Summary of Crescent No-Action Letter

On July 17, 2015, the SEC published a no-action letter addressing the effect on the sponsor's credit risk retention requirement of the refinancing of one or more tranches of existing CLO debt, an issue which has been of considerable interest to the CLO sector as it directly affects the utility of the refinancing option in transactions done before the adoption of the credit risk retention rules.  In response to a request submitted by Crescent Capital Group LP, the SEC indicated that under the terms and conditions described in the request, such a refinancing of collateralized loan obligations priced prior to the December 24, 2014 publication of the final credit risk retention rules would not trigger the application of the credit risk retention requirement to the CLO.  In order to be entitled to such treatment, among other things, (i) the refinancing must be completed within four years of the original closing date, (ii) the interest rate of the refinancing notes must be lower than the rate of the refinanced notes, (iii) other than the reduction in rates, the capital structure must remain unchanged and the principal amount, priority of payment, voting and consent rights and stated maturity of the refinancing notes must be the same as the refinanced notes, (iv) the investment criteria applicable to the CLO must remain unchanged, (v) the proceeds from the refinancing must be applied to repay the refinanced notes (and not applied as a means to acquire other assets), (vi) no additional subordinate interests may be issued in connection with the refinancing nor may the identities of the subordinated interest holders be changed as a result of the refinancing and (vii) while refinancing of different classes of notes may occur on different dates, each class may be refinanced only once.  In addition, the offering document for the refinancing notes must prominently state, among other things, that the sponsor is not retaining a risk retention interest in connection with the refinancing.  The no-action request and the SEC's response are available through this link.

On July 22, Moody's republished its credit rating methodology report on EMEA CMBS transactions.  Report.

On July 20, DBRS published updated Canadian surveillance methodology for CDOs of large corporate credit.  Report.

On July 16, DBRS published updated rating methodology for North American commercial mortgage servicer evaluations.  Report.

The Restructuring Mid-Summer Review: Europe and the Emerging Markets

For those focused on the debt restructuring market, the Greek sovereign crisis (covered extensively in our recent updates¹) has drowned out news of other debt restructuring matters this year. Our Alert below addresses key trends in Europe and the Emerging Markets this year which may have gone unnoticed given the understandable emphasis on Greece.

Opportunities for Distressed Debt Funds to buy attractively priced distressed corporate assets and work them out have been few and far between in recent terms. Prices of distressed assets have been high, and often par lenders have decided to extend and amend loans (rather than engage in loan sales to funds or effect fundamental work outs of problem loans). Risk has not been fairly reflected in the price of either primary or secondary market debt. The risk/reward dynamic has been skewed in favour of high risk and low yields; not an attractive combination. The main driver of the activities of Distressed Debt Funds is the default rate. In the 2015 Deutsche Bank Annual Default Survey, Deutsche Bank commented, 'We can't overstate how low defaults are…the 2010-2014 cohort [of High Yield Bonds] is the lowest 5 year period for HY defaults in modern history'. Hence, the low level of distressed debt activity.

Poor European growth rates, the difficult backdrop of the Greek debt restructuring talks, and major geopolitical risk, have yielded surprisingly few loan defaults and insolvencies in recent times. In Europe, restructuring activity has tended to be concentrated more in Southern than Northern Europe.

Read more.

Judge Scheindlin Denies Motion to Dismiss NCUA Claims

On July 20, 2015, Judge Scheindlin of United States District Court for the Southern District of New York denied HSBC Bank USA, NA's ("HSBC") motion to dismiss claims brought by the National Credit Union Administration ("NCUA") related to the administration of mortgage-backed securities worth $2 billion.  NCUA alleges that HSBC failed to perform its duties as the indentured trustee for 37 RMBS trusts.  Judge Scheindlin rejected HSBC's argument that NCUA lacked standing to bring the suit because most of the debt had been resecuritized, and held that NCUA has standing to pursue the claims against HSBC derivatively because the current trustee of the resecuritized loans tacitly consented to the action by remaining neutral.  Opinion and Order.

JPMorgan Settles RMBS Class Action

On July 17, 2015, lead plaintiffs filed a stipulation and agreement settling a 2009 class action lawsuit against JPMorgan Chase & Co. ("JPMorgan") alleging that the bank had misrepresented the quality of loans underlying $10 billion worth of mortgage-backed securities it sold.  Without admitting any wrongdoing JPMorgan agreed to pay plaintiffs $388 million, subject to court approval.  Stipulation and Agreement of Settlement.

Morgan Stanley and Natixis Win Dismissal of RMBS Claims

On July 14, 2015, Justice Friedman of the New York State Supreme Court for the County of New York granted in part Morgan Stanley & Co.'s motion to dismiss fraud claims brought by HSH Nordbank AG ("HSH") and Carrera Capital Finance Limited (together, "Plaintiffs") in connection with 21 RMBS securitizations, and granted in full a separate motion to dismiss filed by Natixis Real Estate Capital LLC ("Natixis") against the same Plaintiffs.

Justice Friedman ruled that all claims against Natixis were barred by the statute of limitations for fraud in New York, finding that Plaintiffs could have discovered the alleged fraud at least two years prior to filing.  Justice Friedman also dismissed certain of HSH's fraud claims because it did not sufficiently allege that the certificates' original purchaser had intended to assign the claims to HSH.  The court will permit claims arising from certificates purchased directly by Plaintiffs to proceed.  Order.

EBA Publishes RWA Assessment as the Next Step in Improving Consistency of Internal Model Outcomes

The European Banking Authority (EBA) has published two reports on the consistency of Risk-Weighted Assets (RWAs) across large EU institutions for large corporate, sovereign and institutions' Internal Ratings-Based (IRB) portfolios (collectively referred to as "low default portfolios", or LDP). The LDP analysis explains how much of the variability in RWAs is led by difference in riskiness (namely, idiosyncratic portfolio features), and tries to identify residual drivers that are linked to banks' practices. The CCR benchmarking report considers the calculation of counterparty credit risk (CCR) exposures under the Internal Model Method (IMM) and the credit value adjustments (CVA) according to the advanced approach (ACVA).

The reports summarize the findings obtained from two benchmarking exercises aimed at improving the comparability of EU banks' RWAs. A key finding is that around 75% of the observed difference in global charge (GC) levels across institutions could be explained by the proportion of defaulted exposures in the portfolio and the portfolio mix. As for the CCR and ACVA analyses, the report shows that there is significant variability across banks in the calculation of CCR and ACVA, especially for equity and foreign exchange OTC derivatives.

ESMA Publishes 17th Extract from EECS' Enforcement Decisions

The European Securities and Markets Authority (ESMA) has published extracts from the European Enforcers Coordination Sessions confidential database of enforcement decisions on financial statements. European Enforcers monitor and review International Financial Reporting Standards (IFRS) statements and consider whether they comply with IFRS and other applicable reporting requirements, including relevant national law. The decisions included in this publication were taken by national enforcers in the period from February 2013 to November 2014

The aim of the publication is to provide issuers and users of financial statements with relevant information on the appropriate application of the IFRS. It will inform market participants about which accounting treatments European national enforcers may consider as complying with IFRS – namely, whether treatments are considered as being within the accepted range of those permitted by IFRS. The publication of the decisions, together with the reasoning behind them, will contribute to a consistent application of IFRS in the EEA.  Release.

ESMA's New Q and A Responses on the Application of AIFMD and Consultation on New Guidelines

ESMA has published updated questions and answers on the application of the Alternative Investment Fund Managers Directive (AIFMD), which includes updated and new questions and answers on reporting to national authorities and the calculation of the total value of assets under management (AUM). In the same week, it has launched a consultation on proposed guidelines on sound remuneration policies under AIFMD and the UCITS V Directive (the latest changes to the Undertakings for Collective Investments in Transferable Securities Directive).

UCITS V includes rules that UCITS must comply with when establishing and applying a remuneration policy for certain staff categories and the proposed UCITS Remuneration Guidelines further clarify the Directive's provisions. The proposed Guidelines aim to ensure a convergent application of the remuneration provisions and will provide guidance on issues such as proportionality, governance of remunerations, requirements on risk alignment and disclosure. The consultation paper also proposes a revision of the AIFMD Remuneration Guidelines by clarifying that, in a group context, non-AIFM sectoral prudential supervisors of group entities may deem certain staff of an AIFM in that group to be identified staff for the purpose of their sectoral remuneration rules.

ESMA will consider the feedback received to the consultation and is aiming to finalize and publish the UCITS Remuneration Guidelines and a final report by Q1 2016, ahead of the transposition deadline for the UCITS V Directive (March 18, 2016). It is expected that the final report will also include the revision of the AFIMD Remuneration Guidelines.