Contents

CLOs

Equity holds the cards amid heavy refinancings

While buoying European CLO deal volumes, refinancings and resets are not always favoured by senior investors that have little control over the resultant reduced margin and amended deal terms. However, if navigated adequately by the equity holders, European CLO investors across the capital stack can benefit from the refinancing/reset process and new investors continue to be drawn to the asset class.

European CLO new origination volume stands at €4.37bn year to date, across 11 deals, according to JPMorgan figures. European CLO refinancing and reset activity has been stronger, accounting for €9.86bn across 29 deals (see SCI's new issue database). An estimated €20bn of eligible paper has yet to be refinanced in the region.

Nevertheless, Nick Shiren, partner in the capital markets group at Cadwalader, says that senior investors aren't always that keen on refis/resets, as it affects their returns. "However, it can only be done after the non-call period and so they get that certainty during that time period. Also, equity investors can ultimately call a deal after this period, so it is better in many ways for senior investors in the CLO refis or resets to have that further certainty, even though it might be a less high yield."

In terms of deciding whether to reset or refinance, different benefits and challenges have to be weighed up by the equity holders, which are "ultimately in the driving seat", says Shiren. He adds that the main motivations of resets or refis "ultimately come down to what the equity investor wants to achieve, such as pushing out the reinvestment period and maturity date," which can result in better terms in pricing.

Furthermore, resets can be beneficial because they have the attraction of being like a new deal, with the ability to set new terms, but without having to source a new portfolio. This is particularly useful in an environment where new assets are hard to source.

Refis also have a number of benefits, including the time involved, complexity and cost. Shiren comments: "Where you refinance, you can just refinance a select number of rated notes. But with a reset, you are re-issuing all of the rated notes and can amend the terms of the deal."

He continues: "Refi documentation is less on the whole and ultimately you're just lowering the margin. Resets are more costly, as it is a more documentation-intensive process and legal fees are therefore higher."

As a result, while both usually only take about a month to close after pricing, resets can be as documentation-intensive as a new deal and so typically take nearer a couple of months to price, Shiren says. In terms of timing, however, refis and resets differ little, as both can only happen after the non-call period. In many cases, both also have to close on the quarterly payment date, and prior notification has to be given to noteholders.

Shiren notes that the introduction of the US risk retention rules have introduced another layer of complexity when considering a European CLO refi or reset. This is particularly relevant where "deals issued before the risk retention rules came into effect, as these may now come under risk retention rules if they refi/reset." However, solutions are being found to work around this, such as using the foreign transaction safeharbour and the Crescent no-action letter (SCI passim).

Despite these complexities, Shiren believes that European CLOs are gaining ground among non-traditional investors. He says: "I think there has been a broadening of the investor base in European CLOs and we've seen Japanese investors come in, appearing last year. Europe does, however, continue to be dominated by European investors - typically banks and pension funds."

Shiren adds that while questions are raised about whether refi/resets represent new capital or are funding the market in a real way, the environment looks set to change. He concludes: "New issuance has been affected by the difficulty of sourcing collateral - this is essentially down to availability in the leveraged loan market. I think this will improve soon though. We see some signs of this improving and this should feed into new issuance."

RB

Capital Relief Trades

Landmark portfolio guarantee inked

The EIF has agreed to guarantee 50% of a €5.52bn Spanish SME credit portfolio originated by nine Spanish banking groups. Dubbed the SME Initiative Uncapped Guarantee Instruments (SIUGI) for Spain, the deal is a bespoke EU-sponsored risk transfer transaction (see SCI's capital relief trades database).

Under the agreement, the EIF enters into bilateral financial guarantees with each of the participating financial institutions - Banco Cooperativo Español, Banco Popular, Banco Sabadell, Banco Santander, Bankia, Bankinter, CaixaBank, Ibercaja and Liberbank. The banks then originate a portfolio of SME debt, with half of the associated credit risk transferred to the EIF and the remainder retained.

Under the guarantees, the banks receive cash payments from the EIF for 50% of defaulted assets, which are defined as assets that are 90 days overdue or subject to subjective default and acceleration or restructuring of the credit right. Recovery proceeds from the defaulted assets result in a payment by the respective originating bank to the EIF, for 50% of these recoveries. In exchange for the credit coverage, the banks pay a guarantee fee to the EIF, equal to 55bp per annum on the outstanding performing portfolio.

The aggregate portfolio risk covered by the guarantees is then split between five 'risk covers': the senior, underwritten by the EIB; the upper mezzanine, retained by the EIF; the middle mezzanine, supported by the EU Horizon 2020 budget (its €80bn research and innovation programme); and the lower mezzanine and first loss, both of which are covered by structural funds allocated to the facility by the Kingdom of Spain.

According to Sebastian Dietzsch, senior analyst at Scope, the €1.64bn senior risk cover was assigned a double-A rating, with the €124.3m upper mezzanine risk cover rated triple-B plus. "There was no mandate to rate the bottom three tranches," he confirms.

The agency's rationale for rating the senior notes was driven by the 34.1% credit enhancement available in the structure, which "strongly protects the risk cover against credit losses, as well as by the benefits from its sequential amortisation," observes Dietzsch. The rating for the upper mezzanine notes reflected the lower credit enhancement of 29.2%.

The structure is regulated by an inter-creditor agreement, which governs waterfall allocations, as well as bilateral arrangements between the EIF and risk takers - where the latter commit to reimburse the EIF or even cash collateralise its exposures. At the same time, the inter-creditor agreement grants significant contractual rights to the EIF, with respect to the scrutiny of credit policy applications and credit processing for each of the originating banks.

Although a risk transfer transaction, the deal is not a traditional capital relief trade. Bernardo Ghilardi, deputy head of regional mandates - guarantees and securitisation - at the EIF, states: "The guarantees provide capital relief to the originating banks, but they are not tranched, since the EIF covers each and every defaulted exposure without any liability cap. In other words, there is no detachment point, since the payout for portfolio losses can be as high as 50% of the total portfolio outstanding."

Commenting on the large size of the deal, he explains that "for a programme of this size, we definitely needed strong interest from the main banking players in the local market to ensure robust delivery prospects and risk diversification". The banks were selected in accordance with a transparent and strict process of evaluation, following the publication of a call for expression of interest. Lender motivations were also a factor, given that "capital relief was very important for banks", along with the ability to offer better terms to SMEs.

Structural funds are allocated at regional level in Spain and the majority of regions contributed to the initiative, coordinated and managed by the central government. As Ghilardi points out, however, "the regions set out a condition from the beginning that they receive resources to achieve their SME lending targets".

This meant that the EIF had to allocate regional portfolio volumes to banks while simultaneously trying to balance good coverage at the national level. Additionally, it took time and effort for the banks to set up the necessary business and IT support systems to automate the process as much as possible.

Portfolio ramp-up was another challenge. Guillaume Jolivet, head of structured finance at Scope, notes: "Originators have a strategy which they wouldn't shift. Once we understood their strategic position, however, we were able to build an estimated portfolio which was a good estimate. It's not an extreme worst case expectation, since we modulated our assumptions for sources of uncertainty, taking into account each lender's strategy."

Ghilardi says that the tranching of the risk covers had to be defined upfront while there were no signed transactions and no originated portfolios. "We dealt with it with benchmarks and our history of trades in Spain. We also had good insight by engaging with the banks and the banking association early on in the process, in an attempt to acquire a good understanding of the credit dynamics in the SME space and the potential characteristics of the portfolios."

From a ratings perspective, Jolivet notes: "There is an inherent complexity when rating nine lenders with different levels of sophistication. We had then to pay close attention to qualitative elements, such as how each originator assesses risks and apply all their criteria. We were able to provide that level of differentiation."

Ghilardi anticipates further issuances under the SME Initiative. "We have already executed in Malta and Bulgaria; we are almost done in Finland and we are closing the first deals in Romania. Italy is our next stop."

SIUGI for Spain is one of the five largest risk transfer deals in terms of reference portfolio size over the last 10 years, according to SCI data. These include last year's synthetic securitisation between PGGM and Nordea, CRAFT 2013-1, Papillon 2011-5 and Colonnade Global 2016-1.

SP

Secondary markets

Euro ABS/MBS quiet

Despite the resolution of the French presidential election the European ABS/MBS secondary market remains quiet.

"Overall, it's still very quiet," says one trader. "We had a new Bavarian SKY issue announced yesterday, but that's the first primary deal in a few weeks."

The trader continues: "In secondary not much happened between the two rounds of the French presidential election. We're hoping things will begin to pick up now, but there is no sign of that yet."

Meanwhile, pricing levels are broadly unchanged. "Secondary spreads are stable," the trader says. "If anything there's a slight tightening bias, but that's mainly a result of the lack of supply."

There are currently three BWICs on the European ABS/MBS schedule for today. The largest piece in for the bid is a single-line auction at 14:00 London time of £20m PARGN 13X A2A. The bond hasn't appeared on PriceABS in the past three months.

Secondary markets

US ABS firm

Tone and spreads remain firm in the US ABS secondary market though activity has dipped.

Flow and BWIC volume last week and this has declined from previous high levels as market participants' focus has been drawn to primary with heavy issuance expected this month. That supply is yet to fully materialise, but when it does could also boost BWICs once more with rotation activity.

Meanwhile, secondary spreads remain flat to slightly tighter in most sectors thanks to pent up demand and positive fundamentals. One exception is subprime autos, which widened a little last week, though they could quickly reverse as investors have begun looking for yield beyond the recent focus of higher quality paper in the main sectors.

Equally, more esoteric areas such as container and equipment ABS are gaining some traction. Notably, the former has seen a flurry of BWICs in recent sessions, including a six line auction yesterday, all of which have traded well.

Today's BWIC calendar is steadily growing and half a dozen lists are already circulating. The longest of which is a $34.5+m five line student loan seniors auction due at 13:15 New York time.

It comprises: NAVSL 2014-8 A2, NAVSL 2017-1A A1, NAVSL 2017-1A A2, SLCLT 2006-2 A5 and SLMA 2005-3 A5. None of the bonds has appeared on PriceABS in the past three months.

Secondary markets

Euro CLOs diverted

A busy primary market is diverting focus away from the European CLO secondary market this week.

"It's much quieter this week as we're being dominated by primary," says one trader. "There, shorter dated triple- and double-As are drifting wider, but that's not yet feeding through into secondary spreads."

The trader expects 2.0 triple-As to edge out in line with that trend over the coming sessions, once secondary volumes pick up again, but suggests there will be little movement elsewhere. "Double-A refi paper doesn't get sold back into the market very often and on the evidence of strong trading last week the rest of 2.0 investment grade is very stable."

Tone is similarly positive in 1.0s, the trader adds. "We did a lot of 1.0 trades last week and all of the stack is at new tights."

There is currently one BWIC on the European CLO schedule for today - a single €14.5m line of JUBIL 2015-16X E due at 13:00 London time. The bond last covered on PriceABS at 98.77 on 11 April 2017.

In addition, there is a seven line €22.5m Trups and fund CDO auction due at 14:00, comprising: DEKAE I-X A2, DEKAE I-X E, DEKAE II-X D1, DEKAE III-X F, SCCFO 2006-1X A, SCCFO 2006-1X B and SCCFO 2006-1X C. None of the bonds has appeared on PriceABS in the past three months.

Secondary markets

US CLOs unshaken

A flurry of BWICs over the past two sessions has failed to shake the US CLO secondary market out of its torpor and this week looks set to be another quiet week overall.

"The lull in secondary activity is continuing," says one trader. "Overall, volumes are light with the major focus on re-fis and re-sets."

That focus goes beyond the distraction of a heavy primary pipeline and is also holding back secondary trading. "A lot of people are sidelined by the technicals and are happy to sit on positions they bought in the high 90s and wait to be re-set out at par," the trader says.

Meanwhile, the trader adds: "The closest to any kind of consistent activity we're seeing is around mezz and people putting defensive risk positions on. They're utilising higher coupon premium bonds to minimise mark-to-market movement should there be a sharp turnaround."

There is one BWIC on the US CLO calendar for today so far. Due at 11:00 New York time the $31.75m five line double- and single-B list consists of: AVERY 2013-3A E, CIFC 2014-2A B2L, OCP 2015-8A D, WINDR 2014-1A E and WINDR 2015-2A F.

Only CIFC 2014-2A B2L has covered with a price on PriceABS in the past three months - at M90s/MH90s on 28 March.

ABS

Container ABS wave continues

Textainer Equipment Management is in the market with the latest container ABS (see SCI's deal pipeline). The deal's arrival comes as part of a flurry of activity in the sector, which is riding high on a rebound in shipping container prices.

SeaCo priced the US$294m Global SC Finance IV Series 2017-1 transaction last month (see SCI's primary issuance database). Earlier in the month, TAL International Group priced its US$281m TAL Advantage VI Series 2017-1 ABS, the first container lease ABS of the year.

The US$300m Textainer Marine Containers V Series 2017-1 ABS is split into a US$250m A tranche and a US$50m B tranche. S&P has rated the A tranche at single-A and the B tranche at triple-B.

The portfolio consists of 120,973 units comprising 11 different marine cargo container types, of which 113,914 units are currently out on lease. The fleet's average age is 5.39 years, which is relatively old, and comprises 83.54% long-term leases, 1% finance leases, 6.78% master and spot leases and 8.24% in-depot.

S&P notes that the manager has considerable experience and that much of the fleet was previously held by other securitisations, which experienced low write-offs and high recovery rates. Performance tests and early amortisation events are also transaction strengths.

The rating agency is more concerned by the break-even cashflow results, which are lower than other recent transactions, and the weighted average age test, which is set to trigger at 11.5 years and is therefore older than in other container transactions. S&P also lists the relatively high concentration in standard dry containers as giving pause for thought, although Moody's reports that dry freight containers are experiencing a rebound in prices.

Prices for new dry freight containers were up 55% on average in 1Q17 from their lows a year earlier. This is credit positive for ABS backed by shipping containers and related leases and if container prices continue to increase, per diem lease rates for both new and used containers will also rise, improving ABS transactions' cashflows, notes Moody's.

The rating agency expects container lease ABS to benefit from higher lease rates when existing contracts expire, as lessees will sign leases at the current, higher rates, which are closer to 2014 levels than to the lower rates of the last couple of years. Rising new container prices will also lead to higher used container prices, increasing the cashflows to the ABS when container leasing companies sell used containers.

JL

ABS

Insurer hits mark with first cat bond

Palomar Specialty Insurance Company has successfully closed its first cat bond obtaining protection against catastrophe perils. Torrey Pines Re Series 2017-1 is a US$166m ILS providing the insurer with US earthquake, named storm and thunderstorm reinsurance protection.

The transaction has three tranches of notes. The class A tranche is sized at US$45m, with initial price guidance of 2.75%-3.25% since fixed at 3%. The class B notes amount to US$66m, with pricing around 3.75%, and the class Cs are US$55m, with pricing fixed at 6.25%.

The A and B tranches both provide protection against earthquake risk while the C notes provide earthquake protection and additional protection against named storm and severe thunderstorm risk. All three tranches cover a three-year risk period and Palomar can include business in subsequent years in a broader covered area than in the first year.

"The transaction with Torrey Pines Re marks another important step in Palomar's development into a market leader in the catastrophe insurance space," says Palomar ceo Mac Armstrong. Company president Heath Fisher adds: "The cat bond not only further optimises our risk transfer programme it also diversifies our panel of reinsurance capital providers."

The US$166m offering was upsized from an initial US$143m. GC Securities was lead structurer, sole bookrunner and sole initial purchaser. TigerRisk Capital Markets & Advisory acted as co-structurer and co-manager.

Palomar is an insurer that focuses on catastrophe-exposed residential and commercial property lines of business.

JL

ABS

Five Guys taps ABS appetite

Five Guys Enterprises has become the latest company to bring a whole business securitisation. The US$440m Five Guys Funding transaction is secured by most of its revenue-generating assets in the US and Canada.

The collateral includes existing and future domestic franchise agreements, existing and future company-operated restaurant royalties, US and Canadian intellectual property and related license agreements, collections from company-operated restaurants and bakery sales, and certain international collections. The proceeds from the offered notes will be used to refinance the company's existing credit facility, pay certain transaction expenses and fund the capital enhancement account.

Provisionally rated by KBRA, the deal comprises US$40m triple-B rated class A1 notes and US$400m triple-B rated class A2 notes. Guggenheim Securities is sole structuring advisor and book-running manager on the transaction. Midland Loan Services is servicer and control party, while FTI Consulting is back-up manager.

As of March 2017, the Five Guys restaurant system included 1,437 locations - of which 1,360 were located in North America - with annual system-wide sales of approximately US$1.6bn. The transaction is supported by royalties from 908 franchise locations and 452 company-operated restaurants, representing approximately 66.8% and 33.2% of total North American locations respectively. Approximately 94.6% of the restaurant locations are within North America, while the remainder are located across seven other countries.

Five Guys was founded in Arlington, Virginia in 1986 by Jerry and Jane Murrell and their four sons. Since transitioning to a multi-unit franchise restaurant operation in 2003, the company has assembled a management team with experience in restaurants and related industries at both public and private companies. The current management team has spent an average of approximately 10 years at Five Guys, according to KBRA.

The company expects to continue broadening its domestic restaurant base while increasing its presence abroad, leveraging its recent success in the UK and France. KBRA notes that Five Guys anticipates opening over 82 locations in North America this year, for example.

"While Five Guys' infrastructure is positioned for growth, there is potential for increased execution and operation risk associated with its strategies," the rating agency adds.

The transaction includes similar structural protections as other recently issued whole business securitisations, according to KBRA. The class A1 notes are variable funding senior notes that are pari passu with the class A2 term notes. The class A1 notes are expected to be undrawn at closing, but outstanding principal balance will be due five years after closing, unless extended by up to another two years, subject to certain conditions.

The agency notes that the deal benefits from a dynamic structure that accelerates principal payments to noteholders upon the weakening of collateral performance. It cites a cash trapping event, a rapid amortisation event, manager termination and an EOD default DSCR trigger as key structural features.

The class A2 notes will have scheduled amortisation at a rate of 1% per annum of the closing principal balance until the ARD, at which point all excess cashflows will be used to repay the outstanding notes. However, if the senior leverage ratio is at 5x or below and no rapid amortisation event has occurred by the quarterly payment date in January 2018, there will be scheduled amortisation for the class A2 notes.

Looking ahead, burgers account for over 60% of Five Guys' system-wide sales, but ground beef prices have increased by over 50% over the past 10 years. The company has historically been able to pass most changes in pricing for ingredients through to the consumer. However, KBRA warns that the reliance on beef prices - together with the ability to source quality beef and other event risks, such as food-borne illness - may have a negative impact on the performance of the system.

CS

Structured Finance

Channel Tunnel refinancing underway

Groupe Eurotunnel is set to refinance its Channel Link Enterprises Finance (CLEF) whole business securitisation, as part of an ongoing strategy to optimise the structure of its debt and to reduce the cost of its debt service. The company proposes to issue up to €2bn-equivalent senior subordinated variable and fixed-rate notes, split across a number of tranches due in 2050.

The new notes - which Eurotunnel refers to as 'tranche C debt' - comprise: £350m variable rate notes, which will have a fixed rate of interest until 2029 and then a floating rate of interest, with a step-up for the remainder of the term; an unspecified amount of sterling-denominated fixed-rate notes; €953m variable rate notes, which will have a fixed rate of interest until 2022 or 2027 and then a floating rate of interest, with a step-up for the remainder of the term; and an unspecified amount of euro-denominated fixed-rate notes, to be privately placed. They are provisionally rated BBB/Baa2/BBB+ by Fitch, Moody's and S&P.

Moody's suggests that the step-up feature, which - while payable at a subordinated position in CLEF's priority of payments - somewhat increases refinancing pressures at the expected maturity dates of the affected tranches. The new notes will rank pari passu with and have the benefit of the same security as the existing tranche A and G notes.

The proceeds of the new notes will be used to refinance the £350m class A3 and €953m class A4 CLEF notes currently outstanding (which have been incurring step-up fees since 2012), cover a portion of the mark-to-market loss related to interest rate swaps currently in place for these notes and pay for transaction costs. After the new debt issuance, CLEF's total senior secured debt will total approximately €4.5bn, an increase of around €600m.

Eurotunnel expects the refinancing to result in a significant reduction in the average cost of its debt for at least the next five years, with tranche C having an effective interest rate of 8.39%. "The group's debt is exceptionally well adapted to the unique nature of the Fixed Linked: it benefits from a long maturity (2050) consistent with the duration of the concession (2086); it is denominated both in euros and in pounds to match the group's revenue profile, with moderate repayments spread over time (33 years)," it adds.

Proceeds will ultimately be on-lent to borrowers The Channel Tunnel Group and France Manche. Following the repayment of the A3 and A4 notes, a mandatory repayment of a pro-rata share of the CLEF sterling and euro liquidity notes will occur, resulting in their reduction to £152m and €96m respectively (from £175m and €160m). The reduced liquidity amount is expected to be replaced by an undrawn liquidity facility provided by Assured Guaranty Municipal Corp and AGE at the borrower level.

The issuer has published, for information purposes only, certain materials - including a financial model - on its investor website.

CLEF is the issuer of the notes constituting the restructuring of Groupe Eurotunnel in June 2007 to reduce the company's debt to £2.84bn from £6.2bn. Eurotunnel owns the two concessionaires under the concession agreement for the Channel Tunnel (also known as the Fixed Link) - France Manche and The Channel Tunnel Group.

Deutsche Bank and Goldman Sachs are lead managers and placement agents on the issue of the new notes. Final pricing is expected to take place within two weeks.

CS

Structured Finance

SCI Start the Week - 8 May

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

Pipeline
ABS names dominated the list of pipeline additions last week. There were eight new ABS added to the pipeline as well as an ILS, two RMBS and two CMBS.

The ABS were: US$1.414bn AmeriCredit Automobile Receivables Trust 2017-2; CNY4.12bn Driver China Six Trust; US$442.41m DT Auto Owner Trust 2017-2; US$250m Higher Education Student Assistance Authority (State of New Jersey) Student Loan Revenue Bonds Series 2017-1; C$490m MBARC 2017-A; US$308.65m Nissan Master Owner Trust Receivables Series 2017-A; US$308.65m Nissan Master Owner Trust Receivables Series 2017-B; and US$1.75bn Toyota Auto Receivables 2017-B Owner Trust.

US$125m MetroCat Re 2017-1 was the ILS, while the RMBS were A$500m Progress 2017-1 Trust and US$2.29bn Towd Point Mortgage Trust 2017-2. The two CMBS were US$272m CSMC Trust 2017-LSTK and US$223.1m Velocity Commercial Capital 2017-1.

Pricings
It was another week of considerable CLO issuance, split between new deals and refis. There were nine CLOs, along with five ABS, three RMBS and two CMBS.

Those ABS were: US$1bn CARDS II Trust 2017-1; US$900m Coinstar Funding Series 2017-1; C$540m Ford Auto Securitization Trust 2017-R²; US$268.47m HERO Funding 2017-1; and US$217.54m Renew 2017-1.

C$2bn Bicentennial Trust, US$402.6m COLT Mortgage Loan Trust 2017-1 and Freddie Mac SCRT Series 2017-1 were the RMBS. The CMBS were US$900.5m CD 2017-CD4 and US$1.55bn FREMF 2017-K64.

The CLOs consisted of: US$406.7m Jamestown CLO 2013-3R; US$386m Marathon CLO 2014-6R; US$400m Oaktree CLO 2014-1R; US$410.25m OZLM 2017-16; US$409.5m Parallel CLO 2017-1; US$406m Regatta IX Funding 2017-1; €412.5m Sorrento Park CLO 2014-1R; US$611.3m Voya CLO 2017-2; and US$512m ZAIS CLO 6 2017-1.

Editor's picks
Irish NPL wave expected: Allied Irish Bank last month sold €400m gross book value of non-performing buy-to-let loans to Goldman Sachs at a 50% discount to their original value. The transaction signals a shift in the seller base for non-performing loans from foreign banks and bad bank NAMA to domestic Irish lenders...
European CLO investor base expands: The European CLO investor base is broadening, thanks to less perceived volatility than in the US market. As well as the stability Europe offers, panellists at IMN's European CLOs and Leveraged Loans conference last month said that low defaults and strong collateral quality is driving renewed interest in European CLOs across the capital stack...
Brexit may see CLO managers up sticks: Article 50 may have recently been triggered following the Brexit referendum, but uncertainty remains rife about what it means for CLO managers in the UK. In combination with the slow-moving STS securitisation framework negotiations, CLO managers are consequently weighing up other jurisdictions and the possibility of issuing elsewhere in Europe...
Chinese NPL ABS to expand: The Chinese government is set to allow some mid-sized banks to issue non-performing loan ABS this year, providing them with a new channel to offload bad loans. The move is part of an attempt to establish a risk curve, which aims to increase the alternatives available in the credit market...
'Major uncertainy' from swap mismanagement: Notices have been released highlighting swap book mismanagement by 11 issuers in the E-MAC RMBS series. CMIS, which serves as loan servicer and SPV issuer administrator, has stepped in to cover certain fees, but in claiming for reimbursement has created what Rabobank analysts refer to as "a major uncertainty"...

News
• Credit Suisse is in the market with a single-asset/single-borrower CMBS secured by two of three land parcels beneath 885 Third Avenue in New York, known as the 'Lipstick Building'. Dubbed CSMC Trust 2017-LSTK, the US$272m transaction is sponsored by a joint venture between BVS Acquisition Co and Shanghai Municipal Investment (Group) USA.
• Italy's troubled flagship airline Alitalia has been placed under special administration. Should the company ultimately be liquidated, a number of aircraft ABS could face temporary cashflow disruptions as aircraft are repossessed, repaired and re-leased by the lessors.
• Several US credit card banks have reported higher-than-expected net charge-off rates on their card portfolios in their 1Q17 earnings reports. The move seemingly coincides with lenders taking on more risk based on perceived borrower quality and larger credit limits. At the same time, borrowers appear to be taking on too much debt relative to their income growth prospects.
• Sequant Re is looking to raise capital through a peer-to-peer platform which connects investors directly with companies and funds seeking to raise funds or gain market exposure. The novel approach may seem more suited to a technology start-up, but should bring new investors into the ILS market.

Capital Relief Trades

Risk transfer round-up - 12 May

Risk transfer activity has rebounded this week, with the EIF's landmark Spanish portfolio guarantee. More activity is expected from the fund in the near future (SCI 12 May).

At the same time, sources talk of more to come in June, along with a capital relief trade in September or October for a Portuguese bank. The issuer is rumoured to be Banco Comercial Portugues.

The Portuguese lender has sold a €1bn diversified portfolio of NPLs, but large corporate exposures remain on the bank's balance sheet, which haven't attracted investor interest so far.

CMBS

Pari passu exposure highlighted

DBRS has updated its Pari Passu Index for loans in US CMBS transactions issued after 2010. The results show that an unusually large volume of pari passu notes were included in CMBS deals last year, accounting for US$23bn of loans and 489 pieces.

The pari passu loan structure allows originators to make large commercial real estate loans and CMBS issuers and investors to diversify single-loan concentrations. As such, they tend to be significantly larger and are concentrated in more liquid property types and markets.

One large pari passu loan highlighted in the index is the US$1.275bn Hilton Hawaiian Village full service hotel asset, which is split across nine transactions, including the recent CD 2017-CD3 (with a US$60m slice) and last year's HILT 2016-HHV (US$171.6m) (see SCI's primary issuance database). Another example is the US$900m 10 Hudson Yards office loan, which appeared in five deals last year - including CD 2016-CD1 (US$65m) and 2016-CD2 (US$67.5m), as well as HY 2016-10HY (US$408.1m).

Indeed, DBRS notes that the most common property types seen in pari passu loans are office and retail, particularly regional malls. The agency says that its market rank for the location of the properties is typically strong, with urban locations comprising 54% and suburban markets comprising 39% of the total pari passu loans contributed to CMBS transactions since 2010.

"This is a stronger concentration in highly liquid urban markets than traditional multi-borrower conduits," it observes.

Pari passu loans are ultimately controlled by one pooling and servicing agreement and therefore one special servicer. "Any loss associated with these loans should theoretically be distributed pro rata among the various pari passu notes contributed to various CMBS transactions. In reality, servicers and/or trustees sometimes apply different loss expenses to different tranches of the same collateral in different CMBS transactions," DBRS comments.

The agency also notes occasional financial reporting discrepancies across transactions with pieces from the same pari passu loan, despite the fact that financial metrics should be the same for all notes of like-payment priority.

CS

RMBS

Letter opposes Lehman proposal

Lawyers from Kasowitz Benson Torres, representing an investor group holding certificates issued by RMBS trusts with claims in the Lehman Brothers bankruptcy, have expressed concern over a proposed US$2.4bn settlement. The case is one of the few remaining put back disputes arising from pre-crisis RMBS and one of the last remaining Lehman bankruptcy cases.

Trustees for 244 RMBS trusts are considering accepting a proposed settlement of claims against the Lehman Bankruptcy Estates for breaches of reps and warranties on 410,000 loans sold to them. The proposed settlement, reached on 17 March, was negotiated between the debtors and a group of 14 institutional investors represented by Gibbs & Bruns.

The proposed settlement appears to make a US$2.416bn claim amount most likely, although a short 14-day trial has been scheduled for October, during which an amount will be confirmed. Kasowitz Benson Torres, representing seven investors holding US$1.3bn in outstanding principal in 114 of the 244 affected trusts, has written to object to the proposed settlement.

The law firm argues that the US$2.416bn anchor for the settlement is far too low considering trustees' determinations that the claims are worth at least US$16.7bn. The firm also says the 14-day hearing will lead to a "preordained outcome of an allowed claim of US$2.416bn" and has requested modifications to the proposed settlement.

"It would be unreasonable for the trustees to accept the proposed settlement as presently constituted," says the Kasowitz letter. This is not least because the trustees have loan-level evidence that the RMBS claims are valid and can be valued at US$16.772bn or more, but also because "the estimation proceeding is structured such that an allowed claim of US$2.416bn - an indefensibly low recovery for certificateholders that would be neither a fair nor a reasonable settlement of the RMBS claims - is the most likely outcome".

The US$16.772bn figure reflects actual losses attributable to breaching loans. The Kasowitz letter notes that certificateholders have spent over US$200m on efforts to arrive at good faith determinations as to which of the 416,000 loans sold to the trusts breached reps and warranties that triggered the debtors' contractual repurchase obligation.

The fact that the proposed settlement is for only US$2.416bn "replaces the trustees' good faith determinations with an arbitrary benchmark fabricated by the debtors more than five years ago". This anchor figure "is therefore based on obsolete assumptions superseded by the trustees' precise calculation of protocol damages".

The proposed settlement allows for a 14-day estimation proceeding at which the debtors would push for US$2.416bn to be accepted. The institutional investor group represented by Gibbs & Bruns has already indicated it would support this estimation, leaving the Kasowitz investor group "deeply concerned" that trustees will be unable to achieve a higher settlement amount during the short estimation proceeding, as a 14-day trial "will foreclose any meaningful opportunity for introducing the best evidence [the loan-level findings of material breaches in 91,528 loans] of the value of the RMBS claims".

Kasowitz Benson Torres says significant modifications to the proposed settlement are necessary in order to make it palatable, including increasing the amount at which the debtors will agree to seek estimation of the claims and also extending the time and scope of the estimation proceeding so that loan-level evidence can be introduced. Alternatively the trustees could adjudicate each of the RMBS claims within two years and obtain a superior recovery for certificateholders.

Either way, the firm stresses that much additional information is required in order to assess the proposed settlement. This information is requested by 15 May.

JL

Structured Finance

Job swaps round-up - 12 May

Amicus briefs

The LSTA has joined The Clearing House and the American Bankers Association to file amicus briefs in cases initiated by the State of Colorado against Avant and Marlette, both of which have bank partners (WebBank and Cross River Bank respectively). In January, Colorado regulators sued the two marketplace platforms, claiming that their loans are subject to Colorado interest rate and fee limitations because the banks are not the 'true lenders' of the credit extended. The state also has challenged the 'valid-when-made' doctrine, asserting that assignees of loans are not entitled under section 27 of the FDI Act to enforce loans on the same terms available to the state banks that made them.

WebBank and Cross River have each filed separate lawsuits against the Colorado regulator. The amicus brief focuses on the 'valid when made' principle, asserting that for hundreds of years, the US credit markets have relied on long-settled expectations regarding usury law. The LSTA notes that since the first half of the nineteenth century, courts have recognised the cardinal rule that a loan that is not usurious in its inception cannot be rendered usurious subsequently, including by being sold or transferred to a third party.

EMEA

Twelve Capital has hired Florian Steiger as director in the portfolio management team, based in the firm's Zurich office. He will focus on catastrophe bond strategies and joins from Cape Capital, Zurich, where he set-up and managed the Cape Fixed Income Fund.

North America

Crestline Investors has appointed Michael Rich as a director in its private equity credit team. Rich was previously a director at LStar Capital and before that co-founder and principal at Three Seas Capital, portfolio manager at Highland Capital Management and vp at Banc of America Securities.

TCW Group has filed a preliminary proxy statement with the US SEC, outlining its proposal to become the external asset manager for Hercules Capital. TCW sent the terms of its proposal to Hercules' independent directors on 6 May, three days after Hercules filed with the SEC preliminary proxy materials regarding its proposal to externalise its investment management function by transferring it to Hamilton Advisers, a newly formed entity owned by Hercules co-founder, chairman, president and ceo Manuel Henriquez. TCW states that whereas the current proposal by Hercules' management is "inherently uncertain and contemplates extensive ramp-up costs", its own proposal would "immediately provide superior economics and competitive advantages in the form of economies of scale, employee compensation and asset diversification", in order to create more value for stockholders.

ISDA has appointed several new members to its board of directors, including Thijs Aaten, md of treasury and trading at APG Asset Management. It is the first time a pension fund expert has served on the ISDA board. ISDA has also appointed: Sian Hurrell, head of fixed income, currencies and commodities, Europe, RBC Capital Markets; Masanobu Ichiya, md, head of the derivative trading department at Mizuho Securities; Tom Wipf, vice chairman of institutional securities, Morgan Stanley; and Rana Yared, md, principal strategic investments team, securities division, Goldman Sachs.

Medley Management has named Christopher Allen as senior md and head of structured credit. He was previously a founding partner at CVC Credit Partners and held a number of roles at the firm, including coo and head of structured finance origination.

Partnerships

dv01 has agreed a reporting partnership with SoFi, whereby all institutional investors using dv01's loan and bond analysis platform will be able to access all of SoFi's securitisations. Initially, dv01 will receive securitisation data directly from SoFi, which it will normalise, format and roll up for monthly level reporting. The data, which includes 23 historical deals, will also be available through dv01's portal.

BlockEx - a blockchain start-up - has teamed up with Winston & Strawn to create standardised legal documentation templates, which will form the basis of the smart contracts establishing bond issuances through the platform. These templates will cover approximately 90% of the documentation required, so potentially reducing the time and costs for bond issuances. BlockEx has 12 new issues currently under due diligence vetting and the intention is for the first issue to be made this month.

SEC investigation

Radian Group has disclosed in its latest 10Q filing that Clayton subsidiary Green River Capital received a letter from the US SEC in connection with an investigation of certain single-family rental securitisations, stating that it is requesting information from market participants. The letter requests that Green River Capital provide information regarding broker price opinions (BPOs) that it provided on properties included in SFR transactions. The firm says it is cooperating with the SEC.