Contents

Secondary markets

Euro secondary sporadic

The European securitisation secondary market continues to exhibit the pattern of recent weeks with sporadic bursts of activity in specific areas.

The stop-start nature of all asset classes has been further exacerbated by recent public holidays, month-end and the run-up to Global ABS. With wholesale absences at the conference next week little is likely to change in the near future.

Yesterday saw another diverse day in ABS/MBS with very light flows but a strong BWIC calendar headlined by a 30 line mixed mezz list. Notwithstanding that those auction results are yet to be released, the overall grind tighter in ABS/MBS secondary spreads continues supported by strong market tone.

European CLOs have seen more consistent activity of late, fuelled by a pick-up in BWIC volumes over recent sessions. Nevertheless, the overwhelming buying bias is being maintained across vintages and throughout the majority of the stack with spreads down to lower mezz edging in further over the past week.

There are currently six BWICs on the European schedule for today - three ABS/MBS and three CLOs. Among the former the largest is a four line collection of RMBS seniors due at 13:30 London time.

The 33.923m euro and sterling list comprises: FSTNT 9 A1, PMF 1 A, RMS 25 A1 and THRON 2014-1 A. Two of the bonds have covered on PriceABS in the past three months - PMF 1 A at 100.485 on 4 May and RMS 25 A1 at 102.285 on 18 May.

The longest CLO list is a €17.735m three line auction due at 14:00 involving ARESE 7X D, ARESE 7X E and GLGE 1X E. None of the bonds has covered on PriceABS in the past three months.

Secondary markets

US CLOs stable

The US CLO secondary market continues to be stable.

"The market is taking a bit of a pause and we're in the gap between last week's CLO conference in New York and Barcelona next," says one trader. "Overall market tone remains cautiously optimistic."

The trader continues: "Secondary spreads remain stable with retail concerns not having an impact. Everyone is still looking for the stimulus to push us a bit wider, but there's nothing yet in evidence."

Nevertheless, the trader reports that secondary trading conditions are quite difficult. "Investors don't want to give up their CLO holdings as they're concerned they won't be able to access anything of similar quality to replace them. Equally, there's a strong focus on primary distracting people away from secondary - there, the emphasis has shifted away from refis to resets and real new issuance."

Meanwhile, Trups CDOs are seeing an uptick in secondary activity. "We're now seeing one or two BWICs regularly each week, but the sector continues to struggle for supply," the trader says. "For example, there is a Trups list today and while it's good to have a number of names to look at, the volume in current face terms is negligible."

There are five BWICs on the US CLO/CDO calendar for today so far. The longest is the aforementioned list that combines 13 Trups CDOs with 15 CLOs.

Totalling $35.519m original face the auction is due at 13:00 New York London time. It comprises: ALESC 12A A2, ALESC 1A A1, ALESC 8A B1, ATTN 2007-3A A1B, BLUEM 2013-2A D, BNPIP 2014-1A C, CGMS 2013-3A D, CGMS 2014-2A D, CIFC 2012-2A B1R, CTWTR 2015-1A D1, FLAGS 2014-8A D, KDIAK 2006-1A B, LCM 12A DR, MARLB 2007-1A D, MIDO 2013-2A E, MRNPK 2012-1A DR, OCT19 2014-1A D, PRETSL 18 A2, PRETSL 21 A1, PRETSL 24 A2, PRETSL 26 B2, PRETSL 9 B1, SYMP 2006-2A D, TBRNA 2006-6A A2, TRAP 2003-5A A1A, TRAP 2007-13A A2A, VENTR 2007-8A E and WASAT 2006-1A C.

Four of the bonds have covered with a price on PriceABS in the past three months. They last did so as follows: CGMS 2013-3A D at VH90S on 31 May; CGMS 2014-2A D at 100.09 on 6 April; MIDO 2013-2A E at 96.35 on 21 March; and VENTR 2007-8A E at 100A on 1 March.

ABS

Credit-scoring models contrasted

The importance to ABS of the VantageScore credit-scoring model continues to grow, with structured finance transactions increasingly using the credit metric. As such, rating agency DBRS believes investors would benefit from a greater understanding of the FICO alternative.

"Evidence points at VantageScore gaining traction in consumer lending and, by extension, in structured finance. The inclusion of VantageScore as a credit metric was originally seen in student loan refinancing ABS, but is now enjoying wider adoption in structured finance," says DBRS.

VantageScore is overseen by VantageScore Solutions, a joint venture established in 2006 by Experian, Equifax and TransUnion. FICO is almost 30 years old, with its latest model released in 2014.
Both VantageScore and FICO score creditworthiness from 300 to 850, although their criteria and relative weights to arrive at each score do differ. A FICO score takes account of new credit (which accounts for 10% of the score), payment history (35%), amounts owed (30%), length of credit history (15%) and credit mix (10%), while VantageScore takes account of recent credit (5%), available credit (3%), payment history (40%), depth of credit (21%), utilisation (20%) and balances (11%).

While the two metrics sometimes use somewhat different labels, VantageScore gives a slightly higher weighting to payment history than FICO (40% compared to 35%) and a marginally higher weighting to amounts owed (31% and 30%), which VantageScore labels balances and utilisation. FICO gives greater weight to length of credit history and credit mix (25% for FICO and 21% for VantageScore), which VantageScore labels depth of credit, and FICO also gives greater weight to new/recent credit (10% and 5%).

Length of credit history and credit mix account for 25% of a borrower's FICO score, while depth of credit accounts for 21% of a VantageScore score. Therefore making limited use of credit facilities - being a so-called 'thin file' consumer - would appear to have less of a derogatory impact on a VantageScore than on a FICO score.

It is also interesting to note that FICO attaches twice as much importance to whether borrowers have new accounts and have made recent credit inquiries. However, FICO gives no specific consideration to the total amount of credit available to a borrower, which does constitute 3% of the VantageScore score.

FICO and VantageScore also take different approaches to length of credit history. VantageScore scores new populations that have less than six months of history on their credit file, have updates to their credit file within a 6-24 month window, have trade activity that is at least 24 months old or have no open trades. FICO Score's minimum score criteria has remained consistent across its history and includes that the consumer cannot be deceased, the credit file needs one trade line reported by a creditor within the last six months and the credit file needs one trade line that is at least six months old.

FICO remains far more widely used than VantageScore. FICO sells over 10 billion FICO scores each year and 90% of lending decisions in the US rely on FICO scores.

By contrast, DBRS notes that the frequency of VantageScore usage is unknown. VantageScore Solutions says over six billions scores were used in 2014-2015 and that its credit scores were used by over 2,000 lenders in that time.

Within structured finance, the usage of credit scores does vary. Sectors such as RMBS rely heavily on credit scores as a predictive element in assessing expected losses, but auto loan ABS would be an example of a sector where credit scores are used more passively to stratify credit tiers for analysis of historical performance data.

"It is important for consumers seeking to use these metrics to understand the various elements considered in the two analyses and the comparability of [FICO score and VantageScore]. Based on some of these differences in scoring, VantageScore provides the ability to report on an additional portion of the borrower universe, increasing the number of tools for lenders considering thin file and similar consumers," says DBRS.

The rating agency adds: "Concurrently, lenders need to adequately understand the differences in the two analyses and utilise the outputs accordingly. With respect to securitisation, market participants could see more consumer loan originators utilising VantageScore and correspondingly becoming a credit consideration in structured finance transactions."

JL

Structured Finance

STS framework finalised

A deal has been reached on the long-awaited new EU securitisation regulations, including a framework for STS securitisation. In what is being seen as a major step forward for the European ABS market, the European Commission, Council and Parliament reached a compromise yesterday evening, with risk retention requirements to remain unchanged at the current minimum of 5% and several punitive regulations omitted (SCI 19 May).

While documents have yet to be released, the two bills look set to be finalised by summer. The first is on overall securitisation regulations, including a dedicated framework for STS securitisations, and the second implements Basel's Revised Securitisation Framework into the CRR. Seemingly in return for the European Parliament's compromise on the 5% risk retention rate, it is said to have advanced its desire to create data repositories, with investors required to register their exposures to securitisations with their supervisors.

TwentyFour Asset Management highlights in an investor memo that confirmation of the 5% risk retention requirement is positive. The firm states: "While there were also a number of other no-less important but more technical issues being tabled in the meeting, a successful outcome for this point was crucial to the future development of the market."

A further proposal in the final texts is to "give room for third-party certification of securitisations", but no concrete details were released on the hierarchy of setting risk weights to securitisation exposures. Rabobank credit analysts note that the European Parliament mentions "flexibility in their approaches", which "could suggest that the second (rating based) and third (standardised approach) method rank equal."

They add that the new regulation is a "major step forward for European ABS", although may not necessarily lead to the touted €150bn of new supply it is meant to induce because the requirements are "relatively burdensome in some aspects". They suggest that the creation of a harmonised asset class of STS securitisations is a positive development, but say that more clarity is needed on the regulatory benefits of investing in them.

At the moment, the Rabobank analysts state that the lower risk weights under CRR is a positive, but the extra layer of requirements is still present. They suggest that Solvency 2 will be important as "a recalibration of STS securitisations" is needed and, now the STS framework is nearly finalised, the focus will move to Solvency 2.

Simon Lewis, chief executive for AFME, also says that the agreement is a "crucial milestone in the development of a Capital Markets Union" and that now how the regulations are implemented is vital. He says that a "piecemeal approach" should be avoided at the risk of a "damaging down-draught on issuance as higher capital requirements for bank investors take effect before lower capital requirements for insurers are introduced."

He suggests further that European institutions should choose an implementation date for the STS framework. Lewis concludes that doing so "will allow enough time for this important secondary legislative work to be completed."

RB

Structured Finance

MARF listing breaks new ground

The Mercado Alternativo de Renta Fija (MARF) has admitted a new synthetic securitisation dubbed FT PYMES Magdalena, set up by Banco Santander's securitisation management company, Sociedad Gestora Santander de Titulización SGFT. The move sets a precedent in terms of synthetics being publicly listed and is seen as a test case for the 2015 amendments to Spain's securitisation law.

Following the amendments, Spanish securitisation funds can now securitise loans and credit rights via derivative instruments. "In that sense, it is a proof of concept," says a source close to the transaction. "The CNMV, the Spanish securities watchdog, has a new director that wants to modernise the authority in an attempt to get more transactions registered in Spain."

The 24-year €66.5m publicly syndicated significant risk transfer deal pays 10.4% and has a tranche thickness of 7%. It references a €1bn Spanish SME portfolio, with a 49% concentration in three key regions - Madrid (20%), Catalunya (15%) and Andalucia (14%). Proceeds of the sale have been deposited with Santander in order to cash collateralise the protection purchased from the fund.

Launched in October 2013, MARF is a trading platform for financial instruments issued by companies not listed on secondary markets. As a multilateral trading facility, it offers fewer guarantees than a regulated market like the AIAF, Spain's benchmark market for corporate debt and private fixed income. For this reason, it targets mainly institutional investors.

The formal issue requirements are also less strict than those of official markets, although they are stringent enough to ensure investor confidence. Such requirements include: audited accounting information; simplified and standardised information documents; and a credit rating report.

"This is the first transaction to receive the PCS Risk Transfer label out of Spain," says Mark Lewis, head of operations at the PCS Secretariat. "In this sense, it is an important and unique deal, but in other PCS-related aspects - for instance, key structural features and SME assets - it's similar to another PCS Risk Transfer transaction, namely UniCredit's ARTS MidCap 2016-2 that references a portfolio of Italian SME loans." The label was awarded to the UniCredit deal on 12 January, marking the first synthetic transaction to be awarded the PCS Risk Transfer label (SCI 23 February).

As stipulated by the PCS eligibility criteria for such transactions, PCS reviewed 95 criteria, which seek to address the four issues associated with primarily US pre-2007 securitisations that performed badly during the crisis. Namely, the assets must be on the balance sheet of the originator and there should be 'skin in the game' in the form of risk retention and alignment of interest. Additionally, there should be no re-securitisations and no embedded maturity transformation in the transaction.

Other PCS criteria focus on investor transparency issues and structural features, such as loss triggers, call features and verification agents, with the latter appointed to audit the expected loss calculations of protection buyers. There are also a range of PCS criteria that focus on specific technical features of risk transfer transactions, including those where the protection buyer seeks to achieve SRT, along with PCS quality standards such as asset homogeneity.

Investors in the deal were UK-based asset managers and are said to have been attracted to the deal for several reasons, most notably to gain exposure to the SME sector in Spain at an attractive yield, as well as it being a public transaction that can accommodate secondary market trading. Given the deal's syndicated and public nature, investors also benefitted from competitive execution terms. At the same time, with greater than usual investor participation, Santander benefited from more competitive pricing.

The transaction was nevertheless executed in accordance with regulations for private transactions, which do not require the formal registration of the offering circular.

SP

Structured Finance

Risk transfer round-up - 2 June

Dynamic Credit is prepping another Dutch RMBS originated under the ELAN Woninghypotheken brand. Dubbed DCDML 2007-1, it is being arranged by Goldman Sachs and is expected to launch by end-Q3. The full capital stack DCDML 2016-1 was completed last October (see SCI's primary issuance database), achieving balance sheet relief for the lender.

CMBS

Bio-science CMBS prepped

Blackstone is in the market with a US$330m CMBS backed by a two-year floating rate commercial mortgage. Dubbed CGDB 2017-BIO, the transaction is backed by a first lien on the borrower's fee and leasehold interests in a portfolio of 18 life science, office, laboratory and medical properties.

The transaction is sponsored by Blackstone's real estate fund Blackstone Real Estate Partners (BREP) VIII and certain of its co-investment and managed vehicles. Citi and Deutsche Bank are sellers and arrangers on the deal.

S&P has assigned provisional ratings to the transaction of triple-A on the US$154.35m class A notes, double-A minus on the US$37.19m B notes, single-A minus on the US$27.89m class Cs, triple-B minus on the US$34.21m class Ds, double-B minus on the US$46.49m class Es and single-B plus on the US$13.34m class Fs. There is also an unrated non-offered US$16.5m vertical interest certificate to satisfy risk retention requirements, as well as US$69.51m XCP and US$99.31 XNCP triple-B minus rated IO notes.

S&P notes that a transactional strength is that the loan is secured by the borrower's fee and leasehold interests in 18 cross-collateralised properties that contain 35 distinct tenants. The largest tenant, Novo Nordisk, occupies 5.3% of the portfolio's net rentable area and contributes 11.7% of in-place base rent.

The properties are also spread across eight distinct markets, with the largest concentration in Seattle (30.3%), Washington DC (25.8%), Boston/Cambridge (12.5%), San Diego (12%) and Denver/Boulder (8.7%). The majority (91.3%) of the portfolio by allocated loan amount is located in the top-10 biotech markets in the US. A further strength is that the majority of the properties securing the loan are in primary or secondary markets, with 83.4% of the loans by ALA located in primary markets and 16.6% in secondary markets.

The portfolio is also 95.2% leased, with a weighted average remaining lease term of 6.3 years, and the submarkets that comprise the portfolio exhibit a weighted average vacancy of 6.6%. A portion (14.9%) of in-place base rents are derived from three investment grade rated tenants.

One tenant, Nanostring, represents some transaction risk because it accounts for 5.3% of the portfolio and has the option to terminate a portion of its lease, so long as it enters in to a new lease for space in another sponsor-owned property. Such an event would, however, trigger a cashflow sweep until US$1.8m in funds were accumulated in the lease termination reserve account.

S&P comments that according to the appraiser, the life and science sector has "become increasingly appealing to investors, both on the financial and real estate front", with the greatest driver being the ageing population and increased opportunities for prescription pharmaceuticals. The sector is open to various threats, however, such as government regulation and the volatility attached to heavy venture capital involvement.

Further, as the tenancy is primarily concentrated in the life and bioscience sector, its performance is tied to the performance of the life science industry and the cost of converting the properties for other industries would be considerable, according to the rating agency. Equally, the transaction has a concentration of suburban office properties, which are riskier than central business district office properties, due to lower barriers to entry and a generally lesser-quality tenant base.

However, the transaction has a favourable debt service coverage ratio of 1.52x and benefits from the excellent condition of the majority of the properties, as well as a hard lockbox and springing cash management loan structure. There is a net cashflow sweep upon a loan EOD or if the yield on the combined debt of the loan or mezz loans falls below 7% for two consecutive quarters.

The loan has additional debt in the form of two mezzanine loans totalling US$135m and the first 30% of prepayment will be applied to the certificates pro rata.

RB

Structured Finance

Job swaps round-up - 2 June

EMEA

BNP Paribas Asset Management has launched a new private debt and real assets investment group, headed by David Bouchoucha. This is together with the appointments of Philippe Deloffre as head of real estate debt, Karen Azoulay as head of infrastructure debt and Christophe Carrasco as head of SME lending. The group will focus on three main investment areas: real assets, SME lending and structured finance; the existing global loans capability; and the newly-created SME Advanced Solutions, an innovative pan-European SME lending platform led by Fabrice Susini.

HSBC has hired Karen Lomax as head of business development, Europe. She was previously head of EMEA sales, issuer services at Deutsche Bank, incorporating capital markets experience with structured and conventional products.

Intertrust has hired Cliff Pearce as global head of capital markets, replacing Robert Berry following his retirement. Pearce joins from BAML and has over 20 years' experience in the capital markets originating and delivering structured finance transactions for a wide range of clients.

ISDA has hired Ulrich Karl as head of clearing services, a newly created role. Karl joins from HSBC, where he served as director, CCP, global markets and in which he also acted as the industry chair of ISDA's clearing, risk and capital working group.

Pretty Sagoo has joined Legal and General as head of strategic pension risk transfer. Sagoo was previously a director at Deutsche Bank in the corporate and investment banking division.

North America

Alcentra has promoted Frank Longobardi to CLO portfolio manager, working with svp Thomas Frangione, to manage the firm's Shackleton series of US CLOs. Kevin Cronk has also been named loan portfolio manager for Alcentra's mutual fund and market value portfolios. Meanwhile, after 30 years with BNY Mellon, including nine years at Alcentra, Bill Lemberg will be retiring, effective 19 August.

AlphaCat Managers, a subsidiary of Validus, has appointed Bernard Van der Stichele as portfolio manager, reporting to ceo Lixin Zeng. In his previous role, Stichele was vp at AQR Capital Management. Separately, Chris Silvester, Validus Services evp, will assume primary responsibility for AlphaCat's reinsurance business origination, in addition to his role as head of the firm's US property team.

Intercontinental Exchange has acquired BAML's Global Research Index Platform, which will be rebranded as the ICE BofAML indices. The terms of the agreement are not disclosed and the transaction is set to be completed in 2H17.

Michael Mauboussin will join BlueMountain Capital Management in the newly created role of director of research, in July. Most recently, he was head of global financial strategies at Credit Suisse.

The London Stock Exchange Group is to acquire The Yield Book and Citi Fixed Income Indices from Citi, including the World Government Bond Index (WGBI), for a total cash consideration of US$685m, subject to customary adjustments.

Funds

RAIT has entered into a cooperation agreement with Highland Capital, in which RAIT has agreed that following the certification of the vote at its 2017 annual meeting of shareholders, it will appoint to its board of trustees a new trustee who will be one of two candidates recommended by Highland Capital. In addition, RAIT has agreed that within 120 days from the date of the cooperation agreement, it will appoint an additional new trustee to its board.

Blackrock is set to launch a consumer loan ABS ETF investing in notes supported by consumer loans, such as student and credit card debt. Dubbed iShares Consumer Asset-Backed Securities ETF, it has been registered with the SEC but is yet to be approved.

Settlements

The majority (95%) of net funds from the IndyMac RMBS settlement (SCI passim) were distributed to authorised claimants last week, with the remaining funds due to be distributed at a later date. The settlement amounts for the underwriter defendants and individual defendants were US$340m and US$6m respectively, according to Wells Fargo figures. The funds were distributed on a pro-rata basis, according to the size of the claimant's 'recognised claim' relative to the total recognised claims of all claimants in the respective settlement class.

The offer from the plan administrator for Lehman Brothers Holdings and the other debtors in the Lehman bankruptcy proceeding to settle mortgage repurchase claims has been accepted by 14 institutional investors in connection with 238 of the 244 covered RMBS trusts (SCI 12 May). Of the six trusts for which the offer was not accepted, one trust (SASCO 2003-38) has terminated, while the trustees submitted no claims for breaches of representations and warranties for the remainder - ARC 2004-1, SAIL 2004-4, SASCO 2005-11H, SASCO 2006-RF1 and SASCO 2007-RF1.