A round up of this week's structured credit news
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Bear brings new ABS CDO
In a new twist on the normal CDOs of ABS, Bear Stearns has launched the EUR450m Colonnade I, a partially synthetic CDO of European mezzanine ABS, for the Morgan Stanley Global Proprietary Credit Group. Typically CDOs of ABS are cash, and although this has in some ways been made to look like a cash deal it involves a synthetic transfer of risk into the SPV.
All assets are referenced at the full market value, reinvestments will be at market value and there is a cashflow waterfall. This means there are IC and OC triggers, along with additional coverage tests that would be expected in normal cash deals. The deal comprises a EUR324m super senior retained piece and five tranches, A through to E, rated Triple A, Double A, Single A, Triple B minus and Single B, all with a 9.05-year WAL. As a result of its unusual structure the deal paid a slight premium across the capital structure to where cash flow European mezzanine deals trade/price.
Taiwan CDO market enters new phase
Fitch Ratings reports that issuance of primary CLOs and asset-backed commercial paper are likely to dominate Taiwanese structured credit issuance in the short to medium term.
In 2005, CDO technology was used to repackage illiquid Taiwanese structured bonds and this led to explosive growth in Taiwan's CDO market. Fitch believes the Taiwanese CDO market is entering a new phase in 2006, with some new drivers emerging. While the agency expects overall CDO issuance in Taiwan to remain stable, it expects more issuance of ABCP rather than term notes in coming months.
Fitch recently rated the first Taiwanese ABCP transaction backed by a local insurer, Taiwan Life 2006-1 ABCP Securitisation Trust. "This transaction is likely to provide the impetus for other Taiwan insurance companies to explore how they can advance their risk-return profiles through the use of CDO technology," says Jackie Lee, associate director in Fitch's Structured Credit team in Taipei.
ESF says CDOs fastest growing sector
The European Securitisation Forum's summer 2006 data report finds that CDOs, including funded cash and synthetic deals, were the fastest growing product sector and continued to raise their share of issuance volume to 8.2% in the second quarter. CDO issuance surged to EUR31.5bn in the first six months of the year, about 61% higher than the EUR19.5bn during the first half of 2005. Arbitrage CDO issuance accounted for 48% of aggregate CDO issuance, with the remaining 52% being balance sheet CDO.
"The percentages confirm the resurgence of balance sheet CDO issuance that began late in 2005. It is expected that a number of bank balance sheet CLO transactions will come with issuers motivated by economic and regulatory capital issues arising from Basel 2," ESF says.
Principia launches V5
Principia Partners, a provider of end-to-end processing solutions for structured finance and capital markets, has announced the release of V5, an improved version of Principia's structured finance platform. Improved features in the software aim to facilitate and automate the manually-intensive tasks associated with managing ABCP conduits, securities arbitrage conduits, structured investment vehicles (SIVs) and credit derivative product companies (CDPCs).
"CDPCs represent an important growing trend in the structured finance world, merging the best practices and economic benefits of credit derivatives and securitisation," states Douglas Long, Business Strategy at Principia. Indeed, CDPCs are widely predicted to quickly become a major component in the credit derivatives market.
Fitch Synthetic Index Quality Remains Stable
Fitch Ratings says its Synthetic Collateralised Debt Obligation (SCDO) index showed stable credit quality in H106. The index's Weighted Average Rating Factor (WARF) deteriorated 7% in H106, compared to 8% deterioration in H105. The weighted average credit quality of the index was more stable in Q206 than Q106, with 2% deterioration in the index's WARF in Q206 compared to 5% deterioration in Q106.
Following a rebalancing carried out in July, the index has been refined to better account for merger-related activity. There have also been some changes in the most widely referenced speculative-grade names. Following its downgrade to speculative grade, Albertsons is now the second most widely referenced and VNU remains the most widely referenced speculative-grade.
By country and industry, the index remains concentrated in US banking and finance names. Exposure to the US automobiles sector has decreased; it is now the fifth most widely referenced sector in the index, having fallen from the fourth in April. Exposure to the US telecommunications sector has been increasing, reflecting increased confidence in the sector just four years after the credit event on WorldCom. Exposure to this sector has increased in spite of it suffering the second highest number of downgrades in H106.
T-Zero signs up BGC
STP service provider T-Zero has announced an agreement to provide connectivity and post-trade affirmation to derivatives broker BGC partners. BGC will initially utilise T-Zero's post-trade technology for CDS single names and CDS indices and tranche trades.
T-Zero claims participation of 80 buy-side firms, as well as a significant number of other clients including, Bloomberg, several banks and operations service providers such as DTCC Deriv/SERV and GlobeOp, Calypso and Thunderhead. Five major banks are expected to join the service in the coming weeks.
Fitch releases ABS CDS case study
A report released by Fitch Ratings suggests that available funds caps (AFC) shortfalls are not a material issue for synthetic ABS CDOs. Fitch has studied the ABX.HE CDS index to analyse the potential for AFC induced interest shortfalls and the implications for single name ABS CDS and synthetic ABS CDOs in particular. In the US, equity holders would most likely feel the impact of any AFC shortfalls within a synthetic CDO in the form of reduced returns, while credit enhancement in the form of over-collateralisation typically would be unaffected.
US CLO issuance falls
Standard and Poor's LCD (SPLCD) reports that after totalling US$11bn in June, CLO issuance fell to a six-month low of US$5.3bn in July. This brings year-to-date issuance to US$47 billion, up from US$21 billion during the first seven months of 2005.
"Looking ahead, inflows are expected to remain strong. On the CLO front, collateral managers expect issuance to continue to register US$6-8 billion per month. August, in fact, got off to a strong start. During the first week of the month five new CLOs printed for a total of US$2.3 billion. Even so, the calendar remained at a robust US$12 billion as of Aug. 4, right in the middle of its recent range," SPLCD says.
H1 rating transitions show improvement
Moody's and Standard and Poor's have released their updated rating transitions studies for the first half of 2006. Both reports showed that worldwide structured security credit performance remained strong in the first six months of the year.
Moody's found that the global structured finance market experienced 292 rating downgrades and 918 upgrades in the first half of 2006, producing an upgrade-to-downgrade ratio of 3.1. Standard and Poor's report provided similar results showing an upgrade rate of about 2.3 times the downgrade rate during the first half of 2006.
Standard and Poor's went on to say that global CDO performance continues to improve and that transactions backed by credit cards and auto loan ABS and prime jumbo and second-lien RMBS have experienced increases in credit quality, as have high-yield CBOs and CLOs, synthetic emerging market CDOs, and recent-vintage CDOs of ABS.
