Contents

Secondary markets

Euro ABS/MBS picks up

Activity in the European ABS/MBS secondary market is picking up after the Easter break.

Yesterday saw a flurry of both bilateral trading and BWICs primarily driven by rotation activity. Secondary spreads remain firm for now given the recent paucity of supply, but the possibility of some weakening in higher beta paper is emerging.

There are currently four BWICs on the European ABS/MBS schedule for today, mainly involving Spanish bonds and UK non-conforming. The largest list is a euro-, dollar- and sterling-denominated mix due at 15:00 London time.

The 11 line 55.76m auction comprises: BBVAR 2007-2 C, BCJAF 10 C, BPMO 2007-1 C, BRNL 2007-1X D4A, CANWA II C2, EHMU 2007-1 M2, GHM 2007-2X AC, HIPO HIPO-10 C, INTS 3 C, LEEK 19X CC and TDAC 8 C. Only BCJAF 10 C has covered on PriceABS in the past three months - at 54H on 8 March.

Secondary markets

US CLOs slumber on

The slumber seen in the US CLO secondary market pre-Easter is continuing.

Despite broadly positive market sentiment, volumes continue to be light as investors look to hold on to the paper they have. As result, secondary spreads across the capital structure and vintages are unchanged over the past week or so.

There are two BWICs on the US CLO calendar for today so far. First up at 11:00 New York time is a $23.6+m seven line triple- and double-B combination comprising: BABSN 2016-2A E, BRIST 2016-1A D, CIFC 2017-1A D, OCT27 2016-1A E, OCT30 2017-1A C, SEVEN 2016-1A D and VOYA 2016-3A C. Only BABSN 2016-2A E has covered on PriceABS in the past three months - last doing so at 101.01 on 30 March.

Then at 14:00 there is a pair of triple-As - $12m CIFC 2015-5X A1 and $12.494m OZLM 2015-13X A1A. Neither bond has appeared on PriceABS before.

ABS

Coinstar ABS debuts

Coinstar is marketing its inaugural US$900m whole business securitisation. Coinstar Funding Series 2017-1 is backed by revenue generated from a multi-national network of fully automated self-service coin counting machines.

KBRA has assigned provisional ratings of triple-B to the deal's US$60m class A1
and US$840m class A2 notes. The anticipated repayment date is April 2022, while the legal final maturity date is April 2027 on the A1s and April 2047 on the A2s.

The collateral includes existing and future Coinstar branded kiosks, existing and future agreements with retail and product partners, and intellectual property. The proceeds from the offered notes will be used to refinance the company's existing credit facilities, pre-fund working capital, pay certain transaction expenses and fund the return of capital to shareholders.

As of December 2016, Coinstar had approximately 19,600 kiosks globally, with revenues of approximately US$324m. The majority of kiosks (86.1%) are located in the US, with the remainder located internationally.

The transaction benefits from extensive operating history and strong performance, with Coinstar operating since 1991. The company has counted and processed over 763.7 billion coins worth approximately US$46.5bn in over 1.18 billion transactions globally through December 2016. KBRA adds that the deal benefits from the low operational complexity of the company relative to other companies within the whole business securitisation sector.

Additionally, the transaction has a number of structural protections, such as cash trapping, rapid amortisation, manager termination (in the event that the interest-only DSCR is less than 1.20x on any payment date) and a default DSCR trigger, so that if on any payment date the interest-only DSCR is less than 1.10x, an EOD will occur, triggering the acceleration of all outstanding notes.

A potential weakness of the transaction is the concentration of the retail partners, with the top four retail partners accounting for a substantial amount of Coinstar's business. The top four stores are Wal-Mart Stores, The Kroger Company, Albertsons Companies and AholdDelhaize, accounting for 22%, 14.6%, 11.5% and 10.7% respectively of the total US dollar value of coins deposited in Coinstar kiosks during 2016.

Furthermore, the transaction has the shortest contractual agreements seen within whole business securitization, with a typical retail agreement of three to five years. This is moderated, however, by the fairly long average relationship with the company's top ten retail partners of 18.2 years.

Further weaknesses include a potential reduction in coin usage, as coins become less heavily used in the US, and the fact that several of the company's patents are set to expire prior to transaction maturity. Finally, KBRA notes that there could be a potential negative impact from foreign currency fluctuation, since 13.9% of the firm's kiosks are located outside the US, with royalties from international license agreements paid in US dollars but converted at the then current exchange rate.

Coinstar is guarantor and manager on the ABS, while the servicer/control party is Midland Loan Services and the back-up manager is FTI Consulting. Guggenheim Securities is sole structuring advisor and book-running manager.

RB

Capital Relief Trades

Risk transfer round-up - 21 April

The EIF returned to the risk transfer market this week, with a €90m mezzanine guarantee for a €1.5bn portfolio of corporate loans originated by Commerzbank. The guarantee aims to spur lending to mainly German SMEs and midcaps by reducing bank capital requirements.

Elsewhere, sources in the Dutch market suggest that Dynamic Credit is readying another balance sheet relief RMBS, following the issuance of DCDML 2016-1 by its ELAN Hypotheek brand last year (SCI 13 October 2016).

CLOs

Antares returns with first 2.0 CLO

Antares Capital Advisers is in the market with its first 2.0 CLO transaction, Antares CLO 2017-1 (see SCI's deal pipeline), its first deal in more than a decade. The transaction is a cashflow SME CLO provisionally sized at US$1.8bn and backed by middle-market speculative-grade senior secured term loans.

The US$1.035bn A class notes have been rated at Aaa by Moody's and triple-A by S&P. The notes have effective subordination of 42.5% and will pay an assumed coupon of three-month Libor plus 1.725%.

The US$207m class B, US$131.4m class C, US$106.2m class D and US$131.4m class E notes are not rated by Moody's, but S&P has rated them double-A, single-A, triple-B minus and double-B minus, respectively. Neither rating agency has assigned ratings to the US$206.88m subordinated note class.

The class Bs will pay three-month Libor plus 2.3%. The class Cs will pay plus 3.05%, the class Ds plus 4.1% and the class Es plus 6.45%.

S&P notes that Antares CLO 2017-1 has higher total leverage and lower subordination than other middle-market CLOs it has rated in the last three months. It also has a lower weighted average cost of debt, lower WAS and available excess spread, a lower scenario default rate and a lower obligor diversity measure for the portfolio.

The CLO must hold a minimum of 96% first-lien senior secured loans and eligible investments. Covenant-lite loans could account for a maximum of 25% of the collateral and fixed rate assets may account for a maximum of 5%.

The CLO cannot hold long-dated assets, limiting the risk of the manager needing to liquidate assets remaining at the CLO's maturity date. The likelihood of an OC-based event of default is also low, as the event of default par ratio trigger is 102.5%, well below the initial OC level of 173.9%.

However, the portfolio's WAL could be extended because of provisions on amendments which extend assets' maturities. Moody's also notes that there is no requirement to maintain notes' then-current subordination levels if the CLO repurchases notes.

The CLO allows the issuer to issue additional classes of subordinate notes, which could therefore make the interest diversion test less effective. Furthermore, in order to comply with risk retention rules, the issuer is able to issue additional notes without consent, can designate trading gains as interest proceeds, and can amend the transaction terms without consent.

Of the identified portfolio, the largest exposure is to services, at 14.6% of par. The next highest concentrations are healthcare and pharmaceuticals (at 10.5% of par), high tech industries (10.4%), capital equipment (8.3%), and chemicals, plastics and rubber (6.8%).

S&P reports that Antares plans to establish a cashflow CLO programme to raise capital to diversify its funding sources and support the continued growth of its middle-market loan platform, which is one of the largest in the US. As of December 2016 Antares had US$18bn in total assets under management.

Antares was a fairly frequent CLO issuer pre-crisis, but that ended when it was acquired by GE Capital in 2005. The firm has since been bought by the Canada Pension Plan Investment Board (CPPIB).

JL

CMBS

'Substantial' loss forecast after methane claim

The US$77.2m City View Center loan - securitised in MSC 2007-IQ14 - has received a US$62.5m payment, following the representation and warranty settlement between the special servicer and originator Morgan Stanley (see SCI's CMBS loan events database). The loan transferred to special servicing in late 2008 over a lawsuit, initiated when the borrower violated EPA requirements related to methane gas extraction and monitoring.

As a result of the settlement payment, the transaction's class C notes received US$44.5m of principal and interest this month. A review of the loan's payment details undertaken by Wells Fargo structured products strategists indicates that US$36.3m of the total warranty claim was categorised as an interest adjustment related to cumulative non-recoverable interest.

"This prompted interest shortfalls totalling US$26.8m to be reversed on the AJ, AJFX, B and C classes, with the C class being paid US$15.2m," they explain. "Furthermore, given that the C class was the first-loss bond and excess interest was available after the repayment of all shortfalls on the C class and higher in the capital stack, bondholders of the C class were also paid US$11.2m, labelled as a reimbursement of prior losses and trust fund expenses."

The next substantial payout went towards refunding US$18m of prior write-downs that had been accumulating on the loan since August 2010, according to the Wells Fargo strategists. This resulted in the C class being written up by US$18m to an outstanding balance of US$46.8m.

Special servicing fees amounted to US$1.7m and the outstanding balance of the loan was paid down by US$3.8m. With the finalisation of this agreement, the loan will be marketed for sale.

The loan is backed by a Garfield Heights, Ohio anchored retail property, in which Walmart originally occupied 29% of the GLA. Servicer commentary indicates that the property was built on top of two landfills and methane gas began leaking into the stores, which resulted in Walmart vacating and other tenants to follow suit through co-tenancy clauses.

The special servicer subsequently engaged legal counsel to evaluate loan documents for any issues, prompting an R&W claim against Morgan Stanley Mortgage Capital in January 2011. Based on the May 2016 appraisal of US$200,000, the strategists project a substantial loss on the loan - an event that could drive losses into the AJ class of the CMBS, assuming no other loans are liquidated with a loss beforehand.

CS

CMBS

Special servicing shift underway?

A shift in the US CMBS special servicing landscape is emerging, according to Fitch's year-end review of servicing trends. While the traditional cartel of legacy CMBS special servicers - who invested in controlling bond positions - continue to represent the largest balance of active special servicing, a new set of players take the lead when measuring volume by named special servicing.

LNR Partners, CWCapital Asset Management and C-III Asset Management account for 82% by loan count of the active CMBS special servicing total (including REO), as of 31 December 2016. However, by named balance, Fitch's review shows that Midland Loan Services and Wells Fargo Bank - which do not invest in controlling bond positions - rank first and second respectively (excluding Fannie Mae and multifamily).

"Run-off of legacy CMBS is expected as loan maturities through 3Q17 will significantly reduce the named special servicing portfolios of the legacy cartel, as well as the continued dispositions of those assets. Rialto Capital - which has been an active B-piece buyer since 2011 and also has a captive servicer - will likely be the largest named non-third-party CMBS special servicer by year-end," the agency suggests.

Fitch says that the shift to third-party servicers is the result of new B-piece buyers, which have been active in CMBS since 2010, without affiliate servicers. "Many of these buyers engage special servicers to perform due diligence on new transactions and retain them as special servicer. Several of these new buyers are not always loyal to a single servicer, often choosing to spread assignments among multiple third-party servicers," it explains.

Meanwhile, the loan level servicers that Fitch rates continue to be heavily weighted towards non-CMBS servicing, as they focus on balance sheet, general account and third-party loans. These servicers typically have limited CMBS assignments for single-borrower, single-asset fixed- or floating-rate transactions.

The 36 special servicers the agency rates ended last year with a total named portfolio of US$1.5trn in outstanding balance, 76% by balance of which is in CMBS servicing.

CS

Insurance-linked securities

Record cat bond issuance assessed

The average size of catastrophe bonds climbed significantly - by 31% - to US$292m in 1Q17, according to PCS figures. The firm notes that the issuance of the Galilei Re, Aozora Re and Sanders Re transactions had "disproportionate effects" on volumes (see SCI's primary issuance database).

"Half the transactions [issued in Q1] were small (under US$200m) and it took two large transactions of around US$500m to lift aggregate limit to the year's record-setting issuance of US$2.3bn," PCS explains.

ILS sponsors completed eight deals last quarter, versus nine in 1Q16. Seven of the eight deals had exposure to North America, with Galilei Re including Canadian and European risks. One catastrophe bond covered risks in Japan.

Meanwhile, three cat bond-lite transactions were issued in the first quarter - ranging from US$5m to US$63m in size - totalling US$118m. Two of these deals featured indemnity triggers and one - Alpha Terra - covered non-US risk only (SCI 15 February). Sponsors also completed five private transactions.

PCS points out that ILS market demand for new risk areas and types remains significant. "Conversations throughout the 1 January 2017 renewal and after have emphasised the interest the ILS market has in lines such as global marine and energy, terror and cyber, among others. The launch of PCS Global Marine and Energy should help satisfy this need by bringing more original risk to market, with subsequent loss aggregation solutions likely to help the market expand further," it concludes.

CS

RMBS

Clean-up call volume rising

US non-agency RMBS amounting to more than US$1bn in UPB was called in 1Q17, making it one of the busiest quarters for calls in many years. There is no longer such a clear skew towards prime collateral backing deals being called, while a greater variety in vintages being called is expected to develop.

New Residential Investment Corp (NRZ) has been a significant driver of the increased call activity. The REIT owns the call rights on around US$160bn of UPB, which Wells Fargo analysts note is about 30% of the non-agency market.

NRZ acquired call rights for a significant number of deals through its acquisition of HLSS, which was spun off from Ocwen in 2010, with Ocwen retained as a subservicer. February alone saw clean-up calls in 14 Ocwen-serviced deals totalling more than US$417m in UPB.

NRZ executed 25 clean-up calls during the last quarter, totalling US$600m in UPB. Tightening spreads have increased the profitability of calling and resecuritising legacy collateral, encouraging a ramping up of call activity by NRZ and others after optional redemptions had slowed in 4Q16.

Back in 2013 and 2014, call activity was dominated by prime collateral, but that trend has changed more recently as the owners of call rights have moved into deals collateralised by subprime and Alt-A loans. Falling delinquencies and rising home prices have improved the economics of calling and resecuritising the seasoned loans.

Calls do remain concentrated in 2003-vintage, and earlier, deals. These typically have lower delinquencies and LTVs and more of them have dropped below their clean-up call threshold.

In total, 1Q17 brought 36 clean-up calls. As well as the aforementioned 14 Ocwen-serviced deals there were 12 MASTR deals called in March, with the Wells Fargo analysts noting that loans from these deals are found in NRZ's most recent offering, suggesting that it is also acquiring call rights from other servicers.

NRZ reported that US$30bn of its call rights were exercisable as of 4Q16 and says that another US$9bn-US$10bn will become callable every 12 months for the next several years. While not all of these will be economical to call, investors can make educated guesses as to which ones are most likely.

The most obvious factors are low delinquencies and collateral factors below their optional redemption thresholds. Most deals from the 2004 vintage or earlier are below their thresholds, while most from 2005 or later remain above them.

WAC is an important consideration, as high deal WAC allow deals to be called at par and then the collateral to be reissued at a premium. 2003 and earlier vintages have significantly higher WACs than later vintages.

ARM loans are less likely to trade at a significant premium dollar price, reducing the profitability of calling a transaction and resecuritising. ARM collateral makes up a significant portion of the legacy universe and this could be more attractive for a call if credit spreads compress.

NRZ has found certain ARM deals attractive in the past. Typically these have included rate floors for the ARM collateral, with the floor level frequently more than 100bp higher than where the all-in coupon would be based on prevailing rates.

OOMLT 2003-1, called in February, is an example of such a deal. Slightly more than half of the collateral consisted of ARM loans, but all of the ARM loans had lifetime floors, which averaged more than 800bp and many of the loans have subsequently been modified into lower fixed-rate coupons.

Over the past three years, NRZ has issued almost US$4bn in seasoned performing loan deals through its NRZT shelf. Senior bonds are generally sold at a premium, which is the source of much of the profitability in calling a deal.

"Given the large volume of call rights that NRZ owns, we believe this resecuritisation programme should continue to drive high levels of optional redemptions, leading to waves of calls such as the one we have witnessed so far in 2017. Also, the resecuritisation of loans from the MASTR deals shows that, in addition to the call rights that NRZ already owns from its HLSS transaction, it is in touch with other servicers, and is willing to act as a conduit for called collateral across the non-agency universe," say the Wells Fargo analysts.

They expect improving delinquencies and rising home prices to lead to an increase in calls for post-2003 deals. Additionally, as the supply of fixed rate loans shrinks, they believe sponsors may shift to deals backed by ARM products.

NRZ is currently in the market with New Residential Mortgage Loan Trust 2017-2 (see SCI's deal pipeline).

JL

RMBS

Ocwen may target MSR purchases again

Ocwen Loan Servicing has reached a settlement with the New York Department of Financial Services (NYDFS) which brings closer the prospect of the company being able to acquire MSRs again. The California Department of Business Oversight (DBO) has already lifted its own prohibition against Ocwen purchasing MSRs (SCI 24 February).

The servicing company has been unable to acquire new MSRs since 2014, when regulators barred the company from making additional purchases (SCI 23 December 2014). The NYDFS had taken an interest in the matter even earlier, specifically blocking a potential MSR purchase by Ocwen from Wells Fargo at the start of that year (SCI 7 February 2014).

Ocwen's new consent order with the NYDFS lays out a process for the determination of whether restrictions on acquiring MSRs should be eased. Fitch believes that the easing of restrictions would be a positive step toward alleviating near-term margin pressures, but warns that Ocwen remains susceptible to longer-term risks associated with building a mortgage lending platform positioned for sustainable growth.

To meet regulators' concerns, Ocwen has implemented a comprehensive milestone tracker to manage key deliverable dates, a conversion balancing tool to reconcile specific statuses between Ocwen and the counterparty servicer, and over 100 additional quality control checks. There is a three-way data reconciliation process to compare prior servicer, converted, and uploaded core servicing system data and Ocwen has also expanded its servicing transfer management quality assurance team to review on-boarding activity.

Ocwen reported last quarter that it had successfully performed a mock boarding exercise with 2,000 previously boarded loans that contained a wide variety of characteristics and statuses. That followed a third-party consultant's review of Ocwen's loan-boarding policies and procedures to verify compliance with more than 40 servicing transfer regulatory requirements with an emphasis on existing loss mitigation files and timely receipt of trailing payments.

As part of the consent order with the NYDFS, the regulator has scheduled an on-site examination of Ocwen in order to make a determination as to whether the restrictions on acquisitions of MSRs should be eased. The use of an operations monitor, as required by the 2014 consent order, has also been ended, although Ocwen must submit a written plan to address outstanding corrective measures within 30 days of the operations monitor's final report.

Ocwen must also conduct an enterprise-wide risk assessment and information technology risk assessment within six months and must provide the completed assessments to the NYDFS. It must also report on its progress in addressing the outstanding corrective measures on a quarterly basis, from the end of this quarter.

"Although the use of an operations monitor is not being extended, the NYDFS could require Ocwen to retain an independent consultant to review and issue recommendations on the company's servicing operations if the NYDFS concludes that Ocwen has materially failed to implement the corrective measures or that the servicing operations are materially deficient. The NYDFS will schedule a future examination of Ocwen in order to assess the company's implementation of the outstanding corrective measures and the safety and soundness of its servicing operations," notes Fitch.

The rating agency adds: "Ocwen's servicing portfolio continues to decline; however, the company remains one of the largest non-bank servicers and the largest servicer of private label securities in the US. As of 31 December 2016, Ocwen's servicing portfolio was comprised of 1.36 million loans totalling US$203.3bn. Fitch will continue to monitor Ocwen's efforts to work through its regulatory settlements and re-establish itself as an acquirer of mortgage servicing while successfully addressing outstanding corrective measures."

JL

RMBS

Debut Canadian RMBS prepped

The first RMBS sponsored by a major Canadian bank is marketing. Dubbed Bicentennial Trust 2017-1, the C$1.96bn deal is backed by 6,364 prime fixed-rate Canadian residential mortgage loans originated by Bank of Montreal (BMO).

Moody's and DBRS have assigned provisional ratings of Aaa/AAA to the C$1.86bn class A notes, Aa2/AA to the C$39.21m class Bs, A1/A to the C$19.6m class Cs, A3/BBB to the C$14.7m class Ds, Baa2/BBB (low) to the C$6.86m class Es, Ba1/BB to the C$6.86m class Fs and B2/B to the C$5.82 class G notes. The C$4.9m class H notes are unrated and are non-offered certificates, along with classes F and G.

The transaction features significant balloon risk, as although the underlying loans have short contractual terms of up to five years, they have a long-term amortisation schedule of 25-30 years. Moody's notes that the balloon risk is mitigated because the seller has to offer to renew all performing loans on their maturity date, providing those loans meet BMO's underwriting criteria. BMO then has to repurchase all such renewed loans from Bicentennial Trust.

Moody's comments: "In the event that these performing loans are not either repaid by the borrower or renewed at their maturity and repurchased by BMO, they are required to be extended by the servicer and allowed to continue to amortise within the custodial pool."

DBRS adds that such balloon risk is mitigated by the strong asset quality, the financial strength of the seller and proven refinancing liquidity during the financial crisis, structural features, conservative modelling assumptions and available credit enhancement. The agency also points to the strong collateral characteristics: conventional Canadian residential mortgages, with a weighted average LTV of 66.5%. Additionally, the transaction benefits from strong originator characteristics and the fact that the pass-through structure increases subordination over time.

Challenges to the transaction include a potentially weakened Canadian housing market, resulting in higher defaults and/or lower recovery rates than those factored into the assumptions determining credit enhancement levels. Furthermore, 86% of the mortgages in the collateral pool are credit exception loans, with potentially higher credit risk.

BMO is the seller, administrator, originator and servicer on the transaction is, while the dealer is BMO Nesbitt Burns.

RB

CLOs

Euro CLO relative value discussed

Identifying relative value in the current loan environment, where asset spreads are compressing, was a key theme at IMN's recent European CLOs and Leveraged Loans conference. Against the backdrop of rising refinancing and reset volumes, call optionality and manager style emerged as strong contenders.

From a relative value perspective, Natixis ABS/CLO trader Peter Cui said that in terms of carry, older double-B and single-B European CLO bonds trading at below par trade around 50bp tighter versus recent deals trading at above par. "From a short-term trading standpoint, given the rate of loan prepayments, CLO 1.0 deals are delevering quickly and therefore improving from a credit perspective and in terms of call optionality. But from a buy-and-hold standpoint, 2.0 junior debt is more attractive."

However, Aza Teeuwen, partner and portfolio manager at TwentyFour Asset Management, noted that double-B and single-B bonds - specifically early/mid-2016 vintage double-Bs and 2014/2015 vintage single-Bs - have been the sweet spot for his firm in 1Q17. Prytania Investment Advisors senior investment analyst Marcus White added that while triple-A rated European CLO bonds have long represented the best risk-adjusted value versus other European risk assets, given the severity with which they have tightened, even that is becoming less clear.

"Single-Bs have more room to run, if you compare them to their 2014 tights. CLO equity is interesting, with CLO liabilities at post-crisis tights and up to 50bp tighter than where we have seen them in the past few years - that's an extra 5% of excess spread on a 10x levered CLO," he observed.

Meanwhile, when assessing a CLO manager, Sheil Aggarwal, head of valuations at SCI Valuations, said that a first step is to identify whether it is debt-friendly or equity-friendly, depending on where in the capital stack the investor plays. Cui noted that he is neutral on CLO managers at the top of the capital stack, but at the bottom of the capital stack, manager style makes a difference because it highlights whether they are picking the correct credits.

"When choosing a manager, the biggest concerns should be erosion of par and lower WAS. With a five-year reinvestment period, if there is a market correction in, say, 18 months, a good manager can take advantage of the lower loan prices and deliver a good equity return because the tight liability spreads are already locked in," he explained.

White said his firm tends to avoid larger and prolific CLO managers when buying lower in the capital structure, given the risk they typically 'buy the market', and is more concerned about performance. "We prefer managers to actively trade, who demonstrate an ability to build par. We also look for disciplined underwriting - do managers deliver on what they said they would, particularly in terms of portfolio ramp?"

As well as what a manager's rationale and investment processes are, Teeuwen recommended that investors question whether it will still be around in six years' time. He added that larger CLO managers may struggle to exit problematic names, but achieve a decent allocation in the primary market, while it's often the opposite for small managers.

"Secondary market liquidity is strong at the moment, but finding bonds in reasonable size can be challenging," he suggested. "NAVs have peaked and defaults will begin rising at some point. If you're a CLO equity investor, I would stick with smaller, more conservative managers, with liquid holdings, that are more nimble and can pick up spread in a sell-off."

Another factor investors should be aware of is how a manager treats defaults. Anton Spadar, senior analyst at Chenavari, cited the example of CLO-friendly HoldCo tranches of AVR loans, which a few managers treated as equity, others sold and some kept, which paid off for equity investors.

Chris Whitcombe, quantitative analyst at 400 Capital, noted that from a CLO equity perspective, the investment horizon is critical in the current environment. "Currently, the initial arbitrage is weak, so a long investment horizon is required to allow time for the equity optionality to add value but also for selected managers to outperform. An area where managers can add value is through the active use of fixed-rate buckets and the inclusion of second tier loans in the portfolio, where appropriate to their skill-set and style," he observed.

Liquidity has been greater at the bottom of the capital stack and more constrained at the top, in terms of being able to buy paper in good size, according to Cui. He suggested that sellers will still get good execution when selling, even for small clips.

Cui added that refinancings and resets have affected secondary activity. "As a CLO gets closer to the end of its non-call period, trading tends to dry up as participants begin pricing to the first call," he explained.

Panellists indicated that call optionality could increase as deals are reset, due to limited loan supply for new issues. Equally, generating alpha via refinancings and resets could make CLO equity a more interesting proposition.

Looking ahead, Matthew O'Sullivan, head of commercial securitisation at M&G Investments, sees no reason for the current spread tightening trend to ease off. He pointed out that there is a floor, given US CLO spread levels and the fact that most CLO investors require a premium over investing in more vanilla securitisations, but doesn't envisage any widening without some shock to the market.

CS

Structured Finance

Job swaps round-up - 21 April

North America

Morningstar has hired Charles Citro as md for CMBS ratings and analytics, based in New York, reporting to Vickie Tillman, president of Morningstar Credit Ratings. Most recently, Citro was senior md at Cushman and Wakefield within the asset surveillance group.

Nations Equipment Finance has hired Susan O'Donovan as cfo. She was previously at Castleton Commodities International as executive director, head of controller project management and strategic initiatives and has 15 years of asset management and 10 years of securitisation experience.

Europe

Pillarstone has hired Mark Knight as partner and general counsel. He joins from Kirkland & Ellis, where he was partner, European restructuring. Knight will be Pillarstone's first general counsel since being established by KKR in 2015 to turn around underperforming and non-core European banks assets.

Willis Towers Watson has made several senior appointments in its global manager research team, with Chris Redmond promoted to the new role of global head of credit and diversifying strategies, while Nimisha Srivastava and Paul Jayasingha are appointed to the roles of global head of credit and global head of real assets respectively.

Acquisitions

Forestar Group has entered into a definitive merger agreement with affiliates of Starwood Capital Group, under which Starwood will acquire all of the outstanding shares of common stock of the company for US$14.25 per share in cash. The total transaction equity value is approximately US$605m.

CDO manager transfer

Trapeza Capital Management has assigned all rights, title and interest in its Trapeza CDO VI, VII, IX, XI, XII and XIII Trups deals to Hildene Collateral Management Company. The assignments do not alter the responsibilities, duties and obligations of the collateral manager under the agreements.

Funds

Cerberus Capital Management has announced its final close for Cerberus Institutional Partners VI (CIP VI), raising US$4bn for its sixth flagship multi-strategy fund. CIP VI reached its hard cap with commitments from more than 150 investors globally and exceeded the initial fundraising target of US$3.5bn. This is the third fund that Cerberus has closed in 2017.

RAIT Management has rejected a proposal from Highland Capital Management for an affiliate of Highland to pursue an externalisation of management transaction with RAIT and serve as RAIT's external advisor (SCI passim).

Litigation

The CFPB is suing Ocwen Financial and its subsidiaries for "failing borrowers at every stage of the mortgage servicing process." The CFPB alleges "that Ocwen's years of widespread errors, shortcuts and runarounds cost some borrowers money and others their homes." The complaint has been filed in the federal district court for the Southern District of Florida and the CFPB seeks a court order requiring Ocwen to follow mortgage servicing law, provide relief for consumers and pay penalties. Many state financial regulators are also issuing cease-and-desist and license revocation orders against Ocwen for escrow management and licensing issues.

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