Contents

Capital Relief Trades

Basel 4 raises Dutch SRT prospects

Higher capital requirements mooted under Basel 4 are likely to disproportionately affect Dutch banks, given their large mortgage exposures. This is expected to result in a flurry of Dutch capital relief trades.

One industry source notes that a 90%-100% LTV currently results in a 43% risk weight for standardised banks, but the Basel 4 proposal contemplates increasing it to 55%. For IRB banks, which are affected by floors, it would result in a 70% capital floor, with a consequent 35% risk weight. This would significantly impact Dutch banks, which hold mortgages with high LTVs of above 100%.

Under such a scenario, lenders are concerned that risk weights would double compared to current IRB risk weights. For this reason, Rob Koning, the head of the Dutch Securitisation Association, believes that the future could bring a flurry of Dutch mortgage significant risk transfer deals.

For Ian Bell, the head of the PCS secretariat, the problem with Basel 4 is non-neutrality - the principle that stipulates higher capital requirements for securitised as opposed to non-securitised exposures - which results in higher capital requirements for the retained senior positions. "Once you have sold the mezzanine, the senior is considered a securitisation, which, in turn, gets charged with higher capital requirements. It doesn't make any sense at all, since the risk - whether it is securitised or not - is still the same risk."

Some in the market believe that synthetic securitisations can help reduce risk weights with less cost, since there is no need to sell all tranches, while investment activity with synthetics tends to be more consistent. The Dutch market, however, is dominated by true sale or balance sheet relief transactions, given their advantages in terms of improving the leverage ratio and decreasing balance sheet size.

Moreover, it is debatable whether synthetics can be eligible for improving the leverage ratio. The European Parliament states that if an asset is sold through a traditional securitisation, it can be excluded from leverage ratio calculations. Yet it remains unclear what counts as a 'traditional securitisation'.

Another way that potential challenges from Basel could be dealt with is through an STS designation for synthetic securitisations - a "genuine possibility", says Bell. The current market consensus is that amendments to Article 270 of the CRR can help solidify a future for STS synthetics, starting with an STS designation for synthetic SME assets, although he considers this as an optimistic scenario.

A better indication, he says, is the European Parliament's STS proposals from December 2016. "The proposals essentially put down a marker, saying that we are prepared to consider synthetics, but we will not accept arbitrage."

The document states: "Arbitrage synthetic securitisations shall not be part of an STS securitisation and shall not be considered to be STS, where the assets are not transferred to a SSPE through a true sale securitisation or retained on the balance sheet of the originator, as is the case in a balance sheet synthetic securitisation."

Yet, for one industry source, the Parliament's efforts on STS "throw the baby out with the bathwater", since legacy mortgages with an LTV greater than 100% cannot achieve the STS designation, even if they are prime mortgages.

Basel 4 negotiations remain riddled with uncertainty (SCI passim), with the main stumbling block appearing to be disagreements between the US and the EU over capital floors. The Basel Committee is pushing for the introduction of floors for credit risk parameters, such as exposure at default, probability of default and loss given default, in an effort to reduce variability over the calculation of RWAs.

US banks typically sell their mortgage loans to the GSEs, while European banks hold large exposures to mortgages. Consequently, higher capital floors would be detrimental for the latter but not the former.

If an agreement is not possible, several market participants believe that the EU will simply go its own way, allowing all assets to be grandfathered during a transitional period. This was the impression of several who attended a recent Dutch Securitisation Association conference.

"From talking to people at the conference, there is a sense that Europe will go its way if risk weights double, as Dutch banks believe they will," observes one source.

Koning expects to see a move away from securitisation as a funding tool, which will likely be restricted to smaller banks without access to ECB funding, while larger banks will use SRT in the long term. "In the short term, on the other hand, we will see more whole loan sales being used for capital management purposes," he concludes.

SP

Marketplace Lending

Multi-seller ABS approach to flourish

Marketplace loan ABS involving a multi-seller approach is expected to become more commonplace, due to the extra control that online lending platforms can exert over the securitisation process. Investors and loan sellers also benefit from a consistent securitisation programme, but a degree of expertise is required to handle the greater complexity involved in executing such transactions effectively.

Marlette Funding recently priced Marlette Funding Trust 2017-1, a US$304.47m ABS backed by consumer loans originated through the firm's Best Egg platform (see SCI's primary issuance database). Unusually, the deal utilised a multi-seller approach, whereby loans that the platform had sold to seven loan buyers were sold back to Marlette and then securitised.

Marlette's hybrid lending model facilitated this process, whereby once the loans are sold back to Marlette, it then sells them to the issuance trust. Karan Mehta, head of capital markets at the platform, illustrates: "It's like a funnel, where loans are poured in from independent sellers, which are not linked in any way - although all the loans are originally applied for through the Best Egg platform and underwritten by Cross River."

In terms of closing the transaction, it is much like any other ABS, but the earlier stages are more novel. "On the day of closing the transaction, the loans are sold by the seller to the depositor, Marlette, and then transferred to the SPV. This happens in one day, but is preceded by weeks of behind-the-scenes work and there are many quite complex - but also very detailed - agreements made to ensure consistency in how the asset owners sell the loans back to Marlette."

Mehta adds that loan buyers have to be on the same page. "Many factors need to be pre-agreed and ironed out. There can't be a perception of unfairness between sellers and we value the long-term relationship with all our partners."

While the process adds complexity, it also provides benefits for both the platform and investors. Eric Neglia, senior director at KBRA, which rated the Marlette deal, comments that Marlette and its investors benefit from the transaction structure due to standardisation, a consistent message and greater control over the securitisation process. By bringing the securitisation process in house, Marlette can control aspects such as credit enhancement levels, ratings, structure and timing, as well as frequency of issuance - the last two factors being especially valuable in terms of creating a programmatic shelf.

Neglia adds that investors further benefit because they can "achieve economies of scale, by spreading fixed securitisation costs across larger deals and reducing execution risk through frequent and consistent programmatic issuance. Execution risk is reduced, as investors can become part of the regular programme and they're able to tap the market more easily. Investors are encouraged by such multi-seller deals going through successfully, particularly since they don't need to worry about competing with other issuers for deals from the same platform."

Prior to platforms structuring their own deals in this way, renting out securitisation capabilities was more common, such as through the Citi-sponsored Citi Held for Asset Issuance shelf, by which a number of platforms have securitised their loans. Bringing the transaction under one roof, however, is cheaper and more efficient, according to Mehta. He adds that the major benefit of transactions undertaken in this manner is controlling the message put out, establishing a long-term vision for the firm and reducing a fragmented approach, which is harder to manage for all parties.

Mehta agrees that while the final execution is familiar, the initial stages are more complex. "Multiple sellers and various details of each raises the complexity level - generally, there are more challenges in the front negotiation and back-end settlement too," he comments.

Despite this complexity, investors do not receive greater compensation because the final product looks like any other consumer loan or marketplace lending ABS from a risk perspective. Different loan sellers, however, have portfolios with different characteristics, so have to be appropriately compensated for the different collateral they sell.

Mehta stresses that some platforms underestimate the level of complexity involved and that sufficient expertise is therefore vital. These transactions also require time investment to build relationships with loan buyers.

For Marlette Funding Trust 2017-1, all of the loan sellers have established relationships with the lender, with "forward flow agreements" - whereby it sells a certain number of loans over a set timeframe. Mehta says that this is "a fundamental principal of these transactions."

Multi-seller deals are not limited by the number of loans or the number of sellers involved. Mehta concedes that greater size in either respect increases the complexity and Neglia concurs that the due diligence process is "labour intensive", which would only grow with more loans or loan sellers.

KBRA approaches multi-seller transactions in the same way as any other consumer loan ABS, but Neglia suggests the agency might favour the Marlette transaction more favourably over an ABS issued by an investor that doesn't have ongoing involvement in the platform. Marlette has ongoing involvement from the platform to the securitisation shelf and "alignment of interest with loan performance through the risk retention requirement."

He points out that a potential risk is that of "cherry picking", whereby loan buyers could sell off the loans with the higher risk characteristics and keep those with less risk. This is, however, avoided because all the whole loan buyers receive a random allocation of the originations from the Marlette platform.

Mehta says that overall multi-seller transactions, such as his firm's most recent issuance, are in the best interests of all parties involved and it stands to reason that further platforms will follow suit. Neglia concludes: "I think this will be the type of execution that we'll see going forward. I think we'll see less single-seller, whole loan buyer securitisations, similar to the CHAI and MPLT shelves. Platforms are looking to create more standardisation in their securitisation shelves and investors are looking for lower cost, consistent securitisation options."

RB

Secondary markets

Euro secondary boosted

The European securitisation secondary market has been boosted by the first round result in the French presidential election.

Trading activity picked up yesterday and the BWIC calendar is slowly growing albeit from very low recent levels. The elements of softness seen last week have reversed and secondary spreads across ABS/MBS and CLOs are flat to slightly tighter.

There are currently two BWICs on today's European schedule. Both are due at 14:30 London time.

One involves 37.698m original face from four PARGN triple-As - PARGN 12X A2B, PARGN 13X A2B, PARGN 14X A2A and PARGN 14X A2B. The other is a four line RMBS mix comprising: €2.5m CFHL 2015-2 D, €2m or €4m RMACS 2006-NS1X B1C, £500k WARW 1 E and £1m WARW 2 F.

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

Secondary markets

Euro secondary stifled

The hoped for boom in the European securitisation secondary market this week is being stifled.

Market sentiment remains very positive bolstered by the rally in wider markets, but sellers remain thin on the ground as most investors seek to retain current positions. Consequently, flows and BWIC volumes have eased as the week has progressed, but secondary spreads are holding firm across the board.

There are currently three BWICs on the European schedule for today. The largest of which is a £26.7m three line UK non-conforming list due at 15:00 London time and comprising: LMS 1 D, MARS4 4X E1C and MFD 2008-1 B2. None of the bonds has appeared on PriceABS in the past three months.

In addition, there are two single line item auctions - €3.2m of consumer ABS SCGC 2015-1 D at 15:00 and €5m of CLO OCI 2007-1X E at 15:30. Neither bond has covered with a price on PriceABS in the past three months.

Secondary markets

US CLOs still slow

The US CLO secondary market is still slow thanks to a combination of factors.

"So many bonds are trading at a premium that it makes trades difficult because it's hard for there to be a meeting of minds on value," says one trader. "Also, with so much of the market becoming callable everyone is expecting to be refi'd out of positions, which adds to the reluctance to participate."

At the same time, the trader adds: "Everyone is so busy on refis it's taking away focus from the rest of the market. We're now seeing a touch of weakness in refi mezz new issuance, but that's not translated into secondary where we continue to see what bonds there are in for the bid meet strong demand and very few DNTs."

That demand is underpinned by the lack of secondary supply in recent weeks along with the shortage of non-refi primary paper. "Expensive collateral is testing the arbitrage, which is proving a challenge for pure new issuance," the trader notes.

There are four BWICs on the US CLO calendar for today so far. The chunkiest is a six line $22.4m double-B list due at 10:30 New York time.

It consists of: BATLN 2015-8A D, CGMS 2014-1A E, FLAT 2013-1A D, OZLM 2015-11A D, OZLMF 2013-5A D and VENTR 2013-13A E. Four of the bonds have covered on PriceABS in the past three months, last doing so as follows: CGMS 2014-1A E at 96.26 on 19 April; FLAT 2013-1A D at 98.27 on 28 March; OZLMF 2013-5A D at 98.27 on 15 March; and VENTR 2013-13A E at 99H on 12 April.

ABS

Wireless spectrum auction 'ABS positive'

T-Mobile won the most number of licences in the US Federal Communication Commission's 600-megahertz spectrum auction earlier this month, spending US$8bn in the US$19.8bn auction. This win is credit positive for wireless tower ABS sponsored by American Tower Corporation, Crown Castle International and SBA Communications, says Moody's.

The rating agency believes T-Mobile will be prompted to spend more to upgrade or install new equipment at tower operators' sites. Such upgrades would increase revenue and cashflows available to ABS bonds.

The other major winners in the spectrum auction were Dish Network and Comcast. T-Mobile's average spend per licence was below the national average, suggesting that its spectrum acquisitions were mainly in smaller rural markets.

"Further build-out of spectrum will benefit tower operators because the incremental increase in revenue per tower arising from T-Mobile's deployment of the 600-megahertz spectrum can total US$500-US$800 a month. To install new equipment on the towers to handle the new frequency, T-Mobile will have to amend its existing leases with cell tower operators. This revenue growth from the deployment of new spectrum equals a monthly revenue increase of 9%-25% of the revenue from T-Mobile per tower," says Moody's.

Should T-Mobile be able to put the spectrum to use this year, tower operators could see revenues growing in late 2017, but would be expected to see the greatest benefit next year. However, Moody's notes that broadcasters have up to 39 months to transfer the spectrum to winning bidders, so the benefit to tower operators could actually be two to four years away.

SBA Communications has a bigger rural footprint and a larger exposure to T-Mobile than the other tower operators. It should therefore benefit the most from T-Mobile's spectrum deployment.

Cashflows in wireless tower ABS are highly concentrated among the four largest US wireless carriers. Securitisations typically have around 18% exposure to T-Mobile.

Moody's reports the greatest proportional exposure to T-Mobile is Crown Castle Series 2010-3, 2010-5, 2010-6, 2015-1 and 2015-2. The lowest exposure is American Tower Trust I Series 2013-1 and Series 2013-2, at 16.2%.

JL

ABS

Debut issuer brings unusual ILS

NMI Holdings has priced US$211.3m of 10-year mortgage insurance-linked notes. The ILS, Oaktown Re Series 2017-1, sponsored by NMI Holdings subsidiary National Mortgage Insurance Corporation (National MI), is being privately offered.

National MI will receive US$211.3m of fully collateralised excess of loss reinsurance protection, covering an existing portfolio of mortgage insurance policies written from 2013 through 2016. The ILS is expected to close on 2 May with three classes of notes.

The M1 class will be sized at US$98.616m. It will pay one-month Libor plus 225bp.

The M2 class will also be sized at US$98.616m. It will pay one-month Libor plus 400bp.

The B1 class will be sized at US$14.088m. It will pay one-month Libor plus 575bp.

Oaktown Re is National MI's first foray into the mortgage ILS market. In fact, the only previous sponsor of a mortgage ILS was AIG, through its United Guaranty subsidiary.

AIG has previously issued Bellemeade Re Series 2015-1 and Bellemeade Re II Series 2016-1. The first deal priced in August 2015 with the M1 and M2 notes respectively 25bp and 30bp wider than the latest Oaktown deal (SCI 7 August 2015). As with Oaktown Re, both Bellemeade transactions offered 10-year notes (see also SCI 10 May 2016), offering long protection by ILS standards.

National MI is a US-based private mortgage insurance company. It specialises in low down payment purchases with protection for lenders and investors against losses through borrower default.

A special purpose issuer has been established in Bermuda for the ILS. Aon Insurance Managers, which acted as the insurance manager for the Bellemeade deals, is understood to be once more filling that role for Oaktown Re.

JL

Structured Finance

Bill to repeal Dodd-Frank scrutinised

Hearings are scheduled for today on a draft bill published last week by House Republicans which would repeal much of the Dodd-Frank Act. The Financial CHOICE Act would repeal risk retention rules for CLOs and all other asset classes except residential mortgages and would also repeal Volcker Rule restrictions on banks owning the debt securities of CLOs that hold anything other than loans.

The LSTA notes that the Financial CHOICE Act's passage through both the financial services committee and full House are virtually assured. However, the bill's prospects in the Senate are somewhat dimmer.

While Republicans may well get the bill onto the House floor in the coming weeks, an Arnold & Porter Kaye Scholer memo notes that it is not yet clear whether this drive will be co-ordinated with the Trump administration. The Treasury department is currently completing its own study on financial regulatory reform.

"While we anticipate that the House of Representatives will pass some version of the Financial CHOICE Act in 2017, prospects in the Senate are much less clear. The Senate is more likely to pursue regulatory reform legislation that is more limited in scope than the Financial CHOICE Act. Also, the Senate being the Senate, such action probably will not be seen until 2018," says the law firm.

The CHOICE Act does not entirely repeal Dodd-Frank, but it does repeal several of its major provisions and substantially rewrites others. Among its other changes, it would: repeal restrictions on conflicts of interest in securitisations; ease regulation of mortgage lending; eliminate CFPB supervisory authority over banks and non-banks; revise derivatives regulation; and restructure organisations such as the CFPB, SEC, Federal Reserve, FDIC and FHFA.

"As with most legislative efforts during the 115th Congress, the true test of a bill's prospects will be in the Senate, where a narrower Republican majority combined with minority-friendly procedural rules give the Democrats a greater ability to obstruct or at least delay action. We expect many if not most Democratic Senators will fight attempts that they believe will weaken Dodd-Frank at both the committee level and on the Senate floor," says Arnold & Porter Kaye Scholer.

Perhaps with that in mind, Senate banking committee chairman Mike Crapo has requested more muted proposals. Crapo and committee ranking member Sherrod Brown canvassed public opinion in late March and the first half of this month and both the LSTA and Arnold & Porter Kaye Scholer suggest this more moderate approach stands a higher chance of achieving bipartisan consensus.

"It therefore remains to be seen how much of the Financial CHOICE Act might survive into a final bill, and indeed whether the effort might stall as a whole. [House financial services committee] chairman Hensarling is aware that some compromises will be necessary for the effort to ultimately succeed, and there may come a point at which Hensarling must decide whether such compromise is a price he wants to pay for a legislative victory," notes the law firm.

JL

Structured Finance

SCI Start the Week - 24 April

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

Pipeline
Additions to the pipeline were focused on ABS and RMBS last week, with the former dominating. Among these is a US$1bn-plus ABS and a C$2bn RMBS.

The ABS were: US$235.6m Ascentium Equipment Receivables 2017-1 Trust; US$900m Coinstar Funding Series 2017-1; US$996.58m Dell Equipment Finance Trust 2017-1; Ford Auto Securitization Trust 2017-R²; US$176m GoodGreen 2017-1; US$268.47m HERO Funding 2017-1; US$1.1bn MMAF Equipment Finance 2017-A; US$481.9m NextGear Floorplan Master Owner Trust Series 2017-1; A$882.4m SMART ABS Series 2017-1 Trust; and US$344.7m Thunderbolt Aircraft Lease.

The RMBS were C$2bn Bicentennial Trust, US$402.6m COLT Mortgage Loan Trust 2017-1, FCT ELIDE Compartiment 2017-02 and US$657.154m New Residential Mortgage Loan Trust 2017-2.

Pricings
There was another long list of prints, with the familiar weighting towards ABS and CLOs. There were nine of the former and seven of the latter, along with an ILS and a CMBS.

The ABS were: US$1.7bn American Express 2017-3; US$350m Discover Card Execution Note Trust 2017-A3; US$400m Discover Card Execution Note Trust 2017-A4; US$450m Exeter Automobile Receivables Trust 2017-2; US$300m First National Master Note Trust Series 2017-1; US$294m Global SC Finance IV Series 2017-1; US$600m Golden Credit Card Trust 2017-2; US$500m Hertz Fleet Lease Funding Series 2017-1; and US$1.998bn MBALT 2017-A.

US$425m Residential Reinsurance 2017-1 was the sole ILS. The CMBS was US$760m SBA Tower Trust 2017-1C.

The CLOs consisted of: US$2.113bn Antares CLO 2017-1; €246.5m Aurium CLO 2015-1R; €247.75m Cairn CLO 2014-4R; US$373.25m Cent CLO 2013-20R; US$382.43m Neuberger Berman CLO 2013-14R; US$514.6m Thayer Park CLO 2017-1; and US$345.5m York CLO 2014-1R.

Editor's picks
Tranched cover trades gaining traction: Tranched cover synthetic securitisation issuance is picking up in Europe, as regulatory capital requirements bite. The advantages of such non-standard structures include their limited ongoing costs, as well as their flexibility and bilateral nature...
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...
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...
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...

Deal news
• Antares Capital Advisers is in the market with its first 2.0 CLO transaction, Antares CLO 2017-1, 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.
• 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.
• 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.

Regulatory update
• 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.

Structured Finance

SFR composition trends analysed

Fewer distressed buying opportunities for institutional investors in single-family rental houses has led to a shift of securitised properties from the southwest US to the southeast. A new Morningstar Credit Ratings analysis highlights that the composition of future issuance in the sector will depend on market-driven property acquisition and disposition strategies.

After peaking in 2014, fewer single-borrower SFR properties are being securitised, with Morningstar figures showing that securitised acquisitions dropped by 65.6% in 2016 compared with 2015. At the same time, the geographic make-up of recent securitised pools is concentrated in the broader southeast - including Florida and Texas - rather than in California, Nevada and Arizona.

"Property purchases in California, Arizona and Nevada were more prevalent in 2012-2013, while Texas, North Carolina, Tennessee and even Indiana had more institutional acquisitions from 2014 to 2015. Florida has been among the top states for acquisitions annually since 2012," Morningstar notes.

The agency suggests that this shift is due to lower acquisition costs and more attractive yields in the southeast.

House price appreciation has been substantial in many of the states where institutional investors have acquired properties. For example, since 2013, both California (at 44.3%) and Florida (39.7%) bested the national housing price index's increase of 31%.

While gross yields have fallen across the top 20 metropolitan statistical areas in single-borrower SFR deals, double-digit yields are still available in the MSAs that have seen more representation in recent securitised pools - Texas, Tennessee, Indiana and North Carolina. Atlanta and most Florida MSAs have sustained higher gross yields, although Fort Lauderdale and Orlando have dipped below 9%. In contrast, the gross yields in California MSAs are among the lowest.

Morningstar notes that gross yields imply that the gains in rents and home values have been more balanced in Texas and the broader southeast, thereby making them candidates for future investment opportunities. While California properties have experienced some of the highest rental increases among securitised SFR properties, the rental gains have been outpaced by the increases in property values to such a degree that the state "may no longer be a viable option for acquisitions".

A similar trend is seen based on net yield, where MSAs in Tennessee, Texas, North Carolina and Indiana are typically higher.

In terms of performance, the Phoenix, Las Vegas and California MSAs have some of the lowest average vacancies and highest year-over-year rent increases in single-family rentals, reflecting strong tenant demand. On the other hand, the Florida, Indiana, Tennessee and Texas MSAs have had higher-than-average vacancies, although Morningstar says they are within expectations.

Nevertheless, tenant demand in the southeast typically has been strong enough for issuers to raise rents, albeit the increases have been smaller than those in California, Arizona and Nevada. In its analysis, Morningstar compared the contractual monthly rent in each MSA to the property-level RentRange rent estimate. Typically, institutional investors can obtain higher rents than their property-level RentRange estimates - the most notable exceptions being the Florida MSAs of Sarasota-Bradenton-Venice and Fort Lauderdale.

"Contractual rents that are higher than their property-level RentRange estimates in markets such as Houston, Indianapolis and Memphis indicate that issuers may be willing to accept a higher-than-average level of vacancy in exchange for higher rents," the agency observes.

As securitisations reach their maturity dates, issuers may decide to refinance existing properties into new deals to borrow against HPA gains and so previously acquired California, Arizona and Nevada properties could still appear in future issuance. However, house price increases can also drive institutional investors to sell properties to monetise these gains. Properties sold in higher cost areas are unlikely to be replaced by properties in the same region because yield expectations changed over time.

"Property performance has been strongest in California, Arizona and Nevada - regions from which institutional investors may no longer be able to add assets," Morningstar concludes. "Vacancy metrics in securitised pools have benefited from properties in these high-demand regions and while performance in the broader southeast and Texas has been within Morningstar's expectations, if pools become more concentrated in these locations, overall vacancy may increase."

CS

Capital Relief Trades

Risk transfer round-up - 28 April

Deutsche Bank closed its CRAFT CLO 2017-1 this week (see SCI's capital relief trades database). The US$371m seven-year notes reference a US$5.3bn corporate loan portfolio and have a three-year call.

Sources also suggest that Nordea is prepping another risk transfer transaction. The Nordic issuer's last trade was an €8.4bn transaction with PGGM last year (SCI 25 August 2016).

At the same time, rumours are circulating of a Santander UK club deal, a Barclays corporate deal and a Spanish bank tapping the market.

Capital Relief Trades

First EFSI risk transfer boosts SME lending

The EIB Group has provided a mezzanine tranche guarantee of around €90m to Commerzbank in connection with the first deal under the European Fund for Strategic Investments (EFSI). Dubbed CoCo III-1, the risk transfer transaction references a €1.5bn portfolio of European corporate loans (see SCI's capital relief trades database).

The EFSI is the central pillar of the Investment Plan for Europe (also known as the Juncker plan, after European Commission president Jean Claude Juncker), in which the EIB Group and the European Commission are strategic partners. The initiative is an ambitious infrastructure and SME investment programme that aims to unlock public and private investments in the real economy of around €315bn over a period of three years.

The CoCo transaction therefore aims to release regulatory capital that will, in turn, enable Commerzbank to provide further lending of several hundred million euros to SMEs and mid-caps mainly in Germany. The threshold and senior piece were retained, with the former being equal to the accumulated expected loss of the portfolio.

According to George Passaris, head of securitisation at the EIF, the structure of the guarantee capitalises on EIB Group synergies. Under the guarantee, the EIF takes on the mezzanine risk of the tranched covered synthetic securitisation, while the EIB provides a back-to-back guarantee to the EIF that fully mirrors the fund's obligations under the guarantee.

"The most efficient way was to allow the EIF to face the securitisation market, given [its] experience," Passaris states. There is also a separate agreement between the EIB and Commerzbank, consisting of a contractual obligation whereby the German lender has to comply with the requirements under the EFSI programme.

Passaris says that unfunded securitisations, such as tranched covered deals, can provide an efficient way to release capital, given the EIF's multilateral development institution status and triple-A rating. This allows issuers to acquire zero risk weights for mezzanine guarantees.

Gauging the impact of the transaction is difficult, given that it is the first of its kind under the Juncker plan. However, industry sources state that if there is a positive impact in terms of RWA reduction and SME lending, they expect to see further such issuance emerge.

SP

CLOs

CLO refinancing capacity gauged

New issue CLO spread tightening is expected to remain a key contributor to refinancing activity across the sector. US$50bn-US$60bn refinancing capacity remains for US CLOs under the SEC no-action letter (SCI 21 July 2015), according to Wells Fargo figures.

The no-action letter limits eligible refis to CLOs within four years of issuance that were issued before 24 December 2014. Wells Fargo structured products analysts estimate that US$165bn in deals fit the eligibility requirements, of which US$91bn (or 55%) have already been refinanced or reset, as of end-1Q17. Of the US$74bn in eligible but not yet refinanced or reset CLOs (150 deals), 40% is from the 2013 vintage and 60% from the 2014 vintage.

The analysts suggest that 123 of the remaining refi-eligible CLOs have triple-A coupons that are 'in the money' relative to the median triple-A refi level in March/April (115bp). Of these deals, 109 have triple-A coupons that are above 125bp.

"If all 123 deals were refinanced, an additional US$60bn in refinancing would price. If only 109 deals were refinanced, an additional US$54bn in refis would price," they observe.

Adjusting for reinvestment period, the count of refi-eligible CLOs with 'in-the-money' triple-A coupons relative to their same-length refinanced peers increases to 143 deals, representing US$70bn in volume. Of these, 133 have current triple-A coupons that are more than 10% above those of their refinanced peers, according to Wells Fargo figures.

Of the total 2013 vintage issued, approximately 19% has been refinanced and 15% has been reset, while 57% of total 2014 vintage issued has been refinanced and only 5% reset. By 2018, however, all 2013-vintage deals will be outside of four years of issuance and will be ineligible for retention-free refinancing.

"We estimate that the current US$74bn in eligible CLOs will shrink by roughly half, to US$35bn, by Q218. Between US$8bn-US$17bn in deals lose eligibility each quarter until year-end 2018 as they pass their fourth birthday," the analysts note.

They suggest that 41 2013-vintage CLOs (from 39 managers) are now ineligible to refinance without risk retention. Roughly half of the deals had low triple-A coupons that are already close to the median triple-A refi coupon level.

Moody's notes that 68 US managers have refinanced at least one transaction since 1 January 2016, with the most active refinancing managers being CIFC Asset Management, Carlyle Investment Management and GSO/Blackstone Debt Funds Management - each of which led with seven to nine refinancings. For the 127 US CLO refinancings that closed between 1 January 2016 and 14 April 2017, the agency calculates that a majority of them resulted in cost savings of 10bp-30bp at the triple-A level.

Of these refinancings, 112 related to CLOs without coupon step-up features and produced an average cost savings of 24.5bp on the triple-A notes, with a range of 7bp-53bp. For the 15 deals that refinanced to avoid coupon step-ups, the average cost savings post-refinancing was 35bp, with a range of 8bp-61bp.

Triple-A US CLO spreads tightened by about 20bp to around 145bp from May to December 2016 and have narrowed further to below 120bp for some recently priced new issues (see SCI's primary issuance database).

CS

CMBS

Special servicing books creep down

The three largest legacy special servicers - C-III Asset Management, CWCapital Asset Management and LNR Partners - accounted for 86% of US CMBS special servicing resolutions last year, according to Fitch. In a review of its rated CMBS, the agency notes that these servicers represented 82% of the active special servicing segment at year-end 2016.

Relative to active special servicing portfolios at year-end 2015, these three special servicers resolved almost two-thirds of their servicing book during 2016 on average (excluding transfers into special servicing during the year). Including inbound transfers, portfolio turnover totalled 38% and specially serviced assets declined by 3% on a net basis.

REO liquidations represented the plurality (43%) of all special servicing dispositions last year and had the lowest average recovery (48%) and longest average time in special servicing (45.6 months). Fitch continues to highlight aged REO assets as a concern, given the correlation of higher losses with protracted resolutions.

The next largest subset of resolutions was loans that paid in full. Unsurprisingly, transactions securitised in 2006 made up the bulk of resolutions in Fitch's analysis (45% of all resolutions) and accounted for 69% of loans that paid in full during 2016. Generally, these loans were in special servicing for an average of 5.8 months - mainly to secure refinancing - and had a minimal average loss severity (1%), usually to reflect special servicing fees.

Fitch expects maturity defaults to continue through the summer as legacy CMBS transactions mature. However, going forward, maturity-related defaults are likely to take longer to resolve, given adverse selection among the remaining assets.

Among core commercial real estate property types, office, followed by retail and hotel properties had the lowest average recoveries. However, hotel properties spent the longest time in special servicing.

For office and retail properties, the driver of losses was REO liquidations, representing 51% and 41% of all office and retail resolutions respectively, with average recoveries of 36% and 50% respectively. Hotel properties saw the highest ratio of REO liquidations (61%), but achieved better average recoveries of 68% for REO liquidations. On average, REO office, retail and hotel assets spent 46 months in special servicing, according to Fitch.

The agency's data set comprised 561 specially serviced CMBS loans resolved from 1 January to 31 December 2016. Fitch's recovery calculation is based on the unpaid balance at transfer into special servicing, as it believes it is a better measure of special servicer recoveries than the original securitised balance.

CS

CMBS

Mall refi prospects mixed

While many CMBS loans on regional malls are expected to struggle to refinance at maturity, Morningstar Credit Ratings has identified three such loans maturing this year which should be able to refinance successfully. These are the West Town Mall, Westfield Southlake and North Hills Mall loans securitised in MSC 2007-IQ16, LBUBS 2008-C1 and JPMCC 2007-CB20 respectively.

Loans which amortise over their loan terms have a clear advantage over interest-only mortgages due to the higher debt yields. Malls with a dominant position in their markets are also typically better able to consolidate gains.

Several major retailers, including Sears, Macy's and JC Penney have announced significant store closures recently (SCI passim), with 20 mall-backed loans transferred to special servicing since 2016 (see SCI's CMBS loan events database). These developments have made lenders increasingly wary of the property type, leaving CMBS investors to bear the risk of large losses.

"Lax underwriting standards of the 2006 and 2007 vintages left many malls that were otherwise performing in the hands of CMBS trusts as a result of their high leverage. As the maturity wave culminates in 2017, decline of CMBS issuance from 2008 through 2010 likely means that we will likely see a smaller number of defaults. However, many loans in the 2012 and 2013 vintages are backed by regional malls, many of which are in secondary and tertiary markets," says Morningstar.

Term defaults are unlikely so long as properties generate positive cashflow. However, if cashflow at malls continues to decline, borrowers may well choose to not invest resources to cover debt service shortfalls.

Lower-quality assets continue to lose tenants and cashflow, although many higher-quality malls continue to perform well. Simon Property Group reports mall occupancy of 96.8%, while mall owners such as CBL or Washington Prime Group have divested lower-quality malls from their portfolios so as to focus on their better properties.

The West Town Mall secures a US$210m loan in MSC 2007-IQ16 which matures in December. The loan was issued with a 9% debt yield and 62.7% LTV and these metrics have improved over time, while cashflow has increased from US$18.9m in 2007 to US$22.5m in 2016.

The mall has five anchors, including a Sears and a JC Penney, each of which have been spared those firms' mass shutterings. Morningstar classifies the mall as Class B. The mall appears to have flourished at the expense of the neighbouring Knoxville Center Mall, which was spun off by Simon Property Group into Washington Prime and then sold, although it does not back a securitised loan.

The Westfield Southlake mall backs a US$140m loan in LBUBS 2008-C1 which matures next January. It is the only enclosed regional mall in Northwest Indiana and just like West Town Mall it counts Sears and JC Penney - as well as Macy's - among its anchors, with those stores all scheduled to remain open.

"The loan is a likely payoff candidate largely thanks to the low leverage at issuance and the steady performance of the collateral. Although the loan structure included a full interest-only term, the 12.1% debt yield at issuance and the 50.7% LTV allow for some cushion should cash flow decrease," says Morningstar.

The agency adds: "While the property's 2016 net cash flow of US$16.9m has not increased from its issuance level, we estimate that the 12% debt yield today should be adequate for the borrower to obtain refinancing. Also, despite a drop in cash flow in 2009 and 2010 during the recession, the reported occupancy never dipped below 96%, and cash flow returned to US$16.7m in 2012."

Meanwhile the North Hills Mall backs a US$141.2m loan in JPMCC 2007-CB20 which matures in July. The loan has a 6.8% debt yield and an LTV greater than 100%. These metrics are somewhat worrying, but there are mitigating factors.

The property is part of a large development by Kane Realty, including multifamily housing, and the borrower is unlikely to allow the retail element of the complex to default. Kane continues construction at a rapid pace and has plans for significant construction this year which will include a two-tower mixed-use project with Class A office space and a hotel.

Kane sold a 50% stake in the mall in 2014 to a JPMorgan Investment Management affiliate for US$131m. Even if the value is lower today, Morningstar believes Kane and JPMorgan would seek to hold onto the property as it produces consistently strong cashflow of US$9m-US$10m annually.

"The regional mall industry is experiencing a seismic shift, as owners of larger Class A malls invest in their properties, while Class B malls struggle to find their place amid a changing retail landscape. Some owners will have difficulty obtaining financing for the weaker malls in their portfolios with declining sales and occupancy," concludes Morningstar.

"However, loans that amortise over their terms have a higher likelihood of paying off at maturity, as do those backed by malls that are dominant in their market and those that enjoy stable occupancy. While recent news has focused on the downturn of the mall industry and the uptick in regional malls that have defaulted on their loans, the industry remains a core component of the commercial real estate sector."

JL

NPLs

Cypriot securitisation bill pending

A new Cypriot securitisation framework is currently pending parliamentary approval. The bill is expected to address the restricted scope of eligible investors in the country's non-performing loan market.

Current Cypriot securitisation legislation - the 'Purchase and Sale of Credit Facilities and Relevant Matters Law of 2015' - is "restricted in both scope and application", according to Thomas Keane, partner at Keane Vgenopoulou & Associates. In particular, eligible purchasers are confined to licensed credit institutions within Cyprus or other EU member states. The new law is expected to have a wider scope that will include private equity firms.

Should the bill pass into law, credit institutions would be able to transfer loans from their portfolios to corporate entities exclusively set up for this purpose. Such entities will, in turn, issue securities or bonds to investors, using the loans as collateral.

Although an existing concept in Cypriot law, securitisation has yet to attain a statutory definition applicable across all contexts, says Anastasios Antoniou, advocate at Antoniou McCollum & Co. Whether securitisation needs legal enactment is disputed, however. Keane observes: "Cyprus, like other common law jurisdictions, has principles which are well established and are the bedrock of securitisation."

The country's insolvency framework was also enacted in 2015. The legislation deals largely with the winding-up and examinership of companies.

"Although offering useful tools to enhance economic distress and facilitate the performance of previously non-performing loans, it hasn't sufficed to drastically resolve the NPL problem," Antoniou observes.

NPLs account for €23.7bn, approximately 47% of total loans in the Cypriot economy, according to March 2017 official data. However, the NPE ratio has been improving (SCI 31 March). 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.

SP

RMBS

Ocwen actions could hit related RMBS

The recent court actions against Ocwen Financial Corporation (SCI 21 April) are credit negative for the firm and could also negatively affect related RMBS, Moody's suggests. If the consequences of the legal actions are severe enough, the ratings agency says, they could impact Ocwen's ability to adequately service a number of loans that back several RMBS transactions.

Moody's has placed Ocwen and Altisource Solutions' ratings on review for downgrade and Ocwen Loan Servicing and its associated subsidiaries on review for downgrade. Fitch has also placed the firm's ratings on watch negative, and has revised its rating outlook for Ocwen Loan Servicing ratings from stable to negative.

Last week the North Carolina Commissioner of Banks and 21 other US states filed cease-and-desist orders against Ocwen Financial Corporation for improper handling of consumer escrow accounts. Separately, the US CFPB and the State of Florida have sued Ocwen for allegedly faulty mortgage servicing practices, which could expose Ocwen to potential monetary penalties and business restrictions that could affect the firm's financial stability.

Moody's suggests that Ocwen's financial strength may be weakened by the cease-and-desist orders because they restrict the firm's business activities. This includes prohibiting the acquisition of new mortgage servicing rights and origination of new loans serviced by Ocwen, until the firm can prove its escrow accounts are properly managed and reconciled. The states of South Dakota and Montana have gone further in requesting Ocwen cease foreclosures there, while Massachusetts has directed Ocwen to transfer the servicing of its loans in that state to other servicers.

Furthermore, the CFPB and Florida suits could result in monetary liabilities for consumer relief and increased costs related to monitoring and complying with mortgage servicing law. If these factors result in foreclosure delays or servicing transfers, it will be credit negative for private-label RMBS that contain loans Ocwen services.

Moody's suggests that foreclosure delays harm bondholders because servicers make additional advances of delinquent principal and interest and will accrue legal and property-related expenses, which will reduce overall cash to the securitisation trusts. Servicing transfers can delay cashflows backed by the serviced loans and increase the potential for error and servicing disruptions as loan files are transferred from one servicer to another.

Fitch comments that it does not expect any rating revisions on outstanding related RMBS and says that the risk of Ocwen experiencing financial stress is higher than the risk of a servicing disruption. Additionally, many Ocwen-serviced transactions benefit from a master servicer, which should help mitigate the risk of a servicing disruption in most scenarios.

RB

RMBS

GSE CRT value explored

High-LTV GSE credit risk transfer (CRT) deals differ from low-LTV ones in more ways than just LTV ratio. While controlling for these differences shows worse delinquencies for high-LTV deals, loss severities are actually better, and therefore high-LTV CRTs could provide compelling opportunities for spread pickup.

When Fannie Mae and Freddie Mac launched their CRT programmes in 2013, reference pools consisted only of mortgages with LTVs of 60%-80%, but both GSEs introduced high-LTV programmes shortly thereafter. Low-LTV deals continue to account for the majority of GSE CRT issuance, but high-LTV deals, with LTVs of 80% or more, now account for a third of total origination volume, note Morgan Stanley analysts.

The analysts report a 10bp-20bp gap between last cashflow tranches for low-LTV and high-LTV deals. That basis had disappeared in 2016, but has re-emerged this year.

Low-LTV and high-LTV deals are separated by more than just LTV. Only 2% of loans in CAS and STACR pools that are referenced in high-LTV pools have a FICO score below 660, but in low-LTV pools the level is around 50% higher. Low-LTV deals also have a 20% larger exposure to borrowers with FICOs above 780, exhibiting greater barbelling.

Around 24% of low-LTV STACR loans and 17% of low-LTV CAS loans have debt-to-income ratios in excess of 43%. That share falls three or four percentage points in both programmes' high-LTV deals.

High-LTV deals also have far less jumbo conforming paper. Low-LTV deals contain around three times as many mortgages with a balance over US$500,000.

Controlling for DTI, high-LTV borrowers fall delinquent at faster rates than low-LTV borrowers and that gap grows as loans age. The performance basis also gets wider as we move further down the credit quality spectrum, although high-LTV deals have less exposure to these borrowers.

Both LTV cohorts have robust cure rates, so falling delinquent is not terminal for a loan's prospects. Realised loss severities are actually better for high-LTV loans than for low-LTVs.

Since the first actual loss STACR was issued in 2015 (SCI 8 April 2015), low-LTV STACR deals have liquidated 46 mortgages. The weighted average severity has been 24.8%, although around a third of each of these losses can be attributed to costs such as taxes, insurance and legal costs, rather than simply the loss on sale of the property.

"If we were to just look at the net sale proceeds versus the balance of the liquidated mortgage, loss severities on the same 46 low LTV mortgages would be 17.7%. If we look at the 30 high-LTV mortgages that have been liquidated since the first actual loss deal in that programme in September 2015, despite their LTVs liquidation severities are actually lower, at 17.5%. Once we take into account the mortgage insurance credit, weighted average realised loss severities to the deals have been a paltry 6.1%," say the Morgan Stanley analysts.

Therefore while high-LTV deals might be experiencing higher levels of defaults than their low-LTV peers, the loss given default has been far more benign. Considering the spread differential that has developed recently, and the trends seen in loss severities, the analysts recommend leaning in favour of high-LTV deals as long as this basis persists.

JL

RMBS

Second SCRT 'worse credit quality'

Freddie Mac is in the market with a securitisation of re-performing residential mortgage loans, its second RPL credit risk transfer deal. Moody's notes that the pay history of the transaction is worse than its predecessor (SCI 16 December 2016).

Moody's has rated the US$30.665m subordinate M1 class of Freddie Mac Seasoned Credit Risk Transfer Trust Series 2017-1 (SCRT 2017-1) at Ba3. For the previous SCRT 2016-1 deal, Moody's rated the M1 class at Baa1 and the M2 at B2. It has not rated the US$47.4m M2 class this time.

DBRS has rated the M1 class at double-B high and the M2 class at single-B. The other classes are unrated. Freddie Mac will guarantee the timely interest and ultimate payments to classes HA, HB, MA and MB.

The loans are divided into two groups: Group H and Group M. They have all been previously modified either under GSE HAMP or GSE non-HAMP modification programmes, but have been current for at least the prior 12 months before securitisation.

Group H consists of 3,620 first lien mortgage loans that were subject to step rate modifications and have a weighted average FICO of 695 and current LTV of 86%. The total unpaid principal balance of the loans is US$952m.

Group M consists of 741 first lien mortgage loans that were subject to fixed rate modifications and have a weighted average FICO of 669 and current LTV of 99%. The total unpaid principal balance of the loans is US$163m.

Moody's expects losses of 9.5% on the Group H loans and 11% on the M loans. Only 40.1% of the Group M loans and 83.4% of the Group H loans have been current for 36 months, whereas in Freddie Mac's previous SCRT deal every loan in the H and M groups had been current for at least 36 months at the time of securitisation.

DBRS notes that the rep and warranty framework of SCRT 2017-1 is stronger than it had been for 2016-1. However, the rating agency believes the framework remains weak. The newer framework includes a 36-month sunset, as opposed to 12 months for the previous deal without a rep and warranty reserve account, substantial knowledge qualifiers and fewer mortgage loan representations relative to DBRS criteria for seasoned pools.

JL

RMBS

Specialist lenders driving UK RMBS

The UK has accounted for an outsized share of the European RMBS market in 2016 and 2017 year to date, relative to 2014 and 2015 volumes. However, the spike in issuance has largely been driven by specialist lenders (SCI passim) and this seems set to continue, due to the success of the Term Funding Scheme (TFS).

Net mortgage lending continues from UK monetary financial institutions (MFIs), providing a good source of collateral for potential securitised issuance. However, JPMorgan international securitisation analysts suggest that traditional issuers will continue to utilise cheap central bank funding - through schemes like the FLS and TFS - utilising the securitisation market more for relationship management than for funding needs.

The recent UK buy-to-let RMBS from Charter Court Financial Services, Precise Mortgage Funding 2017-1B, is the first scheduled issuance of the year from a TFS-eligible issuer. In 2014 and 2015, 60%-65% of UK RMBS came from traditional issuers; this fell to 31% in 2016 (including 16% in 2H16), with just €1.5bn issued by banks and building societies across three transactions.

In the last seven months since the TFS has been operative, £55.6bn of loans have been disbursed under the scheme to eligible institutions, with the TFS has having much more success than the Bank of England's FLS. Indeed, the continued healthy pace of engagement with TFS is suggestive of eligible lenders' preference to obtain cheaper TFS funding, largely leaving RMBS as a funding tool for TFS-ineligible specialist lenders.

The analysts suggest therefore that Charter Court's RMBS is more likely a transaction to access a loyal RMBS investor base, rather than an indication of a trend for similar issuance from other TFS-eligible originators.

While the overall trend in UK mortgage lending has been modestly positive in the post-Brexit period, buy-to-let origination activity has experienced a sustained decline since the increased stamp duty came into effect in 2Q16. The balance of new BTL advances fell by nearly 45% in 2Q16 to £7.7bn, rising slightly in 2H16, to an average of £8.6bn per quarter.

BTL advances as a proportion of total advances has therefore now fallen to 13%-14% since 2Q16 - a level last seen in late 2014. The analysts suggest that new BTL lending will remain constrained going forward.

Homeownership in the UK has also fallen, with an increasing number of prospective buyers pushed to rent due to lack of affordability. As a result, the UK homeownership rate fell to 62.9% in 2015-2016. This marks a 7.7% decline since 2005 (its lowest level since 1985), with London most acute, falling 11% since 2005 to 49.3%.

Simultaneously, the proportion of households that own a home outright has risen to nearly 34%. The decline in overall homeownership rate is therefore due to a lower proportion of buyers purchasing a house with a mortgage, falling to 29% from more than 40% in 2005.

RB

RMBS

Mortgage market model outlined

The Mortgage Bankers Association has released a whitepaper on GSE reform that outlines its vision for an 'end state' model that fulfills what it describes as an affordable housing/duty-to-serve mission. The report also attempts to shed light on two areas that the association says have tested past reform efforts - the appropriate transition to the reformed system and the role of the secondary market in advancing an affordable housing strategy.

"This paper not only lays out a detailed end state solution that will work for the residential and multifamily markets, but also the transition steps to accomplish this goal," comments Rodrigo Lopez, executive chairman of NorthMarq Capital and chairman of the MBA. While the association concedes that progress has been made during conservatorship, it says that only Congress has the power to ensure lasting reform.

The paper is the product of over a year's work by the MBA's task force for a future secondary mortgage market. In assessing the trade-offs of various approaches it considered, the group notes that several core principles emerged as critical to ensuring the long-term health of the secondary mortgage market.

"We believe that all GSE reform options should be evaluated and measured against these core principles. Working from these principles, MBA's proposal is for a new government-guaranteed secondary market 'end state' that would advance [a number of] critical policy objectives," the whitepaper states.

Together with maintaining the liquidity and stability of the primary and secondary mortgage markets, these principles include replacing the implied government guarantee of Fannie Mae and Freddie Mac with an explicit guarantee at the MBS level only, supported by a federally-backed Mortgage Insurance Fund with appropriately priced premiums. They also call for the protection of taxpayers by putting more private capital at risk through expanded front- and back-end credit enhancements, as well as increasing competition by allowing the regulator of the new system to charter multiple new privately-owned utilities (monoline 'guarantors') to provide for the securitisation of eligible single-family and multifamily MBS (including re-chartered Fannie Mae and Freddie Mac).

Specifically, firms would be able to apply for a guarantor charter that authorises them to serve the single-family or multifamily market or both markets. Guarantor activities would include: the acquisition of loans through cash-window, multifamily financing and MBS executions; the issuance of a single MBS through the Common Securitization Platform, which would operate as a self-funded government corporation; and holding a limited mortgage portfolio intended only for aggregation prior to MBS issuance from cash-window operations, for delinquent loan buyouts and loss mitigation, and for limited multifamily purposes. Guarantor activities will need to comply with rules establishing a bright line separating the primary and secondary markets.

Finally, guarantors would compete primarily on operations/systems development, customer service, product parameters and innovation, and pricing/execution. Additional private capital would arise from rigorous capital requirements for guarantors that could be satisfied through a combination of their own capital and credit risk transfer.

The approach also envisages a clear set of market conduct rules and prudential requirements, and should ensure that mortgage lenders of all sizes and business models have equal access to the secondary market and that the needs of the full continuum of households are met. Disruption is expected to be minimised during the transition to the new system by preserving what works in the current system and utilising the existing regulatory framework where appropriate.

Once Congress enacts legislation, the transition process - as outlined in the whitepaper - would consist of three phases. Phase 1 would involve preparation planning, regulations, the creation of the Mortgage Insurance Fund, technology readiness and acceptance of new entrant applications.

Phase 2 would encompass winding down the GSEs and transferring their assets, chartering of the new guarantors; issuance of MBS backed by the MIF and the build-up of guarantors' capital base. Phase 3 envisages the government selling its interests in the guarantors to private investors, as well as the continued regulation and operation of guarantors under new framework.

This latest paper is a follow-up to 'GSE Reform: Principles and Guardrails', which the MBA released in January (SCI 14 February).

CS

Structured Finance

European hot spots highlighted

CLOs and RMBS are seen as the main growth areas in the European securitisation market at present. Drivers include a broadening of the investor base for the former and continued bank deleveraging for the latter.

AFME data for 1Q17 shows that pan-European CLOs led placed European securitisation issuance, followed by UK RMBS and Dutch RMBS. Volumes across these sectors totalled €5.8bn, €2.5bn and €2.1bn respectively last quarter.

One law firm that is ramping up its securitisation presence in Europe is Dentons, which has boosted its teams with a number of hires recently (SCI 17 March) in response to the market's growth. Edward Hickman, partner at the firm, confirms that it is capitalising on growing RMBS activity - particularly in the UK, where it has advised on the UK's first non-performing RMBS since the financial crisis and a recent Skipton RMBS. Elsewhere, the firm advised on Bluestep's recent Swedish RMBS and is advising on the Grand Canal Securities Irish RMBS.

Less traditional real estate portfolios are a particularly fertile area. "We see continued growth in non-conforming and non-performing RMBS and expect to see more, especially in Europe. US RMBS is also growing and there is a lot of focus this side of the Atlantic on US risk retention, and our expertise is being sought on interesting US and European risk retention-compliant structures," Hickman says.

Bank deleveraging is driving NPL securitisation and investors also want to buy loan portfolios, some with distressed assets, and refinance these through the RMBS or CMBS markets. Some buyers are adopting an innovative approach, whereby portfolios are split into performing and non-performing assets, with the performing portion securitised before the NPL portion is securitised.

From a legal perspective, NPLs can be problematic, according to Hickman. "These NPL transactions require a lot of due diligence, and multi-jurisdictional portfolios can prove challenging, with different regulations in each country - which can take a great deal of time."

Furthermore, while investing in distressed assets has yield benefits, the negatives must also be weighed. "Investors in distressed assets can find more yield, but there is greater uncertainty regarding timing and quantum of payments. And the servicing proposition becomes increasingly important for NPL portfolio acquisitions, taking into account local knowledge and local regulatory requirements. Several of the large portfolio buyers have their own captive servicers," comments Hickman.

Meanwhile, Martin Sharkey, partner, joined Dentons from Clifford Chance last year as it continued to expand its CLO practice. European CLO activity may have been dampened by "arbitrage economics" this year, but he believes there is a desire from managers to issue, along with matching investor appetite. He adds that the investor base has widened, with less dependence on Japanese investors and more equity investors entering the market.

Indeed, the buoyant European investor base has influenced the number of CLOs issued with a dual compliant risk retention structure. Sharkey says that while vertical risk retention is naturally dual compliant, many European CLOs utilise a horizontal structure because "the investor base is broad enough not to need US investors at the moment."

Equity investor interest remains, despite increased tightening across the capital stack. Sharkey comments: "Pricing on the debt tranches of CLOs has significantly tightened; for example, a recent Spire deal was about 90bp on the triple-As [see SCI's primary issuance database]. The mezz piece has also come in and despite repricings on the underlying assets, CLOs are still attractive to equity investors. They look at a four- to six-year reinvestment period timeframe and there's plenty of space for assets to price up again in that window."

He adds: "CLO issuance naturally ebbs and flows as it moves with the leveraged loan market and investor appetite, but there has been a plethora of refinancings and resets recently and I'm optimistic that new issuance volumes will pick up later this year as they did last year."

In terms of future growth areas, Hickman expects activity to continue in the residential and commercial mortgage loan markets in Central Europe and suggests that there may also be issuance in more esoteric sectors. He concludes: "We're seeing more European appetite on solar and wind renewable deals. We're also working with a UK firm looking to reinsure insurance risk through the capital markets."

RB

Structured Finance

Job swaps round-up - 28 April

EMEA

Ashurst has promoted Alex Biles and Malcolm Charles to its partnership in London. Biles advises on a broad range of debt capital market products, including structured finance. Charles is a member of the firm's corporate trust and agency practice, advising on securitisations.

Tikehau Capital has appointed Peter Cirenza as head of its London operations. His new role is aimed at broadening the company's global leadership team and he will be responsible for helping develop the firm's private asset strategies. He will be running the London operations alongside chairman Peter Levene and he was previously a teaching fellow at the London School of Economics.

Tyron Eng has joined Nomura as an executive director and European ABS trader. He was previously a securitised products portfolio manager at BTG's global emerging markets and macro fund, where he was responsible for the European CLO book.

Fieldfisher has hired Dougall Molson as partner to its structured finance team in London, starting 1 May 2017. He joins from Freshfields Bruckhaus Deringer, where he was a partner in the finance group.

White & Case has expanded its global capital markets practice with the addition of structured finance lawyer Chris McGarry as a new partner in London. McGarry joins White & Case from Ropes & Gray, where he was a partner.

Hermes Investment Management has hired Andrew Jackson as head of fixed income, reporting to Eion Murray, head of investment and will be based in London. Jackson joins from Cairn Capital, where he was cio, head of the investment committee and senior member of the executive management committee.

Timothy Cleary and Terry Yang have been promoted to partner at Clifford Chance, based in London and Hong Kong respectively. Both lawyers work in the firm's structured finance and derivatives team.

BlueMountain Capital Management has hired Rollo Wigan as client advisor in the firm's London office, where he will support ongoing client and business development activities for BlueMountain across EMEA. He joins from Eisenstat Capital Partners, where he was md.

Clayton Euro Risk has appointed Maurice Wijmans to the new role of senior manager, business development for the Netherlands, based in the Hague and reporting to Simon Collingridge, Clayton Euro Risk's strategic delivery director. Wijmans has over 25 years' experience in the Dutch mortgage market and most recently was director of shipping and intermodal at NIBC.

North America

Blue Capital Management has appointed Michael McGuire as ceo, replacing Adam Szakmary, who has resigned. McGuire has been a director of Blue Capital Management and chairman of Blue Capital Reinsurance Holdings since August 2015, as well as cfo of Endurance Specialty Holdings since January 2006. He will continue to serve as cfo of Endurance.

CDO manager transfer

Vertical Capital has assigned its rights and obligations as portfolio manager for Vertical ABS CDO 2005-1 to Dock Street Capital Management. Moody's confirms that the move will not negatively impact the ratings on any of the notes.

Funds

Kempen Capital Management has launched a pool of long-only structured credit funds. Dubbed the Diversified Structured Credit Pool (DSCP), it enables investors to access structured credit products from GoldenTree, LibreMax and One William Street. The DSCP is targeting a net return of 4%-6% and will invest in a mix of investment and sub-investment grade bonds, with interest rate duration of 2-3 years, with allocation of 80%-85% US and 15-20% Europe. It will also invest across RMBS, CMBS, ABS and CLOs.

Litigation

Jesse Litvak, a former Jefferies RMBS trader, has been jailed for two years and fined US$2m for fraudulent RMBS trades. His imprisonment will be followed by three years of supervised release. The case, brought by the District of Connecticut with the help of SIGTARP and the FBI, finds Litvak guilty of lying in 76 trades to 35 victims, resulting in US$6m in unearned profits for Jefferies.

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