Series 2017-1 Trust.

Finally, FlexiGroup has announced its latest consumer ABS - the A$251.75m Flexi ABS Trust 2017-1. The transaction is backed by a portfolio of Australian unsecured retail 'no interest ever' payment plans, originated by Certegy Ezi-Pay.

CS

Structured Finance

Capital charges to drive out banks?

Securitisation amendments to the Capital Requirements Regulation (CRR) are currently being discussed. With the new capital charges likely to trigger capital cliffs, Bank of America Merrill Lynch analysts suggest that bank investors may be put off the market.

Differences between the visions of the European Parliament, European Council and European Commission for the regulatory framework for securitisation are being hammered out. The BAML analysts expect an EU-wide regulatory framework to be adopted in 2H17, with new capital charges as recommended by BIS and modified to EU markets then going into force as of 1 January 2018.

Under the existing framework, securitisation exposure capital charges are calculated using two main methods: the standardised approach and the ratings-based approach. However, the calculation of capital charges for European banks will be changing.

BIS has proposed a new hierarchy of approaches, with an Internal Ratings Based Approach (IRBA) at the top. This will be available to certain banks which are able and authorised to use internal models to calculate capital charges for the exposures underlying securitisations.

Banks unable to use the IRBA will be able to use the External Ratings Based Approach (ERBA), which is next in the hierarchy. The ERBA specifies risk weights according to rating, maturity, thickness and seniority of a tranche and can be used by banks so long as the use of external ratings is permitted in their jurisdiction, the tranche has an external or inferred rating, and the rating is not based on a guarantee or similar support from the bank itself.

If a bank cannot use the IRBA or ERBA, it will rely on the Standardised Approach (SA), which the analysts think will be the main approach used by EU banks. This is a simpler version of the IRBA and requires fewer inputs on the underlying portfolio.

Each of these approaches includes differentiated treatment for securitisation exposures that can be classified as 'Simple, Transparent and Comparable' (STC). If a bank cannot use one of these approaches then a 1250% risk weight is applied, corresponding to a 100% capital charge assuming a capital requirement of 8% of risk weighted assets.

The introduction of new capital requirements could have significant capital effects on securitisation exposures. Capital charges are likely to increase across the board in comparison to current capital charges, regardless of the introduction of STS.

"The reduction in capital charges for STS securitisation is relative to future higher capital charges for securitisation - it is an overall increase (with very few exceptions) of capital charges relative to current if considering the capital charges derived by the new SA vs current RBA and the new ERBA relative to current SA, and applying the floors," note the BAML analysts.

Around 80% of EU banks are understood to use the SA approach to derive regulatory capital for securitisation, although the 20% which use the RBA approach are believed to be more active investors, so the change from RBA to the new approaches will affect more securitisation investments. Additionally, EU banks are typically restricted to investing in the triple-A to double-A range, so the capital changes for double-A exposures will have a particularly significant effect on bank capital.

Banks changing from the SA or RBA approach to IRBA, SA or ERBA will experience capital increases due to several factors. First, there are the differences in risk weights for triple-A and double-A, which will result in a significant increase in capital for subordinated double-A tranches for non-STS securitisations under the SA and ERBA approaches and for STS securitisation under the ERBA approach, which the analysts expect not to be used for STS exposures.

Second is the sovereign cap on ratings in peripheral EU countries. The analysts comment: "Thanks to the caps on ratings and the 'seniority matters' approach to derivation of senior tranche capital charges, the new approaches will actually reduce significantly or in a few cases increase very little the regulatory capital for peripheral double-A, single-A and triple-B senior-most tranches, with the exception of non-STS senior most tranches of those ratings under ERBA."

Third, there are effects for junior tranches. All junior tranches of non-STS securitisations will see a significant jump in regulatory capital. "The thinner the tranche, the higher the increase in capital - note CLOs and UK prime RMBS (non-STS)," say the analysts. "For STS securitisations the effects differ according to tranche thickness."

The BAML analysts speculate that investors will have to accept reduced RAROC. Coupling this with the increase in other requirements related to securitisation investments, they believe bank investors' interest may be turned away from securitisation and into other areas. However, what can be a loss for bank investors could be a win for others, such as asset managers.

JL

CLOs

Refi wave puts WAS under stress

US CLO portfolio weighted average spread (WAS) is decreasing due to the ongoing wave of refinancings across the sector. The number of CLOs failing WAS tests is rising as a result.

If a loan held by a CLO is repriced and then the CLO rolls into the new loan, the WAS should theoretically drop. JPMorgan CLO analysts note, however, that most CLOs include the Libor floor benefit in WAS calculations and while this has "boosted WAS tests in the past", there is the chance that the Libor floor being included in the WAS is a risk.

Moody's comments that while the Libor floor calculation can keep WAS afloat, the "inclusion of Libor floors in the WAS calculation can create additional ratings volatility, if WAS test compliance is measured at a time when either Libor increases above the average floor rate or when loans with Libor floors mature, prepay or are sold and are not replaced by loans with comparable yields."

WAS has dropped by 21bp on average across US CLO 2.0 portfolios since July 2016, with current average WAS at 3.96%, compared to the average limit of 3.75%. The JPMorgan analysts estimate that 30 CLOs - or about 4.44% of the post-crisis US CLO universe - are now failing WAS tests, which could put pressure on CLO managers to go down in rating quality in order to maintain an equivalent WAS portfolio.

Generally, if WAS tests are breached, most CLO 2.0 managers have to maintain or improve the test and the analysts suggest that to the extent loan repricings continue, so more failures are likely. They add that managers can work around this by changing WAS covenants to bring the tests back into compliance, but this requires a decrease in the WARF covenant or an increase in the diversity score covenant.

Another option for CLO managers is to move along the asset quality matrix to get relief if failing either a WARF, diversity or WAS test - albeit changing a covenant by moving along the matrix would require notifying the trustee. Furthermore, to change the matrix in its entirety, a manager would need to make an amendment to deal documentation, which can be done as part of a reset or refinancing, but can't be part of a refinancing under the guidance of the SEC no-action letter.

The JPMorgan analysts find that of 615 post-crisis US CLOs, 55% (or 336) have decreased their WAS covenant since June 2016 by 1bp to 80bp. Additionally, 46 US CLOs have increased their WAS covenants, while the largest cohort in their sample (233 CLOs) left their WAS covenants untouched. The second highest cohort is US CLOs that decreased their WAS covenant by 20bp-30bp.

The analysts conclude that as the average WAS test has 21bp of spread cushion before failure and because managers have flexibility to adjust covenants along the asset quality matrix, CLOs have further flexibility before broader asset quality test failures emerge.

RB

CMBS

Debut green agency CMBS priced

Fannie Mae has priced its first green REMIC tranches as part of a multifamily DUS transaction. The US$1bn FNA 2017-M2 is the GSE's second multifamily DUS REMIC in 2017 under its GeMS programme, but the deal is unique in that two tranches are backed by 30 loans originated under the Fannie Mae green financing business and securitised as green DUS MBS.

Josh Seiff, Fannie Mae's vp of capital markets and trading, comments: "This deal is another first for the Fannie Mae multifamily platform. We had a number of new investors who focus on green and socially responsible investing participate in this deal. We're proud to be able to lead the way with a multifamily mortgage product that truly benefits communities, as well as borrowers, lenders and investors."

The deal comprises three offered tranches, with the 6.51-year US$393m FA class printing with a spread of Libor plus 53bp. The US$393m FX note isn't offered, but has a WAL of 0.87 years and a 0.58% coupon.

These notes are backed by 39 Fannie Mae DUS MBS loans, 56.4% of which were originated in Texas, 21.1% in Georgia and 5.2% in Florida. The pool has a weighted average debt service coverage ratio of 2.36x and a weighted average LTV of 71.7%

The offered notes backed by loans originated under the Fannie Mae green financing business comprise a US$75m 6.06-year class A1 note with a swaps plus 50bp spread and a US$536m 9.82-year class A2 note with a swaps plus 66bp spread. These notes are backed by a US$611.7m collateral pool comprising 30 Fannie Mae DUS MBS loans, with 23% originated in Texas, 19.3% in California and 8.9% in Georgia. The weighted average DSCR of the pool is 1.36x, while the weighted average LTV is 70.1%.

Chrissa Pagitsas, director of Fannie Mae's multifamily green financing business, notes: "The M2 A1 and A2 tranches included loans secured by collateral that achieved a green building certification, such as LEED, ENERGY STAR or Green Globes, or was targeting a 20% or greater reduction in energy or water consumption. The end result will be better quality housing, with a lower environmental impact and positive cashflows."

Citi was lead manager on the deal, with Nomura, KGS-Alpha Capital Markets and CastleOak Securities acting as co-managers. The transaction's settlement date is 28 February.

RB

CMBS

Rollover risk highlighted

A Paramount Group Operating Partnership and Blackstone Property Partners JV is the sponsor of the latest US single-borrower CMBS to hit the market. The US$975m OMPT 2017-1MKT is secured by the One Market Plaza building, a Class-A office complex located in San Francisco's South Financial District.

The complex comprises a 27-story office tower (Stuart Tower), a 42-story office tower (Spear Tower), a six-story annex building and a two-story subterranean parking garage. The property was built in 1976 and totals approximately 1.6 million square-feet, including 1.5 million square-feet of office space.

As of February 2017, the property was 97.2% leased to 54 tenants, of which the five largest - Google, Morgan, Lewis, & Bockius, Autodesk, Visa and Capital Research - account for 52.9% of total base rent. Four high quality creditworthy tenants lease space at the property, representing 36.7% of the building's total square-footage and 36.6% of total base rent.

The tenancy is dominated by technology, financial services and law firms, which together represent 86.8% of the total square-footage and 87.5% of total base rent. KBRA notes that this concentration is mitigated by the property's location, the high quality of the asset and the strength of the tenancy.

However, the agency points to tenant rollover risk, with the leases of two of the largest tenants scheduled to expire during the loan term. Morgan, Lewis & Bockius currently occupies 155,543 square-feet - all of which is scheduled to rollover in February 2021 - while Autodesk currently occupies 144,802 square-feet, which is scheduled to rollover in December 2018 and December 2020.

The loan was co-originated by Goldman Sachs, Barclays, Deutsche Bank and Morgan Stanley, has a seven-year term and requires monthly interest-only payments of 4.03%. Proceeds were used to retire existing debt of US$840m, pay prepayment penalties of US$33.6m, fund reserves related to outstanding tenant improvement and leasing commissions, free rent obligations and outstanding capital work of US$24.6m, as well as pay swap and liquidity breakage (US$23.1m) and closing costs (US$9.2m). In conjunction with the financing, approximately US$44.5m of equity was returned to the sponsors.

Provisionally rated by KBRA and S&P, the CMBS comprises: US$463.73m AAA/AAA rated class A notes, US$103.05m AA+/AA- class Bs, US$77.29m A+/A- class Cs, US$94.81m BBB+/BBB- class Ds, US$128.82m BB+/BB- class Es and US$55.41m BB/B class Fs. There are also three notional class XCP, XNCP and XE certificates.

CS

Insurance-linked securities

Optimistic outlook for Brazilian ILS

AlphaCat Managers and Terra Brasis Resseguros have completed a US$5m private catastrophe bond-lite. Dubbed Alpha Terra Validus I, the transaction is believed to be the first offering of Latin American reinsurance risk on an indemnity basis and is the first cat bond sponsored by a Brazilian company.

Listed on the Bermuda Stock Exchange, Alpha Terra Validus I was issued through a segregated account of the White Rock Insurance (SAC) ILS programme, which is managed by Aon Insurance Managers (Bermuda). Paschal Brooks, md at AlphaCat, explains that Brazil lacks a regulatory framework to domestically execute catastrophe bonds, so the risk had to be transferred to Bermuda via the White Rock and Validus transformers.

"The transaction required dollar-for-dollar hedging, based on actual reinsurance losses, which requires the ability to analyse the portfolio. We're uniquely positioned to do that with our local analytical tools," he adds.

The deal covers a layer of Terra Brasis Re's entire property portfolio, which spans the Latin American region, and was taken down by AlphaCat. The private cat bond-lite structure was chosen in order to avoid the large fixed costs involved with a 144a placement.

Brooks is optimistic about the potential for further cat bond issuance from Brazil. "Brazil has a fast-growing economy and the government has only recently begun to encourage retrocession of risk outside of the country. If this trend continues, the market can only grow and create more opportunity for issuance," he says.

Rodrigo Botti, director of Terra Brasis Re, expects the partnership with AlphaCat to "significantly contribute to the development of the Latin American insurance and reinsurance markets, as it brings capital markets-based solutions to the region's exposures."

CS

NPLs

Shift in NPL asset mix anticipated

Loan disposals totalling €103.3bn were completed in Europe last year, with the number of ongoing transactions at end-2016 representing €69.5bn across 56 deals, according to Deloitte's latest 'Deleveraging Europe' publication. The firm expects the deal rate to rise in 2017, as new markets open up and the asset mix shifts to more performing, sub-performing and complex portfolio structures.

More complex loan portfolios are starting to emerge in Italy and Spain, in particular, as the loan sale market continues to evolve from fully-provisioned unsecured loans to more difficult-to-value real estate and business asset secured loans. However, as banks shift towards more complex asset classes to realise their wind-down targets, the size of potential portfolios becomes limited by the level of provisioning necessary for such pools.

Italy became the biggest loan sale market by value in 2016, with €36bn transacted across 43 completed deals and €39.7bn worth of deals ongoing. After €13.3bn across 31 deals was completed in 2016, Spain is also set for a record year of transactions, as an improving real estate market should help make the jurisdiction among the leading European loan sale markets in 2017. Deloitte highlights Banco Popular - which recently re-provisioned its real estate lending - as a bank to watch.

Elsewhere in Iberia, Portugal is likely to achieve more than the €1.8bn across 11 completed deals seen in 2016 if pricing becomes more realistic. A 'bad bank' solution is anticipated in the country by end-2Q17, with portfolios coming to the market later in the year.

These three southern European jurisdictions should take the lead from Ireland and the UK, which Deloitte suggests are nearing the end of their deleveraging journey, having respectively seen eight and seven deals completed in 2016. Activity in these two northern European jurisdictions is likely to be focused on residential loans, including UKAR's sale of Project Rippon and the Bradford & Bingley portfolio.

Meanwhile, Austria and the CEE region accounted for 22 deals last year. Deloitte notes that pricing in Central and Eastern Europe will continue to reflect the risks and costs of a multi-jurisdiction deal environment and the difficulty of leveraging transactions. The firm points to potential opportunities from Serbia, Slovenia and Croatia.

The German bad banks EAA and FMS-WM are likely to continue bringing portfolios to market, albeit at a relatively slow pace, due to their long-term wind-down targets. In the Netherlands, sales are anticipated from ABN AMRO and Rabobank, which is on course to reduce its total loan book by €100bn by end-2017.

One potential new market is Greece, where loan sales could begin emerging by year-end, with unsecured asset disposals initially. The Bank of Greece's NPL performance targets call for a reduction of an estimated €100bn worth of NPLs to around €66bn by end-2019, through a mixture of resolutions, liquidations and portfolio sales.

Deloitte estimates that €2trn in unresolved non-core assets remain in Europe and therefore anticipates high levels of loan sale activity in 2017. Improving economies are facilitating better values for loan securities, while regulatory pressure continues to push troubled banks to resolve their NPL and non-core issues. For instance, this year banks must prepare for changes in accounting rules on valuing NPLs ahead of the introduction of IFRS 9 accounting standards in 2018, as well as the forthcoming 'Basel 4' rules.

CS

RMBS

Euro RMBS volume builds

Crédit Agricole has priced a rare publicly placed French prime RMBS named FCT Crédit Agricole Habitat 2017. Elsewhere, Fortress subsidiary Paratus AMC is in the market with the £233.23m Stanlington No. 1, a UK non-conforming RMBS.

The final book for FCT Crédit Agricole Habitat 2017 was seen at around €2bn, out of which the seller raised €1bn. The offered senior tranche printed at three-month Euribor plus 29bp, slightly below initial price thoughts of three-month Euribor plus low/mid-30s.

"In our view, this is a good result for Crédit Agricole, which managed to launch a first French RMBS funding deal in the post-crisis era. Investors were clearly eager to get a hold of this paper, which raises the fair question of if we can expect more in the future," observe Rabobank credit analysts.

The transaction is backed by residential home loans originated by 39 Caisses régionales de crédit agricole mutuel, all belonging to Crédit Agricole Group, made to some 13,280 prime borrowers. The portfolio consists of 14,539 loans secured by mortgages on residential properties or secured by cautions given either by CAMCA Assurance or Crédit Logement.

The class A notes are rated triple-A by DBRS and Moody's. Santander and Rabobank were joint lead managers on the deal, alongside Crédit Agricole.

Meanwhile, Stanlington No. 1 is backed by legacy owner-occupied (accounting for 83.1% of the pool) and buy-to-let assets originated by GMAC-RCF (62.5%), Victoria Mortgages Funding (37.4%), Amber Homeloans and First Alliance Mortgage Company (together representing 0.1%). The assets are 49.02% concentrated in London and the Southeast of England, with the majority (83.56%) being interest-only loans.

The seller is expected to offer notes down the capital structure to the class E tranche. Moody's and S&P have assigned preliminary ratings to the transaction, which is arranged by Natixis and NatWest Markets.

The senior tranche - which is provisionally sized at £163m - has a WAL of nearly four years, which is based on a CPR assumption of 5% and a call date in March 2022, according to the Rabobank analysts. Pricing and launch are scheduled for next week.

Cerberus was the most recent sponsor to tap the UK RMBS market, having priced its £1bn Towd Point 2017-Auburn 11 last week.

CS

RMBS

High-balance RMBS marketing

JPMorgan is tapping the RMBS market with a US$1.02bn transaction. Dubbed JPMorgan Mortgage Trust 2017-1, the deal is backed by 1,645 30-year fully-amortising fixed-rate mortgage loans with different origination characteristics to previous JPMMT RMBS.

JPMMT 2017-1 differs from previous RMBS issued by JPMorgan because the pool consists of a large percentage (36.3% across 724 loans) of high-balance conforming fixed-rate mortgages originated by JPMorgan Chase Bank and underwritten to GSE guidelines. In addition, 921 prime jumbo non-conforming mortgages were purchased by JPMorgan Mortgage Acquisition Corporation from various originators and aggregators, including directly from TH TRS Corp (Two Harbors) and indirectly through MAXEX (a mortgage loan exchange). Indeed, this is the first JPMMT transaction where more than 10% of the mortgage loans were purchased by JPMMAC through MAXEX.

This is also the first JPMMT transaction to include a high percentage of high-balance conforming loans to borrowers with strong FICO scores and sizeable equity in their properties, although Moody's notes that the characteristics of the loan pool are otherwise comparable to other JPMMT transactions backed by 30-year prime fixed mortgage loans it has rated. More than 70% of the conforming loans are backed by single-family properties, with the higher conforming loan balance attributable to the greater number of properties located in high-cost areas, such as the metro areas of New York City and San Francisco. The conforming loans have an average balance of US$515,687, a weighted average FICO score of 779 and an original combined loan-to-value ratio of 68.9%.

Over 50% of the mortgage loans were originated through correspondent and broker channels, which is in contrast to recent prime jumbo transactions where on average 70% are originated through the retail channel. Typically, Moody's notes, loans originated through a broker or correspondent channel do not perform as well as loans originated through a retail channel - although performance is likely to vary by originator.

The deal has a weighted average remaining term to maturity of 355 months and a WA seasoning of five months. Distributions of principal and interest and loss allocations are based on a typical shifting-interest structure that benefits from a subordination floor.

The transaction comprises 24 classes of notes and has received provisional ratings from Fitch, KBRA and Moody's. The deal also includes several exchangeable classes and a senior support class, while the A9 tranche is a super senior accretion-directed class and the A10 is a super senior accrual class. The AX1, AX2 and AIOS notes are interest-only classes.

Chase will service the conforming loans, while Shellpoint Mortgage Servicing will service the prime jumbo loans. Wells Fargo will be the master servicer and securities administrator, with US Bank Trust acting as trustee and Pentalpha Surveillance the representations and warranties breach reviewer.

RB

RMBS

Call for clarity around GSE reform guidelines

Following US Treasury Secretary Mnuchin's commitment to reform the GSEs, the Mortgage Bankers Association (MBA) has published proposals as to how this can be best executed. While the recommendations - entitled 'GSE Reform Principles and Guardrails' - may improve on the current system, further clarity on certain areas may be needed if they are to be successful.

The MBA's proposals are largely for a government-guaranteed housing finance system with multiple privately-owned guarantors, organised as privately-run utilities, with a regulated rate of return and a public purpose of providing sustainable credit availability to the conventional mortgage market. The paper suggests that MBS should have an explicitly guaranteed government wrap.

In terms of funding, the MBA recommends that an insurance fund pays for the guarantee, built from insurance premiums and paid to guarantors who will then additionally source private capital to share risk on top of any loan level credit enhancement provided by the market. It also suggests keeping certain features from the existing system, such as the common securitisation platform and the GSEs' credit risk transfer programme, which is seen as an important source of private capital.

The MBA elaborates that long-term stability, promoting liquidity and protecting taxpayers should be core principles of the new system. It suggests this can be achieved by preserving the 30-year fixed rate prepayable single-family mortgage, maintaining the deep, liquid TBA market, explicitly guaranteeing MBS and promoting affordable housing for both owned and rented single- and multi-family properties.

Further core principles include promoting equal pricing and access to secondary markets for all lenders, reliance on primary and secondary sources of private capital to assume most of the risk and to minimise transition risk, likely reforming and repurposing the GSEs' operations and infrastructure. Additionally, GSE reform should be gradual to minimise secondary market disruption and that the PSPAs should be kept in place, along with the GSEs' human capital and operational processes, with the transition framework to be established by Congress.

Jeana Curro, director, agency MBS strategy at Deutsche Bank, notes that elements of these proposals are an improvement on the existing system, such as the insistence on affordable housing and accessibility for small and large lenders alike. The MBA's emphasis on preserving liquidity and transparency of the TBA market and the need for an ongoing government presence are further strengths. Curro states that "government presence homogenising MBS is essential for a functioning TBA market."

She agrees that an implicit guarantee will help maintain or build investor comfort and adds that an explicit guarantee should also improve capital weightings and imply the top tier LCR classification. She suggests that "while an explicit guarantee implies lower yields", the advantages of a guarantee should maintain strong investor demand.

Other elements of the MBA's proposals may need more consideration, however, such as the fact that any "meaningful" GSE reform must get Congressional approval before going ahead - something that has proved a challenge in the past with previous reforms. Furthermore, with a more right-leaning Congress, some of the MBA's proposals might receive greater challenges in Congress, such as an affordability mandate and an explicit government guarantee. Curro indicates that a bill that eliminates Federal backing altogether might be more likely to succeed.

Meanwhile, how effective a privately-owned company with shareholders can be in adopting a public purpose and issue MBS with government backing is questionable. Curro notes that such a plan sounds similar in structure to the previous hybrid state of the GSEs and it remains unclear who the private shareholders would be.

She agrees on the need "for private capital to step into the first loss", but suggests that this might prove difficult, given a lack of private capital that emerged in the post-crisis era. "Determining the required amount of private capital and then sourcing it will be a challenge," Curro comments.

While the MBA advocates a smooth transition in the reform process, it doesn't outline the potential costs involved in such a transition. While maintaining GSE property should reduce expenses, it is unlikely to eliminate them altogether, and it remains unclear whether the CSP will be sold to the new guarantor and what would happen to the proceeds. Curro concludes that there is an assumption that the GSEs will be reformed as utilities, but the MBA's proposals lack clarity on this issue.

RB

Structured Finance

Job swaps round-up - 17 February

Europe
Wells Fargo has hired Steve Hulett as head of credit and ABS sales EMEA. He was previously co-head of mortgages and ABS for Jefferies, Europe.

North America
Gramercy Funds Management has appointed Bradshaw McKee to the role of md, capital solutions and distressed portfolio manager. He was previously co-head of emerging markets, structured credit trading at Deutsche Bank.

Houlihan Capital has promoted Ted Frecka to the position of svp. He was previously vp and senior associate at the firm and has worked in financial derivatives and structured products of domestic and international companies.

Joseph Lau has joined Lord Capital as md and head of ABS. He was previously md and head of term non-traditional ABS at RBC Capital Markets.

Acquisitions
Moody's has acquired the structured finance data and analytics business of SCDM, a Frankfurt-based provider of analytical tools for participants in securitisation markets. The business acquired from SCDM will be integrated into Moody's Analytics existing structured finance solutions.