Contents

ABS

Retail woes could hit card ABS

Store closures across the US are expected to negatively impact credit card ABS trusts, due to their exposure to the private-label card market and co-branded card accounts. Consumers could be more willing to default on a credit card from a retailer without local stores because they won't expect to make future purchases at its other locations or online.

The private-label credit card market includes almost 300 million active accounts, which can only be used at the stores and websites of specific merchants. Co-branded cards, on the other hand, can be used as general purpose cards but have reward programmes typically associated with a specific merchant. As of 1Q17, consumers owed US$120bn on private-label cards and nearly US$700bn on general purpose cards, according to Moody's.

The US private-label card market is dominated by a small number of banks, with the top five accounting for 79% of issuance and the top ten accounting for 91%. These include Synchrony, Citi, Alliance Data via its Comenity Bank subsidiary, Capital One, Wells Fargo and TD Group US Holdings.

Moody's suggests that even if a retailer enters bankruptcy but continues to operate in some way, cardholders will not view the loss of the store they visit most often as "significantly damaging the utility of their card."

Sharp increases in the charge-off rates for receivables in Fingerhut and Spiegel card ABS trusts were seen after the underlying accounts lost utility, however. Fingerhut's owner company Federated Department Stores closed the Fingerhut catalogue unit and halted mailings in January 2002, closed its website shortly after and ended new purchases on its securitised accounts in March 2002.

Spiegel filed for bankruptcy protection in March 2003, following which the bank unit was placed into receivership and closed its securitised accounts. Moody's comments that this supports the view that the "the loss of card utility leads to a deterioration in performance."

The rating agency adds that as locations that private-label cardholders visit often disappear, new purchases on their accounts will decline, thereby reducing revenues from ongoing balances that produce interest income and other fees. A retailer liquidation would therefore lead to more significant declines.

Co-branded cards would be affected by store closures but to a lesser extent, because while they can be used at a range of merchants, they are often utilised for rewards at a specific retailed. Moreover, if a borrower has multiple cards, a co-branded card could become a lower priority payment, particularly if the other cards offer rewards still of use to the consumer.

Moody's notes that banks may try to convert private-label and co-branded accounts to their other card products, but the impact will differ between banks and ABS trusts. The agency points out that an ABS trust will not benefit from the cashflows from a new card unless the bank added it to the trust, while the closure of the initial account would affect the trust performance.

With retailers struggling, they may push for looser underwriting by their card issuing partners, leading to weaker credit quality. Since 2015, private-label account origination volumes have contracted, but a growing number of accounts have gone to borrowers with FICO scores of under 660 - which contrasts with general purpose card trends.

However, weaker standards would only have a detrimental effect on an issuer's ABS trust if the issuer chose to include the accounts in its trust. Most credit card ABS sponsors have excluded a vast majority of new accounts from their trusts.

Moody's adds that while delinquency rates on private-label and general purpose cards currently remain below levels reached during the last recession, performance is weakening, especially for private-label accounts. This is mainly due to general loosening of credit standards that tightened significantly after the financial crisis.

Nevertheless, the agency suggests that the negative effects of retail trends is limited for most banks and ABS trusts because of their small exposure to co-branded and private-label cards, with only Synchrony and Alliance Data relying heavily on private-label card issuers. Private-label and co-branded cards account for almost the entire loan books of both firms, with heavy retail card concentrations.

Consequently, major exposures to private-label and co-branded accounts is limited to two the Synchrony Credit Card Master Note Trust and Comenity Bank's World Financial Network Credit Card Master Note Trust programmes. Citi's Omni Master Trust has significant exposure to private-label and co-branded cards, but other securitisation trusts have immaterial amounts of private-label accounts and while some have large amounts of co-branded accounts, they have very limited exposure to cards associated with contracting retailers.

Indeed, only a portion of the private-label and co-branded cards are associated with retailers that are most directly exposed to the shifting retail landscape or are financially weak and at risk of liquidation. A strong economic environment and continued low unemployment will help mitigate the negative effect of store closures - and while card balances might become a lower priority, borrowers may be more likely to pay off store card balances, which are typically quite low.

Moody's notes that a move towards online shopping could actually benefit certain issuers and ABS trusts where cards have become linked with online retailers, such as Amazon.com and Synchrony, or simply through increased use of their general purpose cards. Finally, some retailers may be able to offset a portion of lost sales with a conversion to their online channels, with a portion of that online spending being financed via private-label and co-branded cards.

RB

ABS

Short-term STC consultation underway

The Basel Committee and IOSCO have released consultative documents outlining criteria for identifying simple, transparent and comparable (STC) short-term securitisations and their proposed capital treatment. The criteria take account of the characteristics of ABCP conduits, such as the short maturity of the CP issued, the different programme structures (multi-seller and single seller) and the existence of multiple forms of liquidity and credit support facilities.

The short-term STC criteria maintain and build on the principles in the criteria for identifying STC securitisations issued in July 2015 (SCI passim). In the case of short-term securitisations, the Basel Committee and IOSCO note that simplicity refers to the relative homogeneity of underlying assets included in each transaction financed by the ABCP conduit, with simple characteristics and a conduit structure that is not overly complex.

Similarly, criteria on transparency aim to provide: investors with sufficient information on the underlying assets and underlying transactions, as well as details about the conduit structure and liquidity and credit support received; and sponsors with granular information on the underlying assets. Criteria promoting comparability could assist investors in their understanding of such investments and enable more straightforward comparison across similar securitisation products within an asset class. Importantly, they should appropriately take into account differences across jurisdictions.

The two organisations add that while the short-term STC criteria are sufficiently detailed to serve as guidance for good practice, the use of the criteria for the setting of preferential regulatory capital requirements requires greater prescriptiveness. In addition, the short-term STC criteria focus on the perspective of investors of notes issued under an ABCP programme rather than on the role of a bank as a sponsor.

Consequently, the consultative document on capital treatment sets out additional guidance and requirements for the purpose of applying preferential regulatory capital treatment for banks acting as sponsors of, as well as investors in STC short-term securitisations. These requirements include: investor access to key monthly information on the performance and key characteristics of the ABCP structure; the redemption risk of the underlying assets being addressed from the sponsor's perspective; and the transactions funded by the conduit having an enforceable legal structure and that the relevant information is disclosed by the sponsor to investors.

The proposed treatment is consistent with the Committee's July 2016 revisions to the securitisation framework. As such, STC short-term securitisations will receive the same reduction in capital requirements as other STC term securitisations, provided that the proposed criteria are met. In other words, when applying the external ratings-based approach for its holding of a note issued by an ABCP conduit that meets the short-term STC capital criteria and has an external credit assessment of A-1/P-1, the risk weight will be 10%.

The short-term STC criteria distinguish between criteria relevant at the transaction level (which must be separately met by each transaction in the conduit) and at the conduit level (which must be met by the overall conduit as a whole). Most criteria are relevant at both levels, but have a slightly different focus to reflect the differences in risk, stakeholders or structure at each level.

For instance, at the transaction level, for the criterion on consistency of underwriting, the sponsor is required to ensure that sellers apply a consistent underwriting standard between the assets transferred to the transaction and those retained on its balance sheet. At the conduit level, the sponsor is required to make representations and warranties to investors that it has taken steps to verify that assets financed by the conduit have been subject to consistent underwriting standards.

The Committee proposes that the short-term STC capital criteria have to be fully complied with at both the conduit level and the transaction level, but with an exception for sponsors' exposures (referred to as the 'baseline approach'). The aim is to ensure that investors are fully protected against all losses, including those arising from a deterioration in the performance of the underlying assets.

The baseline approach provides for exposures providing 'partial' support to qualify for STC capital treatment, assuming all other short-term STC capital criteria are satisfied. Under the baseline approach, two different ABCP structures - one receiving 'partial' support and one receiving full support - could both qualify for STC capital treatment for their respective sponsors' exposures, but only investors in the notes issued by the ABCP conduit receiving full support could qualify for STC capital treatment.

In addition to the baseline approach, two alternative approaches are being considered by the Committee. First, for a bank's exposure to qualify for STC capital treatment, the short-term STC capital criteria would have to be complied with in their entirety. This approach is more conservative than the baseline approach in that the short-term STC capital criteria would have to be fully complied with by both investors and sponsors.

Second, for a bank's exposure at the transaction level to qualify for STC capital treatment, compliance with the transaction-level short-term STC capital criteria alone would suffice. This approach has the advantage of being more risk-sensitive than the baseline approach from a credit risk perspective. Together with allowing exposures providing 'partial' support to qualify for STC capital treatment, it subscribes to the idea that assessing STC capital treatment on a transaction-by-transaction basis provides an incentive to structure STC-compliant transactions.

In addition, any increase in risk exposure resulting from non-STC transactions under the ABCP structure has no impact on the transaction sponsored by the sponsor bank. Moreover, it provides an incentive to transaction-level participants to reinforce the sponsor's STC attestation by carrying out their own due diligence regarding the transactions they are exposed to.

Comments are invited on all aspects of the consultative documents by 5 October.

CS

Structured Finance

SCI Start the Week - 3 July

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

Pipeline
Only a handful of transactions remained in the pipeline last week. Of these, RMBS accounted for the majority of deals: US$393.97m CSMC 2017-RPL1, Residential Mortgage Securities 30 and US$784.33m Towd Point Mortgage Trust 2017-3. A pair of auto ABS - €574m Bumper 9 (NL) Finance and £542m Globaldrive Auto Receivables UK 2017-A - and an ILS (US$100m Fortius Re II Series 2017-1) were also announced.

Priced
CLO refinancings dominated new issuance last week. A number of ABS and RMBS also printed.

The CLO refinancings comprised: US$524.05m Anchorage Capital CLO 6 (refinancing), US$351.6m Black Diamond CLO 2013-1 (refinancing), US$472.6m BlueMountain CLO 2014-2 (refinancing), US$368m Cathedral Lake III (refinancing), €421m CVC Cordatus Loan Fund V (refinancing), US$322.13m Denali Capital CLO XI (refinancing), €297.6m Euro-Galaxy IV CLO (refinancing), €249.93m GLG Euro CLO I (refinancing), US$470m Highbridge Loan Management 3-2014 (refinancing), US$480m Jamestown CLO VI (refinancing), US$349m Neuberger Berman CLO XIX (refinancing), US$458.8m Octagon Investment Partners XV (refinancing), US$523.6m Palmer Square CLO 2015-2 (refinancing), US$521.25m Regatta IV Funding (refinancing), US$415.7m THL Credit Wind River 2013-1 CLO (refinancing) and US$304.5m WhiteHorse IX (refinancing). A pair of newly originated CLOs also priced - US$713m KKR CLO 18 and US$507.6m Shackleton CLO 2017-XI.

The ABS new issues comprised: €193m Aqua Finance No. 4, US$253.07m CAL Funding III Series 2017-1, US$160.9m College Ave Student Loans 2017-A, US$925m Discover Card Execution Note Trust 2017-5, US$850m Jimmy John's Funding Series 2017-1, £250m Newday Funding 2017-1, US$499.5m SoFi Consumer Loan Program 2017-4 and €134m Ulisses Finance No. 1. The US$350m Northshore Re II Series 2017-1 catastrophe bond also priced.

The US$210.45m Angel Oak Mortgage Trust I 2017-2, £242m Castell 2017-1, US$512m CSMC 2017-HL1, US$493m New Residential Mortgage Loan Trust 2017-4 and A$350m Triton Trust No. 7 Bond Series 2017-1 accounted for the RMBS prints. Finally, the US$376.7m Resource 2017-CRE5 CRE CDO rounded out last week's issuance.

Editor's picks
Risk-retention vehicle restructurings expected: Appetite for European CLO risk-retention and warehouse investments is strong. Uncertainty post-Brexit around third-country provisions is proving a threat to the nascent development of CLO risk-retention vehicles, however...
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...
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...
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...
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..."

News
• Crescent Capital Group has 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).
• 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.
• 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.
• College Avenue Student Loans has priced 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.
• Blackstone has priced 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 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.
• 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. KBRA has designated 255 loans it monitors as loans of concern, due to multiple underlying negative credit factors.
• The inclusion of electric vehicles in future European auto ABS collateral pools could introduce idiosyncratic risks. S&P says that these risks would warrant specific consideration in its ratings analysis.

Capital Relief Trades

Risk transfer round-up - 7 July

The second quarter appears to have been a quiet period in the risk transfer market, with only two capital relief trades completed. "Most of the pipeline is scheduled for September or December, with approximately 20 transactions being worked on so far," states one source. "Delays in the CRR regulation mean that many issuers don't feel pressured to bring trades this year."

Among the trades in the pipeline are "several" trade finance deals, with one source referring to Standard Chartered as the most likely issuer. According to SCI's capital relief trades database, the lender is the most active issuer in the space, with most of the jurisdictions being emerging markets.

CMBS

Further Sears closures threatens CMBS

Sears is set to terminate its master lease at 20 unprofitable locations owned by Seritage Growth Properties and vacate the properties in October (SCI 7 April 2015). The move could adversely affect about US$550.4m of loans in associated CMBS.

The stores are part of the collateral for the US$925m Project Madison loan, securitised in JPMCC 2015-SGP (see SCI's CMBS loan events database). Morningstar Credit Ratings suggests the impact on JPMCC 2015-SGP will likely be minimal, given the large number of stores in the portfolio, although the vacant space may be difficult to fill.

However, the rating agency notes that more concern surrounds seven malls that back US$550.4m of loans in other deals where the closing stores are non-collateral tenants. It adds that while non-collateral anchors don't typically pay rent and make a minimal contribution to common area maintenance, they contribute to a mall's health.

Closure of an anchor tenant may trigger co-tenancy clauses that allow in-line tenants to terminate their leases or renegotiate the terms. This typically results in lower rents, until the co-tenancy issue is resolved.

Morningstar says that the longer it takes for the co-tenancy clashes to take effect, the less likely it is the anchor spaces will be filled. The situation in such malls may then worsen, as a limited customer base makes it harder to replace tenants and limited alternative uses for regional malls could lead to a sharp devaluation.

As a result, the rating agency has identified eight CMBS loans with higher risk of defaults due to the Sears closings, with the US$124.1m Mall of Acadiana mall being the highest risk. The loan features in BACM 2007-2 and when it matured in April was transferred to the special servicer, with in-line sales at Acadiana Mall declining sharply between 2014 through 2016 from US$435 to US$337 per square-foot.

Morningstar notes that at Mall of Acadiana, JCPenney and Macy's are also non-collateral anchors and Sear's closure follows the closure of the Limited store. A loan extension or modification is under review at the mall.

The rating agency suggests that a modification that leaves owner CBL & Associates Properties in place could be the most desirable outcome for investors. It values the collateral at US$123.2m, suggesting a 100.8% loan-to-value ratio.

Other concerns for Morningstar include three properties where Sears would be the second anchor closing, possibly accelerating the malls' decline. Sears departed from the Oakdale Mall (which makes up 5.2% of WFRBS 2011-C3) and Sarasota Square (which makes up 3.2% of COMM 2013-CR9), following Macy's closure at both.

Furthermore, Sears is second anchor at the Southridge Mall, where Kohl's will close in 2018. Morningstar suggests that these malls could lose in-line tenants if the anchors aren't replaced and they have long-term maturity risk as a result. The rating agency adds that the loss of two anchors makes it unlikely that a lender will take a chance on a take-out loan and while cashflows on the loans suggest yields of 9%, further deterioration can make refinancing the loans questionable.

Morningstar indicates that while Sears has stayed afloat through selling off various assets, the chance of a turnaround seems unlikely after years of failing to modernise. Equally, the rating agency comments that, after the retailer span off Seritage Growth Properties in 2015 as a REIT owning 235 Sears properties (and holding joint venture stakes in 31 others), Sears "may be running out of big cash-raising opportunities, as it included many of its higher-quality properties in the Seritage deal."

Sears currently has 330 locations backing 209 CMBS loans, with an aggregate allocated principal balance of US$12.78bn.

RB

CMBS

Early redemption for Annington CMBS

The Annington Group is set to refinance its capital structure, after investors passed an extraordinary resolution last week allowing the firm to redeem its Annington Finance No. 1 and No. 4 CMBS. The move is designed to take advantage of favourable market conditions and is expected to reduce the firm's borrowing costs.

Annington is proposing to replace the outstanding £168.86m ANNFIN 1 (due 2021) and £2.48bn ANNFIN 4 (due 2022 and 2023) notes, plus £550.83m of Annington Repackaging No. 1 notes (due 2023) with senior unsecured corporate bonds. The new bonds will be placed under a £4bn multi-tranche EMTN programme that can issue sterling- or euro-denominated debt, with short, intermediate and long tenors. Fitch and S&P have both assigned preliminary triple-B ratings to the programme.

Bank of America Merrill Lynch European securitisation analysts note that under the current structure, Annington's credit quality is restricted by the securitisation, which effectively locks up any cashflow generated by the main operating entity. "The refinancing will substantially improve the business risk profile by allowing access to the 40,531 rental properties and cashflows that are currently isolated within the securitisation group," they observe.

The CMBS financed Annington's acquisition in 1996 of a portfolio of UK Ministry of Defence married quarters, the majority of which were then leased back to service families. The assets were valued at £7.5bn, as at 31 December 2016.

As a result of the refinancing, S&P projects that Annington's LTV should decrease to around 45% and its interest coverage ratio increase to 1.5x-1.8x over the next two years, from 47.5% and 0.67x respectively at end-2016. The agency consequently expects to upgrade the firm's rating to triple-B from triple-C plus.

In comparison, the LTVs for the securitised class A, B, C and M notes were 14.8%, 24.1%, 27.3% and 24.9% respectively, as of April 2017.

Annington last month invited noteholders to consent to amendments designed to more closely align, through the insertion of a call mechanism, the redemption mechanics of the ANNFIN 1, ANNFIN 4 A and ANNFIN 4 B1 notes with those of the ANNFIN 4 C1 notes and to provide the issuers with the ability to execute future redemptions under an abbreviated notice period. The firm suggests that at the proposed early redemption price of Spens, early redemption would protect the value of the notes on a net present value basis.

The proposals were deemed acceptable by a special committee - the members of which hold in aggregate approximately 45.10% of the AF1 notes, 55.32% of the AF4A notes, 18.58% of the AF4B1 notes and 24.89% of the AF4C1 notes - ahead of the consent solicitation. Annington has mandated Barclays and JPMorgan to act as joint lead managers on the subsequent bond issuance.

CS

CMBS

CMBS green bond debuts

Natixis has issued the first-ever 'green' tranche in a CMBS, in collaboration with Ivanhoe Cambridge and Callahan Capital. The US$72m bond was incorporated in the recent CSAIL 2017-C8 transaction and refinanced part of the US$358.6m fixed-rate first mortgage loan provided by Natixis to Ivanhoe Cambridge for the acquisition of the 85 Broad Street building in New York.

Natixis commissioned an independent body, Oekom Research, that confirmed that the 85 Broad Street loan-specific certificates met the ICMA Green Bond Principles and the Green Bond Principles' Green Use of Proceeds Securitized Bond's formal concept. The firm also provided a positive opinion in terms of the sustainability quality (benefits and risk avoidance) of the property and overall sustainability quality of the original lender.

In line with this, the building received a Leadership in Energy and Environmental Design Platinum Certificate for Existing Buildings: Operation & Maintenance, which is the highest rating level obtainable under the LEED rating system. The green tranche received strong interest from green investors in the US and overseas and was oversubscribed, according to Natixis.

The US$811.1m CSAIL 2017-C8 is backed 32 fixed-rate loans secured by 55 commercial and multifamily properties. Natixis contributed 10 loans to the deal, accounting for 43.6% of the transaction. Benefit Street and Column Financial were also loan sellers, contributing 16 loans (32%) and five loans (24.4%) respectively.

The average loan size in the pool is US$25.34m, with a weighted average interest rate of 4.48%, weighted average remaining term of 106 months and weighted average remaining amortisation of 355 months. The 85 Broad Street loan originally totalled US$90m of the trust loan amount and 11.1% of the pool and is one of four investment grade loans, along with Apple Sunnyvale, Urban Union Amazon and 71 Fifth Avenue.

DBRS, Fitch, KBRA and Moody's rated the transaction, all assigning triple-A ratings to the class A notes. The deal includes an eligible vertical interest totalling US$63.65m (or 4.13%) for risk retention purposes.

DBRS notes that the transaction is concentrated by loan size, property type and geography, with the five and ten largest loans comprising 41.3% and 62.9% of the pool respectively. Of these, 52.4% of the properties are located in just two states - New York and California - with the property type being mainly office, representing a concentration of 47.8% of the pool.

The rating agency adds that this lack of pool diversity increases each loan's probability of default, but this is mitigated to an extent by the investment grade rating on three of the ten largest loans, making up nearly 25% of the pool. Furthermore, it suggests that there is an elevated concentration of loans that exhibit higher refinance risk.

RB

NPLs

Attica deal unlikely to be replicated

Greek bank Attica has announced a securitisation of €1.3bn of non-performing loans. Although rare, the transaction is unlikely to become a template for larger systemic banks, as control of servicing and the portfolio remains an issue.

Attica will transfer €1.3bn of non-performing loans to an SPV, which will in turn issue a senior bond of a nominal value of €525.2m and a junior note of a nominal value of €806.4m. According to the plan, the bank will set up a liability management company called 'Goddess Artemis' that will manage the NPL portfolio and will in turn be 80% owned by investment firm Aldridge EDC Specialty Finance. The plan stipulates that Goddess Artemis will sign a ten-year agreement to manage the SPV's bad loans.

Attica Bank has one of the highest NPE ratios in Greece, at 61.8% of total loans. It also faced a capital shortfall of €70m in an adverse stress test scenario of the comprehensive assessment by the Bank of Greece.

Aldridge EDC will buy the junior note, composed of loans fully covered by credit risk provisions, for €70m. The lender will, in turn, record that amount as a profit on its balance sheet, counting it as Tier 1 capital.

According to George Kofinakos, md at StormHarbour, there are two drivers behind the project. First, it helps with the capitalisation of Attica's €70m shortfall. Second, the hiring of an experienced external servicer enhances efficiency and thus recovery collection.

"Recovery ratios tend to be 20%. This is a mixed portfolio, so if they can take it to 40%, the investor can break even," he notes.

Additionally, the transaction benefits from a performance-based fee for the servicer, whereby more of the recoveries are shared with the servicer as the recovery ratio improves. This will, however, depend to a large extent on the servicing.

Nevertheless, the transaction isn't replicable across larger systemic banks since, in this case, the investor benefits more than the issuer. Kofinakos observes: "It's an arm's length deal, where the investor puts in €70m but takes all the portfolio, doesn't surrender the servicing and gets the junior bond for €800m."

The benefits of an NPL securitisation are clear, however. He continues: "The bid/ask gap would have been large and immediately effective, if they transferred the portfolio through an outright sale. In this case, there is a transition period of ten years, whereby losses come at an annual basis if the servicer doesn't accomplish the targeted recoveries."

SP

NPLs

Atlante II role confirmed in MPS deal

The European Commission has approved a €5.4bn precautionary recapitalisation of Monte dei Paschi di Siena under EU state aid rules, which is conditional on a five-year restructuring plan that includes the disposal of a €26.1bn non-performing loan portfolio via securitisation. Atlante II is expected to share the funding of the junior and mezzanine tranches with an undisclosed group of investors, while the senior note will be sold to private investors.

Monte dei Paschi's NPLs are expected to be sold to the SPV at a 21% transfer price (€5.5bn). The Atlante II fund will buy the mezzanine and junior tranches for around €1.8bn. A senior tranche of just over €3bn will be sold to institutional investors supported by the GACS state guarantee, while around €500m will remain with the bank.

Massimo Famularo, head of Italian NPLs at distressed technologies, suggests that the €500m is probably the difference between the transfer price and the net book value of the portfolio, since it was not possible to match the entire amount.

These figures are well below the "market deal" that MPS tried to close in 2016, when the senior tranche was assessed at €5bn-€6bn and the mezzanine and junior at €3.2bn (SCI passim). The new transfer price is the result of the most recent due diligence undertaken by Fortress and Fonspa, on behalf of Elliot Capital. The latter is said to have backtracked from the sale last month over disagreements regarding NPL recoveries.

As well as MPS, Atlante II is working with three small banks - CR San Miniato, CR Cesena and CARIM (SCI 16 May) - while holding €450m that is earmarked for the Veneto banks. "Atlante II is partially funding all of these deals, due to capital constraints, leaving the rest of the funding gap to be filled by investors," says one source.

Famularo concludes: "Atlante II should have €1.65bn - including €450m earmarked for the Veneto banks - and a commitment of about €1.8bn to close the securitisation structure. Yet this would still leave approximately €100m-€150m that would need to be addressed somehow."

SP

NPLs

Carige NPL deal unveiled

Banca Carige has launched its keenly-anticipated non-performing loan securitisation (SCI 1 March). Dubbed Brisca Securitization, the €309.7m transaction is backed by an NPL portfolio with a total gross book value of €938.3m.

The assets comprise 5,001 loans extended to 2,069 borrowers by Carige, Banca Cesare Ponti and Banca del Monte di Lucca. The collateral is primarily located in the northern regions of Italy, which is viewed as a strength of the transaction.

The majority of loans in the portfolio defaulted between 2007 and 2015 and are in various stages of the resolution process. Loans representing around 22.8% of the GBV are unsecured loans, while the remaining 77.2% are secured, of which about 2.7% are secured with a second or lower ranking lien.

Of the secured loans, 60.3% are backed by residential properties and the remaining 39.7% by different types of non-residential properties. In terms of GBV at borrower level, 29.3% of the processes are bankruptcies.

Rated by DBRS and Moody's, the deal comprises €267.4m BBB (high)/A3 rated class A notes, €30.5m B (low)/B3 class Bs and €11.8m unrated class Js. The class A notes are eligible to benefit from the GACS guarantee.

The portfolio will be serviced by Prelios Credit Servicing, with Zenith as monitoring agent. Securitisation Services has been appointed back-up servicer.

If the servicer report is not available at any payment date, the continuity of payment for the class A notes will be assured by the calculation agent that prepares the payment report, based on estimates.

The Prelios business plan assumes that all loans will be disposed of through a legal foreclosure process and the collections received will be the principal source of payment under the notes, according to DBRS. Gross disposition proceeds (GDP) totalling €393m are expected to be collected, of which residential real estate represents 63.6% and commercial real estate 30.4%. Unsecured loans only account for 6% of the expected Prelios GDP.

DBRS points out that there is a significant reliance on Prelios's ability and performance as a servicer in executing its business plan, although the granularity of the portfolio, the cash reserve and the experience of Prelios are mitigating factors for this risk. In its analysis, the agency says it assumed that all loans are disposed of through an auction process, which generally has the longest resolution timeline. It adds that its ratings assume a haircut of 18.7% and 5.5% respectively to Prelios's business plan for the portfolio.

In order to estimate the cashflows generated by the pool, Moody's says it used a model that, for each loan, generates an estimate of the timing of collections and the collected amounts. The key drivers for the estimates of the collections and their timing are: the historical data received from the special servicer, which shows the historical recovery rates and timing of the collections for secured and unsecured loans; the fact that bankruptcies usually take a significantly longer time to go through the legal system than a foreclosure; and benchmarking with comparable Italian NPL transactions.

As the collections from the pool are not directly connected to a floating interest rate, a higher index payable on the notes would not be offset with higher collections from the pool. The transaction therefore benefits from an interest rate cap linked to six-month Euribor, with Banca IMI as cap counterparty.

The notional of the interest rate cap is equal at closing to the outstanding balance of the class A and class B notes. The cap will have a strike of 0.30% at closing, increasing over the life of the transaction up to 1.25% after 7.5 years from closing.

The transaction also benefits from an amortising cash reserve equal to around 4.6% of the class A note balance, funded through part of the recoveries collected from the cut-off date and the issuance date. The cash reserve is replenished after the interest payments on the class A notes and may be used to pay interest due on the class A notes, as well as any senior fees and expenses.

CS

RMBS

BTL refinancing risk highlighted

Tighter policy guidance is influencing the range of products that UK buy-to-let mortgage lenders are offering. Indeed, some lenders appear to be exploiting the differences in regulatory lending policies across mortgage products - which could lead to unintended risks within BTL RMBS, according to DBRS.

Following changes in January to PRA guidance for affordability testing of UK BTL borrowers, lenders are expected to test for stressed interest rates for a minimum period of five years from the origination date, unless the interest rate is fixed or capped for at least five years. Affordability assessments should generally encompass a stressed interest rate equal to at least 5.5% and 2% above either the initial rate or the reversionary rate, but the PRA does not specify over which interest rate a 2% increase should be considered. Five-year fixed-rate products are, therefore, excluded from stressed interest rate affordability assessments.

"This exclusion means that lenders have flexibility to offer five-year products without factoring in interest rate increases in affordability calculations, while still adhering to the PRA's guidance. A borrower can achieve a higher loan amount when applying for a five-year fixed-rate product, ceteris paribus, compared with a shorter fixed-rate loan because the interest coverage ratio would be higher," DBRS observes.

The agency suggests that the differential created by this new regulatory guidance increases the risk that borrowers will reach levels of indebtedness that might not be affordable or otherwise possible using alternative BTL products. In its view, borrowers can become exposed to payment shocks and refinancing risk after the end of their five-year fixed-rate period if stressed interest rate scenarios are not considered during the underwriting process.

The refinancing risk that can arise after the step-up date is amplified by the interest-only nature of BTL lending in the UK. Typically, there is no verification of repayment strategy for those offered a mortgage on an interest-only basis.

The risk of payment shocks is partially mitigated by an affordability buffer requirement, however. The market standard approach requires an ICR of 125% for basic-rate taxpayers and between 140% and 150% for higher-rate taxpayers. This provides a safeguard against interest rate rises, as well as vacancy periods and property maintenance costs, but does not assess ICRs following decreases in rental income.

The positive correlation between interest rates and LTV ratios provides further mitigation to the risk of payment shocks because borrowers might find that high LTV loans are unaffordable, even after a low five-year fixed-rate affordability test.

The popularity of five-year products has been driven by a falling five-year interest rate swap curve, which has reduced hedging costs and forced down the pricing of BTL mortgages. DBRS notes that the majority of five-year products are grouped with a fixed rate of 2.8%-4% and a reversionary rate of 4%-5.5%. The median step-up is 1.5% and the maximum is 3.1%.

For shorter-tenor products, DBRS believes that the tighter affordability assessments should have a positive impact on the performance of UK BTL loans due to reduced risk of payment shock. For five-year products, the longer tenor of the initial fixed period is expected to be positive for landlords and BTL performance in general, despite the fact affordability may not be assessed under stressed conditions.

While DBRS's UK RMBS criteria does not explicitly stress for the possibility of elevated payment shocks associated with new five-year BTL products, the risk is considered in the analysis of historical performance data used in developing its UK mortgage scoring model and dynamic delinquency migration matrices. But the agency says it will continue to monitor for the possibility of payment shocks and refinancing risk arising from BTL affordability checks on an ongoing basis as the market continues to evolve and normalise after changes in policy.

BTL mortgage lending totalled approximately £41bn, as at the year ended 31 March 2017. Since March 2016, BTL RMBS issuance has reached approximately £16.4bn.

CS

RMBS

Reserve uncertainty weighs on legacy RMBS

It emerged last week that Wells Fargo withheld over US$90m in cashflow across 20 Bank of America-originated legacy non-agency RMBS, which resulted in losses across the capital structure. The move has introduced uncertainty due to legal complications to the sector, unrelated to ongoing collateral performance.

Wells Fargo invoked its right as trustee to hold back funds to cover legal costs, after the 20 deals were called. The transactions - comprising six 2004 Alt-A and 14 prime deals split equally across the 2004 and 2005 vintages - had a principal balance of US$542m and are among the 2,243 deals involved in lawsuits brought by investors in 2014 against six banks over their role as trustee on failed RMBS (SCI passim). It appears that the bank withheld US$3,000 per loan, plus an additional US$130,000 per deal.

Morgan Stanley RMBS analysts note they have a wide range of estimates for the universe of the outstanding legacy resi credit market that could be affected, given the many uncertainties raised by the development. "Considering that the 2014 lawsuits name Wells Fargo, US Bank, Bank of New York, Deutsche Bank, HSBC and Citi as defendants, the potential scope of deals affected could encompass roughly half of the universe of over 4000 deals outstanding. On the other hand, if the scope is limited just to deals where Wells Fargo is the trustee, the exposure falls to less than 10% of the universe. If we limit the scope just to deals likely to be called, the exposure falls even further," they explain.

Based on the universe of deals outstanding and the underlying collateral characteristics of the 20 deals as a crude guide, the Morgan Stanley analysts identify roughly 400 trusts in the legacy resi credit universe that appear somewhat similar. Of these transactions, 34 have the same trustee.

Meanwhile, of the deals involved in the six trustee lawsuits, JPMorgan RMBS strategists estimate that 40 have been called to date. They indicate that four of the trustees - US Bank, BNY Mellon and HSBC, as well as Wells Fargo - hold reserves against 24 of the called deals.

The other trustees seem to have used different methodologies to Wells Fargo to calculate their reserve amounts, however. Absent any clarity from the other trustees as to how these were calculated, the JPMorgan strategists estimate the exposure to reserves based on Wells Fargo's assumptions. Of the US$265bn of bonds included in the lawsuits, they project that potential reserves total US$24bn across the deals (or 9% of the current balance).

Where RMBS trusts are involved in a legal action, the PSA grants that the trustee is indemnified against any loss, liability or expense incurred in connection with any claim or legal action relating to the certificates or the performance of any of its duties. Depending on the outcome of the trustee lawsuits therefore, Wells Fargo may have the right to reimburse itself for any legal fees accumulated and remit whatever is left to the affected trusts, or it may be forced to repay the entire US$90m it held back. Although the affected deals could recover their losses at some point in the future, the timing and amount of that recovery remains uncertain.

CS

Structured Finance

Job swaps round-up - 7 July

North America

Mayer Brown has hired Jay Kallas as counsel in its Chicago office, focusing on structured insurance and reinsurance transactions. He was previously counsel at Drinker Biddle & Reath.

Cadwalader has hired Peter Morreale as partner in the capital markets team in the Washington, DC office. He was previously at Goldman Sachs, where he was md and associate general counsel in the mortgages-legal group.

Consumer relief

Monitor of the 2016 Morgan Stanley Mortgage Settlement Eric Green has confirmed that Morgan Stanley has provided US$29.04m to assist New York local government consumer relief efforts and US$746,646 to support housing quality improvement and enforcement programmes. The cumulative credit validated by the Monitor so far now totals US$338.92m, representing 85% of the bank's obligations under the settlement agreement with the State of New York.

Liquidating distribution

Gleacher & Company is set to make a fifth liquidating distribution to company stockholders in the amount of 80 cents per share on 26 July. Total liquidating distributions, including this fifth distribution, since the filing of the company's certificate of dissolution in July 2014 amount to US$11.17 per share (approximately US$69.1m in aggregate). The company says it will continue to monitor its assets and liabilities and to make further liquidating distributions when advisable and consistent with its legal obligations.

CLO manager sale

Fifth Street Asset Management (FSAM) has agreed to sell Fifth Street CLO Management (FSCM) to NewStar Financial and will use the proceeds to pay down its credit facility and for general corporate purposes. The estimated purchase price is approximately US$16m, net of US$13m of assumed indebtedness, and will be subject to adjustment up or down based on certain working capital items as of closing. The transaction is expected to close in Q3, subject to investor consents and closing conditions. FSCM currently manages two middle market CLOs, with approximately US$726m of assets under management as of 31 March 2017, and holds interests in its sponsored CLOs primarily to comply with regulatory risk retention requirements.

CRE joint venture

GoldenTree Asset Management and GTIS Partners have formed GTIS Debt Capital Management, a new joint venture led by David Blum, who recently joined GTIS as md and portfolio manager of real estate credit. The platform will focus on real estate financing, providing customised solutions for both development and bridge debt, with loans generally ranging from US$20m to US$200m. Blum has over 18 years of experience in the real estate industry and was previously co-head of LStar Capital.