Contents

Capital Relief Trades

Swedish regulations to limit risk transfer

Finansinspektionen, Sweden's financial supervisory authority, recently released new securitisation guidelines in an attempt to tackle what it sees as flow-back risk, or the possibility of credit risk flowing back onto bank balance sheets. The guidelines are expected to reduce issuance of Swedish capital relief trades.

Traditionally, Swedish systemic lenders have funded themselves cheaply through covered bonds rather than securitisations. Yet, with rising capital requirements, regulators recognised the growing case for securitisations and in particular capital relief trades.

Regulators, however, had their own concerns. "We saw that there could be a systemic risk for the economy, if issuance breached certain levels," says Karin Lundberg, head of supervision for Swedish systemic lenders at Finansinspektionen.

The regulator's main concern is the effect that so-called flow-back risk can have on lending to the real economy. If the market for securitisation closes for new issues, banks may be inclined to deny borrowers new or extended loans in order to maintain their capital levels. If this coincides with weak economic growth, this could be pro-cyclical for the economy.

A sudden increase in capital requirements due to credit risk flowing back on the balance sheet could lead to banks reducing lending, which in turn could reduce the growth of credit in the economy as a whole. "If a large part of the Swedish credit market is financed through securitisations, there could be a serious reduction in the supply of credit, following a disruption in the securitisation market," observes Lundberg.

For Finansinspektionen, dealing with this scenario means limiting the volume of securitisations through a number of ways. The first is a cap on securitised amounts, whereby any rise in capital requirements above 25bp for systemic lenders following a flow-back does not get capital relief. Additionally, there is a cap of 15% of total lending for a specific exposure class within a jurisdiction.

The capital assessment method applies to Pillar 2, since the latter takes into account a broader set of risk variables - most notably systemic risk, which Pillar 1 does not take into account.

Lundberg confirms, however, that the method will not apply below the cap. "The cap has been set at such a level that it will allow issuers to do trades," she states.

Yet Lundberg is unequivocal regarding the reduced capital relief trade volumes that will accompany the implementation of the guidelines. She notes: "If your main driver is CRTs, then the cap will reduce the volume. But if you have other incentives, such as funding, the effect will be more neutral."

Jonas Backlund, head of credit execution and structuring at Nordea, notes: "There is no ban on securitisations, but the cap is set tight enough to have an effect, since it might be difficult to roll off the deals. This is why issuers need to consider the flow-back risk."

In a synthetic securitisation, when a transaction matures, some assets may not have fully amortised. Consequently, an issuer's balance sheet sees higher capital requirements, since the credit risk flows back on the balance sheet. Replenishment is useful for managing efficiency during the lifetime of the trade, but flow-back risk can be better mitigated by a replacement transaction.

Backlund adds: "Dealing with the challenge will inevitably involve structuring the trades so that the flow-back risk is managed. This could involve doing fewer or smaller trades to achieve a more even distribution. During the structuring phase, you will need to consider the expected amortisation."

This suggests that new trades might be accompanied by longer amortisations to further postpone the future date when the credit risk returns onto the balance sheet. The guidelines, however, allow for some leeway, since Swedish issuers will be allocated Pillar 2 add-ons in case of a breach of the cap.

Nevertheless, when the fixed investments in time and resources to execute such risk transfer transactions are factored in, it becomes clear that the cap will be felt, especially for smaller Swedish lenders. As Backlund observes: "15% of a relatively small asset base will be potentially difficult to justify, considering the required investments in time and resources."

The new guidelines follow a series of interventionist measures by Finansinspektionen over the last seven years, due to concerns over financial stability, in particular household debt. For instance, in 2010 the regulator introduced the mortgage cap, which limits the size of loans collateralised by homes. Under the guidelines, new loans secured by a home should not exceed 85% of its market value, while between 2010 and 2016 FI gradually increased capital requirements in general and for mortgages in particular.

In June 2016, the regulator introduced the amortisation requirement. According to the latter, households with an LTV ratio of between 50% and 70% must amortise at least 1% of the mortgage's original value. On the other hand, households with an LTV ratio greater than 70% must amortise at least 2%.

SP

Secondary markets

Euro CLOs carry on

The European CLO secondary market is carrying on in the face of the earlier than usual secondary market summer slowdown across other securitisation asset classes either side of the Atlantic.

"Overall things are ticking along and given it's the summer we're still doing decent volumes this month so far," says one trader. "However, the market remains dominated by primary in terms of both new issues and refis. There is activity in re-sets too, but we're seeing some fatigue there as the arb is currently not so great."

The trader continues: "Sourcing bonds remains difficult and dealers are very light so the majority of paper is trading well, though we are starting to see some manager disparity. Currently the weakest bid and the least investor interest is in 1.0 lower double-Bs. Conversely, 2.0s that can be refinanced or re-set, so triple-Bs and above, are trading very tight."

Current patterns could easily drift on throughout the remainder of the summer with flows tapering off through August. However, the trader notes: "With typically thin seasonal liquidity it will only take one big piece of news from the loan market to shift prices and potentially generate a large number of BWICs."

There are currently four European CLO BWICs on today's schedule. Three involve one or two lines, while the longest is a collection of small-sized single-Bs due at 14:30 London time.

The €9.85m 15 line list comprises: ARBR 4X F, AVOCA 16X F, AVOCA 17X F, BABSE 2014-2X FR, BABSE 2016-1X F, BECLO 2X F, BECLO 3X F, CGMSE 2015-3X E, CORDA 8X F, EGLXY 2015-4X FR, JUBIL 2015-16X F, NEWH 2X F, OHECP 2015-4X F, OHECP 2016-5X F and TIKEH 2X F. Four of the bonds have covered on PriceABS in the past three months - AVOCA 17X F at 98.87 on 27 June; BECLO 2X F at 98.74 on 23 May; CGMSE 2015-3X E at 97.875 on 25 May; and CORDA 8X F at 101H on 29 June.

ABS

Swiss auto ABS taps Euro appetite

BMW has priced its first public securitisation of Swiss auto lease receivables to feature a euro-denominated class A note. The €431.6m-equivalent Bavarian Sky Europe Compartment Swiss Auto Leases 2 is collateralised by 13,430 fixed-rate auto lease contracts and comprises a €325m floating-rate class A note and a Sfr97.8m fixed-rate class B note.

Fitch, Moody's and S&P assigned ratings of AAA/Aaa/AAA to the class A notes, while the class B notes were unrated. Available credit support is 25.2% on the class A tranche and 0.5% on the class B tranche. Legal final maturity is July 2026 and June 2025 respectively.

The class A note was initially marketed at €275m, but was upsized - after the book size grew to 2.1x - and printed at one-month Euribor plus 40bp with a WAL of 1.99 years. JPMorgan international ABS analysts note that the cash price was 100.299, equating to a discount margin of plus 25bp, which is at the tighter end of the final guidance of plus 25bp-27bp. The deal priced 6bp wider than Bavarian Sky German Auto Loans 6 from May (see SCI's primary issuance database) and offered a pick-up of roughly 10bp versus generic senior European auto ABS spreads, according to JPMorgan figures.

The collateral comprises Swiss fixed-rate auto lease contracts for commercial and private borrowers resident in Switzerland for the lease of used and new vehicles, including motorcycles and the associated residual values. The transaction has a two-year revolving period, during which time the issuer will reinvest the principal proceeds from the pool to purchase further collateral, subject to certain concentration limits and performance triggers.

S&P highlights several changes from the previous Bavarian Sky Swiss transaction, notably that the class A note will be euro-denominated with a floating rate, rather than Swiss franc-denominated fixed rate notes. As such, the class A notes will benefit from an interest rate and currency swap with ING, as the initial counterparty.

The swap is structured so the notional amount is equal to the class A notes' outstanding euro-denominated principal balance. As a result, the issuer pays ING a fixed rate of Swiss franc-denominated interest and in return ING pays the issuer Euribor plus a margin, which is equal to the coupon on the class A notes.

Furthermore, on dates when principal payments are scheduled to be made on the class A notes, the issuer pays the available distribution amount to be applied to the redemption of the class A notes, in Swiss francs, to ING. In return, ING pays the issuer the euro equivalent of the payments received from the issuer, determined by using the exchange rate established on the transaction's closing date.

The end result is that the swap makes the effective cost of funds on the class A notes to be Swiss franc-denominated and fixed-rate obligations. However, S&P notes that the hedge isn't perfect and that in certain negative interest rate scenarios the issuer could be exposed to make payments in euro and following the Euribor index.

The transaction further differs from its predecessor because it will also pay a monthly interest from closing, as opposed to annual payments during the revolving period and monthly during the amortisation period. Additionally, the structure mitigates commingling risk by subordination rather than a specific cash reserve and features a shorter revolving period, compared with 36 months for the first Bavarian Sky Swiss deal.

Bank of America Merrill Lynch and ING were arrangers on the latest transaction.

RB

ABS

Legal disputes weigh on NCSLT payoffs

Ongoing legal disputes between several National Collegiate Student Loan Trust (NCSLT) transaction parties are credit negative for the affected private student loan ABS, due to the risk of servicing transfers and litigation expenses. Most senior tranches in the securitisations are expected to pay off, however.

The crux of the NCSLT disputes are misaligned interests of the securitisation residual interest holder and noteholders, which Moody's suggests is a product of poor transaction performance and the purchase of the residual interests by VCG Securities (the beneficial owner). "A negative trajectory of parity levels in the transactions illustrates the poor performance, with parity currently in the 55%-85% range from 95%-100% in 2009. The performance trends are the result of higher default rates in direct-to-consumer loans, the primary collateral backing the transactions," it observes.

The rating agency highlights three disputes: the US Bank action; the VCG action; and the PHEAA action. The US Bank action relates to VCG's attempt to appoint its affiliate Odyssey Education Resources as servicer or special servicer for the vintage 2003-2005 NCSLT transactions.

The VCG action relates to a lawsuit asserting that Pennsylvania Higher Education Assistance Agency - the general servicer to the NCSLT transactions - failed to comply with the terms of its servicing agreement. The 15 trusts involved are seeking specific performance of the governing agreements and other remedies.

PHEAA has, in turn, sued VCG for alleged inducement, breach of contract and tortious interference with contract.

A VCG victory in the US Bank lawsuit would result in a special servicing transfer in some of the transactions, while if it prevails against PHEAA, the general servicer would be replaced in all of the transactions. Moody's notes that a transfer of servicing would be credit negative for the six transactions involved in the US Bank action, if the new servicer does not have the requisite experience or infrastructure to service the underlying student loan pool effectively.

"In our view, servicing disruptions will generally result in higher defaults and lower recoveries in the underlying collateral pools," the agency observes.

The legal disputes are also increasing expenses that the securitisation trusts incur, thereby reducing cashflow payments to noteholders. With regard to the US Bank and VCG actions, both the indenture trustee and owner trustee are currently being reimbursed for expenses related to the lawsuits through cashflow from the NCSLT transactions. Payment of trustee expenses are given priority at the top of the waterfall, up to a capped amount, which is US$200,000-US$250,000.

Additionally, Odyssey has been invoicing servicer-related expenses for reimbursement from the six NCSLT transactions involved in the US Bank action. These reimbursements have been reserved by US Bank at the top of the waterfall, pending resolution of the action.

Moody's expects the senior-most outstanding class A tranches in nine of the 15 NCSLT transactions to pay off under high-stress assumptions, thanks to rapid deleveraging and the cap on additional trust expenses. The sequential pay structure allows these tranches to receive all principal distribution prior to any junior class A tranches.

At the same time, most of the transactions have breached a subordinate principal trigger and a subordinate interest trigger. Most of the transactions have also breached a non-curable principal turbo trigger, in which all subordinate payments are redirected to the class A tranches once a cumulative default rate is breached.

The senior-most outstanding class A tranche parity ratios for the nine transactions range from 212% to 3328%. However, the senior-most outstanding parity ratios for the other six NCSLT transactions are not on the same trajectory, due to a lack of triggers, the transactions' payment priority and the large balances of the tranches.

In five of the 15 NCSLT transactions, the senior-most outstanding class A tranches are unlikely to be able to pay off under Moody's stress assumptions because they benefit less from deleveraging, given elevated coupon costs and a lack of subordinate triggers. The elevated coupon costs are due to the issuance of auction rate securities that currently pay a failed auction rate across the NCSLT 2003-1, 2004-1, 2007-3 and 2007-4 transactions.

For three (2004-2, 2005-1 and 2007-2) of the nine NCSLT transactions that have benefited from rapid deleveraging of the senior outstanding class A tranches, the agency anticipates that the next-in-line junior class A tranches will pay off under moderate stress assumptions, as they will also benefit from sequential paydown and the principal and interest triggers. This is due to the lower percentage of the senior-most outstanding class A tranche, compared with the other NCSLT transactions.

Junior class A tranche-level parity is currently 125%-245% for these three deals. For the remaining junior class A tranches, either the higher percentage of the senior-most outstanding class A tranche or the relatively large size of the junior class A tranche is hindering deleveraging. Tranche parity for the remaining junior class A notes ranges between 55% and 102%.

Finally, most subordinate tranches in the transactions are expected to take a loss, given weak performance of the collateral pool, which has resulted in low parity ratios and a lack of excess spread. "The low parity ratios are a result of high defaults in the NCSLT transactions, as well as high funding costs in some of the transactions. Although the transactions are already under-collateralised, owing to historical performance, additional trust litigation expenses would further reduce credit enhancement for these tranches," Moody's concludes.

CS

ABS

Spanish card ABS prepped

A Spanish credit card ABS rated by both Fitch and DBRS has started marketing (see SCI's deal pipeline). €518.8m of notes will be offered to the market, with the the rating agencies provisionally rating the senior notes at double-A plus and double-A.

The rated class A notes of Wizink Master Credit Cards 2017-01 have been sized at €451.1m. An unrated €67.7m C tranche will also be offered.

The deal securitises credit card receivables related to credit agreements originated by Wizink Bank to individual customers in Spain. Wizink was originally Citi Spain's credit card business, before being acquired by Banco Popular Espanol and Varde Partners. Banco Popular Espanol was acquired by Banco Santander last month.

The ABS is the first issue under the Wizink Master Credit Cards programme and the second securitisation by Wizink after IM Tarjetas 1 in late 2012 (see SCI's deal database). Wizink is servicer, originator and seller for both transactions.

Fitch expects annual charge-offs of 6.5% and annual yield of 22%. The rating agency has assumed a steady state monthly payment rate of 14%.

A Dutch ABS - Aurorus 2017 - originated by Qander Consumer Finance (known as LaSer Nederland until the end of 2014) has also joined the pipeline. It is also primarily collateralised by credit card receivables, but also by revolving credit facilities and fixed-rate instalment loans. DBRS has provisionally rated the senior notes at triple-A, with ratings of double-A through to single-B for the B, C, D, E and F notes.

JL

Structured Finance

Robo-advisors could boost RMBS quality

Robo-advisors could improve consumer loan and mortgage affordability and strengthen pool quality in associated securitisations. Moody's suggests that by enabling consumers to switch to a lower-rate mortgage more easily, robo-advisors could improve mortgage prepayments and therefore boost credit enhancement for prime UK RMBS transactions.

Moody's indicates that robo-advisors could become challengers to traditional intermediaries in the UK consumer loan and mortgage market and improve consumer affordability. The rating agency points out that borrowers with a high standard-variable rate (SVR) are those most likely to benefit from switching to another mortgage.

Robo-advisors introduce consumers to brokers and therefore reduce loan application time and increase affordability by helping them switch to a lower rate. This could, in turn, boost securitisation pool quality by reducing the likelihood of default.

Approximately 30% of underlying mortgages within UK RMBS that Moody's analysed are on SVR rates higher than 3%, with a weighted average SVR of 4.25%. Furthermore, the gap between the average SVR and the two-year fixed rate is at a historical high of up to 2.5%, which is a strong incentive for SVR borrowers to refinance.

Additionally, the rating agency suggests that while robo-advisors simplify how borrowers can access mainly high-street lenders, underwriting standards of these will likely remain unchanged. The firm notes that using a robo-adviser is unlikely to increase the credit risk associated with the corresponding mortgage, although this depends on the lender continuing to perform all regular checks, such as income verification, credit searches and fraud protection.

RMBS quality could be boosted further if longer-term borrowers move to lower interest rates, as they are more resilient to future economic shocks and may be able to prepay their mortgage, reducing their debt burden and potentially increasing their ability to resolve other financial difficulties. Furthermore, lower rates - via affordability - also decrease the possibility of future arrears and defaults within mortgage pools, which would be credit positive for RMBS.

Moody's adds that should a borrower switch to a lower fixed rate with the same lender, they might have to repurchase the securitised loan or leave it within the securitised pool - in which case the default probability of the associated borrower would be lower. Otherwise, if the borrower switches to another lender, this would result in the loan balance crystallising as a prepayment as the loan leaves the pool, so boosting available credit enhancement.

The agency says that borrowers with an SVR loan would benefit from refinancing the most and that, of the fixed rate borrowers it analysed, the WA interest rate of 2.86% is lower than many borrowers have with an SVR. Prime borrowers with low LTVs paying above 3% SVR should therefore be able to refinance to a lower rate and so boost their affordability.

Moody's concludes that the proportion of borrowers paying above 3% fixed rate is fairly low for low LTV loans, but rises for higher LTVs, which suggests better credit-risk tiering by the level of interest rate for the fixed-rate borrowers.

RB

Structured Finance

SCI Start the Week - 17 July

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

Pipeline
Pipeline activity stepped up again last week. The additions consisted of eight ABS, an ILS, five RMBS and four CMBS.

The ABS were: US$1.375m CarMax Auto Owner Trust 2017-3; US$748m CNH Equipment Trust 2017-B; US$225m CPS Auto Receivables Trust 2017-C; C$460m Ford Floorplan Auto Securitization Trust Series 2017-F1; US$700m Kubota Credit Owner Trust 2017-1; US$1.02bn Navient Student Loan Trust 2017-4; US$551m SoFi Professional Loan Program 2017-D; and US$512.2m Wheels SPV 2 Series 2017-1.

US$290m Fonden Series 2017-1 was the ILS. The RMBS were: Charter Mortgage Funding 2017-1; US$1.143bn Connecticut Avenue Securities Series 2017-C05; Dutch Property Finance 2017-1; Freddie Mac Whole Loan Securities Trust Series 2017-SC02; and US$370m Progress Residential 2017-SFR1.

The CMBS were: US$933m BANK 2017-BNK6; US$125.7m CSMC Trust 2017-MOON; US$634.6m JPMCC 2017-JP7; and US$150m West Town Mall Trust 2017-KNOX.

Pricings
There was also a considerable uptick in deals departing the pipeline, with CLOs accounting for more than half of the activity. The final count consisted of five ABS prints, an ILS, four RMBS, two CMBS and 13 CLOs.

The ABS were: €365m-equivalent Bavarian Sky Europe Compartment Swiss Auto Leases 2; €527m Elrond NPL 2017; US$227m First Investors Auto Owner Trust 2017-2; US$1bn GM Financial Consumer Automobile Receivables Trust 2017-2; and US$857.23m John Deere Owner Trust 2017-B. The ILS was US$100m Fortius Re II Series 2017-1.

£412m Finsbury Square 2017-2, US$370m Progress Residential 2017-SFR1, US$784.33m Towd Point Mortgage Trust 2017-3 and £296m Twin Bridges 2017-1 accounted for the RMBS. The CMBS were US$1.1bn FREMF 2017-K65 and US$285m MSDB 2017-712F.

The CLOs consisted of: US$371m AMMC CLO XIV 2014-14R; €466.25m Babson Euro CLO 2017-1; US$351m BlueMountain CLO 2013-13R; US$563.5m Carlyle Global Market Strategies 2015-1R; US$372m CVP CLO 2017-1; US$600m Hempstead CLO 2017-2; US$461m LCM Partnership 2017-25; US$510m Mountain View CLO 2017-1; US$322m Silver Creek CLO 2014-1R; €327m St Pauls CLO V 2014-5R; US$441.75m Telos CLO 2013-3R; US$408.6m TWC CLO 2017-1; and US$307m Vibrant CLO 2013-2R.

Editor's picks
Final STS document welcomed: The European Parliament's economic and monetary affairs committee has approved, as expected, the new STS securitisation framework by a substantial majority. The final document indicates an overall positive impact for the securitisation market, although the lack of a third-party regime and complex grandfathering provisions may constrain issuance in post-Brexit UK and the EU respectively...
Demand drives Euro CLO portfolio loosening: With demand for high-yielding assets outstripping supply, more European CLOs are being issued with atypical, looser portfolios. While investors may be taking on greater risk as a result, spreads are not reflecting this, leaving some wondering whether the compensation is adequate...
Servicer consolidation boosts NPL recoveries: The Italian servicing industry is experiencing a strong growth trend. Italian non-performing loan recoveries are expected to benefit as a result...
Ratings reviewed for payment disruption risk: Fitch and Moody's have placed a slew of US RMBS classes on rating watch negative, after Wells Fargo withheld trust funds to reserve against future expenses it may incur to defend itself against litigation (SCI 3 July). The actions are primarily due to the trustee's allocation of losses following transaction clean-up calls, which resulted in noteholders failing to receive expected payments...

Deal news
• Credit Valtellinese and Credit Siciliano have tapped the market with their first Italian non-performing loan securitisation. Dubbed Elrond NPL 2017, the €526.6m transaction is backed by an NPL portfolio with a gross book value (GBV) of €1.405bn, of which €30.8m is cash in court.
• JPMorgan and Column Financial are in the market with a US$150m CMBS. West Town Mall Trust 2017-KNOX is backed by a commercial mortgage loan secured by the largest enclosed mall in Tennessee.
• GC Securities has priced the first 144A catastrophe bond that provides indemnity protection against multiple European perils and the first to cover European flood. The €200m Lion II Re transaction provides Assicurazioni Generali with four years of per occurrence cover against windstorms and floods affecting selected European countries, as well as earthquakes affecting Italy.
• Citi and Morgan Stanley are in the market with an unusual US$706.7m CMBS sponsored by Madison International Realty and DDR. Dubbed CGMS 2017-MDDR, the transaction is backed by three separate loans, each secured by a portfolio of predominantly grocery-anchored retail properties located across nine US states.

Regulatory update
• The European Commission has launched a public consultation regarding initiatives to facilitate the development of a non-performing loan secondary market. Together with gathering targeted input on improving loan transfers and servicing activities, the consultation introduces a potential new instrument - dubbed the accelerated loan security - that aims to increase the protection of secured creditors from borrower defaults.

Structured Finance

Synthetic expected loss approach outlined

Scope has published research that offers a technical illustration of how the expected loss framework described in its general structured finance rating methodology can be implemented for tranches of simple synthetic securitisations. Further, the report describes how expected loss can be calculated in practical cases.

Simple synthetic securitisations generally allocate losses from a reference portfolio of assets, for which an investor is the protection seller. The risks of the portfolio are generally split into different tranches, which are defined by the level of protection an investor provides against losses.

The level of protection is, in turn, determined by: the minimum percentage of losses from the reference portfolio, above which the investor must pay indemnity (the attachment point); and the maximum percentage of losses from the reference portfolio, above which the investor no longer has to pay indemnity (the detachment point). An investor's exposure to losses reduces as the notional of the reference portfolio amortises.

Scope notes that amortisation of synthetic tranches is typically sequential and starts with the most senior tranche. Allocation of losses is also generally sequential in reverse order and starts with the most junior tranche.

Under the agency's rating approach, the calculation of expected loss for an investor in a synthetic tranche only requires the probability distribution of portfolio losses under different rating-conditional stresses. These are labelled B to AAA, with AAA being the harshest rating-conditional stress.

The portfolio default distribution originates six rating-conditional portfolio loss distributions under this approach, typically from the assumption of ever-decreasing rating-conditional recovery rates. The expected loss of a tranche is then benchmarked against the idealised expected loss curves defined in Scope's general structured finance rating methodology. For this, it is assumed that the WAL of a tranche is its WAL under zero defaults.

The calculation process involves a number of steps, the first of which is preparing the portfolio loss-rate cumulative probability distributions. This is followed by the: calculation of the portfolio weighted average time to default; definition of the synthetic tranche, by specifying its attachment and detachment points; calculation of the WAL of the tranche, under zero defaults; and allocation of losses for all possible portfolio loss rates from 0% to 100%.

For every rating-conditional loss-rate probability distribution, the expected loss of a tranche is then calculated by weighting the losses for that tranche with the probability of the portfolio loss rate, which triggered the corresponding level of loss on the tranche. Finally, the expected loss is compared with the idealised loss curves of Scope's methodology at the risk horizon of the tranche's WAL, thereby indicating whether the tranche passes the corresponding rating-conditional stress.

Accompanying the research is an excel file that illustrates how these steps are applied to two simple cases of uncollateralised synthetic structures with no synthetic excess spread. The first neglects the time value of money, while no premia are defined or accrued for the protection seller.

The second case considers premia accrued for the seller of protection on the effective outstanding notional of tranche. In this case, losses to the investor include foregone premia payments - which increase the losses from indemnity payments to the buyer of protection - while the calculation of expected loss considers the time value of money. Scope points out that the present value of loss is calculated by discounting at the premium rate of the tranche.

CS

Capital Relief Trades

Pension fund increases risk transfer mandate

The New Mexico Educational Retirement Board has been steadily increasing its foothold in the risk transfer market. Indeed, the pension fund's mandate has broadened since its first investment in the sector back in 2008.

Under cio Bob Jacksha, the New Mexico Educational Retirement Board has invested US$350m in risk transfer transactions to date. Encouraged by the track record of the investments, he is set to allocate another US$150m to the sector this year, based on approvals by his investment committee in December 2016.

While Jacksha had initially invested in funds that would focus only on capital relief trades, the mandate for future investments was broadened to include opportunistic co-lending with banks. The latter activity involves sharing capital requirements and coupon payments between banks and investors.

The New Mexico pension fund was one of the first investors in the risk transfer market. "We were looking at such credit opportunities since 2008, given stressed bank balance sheets," notes Jacksha.

The biggest driver behind its activity, however, is the lower returns in the equity market. In contrast, investors can typically expect returns in the low double-digits (9%-12%) in corporate capital relief transactions.

Jacksha confirms that his fund accesses the risk transfer market by investing in vehicles offered by hedge fund Orchard Global Asset Management, citing the latter's experience and expertise in the space. "It's a specialised market, where most pension funds would not attempt to do it on their own."

The Orchard investment is structured as a draw-down fund, in which the New Mexico Educational Retirement Board makes a commitment upfront and then Orchard can draw down the capital within a locked-in period.

US pension funds, however, lag European ones in terms of capital relief trade activity. "European pension funds have a slight advantage, in the sense that their average size is larger, compared to the US$12bn average for US funds. This is further aided by their governance structures, which allows them to execute these investments internally," Jacksha states.

He concludes: "US pension funds are also bound by state law in how high of a salary they can offer. Generally speaking, it is much lower than the private sector. These issues are further compounded by the fact that US funds are bounded by asset allocation targets."

SP

CLOs

Expensive valuations concern CLO investors

The biggest concern for the CLO market is expensive valuations, according to the latest quarterly survey by JPMorgan. Over half of survey respondents identified expensive valuations as a key concern.

Conversations with JPMorgan clients suggest there is still value in the CLO trade for the carry, but CLOs are not expected to tighten meaningfully in the near term. New issue CLO spreads in the belly of the curve are 10bp-15bp within their post-crisis tights set in March this year.

The second largest concern is fundamental credit deterioration. Although oil prices are recovering, the energy sector is facing fresh concerns after being the worst performing sector in June within the JPMorgan leveraged loan index. The second worst performer that month was retail.

Other key concerns are Fed balance sheet normalisation and ECB tapering. While these are of course not CLO market-specific concerns, combining Fed balance sheet normalisation and ECB tapering under the banner of central bank policy normalisation would represent the single largest concern for CLO investors.

JPMorgan expects the ECB will taper asset purchases to €40bn per month in 1Q18 and half that in the quarter after, before ceasing entirely in 3Q18. Less quantitative easing is expected to be negative for credit spreads, as it is believed to have contributed to lower spreads by making sovereign bond holdings less attractive.

Only 65% of survey respondents in 3Q16 thought CLOs represented the best relative value across US credit, but in this latest survey 83% of respondents identified CLOs as representing the best relative value. Beyond CLOs, the preference was for leveraged loans, followed by ABS, followed jointly by high yield, high grade and RMBS.

CLOs were also identified as the best relative value in Europe, but by a smaller margin than in the US. CLOs were seen as best value in Europe by 61% of respondents, followed by leveraged loans by 17% of respondents and then ABS and high yield tied at 8% each.

US CLO investors see most value in triple-A paper for both the primary and secondary markets. In the primary market there is also demand for equity and double-A paper.

There is less demand for equity in the secondary market, partially given the drop in weighted average spreads. Besides triple-A, secondary US CLO investors continue to see value in double-B and single-B.

In Europe, primary and secondary investors indicated no clear consensus on the best relative value tranche. Every tranche in European primary received anywhere from two to four votes, with a slight favour towards the two senior-most tranches. There was no support for secondary equity.

Survey respondents say they intend to put money to work in the primary market, with 29 respondents plumping for new issues and 28 for resets. Another 22 said they are generally positioning to invest in refinancings and 20 chose the secondary market.

Considering concerns about valuations, 14 investors say they are trying to go up in credit quality and 12 say they are looking to shorten portfolio WAL/duration. Over two-thirds of respondents - 69% - plan to add risk in the next six months, with 24% planning to hold risk and only 7% planning to reduce risk. Having fallen for the three prior quarters, the 3Q17 survey shows an uptick in the add/reduce ratio to 10.25x.

The survey also shows that 36% of investors have low cash holdings. Half have moderate cash holdings, which is the highest level since 2Q14, while 13.9% have high or very high cash balances, which is the lowest level since 2Q15.

JL

CMBS

Unusual Austrian CMBS readied

An unusual CMBS has begun marketing (see SCI's deal pipeline). NOE Verwaltungszentrum-Verwertungsgesellschaft represents a credit tenant-lease transaction, backed by a lease with the State of Lower Austria, incorporating supplemental structural features to mitigate certain limitations of the lease agreement under Austrian law.

A Sfr475m A tranche will be offered to investors. Moody's has provisionally rated the notes at Aa3, which is two notches below the rating of the State of Lower Austria. This is because the issuer relies in certain remote scenarios on a comfort letter provider to meet payment obligations if the tenant does not.

The comfort letter is provided by HYPO NOE Gruppe Bank. It partially mitigates the limitations and uncertainties under Austrian law regarding the lease agreement. HYPO NOE will keep the issuer solvent and meet all debt service obligations under the notes in the event that there is any shortfall. The comfort letter does not cover a tenant default.

The notes benefit from scheduled amortisation and should be fully repaid in December 2031. The tenant has waived its termination rights until 2032, after the legal final maturity of the notes. There is also €22m in reserve funds which can be used to meet operating expenditures and creditor claims as and when required.

Of the credit challenges, Moody's primary concern is about limitations under Austrian law to a full transfer of risk and costs to the tenant. The credit tenant-lease structure also means that there is no legal certainty whether the lease agreement classifies as a rental or financing agreement under Austrian law.

The issuer is also not bankruptcy-remote. As well as issuing the notes, the issuer is landlord and owner of the property and acts as borrower in respect of the term loan.

The coupon of the notes is yet to be confirmed. The deal has been arranged by Citigroup.

JL

RMBS

Revolving RMBS launched

Banca Popolare di Cividale has closed a revolving Italian RMBS. Civitas SPV Series 2017-1 issued an initial €258.4m of notes, which can increase up to €600m during the transaction's three-year ramp-up period.

The deal is backed by 3,059 Italian first-lien residential mortgages originated and sold by BP Cividale. The average balance is €82,678 and the proportion of loans with an outstanding balance above €500,000 is 2.7%.

Rated by DBRS, the securitisation comprises €98.19m double-A rated class A1 notes (which have a coupon of 1.70%), €98.19m double-A class A2s (three-month Euribor plus 50bp), €21.96m triple-B (low) class Bs (plus 150bp) and €40.05m unrated class Cs. The class A1 and A2 notes can each be increased to €228m, while the class Bs and Cs can be increased to €51m and €93m respectively.

The initial cash reserve is sized at €5.46m, equal to 2.5% of the rated notes initial instalments. On each payment date, it will be equal to 2.5% of the principal amount outstanding of the rated notes, with a floor of 1.75%.

The reserve is funded by the net proceeds of the note initial instalment payments made by BP Cividale to finance the purchase of the portfolio. During the revolving period, the issuer may acquire further portfolios using principal collections or if BP Cividale - in accordance with the transaction documents - makes note further instalment payments in respect of the associated series of notes.

Principal payments are on a pro-rata basis, with payment of the mezzanine notes subordinated to payment of the senior notes at all times. At closing, the senior notes benefited from 22.35% credit enhancement that consisted of the subordination of the class B and C notes. The class B notes, in turn, benefited from 13.67% credit enhancement from a portion of the class C subordination.

DBRS notes that these credit enhancement levels take into account the deal's undercollateralisation, given that the initial pool is sized at €252.9m. The structure also incorporates a class B trigger, whereby a breach will redirect all residual interest to amortise the senior notes.

The agency points out that one challenge of the deal is that no swaps are envisaged to cover the mismatch between the interest from the pool and the interest to be paid on the notes. However, the coupon on the class A2 and B notes is capped at 4%, which partially mitigates this risk.

The portfolio is split 47.8% floating and 52.2% fixed, although most of the fixed-rate loans (30.3% of the pool) will switch to floating, with the average switch date being in April 2030. The assets have a high concentration in the north of Italy, particularly in the Friuli-Venezia Giulia region (representing 84.5%).

Civitas SPV Series 2017-1 is the third securitisation issued by BP Cividale (see SCI's primary issuance database). The transaction was arranged by Finanziaria Internazionale Securitisation Group.

CS

RMBS

Atypical Dutch RMBS prepped

RNHB is in the market with an unusual Dutch RMBS backed by owner-occupied and buy-to-let mortgage loans secured by residential, mixed-use and commercial properties. Dubbed Dutch Property Finance 2017-1, the €1.5bn transaction is unique in that borrowers are divided into risk groups and are obliged to share servicing of the debt across the risk group.

The preliminary collateral pool comprises 8,368 loans extended to 10,602 borrowers, of which 80.69% are BTL. The properties are 52.17% residential, 23.58% mixed-use and 24.26% commercial, located in Zuid Holland (29.18%), Noord Holland (24.92%) and Noord-Brabant (16.95%).

The average loan size is €178,360, while the weighted-average seasoning of the portfolio is 7.4 years with a WA remaining term of 4.3 years. At 61.9%, S&P notes that the WA current loan-to-value is comparatively low for a Dutch portfolio.

The majority (99.4%) of loans included in the portfolio are fixed with future resets, while the notes pay a floating rate of interest. To address this mismatch, the transaction features a balance guaranteed interest rate swap (with NatWest Markets as the counterparty) that swaps a fixed rate interest into three-month Euribor.

Until the first optional redemption date in July 2022, the seller has the ability to grant - and the issuer the obligation to purchase - further advances and borrowers can sell collateral without using the proceeds to pay down their debt, subject to adhering to certain asset conditions. Borrowers can also be granted permitted variations, which can continue to occur post the first optional redemption date.

S&P notes that the underlying loans in the pool and lending methodology are atypical for the Dutch RMBS market. "Lending by RNHB is done on a risk group basis, where one or more borrowers can take on debt to acquire residential, mixed-use or commercial properties," the agency explains. "The risk group's entire debt is secured over all of the underlying properties associated with the risk group and each of the associated borrowers is responsible for the debt. This feature can be complicated further as a borrower can be present in multiple risk groups, although underwriting is done on a loan-by-loan basis."

From a credit perspective, this feature can have both a positive and negative effect, according to S&P. For example, should borrower X and Y in risk group A default and their collateral sale proceeds be insufficient to clear the outstanding debt, then risk group B - which contains borrower X and Z - can also be foreclosed upon to generate proceeds to clear the debt of risk group A. Under the transaction documentation, RNHB is permitted to take such an action, but in practice this has never been used and may be subject to legal challenges from borrowers in unaffected risk groups.

The pool includes higher levels of non-residential properties than is typical for the Dutch RMBS market and S&P has therefore applied an adjustment to its WAFF of 1.5x for private individuals to purchase a mixed-use or commercial property and 2x for commercial borrowers. Given that the loans in a risk group can be for multiple properties, the agency assumes all loans in a risk group to be for commercial properties, if there is any element of commercial collateral supporting the risk group. For its weighted-average loss severity analysis, the agency has applied higher MVD assumptions to risk groups with mixed-use and commercial properties, in line with its covered bond commercial real estate criteria.

Of the loans in the pool, 89.18% mature within the next 10 years. However, in most cases, the monthly instalments will not result in the loans being redeemed on their maturity dates.

When a maturity date approaches, RNHB may offer the borrower a new rate. The borrower can either accept the revised rate and term or refinance elsewhere and repay their loan.

Alternatively, RNHB can give the borrower three months' notice prior to maturity that it wishes to call the loan and the borrower must repay. "In our view, this presents a potential payment shock risk, as the borrowers in question will have to source alternative financing to redeem their loan ahead of the anticipated schedule," S&P suggests.

At closing, 3.72% of the pool is expected to be in arrears of greater than one month, which is higher than the 0.90% observed in S&P's Dutch RMBS index. To address the potential for increasing arrears in the pool, the agency forecast an additional 1.74% based on historical data from the originator.

Provisionally rated by DBRS and S&P, the transaction comprises AAA/AAA rated class A notes, AA/AA class Bs, A/A+ class Cs, BBB/A- class Ds, BB/BBB class Es and unrated zero coupon class F and Gs. Preliminary tranche percentages for the class A, B, C, D, E and F notes are 76.35%, 10.65%, 3.95%, 4.1%, 1.95% and 3% respectively.

A non-amortising reserve fund will be funded by the class G notes equating to 2% of the balance of the class A to F notes. The notes will also be provided with liquidity support from principal receipts, which can be used to cover interest shortfalls on the most senior class of notes, provided credit is applied to the principal deficiency ledgers in reverse sequential order.

RNHB was formed in 2008 when Rijnlandse Hypotheekbank and Nederlandse Hypotheekbank were merged by their parent company, FGH Bank, which in turn was owned by Rabobank. In December 2016, RNHB - which de-merged from FGH Bank into Yellow Newco and is currently merged into Vesting Finance Servicing - was acquired by funds managed or advised by Carval Investors and Arrow Global in a joint venture.

HSBC is arranger on the deal and joint lead manager with ABN AMRO.

CS

RMBS

UK MPL loans in triple-A RMBS

The £290m Twin Bridges 2017-1 RMBS which priced last week represents the first time that loans from a non-US marketplace lender have been used for a triple-A rated securitisation. While the deal largely securitises loans made by Paratus, it also includes loans from marketplace lender Landbay.

UniCredit analysts note that the A tranche priced in line with initial price talk and guidance at three-month Libor plus 78bp. Paratus and Landbay are the originators, with Natixis serving as lead manager and swap counterparty.

The B, C and D notes also priced in line with talk and at the tighter end of guidance. The senior notes priced 3bp wider than the A tranche in Precise Mortgage Funding 2017-1B, the BTL deal from Charter Court which priced in April (see SCI's deal database).

Both Moody's and Fitch have rated the class A notes at triple-A. The rating agencies have also assigned ratings of Aa1 and double-A respectively to the class Bs. The class C notes have been rated A1 and single-A, and the class Ds have been rated Baa1 and single-A minus.

The RMBS is a static cash securitisation of BTL mortgage loans extended to 965 prime borrowers in the UK. Moody's highlights the high quality of the collateral held in the pool relative to the UK BTL sector average, with LTV around 70.4% and no loans in arrears in the pool. The rating agency also believes the management company has significant experience in the BTL market, which is another strength.

The top 20 borrowers account for 10.64% of the pool. Weighted average remaining term is 20.33 years and weighted average seasoning is 0.7 years. Fixed interest loans account for 94.73%, with floating loans accounting for 4.05% and others making up the remaining 1.22%.

The transaction will use excess spread to pay pro rata interest and sequential principal on class X1 and X2 notes. These will be paid junior to the subordinated swap termination payments. The X1 notes have been rated B1 and double-B, while the X2 notes have been rated B3 and single-B.

The first rated securitisation of UK marketplace consumer loans was Zopa's £138m Marketplace Originated Consumer Assets 2016-1 (SCI 21 September 2016), where the senior notes were rated Aa3 by Moody's. In the US, SoFi has achieved triple-A ratings for its student loan-backed pools, most recently with SoFi Professional Loan Program 2017-C.

JL

Structured Finance

Job swaps round-up - 21 July

Acquisitions

BGC Partners has acquired commercial real estate finance company Berkeley Point Financial for US$875m, subject to certain adjustments at closing. Berkeley Point focuses on the origination and sale of multifamily and other CRE loans through government-sponsored and government-funded loan programmes, as well as the servicing of CRE loans, including those it originates. The company is set to become part of Newmark Knight Frank, BGC's real estate services segment.

Fortress Investment Group has purchased the equity and substantially all of the assets of Colony American Finance. The CAF operating platform will be rebranded CoreVest American Finance Lender and retain its senior management team.

Oaktree Capital Management has signed a definitive asset purchase agreement under which it will become the new investment adviser to two BDCs - Fifth Street Finance Corp (FSC) and Fifth Street Senior Floating Rate Corp (FSFR). Oaktree will pay US$320m in cash to Fifth Street Management upon the close of the transaction, which is expected to be completed in 4Q17. Oaktree portfolio manager Edgar Lee will serve as ceo of both BDCs, which together have approximately US$2.5bn of assets under management across first lien, second lien, uni-tranche and mezzanine credit. Following the transaction, FSC will change its name to Oaktree Specialty Lending Corp and FSFR will change its name to Oaktree Strategic Income Corp.

Asia

Conyers Dill & Pearman partner Peter Ch'ng has relocated from Bermuda to Hong Kong to support the growth of the firm's corporate, banking, reinsurance and investment funds practices in the region. He has been with the firm for 16 years and his practice covers M&A, reinsurance, mutual and investment funds (including ILS structures), segregated accounts companies (SACs), SPVs, private placements and banking and financial derivatives and services.

Data release

Freddie Mac has published daily payoff data on select securitised single-family mortgage loan participation certificate cohorts issued from 2002 to 2016. This historical dataset is expected to increase transparency on voluntary loan payoff activity throughout a calendar month and in different past interest rate environments. Voluntary payoff data is provided to Freddie Mac by its mortgage servicers and reflects mortgage loan prepayments due to refinancing or sale of the underlying property.

Disposition

UniCredit has signed definitive transfer agreements with PIMCO and Fortress, providing for securitisation vehicles to purchase their stakes in the €17.7bn Project FINO non-performing loan portfolio (SCI passim). The issuance of ABS notes is expected by end-July and represents the completion of Phase 1 of the bank's NPL disposals. Phase 2 involves the sale of the remaining UniCredit stake and a potential significant risk transfer transaction.

EMEA

Wilmington Trust has appointed Eileen Hughes as head of structured finance for the UK and Joe Knight as senior trust sales representative, both based in the London office. The firm has also hired Joanna Taylor as senior relationship manager in the Dublin office. Previously, Hughes was head of product development and strategy for structured finance, based in Wilmington Trust's New York office. Knight was formerly head of direct lending at Global Loan Agency Services, while Taylor was senior business development manager for aviation and structured finance services at Capita International Financial Services (Ireland).

Joint venture

Cyprus Cooperative Bank and Altamira Asset Management have agreed to set up a joint venture for the management of the Cypriot lender's NPLs. According to the terms of the venture, shareholders have approved the creation of a 10-year consortium between the CCB (49%) and Altamira (51%) for the management of €7.2bn of NPLs and €400m of real estate.

North America

Charles Miller has joined Tarter Krinsky & Drogin as a partner in its litigation practice, where he will lead the newly formed securities and financial services litigation group. Miller litigates contract and tort claims arising in connection with privately issued debt and equity, CBOs, CLOs, RMBS, swap contracts and structured transactions effectuating a variety of business purposes, including arbitrage and regulatory capital relief. He was previously a partner at Kasowitz Benson Torres.

BlueMountain Capital Management has recruited Claudio Macchetto to a newly created position as head of platform distribution. He will be responsible for the marketing of BlueMountain's diversified alternative investment strategies to wealth management channels and private banking platforms, as well as the management of retail distribution relationships globally. Previously, he was the head of global platforms at Paulson & Co and served in a series of management roles at Citi.

Former Ginnie Mae president Theodore Tozer will join PennyMac Financial Services' board on 1 August. Tozer was at Ginnie Mae for seven years, before leaving his post earlier this year, and managed US$1.8trn in MBS guarantees. Prior to Ginnie Mae, he spent more than 30 years in the financial services industry, including as svp of capital markets at National City Mortgage Company.

Thomas Hettinger has been named md and strategic advisory leader at Guy Carpenter, based in Chicago. He was previously md at Arch Reinsurance, specialising in developing unique reinsurance solutions. Before that, he worked at Towers Watson and EMB America.

Regulation

Republican members of Congress in both the Senate and House have introduced a resolution to nullify the CFPB's arbitration rule (SCI 14 July). The resolution - introduced by Representative Keith Rothfus in the House and Senator Crapo in the Senate - uses the Congressional Review Act to overturn an agency rule within 60 legislative days after an agency has submitted the rule to Congress. The resolution will need a simple majority in both chambers to pass.

The UK has published new regulations introducing a competitive regulatory and tax regime for ILS, as the country targets a share of the rapidly growing market. The regulations set out how to establish SPVs to issue ILS, the legal framework for ILS and the associated tax treatment. The finalised regulations are the result of a consultation launched late last year (SCI 24 November 2016) and are due to come into force in the autumn. "This new bespoke regime for ILS will ensure the UK remains the most competitive insurance and reinsurance hub in the world," comments Stephen Barclay, economic secretary to HM Treasury.

Strategic investment

Tradeweb Markets has made a strategic minority investment in DealVector, with the aim of accelerating DealVector's growth via its distribution channels and existing client base, as well as experience in building financial technology solutions. Initial efforts will focus on driving efficiency and innovation around bondholder communications - including direct integration of services - then potentially expanding into other products or parts of the trade lifecycle.

DealVector ceo and founder Mike Manning says that high yield assets are the "logical next step" in terms of the firm's coverage, but the ultimate goal is to become a universal registry of beneficial ownership information. "The industry needs a new information structure: we have the chance to solve liquidity issues and the inability to locate one another by digitalising balance sheets," he explains. "Our vision is not only to locate assets that people want to trade today, but we're also targeting entire inventories. This will streamline a wide range of activities, from trading to consents to enforcing investor rights."