The RMBS market isn’t shut after all.

When Shellpoint pulled its sophomore offering of residential mortgage backed securities from the market at the end of October, it looked like RMBS issuance might be on hold for the rest of the year.
The pace of issuance had already slowed dramatically from the first half, in large part because the rapid rise in interest rates in June brought mortgage origination to a temporary halt, and it was unattractive to securitize loans with coupons that were no longer current.

Then Shellpoint, which is closely watched because it was founded by mortgage bond pioneer Lewis Ranieri and has big ambitions for its RMBS platform, withdrew its $250 million offering just a week before it was scheduled to close, citing the “substantial price disconnect” between the market for whole loans and new-issue RMBS. 

But on Nov. 7, executives from Redwood Trust, by far the most prolific issuers, expressed confidence that the real estate investment trust’s twelfth deal of 2013, would succeed because it was backed by “higher coupon mortgages [that] will be priced more favorably by investors.” And two weeks later, it did.

Redwood executives, who were speaking on a conference call following the release of third quarter earnings, said that current higher coupons on mortgages, have created a new, much longer, expectation for the duration of securities backed by lower coupon mortgages. “For instance an initial expectation of a five- to seven-year investment period may now be an eight- to 10-year investment period,” the executives said.  “Investors are demanding more yield [lower prices] to compensate for additional duration risk.”

[Citigroup, which was also in the market at the end of October with a $210 million RMBS deal called Series 2013-J1, also sold its entire deal, according to a person familiar with the transaction. The structure offered investors $189.5 million super senior, ‘AAA’ notes and $6.8 million ‘AAA’ –rated, class A-2 tranche. The deal, said the person familiar with the transaction, was not reduced in size, despite rumors to the contrary, and “there was abundant demand for all classes, including the AAAs.”] 

Redwood explained during its call that investors in triple-A rated RMBS will view securities backed by “more recently originated, higher coupon mortgages more favorably from a pricing standpoint.”

“This should help revive RMBS issuance,” said the issuer.

In the near-term, Redwood expects its loan sale distribution to be a combination of direct whole loan sales and securitizations. But the issuer said that “private securitization is our preferred source of loan distribution as it allows us to create attractive, ‘home-cooked’ credit and interest-only investments for our portfolio.” As opposed to whole loan sales, which generate a one-time fee, only.

Several other RMBS issuers provided color on the market during their third quarter earnings conference calls. Two Harbors Investment Corp. stressed that it has a good pipeline of originator partners to support its non-agency RMBS program, with 30 jumbo loan originators in various stages of approval that will potentially contribute scale.

The REIT also noted that big banks have been bidding much more competitively for jumbo residential mortgages.  During the third quarter, it said some banks were offering rates on 30-year, fixed-rate jumbo mortgages more than 25 basis points below GSE conforming rates. Jumbo loans are generally offered 25 basis points higher than conforming rates.

Two Harbors said it did not expect this trend to be long term and that “hopefully the market would revert to opportunities seen earlier in the year.”

As of Sept. 30, 2013, the company held prime jumbo residential mortgage loans with a carrying value of $119.6 million. It also had $16.2 million outstanding under short-term financing arrangements to fund the the collateral.

And PennyMac Mortgage Investment Trust disclosed during its Nov. 8 conference call that it only sold $170 million out of $550.5 million of RMBS bonds structured under its private-label securitization that was completed in the third quarter.

The securitization, PMT Loan Trust 2013-J1  was backed by collateral that was a combination of $393 million in unpaid principal balance of jumbo loans acquired in a bulk purchase transaction earlier in the third quarter and jumbo loans acquired through PMT’s correspondent business throughout the year.

“The subordinate and [interest only] securities are attractive long-term investments for PMT which provide spread income over time and also act as an economic hedge to other assets in PMT’s investment portfolio,” said David Spector, PMT’s president and chief operating officer. He said that the retention of the senior securities was viewed as an “opportunistic investment.”

The mortgage pool backing PMT 2013-J1 is comprised of 691 first-lien mortgage loans with an aggregate principal balance of $550,462,190.54 as of the cut-off date. The loans in the pool are all 30-year fully amortizing fixed-rate mortgages. 

PMT’s chairman and chief executive Stanford Kurland said on the call that the jumbo private label securitization market still offers opportunity that has tremendous promise over the long-term. However over the short-term, Kurland said that the GSE will remain large players in the high balance loan market and any meaningful reduction in conforming loan limits are not likely to occur until late 2014.

“The high level of government involvement makes it difficult for the non-agency market to grow and attract the necessary investor participation required for a healthy market,” said Kurland.

As a result PMT said it “will probably not issue another jumbo securitization until 2014.”

Next up is a $290 million deal that Credit Suisse launched just before the Thanksgiving holiday break; it has been assigned preliminary ratings by Standard & Poor’s.

Hilton’s CMBS Well Timed

Hilton Worldwide priced its much-anticipated $3.5 billion CMBS to strong investor demand.
The J.P. Morgan, Deutsche Bank-led deal is the largest commercial mortgage backed securitization since the downturn and is part of the hotel operator’s broader debt refinancing in preparation for an initial public stock offering.

The deal, Hilton USA Trust 2013-HLT, is backed by first mortgage liens or deed of trust liens on the borrowers’ fee and leasehold interests in 23 full-service and limited-service hotels; all furniture, fixtures, and equipment and personal property owned by the borrowers used to operate the properties; and all reserves, escrows, and deposit accounts maintained by each borrower.

The deal is structured with an $875 million floating-rate component with an initial term of two years and a fully extended maturity of five years, and a $2.625 billion fixed-rate component with a term of five years.

“The transaction has a unique structure in that the two loan components have different terms, and principal prepayments may be distributed to subordinate floating-rate classes despite their lower payment priority relative to more highly rated fixed-rate classes,” Standard & Poor’s stated a presale report.

In the $2.625 billion fixed-rate portion of the deal, the ‘AAA’ rated, class A notes priced at 125 basis points over swaps; the ‘AA-’ rated  class B notes priced at 185 basis points over swaps; the ‘A-’ rated class C notes priced at 220 basis points over swaps;  the ‘BBB-’ rated class D notes priced at 290 basis points over swaps; and the ‘BB’-rated class E notes priced at 390 basis points over swaps.

The deal’s $875 million of floating-rate tranches also attracted solid interest, “given investor expectations of rising rates over the next year,” according to analysis published by  Trepp. 

Hilton filed an initial prospectus for the deal in September, when the CMBS market was dogged by concerns about the Fed tapering and the debt ceiling. Manus Clancy, a senior managing director at Trepp, said waiting to price the deal until November paid off, as “both are behind us now,” and spreads have since narrowed.
DB Pricing Shows Appetite for REO-to-Rent

Deutsche Bank completed the first-ever securitization of rental income from single-family homes. The $479 million Invitation Homes 2013-SFR1 priced at 5 basis points to 35 basis points tighter than initial guidance, according to a person familiar with the transaction.

Invitation Homes, a subsidiary of Blackstone, is the deal’s sponsor; it has built the nation’s largest portfolio of single- family rental properties, spending $7.5 billion to acquire 40,000 houses.

The inaugural securitization is backed by a single floating-rate loan backed by mortgages on the 3,207 rental properties. It has six sequential floating rate tranches,  rated by Moody’s Investors Service, Kroll Bond Ratings and Morningstar. 

The ‘Aaa’/‘AAA’/‘AAA’ , class A notes structured with a weighted average life of 4.9-years priced at 115 basis points over one-month Libor. That was around 5 basis points tighter than initial price talk.

The ‘Aa2’/’AA’/ ‘AA’, class B notes structured with a weighted average life of 5.1-years, priced at 135 basis points over the one month Libor, at least 15 basis points tighter than price talk.

The ‘A2’/‘A’/‘A’, class C notes, structured with a weighted average life of 5.1-years priced at 185 basis points over Libor, which was also 15 basis points tighter than price talk.

Lower down the credit curve, the class D, E and F notes all priced around 35 basis points tighter than initial price talk. The ‘Baa2’/‘BBB’/‘BBB+’, class D note structured with a weighted average life of 5.1-years priced at 215 basis points over  Libor.

The ‘BBB-‘/‘BBB-’, class E notes structured with a weighted average life of 5.1-years priced at 265 basis points over Libor.

KBRA assigned a ‘BB’ rating to the class F notes, which were structured with a weighted average life of 5.1-years and priced at 365 basis points over Libor.

Student Lender SoFi Plans First Securitization

In a sign of the interest among U.S. professionals in refinancing their federal student loan debt, start-up lender Social Finance is planning its first loan securitization.

The approximately $170 million deal is expected to be distributed in early December. It will include about $150 million in senior notes and $20 million in equity, according to the San Francisco-based company.

SoFi, as the firm is known, is a two-year-old non-bank lender whose borrowers are either enrolled in, or have graduated, from business, law, medical and other professional schools.

Under the federal student loan program, such students often have to borrow at relatively high interest rates, so refinancing into a private student loan can be an attractive option. Startups, including SoFi and competitor CommonBond, Inc., which launched in 2012, have rushed in recent years to fill this niche.

SoFi is touting its upcoming securitization as the first rated securitization by a peer-to-peer lender. The company calls itself a peer-to-peer lender because some of its funding has come from alumni of the universities its borrowers attend.

But like a number of other firms that use the peer-to-peer moniker, SoFi has also raised money from large investors, including Morgan Stanley, the Bancorp Bank, and East West Bank.

The securitization deal is being structured by Barclays and distributed by Morgan Stanley, according to SoFi.
SoFi expects the securitization to receive a single-A rating from the ratings agency DBRS. A DBRS spokesman said the ratings agency does not discuss potential deals.

Since SoFi was launched, the company has lent out roughly $200 million to 2,500 borrowers, according to its website.

PineBridge Returns to  European CLO Market

PineBridge Investments is returning to Europe’s collateralized loan obligation market for the first time since the financial crisis. Its latest deal, Euro-Galaxy III CLO, will issue €335 million of variable funding notes and floating-rate notes, according to a presale report published by Standard & Poor’s.  Barclays Bank is the arranger.

The deal has two AAA-rated, super senior tranches with credit enhancement of 50.88% that are being marketed at euribor plus 130 basis points. One is a €67 million a variable rate note class, the other a €94 million floating-rate note class.

A $40 million, AAA-rated senior class has credit enhancement of 38.67% and is being marketed at three-month euribor plus 170 basis points.

As is common with recently issued European CLOs, the portfolio manager has the flexibility to purchase non-euro-denominated obligations, subject to an asset swap. The maximum bucket for unhedged obligations is 2.5%, subject to certain conditions, according to S&P. The manager also has some flexibility to put money to work in loans with loose financial maintenance covenants.

Less common is the ramp-up period in which the collateral manager can invest the proceeds of the issuance. As of Nov. 18, PineBridge had identified 62.89% of the indicative portfolio. However, S&P expects only 60.0% of the portfolio to be acquired at closing. The manager will have another six months to meet the target collateral balance of €327.75 million.

S&P also notes that, under the transaction documents, the issuer may repay the total variable funding drawings outstanding by issuing further class A-1 notes, subject to certain conditions.

PineBridge Investments Europe will hold on to subordinated notes equivalent to 5% of the capital structure in order to meet regulatory requirements to align its interests with those of investors.

PineBridge has brought two prior deals to market under the Euro-Galaxy moniker; Euro-Galaxy CLO II was issued in July 2007 and Euro-Galaxy CLO in September 2006.

Tobacco Bonds Backed by Law Firm Fees

Here’s another post-crisis first: a tobacco settlement securitization that is backed by fees paid to law firms, rather than states that were parties to the 1998 Master Settlement Agreement with Big Tobacco.
Moody’s Investors Service assigned a provisional rating of ‘A2’ to the class A notes to be issued by Tobacco Settlement Fee Finance 2013-1. They have a weighted average life of 5.77 years, and were priced today at par to yield 4%, according to a person familiar with the transaction.

Barclays Capital is lead underwriter

The notes are secured by participation interests in a static pool of future fee award payment streams from four tobacco companies: Philip Morris USA, R.J. Reynolds Tobacco Co., Lorillard Tobacco Co. and U.S. Smokeless Tobacco Co. The fee awards that serve as collateral exist as the result of multiple law firms’ service as outside counsel to the states in the Master Settlement Agreement and to Florida and Mississippi in a separate settlement agreement, according to Moody’s.

Moody’s presale report does not identify these law firms; it lists Galway III as the deal’s sponsor.

Under the fee pay agreements, the law firms elect one of two options for payment on a state-by-state basis. Under the first option, the law firms negotiate with the tobacco companies for a “liquidated” fee award capped at a total of $1.25 billion nationwide, and under the second option, the law firms go through an arbitration process to determine the amount of the fee awards. This happens once a quarter and the aggregate quarterly payments are capped at $125 million.

Apparently at least some of the participating law firms chose option No. 2.

The tobacco companies to continue making quarterly payments until the fee awards are repaid in full, according to Moody’s. The aggregate original balance of the fee awards was $14.3 billion. At the end of third-quarter 2013, the tobacco companies had repaid all but $5.5 billion.

According to a person familiar with the transaction, this is the first such deal since 2005. There has been approximately $900 million of issuance in this asset class since 2001.

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