Contents

Capital Relief Trades

Leverage ratio driving off-balance sheet trend

A number of European banks - including Rabobank and Credit Foncier - are becoming more active in the true sale securitisation format for risk transfer transactions. The move is being driven by the focus on balance sheet reduction, following the introduction of leverage ratio requirements under Basel 3.

Rabobank's foray into the true sale format follows its debut off-balance sheet RMBS from last July, Purple Storm 2016 (see SCI's primary issuance database). "Synthetic securitisations are used to mitigate risk and can help improve risk-based capital ratios," says Serdar Ozdemir, portfolio manager at Rabobank.

However, if the goal is to reduce balance sheet size and improve leverage ratios, he suggests that there are only two ways to achieve this. "You can either do whole loan sales or you can do an off-balance sheet securitisation. From a balance sheet perspective, the result is the same."

For issuers, there are several benefits of issuing off-balance sheet securitisations. "You can create an arbitrage from a pricing perspective. Additionally, you can potentially achieve more from a structured sale, since you can target specific investors, each with their own risk and return requirement," Ozdemir says. Rabobank has employed both whole loan sales and true sale securitisations.

Investors, on the other hand, can target specific risks. For instance, junior investors in the Rabobank deal can, on a levered basis, gain access to the Dutch mortgage market.

While there is only a small number of such investors, those who are able to invest benefit from diversification and attractive yields. "Most Dutch RMBS issuances are limited to senior tranches, with three- to five-year maturities and a relatively low yield. In these deals, the average life of the portfolio is longer, at eleven to twelve years," Ozdemir observes.

The true sale format, however, has its own challenges. "There is extensive legal documentation, which is quite cumbersome, as opposed to synthetics - which tend to be much simpler," Ozdemir explains.

The biggest challenge is achieving accounting derecognition of the assets. "You have to prove that you have transferred assets from the balance sheet and that can be a cumbersome process," he continues.

If the seller is not in a position to achieve derecognition, true sale transactions become expensive, as the mezzanine and junior tranches still have to be paid and additional capital has to be attracted to maintain capital ratios.

Gregory Rousseau, head of structuring at Credit Foncier, notes that issuers have to demonstrate for derecognition purposes that they don't have material influence on the profitability of the structure. "In this regard, renegotiating mortgage interest rates for commercial purposes would not work," he says. "For the same reason, three- to five-year calls by the originator are also prohibited."

Credit Foncier has issued two landmark true sale deals in the risk transfer market, CFHL-1 2014 and CFHL-2 2015.

Dealing with derecognition issues involved what Rousseau calls a "remarketing mechanism", which allows the management company to refinance the existing triple-A notes with new triple-A notes directly in the market, should the new margin required by the market be lower than the step-up on the original triple-A notes (SCI 5 June 2014). Moreover, the accounting deconsolidation requires a demonstration that the potential residual volatility of the links kept by the originator with the structure is much lower after the securitisation, typically less than 10%.

The latter issue was dealt with through an interest rate swap to address the mismatch between fixed-rate assets and floating-rate notes. In particular, prepayment risk and duration risk were partly incorporated into the swap.

"All the structuring was designed accordingly to reduce the volatility of the originator links with the structure, allowing Crédit Foncier to get the prudential and accounting deconsolidation, in addition to accounting derecognition," Rousseau confirms.

Ozdemir's outlook on the future of true sale risk transfer trades is optimistic, but he remains cautious. "Banks have to originate and distribute more to keep their balance sheets clean. Over the last four years, we have seen five of these off-balance sheet trades in Europe."

He concludes: "In our case, we have a €200bn mortgage book. While we have distributed a couple of billion, there is scope for more. The market still needs to develop more, but we remain positive and we expect to see more of these trades in the future."

SP

Capital Relief Trades

Synthetics to receive an STS designation?

Momentum is growing for a simple, standardised and transparent (STS) designation for synthetic securitisations at the EU level, driven by the support of the European Commission and the EBA. Such a designation is expected to increase supply and enhance standardisation in the risk transfer market.

Synthetic securitisations were not initially included in the scope of either the Basel Committee's simple, transparent and comparable (STC) or the European Commission's STS securitisation criteria (SCI passim). However, George Passaris, head of securitisation at the European Investment Fund, says that discussions are currently underway on Article 270 of the CRR, which lays out the conditions for an STS senior position in synthetic SME securitisations.

Among the conditions is a requirement for a certain percentage of SMEs to be included in the portfolio (currently expected to be between 70%-80%), as well as a requirement that the positions not retained by the originator are guaranteed by SSAs, such as central and multilateral development banks. "Such guarantees qualify for zero risk-weight capital," Passaris adds.

A further condition, in line with EBA proposals, would potentially enlarge the scope of the Article to include private investors besides SSAs, as long as they deposit cash collateral with the protection buyer. "It is currently being discussed by the negotiating parties; namely, the European Commission, the Council of Europe and the European Parliament," Passaris continues.

He notes the importance of an STS designation for synthetic SME deals, given that "SMEs are the backbone of the European economy". The rationale is that an STS designation would lower excessive or punitive capital requirements for the senior tranches of synthetic SME securitisations - currently proposed at 15% for non-STS triple-A rated tranches - freeing up capital for lending to European SMEs and the real economy.

Passaris adds: "It would potentially contribute to creating an environment where investors feel more comfortable and where trades are more standardised. At the same time, it would actually allow originators to use securitisation for their SME portfolios, since they would be able to release a meaningful amount of regulatory capital."

One source suggests that including synthetics in the STS framework would increase efficiency and supply by encouraging issuers to sell more risky assets. From an investor's point of view, however, "whether a transaction has the STS designation or not is not something that affects the analysis of the credit risk of the underlying assets, as the STS label is not meant to address credit concerns," argues Passaris.

In a similar vein, the recently-introduced PCS Risk Transfer Label does not envisage the analysis of credit risk, but seeks to help educate stakeholders about the strong potential for standardisation and simplicity in synthetic transactions (SCI 23 February).

However, others are yet to be convinced. According to Ramnik Ahuja, director at Deloitte, the targeted implementation of STS in January 2018 - in line with the 2016 Basel revisions of the securitisation framework - would drive up capital requirements for synthetic securitisations. "The market currently expects that synthetics will be included if they involve a quasi-public institution, such as KfW, EIB or EIF, as the CDS counterparty or those facilitating lending to SMEs. The reality remains that regulators view these transactions as being bilateral and bespoke," he states.

Another issue is whether capital relief trades executed as synthetic transactions will be grandfathered or be considered as non-STS transactions. Ahuja continues: "It's unlikely they will be grandfathered, but regulators have signalled their intent for what requirements are coming. The securitisation market has navigated tougher times in terms of regulatory uncertainty and there will be a period of adjustment, where we will see new structures with different forms of credit enhancements, lower levels of capital relief being achieved and higher coupons somewhat compensating for increased capital requirements."

He anticipates more trades being completed in 2017 in anticipation of these rules. "Market participants should consider whether their national competent authorities have the necessary resources, both in terms of the time and the staff to review transactions to accommodate what might be a flurry of submission activity, and factor this into submission plans for potential transactions."

The STS framework, however, leaves room for interpretation. "There are currently 21 criteria, with over 50 elements that need to be considered. Based on these elements, it is not impossible that transactions that are perceived to not meet the criteria could be restructured to be STS compliant," Ahuja observes.

Passaris adds: "There is plenty of room for optimism. Hopefully, by the summer, there will be an agreement. This will, in turn, be followed by RTS and the appellative stage, where STS will be considered for synthetics."

Nevertheless, he points to the issue of regulatory uncertainty. "The European Parliament proposes the reversal of the order between the standardised and the external rated based approach and this should bring benefits for certain asset classes (such as SMEs). The idea of an STS synthetic SME is gaining traction, but there is still uncertainty as negotiations are still ongoing."

Passaris remains positive, however. "I am optimistic that the STS designation will eventually apply for synthetics as well. We are trying to make the case that securitisation is a tool that can be used towards supporting growth in the European economies and the perception of this instrument by regulators is shifting. They can recognise the benefits."

He concludes: "Good synthetic securitisation that frees up capital that can be channelled into the real economy, as opposed to arbitrage transactions, is something that should be encouraged. Beginning with the SME class is a great start and why not [continue] with other asset classes?"

SP

NPLs

China tipped as next NPL frontier

Distressed debt investors are becoming more active in the Chinese non-performing loan market. Recent government action - including the creation of a more transparent and effective legal system - is widening the scope of opportunities in the sector.

Andrew Brown, partner at Shorevest, notes that the key difference between China and other jurisdictions is the government's control over the economy, which provides it with "more speed and avenues to deflate NPLs". Indeed, the government has recently taken action to create a "more effective, predictable and transparent legal system", according to Benjamin Fanger, another Shorevest partner.

China Banking Regulatory Commission data cited by KPMG at end-2015 suggests that the balance of commercial banks' NPLs was RMB1.27trn, an increase of 51.3% compared to 2011. The NPL ratio for such lenders was 1.7%, up by 0.4 percentage points, compared to end-2014.

In particular, "Beijing has imposed rules on the courts to enforce creditor rights losses, collateral coverage has increased and - as opposed to the 2005-2008 cycle, when the banks were selling to the asset management companies - the borrowers tend to be privately owned firms instead of state owned firms," states Fanger.

The latter tend to be more policy-oriented and this makes any recovery via the courts a more cumbersome procedure. The current cycle began in January 2015, when the asset management companies began selling assets to investors, most of them domestic.

Additionally, collateral values are now available through platforms such as Alibaba, allowing for a speedier assessment of the collateral value. Underwriting and loan documentation has also improved, providing for more effective NPL recoveries, since there is more detailed information on, for instance, the title of the collateral and how long the loan was extended for.

In the last cycle between 2005-2008, local governments had the ability to influence the courts. This has changed, however, since the central government has forced them to follow a more uniform process that includes speedier time requirements on NPL judgement and enforcement.

The market has its own challenges, however. "There's a reason most investors tend to be domestic," observes Fanger. "There is a lot of demand from international investors, but interest doesn't mean execution, since it can be difficult to source loans with adjusted returns unless you have had extensive experience with Chinese courts and the market more generally."

Shorevest's platform has over 100 years of combined experience, tracking tens of thousands of NPLs. The firm has undertaken due diligence on 100,000 borrowers tracked 200-300 portfolios totalling US$60bn in principal balance.

For investors interested in securitised deals, the number of transactions compared to the total number of NPLs has been small. The government has introduced a pilot programme to sell NPL ABS and completed securitisations have been issued with low coupons, with the senior tranche placed with mutual funds, insurance firms and other banks. The junior position, on the other hand, is partly retained and partly placed with institutional investors.

The main obstacle to further securitisation is that there is no credit rating system with NPLs. "As with any other NPL market, the portfolios require extensive due diligence and are characterised by dozens of borrowers with difference credit histories," says Fanger. "No NPL portfolio in China could be cut up in loans that are easily priced. Unless it's a senior tranche that investors have faith in, you won't see much of them."

For these reasons, banks usually sell directly to investors through auctions. According to KPMG, investors include investment banks, cyclical industrial funds and industrial groups.

The first group prefers bulk transfers, leveraging asymmetric information about credit assets to carry out arbitrage trading. They typically liquidate the assets and make a profit by splitting large packages into smaller packages to be bought by a wider range of investors.

Cyclical industrial funds, on the other hand, hold NPLs on a long-term basis in an effort to realise asset value through cyclical fluctuations. Their approach presupposes a unique understanding of certain industries.

Meanwhile, industry groups need to expand capacity and improve their brands. Consequently, purchasing high quality projects that have been poorly managed may be a better option than investing in brand new projects.

Given current opportunities, Fanger maintains an optimistic outlook. "We will see more investors buying up portfolios. We ourselves have invested US$700m and expect to see more capital coming in mainly from domestic investors," he concludes.

SP

CMBS

B-piece buyer shift underway

The US CMBS B-piece investor base is shifting towards those with longer-term capital, following the implementation of risk retention rules. Greater clarity over the structural complexity associated with the rules, together with increasing credit quality is expected to facilitate growth across the sector.

Risk retention requirements stipulate that third-party purchasers of the eligible horizontal residual interest (EHRI) - totalling 5% of a CMBS - must hold it for a minimum of five years. The B-piece sold out of a CMBS was typically 2.5% prior to the implementation of risk retention rules, so B-piece investors now have to find more resources to invest and take on extra duration risk.

Steven Schwartz, partner at Torchlight Investors, comments: "The B-piece investor base is undergoing a bit of a transformation since risk retention. It is moving away from firms that principally have short-term capital to invest, like hedge funds, towards investment managers, like Torchlight, that have locked-up longer-term capital."

The illiquidity of the EHRI in a CMBS also does not sit well with investors that, prior to risk retention, had more freedom with the B-piece. "Before risk retention, there were no restrictions on a B-piece buyer's ability to sell all or a portion of its investment. And a meaningful percentage of B-piece buyers were hedge funds. Risk retention changes the rules and I would expect the hedge fund type of investor will now rotate out or certainly become smaller," continues Schwartz.

Currently, he estimates that only half of the current B-piece buyers have enough risk retention-compliant capital to invest, but suggests there are existing and new firms looking to raise the required capital. While optimistic about new entrants to the space following the implementation of the risk retention rules, he notes there has only been one so far in MassMutual. The insurer purchased the four risk retention-compliant tranches - totalling US$105.64m - in JPMorgan's recent US$1bn JPMDB 2017-C5 CMBS.

Adding to the complexity is that regulatory uncertainty surrounds penalties for breached risk retention rules. Schwartz elaborates: "While issuers of CMBS can comply with the rules by selling an L or horizontal B-piece to a 'qualified' B-piece buyer, they still remain liable for rule infractions. There are three mortal sins a B-piece buyer can commit under the rules - B-piece buyers can't sell, hedge or finance the B-piece."

In JPMDB 2017-C5, for example, JPMorgan will remain liable for any penalties due to rule infractions by MassMutual. As yet, however, "the rules don't spell out what those penalties could be," Schwartz says.

Nevertheless, risk retention could attract more investors - including B-piece buyers - to CMBS, due to a greater "perceived quality" (SCI 9 February) in compliant deals. KBRA suggests that risk retention is "anticipated to incentivise originators to produce higher quality loans."

Joseph Lau, md at Lord Capital, is uncertain. "I think investors are still cautious rather than overly optimistic, despite progress in managing risk retention. They've been cautious about CMBS for a while and continue to be. Many are concerned about paying too much now for the risk. I don't think credit quality has necessarily changed after risk retention. The B-piece buyer hasn't changed their focus," he says.

Schwartz, however, is more bullish. "I think the quality of CMBS deals has been improving for about a year now. I wouldn't say it is exclusively the result of the new regulations, but risk retention definitely helps. Volatility and lack of balance sheet have weeded out some of the weaker originators and I wouldn't be surprised to see the number of originators shrink further," he says.

Ultimately, once further compliant deals are issued, market participants should become more comfortable with CMBS risk retention structures and this could feed into general growth across the sector. Schwartz concludes: "Eventually, the market will gravitate to a small handful of compliant structures. That, combined with stable spreads and predictable executions, will bring borrowers back to CMBS. If that happens, volume could take off."

RB

Secondary markets

Euro secondary restarts

The turn of the quarter has restarted activity in the European securitisation secondary market.

Flows and BWIC supply are picking up across the board this week. So far execution levels remain strong as long-standing pent up demand gets some release.

As a result, secondary spreads remain firm amid positive market sentiment. However, the growing secondary and primary calendars are yet to meet head on and will eventually provide current levels with a stronger test.

There are four BWICs on today's European schedule so far. The largest is a six line CLO list due at 15:30 London time.

The €24.025m double-B and equity auction comprises: ARBR 2014-1X SUB, CASPK 1X D, CRNCL 2014-4X E, JUBIL 2013-10X SUB, JUBIL I-RX F and WODST V-X SUB. Only ARBR 2014-1X SUB has covered on PriceABS in the past three months - at 91H on 25 January.

Secondary markets

US ABS keeps tight

US ABS secondary spreads are keeping tight as the new quarter begins.

The run-in for the last quarter and start to the next were relatively quiet across most US ABS sectors. However, the market continued to hold on to its gains from a very strong Q1.

Multiple sectors and parts of the stack are at or very close to post-crisis tights, with prime autos and student loan ABS still leading the way. At the same time, consumer paper stood out as one of the busiest asset classes last week and saw some strong prints in and out of competition.

Primary ABS issuance has slowed over the past week but a heavy pipeline means the pause is likely to be short-lived. Nevertheless, the lack of a dent made in secondary demand by the high Q1 new issuance volumes is likely to continue given the alignment of fundamentals and technicals currently supporting the market.

Yesterday's US ABS BWIC calendar got off to a slow start before a flurry of lists emerged. Today looks to be following a similar pattern with only four mainly relatively small auctions scheduled so far.

The exception among those is a $35m block of AESOP 2016-2A A due at 11:00 New York time. The bond has not appeared on PriceABS before.

Secondary markets

Euro ABS/MBS active

The European ABS/MBS secondary market is once again active without yet fully taking off.

"Secondary is now chugging along," says one trader. "There's enough going on to keep us occupied, but nothing major."

The trader continues: "There are selective opportunities, but there's no real stand-out activity. One possible exception to that is some of the racier positions from the big CDO liquidation are now emerging."

Primary activity is drawing a fair amount of focus as well, the trader adds. "The news of the two big RMBS deals attracted plenty of attention, though they're largely pre-placed, and there is some peripheral stuff which is interesting."

There are currently five BWICs on the European ABS/MBS schedule for today including a long mixed list of predominantly small clips that was due at 9:00 London time. Of those remaining the largest is a collection of Bluestone paper due at 15:00.

The £29.37m four line list comprises: BLST 2006-1 D, BLST 2007-1 CA, BLST 2007-1 DA and TRANSS 0 06/09/46 (which owns the rights to the residual interest in the Bluestone 2006 and 2007 securitisations). None the bonds has covered on PriceABS in the past three months.

Secondary markets

US CLOs still strong

US CLO secondary market tone remains strong amid lacklustre volumes.

"Overall supply hasn't ticked up too much this week given that it's a new quarter," says one trader. "BWIC and TRACE volumes are fairly light and there's not much in the way of new issuance either so far."

The trader continues: "The market remains strong - as soon as paper becomes available it is very well bid. People might now be watching for cracks as the rally has been one way for quite some time, but none are appearing yet."

There are seven BWICs on the US CLO calendar for today so far. The largest slice in for the bid comes as a $15.313m single line auction of JFINR 2015-3A B1 due at 9:30 New York time. The double-A tranche hasn't covered on PriceABS before.

ABS

Diverse solar ABS announced

Sunnova Energy is marketing its inaugural US$254.75m securitisation. Dubbed Helios Issuer Series 2017-1, it is backed by a pool of 13,838 leases linked to residential solar photovoltaic (PV) installations.

The collateral comprises power purchase agreements (PPA), EZ Pay PPAs and 20 hedged solar renewable energy certificate (SREC) contracts. The solar service agreements (SSAs) securing the transaction have an aggregate discounted solar asset balance (ADSAB) of approximately US$276.1m, while the hedged SREC contracts have an ADSAB of approximately US$23.5m for a total pool ADSAB of approximately US$299.6m.

KBRA has assigned provisional ratings of single-A to the US$191.75m class A notes and triple-B to the US$18m class Bs, while the US$45m class Cs are unrated. The transaction has an anticipated repayment date of September 2023 and final maturity date of September 2049.

The PV systems are geographically distributed across 14 US states, Puerto Rico and Guam. California, New Jersey and Puerto Rico constitute approximately 71.6% of the number of PV systems and approximately 71.4% of the SSA ADSAB.

The original tenor of 99.9% of the agreements is 25 years and, as of 28 February 2017, the weighted average remaining term of the SSAs is 284 months. The average FICO of the underlying customers of the PV Systems is 737, while the average discounted solar asset balance is US$19,953.

Strengths of the deal, according to KBRA, include the capability of the originator, aggregator and servicer - Sunnova - which has exhibited "exceptional" performance history, with average 60- and 120-day delinquencies of only 0.50% and 0.30% respectively. The deal benefits too from sufficient credit enhancement to accelerate principal payments to the notes in the event of weakening asset performance.

Potential weaknesses in the transaction include the possibility that Sunnova will have to make refund payments due to the lease agreements and EZ Pay PPAs holding a minimum performance guarantee, which could potentially reduce available cashflow. A further potential negative is that net metering rules in Guam, as administered by the Guam Power Authority, are not reasonable and justified for the inhabitants of the region.

KBRA notes that lack of historical static pool data is a potential credit weakness, with data only going back to 2013, when Sunnova began offering leases and PPAs to homeowners. Geographic concentration of the collateral pool is also highlighted, with California residents representing approximately 36.2% of the SSA ADSAB.

A further potential weakness, according to KBRA, is that the write-off policy for solar assets is unusually long. At 360 days until recognition of default, this is twice as great as most consumer assets.

Wells Fargo is transition manager, back-up servicer and indenture trustee on the deal, while US Bank is custodian.

RB

ABS

Chinese auto ABS hits top rating

The first Chinese auto loan ABS to receive a triple-A rating from S&P is currently marketing (see SCI's deal pipeline), although Fitch has not rated it so highly. Fuyuan 2017-1 Retail Auto Mortgage Loan Securitization Trust is a CNY2.884bn secured by loans to prime quality borrowers.

The CNY2.505bn class A notes have been rated triple-A by S&P and the CNY150m class Bs have been rated single-A. There is also an unrated CNY229m subordinated tranche.

The transaction is backed by a static loan pool which consists of 45,912 contracts with an average balance of CNY65,342. The weighted average down-payment on those loans is 40.2% and the weighted average interest rate is 3.99%.

The loans were originated by Ford Automotive Finance (China). It is the sixth auto loan securitisation originated by Ford China and the second Fuyuan transaction to be rated by S&P.

The highest rating previously attributed to a Chinese auto loan ABS by the rating agency was double-A, due to S&P's concerns about the uncertainties surrounding Chinese transactions. These concerns largely centre on the relative infancy of China's auto finance sector and uncertainties about the transition of securitisation counterparties during periods of stress.

However, the rating agency believes Fuyuan 2017-1 has several features that are supportive of a higher rating and says credit enhancement and a liquidity reserve fully funded at closing are sufficient for the class A notes to pass rating stress cashflow scenarios. The underlying pool could perform moderately worse than expectations and still not result in a downgrade to the class A notes.

The transaction is fully sequential with a turbo principal repayment mechanism to amortise the most senior tranche first and utilise excess spread to further pay down the principal of the class A notes. Additionally, concerns about underwriting consistency in the wider industry are at least partly addressed by the originator's established track record and stable underwriting policies.

With the loans already six months seasoned, the weighted average remaining loan term for the pool is around 25 months. The weighted average life of the notes is therefore expected to be even shorter, considering the turbo repayment mechanism.

Fitch has rated the class A notes at double-A and the class Bs at double-A minus.

JL

Structured Finance

SCI Start the Week - 3 April

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

Pipeline
The pipeline comprised a mixed bag of issuers last week. ABS deals once again dominated the new entrants.

Among the newly announced ABS were some esoteric names: US$145m BRE Grand Islander Timeshare Issuer 2017-A, US$282m PFS Financing Corp 2017-A and US$281m TAL Advantage VI series 2017-1. The Income Contingent Student Loans 1 (2002-2006) and US$50.26m Rhode Island Student Loan Authority 2017-A student loan deals also began marketing, together with the RMB3.67bn Bavarian Sky China 2017-1 Trust and US$989m GM Financial Consumer Automobile Receivables Trust 2017-1 auto deals.

A pair of Australian issuers - the A$350m Light Trust 2017-1 and A$500m RESIMAC Premier Series 2017-1 - joined STACR 2017-DNA2 on the RMBS side, while US$1bn BANK 2017-BNK4 and US$760m SBA Tower Trust 2017-1C accounted for the CMBS. Finally, the US$150m First Coast Re Series 2017-1 ILS deal rounded out the pipeline additions.

Priced
CLOs once again accounted for the majority of pricings last week. ABS and RMBS issuance also saw healthy volumes.

Last week's CLO refinancings comprised: US$466m AMMC CLO XVI (refinancing), US$569.75m Avery Point IV CLO (refinancing), US$348m Ballyrock CLO 2014-1 (refinancing), €400.6m Carlyle Global Market Strategies Euro CLO 2015-1 (refinancing), US$249m Fortress Credit BSL 2013-2 (refinancing), US$442m Fortress Credit Opportunities V CLO (refinancing), €282.85m Halcyon Loan Advisors European Funding 2014 (refinancing), US$242.5m Hildene CLO I (refinancing), US$323.25m Hildene CLO II (refinancing), US$302.5m Hildene CLO III (refinancing), US$460.5m Mariner CLO 2015-1 (refinancing), US$303m Northwoods Capital X (refinancing), US$374.5m OHA Credit Partners IX (refinancing), US$702.75m OZLM VII (refinancing), US$561.25m Seneca Park CLO (refinancing), US$406.8m TICP CLO II (refinancing) and US$407m Venture XVI CLO (refinancing). There were also a handful of new issue CLOs: US$608.1m Benefit Street Partners CLO XI, US$604.31m Cerberus Loan Funding XVIII, US$587.5m CIFC Funding 2017-II and US$457.8m Wellfleet CLO 2017-1.

Meanwhile, the £486m E-CARAT 8, Sfr297m First Swiss Mobility 2017-1, €510m IM Grupo Banco Popular Consumo I, A$1bn Latitude Australia Credit Card Loan Note Trust 2017-1, €450m RevoCar 2017 and US$175m Westgate Resorts Series 2017-1 deals accounted for the ABS prints. The RMBS were €390m Prado IV, A$300m RedZed Trust Series 2017-1 and €403m SRF 2017-1. The CARS-DB4, DB5, DB6, DB7, DB8, DB10, DB11, CNI-2 Series 2017-1 triple-net lease securitisation rounded out last week's issuance.

Editor's picks
Value seen in jumbo 2.0 and RPL deals: US non-agency issuance volumes are inching up on the back of the housing market recovery. Re-performing and post-crisis prime jumbo RMBS, in particular, are tipped as offering value in the current environment...
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...
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..."
Legislation, growth drive Cyprus turnaround: Cyprus's non-performing exposures 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...

Deal news
• 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).
• 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.
• Kensington Mortgage Company 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.
• GM Financial is prepping 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.

Other news
• 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.
• The FHFA has postponed the implementation of Release 2 of the Common Securitization Platform 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".
• 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.

Structured Finance

Compliant wireless tower deal debuts

SBA Communications is marketing its first risk retention-compliant securitisation. The US$760m SBA Tower Trust Series 2017-1C is backed by a pool of wireless towers located across the US and their related tenant leases.

The deal is secured by a mortgage loan that the issuer will make to borrowers that are wholly owned by SBA Communications. Fitch and Moody's have assigned provisional ratings of A/A2 to the single tranche of notes, which have an anticipated repayment date in April 2022 and a legal final in April 2047. The sponsor will retain an eligible horizontal residual interest to satisfy its risk retention obligation, in the form of the US$40m 2017-1R securities, which represent 5% of the total value of the transaction.

This is the twelfth securitisation sponsored by SBA and it is expected to increase the total amount of the programme's secured tower revenue securities outstanding by US$150m. The sponsor will use a portion of the proceeds to refinance the US$610m Series 2012-1C securities, as well as to pay transaction fees and expenses. The remaining amount will be used for general corporate purposes.

Moody's notes that the deal is supported by favourable conditions in the wireless tower sector that should continue to sustain wireless tower cashflow growth and strong contractual cashflows, with 94% of the portfolio's annualised run rate revenue from lease contracts with the four big wireless carriers AT&T, Sprint, Verizon and T-Mobile. Fitch adds that the diversity of the collateral supports the transaction, encompassing 10,453 tower sites and 21,967 tenant leases. The largest state concentration is Texas, but this only represents 8.1% of annualised run rate net cashflow.

In terms of credit challenges, Moody's highlights the operational risk associated with the fact that SBA Network Management (a subsidiary of SBA) will act as the manager of the tower sites for the transaction. Bankruptcy of the manager could therefore disrupt the administration of the tenant leases.

Barclays is the structuring agent and underwriter on the transaction. Title insurance is provided by Stewart Title Guaranty Company.

RB

Capital Relief Trades

Risk transfer round-up - 7 April

Activity in the capital relief trade space appears to be increasing in line with expectations of more issuance, as the revisions to the CRR kick in next year (SCI 5 April). Indeed, volumes are anticipated to pick up this quarter.

Most recently, Lloyds closed Salisbury II-A Securities 2017, a tap of the Salisbury deal it issued in December (SCI 14 December 2016). The transaction is a granular synthetic securitisation of £600m unfunded CDS, referencing UK SME loans, primarily secured by real estate collateral. It has a three-year replenishment period.

NPLs

Irish NPL RMBS 'could start wave'

Lone Star is back in the market with another Irish RMBS. It is currently marketing European Residential Loan Securitisation 2017-NPL1, which securitises non-performing loans.

Lone Star priced an Irish non-conforming RMBS, European Residential Loan Securitisation 2017-PL1, last month (see SCI's new issue database). For its latest transaction, the private equity house is offering the senior three tranches, making it one of the first NPL securitisations to be offered publicly.

Moody's has rated those three publicly offered classes at A1 for the A notes, which account for 43.5% of the secured balance, Baa3 for the B notes, and B1 for the C notes. The P and D notes are unrated.

The deal is only the second securitisation of Irish non-performing loans to be rated by Moody's. The underlying pool is sized at €420m and the loans were originated by Bank of Scotland Ireland.

The average current indexed LTV is 90.45% and more than 15% of the loans in the pool have an LTV of more than 120%. Most of the loans in the pool have not been restructured and around 38% of the loans have a pay rate of over 50%.

Legal enforcement as a result of arrears is either in process, or expected to being, for 71% of the loans in the pool. A further 10.3% are either in the possession pipeline or repossessed.

Rabobank analysts report that as many as 79% of the loans are overdue by more than a year and a half, with 98% at least three months in arrears. The strongest regional concentration is Dublin, which accounts for 33.1% of the loans. Average seasoning is 11 years.

The non-performing nature of the collateral has resulted in irregular cash flows from the assets, so payments to the SPV by borrowers are expected to be irregular and limited. A class A reserve is therefore in place which would be sufficient to cover 23 months of interest on the class A notes and more senior items.

"This deal is one of the first NPL securitisations coming to the public market," notes Rabobank. "More similar deals could follow, as private equity has acquired substantial NPL portfolios over the last years, especially from banks in the Eurozone periphery."

As well as European Residential Loan Securitisation 2017-NPL1 adding to Lone Star's March transaction, there is also another Irish RMBS currently marketing. Grand Canal 1 (see SCI's deal pipeline), backed by buy-to-let and owner-occupied mortgage loans to non-conforming borrowers, is Mars Capital Ireland's first securitisation.

JL

RMBS

B&B portfolio sale to bring new RMBS

UK Asset Resolution (UKAR) has sold two asset portfolios comprising performing buy-to-let loans totalling £11.8bn to Blackstone and Prudential (SCI 31 March). The loans come from the old Bradford & Bingley portfolio and are set to be securitised in two deals, including potentially the largest post-crisis European RMBS to date.

The two RMBS are Ripon Mortgages and Harben Finance 2017-1 (see SCI's pipeline), with the latter being sponsored by Prudential. Both RMBS are currently unsized and S&P has assigned preliminary ratings to both.

UKAR reports that the price achieved on the sale of the Bradford & Bingley portfolio is at the upper end of expectations and compares favourably with the fair value of the loan book disclosed in Bradford & Bingley's accounts last year, which is less than its reported book value of £16.35bn on 30 September 2016. The transaction is expected to be completed in the coming weeks and following the sale UKAR's balance sheet will shrink to £22bn, having been £116bn in 2010 when it was formed.

Blackstone has acquired the majority of the Bradford & Bingley loan book through various funds, while Prudential has taken a little under £2bn. Underwriting for the purchasers was undertaken by Barclays, HSBC, Lloyds, Nationwide, RBS and Santander.

Class A notes for the Ripon Mortgages RMBS have been provisionally rated at triple-A by S&P, Moody's and Fitch. S&P has also rated the class B, C, D, E, F and G classes, at double-A, single-A plus, triple-B plus, triple-B, double-B plus, and double-B, respectively.

Moody's has assigned a rating of Aaa to the class As, Aa1 to the Bs, A1 to the Cs, Baa1 to the Ds, Baa3 to the Es, Ba1 to the Fs and Caa1 to the Gs. Fitch has rated the class As at triple-A, but not rated the other classes of notes.

Ripon Mortgages could well surpass Towd Point Mortgage Funding 2016-GR1, the £6.2bn RMBS brought to market by Cerberus European Residential Holdings last year (SCI 5 April 2016). The anticipated RMBS also includes unrated R and Z notes and X and Y certificates.

The transaction is backed by a £9.97bn pool comprised of 100% BTL mortgages originated by Bradford & Bingley and Mortgage Express. The weighted-average LTV is 64.4%, having been 79.23% at issuance, and the average loan size is £116,702. Weighted average seasoning is 134 months and 95.52% of the loans are interest-only, with 4.478% repayment mortgages. There is significant geographic concentration, with 46.8% of the mortgages securing properties in London and southeast England.

Prudential's Harben Finance 2017-1 transaction has also achieved a preliminary triple-A rating from S&P, Moody's and Fitch for its class A notes. S&P has also rated the B, C, D, E, F and G notes double-A, single-A plus, triple-B plus, triple-B plus, triple-B minus and double-B, respectively. The R and Z notes are unrated.

Moody's has assigned a rating of Aaa to the class As, Aa1 to the Bs, A1 to the Cs, Baa1 to the Ds, Baa3 to the Es, Ba1 to the Fs and Caa1 to the Gs. Fitch has rated the class As at triple-A, but not rated the other classes of notes.

The transaction is backed by a £1.9bn pool comprised of 100% BTL mortgages originated by Bradford & Bingley and Mortgage Express. Similar to Ripon Mortgages, the weighted-average LTV is 64.14%, having been 79.26% at issuance, and the average loan size is £115,604. Weighted average seasoning is 133 months and 95.31% of the loans are interest-only, with 4.68% repayment mortgages. Mortgages on London and southeast England properties account for 47.14% of the pool.

JL

RMBS

Largest STACR to date prices

Freddie Mac has priced its largest STACR deal to date. The US$1.32bn STACR 2017-DNA2 is also Freddie Mac's second low-LTV deal of the year.

The M1 class has priced at one-month Libor plus 120bp, while the M2s priced at plus 345bp. The B1 class priced at plus 515bp and the B2s at plus 1125bp.

STACR 2017-DNA2 has a reference pool of single-family mortgages with an unpaid principal balance of approximately US$60.7bn. The pool consists of a subset of fixed-rate, single-family mortgages with an original term of 241-360 months acquired by Freddie Mac between July and October 2016. LTVs for the reference pool range from 60% to 80%.

Freddie Mac holds the senior loss risk in the capital structure and a portion of the risk in the class M1, M2 and B1 tranches, and also a significant portion of the first loss risk in the B2 tranche. Bank of America Merrill Lynch and Wells Fargo are co-lead managers and joint bookrunners.

Freddie Mac has transferred a significant portion of credit risk on US$727bn of unpaid principal balance on single-family mortgages since 2013 (SCI passim). This has been achieved through a mix of STACR, ACIS and WLS transactions, attracting more than 220 unique investors, including insurers and reinsurers.

Freddie Mac's two previous transactions, STACR 2017-DNA1 and STACR 2017-HQA1, were sized at US$802m and US$752.5m, respectively (see SCI's new issue database).

JL

RMBS

Deephaven debuts non-conforming deal

Deephaven Mortgage is in the market with an RMBS backed primarily by non-QM loans extended to non-conforming borrowers. Dubbed Deephaven Residential Mortgage Trust 2017-1, the US$219.82m transaction features a double true sale structure and an atypical cashflow waterfall.

The DRMT 2017-1 pool consists of 715 fixed rate (31.7% by balance), adjustable interest-only (6.1%) and five- and seven-year hybrid adjustable-rate fully amortising mortgage loans with 30-year original terms to maturity. The loans are secured by first liens on single-family residential properties (45.6%), planned-unit developments (45%), condominiums (8.7%) and two- to four-family homes (0.7%). Approximately 89.6% of the properties are primary residences.

S&P notes that the collateral pool is weaker than an archetypical prime pool from a credit perspective, but is generally in line with its expectations of a non-prime residential mortgage pool. Approximately 82.2% of the loans have full documentation, while income was verified on 17.7% using 24 months of bank statements. Non-QM loans account for 92.5% of the collateral.

The borrowers for 393 loans in the pool had one or more prior credit events (PCEs), which may have limited their access to loan products offered by Fannie Mae, Freddie Mac and the FHA. S&P says it applied an adjustment to the loss coverages on 160 loans that had a bankruptcy discharged or dismissed in the past two years or a housing-related PCE in the past three years from the 1 March 2017 cut-off date.

Weighted average seasoning of the collateral is approximately eight months and the weighted average FICO score is 682. There are 27 loans to foreign borrowers in the pool, 17 of which do not have a recent FICO score (2.1% by balance). S&P used a FICO score of 500 for the loans missing FICO scores and applied a 1.5x multiple to the foreclosure frequencies for these loans to foreign borrowers.

Angel Oak Mortgage Solutions originated 59.6% of the pool, with the remaining loans originated by 42 other lenders, each of which account for less than 5% of the collateral. In terms of geographic concentration risk, 46.85% of the collateral has exposure to the top 10 core-based statistical areas.

Provisionally rated by S&P, the deal comprises US$141.09m triple-A rated class A1 notes, US$233.33m double-A class A2s, US$27.86m single-A class A3s, US$11.17m triple-B class M1s, US$9.73m double-B class B1s, US$6.64m single-B class B2s and US$1.33m unrated class B3s.

The transaction is structured as a double true sale of the receivables from the mortgage loan seller (Deephaven Mortgage) to the depositor (Toringdon Way) and from the depositor to the issuing trust (DRMT 2017-1). The issuing trust transfers the notes to the depositor and the depositor sells the offered notes to the initial purchasers (Nomura and Credit Suisse), which sell them to third-party investors. The depositor sells the non-offered notes, as well as the risk retention notes to the sponsor.

Unlike traditional RMBS that have a shifting-interest structure, DRMT 2017-1 has an atypical waterfall that mixes pro-rata and sequential structures, according to S&P. Principal is paid pro rata among the senior classes and then sequentially to the subordinate classes. In the periods that a cumulative loss trigger fails, principal is paid sequentially to classes A1, A2 and A-3.

The transaction also uses excess monthly cashflow to cover current period realised losses and reimburse any applied realised loss amounts. "This feature allows certain notes (classes A3, M1, B1 and B2) to have initial subordination lower than our estimated loss coverage amounts," S&P observes.

CS

Structured Finance

Job swaps round-up - 7 April

North America

KeyBanc Capital Markets has hired Chris O'Neill and Jeffrey Tucker to its securitised products team. O'Neill will act as md and Tucker as director and both will report to Keith Newman and Michael Corsi, co-heads of securitised products. O'Neill was previously md at RBC, focusing on non-agency and agency MBS and ABS. Tucker was previously director in the securitised products institutional sales group at Credit Suisse.

Renovate America has hired Paige Wisdom as cfo, joining from Exeter Financial, where she was also cfo. She also worked for Freddie Mac for five years as chief risk enterprise officer and evp. Tom Hemmings will move from cfo to evp at the firm. Roy Guthrie will also join Renovate America's board of directors. He is currently on the board of Synchrony Financial.

Funds

Griffin Capital has launched a closed-end, interval fund to be managed by Bain Capital Credit. Dubbed the Institutional Access Credit Fund, it will invest in structured credit, NPLs, high yield bonds and middle market direct loans.

Settlements

The New York Supreme Court has ruled that the pay-out mechanism for 14 of the remaining Countrywide RMBS trusts should not be adjusted to favour senior bondholders (SCI passim). Rather, the pay-out should proceed pursuant to the governing documents, even in cases where this resulted in overcollateralisation leakage. While the documentation of the final trust - CWL 2006-12 - contains a provision to account for OC leakage, the judge denied the junior holders' petition to have the payment distributed as if it were excess cashflow.

Acquisitions

FTN Financial has acquired Coastal Securities. Coastal Securities trades, securitises and analyses small business administration loans, as well as other loans and fixed income products.

Dyal Capital Partners, a division of Neuberger Berman, has acquired a 15% minority share of CLO firm Sound Point Capital.

Marketplace Lending

Ex-Lending Club ceo Renaud Laplanche has launched Upgrade, a new online lending platform, and will act as its ceo. The platform has received US$60m in equity funding and convertible notes from a range of investors.

For more people and company moves, see SCI's job swaps database.