Contents

NPLs

NPL auction model highlighted

Online platform Debitos welcomes the European Commission's public consultation on the development of a secondary market for non-performing loans (SCI 11 July). The platform's auction process offers a potential model for dealing with Europe's NPL overhang by narrowing the bid/ask gap.

Debitos founder and md Timur Peters sees the consultation as a confirmation of his business concept. "It's about the efficiency of the secondary market. When trading non-performing loans, the difference between investors' bids can be as high as 50%-60%. This bid spread is far too high - a more efficient secondary market could significantly reduce it."

He continues: "Our auction-based exchange shows that the demand for innovative solutions is very high in Southern European countries, such as Italy and Spain, which are particularly affected by these problems."

The Frankfurt-based fintech firm is the first of its kind to connect debt buyers and sellers via an online exchange platform. Debitos handles the entire process digitally, including contacting investors, price negotiations and contract conclusions.

Large bid/ask spreads between sellers and investors are the biggest impediment to the proper functioning of an NPL secondary market, with pricing gaps reflecting different loan recovery expectations, due to information asymmetries between sellers and buyers. The latter tend to lack access to reliable and standardised information on asset quality and loan tapes in banks.

As a consequence, potential buyers may bid a purchase price that does not reflect the economic value of the portfolios, thus hindering potential transactions. Often portfolio sales involve loans that are provisioned the best in order to incur minimum losses. Such portfolios are likely to have poor credit quality, thereby sending an overly pessimistic signal on overall NPL quality to potential buyers.

The Commission makes it clear in its consultation that banks need to be incentivised to improve data quality and disclose more information on NPLs to potential buyers. According to a recent European Council report, to the extent that banks lack the capabilities to do so, there could be a case to establish a reliable data infrastructure to facilitate transactions - as has been done with the European DataWarehouse for securitisations.

Given the early stages of the consultation, however, there is no model of how such a platform could work. The Council's report proposes a centralised platform to "strengthen the quality and comparability of information on loans and counterparties for potential investors", but details remain sketchy.

Nevertheless, Debitos could provide a model of how transparency and execution can work. Initially, the platform selects NPLs before data are uploaded, along with the reserve price and the duration of the auction on a centralised online platform that provides both fast valuation and real-time information on competitor bids. This process is then followed by due diligence, valuation and bidding by investors.

The bidding process as a whole, observes Peters, creates a "pricing tension and a certainty of execution, which allows the platform to reach the highest price in the market, reducing the bid/ask gap and allowing a higher number of transactions to take place."

He adds: "It's a centralised platform that matches sellers and buyers in a manner that they are aware of the deals that are happening. Additionally, sellers can concentrate liquidity through the auction process, where each buyer has access to real-time information on prices."

This, in turn, permits investors to evaluate each debtor in a portfolio and acquire access to the legal status of a bankruptcy claim. Information that can be accessed in relation to the claim include receiver reports, information on assets and average pay-out from the bankruptcy.

This is accompanied by a reduced sales process of five weeks and standardised sales and purchase agreements. However, data quality cannot be guaranteed, as although each seller uploads the data, they have to be able to proof them.

Yet, as Peters qualifies, the data have to be guaranteed - which is a marked improvement on past practices. "In our case, there is a streamlined compliance process and a centralised platform, with buyer information, sales and purchase agreements, Q&A and due diligence," he concludes.

SP

NPLs

Ukrainian NPL sales gain traction

DebtX is set to facilitate the largest Ukrainian NPL portfolio sale next month, signalling a growing shift in sentiment by international investors in the country's NPL market. The US$240m commercial loan pool is secured by assets that are representative of the market as a whole, including resorts, supermarkets, agricultural operations and logistics.

"The government has been testing the market with small sales, but this is its first bulk deal addressed to international investors," notes Gifford West, md at DebtX.

There has been modest foreign bank activity in Ukraine, but the focus has typically been on sales of non-core units to domestic investors rather than NPL sales. West continues: "The sale is raising the profile with international investors, who are targeting 20% returns or more, while more of these are expected to bring in fresh money in specific projects, given that Ukraine has an educated workforce and the least expensive commercial real estate in Europe."

First Financial Network will also be conducting a US$170m sale of 52 commercial NPLs on behalf of the NBU in September. The firm expects additional larger balance sales to follow.

Sales in the market are mainly government-driven, with US$15bn NPLs earmarked for sale overall, having already been transferred onto the sovereign's balance sheet. The government is committed through the Deposit Guarantee Fund to sell this amount over a three-year period. There is also an additional US$10bn on bank balance sheets, according to DebtX estimates.

According to World Bank data, Ukrainian NPLs as a percentage of gross total loans have increased markedly from its lowest point of 3.9% in 2008 to 30.5% in 2016, with the bulk of the portfolios lying with state-owned banks. However, the central bank - National Bank of Ukraine (NBU) - puts the number at a much higher ratio of 57%, as of April 2017.

Driving the investment shift has been the hunt for yield. "Investors are looking for a higher yield, since Western markets are saturated," says Denise Hamer, partner at DLA Piper. "The alternative is to look at CEE countries, such as Ukraine, because, among other things, for the last two years the central bank has finally disclosed the true state and ratios of NPLs."

Investors, however, need to competently navigate a legal system where corruption remains an issue - as the PrivatBank case illustrates. The bank had failed a series of stress tests and was faced with a US$4.2bn capital hole more than two years ago.

Most of the loans had been issued to business partners of owner Igor Kolomoyskiy, who at some point could not repay them. His inability to raise the cash led to the bank's nationalisation in December.

Nevertheless, IMF assistance programmes and collaborations with the Vienna Initiative have spawned a series of legal measures to stabilise the economy and the financial sector, with several of these measures aiding NPL investments. As Hamer observes, it has been made easier for banks to buy loans, streamline the administrative process, expedite resolution - including out-of-court settlements - and take advantage of accounting changes designed to allow lenders to take a write-down in their portfolios in a realistic manner.

For instance, in January 2016 the NBU implemented Resolution Number 996, which repealed a prohibition on the transfer of cross-border loans to Ukrainian borrowers denominated in foreign currency. This prohibition had been in effect since 20 August 2015, as a crisis measure following the devaluation of Ukraine's Hryvnia, and had suspended all trading in the Ukrainian secondary loan market relating to cross-border loans denominated in foreign currency.

According to Olena Polyakova, counsel at Redcliffe Partners, investors still need to register as lenders of record with the NBU and this takes time. Yet, she qualifies that the requirement holds only if a loan is transferred to an offshore lender and not to investors who want to use a local entity to acquire NPLs.

Moreover, the registration process has been simplified. The NBU now allows both Ukrainian banks and foreign lenders to apply for the registration of a transfer of a loan to a foreign assignee without the cooperation of the borrower.

The January amendment was followed by Law Number 3555 on Financial Restructuring in July of the same year, which addresses corporate financial restructuring. Among other innovations, the Law enables creditors and debtors to negotiate out-of-court agreements, corporate management to be replaced and corporate governance to be overhauled, and loans to be amended or extended. It is aimed at expediting and streamlining corporate financial restructuring by empowering creditors and reducing the influence of third parties.

However, creditor enforcement rights remain a work in progress, given lengthy court proceedings - since debtors can use schemes to prevent it. Examples include changing the identification characteristics or location of the collateral.

Finally, last year saw the introduction of several amendments to existing tax legislation, initiating what will be an ongoing reform of the Ukrainian Tax Code. The amendments are expected to grant preferential tax treatment for corporate write-offs.

Another important development for investors has been the growth of the servicing market. Until 2012-2013, the country lacked experienced servicers, given the focus on unsecured consumer finance.

"It's a shift that makes sense, given that servicers are now investing in the portfolios themselves," Hamer concludes. "The shift from unsecured to secured means that the returns need to be higher, given the capital that has to be put in, so you need to have an equity position - especially in such a small market."

SP

Structured Finance

Libor transition provisions eyed

Despite the UK FCA's recent announcement that it plans to phase Libor out by 2021 (SCI 31 July), the move is far from an outright ban and the benchmark could live on past the deadline. However, without any agreement as yet about a successor rate, uncertainty prevails over how the estimated US$150trn bonds with exposure to Libor will be affected.

Kevin Ingram, partner at Clifford Chance, is keen to emphasise that there hasn't been a clear cut decision to rule Libor out completely. "The first thing to mention is that there has been no outright ban of Libor, but the FCA has stated that banks will no longer be compelled to submit Libor after 2021. The FCA has said it would prefer a different index to be used, but there is none identified yet and so it will ultimately be up to the market to decide about moving to another index."

As a result, Ingram comments that Libor may therefore continue to exist in a "smaller part of the market", but agrees that all interested parties would benefit from clarity as to what may take its place. He adds that the level of the impact may come down to whether there is some leeway come the deadline.

"Ultimately, if the phase-out happens in 2021 with a transition period, then most pre-existing transactions will not be affected. If it comes to a juddering halt with no transition, there will be more work to do," he says.

From a securitisation investor perspective, however, the FCA's announcement has caused something of a stir. Walter Schmidt, svp and manager in the mortgage strategies group at FTN Financial, notes: "This is a definitely big concern. I'm not sure if the FCA has intentionally positioned that date to cause a stir or get things moving, because it seems very ambitious."

He continues: "So many assets are tied to Libor; the impact really could be significant - hybrid ARMs, floating rate CMOs, student loans, auto ABS to name but a few. A large number of products are tied to it."

Ingram adds that straightforward products aren't the main challenge. He says: "The issue with switching to other indexes is that in securitisation, you need alignment of all the different components of the transaction - including products necessary for the securitisation, like derivatives, which may also be tied to a Libor basis."

He continues: "Further issues could arise where the bond market meets the swaps market. For example, if a Libor-based bond transaction has a fixed-to-floating rate swap involving Libor, that could be a lot more difficult to work through."

In terms of how existing transactions manage the transition to a different index, Andrew Bryan, senior professional support lawyer at Clifford Chance, comments that a change to Libor will mean a change to the margin - which will require agreement from all noteholders before any changes are made. The flexibility to amend deal documentation is therefore a hot topic.

Bryan says: "There is some discussion about basic terms modifications and whether that definition can be amended to facilitate changes relating to the phasing-out of Libor. There are questions too about how you'll get widespread agreement from all the relevant parties in a transaction about how to deal with margin changes if the benchmark is changed."

He adds: "Hardwiring provisions are being discussed - clauses can be added that make it easier to amend documentation down the line when a change is anticipated. A non-economic change is usually easier to provide for - something like a change to Libor could be a bigger issue."

With regard to a successor to Libor, the US Treasury's Financial Stability Oversight Council (FSOC) set up the alternative reference rates committee (ARRC) in 2014, which announced in June of this year that it favoured the use of the Broad Treasuries Repo Financing Rate (BTFR) as a replacement. The rate is the cost of overnight loans that use US government debt as collateral and the LSTA suggests that the rate has "much to recommend it."

This includes the fact it is "transactional, liquid and deep (with an average daily trading volume of US$660bn), it will likely remain robust, and it satisfies IOSCO's Principles for Financial Benchmarks." The trade association comments too though that the rate has its downsides, such as that "as an overnight, secured rate...even with compounding, it is backwards-looking and it is materially lower than Libor."

Bryan and Ingram agree, however, that an overnight rate such as this one is most likely to be implemented. Ingram says: "At the moment, the FCA would like an index with a less fragmented approach in terms of currencies and tenors. In particular, it seems that they want something with robustness, like an overnight index which also has a large number of transactions to provide the market-based rate-setting needed and the data to support it."

In the meantime, with no replacement agreed upon, there are some suggestions that Libor may continue in one form or another - although this would present issues. Schmidt says: "You could potentially employ 'grandfathering' for past issuance, but that would mean the BBA would still need to publish the lending rate every day. There are also potential jurisdictional issues - you would ideally need all jurisdictions to cooperate to stop using Libor too and you can't necessarily make certain countries stop pricing things in Libor."

Bryan agrees that Libor could continue in some form, although it might not be a long-term solution. He says: "In the absence of a successor, the other option is to go to reference banks. A panel of five or six banks may agree to quote for a Libor rate two or three days before the interest payment date. This could work in the short term, but it's unlikely to last long term, as these banks would not be happy putting so much time and effort into it."

While some may not welcome the move, Ingram believes the regulator has given the market time to prepare. He concludes: "The FCA has specified the 2021 date, otherwise the market may just leave things as they are. In essence, they have given time for people to adjust and have flagged up issues to help the transition. It is intended to avoid the risk of a cliff jump, like with the original Brexit proposals."

RB

ABS

IBR driving collateral convergence

FFELP student loan ABS collateral performance has converged in recent years due to the growing use of income-based repayments (IBR). Wells Fargo structured products analysts suggest that this convergence should spur investors to reassess their "old school" prepayment pricing assumptions.

Principal paydowns are more similar than different, despite the various prepayment rates among FFELP SLABS collateral, according to a recent Wells Fargo study. It shows that the different collateral pool factors - including for non-consolidated, consolidated and rehabilitated loans - are narrowing rather than widening, in part due to the growing use of IBR.

Traditionally, analysis of FFELP SLABS collateral assumed a fixed prepayment rate of 4% CPR on consolidated loans and 6% on non-consolidated loans. The Wells Fargo analysts note, however, that this doesn't account for the rising use of IBR - which has led to a slowdown in principal cash and extention risk in many FFELP SLABS.

The study cites the SLMA 2012-3 transaction, which is a pool of non-consolidated loans with an original remaining loan term of 124 months and which outperformed its 6% CPR with the introduction of a federal refinancing programme in 2012. As IBR rates rose, however, principal paydowns slowed and, as of July 2017, the weighted average remaining loan term remained 124 months. The analysts suggest that this is due to the unexpected extension of cashflows following the introduction of IBR.

As well as slower prepayments, payments have sped up - as seen in SLMA 2012-4, which initially priced at 4% CPR. Despite IBR usage rates increasing, extension risk has not been seen and, as of July 2017, the remaining loan term was 179 months compared to 227 months at issuance. Due to the longer loan terms at origination, the same dollar amount of prepayment has been more beneficial for this consolidated loan pool.

A transaction featuring rehabilitated student loans - NSLT 2012-2 - used a proportional payment curve of 4% CPR for consolidated loans and 6% for non-consolidated loans. It originally underperformed its pricing speed, but caught up and outperformed 1-2 years after issuance.

The analysts hypothesise that principal paydowns recovered as newly rehabilitated loans re-defaulted, while stronger ones prepaid. The actual paydowns started to converge with the initial pricing speed and some IBR usage potentially led to extension of cashflows compared to pricing assumptions.

Based on this analysis, actual pool paydowns among FFELP collateral types are more similar than different - despite different kinds of FFELP collateral displaying varying performance compared to original pricing assumptions. The analysts add that growing homogenisation of FFELP collateral performance is related to broader use of IBR programmes. They conclude that rising IBR rates in non-consolidated loan pools have acted as loan term extensions and have slowed principal paydown rates.

They comment, however, that IBR usage may be reaching a peak and that the biggest effects from IBR could have been incorporated in deal cashflows. Consequently, paydown rates could slow with future increased IBR usage.

RB

ABS

Bond Connect debuts auto ABS

Ford Automotive Finance (China) (FAFC) has launched the first securitisation utilising Bond Connect, which allows offshore investors to participate in China's inter-bank bond market. The RMB3.77bn Fuyuan 2017-2 auto loan ABS is also noteworthy for being rated by two domestic and two international rating agencies.

A China Foreign Exchange Trade System/HKEX joint venture, the Bond Connect platform was established last month under the central bank's 'Interim Measures for the Connection and Cooperation between the Mainland and the Hong Kong Bond Market' as a mutual market access scheme in respect of trading, custody and settlement. Northbound trading - overseas investors investing in the Chinese interbank bond market - commenced in the initial phase and southbound trading will be explored at a later stage.

Around 20 large onshore institutions - including Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank and Bank of Communication - have already submitted applications to become Bond Connect participating dealers. Over 130 institutions are signed up as offshore participants.

Rated by China Bond Rating Corp, China ChengXin International Credit Rating Co, Fitch and S&P, Fuyuan 2017-2 comprises RMB3.32bn AAA/AAA/AA/AAA rated class A notes, RMB144m AA+/AA+/AA-/A class Bs and RMB304m unrated subordinated notes. There is also an overcollateralisation tranche of RMB232m, as well as a RMB40m non-amortising liquidity reserve.

At the 1 July cut-off date, the static collateral pool consisted of 60,346 auto loans with a total balance of RMB4bn. The original weighted-average LTV ratio is 58.6%, the WA remaining term is 23.3 months and the maximum single-obligor concentration has exposure of 0.01% of the outstanding principal balance. The average receivables balance is RMB66,284 and the portfolio contains no loans subject to refinancing risk.

The loans finance the purchase of new Ford and Lincoln cars manufactured or distributed by Chang'an Ford Automobile, Jiangling Motors Corp, Ford Motor Co or their affiliates.

The transaction features a single waterfall, which pools interest and principal collections together for payments. S&P notes that this structure has a greater ability to pay fees and note interest on a timely basis.

The transaction is established as a special-purpose trust under China's Trust Law, consistent with the People's Bank of China's credit assets securitisation (CAS) scheme. The deal is the first under a registration FAFC obtained with the China Banking Regulatory Commission for public offerings of ABS in the national interbank bond market. PBoC approved RMB12bn in issuance quota for the trustee to issue ABS backed by retail auto mortgage loans originated by FAFC valid for two years from 1 August 2017.

The trustee and issuer is Shanghai International Trust Co, the lead underwriter is China Merchants Securities Co and the joint-lead underwriters are Bank of Communications Co, HSBC and Standard Chartered. Citi served as financial advisor on the deal.

Fuyuan 2017-2 is FAFC's seventh Chinese transaction (see SCI's primary issuance database) and the firm was advised by Zhong Lun. In 2014, it was assisted by Zhong Lun in launching its first ABS, marking the first securitisation from a wholly foreign-owned enterprise in China.

CS

Structured Finance

SCI Start the Week - 21 August

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

Pipeline
Only a handful of transactions remained in the pipeline at the end of last week. The majority of the deals were from the Asia-Pacific market.

Accounting for the newly-announced APAC deals were the A$500m Latitude Australia Credit Card Loan Note Trust Series 2017-2 and RMB3bn Rongfa 2017-1 ABS, as well as the A$350m AFG 2017-1 Trust RMBS. The sole remaining pipeline entrant from the US was the US$482.2m BBCMS 2017-DELC CMBS.

Pricings
ABS and CLO transactions made up the bulk of last week's prints. A number of CMBS and RMBS were also priced.

The ABS new issues comprised: €366m abc SME Lease Germany Compartment 4, US$1.1bn Ally Auto Receivables Trust 2017-4, A$350m CNH Industrial Capital Australia Receivables Trust Series 2017-1, US$223m Flagship Credit Auto Trust 2017-3, US$1.38bn GMF Floorplan Owner Revolving Trust Series 2017-2, US$1.382bn Nissan Auto Receivables 2017-B Owner Trust, US$335m Prestige Auto Receivables Trust 2017-1, US$991.7m S-JETS 2017-1 and US$350m Triton Container Finance Series 2017-2. The CMBS consisted of US$350m BXP Trust 2017-CC, US$240m CGCMT 2017-1500, US$1.1bn GSMS 2017-GS7 and US$1.1bn WFCM 2017-C39, while the RMBS were US$1.07bn CAS Series 2017-C06, €250.5m EDML 2017-1, US$1bn JPMMT 2017-3 and A$750m Torrens Series 2017-3 Trust.

CLO issuance included a CRE CLO (US$315m A10 TAF 2017-1) and a couple of newly originated transactions - US$814.41m CIFC Funding 2017-IV and US$557m Wellfleet CLO 2017-2. Refinancings accounted for the remainder: €359.1m Carlyle Global Market Strategies Euro CLO 2015-2, US$369.3m KKR CLO 10, US$345m Monroe Capital BSL CLO 2015-1, US$356m Ocean Trails CLO IV, US$527.25m Venture XIV CLO and US$322m Flatiron CLO 2015-1.

Editor's picks
RMBS reaping RPL benefits: Freddie Mac has settled its largest SCRT deal to date. The RPL RMBS market is growing and investors are enthusiastic about its prospects...
Risk transfer framework outlined: Outlines of the main elements of the EBA's risk transfer discussion paper - due to be released next month - have been revealed. The recommendations will focus on the main structural features of risk transfer transactions and may at a later stage result in regulatory changes...
Bespoke boost opportunity: The search for yield is driving activity in bespoke CDS tranches, referred to as bespoke tranche opportunities (BTOs) post-financial crisis. The sector is expected to receive a further boost if single-name CDS liquidity continues to improve...
Hedging changes a boon for MBS: FASB recently announced plans to finalise new accounting rules for financial instruments used for hedging (SCI 24 July). Within the securitisation industry, MBS are likely to be most affected by the move, with the changes largely acting as a supportive measure by potentially boosting liquidity in the sector...

Deal news
• Three CLOs are being repackaged to issue the senior notes in Japanese yen, rather than US dollars, as the market prepares for the first repacks of resets. Repackaged CLO Series KK-2 will issue ¥25.172bn, Repackaged CLO Series KK-3 will issue ¥29.37bn and Repackaged CLO Series KK-4 will issue ¥27.72bn.
• The trustee for the MLCFC 2007-8 CMBS has withheld US$143.7m in principal, according to August remittance data, as the transaction parties seek to determine the payment order. The dispute is believed to pertain to how principal payments in 'cross-over periods' should be handled.
• Air Berlin has filed for insolvency. While intervention from the German state should keep the airline operational for at least the next three months, there are a dozen aircraft ABS deals exposed to Air Berlin and temporary cashflow disruptions are anticipated.
• EART 2015-2 senior bondholders received no principal payment this month, after the auto ABS deal's cumulative net loss trigger was cured. Although this appears to be an atypical event, it nevertheless highlights the importance of understanding structural characteristics in order to price risks more efficiently.

Other news
• The self-certified mortgage loan ban included in a recent amendment to European legislation (SCI 27 July) could lead to extension risk for securitisation investors. The sale and price of distressed or reperforming mortgage portfolios could also be negatively affected, which would in turn be detrimental to issuance volumes.
• The US FHFA has extended HARP through to the end of 2018 and announced that the new GSE streamlined refinance programme for high LTV borrowers will be effective from 1 October. Given that the eligibility criteria limit the population that can take advantage of the new programme, it appears to be geared towards having an efficient refinancing construct in place, should there be another housing downturn.
• Collections for most Chinese non-performing loan securitisations have outpaced originators' initial projections, as of June 2017, according to a recent analysis of trustee report data. The study suggests that while originators of unsecured consumer NPL deals are the most optimistic about collections, the expense ratio for these transactions is the highest.

CLOs

Debut CRE CLO closed

Hunt Mortgage Group has closed its inaugural US$349.3m CRE CLO, dubbed Hunt CRE 2017-FL1. The transaction is backed by 23 floating-rate mortgages secured by 36 transitional properties, with plans to stabilise and improve the asset value.

Hunt's first CLO follows the recruitment of several staff with extensive securitisation expertise. This effort began nearly two years ago, with the hire of ex-real estate attorney Amy Shah to help build out the CLO platform (SCI 29 October 2015).

The firm's debut transaction features a 180-day ramp-up period and a 2.5-year reinvestment period, with un-invested proceeds after the ramp period to be paid in a pro-rata manner. While the initial collateral pool totals US$279.4m (or 80% of the total loan pool), this excludes the US$15.5m of future funding and additional ramp-up commitment, resulting in a total mortgage asset balance of US$349.2m.

Moody's and DBRS have assigned ratings of Aaa/AAA to the US$202.552m class A notes (which priced at one-month Libor plus 130bp). DBRS has also assigned ratings of triple-A to the US$17.461m class AS notes (plus 200bp), double-A to the US$23.137m class Bs (plus 240bp), single-A to the US$22.263m class Cs (plus 300bp), triple-B to the US$25.319m class Ds (plus 500bp) and single-B to the US$30.557m class E notes (plus 500bp). There are also US$27.938m of unrated preferred shares.

DBRS highlights that while this is the first CRE CLO to be managed by Hunt Investment Management, the firm has the organisational structure, staffing and experience to capably manage the transaction. Moody's adds that the deal is further strengthened by the 100% composition of first-lien whole loan and senior participation interests in whole loans secured by CRE properties.

The rating agency notes that the deal features a par value test to protect the rated notes with cushion and there is also an absence of any long-dated assets. Furthermore, the transaction is supported by the property type mix, which consists mainly of loans secured by multifamily - although during the reinvestment period, 7.5% of the total pool can be in loans secured by retail, office, industrial or mixed-use properties.

Moody's highlights the 2.5-year reinvestment period as a credit challenge, as well as an asset pool featuring 100% credit assessments that don't have the same level of ongoing disclosure as publicly rated assets. Further challenges include the large percentage of highly leveraged assets, but this is built into the credit assessments and recovery rates are high at 59.7%, given the first lien nature of the collateral and multifamily property type.

DBRS highlights that the collateral pool is concentrated based on loan size, with only 23 loans, a concentration profile more similar to a pool of 16 equally sized loans. The 10 largest loans also represent 68.6% of the initial pool balance and the three largest 31.8%. Geographically, the pool lacks diversity, with the top two states - Texas and Georgia - accounting for 17 properties, making up 49.7% of the pool.

The rating agency notes, however, that this is moderated by the fact that the concentration profile is superior compared with many floating-rate transactions that generally have less than 20 loans and a concentration profile more similar to a pool of 10 to 15 loans. Additionally, there are geographic restrictions associated with reinvestment loans acquired during the reinvestment period.

Servicer on the transaction is Keybank and operating advisor is Park Bridge. Wells Fargo is trustee and a placement agent alongside JPMorgan.

RB

CMBS

Large loan volatility examined

Larger properties have shown higher default rates than smaller properties in US CMBS over the last decade, according to DBRS. While this is partly due to the recession, the rating agency also finds that cashflow is more volatile in portfolios of larger loans.

Over time, cashflow change in portfolios of larger loans appears more volatile, with steep decreases in a downturn and quick recoveries in an upswing. Yet cashflow volatility is substantially lower for individual properties with larger loans.

DBRS notes that historically there is less cashflow change dispersion in larger loans and higher cashflow volatility of larger loans is caused by the higher cashflow correlation. The rating agency says this ties in with previous research that states that lenders often securitise larger loans for diversification - although this does not mean larger loans are necessarily riskier.

DBRS suggests that this could have important implications for the single-asset/single-borrower CMBS market, whereby investors commonly create a portfolio of SASB loans. Investors should potentially be cautious of this strategy if the theory that larger loans have a higher correlation is true, particularly if the entire SASB market is stressed for a long period of time. Theoretically, with more pari passu loan issuance, the default correlation will be magnified in the conduit market as well.

Typically, larger loans in CMBS have a lower loss severity, due to having a higher modification rate to live through the stress timing. Also, the liquidation expense is lower as a percentage, since there is a portion of fixed liquidation fee and larger loans tend to be able to continue receiving remaining cashflow during the workout period, which lowers the owed advance.

The higher volatility of larger loans seems to result from less cross-sectional dispersion and heterogeneity. DBRS adds that larger properties tend to be owned by larger institutions, leading to management and performance homogenisation - making them susceptible therefore to capital market fluctuation.

Smaller properties, however, may be individually owned by borrowers who run a business or live on the property and can therefore access more readily available lending resources from local and regional banks.

The pari passu effect can also have an impact whereby large properties are split into several pieces and put into different conduit deals to mitigate concentration risk in a transaction. Investing in a CMBS portfolio would therefore increase concentration risk as the deals may be exposed to many pari passu loans of the same large properties.

Individually, larger loans outperform smaller loans due to better cashflow stability. However, the CMBS mechanism favours larger loans and so they exhibit lower loss severity.

RB

Structured Finance

Job swaps round-up - 25 August

EMEA

Fitch has appointed Marjan van der Weijden as global group head of structured finance and covered bonds, based in London. She has been with Fitch for 18 years and most recently served as head of EMEA structured finance since 2010. The agency has also appointed Kevin Duignan as global group head for financial institutions, based in New York. He has been with Fitch for 25 years and was previously global head of structured finance and covered bonds. Both appointments are effective 1 September and will report to Brett Hemsley, Fitch's global analytical head.

Ashurst has hired Martin Kaiser as partner in its Frankfurt office. He was most recently at Baker McKenzie, where he was head of banking and finance in Germany and Austria. He will be joined by associates Sahra Demirbilek and Stephan Lehnen.

Acquisition

The court has sanctioned Patron Capital's acquisition of Punch Taverns via a scheme of arrangement (SCI passim). As such, the entire share capital of Punch is now owned by Vine Acquisitions and shareholders of Punch will be entitled to receive £1.80 in cash for each scheme share held.