Contents

Endgame signalled

Lack of demand dents CLO negative basis trades

The future for CLO negative basis trades looks bleak. Not only because there are so few remaining triple-A rated monolines to write the trades, but also because the demand for such a practice has dropped significantly as banks seek to clean up their balance sheets.

At some estimates, up to 90% of all CLO triple-A tranches have been subject to negative basis trades in the past, with the majority of trades comprising arbitrage opportunities that arose due to the competition that existed between the monolines. But market participants now doubt that the close link between CLOs and negative basis trades that existed in 2006 and 2007 will be seen again.

"If it were possible to find basis quotes today, they would certainly be positive," says Benjamin Herzog, quantitative strategist at Société Générale. "One thing that we have learnt from this crisis is that the CDS market over-reacts. Over the past year players with cash exposure have needed to rebalance their synthetic exposure, but protection has become more and more expensive. Clearly negative basis is not a safe trade."

While CDPCs have been mooted as a potential alternative for writing protection on such trades in the absence of monolines, the concept doesn't appear to have found any traction yet. "CDPCs are no solution in this case; there would be very few takers and, if it is a more expensive alternative to what the monolines offered, then there is no point," Herzog says.

Even if demand does return for negative basis trades once bank balance sheets improve, the absence of triple-A rated monolines - plus draft legislation currently under consideration - will likely dampen any resurgence in this area. According to Ratul Roy, head of structured credit strategy at Citi, the proposed restrictions placed on monoline structured finance business could lead to a reduction in the protection selling capacity within the industry.

The legislation in question is a proposed bill, released by the New York State Insurance Department, to amend Article 69 of the Insurance Law, which allowed monolines to sell protection on structured finance assets. Some of the changes that would come into effect under the new law include the disallowance of pledges by insurers to post collateral, the disallowance of acceleration in the event of a payment default or insolvency of the insurer unless the insurer so decides, and the buyer of monoline protection would be obliged to have a material interest in the reference asset.

In the meantime, the market is watching closely the fate of the two remaining triple-A rated monolines, FSA and Assured Guaranty. Both are currently on rating watch negative with Moody's, while FSA has a negative outlook from S&P. Furthermore, FSA has announced that it is exiting the ABS business (see last issue) - meaning that there is even less protection-selling capacity in structured finance and so even fewer potential participants in negative basis trades.

AC

CLO sentiment softens

Holiday season sees spreads reach historic wides

Traders have reported light trading volumes and a weakening of sentiment across the secondary CLO market over the past few weeks, with spreads reaching historic wides in both the US and Europe. Blame for the most part has been attributed to the holiday season; however, weakening technicals and concerns over defaults and potential liquidations are expected to weigh on CLO spreads over the coming weeks.

According to JPMorgan research, both European and US high-yield CLO triple-As are trading in the 200bp range (approximately 50bp wider than levels seen in July), double-As in the 500-575bp range, single-As around 700bp, triple-Bs at 900-1000bp and double-Bs at 1500-1800bp. But, while credit analysts at the bank expect ABS spreads to tighten during September as accounts return and trigger execution levels for some real-money investors are reached, they do not anticipate the same tightening trend for CLO spreads.

Signs of deterioration are already beginning to show in seasoned European CLOs: last week S&P assigned a negative outlook to the double-B rated tranche of Dryden V Leveraged Loan CLO 2003 and to the double-B rated Class E and Class F preferred shares of Babson CLO 2003. In both cases the agency cited negative rating migration in the underlying portfolios. Approximately 70% of the underlying loans in Dryden V's portfolio are now rated in the single-B range (up from 50% as of the earliest trustee report dated July 2004), while 72% of underlying loans in Babson CLO 2003 have ratings that are in the single-B range (up from 47% as of the earliest trustee report from June 2004).

Meanwhile, a number of mezzanine bid lists from previously-frozen German funds appeared in the European market during August, skewing the market further and prompting traders to call into question the timing of such a move given the market's illiquidity and current lack of consistency in pricing. But it is not all bad news: a few trades are said to be going through, albeit name-dependent and at inconsistent prices.

Equity tranches are also trading relatively well, and analysts remain confident that top-tier managers and transactions should outperform. There has even been a small amount of activity on the primary side (see SCI CDO database), with cautious investors seeing good names at cheap levels as a must-have, despite prolonged worries about mark-to-market risk.

For example, Babson Capital recently announced the closing of two US CLOs - Babson CLO 2008-I and Babson CLO 2008-II, totalling €840m in issuance and attracting a wide range of US and non-US institutional investors.

"The majority of the interest was seen in the middle part of the capital structure, where we had on average more than one investor per tranche," comments Russell Morrison, md and co-head of the firm's US bank loan team. "On average we had about 10 investors per transaction."

He concludes that, while the market for CLOs remains very selective, there are still opportunities for quality managers.

AC

Repo risk

ECB changes to help or hinder new issuance?

The ECB is set to refine its repo eligibility criteria imminently, amid concerns that banks have become over-reliant on the system for funding and liquidity (see SCI passim). Although the changes aren't unexpected and will likely only be minor, analysts warn that they could impact the ABS and CLO markets in a number of ways.

ECB council member and Luxembourg central bank president Yves Mersch announced at the Federal Reserve's Annual Economic Symposium that the ECB will amend its rules regarding repos in the near future (some expect this to be as soon as tomorrow, 4 September). He indicated that, while the central bank is comfortable with the broad collateral framework, the risk of "banks gaming the system" at the margin remains.

Shubhankar Nayak, ABS analyst at Lehman Brothers in London, suggests that the changes most likely to be made by the ECB involve increasing margin requirements and encouraging institutions to limit their reliance on the repo facility. He points out that, for the central bank's refinancing operations, the margin requirement for floating rate RMBS currently stands at a relatively small 2% (though it undertakes daily valuations and makes margin calls if needed). By comparison, the Bank of England special liquidity scheme (SLS) typically requires a haircut of at least 12%, while the US Federal Home Loan Banks require 5%-15% haircuts on triple-A rated RMBS.

However, the ECB lending facility has a short maturity of one week (for the main refinancing operations) and three to six months (longer-term refinancing operations), while the SLS scheme provides funding up to three years and the Fed up to five years or more. "Nonetheless, the ECB could potentially increase margin requirements from the current levels of 2% to reduce incentives to use it primarily as a tool for leverage," Nayak observes.

In terms of limiting reliance on the ECB's repo facility, Mersch indicated that this would best be done on a non-public basis. "Other possibilities exist, but we would view these as unlikely," explains Nayak. "The ECB could, for example, set explicit funding limits based on bank size or other factors, but we agree that restricting access to the facility would best be done on a private basis. It could also preclude certain types of securities from eligibility."

He adds that such changes are plausible, but only if they are minor, since significant changes in eligibility rules could have a de-stabilising effect on the market.

Whether it is an appropriate time for the ECB to begin tightening up the rules is difficult to judge because there isn't much data available as to how the flow of money is being managed. The moral hazard argument about arbitraging the system against the current funding market constraints is well known, but appears to be a side-effect of the general framework, which has worked efficiently to provide market liquidity.

Some say it's a 'chicken-and-egg' situation in that central banks are providing repo facilities because the interbank market isn't functioning properly, yet the interbank market is unlikely to regain liquidity while the repo facility is being used to such an extent. The ECB's move - together with the BoE's reported aim of withdrawing the SLS at the beginning of 2009 - won't necessarily open up primary ABS/CLO markets, but it could help reduce banks' reliance on repo as a source of funding.

While potentially negative for market technicals, any measures to wean banks off the central bank's liquidity window may prove persuasive in bringing lenders back to the securitisation market, agrees Ganesh Rajendra, head of securitisation research at Deutsche Bank. "At this stage we see issuer reluctance to fund at current spreads, rather than the outright lack of demand, being a greater factor in explaining the dearth in publicly placed primary supply," he notes.

Ron Thompson, head of securitisation and real estate research at RBS, points out that - with an average issuance of €36bn per month since the beginning of the year (nearly €290bn in total) - the number of retained deals is expected to fall in the future. However, he warns: "While some curtailment should not have been unexpected, this preliminary caution likely will unsettle markets. Though any changes will likely impact future securitisations rather than existing ones and retained deals should have had limited impact on publicly traded markets, participants may begin to price in liquidity limitations imposed by the ECB as the markets may be forced to absorb more collateral directly."

CS

Fund hires in EM credit

The latest company and people moves

Fund hires in EM credit
Chenavari Credit Partners has appointed Demian Duwe Brasil as senior credit portfolio manager focusing on corporate credit, primarily in emerging markets and high yield. He will also manage money from managed accounts that Chenavari has secured and act as a portfolio manager on the Chenavari Credit Dislocation Fund, whose launch is expected later this year.

Brasil has over 10 years of trading experience in asset management. Prior to joining Chenavari, he was a senior credit portfolio manager at Washington Square Investment Management, responsible for running a relative value credit opportunity fund, investing in leveraged loans, high yield bonds, CDS, LCDS and index tranches.

He also ran a dedicated EM fund with exposure to corporate and sovereign credits, and was a co-portfolio manager for the global corporate synthetic CDOs portfolio. Additionally, he was involved in setting up credit portfolio risk management models for various portfolios, including correlation VAR, spread VAR, DV01 and jump-to-default exposures, as well as extreme scenario stress tests.

From 1999 to 2004 Brasil was a portfolio manager and strategist at HSBC Asset Management in London and Brazil, responsible for South Korea, China, Taiwan, Malaysia, Thailand, India, Turkey, Russia, South Africa, Brazil and Mexico. Between 1997 and 1999, he worked for Unibanco Asset Management in Brazil as a fixed income portfolio manager, where he was responsible for Brazilian fixed income portfolios.

Team of Bear traders hired
RBS Greenwich Capital has hired a number of traders and sales people from Bear Stearns as the bank expands its mortgage business. In total the bank has taken on 16 new hires, 15 of which were previously at Bear Stearns.

These include ABX trader David Dietche, CDO trader Matt Katke, CDS trader Keith Lind and ARMS trader Joe Steffa. RBS has also hired John Suh from Bank of America to trade mortgage derivatives. Scott Eichel will co-head the asset-backed and mortgage trading business with David Cannon of RBS.

Eichel is joined by his two senior traders, Adam Siegel and Paul Van Lingen, while the additions to the sales team include Corey DeForrest, Andrew Javorksy, Dan Hoffman, Andrew Kail, Jesse Maffei, Lou Rosenfeld and Darryl Smith in Connecticut, and Matt Zisette who joins the Los Angeles office.

PIMCO gets Posch
PIMCO has hired Brigitte Posch as evp and portfolio manager in its emerging markets group. Posch joins PIMCO from Deutsche Bank in New York, where she was an md and head of LatAm securitisation and trading. She previously worked at Ambac, where she led construction of a local securitisation platform in Latin America, and before that she was a senior credit officer in Latin America structured finance at Moody's.

In the newly created position, Posch will be based in Newport Beach and report to Curtis Mewbourne and Michael Gomez, co-heads of PIMCO's emerging markets group. She will focus on emerging market investments in private sector credits, such as mortgage-backed and asset-backed securities, as well as investments related to emerging market infrastructure.

StanChart hires structuring head
Vinod Aachi has been appointed global head of structuring at Standard Chartered, a newly created position. Aachi will be a member of the Financial Markets Management Committee and report directly to Lenny Feder, group head of financial markets. He will be based in Singapore.

Aachi joins from Deutsche Bank, where he was previously responsible for all structuring for Asia, based out of Hong Kong and Singapore. He joined in 1997 in its Hong Kong Global Relative Value Group, which structured derivative products across Asia ex-Japan.

Over his 11 years at Deutsche he helped build a market leading capability in structuring, covering a wide range of products including fixed income, credit, currency, equity, commodity and hybrid derivatives. Deal structuring responsibilities included idea generation, pricing, co-ordination with trading desk, sales, credit, legal and regulatory clearances. In 2002, Aachi was promoted to lead the division.

Prior to this, he was a non-deliverable forwards swap trader at JPMorgan in Singapore, a fixed income research analyst with ICICI Securities in Mumbai and a Systems Executive for TATA-IBM in Mumbai.

Dresdner's 'at risk' assets moved into SPV
Following Allianz's sale of Dresdner Bank to Commerzbank, Dresdner, Commerzbank, and Allianz are to provide risk coverage for €4.9bn of specific ABS and monoline assets held by Dresdner. Under a 'trust' solution, the assets will be moved into an independent SPV, where the €275m first-loss piece will be paid by Commerzbank and the second-loss piece of €975m will be paid into the trust by Allianz.

The SPV will pay only for ultimate losses until the first and second loss pieces are depleted. There is no protection covered in terms of market movements. The guarantee lasts for 10 years.

The moving of the at risk assets into a SIV follows rumours that Lehman Brothers is looking to sell off a large portion of its commercial real estate assets. According to BNPP credit analysts, a leveraged sale could be difficult to pull off for Lehman, since it has less financial flexibility than other brokers and cannot offer financing packages as easily. On the other hand, BNPP say a spin-off would not be easy either, given the limited interest for mortgage assets in the marketplace, at least on a non-leveraged basis.

Swiss Re reorganises
Swiss Re is re-jigging the operational and management structure of its financial markets division. The company declined to provide any details other than the following statement:

"The recent organisational refinements represent a further step towards realising the evolving business model described in Swiss Re's vision, which we presented to the public in February 2008. To this end Financial Markets continues to focus on two strategic mandates that are core to Swiss Re and clearly reflected in the new organisational set-up:

• Firstly, the Investment Management Divisions are dedicated to generating superior risk-adjusted returns investing the assets Swiss Re sources through its re/insurance activities, and
• Secondly, the Financial Markets Products Division is focused on fostering innovation and profitable growth in hybrid products at the intersection of capital markets and re/insurance."

Exotix adds Pons
Vicente Pons has joined the structured products desk at Exotix as the firm strengthens its structuring capabilities in sub-Saharan Africa. He will be a director in the structured products team.

Pons has focused his banking career on the emerging markets of Africa. He is well known in the industry as the initiator of African local currency trading at Citibank. At Exotix, he will also take responsibility for domestic currency issuances.

Pons initially joined Citigroup's emerging markets credit trading team as a structured credit trader, later setting up the local access fixed income business. He then moved to Renaissance Capital as head of fixed income trading and equity derivatives for Africa. At Exotix, he will be part of the structuring group, advising on local currency issuance and investment opportunities in sub-Sahara Africa and other frontier emerging markets.

GCC investors to sue over Cheyne SIV losses
Abu Dhabi Commercial Bank (ADCB) has announced that it is taking legal action in New York, following losses as result of investment in the Cheyne SIV. The legal action alleges, amongst other things, that ADCB was misled about the quality of the underlying mortgages in which the Cheyne SIV would invest.

ADCB has also held talks with other GCC banks and investors about joining the class action, and based on these conversations, ADCB expects additional investors to join or support the legal action as required.

ADCB's ceo, Eirvin Knox, comments: "This is the next step in a process aimed at recouping the losses ADCB has already incurred and, additionally, this is an important step in paving the way for other GCC investors to ensure they are provided an opportunity to recover their own losses. This is the right thing to do and ADCB has taken a proactive early lead to protect itself and other investors."

Ex-CDO head joins Churchill
The Churchill Financial Group has hired David Heilbrunn in the newly created position of senior md, head of corporate strategy & development. He will also be a member of Churchill's senior management team.

Heilbrunn will be responsible for executing and coordinating M&A, joint venture and strategic alliances, launching new product offerings, managing existing and new banking and investor relationships, and coordinating future capital raising activities. He was previously senior md and CDO group head for Bear Stearns' structured financial products group. Before that, he spent 12 years with JPMorgan, leading various business units, most recently serving as md, structured credit products, responsible for the bank's North American CDO origination, structuring and execution activities.

DE Shaw hires for new ABS group
Richard McKinney has joined D. E. Shaw & Co as an md to oversee the firm's newly formed ABS unit. He will report to Max Stone, a member of the firm's six-person executive committee. Rocky Kurita joined the firm in July as a svp and will work with McKinney in the new endeavor.

According to a statement, the team will invest in a broad range of asset-backed products.

McKinney joins the firm from Lehman Brothers, where he headed the securitised products business for the past year. Kurita has fourteen years of experience in trading, hedging and marketing ABS and joined the firm from Deutsche Bank, where he was an md.

FRSGlobal buys IRIS
FRSGlobal has acquired Iris integrated risk management (IRIS), a provider of risk management solutions. The acquisition enables FRSGlobal to introduce the first combined risk and regulatory reporting solution for financial services - addressing the need to create a single, reliable data framework to best manage risk and meet increasing global regulatory demands.

Steve Husk, ceo, FRSGlobal, comments: "Risk and regulatory solutions have always been vital to the smooth operation of the financial industry and their true value is being highlighted in today's tough economic climate. Risk and regulatory software have traditionally developed separately - we see this as the ideal time to pursue a strategic acquisition and bring the two together."

BGC and Liquidez team up
BGC Partners has entered into a definitive agreement through one of its affiliates to acquire Brazilian inter-dealer broker Liquidez. With offices in Sao Paulo and Rio de Janeiro, Liquidez is a Brazilian inter-dealer broker for foreign exchange derivatives, commodities, credit, equities and interest rate products.

BGC Partners has agreed to purchase Liquidez for an initial consideration made up of approximately an even amount of cash and partnership equity and which values Liquidez at approximately seven times its expected 2008 post-tax profits. The transaction is expected to close in Q109 and to be immediately accretive to BGC Partners' distributable earnings.

Sophis appoints Italian operations head
Sophis has opened a new office in Milan and appointed Willy Contrada as head of its operations in Italy. This is Sophis' first office in Italy and follows the opening of new offices in New York and Dubai, plus the appointment of a new senior management team across the world.

Contrada was previously Italian country manager at Misys, where he had the specific role of building a new market for Misys and growing its customer base. At Misys he was also responsible for developing a specific business line (regulatory and compliance reporting for South Europe, including Iberia and Greece).

ICE and Creditex merger complete
IntercontinentalExchange (ICE) has completed its acquisition of Creditex. Creditex Group is now a wholly-owned subsidiary of ICE, operating under the Creditex name with continued leadership by the existing Creditex management team.

"Together with Creditex, we look forward to serving the interdealer CDS market by building on our track record of working closely with dealers, their clients and regulators to provide enhanced operational and risk management tools," says ICE chairman and ceo Jeffrey Sprecher. "The recent development of a portfolio compression platform by Creditex and Markit is just one example of our commitment to meeting the evolving needs of the CDS market through innovation, service and rapid time to market."

Wells Fargo promotes Shrewsberry
John Shrewsberry, head of Wells Fargo's Securities Investment Group, is to also lead the firm's US Corporate Banking division. Since 2006, he has been responsible for Wells Fargo's proprietary portfolio of fixed income investments, including corporate, high-yield, municipal and ABS, as well as Wells Fargo Financial Products - the company's derivative sales and trading division.

Shrewsberry joined Wells Fargo in 2001, when the firm he founded, American Commercial Capital, was acquired by the bank. Earlier in his career, he was a vp in the fixed income division at Goldman Sachs, and in the principal finance and mortgage finance business lines at Credit Suisse First Boston.

AC & CS

BIS critiques the ABX

A round up of this week's structured credit news

BIS critiques the ABX
The BIS has released its Quarterly Review, which is divided into two parts. The first presents an overview of recent developments in financial markets, before turning in more detail to highlights from the latest BIS data on international banking and financial activity. The second part presents four special feature articles, including one on the determinants of the returns of Markit ABX indices.

The authors of the report state that the ABX family of indices has become a key barometer of sub-prime mortgage market conditions during the financial crisis. Simple regression analysis illustrates the relationship between observed index returns and proxies of default risk, interest rates, market liquidity and risk appetite. The results suggest that declining risk appetite and heightened concerns about market illiquidity have provided a sizeable contribution to the observed collapse in ABX prices since the summer of 2007.

While proxies for fundamental drivers of sub-prime mortgage risk, such as indicators of housing market activity, have continued to exert a strong influence on the subordinated ABX indices, the double-A and triple-A indices have tended to react more to the general deterioration of the financial market environment. These results underline the view that risk premia are important components of observed prices for default-risky products, and that the relative importance of non-default-related risk factors will tend to increase in periods of strong repricing of risk. This suggests that theoretical pricing models that do not sufficiently account for these factors may be inappropriate, particularly in periods of heightened market pressure, the authors note.

A related set of findings concerns the use of ABX price information by market participants and policymakers for the valuation of positions in US sub-prime instruments. Importantly, the authors say, the empirical results provide tentative evidence suggesting that observed ABX prices are unlikely to be good predictors of future default-related cashflow shortfalls on outstanding sub-prime MBS, especially for tranches at the higher end of the capital structure. This is in part because coverage of the ABX indices extends only to a small fraction of the outstanding sub-prime MBS universe, which can lead to significant price divergence across like-rated products even in the absence of sizeable risk premia.

Understanding the specific factors driving the variation of ABX prices is important for market participants and policymakers because changes in the weight of credit- and non-credit-related elements may have different implications, the BIS explains. For instance, indications of changes in risk appetite with regard to sub-prime mortgage risk may help explain any discrepancies between observed ABX prices and projections of default-related losses on the underlying pool of sub-prime MBS.

These discrepancies, in turn, can have consequences for investors; for example, when ABX quotes are used to value existing holdings of sub-prime MBS. Yet, despite the importance of these issues, empirical work on the ABX indices has so far been scarce.

Distressed debt funds perform below expectations
The number of hedge funds investing in special situation and distressed debt is growing considerably, according to recent data from Hedge Fund Net (see also separate news story). Distressed funds increased by US$23.1bn in Q208 to US$275.4bn, while funds focusing on MBS rose by 19% on a quarter-on-quarter basis to approximately US$35bn.

But according to HFN, the average performance from distressed hedge funds has been "well below the expectations of many" in 2008. Distressed funds reported returns of -4.36% in July and -7.14% since the beginning of 2008.

Returns from distressed funds have varied widely depending on fund size. At almost every single percentile rank, the larger funds have performed better.

The smallest funds, those with less than US$20m in assets under management, produced a median last twelve months return of -9.48% and a top-tenth percentile return of almost 400bp lower than the equivalent fund in the next larger fund size group. Distressed funds with more than US$100m in AUM have performed significantly better than those with less than US$100m.

The report suggests that smaller distressed firms are more likely to buy distressed securities based on analysis of likely outcomes, or with expectations of recovery. "As bank financing has become less available and riskier debt prices in many sectors continue to fall, smaller distressed funds are operating in a very difficult environment," it says.

Meanwhile, the larger distressed funds are able to undertake traditional distressed debt strategies, whereby the investor builds a position in the most senior debt of a failing company and uses the position to influence or prevent bankruptcy proceedings.

Yet, despite lower than expected returns, structured credit analysts at UniCredit predict an influx of more distressed hedge funds on the buy-side and expect significant upside potential as soon as liquidity returns to the market.

CIFG downgraded over "slow progress" ...
S&P has lowered its financial strength ratings on CIFG to single-B from single-A minus. The ratings remain on credit watch, with the implications changed to developing from negative. The downgrade is the result of delays in the company's implementation of its restructuring plan and slow progress in its negotiations with counterparties of its ABS CDO exposure.

"If management is not successful in its negotiations to develop strategic alternatives for problematic credits in its insured portfolio, we believe the impaired financial position of the company could lead to regulatory intervention, in which case the rating could be further lowered," says S&P. "If management is successful in its negotiations and presents a viable business strategy for the company, the rating could be revised upward."

... then CDS commutation plan is announced
However, yesterday (2 September) CIFG announced that it has entered into a memorandum of understanding with more than 75% of CDS counterparties and insured bondholders on its insured ABS CDO exposures and certain specified CRE CDO exposures.

Upon the closing of the transactions contemplated, CIFG will have successfully commuted approximately US$12bn in notional ABS CDO and CRE CDO exposures in exchange for cash and equity. The monoline anticipates that the contemplated transactions will substantially reduce its exposure to problematic derivatives, resulting in a significantly improved capital position and claims paying resources sufficient to satisfy rating agency investment grade capital requirements.

CIFG is also seeking to reinsure its public finance portfolio with a double-A rated insurer, thus providing municipal investors with enhanced protection. The final agreement is subject to the execution of definitive documentation by 100% of the CDS counterparties to the ABS CDO transactions and the designated CRE CDO transactions. The closing is also subject to a number of other conditions, including obtaining any required approvals from Bermuda, New York and French regulators.

"While much work remains to be done, this is a major step forward. When we reach final agreement, it will work to the mutual benefit of all parties, as it will restore CIFG to financial health and better position the company to honour its obligations to policyholders," says John Pizzarelli, ceo of CIFG.

Havenrock II exposure also commuted
FGIC UK has paid Calyon US$200m to commute the insurance provided by the monoline to Havenrock II, an ABS CDO that has been deemed one of FGIC's most problematic exposures. FGIC UK had insured some US$1.87bn of high-grade and mezzanine ABS CDOs contained in the US$2.5bn deal.

FGIC has also announced that MBIA will reinsure certain policies covering approximately US$184bn of FGIC's US public finance insured par outstanding. The reinsurance provided by MBIA will enable covered policyholders to make claims for payment directly against MBIA. The closing of the reinsurance transaction is subject to a number of conditions, including approval of the New York State Insurance Department, and is expected to close in late September 2008.

FGIC says it believes that this reinsurance transaction will benefit all policyholders and will substantially strengthen its statutory financial position.

Ambac gets go-ahead for Connie Lee reactivation
Ambac has received regulatory approval from the Commissioner of Insurance for the State of Wisconsin to capitalise and reactivate Connie Lee Insurance Company, a subsidiary of Ambac Assurance, its existing insurance entity. It is looking to obtain ratings from S&P and Moody's, targeting a triple-A rating from both. Ambac says it expects Connie Lee to begin writing new business no later than Q408.

Delinquencies rise for prime UK mortgages
Delinquencies in prime UK mortgages continued to increase in Q208, according to S&P. Total delinquencies rose to 2.94%, up from 2.33% the previous quarter, and 90+ day delinquencies hit 1.00%, up from 0.92%. These are the highest values seen in S&P's index, exceeding the previous peak in 2006.

The number of repossessions also increased across most transactions, noticeably in Northern Rock's Granite trust. "Despite the fact that almost all transactions saw some increase in delinquencies, the UK prime RMBS transactions that we rate have performed well to date, with no reserve fund draws, no note defaults and no lowering of the ratings in any of the transactions used to calculate our indices," explains credit analyst Kate Livesey.

The payment rate index has remained in the low 30% range throughout Q2, reflecting reduced refinancing activity and fewer product switches.

In a separate report, S&P notes that the total delinquency index for UK non-conforming RMBS increased to the record level of 23.31% in Q208. The collateral performance of the transactions in its UK non-conforming RMBS index worsened in Q2, and it lowered the ratings on tranches in 11 UK non-conforming RMBS transactions since the publication of the Q1 index report. Ratings in eight transactions are on credit watch negative.

SIV-lite restructuring gets underway
The restructuring of Solent Capital's SIV-lite Mainsail II has been agreed. The restructuring follows a similar route to that of the Cheyne and Rhinebridge SIVs, whereby a portion of the assets will be sold in an auction to cash bidders and the remaining assets sold to Goldman Sachs at a price defined by the auction.

The receiver, KPMG, has said that it does not anticipate that net cash proceeds from the sale will be sufficient to allow any payment to be made to the holders of the mezzanine notes or the capital notes, or to any other party which is subordinate to the senior secured parties in the applicable priority of payments.

The portfolio sales are due to take place this month, with settlement expected shortly thereafter. However, portfolio sales may be delayed or cancelled due to adverse market conditions or if the price achieved in the auction is deemed unacceptable.

PGGM and SCB share Shangren risk
Dutch asset manager PGGM and Standard Chartered have completed a US$2.5bn synthetic trade receivables deal named Shangren. The move comes as Citi preps its own credit-linked trade finance transaction (see last issue).

In a risk-sharing agreement PGGM is providing credit protection at the equity and mezzanine level on a portfolio of trade finance credit exposures. Standard Chartered will co-invest in the equity tranche and is retaining the senior tranche.

All assets are sourced from SC's balance sheet - the portfolio comprises 1,600 customers in 30 countries across the bank's core markets. Raymond van Wersch, senior portfolio manager of structured credit at PGGM, comments: "Shangren offers us a unique opportunity to invest in a new asset class that is difficult to find in the public market. The portfolio is well-diversified and Shangren's attractive risk-return characteristics represent a valuable addition to our continuously growing structured credit portfolio, as well as the overall portfolio."

Paul Hare, md of portfolio management at Standard Chartered, comments: "We see Shangren as strong endorsement of our credit discipline and clear strategic focus in our core markets."

Moody's downgrades ABS CDOs
Moody's has downgraded the ratings of 101 classes of notes issued by 29 CDOs backed primarily by portfolios of RMBS securities and CDO securities. Two of the rating downgrades were left on review for possible further downgrade. In addition, the agency has withdrawn the ratings on two ABS CDO notes because they have been paid in full.

Moody's explains that each of the transactions has experienced an event of default (EOD) under the applicable indenture. As provided in Article V of the CDO indenture, during the occurrence and continuance of an EOD certain parties to the transaction may be entitled to direct the trustee to take particular actions with respect to the debt securities and the notes. In this regard, the trustee of each CDO notified Moody's that it was directed to dispose of or terminate all of the CDO collateral.

OTC Hub launches
State Street Corporation has launched an OTC derivatives servicing platform. Already beta-tested, the OTC Hub is now live with PIMCO.

OTC Hub is a global end-to-end servicing solution that automates a number of stages in derivatives processing, including customer reporting, electronic trade flow and the reconciliation of positions and cashflows between the middle and back offices. The platform will now reconcile data from the industry utilities and dealers to customer trade details, as well as automate acquisition of vendor prices. It is flexible in order to allow for enhanced services and capabilities as the derivatives market evolves and industry technologies mature.

"This cutting-edge technology provides an excellent opportunity to automate what has been a manually driven and complex part of our investment servicing operations," comments Richard Tyson, evp of PIMCO. "Throughout our long partnership, State Street has consistently delivered advanced technological solutions for the challenges that come with a changing marketplace."

LSS approach updated
In light of the unprecedented spread levels and volatility experienced by the corporate credit market, Moody's has updated the tools it uses to monitor LSS transactions featuring loss and spread triggers. The agency's approach now integrates a more efficient, streamlined modelling test.

This test assesses the resilience of the LSS against both short-term and long-term credit and market value stresses. Moody's uses the results from this test as information for its rating committees and intends to run it periodically on all rated LSS transactions.

The transaction distance to trigger is defined, at each point in time, as the difference between: the trigger (as per each transaction's trigger matrix) and the current weighted average spread of the reference pool. To pass the test, the distance to trigger (evaluated according to Moody's default rate scenarios) over multiple time horizons needs to be higher than the spread widening criteria defined by Moody's according to the target rating.

Note that the short-term risk is addressed with the test run at one month with no default taken into account, while the long-term risk is addressed with the test run at six months, one, two and five years with appropriate default rates. It is also important to note that the spread-widening criteria were developed, in part, using data from the various CDS IG indices. To the extent that a reference pool deviates from the typical names in the CDS IG indices and to the extent Moody's believes that there may be additional adverse selection in the pool such that there is potential for higher spread volatility, the criteria may be adjusted to take into account the specific characteristics of the pool.

In monitoring LSS transactions, Moody's rating committees consider various aspects of the deals, including the expected performance of each transaction relative to the test described above, both at a single point-in-time as well as over time. This approach only applies to transactions with spread and loss triggers and for portfolios that are comprised of names from CDS IG indices or that are not expected to have higher spread volatility than these indices. Portfolios that may have higher volatility will be analysed on a case-by-case basis.

SEC to publish IFRS roadmap
The SEC has voted to publish for public comment a proposed roadmap that could lead to the use of IFRS by US issuers beginning in 2014. The Commission would make a decision in 2011 on whether adoption of IFRS is in the public interest and would benefit investors. The proposed multi-year plan sets out several milestones that, if achieved, could lead to the use of IFRS by US issuers in their filings with the Commission.

The increasing integration of the world's capital markets, which has resulted in two-thirds of US investors owning securities issued by foreign companies that report their financial information using IFRS, has made the establishment of a single set of high quality accounting standards a matter of growing importance. A common accounting language around the world could give investors greater comparability and greater confidence in the transparency of financial reporting worldwide, the Commission says.

"An international language of disclosure and transparency is a goal worth pursuing on behalf of investors who seek comparable financial information to make well-informed investment decisions," notes SEC chairman Christopher Cox. "The increasing worldwide acceptance of financial reporting using IFRS, and US investors' increasing ownership of securities issued by foreign companies that report financial information using IFRS, have led the Commission to propose this cautious and careful plan. Clearly setting out the SEC's direction well in advance, as well as the conditions that must be met, will help fulfill our mission of protecting investors and facilitating capital formation."

Chairman Cox says that since March 2007 the SEC has held three roundtables to examine IFRS, including one in August regarding the performance of IFRS and US GAAP during the sub-prime crisis. The Commission also issued last year a concept release on allowing US issuers to prepare financial statements using IFRS.

Permacap reports
Carador has announced that, as at the close of business on 31 July 2008, the unaudited net asset value per share was €0.6674. The month's calculations includes an estimated €701,987.58 worth of net cashflow interest received in the month (to be allocated between capital and income), which equates to €0.0140 per share.

Following the appointment of GSO Capital Partners as investment manager, an adjustment has been made to the portfolio valuation methodology. With effect from 31 July 2008, the portfolio will be valued by inputting a number of assumptions into a model provided by GSO based on Intex software.

Intex will provide a platform for the production of valuations on a consistent basis, across the portfolio, month on month. Applying the change in the valuation methodology retrospectively to the portfolio as at 30 June 2008, the net asset value would have been €0.6470 per share compared to the published net asset value of €0.6493 per share using the old methodology.

Crown Woods securities sold
Cambridge Place Investment Management has announced that the portfolio of securities held in the Crown Woods funding facility was sold following a process of competitive auction on 1 September. The proceeds raised from the sale have been used to repay the third-party funding against these securities.

There were no surplus funds available to the Caliber vehicle following this repayment and, as such the company's investment in the Crown Woods entity is nil.

As at the close of business on 31 July, Caliber's unaudited company-only net asset value per share was US$0.36 (compared to US$0.40 on 30 June). The figure excludes those non-recourse SPVs which contributed negative net assets to the unaudited consolidated NAV as at 31 July.

Caliber's investment in Crown Woods on 31 July was US$2.4m. The company-only NAV adjusted to exclude the investment in Crown Woods was US$0.27. The unaudited consolidated NAV was US$5.41 (compared to US$5.29 on 30 June).

Loan performance continues to weaken ...
The performance of the pools of loans backing US RMBS issued in 2006 and 2007 continued to weaken throughout the first half of 2008, says Moody's in a mid-year update. Pools of both first and second lien loans issued in 2006 and 2007 and across the credit spectrum continue to suffer from difficult market conditions, with delinquencies and losses continuing to rise in recent months.

Many factors have adversely affected the performance of recent mortgage pools, including weaker collateral, declining home values, higher mortgage rates and reduced credit availability to lenders. First lien sub-prime and Alt-A transactions have seen dramatically higher levels of delinquencies and losses in 2006- and 2007-vintage transactions relative to prior years.

The performance of mortgage pools in jumbo transactions from 2006 and 2007 has also weakened relative to that of prior years. While the absolute level of delinquencies remains low in comparison to other RMBS segments, jumbo delinquencies have been building more quickly in recent months.

Moody's had previously identified some recent-vintage jumbo transactions that were at risk of downgrade based upon the performance data available at the beginning of 2008. Given the continued performance deterioration in the jumbo sector, the agency is currently reviewing all such transactions that were originated in 2006 and 2007.

Second lien pools, a much smaller proportion of RMBS issuance in comparison to first liens, have also experienced extreme poor performance. Moody's expects 2005 vintage sub-prime closed-end second (CES) pools to lose 17% on average, 2006 vintage pools to lose 42% on average and 2007 pools to lose 45% on average. However, given the wide range of deal characteristics and pool performance among transactions, its expectations for any given transactions can vary significantly.

Prime CES pools have experienced far lower losses than have sub-prime ones, although - like in every other RMBS sector - 2006 and 2007 vintage delinquencies and losses have been increasing. On average, Moody's expects 2005 vintage prime CES pools to lose about 6% of their original balance, 2006 vintage pools to lose about 13% and 2007 vintage pools to lose about 17%.

The performance of recent vintages of home equity line of credit (HELOC) pools has also weakened significantly. Moody's projects that pool losses on 2005 vintage HELOC transactions will average about 9%, while 2006 vintage transactions will on average lose around 24% and 2007 vintage around 26%.

... and delinquencies climb
Remittance reports for the August distribution date show that monthly aggregate 60+ day delinquencies have climbed 28bp, 117bp, 158bp and 142bp (compared with rises of 46bp, 134bp, 135bp and 158bp last month) for Series 06-1, 06-2, 07-1 and 07-2 respectively. Index collateral performance was mixed across series and by delinquency bucket, according to analysts at Barclays Capital.

All delinquency buckets for Series 07-1 showed increases in August, as did 07-2 with the exception of foreclosures. The percentage of loans that were 90+ days delinquent, in bankruptcy, foreclosure or REO rose in Series 06-2, although 30-59 and 60-89 day delinquencies declined. In Series 06-1, 60-89 day delinquencies and foreclosures declined, while other buckets increased.

In aggregate, total prepayments rose for Series 06-1, 07-1 and 07-2, and fell for Series 06-2. Default rates continued to rise for all index series, though voluntary prepayments were mixed.

However, one development regarding loan modifications caused the analysts to question the accuracy of reported voluntary prepayment speeds. "In a housing market note, existing home sales in July were boosted by increasing REO liquidations, based on our updated estimates of distressed home sales. REO inventories grew 6% on the month, suggesting continued downward pressure on home prices."

Fitch examines LBO debt recovery rates
Fitch says in a criteria report that ring-fencing, strategic interest and cross-acceleration provisions (i.e. both debts become payable at the same time) between receivables securitisation programmes and LBO debt are key to assessing the likelihood of recovery rates for an LBO financing's debt. The report provides a pragmatic rather than an accounting approach to the structures featuring these two types of debt and helps to assess the recovery rate for the LBO debt using Fitch's recovery ratings methodology.

The document identifies the key factors that would lead the agency to consider the receivables securitisation as a super-senior form of financing, including ring-fencing and non-recourse clauses, but also the size of the programme, availability of other sources of financing, the associated reputation risk and other strategic consideration issues. The criteria report formalises current best practice and, therefore, limited rating actions are expected to result from its publication.

Disclosure proposals on hold
Fitch says that it is waiting to assess the shape of further regulatory proposals regarding retained securitisation positions and broader securitisation industry actions in response, prior to determining whether to proceed with its own related disclosure proposals. For example, the European Commission proposed changes to the Capital Requirements Directive following the publication of Fitch's proposals, which - if implemented - would go further than only disclosure in this area and require originators and arrangers to retain a proportion of any securitised positions in which European banks invest (see SCI issue 98).

"In Fitch's view, the disclosure of retained risk would improve transparency, allowing market participants to form their own judgements on any perceived alignment of interest issues, as well as offering the possibility to accumulate performance data to assess any impact," says Stuart Jennings, structured finance risk officer for EMEA Structured Finance. "Fitch has, however, decided to wait in deciding whether to implement its own disclosure proposals. This is to allow us to assess what final proposals come from regulatory authorities and what alternative initiatives might be proposed by securitisation industry bodies. These may impact the relevance of Fitch's proposals - particularly, for example, if a more universal disclosure regime might be proposed."

In an exposure draft published on 24 June, the agency proposed voluntary issuer disclosures on Fitch transaction surveillance pages as to whether equity piece risk had been retained or not by key transaction counterparties, such as the originator and servicer. In the exposure draft, Fitch raised a number of further questions for comment, including whether disclosures of retained positions further up the capital structure would also be valuable, as well as only equity piece risk.

The extended exposure period ended on 5 August. The agency says that feedback on the exposure draft has been mixed in relation to the proposal, with no broad consensus emerging on its merits among any industry group.

PLA introduced for SF CDOs
Fitch has introduced its asset-level projected loss analysis (PLA) to quantify loss expectations on structured finance CDOs. This new analysis builds off Fitch's RMBS mortgage loss assumptions to estimate the impact to SF CDOs. PLA analysis complements its criteria used for the review of existing SF CDO transactions with portfolio concentrations of sub-prime and Alt-A RMBS issued between 2005 and 2007.

Fitch initially developed the SF CDO PLA to identify tranches that were at risk for downgrades based on loss expectations for the underlying RMBS assets. This analysis shows how much mortgage distress any one SF CDO tranche can sustain before experiencing losses, according to md Kevin Kendra. The criteria report presents these RMBS loss estimates by issuance year, as well as sensitivity of RMBS loss estimates to underlying mortgage loss assumptions.
"Bridging the gap between residential mortgage delinquencies, foreclosures and losses to the structured finance CDO tranches held by banks, insurance companies and other investors has proven to be a challenge for many in the marketplace," says Kendra. "This analysis demonstrates the variation of CDO loss expectations to changes in mortgage loss assumptions."
Fitch has applied the PLA criteria in screening Fitch-rated SF CDOs to identify tranches to be placed on rating watch negative where asset credit migration had not materialised at that point in time. The continued RMBS downgrade activity experienced this year corroborated the insights from this analysis.

The PLA also allowed Fitch to generated stressed CDO loss estimates for SF CDOs not rated by Fitch, but held by Fitch-rated entities. This analysis has been used in analysing CDO-squared transactions, financial guarantors, financial institutions and CDPCs that have exposure to SF CDOs.

CMA releases DataVision 2.1
CMA has released DataVision 2.1, an upgraded and expanded version of its same-day price verification service for the OTC credit derivatives market. DataVision provides portfolio and risk managers with independent price verification for CDS, indices and tranches based on a buy-side consortium model.

DataVision 2.1 will include enhanced curve modelling and additional features including improved bid-offer spreads, cumulative probability of default, PV01 calculations, hazard rates and liquidity netrics as part of the end-of-day file. The expanded data set will be made available both to users who receive the data directly from CMA and those who access the data through CMA's distribution partners.

This is the first major product release from CMA since it was acquired by CME Group in March and follows on from an announcement earlier this summer that CMA had enhanced its ability to value thinly traded and illiquid CDS tranches and tranchelets in DataVision.

Moody's reports on MV CDOs
Managers of corporate market value (MV) CDOs have generally succeeded in maintaining credit quality through active steps, such as shifting assets to a more conservative mix, Moody's says in a market update.

"The exceptional market circumstances that have emerged over the past year have stressed the performance of corporate-backed MV CDOs," says Moody's vp and senior credit officer David Ham. "Nonetheless, Moody's has only had to take rating actions with respect to one of these transactions because managers have worked to maintain rating stability."

He adds: "However, in light of the unprecedented market turmoil that we have observed over the past year, it is reasonable to ask whether or not overcollateralisation (OC) levels are adequate."

Specifically, when monitoring MV CDOs, Moody's believes that the Advance Rates (or ARs) assigned to each transaction at its inception may not be consistent with the current market environment and may take action on those transactions where the reported OC levels are low, but are not necessarily at or below their covenanted OCs. An AR represents the proportion of liabilities that may be supported by a particular mix of collateral assets, and this reflects the haircut Moody's applies to those assets to assure adequate collateralisation.

Because managers have proactively moved towards a more conservative asset mix, many of the CDOs have maintained relatively large OC cushions, says Moody's. Most of these transactions are able to withstand lower ARs, if necessary. When OC levels on any rated MV CDO decline to levels close to what Moody's perceives as being inadequate to current ratings, Moody's seeks additional information and updates from managers on underlying collateral.

CS & AC

Trading ideas: the sweet spot

Byron Douglass, senior research analyst at Credit Derivatives Research, looks at an energy sector basket

Spreads continue to inch wider, making us more inclined to put on beta-neutral trades rather than take outright bets. And, with crude oil continuing to make the news, we felt it was appropriate to put together an energy sector long/short basket.

The basket is taken directly from our quantitative credit model. The model takes into account both fundamental and market-implied factors, and calculates an expected spread level for all issuers based on a peer-to-peer comparison. Since this is a pure relative value model, it makes sense to use it to generate long/short basket trades.

This basket also focuses on triple-B credits, which we consider to be a 'sweet spot' for the MFCI model. Crossover issuer spread levels are highly sensitive to market-implied factors while still rooted to their core fundamentals. With equal notional weightings for each credit, the basket has a small amount of negative carry; however, we believe that now is a time of differentiation where good credits will perform well and bad credits will continue to worsen.

The process
This week's basket was generated by restricting the selection pool to the energy sector and then filtered by choosing only triple-B credits. Crossover credit spread levels are highly sensitive to market-implied factors while still rooted to their core fundamentals. The final cut was made by picking credits with either very positive (for the longs) or negative (for the shorts) MFCI scores.

The basket
With our decision process in place, we finalised the basket of longs and shorts. Exhibit 1 lists the issuers for the trade, along with their quantitative credit scores.

Exhibit 1

On the long side, Energy Transfer Partners (ETP) leads off as our top pick. Its credit spread trades in the mid-140bp and we expect it to drop by almost half in the next few months.

ETP's market-implied factors scream for its credit to tighten. Its equity-implied volatility is in the top decile relative to its peers - thus the equity market does not see increasing volatility in the company's future earnings.

A fundamental factor we like to look at is accruals, as they give us an idea about the quality of a company's earnings. ETP's accruals fall into the top decile ranking bucket.

Talisman Energy is the other long credit for the basket and it too has extremely strong accruals. On top of that, every single fundamental factor for Talisman is in one of the top-two ranking buckets.

This company is positioned well from a fundamentals standpoint. We see potential for about 70bp of spread tightening for the credit.

Valero Energy has consistently made our top short list for the energy sector over the past few months and we got the jump in spread that we were looking forward to. Valero's CDS widened 60bp since the beginning of August. We see more room to the downside and expect its spread to trade close to 300bp, due to weak relative margins, poor accruals and free cashflow levels, as well as bad market-implied factors.

Another credit we are bearish on is Weatherford International. At a spread of 130bp, we see around 50bp of spread widening potential - enough to pay for the negative carry and negative roll-down. Weatherford's implied volatility, free cashflow and accruals all point to deterioration in its credit spread.

Exhibit 2

All MFCI factor ranks are shown in Exhibit 2.

Long issuers                                Positive model factors
Energy Transfer Partners           EiPD, implied vol, accruals
Talisman Energy                          Margins, leverage, free cash, interest coverage, accruals

Short issuers                               Negative model factors
Weatherford International          Implied vol, free cash, accruals
Valero Energy                               EiPD, implied vol, margins, free cash, accruals

With equal weighting across all names, both longs and shorts, the overall trade has 42bp of negative carry. Recently, the short basket has underperformed the long and we expect this trend to continue (Exhibit 3).

Exhibit 3

Economic intuition
The MFCI model, through use of a peer-to-peer comparison, quantifies how much spread investors should require to be exposed to the credit risk of a given company. We use the following factors to quantify an issuer's fundamental risk level: earnings, leverage, accruals, free cashflow level and interest coverage.

We also use market-based factors to incorporate forward-looking risk estimation; EiPD (equity-implied default probability) and equity-implied volatility. The EiPD is backed out from a Merton-style hybrid structural model that uses equity, credit and balance sheet data.

Use of model
We believe this model provides a quick way to scan a large universe to find credits that are trading out of line relative to one another. We recommend using our top long and short lists as a first stop for idea generation or as a tool for confirming trading ideas that have a more pure fundamental rationale. The MFCI score can be used for both intra-sector pairs trades and outrights.

Risk analysis
Due to the quantitative nature of the MFCI model, there are a few pitfalls to using the model and we would never recommend anyone to blindly execute trades from it. One potential risk to the model is that it under-weights the notion of event risk (other than inherent in the market-based factors). A potential levered event could actually cause the model to issue a long (sell protection) signal.

Also, the model is a relative value tool and therefore extremely dependent on the data and current spread levels of peers. We have tried to take this into account by having strict data requirements and manually screening the data. We highly recommend any trading ideas be judged both quantitatively and fundamentally before execution.

Entering and exiting any trade in these maturities carries execution risk, and this is a concern with these credits in these maturities as they are high yield names with large bid/ask spreads.

Liquidity
Liquidity - i.e. the ability to transact effectively across the bid-offer spread in the CDS market - is a major driver of any longer-dated trade. Our data on liquidity, created from the volume of bids, offers and trades we see each day, provide us with significant comfort in both the ability to enter a trade in all of these credits and the bid-offer spread costs. The Crossover market carries with it reasonable spreads which are not of great concern to us.

Summary and trade recommendation
Spreads continue to inch wider, making us more inclined to put on beta-neutral trades rather than take outright bets. And, with crude oil continuing to make the news, we felt it was appropriate to put together an energy sector long/short basket.

The basket is taken directly from our quantitative credit model. The model takes into account both fundamental and market-implied factors, and calculates an expected spread level for all issuers based on a peer-to-peer comparison. Since this is a pure relative value model, it makes sense to use it to generate long/short basket trades.

This basket also focuses on triple-B credits which we consider to be a 'sweet spot' for the MFCI model. Crossover issuer spread levels are highly sensitive to market-implied factors while still rooted to their core fundamentals. With equal notional weightings for each credit, the basket has a small amount of negative carry; however, we believe that now is a time of differentiation where good credits will perform well and bad credits will continue to worsen.

Buy US$10m notional Weatherford International 5 Year CDS protection at 130bp.

Buy US$10m notional Valero Energy Corp. Inc.5 Year CDS protection at 203bp

Sell US$10m notional Energy Transfer Partners 5 Year CDS protection at 152bp.

Sell US$10m notional Talisman Energy Inc. 5 Year CDS protection at 139bp to pay 42bp of carry.

For more information and regular updates on this trade idea go to: www.creditresearch.com

Copyright © 2008 Credit Derivatives Research LLC. All Rights Reserved.

Note: This article is intended for general information and use, and does not constitute trading advice from Structured Credit Investor (see also terms and conditions, below, section 12).