Contents

NPLs

Veneto liquidation opens NPL ABS opportunities

Veneto Banca and Banca Popolare di Vicenza will be wound down after the ECB confirmed that they are "failing or likely to fail". The Italian government is set to provide €17bn to cover losses from bad loans while handing the 'good' assets to Intesa Sanpaolo for a symbolic amount. The government's intervention and recent amendments to the Italian securitisation law are expected to create opportunities for non-performing loan securitisation issuance from the jurisdiction.

Of the €17bn, an initial €5.2bn includes €4.8bn for allowing Intesa to maintain its capital ratios following the acquisition of the two banks, as well as an additional €400m in guarantees against the risk that some of the credits acquired by the lender incur losses. S&P considers this event as a watershed moment that "may eventually see NPLs find their way into European securitisations."

The liquidation of the Veneto banks follows recent amendments to the Italian securitisation law that are expected to facilitate both issuance and investment (SCI 23 June). Amendments to the 1999 Italian Securitisation Law expand the range of operations of Italian securitisation vehicles in order to facilitate - among other things -the sale of NPLs. The amendments aim to enhance the performance of the underlying portfolio, ultimately improving returns and attracting more investors in the junior tranches of NPL securitisations.

"The GACS guarantee scheme hasn't developed all potential in terms of attracting investor interest for the junior tranches of NPL securitisations," says Luciano Morello, partner at DLA Piper. "It is hoped that that the new law - in line with previous amendments - will do the job."

An amendment to the Italian securitisation law from last year stipulates that an SPV may grant loans to debtors other than physical persons and micro-companies, if the borrowers are identified by a bank or financial intermediary. The issued notes in turn are subscribed by qualified investors, with the bank or financial intermediary retaining a 5% economic interest.

Having the SPV grant loans serves several purposes. According to Morello, besides relieving banks of their NPL portfolios, it "improves the collectability of their portfolios".

There are two reasons for this: the first is diversification of funding sources from banks to SPVs; secondly, banks and other financial intermediaries are in a good position to act as financial intermediaries, given that they are incentivised through risk retention to segment debtor profiles and conduct in-depth due diligence. Article 7.1 has further expanded SPV powers by enabling them to advance loans in the context of a restructuring procedure.

The law also stipulates that within the context of a restructuring agreement, the SPV would be able to purchase equity or equity-like instruments by the assignors for the purpose of making a debt to equity swap. The swap proceeds and the debtor repayments would then be used to cover the securitisation's transaction costs. Further, SPV creditor claims are not ranked pari passu with shareholders, leaving the SPV with an additional incentive to provide loans.

Finally, the law allows - within the context of a securitisation - the purchase and management of real estate, as well as assets subject to leasing agreements. In case the assets and the relevant leasing agreements are 'jointly transferred', the relevant SPV would be consolidated on the bank's balance sheet and set up solely for the one-off purpose of concluding the securitisation.

"The SPV is an unregulated entity in Italian law, so restrictions apply," explains Morello.

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Euro secondary solid

The European securitisation secondary market remains solid despite distractions from primary and month-end.

"As has been the case over the past few weeks people are focused on primary, but secondary is still ticking over this week," says one trader. "Over the past couple of days we've seen a number of bid lists going through and trading at decent to very good levels."

The trader continues: "Overall, secondary spreads are stable to a little tighter. There is some sign of softness in parts of the CLO stack and around UK non-conforming, though a PARGN BWIC traded at aggressive levels yesterday, but fundamentally the market appears well supported, albeit on relatively light volumes."

There are currently four fairly short BWICs on the European schedule for today. The longest is a four line 8.106m euro and sterling mix of UK non-conforming RMBS.

Due at 14:30 London time it comprises: ALBA 2005-1 B, ALBA 2015-1 D, LGATE 2006-1X C and MARS4 4X B1C. Only ALBA 2005-1 B has covered on PriceABS in the past three months - at 92.02 on 1 June.

Secondary markets

US CLOs slow

Activity in the US CLO secondary market is slow as the seasonal lull looks to have started early.

"It's a summer market already and there's overall not much action in secondary while primary continues to roll on with refis and re-sets," says one trader. "There's not much connection from investors for the most part - they're only active here and there, with most focus around lower mezz and equity."

The trader continues: "We have seen some softness in lower mezz, particularly around single-Bs, with some of the hedge funds normally active there stepping out. However, that is expected to be short-lived."

In equity there is a more positive tone. "Dealers are adding equity positions to their offerings and at the same time we're seeing investors heading towards longer-dated pieces," the trader reports.

There are six BWICs on the US CLO calendar for today so far. Again, the main supply comes from double- and single-Bs, but the most sizeable list comprises three triple-As.

Due at 10:00 New York time it involves $25m each of ATRM 9A AR, BSP 2014-VA AR and OZLM 2014-9A A1R. None of the bonds has covered on PriceABS before.

Secondary markets

Euro secondary steps up

Activity has started to step up across the European securitisation secondary market following an extended series of relatively quiet sessions.

Flows continue to be thin, though there have be patches of increased activity seen in a variety of sectors since the end of last week and into this. At the same time, rotation activity combined with month- and half-end positioning has generated a surge in BWIC volume today.

To date, sentiment has remained positive and secondary spreads are flat to slightly tighter across the board over the past 10 days or so. Pricing levels provided by today's BWICs could give a stronger sense of future direction and give fresh impetus to trading. However, the looming summer doldrums could equally cause activity to quickly fizzle out once more.

There are currently four ABS/MBS and two CLO BWICs on today's European schedule. The chunkiest among the former is a €53.2m four line ABS mix.

Due at 11:00 London time the list comprises: ABEST 11 A, BSKY GER6 A, DRIFR 3 A and MCCPF 2017-1 A. Only MCCPF 2017-1 A has covered on PriceABS in the past three months - at 100.597 on 22 June.

The largest CLO list is due at 15:00 and involves 16 European deals totalling €48.545m - ARESE 2007-1X D, ARESE 2007-1X E, AVOCA VIII-X D, AVOCA VII-X D1, BOPHO 2X D, CELF 2006-1X D, CELF 2007-1X D, EATON 2007-10X D1, EGLXY 2007-2X D, HARBM 9X D, HARBM PR²X B1E, HARBM PR3X B1, HARVT IV C, HEC 2006-2NX D, HEC 2007-3X D and PENTA 2007-1X D. Plus one $2m line of ATRM 10A CR.

Four of the bonds have covered with a price on PriceABS in the past three months, last doing so as follows: ARESE 2007-1X E at H100H on 31 May; AVOCA VII-X D1 at M98H on 30 March; HARBM 9X D at 98H on 30 March; and HEC 2006-2NX D at 99.615 on 2 June.

Secondary markets

US ABS accelerates

Activity in the US ABS secondary market has begun to accelerate this week.

After several weeks of focus on the primary market attention has returned to secondary this week. Yesterday saw a pick-up in BWIC volume as rotation activity began to take hold and sellers looked to get lists out as early as possible before the de facto long weekend.

Demand for paper continues to be strong and consequently lists continue to trade well. Secondary spreads have broadly remained firm in recent weeks though some hotspots away from core prime paper have seen a little tightening in recent sessions.

Today's BWIC schedule is building strongly again across sectors. The chunkiest list in the visible pipeline so far is a three line $31m FFELP auction.

Due at 12:00 New York time it comprises: NAVSL 2014-1 A3, PHEAA 2014-2A A and PHEAA 2014-3A A. None of the bonds has covered on PriceABS in the past three months.

ABS

Lender targets in-school and refi loans

College Avenue Student Loans is in the market with its first rated term ABS, dubbed College Ave Student Loans 2017-A. The US$160.89m transaction is backed by a mix of in-school and refinanced student loans originated online through the College Ave platform.

DBRS and S&P have assigned provisional ratings to the transaction of A/BBB on the US$95.32 class A1 notes, A/BBB on the US$43.47m class A2s, BBB/NR on the US$10.76m class Bs and BB/NR on the US$11.34m class Cs. College Ave Student Loans 2017-A will consist entirely of student loans made to students and parents of students under College Ave's in-school private student loan programme.

DBRS notes that College Ave is the first student lender to focus primarily on both the in-school and refinance student loan markets, with the core 'in-school product' being mainly co-signed private student loans originated through a digital marketing effort, competing with other private student loan originators like Sallie Mae Bank and Wells Fargo. However, the firm also offers a student loan refinancing product, competing with firms like SoFi, DRB Bank, CommonBond and Earnest. Of these two categories, it has lent approximately US$200m in in-school student loans and over US$400m in refinanced student loans.

DBRS adds that while College Ave has a limited operating history as a student lender, the firm's management team has an extensive background in student loans, credit and financing, having been founded by two former Sallie Mae executives - Joe DePaulo and Tim Staley. DePaulo was cfo and chief marketing officer at Sallie Mae, while Staley was cio and svp of technology.

DBRS notes several strengths of the transaction, including the average credit score of 763, which is significantly higher than recent private student loan securitisation pools with similar loan types. The rating agency adds that 90.2% of the loans are co-signed, which typically display far lower default rates than loans without co-signers.

The transaction also benefits from a requirement for the notes to enter into full turbo principal amortisation if certain minimum parity levels are not maintained.

Among potential weaknesses in the transaction, DBRS comments that the firm has incurred operating losses since its inception, due to costs involved in building out its origination platform. As a result, financial stress could affect the firm's ability to perform certain duties as sponsor, seller, master servicer or administrator - including its ability to fulfil loan repurchase obligations as a result of R&W breaches.

College Ave utilises a bank partnership model, whereby either Firstrust Savings Bank or The Middlefield Banking Company acts as direct lender to the borrowers, then sells and assigns the student loans to College Ave. DBRS concludes that while recent judicial decisions have created uncertainty about online lenders receiving federal pre-emption of state usury laws, the interest rates on 99.93% of the trust student loans are below applicable state usury limits in existence at the time the loans were made.

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ABS

Private SLABS upgrades anticipated

Moody's has placed on review for possible upgrade the ratings of 41 private student loan ABS bonds - totalling approximately US$2.56bn worth of securities across 19 securitisations - issued by three marketplace lending platforms. At the same time, Fitch has released an exposure draft of criteria for rating US private student loan ABS that could result in multiple-category upgrades for certain senior classes of notes.

The agency is proposing changes to a number of its key private student loan assumptions and stresses, including the removal of one rating category tolerance for default multiples in surveillance to achieve better comparability between new and existing ratings. It is also proposing the standardisation of: default timing curves based on WAL; a recovery timing curve spanning a 10-year period after defaults; and deferment and forbearance assumptions in credit scenarios.

Additionally, the update would introduce recovery haircuts off a forecasted base-case recovery rate, as well as servicing-fee market rate and minimum senior expenses at the tail end. Finally, Fitch intends to analyse structures at the tranche level rather than class level when there is no trigger before an EOD to reverse prevailing sequential pay structure or when the possibility of such triggers being breached is considered remote.

If the proposed criteria are approved and implemented, the agency estimates that approximately 7%-12% of existing private SLABS tranches could experience a rating change. "Analysis of structure at tranche level rather than class level (timing tranche) could result in multiple-category upgrades for top senior tranches in a sequential pay structure. In the absence of a timing tranche, the magnitude of potential rating movements is expected to be limited to one rating category," it observes.

Fitch is seeking feedback on the proposed changes by 25 July.

Meanwhile, Moody's review affects approximately US$331m of CommonBond Student Loan Trust (four classes from 2016-B and 2017-A-GS), US$521m of DRB Prime Student Loan Trust (10 classes from 2015-D, 2016-A, 2016-B and 2017-A) and US$1.71bn of SoFi Professional Loan Program (27 classes from 2014-B, 2015-A, 2015-B, 2015-C, 2015-D, 2016-A, 2016-B, 2016-C, 2016-D, 2016-E, 2016-F, 2017-A and 2017-B) securities. The agency says the move is prompted by lower-than-expected losses across the transactions to date, compared to its current assumptions and to the performance of private SLAS securitisations from other refinance lenders.

For example, its initial base-case pool expected loss was 5.40% in CommonBond 2016-B and 5.10% in CommonBond 2017-A-GS. However, the cumulative loss to date is at zero for both deals.

Similarly, Moody's initial base-case pool expected loss ranged from 5% to 5.90% for the DRB deals (whose loss to date is also at zero) and from 4% for SoFi 2014-B to 5.15% for SoFi 2017-A - with the exception of SoFi 2016-F at 9.25%, due to a pool composition concentrated on borrowers with lower credit quality. For the latter issuer, the cumulative loss to date ranges from zero for the least seasoned deal to 24bp for SoFi 2015-A.

However, the agency warns that if its revised methodology for assessing counterparty risk is implemented as proposed (SCI 22 March), the ratings on CommonBond 2016-B and 2017-A-GS, as well as DRB 2015-D, 2016-A and 2016-B are expected to be negatively affected.

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ABS

EV idiosyncratic risks highlighted

The inclusion of electric vehicles (EVs) in future European auto ABS collateral pools could introduce idiosyncratic risks, according to S&P. The agency says that these risks would warrant specific consideration in its ratings analysis.

S&P suggests that the unique risks of EVs - such as limited historical data, technological obsolescence, linkage to the manufacturer and reliance on fiscal incentives - make the future value of the vehicles less predictable than internal combustion vehicles. Any decrease in resale values can affect recoveries on defaulted receivables and, for transactions where the residual values of the vehicles are securitised, could result in losses if the sales proceeds of vehicles returned at contract maturity are less than the amount that the issuer initially funded against.

Absent any mitigating factors, limited data on EV resale values may warrant more conservative base-case and stress assumptions in its ratings analysis, according to the agency. With respect to technological obsolescence, it points to continued reductions in battery prices, which may lower the cost of new vehicles and could have a direct knock-on effect on used vehicle values.

Equally, reductions in fiscal incentives would likely limit second-hand EV prices. S&P cites several instances of significant EV sales declines once governments announced curbs on incentives, such as in Sweden and Denmark.

The International Energy Agency (IEA) has set an aspirational target of 30% market share for EVs by 2030 in all member countries. Current IEA estimates indicate that global total sales of EVs exceeded two million vehicles in 2016, with Western Europe accounting for 490,740 vehicles (a 52.8% growth rate since 2014).

Hybrid vehicles currently make up the majority of EVs in Western Europe. However, fully electrically chargeable vehicles are recording the largest growth rates.

If the customer base for EVs moves from early adopters to the mass market, increasing demand for EVs may decrease the resale values of diesel and petrol vehicles over the medium term (SCI 29 March). This would expose auto ABS transactions to further residual value risk, although S&P suggests that this is a medium- to long-term risk for the sector.

For now, the primary obstacle to EVs becoming mass market vehicles are high vehicle prices compared with internal combustion models: EVs have premiums of about €10,000-plus above comparable petrol models. For fully EVs, the limited driving range is another obstacle. The fuel economy of internal combustion vehicles is also improving, resulting in less economic benefits for switching to EVs.

"Nevertheless, we expect more advanced battery technology and the charging infrastructure to gradually offset the current pitfalls of EV ownership, leading to higher consumer uptake. Notably, in Norway - where government incentives and investment in charging infrastructure have addressed these issues - new EV registrations have already reached one-third market share," the agency observes.

Direct exposure to EVs in existing European auto ABS transactions remains limited, generally comprising less than 5% of the collateral pools in the transactions that S&P rates. "Our existing assumptions capture the indirect risk posed by EVs. As a result, we consider the current direct exposure to EVs to not be material enough to warrant different stress assumptions for rating auto ABS receivables. However, if when reviewing a new transaction, we consider the collateral pool to have material direct exposure to EVs, we would account for the unique characteristics of this collateral type in our rating analysis," the agency concludes.

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ABS

IBRD debuts pandemic cat bonds

The World Bank has launched US$320m pandemic catastrophe bonds, with the aim of providing financial support to the Pandemic Emergency Financing Facility (PEF), its vehicle that channels surge funding to developing countries facing the risk of a pandemic. The IBRD CAR 111-112 note issuance marks the first time that pandemic risk in low-income countries is transferred to the capital markets.

The PEF will provide more than US$500m to cover developing countries against the risk of pandemic outbreaks over the next five years, through a combination of the ILS bonds and US$105m pandemic risk-linked swaps, a cash window and future commitments from donor countries for additional coverage. The structure was designed to attract a wider, more diverse set of investors, according to the World Bank.

The note issuance - comprising US$225m class A notes (which priced at six-month Libor plus 650p) and US$95m class Bs (plus 1110p) - was oversubscribed by 200% and printed below the original guidance. The class A notes cover the flu and coronavirus perils, while the class Bs cover filovirus, coronavirus, lassa fever, rift valley fever and Crimean Congo. The three-year notes can be extended monthly in whole or in part, up to a maximum of 12 months.

Dedicated cat bond investors and pension funds accounted for 61.7% and 14.4% respectively of accounts for the class A notes, and 35.3% and 42.1% for the class Bs. Asset managers and endowments made up the remaining investors in the bonds.

European investors accounted for 71.8% of the class As and 82.9% of the class Bs, while US investors accounted for 27.9% and 15% respectively. The remaining bonds were bought by accounts in Bermuda and Japan.

The PEF comprises two windows: an 'insurance' window, with premiums funded by Japan and Germany, consisting of bonds and swaps; and a 'cash' window, for which Germany provided initial funding of €50m. The cash window will be available from 2018 for the containment of diseases that may not be eligible for funding under the insurance window.

The bonds and derivatives for the insurance window were developed by the World Bank Treasury, in cooperation with Swiss Re and Munich Re. Modelling was based on the AIR Pandemic Model.

Swiss Re was the sole book runner for the bond issuance and joint structuring agent with Munich Re. Munich Re and GC Securities were co-managers.

The bonds will be issued under the IBRD's 'capital at risk' programme. PEF financing to eligible countries will be triggered when an outbreak reaches predetermined levels of contagion, including: number of deaths; the speed of the spread of the disease; and whether the disease crosses international borders. The determinations for the trigger are made based on publicly available data as reported by the World Health Organization (WHO).

The PEF will be governed by a steering body, whose voting members include Japan and Germany. WHO and the World Bank serve as non-voting members.

World Bank Group president Jim Yong Kim comments: "We are leveraging our capital market expertise, our deep understanding of the health sector, our experience overcoming development challenges and our strong relationships with donors and the insurance industry to serve the world's poorest people. This creates an entirely new market for pandemic risk insurance. I especially want to thank the World Health Organization and the governments of Japan and Germany for their support in launching this new mechanism."

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Structured Finance

SCI Start the Week - 26 June

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

Pipeline
A mix of new deals - both in terms of collateral type and jurisdiction - entered the pipeline last week. ABS was the dominant asset class, but RMBS made a good showing too.

The ABS new entrants comprised: €193m Aqua Finance No. 4, US$253m CAL Funding III Series 2017-1, US$160.9m College Ave Student Loans 2017-A, NZ$140.6m FP Ignition 2017-8, US$850m Jimmy John's Funding Series 2017-1, NewDay Funding 2017-1 and US$499.5m SoFi Consumer Loan Program 2017-4. US$250m Northshore Re II Series 2017-1 was the sole ILS to begin marketing last week.

The RMBS were: US$383.3m Bayview Opportunity Master Fund IVa Trust 2017-SPL5, €346.6m Cartesian Residential Mortgages 2, £242m Castell 2017-1, US$512m CSMC 2017-HL1 and A$350m Triton Trust No.7 Bond Series 2017-1. The US$536m IMT Trust 2017-APTS, US$248.1m SCF RC Funding I, II & III Series 2017-1 and US$1.2bn WFCM 2017-C38 made up the newly announced CMBS. Finally, the US$376.7m Resource 2017-CRE5 CRE CLO rounded out the pipeline entrants.

Pricings
Auto ABS dominated last week's prints, with CLOs also showing strong issuance. A handful each of CMBS and RMBS also priced.

The auto ABS comprised: €688m A-BEST 12 (re-offer), US$250m Ally Master Owner Trust 2017-2, US$500m Ally Master Owner Trust 2017-3, US$450m Credit Acceptance Auto Loan Trust 2017-2, US$1.38bn Drive Auto Receivables Trust 2017-1, US$750m Enterprise Fleet Financing 2017-2, US$1.3bn Ford Credit Auto Owner Trust 2017-B, US$208.65m GLS Auto Receivables Trust 2017-1, US$1.317bn Honda Auto Receivables 2017-2, US$1.2bn Nissan Auto Lease Trust 2017-A, US$250m Navistar Financial Dealer Note Master Owner Trust II Series 2017-1 and €1.192bn Silver Arrow Compartment 8. US$350m Lendmark Funding Trust 2017-1, US$322.7m Marlette Funding Trust 2017-2, US$651.7m Springleaf Funding Trust 2017-A, US$350m Textainer Marine Containers V Series 2017-2 and US$500m Trafigura Securitisation Finance 2017-1 also priced. The sole ILS print last week was €200m Lion II Re.

The RMBS new issuance consisted of: A$300m ABA Trust 2017-1, US$335m Home Partners of America 2017-1, £750m Lanark Master Issuer Series 2017-1, RUB4.7bn Mortgage Agent TKB-3 and €1.1bn Storm 2017-II. US$2.3bn BXG Trust 2017-GM, US$889m CSMC 2017-CHOP, US$974m FREMF 2017-K726, US$115m JPMCC 2017-MARK and US$500m Rosslyn Portfolio Trust 2017-ROSS made up the CMBS pricings.

The CLO refinancings were: US$959.75m ALM XVI (refinancing), €369.63m Dartry Park CLO (refinancing), US$538.75m Greywolf CLO III (refinancing), €451.3m Jubilee CLO 2014-XIV (refinancing), US$324.05m Silver Spring CLO (refinancing) and US$570.5m Venture XVII CLO (refinancing). A couple of new CLO issuances - €464.1m Carlyle Euro CLO 2017-2 and US$512.02m TCI-CENT CLO 2017-1 - also printed.

Editor's picks
IFRS 9 to spur risk transfer trades: Higher expected provisioning under IFRS 9 is expected to spur a slew of risk transfer issuance before its enactment in January 2018. Indeed, portfolio management will be central to how institutions manage and price the volatility that the new accounting standard will bring...
Regulatory boost for risk transfer trades: Balance sheet synthetic securitisation volume is predicted to rise in the coming years, with greater conformity in deal structure and increased variance in reference assets. A more accommodating regulatory environment should help boost the growth and acceptance of the market...
Data drought impedes NPL ABS growth: Incomplete data and inadequate servicing infrastructure continues to beset the European non-performing loan market. Nevertheless, recent changes to Law 130 in Italy may help to address the growing number of 'unlikely to pay' debtors - a large, but untapped, portion of Italian banks' NPL exposures...
Time to taper?: Participants at IMN's Global ABS conference recently suggested that quantitative easing is likely to ease off in Europe soon, coinciding with a potential tapering of programmes like the Europe-wide ABSPP and TLTRO in the UK. While the view that tapering should begin was widely held, panellists were uncertain about how government support for the securitisation market should - and would - be removed...
AIG's debut RMBS collateral 'among strongest': American International Group - which has not previously participated in the issuance of RMBS - is in the market with Credit Suisse Mortgage Capital 2017-HL1 Trust, sized at US$512m (see SCI's deal pipeline). The senior notes have been rated triple-A by Fitch and DBRS, with the collateral deemed to be among the strongest since the crisis...

News
• Optimum Credit is in the market with its first UK non-standard prime RMBS. The transaction is called Castell 2017-1 and is backed by a £242m pool of second lien mortgage loans (see SCI's deal pipeline).
• Jimmy John's is in the market with its debut whole business securitisation. The US$850m ABS is backed by royalties from 2,627 Jimmy John's franchises and 63 company-owned restaurants, representing 97.7% and 2.3% of system-wide locations respectively.
• The Reserve Bank of India has announced plans to resolve the troubled loans of 12 large borrowers responsible for about 25% of the banking system's non-performing assets under India's Insolvency and Bankruptcy Code of 2016. The move is credit positive for Indian banks, since it can help with overall asset quality - albeit large write-downs for state banks are expected.

Capital Relief Trades

Risk transfer round-up - 30 June

The EIF has recently signed guarantees with five banks in Romania under its SME initiative (SCI 12 May). This is happening at a time when the fund's securitisation team is working on new EFSI deals "similar" to the recent deal with BBVA (SCI 12 June). Additionally, the SSA intends to finalise traditional synthetic securitisations in Italy by the end of the year, in accordance with the local SME initiative.

CLOs

Refinancings spur trading reversal

The CLO refinancing wave appears to have caused a reversal of trading trends for investment grade and non-investment grade tranches in the secondary market. Demand for refinanced paper - represented mainly by triple-A to triple-B tranches - has resulted in a -28% year-on-year pull-back in CLO BWICs and -47% in TRACE trading volumes for investment grade tranches, according to JPMorgan estimates.

TRACE data indicates that US$40.91bn in CBO/CDO/CLO volume has traded so far in 2017 (as of 22 June), compared to a previous annual average of US$89bn from 2012-2016. This year, 37% (US$15.10bn) of trading volume has been IG rated tranches versus 63% (US$25.81bn) non-IG rated tranches. Non-IG trading volumes totalled US$25.81bn in 1H17, which is the highest level seen since 2012.

"IG rated tranches have historically represented the majority of trading volume, but this year we believe trading volumes have been depressed in IG rated tranches, given the record amount of CLO refinancings," CLO strategists at JPMorgan observe.

They add: "With US$75.92bn in supply from US CLO refinancings this year, we think the option to roll into or invest in CLO refinancings has given CLO investors an alternative to reposition their portfolios without trading in the secondary market. Only 6.4% of CLO refinancings in 2017 have included non-IG rated tranches, which explains why secondary volumes in non-IG rated tranches have been relatively unaffected by the refi wave."

Overall, CLO BWIC volumes indicate a drop in secondary trading year-over-year, with notional amounts of US$9.6bn in the US and €2.25bn in Europe (as of 23 June). These totals amount to a 28% drop versus 1H16 in US CLO BWICs and a 2% increase in European CLO BWICs, according to JPMorgan figures. "The numbers look slightly better in the US on a BWIC item count basis, with 2,435 line items on BWIC, representing a 21% drop versus 1H16. There were 545 BWIC line items in Europe, which is a 19% drop versus 1H16," the strategists note.

Typically, US CLO triple-A bonds represent 40%-55% of notional BWIC volume, but this year they have only represented 24.4%. Indeed, double-B bonds appear to have overtaken triple-As as the most common tranche available on BWIC, representing 28% of notional volume versus an average of 12% since 2012.

Nevertheless, double-B volume of US$2.4bn year-to-date is still tracking below the post-crisis record from last year, which saw US$5.2bn on BWIC. This year, however, single-B BWIC volume of US$653mn is on pace to surpass last year's post-crisis record of US$1bn.

IG tranche volume stands at US$4.56bn, representing about half of 1H16's volume of US$9.01bn. Interestingly, mezzanine BWIC volumes are slightly higher at US$3.70bn versus US$3.59bn in 1H16.

Similar to the US, European double-B tranches have surpassed triple-As as the leading tranche with €470m (21%) in BWIC notional, compared to an average 11.5% over the last five years. BWIC volumes for triple-A, double-A and single-A tranches are currently €130m, €110m and €10m greater than those seen in 1H16.

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CLOs

Atlas CLO debuts AMR feature

Crescent Capital Group last week priced its latest broadly syndicated CLO. The US$413.7m Atlas Senior Secured Loan Fund VIII debuts an applicable margin reset (AMR) feature, which is designed to aid in the execution of CLO refinancings (SCI 5 September 2016).

The AMR feature is classed as a redemption event under the transaction documents, whereby the notes can be redeemed before the stated maturity date. It provides for the class A, B, C and D notes to be subject to mandatory tender and subsequent auction-style sale after the non-call period, at the election of the holders of more than 50% of the subordinate notes' aggregate outstanding amount or the collateral manager.

The auction process will result in a successful reset only if the winning bid for each class is less than a capped margin, which will be based on a percentage of the applicable margin at the time. Under the indenture, the issuer will obtain an applicable margin reset only if certain conditions are met.

Crescent Capital teamed up with CLO equity buyer Sancus Capital Management to launch the transaction. The US SEC last September provided a no-action letter to Sancus that granted relief under Regulation RR in connection with the AMR procedure.

Rated by Fitch and S&P, the deal comprises US$4.1m AAA/AAA rated class X notes (which priced at a DM of three-month Libor plus 100p), US$246m AAA/AAA class As (plus 130bp), US$53.8m NR/AA class Bs (plus 185bp), US$26.5m NR/A class Cs (plus 255bp), US$20.3m NR/BBB class Ds (plus 370bp), US$17.7m NR/BB- class Es (plus 655p), US$6.9m NR/B class Fs (plus 850bp) and US$38.4m unrated equity.

S&P notes that compared to other CLOs it rated in the three months ended 31 May, Atlas VIII has: lower total leverage (at 9.74x) and higher subordination (AAA/BBB 39.9%/15.32%); a higher weighted average cost of debt (1.94%); lower WAS (3.77%) and available excess spread (1.83%); a higher scenario default rate (AAA/BBB 67.38%/47.64%) and a lower weighted average recovery rate (AAA/BBB 44.58%/65.57%); and a higher obligor diversity measure (148.49). The target portfolio comprises 162 obligors (at an average obligor holding of 0.62%) from across 10 industries, with ratings ranging from single-B minus to double-B minus.

The transaction was arranged by MUFG.

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CLOs

Euro middle market CLOs on the cards

Middle market CLO issuance is expanding in the US and emerging in Europe, with a variety of warehouse financing options for middle market loans and increasing variability. Increased middle market activity appears to be pressuring lenders, investors and arrangers, as demand exceeds available supply.

Investors in the US have flooded the middle-market loan space with liquidity, according to DBRS, with record fundraising in 4Q16 of US$51bn and further growth in 1Q17 of US$23bn. As a result, middle-market loan issuance has increased, with middle-market deals with debt financing of US$350m or less totalling US$8bn in 1Q17, compared to US$5bn in 1Q16 - with little indication of letting up.

Middle market CLO primary issuance has been buoyant at US$5.1bn year-to-date, compared to the entire 2016 volume of US$7.7bn. Further, a variety of rated warehouse financing has emerged, with greater flexibility in ramp-up terms and portfolio concentrations. DBRS suggests, however, that demand is outstripping supply and there is now a lack of deals - prompting borrowers and arrangers to utilise increased leverage and more aggressive deal terms.

The agency adds that while the US has been the leading supplier of leveraged loans, Europe is gaining interest for CLO managers and investors, with direct lenders looking to take advantage of opportunities. According to a recent Preqin survey, half of consultants polled recommended investing more capital in private debt in Europe in 2017 and the amount of 'private equity dry powder' has risen in the region to around €320bn in 1Q17, from €175bn in 2010.

European private debt funds are deploying more capital, closing 79 new European deals in 1Q17, which is the largest number of new transactions since 3Q14. To deploy capital and to compete with European banks, direct lenders are offering a greater variety of loans than bank lenders, more leverage and loans with more flexible terms to middle market borrowers.

On the back of growing demand for middle-market loans, investors and arrangers are testing the appetite for middle-market CLOs in Europe, with direct-lending and middle market CLOs and warehouse facilities being considered. According to DBRS, these facilities include regionally focused, as well as pan-European portfolios. While leverage tends to be lower than in the US, there are different issues for European lenders to contend with, including various jurisdictional, cultural, legal and economic environments.

As more funds seek leverage, European banks could seek to syndicate these credit facilities to investors. Such syndication progression mirrors the evolution of middle-market fund financing in the US, including bank credit facilities, club syndicated bank credit facilities and distributed middle market CLOs.

DBRS suggests that "a variety of rational leverage options signals a maturing market" and that bank credit facilities can act as both permanent financing for portfolios of middle market loans, as well warehouses for other financing, including distributed middle market CLOs. The agency notes that European banks are already syndicating credit facilities to pension funds and insurance companies, while rated varieties of bank credit facilities and European middle market CLOs are "in the works".

RB

CMBS

'Novel' single-borrower CMBS prepped

Blackstone is marketing an unusual US$536m single-borrower CMBS. Dubbed IMT Trust 2017-APTS, the transaction is collateralised by a first lien fixed- and floating-rate mortgage loan on 11 multifamily properties totalling 4,488 units, located in Texas, Florida and California.

The US$536m mortgage loan comprises two pari passu components: a US$268m floating-rate element, with an initial term of two years and a fully extended maturity of five years; and a US$268m seven-year fixed-rate element. S&P notes that the transaction has a novel structure in that the loan components have different terms and principal payments may be distributed to subordinate classes, despite their lower payment priority compared to the more highly rated classes.

The assets backing the deal are a mix of class A (68.1%) and class B (31.9%) properties located in 10 submarkets, with Blackstone Property Partners acting as sponsor. The trust will issue 18 classes of certificates, with 17 of these categorised as fixed- or floating-rate notes and a US$32.7m HRR tranche making up the non-offered eligible horizontal interest for the purposes of risk retention.

Both KBRA and S&P have assigned provisional ratings to the transaction, with KBRA assigning a triple-A rating to the US$117.54m AFL, US$117.54m AFX and US$117.54m XFXA notes. S&P has assigned provisional ratings of triple-A to the US$117.54m AFL notes through to single-B minus on the US$19.24m FFL notes and triple-A to the AFX notes through to single-B minus on the US$19.24m FFX notes.

S&P says that it stress tested the portfolio using adverse selection scenarios, whereby either the higher-valued or lower-leveraged properties by ALA are released first. The agency notes that this could result in a less diverse portfolio with weaker credit characteristics than at the loan's origination, but adds that this risk is mitigated by the fact that the loan documents require a release premium equal to 105% of ALA for all properties, other than Rialta (which accounts for 41.1% of ALA). This property requires a release premium equal to 115% of ALA when the floating rate is outstanding (and 110% thereafter) and a debt yield post-release greater than or equal to the debt yield at the loan's origination.

Other risk considerations are that the properties collateralising the mortgage loan secure the entire loan balance, rather than the individual loan components, which have fully extended maturity dates of five and seven years. To repay these loan components and fund the release premiums for the earlier maturity dates, the borrower will have to either refinance or sell sufficient collateral. Depending on whether financing is available and the potential purchasers' preferences, S&P suggests that the borrower may be incentivised to obtain lien releases on the highest-performing properties in the portfolio.

Other risks include the highly leveraged nature of the loan - with a 98.9% LTV ratio - and that the mortgage loan is interest-only for its entire term. Furthermore, the floating-rate loan component of IMT Trust 2017-APTS is indexed to one-month Libor, which could lead to higher interest payable on the underlying loan, should Libor increase.

The floating-rate component of the loan bears interest equal to one-month Libor plus 1.60% and fixed-rate component bears interest at 3.51%. The floating-rate component is also subject to an interest rate cap agreement with SMBC Capital Markets and has a strike price of 4%.

Mortgage loan originators on the transaction are Goldman Sachs, Deutsche Bank and Wells Fargo. Wells Fargo is master servicer and AEGON USA is special servicer.

RB

CMBS

Houston lodging loans plagued by oversupply

Of all US CMBS loans secured by lodging properties, 10% are exposed to an elevated level of credit risk, with risks highest in Houston, Texas, according to KBRA. The rating agency has designated 255 loans it monitors as loans of concern, due to multiple underlying negative credit factors, such as low DSCR, declines in average occupancy, delinquency or transfer to the special servicer.

In Houston especially, of the 80 hotels securing CMBS in the state, 27 (or 33.8%) serve as collateral for loans that have been identified as 'of concern'. The next highest concentration is in Washington, DC, where 13 (or 21.7%) out of 60 lodging loans are of concern. Philadelphia is the third highest in terms of exposure, with eight (or 17.8%) of 45 lodging loans being of concern.

One in three hospitality loans in Houston is of concern, with 24 residing in post-crisis CMBS transactions, totalling an aggregate balance of US$361m. Of these 24 post-crisis loans, 15 have a below breakeven DSCR and five loans are with the special servicer. KBRA is projecting losses of US$59.2m across 18 of these loans.

Driving these loss projections is Houston's exposure to the energy sector and oversupply, with a decline in average occupancy of 3.6%, from May 2016 to May 2017. Houston is now therefore the worst among the top 25 markets, with average occupancy of 63.7% year-to-date in May 2017.

As of June 2017, 4,813 rooms were under construction in Houston, which has led to extreme oversupply with totals greater than 75,000 keys. KBRA suggests that some of the largest losses projected will stem from the US$38.8m Sheraton Suites Houston loan securitised in GSMS 2014-GC20, which has seen cashflow decline dramatically since 2014 in line with a decline in room rates (see SCI's CMBS loan events database).

From December 2014 to December 2016, Sheraton Suites Houston has seen a 23% decline in room revenue and a 34% drop in NCF. As such, KBRA's valuation of the hotel is now US$30.3m, which indicates a loss of US$9.2m.

While Houston suffers, Fitch suggests in a recent comment that underperforming US CMBS loans could see a turnaround in the Bakken Shale region of North Dakota, due to technological improvements in shale production. As a result, the agency notes that US shale producers could enjoy lower pumping costs and therefore maintain profit margins longer than before, despite retreating global oil prices.

The rating agency adds that while hit especially hard by the fall in oil prices in early 2016, the Bakken region has seen net gains on rig counts in recent months, which could boost jobs and increase demand for accommodation. This boost could be positive for real estate in the area and the substantial unoccupied inventory, with 20 loans across 13 transactions still in special servicing.

Most of the multifamily and hotel properties in Bakken-region CMBS remain delinquent on loan payments, but are not being liquidated, with servicers opting to modify them. This potentially allows for time to recover lost occupancy, along with oil price recovery - although Fitch concludes that conditions are still challenging and property values are far off appraised values at the time of securitisation.

RB

RMBS

GSE SFR deal 'first of its kind'

The Fannie Mae Grantor Trust 2017-T1 single-family rental securitisation from April was the first transaction backed entirely by institutionally-owned SFR properties (see SCI's primary issuance database). The transaction has several features not found in typical private SFR securitisations, according to Moody's.

Fannie Mae guarantees the US$944.5m class A notes on the transaction, which is backed by a 10-year US$1bn interest-only loan to Invitation Homes. The GSE then receives a fee in exchange for issuing and guaranteeing the notes, while Invitation Homes retains approximately 5.5% of risk to satisfy risk retention. Fannie Mae and the loan seller, Wells Fargo, will also enter into a loss-sharing arrangement with respect to the class A certificates.

Unlike typical private SFR transactions, the sponsor - Invitation Homes - can take out and sell up to 100% of the properties backing the loan, through voluntary substitution or special release. Moody's notes that such added flexibility potentially increases certain risks, but there are strict criteria for substituting or releasing properties and the risks are mitigated through the GSE's guarantee on the class A notes.

Private label SFR transactions are typically more restrictive for sponsors and do not allow for voluntary substitution or special release of properties; if sponsors wish to do so, they have to pay a premium, which deleverages the transaction. Moody's says that voluntary substitution would likely be credit negative, due to factors like adverse selection, but it could be mitigated by certain substitution criteria and the amount of allowable substitution.

The agency outlines 16 criteria for substitution, such as the property needing to be either a detached single-family residence or a townhome and that an EOD is not occurring, except if the substitution of the property cures the event of default. It highlights that special release of properties without prepaying the loan is also allowed if certain LTV requirements are met, citing nine special release criteria - including that the properties can be released only after the first anniversary of the closing date, but prior to the fifth anniversary of the closing date, and that no EOD has occurred and is continuing.

Moody's adds that these strong substitution and release requirements would help mitigate the risk of adverse selection of collateral and collateral deterioration. Furthermore, the rating agency says that even if substitution were to deteriorate the credit quality of the collateral pool, the Fannie Mae guarantee would likely insulate the class A investors from any resulting risks.

Moody's suggests that the issuance of further GSE SFR transactions may boost liquidity in the sector. The agency concludes that the structure could allow for an alternative source of funding for SFR operators and potentially reduce risk for outstanding SFR transactions.

RB

RMBS

Subprime and non-QM compared

Non-qualified mortgages (non-QM) are not equivalent to subprime mortgages made during the pre-crisis era and do not share the same characteristics, Morningstar comments. The rating agency adds that the QM designation outlined by the CFPB three years ago does not necessarily equate to strong credit quality and - conversely - non-QM mortgages do not necessarily equate to excessive risk.

Unlike pre-crisis subprime loans, non-QM loans thoroughly examine proof of income in applications for loans, whereas pre-crisis subprime often required little or no income documentation. Furthermore, the performance of non-QM loans has been strong, with low losses in non-QM RMBS.

The CFPB's criteria for a QM loan includes stipulations that the underwriter must follow the criteria in the Truth in Lending Act for determining monthly income and debt, and that the borrower's debt-to-income ratio cannot exceed 43%. Morningstar suggests that borrowers seek non-QM loans for various reasons, including inconsistent income that cannot be accurately verified, that their debt-to-income ratio is above 43% or, for example, they have experienced a recent credit event such as bankruptcy.

However, the rating agency highlights that even when a mortgage is non-QM, the lender must still thoroughly determine the ability of the borrower to repay the loan, based on a range of factors - including income, assets and credit history. Pre-crisis, subprime loans were often granted with little or no documentation. As a result, Morningstar says, non-QM mortgages have much lower potential for fraud and much better underwriting quality than pre-crisis subprime loans.

Furthermore, QM loans do not necessarily equate to stronger credit because, for example, there is no maximum loan-to-value ratio or minimum FICO score for QM loans. As such, a loan with a high LTV of 90% but a lower FICO score of 640 and a debt to income (DTI) ratio of 43% could be a QM loan, whereas a loan with a 50% LTV, 800 FICO and 43.5% DTI ratio cannot be a QM loan because of the DTI ratio - despite the former loan being more likely to default than the latter.

Morningstar believes that LTV and FICO are the main factors in predicting loan performance and that an interest-only loan with a 40% LTV - making it non-QM - is less likely to default than a fully amortising QM loan with a 90% LTV. The agency adds that interest-only loans can be appropriate loans for some borrowers, such as the self-employed or those with irregular income.

Non-QM loans in securitisations don't necessarily indicate excessive risk and while weighted average metrics are typically weaker for non-QM loans, the values for non-QM loans typically indicate strong loans. According to Morningstar, based on FICO, LTV and DTI, a borrower with the average attributes for non-QM loans would be able to qualify for most mortgage programmes, including Fannie Mae and Freddie Mac.

Furthermore, the rating agency says its analysis shows that most non-QM loans are not like subprime mortgages in that 79.8% have an original FICO of 660 or more and only 4.7% have a FICO below 610. The majority (93.5%) of non-QM loans have an LTV of 80% or below, with only 6.5% having an LTV of more than 80%. Additionally, only 26.7% of non-QM loans have a DTI greater than 43%, with only 7.9% having a DTI of more than 48%.

Morningstar adds that the majority of non-QM loans - 73.4% - have an LTV of 80% and a FICO of 660 or higher. When LTV increases, FICO also typically increases, and where there is an average LTV of 80% and 85%, FICO goes up to 610 and 660 respectively.

The rating agency adds that alternative credit assessment methods are often used for borrowers, such as the self-employed. However, it doesn't necessarily view these borrowers as riskier and non-QM programmes are viewed positively by the firm, as income is often thoroughly documented.

These non-QM programmes include bank statement programmes, whereby borrowers provide 12-24 months of bank statements to prove an ability to repay, often for self-employed borrowers. The rating agency comments that this programme can be prudent, particularly when borrower earnings fluctuate but that the 24-month programme is better than 12 months and is enhanced with a third-party prepared profit-and-loss statement and employment verification.

Morningstar suggests that programmes that meet all QM requirements but allow DTIs of above 43% can also work, especially where minimum credit scores in the mid- to upper-600s are required or where there is a reduced maximum LTV. Another programme uses the borrower's liquid assets to determine a monthly income that can be used to repay the mortgage. The agency doesn't regard these programmes as full documentation, but they are regarded as stronger than stated income, where there is little or no documentation.

Foreign nationals also often struggle to get a QM, due to a lack of US credit score and credit history and, as such, reserve requirements are usually high and LTVs low (typically capped at 60%). While foreign nationals usually provide alternative documentation and foreign tax returns to show income, Morningstar doesn't typically treat foreign national loans as full documentation loans, but they're still not as weak as stated income or no documentation loans.

In terms of when a borrower has experienced a recent credit event, Morningstar believes that non-QM programmes offering lower seasoning requirements can be effective and are stronger when there is valid justification for the event and when there are no other blemishes in credit history. It adds that there should be restrictions on LTV and FICO and it may review the reason for the credit event, as it may not indicate poor credit history.

The agency adds that while some non-QM programmes use alternative underwriting procedures, the programmes document income and the borrower's ability to repay as opposed to pre-crisis subprime loans. Reviewing underwriting guidelines, originator and aggregators is important to understand the origination process and aggregators to get a "full picture" of the origination process.

Further, there is some uncertainty about how non-QM loans will perform in the future and concerns surround the foreclosure process; in particular, because non-QM loans are not protected from defence of foreclosure claims as QM loans are. However, the rating agency suggests that lenders of non-QM loans will be able to defend how they determined the borrower's ability to repay, due to the level of documentation they collect.

Morningstar suggests that the industry will gain comfort when it sees non-QM loans go through the foreclosure process. The rating agency concludes that while lack of liquidity for non-QM is a concern, the growing number of non-QM transactions should help and non-QM originations are expected to increase, despite rising interest rates.

RB

Structured Finance

Job swaps round-up - 30 June

North America

Alexander Popov has joined Carlyle Group as md to lead the credit opportunities business within the firm's global credit platform. Popov was previously md with HPS Investment Partners, formerly known as Highbridge Principal Strategies, and before that was svp at Oaktree Capital Management.

Funding Circle has hired Joanna Karger as US head of capital markets. She has extensive structured finance experience and most recently was evp, capital management for Renew Financial.

Lea Overby has been named as head of CMBS research and analytics at Morningstar Credit Ratings, based in New York reporting to Vickie Tillman, president of Morningstar Credit Ratings. Overby was previously md at the firm and prior to Morningstar, was head of CMBS and ABS research at Nomura Securities.

IHS Markit has hired Adrienne Cerniglia to lead the growth of its CLO pricing team. She reports to Matt Fiordaliso, global head of securitised and municipal pricing at IHS Markit, and joins from Hapoalim Securities USA, where she led the CLO and CDO trading teams.

EMEA

Ares Management has hired Peter Higgins as a partner and portfolio manager in the Ares Credit Group. He will be based in London and lead the expansion of Ares' European leverage finance product offerings alongside the existing European credit team. Higgins was most recently with BlueBay Asset Management, where he was partner and senior portfolio manager for its global leverage finance group.

Vaibhav Piplapure is joining M&G Asset Management. He was previously md and head of asset finance in Europe at Credit Suisse.

Standard Chartered has appointed Lyndon Hsu as global head, leveraged and structured solutions. He will be based in Singapore and report to Sumit Dayal, global head, corporate finance. He was previously md, head of leveraged and acquisition financing, Asia Pacific at HSBC in Hong Kong.

Board appointments

RAIT Financial Trust has increased the size of its board by two to total 11 trustees, with the appointment of Nancy Jo Kuenstner and Justin Klein, effective on 9 July. Kuenstner is an experienced strategic consultant, with an extensive banking and finance background. Klein is a partner with Ballard Spahr and a seasoned practitioner in securities law, M&A and corporate governance.

Index launch

JPMorgan has launched a Consumer Core ABS Index, comprising investment grade and SEC-registered auto, credit card and student loan securitisation bonds (weighted 43%, 30% and 27% respectively, as of 31 May). The index contains 1,129 ABS CUSIPs, accounting for US$265bn in notional, compared to approximately US$515bn outstanding across the three sectors. It consists of bonds across the largest and most liquid sectors of the ABS universe, and has roughly tracked 58% of monthly total ABS TRACE volume and 70% of monthly total auto, credit card and student loan ABS TRACE volume.

Acquisitions

Indian rating agency CRISIL has acquired 8.9% of the equity share capital of CARE Ratings, pursuant to a bid process conducted by Canara Bank. CRISIL says it continuously evaluates investment options as part of its corporate strategy and that this purchase is an investment in the "excellent long-term prospects of the credit rating sector" in India. It adds that these prospects are driven by significant demand for capital investments and infrastructure financing in the country.

Atalaya Capital Management has entered into a primary transaction with Dyal Capital Partners, a division of Neuberger Berman Group. Dyal will become a passive, non-voting minority partner in Atalaya. All of the proceeds from the investment will be retained on Atalaya's balance sheet to expand the firm's capabilities and increase the firm's investment alongside its investors.

Retro launch

Guy Carpenter has launched a new unit offering dedicated retrocession services to clients in the Asia Pacific region, headed by md Simon Hughes and svp Ben Dunnett. Dubbed GC Asia Pacific Retro, it will link in with Guy Carpenter's existing marine and aviation global specialties units in the region, focusing on retrocessional solutions, capital raising and product and capacity development. The firm says it aims to "play a central role in facilitating the growth of the retrocession market in the region, while also expanding the potential afforded by ILS capacity."

Sponsor vehicle established

CVC Credit Partners has closed CVC Credit Partners Global CLO Management - a vehicle that will provide the firm with risk retention capital for its global CLO business (SCI 26 June) - at its hard cap of US$600m. The vehicle has the exclusive right to invest in the majority CLO equity of CVC Credit's US and European CLOs, enabling the manager to comply with both the US and European CLO risk retention rules. It is expected to support roughly US$12bn of CVC CLO issuance globally over the next several years.

Accounting fine

The US Fed has fined BNY Mellon US$3m after the firm improperly assigned a lower risk-weighting to a portfolio of CLOs, reducing the risk-based capital ratios. Following a change in accounting rules in 2010, BNY Mellon consolidated the portfolio onto its balance sheet and incorrectly assigned the assets a zero-risk weighting, understating its reported risk-weighted assets and overstated its risk-based capital ratios for nearly 14 quarters. The firm corrected its risk-weighting and risk-based capital ratios when the errors were identified and is now in compliance.