Another mystery around 1MDB

Volkswagen is readying its fourth Japanese auto ABS. Pre-sale reports from Moody’s and S&P show BofA Merrill and Mitsubishi UFJ Morgan Stanley Securities as joint lead managers on Driver Japan Four. The ¥30bn deal has received provisional ratings of Triple A, and has a final maturity in June 2023. The provisional portfolio contains 15,575 contracts, split 85.2% retail and 14.8% corporate. The loans are originated mainly for the purchase of new cars (83.2%), according to S&P. This statistics are similar to the three previous transactions in the series. The new trade is expected to close on February 27, almost a year after its previous transaction from the series. Driver Japan Three was also ¥30bn in size.

The US House of Representatives struck down a financial bill on Wednesday that would have extended a Volcker Rule compliance deadline for affected CLO debt until July 2019. Last April, various regulators including the Federal Reserve, Federal Deposit Insurance Corporation, Securities Exchange Commission, Office of the Comptroller of the Currency, and Commodities Futures Trading Commission announced plans to relax Volcker Rule conformance periods for banks until July 2017 from the initial July 2015 date. “While the CLO-related Volcker legislation did not obtain the two-thirds vote for approval under the Congressional suspension rules, it did receive a substantial majority approval and, given this support, is quite likely to be re-introduced in this current Congress for regular approval,” said J. Paul Forrester, a partner in Mayer Brown’s structured finance practice. Finalised in December 2013, the Volcker Rule forces banks to divest or restructure their CLO debt falling under Volcker’s “ownership interest” umbrella. Such debt typically backs CLOs that own securities other than loans and contains contractual language enabling bondholders to remove CLO managers for cause. Since Volcker’s enactment, the CLO market has adapted to exclude securities and assets other than loans as collateral in new deals. New CLO debt would not trigger Volcker ownership interest rules. The House did last April approve draft legislation sponsored by Representative Andy Barr that permitted management removal rights without running foul of ownership interest. The conformance period under the Barr bill would have ended in July 2017. The bill was not voted on by the Senate in 2014. And with a new Congress in session, House representatives are trying to keep the CLO issue active with a revised bill.

Long debated rules to align the interest of the different players of the European securitisation market should not only be maintained but also strengthened, the European Banking Authority said in late December. Issuing an advice to the European Commission, the EBA said requirements for ABS players to retain part of the risk of their transactions are proportionate, and could be refined in some areas. The rules come as part of the EU capital requirements for banks, and mandate originators and sponsors managing a transaction to retain a 5% exposure to it, either across different tranches or in the junior tranche that takes losses first. However, the responsibility to ensure originators and sponsors’ risk retention is effective falls on investors, who are tasked with examining the assets they are looking to buy through additional due diligence. Now the authority is proposing to complement investor due diligence with a “direct approach”, requiring originators and sponsors to publicly disclose the level and format of their exposure to a transaction using a standardised format. While this could mean additional costs for banks and managers, it would encourage new investment, “reducing compliance costs and improving legal certainty for investors”, the EBA said. The EBA also suggested a stricter definition of the originator of ABS trades, as the current scope of the category could lead banks and other players to comply with the letter but not the spirit of the alignment of interests, it warned. To avoid legal loopholes, “the entity claiming to be the originator should always be of real substance and should always hold some actual economic capital on its assets for a minimum period of time,” the authority said, adding that it is ready to work on a more detailed definition. Another level the EBA said should be improved is the regulatory consistency across jurisdictions, as the alignment of interests among securitisation players is applied differently in different parts of the world, it said. In the US, for example, risk retention rules are softer and only fall on sponsors, who are called to maintain an exposure for a minimum of five years rather than for the whole life of a transaction, as in Europe. And various US deals backed by residential, commercial and consumer loans would be exempt from the rule, if they meet certain criteria on the underlying pool. “The EU regime and the foreign legislation, if not harmonised, may drive a real wedge in the global securitisation markets, therefore reducing the competitiveness of the EU financial industry and its ability to be engaged in the global securitisation market,” the EBA warned.

Paragon Community Housing Group (PAR) will roadshow a sterling social housing deal on Monday and Tuesday via Lloyds Bank and RBS. The issuer has received an A2 rating from Moody’s, which indicates a £250m trade to be sold via Paragon Treasury PLC. The agency says Paragon is a medium-sized housing association with around 9,000 units in Surrey and southwest London. PAR has higher operating margins than its peers, with high demand for both social and non-social housing in its areas of operation, Moody’s says. It has strong liquidity and a high level of unencumbered assets. The issuer had an operating margin of 37% for the full-year 2014, among the highest in this rating bracket, and it has been over 30% since 2011, according to the agency. This is expected to average 34% in 2015–19, but during that time the issuer will take on more debt, which will reduce its housing letting interest cover to 1.2 times in 2015 from 1.9 times in 2014, before recovering to 1.6 times by 2019. PAR is embarking on a restructuring plan over the next three years which will see it replace loans with bonds, and is expected to see an increase in debt to £367m from £244m. Moody’s expects the deal to have a 30-year tenor, and the issuer to retain £75m. The notes will be secured by assets held by Elmbridge Housing Trust and Richmond Upon Thames Churches Housing Trust Limited. These properties are valued at £318m, Moody’s says.

Morgan Stanley printed a UK CMBS before Christmas to take out a five-year loan it granted to Capital & Regional to refinance its UK Mall Fund debt. Zephyrus (ELoC 30) had a £196.666m Class A tranche, backed by part of the loan provided by Morgan Stanley, and a £25m Class B loan provided by AIG Europe. The unrated senior notes pay a fixed rate of 1.86% plus a margin of 145bp until the loan termination date of May 30 2019. After that, it switches to three-month Libor plus 145bp. The B loan’s margin is 239bp. The loan, which was originated in June 2014, was £350m in size, split into a £233.3m fixed piece and a £116.7m floating. The initial margin across both pieces of that loan was 190bp, but is dependent on the LTV calculation. According to the bond prospectus, the loan margin changes to 195bp if the LTV falls to 45% or lower. If it is between 45% and 60% the loan margin becomes 210bp and if the LTV exceeds 60% it rises to 235bp. The loan was granted based on an LTV of 51%, with a covenant of 75%. The assets were deemed to be worth £674.4m by external valuer Savills as of March 25 last year. However, Capital & Regional carried out its own internal valuation at £723m in September. Covenants in the deal aside from the LTV restrictions include a projected interest cover of at least 125%. There is also an ICR/default cash trap mechanism on any payment date when the projected interest cover is below 150% or a default is continuing, and when the LTV is greater than or equal to 65%. Sanctions The representations and warranties also include clauses restricting the borrower, any of its directors or employees or any other persons acting on behalf of it from being a restricted party on a sanctions list. According to the documents, this list includes Cuba, Iran, North Korea, Sudan and Syria. Deutsche Bank, meanwhile, closed the second series of notes from its Winchester Street repackaging programme. The deal, small in size at £11.225m, was backed by second-lien UK residential mortgages originated by Principality Building Societies’s Nemo Finance brand and sold to Mortgage Trading (UK) Limited (MTUK). According to the deal documents, MTUK is a subsidiary of an affiliate of Deutsche Bank. The deal is backed by 606 loans worth £11.538m as of October 31 2014. The loans are 39 months seasoned with an average balance of just £19,040. They have, however, a high average interest rate of 10.35% with an average original weighted average LTV of 73.67%. The first deal in the series was £16.9m, carried out in September 2012. It was backed by a £18.2m pool of 687 loans. These were 26 months seasoned, had an average interest rate of 10.6% and an original weighted average LTV of 66.58%. The Winchester programme is £10bn in size, permitting an array of collateral types including bonds, options, and mortgage portfolios. Principality Building Society’s own RMBS programme is called Friary, from which it has issued two deals. The last trade came in June 2014.

Moody’s is proposing changes to its global approach to rating structured finance securities in light of its proposed changes to its global bank rating methodology, including a new bank counterparty risk (CR) rating. This CR would represent the agency’s opinion on the probability of default on certain senior bank obligations. Moody’s says that in light of the outstanding bank rating RFC, it is not in a position to fully assess and disclose the exact impact of proposed changes to its structured finance methodologies on outstanding SF ratings. In a request for comment, Moody’s proposes to match each type of credit exposure that SF transactions face to bank entities with one of three reference points: (1) senior unsecured debt rating or equivalent, (2) bank deposit rating or (3) CR rating. In its current methodology, Moody’s uses the senior unsecured debt rating as the single reference point. However, by proposing three reference points the agency says its analysis would better account for discriminatory effects of bank resolution on the diverse range of exposures. The new proposal would replace the senior unsecured debt rating with the new CR as a reference point for contractual performance obligations such as servicing, derivatives and liquidity facilities. The proposals would reference operational risk, liquidity facilities, derivatives and commingling risk to the CR only. The counterparty instrument rating would use the CR as well as senior unsecured debt rankings on a case-by-case basis. Bank accounts, meanwhile, would use the bank deposit rating as the reference point. Moody’s is also proposing a review to methodologies governing recovery modelling. The agency seeks market reaction to its rating methodology updates by February 9.

Alba Leasing retained an Italian lease ABS on December 22, structuring a €731.3m trade called Sunny 1 SPV via JP Morgan. The transaction included a €450m Class A tranche with a three-month Euribor plus 150bp coupon and a €281.331m Class B at 200bp. The portfolio contained 3,411 contracts in four asset pools out to 2,205 borrowers. The leases were originated by Creval and ex-Italease entities, but subsequently transferred to Alba Leasing. Auto leases accounted for around 3.22% of the portfolio balance, equipment contracts 13.15%, real estate 83.47% and maritime 0.15%. The leases had an average current balance of €214,396 and 6.15-years seasoning. Less than 5% of the assets have a fixed rate of interest, while the floating part earns an average spread of 170bp. Nearly all the floating loans (99.89%) are referenced to three-month Euribor.

Portugal’s electricity grid operator Energias de Portugal closed its latest electricity tariff deficit securitisation on December 23, structuring a €240.5m senior tranche via StormHarbour Securities. The utility company used the securitisation vehicle Tagus for CEMC Volta Electricity Receivables Notes. This deal is backed by €240.869m of receivables not yet reflected in the tariff deficit calculations from 2012. The energy regulator identified €489.703m of receivables for 2012, of which €248.833m was recovered. The difference will be recouped through electricity tariffs charged to customers in 2017 and 2018. EDP has issued two previous Volta deals, in 2013 and 2014, for €450m and €750m respectively, and four overall. Its other two trades were EnergyOn 1 and 2 in 2009. The new notes had a coupon of 2.89678% and a price of 99.9629. Portugal and Spain’s energy system accumulated significant shortfalls between revenues and the costs of supply energy in recent years, as some renewable and non-mainland producers benefited from government subsidies that allowed them to keep prices lower than the actual costs of production. The Portuguese government reached an agreement with EDP last year for the gradual repayment of the deficit – in the form of receivables in the company’s balance sheet – until around 2020. Securitisation is one way of recouping such shortfalls. In Spain, where the problem is much more severe, the government stepped in to form the FADE programme to issue more than €26bn of guaranteed transactions. The programme was established as €22bn in 2011, but increased by €4bn in 2013.

Tesco’s secured property bonds continued to underperform the unsecured notes last week, as the latter shrugged off the downgrade of the UK’s leading food retailer to Ba1 from Baa3 by Moody’s. The notes began widening on Thursday as Tesco released its trading update, in which it stated it would cut its capital expenditure by £1bn in 2015/2016, close 43 stores and also scrap plans to build 49 new stores. According to Tradeweb, Tesco Property Finance 6 fell during the day from a cash price just short of 96 to around 87.5 before recovering slightly to 90 by the close. The six Tesco Property Finance bonds closed 55bp–65bp wider on Thursday and Delamare Finance 50bp wider, according to a trader. He said they opened unchanged on Friday, although Tradeweb prices showed some further weakening to below 87, on a cash basis. The secured bonds did actually recoup some lost ground, having been up to 100bp wider during the Thursday session. Bids ranged from 425bp to 460bp in the six Tesco Property Finance trades, yielding 6% to 6.6% by the end of the day, but had been as wide as 475bp according to the trader. The Delamare deal was bid at 360bp at the close, having pushed out to 400bp at one point. Tesco unsecured notes, however, shrugged off the Moody’s downgrade and on Friday were actually tighter than where they opened on Thursday. The 2019 euro notes, for instance, were at swaps plus 198bp, having begun Thursday at 201bp (see “Tesco bonds shrug off downgrade to junk”). Rating action on Tesco plc is typically mirrored in the property bonds because their rating strength is based on the credit quality of Tesco as the main tenant. But discrepancies remain between the secured and unsecured bonds even though the ratings are tied. “The property deals have been badly hurt as they are largely owned by less active pension and life insurance funds in buy-and-hold mandates,” said an investor. “Being dinged to high-yield by Moody’s means forced selling for the time being under those mandates.” Fitch has Tesco at BBB– with a negative outlook, and S&P put its BBB– rating on CreditWatch Negative last month. Any downgrade by either agency could end the unsecured notes’ resistance as they would be pushed into the high-yield indices. The last of the Tesco Property Finance deals printed in February 2013. It was not a straight repeat trade to mirror the first five in the series as three of the seven properties in the pool, accounting for 70% of the vacant possession value, were still under construction at the time of pricing. Tesco was also obliged to pay rent on them even if they were not completed by the end of 2013. In other secondary market news, the Dutch RMBS list from Thursday afternoon covered in the range of 100.271 to 101.335. €15m of Arena 2011-I A2 covered at 101.17, €10m of DMPL VI A at 100.815, €10.5m of Dutch MBS XV A2 at 100.271, €11.6m of Saecure 9 A2 at 101.35, €25.6m of Storm 2010-III A2 at 100.715 and €28.7m of Storm 2011-III A2 at 101.335. Another mainly UK non-conforming list traded too, but contacts said that activity was on the whole quite limited over the week.

Sunway Construction has filed the preliminary prospectus for its US$150m–$200m Bursa Malaysia IPO with the Securities Commission. The IPO is scheduled for the second quarter. The IPO will involve up to 401m shares, or 31% of the company’s paid-up capital. The institutional portion will be for 330m shares. Of these, 135.8m will be sold to bumiputra investors and 194.1m to other Malaysian and foreign investors. Around 71.1m will be sold to retail investors. Maybank and RHB are the joint global co-ordinators, and the joint bookrunners with HSBC and Standard Chartered.

Hospital operator Mitra Keluarga plans to start pre-marketing its Indonesia Stock Exchange IPO of US$200m–$300m in late January or early February. Morgan Stanley and UBS are joint global co-ordinators, while CIMB is the co-lead manager. Siloam Hospitals was the last health- related chain to float in Indonesia, raising approximately US$120m through its IPO in August 2013.

HDFC Bank has hired Bank of America Merrill Lynch, Credit Suisse, JP Morgan and Morgan Stanley for its Rs100bn (US$1.5bn) share issuance. The bank is considering a US$1.2bn follow-on offering of American Depositary Receipts in the US and a domestic qualified institutional placement of US$300m, according to a person close to the transaction. However, the source said the structure had yet to be finalised and the bank might opt for a completely domestic offering. HDFC is awaiting the federal cabinet’s approval to launch the issuance. Shares of HDFC Bank closed up 1.12% at Rs975.65 last Friday on the National Stock Exchange.