Contents

Structured Finance

STS could take a year, but optimism prevails

The implementation of the STS securitisation framework is unlikely to be completed within a year, according to panelists at the recent IMN Global ABS conference. However, speakers on a regulatory panel emphasised that while it may take time to finalise the finer details, optimism is strong that the long-awaited clarity on STS could provide a much needed boost to the industry in Europe.

Andrew Bryan, senior professional support lawyer at Clifford Chance, confirmed that having clarity on what the STS framework will look like is a boon for the sector. He commented that "the single most positive thing is the fact that a deal has been reached" and agreed that keeping 5% risk retention is a big plus for the market, along with clarification on disclosure rules for private transactions.

He added that more work does, however, need to be done on the finer details of the regulation and that time might be an issue. He said: "We need clarity also on the RTS and especially with regard to the disclosure requirements. We need the more precise information outlined in the RTS to meaningfully progress preparation work for the new regulation. Systems need to be set up, securitisation data repositories have to be set up and you have to publish templates which originators need to upload data."

Bryan continued: "Originators also have to start collecting the data, which they are required to disclose as they originate assets, so there is quite a long lead time from the time you have the RTS until you will be in a position to comply. The 1 July 2018 seems a way off, but in terms of ensuring compliance by then, it is a very short time."

Christian Moor, policy expert, securitisation and covered bonds and market risk at the EBA, concurred that while a positive development, the STS framework may take longer than hoped to complete. "It will take at least a year to draft the technical standards after finalisation of the texts. It's hard to finalise things in less than 12 months. To my knowledge, we've never delivered technical standards in six months, for example."

The reasoning behind the length of time taken to finalise such regulations was discussed also by Thierry Sessin-Caracci, senior officer for ESMA. He is optimistic that clarity on the STS will help boost securitisation in Europe, but points out that it's crucial there is enough time to consult the market.

"We need at least three months and then we need time for a proper hearing, to draft the paper and to look at the feedback and to then fine tune the final draft. We need time to ensure the final draft reflects the final regulation," he said.

In terms of the positive impact that STS will have, George Passaris, head of securitisation at the EIF, agreed that its finalisation is a major step in the right direction for the industry. He suggested that investors will return if the framework is conducive, but still advised some caution about being overly optimistic, as "the devil is in the detail" and "there is more to be done."

Christian Aufsatz, md, head of European structured finance at DBRS, said further finessing of regulations is necessary in order to really support the securitisation sector. "Even for STS, capital requirements would still increase, just less so compared with other securitisations. The potential change of the hierarchy would be positive, considering that proposed standardised approach (SA) capital charges are lower than for ERBA. However, securitisation is still penalised in relation to other assets like covered bonds, so the regulations are still unfair to a certain extent."

He continued: "There also needs to be more focus on the capital charges for non-senior securitisation tranches - those are the ones with which credit risk is transferred, which is one of the CMU's goals. Investors - insurance companies in particular - will likely require a higher yield amid the increased capital charges. This could result in securitisation continuing to be uneconomical, unless loan interest rates increase as well."

With the outline of STS in place, EMIR is now a growing concern among participants in Europe, particularly with regard to the possibility of the different treatment of SPVs and additional reporting requirements. Bryan concluded that should EMIR carry this through, it may not spell disaster.

"It is problematic, but might not be the end of the world if done properly. SPVs might, for example, be re-categorised as financial counterparties, but then exempted from clearing and margining obligations," he noted.

RB

Secondary markets

Euro secondary flickers

The European securitisation secondary market is slowly flickering back to life.

Overall, all ABS/MBS and CLO sectors remain insulated from broader market moves with tone and secondary spreads still solid. Nevertheless, flows have been thin over the past two sessions as the market slowly finds its feet post the Barcelona conference and UK election.

There has, however, been a flurry of BWICs since last Friday with the majority of line items trading at or above market expectations. There are a further four lists already on today's European schedule.

The most eye-catching of those is a chunky CMBS auction due at 14:00 London time. The five line €93+m original face list comprises: DECO 2007-E5X C, DECO 2007-E5X D, INFIN SOPR B, INFIN SOPR C and INFIN SOPR D.

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

Secondary markets

US CLO demand continues

Demand for paper across the capital structure continues unabated in the US CLO secondary market.

"There's not a whole lot going on right now," says one trader. "However, we are still seeing good demand across the board."

The trader continues: "The BWICs that do appear are trading very well. Of late they have involved lower rated paper, which is mainly being sold by hedge fund accounts that bought at lower levels and now feel the optionality is running out on some of their positions and it's time to move on."

There is equally strong demand for paper higher up the stack, but less is coming in for the bid at the moment. "There's also investor appetite from triple-B to triple-A, so we're spending most of our time scrounging around trying to satisfy that," says the trader.

There are five BWICs on the US CLO calendar for today so far. The chunkiest is a three line double-B and equity mix due at 10:30 New York time.

The auction comprises: $5m APID 2013-12A E, $1.25m DRSLF 2013-26A E and $7m TICP 2014-3A SUB. Only APID 2013-12A E has covered on PriceABS in the past three months - at 99.4 on 7 June.

Secondary markets

Euro ABS/MBS unchanged

Trading patterns in the European ABS/MBS secondary market remain unchanged.

The lack of primary supply across all sectors continues to stifle flows and discourage BWIC activity. Nevertheless, tone remains positive and demand strong, consequently secondary spreads are flat to slightly tighter on the week.

There is currently one BWIC on the European ABS/MBS schedule for today. It is a five line €32.4m mix of Dutch RMBS and consumer ABS.

Due at 15:30 London time the auction comprises: CHAPE 2003-I B, CHAPE 2007 C, ESAIL 2007-NL2X B, MONAS 2006-I B and MONAS 2006-I C. Two of the bonds have covered on PriceABS in the past three months - MONAS 2006-I B at 85.05 on 12 May and MONAS 2006-I C at 77.773 on 11 May.

Secondary markets

US CLOs similar

Focus and activity in the US CLO secondary market continue to be similar to recent sessions.

BWIC volumes have remained light this week and predominantly revolve around the lower part of the stack. At the same time, bilateral trading is still patchy with little paper on offer. As a result, the bonds that do appear continue to trade well and secondary spreads are holding firm.

There are five BWICs on the US CLO calendar for today so far. Again, most line items are lower mezz or equity, but there is also one triple-A list.

Due at 13:00 New York time it involves $10m each of ACIS 2014-4A A and VENTR 2014-18A A. Neither bond has covered with a price on PriceABS in the past three months.

ABS

ABS first for marketplace lender

Lending Club in in the market with a US$279.38m ABS backed by near-prime unsecured consumer loans originated via its online lending platform (see SCI's deal pipeline). Dubbed Consumer Loan Underlying Bond Credit Trust 2017-NP1 (CLUB 2017-NP1), it is the first transaction the platform itself has sponsored.

Kroll Bond Rating Agency has assigned provisional ratings of single-A minus to the US$162.41m class A notes, triple-B to the US$41.23m class Bs and double-B to the US$75.73m class Cs. The notes have a legal final maturity date of 17 April 2023 and have credit enhancement on the class A, B and C notes of 52.25%, 40% and 17.50% respectively.

The proceeds from the sale of the notes will be used to fund the reserve account and acquire the loans previously acquired by the transferors, which are seven third-parties unaffiliated with LendingClub. The deal is expected to close on 22 June.

The deal is the second rated securitisation of near-prime unsecured consumer loans originated through Lending Club's platform, after Lending Club Issuance Trust 2016-NP2, although a further two unrated transactions have also been closed (see SCI's deal database). Kroll notes that while Lending Club initially sought to operate a true marketplace lending model, it now plans to use some capital to purchase loans and to contribute some collateral to its securitisations, which should align its interests with investors to a greater degree.

CLUB 2017-NP1 is the first securitisation of Lending Club loans where the platform is acting as sponsor, servicer and administrator and where a majority-owned affiliate of LendingClub will be the risk retention counterparty. Furthermore, LendingClub modified its agreement with WebBank in the first quarter of 2016 so that WebBank has an ongoing financial interest in the performance of the loans that it originates.

The collateral backing the transactions consists of 46,766 36-month and 60-month near-prime unsecured consumer loans, with an average loan balance of US$7,198. The weighted average coupon is 27.26% and the weighted average FICO is 639. In terms of geographical concentration, the top three states are California with 13.41%, Texas with 8.49% and Florida with 8.47% of loan originations.

Kroll highlights that a potential deal weakness is that approximately 8.59% of the loans have been originated to borrowers in New York, Connecticut and Vermont, and are therefore subject to any subsequent decisions by courts in the Second Circuit regarding exportation of usury limits - an issue that arose following the Madden v Midland court case (see SCI passim).

The rating agency however says that it has reviewed a "legal opinion from a reputable international law firm that, based on specific assumption and qualifications, a court should respect the exportation of Utah's usury limits no matter where the borrower resides for the loans included in this deal". LendingClub has also made a representation that, at the time each loan was originally sold, each loan complied with all applicable laws, including laws related to the usury limits.

In early 2017, the Colorado Uniform Consumer Credit Code Administrator filed complaints against Avant and Marlette arguing that Colorado limitations relating to interest rates and other charges apply to marketplace loans transferred from a funding bank to a non-bank assignee. While no complaint has been filed against LendingClub, there is no assurance that Colorado will not do this. No loans in the CLUB 2017-NP1 pool have been made to Colorado borrowers, however.

Furthermore, the lending platform has several unresolved legal issues such as a subpoena from the New York State Department received 17 May 2016, inquiries from regulators in Massachusetts and a subpoena from the West Virginia Attorney General. The firm has also been contacted by the SEC and Federal Trade Commission and continues to cooperate with these bodies and all other regulatory or governmental authorities that have contacted it.

RB

Structured Finance

SCI Start the Week - 12 June

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

Pipeline
It was another week of limited pipeline activity, although several CMBS have been announced. Along with those there were two ABS, an ILS and two RMBS added to the list last week.

US$163.1m Upstart Securitization Trust 2017-1 and US$1.3bn Verizon Owner Trust 2017-2 were the ABS, while the ILS was US$100m IBRD CAR 111-112. The RMBS were US$735m STACR 2017-HQA2 and Twin Bridges, a UK deal.

The CMBS consisted of: US$900m BANK 2017-BNK5; US$418.1m BSPRT 2017-FL1; US$900m CSAIL 2017-C8; US$900m DBJPM 2017-C6; JPMCC 2017-MARK; and US$342.4m RAIT 2017-FL7.

Pricings
There was a healthy tally of ABS, RMBS and CLO prints. The final count consisted of eight ABS, four RMBS and seven CLOs.

The ABS were: €133m Citizen Irish Auto Receivables Trust 2017; US$259.71m CCG Receivables Trust 2017-1; US$231.684m CommonBond Student Loan Trust 2017-A-GS; US$150m Drug Royalty III Series 2017-1; US$1.21bn GM Financial Automobile Leasing Trust 2017-2; US$684.9m Synchrony Credit Card Master Note Trust 2017-1; US$318.9m Triton Container Finance VI; and US$147.5m United Auto Credit Securitization Trust 2017-1.

The RMBS were: Deephaven Residential Mortgage Trust 2017-2; US$959m Mill City Mortgage Loan Trust 2017-2; US$698m New Residential Mortgage Loan Trust 2017-3; and £477m Oat Hill No.1.

Lastly, the CLOs were: US$708.25m ALM Loan Funding 2015-12R; US$524.75m Apidos CLO 2013-16R; US$458.15m Battalion CLO 2015-8R; US$1.252bn CBAM CLO Management 2017-1; €413.55m Clontarf Park CLO; US$359m Figueroa CLO 2013-2R; and €337.9m Halcyon Loan Advisors European Funding 2017-1.

Editor's picks
WAC caps not deterring RMBS investors: Since early 2016 a number of European RMBS have been issued featuring net WAC caps, which alter the normal function of the revenue waterfall. While these deals may present worse value for mezzanine noteholders, lack of supply is enabling issuers to structure deals more aggressively in the knowledge that paper will be absorbed by yield-hungry investors...
MPS solvency plan outlined: Monte dei Paschi di Siena (MPS) has set out a plan to demonstrate its solvency to regulators, paving the way for a precautionary recapitalisation by year-end. The plan hinges on the lender's ability to dispose of its €30bn non-performing loan portfolio - including via a securitisation - which it was unable to achieve in December, when it was forced to seek a government bailout (SCI 21 December 2016)...
Bankruptcy reform opens floodgates: India's bankruptcy law has attracted increased investment in its non-performing loan market, following reforms to the enforceability of contracts. However, concerns remain over whether associated time-bound decisions can be achieved, due to the complexity of the legal system...

News
• The US House of Representatives has passed the Financial CHOICE Act. The legislation aims to replace much of the Dodd-Frank Act, specifically criticising Dodd-Frank's "one size fits all" approach to securitisation and doing away with risk retention requirements for all asset classes except RMBS.
• US non-performing loan RMBS early redemption activity has hit record levels this year. US$5.3bn of bonds have been called since the beginning of 2017, compared to about US$2.4bn in 2016, according to Wells Fargo figures.
• European securitisation market participants expect the number of investors to grow and participation by investors to increase. Increased investor support is identified in a recent DBRS survey as one of the most important changes required in order to grow the securitisation market, while regulatory concerns once again dominate.
• At the upcoming SCI Marketplace Lending Securitisation Seminar in New York on 22 June, panellists will discuss the structuring and evolution of marketplace loan ABS. The fact that deals are increasingly incorporating features to reduce risk is one area that is expected to be covered.

Structured Finance

China innovation paves way for securitised products

US dollar-denominated notes backed by Chinese regional and local government (RLG) bonds have debuted in China and provide a new opportunity for offshore investment in securities traded on China's interbank bond market. Moody's believes further similar deals backed by Chinese collateral could follow, including CLOs, ABS and RMBS.

Such US dollar-denominated bonds issued by Chinese RLGs are the first of their kind in the country and have been issued by an offshore-incorporated SPV, specifically targeting offshore investors interested in Chinese local government bonds which trade on the country's interbank bond market. Moody's says that these bonds could help diversify the investor base for bonds traded in China and that Chinese securitisations could benefit significantly from more cross-border investment and a broader range of off-shore investment.

Chinese RLG bonds do however pay coupon and principal in CNY and these new repackaged notes use cross-currency swaps which hedge the currency mismatch between US dollar-denominated notes and the CNY-denominated collateral pools. If US dollar-denominated repackaged notes with CLOs, ABS or RMBS is used as the underlying collateral in future, they would need to incorporate balance guaranteed cross-currency swaps to account for the greater principal repayment uncertainty of the underlying collateral, the rating agency says.

Moody's adds that the use of CNY and US dollar cross currency swaps in repackaged notes also means there is no need for investors to acquire a separate currency hedge. This contrasts with other investment channels for foreign investors in China where investments are based on approved quotes and made in offshore CNY rather than US dollars.

The new repackaged notes have an asset ring fencing structure so that the Chinese RLG bonds owned by the issuer are pledged in favour of the deal's pledgee acting on behalf of the noteholders. The issuer is a bankruptcy remote SPV and the ring fencing structure is adopted to limit noteholders' recourse to the secured collateral pool relating only to the series of repackaged notes that they hold, which ensures the series assets are only available to the relevant noteholders and minimise the issuer's bankruptcy risk.

Additionally, if such repackaged notes are backed by CLOs, ABS or RMBS, a balance guaranteed cross-currency swap would be needed to account for the greater principal repayment uncertainty of the underlying collateral as this is naturally higher than RLG bonds with bullet repayments, whereby principal is paid on maturity. Cross-currency swaps with a specific notional amount that amortises on certain assumptions of cash flow collections form the underlying assets, posing additional challenges for the issuers and the noteholders.

Furthermore, cross-currency swaps used in repackaged notes with CLOs, ABS and RMBS as collateral will need to factor in cash flow uncertainty, according to Moody's, so necessitating the use of balance guaranteed swaps and to ensure the swap notional amount will amortise in accordance with the amortisation of the underlying securitisation collateral. The rating agency adds that a balance-guaranteed swap can however increase the cost of the swaps which in turn could make the funding cost of the notes unattractive to issuers.

US-dollar repackaged notes could bring in more offshore investors to the CNY59.2trn Chinese interbank bond market, diversifying the investor base and Chinese securitisation itself could benefit from more cross-border investment particularly to foreign, non-bank investors. Moody's says that these US dollar-denominated notes could expedite access for foreign investors that typically have to be vetted by onshore settlement agents and to meet PBOC reporting requirements to invest the Chinese interbank bond market.

RB

Structured Finance

Treasury reports on regulatory impact

The US Treasury has issued a first report in a series regarding regulation of the financial system in a manner consistent with an executive order issued by President Trump back in February. The report addresses the regulation of the depositary system and makes several findings and recommendations which could impact the future regulation of securitisations.

The report criticises certain regulatory capital rules adopted by US regulators that are more stringent than Basel Committee standards, including US risk-based capital rules such as a risk weight floor of 20% rather than 15% for securitisation exposures. The report says stringent capital and liquidity standards have negatively impacted the market for private label securitisations.

The report notes that the treatment of securitisation positions in stress testing and the comprehensive capital analysis and review (CCAR) can result in banks being required to hold more capital against a securitisation position than the bank would be required to hold if it held the entire asset pool on its balance sheet. It calls for this to be reviewed.

The report also encourages bank regulators to simplify the regulatory capital rules and emphasises the standardised approach for calculating risk-based capital. A Chapman & Cutler client memo notes that for securitisation exposures, use of the standardised approach would typically mean that capital would be calculated using the simplified supervisory formula approach (SSFA).

"While SSFA is easier to use than the supervisory formula approach currently applicable to 'advanced approaches banks' (i.e.; banks with greater than US$250bn in assets or greater than US$10bn in on balance sheet foreign exposure), in its current form SSFA has the disadvantage of not differentiating capital treatment based on the creditworthiness of the assets in the pool. Treasury recognises the lack of risk sensitivity in the standardised approach, and suggests that the bank regulators should consider making appropriate adjustments," notes the law firm.

The Treasury also says no changes should be adopted to the market risk capital rules on the basis of Basel's fundamental review of the trading book (FRTB) framework without further analysis of the impact of these changes. The FRTB would generally impose higher capital charges on securitisation positions held by banks in their trading books than current rules do.

The report also calls for a review of thresholds for the application of certain capital requirements, particularly as they apply to banks with more than US$50bn in assets but that are not deemed globally systemically important. One example is the supplementary leverage ratio, which includes all unfunded commitments in its denominator, driving up the cost of banks providing those commitments in connection with securitisation transactions they finance.

The Treasury report says the liquidity coverage ratio should only apply to globally systemically important banks and that non-agency RMBS - and by extension, Chapman & Cutler notes, ABS too - with appropriate liquidity characteristics should be evaluated for status as high quality liquid assets (HQLA). It also recommends that the NSFR not be adopted until it can be calibrated appropriately, warning that the NSFR may be duplicative of other existing liquidity standards.

The Treasury also says that the Volcker Rule's definition of covered funds is overly broad and should be revised to focus on entities that have the substantive characteristics of hedge funds and private equity funds and provide for additional exemptions as necessary. It additionally recommends repealing or substantially revising RMBS risk retention requirements, perhaps with a single agency designated from the six rule-writing agencies to interpret the rule.

Finally, the report also notes the significant additional burdens imposed upon securitisation issuers by Regulation AB II. The memo says: "Treasury recognises the need for loan-level disclosure to maintain transparency and promote investor confidence, but recommends that providing for fewer information fields and creating standardised definitions would provide sufficient transparency while reducing excessive burdens on securitisation issuers."

JL

Capital Relief Trades

Risk transfer round-up - 16 June

One talking point this week was the EBA's announcement at IMN's Global ABS conference of its intention to publish a paper on risk transfer transactions. "This is a very important step," says one issuer.

He adds: "Despite a surge in risk transfer issuance, many of our clients still have hesitations over these deals, due to regulatory uncertainty over their defining structural features. Any guidance then by the EBA - even at a high level - would be welcome."

Meanwhile, sources suggest that a planned Portuguese capital relief trade rumoured to be with StormHarbour as arranger and Banco Comercial Portugues as issuer will not proceed as expected (SCI 12 May). At the same time, a number of market participants agree that more activity is likely from UK banks - especially the "usual issuers" - by the end of the year.

Capital Relief Trades

Spanish EFSI deal debuts

The EIF has closed its second European Fund for Strategic Investments (EFSI) deal, providing BBVA with a €143bn mezzanine guarantee facility. The transaction references a €3bn portfolio of Spanish SME loans and is the first Spanish synthetic securitisation under the Investment Plan for Europe.

The Investment Plan allows the EIB Group to fund investment projects that - due to their nature or structure and in line with the guiding principle of the 'Juncker Plan' - entail higher-risk activities, promote business competitiveness and help create new jobs (SCI passim). The BBVA transaction is also the largest ever Spanish synthetic securitisation, indicating the bank's willingness to "release lots of capital for lending", states George Passaris, head of securitisation at the EIF.

He adds that the transaction provides "significant capital relief in line with CRR rules on significant risk transfer." The rules stipulate that at least 50% of the mezzanine piece has to be transferred, but in this case BBVA transferred the whole of the mezzanine. Capital relief will, in turn, allow the bank to provide further lending of about €1bn to Spanish SMEs.

The funding mechanism is typical of EFSI deals. In this case, the EIF acts as the counterparty to BBVA and then benefits from a back-to-back counter-guarantee with the EIB, given that Juncker plan funds are channelled through the latter.

The mechanism utilises the large funding power of the Juncker plan and the EIF's experience in structuring and executing securitisations. "We wouldn't be able to provide a guarantee of that magnitude by ourselves, due to our capital constraints," observes Passaris.

The transaction follows the fund's first EFSI deal from April, dubbed CoCo III-1 (SCI 26 April). This deal referenced a €1.5bn portfolio of European corporate loans (see SCI's capital relief trades database).

Given Spain's improving economy, Passaris is optimistic that this latest transaction will provide the incentive for similar capital relief trades from the jurisdiction. "These transactions allow the release of regulatory capital, which can then be translated into additional lending, thus providing further support to the improving Spanish economy," he says.

Moody's suggests that Spanish banks are well positioned to strengthen their capital ratios through the synthetic securitisation of SME loans. Spain is Europe's largest SME securitisation market, originating a quarter of all SME deals by volume.

Banco Santander and Caixabank launched two synthetic securitisation deals - Victoria and Gaudi Synthetic 2015-I - early last year to free up capital, marking the first synthetics in Spain since the peak of the financial crisis.

SP

CLOs

Loan refis to increase CLO pressures

US CLO managers are increasingly constrained by WAS tests in the current environment of declining loan spreads and elevated loan repricings. Half of CLOs within their reinvestment periods have a WAS cushion of less than 10bp, so managers may need to look at WARF and diversity scores.

CLO managers cannot typically reinvest sales and redemption proceeds without meeting WAS tests. However, the structuring of deals with a three-way matrix means that a CLO can be allowed a lower WAS if it also moves down in WARF or increases diversity.

Wells Fargo figures show almost US$300bn in loans has repriced year-to-date, while post-crisis US CLO median WAS has declined 8bp in just the past three months. WAS has declined 14bp year-to-date and 19bp year-over-year.

The average spread reduction for a loan repricing was 92bp in 1Q17. That has since dropped to around 88bp as of May, and may drop a little further in the coming months, perhaps by another 20% or so.

An extra US$191bn of loans will be eligible for repricing by the end of August. Including these loans, around US$197bn of loans will be trading above a dollar price of 100.5 and will be callable by the end of August, with US$129bn trading above 100.76 and callable by that date.

Wells Fargo analysts believe that if loans which are trading above 100.75 and that are callable by end-August were to reprice over the next three months, then the CLO portfolio WAS would shrink by 14bp. Further loan repricing would lead to difficulty managing both WAL and WAS tests.

A conservative estimate suggests that 20% of loans held in CLOs would be affected if 14% of the loan market refinanced or repriced. Assuming a spread reduction of about 70bp on refinanced loans, loans currently trading above 100.75 would reprice from around 325bp to 250bp.

"A 70bp drop in spread on 20% of loans held in CLOs would result in a drop in CLO median weighted average spread of an additional 14bp (assuming no active management)," note the analysts. "This would reduce the median CLO WAS to 352bp; median funding costs, including management fees, are roughly 230bp for 2013, 2014 and 2017 vintages, and roughly 260bp for 2015 and 2016 vintages. Assuming the median WAS dropped by 14bp to 352bp, the 'arb' or excess spread would decline to 92bp-122bp."

If all US$197bn in loans above 100.5 all refinanced over the next three months, then 22% of the outstanding US$909bn loan market would refinance. That would equate to at least 30% of CLO collateral which, even with an average coupon reduction of only 60%, would lead to a CLO portfolio WAS reduction of 18bp.

A loan refinancing wave would put more of the loan universe into a 5-7 year maturity, which would be above the current WAL limit for many seasoned CLOs. Should a manager compensate for WAL test pressure by buying shorter loans, the analysts say the credit quality of the portfolio could fall, because shorter loans are likely to be those that could not refinance due to credit concerns, or possibly due to very tight coupons, which would further pressure WAS tests.

WAL tests are currently being failed by 20% of CLOs, including more than half of 2012 and 2013 CLOs. A third of 2014 CLOs are passing with a cushion of less than 0.25.

In response to declining spreads, Fitch notes that many high- and low-WAS style managers are repositioning within their respective collateral quality matrices. Across Fitch-rated US CLOs, 92% of CLO managers in 2014-2016 vintage deals have moved within their collateral quality matrix since the middle of 2016.

However, despite these measures, more CLOs are failing the test or seeing cushions shrinking. The rating agency says the effect is most noticeable for 2014 transactions, which find it harder to lower their WARF thresholds because of their typically higher exposure to commodity and retail sectors.

JL

CMBS

Freddie launches tax-exempt loan series

Freddie Mac has launched a new series of credit risk transfer securities backed by tax-exempt loans (TELs) made by state or local housing agencies and secured by affordable rental housing. The first issuance has already priced and includes around US$292m in ML certificates backed by TELs on 25 properties.

The FRETE 2017-ML01 certificates are backed by the TELs. There are also US$18.5m of FRETE 2017-ML02 certificates backed by taxable subordinate loans on three of the same properties. Both series of ML certificates are expected to settle around 29 June.

The ML01 certificates include one senior principal and interest class, rated triple-A by Fitch and Aaa by Moody's. The class A and X certificates are guaranteed by Freddie Mac, while the class B certificates are not guaranteed.

The ML02 certificates also include one senior principal and interest class, also rated triple-A and Aaa. The A and X certificates are guaranteed, although the B, R and RS certificates will not be guaranteed.

The ML01 class A notes will pay 50bp over one-month Libor, while the ML02 class A notes will pay 45bp over one-month Libor. Citigroup and Wells Fargo are lead manager and bookrunners, while Barclays, Jefferies and Stern Brothers are co-managers.

"We are very proud to announce our first securitisation backed by tax-exempt loans," says Robert Koontz, Freddie Mac multifamily capital markets vp. "Eight years after our first modern K-Deal, Freddie Mac Multifamily continues to expand our securitisation series and offload risk to private investors."

ML certificates create more liquidity for affordable multifamily housing while also transferring mortgage risk away from taxpayers. The proceeds will be used to finance multifamily affordable housing projects.

JL

NPLs

International investment boost for China

Shorevest Capital Partners has launched a US$750m fund targeting Chinese non-performing loans. The move underscores the shift in the market's investor base from a domestic to an international one.

"It all comes down to the NPL cycle in China, where the investible universe is growing and the infrastructure to facilitate NPL portfolio sales is attractive," says Andrew Brown, partner at Shorevest.

The firm is raising capital from pension funds, sovereign wealth funds and private equity funds. Underwriting the returns is the major challenge for new entrants.

As Brown observes: "The market has many barriers to entry, such as developing an understanding of creditor rights enforcement, populating a statistically significant database to process portfolios in a timely fashion, attracting experienced human capital and developing a network for sourcing and servicing. If you do not have any of these things, it is very hard to determine your returns."

Shorevest dealt with these challenges as master servicer in Bain Capital's recent acquisition of a US$82m bad loan portfolio from a Chinese asset management company. The Guangzhou-based firm sourced the deal, underwrote it and will service it.

The level of bad debt in China has surged since 2013, bringing a surplus of NPL deals to the market and adding pressure on Beijing to resolve the issue. The government has imposed rules on the courts to enforce creditor rights, collateral coverage has increased and - in contrast to the 2005-2008 cycle, when banks sold to asset management companies - the borrowers tend to be privately owned firms instead of state owned firms.

The latter tend to be more policy-oriented and this makes any recovery via the courts a more cumbersome procedure. The current cycle began in January 2015, when asset management companies began selling assets to investors.

While the official NPL rate at Chinese commercial banks hovers below 2% of total assets, analysts suggest that the true figure could be as high as 15%. Shorevest estimates that China's bad loan volume has hit US$3trn.

Another route that state authorities are using to offload NPL portfolios is securitisation. The government recently allowed some mid-sized banks to issue non-performing loan ABS this year (SCI 2 May). However, the resulting 13 deals were limited to domestic investors.

SP

Structured Finance

Job swaps round-up - 16 June

Acquisitions

The Competition and Markets Authority (CMA) has announced an initial decision in relation to the anticipated acquisition by Heineken UK of Punch Taverns, including Punch Securitisation A. The CMA has decided that the merger may result in a substantial lessening of competition within markets in the UK. The merger will be referred for a Phase 2 investigation, unless the parties offer acceptable undertakings to address these competition concerns. Heineken states that it intends to "offer acceptable undertakings and is confident that these will enable the transaction to be approved by the CMA without a Phase 2 referral."

CDO manager transfer

Trapeza Capital Management has assigned all rights, title and interest in its Trapeza CDO X Trups deal to Hildene Collateral Management Company. The assignments do not alter the responsibilities, duties and obligations of the collateral manager under the agreements.

CLO name change

The ACAS CLO 2015-1, ACAS CLO 2015-2 and ACAS CLO IX transactions have respectively been rebranded MP CLO VII, MP CLO VIII and MP CLO IX. The name changes follow the acquisition of American Capital CLO Management by Marble Point Credit Management at the start of the year (SCI 4 January).

Europe

Natixis has hired Emmanuel Issanchou as global head of structured credit and solutions. He will report to Selim Mehrez, the bank's global head of fixed income, as well as Serge Ekue, who is senior country manager for the UK. Inssanchou replaces Emmanuel Lefort, who was appointed head of global markets for Asia Pacific. He has been with Natixis since 2005, when he joined as a structurer, and will be based in London.

Funds

SCIO Capital's Partners Fund I is in planned liquidation, five years after the launch of the closed-ended fund. It invested in core European private structured credit on behalf of institutional and other professional investors and returned 11.5% per annum net of fees over its lifetime. SCIO Opportunity Fund I, an open-ended fund with a similar investment philosophy, will remain active - to which a majority of Partners Fund I investors have transferred their liquidation proceeds.

Legislation

In February 2017, APRA issued for consultation two minor amendments to the reporting framework to align Reporting Standard ARS 120.0 Securitisation - Regulatory Capital and Reporting Standard ARS 120.1 Securitisation - Supplementary Items with the revised Prudential Standard APS 120 Securitisation, including consequential changes to Reporting Standard ARS 110.0 Capital Adequacy, and to capture in ARS 110.0 the countercyclical capital buffer ratio applying to authorised deposit-taking institutions (ADIs). For each proposal, APRA received one submission and minor amendments have been made to the reporting forms and instructions in response to the submission. The submission about the countercyclical capital buffer reporting requirement was fully supportive of the proposed change. APRA has consequently released final versions of these reporting standards, which will come into effect on 1 January 2018.

Litigation

Michael Gramins, formerly an executive director and RMBS trader at Nomura, has been found guilty by the District Court of Connecticut of conspiracy to commit securities and wire fraud. He was charged in 2015, along with ex-Nomura RMBS traders Ross Shapiro and Tyler Peters of conspiring to commit securities and wire fraud (SCI 9 September 2015), but Shapiro and Peters have been found not guilty. The court found Gramins guilty of conspiring to defraud customers of Nomura by "fraudulently inflating the purchase price at which Nomura could buy a RMBS bond to induce their victim-customers to pay a higher price for the bond, and by fraudulently deflating the price at which Nomura could sell a RMBS bond to induce their victim-customers to sell bonds at cheaper prices, causing Nomura to profit illegally." The court also finds Gramins guilty of training subordinates to lie to customers, providing them with language to deceive customers and encouraging them to engage in the practice. Gramins is yet to be sentenced, but could face a maximum term of imprisonment of five years.