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A round-up of this week's structured credit news
Upside for FFELP student loan ABS
Structured finance analysts at JPMorgan note that FFELP student loan ABS has the most potential for upside, given the proposed stimulus bill currently going through Congress. The bill includes an amendment to the Higher Education Act that aims to fix the CP/Libor basis by changing the FFELP subsidy index to three-month Libor minus 13bp instead of 90-day CP. The Department of Education has also completed work on a proposed ABCP conduit facility for FFELP loans that will provide back-stop liquidity to the ABCP, buying loans from the conduit only in the event that the market cannot roll.
"There remains over 200bp pick-up in FFELP student loan ABS over comparable agency paper; an exceptional relative value," the analysts argue. "In addition, the FFELP lending industry has benefited from the fastest and most decisive government actions, in comparison to banks and automakers."
FFELP student loan ABS tightened by 50bp across the structure with three-, five- and 10-year paper at 250bp, 260bp and 275bp respectively. The term curve has flattened since the beginning of the year: the three- versus 10-year spread differential is now 25bp compared to 75bp.
UK Asset Purchase Facility outlined
Further details of the UK government's Asset Purchase Facility were outlined last week by Chancellor Alistair Darling and Bank of England governor Mervyn King. The UK government is to direct the Bank of England to purchase up to £50bn of high quality private sector assets, which will initially include paper issued under the Credit Guarantee Scheme, corporate bonds and commercial paper. At the same time, the BoE will consult with market participants about plans to purchase syndicated loans and ABS created in viable securitisation structures.
Details of the mechanisms through which the Bank of England plans to conduct its initial asset purchases are expected to be announced this week. King says he expects the amount of assets purchased to increase gradually in the early stages of the facility in order to assess the impact of those purchases on market liquidity. A new company is being established to undertake the transactions, which King says will provide a clear, transparent mechanism for monitoring the operations conducted under the facility.
Basel 2 changes to impact senior CLO capital efficiency ...
Enhancements to the Basel II framework, which include a move to increase the risk weights that banks would use when calculating capital allocations against holdings that qualify as resecuritisations (see SCI issue 120), will have only a moderate effect on the overall capital efficiency of senior CLO tranches as far as banks are concerned, according to structured credit strategists at Barclays Capital.
"We believe that the proposed increases in risk weights, if implemented in their current form, will have only a moderate effect on the overall capital efficiency of senior CLO tranches as far as banks are concerned," say the BarCap strategists.
CLO tranches that do not hold securitised assets will not qualify as resecuritisations, so the proposed changes to risk weights would have no effect.
However, many CLO transactions would qualify as resecuritisations because of their holdings of other securitisations (e.g. tranches of other CLOs). BarCap estimates that about 44% of such CLO trades are currently outstanding.
"For these CLO transactions, the effect of the changes in risk weights will depend on a number of different factors, including the current regulatory framework that banks are operating under; the rating of the tranche; and whether or not the exposure is being held in a negative basis book and insured through another counterparty."
... while CLO weakness may increase refinancing risk
S&P has released a research note explaining that extended weakness in the CLO market may exacerbate refinancing risk for speculative-grade US corporations. The agency argues that a considerable portion of corporate borrowing, which in recent years had been handled outside the traditional banking system through the 'originate and distribute' business model employed by many banks, is now reverting back to banks' balance sheets with unprecedented speed. As these financing sources have become considerably scarce, many already financially-challenged US corporations are now facing the increasingly daunting prospect of refinancing their borrowings.
"It's entirely possible that corporations could refinance their future borrowings without using structured finance techniques," says the rating agency. "Nevertheless, it's neither feasible (without significant governmental intervention) nor desirable for many market participants to abruptly wind down their entire amount of outstanding structured finance debt instruments. Because a significant amount of these debt instruments have relatively long maturities, we believe it is useful for us to continue to examine these existing structures (and structured financing techniques in general) and their potential impact on future corporate borrowings."
Benchmark to measure impact of TALF?
The recent closing of the US$1.3bn HAROT (Honda Auto Recievables Owner Trust) 2009-1 provides a useful benchmark to measure the impact of TALF on the ABS market, according to structured finance analysts at Wachovia Capital Markets. The difference in spread between TALF ineligible and eligible deals will give a measure of the subsidy being provided, they say.
It is anticipated that pricing spreads on new TALF ABS deals will be tighter than they would be without TALF funding. Investors who can take advantage of the leverage available from TALF would benefit from the subsidy disproportionately compared to cash investors because they may be able to accept lower credit spreads, while boosting returns through leverage.
"We believe that TALF will boost new issue activity, but it will likely come at the expense of traditional cash ABS investors who will find it more expensive to provide liquidity to issuers," the analysts note.
HAROT 09-1's two-year triple-As priced at 375bp over swaps - 50bp more than generic two-year triple-A prime auto spreads, which is unusual for such a benchmark issue. The deal isn't TALF eligible because the collateral is too seasoned.
Lyondell CDS/LCDS auction prices determined
Creditex and Markit, in partnership with credit derivative dealers, have announced the results of the credit event auctions conducted to facilitate settlement of credit derivative trades referencing three subsidiaries of LyondellBasell Industries: Lyondell Chemical Company, Equistar Chemicals and Millennium America. The final prices were determined as follows: 15.5% for Lyondell Chemical CDS; 20.75% for Lyondell Chemical LCDS; 27.5% for Equistar Chemicals CDS; and 7.125% for Millennium America CDS.
Monoline hit by distressed exchange criteria change
S&P has lowered its issuer credit and financial strength ratings on Syncora Guarantee to double-C from single-B. At the same time, these ratings were removed from credit watch with developing implications. The outlook is negative.
The downgrade is the result of S&P's recent update to its distressed exchange criteria, including the commutation of CDS by bond insurers. Once a distressed offer or commutation is announced or otherwise anticipated, the agency will lower the issuer credit and financial strength ratings to reflect the risk of non-payment under a financial guarantee policy.
S&P says it generally lowers the ratings to double-C and assigns a negative outlook, reflecting the possible 'SD' issuer credit rating upon completion of the commutation. After the commutation is complete, the agency could raise the rating if management presents a reasonably viable strategy to strengthen the company's financial positions and protect policyholders.
Syncora has entered into an agreement with 17 bank counterparties to commute, terminate, amend or restructure existing CDS and financial guarantee contracts. S&P has taken into consideration the company's lack of meaningful advancement on the restructuring and slow progress in its negotiations with counterparties of its ABS CDO exposure.
For the quarter ended 30 September 2008, the New York Insurance Department (NYID) granted Syncora permission to release statutory basis contingency reserves on terminated polices and on policies on which the company had established case reserves. As a result, the company reported policyholders' surplus of US$83.3m. Absent the release of contingency reserves, Syncora would have reported policyholders' surplus of US$19.1m, well below the US$65m minimum.
If Syncora experiences further adverse loss development on its ABS CDOs or on its 2005-2007 vintage RMBS exposure, the company could fall below the NYID minimum surplus requirement. It is unclear if the NYID would grant an additional release of contingency reserves to bolster surplus.
SIFMA CDO volumes down
Total quarterly CDO issuance volume in Q408 dropped by 61% compared to Q308 (which had already seen a 46% decline from the second quarter), according to the latest SIFMA figures. Total issuance in 2008 was 87% below the volume in 2007.
The SIFMA data accounts for public cashflow and funded synthetic and hybrid transactions only.
Balance sheet issuance rose on the quarter, although it accounts for below 40% of volume. Structured credit analysts at UniCredit are surprised by this figure, given that CDOs (and ABS in general) are still primarily structured as collateral for central bank lending facilities.
Almost half of the CDOs issued (49%) have high yield loans as collateral, according to SIFMA, resembling the situation during the first three quarters of 2008 and reflecting the fact that banks continue to deleverage their balance sheets. The fraction of investment grade CDOs was small at 15% (an absolute volume of only US$755m). With a volume of nearly US$1.8bn, structured credit CDOs contributed the remaining 36% of issuance.
The total issuance of US$5bn in Q4 is record-breaking, according to UniCredit, with 47% being euro-denominated transactions and only 18% in USD. An unprecedented fraction of 29% was issued in currencies other than euro, dollar, yen and sterling.
Synthetic funded transactions had a 0% share in Q4 as well as in Q3. Cashflow and hybrid CDOs represent 61% of the Q4 issuance, while market value CDOs make up the remainder.
S&P enhances loan modification assumptions
Issuers can change loan modification terms in most instances by amending a transaction's pooling and servicing agreement, with an opinion of counsel, rating agency confirmation letter and/or certificate holder consent. With the number of load modifications rising, S&P has added several new steps to its existing criteria for such analysis.
First, the agency says it will analyse loan modification proposals under a variety of scenarios to assess the potential impact to the amended transactions. By their nature, loan modifications will result in a loss of principal, interest or both.
Consequently, S&P will evaluate whether any proposed modification programme allocates these losses to excess spread and overcollateralisation, to the extent available, then to the most subordinated class in the capital structure in the same way that ordinary losses resulting from defaulted loans would be allocated. If the proposed modification programme requires the servicer to re-underwrite loans, S&P will evaluate this underwriting based on its criteria for mortgage origination, underwriting, representations and warranties, and due diligence.
Non-agency MBS ETFs launched
Invesco PowerShares Capital Management has filed registration statements for two new actively managed ETFs focused on the non-agency, prime and Alt-A RMBS markets. The anticipated fund names are: PowerShares Prime Non-Agency RMBS Opportunity Fund and PowerShares Alt-A Non-Agency RMBS Opportunity Fund.
"We believe that various economic factors have converged to push the prices of many Prime and Alt-A residential mortgage-backed securities well below their fundamental values," says Bruce Bond, president and ceo of Invesco PowerShares. "We are hopeful that these ETFs will provide access and transparency into these markets, along with some of the much needed additional liquidity originally intended by the TARP."
Both funds will seek to provide total returns by investing, under normal market conditions, at least 80% of their assets in non-agency MBS collateralised by pools of either prime or Alt-A residential mortgage loans.
CDPCs' ratings withdrawn
Moody's has withdrawn its counterparty rating for Cournot Financial Products, as well as its counterparty rating and two provisional debt ratings (Aaa to the US$300m Series A and Aa2 to the US$100m Series B deferrable interest notes) for Quadrant Structured Credit Products (QSC). Both CDPCs are managed by Quadrant Structured Investment Advisers (QSIA), which has requested the ratings to be withdrawn for business reasons. The move follows QSIA's purchase of Cournot from Morgan Stanley in December (see SCI issue 116).
Hedge fund CFO criteria updated
Loss severities and marked reduction in underlying fund liquidity for hedge fund CFOs in 2008 have exceeded original expectations, according to Fitch, which has updated its rating approach on such transactions. Hedge fund returns, as represented by several multi-strategy indices, declined by approximately 20% to 25% in 2H08. Fitch has also observed reductions to hedge fund CFO liquidity (including gating, restructuring, side pockets) in a range of approximately 5% to 40% of net asset value (NAV) in Q408.
The agency has consequently updated its analysis of hedge fund CFOs to reflect recent and expected increases in market volatility and reduced liquidity. To address short-term volatility in CFO performance as well as reporting delays from underlying hedge fund investments, Fitch's analysis applies a 10% haircut upfront to the most recent reported portfolio NAV. The 10% haircut was derived using the worst monthly return decline reported by Fitch-rated CFOs.
Fitch then determines a triple-B market value stress by incorporating historical returns from the CFO under analysis, returns of representative hedge fund indices and observed hedge fund liquidations. Transactions are analysed applying this stress, with adjustments made for structure-specific time horizons and rating levels. For example, notes with investment grade ratings must be able to absorb sustained sequential market value losses as was experienced in Q408.
To assess the impact of reduced liquidity to the CFO from underlying hedge fund suspensions, Fitch analyses the transactions using three scenarios with various liquidity stresses. At the same time, these fund assets are subjected to market value declines. The results from these scenarios provide an indication of a rated note's sensitivity to future changes in a CFO's liquidity profile.
It is important to note that Fitch continues to analyze transactions on a case-by-case basis. Additional considerations in its rating decisions may include: amounts of redemptions in the pipeline, cash balances relative to liabilities, the size of a CFO relative to its master fund, increases in strategy/fund concentration levels as transactions unwind/mature, and performance relative to an index and peers.
Irish bank issues CDO, CMBS
Melepard 1 CDO, a €1.2bn funded balance sheet securitisation, has been assigned final ratings by Fitch. The deal is backed by a geographically diverse portfolio of corporate and leveraged loans predominantly located in Western Europe and North America managed by Bank of Ireland.
The transaction is the second European CDO to be managed by the Bank of Ireland, which acts as counterparty to the transaction in various forms. Amongst others, it is the cash manager, the issuer account bank, the collection account bank, the swap counterparty, the originator trustee and the servicer.
The triple-A rated Class A notes priced at 10bp over and the unrated Class B notes at 40bp over. 85.5% of the pool was purchased at closing, with the remainder to be added during the six-month ramp up period.
Fitch has also assigned final ratings to Morrigan CMBS 1 - the first multi-borrower deal of loans related to Bank of Ireland's balance sheet. The transaction is a securitisation of 38 commercial mortgage loans that were not originated for securitisation purposes, with a total outstanding principal balance of €1.77bn. The 38 loans are secured by real estate located in Ireland, Germany and the Netherlands.
Sirrah Funding refinanced
The £2.7bn Sirrah Funding II, a project finance and utility bond CDO that closed in October and was subsequently tapped in December last, has been refinanced by DEPFA and Hypo Real Estate. According to S&P, the new notes are the only remaining debt obligations of Sirrah Funding II. All assets of the old Sirrah Funding II are charged to the secured creditors of the new deal.
AIG-managed CLOs hit
S&P has taken negative rating action on five CLOs managed by AIG Global Investment Corp. The rating agency lowered ratings on four tranches (whose ratings remain on credit watch negative), while the ratings on two additional tranches were placed on credit watch negative.
The downgrades and negative credit watch placements affecting Galaxy IV CLO and Galaxy V CLO reflect deterioration in the credit quality of the corporate loans in the underlying collateral portfolios of the transactions. Based on the 7 January trustee reports for these transactions, the current defaulted balances were US$13.8m and US$20.1m respectively. At the same time, the amount of collateral in the triple-C rated buckets for the Galaxy IV and Galaxy V transactions had increased to 10.8% and 7.3% respectively.
Distressed mortgage pricing solution launched
Response Analytics has launched a new pricing solution for distressed mortgages based on behaviour modelling and optimisation technology. The firm says that the offering not only makes it possible to determine the value of these under-priced assets, but also to direct their modifications so as to maximise collectible value. The solution operates at the loan level and, with the requisite data, extends to MBS as well as whole loans.
According to Response Analytics, borrower behaviour is not just a factor of income and FICO score, but is dependent on a wide range of other variables. Brent Lippman, the firm's ceo, says: "By applying advanced behavioural modelling and optimisation technology, our Distressed Portfolio Management solution can establish the optimised individualised workout for each distressed loan in the portfolio, based on terms that have a much higher probability of being met. Furthermore, within the solution our robust 'NPV Engine' uses a broad array of dynamic modelling factors which ensure the most accurate NPV forecasts."
Further, an Optimisation approach can take into account regulations or investor covenants that constrain the optimisation of workout options across the portfolio, as well as the investor's own time horizon. All of this information is used to calculate the real hold-to-maturity value of the entire portfolio. The investor can use that calculation to make an informed decision about whether to purchase the portfolio, and at what price, and can then direct the servicer to modify the loans accordingly.
Synthetic SF CDOs downgraded
Fitch has downgraded US$932m of notes from 12 US synthetic structured finance CDOs that reference RMBS, CMBS and other CDOs. These rating actions reflect the agency's view on credit events experienced to date, as well as industry and vintage concentration risks outlined in its revised structured finance CDO rating criteria released on 16 December 2008.
The magnitude of the rating actions range from one to four rating categories, with a total of 22 rated tranches downgraded. The six classes previously rated triple-A (comprising approximately US$315m of the US synthetic structured finance CDOs) retain investment grade ratings, while all remaining classes were assigned ratings below investment grade.
All but one of the affected CDOs have experienced at least one credit event, most of which have been losses on written-down RMBS reference obligations. Fitch expects the reference obligations that have experienced write-down credit events will continue to write down, causing further losses attributable to future credit events.
In addition, most of the counterparties in these synthetic transactions have the ability to call credit events on the reference obligations that have been downgraded to triple-C minus and lower. To date, however, no such credit event has been declared - despite many reference obligations being rated triple-C minus and lower among these 12 transactions.
A second driver of these rating actions is sector concentration in the structured finance reference portfolios. RMBS sector concentration, predominantly in the sub-prime RMBS sub-sector, averages 70% in these transactions. Exposure to a single sector of structured finance securities can significantly increase portfolio default rates, as the correlated reference obligations would likely face the same macroeconomic pressures.
All classes were assigned stable outlooks, reflecting Fitch's expectation that the ratings will remain stable over the next one to two years.
Equity CDS index shows improvement
The cost of buying default protection on the S&P 100 entities, as measured by the S&P 100 CDS Index, has begun to show improvement. The index spread improved to 131bp, down from 146bp a week ago (see last week's issue) and 142bp at 2008 year-end. The S&P 100 Index has fallen by over 7% this year.
The leveraged loan market also continues to demonstrate improvement: as measured by the S&P/LSTA US Leveraged Loan 100 Index, the loan market has achieved a year-to-date return of 7.87%, while the average bid price for loans in the index has seen an improvement of over 5% to date.
CDS analytics engine available industry-wide
JPMorgan has transferred to ISDA its CDS Analytical Engine. Originally developed by the JPMorgan's quantitative research, the engine is widely used in the industry to price CDS contracts. ISDA will make it available as open source code, thereby increasing transparency around CDS pricing.
"JPMorgan has invested a lot of intellectual capital in this analytical engine. Its willingness to assign this to ISDA for us to make it available as open source to the entire industry demonstrates our collective commitment to the integrity of the CDS product," comments Robert Pickel, executive director and ceo, ISDA. "ISDA and its members are vigilant to public concerns around transparency. This is yet another measure of increased standardisation in CDS."
Japanese SME CLOs impacted
Moody's has downgraded and left on review for further downgrade its ratings on the senior and mezzanine trust certificates issued by two Japanese government SME CLOs - the 'CLO in September 2006 Regional Financial Institutions' and 'CLO in June 2007 Regional Financial Institutions' transactions. The downgrades reflect the decline in current credit enhancement, which resulted from deterioration in the credit quality of the transaction pool due to the ongoing economic slump.
The first CLO is backed by corporate loans originated by regional financial institutions and purchased by JASME (the Japan Finance Corporation) under its 'purchase scheme' securitisation programme, while the second securitises SME loans originated by JASME under its 'self-origination scheme' securitisation programme. The SME loans were originated with the intention of securitising them.
The ratings remain on review for further possible downgrade. Assessments will be based on the effect on underlying pool performance of the worsening economic environment and the Japanese government's policy to expand its guarantee programmes to support SME finance.
Banking Bill could impact UK triple-A SF ratings
The Banking Bill currently being considered by the UK parliament could - upon becoming law - have rating implications for S&P's analysis of deals up to and including the triple-A level where UK deposit-taking institutions are involved in any capacity, the rating agency said today (30 January). The Bill, which is expected to become law when the Banking (Special Provisions) Act 2008 (the B(SP)A) ceases to have effect after 20 February, is a replacement for the B(SP)A that was only ever intended to be a temporary measure.
"We understand that the Bill is likely to contain wide-ranging powers for the Bank of England to make orders effecting the full or partial transfer of ownership in and/or property of UK deposit-taking institutions that are failing or might fail. We also understand that the UK Treasury would be given the power to nationalise such institutions," explains the rating agency.
The breadth and nature of the powers in the Bill is causing concern among market participants, and S&P notes that the uncertainty this could give rise to may affect the type and level of legal comfort available for structured finance transactions involving UK deposit-taking institutions. "There could, therefore, be rating implications for our analysis of deals up to and including the triple-A level involving UK deposit-taking institutions in any capacity," adds S&P.
However, until the final form of the Bill is known (including the relevant secondary legislation), S&P will - where it considers it appropriate in all the circumstances - continue to rate securitisation debt involving UK deposit-taking institutions up to and including the triple-A level. However, once the form of the Bill and secondary legislation is known and in light of any other relevant developments and information, the agency will reconsider whether it continues to be possible to do so.
CRE delinquencies reviewed
In light of the deteriorating macroeconomic environment and its effect on commercial real estate delinquencies, Fitch has published its quarterly review of the largest specially serviced loans within US CMBS. The report highlights the 10 largest delinquent CMBS loans, as well as the 10 largest non-delinquent specially serviced loans.
Specially serviced loans range in size from US$86,647m to US$225m, with an average loan size of US$7.8m. While historical CMBS default curves show defaults peaking in years three through eight, there are a number of loans from the 2006 through 2008 vintages that have already been transferred to special servicing.
The 10 largest loans of concern within Fitch's US CMBS portfolio are currently with the master servicer, but have shown declines in performance as a result of current market conditions or will unlikely be able to meet stabilisation expectations at issuance.
RMBS-backed CDOs downgraded
Moody's has downgraded its ratings of 98 notes issued by 17 CDO transactions that consist of significant exposure to Alt-A, Option-ARM and sub-prime RMBS securities. The rating actions reflect Moody's revised loss projections for Alt-A RMBS securities.
On average, Moody's is now projecting cumulative losses of about 20% for 2006 securitisations and about 24% for 2007 securitisations. As a result of the revised loss projections, in most cases, subordinate Alt-A RMBS securities are likely to be completely written down. The agency says it is likely to downgrade the ratings of these securities to Ca or C.
Credit protection from structural features should provide most senior Alt-A RMBS bond holders with fairly high recovery rates, although approximately 80%-85% of all senior securities are likely to experience recoveries consistent with ratings lower than B3.
Rating confirmation policy further clarified
Fitch has further clarified its policy regarding rating confirmations. The agency says it has recently received an increasing number of requests for confirmations related to rating triggers applied to counterparties.
Rating triggers are often used with respect to counterparty risk to specify remedies to be followed when rating triggers are breached. Such triggers may be based upon Fitch's ratings, as well as the ratings of other agencies. The counterparty exposures involved may include swap or other derivative positions, account banks, qualified investments and/or liquidity facility providers.
With respect to counterparty risk in structured finance transactions, Fitch says it will always look to apply its then current criteria and will expect counterparties to honour the criteria in order for associated structured finance note ratings to be maintained. Transaction parties often choose to include specific rating triggers in transaction documentation that reflect rating criteria that were outstanding at the time of the transaction's origination.
However, rating criteria may change as Fitch analyses developments in the market or as its opinion of the risks involved changes. In the event that a counterparty continues to satisfy the provisions of Fitch's current criteria, the agency would not expect to downgrade the note ratings of a transaction exclusively due to the breach of any triggers specified in transaction documentation which no longer reflect Fitch's current criteria.
Nevertheless, the consequences under the transaction documentation of such a breach would be a matter for transaction parties to address. Fitch would expect to be notified of any action taken by the transaction parties in response to such a breach, which could cause the agency to take rating action or issue a commentary.
New ABX calculator unveiled
Barclays Capital has rolled out a new ABX Calculator tool on the Lehmanlive website. The tool has two components: an ABX calculator that computes yield tables based on BarCap's default/loss model; and an ABX surveillance tool.
The surveillance tool is designed to allow users to view index level characteristics and historical/projected performance across HPA scenarios. It also allows the user to easily drill down to the constituents of the index for this data.
The calculator shows yield tables for the ABX bonds and allows the user to compare yields for multiple indices across different HPA/collateral loss scenarios, BarCap says. The tool also shows cashflows on the ABX indices using model projections for each constituent deal.
Troubled company index improves
The Kamakura index of troubled public companies for January showed improved credit quality for only the second time in the last 18 months, decreasing 0.9% to 23.1% of the public company universe. Kamakura Corporation defines a troubled company as a company whose short-term default probability is in excess of 1%.
At the January level of 23.1%, the index shows that credit conditions are better than only 6.2% of the monthly periods since the start of the index in January 1990. "On January 6, Kamakura reported that US Shipping was among the rated companies with the largest one-month jumps in short-term default risk," comments Warren Sherman, Kamakura president and coo. "The company declared bankruptcy the following day. This month, among rated public companies, the companies showing the sharpest rise in short-term default risk were Royal Bank of Scotland Group, Allied Irish Banks and Entravision Communications."
Moody's to publish regular performance overviews
Moody's is to publish regular performance overviews of all ABS (as defined by the European Central Bank) that it rates publicly and which are included on the ECB's list of eligible marketable assets. The announcement is in response to the provisions of the 'Guideline on monetary policy instruments and procedures of the Eurosystem (ECB/2008/13)' (the 2008/13 Guideline), which was adopted by the ECB's Governing Council on 23 October 2008.
European RMBS analysis tool on offer
Fitch has launched a new model for European RMBS asset analysis called ResiEMEA. The tool is designed to help determine the expected default probability, loss severity and recovery on a loan-by-loan basis for transactions.
"Individual loan level performance data is vital for investors in the current market conditions," says Gregg Kohansky, md EMEA RMBS at Fitch. "ResiEMEA meets this demand for increased transparency and more accurate and predictive credit default assessment."
Available to arrangers, originators and investors, the model will be used by Fitch as the first stage in the quantitative analysis of an EMEA RMBS transaction. "The model provides a more rapid assessment of credit risk across residential mortgage loans," says Philip Walsh, md EMEA structured finance at Fitch. "This enables the user to fine tune mortgage portfolios and input closing pool cuts into ResiEMEA for surveillance purposes. Additionally, the outputs can be used for RMBS cashflow modelling purposes."
Initially covering the UK and the Netherlands, the model can process loan portfolios of master trust magnitude in minutes. The flexible interface allows users to adjust Fitch criteria assumptions and stress the loan, borrower and property-specific factors that most influence default probability and loss severity.
Ferretti defaults
Ferretti, the Italian luxury boat maker, has experienced a payment default and is currently in discussions with its lenders. CDO analysts at JPMorgan have found that, out of the €1.2bn loan, €329.4m is present in a sample of 47 European CLOs (or about a quarter of the market). Concentrations range from 0.4% to 5.6%, according to Intex data.
Best performance achieved for credit index
The Barclays Capital Credit Index tightened 62bp during January, outperforming duration-matched Treasuries by 319bp. This represents the best monthly performance since its return series began in the late 1980s.
The best performing sectors included home construction (TOL: +1,640bp; MDC: +695bp), lodging (led by MAR: +1,495bp), airlines (led by DAL: +1,503bp) and automotive (DAIGR: +1,722bp). The worst performing sectors included non-captive diversified (ACAS: -5,246bp; PHH: -4,912bp), supranationals (Asia: -53bp; EBRD: -50bp) and banking (RBS: -1,632bp; ING: -1,496bp). The banking sector results were driven in part by the significant underperformance of Tier 1 and Upper Tier 2 securities, BarCap notes.
Alt-A RMBS ratings lowered to default
S&P has lowered its ratings to single-D on 1,078 classes of mortgage pass-through certificates from 650 US Alt-A RMBS transactions from various issuers. It removed 26 of the lowered ratings from credit watch with negative implications. In addition, the agency placed 2,111 ratings from 143 of the affected transactions on credit watch with negative implications, while the ratings on 117 additional classes from 15 of these transactions remain on watch.
The downgrades reflect principal write-downs on the affected classes during recent remittance periods. Approximately 81.82% of the ratings on the 1,078 defaulted classes were lowered from the triple-C or double-C rating categories and approximately 98.98% of the ratings were lowered from a speculative-grade rating. S&P expects to resolve the watch placements affecting these transactions after it completes its reviews of the underlying credit enhancement.
Ex-Japan Asia outlook published
Fitch says in its special report, entitled '2009 Non-Japan Asia Structured Finance Outlook', that the more severe economic environment faced by non-Japan Asian countries may ultimately affect the performance of all asset classes within structured finance. In the report, the agency provides opinions on how the underlying assets and ratings of non-Japan Asia structured finance transactions will perform in 2009.
For the Korean market, the agency expects that the coming economic stresses, such as likely rising unemployment rates and possible home price depreciation, may pressure the securitised portfolios backing Korean cross-border securitisation transactions, such as credit card ABS, auto loan ABS and RMBS. Korean cross-border securitisation transactions may therefore experience increases in delinquencies and defaults in 2009. Nonetheless, due to the strengthened risk management approach and proactive asset quality control practices adopted by most Korean originators, Fitch expects that such increases in delinquencies and defaults of the securitised portfolios will be moderate.
The asset performance of Korean credit card ABS, auto loan ABS and RMBS transactions thus far has been within the agency's expectations. Fitch expects that the ratings of rated Korean cross-border securitisation transactions will remain stable in 2009.
The Singapore structured finance market, on the other hand, is characterised by real estate-related securitisations, including CMBS and residential receivables transactions. Since Q308, the prices and rental indices of the residential and commercial real estate sectors in the country have softened, coupled with the decrease in international visitor arrivals due to the global economic slowdown.
Fitch expects the fundamentals of underlying commercial properties collateralising Singapore CMBS transactions to weaken in 2009. Nevertheless, the agency expects that the ratings of most such deals will remain stable in 2009, due to the underlying properties' capabilities to generate healthy cashflows which exceed the agency's stabilised assumptions.
Based on Fitch's surveillance analyses, Singapore CMBS transactions - which were mostly issued during 2004-2005 - can withstand a 20%-50% decline in net cashflow before a rating downgrade is triggered. Additionally, refinancing risk for a few 2009 maturing Singapore CMBS transactions may emerge.
However, Fitch expects that such refinancing risk is limited, as the maturing CMBS transactions are performing well, with low current loan-to-value ratios. These are deemed positive credit features by both securitisation and bank loan markets. The agency expects the ratings of most Singapore CMBS transactions to remain stable.
Singapore residential receivables transactions will be affected by the softening of the residential market. Under the current market conditions, the residential property price decline may exceed the extent of price appreciation accumulated over the past two years. The declining residential property prices may also restrain buyers' capabilities to obtain loans from the bank mortgage market.
Fitch expects Singapore residential receivables transactions to experience an increase in buyer defaults in 2009. To address the resale value of the residential unit after a buyer default, Fitch has applied market value decline assumptions of 48%-58% on the transactions. The agency expects the outlook of Singapore residential receivables transactions to be stable to negative.
Updated CDOROM released
Moody's has released an updated version of its CDO modelling tool, CDOROM. The new version (v2.5) includes Moody's latest parameter assumptions for analysing CDOs backed by corporate and structured finance assets (SCI passim). Although the tool was primarily designed to model synthetic structures, it can also be used as part of the cashflow transaction modelling process.