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A round up of this week's structured credit news
Another SIV-lite set for restructuring
Barclays Capital has proposed an outline restructuring solution to the security trustee of Solent Capital's Mainsail II SIV-lite transaction.
The restructuring proposes that all CP investors will be fully paid out at par at the same time as the restructuring is implemented through the provision of an additional liquidity facility underwritten by the bank. This liquidity facility will be split into three tranches, and capital and mezzanine noteholders will be invited to participate in the junior tranche of this facility.
Barclays Capital will underwrite the liquidity facility by sourcing suitable credit protection in the form of such noteholder participation, as well as the purchase of additional credit protection via a CDS. The bank will be providing detailed proposals to all mezzanine and capital noteholders shortly.
The security trustee is evaluating the proposal and will continue to do so as further details are provided; however, based on the information it has at present, the proposal is regarded as being credible.
Barclays Capital is also understood to be in restructuring negotiations over Avendis' Golden Key SIV-lite. But sources suggest that, under the restructuring of the Mainsail and Golden Key transactions, the CP may be paid back over several years, as opposed to that of Cairn High Grade Funding which will be paid as it comes due.
ECMBX postponed
The group of dealers behind the launch of a family of European CMBX indices has decided to postpone the index launch date of 18 September as a result of the increased recent market volatility. A re-valuation process is currently underway, including bankers taking in comments from the buy-side with a view to the dealer group holding a conference call within the next two weeks to firm up a new launch date.
While the start date is uncertain, there are not expected to be any material changes to the ECMBX products. The indices will comprise an equally-weighted basket of 20 pay-as-you-go (PAUG) CDS referencing European CMBS selected according to a defined set of rules.
The index coupon will be fixed at roll and the index will be quoted on a price basis rather than spread, due to the prepayment uncertainty. There will be indices based on triple-A and triple-B, euro and sterling denominated tranches.
Indices to tighten?
The past week has seen the usual steady flow of pre-roll CDS index constituent announcements. Market moves today, 12 September, and a number of analyst reports suggest that the new series could trade tighter after the roll on 20 September.
For example, Dresdner Kleinwort structured credit research team in London notes: "Series 9 of the investment grade index, CDX.NA.IG, will see eight name changes. In particular, three of the widest names in the current series, First Data, Residential Corp and Alltel, will be removed and the new series is therefore expected to price significantly tighter despite the six month maturity extension."
For full index details see:
http://www.markit.com/information/affiliations/cdx/index_news for the CDX indices
http://www.indexco.com for the iTraxx indices
Seven SIVs reviewed
Moody's has taken rating actions on seven structured investment vehicles, following the agency's review of its approach to the sector (see story on SIVs for more).
Moody's placed the A-1 rated mezzanine capital notes of Axon Financial Funding and the Baa2 ratings of Harrier Finance Funding's income notes on negative watch, reflecting the deterioration in market value of their portfolios and the potential impact of crystallised losses following asset sales.
It has also placed on review for possible downgrade the Prime-1/Aaa ratings of Kestrel Funding's MTN and CP programmes, as well as the Baa2 ratings of its income notes. The vehicle has breached a trigger which caused it to enter into a restricted operations mode, which means that it cannot purchase further assets.
Additionally, Rhinebridge had the Aaa ratings of its senior capital notes, the A3 ratings of its mezzanine capital notes and the Baa2 ratings of its combination notes put on negative watch, while Victoria Finance's Baa2 rated capital notes were also placed on review.
And Moody's has downgraded to Caa2 from A3 Cheyne Finance's mezzanine capital notes, as well as downgrading to Caa3 from Baa2 its combination capital notes and placing on review for possible downgrade its MTN and CP programmes. The rating action reflects the breach of a trigger which resulted in the vehicle entering an irreversible wind-down mode.
For all vehicles that now have rated debt under review for possible downgrade, Moody's will focus on the ability of the vehicles to issue new debt, the future evolution of market prices and the potential crystallisation of losses following any asset sales.
Meanwhile, Fitch has also placed Axon Financial's mezzanine capital notes on watch negative due to the continuing challenge of accessing the CP and MTN markets to refinance maturing debt. The action also takes into account losses realised from the continued sale of assets to meet maturing debt or the sale of assets if the vehicle were to enter into a restricted funding operating status. Restricted funding operating state could be triggered if the net asset value of capital and mezzanine notes fell below 50% of capital and mezzanine notional amount.
The agency notes that the manager is in discussions with third parties to secure alternative funding sources.
And unlike Moody's, Fitch downgraded Rhinebridge's CP from F1+ to F3, its MTNs from triple-A to triple-B minus and its senior, mezzanine and combo capital notes from AAA/B/BBB respectively to B/CCC-/CCC-. The move was precipitated by: the vehicle breaching an NCO liquidity trigger on 7 September; the increased likelihood of a restricted funding/enforcement event occurring in the very near future; the unknown direction the security trustee may follow should an enforcement event occur; the likelihood of increased market value losses materialising in the Rhinebridge portfolio in any forced sale scenario; its continuing inability to access the CP market; and losses realised upon the continued sale of assets to meet maturing CP.
The rating actions reflect Fitch's view that no alternative sources of funding will now be found for Rhinebridge and a sale of assets or further liquidity draw will be required to meet maturing liabilities.
The portfolio has experienced a price decline of approximately 5%; a portfolio price decline of approximately 8.5% would cause a breach of a major capital test and could lead the vehicle into enforcement. However, the portfolio could withstand a 12% price deterioration without impacting upon the senior capital notes and a price deterioration of 17% without impacting upon the CP investors.
New CDPC rated
Moody's has assigned a provisional counterparty rating of Aaa to Quadrant Structured Credit Products; a provisional rating of Aaa to Quadrant's senior subordinated 2007 deferrable interest auction rate notes, series A; and a provisional rating of Aa2 to Quadrant's subordinated 2007 deferrable
interest auction rate notes, series B.
Quadrant is a credit derivative product company organised in Delaware that will invest in a diversified portfolio of single name and static tranches of corporate credits through the CDS market. Quadrant is majority owned by Magnetar MQ and minority owned by Lehman Brothers Holdings and certain members of Quadrant's management team.
Magnetar MQ is advised by Magnetar Financial, which is an alternative asset manager. As of 31 December 2006, Magnetar had assets under management of approximately US$4bn.
Rating volatility examined
DBRS has published a commentary on the analysis of rating volatility in the structured credit market. The research discusses the impact of leverage and portfolio and structural effects, and shows how model risk can increase rating volatility.
Moreover, the article demonstrates the importance of rating volatility analysis in developing reliable rating and surveillance tools, as well as helping to improve the transparency of the meaning and future performance of ratings. The responsibility of rating agencies is to be as transparent as possible about the potential of one security to display more rating volatility than another, especially when both have the same rating.
DBRS calls for more information and transparency to be provided on the meaning and expected future performance of ratings. Focusing on the structured credit market, the research shows how rating volatility can be measured, mitigated and communicated to the market.
Three potential options for communicating rating volatility are assessed in the paper. First, a new rating scale for more volatile structured credit is discounted as unworkable because it would lead to more confusion. Second, DBRS says that making all ratings mean the same thing might be appealing in principle, but it is not possible given the number of different factors driving the risk of each underlying portfolio and the variety of liability structures.
Third, DBRS suggests that a "3-D view of risk" might be a workable solution. This would imply the adoption of a three-dimensional approach, in which ratings remain one-dimensional (addressing default risk), but the other two dimensions (recovery risk and volatility) are analysed separately and communicated to the market in parallel as separate pieces of information.
CPDO gloom overdone?
Research published by Royal Bank of Scotland's structured credit strategy team last week seeks to address recent criticism of CPDOs. "We believe that the doomsday slant accompanying the majority of press reports on CPDOs is rather unwarranted, though maybe understandable," it says.
To counterbalance the negative reporting certain observations need to be made (once more), RBS argues. These include: the risk equivalent of CDPOs issued so far is, by RBS estimates, no higher than €30bn and that, while certainly there are market scenarios which can force a CPDO to cash out, this can be said for practically any structure, no matter how defensive it is.
Nonetheless, RBS concedes that a major feature of the index-based long-only CPDO structure is that it aims to shield from defaults by substituting deteriorating credits in the portfolio, which is achieved via rolling into a fresh, cleansed, iTraxx/CDX portfolio every six months. Indeed, this defence mechanism against defaults can prove quite costly.
Yet RBS notes that this is not a CPDO-specific issue but rather a well-known dilemma for any credit portfolio: is it economically preferable to trade-out of deteriorating credits at a cost (the earlier one trades-out the lower the cost) or to just let the portfolio take its due defaults? Navigating an optimal route between the two approaches is by no means a trivial task.
Specific to the current CDPO structures, if only a bunch of credits in the portfolio suffer downgrades and exhibit spread widening during the six-month period, and are subsequently removed from the new portfolio, the CPDO is hurt twofold: it sustains negative mark-to-market due to the spread widening; and it rolls into a tighter spread (as the wider credits are replaced by tighter credits), giving it a lower chance to recoup the MTM loss through higher excess spread.
"This exactly demonstrates the CDPO sensitivity to idiosyncratic risk," RBS observes. "Yet current market conditions have gone beyond idiosyncratic spread blow-ups."
Caliber NAV drops
Cambridge Place Investment Management's Caliber vehicle last week announced its latest net asset value per share. As at 31 July, Caliber's unaudited NAV was US$1.61, against a NAV of US$5.55 at 30 June. The fall in the NAV reflects severe market disruption during July, Caliber explains.