Contents

NPLs

Irish central bank steps up NPL pressure

The governor of the Central Bank of Ireland stated this week that the pace of NPL reduction in Ireland is too slow and new strategies are needed to combat the still elevated volume of bad loans. The move signifies increased political pressure on Irish banks to reduce NPL ratios.

This is somewhat complicated by the fact that Ireland is considered as a model for other European countries when it comes to resolving NPL issues. "The Central Bank of Ireland has to be seen as being forceful with the Irish banks, given that Ireland is still a high NPL country (13.6% NPL ratio) and is also seen as a model country across Europe for dealing with NPLs, as evidenced by the establishment of bad bank NAMA, restructuring targets and provisioning guidelines," says Tom McAleese, md at Alvarez and Marsal.

He continues: "The Single Supervisory Mechanism's (SSM) NPL taskforce for instance is chaired by the Irish deputy governor, who is also the main driver behind the bank's NPL reductions targets."

According to central bank data, 43% of all accounts in arrears are at least 720 days past due. However, repossessions are very low, running at 120 or 130 per quarter, or 0.6% per annum.

"When one adds to this the resignation of [Taoiseach] Enda Kenny there is added pressure to deal with the arrears issue through a more systemic solution," says McAleese. He suggests one such solution could be a situation where banks and investors can buy properties and then rent them back to borrowers who become tenants.

Irish bank NPL ratios currently average 13.6%, but the ECB is compelling lenders to reduce these ratios to the EU average of 5% over the next 3-5 years. This tight ECB timeline explains the necessity of loan sales.

McAleese has previously said that NPL reduction cannot be done only through restructuring and forbearance because cure periods can take up to three years. Therefore a combination of loan sales, asset sales, debt settlements, write-offs and debt-for-equity swaps are required (SCI 3 May). The slow pace of asset recovery has been another issue since the work-out period is often longer than expected.

Significant numbers of owner-occupiers are still carrying negative equity in their properties. The Irish pillar banks are under increasing pressure to bring residential loans to market, following their poor performance in the 2016 EBA stress tests. AIB and Bank of Ireland, for example, were among the weakest of all 51 EU banks included in the stress tests.

Kenny resigned this month following his alleged involvement in a long-running police misconduct scandal, although this was not explicitly stated in his resignation letter. Government lawmakers and other party members must choose a new leader by 2 June, followed by a vote in Parliament. He will stay on as caretaker until then.

SP

ABS

First Aussie master trust ABS well received

The first Australian ABS to use a master trust structure has proved ground-breaking in several ways. While it took a lot of work, the market reaction suggests the effort was well worth it.

The A$1bn Latitude Australia Credit Card Loan Note Trust Series 2017-1 transaction (see SCI's deal database) was the first deal to come from Latitude Financial Services. The firm split from GE Capital in 2015 and intends to become a programmatic issuer, hence its interest in setting up a master trust structure, which had not been done in Australia before.

"Not only is the use of a master trust structure for credit card ABS new for Australia, but we ourselves are a brand new issuer, so for us there were a lot of firsts in this transaction. That certainly brought a few challenges, but this is a well-known product in both the US and the UK, so it was not entirely new territory," says Paul Varro, group treasurer, Latitude Financial Services.

While the Australian securitisation market has traditionally leant on RMBS and auto ABS, credit card securitisations are common elsewhere. The investor reaction has been strong, suggesting the appetite is there to add this asset class to the stable.

Varro says: "The investor reaction has been good, both domestically and internationally, so we are delighted with the outcome. The deal as a whole was 3.2x oversubscribed. The double-B was 6.7x oversubscribed. That is very heartening for our inaugural deal."

The deal was not put together overnight, with a lot of preparation required to get both Latitude and the market ready for Australia's first master trust deal. The internal challenges included elements such as Latitude's IT infrastructure, while the external challenges largely revolved around investor education.

"Work on this transaction really started back in August, leading into December. There was some work required on our internal IT infrastructure, for example, to tag assets and put them into our master trust. There was a lot of work to set up the master trust and to conduct the roadshow," says Varro.

Latitude worked with Clifford Chance on the deal. The law firm was specifically chosen for its experience of master trusts in the UK and the firm used staff in both London and Sydney as it worked with Latitude to set up the master trust and its first issuance.

"We were delighted to advise on this transaction which is an excellent example of how Clifford Chance's global network and depth of practice came together to provide the best service for our clients," says Sydney partner Caroline Jury. "Not only is this transaction significant in terms of scale and because it is the first of its kind in the Australian market, but we also expect it to make a contribution to the securitisation industry as a whole in Australia."

While Clifford Chance shared its expertise with Latitude, Latitude was busy meeting with and educating investors. Not all investors will have known Latitude well, while the intricacies of a master trust structure would also have been new to many, and an Australian credit card ABS had never been successfully attempted before, so there was plenty for investors to get up to speed with.

"There was extensive pre-marketing for this transaction, which really gave investors time to get comfortable with the structure and to understand who we are. We met a lot of people both before the official deal roadshow (via non deal roadshows) and then on the deal roadshow as well, meeting investors and making sure they had plenty of time to do their diligence," says Varro.

He continues: "For a lot of investors we were a brand new proposition. There were European investors, for example, who might not have had approval for Australian card ABS, because it had not been done before, who therefore needed to go away to get internal approval to invest in the deal."

After investors did show such strong interest, Varro says Latitude certainly plans to follow up its debut with future issuance. While setting up the master trust structure brought certain complexities, once established they bring significant efficiencies for regular issuers.

"We would like to be a programmatic issuer with our credit card portfolio. At the minute the plan is for at least one deal a year. The master trust structure allows programmatic issuance to be more efficient, one of the reasons is that we only have to report on the master trust programme, rather than on each individual issuance," says Varro.

JL

ABS

CEA completes its largest ILS yet

The California Earthquake Authority (CEA) has completed its largest ever ILS (see SCI 22 May). The US$925m Ursa Re 2017-1 transaction, structured by Swiss Re, is one of the largest indemnity, annual aggregate catastrophe bonds and covers California earthquake risk.

Swiss Re underwrote the transaction through two classes of principal-at-risk variable rate notes issued by Ursa Re. The CEA receives protection against residential homes for earthquake damage in California.

The transaction has issued US$425m of class B notes and US$500m of class E notes, each with a three-year risk period starting from last week. The deal is unrated, with the coupon on the class Bs understood to be 350bp and on the class Es understood to be 600bp.

The class B notes provide protection from an attachment point of US$5.1bn and cover a US$500m layer of risk. The class E attaches at US$1.7bn and also covers a US$500m layer.

"Swiss Re is pleased to provide continued support to the CEA on its largest catastrophe bond issuance to date. The transaction was well received by investors, as demonstrated by, among other factors, the final issuance size," says Judy Klugman, co-head of ILS at Swiss Re Capital Markets.

"We were also glad to be able to support the CEA in its desire to make future issuances more efficient by introducing pre-modeled programme notes. Such programme notes are intended to allow the CEA to tap investor demand on a more timely and cost efficient basis."

These programme notes will allow the classes A, C, D and F to be issued at a future date, although this cannot happen after the end of the third loss occurrence period of the initial issuance.

The previous Ursa Re, Series 2016-1, issued a single US$500m tranche. Ursa Re Series 2015-1 issued a US$250m B class, while Ursa Re Series 2014-1 issued two classes, each sized at US$200m (see SCI's deal database).

JL

ABS

VW's Spanish auto ABS breaks new ground

Volkswagen Financial Services has placed the largest Spanish auto ABS since the financial crisis and called on regulators to acknowledge the asset class' utility. The €914bn Driver Espana Four auto loan securitisation is backed by approximately 110,000 financing contracts, around 82% of which are for new vehicles.

The deal has also achieved the lowest pricing of a Spanish auto ABS from Volkswagen. The €888m class A notes (upsized from €666m) priced at one-month Euribor plus 38bp, while the €28m class B notes (upsized from €19.5m) priced at plus 75bp. Volkswagen reports that at placement pricing levels the tranche A order book was 2.6 times oversubscribed and the class B order book was 5.6 times oversubscribed.

"The successful placement at an attractive price shows the confidence of investors in high-quality auto ABS and in the sustainability of the solid business model," says Frank Fiedler, Volkswagen Financial Services cfo. He adds: "Auto ABS are a major refinancing instrument for the industry and substantially contribute towards stimulating the real economy in the EU. Hence, it is important that this instrument will not suffer any harm from the current legislative process on high-quality securitisations."

The greatest geographic concentration is in Catalonia, which accounts for 20.57% of the pool. Andalucia (16.65%) and Madrid (16.47%) are the next largest regions.

By manufacturer distribution, the largest is Seat at 34.29%. Volkswagen accounts for 33.89%, with Audi accounting for 22.43%.

The A notes were rated triple-A by DBRS and Aa2 by Moody's. The B notes were rated single-A by DBRS and A2 by Moodys.

The WAL of the A notes is 1.66 years. The WAL of the B notes is 2.97 years. The deal is expected to close on 28 June. Marketing was carried out by lead managers Crédit Agricole and Lloyds Bank.

JL

ABS

Risk transfer round-up - 26 May

According to sources Barclays is prepping a deal, although the underlying asset is unknown. Given the lender's active corporate loan issuance however the underlying asset may likely be corporate loans.

At the same time we have heard of another GARC deal by Intesa San Paolo. This deal could "possibly" come by the end of the year, sources say. The issuer's last transaction was in December 2016 (SCI 14 March) with a €2.5bn SME synthetic securitisation.

Such rumours are consistent with what Elisabetta Bernardini, head of credit portfolio management at Intesa Sanpaolo, stated last March (SCI 14 March). As she pointed out, "at the moment, we are structuring one or two transactions a year on SMEs, but we expect to develop the platform and include other asset classes that may be of interest to the market".

Structured Finance

SCI Start the Week - 22 May

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

Pipeline
There were 11 ABS deals added to the pipeline last week. These were joined by an ILS, six RMBS, two CMBS and a CLO.

The ABS were: US$220m American Credit Acceptance Receivables Trust 2017-2; US$210m Cajun Global Series 2017-1; US$650m Chesapeake Funding II Series 2017-2; €723.7m Driver Espana Four; US$1.15bn Ford Credit Floorplan Master Owner Trust A 2017-1; US$978m Hyundai Auto Lease Securitization Trust 2017-B; €300m Master Credit Cards Pass 2017-1; US$375m Mercedes-Benz Master Owner Trust 2017-A; US$375m Mercedes-Benz Master Owner Trust 2017-B; US$160m Oportun Funding VI Series 2017-A; and US$1.06bn Santander Drive Auto Receivables Trust 2017-2.

The RMBS were: US$218.26m Bayview Opportunity Master Fund IVb Trust 2017-SPL4; ConQuest Trust Series 2017-1; Friary No.4; Green STORM 2017; US$1bn JPMMT 2017-2; and Nationstar HECM Loan Trust 2017-1.

US$250m Cranberry Re Series 2017-1 was the ILS, while the CMBS consisted of US$959.1m GSMS 2017-GS6 and US$1.09bn Morgan Stanley Capital I Trust 2017-H1. The sole CLO was €450m Cadogan Square CLO IX.

Pricings
There were 17 ABS prints last week. There were also two ILS, three Australian RMBS, three CMBS and eight CLOs.

The ABS were: €1.015bn A-Best 15; US$1.05bn Ally Auto Receivables Trust 2017-3; US$575m ARI Fleet Lease Trust 2017-A; US$750m Barclays Dryrock Issuance Trust Series 2017-1; €1.075bn Bavarian Sky Compartment Germany 6; US$775m Citi Credit Card Issuance Trust 2017-A6; CNY4.12bn Driver China Six Trust; US$175m Earnest Student Loan Program 2017-A; US$195.29m Flagship Credit Auto Trust 2017-2; €1.1bn IM Grupo Banco Popular Leasing 3; US$356.23m LEAF Receivables Funding 12 Series 2017-1; C$490m MBARC 2017-A; US$535m Nelnet SLT 2017-1; US$470m Prosper 2017-1; US$560m SoFi Professional Loan Program 2017-C; CNY3bn Toyota Glory 2017-1; and US$400m World Financial Network Credit Card Master Note Trust Series 2017-A.

US$125m MetroCat Re 2017-1 and US$925m Ursa Re 2017-1 were the ILS. The RMBS were A$300m Illawara Series RMBS Trust 2017-1, A$342.6m Liberty Series 2017-2 Trust and A$250m Sapphire XVI 2017-1.

US$500m 245 Park Avenue Trust 2017-245P, US$754m CLNS Trust 2017-IKPR and US$805m Hospitality 2017-HIT were the CMBS. The CLOs were: €564m Babson Euro CLO 2014-2R; €232.2m Bosphorus CLO 2016-2R; US$613.5m Carlyle Global Market Strategies 2017-2; US$300m Cerberus Onshore I CLO 2017-2; US$373.55m Ellington CLO I 2017-1; US$264.5m Octagon Investment Partners XVII 2013-1R; US$521.75m OZLM 2014-8R; and US$717.1m Trinitas CLO 2017-6.

Editor's picks
STS discussions stumble on hierarchy: The Strasbourg Trilogue discussions on simple, transparent and standardised (STS) securitisation have been postponed until 30 May, due to disagreements between the European Parliament on the one hand and the European Commission and Council on the other over the hierarchy of CRR approaches. However, the European Parliament has made important concessions over risk retention, increasing the likelihood of a final deal before June...
CRT customisation gains traction: The GSE credit risk transfer (CRT) market has continued to evolve since it began in 2013, with Fannie Mae and Freddie Mac respectively issuing US$23.9bn and US$19.8bn in CAS and STACR securities to date. The sector has taken a further step forwards in recent weeks, following the execution of the first exchangeables trades...
IFRS 9 to spur 'underperforming' loan sales: The implementation of IFRS 9 is expected to increase provisioning for a new loan category dubbed 'underperforming loans'. As lifetime losses will have to be addressed in this category, it is likely that these assets will become non-core and therefore be subject to increased sales activity...
Big appetite for BTL RMBS pair: The two UK buy-to-let RMBS issued by Blackstone and Prudential last month (SCI 4 April) provided a significant source of paper for the market. With UK Asset Resolution (UKAR) set to offload more loans later this year, there could be future RMBS in the pipeline as well - although, as with the latest two deals, absorbing that paper may test the market...
Optionality driving RMBS focus: The legacy US non-agency RMBS market is experiencing a 'perfect storm' of events, given the current low rate, low volatility environment. Strong performance and increasing optionality has prompted a renewed focus on the product...
Atlante momentum waning?: Italian bank rescue fund Atlante II has completed the purchase of its debut €2.2bn non-performing loan securitisation, clearing the way for UBI Banca's acquisition of three small rivals rescued in late 2015. The investment is believed to be one of four transactions that the fund will finalise this year...

Deal news
• Freddie Mac is auctioning an approximately US$292m pool of seasoned re-performing loans from its mortgage investments portfolio in its second such structured sale. The transaction will involve a two-step process and ultimately result in the issuance of the Freddie Mac SLST Guaranteed Securities Series 2017-1 resecuritisation.
• Premium Credit is bringing to market is first term ABS, an unusual deal backed by premium finance contracts (see SCI's deal pipeline). While the size of the deal has yet to be confirmed, both Moody's and DBRS have assigned triple-A ratings to the senior notes.
• Proposed European regulatory changes to classify SPVs as financial counterparties have created significant uncertainty and are credit negative, rating agencies warn. Should the European Commission's (EC) intended amendments to EMIR be carried out, transactions would be required to post two-way variation margin and clear derivatives centrally.
• Regulation AB 2 loan-level disclosures have shed light on performance differences across transactions originated by the largest US subprime auto loan ABS issuers that would not have been apparent under previous disclosure requirements. A new Moody's analysis of Santander Consumer USA and AmeriCredit Financial Services data suggests that the differences reflect the sponsors' underwriting and pooling strategies.

Structured Finance

Global interest in Euro SF surges

The number of investors in European securitisations is ramping up and transactions are increasingly oversubscribed. Issuance volumes still lag behind 2016, but structured finance analysts at Bank of America Merrill Lynch are optimistic that 2017 can gain momentum thanks to increased global investor demand.

There has been renewed investor interest in European structured products, which the analysts believe will push spreads tighter. Investors' continuing pursuit of yield is leading them to new and esoteric asset classes and to construct CLO combos.

There is significant demand from Asia, with Japanese investors "returning in droves" to European securitised products following a sell-off of foreign bonds in the run up to the fiscal year-end. The return of these investors could have a positive effect on demand for structured finance products, particularly in CLOs and non-conforming RMBS, not only in Europe but in the US as well and Japanese insurers are expected to buy more foreign bonds than they did in 2016, often unhedged at that.

Although there is strong enthusiasm for European CLOs from Korean investors, their involvement in that asset class may well tail off as Korean regulators are reviewing investment in CLO combo notes due to their perceived volatility in the equity component of the combo. Despite this, the analysts expect Korean investor appetite will only increase for other asset classes, particularly from the UK and Australia.

A flurry of investment by Chinese buyers of CLO paper in the upper mezz sections has tailed off as a result of purchase restrictions imposed by regulators on onshore Chinese investors. This means demand will come primarily from offshore Chinese investors, albeit most likely with decisions taken onshore, and the analysts caution that it will take time to build a loyal and sustainable investor base.

There has also been a renewed buying spree by US and European investors. The number of investors in deals has been increasing and more investors are allocating money to securitised products.

"For example, Bavarian Sky German Auto Loans latest deal reported 38 investors vs 31 in the previous one and an oversubscription level of 2.8 times. And this occurred despite the near halving of the official sector participation now relative to previous deal (24.4% vs 43%) and despite the 4bp tighter spread on the senior tranche than back in September 2016," say the analysts.

The analysts add that while, as of mid-May, there has been a 25% reduction in deals year-on-year, there are signs of a catch-up. In recent weeks, for example, the pipeline has been filling up. However, many transactions that are pricing are being retained, such as a large Belgian RMBS, Spanish SME ABS and Italian ABS.

The analysts express "guarded optimism" about a positive outcome in June from the EU's STS discussions, but suggest that other risks stand in the way of a revival of securitisation in Europe before 2019. As a result, they suggest that volumes will be depressed for the foreseeable future. This does however immunise structured finance in Europe from the volatility of EU monetary policy and rates developments, which is positive for investors in the near- to medium-term.

The analysts add that the "stars are aligning in favour of the EU" due to minimal fears of risk fragmentation, economic growth picking up and optimism about the political future of the EU under a joint stewardship of Germany and France. As a result, the securitisation markets will not be affected by political risks in the rest of Europe, supporting the performance of securitised pools and spread performance.

The analysts expect "a decent volume near-term and potentially a catch-up in issuance year-on-year by the end of 1H17", but do not think this will be enough to beat last year's total.

RB

Structured Finance

Investors overweight RMBS

Investors are moving out of consumer ABS and into US non-agency RMBS, agency RMBS and cash, according to a Morgan Stanley survey. 89% of survey respondents expect to stay in line or add to their current allocation to securitised products.

The 2Q17 global investor survey polled 30 hedge funds, 67 asset managers, 23 insurance companies, 27 banks, two pension funds and 11 other investors. They revealed that their greatest concern over the next six months is geopolitical unrest, while fiscal policy uncertainty and disappointing US economic growth also figured prominently.

Investors appear to favour US non-agency RMBS and CLO seniors, overweighting on these asset classes. 49% of US non-agency RMBS investors polled expressed an overweight view, as opposed to 16% underweight. For CLO seniors, it was 45% overweight and 27% underweight.

Cash, UK non-conforming RMBS and consumer ABS were also favourites, although Morgan Stanley's previous quarterly survey actually had consumer ABS with the highest proportion of overweight views, so interest is clearly cooling. More than 40% of investors were underweight in legacy US CMBS AMs and AJs as well as US and European CMBS new issue seniors, US agency mortgages and CLO equity.

"Consumer ABS saw the biggest shift [from the previous survey] to underweight (9%), while US non-agency RMBS (18%), US agency RMBS (14%), and cash (14%) gained the most overweight support," says Morgan Stanley. "The shift to overweight in cash has largely come from the neutral category. CLO mezz (20%), CLO equity (15%) and European/UK Prime RMBS (15%) had the highest shifts to neutral from overweight, given the strong amount of spread tightening in these sectors in 2017 so far."

Investors expect the 10-year US Treasury rate to rise over the next six months, with 33% of respondents believing it will raise by 25bp-50bp and 37% believing it will raise by 0bp-25bp. A further 3% expect the rate to rise by more than 50bp.

With the FOMC expected to begin reducing its balance sheet later this year, 57% of survey respondents believe the Fed will taper reinvestments of both agency RMBS and Treasury securities, while 37% think the reduction will come in mortgages only. Another 9% believe the Fed will cease both agency RMBS and Treasuries.

"With almost four months of the Trump administration having come and gone, we also asked investors to refresh their views on the prospects of GSE reform over the next 24 months. The views remain roughly the same as last quarter, with even more investors believing there will be no substantial progress but that the CRT programme will expand (53%)," Morgan Stanley says.

Agency-focused respondents have become less bearish on the basis between nominal current coupon spreads and the seven-year part of the Treasury curve as OAS has widened. The majority opinion is that the basis will continue to widen over the next six months.

For non-agency RMBS investors, there is significant concern about contagion from a sell-off in other risk assets, while respondents are also concerned about lack of liquidity as the market continues to shrink. Sentiment on spread movements in the non-agency space remains largely dispersed, but generally spread tightening in the near term is expected.

US CMBS investors have become slightly more constructive, with almost half expecting US$60bn-US$70bn of supply. "However, despite a more positive tone on issuance volumes, CMBS investors continue to be bearish about spreads, with 44% believing generic CMBS 2.0 spreads will widen over a six-month horizon," says Morgan Stanley.

Only 14% of CLO investors believe the best value is in equity, while 44% favour seniors and 40% identify investment-grade mezz and junior mezz backed by clean portfolios as having superior relative value. Just over half of CLO-focused investors expect generic CLO debt spreads to tighten over six months.

With delinquencies climbing in US consumer ABS, nearly half of consumer ABS-focused investors believe that this could be an early warning sign that the consumer might not be so healthy after all, while 38% say that this is an idiosyncratic issue in these specific sectors only. Very few believe that rising delinquencies are just a transient effect.

As for European ABS, investor sentiment about spread levels over the next year is broadly mixed. Among European ABS-focused investors, 52% of respondents think spreads will tighten for peripheral sectors. That marks a dramatic change from the last survey, where 76% thought they would go wider.

"This quarter, we asked investors about their views on which areas within the European ABS sector would experience the strongest growth in the primary market for the remainder of the year. Among European ABS-focused investors, 38% thought that securitisations of non-performing loan portfolios would experience the strongest growth, and a quarter of investors believed European CLOs would. Securitisations of performing legacy loan portfolios secured 21% of investors' votes," says Morgan Stanley.

JL

CMBS

Urgent-care centres could help fill retail vacancies

Non-traditional tenants such as medical and urgent-care centres could help fill vacancies in large retail properties, according to Morningstar Credit Ratings. There is currently US$739.8m in CMBS with exposure to urgent-care centres where they are one of the five largest tenants and Morningstar suggests the growth of these centres may help combat the growing number of retail tenants filing for bankruptcy.

The number of urgent care centres in the US has risen by 22.6% from 2014 to 2016, driven by a growing number of consumers needing healthcare and more people being insured in the US after the passing of the Affordable Care Act (ACA). Four of the top five states with urgent-care centres are Texas, New York, California and Florida, which are also among the top five states with CMBS exposure.

Accordingly, there has been a surge in investment in urgent-care centres from private equity and venture-capital funds because the clinics have strong corporate guarantees, familiar tenants and many medical leases feature rent escalations. Private equity firms see the opportunities for growth by capitalising on the increased demand that demographic changes are bringing to retail health, Morningstar says.

Another stimulus for urgent-care industry growth is lack of regulatory hurdles and federal health care reform. The centres are not required to register with the government or get accredited by the non-profit Joint Commission. They could also seeing more insured patients due to the ACA, with more patients obtaining insurance.

A rollback of the ACA would therefore constrain the growth of urgent care centres, the rating agency suggests, and the growth of the industry could slow because of healthcare trends like telemedicine or in-home care. Potentially clinics too could be a competitive force, such as those from CVS Health Corp which has rapidly expanded its MinuteClinic chain, from 640 locations end of 2012 to 1,125 currently.

Traditionally, landlords of large shopping centres or strip malls have dismissed medical tenants, but with many retailers downsizing, medical tenants have become a more attractive prospect to fill vacancies. Landlords are now leveraging medical and urgent care to bring traffic back to retail spaces.

While shopping centres and strip malls are prime locations for urgent-care centres, big box spaces and mall anchor stores are unlikely to be suitable due to less accessibility and convenience. Morningstar says that as urgent care centres in CMBS average 5,400 square feet, mall or big-box spaces are more viable for hospitals or other healthcare facilities.

Instead of taking large spaces in retail outlets, urgent-care centres typically occupy just 8.9% of the leasable area of properties backing CMBS loans. As such, Morningstar says the loss of a tenant "would be a small dent to most properties' net cash flow because of these centres' footprint".

The rating agency suggests obstacles to the growth of urgent care centres include over-building, winning over consumers, the rise of work-site clinics and clinics in stores. Urgent care centres do not however face the same kind of competition that retailers do, such as e-commerce.

The firm adds that insurance firms and the ACA control the amount of money providers can make from each customer, forcing the need for volume and increasing demand for strategic locations, ultimately meaning less profitable locations are at risk of failure. Furthermore, urgent care centres are still not viewed that favourably by the American public, according to Morningstar.

However, while the expansion of clinics in former retail spaces will continue, the effect on CMBS "should be minimal" because such tenants make up a small portion of most collateral properties' gross leasable area. Morningstar says that it has identified 104 properties in the CMBS universe where an an urgent-care related tenant is one of the five largest.

Of this 104, only 11 properties, making up 6% of urgent-care exposure by balance, does an urgent-care tenant occupy more than 20% of the gross leasable area. Morningstar concludes that a downturn in the sector and potential tenant loss is therefore unlikely to increase the default risk for most loans.

RB

CMBS

More store closures add to retail woes

Retail woes continue to trouble the CMBS sector, with Rue21 filing for bankruptcy last week and announcing it will close approximately 400 stores. Fitch figures show more than ten retailers have now filed for bankruptcy in 2017, including General Wireless Operations (RadioShack) shutting 552 stores, and around 40 retailers have announced store closures.

Clothing retailer Rue21 takes up a large amount of space in several malls linked to CMBS, potentially affecting cashflow down the line. The company's plans to close around 400 locations will affect 23 CMBS loans with a combined balance of US$174.2m.

Morningstar Credit Ratings notes that if the clothing retailer closes further stores, some 11 CMBS loans totalling US$100.7m, secured by properties where Rue21 is a major tenant, could become troubled. The rating agency does not however see much near-term default risk.

For the 23 loans affected by the announced store closures, Morningstar does not believe there will be a significant decline in cashflow as Rue21 only accounts for a small portion of net rentable area. However, the rating agency suggests that if the company closes additional stores and rejects leases, certain CMBS transactions could see a large drop in net cashflow, particularly in those transactions with DSCR at or below 1.20x or if collateral occupancy falls below 80%.

Morningstar's largest loan of concern among the additional 11 is the US$21.74m Fountain Place Shopping Center loan which amounts to 9.7% of JPMCC 2006-CB16. Morningstar believes that the "potential closure of Rue21 would be a further blow to the distressed loan, which defaulted on its July 2016 maturity date, because of low net cashflow and the upcoming lease expiration of the property's largest tenant, Lowe's Companies".

Rue21 is the fourth largest tenant in this shopping centre, occupying 3.7%. Morningstar suggests that the loss of this store would push the DSCR ratio below break-even, and so it expects a closure of Rue21 to increase loss expectations on the asset.

The rating agency also highlights the distressed asset Wausau Center in WFRBS 2011-C4, which has been in special servicing since June 2016 and was only just more than half occupied in September 2016. As Rue21 occupies 2.5% of the mall, its closure would further erode the property's value.

The US$13.3m Gateway Station loan, comprising 1.2% of MLCFC 2007-9, could become the largest master-serviced at-risk loan if Rue21 rejects its lease. This is largely because Rue21 is the third-largest tenant with 7.3% of the total space and Morningstar notes that with net cashflow down 6.6% from issuance, a Rue21 lease rejection would further hamper the borrower's ability to obtain full takeout proceeds.

Retail concerns within CMBS are not new, with Fitch highlighting the issue in 2013. That rating agency believes the survival of major retailers like Sears (SCI 6 January), JC Penney (20 March) and other "big-box" and department stores remains in question. Such companies have nationwide reach and often are the two largest anchors in individual malls.

Fitch highlights that Macy's continues to suffer with a drop in sales of 7% a year ago, only made worse by a further 5% decline as of 11 May this year. With Macy's often a third anchor at a mall, closures could put a further strain on malls already performing weakly (SCI passim).

The declining performance of stores like Macy's is exacerbated by the rise in e-commerce which is making greater inroads into traditional clothing markets and the rating agency adds that e-commerce has been strongly felt in electronics. This has been seen in the disappearance of Circuit City and RadioShack, although Best Buy is now in a stronger position as a result.

Fitch comments that apparel retailers will follow a similar pattern with fewer stores and smaller footprints, with weaker malls closing and survivors offering a greater mix of retail, restaurants and entertainment. The rating agency suggests that surviving malls will utilise a range of marketing channels and that online retailers will use bricks-and-mortar stores more for returns, but that this development will not improve long-term the viability of weak retail properties.

The rating agency adds too that the lack of malls being developed is a positive for the sector and that it should eventually "help right-size retail square footage and support the property type despite e-commerce's continued growth".

In terms of the impact of retail on CMBS, Fitch highlights that retail has been the second largest property type in the CMBS 2.0 deals it rates, representing 22% of total collateral. Malls comprise 35% of CMBS 2.0 retail exposure and 7.6% of overall CMBS collateral. Of the collateral represented by malls, nearly 20% are in nine single-asset deals totalling US$4.5bn.

RB

ABS

MPL ABS event to explore regulatory implications

Industry participants will gather in New York on 22 June to discuss the major issues in marketplace lending securitisation at SCI's third annual MPL ABS seminar. The first panel will look at regulatory challenges and developments in the sector, including the future of the CFPB and the repercussions of the Madden v Midland case.

The future of the CFPB is a key consideration after a legal case questioned the constitutionality of its structure. President Trump has suggested that he may severely reduce its powers and on 24 May the US Court of Appeals for the District of Columbia heard oral arguments on the CFPB, although no decisions have yet been made.

"There is some uncertainty about the CFPB, particularly the future structure of the CFPB, in the wake of the Second Circuit's decision in October of last year in the PHH case. The Second Circuit ruled in PHH that the CFPB's current structure - that is, a structure with a single director, removable only for cause - was unconstitutional," says Ross Wallin, partner at Grais and Ellsworth.

He continues: "But the Second Circuit subsequently granted the CFPB's petition for rehearing en banc, which effectively vacated the Second Circuit's October decision."

Wallin notes that the effect of a structural change at the regulator and its ability to wield real enforcement ability is yet to be seen. If major changes are executed, it could have significant implications for financial firms, as well as marketplace lending companies.

As well as the status of the CFPB, marketplace lending is still dealing with the repercussions of the Madden v Midland case which contested the true lender status of marketplace lenders. However, Wallin points out that because the US Supreme court refused to hear the case, it remains 'good law' in the Second Circuit.

He suggests too that a clarifying decision from the Supreme Court that effectively would resolve the issues raised in Madden does not seem imminent. As a result, he believes marketplace lenders seem to have "adjusted their operations to adapt to life after Madden, and presumably will continue to do so".

Another issue that may be discussed on the panel in June is whether platforms may look to circumvent state laws by applying for a bank charter through the Office of the Comptroller of the Currency (OCC). The regulator announced last year that it had drafted a policy to enable fintech firms to apply to become national banks.

Wallin is not sure, however, that such an idea will take off. He says: "While I think that platforms may look at OCC special-purpose bank charters as an option, I think most would see it as a mixed bag. One the one hand, a national charter would provide some uniformity and relief from state-by-state licensing and compliance, but the costs of obtaining the charter and other regulatory requirements could be significant."

Another topic that could be discussed is which regulator may look to oversee the marketplace lending space. Currently there remains a lack of a singular body taking responsibility for regulation of the industry.

The SEC has made some motions that it could look to step-up involvement in regulation of the sector but this could depend on a number of factors. "To some degree, regulators compete with each other and have overlapping mandates," notes Wallin.

"It is difficult to predict the relative impacts of different regulatory bodies going forward, but it is certainly an issue. If the CFPB's influence were to diminish, the SEC's role could become more prominent."

SCI's third annual marketplace lending securitisation seminar will be held at 250 West 55th Street, New York, on Thursday 22 June. Further details and the link to register are available here.

RB

Structured Finance

Job swaps round-up - 26 May

North America

SFIG has hired Covell Adams as chief administration officer and Scott Brody as director of education and conferences. Adams joins from Wells Fargo Securities where she was head of business strategy and development for the asset backed finance and securitisation unit. Brody was previously md at IMN-Euromoney and he co-founded IMN in 1994.

KBRA has hired Michael Dean as md in the firm's issuer relations group. He was previously at Fitch for 25 years where he was md and co-head of its ABS group in North America.

Agency MBS

Freddie Mac has announced its second front-end credit risk transfer offering, Freddie Mac Deep MI CRT DI 2017-1. Through a forward credit insurance policy provided by a panel of mortgage insurance company affiliates, this structured transaction provides additional coverage beyond the primary mortgage insurance on 30-year fixed-rate mortgages with 80-97% LTVs, which is placed immediately upon their sale to Freddie Mac. The GSE ran a pilot for the programme last year (SCI 27 September 2016).

CDO Manager Transfer

Vertical Capital has assigned its rights and obligations as collateral manager for E*TRADE ABS CDO I, E*TRADE ABS CDO III and E*TRADE ABS CDO IV to Dock Street Capital Management. Vertical Capital had itself been successor to E*TRADE Global Asset Management. Dock Street has recently also replaced Vertical on Vertical ABS CDO 2005-1 (SCI 28 April), Vertical ABS CDO 2006-1 and 2006-2 (SCI 5 May), and Summer Street 2005-HG1 and Vertical CDO 2003-1 (SCI 19 May).

Settlements

Lehman Brothers Holdings Inc (LBHI) has sent thousands of US mortgage lenders a notice of a motion to approve a proposed settlement of RMBS claims asserted by trustees and investors against LBHI over the last few years. The notice refers to proposed findings of fact, sets a deadline of 22 June for objections to the settlement and schedules a hearing date of 6 July for approval of the settlement.