Contents

Structured Finance

Slow start to year 'not concerning' for Euro ABS

The European securitisation market started the year with its traditional quiet January, but issuance has picked up through February and there are large, innovative deals on the horizon. However, the future of the ECB's ABSPP already appears to be weighing on the market.

"January issuance was about €3bn this year. It was €6bn in 2016, but only €3.2bn the year before that. There is a longer-term trend of declining issuance, but with that in mind, this January's total issuance was not unexpected or particularly unusual," says Alexander Batchvarov, head of structured finance research, Bank of America Merrill Lynch.

He continues: "January is frequently a dead month. Activity picks up in February - as it has already started to - and then really hits its stride in March. March is frequently the busiest month in the first quarter and there is nothing at the moment to suggest that trend will not play out this year."

Nevertheless, issuance last month was about half of what it had been the year before. Debashis Dey, partner at White & Case, suggests this is for two main reasons: first, there are the continued regulatory headwinds, of which everyone in the market is all too aware; and second, there is the cost of funding for corporate debt.

"As for the cost of funding straight corporate debt, that remains very low. If issuers are able to get funding from other sources, then securitisation is simply less attractive," says Dey.

He continues: "For example, in the CLO space right now, the yield coming off loan portfolios is very low, so CLO yields are low and investors are left to ask themselves why they should choose to invest in a CLO when the returns are no better than, for example, some sovereign bonds."

A further factor may also be in play. Although difficult to verify, the public market seems to be shrinking in tandem with substantial growth in private issuance (SCI 25 August 2016).

"The European market is transitioning from a public market into much more of a private market. We are also seeing fewer plain vanilla public deals from bank issuers, coinciding with an increase in more complicated transactions from non-bank issuers and private equity houses," says Dennis Heuer, partner, White & Case.

He continues: "It is very hard to say what the actual size of the securitisation market is at the moment and whether the increased volume of private deals balances out the continued low volume of public deals. The current market volume might very well be higher than in previous years, but my feeling would be that the numbers still do not quite match. At the moment, we can only observe that the direction of the market is increasingly leaning for bilateral trades behind closed doors, making it hard to estimate the correct market volume."

By its very nature, private issuance is difficult to quantify. Heuer notes, for example, that his firm has just been involved in "a huge synthetic balance sheet transaction" in Germany, but that it is very difficult to provide further details because the issuer does not want them made public.

Many transactions now being undertaken are not for the purpose of raising funding, as securitisation has traditionally been employed, but instead have a much narrower focus on balance sheet management. "I would expect - considering public strategy goals like capital relief, as required by the ECB and other competent authorities - that we may be seeing an elevated level of issuance at the moment," observes Heuer.

"If you measured total volume of RMBS and ABS, then I suspect that has dropped, because of uncertainty about assets and regulation and turmoil as traditional buyers and sellers have been disintermediated. The European securitisation market now is a little bit like it was back in the late 1990s: volumes are still pretty low, but with a lot of synthetic and bespoke transactions," says Dey.

He continues: "What we are seeing right now is an active market, but activity in sectors that are not very visible. For example, the German domestic market is very interesting. For the last three years, you have had German banks quietly trying to digest large sovereign risk on their balance sheet, coupled with changes in capital regulation, so this is very different to the way many market participants think of securitisation."

The public market is far from dead, however. After the traditionally slow first month of the year, issuance has picked up through February and there are sizeable deals on the horizon (see SCI's pipeline).

A large student loan ABS, as well as a possible RMBS secured by the legacy Bradford & Bingley portfolio are both on the radar. Meanwhile, a raft of European CLOs are slated to price shortly, following on from CVC's Cordatus VIII transaction, which priced earlier this month at the tightest triple-A print since the financial crisis (see SCI's primary issuance database).

"The UK government's student loan ABS plan is interesting [SCI 21 February]. There is a thriving student loans market in the US, but it has not really developed in other markets. However, it has been shown to work either with government support or privately," says Batchvarov.

He continues: "That is a challenging sector to analyse, but it could set a good precedent to create a new market niche. There is also a lot of speculation as to what will happen with Bradford & Bingley, where we expect something along the lines of what happened with Northern Rock."

Further ahead, the anticipated wind-down of the ECB's ABSPP already appears to be weighing on the market. The minutes from the January ECB monetary policy meeting on its APP - of which ABSPP is a part - were released last week, with TwentyFour Asset Management noting the central bank's tacit admission that the purchase programme hit liquidity constraints and required adjustments, with further amendments possible in the future.

"We think this is a most interesting and subtle insertion in the minutes; i.e. the governing council is recognising that under its current guise, the APP may require tweaking to deliver the result initially hoped for when QE was introduced," the firm observes.

But that does not mean the programme will be wound down just yet. "I believe it would be premature to talk about any taper and indeed investor surveys suggest a widespread expectation that QE will continue into 2018. If it is indeed continued, then that will provide a floor to the market," says Batchvarov.

He continues: "Regardless, right now, even with ECB participation, we hear that there simply are not enough bonds. Deals continue to be oversubscribed."

Batchvarov notes that ABSPP purchases have averaged about €1bn per month since the programme began, around 30% of which has been placed in the primary market. That is only €300m a month of primary market purchases, which in many cases is less than 10% of the available paper.

White & Case ran legal due diligence for one of the ECB's investment partners for the purchase programme. "We expect that ABSPP is being scaled back and in 3Q17 the market will be told what is coming next," Heuer concludes. "That could lead to significant spread widening in 2H17 for certain asset classes."

JL

ABS

Warm investor response for debut turboprop ABS

Elix Capital has closed its debut securitisation of turpoprop aircraft at a time when investors are craving such assets to diversify their investment strategies. Dubbed Prop 2017-1, the US$411m deal is the first-ever aviation ABS backed entirely by turboprop airplanes.

One source notes that structurally the transaction was "fairly straightforward", but that there were challenges involved in educating the investor community about the aircraft. "There are a lot of misconceptions about turboprop in the investor community. Investors had a lot of predispositions about the aircraft, which have made them very hesitant about it in the past and made them hesitant this time," he says.

Part of the challenge therefore was walking investors through the asset class and the deal and getting them comfortable with it. There appears to have been confusion, for example, about the commercial life of the aircraft.

The source suggests that as further turboprop deals are issued, spread compression could emerge between the more established triple-A Boeing and Airbus midlife transactions and turboprop deals like Prop 2017-1. He adds that the investor community is drawn to aviation ABS in general at the moment because they recognise that the spread-to-risk ratio is "very inviting", thereby enhancing the "risk-reward paradigm" and the value on offer.

Certainly the sector is set to grow, with Elix at least intending to become a programmatic issuer, according to the source. He suggests that Prop 2017-1 provides proof of concept and hopes that other issuers will gain confidence from the deal's success or at least more deals featuring a significant percentage of turboprop aircraft will emerge.

KBRA assigned a single-A rating to the deal's US$300m class A loans, triple-B to the US$57m class Bs and single-B to the US$54m class Cs. The securities have coupons of 5.30%, 6.90% and 9.55% respectively and LTVs of 55%, 65.5% and 75.4%. The deal's legal final maturity date is 15 March 2042.

Proceeds were used to purchase 63 turboprop aircraft on lease to 17 airlines located in 12 countries. The portfolio has an initial value of around US$545m, as of 1 February 2017, and an aggregate maintenance-adjusted current market value of US$580.8m.

Elix Aviation Capital is the servicer on the transaction, DVB Bank SE is the liquidity facility provider and Phoenix American Financial Services is the managing agent. Wells Fargo is the facility agent, operating bank, security trustee and trustee.

KBRA notes that the deal benefits from an experienced management team that founded Elix along with Oaktree Capital, which is the firm's main shareholder. Certain risks are associated with aircraft securitisations concentrated in one aircraft type, as well as the overall age profile of the aircraft. However, the transaction benefits from structural enhancements, such as lower initial leverage, cash sweep mechanisms and performance triggers.

Additionally, while the leasing market for turboprops is not as extensive as for commercial jets, KBRA views turboprops as aircraft with a "long useful life, positive leasing characteristics and strong historical value retention." The rating agency highlights other credit strengths, including that the average retirement age of turboprops is trending upwards due to limited availability and replacement scarcity, while turboprops are the only aircraft to navigate certain routes in more challenging environments.

In terms of portfolio concentration, the three largest lessees are CommutAir, Island Air and Alliance Air, representing around 15.8%, 13.2% and 12% respectively of the portfolio. The three largest country concentrations are the US, India and Ethiopia, at 37.8%, 18.9% and 8.8% of the portfolio respectively.

KBRA notes that while this concentration risk is mitigated to an extent by the creditworthiness of the initial lessees and the initial remaining average lease term, it is "difficult to predict the migration of the portfolio over time", which could see greater concentration due to re-leasing and disposition activity. The rating agency also highlights the inherent volatility of the aviation sector, which is prone to "exogenous shocks", ranging from oil prices and weak economic conditions to terrorism, pandemics and natural disasters.

Nevertheless, investor response to the deal was strong, with accounts representing all three major regions - the US, UK and Europe. Aviation in general continues to whet investor appetites, as it can provide much-needed portfolio diversification. The source concludes that while economic factors aren't the main driver of interest in esoteric assets like turboprops, given market conditions, "short-term, high yield paper like the Prop 2017-1 deal isn't a bad place to invest."

RB

Secondary markets

Euro secondary quiet

It was a quiet start to the week across the European securitisation secondary market thanks primarily to the US public holiday.

As a result, little has changed - sentiment remains positive, the demand for paper is still strong and sellers are few and far between as the belief continues that it is not yet the time for extensive profit-taking. Overall, secondary spreads remain flat to slightly tighter week on week.

There is one BWIC on the European schedule for today so far - a nine line €16.17m CLO BWIC due at 14:30 London time. it comprises: ACLO 1X F, BABSE 2015-1X F, BECLO 2X D, BECLO 2X E, BLACK 2015-1X F, DRYD 2013-29X D, JUBIL 2015-15X F, PENTA 2015-2A F and SPAUL 5X F.

Only BECLO 2X E has covered with a price on PriceABS in the past three months - last doing so at 99.3 on 26 January.

Secondary markets

Euro ABS/MBS edges in

European ABS/MBS secondary spreads continue to edge in.

"The market remains strong and well-supported," says one trader. "At the same time, we're not seeing any real rotation activity from clients - even though there's action in primary, they appear content to hang on to their secondary positions as well."

As a result, the trader adds: "Secondary spreads continue to creep tighter. The benign background in broader markets, including the news around the French election yesterday, is only serving to reinforce that pattern."

There are currently no BWICs on the European ABS/MBS schedule for today.

Secondary markets

US CLOs subdued but strong

Activity in the US CLO secondary market is subdued but demand is still strong.

"Things are on the slower side this week," says one trader. "However, there is no particular softness anywhere."

The trader continues: "Generally, there's a scarcity of opportunity in secondary at the moment and relatively little new issuance with the focus still on refinancings. So any paper out there is being well bid."

In addition, the trader notes: "It's been a holiday shortened week this week and ABS Vegas is next week. Focus is already shifting to that and while we'll go into the conference with a lot of momentum the market is likely to remain quiet until everyone is back."

There are currently five fairly short BWICs on the US CLO calendar for today. The largest piece in for the bid comes in a $22.78m single line auction of SHPLF 2014-1A SUB due at 14:00 New York time.

The bond has not covered on PriceABS before.

ABS

FFELP rating actions revealed

Fitch has disclosed the rating actions resulting from the update to its US FFELP student loan ABS criteria (SCI 27 July 2016). The most significant change to the criteria was the introduction of new stresses aimed at analysing the vulnerability of transactions to maturity risk.

Of the 813 tranches from 264 transactions reviewed, Fitch has upgraded 42, downgraded 105 and affirmed 629. Further, 37 tranches were paid in full in the interim, while 45 tranches from 17 transactions (including 16 SLM deals) remain on rating watch negative - either because the issuer is in the process of soliciting maturity amendments or because the agency is awaiting additional information to finalise the review. The agency expects to conclude its review of these transactions by April, regardless of whether the amendment efforts are successful.

The majority of the upgrades occurred to AA/A rated bonds, which were upgraded to AAA/AA, due to stable asset performance and improving credit enhancements with limited maturity risk. Proportionally, downgrades applied about evenly to previously triple-, double- and single-A rated bonds.

"In absolute terms, triple-A bonds were most affected, as they represent the largest number of outstanding ratings," Fitch observes.

Of the downgraded triple-A rated tranches, 15 have been lowered to double-A, 18 to single-A and 30 to non-investment grade. The agency reports that the most common reason for downgrade was the failure to pay before legal maturity under its base case or stress scenarios. In many of the modelling scenarios, the defaults would be considered technical defaults, with principal eventually being paid in full after maturity.

Notes downgraded to non-investment grade following the review have substantial maturity risk and often depend on continued stable or even positive economic developments or positive sponsor actions for their payment by maturity. Only a small number of the downgrades are attributable to credit failure and these downgrades were mostly limited to one rating category.

Fitch notes that sponsor activities - such as the exercise of call options and amendments of bond maturity dates - prevented some downgrades that could have occurred in the absence of these activities. The agency adds that some sponsors continue efforts to amend maturity dates for the bonds that were subject to previous Fitch downgrades. It says that bonds downgraded previously due to maturity risk could be upgraded once the maturity dates are revised, resulting in higher than anticipated rating volatility.

Over the past few years, the risk of failure to pay principal and interest in full by the legal final maturity date has become increasingly prominent for FFELP SLABS, as payment rates slow and terms are extended due to borrowers taking greater advantage or forbearance, deferment and income-based repayment (IBR) options. Fitch notes that IBR enrolment continues to rise, more than offsetting the declines in deferment and forbearance in most transactions.

Meanwhile, the uptick in prepayments accelerates asset amortisation, which helps mitigate extension risk. However, greater utilisation of IBR extends loan terms and increases the tail risk of transactions.

CS

Structured Finance

SCI Start the Week - 20 February

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

Pipeline
There were eight ABS additions to the pipeline last week. These were joined by three RMBS and a CMBS.

The ABS were: US$209m American Credit Acceptance Receivables Trust 2017-1; US$325.6m CNH Capital Canada Receivables Trust 2017-1; US$1.08bn Ford Credit Auto Owner Trust 2017-REV1; US$350m Hilton Grand Vacations Trust 2017-A; US$759m John Deere Owner Trust 2017; US$500m Kabbage Asset Securitization Series 2017-1; US$1.08bn Santander Drive Auto Receivables Trust 2017-1; and US$343.7m SoFi Consumer Loan Program 2017-2.

Finsbury Square 2017-1, €407.1m Grecale 2015 (re-offer) and £233m Stanlington 1 accounted for the RMBS. The CMBS was US$1.4bn FREMF 2017-K62.

Pricings
After weeks of building up in the pipeline, the weekly volume of ABS prints leapt last week, to 14. There were also four RMBS and two CMBS as well as 10 CLOs, with refis once again accounting for a significant proportion.

The ABS were: US$650m Ally Master Owner Revolving Trust Series 2017-1; US$2.4bn American Express Credit Account Master Trust Series 2017-1; US$700m American Express Credit Account Master Trust Series 2017-2; US$930m AmeriCredit Auto Receivables Trust 2017-1; C$400m BMW Canada Auto Trust 2017-1; US$350m Credit Acceptance Auto Loan Trust 2017-1; A$2.15bn Crusade ABS Series 2017-1 Trust; US$225m First Investors Auto Owner Trust 2017-1; US$1bn Golden Credit Card Trust Series 2017-1; A$266m Flexi ABS Trust 2017-1; US$255.2m Mariner Finance Issuance Trust 2017-A; €1.5bn Quarzo 2017; US$255m SCF Equipment Leasing 2017-1; and US$724.06m Volvo Financial Equipment Series 2017-I.

The RMBS consisted of US$266m Bayview Opportunity Master Fund IVb Trust 2017-CRT1, €1.136bn FCT Credit Agricole Habitat 2017, US$752.5m STACR 2017-HQA1 and US$145m Verus Securitization Trust 2017-1. The CMBS were US$1bn FNA 2017-M2 and US$975m OMPT 2017-1MKT.

Lastly, the CLOs were: US$896.8m Ares 2014-31R; US$407m Apidos CLO 2013-15R; US$493m Birchwood Park CLO 2014-1R; US$431.5m CIFC CLO 2013-4R; US$411.38m Golub Capital Partners CLO 34; US$613.16m LCM Partnership 2017-1; US$490.25m MP CLO V; US$397m NewStar Commercial Loan Funding 2017-1; US$522m Symphony CLO 2014-15R; and US$666m Venture CDO 2012-12R.

Editor's picks
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...
Italian mixed NPL portfolio added: AnaCap Financial Partners is set to acquire a €177m portfolio of Italian performing and non-performing corporate secured loans from Barclays. The transaction is the latest in a flurry of Italian mixed portfolio acquisitions through which the private equity firm has developed valuation expertise...
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...
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...
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...

Deal news
• 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.
• 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.
• 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 [since upsized - see above] 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).
• 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.
• 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.
• 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).
• 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.

Regulatory update
• 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.

Structured Finance

Ratings expansion outlined

KBRA has named Jim Nadler ceo, with co-founder Jules Kroll stepping down from the position. The move coincides with the rating agency's plans to expand into rating European securitisations and CLOs.

Nadler will retain the title of president, which he has held since KBRA was established in 2010, while Kroll will remain chairman. Kroll intends to spend more time on K2 Intelligence, the corporate investigations business he started with his son.

Additionally, Ira Powell has been appointed coo of KBRA. Previously the chief of staff and chief credit officer, he joined the agency in 2015 from Goldman Sachs.

KBRA has so far assigned ratings to over 1000 deals, accounting for US$625bn worth of securities - of which approximately 650 deals are structured finance transactions. "We rated our first CMBS deal in June 2011 and started gaining traction in 2012, and have now rated over 300 CMBS and 200 ABS transactions," confirms Nadler.

He adds: "We're now routinely either second or third place in CMBS for market share, tied for first place in esoteric ABS and number one in aircraft ABS. We've seen the biggest increase in market share in ABS in 2016, as our ABS ratings increased by 77% over 2015."

Nadler points to two main reasons behind the growth of KBRA. The first is that it was the first rating agency to recognise post-crisis that investors are an important part of the ratings process and that listening to them is critical. The second reason is the realisation that a rating is a secondary product and that what investors need more is research, given that regulations require them to do more work and therefore they need more information on a timely basis.

He says: "All of our research is free and we're usually the first rating agency to publish our presales on structured finance transactions. Our presales also tend to be more in-depth than the other rating agencies."

He continues: "For example, within CMBS presales, we include a write-up of each of the top 20 loans (which account for roughly 70% of the pool). In comparison, some of the other agencies only focus on the top 10 loans (which account for around 30%)."

Nadler was one of the first analysts hired by Fitch after it was recapitalised in 1989. He began by running the MBS team at the agency, before leading its overall structured finance effort. He left in 2001 to work at General Reinsurance as vp.

"I experienced both sides of the ratings equation - as a provider and as an end-user - and so I had a good sense, when establishing KBRA, of the changes that investors wanted to see," Nadler observes.

Looking ahead, one area of focus for the agency is Europe, with plans to begin rating securitisations in the region. It is due to open its Dublin office next month, to be led by Mauricio Noe (SCI 9 September 2016).

"Europe is an area of growth, with some interesting structured finance activity, especially in terms of UK and Dutch RMBS, as well as consumer deals. We may also see more SME deals being issued, as there is an increasing need for these companies to tap the public market," Nadler explains.

He adds that the global spend on infrastructure is expected to increase and so a decent flow of project finance deals should emerge in Europe and Latin America in particular.

Corporate ratings are another area of focus for KBRA. The agency already has a decent business in private corporate ratings, but is expanding into public ratings, having recently hired Van Hesser as senior md of corporate finance.

"The secondary reason for enhancing our corporate capabilities is to move into rating CLOs, which we expect to begin offering at least by the autumn," Nadler continues.

Overall, KBRA has a positive outlook in terms of securitisation supply. "Even in the face of a raft of legislative changes, the structured finance industry finds a way to effectively incorporate them and continue. It speaks to the need for diversification by investors and the utility of securitisation as a funding tool," he concludes.

CS

Capital Relief Trades

Risk transfer benchmark introduced

PCS has launched the first risk transfer quality label for synthetic risk transfer deals. One of the aims of the label is to help incorporate synthetic securitisations into a future STS regulatory framework through criteria that identify key elements of a simple, transparent and standardised instrument.

The PCS Risk Transfer Label is the product of a cross-industry and pan-European working group of market stakeholders and distils their views of the best current practices in the European risk transfer market. The first label has already been awarded to Unicredit for its Unicredit ARTS MidCap 2016-2 deal, which references a portfolio of performing loans granted to Italian SMEs.

European authorities have so far been reluctant to give synthetics the STS treatment. It is hoped that the new label will help support the market by assisting both protection buyers and investors through standardisation and added transparency.

"Synthetic securitisations have been excluded from STS, since it is only available for true sale securitisations," says Ian Bell, head of the PCS secretariat. "The main problem with synthetics is the capital treatment of the senior note retained by the protection buyer. You transfer the unexpected loss through the mezzanine, but you still need to account for the senior note as a non-STS securitisation position."

He continues: "Under CRR rules, these senior notes are punished with high capital requirements. Consequently, market participants approached us to set up a set of criteria that would define standards."

Since most credit risk transfer deals are private and bespoke, from an investor's point of view, the label is unlikely to facilitate liquidity. However, it may help with their internal processes, given that "it provides a nice summary of what you are doing to a credit committee".

They also provide a standard "encapsulated in a single word". For Bell, "that can be very useful in setting the boundaries of a conversation between a prospective issuer and investor."

Despite the different criteria used for synthetics, Bell emphasises the fact that in practice the PCS label works in a similar fashion to the organisation's true sale label. "There is a checklist that is provided, which is in turn double-checked by a screening partner, such as KPMG and the Irish Stock Exchange. The big picture though is the same with true sale securitisations."

To date, PCS has issued 161 true sale labels for securitisations with a total volume of €230bn.

SP

Capital Relief Trades

Risk transfer round-up - 24 February

Several risk transfer securitisations are understood to have entered the pipeline this past week.

According to sources, Lloyds is working on a capital relief trade referencing commercial real estate assets, which is said to be "similar" to Barclays' Griffon deal from last year. Meanwhile, Barclays is rumoured to be prepping a transaction referencing corporate loans that will reportedly be priced in either sterling or US dollars.

Other deals on the radar include Deutsche Bank's new CRAFT CLO, which is expected to close in 2Q17.

CLOs

Euro CLO retention strategies weighed

Two European CLOs have priced since the US risk retention rules came into effect on 24 December (excluding refinancings) and both are structured to enable the manager to satisfy both European and US risk retention requirements. Several deals structured before the risk retention deadline and some refinanced deals priced recently have also been dual compliant.

European transactions can remain exempt from US risk retention rules in a number of ways by complying with safe harbour provisions, such as if the transaction is not required to be registered under the US Securities Act and if no more than 10% of notes are sold to US persons. European CLOs relying on these provisions include the new issue CRNCL 2016-7 and refinanced HARVT 8, PHNXP 1 and NEWH 1.

So far, the most common risk retention strategy in issuing a dual-compliant CLO - without relying on safe harbour provisions - appears to be the vertical interest approach, according to Bank of America Merrill Lynch European securitisation analysts. To date, it's been employed in new issue deals CADOG 8, DRYD 2016-48 and OHECP 2016-5, as well as in the refinanced JUBIL 2014-12, DRYD 2013-29 and CGMSE 2014-2 deals.

The vertical slice approach requires a 5% retention of the notional value of each issued class of notes, meaning that the amount of notes required to be held should be the same under both US and European rules. However, differences remain between US and European risk retention rules regarding the horizontal slice option.

Under European rules, horizontal retention requires the retention holder to hold the first loss tranche equal to 5% of the nominal value of the securitised exposers. The US rules require 5% of the fair value of all notes issued to be held by the retention holder, using a fair value measurement framework under US GAAP.

Additionally, in Europe the 5% requirement is measured on an ongoing basis - meaning that "manager trading gains resulting in an increase in the nominal value of the securitised exposures could result in a retention deficiency", the BAML analysts suggest. They add that measures are typically included to avoid this scenario, such as allocating trading gains to an interest account.

So far, dual-compliant European CLOs have involved the manager holding the retention as the 'sponsor', as defined in US and European rules - although there have been examples, such as OHECP 2016-5, where the manager holds the risk retention as a US sponsor but a European originator. The analysts expect to see "more variation in approaches going forward."

Two risk retention approaches are emerging in the US for CLO managers (SCI 9 February). The first is for the manager to use a capitalised manager vehicle (CMV), meaning a newly capitalised and self-managed entity is created to manage the CLO. The second is for a majority owned affiliate (MOA) to hold the risk retention, permitted provided the manager has control over the entity through a 50% equity stake, for example.

A further option may be suitable to meet dual-compliance requirements - using a capitalised manager owned affiliate (C-MOA), which combines elements of both the CMV and MOA approaches. Under C-MOA, an MOA of the manager could be set up to effectively 'originate' the loans according to European rules and - because of the use of an MOA as a manager - this would satisfy US risk retention rules.

The BAML analysts conclude that further complications in Europe are likely with the UK exiting the EU and upcoming changes to risk retention rules in the European Securitisation Regulation. These events could make the environment more challenging for CLO managers and may lead to a more conservative approach.

RB

CLOs

GSO/Blackstone tops global CLO AUM

The top 10 US CLO managers once again accounted for around 29% of AUM in 2016 (SCI 22 February 2016), while the top 10 European managers accounted for 59%, according to Moody's latest CLO manager league tables. However, there were a few changes to the composition of the rankings over the year.

The most notable changes in the US top 10 manager rankings last year by deal count were the appearance of MJX - which tied with BlueMountain, Octagon and Voya for joint-sixth place - and the ascension of GSO/Blackstone to the top spot. MJX brought its deal count to 20, after issuing three deals during 2H16, while GSO/Blackstone finished the year with 28 deals under management.

Carlyle, CIFC, CSAM and Ares are ranked second, third, fourth and fifth in Moody's league tables, with 27, 26, 24 and 23 deals respectively. Golub rounds the list out, with 19 deals under management, as at end-2016.

Meanwhile, CSAM remained top of the AUM rankings, with US$16.2bn under management. GSO/Blackstone, Carlyle, Ares, CIFC, Apollo, Octagon, MJX and Voya are ranked from second to ninth place, accounting for a range of AUM from US$13.3bn down to US$9.3bn. Golub was replaced at 10 by PGIM, with US$8.8bn AUM.

In Europe, the top four managers by deal count remained the same by year-end, with Alcentra tied in first place with Carlyle (CELF) at 16 CLOs each. GSO/Blackstone and KKR are in the third and fourth spot, with 13 and 11 deals under management respectively.

Ares, CSAM and 3i are tied in fifth place, with eight deals each. At the bottom of the ranking, Barings, CVC and ICG are tied in eighth place, with seven deals each.

GSO/Blackstone reclaimed the top spot in terms of AUM from Carlyle, with the pair accounting for €5.4bn and €5bn respectively. Alcentra, KKR, CVC, Barings, PGIM, CSAM, 3i and Ares round out the AUM rankings, managing from €4.6bn down to €1.9bn of European CLOs.

There were few changes in Moody's global league tables. Carlyle retained the top spot in the deal-count rankings with 43 transactions, while GSO/Blackstone climbed into first place on the AUM list with US$19bn.

Voya dropped out of the global rankings by deal count, after tying for the tenth spot in 1H16. Alcentra was replaced by MJX in tenth place - with US$10.5bn - in terms of AUM.

Moody's notes that as CLO 1.0 deals amortise and the proportion of 2.0 transactions among outstanding transactions rises - to 88% by deal count, as of end-2016 - its CLO 2.0 ranking increasingly resembles that for all US CLOs. Thus, the top firms by deal count and AUM - GSO/Blackstone and CSAM respectively - are the same in the overall US and US CLO 2.0 lists. However, while PGIM makes the top 10 US 2.0 list by both deal count and AUM, it is not among the top 10 US managers by overall deal count.

The agency rated 154 new deals from 72 managers totalling US$70.5bn in AUM last year. Five new US managers entered the market: TCI Capital Management, Newfleet Asset Management, Maranon Capital, Park Avenue Institutional Advisers and TIAA Global Asset Management. New entrants to the European market included Accunia Credit Management and Och-Ziff Europe Loan Management.

CS

CMBS

Defeasance trending down on volatility

US CMBS defeasance activity trended lower last year, after steadily increasing year-over-year between 2013 through 2015. Many loans defeased within a few months of their open or prepayment periods, as borrowers sought either to lock in favourable refinancing or to accommodate property sales or portfolio repositioning opportunities.

CMBS defeasance volumes in 2016 totalled US$17.2bn, down by 23% from the 2015 level of US$22.4bn, according to Moody's. The agency notes that interest rate volatility made defeasance less attractive financially, while reduced liquidity in CRE debt and equity markets negatively influenced refinancing and defeasance activity. The latter was primarily due to concerns surrounding the implementation of risk retention rules in December.

"Defeasance activity has fluctuated throughout the year over the past four years, with fourth-quarter results consistently higher," says Gregory Reed, vp and senior credit officer at Moody's. "After a strong first quarter in 2016, defeasance activity throughout the second through fourth quarters in 2016 was inconsistent, with wide fluctuations month to month. Consistent with prior years, the fourth quarter of 2016 ended higher overall, but defeasance activity actually peaked in September 2016."

Loans with remaining terms of one year or less accounted for 64% of defeasance activity in 2016. Defeasance activity of loans with five or more years before maturity also increased, accounting for 13% of 2016 defeasance volumes, compared to 10% in 2015, 5% in 2014 and 1% in 2013.

The average balance of defeased loans in 2016 was US$15.4m, compared with US$17.1m in 2015, US$16.5m in 2014 and US$14.9m in 2013. The size of defeased loans varied considerably by loan balance and loan count.

For example, 49 loans over US$50m defeased, representing 4% of total defeasance by loan count, but 32% by loan balance. Conversely, 354 loans were defeased in the US$10m-US$25m range, representing the highest figure by both loan count (at 32%) and dollar volume (33%).

Unlike prior years when office loans accounted for the majority of defeasance activity by balance, multifamily loans accounted for the largest share of defeasance at 38%, versus office at 22%, retail at 15%, hotel at 10% and industrial at 5%. Moody's suggests that the increase in multifamily loan defeasance activity reflected the increased issuance volume of Freddie Mac loans.

Multifamily loan defeasance totalled US$6.6bn across 456 loans. The other property sectors with large average defeased loan sizes were hotel (at US$23.4m across 70 loans) and mixed use (at US$23.3bn across 27 loans).

Consistent with 2015, office loans defeased in 2016 were much larger than loans in other sectors of the property market, averaging US$32m per defeased loan. Indeed, the top six defeased loans were secured by office properties: the US$250m 667 Madison Avenue, US$235m 540 West Madison Street, US$226m 85 Tenth Avenue, US$210m One Seaport Plaza (A-note), US$210m Waterview and US$203m 5 Penn Plaza (see SCI's loan events database).

Totalling US$2.03bn, the top 10 largest loans that defeased in 2016 made up 12% of overall defeasance volume, compared to 17% in 2015, 20% in 2014 and 23% in 2013. The major metro markets of New York, Chicago and Washington, DC accounted for six of the top 10 defeased loans.

2006-2007 vintage loans accounted for 55% of total 2016 defeasance activity. This compares with 73% of 2015 defeasance activity from loans originated between 2005-2007.

Moody's says that a highlight last year was the increase in the share of defeasance in deals with loans that were newly eligible for defeasance. Loans in deals that were securitised in 2012-2014 totalled 24% in 2016, compared with 12% from the 2012-2013 vintages that defeased in 2015, 9% of loans in deals that were securitised in 2011-2012 that defeased in 2014 and zero loans in deals securitised in 2010-2011 that could have defeased in 2013.

CS

CMBS

MC Sports filing threatens CMBS

Of the 15 US CMBS loans exposed to MC Sports, there are six which stand to be particularly affected by the company's bankruptcy filing last week, says Morningstar Credit Ratings. The largest loan of concern is the US$17.2m Wilsontown Shopping Center loan securitised in JPMBB 2013-C17.

MC Sports is set to begin liquidation sales immediately at its 68 stores in seven Midwest states. The six loans have a combined total of US$57.7m and are particularly at risk either because MC Sports occupies at least 22% of the gross leasable area or because the loan has a DSCR below 1.2x.

The US$17.2m Wilsontown Shopping Center loan securitised in JPMBB 2013-C17 has MC Sports as the third-largest tenant, occupying 13.5% of the property. The latest reported DSCR was 1.16x as of June 2016, but would be likely to drop below 1x on the closure of the MC Sports store, which would also rocket LTV from 60.2% to more than 90%.

MC Sports accounts for 9.9% of the property in the US$16.6m Wildwood Crossings loan backing LBCMT 2007-C3. The latest reported DSCR was 1x as of September 2016 so the loss of MC Sports would push the property below break-even.

"We believe that a full takeout of the debt prior to the loan's July maturity date would be challenging without additional equity from the borrower. Morningstar already projects a US$1.3m loss because of diminished net cash flow and the loss of Barnes & Noble, which departed the property in January. Consequently, the closure of MC Sports will be another blow to this distressed loan," says the rating agency.

There is also risk for the US$11.1m Lapeer Pointe Plaza loan securitised in WFCM 2016-LC25, where MC Sports is the largest collateral tenant, occupying 26% of the property. Occupancy would decline from 97% to 71% and DSCR would drop below break-even, which would elevate default risk. Morningstar's valuation suggests the property value is less than the loan balance, with the rating agency putting LTV at about 125%.

"The three other loans of note, all with balances less than US$6m, are Delavan Crossing, Plover Retail Center, and 5001 Kendrick Street, where MC Sports occupies more than 20% of the GLA. Morningstar has some concern that, because each property is considered a tertiary location, the spaces left vacant by MC Sports will be difficult to re-lease," says the rating agency.

Delavan Crossing is securitised in BACM 2007-4, Plover Retail Center is securitised in CWCI 2007-C2 and 5001 Kendrick Street is securitised in COMM 2015-PC1. Other CMBS with exposure to MC Sports include BSCMS 2007-T28, CGCMT 2016-C3, COMM 2014-LC17, JPMCC 2012-C8, JPMCC 2013-C16, MSBAM 2016-C30, MSC 2007-IQ14, MSC 2016-BNK2, and UBSBB 2012-C2.

JL

CMBS

Student accommodation CMBS prepped

Brookfield Asset Management affiliate GL Europe RE Holdings is prepping a £215m single-tranche UK CMBS. Dubbed Student Finance, the transaction is backed by a single loan secured by 13 student accommodation buildings located in England and Wales.

The portfolio comprises 5,684 bed spaces across properties in Leicester, Newcastle, Nottingham, Sheffield and Wrexham, with the largest property accounting for only 21% of the pool. The buildings offer students an all-inclusive product, including high-speed broadband service, 24-hour management presence, full furnishing, code swipe card entry, CCTV, games rooms, bike stores and laundry facilities.

The properties have all been built or substantially refurbished since 2003, with the majority directly let to students on tenancies of up to 52 weeks. Approximately 11% of the beds are fully or partly occupied under rolling annual agreements with a university.

S&P notes that the portfolio is generally aligned with stronger universities. Of the bed spaces, 97% are located in cities with at least two universities, including one top 30 ranked institution.

The buildings were 98.7% occupied for 2015/2016 and are 99.4% occupied for the current 2016/2017 year. Cushman & Wakefield valued the portfolio at £404.3m, as of September 2016. On this basis, the senior loan-to-value ratio is 53.2%.

S&P reports that demand for student accommodation in the UK exceeds supply because of growing student numbers and a limited supply of new properties. While Brexit could affect demand for UK student accommodation from international students, given that only 24% of all UK students are housed in purpose-built student accommodation, demand from UK students is expected to fill any resulting spaces.

S&P has assigned preliminary triple-B ratings to the fixed-rate notes, reflecting its evaluation of the underlying real estate collateral. The agency considers that the portfolio's net cashflow-producing potential is £20m on a sustainable basis, implying a debt yield of 9.3%. Its net recovery value for the portfolio is approximately £292m, representing a haircut of 28% to Cushman & Wakefield's valuation.

Barclays, HSBC and RBC are arrangers and book-runners on the deal.

CS

CMBS

CMBS liquidation trust prepped

An innovative liquidation vehicle backed mainly by commercial real estate loans is marketing. Dubbed VSD 2017-PLT1, the securitisation has an aggregate unpaid principal balance of US$378.1m and monetises recoveries from performing, non-performing and REO assets to pay the notes.

Interest payments can be deferred by up to one year, if there are insufficient funds to make the payment, while principal will be paid in a manner that allows leakage of cash to the equity interests upon compliance with certain advance rate and fast-pay trigger tests.

The trust comprises 201 assets with an aggregate UPB of US$371.1m, of which 191 were acquired by and 10 originated by Värde Partners. KBRA notes that based on the acquisition cost of the US$299.6m acquired assets and the UPB of the originated assets, the aggregate basis of the portfolio is US$348.2m, making up 92.1% of the UPB.

KBRA has provisionally rated the US$208.49m class A notes triple-B minus, while the remaining US$139.72m equity interest is unrated. The final payment date on the A note is December 2043.

The collateral consists of 178 performing CRE loans, 22 NPLs and one REO property, with some of the assets collateralised by multiple pieces of real estate or other items. The assets will be sold to the trust by affiliates of Värde and relate to 168 unique borrower relationships across 217 pieces of collateral.

The collateral is made up of CRE properties, land and residential assets. The CRE property types are mainly office (accounting for 39 items), retail (65 items) and multifamily (57 items). The land collateral is broadly categorised as for agricultural use (2.9% of the pool), for residential development (1.6% of the pool) and land for commercial development (0.02% of the pool). The residential collateral comprises two single-family rental units.

In terms of geographic concentration, the top five state exposures represent 52% of the collateral, with California making up 15% of the acquisition basis, Illinois 14.8%, Texas 12.6%, Florida 9.5% and West Virginia 7.2%. The average balance of the assets based on acquisition basis and UPB is US$1.7m and US$1.9m respectively.

KBRA notes that at 93.3%, the deal comprises a significantly higher proportion of performing assets than the 10 liquidating trusts rated by the agency since March 2013. A credit strength of the deal, it adds, is that performing assets produce ongoing cash flow via debt service payments and there is a higher likelihood that they may recover a higher proportion of their UPB than NPL and REO assets.

The seller and sponsor of the transaction is Värde Scratch and Dent Holdco, with the repurchase guarantor being Värde Scratch and Dent Master. KBRA notes that the experience of the seller and sponsor is a credit strength for the deal, while the servicer Trimont Real Estate Advisors has experience in issuing and managing liquidating trust securitisations.

There is no separate asset manager and until a securitisation EOD occurs, the issuers have consent and consultation rights over all major credit decisions with respect to the assets and the servicer must generally consult the issuers before taking any action. Credit Suisse is lead placement agent on the deal.

RB

Marketplace Lending

Marketplace deals readied, with innovations

Kabbage is marketing its first marketplace loan ABS of the year and its second since inception. Meanwhile, SoFi is in the market with its second consumer loan ABS - SoFi Consumer Loan Program 2017-2 - backed by US$343m of consumer loans and comprising several elements that differ from its previous securitisation.

Dubbed Kabbage Asset Securitization Series 2017-1, Kabbage's transaction is backed by US$500m SME loans originated via its online platform. Provisionally rated by KBRA, the deal comprises US$370m single-A rated class A notes, US$79.3m triple-B plus class Bs, US$26.4m double-B class Cs and US$23.8m single-B class D notes.

The advance rate on each note is 70%, 85%, 90% and 94.5% respectively. The initial credit enhancement is 30.50%, 85%, 90% and 94.5%, with a legal final maturity date of March 2022.

KBRA notes that the previous Kabbage securitisation - also rated by the agency - has performed in line with expectations, due to a number of factors, such as an experienced management team and "the operational capabilities to service the portfolio". It adds too that the transaction structure benefits from "sufficient credit enhancement" and a structure that "accelerates principal payments on the note upon a deterioration of asset performance to support the rating on the notes."

In terms of the deal collateral, the pool comprises 97,529 receivables from 29,311 merchants, with the average outstanding receivables balance per receivable at U$4,536 and the average outstanding receivables balance per merchant US$15,094. The weighted average original term is nine months and the weighted average remaining term is 7.7 months.

The average FICO score of the collateral pool is 692 and the largest geographic concentration is in California, accounting for 15.80% of the pool. The second largest state by geographic concentration is Florida, at 10.43%, with Texas third largest at 7.94%.

While Kabbage is seller and servicer of the deal, with the initial back-up servicer role filled by First Associates Loan Servicing, Celtic Bank is originator of the loans. Guggenheim Securities is sole structuring advisor, book running manager and initial purchaser.

SoFi's SCLP 2017-2 has also been provisionally rated by KBRA. The US$307.1m class A notes are provisionally rated single-A and the US$36.56m class Bs triple-B plus.

KBRA notes that the deal is similar to the last in that it is backed by a pool of prime quality unsecured personal loans, but it does contain notable differences. While credit enhancement for SCLP 2017-1 and 2017-2 are "identical", SCLP 2017-2 has 0.10bp more excess spread per annum and a 0.13% lower expected lifetime loss rate on the collateral. The rating agency says that these changes "support break-even cashflow loss coverage multiples that support the same single-A rating for the class A notes and a higher triple-B plus rating for the class Bs."

Furthermore, the collateral comprises loans to borrowers with a higher weighted average free cashflow (US$5,184 versus US$5,166) and lower credit score (730 versus 732). The borrowers have a slightly lower weighted average income of US$141,633 versus US$142,857, the loans have a higher weighted average borrower rate at 9.73% versus 9.6% and the lowest percentage of 84-month loans and the highest percent of 36-month loans.

Notably, SoFi has modified its personal loan credit risk policy to include additional criteria based on an applicant's debt, so that no loan will now be approved if the applicant has a ratio for revolving and instalment debt balance to income above a specified level and if the applicant has two or more unsecured trades opened within the last 12 months. This latter criteria is meant to avoid loan stacking, where borrowers take out multiple loans from different lenders. The combination of these new policies, KBRA adds, should "have a positive impact on future loan performance."

KBRA notes that SoFi has continued to grow successfully in terms of loan origination, with the platform originating US$1.005bn in personal loans in 4Q16. This is an increase of US$348m on the prior quarter and the largest quarter in the company's history, exceeding the previous high of US$895m from 4Q15.

SoFi will act as sponsor, administrator, originator, lender and servicer on the deal, with Systems & Services Technologies acting as back-up servicer and custodian. Wilmington Trust will act as indenture and underlying trustee.

RB

RMBS

Galton debut 'weaker' than other prime RMBS

GMRF Mortgage Acquisition Company is in the market with its first ever RMBS (see SCI's pipeline), funded by Mariner Investment Group. Galton Funding Mortgage Trust 2017-1 (GFMT 2017-1) is backed by 363 prime quality, mainly 30-year residential mortgages with total unpaid balance of US$254.5m, but Moody's warns that collateral is weak compared to recent prime deals.

GMRF Mortgage Acquisition Company is a wholly-owned subsidiary of Galton Mortgage Recovery Master Fund III. Its RMBS has 41 classes of notes, which have been provisionally rated Aaa-B2 by Moody's and triple-A to single-B by DBRS, and will be compliant with Dodd-Frank risk retention requirements.

The collateral backing the RMBS is strong in its own right, says Moody's, with a weighted average borrower FICO of 753 and combined LTV of 67.6%. Fixed-rate loans account for 93.4% of the pool and 64.8% are owner-occupied. Weighted average seasoning is 11 months, with no mortgage delinquency since origination.

However, non-qualified mortgage (non-QM) loans account for 35.1% of the pool, with the non-QM designations typically due to DTI ratios above 43%, alternative income documentation or interest-only periods, and this high concentration of non-QM loans marks the transaction out as weaker than other recent prime RMBS, says Moody's. Galton is different to other prime RMBS aggregators in that it allows for higher DTIs, prior seasoned credit derogatory events, alternative income qualification and higher LTVs.

As many as 44.6% of the loans were made to self-employed borrowers. All of the loans using alternative income documentation - 21.5% - were made to self-employed borrowers.

JL

Structured Finance

Deploying capital

Chris Redmond, global head of credit at Willis Towers Watson, answers SCI's questions

Q: How and when did Willis Towers Watson become involved in the securitisation market?
A: Willis Towers Watson has an international team conducting research of all credit managers and products, including securitised credit. While we had exposure to securitised credit via broad, generalist mandates beforehand, it was in the aftermath of the financial crisis when we started making dedicated, specialist allocations to securitised credit.

At that time, we worked with managers to put in place solutions exploiting the 'cheap beta' - investing predominantly in senior tranches of non-agency US RMBS, as well as European CLOs and Dutch RMBS, exploiting the highly discounted prices. We were very successful in playing this credit burn-out theme, whereby the initial surge in default rates and loss severity wasn't sustained.

Since then, we've rotated into segments of securitised credit where the barriers to entry are higher and tilted towards greater active management; targeting asset classes where we see greater scope for active management to be well rewarded, such as in the lower-trafficked asset classes. While we are generally quite cautious on credit, we continue to see pockets of attractive opportunity in securitised credit, particular where we can buy senior tranches with credit enhancement. Where possible, we are looking for less credit risk, more illiquidity risk and where the supply/demand dynamic is imbalanced.

Q: What are your key areas of focus today?
A: As mentioned above, we continue to view securitised credit as a ripe space for active management. Consequently, we are focusing on identifying highly skilled, highly active managers capable of exploiting a market niche or dynamically managing exposures across asset classes.

One thesis we like is the fact that rating agencies review structured finance ratings on a quarterly basis (and sometimes less frequently), meaning that it's possible to benefit from structural improvements that haven't yet been reflected in the rating. Small pockets of market inefficiencies exist in some of the lesser followed securitised credit asset classes, such as in railcar ABS.

We're also looking closely at 2007-vintage US CMBS: we expect the value to break either in the mezzanine or AJ tranches. It remains an interesting distressed opportunity.

The average LTVs at today's prices are typically in the 80s; however, this disguises a pool of loans including some with 120%-125% plus type LTVs. Identifying the right securities and those with less exposure to troubled retail names appears to be the key to success.

Many loans will fall due in the next six months and some kind of value realisation event should occur. Hedge fund and real money are sellers at the moment, as they have little appetite for extension risk and challenging work-outs, so it's possible to acquire decent AJ bonds at around 80c.

Another area of research focus for us is Trups CDOs, especially in terms of regional bank trust preferreds. Industry consolidation needs to occur: there are thousands of regional banks that don't know what to do with their Trups and many securities are non-compliant.

In these cases, one strategy would be to collapse the structure and put the Trups back to the bank. The opportunity comes from allowing the bank to book a profit by buying back the par debt at a discounted price, while still providing outsized returns to the owner.

We are increasingly avoiding the more mainstream securitised credit asset classes and those with a heavy correlation to trade; for example, shipping.

Q: Which challenges/opportunities does the current environment bring to your business and how do you intend to manage them?
A: We expect a modest pick-up in capital relief trade volume this year, as many European banks remain insufficiently capitalised. There remains an impetus for banks to conduct credit risk transfer type transactions to improve capital positions, namely the EBA's stress tests and stricter bank regulation. For example, a number of French banks are working on more new transactions to help improve their capital position from infrastructure assets.

The broader CRT space appears to be becoming a permanent financing tool at a bank's disposal. Regulators are involved in each one and they generally appear supportive of banks accessing a broad array of financing channels, indicating that CRT activity isn't a fad.

We believe that capital relief trades are often the cheapest way to buy assets in the current environment. However, we've shied away from middle-market corporate deals - given our cautious macro view - and instead favour infrastructure loans and counterparty risk exposures, where we feel downside is better protected.

We like CRTs because they're typically quite short-dated and can be structured to focus on more defensive assets. So far, we've deployed around €1.5bn of capital, with our managers completing some 20 transactions over the last two years. The structuring of the deals is often in the form of insurance against a first or second loss exposure.

The emergence of syndicated deals is reducing some of the opacity in the capital relief trade space, but investors still require a unique skill-set to be successful, including banking relationships and credit/structuring capabilities. Investment managers would need to replicate the infrastructure of a bank in order to fully underwrite a regulatory capital relief transaction. Consequently, for some, the credit work is predicated on statistics.

Our preference is a slightly more fundamental and thorough credit underwriting, thereby constraining the number of credible buyers. I would say there are only a handful of credible institutional managers in the space.

Nevertheless, the syndicated route could be a serious avenue for growth of the CRT market - although the potential increased disclosure of balance sheet means it will remain appealing for some banks to execute bilaterally.

Running out of good collateral is one potential limiting factor for the market, however. CRTs generally are most efficient for triple- and double-B rated assets, where the associated capital charge bites.

Q: What major developments do you expect from the market in the future?
A: We have some concerns over the simple, transparent and standardised (STS) securitisation regulation and how negotiations are shaping up at the European Commission is concerning. Risk retention in Europe, as currently proposed, is likely to kill the ABS and CLO markets and is contrary to policymakers' stated aims of boosting the economy and strengthening banks (through having access to different financing channels). It could also trigger a divergence in regulatory environments between Europe and the US - although this may, in turn, create opportunities.

CS

Risk Management

Investment differentiation

SCI's profile questions are answered by Triphonas Kyriakis, md for analytics at MSCI; Raghu Suryanarayanan, executive director of MSCI's risk research group; and Thomas Ta, who directs the company's development of risk management analytics.

Q: How and when did MSCI's analytics business become involved in the securitisation market?
TT: MSCI has been helping investors analyse securitised products for over a decade, though we've intensified our focus in recent years. For example, because such analytics are computationally intensive, we decided to start from the ground up and invested heavily in our infrastructure about three years ago.

Today, MSCI conducts several billion securitised product pricings and several hundred billion pricings across all asset classes each day. This allows users to stress-test credit spreads and prepayment rates, as well as to project the impact of varying assumptions to see the protection around any particular tranche.

We've also deepened our team of researchers and modellers in fixed income. They include: David Zhang, who was formerly head of securitised products research at Credit Suisse [SCI 18 January]; Misha Shefter, who previously headed analytics modeling at Barclays Portfolio & Index Analysis Tools (POINT); and, in technology, Nooshin Komaee, who previously headed analytics for JPMorgan's BondStudio.

Q: What are your key areas of focus today?
TK: We're hearing from clients, who are being spurred by evolving regulatory frameworks to embed risk management at the core of their organisations. The financial crisis proved that different departments within organisations need a common language of risk.

That can be a challenge because the language of risk departments is typically framed by value at risk, whereas front offices tend to think in terms of factors and exposures. MSCI helps them bridge that gap with technology, data, analytics and insights.

We also create risk models to address particular uses and provide highly detailed, specific sensitivities that allow the users within organisations to interact with one another. That requires the scale to support all asset classes and to create a consolidated view of risk for the different departments within the organisation.

Q: How do you differentiate yourself from your competitors?
TK: While some providers may be good at single asset classes or providing a holistic view, the granularity gets lost with a one-size-fits-all approach. When it comes to integrating our risk and performance analytics across an organisation, we believe in optionality.

Users have a choice in how to consume our content, which allows them to focus on what they're good at. They can access our content via an MSCI workflow application, their own applications or through a third-party application.

RS: Another differentiator is that our analytics are strongly grounded in research. Investors increasingly need consistent ways to measure the portfolio implications of forward-looking scenarios that incorporate market, macroeconomic and geopolitical risks. Before the financial crisis, the concern was where you were in the cycle; now, clients want to identify potential new risks that could be destructive.

The focus is shifting from the risk around a trend to the risk of the trend itself or uncertainty. This can be challenging from a modelling perspective.

However, our stress-testing analytics, best-practices guide and macroeconomic risk model provide a structured framework for investors to measure the impact of their forward-looking views on market and portfolio returns. In short, we've embedded innovative research into the system. Uses range from risk management to governance and portfolio construction.

Q: Which challenges/opportunities does the current environment bring to your business and how do you intend to manage them?
TK: A significant opportunity for us is facilitating investment differentiation. That means helping clients build better portfolios and establish best practices and efficiencies via traditional market risk models (such as factor risk and value-at-risk), as well as non-traditional market risk paradigms (such as stress testing, credit, liquidity and counterparty risk).

Technology facilitates that, but it also requires an operationally efficient infrastructure. We're seeing investment managers consolidate platforms, especially those legacy systems whose complexity makes them costly to maintain. We help clients simplify that with the goal of a coherent ecosystem from the front to the back offices.

TT: In the securitisation market, risk managers tend to be relying less on widely held assumptions. We're seeing a return to basics in terms of stress testing at both the tranche and loan levels, with an emphasis on shocking pieces of collateral and gauging the impact on the rest of the capital structure.

Q: What major developments do you expect from the market in the future?
TT: We recently integrated IHS Markit's rich bank loan index and reference data into our new syndicated loan risk analytics model. The data covers 16,000 loans across 85 countries and 25 currencies.

It allows our pricing models to better reflect optionality, terms and conditions, first and second liens, and revolvers. The next step is for us to begin modelling CLOs with this information, which we're aiming to introduce later this year.

We've ramped up coverage of Japanese and Australian securitisations, and continued to improve US agency and non-agency RMBS and European ABS. We decide what to build based on client demand and, in this instance, clients are increasingly pushing us to invest in improving securitisation.

CS

Structured Finance

Job swaps round-up - 24 February

Europe

Clayton Euro Risk has partnered with Lime Risk Agency to launch specialist insurance products aimed at mitigating mortgage and property risks.

Alan Kerr has decided to leave his current role at GSO/Blackstone Debt Funds Management in 2017. He is senior md and head of GSO's European customised credit strategies (CCS) business and joined GSO in 2012. Kerr will be transitioning his responsibilities to senior portfolio manager Alex Leonard and Fiona O'Connor, head of European credit research for CCS, but will remain with the firm as senior adviser to Blackstone.

North America

BNY Mellon has appointed Declan Turner as a business development manager for its corporate trust team, EMEA. Turner will focus on promoting BNY Mellon's administration solutions across all loan portfolios, including direct lending and CLOs. He was previously md and head of the ABS and CLO sales team for EMEA at Bank of America, Merrill Lynch in London.

Adam Margolin has joined George K. Baum's structured finance group as a senior vp. He will assess debt capital markets to complement the firm's national practice groups. He joins from Structured Finance Solutions where he was a managing partner.

Acquisitions

Bain Capital Credit has acquired Heta Asset Resolution Italia, including all outstanding loans, from HETA Asset Resolution. This is Bain Capital Credit's first NPL portfolio acquisition in Italy, following European NPL investments in Spain, Greece, Ireland and the UK.

Technology

Dv01 has launched a marketplace loan securitisation platform. Dubbed, Securitisation Explorer, it is a web portal dedicated to providing investors with increased insights into securitisations of consumer loans.

Settlements

Ocwen Financial Corporation has announced a comprehensive settlement and termination of the January 2015 consent order between Ocwen Loan Servicing and the State of California Department of Business Oversight (DBO), without admitting any wrongdoing. Ocwen has agreed to pay a cash settlement of US$25 million to the DBO. Ocwen will also provide an additional USUS198 million in debt forgiveness through loan modifications to existing California borrowers over a three year period, as permitted under various servicing agreements.

Under this settlement, the DBO will lift its prior restriction on Ocwen's ability to acquire mortgage servicing rights associated with California properties, and will terminate the engagement of the independent auditor, which has been in place under the prior Consent Order in California.