Contents

NPLs

Legislation, growth drive Cyprus turnaround

Cyprus's non-performing exposures (NPE) ratio has experienced significant improvements, given stronger GDP growth and the adoption of an insolvency framework. At the same time, servicing is becoming an increasingly viable option for the restructuring of delinquent loans.

According to Adriana Alvarado, vp at DBRS: "The steady recovery of the economy, which posted growth for a second consecutive year in 2016, and a recovery of the housing market should contribute to further reduction of NPEs. DBRS expects the clean-up of Cypriot bank balance sheets to continue, supported by the comprehensive framework of measures now in place."

She adds that the adoption of the insolvency framework in 2015, along with the servicing units has supported the restructuring of delinquent loans. Restructured loans increased in December 2016 to 26% of total loans, up from 22% at the beginning of 2015.

The country's new insolvency framework protects primary homes with a mortgage of up to €250,000, with repossessions and auction processes in place thereafter, replacing previous practices that meant banks could spend up to 20 years attempting to recoup their debt. The framework also includes legislation to accelerate the transfer of title deeds and allow banks to sell loans to third parties (adopted in November 2015), as well as pending legislation on loan securitisation.

At the same time, servicing is becoming an increasingly viable option. For example, in January, Hellenic Bank signed an agreement with APS Holdings to set up a servicing unit to manage the bank's arrears and real estate assets, with the bank retaining ownership of the portfolio.

According to the Central Bank of Cyprus, several restructured loans are now classified as performing, following the 12-month probation period of no past due amounts. Moody's suggests that the Bank of Cyprus has made the most progress in terms of tackling its non-performing loan portfolios. As of September 2016, the bank had restructured around 40% of its loan book, compared to 30% for Hellenic Bank and 20% for Cooperative Central Bank.

As a large portion of NPEs stem from the real estate market, the recovery of the Cypriot housing market will be crucial to the ongoing reduction in problem loans. "Most of the improvement has been in the corporate sector, with the efforts now expected to be focused on SMEs and households," says Alvarado.

The steady growth of the economy, with higher real incomes supporting borrowers' debt repayment capacity, should also contribute to the further reduction of NPEs. Challenges remain, however.

"The NPE ratio is still high and although there may be interest from international investors, the bid/ask gap is still a problem," observes Gordon Kerr, head of European structured finance research at DBRS. "Moreover, similar to other peripheral countries such as Italy, the efficiency improvements of the legal system remain a large question, with NPL recoveries taking a long time to materialise."

Nevertheless, Kerr notes that Italy was in the same position before the introduction of measures such as GACS and the Atlante fund. Alvarado concludes: "With the ongoing recovery, the reduced unemployment and the [new] legislation, we are confident that the situation will change for the better."

SP

Secondary markets

Euro secondary unmoved

The European securitisation secondary market remains unmoved by wider market volatility.

The see-saw in equities and broader credit over the past two sessions has not been reflected in secondary spreads, which continue to hold firm. Indeed, sentiment remains positive and demand continues to outstrip supply.

Nevertheless, activity overall remains light with only some rotation activity and patchy flows in key sectors disturbing the general ABS, CLO and MBS peace. That calm looks likely to continue in the near term with technicals holding sway.

There are currently four BWICs on the European schedule for today, predominantly involving CMBS. The largest of which is due at 14:00 London time.

The six line 24.7m auction comprises: DECO 2006-E4X C, ECLIP 2006-2 E, EMC 4 B, EMC 4 C, MESDG CHAR C and RIVOL 2006-1 C. None of the bonds has covered on PriceABS in the past three months.

Secondary markets

US CLOs sporadic

Activity in the US CLO secondary continues to be patchy.

"We're now just seeing sporadic buying and selling," says one trader. "Even though it's quarter-end so people are anxious to get stuff done and there's plenty of money out there, investors are finding there isn't much value to be had."

The trader continues: "At current levels no one wants to take a hard stance, in fact my sense is that a lot of people have already done all their buying and selling and are simply sitting on a core ideal portfolio. They're now just waiting for the next macro event or pricing ripple to hit the market and look to take advantage then."

What activity there is revolves around opportunistic trades, mainly refi/re-set plays. At the same time, the trader notes: "There is also some stuff going on out of comp, but overall most people are taking a breather."

Nevertheless, there is a fairly healthy US CLO BWIC calendar for today, with nine lists currently circulating. The chunkiest of which is a four line $15.419m list due at 11:00 New York time.

The single-A and triple-B mix comprises: ALLEG 2015-1X D, FOURC 2006-2A C, FOURC 2006-2A D and GHAWK 2007-1X B. None of the bonds has covered on PriceABS in the past three months.

Secondary markets

Euro ABS/MBS unchanged

Spreads and activity levels remain unchanged across the European ABS/MBS secondary market.

A combination of month-end and benign wider markets has made for another couple of quiet sessions. Consequently, strong market tone and limited supply continue to hold secondary spreads in.

The pricing of a number of new issues this week could yet shake out some sellers before month-end. However, today so far looks likely to remain sedate across the board.

There are currently two BWICs on today's European ABS/MBS schedule. At 14:30 London time there are two lines of UK non-conforming - £8.09m GHM 2007-1 A2A and £18.796m RMS 26 A1. At 15:00 there is a £10m four line ABS auction that consists of: MOTOR 2016-1 D, MOTOR 2016-1 E, NDFT 2015-2 D and SBOLT 2016-1 C.

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

Secondary markets

US CLOs surge

Activity in the US CLO secondary market has surged this week.

"There's been something of a quarter-end surge," says one trader. "BWIC activity has picked up over the last few days to recalibrate pricing and clean-up positions."

The trader continues: "It's been mostly mezz in for the bid and everything continues to trade well especially 2012-2014 deals. Spreads haven't moved in hugely, but there is a deep and stable bid right now."

Today could be the last busy day for a while, the trader suggests. "From tomorrow and well into next week the auction schedule looks very quiet with people likely to focus on quarter-end admin over the next few sessions."

There are seven BWICs on today's US CLO calendar so far and the chunkiest is a 10 line $36.475m double-B, double- and single-A mix due at 13:00 New York time. It comprises: ARES 2016-40A D, ATRM 10A B1, BABSN 2016-2A E, BLUEM 2013-4A E, DRSLF 2013-26A C, HLA 2013-2A C, MCLO 2014-6A A2, OCT28 2016-1A E2, VENTR 2016-24A E and ZAIS1 2014-1A D.

Four of the bonds have covered with a price on PriceABS in the last three months, last doing so as follows: ARES 2016-40A D at 100.73 on 21 March; BABSN 2016-2A E at 101.34 on 21 March; HLA 2013-2A C at 100A on 16 February; and VENTR 2016-24A E at 98.75 on 23 January.

ABS

Income-contingent SLABS approach revealed

Further details have emerged of the UK government's £3.94bn Income Contingent Student Loans 1 (2002-2006) transaction, the first UK student loan ABS to be backed by income-contingent repayment (ICR) loans (SCI 21 February). Together with assigning expected ratings to the deal, Fitch has published a criteria report detailing its approach to rating UK income-contingent student loan securitisations.

Income-contingent student loans granted by the UK government finance maintenance and tuition fees incurred by students to support their higher education. Collateral includes payroll-deductible loans or loans repaid via tax self-assessment systems granted to students at UK universities between 1998 and 2012 (known as Plan 1 loans). Such loans do not have a repayment schedule - as their repayment varies according to the borrower's income level - and can be cancelled for death or permanent disability, or when the obligor turns 65.

Portfolios typically comprise a large number of relatively small-balance obligations with homogenous characteristics. Repayment levels are predicated on past earnings and established career patterns, but envisage a repayment threshold that increases annually in line with RPI.

The repayment period starts on 6 April following a borrower's graduation and the annual repayment due is defined as 9% of the excess earnings above the annual threshold. Interest applies over an academic year and accrues at the lower of RPI and the base rate plus 1%. It is charged from the day the loan is advanced and compounds monthly.

Earlier UK student loan transactions, such as the HNRS and THESIS programmes, securitised 'mortgage-style' loans. Fitch notes that ICR loans add an element of variability not seen in the earlier mortgage-type deals: rather than amortising with fixed instalments, the repayment profile is sensitive to real wage growth. However, ICR loan repayment is mainly collected by the UK taxation system on a 'same as tax' basis, meaning that defaults and arrears are rare for the majority of obligors.

The collateral backing the debut ICR deal comprises a static pool of 1,288,517 Plan 1 maintenance loans with a statutory repayment due date between 2002 and 2006. The number of borrowers in the pool is 441,258, with an average outstanding loan balance of £8,931.

Provisionally rated by Fitch and S&P, the capital structure consists of five tranches: AA/A rated class A1 notes (with an anticipated tranche thickness of 20.2%); A/A class A2s (22%) and A3s (5%); BBB/BBB class Bs (4%); and unrated class X notes (48.8%). The class A1 notes are expected to pay a floating rate of interest, the A2s and Xs a fixed rate, and the A3s and Bs an index rate subject to a floor of zero and a 5% cap. The senior notes are due to be offered in a fast- and slow-pay format.

Fitch notes that an integrated third-party model prepared by the UK government actuary's department and UK Government Investments was used in the rating process. The notes' exposure to model risk varies depending on their tenor, which the agency reflects by assigning higher expected ratings to the short WAL class A1 notes, as they can withstand a significantly higher loss of available funds compared with the class A2 and A3 notes.

The repayment mechanism means collections can only be performed by the UK tax authorities. In addition, the transaction benefits from government indemnifications of the issuer for certain key loan term modifications. The combination of operational risk and direct reliance on the UK government's credit strength therefore results in rating caps at the UK government's double-A long-term issuer default rating.

Among the key rating drivers is macroeconomic expectations: real wage growth, unemployment and emigration patterns affect repayment prospects. Fitch's base case relies on its medium- to long-term expectations for these factors, while analysis of national statistical data and past economic cycles helped form rating-specific assumptions. The agency set its steady-state assumptions for UK GDP growth, real wage growth, RPI inflation and base rate at 1.75%, 1.3%, 2% and 3.75% respectively.

Future borrower earnings projections are based on matrices of annualised probabilities of moving between a set of 10 earnings bands and the status of economic inactivity. The transition matrices are based on borrower earnings data held by the Student Loans Company and a time series of earnings for a large sample of UK taxpayers held by HMRC that covers tax years 2004/2005 to 2013/2014.

Using these datasets, in each year borrowers are grouped into 10 different earnings bands or four different groups for those not earning. The data sources are then used to estimate the probability of borrowers moving between earnings groups and non-earning at a given age. The resulting earnings projections model feeds into a repayments module that transforms these simulated earnings paths into individual repayment projections, thereby forecasting the loan performance over time for each obligor in the securitised pool.

Plan 2 income-contingent loans issued after September 2012 are excluded from Fitch's criteria. These loans were originated from September 2012 and can also be granted to students that possess a 'settled status' and for further postgraduate courses.

Arranged by Barclays (along with JPMorgan, Lloyds and Credit Suisse as joint-leads), Income Contingent Student Loans 1 (2002-2006) is expected to close in 2Q17. UniCredit credit strategists suggest that the deal may price below face value, as a portion of the debt is unlikely to be paid in full.

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ABS

'Less conventional' auto ABS to emerge?

Moody's expects German carmakers to offer attractive financing terms and retain residual value risks to boost demand for their alternative fuel vehicles (AFVs) and encourage AFV adoption. However, as the technology matures and AFV penetration increases, residual value risk is likely to shift to new industry participants.

"BMW, Daimler and Volkswagen will make full use of their captive finance operations to stay ahead in the race for car-related consumer spending. Carmakers' new auto technologies, combined with attractive financing terms and risk retention will prove a risky strategy to stay on top of the market, but is one to which they have few strategic alternatives," says Falk Frey, svp at Moody's.

As auto manufacturers prepare to roll out more AFVs to comply with stricter carbon emissions regulations, their captive finance subsidiaries and captive-arranged ABS pools will assume greater asset risks, according to the agency. "We expect a riskier profile of vehicle financings, given higher uncertainties around the future residual value of the collateral. This is due to greater uncertainty of future market price of used AFVs and used combustion-engine cars alike, given risk of technological disruptive innovation, but also evolution of existing technologies. BEVs sold on the market today are first-generation models, for which there is no meaningful secondary used vehicle market from which residual value data can be derived."

The typical balloon loan tenor in Germany is three years; hence, Moody's views that as the minimum time span required for first-generation AFVs to be returned under lease or balloon contracts before being tested on the secondary market. The agency expects sales volumes to be low during this period, which will complicate efforts to collect sufficient data to gauge residual value risk and its relation to underlying technologies.

But as the technology matures and AFV penetration in the German market increases, residual value risk is expected to shift over the next five to 10 years from auto manufacturers to their customers and new industry participants, such as mobility service firms (with whom carmakers' in-house finance arms will compete). Mobility service providers will, in turn, evaluate residual value risks for vehicle fleets they own to meet rising demand for car-sharing and short-term rentals, as the need lessens for individual drivers to buy in order to use cars.

Moody's suggests that mobility services are likely to gain traction with the growing presence of AFV vehicles on the streets, particularly as battery-powered cars with zero carbon emissions and lower maintenance costs are a natural fit in urban environments. In a rearranged value chain focused on mobility services, new participants could include asset financiers, whose role it will be to evaluate - and be compensated for assuming - the residual value risks of the vehicle fleets they own.

As AFVs account for a growing share of vehicles circulating in urban centres, the percentage of cars financed or leased by automakers' captive finance units should rise from their already-high levels of nearly 50% in Germany. Indeed, a loan-level analysis undertaken by the agency finds that financing of today's combustion-engine cars is already economically "rental-like", given the prevalence of balloon financing, with attractively low instalments but no significant build-up of equity. The review encompassed 1.4 million loan contracts originated from 2011 onwards, sponsored by BMW, Mercedes Benz and Volkswagen.

"Judging by the significant number of German drivers choosing to finance new vehicles via balloon contracts, it's fair to say that many of the traditional fuel-powered cars on the country's roads are in an economic sense 'rented' rather than 'owned'," says Johann Grieneisen, a vp - senior analyst in Moody's structured finance group. "Balloon contracts offer drivers the convenience and option to sell their vehicles at the end of the relatively short contract terms, trading them in for a new vehicle. As such, we see mobility as not just an abstract business concept, but a reality today - even for classic combustion-engine cars."

Moody's says that the financing contracts enabling mobility solutions that it expects to prosper alongside AFV growth may not necessarily have recourse to users that are renting the vehicles, but rather to a fleet operator owning the vehicle. In terms of securitisations, this transition is likely to be accompanied by growing volumes of transactions similar to current asset-backed fleet financing deals and by less conventional auto loan and lease ABS.

Despite a pick-up in demand for AFVs in 2016, the penetration rate of such vehicles remains well below 5% of all new passenger car registrations globally. However, AFVs are poised to account for a much higher proportion of car sales over the next decade.

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ABS

Debut prime auto ABS prepped

GM Financial is in the market with its inaugural prime auto loan ABS. The US$1bn GM Financial Consumer Automobile Receivables Trust 2017-1 transaction is backed by 39,380 retail installment contracts originated or acquired by GM Financial.

The portfolio comprises 22% cars, 21% CUVs, 21% SUVs and 36% light-duty trucks, split 84%/16% between new and used vehicles. The pool has a weighted average FICO score of 769, a weighted average seasoning of 10 months and a weighted average remaining term of 57 months. The top three state concentrations are Texas (accounting for 16.67% of the pool), California (8.45%) and Florida (6.7%).

Provisionally rated by Moody's and S&P, the deal comprises US$217m P-1/A-1+ rated class A1 notes, US$345m Aaa/AAA class A2As and A2Bs, US$310m Aaa/AAA class A3s, US$85.85m Aaa/AAA class A4s, US$16.28m Aa3/AA+ class Bs, US$15.27m A1/AA- class Cs and US$12.72m unrated class Ds. The transaction benefits from an initial 1.5% overcollateralisation amount that will build to a target of 2% of the initial pool balance, as well as a 0.25% fully funded non-amortising reserve account and a 5.49% yield supplement overcollateralisation amount.

Moody's cumulative net loss expectation for the asset pool is 1% and 7% at the Aaa level. The agency cites as a credit strength the credit quality of the collateral, reflecting GMF's prudent underwriting practices. The weighted average FICO is at the higher end of the FICO range of the pools that captive finance companies have securitised recently.

Moody's also points to the experience of GMF as a securitisation sponsor/servicer with significant scale. The lender has completed over 30 public retail senior-subordinated auto loan, three dealer floorplan and nine auto lease transactions since 1994.

"A strong sponsor is more likely able to originate and service loans in a reliable manner, even in the event of new competitive challenges," the agency says.

Barclays, Deutsche Bank, JPMorgan and RBC are lead underwriters on the deal.

CS

Structured Finance

SCI Start the Week - 27 March

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

Pipeline
Insurance-linked securities dominated the transactions remaining in the pipeline last week, after a heavy volume of deals priced. A handful of ABS, RMBS and CMBS also continued to market.

The ILS comprise US$178m Integrity Re Series 2017-1, US$300m Kilimanjaro II Re 2017-1, US$300m Kilimanjaro II Re 2017-2 and US$100m Pelican IV Series 2017-1. The ABS consisted of: €1.375bn BBVA Consumo 9, E-CARAT 8 and US$618.81m Golden State Tobacco Securitization Corp series 2017 A-1. The RMBS are Prado 4 and Residential Mortgage Securities 29, while the CMBS is the US$1bn CGCMT 2017-P7.

Pricings
CLOs accounted for the majority of new issuance last week, with ABS coming a close second. A number of CMBS and RMBS also priced.

US$405.5m ACIS CLO 2017-7 and US$406.35m NXT Capital CLO 2017-1 were the only new CLOs to print last week. The remaining CLO issuance was made up of refinancings: US$192m ACIS CLO 2013-2 (refinancing), US$326m Battalion CLO IV (refinancing), US$324.5m, Battalion CLO V (refinancing), US$319m Battalion CLO VII (refinancing), US$428m Carlyle Global Market Strategies 2014-5 (refinancing), US$525m Dryden 31 Senior Loan Fund (refinancing), US$350.85m Flagship CLO VII (refinancing), US$476m Fortress Credit Opportunities III (refinancing), €287.89m Grosvenor Place CLO 2013-1 (refinancing), US$415m KVK CLO 2014-3 (refinancing) and US$437.5m TICP CLO III (refinancing).

The ABS prints were dominated by auto deals: US$717.48m Ally Auto Receivables Trust 2017-2, US$1.1bn Drive Auto Receivables Trust 2017-B, €468m Driver France 3, US$1bn Ford Credit Auto Lease Trust 2017-A, US$1.19bn Honda Auto Receivables 2017-1 Owner Trust, US$1.21bn Hyundai Auto Receivables Trust 2017-A and US$1bn Nissan Auto Receivables Owner Trust 2017-A. On the consumer side, US$2bn BA Credit Card Trust Series 2017-1, US$600m Capital One Multi-asset Execution Trust 2017-2, US$800m Capital One Multi-asset Execution Trust 2017-3 and €783m Sunrise 2017-1 priced. US$461.5m SoFi Professional Loan Program 2017-B and US$600m FOCUS Brands Funding Series 2017-1 rounded out the ABS issuance.

A handful of RMBS also printed: €2.72bn Caixabank RMBS 2, €420m European Residential Loan Securitisation 2017-PL1, A$1.7bn Firstmac Mortgage Funding Trust No.4 Series 1-2017, US$395m Mill City Mortgage Loan Trust 2017-1, US$969m-equivalent Pepper Residential Securities Trust No.18 and US$340m Sequoia Mortgage Trust 2017-3. Meanwhile, US$567.4m PFP 2017-3 and US$637.5m WFCM 2017-RB1 accounted for the CMBS issuance.

Finally, one CDO - the US$331.25m TruPS Financials Note Securitization 2017-1 - and one ILS - the US$375m Sanders Re 2017-1 - priced.

Editor's picks
SFR strategy raises RMBS questions: American Homes for Rent (AH4R) announced this week an additional public equity offering, expecting to raise over US$250m, in the latest sign that single-family rental (SFR) companies are significantly changing their funding and operations. SFR securitisation performance has been strong, yet the market opportunity may be dwindling just as it proves its value...
Canadian banks eye credit card appetite: Canadian banks are capitalising on strong demand for US dollar-denominated credit card ABS. The sector has seen a resurgence in recent months, with deals being upsized and performance remaining sound...
Lender actions key to managing auto losses: Rising losses across the US auto ABS sector are at odds with strong economic conditions and low unemployment levels, albeit greater losses in the subprime space are being mitigated by lender actions, such as loan extensions. Whether losses increase further may depend on lenders' ability to maintain or further strengthen credit standards that have been weakening until recently...
JCPenney exposure gauged: JCPenney has disclosed the 138 stores that it plans to shutter in an effort to optimise retail operations (SCI 2 March). The impact of the closures on the CMBS market appears to be smaller than anticipated, with 14 liquidated stores encumbered by 17 loans totalling US$1bn, according to Morgan Stanley figures. The IHS Markit CMBX index has exposure to nine properties encumbered by loans totalling US$411m...
Euro CLOs mixed: Tone and spreads remain strong in the European CLO secondary market, but activity levels are still down. "It's a weird market at the moment - it feels quiet, but we are still trading," says one trader. "Clip sizes have gone up, so volumes are growing, but the number of trades has gone down..."

Deal news
• Carlyle recently priced what is believed to be the first post-crisis US CLO to feature a six-year reinvestment period - the US$612m Carlyle US CLO 2017-1. As the new issue CLO term curve evolves, JPMorgan CLO analysts suggest that investor market segmentation provides opportunities to add alpha when the term curve becomes mispriced.
• The Russian SME loan market is anticipated to grow, with further SME ABS issuance following suit. As the Russian SME ABS sector develops, several innovations seen in last year's offering from Promsvyazbank - SPE PSB SME 2015 - are expected to be replicated.
• The recent resurgence in primary issuance is not the only way to tap Irish RMBS value, as further redemptions for a number of Celtic Residential Irish Mortgage Securitisation series transactions could also provide value in the secondary market. JPMorgan analysts believe indicative pricing levels for CRSM 9 A2 and CRSM 11 A3A could yield a sizable spread pickup relative to a no call scenario, should they be called between June this year and December 2018.
• Blackstone affiliate Spain Residential Finance is in the market with its second Spanish re-performing RMBS. Dubbed SRF 2017-1, the €403.1m transaction is backed by 3,307 seasoned residential mortgage loans extended to borrowers in Spain.

Other news
• Although some US retailers continue to underperform, investors should be wary of taking a wholly negative view on the sector, according to Morgan Stanley CLO analysts. They point out that with broadly strong US retail sales and growing personal income, problems lie only in certain subsectors within the segment.
• Moody's is requesting comments on proposals to consolidate and revise its approaches to assessing a number of structured finance-related counterparty risks. If adopted, the changes are expected to have a ratings impact of one to two notches on approximately 210-220 structured finance transactions.

CLOs

Euro, US CLO diversity compared

European CLO collateral pools have better average ratings, measured as lower WARF scores, and slightly lower weighted average coupons compared to US CLOs. However, European CLOs are smaller and lack liquidity compared to US CLOs, according to Morgan Stanley's European CLO factbook.

European CLOs are generally smaller than US CLOs, at €582m on average, while the median average loan facility in the US is US$1.26bn. European CLO collateral also has a lower diversity profile than US CLOs.

Healthcare and chemicals are the two largest sectors represented in European CLO collateral, while computers/electronics and professional/business services are the two largest sectors in US CLOs. In European CLO 2.0 deals, healthcare and pharmaceuticals make up 11.54% by sector concentration, chemicals, plastics and rubber 10.18% and the third largest sector is business services at 7.27%.

In the US, sector concentration paints a different picture, with computers and electronics making up 12.93% of US CLO 2.0 collateral. Professional and business services is the second largest at 9.59% and healthcare is the third largest at 9.38%.

Morgan Stanley CLO analysts note that in terms of issuers of European CLO collateral, the US is the largest by country (representing 19.80%), while France is the second largest issuer (at 15.76%) and Germany the third largest (at 15.41%). The lowest issuer of collateral is Hong Kong (with 0.12%), while the second lowest is Portugal (at 0.30%).

The analysts add that lower collateral diversity and a crowded loan space in Europe leads to higher collateral overlap among deals managed by different managers, compared to their US counterparts. However, while European CLO managers don't tend to trade as frequently as their US CLO counterparts, the overall level of distressed loans in European CLOs is much lighter than in the US.

In terms of WARF, the tenth percentile of European CLO 2.0 deals have an average WARF of 2,570 and the ninetieth percentile an average WARF of 2,863. Of US CLO 2.0 deals, the tenth percentile has an average WARF of 2,632 and the ninetieth percentile has an average WARF of 3,025.

Meanwhile, the median weighted average coupon (WAC) for European CLOs is 4.45%, compared to 4.77% for US CLOs. The average WAC of the tenth percentile of European CLO 2.0 deals is 4.19% and the ninetieth percentile 4.70%. US CLO 2.0 deals have an average WAC of 4.51% for the tenth percentile and 5.14% for the ninetieth.

The Morgan Stanley factbook also highlights the investment style and scale of CLO managers, indicating that GSO/Blackstone is the largest European CLO manager, with a €4.73bn CLO 2.0 deal balance and 11 deals outstanding. Second largest is 3i Debt Management (with €3.68bn in European CLO 2.0 outstanding deal balance across nine deals) and the Carlyle Group is third largest (with a €3.64bn European CLO 2.0 deal balance outstanding across nine deals).

At the other end of the spectrum, Commerzbank has the lowest outstanding European 2.0 CLO deal balance, at €260m in a single transaction. Second to lowest is NIB Capital Bank (with €300m in outstanding European CLO 2.0 deal balance in one transaction) and third smallest is GLG (with €300m in one transaction).

The factbook also highlights the most overweight and underweight sectors by manager. GSO/Blackstone, for example, is most overweight in hotel, gaming and leisure at 9.34% of collateral, while most underweight in chemicals, plastics and media at 6.80%. 3i Debt Management is most overweight in business services at 9.52% of collateral and most underweight in the telecommunications sector at 4.94%.

At the other end of the spectrum, Commerzbank is most overweight in healthcare and pharmaceuticals at 15.45%, while most underweight in chemicals, plastics and rubber at 2.49%. NIB Capital Bank is most overweight in healthcare and pharmaceuticals at 17.03% and most underweight in business services at 4.56%.

RB

CMBS

Beacon Seattle loan closed out

The final three properties securing the Beacon Seattle & DC Portfolio loan - securitised in six conduit CMBS - have been disposed of, resulting in approximately US$55.7m in additional realised losses on top of US$45.2m in losses previously incurred throughout the loan's term (see SCI's CMBS loan events database). At securitisation, the US$2.7bn loan - one of the largest in the US CMBS universe - was backed by a portfolio of 20 office properties and caused waves when it was modified in December 2010 (SCI 14 December 2010).

The original loan was a five-year, interest-only loan sponsored by Beacon Capital Partners and Beacon Capital Strategic Partners V. The properties are located in the Washington, DC and Seattle MSAs, and total approximately 9.8 million square-feet of office space.

At the time of disposition, the loan's unpaid principal balance was US$914.1m, split pari passu across BACM 2007-2, BSCMS 2007-PW16, MSC 2007-HQ12, MSC 2007-IQ14, WBCMT 2007-C31 and WBCMT 2007-C32. Respective losses of US$9.27m, US$42.88m, US$22.95m and US$25.8m were realised by the latter four deals, according to KBRA. In the case of BACM 2007-2 and BSCMS 2007-PW16, the financing was structured whereby a subordinated US$56m component of the whole loan absorbed losses prior to being allocated to the pooled transactions.

The resolution of the loan ahead of its May 2017 maturity date was facilitated by the sale last month of the Booz Allen Complex property (now known as Tysons Metro Center) and the recapitalisations of the remaining two assets in the portfolio - the Lafayette Center and the Polk & Taylor Buildings (now collectively known as the Pentagon Center). Fitch notes that these three properties previously had large exposure to lease rollover after the extended loan maturity date.

However, many of the larger tenants have renewed their leases since then. For instance, GSA extended its lease at the Polk Building through September 2025 and at the Taylor Building through April 2023. The CFTC extended its lease on 36% of the NRA at the Lafayette Center property through September 2025, while Booz Allen Hamilton extended its lease on 27% of the NRA at the Booz Allen Complex property through September 2025.

The loan transferred to special servicing in April 2010 due to imminent default, after the borrower became unwilling to commit additional capital to the properties and fund leasing costs. However, it remained current during loan modification negotiations.

The modification agreement provided for a five-year maturity extension, interest rate reductions and parameters - including a stated release price schedule - for releasing properties from the portfolio in order to pay down the loan balance. The loan was returned to the master servicer in May 2012 and remained performing under the modified terms.

Fitch notes that five properties were released in 2011: Market Square, Key Center, 1616 North Fort Myer Drive, Liberty Place and Reston Town Center. In 2012, four properties were released: 1300 North Seventeenth Street, Army and Navy Building, City Center Bellevue and Washington Mutual Tower.

The Wells Fargo Center was released in 2013, while the Plaza Center was released in 2014. These were followed by Plaza East and 11111 Sunset Hills Road in 2015, and Sunset North, American Center, Eastgate Office Park and Lincoln Executive Center in 2016.

KBRA suggests that several properties were released from the portfolio with sales prices that were significantly higher than the amounts ultimately applied to pay down the loan balance.

CS

CMBS

Revised restructurings touted for DECO 2006-C3

Nearly 72% of DECO 11 - UK Conduit 3 noteholders have instructed the special servicer to explore options that may facilitate a faster resolution of the £216.4m Mapeley Gamma and £37.1m Wildmoor Northpoint loans. The move follows the restructuring of the two loans and the subsequent Fitch downgrade of the CMBS' class A1A and A1B notes.

Accordingly, the special servicer (Solutus Advisors) last week revised the terms of restructurings to provide obligors with the option to discharge all their present and future liabilities with any finance party under the finance documents for a predetermined amount. Solutus believes that the amended terms of the restructurings are consistent with the servicing standard, as the value of the properties would need to increase by over 30% by January 2018 from the October 2016 valuation for Wildmoor Northpoint and by over 16% by April 2019 from the March 2016 valuation for Mapeley Gamma to receive an amount greater than they would under the amended terms, given the priority of payments agreed under the initial restructurings.

Under the revised terms, if the obligors of the Mapeley Gamma loan have repaid at least £30m of the loan by 20 July 2018, they will be entitled to discharge the credit agreement liabilities by making payments of: £133m less the amount of any prepayments, if paid by 20 April 2019; £143m less the amount of any prepayments, if paid after 20 April 2019 but by 20 October 2019; or £160m less the amount of any prepayments, if paid after 20 October 2019 but by 20 January 2020. Similarly, the obligors of the Wildmoor Northpoint loan will be entitled to discharge the credit agreement liability by making payments of: £19.25m less the amount of any prepayments, if paid by 20 January 2018; or £19.75m less the amount of any prepayments, if paid after 20 January 2018 but by 20 January 2019.

Obligors can meet these threshold liabilities through the refinance or sale of assets, as well as the injection of additional equity. However, if the obligors choose not to discharge the credit agreement liabilities, the initial restructuring provisions will prevail.

The initial restructuring of the Wildmoor Northpoint loan - which was entered into in January (see SCI's CMBS loan events database) - is designed to enhance the value of the portfolio through providing £3m of capital via a subordinated loan and the implementation of a comprehensive three-year business plan. The subordinated loan ranks junior to £18.2m of the whole loan and therefore will only be repaid after a recovery of £18.2m has been achieved in respect of the whole loan.

The initial restructuring of the Mapeley Gamma loan - which was entered into in October 2016 - is also designed to enhance the value of the portfolio through providing £10m of capital via a subordinated loan and the implementation of a three-year business plan. For both loans, the asset manager (Solutus affiliate First Investments) is required to commence liquidation/refinancing of the properties by 15 September 2019 and complete them by 15 January 2020. This date may be extended by up to 12 months in order to maximise recoveries.

Fitch downgraded the DECO 2006-C3 class A1A notes to single-B from single-A and the class A1Bs to triple-C from single-B minus in November. At the time, the agency cited the increased risk of the issuer defaulting at legal final maturity in January 2020, due to the restructuring of Mapeley Gamma (the largest loan in the CMBS).

"The restructuring incentivises capital expenditure on some of the 24 properties, with the sponsor and the issuer set to share any upside above £143m (equating to the current valuation of £123m plus a £10m premium from capex and a £10m equity injection used to fund initial capex). The first £133m, after senior costs, is owed to the issuer only," it explained.

Further, Fitch noted that all of the notes are dependent on Mapeley Gamma repaying principal and that the accompanying loan standstill - which could last until four months before legal final - limits the power of the special servicer to enforce loan security. "Unless the asset manager chooses to liquidate collateral during the standstill - rather than reinvesting proceeds as capex - both A1 classes will have little margin from a timing perspective, with the class A1B so reliant on Mapeley collateral value being returned to the issuer more or less intact that it has fallen into the distressed category."

Originated by Deutsche Bank, the transaction securitised 17 loans secured by 56 properties located across the UK. As of October 2016, four loans remained (including the £7.4m CPI Retail Active Management and £1.4m Investco Estates assets), all of which are in default and in special servicing. Fitch expects losses on each of the four loans.

CS

RMBS

Kensington prepping 'recycled' RMS deal

Kensington Mortgage Company (KMC) is in the market with a £538.7m UK non-conforming RMBS. Dubbed Residential Mortgage Securities 29, the transaction is backed by seasoned collateral from five legacy deals that are scheduled to be called on their next IPDs.

The legacy deals are RMS 19, RMS 20, MPS 1, MPS 2 and MPS 3, which were originally issued between October 2004 and May 2006. The pool comprises 7,157 buy-to-let and owner-occupied residential mortgage loans extended to non-conforming borrowers secured on properties in the UK.

Just under half (45.41%) of the mortgages were originated by KMC, 0.53% were originated by Kensington Personal Loans and 51.95% by Money Partners. The remainder is made up of acquired loans.

Moody's and S&P have assigned provisional ratings of Aaa/AAA to the class A notes, Aa2/AA to the class Bs, A2/AA- to the class Cs, Baa2/A to the class D notes, Ba3/BBB to the class Es and Caa2/BB to the class F1 notes. The F2, F3, X1, X2 and Zs are unrated and the X1, X2 and Z notes are not backed by mortgage loans.

The size of the notes is yet to be confirmed, although the class A tranche is expected to comprise 67.50% of the capital structure. All of the notes will have an interest rate of three-month Libor plus a margin, aside from the F3 and Z tranches, which have a fixed rate of interest. The step-up date is September 2021, while the legal final maturity is December 2046.

At closing, the transaction will have a reserve fund, funded from the class Zs and part of the X2s, and the required amount of this fund will be 3.5% of the class A to F3 notes. The required amount of the reserve fund will decrease after two years to 3% and there is also be a liquidity reserve, which will be funded if the reserve fund falls below 2% of the outstanding balance of the class A to F3 notes.

Moody's says that the transaction benefits from strong seasoning, with an average of 11 years, which is "significantly higher" than normally seen in UK RMBS deals. The deal also benefits from a weighted average LTV of 76.2%, while no further advances or product switches are allowed, so the pool characteristics are unlikely to change other than for defaults and prepayments.

However, S&P notes that there is potential for set-off risk, arising from capitalisation redress payments that could be required to be made to borrowers in line with an FCA consultation paper released last year. The agency suggests that the scale of this risk is yet to be quantified, but indicates that the level of redress could have a negative effect on ratings if higher than expected.

The deal is also challenged by potential servicing disruption risk because servicing is expected to move from Homeloan Management (HML) to Acenden shortly after closing. Additionally, some weaknesses in the asset quality of the deal persist, such as a number of second lien and restructured loans and lack of income verification on 64.6% of the pool. The pool has a high level of loan arrears, with 50.7% of the mortgage loans delinquent, as of the cut-off date.

Further credit weaknesses include adverse credit history, with 23.3% of the borrowers with prior CCJs in the pool. Interest rate risk is also a negative, as there is no swap in the transaction.

The arranger is Deutsche Bank, which is also joint-lead manager along with Citi and Credit Suisse.

JPMorgan international ABS analysts estimate that the current outstanding balance of the five legacy deals backing RMS 29 is around €442m. They suggest that the recycling of collateral via the new transaction should keep the size of the outstanding UK non-conforming RMBS universe roughly unchanged at €30.6bn.

The analysts add that year to date, all UK RMBS activity has been issued by specialist lenders, which is a trend they expect to continue.

RB

RMBS

CSP's second phase delayed

The FHFA has postponed the implementation of Release 2 of the Common Securitization Platform (CSP) until 2Q19. The agency says that additional time is required for the development, testing and validation of controls and governance processes necessary to "have the highest level of confidence that the implementation will be both smooth and successful".

Under Release 2, Fannie Mae and Freddie Mac will be able to use the CSP to issue a single, common security to be called the Uniform Mortgage-Backed Security (UMBS) (SCI 9 December 2016). The FHFA's 2016 Scorecard for the GSEs and Common Securitization Solutions (CSS) had anticipated that implementation of Release 2 would occur in 2018. However, following an "extensive review of lessons learned" after the successful implementation of Release 1 - together with industry feedback - the anticipated implementation timeframe for Release 2 has been delayed.

Release 2 will allow the GSEs to use the data acceptance, issuance support, disclosure and bond administration modules of the CSP. The enterprises will use these modules to perform activities related to their outstanding fixed-rate, single- and multi-class MBS, including the new UMBS and single- and multi-class resecuritisations of UMBS.

Single-class resecuritisations of UMBS (to be known as Supers) will be analogous to Fannie Mae Megas and Freddie Mac Giants, which are respectively single-class resecuritisations of Fannie Mae MBS and Freddie Mac PCs. Multi-class resecuritisations will include tranched securities, such as CMOs and REMICs. Such resecuritisations may commingle UMBS or Supers originally issued by both Fannie Mae and Freddie Mac.

The CSP modules will also be used to perform activities related to the loans underlying those securities. Additionally, Release 2 will allow the enterprises to use CSS and the CSP to issue and administer certain non-TBA securities, including securities backed by adjustable-rate mortgages.

The revised timeframe for implementation of Release 2 provides market participants with more than 24 months' advance notice and is intended to facilitate further engagement on the part of market participants in the transition to UMBS, according to the FHFA. The agency notes that implementation of the Single Security Initiative involves a range of readiness activities for lenders, investors, dealers, system and software vendors, data providers and key infrastructure providers.

"As with the enterprises, all of these market participants will have to develop project plans, manage and test operational changes, implement new technologies or changes to existing technology, update legal agreements and establish appropriate controls. In addition, some firms may need to consider accounting, tax, legal and other implications of the changed market," it says.

The FHFA will continue to work with market participants to ensure that implementation of Release 2 and the transition to UMBS proceed smoothly. It says that the timing of some of the interim milestones may change, however, given the multi-year nature of the initiative and the complexity of Release 2.

CS

Structured Finance

Job swaps round-up - 31 March

EMEA

EJF Capital is to float its closed-ended investment fund on the London Stock Exchange. Dubbed EJF Investments, it will aim to invest in long-term, cashflow generating assets in three identified target investment areas - risk retention, capital solutions, ABS and specialty finance. Liberum Capital is acting as financial advisor on the admission and it's expected that dealings in the shares will commence on 7 April.

James Gray has joined the ABS syndicate team at JPMorgan, based in London. Gray joins from Deutsche Bank, where he was head of the ABS syndicate team.

Deutsche Bank has appointed Gerard Hammond as head of global credit financing and solutions syndicate for Europe. He was previously head of European ABS sales and John O'Connell will now take over this role. O'Connell was previously a senior member of the UK sales team at Deutsche Bank.

Asset Sales

The UK chancellor has authorised an £11.8bn sale to Blackstone and Prudential of the £15.65bn Bradford & Bingley loans acquired by the taxpayer during the financial crisis. The acquisition exit is expected to be via the issuance of RMBS.

Partnerships

Global Debt Registry is partnering with TransUnion to utilise the firm's credit information to extend the range of GDR's 'eValidation' services for investors and issuing creditors in the online lending industry.

Settlements

Lehman Brothers has reached a US$2.416bn R&W agreement with large institutional investors represented by Gibbs & Bruns covering 244 legacy RMBS transactions issued by Lehman. LXS, SASCO and SARM are the top three Lehman RMBS shelves that are likely to receive the largest amount of allocated settlement payouts.

Santander Consumer USA has agreed to pay US$26m to the states of Delaware and Massachusetts over allegations the firm violated consumer protection laws when providing subprime auto loans.

Ballantyne Re and Orkney Re have agreed to settle litigation brought respectively by Ambac UK and Assured Guaranty against JPMorgan, relating to the management of investment accounts, which were funded with the proceeds of notes issued in 2005 and 2006 in connection with structured reinsurance transactions. Ballantyne will receive US$325.6m in cash in return for releases of all claims by Ballantyne and Ambac UK. Orkney will receive US$74.4m in cash in return for releases of all claims by Orkney and Assured.

Acquisitions

North America

Pine Brook has acquired Triumph Capital Advisors, a firm that manages and provides services related to CLOs. Pine Brook has also provided a US$250m line of equity to Trinitas Capital Management.

EMEA

Sompo Holdings has completed its acquisition of 100% of the outstanding ordinary shares of Endurance Specialty Holdings. The total consideration for the acquisition is US$6.3bn. Endurance's ordinary shares ceased trading following the market close on 28 March.