Contents

CLOs

CMOA structure prepped

Acis Capital, an affiliate of Highland Capital, is prepping an innovative US$372m CLO. Dubbed ACIS CLO 2017-7, the transaction utilises a capitalised majority-owned affiliate (CMOA) risk retention strategy.

A CMOA structure involves a combination of the capitalised manager vehicle (CMV) and the majority owned affiliate (MOA) approaches and seeks to solve problems associated with each. Hunter Covitz, md at Highland Capital, confirms that the firm considered other structures, but the CMOA suited its requirements most closely.

"The CMV structure works for some managers, as it means you remain the manager and retain a somewhat different standard than with the CMOA," he explains. "However, the CMOA offers more flexibility, which works for us. Risk retention is so new for everyone and everyone is coming from a different place when approaching it, so there are a lot of different nuances."

While the CMOA structure forces managers to hold onto the equity piece, Covitz says this wasn't a significant challenge for the firm, as it is something it has always done. The CMOA approach therefore benefited the firm in the "consistency it offered", although it was quite complex structurally.

Unlike some managers, Acis has a fund called Acis Loan Funding, which it capitalised in August 2015 with "an eye to being a first mover". The fund is a "capitalised vehicle with equity we already owned, which was already generating cashflows, and we have since then put more capital in the fund." It returned 61.77% in 2016 - generated from equity positions in 12 structured finance vehicles - and is now seeking to raise external capital.

Organisationally, Acis therefore incorporates three elements: Acis CLO Management (the originator and registered investment advisor), Acis Capital Management (which has a controlling indirect interest in Acis CLO Management and is also the portfolio services provider to Acis Loan Funding) and Acis Loan Funding (which has a non-controlling indirect interest in Acis CLO Management). Acis Loan Funding is registered in Guernsey and holds a portfolio of loans and CLO equity, and is open to investment from new and existing investors. New CLOs issued by Acis pass the 5% vertical or horizontal risk retention to Acis CLO Management.

Acis chose the CMOA structure to minimise disruption and to streamline the process as much as possible. Covitz comments: "If you're using the CMV, you essentially have to combine two businesses, which can mean bringing in a whole new management team - a large platform has to then figure out different practises at management level and that can be very complex and quite challenging."

He adds that a smaller manager may choose the CMV structure, as they may be able to create a new entity and raise capital from scratch. That was not necessary for Acis, however, being a larger firm.

"If you do it from scratch and create a whole new entity, you can get things moving straight away, which can work. A smaller manager can perhaps do this very simply, so a CMV might work for them. For us, however, we're not a small platform and we weren't ready to move people around and did not have the need to raise capital from scratch. The CMOA was therefore more suitable for us," Covitz continues.

The CMOA structure also enables the fund to be dual compliant, meeting risk retention rules for Europe and the US, with the main benefit being the ability to sell the bonds to a wider investor group - particularly in the secondary market. ACIS CLO 2017-7, however, will not be offered to European investors. Covitz says that this is because demand can "come and go" in Europe at the moment, due to factors such as volatility in the price of the euro and how many dollars European firms have to spend in their budget.

Provisionally rated by Moody's, the transaction - which is expected to price this month - comprises US$260.75m Aaa rated class A notes, US$50.25m Aa2 class Bs, US$20.25m A2 class Cs, US$26.25m Baa3 class Ds and US$14.5m Ba3 class Es. The CLO has a weighted average spread of 3.75%, a weighted average coupon of 7%, a weighted average recovery rate of 47.5% and a WAL of 6.25 years. It has a WARF score of 2650 and a diversity score of 65.

Investors have responded with enthusiasm to the deal, due both to the success of the structure and because of demand for new issuance. "This was the first risk retention compliant deal for us and so it was proof of concept, which is important for all managers, not just us. It's what is needed for risk retention, whether a small or large player. It's good to see in action," Covitz observes.

He concludes: "Generally, any new issue deal is also a plus for the market. There have been a lot of refi/repricings in 2017, but less new issuance."

RB

CLOs

US CLO demand drives on

Activity and demand are growing once more in the US CLO secondary market despite some challenges.

"Overall buying demand is very, very strong even though there are cross-currents going on that make it difficult for some investors," says one trader. "For example, there are a lot of currently callable bonds going out on BWIC that will trade beyond par, which is pricing many customers out of the market."

Continuing demand is a clear progression from the general sentiment at the Vegas conference, the trader says. "The overriding theme in all our conversations there, irrespective of asset class or investor type, was the need for more yield and where to get it. So we're now seeing new people come into the market and traditional investment grade CLO buyers now willing to go down to equity."

Even those with a negative outlook are still buying, the trader suggests. "We hear people saying: 'The rally has gone so far, going up in credit is cheap - it's going to blow up again at some point and I want to get myself some protection.'"

There are seven BWICs on the US CLO calendar for today so far. The chunkiest is a two-line double-A list due at 13:00 New York time.

It involves $21.641m REGT4 2014-1A B and $31.484m ZCCP 2015-1A B. Neither bond has covered with a price on PriceABS in the past three months.

Secondary markets

Euro secondary supply spikes

This week is scheduled to see a spike in the volume of paper in for the bid across the European securitisation secondary market.

Last week was once again very quiet, exacerbated by the Vegas conference and month-end, and yesterday's session was similarly slow. However, flows could be kick-started by the growing BWIC schedule for this week headlined by a very large mixed list due on Friday as a result of the liquidation of the Carnuntum High Grade I CDO.

Any supply is expected to be met with healthy demand as tone remains strong across the board and is still bolstered by lack of new issuance. The limited trading activity over the past week or so continues to leave ABS/MBS secondary spreads unmoved, but in CLOs, where there have been occasional flurries of activity, lower mezz spreads have edged in, though the rest of the stack is still little changed.

There are currently three BWICs on today's European schedule. The most eye-catching of which is a sizeable pair of UK non-conforming seniors due at 15:00 London time - €10m of EMAST 2007-1V A2 and €107.15m of NGATE 2007-3X A2B.

Neither bond has appeared on PriceABS in the past three months.

Secondary markets

US CLOs watchful

US CLO secondary market participants are watching closely for any signs of potential widening despite continuing positive sentiment.

"Market tone continues to be very positive and nothing came out of the Vegas conference to change that," says one trader. "So, of course, many are starting to get a little nervous and watching closely for signs of any change."

The trader continues: "There are concerns that this really is the top as it's not clear what will push us beyond current levels and consequently fears are emerging that we'll start widening instead. Equally, BWIC volumes haven't been very high over the last couple of weeks following a series of $1bn plus weeks that underlined the generally strong sentiment."

Today looks to be relatively quiet too with six BWICs on the US CLO calendar for today so far. Nevertheless, the trader says: "Everyone will be focused even with relatively few lists out today, especially as they mainly surround mezz, which has seen the most tightening."

The chunkiest auction involves three slices of mezz and equity from MHAWK 2013-2A. Due at 11:00 New York time the list comprises: $3m MHAWK 2013-2A D, $11m MHAWK 2013-2A E and $35.67m MHAWK 2013-2A SUB.

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

Secondary markets

Euro secondary simmers

The European securitisation secondary market is still simmering without yet fully coming to the boil.

Volumes have picked up a little this week as expected, but have not yet really taken off. Instead, familiar patterns are being maintained across the board - flows remain patchy and BWICs sporadic.

At the same time, demand continues to outstrip supply amid strong market tone and secondary spreads are flat to slightly tighter on the week so far. The CDO liquidation BWIC due tomorrow continues to draw widespread attention thanks not only to its size, but also to its multi-asset class composition, which should help to ensure it trades well.

Meanwhile, anticipation of the liquidation list looks to have shaken out a few more sellers. There are six ABS/MBS and three CLO BWICs on the European schedule for today so far.

In ABS/MBS a range of assets, jurisdictions and sizes are in for the bid, but the largest piece circulating comes in a €34.9m single line auction of BERCR 8 A due at 15:00 London time. The Italian RMBS last covered on PriceABS at 99.6 on 1 February 2017.

In CLOs the most eye-catching list is a single €10.5m slice of SPAUL 4X SUB. Due at 14:00 the equity piece hasn't covered on PriceABS in the past three months.

ABS

Aussie card ABS prepped

Latitude Finance Australia is in the market with a rare Australian credit card ABS. Dubbed Latitude Australia Credit Card Loan Note Trust - Series 2017-1, the transaction is backed by a A$3.76bn pool of MasterCard, Visa and sales finance card receivables originated under retail partnership agreements.

S&P has assigned the class A1 notes a provisional triple-A rating. These notes are expected to account for 65.5% of the issuance, with class A2 through E tranches making up the rest of the capital structure. There is also a retained originator VFN subordination tranche, which is expected to comprise 4.5% of the balance and will fund a series-specific liquidity reserve of 1%.

The notes are scheduled to revolve for three years until the expected redemption date in March 2020. If they remain outstanding after this date, the deal will enter a 12-month scheduled amortisation period.

Failure to repay the scheduled amortisation amount on any payment date constitutes a series pay-out event, upon which a rapid amortisation period is triggered. S&P notes that the transaction benefits from a sequential pay structure during the rapid amortisation period, whereby the subordinated items are only paid after the senior notes.

The pool has 6.2 years of seasoning and an average account balance of A$2,043.96. Receivables delinquent for over 30 days account for 4.15% of the collateral.

Latitude Australia Credit Card Master Trust was established to fund the acquisition of sales finance card and credit card receivables originated by Latitude or GE Capital Australia. Sales finance cards are originated under retail partnership agreements, while credit cards are originated directly to consumers.

A high proportion of sales finance card receivables in Latitude's portfolio is from one retail partner, Harvey Norman, for the GO MasterCard product. Other retailers the firm has active retail partnership agreements with include Super A mart, The Good Guys, Apple, Michael Hill and Freedom Furniture.

GE Capital Australia's Australian and New Zealand consumer finance business was acquired in November 2015 by a consortium made up of Deutsche Bank, Varde Management and KKR (KVD TM) and renamed Latitude. S&P points to the limited performance data for the period during which Latitude has serviced the portfolio, but notes that the business was well established and the acquisition included most staff, systems and processes. AMAL Asset Management is back-up servicer on the deal.

CS

ABS

Westlake ABS marks 'significant' shift

Westlake is in the market with its latest ABS, Westlake Automobile Receivables Trust 2017-1 (see SCI's pipeline). While the auto finance firm has previously issued a dozen other deals, its latest transaction differs from its previous ABS in significant ways, says S&P.

Westlake Automobile Receivables Trust 2017-1 is provisionally sized at US$600m. The US$167m A1 notes have a preliminary rating from S&P of A-1+. The A2, B, C, D and E classes are rated triple-A, double-A, single-A, triple-B and double-B respectively.

The A2 notes will be split into fixed-rate class and a floating rate class, with the sizes of these classes to be determined at pricing. The floating rate class will be a maximum of 50% of the overall class.

Westlake's latest deal has "significant structural and credit enhancement changes" compared to its previous offering, Westlake Automobile Receivables Trust 2016-3, reckons the rating agency. S&P notes that collateral composition is also weaker for the latest deal.

Initial hard credit enhancement at closing is 200bp higher for classes A and B than it was for series 2016-3. It is also 75bp higher for class C, 100bp higher for class D and 50bp higher for class E. S&P notes that these increases offset its higher expected cumulative net loss range for the transaction compared to the series 2016-3 deal.

Subordination has increased for classes A through D and initial overcollateralisation has also increased, although the overcollateralisation floor remains at 1%.

As for the collateral, Westlake's Platinum programme accounts for a smaller proportion of the pool than it did it Westlake's previous ABS., at 2.96% rather than 6.65%. The percentage of loans with a FICO score of 660 or above has decreased from 15.22% to 13.53%, but the weighted average FICO increased slightly from 595 to 599.

The seasoning of the pool for the 2016-3 deal was 2.99 months and for the new deal is 4.64 month. There are also now fewer loans from franchised dealers.

"Due to some weaker collateral characteristics in this pool versus past pools, coupled with weaker performance in the company's static pools and managed portfolio, we increased our expected cumulative net loss range for this transaction to 13.00%-13.50% from 12.75%-13.25%," says S&P.

JL

ABS

Innovative franchise ABS marketing

Focus Brands is readying a US$800m whole business securitisation. Focus Brands Funding Series 2017-1 is backed by royalties from 5,055 restaurant franchises within the Focus restaurant system and 80 company-operated restaurants.

The 5,055 franchises represent 98.4% of the company's total system-wide locations, while the 80 company-operated restaurants account for the remainder. The majority of the locations (76%) are spread across the 50 US states and the rest are located across 60 foreign countries.

Focus is the franchisor and operator of branded locations under the brands Auntie Anne's, Carvel, Cinnabon, McAlister's Deli, Moe's Southwest Grill and Schlotzsky's. Focus Brands Funding is the master issuer on the transaction, while the co-issuers are Carvel Funding and McAlister's Funding.

Focus Brands will contribute most of its revenue-generating assets to Focus Brands Funding, Carvel Funding and McAlister's Funding as collateral for the offered notes. The collateral includes existing and future franchise and development agreements, existing and future company-operated location royalties, licensing fees, vendor payments and fees, intellectual property and related revenues.

KBRA has assigned provisional triple-B plus ratings to the US$200m class A1 notes and the US$600m A2I and A2II notes. The final notional amounts of the A2I and A2IIs have not yet been determined, but will sum up to US$600m.

KBRA notes that credit strengths for the transaction include the strong operating history and experienced management team of Focus Brands, with a restaurant network of 5,135 locations and annual system-wide sales and store count of US$2.7bn. Since 2012, Focus has grown system-wide sales and store count, and seen positive same-store sales growth each fiscal year since 2010.

The transaction also benefits from a diversified pool, including six different brands catering to different segments of the population, covering various dayparts - including lunch, snacking, dinner and dessert. Focus' six brands afford it a level of diversification by venue, food type, price point, geography and franchise base not typically seen in other whole business securitisations, according to KBRA. Additionally, the large franchisee base can result in a more stable stream of recurring royalty cashflows that is more easily transferable if the company's performance deteriorates.

The deal features structural protections providing sufficient credit support, along with a 'dynamic structure' that accelerates principal payments to the noteholders on the weakening of collateral performance. Key structural features include cash trapping, rapid amortisation, cashflow sweeping, manager termination and a default DSCR trigger.

Weaknesses include exposure to malls and shopping areas, minimum wage rate changes and the potential impact of interest rate and foreign currency fluctuations. While 24% of the overall locations are outside the US, international royalties will be paid in US dollars and converted at the then current exchanged rate, which may be subject to a strong dollar on conversion.

The class A1 notes are expected to be undrawn at closing, but any drawn amount will pay a floating rate of interest, which will be negatively affected if interest rates rise. However, KBRA notes that less than 10% of system-wide sales are from international locations and with locations in 60 foreign countries, the royalties collected will "provide some diversity and a modest amount of natural hedge against a potential strengthening of the US dollar versus any one or group of currencies".

The servicer is Midland Loan Services, while the back-up manager is FTI Consulting. Barclays is sole structuring advisor and book-running manager.

RB

Structured Finance

SCI Start the Week - 6 March

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

Pipeline
The volume of additions to the pipeline increased a little last week. There were eight new ABS announced, as well as an ILS, three RMBS and four CMBS.

The ABS were: Avis Budget Series 2017-1; US$409.2m ECMC Group Student Loan Trust 2017-1; US$1.25bn GM Financial Automobile Leasing Trust 2017-1; Golden Bear 2017-1; Latitude Australia Credit Card Loan Note Trust 2017-1; OSCAR US 2017-1; CNY4bn Shanghe 2017-1; and US$1.5bn Toyota Auto Receivables 2017-A Owner Trust.

The ILS was US$270m Aozora Re 2017, and the RMBS were US$140m Angel Oak Mortgage Trust I Series 2017-1, US$757m New Residential Mortgage Loan Trust 2017-1 and Resimac Premier Series 2017-1. The CMBS were US$366.6m Greystone CRE 2017-FL1, US$1bn GSMS 2017-GS5, US$1.1bn JPMCC Commercial Mortgage Securities Trust 2017-JP5 and US$567.4m PFP 2017-3.

Pricings
The industry conference in Las Vegas did appear to have an effect on completed issuance. There were just a couple of ABS prints, as well as two RMBS, one CMBS and three CLOs.

C$408m CNH Capital Canada Receivables Trust 2017-1 and £432m Driver UK Multi-Compartment Comp Driver UK Five were the ABS, while the RMBS were €507m Berica 5 and €315m-equivalent Bluestep 4. The CMBS was US$525m WFCMT 2017-RC1 and the CLOs consisted of US$412.5m Benefit Street Partners CLO 2014-5R, US$564.5m Dryden Senior Loan Fund 2014-34R and US$320m NewMark Capital Funding 2014-2R.

Editor's picks
Leverage signals maturing CRT market: The increasing availability of leverage suggests that the risk transfer market is maturing. However, while financing can be applied in a number of ways, the extensive due diligence required means that participation in capital relief trades remains limited to sophisticated investors...
US CLO arbitrage favours refis: US CLO refinancings began in earnest late last year and have grown apace in 2017, dwarfing new issuance. Extremely tight arbitrage between leveraged loan spreads and CLO liability costs has further constrained primary volumes, suggesting refis will dominate issuance for the foreseeable future...
MSR transfers under scrutiny: The purchase by non-banks of MSR portfolios from large US banks has ramped up in recent months, as the associated capital charges bite. However, such activity has sparked concern about the ability of the buyers to adequately manage the MSRs and the potential impact on the RMBS market...
German NPL sales to accelerate: Germany's positive economic outlook and the loans' relatively low cost of capital have historically meant that German banks are under less pressure to dispose of non-core assets in any significant volume. However, the introduction of IFRS 9 is expected to accelerate NPL sales in the country (and other European jurisdictions) over the coming 12-24 months...
Trading expansion underlines optimism: INTL FCStone's broker-dealer rates group has expanded its trading remit into US agency CMBS and a wider spectrum of ABS, following the formation of a new securitised products group. Alongside its existing involvement in other securitised mortgage products, the move signals the firm's optimism about the value structured products will bring in 2017 and beyond...
Proposed retention metric assessed: Risk retention regulations in Europe and the US are severely flawed with respect to their key intention of imposing a strict loss retention requirement, argues a Sustainable Architecture for Finance in Europe (SAFE) white paper published last month. A new risk retention metric (RM) measuring an issuer's level of retention relative to the expected loss of a given securitisation is therefore proposed, but concerns about this metric have been raised...

Deal news
• JPMorgan is prepping an innovative US$1.1bn conduit CMBS collateralised by 43 commercial mortgage loans secured by 59 properties. Dubbed JPMCC 2017-JP5, the deal is the first conduit CMBS to utilise the horizontal structure to satisfy risk retention requirements.
• A rare UK consumer loan ABS has hit the market. Creation Consumer Finance's £535.69m LaSer ABS 2017 is backed by 470,321 unsecured personal and point of sale (POS) loans extended to individual borrowers in England and Wales.
• Angel Oak is in the market with its first rated non-prime RMBS - Angel Oak Mortgage Trust I 2017-1 (see SCI's pipeline). As with the issuer's previous unrated deals, the collateral combines loans to borrowers with prior credit events and self-employed borrowers who use bank statements to verify their income.

Regulatory update
• Midland Funding violated New York usury laws by charging interest rates of over 25% to borrowers, the US District Court for the Southern District of New York ruled this week. The decision brings a measure of resolution to the long-running Madden vs Midland case (SCI passim).

Structured Finance

Debut CRE CLO prepped

Greystone is in the market with its debut US$366.6m CRE CLO. Dubbed Greystone Commercial Real Estate Notes 2017-FL1, the transaction securitises 27 floating-rate mortgages secured by 27 transitional multifamily properties.

Moody's and DBRS have assigned provisional ratings to the deal of Aaa/AAA on the US$207.1m class A notes, Baa2/AA (low) on the US$25.66m class Bs and NR/BBB (low) on the US$62.3m class Cs. There are also US$71.5m of unrated preferred shares.

The deal is a typical reinvestment cashflow CRE CLO and will be fully ramped at closing. The manager is Greystone Bridge Lending Fund Manager.

Moody's highlights several credit strengths of the transaction, including that it will consist of 100% first-lien whole loans or senior participation interests in a whole loan secured by commercial properties and the fact that the initial collateral pool will only feature multifamily property, which typically has a lower loss given default than other core property types.

Credit negatives for the deal include the 2.5-year reinvestment period, the 100% concentration of credit assessments - which may lack the same level of ongoing disclosure that publicly rated assets have - and the high leverage. Moody's has assigned the transaction an average LTV of 129.6%, although the average pair-wise asset correlation is 35%, reflecting the corporate related collateral with an average recovery rate of 60%.

A further credit weakness for the transaction is that 100% of the pool is credit assessed below investment grade. The initial assets have a WARF of 4708, equivalent to a Caa1 rating with a recovery rate of 60%.

Of the pool balance, 20 loans (accounting for 86.4%) represent acquisition financing, with borrowers contributing equity to the transaction.

The 10 largest loans account for 65% of the collateral pool, with the largest Texas-originated loan comprising 10.8%. Four more of these loans are backed by property in Texas, with the rest of varied geography, including loans secured by property based in Illinois, Maryland, Virginia, Arizona and Georgia.

DBRS notes that two loans - representing 7.5% of the pool - are secured by student housing properties, which often exhibit higher cashflow volatility than traditional multifamily properties. Student housing exposure for the trust is capped at 10% during the reinvestment period per the eligibility criteria.

JPMorgan and Wells Fargo are underwriters on the deal. Greystone Servicing Corporation will act as both servicer and special servicer.

RB

Structured Finance

Securitisation revival required

The European securitisation market needs to be revitalised imminently to drive the continued recovery and future growth of the region, according to Validis Dombrovskis, vp of the European Commission. While Basel 4 could help, several barriers remain in place that limit European issuance of - and investment in - securitised products.

During a recent speech to the European Parliament's Committee on Economic Affairs, Dombrovskis highlighted the Capital Markets Union and emphasised the need to agree proposals to "restart securitisation markets". He noted that the number of issuers is falling, restricting funding to European companies that is needed to strengthen Europe's recovery. Dombrovskis stated: "To finance the EU recovery, restarting securitisation markets cannot wait much longer."

He commented that the CMU is entering its second phase and that the EC supports the effective restructuring of viable business debt, in order to support the development of a pan-European personal pensions market and to build a "genuine single market for consumer financial services" across insurance, pensions and investment funds to provide pools of capital for market growth.

Fitch suggests that Basel 4, as well as the EU's CMU proposals will help determine the size and nature of the European structured finance market. The agency says: "EU banks' use of publicly placed true-sale securitisation for regulatory relief could become a key tool for optimising regulatory treatment, even as its use as a funding tool is waning, but only if the investor base is sufficient."

Basel 4 could spark more securitisation issuance by EU banks because the Basel Committee could "derecognise true-sale securitised asset portfolios for leverage ratio calculations, while imposing a permanent capital floor that limits the benefit of using internal models for regulatory capital purposes. Banks would then have an incentive to securitise low-margin portfolios that become uneconomical due to higher risk-weighted requirements, while reducing leverage ratio exposure [SCI 29 November 2016]."

However, efforts to revitalise the European securitisation sector could be hampered because "EU banks' motivation to use publicly placed securitisation for funding rather than regulatory relief is limited," according to Fitch. The agency adds that this is in part due to the 5% risk retention rule - which would be even more onerous for banks if it is raised to 10% or more, as suggested by the European Parliament - that, in combination with other factors, could make other instruments (such as covered bonds) a more attractive source of funding.

Furthermore, Fitch suggests that European regulation limits investor appetite, highlighting the European Parliament's proposed requirement to disclose securitisation holdings on a central register - which reportedly is already dissuading investors from securitisations, due to compliance and due diligence hurdles, along with the general dampening effect of regulatory uncertainty.

Dombrovskis' speech outlined the EC's banking reform package, which would include reforms aimed at avoiding excessive leverage building up in the financial system, by introducing a bonding leverage ratio of 3%. This would act as a backstop to banks' internal model based capital requirements, together with the proposed net stable funding ratio.

Additionally, proposals for global and systemically important banks to have a minimum amount of loss absorbing capacity and the TLAC rule would be incorporated into Europe's existing minimum requirement for own funds and eligible liabilities. The EC hopes to reduce reporting and administrative burdens on smaller banks and to therefore continue supporting the extension of loans to SMEs and investment in low risk infrastructure projects.

A new working group on the CMU has also been established for the Central, Eastern and South-Eastern European (CESEE) region. Established by the Vienna Initiative, it has been set up to "promote the diversification of investment finance in the region, mobilise the Vienna Initiative network to analyse structural obstacles and regulatory gaps impeding capital market development in the CESEE region and identify solutions at the national and regional levels."

RB

Structured Finance

Replacement risk weighing on BWIC volume?

International ABS BWIC volume totalled €9.7bn in 2016, according to JPMorgan figures. Average weekly BWIC volume of €186m last year fell by around 17% from 2H15 and has subsequently fallen to €96m per week in 2017 year to date, reflecting the lack of supply and replacement risk.

JPMorgan international ABS analysts point to peaks and troughs in secondary market activity throughout the course of 2016. In the first half of the year, trends in BWIC volume were fairly consistent with periods of market volatility, such as prior to the ECB's March announcement of an increased pace of asset purchases and the introduction of CSPP, as well as in the weeks surrounding the UK referendum. For example, the proportion of BWIC volume that traded around the UK referendum remained at or above the 2016 average of 82%, as an up-tick in selling was met with strong demand for bonds.

In 2H16, BWIC activity steadily rose in September through to the end of the year. "We attribute this trend not to a spike in market volatility, but rather a combination of factors in a more benign market environment - including investors making room to accommodate a surprisingly active primary market and taking profits amid a steady rally in spreads, driven by the intensification of the search for yield across fixed income markets," the JPMorgan analysts observe.

BWIC volume has since fallen sharply, totalling just over €760m (current face) in the first two months of the year - although the ratio of traded bonds has increased to 89%. "In our view, lower BWIC volume at the start of the year is not a comment on the trend in market liquidity, but instead one on the acute lack of supply and replacement risk - investors have simply not had a strong appetite to sell bonds. At the same time, the higher traded ratio seen year to date indicates that the limited amount of selling seen so far has been met with strong demand as the reach for yield continues," the analysts add.

By collateral type, UK RMBS has dominated secondary market activity since the beginning of 2016, with prime, buy-to-let and non-conforming bonds accounting for 47% of BWIC volume over this period. Spanish, Dutch and Italian RMBS accounted for 9%, 6% and 6% respectively.

The analysts point out that UK RMBS continues represent an outsized share of secondary market activity relative to its share of the overall outstanding international ABS universe (25%, as of 4Q16). This imbalance is particularly acute in UK non-conforming, which has comprised 26% of BWIC volume since the start of 2016, versus 9% of the outstanding universe.

In terms of traded ratios, UK non-conforming RMBS has seen 74% of BWIC volume trade since the beginning of 2016, compared to an aggregate of 83%. UK and eurozone CMBS have also seen below average traded ratios of 72% each. In contrast, peripheral RMBS and Dutch RMBS have seen above average traded ratios of 95% and 90% respectively.

Year to date, UK RMBS constitutes a notably lower proportion of BWIC volume at 33%, while the traded ratio for UK non-conforming has fallen to 63%. In comparison, Spanish, Italian and Portuguese RMBS have comprised 32% of BWIC volume so far in 2017 versus 18% in 2016. Moreover, demand for higher yielding euro-denominated assets appears to be strong, as the traded ratio across these three market segments has been 100% so far this year.

Indeed, euro-denominated senior bonds have accounted for a much higher proportion of BWIC volume year to date, at 63% versus 39% in 2016. Sterling-denominated seniors have fallen to 12% of BWIC volume from 29% in 2016, while the proportions of both euro- and sterling-denominated mezzanine bonds have declined modestly, according to the analysts.

CS

Capital Relief Trades

Risk transfer round-up - 10 March

Amid the talk circulating the capital relief trade market this week is a rumour that StormHarbour is seeking to place the thin first-loss piece of a deal from Nord LB. One source also suggests that Mizuho is working on a transaction that references large corporate loans.

At the same time, Rabobank is said to be becoming more active in the true sale format. According to another source: "Balance sheet constraints due to exposure to domestic mortgages, coupled with potential increases in the floor for RWAs point to the importance of the true sale format, since it is the only way to decrease balance sheet size while increasing capital and leverage ratios."

Other participants expect more insurance firms to enter the risk transfer market, as their high investment grade credit ratings "can allow for more efficient trades, which do not require the protection seller to post day 1 collateral".

CLOs

Euro CLO warehouse ramping

Barings has established a warehouse securitisation to ramp up leveraged loans and high yield bonds ahead of the issuance of its forthcoming Barings Euro CLO 2017-1. The transaction comprises a senior funding facility (SFF) and a mezzanine funding facility (MFF), provisionally rated single-A and triple-B (low) by DBRS, and is subject to collateral quality and portfolio profile tests.

The SFF rating addresses the timely payment of interest and the ultimate payment of principal payable by the warehouse maturity date in June 2031, while the MFF rating addresses the ultimate payment of interest and principal. The provisional ratings will be finalised once the aggregate principal balance of the assets - based on committed trades - in the warehouse has reached at least €60m.

As of 27 February, the portfolio consisted of €23.3m of collateral obligations. Barings will draw on the facilities - which are funded by Barclays - based on a predetermined schedule as trades settle.

Depending on the total size of equity, the notional of the warehouse will either reach €320m or €400m. In rating the transaction, DBRS has consequently analysed two different covenant matrices: the collateral quality tests are different for each of the structures, while concentration limits are based on the target CLO issuance amount of €400m.

For the €320m structure, the first drawing point in a post-pricing scenario is expected to have total capitalisation of €170m. This constitutes an SFF size of €119m, an MFF size of €11m and a remainder of €40m in equity.

In pre-pricing scenarios, as the equity size increases to a maximum of €40m (from €5m), the MFF size can be increased or reduced to provide credit enhancement to the SFF. At maximum notional, the SFF size will reach €244.5m and the MFF will reach €35.5m.

For the €400m structure, the first drawing point is expected to have total capitalisation of €210m. This constitutes an SFF size of €154m, an MFF size of €6m and €50m in equity.

In pre-pricing scenarios, as the equity increases to a maximum of €50m, the MFF size can be increased or reduced to provide credit enhancement to the SFF. At maximum notional, the SFF size will reach €308m and the MFF size will reach €42m.

In post-pricing scenarios for both structures, both the SFF and MFF increase in size and the relative credit enhancement decreases.

The warehouse has a 12-month reinvestment period, followed by an amortisation period, and will mature at the earlier of the CLO closing date, the optional early redemption date, the mandatory early redemption date or June 2031. DBRS notes that a mandatory early redemption can be caused by an EOD that is continuing,while optional early redemption can be triggered at the option of key parties involved in the transaction.

Other than an EOD, warehouse redemption can only occur if certain tests are satisfied. Subject to lender consents, there could potentially be deficiency in the payment of ultimate principal, if these options are exercised prior to maturity.

CS

CMBS

Retailer's bankruptcy raises CMBS risk

Hhgregg's bankruptcy filing and plans to close 91 locations, announced this week, may elevate long-term default risk for 10 CMBS loans totalling US$156.8m, says Morningstar Credit Ratings. The rating agency warned last year that store closures were likely (SCI 30 November 2016).

There are nine properties where closures would take occupancy below 80%, which is the agency's threshold for at-risk occupancy. While Morningstar is particularly concerned by 10 loans in particular, there are 17 CMBS loans with a combined balance of US$454.6m with exposure to hhgregg stores that are slated for closure.

The 10 are of particular concern because these are the ones which are expected to see a significant decline in net cashflow. Hhgregg does not represent a large portion of the net rentable area in the other seven.

Of the 10 loans particularly affected by the announced closures, Morningstar flags up the Congressional North Shopping Center, which secures a US$51.7m piece of the US$58.8m Congressional North Shopping Center & 121 Congressional Lane loan in WFCM 2016-C34, as a particular cause for concern. Cashflow should absorb the loss of hhgregg when the tenant's lease expires in September 2020.

The retailer accounts for 14.1% of the space and 11.2% of annual underwritten base rent for the loan, which had a DSCR of 2.17x for the first nine months of 2016. There is also concern at that property as to the future of the third-largest tenant, Staples, whose lease expires in October.

The second-largest loan of concern is the US$31.1m loan backed by Whitman Square in Philadelphia, which amounts to 2.6% of CGCMT 2015-GC27. The loss of hhgregg could push DSCR to below break-even if the store remains unoccupied after its April 2020 lease expiration, potentially landing the loan in default.

The retailer is the largest tenant in the collateral and accounts for 24.1% of the shopping centre. The loan is current and had a DSCR of 1.27x for the first nine months of 2016 with 100% occupancy and Morningstar believes that a replacement tenant should be fairly easy to attract, due to the region's strong retail vacancy rate.

Among the smaller-balance loans, Morningstar sees the greatest risk in the hhgregg-Boca Raton loan because the collateral will be empty once hhgregg vacates. The US$7m loan is current and comprises 0.6% of WFRBS 2014-LC14. It posted a 1.62x DSCR on 100% occupancy for the first nine months of 2016.

The other loans of concern are: Arundel Marketplace (MSBAM 2014-C15 and MSBAM 2014-C16); Baltimore (Towson) (VNO 2010-VNO); Champaign Town Center (JPMBB 2015-C28); Mobile Festival Centre (WFRBS 2013-C14); Mooresville Crossing II (GSMS 2014-GC20); and Westbank Village (COMM 2013-CR12).

The rest of the 17 loans with exposure to hhgregg stores slated for closure are: Christiana Center (WFRBS 2012-C9); Deptford Landing (MSC 2011-C1); Paxton Towne Center (MSBAM 2014-C18); Red Rose Commons (GSMS 2012-GC6); The Shops at Waldorf Center (JPMBB 2015-C28); Tollgate Marketplace (UBSCM 2012-C1); and Westgate Plaza (COMM 2014-UBS3).

There are another 19 loans where further store closures would create a heightened risk of default because the tenant represents over 20% of the gross leasable at more than two thirds of them. However, hhgregg says it remains "fully committed" to all of the stores not included in the just-announced 91 locations.

"The company reported weak holiday sales, as its sales for the quarter ended 31 December plunged 23.7%," reports the rating agency. Morningstar "sees increased competition from online retailers, mass merchants, and warehouse clubs, all of which have reshaped the economics behind the consumer electronics retail category, making a turnaround more challenging".

JL

CMBS

Enforcement actions to remain rare

European CMBS note EODs have occurred frequently, but with few instances in which enforcement actions have been triggered. While a peak in note EODs among 1.0 deals is expected this year, noteholders' unwillingness to initiate enforcement actions is unlikely to change.

A recent Moody's analysis reveals that only three out of 32 EODs ultimately resulted in an enforcement action - for Titan Europe 2007-1, Titan Europe 2006-3 and Titan Europe 2006-5. The agency also cites two other exceptional cases: White Tower 2006-3 and Gemini Eclipse 2006-3. The former's documentation was amended to avoid a note EOD at final maturity, while in the latter case, post-enforcement priority of payments was applied on a voluntary basis - even though the noteholders formally avoided an EOD via resolution to defer interest payments.

While different types of note EODs have occurred in combination, payment defaults due to interest or principal shortfalls were the most frequent category of note EODs in Moody's sample. There have also been three issuer insolvencies and one case of breach of 'any other obligation', related to the liquidity facility agreement.

Moody's study covered 32 CMBS 1.0 deals with 2005-2007 vintages, including 22 note EODs alone over the last two years. In comparison, 152 Moody's-rated CMBS were issued between 2005-2007, meaning that the share of transactions with EODs represents 21% of overall new issuance.

The agency suggests that post note EOD enforcements do not typically materialise for a number of reasons, such as low trustee motivation to initiate enforcement, due to legal risks. Other factors include limited success in attaining a quorum of noteholders in favour of enforcement and the fact that investors in distressed transactions are often invested in several tranches across the capital structure, reducing the incentive to opt for a fire sale of loans.

"Investors prefer to avoid market value risk that materialises as soon as the underlying loans of a transaction have to be sold in an enforcement scenario. This is in contrast to a more controlled and longer-term approach in a special servicing scenario, where multiple strategies can be applied and recovery rates are expected to be higher," says Frank Cerveny, a vp and senior research analyst at Moody's.

In specific cases - for example, Opera Finance/Uni Invest 1 - the restructuring of a transaction post note EOD but prior to its legal final maturity is another alternative targeting noteholder loss mitigation.

Moody's expects 2017 to reach another peak in note EODs among CMBS 1.0 deals because many pre-crisis transactions have reached final maturity and residual pool quality close to the end of the workout period is on average weak. The agency notes that five rated transactions with a legal final maturity in 2017 will not repay in full, generating average losses of 68% of the outstanding note balance, which is in total over €1.5bn.

Nevertheless, the frequency of transaction liquidations is expected to remain low, given that there has not been significant change in the EOD definition and mechanism between CMBS 1.0 and CMBS 2.0 deals. In addition, Moody's does not consider that noteholders' general disinclination to initiate post EOD enforcement actions will change.

In terms of CMBS 2.0 transactions, the number of note EODs should remain low and well below CMBS 1.0 levels. "Transaction structures have become more robust than their pre-crisis peers; in particular, due to longer tail periods, which will help to avoid the occurrence of note EODs at note legal final maturity," Moody's observes.

CS

CMBS

Hope note recovery rates examined

The principal recovery rate of liquidated US CMBS hope notes hit 27.2% in 2016, its highest point since 2011. A recent Moody's analysis shows that the 224 hope notes totalling US$2.74bn disposed of since 2009 registered a weighted average recovery rate of 22%, recovering US$601.6m that may have otherwise been a loss, had the collateral been liquidated at the time they were created.

Since 2009, 340 hope notes with an aggregate balance of US$5.17bn have been created, peaking in 2011 with US$1.63bn of hope notes. The US$500.8m of hope notes disposed of in 2016 had a weighted average principal recovery rate of 27.2%, compared with just 11.9% for the US$181.8m of hope notes disposed of in 2012. The improvement coincides with a 105% rise in US commercial real estate prices since December 2009, according to the Moody's/RCA CPPI National All-Property Composite Index.

"Hope notes are subordinate instruments that are generally structured with market loan-to-value at or above 100% at the time of the restructuring, so a high loss severity is to be expected for most hope note dispositions. Additionally, because of the reduced interest rates associated with these notes, there is typically an increase in interest shortfalls to the trust - which may be credit negative for CMBS transactions," says Keith Banhazl, associate md at Moody's.

The analysis suggests that distribution of principal recovery rates is fairly bimodal. Dispositions with recoveries over 90% account for approximately 24.6% of the hope note dispositions by count and 13.6% by balance, while dispositions with recoveries of 20% or less account for approximately 59.4% of dispositions by count and 73.7% by balance. However, in less than 40% of cases, the dispositions result in no recoveries.

Among the five major property types, hope notes secured by multifamily properties have seen the highest principal recovery rate - of 46.8% - due to a robust recovery in apartment prices. Hotels benefitted from a strong recovery in room revenue and price post-crisis, registering a recovery rate of 32.5%. At the other end of the spectrum, office properties account for the largest exposure of liquidated hope notes at 31.5% by disposition balance and the lowest principal recovery rate, at 10.7%.

Of the disposals, 47 hope notes have been liquidated with a full principal recovery, the largest being the US$75m Four Seasons Resort Maui B-note (GECMC 2007-C1 and CD 2007-CD4). The note was created as a result of a modification in 2011 and paid off in its entirety in 2014 (see SCI's CMBS loan events database).

Meanwhile, the World Market Center II B-note (BSCMS 2007-PW15) saw the largest loss - of US$160m for a loss severity of 87.8%. Indeed, among hope notes that did not receive a full recovery, the cumulative weighted average loss severity is 87.7%.

As of 31 December, 116 hope notes with an aggregate balance of US$2.19bn remained outstanding, according to Moody's. 2007-vintage collateral accounts for approximately 78.4% of outstanding hope notes by balance and 62.1% by count. Hope notes secured by office properties had the largest outstanding balance (at US$1.12bn), followed by retail properties (US$500m).

The largest outstanding hope note is the US$328m Skyline Portfolio B-note. The loan is split across three CMBS (BACM 2007-1, JPMCC 2007-LDP10 and GECMC 2007-C1) and was modified in 2013.

The deal with the largest balance of outstanding hope notes - at US$144.62m (representing 22.7% of the deal balance) - is BACM 2007-1.

CS

RMBS

UK NC clean-up calls considered

UK non-conforming RMBS clean-up calls have long been considered out of the money options, but recent activity has changed that. Despite a rally in mezzanine UK non-conforming bonds since the beginning of the year, Deutsche Bank analysts believe this option is not yet fully priced in.

UK non-conforming RMBS are structured with date-based calls driven by step-up margins on notes or clean-up calls, typically at 10%-20% of original pool balance. In 1.0 deals the call optionality is normally with the mortgage administrator or the issuer, while for 2.0 deals it is typically with the residual holder.

Rated debt must be redeemed in full at par for the option to be exercised. While all 1.0 legacy deals are well past their step-up date, only 23 out of 86 have delevered to below their clean-up call factor.

Whereas bank-supported securitisation programmes have an element of franchise value at play in call decisions, redemptions of UK non-conforming RMBS should be entirely down to the specific economics of a transaction. The economics appear to be shifting. The analysts comment: "The call of MARS 3 and ROOF 1 in recent months, along with the notices around the Northview Group exploring redemptions for RMS 19/20 and MPS 1/2/3, has changed the landscape."

Deal redemptions depend on liability pricing of the non-conforming sector and on deals having factored down considerably. For liability pricing, that best in class 1.0 senior trade at around 90bp, compared to 140bp a year ago.

New issue 2.0 seniors can be as tight as 55bp. Even transactions with riskier pools, such as DKFLD 2 and ROFIN 2 see triple-A seniors at 95bp and 120bp.

The factoring down of deals has led to increased weighted average cost of debt on the liabilities of deal structures and reserve funds becoming an increasing share of the overall SPV assets - for example running to 40% of current collateral balance for RMS 20. There are also cases of senior fees as a percentage of excess spread becoming onerously high and credit enhancement levels moving beyond those seen in new issue deals.

Factoring down has also made WACs higher, while arrears are also generally stronger, although MARS 3 proves an exception to this. Additionally, the size of the pools for deals which have factored down are relatively small.

The argument against calls comes from the cost of refinancing compared to current note coupons, but the presence of large reserve funds can act to offset that. The economics of a call are easier where the residual noteholder holds the call option because of the immediate positive cashflow brought about by reserve funds being released back to the residual holders.

While residual holders have thus far valued net present value of future residual cashflows as being greater than NPV of refinancing, the incentive to release reserve funds does appear to be becoming stronger. Even in situations where the mortgage administrators or issuers retain the call option, the residual noteholder could theoretically subsidise the increased refinancing costs of rated notes from reserve fund proceeds if the NPV upside warranted it.

A call appears to be being actively explored for RMS 19. The Deutsche Bank analysts calculate that the residual holder would receive NPV of £23.8m in a call and refi scenario versus just £11.7m if the deal is left running. The cashflow released back immediately by the reserve fund would more than offset the higher associated debt costs with refinancing the liabilities.

The Deutsche Bank analysts believe that RMS 19, MPS 2 and 3, PRS 7 and 8, RMAC 2003-NS1 NS2 and NS3X and MPLC 6, all of which are already eligible for call, have particularly favourable call economics. Deals such as MARS 4 and MPS 4 also look favourable, but are not yet eligible.

The market does seem to have started to price in non-conforming calls. Following issuers' notices which suggested redemptions were being explored, mezzanine tranches for the RMS and MPS shelves have tightened 75bp for M1 notes and 100bp for B1 notes. Pricing even across the broader sector also appears to be pricing in some degree of call upside.

However, this analysis only shows that a call may be meaningful for the residual holder. It is not always in that residual holder's power to call, although they could work with private equity or hedge fund interests to buy loan pools with issuer and mortgage administrator acquiescence, thereby unlocking value.

The analysts say: "The mortgage administrator or the issuer typically has the right to call, and not the residual holder. Nevertheless we are optimistic that positive economics increases the odds of call in at least a few transactions."

JL

Structured Finance

Job swaps round-up - 10 March

EMEA

Clayton Euro Risk has formed an alliance with The Dutch Mortgage Consultants (TDMC) to assist in its focus on the residential mortgage market in the Netherlands. The firms began working together in January 2017.

Jones Day has hired Christine Van Gallebaert as a partner in its banking and finance practice in Paris. The firm has also hired David Aumain and Bassem Caradec. The trio has extensive experience in asset-backed financings, including securitisations, covered bonds and debt funds.

AXA has launched AXA Global Parametrics, a new parametric solutions unit. It will broaden the range of solutions to better serve existing customers and expand its scope to SMEs and individuals. It will also support AXA's P&C community and group innovation team in designing a broad range of parametric products to cover risks in many forms, both in mature and emerging markets. Tanguy Touffut - previously global head of parametric insurance at AXA Corporate Solutions - has been appointed ceo of AXA Global Parametrics, reporting to Gaëlle Olivier.

BNY Mellon has hired Paul Farrell as head of sales and relationship management for corporate trust in the Middle East and North Africa. Farrell will be based in Dubai and report to Aidan Canny, md of regional markets and investment managers for corporate trust in EMEA. He has been with BNY Mellon's corporate trust business for 10 years and replaces Brian Hoey, who has moved to BNY Mellon's global client management team in London.

Alvarez and Marsal has hired former KPMG executives Richard Fleming, Mark Firmin and Chris Johnston as mds to lead its new creditor advisory and insolvency teams, while Roger Bayly will co-head corporate performance improvement. In addition, Ben Tatham and Paul Kirkbright - who are also former KPMG partners - will be joining A&M as mds in April and June respectively, with Kirkbright as head of the creditor advisory team.

Prytania has demerged its two main trading entities, Prytania Investment Advisors (PIA) and Prytania Solutions, to allow each to operate independently. PIA will rebrand as Prytania Asset Management (PAM) and Mark Hale, cio of PIA, will become ceo of PAM. Jim Irvine, ceo of Prytania Group, and Malcolm Fraser - head of Prytania solutions - will become managing partners in Prytania Solutions. The demerger is expected to be finalised in early Q2 and regulatory approvals have already been received.

North America

Churchill Asset Management has hired Kevin Burke as a senior advisor. Burke has been in the leveraged finance arena for over 30 years and joins from Antares Capital. He will work to help Churchill develop middle market private credit investment funds and strategies designed to meet the current income needs of institutional and high net worth investors across the globe.

Asia

Gibson, Dunn & Crutcher has hired John Hartley as senior counsel in its Hong Kong office, where he will continue to focus on finance transactions. Hartley was a partner at White & Case in Hong Kong, from 2008 through 2014, where he served as Asia head of banking, capital markets and restructuring and as office managing partner. Most recently, he was an independent legal consultant in Hong Kong.

Request for proposals

Korea Post Savings has opened a request for proposals for an ILS manager. It is looking for ILS managers with over US$1bn in ILS AUM and strategies proposed must have over US$200m in ILS and reinsurance-linked assets. The submission date for proposals is 17 March.

CDO manager transfer

Trapeza Capital Management has assigned all rights, title and interest in its Trapeza CDOs I to V to Hildene Collateral Management Company. The assignments do not alter the responsibilities, duties and obligations of the collateral manager under the agreements.