Credit Research

27 October 2015

Securitization Market Watch

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Market Comment: Notwithstanding the spread tightening in broader credit markets, which was triggered by the ECB press conference last week and, to a lesser extent, by further monetary easing in China, ABS secondary spreads were little changed amid low volatility. The ensuing bullish sentiment in equities and synthetic credits did not translate into full-blown ABS spread tightening, however, particularly in riskier ABS sectors, which have not regained much lost ground. Meanwhile, investors suffering from the supply squeeze in paper are starting to come to grips with low primary-market activity in benchmark paper. The pipeline looks more promising thanks to a set of issuers making their comeback or mandating their inaugural issues.

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Primary Market & Pipeline: A Finnish Auto ABS was priced last week, while a UK Prime RMBS, a Swedish consumer ABS and two leveraged-loan CLOs also joined the pipeline.

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Brief Comments: – ECB bank lending survey is positive for ABS – Foreclosure values in Spain are still low – Performance of Italian RMBS remains stable – UK non-confirming RMBS change for the better – A more favorable CLO formation backdrop

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Deal-Specific Information: Fornax Eclipse (noteholder meeting), Windermere X (standstill extension), Mesdag Delta (update), Fairhold Securitisation (update), Deco 15 PE 6 (standstill extension), Deco 10 PE 4 (standstill extension), Deco 7 PE 2 (property sales), Triton (EloC 26) (prepayment), Deco 14 PE 5 (standstill extension), Equinox (Eclipse 2006-1) (update).

UniCredit Research

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Rating Actions: Eurocredit CDO VI (upgrades), Eurocredit VIII (upgrade), Fastnet 3 (upgrade), Fastnet 6 (upgrade), Fastnet 10 (upgrade), Santander Hipotecario (upgrades), BBVA RMBS 1 (upgrades), Valencia Hipotecario 2 (upgrades), GC Pastor Hipotecario 5 (downgrade), Scandinavian Consumer Loans III (upgrades), Voba No. 4 (upgrade), Foncaixa FTGenCat 3 (upgrades), Santander Empresas 2 (upgrade), Santander Empresas 3 (upgrade), Santander Hipotecario 2 (upgrades), Sestante (downgrade), Talisman-6 (downgrades and upgrade), Consumo Bancaja 1 (upgrade), Magellan Mortgages No.2 (upgrades), Invesco Mezzano (upgrades).

Contents Market Comment ____________________________ 2 Brief Comments _____________________________ 3 Deal-Specific Information ______________________ 6 Primary Market ______________________________ 8 Pipeline ___________________________________ 10 Last Week's Rating Changes __________________ 14 Rating Drift ________________________________ 16 Primary Market Comparison ___________________ 17 Market Statistics ____________________________ 18 Delinquency Data ___________________________ 22 Market Spreads ____________________________ 23

MONTHLY ISSUANCE VOLUMES 20 20

21 15 13 11

10

14

14

8 7

11

19

Jan

17 14

12 10

9

9 8

Feb

Mar

Apr

2014 total EUR bn

20 16

5

0

25

23

22

May 2015

Jun

Jul

10

9

Aug Sep

15

6

5

Oct

Nov Dec

2014 Number of deals (RS)

Manuel Trojovsky (UniCredit Bank) Structured Credit Analyst [email protected] +49 89 378-14145

0

2015

Source: Bloomberg, Concept ABS, UniCredit Research

page 1

Authors Holger Kapitza (UniCredit Bank) Structured Credit Analyst [email protected] +49 89 378-28745

Bloomberg UCGR, ABSX Internet www.research.unicredit.eu

See last pages for disclaimer.

27 October 2015

Credit Research

Securitization Market Watch

Newcomers break the silence Notwithstanding the spread tightening in broader credit markets, which was triggered by the ECB press conference last week and, to a lesser extent, by further monetary easing in China, ABS secondary spreads were little changed amid low volatility. The ensuing bullish sentiment in equities and synthetic credits did not translate into full-blown ABS spread tightening, however, particularly in riskier ABS sectors, which have not regained much lost ground. Meanwhile, investors suffering from the supply squeeze in paper are starting to come to grips with low primary-market activity in benchmark paper. The pipeline looks more promising thanks to a set of issuers making their comeback or mandating their inaugural issues. On Thursday, Mario Draghi was unequivocal about potential increases to the expanded asset purchase program, which comprises public sector bonds (PSPPP) securitizations (ABSPP) and covered bonds (CBPP3) and currently amounts to EUR 60bn per month. Unsurprisingly, the ECB left all of its policy rates unchanged, but Mr. Draghi said that “the ECB stands ready to adjust the design of QE," while “the degree of monetary accommodation will need to be re-examined at our December meeting". The comments triggered a notable rally, particularly in equities and synthetic credits, while the response in cash bonds was slightly less euphoric. Notwithstanding the spread compression in broader credit markets, the tightening move in ABS was even less pronounced, with sentiment broadly unchanged as investors continue to deal with subdued trading activity and the lackluster primary market.

UniCredit Research

Secondary market activity was largely BWIC-driven (while the ECB’s OWICs took a breather) as real money investors begin to exercise caution regarding the performance of ABS as the year draws to an end. Our traders reported higher demand in senior, high-quality sectors such as Dutch RMBS, but also for short-dated Italian notes, while peripheral paper generally lagged behind in terms of trading. Despite the current investor reticence, which may be warranted in some cases where idiosyncratic risk is present, we believe that senior peripheral and ineligible assets remain cheap, particularly given the prospect of more ECB stimulus, which would accelerate the spread squeeze in the high-quality fixed-income universe. PROPORTION OF VW GROUP CARS IN AUTO ABS Among the non-captive Auto ABS, residual value transactions have the highest current exposure to VW brands Loans or leases

Residual value deals

80 MOTOR 20141X

70

Current spread (bp)

Market Comment

100%

60

RNBAG 2 BILK 4

40

20

100%

DRVON 13

BUMP 6

50

30

VCL 21

HIGHW 2015-1

EDEL 2013-1 BILK 5

SCGA 2013-1

BILK 6

RNBAG 3

SCGA 2014-1 SCGA 2013-2 0.6

0.8

1.0

1.2 1.4 Current WAL

1.6

1.8

2.0

* bubble size represents share of VW group exposure excluding Porsche Source: European Datawarehouse, Markit, UniCredit Research

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As for ABS, valuations remain particularly attractive amid the ongoing range-bound spread environment. Additionally, peripheral assets also look more compelling from a riskreward perspective due to a more favorable fundamental outlook and a stabilization in collateral performance metrics. In the absence of primary market purchases, holdings under the ABSPP grew by only EUR 200mn last week to a net settled amount of EUR 14.66bn after 47 weeks. In the primary market, Santander Consumer priced the senior tranche of KIMI 4, its Finnish Auto ABS. The spread for Class A (EUR 338.7mn, 1.25Y WAL) was set at 1mE+45bp, the tight end of guidance. The deal priced at a pickup of 22bp against Mercedes-Benz Bank’s SILVA 6. Importantly, the non-captive’s pool does not include any VW loans, whereas its predecessor transaction KIMI 3 was made up of a broader portfolio comprising more than 25 brands (including 8.5% Volkswagen). Volkswagen is roadshowing its German Auto ABS, VCL 22, which is rated by all four external credit assessment institutions (ECAIs, that is DBRS, Fitch, Moody’s and S&P), while Creditreform also rates the deal. The deal has a preliminary pool size of EUR 750mn comprising 71,875 leasing contracts, of which 16,933 (20.8% of the underlying loans) are for vehicles with the EA 189 EU5 diesel type engine. Overall the engine in question is subject to a recall, which affects at least about 2.4mn vehicles registered in Germany. TSB Bank announced its debut UK Prime RMBS transaction, Duncan Funding 2015-1, with the roadshow starting this week. The bank was acquired by Banco Sabadell this year. Importantly, the transaction will offer both EUR and sterling senior tranches. The deal is this year’s fourth UK Prime RMBS to include a EUR tranche (after SMI 2015-1X 2A1, LAN 2015-1X 2A and PERMM

See last pages for disclaimer.

27 October 2015

Credit Research

Securitization Market Watch

In leveraged loan CLOs, two new transactions joined the pipeline. First, Guggenheim Partners Europe announced Cork Street CLO, its first European CLO 2.0, which will offer only the A-1 (AAA) and the A-2 (AA) to investors, while the mezzanine and the equity piece will not be publicly sold. Second, CELF Advisors announced its eighth CLO 2.0 transaction and its third deal in 2015. The EUR 416.1mn CGMS Euro CLO 2015-3 by Carlyle’s CLO manager includes AAA down to single B notes and will be EU risk-retention compliant via the sponsor route.

UniCredit Research

Brief Comments ■

ECB bank lending survey is positive for ABS. The ECB has published its euro area Bank Lending Survey (BLS) for 3Q15. The main takeaways are an improvement in credit supply and demand conditions for corporates. The net easing in credit standards that are applied to firms continued to be supported by better economic and industry prospects – which had a positive impact on banks’ risk perception – and increased pressure from competition among banks. The overall picture appeared to be a bit more mixed for loans to households, and especially for mortgages, for which eurozone banks reported a deterioration in the credit supply conditions applied by banks in 3Q15. The current survey questionnaire also included a section aimed at gauging the direct and indirect effects of the ECB’s expanded asset purchase program (APP). Importantly, eurozone banks reported an improvement in their market financing conditions as a result of the APP (net percentage of 30%, from 47% in the previous survey), in particular for their financing via covered bonds and equity issuance. For the banks with ABS business, i.e. about 65% of the euro area banks in the BLS sample, this financing source also improved. Banks expect the improvement in their market financing conditions related to the APP to also continue for the next six months (in net terms 24%). The eurozone lenders indicated that, over the past six months, they have used the additional liquidity from their sales of marketable assets related to the APP in particular for granting loans and purchasing assets (see chart below). Specifically, 39% of euro area banks indicated that they have used the funds to grant loans to enterprises (after 32% in the previous survey).

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IMPACT OF THE ECB'S EXPANDED APP ON BANKS How eurozone banks use the additional liquidity from the expanded APP past six months

35

next six months

30

% of respondents

2015-1X A3) alongside three deals with USD notes, as UK issuers continue to make use of the cheaper EUR funding while also diversifying their investor base. So far, EUR 1.53bn of UK Prime has been issued in EURdenominated paper (EUR 1.8bn when including UK BTL deals). Despite the momentum in UK RMBS, with the two well-established master trust issuers returning to the market, UK Prime RMBS primary volumes lag those of 2014 YTD, with issuance at an equivalent of EUR 7.6bn from eight deals so far compared with EUR 9.1bn from eleven transactions at the same point last year. The momentum in placed UK RMBS volumes has been largely driven by the riskier BTL (+157% YTD at EUR 2.2bn) and non-conforming (+197% YTD at EUR 3.4bn) segments. In Belgian RMBS, initial pricing thoughts for Penates 5 (PENAT 5), Belfius Bank’s (formerly Dexia Bank Belgium) first post-crisis RMBS to be publicly offered, were released. IPTs for the fast-pay A1 class and the slow-pay A2 classes were released at 3mE+30-35bp and +50bp, respectively – which would correspond to just a moderate 2-8bp pickup over the recent Dutch HYPEN 4. Elsewhere, Nordax is marketing a SEK 1.765bn (EUR 187.9mn) Swedish consumer ABS, Scandinavian Consumer Loan V. The structure is limited to SEK-denominated tranches and includes a two-year revolving period.

25 20 15 10 5 0

refinancing

granting loans

purchasing refinancing assets

Increased liquidity from sales of marketable assets

granting loans

purchasing assets

increased liquidity from increased customers' deposits

Source: ECB, UniCredit Research

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Foreclosure values in Spain are still low. Although recent data suggest a moderate increase in Spanish house prices, in line with the moderate growth in employment, wages and supported by low interest rates, distressed property values lag behind. The values of distressed residential properties sold after being repossessed are two-thirds lower than the initial property valuation, according to Fitch data for 1H15. The agency argues that this will not change in the medium term since a large stock of residential units remains vacant and unsellable due to their poor quality and location. In addition, aggressive foreclosure strategies by creditors to remove problematic real estate assets from their balance sheet negatively affect recoveries, which, in turn, weighs on loss severities. A regional law in Catalonia, which will charge a tax on properties that

See last pages for disclaimer.

27 October 2015

Credit Research

Securitization Market Watch

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LOSS SEVERITY ON REPOSSESSIONS

90-plus-day delinquency in % of CB

Alba Mortgages RMAC

Eurosail MPS RMS

Great Hall Newgate SPS

Leek Other pre 2012 Index

MARS Preferred

45 40 35 30 25 20 15 10 5 0

Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15

Feb-15

Aug-15

Feb-14

Aug-14

Original LTV range

0

Feb-13

>100

Aug-13

80-100

Feb-12

60-80

1

Aug-12