Contents

Insurance-linked securities

ILS issuance hits all-time highs

The insurance-linked securities market has seen a surge in new issuance this year, with 1H17 witnessing the largest monthly, quarterly and half-year volumes on record. The largest-ever deal size was also recorded and overall market outstandings topped previous peaks.

Swiss Re reports that ILS issuance volumes in 1H17 topped US$8bn, nearly 40% larger than any previous half-year, and just US$230m under the full-year issuance record. The firm adds that the market has "grown to new heights", with around US$25.5bn in outstanding bonds, despite contending with a record US$6.5bn of maturities during the first-half.

Barney Schauble, a managing partner at Nephila Capital, comments that the rise in issuance is notable, but that it is growing from a low starting point to a relatively low total. In terms of what's motivating issuance, he says it is partly down to pricing, with spreads in the middle of 2017 at all-time lows making it a good environment for sponsors.

Issuance has also been spurred by demand, with growing interest in ILS from traditional fixed income investors, specialist ILS investors and retail aggregators, like 40-Act and UCITS funds. Schauble suggests that a major driver has been the retail side, with the "the opening up of institutional level investments to retail investors in order to raise capital. As a result, there are simply a lot more people willing or able to buy such products."

He adds that this surge in issuance can afford issuers more flexibility in their structures, which should give investors pause to ensure they're being adequately compensated. "This is certainly true at the moment and you have to be more careful now than ever as to what you are buying," Schauble comments.

As well as unprecedented issuance levels, Swiss Re highlights the development of innovative products, such as pandemic cat bonds. The firm notes that IBRD CAR 111 and 112 provided coverage for pandemic risks in the developing world (see SCI's primary issuance database), marking the first such ILS product aimed to mitigate the catastrophe rather than just cover losses after an event (SCI 30 June).

Drivers behind this innovation vary, but global events play a role in highlighting uninsured risks. "Ultimately, the development of the ILS market comes down to spotting areas where there is no existing transfer of risk and whether you can then provide a solution that can then be invested in. Certain global factors may therefore bring these uninsured risks to the attention of a wider audience and we can look to find risk transfer solutions for these problems," comments Schauble.

While primary issuance grew in 1H17, differing perceptions emerged over secondary market activity during the period. Swiss Re and Aon Benfield both reported lighter trading levels in 1Q17, but while Swiss Re observed "muted" activity in 2Q17, Aon Benfield suggests that "secondary trading activity increased following four consecutive quarters of declining activity".

Meanwhile, the market is awaiting the fall-out from hurricanes Harvey, Irma and Maria, plus the earthquake in Mexico. ILS analysts from Lane Financial suggest that losses from the various catastrophes could reach US$100bn, which "for an industry whose capital deployed for catastrophes is around US$600bn...is a hefty loss."

They note that several factors are at play when arriving at a loss estimate. A starting point for the firm, however, is to pay special attention to 'impaired' bonds - defined as those with a bid price of less than 80 - as it may give a market view of yield going forward.

Based on this method, the Lane Financial analysts project a cat loss of -5.4% for 3Q17, with September's return of -6.51% offset by small positive gains in July and August to -5.4%. Overall, this suggests a mark-to-market loss of -10% and they have therefore marked the market down by US$2.5bn.

On a positive note, the analysts suggest that there could be a disparity between realised and actual losses, with some bonds expecting a total loss, while others are expected to incur only a partial loss. Furthermore, some erosion of principal may occur and realised losses could move closer to US$1bn.

Consequently, the remaining US$1.5bn of mark-to-market loss may never be realised and could mature at par. Equally, with the widespread insurance index up and the P&C index recovering from only a 7% drop, the analysts conclude that the market is taking the recent catastrophes in its stride and "expect the consequences this time round to be more muted than in 2005."

RB

NPLs

NPL platform to boost recoveries

The creation of a non-performing loan platform by Portugal's three largest banks - Caixa Geral de Depósitos (CGD), Banco Commercial Português (BCP) and Novo Banco (NB) - is expected to speed up recovery processes. However, the impact on the three banks' asset quality is likely to be limited.

According to DBRS, the NPL platform is a "positive, but small step, to strengthen [the banks'] recovery processes." However, the rating agency expects the impact on their asset quality to be "fairly limited, as the risks will be kept on the banks' respective balance sheets". Moreover, the platform does not encompass retail or institutional sales of NPLs, but it is expected to accelerate the recoveries of commonly held borrowers.

Maria Rivas, vp at DBRS, explains: "If this platform works and banks can recover, then improvement in recoveries will likely follow asset quality improvements. However, it will take time to see results on asset quality, which is why I would qualify this assessment as short to medium term."

The platform is an agreement rather than a vehicle, under which the three lenders agree to work together to find solutions for the recovery of non-performing exposures. Yet details of the governance structure and mechanics of the platform are still to be announced.

There is a minimum requirement of €5m aggregate nominal value per debtor, which indicates that most exposures from small enterprises could fall outside the platform's scope. The platform has appointed a ceo and some representatives from the banks will be appointed as staff. In the future, other banks in Portugal could also join the agreement.

This follows the abandonment of a bad bank proposal in May, which would be considered as state aid, according to the BRRD. In May, Portuguese Prime Minister Antonio Costa said that Portugal's banks show no signs of needing further state aid and the country does not need a bad bank.

He added that the government was working with the bank of Portugal to further stabilise the banking sector by setting up a platform for banks to coordinate the repayment of debts, as many firms had loans with several lenders. Discussions ensued between the government, the Bank of Portugal and the country's three biggest banks to create a platform that would coordinate lender efforts to manage and recover bad loans.

DBRS data shows substantial progress in reducing credit at risk (CaR) loans at CGD and BCP since end-2014, but the stock remains reasonably high. NB, however, reported higher CaR loans at the end of June than the levels seen at end-2014, although since end-2016 CaR loans have been reduced by around 3.5%.

The CaR ratio also improved at BCP and CGD, in spite of continued loan deleveraging at all banks during the period 2014 to June 2017. Portuguese banks have much higher NPL ratios, according to the EBA definition, which is stricter than the CaR loans definition. BCP, CGD and NB report EBA NPL data on a regular basis, but improvements were seen in all banks' ratios and in the stock of EBA NPLs at end-June 2017.

The challenges in the Portuguese NPL market have historically been seller commitment, a wide bid-ask spread and lack of a foreseeable deal pipeline. The market has been mostly on hold while options were being considered. This has impacted the number of portfolios brought to market so far in 2017, which have been mostly small to mid-sized and mainly unsecured and fully provisioned.

According to Deloitte, as there is now more clarity around NPL policy, banks are likely to start deleveraging their NPLs. The firm expects CGD and BCP to become active sellers, as both banks have raised capital and increased provision levels in 2017, which should bridge part of the bid-ask gap and help drive non-core deleveraging plans.

Increased deal flow has already begun to materialise in July, with Bain Capital's €476m corporate and SME acquisition from CGD. More recently, Montepio Geral is rumoured to be prepping a securitisation dubbed Evora 2017-1.

Total NPLs in the Portuguese banking system stand at €36.8bn. In addition to the NB holdings, BCP has €10.2bn in NPLs, while CGD has €11.6bn. These holdings were largely generated during Portugal's recession following the financial crisis and although SMEs are the key issue, the total NPL pool is a mixture of consumer, SME, residential, corporate and REO exposures.

SP

ABS

BJETS concerns highlighted

Business Jet Securities series 2017-1 exposes investors to multiple risks - including performance volatility, transaction structural risks and a servicer with a limited track record - according to Fitch. The corporate jet aircraft ABS is not rated by the agency, which notes that the deal does not meet its investment grade standards.

KBRA assigned preliminary single-A ratings to the securitisation's class A1 to A3 notes and triple-B ratings to its class B1 to B3 notes (SCI 28 September). While Fitch believes a corporate jet aircraft ABS transaction backed by a pool of fixed contracts is ratable, the current BJETS enhancement levels combined with the revolving master trust structure fall short of what it would expect for single-A and triple-B ratings under its default and recovery stresses.

"These concerns are further exacerbated by the heavy reliance on the servicer Global Jet Capital, which was founded in 2014," the agency notes. "GJC acquired a US$2bn portfolio of corporate jet aircraft from General Electric Capital Corporation, which comprise a large portion of the BJETS pool, and hired experienced former GECC employees. Despite this, GJC as an entity has limited operating history, particularly in the releasing of aircraft in regions outside the US."

Corporate jet aircraft asset values exhibited high volatility during the recent recession, declining by approximately 30%-60% across a broad spectrum of brands and models, and have not yet fully recovered. Fitch suggests that this level of volatility does not appear to have been adequately accounted for when assessing net losses. As such, it does not believe the transaction would provide investors with adequate protection consistent with IG ratings.

The agency adds that unique risks inherent in corporate and commercial aircraft transactions are further compounded in this deal by the revolving structure. These risks include the high cyclicality of the aviation market, volatile asset performance and recovery rates, pronounced exposure to exogenous risks and heavy servicer reliance.

Further, in the BJETS structure each note is time-tranched across two-, three- and five-year intervals with no principal payments scheduled, and along with eligibility criteria enable the pool to potentially migrate to lower credit quality obligors and increase exposure to weaker jurisdictions. This includes the potential for increased exposure to volatile, undeveloped emerging markets in Asia Pacific and Africa, where GJC has limited historical operating history.

Fitch analyses revolving structures by assuming an asset pool migrates to a worst-case pool, taking into consideration concentration limits. However, this methodology is challenging to apply to BJETS, given the lack of servicer operating history in certain regions outside the US and the resulting lack of adequate historical data needed to assess default levels, including releasing data.

In such a scenario, the agency does not believe that defaults could be quantified accurately or mirror those historically observed in the US. As a result, it says that credit enhancement does not adequately account for the level of risk present, regardless of the diverse mix of initial obligors and obligor credit quality in the pool.

CS

Structured Finance

SCI Start the Week - 9 October

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

Pipeline
It was a quieter week for the pipeline, with activity noticeably down on the week before. There were four ABS, four RMBS, three CMBS and two CLOs added.

US$196.3m CPS Auto Receivables Trust 2017-D, Eagle Credit Card Trust Series 2017-1, €486.5m TitriSocram 2017 and US$1.2bn Verizon Owner Trust 2017-3 accounted for the ABS. The RMBS were Fastnet 13, A$1.55bn Securitised Australian Mortgage Trust 2017-1, US$670m STACR 2017-HQA3 and Tower Bridge 1.

US$389.5m Hyatt Hotel Portfolio Trust 2017-HYT2, US$1.05bn MSBAM 2017-C34 and US$743m Towd Point Mortgage Trust 2017-5 constituted the CMBS. The CLOs were €466m BlackRock European CLO IV and US$406.715m NXT Capital CLO 2017-2.

Pricings
There were 14 ABS prints in the week, accounting for around half of the week's total issuance. There were also four RMBS, a CMBS and eight CLOs.

The ABS were: US$741.75m Bank of the West Auto Trust 2017-1; US$750m Canadian Pacer Auto Receivables Trust 2017-1; US$1.5bn Capital One Multi-Asset Execution Trust 2017-4; US$600m Capital One Multi-Asset Execution Trust 2017-5; US$900m Capital One Multi-Asset Execution Trust 2017-6; C$431m CNH Capital Canada Receivable-Backed Notes Series 2017-2; US$258.2m Diamond Resorts Owner Trust 2017-1; US$825m Discover Card Execution Note Trust 2017-7; US$1.4bn Ford Credit Floorplan Master Owner Trust A Series 2017-2; US$575.16m Ford Credit Floorplan Master Owner Trust A Series 2017-3; US$987.31m GM Financial Consumer Automobile Receivables Trust 2017-3; US$1.25bn Nissan Auto Lease Trust 2017-B; US$155.55m Oportun 2017-B; and US$737.86m SoFi Professional Loan Program 2017-E.

The RMBS were: US$512.45m CIM Trust 2017-7; US$237m Freddie Mac 2017-SB39; US$1.7bn Freddie Mac SCRT 2017-3; and US$350.4m Sequoia Mortgage Trust 2017-7. The CMBS was US$991.8m FNA 2017-M12.

Lastly, the CLOs were: Cadogan Square CLO X; US$488.75m Elevation CLO 2014-2; US$517.5m Galaxy CLO 2013-15; US$301.2m KCAP Senior Funding I 2017-1; US$456.9m LCCM 2017-FL1; US$608m Mariner CLO 2017-4; US$504.7m Northwoods Capital XVI; and US$481.23m Wind River CLO 2013-2.

Editor's picks
New dawn for bank funding strategies?: The European securitisation market faces what is expected to be an "interesting" year ahead, as low-cost central bank liquidity dries up and banks adopt new funding strategies. Together with boosting primary ABS issuance, Bank of England and ECB tapering will likely impact the volume of paper being retained...
Risk retention capital largely deployed?: The availability of risk retention financing has been one of the main reasons that CLO supply has outpaced most projections. Responses to JPMorgan's Q4 CLO survey suggest that US$115bn out of a total risk retention capacity of US$200bn may now have been deployed...
Credit unions to tap ABS market?: US credit unions could soon tap the securitisation market after the National Credit Union Administration stated that such institutions have the authority to issue ABS. The move follows legislation that allows credit unions to adopt powers granted to federal institutions, meaning 3,600 federal credit unions could adopt the ruling immediately...

Deal news
• Belmont Green Finance (BGF) is in the market with an inaugural £201.53m UK non-conforming RMBS. Dubbed Tower Bridge Funding 1, the securitisation comprises newly-originated first-lien mortgages originated through the Vida Homeloans brand.
• Chimera Investment Corp is marketing its first rated re-performing loan RMBS, dubbed CIM Trust 2017-7. The US$512.45m securitisation is backed by 3,548 seasoned performing and re-performing first-lien mortgage loans, with US$34.4m of the pool balance comprising non-interest bearing deferred principal amounts.
• Bespoke Capital has established a direct lending warehouse facility, set up as a cashflow securitisation dubbed Be-Spoke Loan Funding, to fund a portfolio of loans granted to Spanish SMEs. The initial transaction portfolio - comprising 21 obligations - stands at €70.8m, with warehouse notional expected to reach €400m, as of the last drawing point.

Regulatory update
• The ECB has launched a public consultation on a draft addendum to its guidance on non-performing loans, under which banks will be expected to provide full coverage for newly classified NPLs. The new rule aims to reinforce guidance with regards to fostering timely provisioning and write-off practices.

Structured Finance

Treasury report supports securitisation

The US Treasury has released a report recommending a number of regulatory changes that could make it easier for companies to issue and invest in securitisations. The second in a series on boosting the US financial system, the report stresses the importance of securitisation to a strong economy and suggests repealing elements of the Dodd-Frank Act and lightening other regulatory burdens, although it stops short of a complete repeal of the risk-retention rules.

Treasury Secretary Steven Mnuchin comments: "By streamlining the regulatory system, we can make the US capital markets a true source of economic growth, which will harness American ingenuity and allow small businesses to grow." The US has seen a 50% drop in the number of publically traded companies in the last 20 years and the Treasury Department says that the capital markets should be able to provide the necessary sources of liquidity that small businesses need to grow, invest and hire.

Structured products analysts at Wells Fargo suggest that the report calls for an "an encouraging lending environment through a promotion of quality securitisation by recalibrating regulations affecting the securitisation market." Overall, they note that the report is a positive for many aspects of the structured products market and could reduce bank regulatory capital on certain non-agency structured product holdings.

The Treasury says in its report that it aims to reduce the burdens on companies seeking to go public by streamlining disclosure requirements and facilitating a tailored approach to disclosure requirements based on company size. It also says it will re-examine the JOBS act to gauge how its tools can be improved.

Additionally, the report suggests improving the regulatory framework by harmonising SEC and CFTC regulation, incorporating more robust economic analysis and public input into the rulemaking process and making it more transparent. It recommends opening up private markets to more investors through proposals to facilitate pooled investments in private or less liquid offerings.

Further, limits on new regulations should be achieved through informal guidance, rather than notice and comment rulemaking, along with reviewing the roles, responsibilities and capabilities of self-regulatory organisations. The report also suggests more appropriate capital and margin treatment for "derivatives and cross-border frictions that fragment global markets."

The Treasury hopes to improve the oversight of financial market utilities (FMUs), to repeal section 1502, 1503, 1504 and 953(b) of the Dodd-Frank Act and to reduce the costs of securitisation litigation for issuers. Furthermore, it recommends reducing the amount that can be raised by crowdfunding to US$5m from US$1m, to examine the impact of Basel 3 on secondary markets and securitised products and, finally, to advance US interests and promote a level playing field in the international financial regulatory landscape.

The Wells Fargo analysts say that they are encouraged by the report's suggestions that the banking regulators should not "increase the p factor in determining bank capital under the SSFA and SFA approach, recognise the added credit enhancement when a bank purchases a securitisation at a discount to par and align the risk weight floor for securitisation exposure with the Basel recommendation." It suggests too that high-quality securitised obligations with a proven track record receive consideration as level 2B high-quality liquid assets (HQLA).

The analysts highlight the recommendation that instead of an overall repeal of the risk-retention requirement, regulators should expand qualifying underwriting exemptions to well-documented and conservatively underwritten loans and leases, regardless of asset class. Additionally, it suggests that CLO managers should be exempt from risk retention if they select loans that meet pre-specified qualified standards.

Furthermore, the report suggest reducing the number of required reporting fields for registered securitisations under Regulation AB 2 and the SEC should review its mandatory three-day waiting period for registered issuance, potentially to only one or two business days. Finally, the report suggests the SEC should signal that it will not extend Regulation AB 2 disclosure requirements to unregistered 144A offerings or to additional securitised asset classes.

CREFC comments that the Treasury report provides "strong recommendations to reform the unnecessary burden that capital, liquidity, disclosure and other rules place[d] on securitisations." In particular, the association highlights certain aspects of the report, such as that current regulation hampers the securitisation sector by discouraging the use of securitisation as a funding vehicle, making it overly difficult to invest in non-agency paper and by discriminating against high-quality securitised products compared to other asset classes.

It further highlights the report's finding that risk retention adds "unnecessary costs to securitisation as a funding source" and that greater disclosure requirements are "unnecessarily burdensome." In terms of the relevance of the report to commercial real estate, CREFC also highlights the recommendation for the HQLA category to be expanded to include liquid private triple-A CMBS and other securitised bonds.

The council also points to the suggested expansion of the exemptions under qualified commercial real estate mortgages and the reconsideration of the five-year hold for B-piece securities. Finally, it highlights the possible designation of a single agency to provide ongoing guidance and exemptions.

RB

Structured Finance

Specialised financing vehicles introduced

The latest reform of the French finance sector introduces a new category of financing vehicle that is expected to benefit both classic securitisation and risk transfer structures. The reform - the first phase of which is due to be finalised in January 2018 - also expands the legal tools available to French banks for refinancing their loan exposures.

The reform introduces into French law organismes de financement, which encompass both the existing organismes de titrisation (securitisation vehicles) and the new organismes de financement spécialisé (specialised financing vehicles). These vehicles will share a common regime based on the existing features of the French securitisation framework, including comprehensive bankruptcy remoteness provisions and the option to select a transparent tax fund structure or a corporate structure subject to corporate tax, according to a recent Orrick post on JD Supra.

"Both types of vehicles will further benefit from an unrivalled creditor-friendly legal regime, such as extended protections against the insolvency of the vehicle's counterparties, a lockbox mechanism and protection of future flows," Orrick explains.

The vehicles will be able to: directly grant loans to corporate borrowers in France and abroad, without being subject to regulatory capital requirements; enter into sub-participations; benefit from the 'Dailly' assignment (which previously could only be granted to credit institutions); benefit from the 'European Long-Term Investment Fund' label; and be managed by a company incorporated outside of France, if licensed in a EU member state to manage alternative investment funds.

Consequently, Orrick suggests that the reform opens up "a large range of new possibilities" for a variety of French and foreign insurers, asset managers, investment funds, private equity funds, debt funds and direct lending platforms. In particular, distressed asset management and restructurings (since the new funds are allowed to grant new money and hold equity in the restructured entity), regulatory capital transactions (the new funds are allowed to enter into a variety of risk transfer instruments, being no longer limited to credit default swaps) and securitisations (including those backed by non-performing loans, project bonds and sovereign exposures) are expected to benefit.

Refinancing techniques have historically been limited in France, as purchasing outstanding loans was viewed as a regulated banking activity. However, the reform should facilitate the acquisition by certain foreign non-bank entities of these loans on the secondary market.

The reform is set forth in an Ordinance, which was executed on 4 October and will come into force in different phases. Paris EUROPLACE - whose purpose is to promote the competitiveness and attractiveness of the Paris financial marketplace - helped to draft the funds reform through a dedicated committee.

CS

Capital Relief Trades

Risk transfer round-up - 13 October

Risk transfer activity continues, with Lloyds reportedly readying a transaction for Q4. Sources also suggest that Mizuho and Lloyds are arranging a transaction for an Irish bank. Meanwhile, Caplantic is said to be prepping a shipping SRT and is targeting a 30 November deadline.

CLOs

Refi success depends on timing

Refis from the final quarter of last year appear to have pulled the trigger too early as they reduced their debt costs by less than those US CLOs that refinanced this year. While refis from 4Q16 outperformed only briefly before later once more underperforming issuance cohorts, refis from 1Q17 and 2Q17 have enjoyed outperformance without then succumbing to underperformance.

CLOs that refinanced in 4Q16 reduced their total debt cost by an average of 15bp-20bp, note Wells Fargo analysts. That compares to reduced debt costs of 35bp-40bp for CLOs refinanced in 2017, despite the fact that the average pre-refi triple-A coupon was around the same for 4Q16 refis as for the 2017 cohort. As refinanced CLO tranche spreads tightened, refinancing savings were greater this year.

The almost US$109bn in US CLOs refinanced year-to-date includes nearly 80% of all 2014 vintage deals. For that vintage, 9% have been reset. For the 2012 vintage 67% have been refinanced or reset, and for the 2013 vintage 55% have been refinanced or reset.

The eligible pool of CLOs that can refinance under the Crescent No-Action letter is shrinking. There are 48 deals, totalling approximately US$18bn, outside of their non-call period that could be refinanced or reset.

The Wells Fargo analysts calculate the average cost of refinancing a CLO, since year-end 2015, to be 94bp. This is the relative reduction in equity distributions. The average benefit, measured as a relative increase in future distributions, is calculated to be 40bp, implying that it takes 2.3 payment periods to reach a break-even point.

Reinvestment environments are not static, so the relative equity performance of refinanced deals has to be compared to that of their vintage issuance cohort. If a CLO posts equity payments following a refi that are greater than their issuance vintage, but had already been making above-average distributions, then it is not possible to say all of the outperformance is due to the refi.

The analysts present the example of a deal with an average equity distribution over the previous four payments that was greater than the average of its issuance cohort by 54bp. That deal is then refinanced and on the refi 'pay date' the deal's payment is lower than its cohort by 76bp.

As the deal was previously outperforming by 54bp and has now underperformed by 76bp, the cost of the refi is 130bp. Suppose that following the refi this example deal averages an equity distribution that is 107bp greater than its issuance cohort, it would be impossible to attribute the full 107bp of outperformance to the refi, since the deal had already been outperforming by 54bp prior to refinancing.

In that example, the deal has actually gained 53bp in relative performance due to the refi. As the cost was 130bp, it would take 2.4 equity payments for the gain to cancel out the cost.

As this and other examples show, a refi is generally worth executing in the long run in terms of outperforming vintage cohorts. However, that does assume that the deal is not called within a couple of quarters of the refi date.

As more deals are refinanced, remaining CLOs which have not had a refi or reset may begin to perform even worse as they await their own refi, reset or call. This creates an adverse selection scenario where even underperforming refinanced deals might look satisfactory compared to unaltered deals.

2013 and 2014 vintages that were refinanced in 4Q16 were underperforming prior to their refis and were outperforming by 2Q17-3Q17. For 2014 vintage CLOs refinanced in that quarter, the change was from 25bp underperformance pre-refi to between 115bp of underperformance and 85bp of outperformance post-refi.

As for 2013-2015 vintage deals refinanced in 1Q17, performance pre-refi was below or in line with their respective cohorts. On the 1Q17 pay date, distributions for refinanced deals were an average of 94bp lower than issuance cohorts, but some cohorts were outperforming by nearly 120bp in the following quarter. The analysts note that outperformance has remained consistent for deals refinanced in 1Q17 so far, although that may be attributed to the adverse selection noted above.

Deals refinanced in 2Q17 have also outperformed non-refinanced ones, despite the short amount of time that has followed the refi pay date. Distributions on the pay date were roughly 135bp lower than the respective cohorts, and about 75bp higher in 3Q17.

"CLOs that refinanced in 2017 show one payment of underperformance (the actual refinancing) but then the equity payments from the refinanced CLOs outperform the comparable samples. However, the data show that CLOs refinanced in 4Q16 enjoyed brief periods of outperformance, but then underperformed. This trend holds true both in comparing refis to the entire vintage cohorts, but also in comparing refi CLOs to non-refinanced/reset CLOs," say the analysts.

They add: "When comparing 4Q16 equity distributions to non-refis the picture is slightly mixed; some quarterly issuance cohorts show the refis outperforming non-refis 2-3 payments after the refi; we believe the mixed data is due to a small sample size. By 3Q17, CLOs refinanced in 4Q16 were underperforming their issuance cohorts."

The data appears to support the conclusion that deals refinanced in 4Q16 were refinanced too early. Refis at that time reduced total debt costs by an average of 15bp-20bp, compared to 35bp-40bp for CLOs refinanced in 2017, despite the fact that the average pre-refi triple-A coupon was roughly the same for both the 4Q16 and 1Q17 cohorts.

JL

RMBS

Mortgage funding facility formed

Natixis has established a secured funding facility in the form of an SPV, dubbed Rembrandt Dutch Mortgages. The facility will fund mortgage loans, with the borrower exiting the vehicle via a securitisation or a whole loan portfolio sale.

Rembrandt Dutch Mortgages will purchase loans funded through the issuance of senior and junior variable funding notes (VFNs), provided a stop purchase event has not been triggered. The SPV is established under Dutch law and the notes are collateralised by Dutch prime residential mortgage loans originated by Fenerantis, through the brand name Merius.

The €180m senior VFNs are rated double-A (high) by DBRS, while the junior VFNs are unrated. The coupon payable on the senior notes is mid-swaps plus 1.10%, with a step-up coupon of mid-swaps plus 1.65% payable after the end of the commitment period 24 months from closing. Fenerantis is part of Credit Management and Investor Solutions (CMIS Group). The mortgage portfolio will also be serviced by Fenerantis through a sub-servicing agreement with Adaxio.

Fenerantis and Merius were launched in partnership with Natixis to provide European institutional investors with access to newly originated prime NHG and non-NHG Dutch residential mortgages. Fenerantis is a new originator (originating since 4Q16) and consequently there is limited historical performance data.

DBRS highlights that the transaction has portfolio and credit support, with the issuer being able to purchase mortgage loans funded through the issuance of senior VFNs two years from the closing date. Furthermore, the senior VFNs benefit from 10% credit enhancement from subordination of the junior VFNs.

The senior notes have additional credit support until the issuer has purchased €50m of mortgages, as €5m must be purchased via the proceeds of the junior VFN before proceeds from the senior VFN can be used. Additionally, the issuer must pass portfolio tests prior to the issuance of senior VFNs and the issuer cannot draw on the facility if the portfolio covenants or performance triggers are breached.

These triggers require that one-month plus delinquencies shall not exceed 1.8% and three-month plus delinquencies shall not exceed 1%, which is relatively tighter than the conditions included in several Dutch transactions. The transaction must also be performing, with the reserve fund replenished to the target level, in order to allow for further drawing on the senior notes.

The portfolio covenants also state that no loans will be granted to borrowers with a negative Bureau Krediet Registratie (BKR) code. A borrower is given a BKR code following two to four months of delinquencies, dependent upon credit type. The covenants also state that a maximum of 10% of the loans can be granted to self-employed borrowers.

Additionally, DBRS notes that unlike typical Dutch transactions, loans with associated repayment vehicles will not be included in the warehouse and the mortgage loans will repay on an annuity, linear or interest-only basis. Finally, the maximum concentration of interest-only loans is lower than typical RMBS, at 45%.

RB

Structured Finance

Job swaps round-up - 13 October

Acquisition

Navient has entered into an agreement to acquire online student lender Earnest for US$155m in cash. Earnest will continue to operate under its current brand and be led by its current management team. Navient has suspended its remaining share repurchase programme through year-end 2018 to allocate capital towards growing its education lending business and building book value. Closing of the transaction is expected in 4Q17, subject to customary closing conditions.

B-piece fund

KKR has closed KKR Real Estate Credit Opportunity Partners (RECOP), a US$1.1bn fund focused on generating attractive risk-adjusted returns for investors through the purchase of CMBS B-pieces. RECOP focuses primarily on investing in newly-issued CMBS B-pieces as an eligible third-party purchaser subject to the new risk retention regulations. The fund has so far closed on seven transactions, representing a face amount of US$517m and approximately US$225m of invested equity, making it the most active CMBS B-piece buyer of third-party risk retention structures.

DC review

ISDA and its credit derivatives determinations committees have disclosed that they are pursuing other avenues for the transition to a new DC secretary before ISDA's term as secretary expires in April 2018. The move follows their inability to reach agreement with ICE Benchmark Administration (IBA) regarding its assumption of the role of DC secretary, after it was selected to act as such in a public tender (SCI 16 December 2016). The association says that IBA has been negotiating directly with the DCs since the appointment on possible changes to the DC rules. However, due to an ongoing process of review to ensure the DC process remains robust, ISDA believes the appointment of an independent specialist organisation to act as DC secretary is a "natural next step in the evolution of the process". In a recent IOSCO survey, market participants suggested improvements to the DC process that focused on transparency, including increased disclosure of potential conflicts of interest, the creation of a panel of independent representatives to vote on material DC decisions and to expand the participation to external observers.

EMEA

Marc Sefton and Kieran McSweeney have founded Aquilam Capital, which focuses on investing and lending in the speciality finance sector - including consumer and SME finance, as well as leasing and mortgage markets - and will offer both debt and equity solutions. Sefton was most recently md at Shawbrook Bank in the structured finance division. McSweeney was also md at Shawbrook and head of its specialist sectors division within business finance at the bank. They will be joined by Jamie Constable and Steve Curtis. Constable is a founder of Rcapital and a specialist in corporate restructuring, while Curtis is operating partner at Rcapital and has run almost 20 companies as ceo or chairman.

MSR disposal

CIT Bank is set to sell its reverse mortgage servicing business, Financial Freedom, to an undisclosed buyer. The transaction is expected to close in 2Q18 and includes the sale of mortgage servicing rights and approximately US$900m of reverse mortgage whole loans, as of 30 June 2017. CIT was advised by Houlihan Lokey as financial advisor and Sidley Austin as legal advisor.

North America

Annaly Capital Management has appointed its ceo and president Kevin Keyes chairman of the board, effective 1 January 2018. Annaly co-founder and executive chairman Wellington Denahan will retire from these roles, but continue as a member of the board, effective 31 December.

Centaur Fund Services administration has appointed IC Condat as head of ILS at Centaur Fund Services Bermuda. Condat was previously senior account manager at SS&C Fund Services (formerly Prime Management Limited). He will be based in Centaur's Bermuda office.

Grandbridge Real Estate Capital has named Alex Haw svp and manager of its Miami/Southeast Florida loan origination team. Haw previously led debt originations as the market manager for TD Bank's Miami commercial real estate platform. Prior to that, he held several senior positions at Bank of America and Citibank/Salomon Smith Barney, including in CMBS and real estate special assets.

Karl D'Cunha is joining Navigant Capital Advisors to help grow its financial services industry practice, including providing corporate finance advisory and valuations. He was previously md at CBIZ Valuation Group and before that senior md, investment banking at Madison Street Capital and senior md at Houlihan Capital.

TigerRisk Partners has hired Seth Ruff as partner and head of reinsurance solutions. Ruff was most recently at Swiss Re, where he was president of US P&C core partners group and president of Swiss Re underwriters agency.

Settlement certified

The trustees subject to the JPMorgan RMBS settlement (SCI passim) last week notified certificateholders that they had received private letter rulings from the IRS, which certified their ability to distribute settlement proceeds to the affected trusts. The total payment amount of the settlement is up to US$4.5bn for the 330 affected trusts. The effective date of the settlement agreement was determined as 19 September and the final allocable share for each trust is to be calculated within 90 days of that date. Given that JPMorgan is then required to pay the allocated amounts within 30 days of the final calculation, Wells Fargo structured products analysts anticipate that the trusts will receive the payments by 17 January and the settlement payout will be distributed to bondholders by the February 2018 remittance cycle.