Some fighting capital markets talk

A €297.8m Italian SME trade pooling loans from 14 banks in the Iccrea network is expected to close on Monday. Credico Finance 15, via co-arrangers Iccrea and RBS, has a €50m Class A1 tranche, a €113.9m Class A2 and a €133.936m Class B. The A notes are rated A2 by Moody’s and AA by DBRS, and have coupons of three-month Euribor plus 70bp and 95bp respectively. According to deal documents, the A1 bonds have been subscribed by SG’s Antalis conduit, and the A2 bonds by the EIB. The junior B tranche comprises smaller notes from each of the 14 originators. The portfolio contains 3,503 loans with a current balance of €297.8m. They are 3.4-years seasoned and have a weighted average current LTV of 44.01%. The loans have an average current size of €85,020.

MyState and The Rock priced their A$300m deal a day ahead of schedule last Thursday via CBA, Macquarie and Westpac. ConQuest 2014-2 Trust came with three Triple A tranches: an A1 sized at A$262.5m with a 2.9-year average life; an A2 at A$18.9m, also at 2.9 years; and a A$8.1m AB with a longer five-year maturity. The A1 notes were talked at the one-month BBSW plus 95bp area and priced at 95bp; the A2 notes at 120bp to print at 120bp; and the AB, which was at the 175bp area, followed at 180bp. The senior tranche benefits from 12.5% credit enhancement in addition to lenders’ mortgage insurance, the A2s at 6.2% plus LMI and the AB at 3.5% plus LMI. A$10.5m across three B bonds was retained. The portfolio is fully income verified, with a 65.7% weighted average loan to value and 54.1 months’ seasoning. According to Fitch, the portfolio is split 29.5% MyState mortgages and 70.5% from The Rock. The two firms merged in December 2011. The former is an authorised deposit taking institution while the latter is a regional building society.

The IMF’s estimate last week of a US$15bn black hole in Ukraine’s finances sent the sovereign’s bond prices into freefall, but even with the country’s short-term debt yielding north of 50%, some market participants say prices need to drop much further before investors will be tempted back in. “We need to see the bond prices fall quite a bit lower to get more certainty that the distressed buyers, like special situation hedge funds, will be there to provide some liquidity,” said Peter Attard Montalto, a research analyst at Nomura. Few investors have as much individual exposure to Ukraine as Franklin Templeton. The firm held US$2.5bn of government debt at the end of September, when it last reported holdings. This is equal to about 7% of Ukraine’s entire debt, according to Tradeweb. A company spokesperson told IFR: “Although our investment in Ukraine appears large, it is only a small percentage of our portfolio. Ukraine does not even appear in the top 10 [of Franklin Templeton’s holdings].” The revelation of the additional US$15bn hole in Ukraine’s financing needs has heaped further pressure on Kiev. There were already doubts bubbling about whether the IMF’s US$17bn funding package would be enough to cover short-term liabilities. The Fund is due to release its next tranche, a US$2.7bn loan, in January. Vladyslav Rashkovan, acting deputy governor of the National Bank of Ukraine, told IFR in London on Tuesday: “I’m sure there will be a solution. But I do not know if [the next tranche] will be enough as I am not in the country.” Fresh talks The IMF was in Kiev last week for a fresh series of talks with the newly elected government to discuss the next round of financing. Ukraine’s due September 2015 dollar debt sold off 8.6 points to a cash price of 72 between when the IMF figures were leaked on December 9 and Friday morning, according to Tradeweb. At that cash price, the notes yield 56.392%. Ukraine’s longer-dated debt faired little better, with the 2023s shedding 5.5 points last week to 64, to yield 15.272%. Ukraine is due to pay US$5.4bn in 2015, according to Societe Generale. A restructuring of its debt now seems probable, although not imminent, according to Montalto at Nomura. “For us, a restructuring is more likely in the middle of next year rather than the beginning,” he said. Still, market observers remain hopeful that the IMF or EU will step up to plug Ukraine’s funding gap and stave off a full-scale default. “The IMF and EU have made promises and there’s still a high probability that the money will be found,” said Pavel Laberko, EM fund manager at UBP. “It’s also an important political issue – for the European Union to allow the country to default would be a strong blow to [the EU’s] image.” Benoit Anne, head of emerging market strategy at Societe Generale and a former IMF employee, added: “At the end of the day the IMF is also a political institution; it is hard for me to see the IMF letting Ukraine go. If that means some kind of intravenous survival strategy so be it, but whatever it takes for the finances of Ukraine to stay afloat.”

A quarter of Irish RMBS could be set for an upgrade if S&P adjusts it methodology and assumptions for the sector. The agency launched a request for comment last Thursday, and is giving market participants until January 30 to respond. This estimate is based on a sample of deals, and of that three-quarters could be raised by up to three notches. This new model will apply to all new and existing RMBS as well as residential mortgage covered bonds, but no rating impact is expected for covered deals. S&P is seeking to align the methodology and assumptions for Irish RMBS more closely with the global RMBS criteria. It is planning introduce modelling assumptions with more stressful scenarios to assess whether cash flows would – at the applicable rating level – suffice to cover timely payment of interest and principal. However, the proposed interest rate curves are less stressful, particularly at the lower rating levels, than current assumptions. The agency’s proposal includes a starting point for assessing portfolios that vary substantially from historic pools and for analysing structures that involve structure-specific risks. S&P will model its archetypal Irish pool on the UK, as it says the two markets share similarities including the types of securitisation mortgage products and borrower characteristics. However, there are some differences between the markets (legal framework, state of the economies) and so S&P’s proposed criteria set a higher foreclosure frequency for Irish RMBS than UK. S&P also says its analysis takes into account that its current outlook on the Irish housing market, as well as the overall economy, requires starting conditions that are more adverse than benign. It has a 2% foreclosure frequency in Ireland but will actually look to model from 3.3%. S&P outlines an archetypal Irish pool as having a 73% LTV at origination, the borrower not being self-employed or a first time buyer or having adverse credit history. The loan balance to pre-tax annual income multiple will be modelled on a maximum 3.5x. In addition, the loan is fully income-verified, in floating-rate repayment format with no discount period and no arrears. It must be a first-lien owner-occupied loan, not exceeding €625,000 in Dublin or €500,000 outside Dublin, and is assumed to be five-years seasoned. And the portfolio must be granular (more than 250 loans), and geographically diverse with no adjustment factors relating to the originators. These give projected loss calculation in a severe economic stress environment of 10.5%, in line with Spain but higher than Italy’s 10.3%. The foreclosure frequency would also match Spain, at 15%, and be higher than Italy’s 13%. The loss severity would match Spain too at 70%, but these undercut Italy’s 79.2%. The agency will also apply adjustment factors or non-archetypal loans which would impact various influences on credit enhancement. For instance, an original LTV at or below 40% would have an adjustment factor of 0.5x. The seasoning factor ranges from 0.75x for loans at least five years’ seasoned to 0.5x for loans more than 10 years’ seasoned. There are also upward adjustments for characteristics such as self-employed, first-time, self-certified, remortgaging, buy-to-let and negative credit history borrowers ranging from 1.075x to 1.7x. These all impact the foreclosure frequency estimates. Jumbo loans, which could be hit with a 1.2x multiple of the market value decline assumptions, and valuation haircuts (for appraisals other than full appraisals) will impact on the loss severity calculations. S&P is also proposing cash flow modelling changes including the amount of defaults, timing of recession and recoveries, interest rate risk, fees/costs, liquidity facilities and portfolio yield compression. The agency is asking for feedback on its proposed definition of an archetypal pool, aligning the adjustment factors with the UK and the higher foreclosure frequency than in the UK, the projected

Moody’s, Fitch and Scope all released their 2015 European ABS outlooks last week, expecting a stable to slightly improving performance, depending on the asset class. In its ABS and RMBS analysis, Moody’s foresees stable credit quality next year, but warns that meaningful recovery is a long way off and it sees regulatory capital treatment uncertainty for investors and issuers as a key concern for the securitisation market. The expectation of stable credit quality stems from slow but continued economic recovery in the eurozone, but barriers such as high unemployment and limited progress in economic reforms in some countries would hinder growth. Nonetheless, RMBS collateral quality is expected to remain sound and improve slightly in consumer ABS asset classes. New UK RMBS and auto ABS deals will continue to improve, owing to supportive economic conditions, higher GDP growth and low unemployment versus the rest of Europe. In the periphery, meanwhile, slow economic recovery is straining loan origination, which in conjunction with general balance sheet contraction constrains the volume of underlying assets available to securitise. Fitch said the rating outlook for European structured finance was stable, with 86% of rating outlooks stable or positive. Its expectations for stability of both ratings and underlying assets have improved substantially over the last year. Even for markets where a weaker performance is expected, ratings should be resilient to continued stress. Most of the shifts to stable or positive outlooks have come in the periphery, and just 23% of outlooks here are negative or on rating watch negative, versus 64% a year ago. For the rest of Europe, the figure is 8%, down from 14% a year earlier. Scope Ratings, meanwhile, expects increased issuance next year, driven largely by political decisions. The agency foresees SMEs being the main sector of growth, with more auto ABS and UK RMBS issuance, but does not see the ECB’s ABS purchase programme (ABSPP) significantly distorting the securitisation mix. RMBS, auto ABS and SME deals will be the main areas of activity, while leveraged loan CLOs will also contribute, supported by positive market technicals and a stable performance credit outlook for the asset class. The ECB ABS and covered bond purchase schemes will determine the dynamics of European securitisation next year, Scope says It argues that the ECB’s commitment to investors in the product reinforces the sector’s credibility, and sees the programme as fuelling issuance and compressing spreads, both for eligible and ineligible deals. This may come at a cost though, as spread compression could erode the perception of credit risk. Quoting AFME numbers, Scope says ABS issuance over the first three quarters of this year was €154.8bn versus €180.3bn for full-year 2013. Issuance hit €819bn in 2008 and repo trades surged. This year, it states that €52bn has been placed with investors, but the spread compression from the ABSPP could convince issuers to use securitisation to achieve regulatory risk transfer. Simultaneously, investor confidence in the market is growing, and many are looking for higher yielding opportunities. This could lead to increased issuance in less conventional areas such as aircraft leases, shipping and project finance or infrastructure deals, Scope says. In the CLO market, Scope expects €15bn of issuance, up slightly from the €13bn-plus achieved so far this year, with more multi-currency deals as a way of coping with the shortage of euro loans. The SME CLO market is seen as the white knight of Europe’s recovery, Scope says. The ABSPP will continue to lower the cost of funding which, combined with more favourable conditions for banks to originate loans, will support increased SME issuance.

NewDay priced its UK credit/store card ABS last week, but not without difficulties in the process that led to the five-year series of notes being pulled from the structure. The issuer went with three-year notes only, but the order book was still covered from the Triple A notes down to the Triple B rated Class D. NewDay had considered selling the E and F Tranches too of NewDay Partnership Funding 2014-1, as they were originally listed as “call desk”, but ended up retaining them. Market contacts have said for a number of weeks that the sterling market has proved a more difficult place for sellers in this final quarter of the year versus earlier in the year. One investor said that floating rate sterling “was certainly a challenge”, which has been borne out by deals over the past couple of months. A syndicate manager away from the deal said UKAR’s £2.8bn Slate RMBS in October took some of the demand out of the market, and subsequent sterling trades have also felt the impact – either coming smaller than the previous deals in the respective series (Brass No.4 and Lanark 2014-2) or wider (Paragon No.21 and Precise 2014-2). The spread impact for the latter two did also take into consideration general market deterioration in October, however. Auburn 8, meanwhile, was shelved while the originator looked to resize the portfolio. This backdrop made for a testing marketing period. It was over two weeks between the deal being announced and pricing last Thursday via Citigroup, Deutsche Bank, RBS (arranger with NewDay itself) and Santander.   Initial price thoughts of one-month Libor plus 80bp area on the Triple A Tranche (S&P and Fitch) put it 37bp wide of where Tesco priced its debut cards deal in June. But NewDay also has store card receivables and instalment credit contracts in the pool, rather than being a pure credit card deal. While Fitch says that the charge-off, delinquency and payment rate performance of the portfolio was in line with UK prime credit cards, the deal was marketed with much thicker investor protection in the form of 25.91% credit enhancement than 10% in Delamare. Price thoughts of 125bp–135bp on the Double A, 175bp area on the Single A and 225bp–235bp on the Triple B followed. The senior note tightened to 75bp–80bp, but the rest remained the same, with coverage levels ranging from 1.1 times in the Single A up to 1.9 on the Triple Bs. The split rated BBB+/BB and BB/B notes were still shown as “call desk” at this point last Monday, but final terms on the Wednesday revealed the bottom two notes to be retained. The rest of the book built relatively well, as the £222.3m Triple A was 1.9 times covered at 75bp, the £27m and £16.8m Double A and Single As both 1.1 times subscribed at 135bp and 175bp and the £12.6m Triple B 2.9 times done at 225bp.  These bonds all have a scheduled maturity in December 2017, but the issuer has the option to delay this by a year. The step-up margin of the lower of (i) twice the initial margin and (ii) the initial margin plus 100bp will apply from the date of the extension. NewDay bought the portfolio from Santander UK in 2013 to become one of the UK’s largest specialist card companies. It is also active in the near-prime credit card market through its Aqua brand, but these are not securitised in this pool.

The ECB added just €233m in the week to December 5 to its ABS purchases, following €368m in the first week of operation. Market participants say the low total of €601m highlights the difficulties of the programme.  TwentyFour Asset Management said the ABS programme would take longer to pick up the pace as “the ECB approval process for purchases is still somewhat cumbersome”, due to the complexity of the sector. A number of dealers had loaded up on bonds after the summer in anticipation of being bought out by the ECB, but the lethargy start to the purchase scheme has left banks with little room to shrink their balance sheets before year-end. “The trade has worked for them in covered bonds perfectly as the ECB has cleared out all the inventory, but in ABS they have been thwarted by timing,” the firm said. As a consequence, banks had to let their inventory go back into the market, leaving it awash with supply and keeping spreads at September levels, TwentyFour’s Mark Holman said last week. By comparison, the ECB has bought €20.9bn through the covered bond programme. But this is its third incarnation of that scheme (the first step came in 2009, and was followed in 2011) and so the systems and expertise are already in place. In addition, there has been heavier eligible covered bond supply than ABS since October, leaving the ECB with slim pickings. Covered bond issuers are also able to bring new deals to market much quicker than ABS, possibly in a matter of days versus months.

Some late stage widening for Deutsche Bank’s German CMBS pushed the blended cost of the trade to around three-month Euribor plus 199bp, some 35bp wider than what it would have been had it printed at initial price thoughts. Deco 2014-Bonn, backed by a €680n loan originated by Deutsche Bank to German real estate firm IVG Immobilien, was jointly led by the German Bank and BofA Merrill – the US investment bank provided a swap covering €540m of the loan amount. The leads started at three-month Euribor plus 100bp area for the €330m 4.7-year Triple A note (S&P/Fitch). This was followed by a selection of 4.9-year bonds. The €50m AA+/AA+ Class B was tested at 130bp area, the €77m AA/AA– notes at 160bp area and the €92m A/A– notes at 190bp area. The €89m BBB/BBB– started at 300bp area and the €41.9m BB+/BB– notes at 400bp area. This was wide of where the previous CMBS from the Deco shelf priced in September. The Triple A notes of the Deco 2014-Tulip Dutch CMBS came at 98bp. However that was after the massive rally fuelled by Draghi’s announcement that the ECB would buy ABS. The new German trade was pushed wider still, hitting a market that is looking to close down for the year. The deal took two weeks from announcement to pricing, and is not the only one to do so, with market participants being selective about what they look at. The issued priced up to 50bp wider than price thoughts, at levels of 125bp, 165bp, 190bp, 235bp, 345bp and 450bp. That pushed it wider even than the Italian deal that Deutsche priced in June. Deco 2014-Bonn’s pricing levels hike the cost of the deal to almost 200bp, but there is still sufficient headroom under the Euribor plus 240bp margin of loan the deal securitises for it to work. The blended cost of Tulip, for reference, was 119bp. The Bonn notes are callable in November 2019, after which stage any amount by which three-month Euribor exceeds 7% will be subordinated to interest and principal on the notes, according to the S&P presale. The loan was originated in August 2014 to IVG Immobilien as part of a bigger restructuring. The court of Bonn approved an insolvency plan including a debt-for-equity swap for €1.8bn and a waiver of a subordinated €400m hybrid bond. Some €1.5bn of secured debt was also refinanced through two facilities from Deutsche. The loan has an LTV of 69.1% based on market value for the portfolio of €983.66m.

Banca Popolare dell’Alto Adige sold its retained Class A2 tranche of Italian RMBS Voba.N5 last Thursday, hitting price thoughts of the three-month Euribor plus 70bp area to come at 70bp. Credit Suisse, Deutsche Bank and Natixis were reoffer agents, bringing the issuer to market in a syndication-style process rather than the BWIC format used by other issuers selling retained bonds, such as Banca Etruria. The potential upside of a more public placement is a diversification of the investor base. And a book update showing around €250m of orders for the €199m tranche suggested it was on its way to that. However, that was before the final distribution statistics were released. Around 55% of the tranche was allocated to “central banks/supras”, which in light of the ECB purchase programme hints at a possible participant in the deal in good size. The other 45% went to banks. By country, 55% went to Germany, 28% stayed in Italy and the Benelux region bought 17%. The bonds were sold at a cash price of 101.80. The deal was retained in April with a coupon of 100bp. The previous syndicated reoffering came from Veneto Banca with its Claris ABS 2011 Class A tranche on November 13. The issuer sold the remaining €962m (original value) at a spread of six-month Euribor plus 75bp at a price of 98.5958. The issuer retained the €1.962bn tranche in February 2012 and reoffered €1bn of it in June at a spread of 125bp. The tranche has paid down to around two-thirds of its original value.

A US court last week dealt investors a heavy blow in their battle with Lehman Brothers, the defunct US investment bank they claim breached representations and warranties made on bonds backed by shaky home mortgages. Judge Shelley Chapman declined a motion on Wednesday for Lehman to increase the amount of reserves it must hold to make payments on 255 residential mortgage-backed securities (RMBS) from US$5bn to US$12.1bn. Chapman also said all 209,000 mortgages underpinning the bonds must be reviewed, one by one. Judge Chapman ruled in favour of Lehman and against the trustees on the bonds, who are suing to get what remains of the bankruptcy estate to buy back the infringing loans. Lehman produced two witnesses in court to say the review could be completed in a year – a claim the plaintiffs as well as observers of the case dismissed as absurd. “There is absolutely no way in hell the process will take a year,” one RMBS analyst told IFR. Lehman asserts that all the loans need to be reviewed on a case-by-case basis before any repurchase of the bonds can take place. Lawyers for the trustees had pushed for statistical sampling to estimate the total damages for which Lehman could be held liable. Witnesses called on behalf of the trustees said the loan-by-loan review would take decades. Number crunching The plaintiffs said that they had tried to prepare a statistical sample of 5,000 of the underlying loans to a forensic underwriter to help bolster their case. But they could only get hold of the paperwork for just under 4,600 of them – and even that, they said, took some 18 to 20 months to accomplish. Charles Parekh, director of Duff & Phelps, a valuation and advisory firm, testified that the bankruptcy court, dedicating one week per month to the case, would take 21 years just to review the disputed loans. But Chapman said long timelines for such comprehensive reviews was not unusual. Pointing to the large number of claims in the Bernie Madoff bankruptcy and fraud case, she said: “They get done when they get done.” If the process does drag on for years, it will reduce the pool of cash available to settle claims that R&W were breached, as payments will continue to be made to other unsecured Lehman creditors during this time. Chapman said statistical sampling could not be used for the entire loan pool, but said it might be permissible at some point in the future on a small percentage of loans. The two sides are now working on determining the logistics and mechanics of what happens next, according to one of the attorneys involved in the case. The process includes engaging forensic underwriters, who would then re-underwrite the loans to determine whether they were in breach of R&W. Loans that appear to require a repurchase would then be submitted to a claim negotiator. Loans in dispute between the trustee and Lehman would be argued back in court. Parekh said the process could move faster if the bankruptcy court was willing to hear the disputed claims full-time. “That’s not happening,” Chapman said.

Traders reported an easing of activity as the market eases to year-end. Some noteholders have taken the opportunity to lighten inventory. A selection of bonds were on offer, from senior tranche of core Europe prime RMBS to CMBS and CLOs. There was also some Australian paper out to bid too. More previously retained tranches featured among the supply too, as Banca Etruria returned to offload more RMBS from its Mecenate programme. It listed the €90m Class A2 tranche and €99.4m Class A3 of Mecenate 4. Three weeks ago it sold the €401.3m Mecenate 3A, which covered at a cash price of 99.15 equating to a discount margin of about Euribor plus 70bp. And it sandwiched a €427m tranche of its SME deal Etruria Securitisation between the RMBS placement, with the class covering at 99.76. A note from TwentyFour Asset Management said banks that had loaded up on paper in anticipation of ECB buying were letting their supply flow back into the market ahead of year-end as the ECB was not up to full speed yet with its buying scheme. One trader said that slowness of the programme was not only holding up action in eligible bonds, but also in non-eligible securities as some investors were waiting to switch some of their money into the ineligible bonds to pick up a higher spread. On Friday afternoon some reasonable tickets traded, including a €30m slice of Portuguese RMBS Magellan 4 A, which covered at 89.25. The list also had a €19m slice of Australian RMBS Interstar Millennium 2004-4E A1 covering at 96.50.

Bulgaria’s ministry of finance has approved the terms of the  €1.5bn bridge loan that is expected to be refinanced by a Eurobond early next year, according to an analyst. The loan has a six-month tenor, extendible by a further six months. Bulgaria is paying a spread of 90bp over Libor for the loan. The six-month euro Libor rate was at 0.14786% at the beginning of last week. The sovereign’s longest-dated euro-denominated notes, due 2024, were bid at a 2.673% yield on Thursday morning, according to Tradeweb. Bulgaria is rumoured to have mandated Citigroup, HSBC, Societe Generale and UniCredit for an international bond that is expected in the first quarter of next year, IFR reported in November. These banks are also arranging the loan, Reuters reported in November. On Friday, Standard & Poor’s cut its rating on the sovereign to BB+ from BBB– citing the fact that “liquidity support to weakened domestic banks has pushed up Bulgarian general government debt”. The other two ratings are Baa2 by Moody’s and BBB– by Fitch.