Job Swaps
Assured/FSA merger "a positive" for both
The latest company and people moves
Assured/FSA merger "a positive" for both
Assured Guarantee's purchase of FSA is being viewed as a positive move for both financial guarantors. Under the agreement reached last week, Assured is to buy FSA Holdings, parent company of monoline FSA, for US$722m, subject to approval by Assured's shareholders as well as the customary regulatory approvals. The transaction is also contingent on confirmation from S&P, Moody's and Fitch Ratings that the acquisition of FSA would not have a negative impact on Assured's or FSA's financial strength ratings.
The transaction is expected to close in Q109 and, if successful, it will see Assured taking on US$730m of FSA's outstanding debt. However, the definitive agreement provides that Assured will be fully protected against exposure to FSA's Financial Products segment, which includes its guaranteed investment contract business. The US$722m will consist of US$361m in cash and 44,567,000 common shares of Assured.
"CDS contracts look set to follow FSA to Assured Guaranty," notes Michael Cox, analyst at RBS. "However, there is nothing here to suggest that there will be a technical succession event, so the two contracts are likely to remain, referencing different vehicles within the same group. I view this as a positive for both entities, and the loss of exposure to the financial products business should be viewed as a positive for FSA."
However, Cox says that the requirement that ratings not be adversely affected need not mean that they are not downgraded, just that this transaction does not cause the downgrade. "Hence, I would not rule out cuts in due course, particularly from Moody's," he continues.
Moody's has responded to the acquisition by pointing out that the triple-A insurance financial strength ratings of both FSA and Assured Guaranty, as well as the Aa2 rating of Assured Guaranty Re, have been under review for downgrade since 21 July 2008. "The potential impact of the proposed transaction on the ratings of Assured Guaranty and FSA will be considered in the context of its ongoing rating reviews of both companies; those reviews are now expected to conclude in the near term," it says in a statement.
Meanwhile, Fitch says it does not expect that the transaction, as presented, would have a negative impact on the current ratings of either group of companies. "As presented, the risks of the financial services business will be fully immunised by Dexia and sovereign support. Fitch understands effective isolation from any risks of the financial services business is a condition to the transaction's close," it notes.
S&P also says that Assured's agreement to acquire FSA appears to pose limited rating risk for any of Assured's rated entities, including Assured Guaranty or FSA. However, the agency notes that if the transaction fails to close, FSA would be in a more difficult position and its ratings could be lowered.
Team hired for distressed debt offering
Herbert Seif and James Duplessie and their team from Epic Asset Management have joined Citi's global fixed income alternative investments group. They are the co-founders of Epic, a distressed debt long/short investment strategy based in New York.
Seif and Duplessie have been named co-heads and mds of the CAI Distressed Debt Strategies Group. The team plans to re-launch their existing fund under the CAI label, and through the acquisition of the team, Citi is hoping to develop and offer distressed debt strategies to CAI's investors.
Prior to founding Epic in 2002, Seif and Duplessie were at UBS, where they managed a portfolio of distressed debt assets. The pair report to Jonathan Dorfman and James O'Brien.
EM credit head appointed
Deutsche Bank has hired Mike Gelhard as md and global co-head of emerging markets corporate credit and special situations. Gelhard is based in New York and will be responsible for the origination, risk management and distribution of corporate credit throughout Latin America and Eastern Europe, the Middle East and Africa. Gelhard and global co-head Tim Zundel will report globally to Sean Bates, md and global head of emerging markets credit trading.
Gelhard joins Deutsche from UBS, where he was head of high yield and distressed credit trading for Latin America and Asia. Prior to that, he held positions at Citibank in Sydney, Australia.
Sailfish co-founder joins Markit
Markit has hired Sal Naro, co-founder and managing partner of Sailfish Capital Partners. He will join Markit's New York office as evp and global co-head of equities, commodities and risk management, in partnership with London-based evp Niall Cameron.
Previously, Naro worked at UBS most recently as md and global co-head of fixed income - a role that encompassed trading, syndication and research for all credit markets. Prior to UBS, he was a senior md and global head of credit trading at Bear Stearns
'Top three' CLO asset issuer reverses outlook
The auditor of Las Vegas Sands, PricewaterhouseCoopers, has reversed its view on the company, having expressed substantial doubt about the company's ability to continue as a going concern earlier this month. Las Vegas Sands Corp has now reissued its 2007 audited financial statements following a US$2.1bn capital raise and the adoption of its updated development plan. The company, which JPMorgan structured credit analysts estimate to be one of the top three asset issuers in the CLO collateral universe, says it has sufficient liquidity and capital resources to both fund its ongoing operations and to execute its updated development plan.
On 6 November the company warned that it could violate debt covenants and its ability to continue in business. JPMorgan analysts suggest that about 390 CLOs are exposed to it or its affiliate VML, with a total of US$600m exposure. The average exposure is 1.3%, ranging from 0.1% to 7.9%.
Moody's confirms structured finance head
Moody's has appointed Andrew Kimball as evp and head of the company's global structured finance business. Kimball had been acting head of the structured finance business since July of this year.
Richard Cantor has been appointed chief credit officer of Moody's and chairman of its credit policy committee. Cantor had assumed acting responsibility for these roles, which Kimball previously held.
Kimball joined Moody's in 1987 as a structured finance analyst and was soon promoted to co-head of its structured finance rating team. Since then, he has held various senior positions at Moody's, including chief credit officer of Moody's and chairman of the credit policy committee, as well as senior md for global corporate finance and md for Moody's Risk Management Services.
Cantor has been md of the credit policy research group, which measures ratings performance globally, publishes related research and contributes to default research data and analytical tools. Cantor joined Moody's from the Federal Reserve Bank of New York, where he held a variety of positions in the research group and was staff director at the discount window.
Numerix and Calypso announce further partnership
NumeriX has announced an extended integration partner agreement with Calypso Technology of an integrated trading application suite to the capital markets. As a result of this expanded agreement, Calypso users will now have access to NumeriX's pricing and risk analytics software.
As per the expanded integration partner agreement, Calypso users will be able to more accurately price and generate sensitivities for the most complex derivatives, including equity, interest rate, credit and hybrids. The integration of these market-vetted analytics within a proven trading system is designed to fully support the lifecycle of even the most complex exotic or hybrid derivative.
Tremon filing to hit Spanish SME CLOs?
Grupo Tremon, the Spanish real estate developer, filed for administration on Monday after a failure to meet outstanding debt payments. According to structured finance analysts at Deutsche Bank, Tremon is understood to have some €1.2bn of debt outstanding (directly and via subsidiaries) held by banks, some of which the analysts expect to have been referenced in Spanish SME CLOs.
Fitch completes CDO CAM review
Fitch Ratings has completed an evaluation of all existing CDO asset manager (CAM) ratings, after the agency published updated global rating criteria for CAM ratings on 16 October, and determined that no rating changes are warranted following the introduction of the new criteria.
Fitch's analysis of each CAM rating included a review of the following categories: company and management experience; staffing, procedures and controls; portfolio management; CDO administration; and technology. For certain CAM ratings, underlying category scores may have changed, reflecting changes in Fitch's categorisations and weightings as outlined in the new CAM rating criteria.
Restructuring lawyer promoted
Akin Gump Strauss Hauer & Feld has promoted Scott Alberino to partner. Alberino is a member of the firm's financial restructuring practice, focusing on corporate restructurings, with an emphasis on creditors' committees and bondholder committees in large, complex restructurings both out of court and in Chapter 11. He represents bondholders, noteholders, institutional investors, hedge funds, post-petition lenders and acquirers of distressed assets in restructuring proceedings.
Quantifi sets up shop in Oz
Quantifi is expanding into Australia with the opening of an office in Sydney. The firm has appointed James Glover as head of APAC sales to manage the Asia Pacific region, including Australia, as well as the firm's existing business in Japan.
He has over 15 years' experience in front and middle office positions in risk management, IT and credit derivatives trading in Sydney and Europe, including four years at Deutsche Bank on the CDO trading desk. The Sydney office will focus on product development, deployment and local access for Quantifi's clients.
Syncora execs resign
Elizabeth Keys has resigned as cfo of Syncora Holdings to pursue another employment opportunity within the financial services industry. The company's board of directors has elected not to name a replacement cfo at this time. Additionally, Mary Hennessy, a board member since the firm's initial public offering in 2006, has resigned from the board of directors.
IDC to buy NTT DATA
Interactive Data Corporation is to buy the majority of NTT DATA Financial Corporation from NTT DATA Corporation for Y1.9bn (US$20.2m) in cash. The transaction is expected to be completed by the end of 2008, contingent upon customary closing conditions.
Interactive Data and NDF have been partners in a redistribution relationship in Japan for more than 14 years, providing financial institutions with global end-of-day securities pricing, evaluations and reference data for clients' mission-critical investment operations, including portfolio valuation and accounting. The acquisition advances Interactive Data's strategy of expanding its business in the Asia-Pacific region.
Credit fund service launched
The Bank of New York Mellon has launched an enhanced credit fund service for alternative fund managers that combines loan administration, fund administration and investor services in one complete solution. BONYM say that the expanding universe of tailored credit opportunity funds has highlighted the void between loan and fund administration, which are services typically delivered to fund sponsors by different providers. The Bank of New York Mellon has combined these and other services into a single offering to unify the servicing requirements of the funds' underlying investments.
AC
News Round-up
CDS index launch draws nearer
A round up of this week's structured credit news
CDS index launch draws nearer
Further details of S&P's planned CDS index have emerged, as the firm moves closer to launching the product. "We've been working on an index family in the CDS space for over a year, having publicly announced it in the spring, and are currently watching the market closely for a potential entry point," confirms James Rieger, vp fixed income indices at S&P. "The aim is to provide our customers with independently-run indices away from the dealers."
The index will be comprised of approximately 85 equity references taken from the S&P 100, based around the obligations of each entity in order to create a CDS price. S&P eventually envisages offering a cash bond price as well for those 85 equity references, thereby completing the capital structure.
Consistent with existing processes, if a credit event is triggered, the obligation will be removed from the first series of the index. But, given that investors don't automatically sell a defaulted position, a twin series will then be established that retains the defaulted obligation. S&P also plans to create a third series that offers a rolling total return for those investors who want a long-term perspective of the market.
"We've identified and mitigated mark-to-market risk, using a secondary source of pricing information (CMA and a dealer source)," continues Rieger. "If a name is illiquid and MTM becomes suspect, the index committee will decide whether to keep the entity within the index - this will be an independently-observed decision (based on wider news and events) rather than being driven by dealers. Ultimately, a mark has to reflect an executable price."
S&P says it will provide transparency in terms of index documentation and how the curves have been boot-strapped to enable investors to make their own decisions about the underlying names. The index will initially be launched in the US, then Europe and potentially Asia - though the agency hasn't yet decided about liquidity in the region.
G20 targets structured credit
The G20 on 15 November determined to enhance its cooperation to "restore global growth and achieve needed reforms in the world's financial systems" (see also separate news story). The Group says it will implement reforms that will strengthen financial markets and regulatory regimes so as to avoid future crises, including: strengthening transparency and accountability; promoting integrity in financial markets; reinforcing international cooperation; and reforming international financial institutions.
As such, regulators are expected to meet the following goals by 31 March 2009:
• ensure that rating agencies are registered and meet the highest standards of the international organisation of securities regulators;
• set out strengthened capital requirements for banks' structured credit and securitisation activities;
• and build on the launch of central counterparty services for CDS by insisting that market participants support exchange-traded or electronic trading platforms for CDS contracts, expand OTC derivatives market transparency, and ensure that the infrastructure for OTC derivatives can support growing volumes.
In consultation with other economies and existing bodies, the G20 also requests that its finance ministers formulate additional recommendations, including in the following specific areas:
• Mitigating against pro-cyclicality in regulatory policy;
• Reviewing and aligning global accounting standards, particularly for complex securities in times of stress;
• Strengthening the resilience and transparency of credit derivatives markets and reducing their systemic risks, including by improving the infrastructure of OTC markets;
• Reviewing compensation practices as they relate to incentives for risk taking and innovation;
• Reviewing the mandates, governance and resource requirements of international financial institutions; and
• Defining the scope of systemically important institutions and determining their appropriate regulation or oversight.
The G20 has come up with an Action Plan that sets forth a comprehensive work plan to implement five agreed principles for reform, drawing on the ongoing work of relevant bodies including the IMF, an expanded Financial Stability Forum (FSF) and standard setting bodies. The Group will meet again by 30 April 2009 to review the implementation of these principles and decisions.
PWG announces initiatives ...
The President's Working Group on Financial Markets (PWG) has announced a series of initiatives to strengthen oversight and the infrastructure of the OTC derivatives market, including the development of CDS central counterparties and the establishment of a Memorandum of Understanding regarding CDS central counterparties among the Federal Reserve Board of Governors, the Securities and Exchange Commission and the Commodity Futures Trading Commission. The PWG also announced a broad set of policy objectives to guide efforts to address the full range of challenges associated with OTC derivatives, and issued a progress summary to provide an overview of the results of ongoing efforts to strengthen the market's infrastructure.
The Treasury Secretary serves as chair of the group, which includes the Chairs of the Federal Reserve Board, the Securities and Exchange Commission and the Commodity Futures Trading Commission. The PWG, working with the Office of the Comptroller of the Currency and the Federal Reserve Bank of New York, has been actively overseeing improvements underway in OTC derivatives markets.
"Over-the-counter derivatives are integral to the smooth functioning of today's complex financial markets and, with appropriate regulatory oversight and prudent management, can enhance the ability of market participants to manage risk. The rapid growth of OTC derivatives markets over the past several years reflects their increasing importance to market participants," the PWG says.
The PWG's top near-term OTC derivatives priority is to oversee the successful implementation of central counterparty services for CDS. A well-regulated and prudently managed CDS central counterparty can provide immediate benefits to the market by reducing the systemic risk associated with counterparty credit exposures. It also can help facilitate greater market transparency and be a catalyst for a more competitive trading environment that includes exchange trading of CDS.
The relevant regulatory authorities are assessing these central counterparty proposals by conducting detailed on-site reviews of risk management and other key design elements. After completing the on-site reviews, regulators expect to proceed toward regulatory approvals and/or exemptions expeditiously and anticipate that one or more CDS central counterparties will commence operations before the end of 2008.
The MOU was signed to facilitate the regulatory approval process and to promote more consistent regulatory oversight, establishing a framework for consultation and information sharing on issues related to CDS central counterparties.
The PWG has announced a set of additional policy objectives to guide efforts to address challenges associated with OTC derivatives, consistent with the recommendations of the Financial Stability Forum:
• improve the transparency and integrity of the CDS market;
• enhance risk management of OTC derivatives;
• further strengthen the OTC derivatives market infrastructure;
• strengthen cooperation among regulatory authorities.
... and ISDA endorses them
ISDA has endorsed the President's Working Group on Financial Markets' (PWG) series of initiatives to strengthen oversight and the infrastructure of the OTC derivatives market, which includes the adoption of best practices with respect to risk management for OTC derivatives activities - including public reporting, liquidity management, senior management oversight and counterparty credit risk management.
The Association says that this also includes the use of legally-enforceable netting and collateral agreements between counterparties where possible. ISDA has facilitated the use of netting, as well as rigorous collateral management practices, since its founding and will work with its members to ensure continued widespread adoption and adherence to these best practices.
"The PWG's initiatives demonstrate the close cooperation of financial market participants and their regulators to ensure the continued health and vitality of the privately negotiated derivatives markets," says Robert Pickel, executive director and ceo at ISDA. "This collaborative process has already produced significant results, but more work remains to be done. ISDA is committed to working with regulators and industry to ensure the OTC derivatives markets continue to play their important role in allowing companies and investors to manage risks, which is more important than ever in these turbulent markets."
EC to regulate rating agencies
The European Commission has adopted a proposal for regulating credit rating agencies. The Commission says that the new rules are designed to ensure high quality credit ratings that are not tainted by the conflicts of interest which are inherent to the ratings business. The proposal forms part of a package of proposals to deal with the financial crisis, as well as Solvency II, the Capital Requirements Directive, deposit guarantee schemes and accounting.
Internal Market and Services Commissioner Charlie McCreevy explains: "I want Europe to adopt a leading role in this area. Our proposal goes further than the rules which apply in other jurisdictions. These very exacting rules are necessary to restore the confidence of the market in the ratings business in the European Union."
The proposal introduces a registration procedure for credit rating agencies to enable European supervisors to control such activities and means that rating agencies will have to comply with rigorous rules to ensure (i) that ratings are not affected by conflicts of interest, (ii) that credit rating agencies remain vigilant on the quality of the rating methodology and the ratings, and (iii) that credit rating agencies act in a transparent manner.
The new rules include the following:
• Credit rating agencies may not provide advisory services
• They will not be allowed to rate financial instruments if they do not have sufficient quality information to base their ratings on
• They must disclose the models, methodologies and key assumptions on which they base their ratings
• They will be obliged to publish an annual transparency report
• They will have to create an internal function to review the quality of their ratings
• They should have at least three independent directors on their boards whose remuneration cannot depend on the business performance of the rating agency and who will be appointed for a single term of office that can be no longer than five years. They can only be dismissed in case of professional misconduct. At least one of them should be an expert in securitisation and structured finance.
Some of the proposed rules are based on the standards set in the International Organisation of Securities Commissions (IOSCO) code. The proposal gives those rules a legally binding character. Also, in those cases where the IOSCO standards are not sufficient to restore market confidence and ensure investor protection the Commission has proposed stricter rules.
TARP changes focus, ABX plummets
Treasury Secretary Hank Paulson has changed the focus of TARP, which will no longer conduct auctions to purchase troubled assets but continue to inject capital directly into the financial sector (see also separate news story). This use of public money is both more effective and efficient, note analysts at BNP Paribas: more effective, as it directly recapitalises banks, rather than doing it indirectly through the purchase of securities at above-market prices; more efficient, as less money is needed to top up capital eroded by losses than to buy troubled assets.
The Treasury has also announced that it is examining ways to use the remaining TARP funds to support consumer access to credit. In particular, the Fed is considering a facility for ABS, which is expected to absorb comparatively more funds than its Commercial Paper Funding Facility, given that the longer maturities of ABS paper would reduce asset churn.
The announcement triggered a sell-off on the ABX index, which saw four tranches dropping more than 10 points - 06-1.AA (-10.15), 06-2.PENAAA (-13.21), 06-2.AAA (-11.63) and 07-1.PENAAA (-13.40). Structured finance analysts at JPMorgan note as a comparison that triple-A cash sub-prime RMBS was down 5-15 points on the week.
The ABX has sold off across the board over the last month, with the biggest loser being 07-1.PENAAA down 20.11 points on the month. The 06-1.AA, 06-2.PENAAA and AAA, 07-1.AAA and 07-2.PENAAA were all down 15-19 points over the same period.
CDS volumes fall ...
Multilateral terminations of outstanding contracts resulted in a decline of 1% in the volume of outstanding CDS in the first half of 2008 - the first fall since CDS statistics were first published in December 2004, says the BIS in a new report. The report, which focuses on OTC derivative market activity in the first half of 2008, shows that notional overall amounts of outstanding OTC derivatives continued to expand in the first half of 2008 - notional amounts of all types of OTC contracts stood at US$683.7trn at the end of June, 15% higher than six months before.
While CDS outstandings declined during H108, markets for interest rate derivatives and FX derivatives both recorded significant growth. Open positions in interest rate derivatives contracts rose by 17%, while those in FX contracts expanded by 12%. Gross market values, which measure the cost of replacing all existing contracts and are thus a better gauge of market risk than notional amounts, increased by 29% to US$20.4trn at the end of June 2008.
... while CDOs see weakest quarter
SIFMA has released its quarterly CDO statistics, covering global issuance until 30 September. Issuance volumes for Q1 and Q2 of this year were revised upwards, increasing the total issuance volumes by 2% and 26% respectively.
However, Q308 was the weakest period since the beginning of 2004, when the data series began. Total CDO issuance in Q3 amounted to 11% of the average quarterly volume of the previous quarters since Q104. From Q2 to Q3, the volume declined by 58% to US$9.8bn.
Structured credit strategists at UniCredit provided the following additional insights on the SIFMA data:
• Issuance volumes of CLOs, which increased substantially from Q1 to Q2, fell below the Q1 volume in Q3 - reflecting the strain in the leveraged loan market in September and muted new issuance activity in the bond market in Q3.
• 87% of the Q3 issuance was contributed by cashflow and funded CDOs, the remainder stemming from market value CDOs as the issuance of synthetic funded CDOs stalled completely. This suggests that CDOs were recently primarily used as a vehicle to repackage cash credit. As the number of balance sheet deals declined, the principal focus seemed to be to create better rated paper from lower rated credits.
• Structured finance CDO issuance activity has not declined as dramatically as CLOs. These are the two most important CDO collateral types, accounting for 97.3% of new CDO issuance. Investment-grade bonds, which were important CDO pool assets until Q2, form the underlying of less than 3% of newly issued CDOs in Q3. This development suggests that such deals are retained and the higher-rated tranches are used by banks for collateralised central bank lending.
CSOs downgraded by Fitch ...
Fitch has downgraded and withdrawn its ratings from 34 publicly rated tranches from 28 synthetic CDOs in Europe and Asia, and removed 30 of these tranches from rating watch negative. These actions are a result of missed interest payments to the noteholders due to the bankruptcy of Lehman Brothers Holdings Inc.
Since Fitch placed the transactions on RWN on 18 September, the majority of the CDO noteholders have not received an interest payment - resulting in a technical default. In other cases, where coupon payments are not yet due, no further payment is expected. The ratings have been withdrawn as no further information is being supplied to Fitch on the transactions.
In an effort to provide transparency to the market and assist investors in the recovery process, Fitch has published an excel data file containing the last recorded charged asset and the Fitch rating of the asset. The agency notes that the recovery profiles fit into three broad categories based on the type of charged asset: unsecured LBHI debt, high quality government or corporate bonds, and the Lehman USD Liquidity Fund.
In the event of charged asset liquidation, the CDO noteholders will either be paid in full from proceeds of the eligible securities or will incur a variable shortfall if the proceeds are less than the outstanding amount of the notes plus any accrued and unpaid interest. Ultimate recovery will depend on the interaction between investors and the trustee, the type of charged asset, as well as investors' ultimate decision on whether to hold the charged asset or liquidate it in a distressed market.
... and S&P
S&P has taken the following rating actions on various US synthetic CDOs:
• lowered 565 ratings: 20 of these ratings were concurrently placed on credit watch negative; 133 of these ratings remain on credit watch negative; and 337 of these ratings were removed from credit watch negative;
• placed 17 ratings on credit watch negative and removed four ratings from watch negative.
The actions reflect the impact of several events that have occurred since the agency's last review of the relevant transaction portfolios. S&P's review of the portfolios considered the ISDA Protocol auction prices for Fannie Mae, Freddie Mac, Lehman Brothers and Washington Mutual in cases where a transaction's portfolio referenced any of these entities.
The analysis also considered other negative rating migrations in the underlying portfolios, but did not account for the recent ISDA Protocol auction prices for the three Icelandic banks included in the portfolios. In addition, S&P reviewed the ratings on all of the classes that it had previously placed on watch negative to determine the appropriate rating action.
If the synthetic rated overcollateralisation (SROC) ratio was lower than 100% at the current date and at a 90-day-forward projected date, the agency lowered the rating on the tranche. If the SROC ratio was lower than 100% at the current date at the lower rating level and above 100% at a 90-day-forward projected date, it lowered the rating on the tranche and left it on watch negative.
S&P says it will complete its review of the transactions with exposure to the three Icelandic banks in the coming weeks.
Masonite auction due
LCDX dealers have voted to hold an auction for LCDS transactions referencing Canadian entity, Masonite International Corp, which is a constituent of the Markit LCDX index series 8, 9 and 10. ISDA will facilitate the process by publishing the auction terms on its website in the next few weeks. The auction terms, including the auction date, will be determined by the LCDX dealers according to the LCDS Auction Rules published on ISDA's website.
Unlike recent credit events, including Lehman Brothers and Washington Mutual, the auction mechanism is already built into ISDA's standard loan-only CDS documentation, therefore no protocol is required. This is the second time the auction has been used to settle loan-only CDS contracts, the first being Movie Gallery in October 2007 (see SCI issue 57). The auction will be administered by Markit and Creditex.
Syncora downgraded
S&P has lowered its financial strength rating on Syncora Guarantee to single-B from triple-B minus. The rating remains on credit watch, with the implications revised to developing from negative.
The downgrade is the result of the company's delay in implementing 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, S&P believes the financial position of the company would be impaired to a point that could lead to regulatory intervention, in which case the rating could go lower. If management is successful in its negotiations and presents a reasonably viable strategy for the company, the rating could go higher.
Mazarin MTNs on review
Moody's has placed under review for possible downgrade its MTN ratings of Mazarin Funding's senior note programmes. The short-term rating of the restructured SIV's CP is unaffected by this rating action.
The portfolio encompasses a significant portion of Alt-A RMBS, mostly of the 2006 to 2007 vintages, and some US sub-prime RMBS, mostly of the 2006 vintage. These rating actions are a response to credit deterioration in the underlying portfolio, monoline downgrades and Moody's change in expectation regarding US mortgage losses.
FDIC proposes loss-sharing programme ...
The FDIC has published a proposal to increase loan modification through a loss-sharing arrangement (see also last week's issue). According to the FDIC: "A loss share guarantee on redefaults of modified mortgages can provide the necessary incentive to modify mortgages on a sufficient scale, while leveraging available government funds to affect more mortgages than outright purchases or specific incentives for every modification. The FDIC would be prepared to serve as contractor for Treasury and already has extensive experience in the IndyMac modification process."
The proposal is designed to promote wider adoption of a systematic loan modification programme by paying servicers US$1,000 to cover expenses for each loan modified according to the required standards; and sharing up to 50% of losses incurred if a modified loan should subsequently re-default
... while foreclosure prevention analysed
Tom Deutsch, deputy executive director of the American Securitization Forum (ASF), testified last week before the Subcommittee on Domestic Policy of the Committee on Government Oversight and Reform at a hearing entitled 'Is Treasury Using Bailout Funds to Increase Foreclosure Prevention, as Congress Intended?' While highlighting the significant effort by the securitisation industry to prevent avoidable foreclosures and preserve home ownership wherever possible, he noted that macroeconomic forces bearing down on an already troubled housing market are too strong for private sector loan modification initiatives to counteract the nationwide increase in mortgage defaults and foreclosures.
"Although industry-driven loan modification and loss mitigation actions have been and will continue to be key components to preventing avoidable foreclosures, there are limits to their effectiveness in addressing the extraordinary challenges in the housing market. As such, we believe expanded government programmes may be effective in bridging this gap, and helping to address the potential foreclosures that commercial and contractual arrangements cannot prevent," Deutsch said.
The three areas under the TARP that the ASF identified as where the federal government could supplement industry initiatives to modify and expand voluntary programmes include: 1) guaranteeing loan modification redefault risk, 2) purchasing individual loans out of securitisation trusts, and 3) providing lender or guaranty facilities for servicer advances. The Emergency Economic Stabilization Act allows the federal government to provide guarantees to incentivise additional loan modifications for distressed borrowers. Currently, up to 44% of borrowers redefault on their loan, even after the lender has granted a loan modification concession.
In his testimony, Deutsch explored in detail the opportunity for TARP to purchase individual distressed loans out of MBS trusts, which could give the Treasury Department unlimited discretion to modify those loans. "Historically, whole loans have not been sold out of securitisation trusts by servicers for a variety of legal, tax and accounting constraints," he said. "The ASF supports, where feasible, facilitating such purchases as part of a broader range of loss mitigation alternatives, and has recently undertaken a review of the various opportunities and obstacles for servicers to sell below par individual distressed loans out of MBS to the TARP."
While the sale of distressed loans to third parties has not typically been a loss mitigation option that servicers had available, this approach may be viewed as one more loss mitigation technique that a servicer could utilise. Unless the securitisation servicing agreement prohibits the sale of these types of loans, and as long as appropriate relief from the accounting and tax consequences is obtained, the ASF could consider reinforcing a market practice that the servicer be permitted to consider such a sale as one option among the loss mitigation techniques it may consider when deciding which course of action to pursue with a defaulting loan.
FAAF fleshed out
The Spanish government released further details of its Financial Asset Acquisition Fund (FAAF) last week, indicating that the stated intent of the fund is to facilitate the flow of credit to Spanish households and companies by purchasing current production ABS and covered bonds. RTC-like in its approach and complemented by the recent mortgage payment deferral and €100bn bank recapitalisation initiatives, the Spanish government is thus far the only policy-maker in Europe to directly target the securitisation market as a means of addressing the credit squeeze, according to securitisation analysts at Deutsche Bank - namely by underwriting new issuance and clearing some of the ABS overhang.
However, FAAF is aimed primarily at relieving the overhang of ABS created by Spanish banks for use at the ECB. FAAF will be specifically mandated to acquire Cedulas issued after October 2008 as well as RMBS and SME CLOs issued after August 2007.
The fund provides a direct funding source for bank lending to individuals and SMEs while also providing a 'warehouse' for repo-eligible securitised bonds created over the past year in order to manage balance sheet liquidity needs. The operating mechanics of the fund will be modelled along the lines of the ECB repo reverse auctions, the Deutsche analysts note.
Alt-A loss expectations revised upwards
Moody's says that it is currently revising its expectation of lifetime losses on pools backing US Alt-A RMBS issued in 2006 and 2007. In the last six months since the agency previously announced upwardly revised lifetime loss expectations for the Alt-A sector, such pools have shown a marked increase in the proportion of borrowers becoming seriously delinquent (more than 60 days past due).
As of October 2008, serious delinquencies for Alt-A (including Option ARM) pools on a seasoning-adjusted basis and expressed as a fraction of current balance, averaged 20.3% for the 2006 vintage and 17.5% for the 2007 vintage - compared to 16.9% and 12.2% six months ago. At the same time, the prepayment rates on these pools are at historical lows and are currently averaging in the mid- to high-single digits. In light of the tight credit environment and the declining level of home equity for these borrowers, voluntary prepayments are expected to remain depressed in the near term.
Given the lack of pool seasoning, cumulative losses have not yet risen as steeply as delinquencies; however, many pools are starting to show a sharp increase in the rate of loss realisation. As the pace of liquidations has picked up, the performance data suggests worsening loss severities.
Moody's expects that the loss estimates for the best performing quintile of the deals from the 2006 vintage will fall by around 3% to 5% of outstanding collateral balance. In contrast, weaker deals from the 2007 vintage (comprising over a third of the 2007 vintage) are likely to have loss projections in excess of 20%.
The agency is also updating its loss expectations on pools backed by Option ARM loans. Option ARM performance has deteriorated notably, and the pace of delinquency build-up has recently outpaced that of regular Alt-A.
Moody's expects loss projections for Option ARMs, on average, to come in higher than the estimates outlined above for Alt-A, due to weaker loan-to-value ratios caused by negative amortisation. In addition, there is an elevated risk of default when the loans reach their amortisation recast dates.
Jumbo asset-backed deal completed
Deutsche Bank has placed €30bn of guaranteed and secured notes backed by a pool of assets - commercial real estate loans, ABS & corporate bonds, infrastructure loans and public finance bonds - with third-party investors. Deutsche's structured credit products syndicate was sole book runner for the deal, which was issued by Hypo Real Estate.
Two tranches of notes were sold. The first comprised €15bn of secured notes that priced at 75bp over three-month Euribor, with a maturity of March 2009. The notes were rated A-/BBB/A2 by Fitch, S&P and Moody's respectively.
The second tranche, also sized at €15bn, benefits from an unconditional and irrevocable guarantee from the Federal Republic of Germany. The notes priced at 25bp over three-month Euribor, with a maturity of March 2009. A rating of F1+ was assigned to the notes, based on the guarantee.
Deutsche Bank stresses that the deal is not a CDO, but secured notes.
Fitch clarifies SF CDO approach
Fitch has clarified its proposed rating methodology for structured finance (SF) CDOs, expanding upon the criteria proposal announced on 14 October. The update clarifies the correlation and recovery rate assumptions to be applied to real estate investment trust (REIT) debt and commercial real estate loans (CREL).
The highlights of the proposed approach are as follows:
• Base correlation between REITs and structured finance securities of 20%;
• Commercial REITs to CMBS correlated by a further 5% (total 25%);
• Residential REITs to RMBS correlated by a further 5% (total 25%);
• Commercial REITs to residential REITs correlated by a further 10% (total 35%);
• REITs in a particular sector (commercial or residential) correlated to each other by a further 5% (total 40%);
• Base correlation between CREL to structured finance securities of 30%;
• CREL to CMBS by a further 5% (total 35%);
• CREL to other CREL by a further 10%-25%, depending on vintage (total 45%-60%);
• REIT recovery rates consistent with other corporate debt;
• CREL B-notes and mezzanine debt assigned recoveries consistent with structured finance debt (based on loan size relative to total property debt);
• CREL whole loans assigned recoveries consistent with corporate senior secured debt, with the ability to apply asset-specific recovery rates where appropriate.
The correlation proposals recognise that REITs as a corporate industry, due to common exposure to the real estate sector, are more correlated to CMBS and RMBS than other corporate industries. The assumptions also seek to recognise that some level of diversification benefit can be gained by adding corporate REIT debt to a pool of CMBS tranches. A key driver of the correlation for CREL is refinancing risk and, as with CMBS, vintage is expected to play a role in the level of correlation risk.
Recovery rate assumptions depend on debt type, jurisdiction and, in the case of CREL subordinate debt, the size of the note relative to the overall debt on the property. The recovery rate assumptions for REIT debt are the same as for other corporate industries, and depend on debt type (senior secured or senior unsecured). The recovery rate assumptions for CREL differ between subordinate debt and whole loans.
TRUP CDOs downgraded
Moody's has downgraded 180 tranches across 44 Trust Preferred (TRUP) CDOs, with 88 tranches remaining on review for further possible downgrade. The downgrades are prompted by the exposure of these TRUP CDOs to trust preferred securities issued by small to medium-sized US community banks, which have or may experience deferral in interest payments and defaults due to the current credit crisis and weak economic conditions. Some TRUP CDO tranches remain on review for possible downgrade for the possibility that an event of default could be triggered within the CDO, due to the deferral of payment by many underlying bank trust preferred securities.
The rating actions reflect Moody's assumption that there will be zero recovery on the 31 bank trust preferred securities that are currently deferring interest payment and the 10 banks that were closed by their regulator in these TRUP CDOs. The agency believes that, while the actions proposed by the TARP are a positive development for the US banking sector, it may not be sufficient to prevent further deferral of interest payment on their trust preferred securities and defaults for some of the weaker banks in TRUP CDOs. Therefore, Moody's has updated its approach to calculating the default probability and correlation for bank trust preferred securities that back the securities issued by bank TRUP CDOs.
In order to promote transparency, Moody's encourages the underwriters and collateral managers for all TRUP CDOs to publish the list of collateral securities in each of their respective CDOs. TRUP CDOs with exposure to bank, REITS and insurance trust preferred securities will be reviewed in the coming weeks.
AIG adverse rating action removed
Fitch says that the high degree of support extended by the US government to AIG has removed the risk of adverse rating action on global structured finance transactions where AIG or one of its subsidiaries is a counterparty. The agency expects the assumed 'government support floor' for AIG to remain in place until the insurer fully executes its restructuring plan, thereby limiting immediate AIG counterparty risk in existing structured finance transactions.
Many of the transactions involved were exposed to AIG counterparty risk in the form of interest rate and FX swaps or other derivative contracts and, to a much lesser extent, in the form of rental guarantees of rental payments in certain CMBS transactions. Each contract has specific remedies to mitigate counterparty risk. In most instances collateral was posted by the relevant AIG entity for the benefit of the transaction following AIG's downgrade in September 2008.
Fitch is currently reviewing its counterparty criteria in light of recent market turmoil.
Fitch reviews impact of updated criteria
Fitch has completed the review of its corporate-related CDO and CLO ratings following the release of its updated criteria for this sector in April 2008. This report sets out the impact of the updated methodology both before and after the unprecedented impact of seven investment grade credit events in September and October. The rating actions over this period reflect the following conclusions:
• Investment grade synthetic CDOs with significant industry and obligor concentrations are inherently riskier and their ratings were significantly impacted by the updated methodology.
• European cashflow CLOs typically have more robust structures and less industry concentration risk than synthetic CDOs. Their ratings were significantly less affected by the updated methodology and most ratings were affirmed.
• However, calculated cushions have diminished and lower rated tranches, especially, are vulnerable to downgrade should defaults of the underlying assets increase or recoveries be lower than expectations.
• The seven investment grade credit events exceeded expectations and could yet prove to be part of a new peak default pattern. Those corporate synthetic ratings already reviewed with the updated methodology saw further downgrades after these events; however, the impact was muted for notes rated in the high investment grade categories.
The key points to note from the report are that when the revised methodology was applied:
• 37% of the triple-A category ratings were affirmed, 90% remained investment grade and 10% were downgraded to non-investment grade.
• 15% of the double-A category ratings were affirmed, 62% remained investment grade and 38% were downgraded to non-investment grade.
• 27% of the single-A category ratings remained investment grade, with 38%downgraded to the double-B range and the balance (36%) downgraded to the single-B category or below.
• 25% of the triple-B category ratings remained investment grade, with 34% downgraded to the double-B range and the balance (42%) downgraded to the single-B category or below.
The rationale and motivation for the updated methodology was to highlight significant industry or obligor concentrations, as well as adverse selection. Unsurprisingly, the ratings most affected were those that demonstrated these characteristics.
Fitch reviewed all of its corporate-related investment grade CDO ratings in the course of October for a second time, taking into account the seven credit events. While it is too early to say definitively whether these seven defaults will form part of a new investment grade default peak, it is already clear that in higher stresses - such as during September and October of this year - financial companies are clearly highly correlated to each other, and that industry concentrations within CDO portfolios are certainly a key driver of risk.
The ratings already amended with the revised methodology since May remained relatively robust, especially in the higher rating categories. The key points to note in this instance are:
• Of the triple-A ratings reviewed with the updated methodology, the effect of the seven credit events was that nearly all (97%) remained triple-A.
• Of the ratings in the double-A category reviewed, the effect of the seven credit events was that 73% remained in the double-A category and only 12% were downgraded to below single-A.
Valuations white paper released
OTC Val has released a white paper entitled 'Independent Pricing For Complex Derivatives and Illiquid, Hard-to-Value, Securities: Trends and Current Practices at Hedge Fund Administrators'. Given today's market conditions and dominant trends in the hedge fund industry, the paper offers a view of the trends and challenges at hedge fund administrators.
With hedge funds seeking institutional assets, investor and regulatory pressure for hedge funds to adopt industry best practices - such as third-party independent derivative valuations and valuation transparency - has renewed pressure on hedge funds to place a greater focus on implementing the appropriate valuation controls. In doing so, this has led to fund administrators that perform back office support functions for hedge funds to revamp their operational processes, the report says.
LSS downgraded
S&P has lowered its ratings on 29 spread-based leveraged super senior (LSS) notes issued by Chess II, Claris, Eirles Two, ELM, Omega Capital Investments, Helix Capital (Jersey) and Sceptre Capital. These ratings remain or were placed on credit watch negative.
The affected transactions have a market-value trigger based on the weighted-average portfolio spread and portfolio losses at a given point in time. If breached, this would lead to an unwind event, where the notes may become immediately repayable. If the notes are unwound, investors may suffer a mark-to-market loss on their investment.
The rating actions follow a widening in CDS spreads over recent weeks for the underlying reference obligors. Some of the transactions affected include reference obligors that have also suffered credit events. For these obligors we assume the ISDA Protocol auction price as the recovery rate received following the credit event.
Japanese CDO market surveyed
S&P says it assigned ratings to securitisation transactions (excluding unfunded synthetic CDOs) worth ¥1,015.9bn in Japan in the third quarter of 2008, marking a 46.7% decrease from the previous year. The number of rated transactions fell to 33, down about 25% from the previous year.
The impact of the crisis has been felt in the Japanese securitisation market as new issuances stalled, despite underlying assets' stable performance. Investors are maintaining a cautious stance toward Japanese securitisation products, and the tendency to enhance risk management for securitisation products also seems to be restraining investment activities.
However, the issuance amount of rated CDO transactions increased by 52.3% year on year to ¥114.7bn. The increase was mainly due to the ¥100bn worth of notes issued by FILP Master Trust 2nd Special Purpose Co. on 6 August. The notes are ultimately backed by a pool of FILP loans extended by the government of Japan (Ministry of Finance).
In the arbitrage synthetic CDO segment, some relatively simple transactions referencing global corporate credits closed between July and August. However, issuances in this segment will likely weaken after September, following the turmoil in global financial markets.
Ratings actions taken on CDO transactions accounted for about 82.8% of all the rating actions that S&P took on securitisation transactions between July and September 2008. Out of 131 ratings revisions, 123 of them were downgrades, reflecting the negative ratings actions on financial intermediaries and the credit events that occurred in September.
Among CDO transactions exposed to Fannie Mae and Freddie Mac, rating actions on deals whose losses were determined by fixed recovery rates were more negative than the actions on deals whose losses were determined by market prices. One of the reasons behind this is that losses (declines in subordinate portion) incurred by CDO transactions with fixed recovery rates are predetermined, and the number of credit events are directly reflected in a downward rating action. On the other hand, losses incurred by CDO transactions with recovery rates determined by market prices are not confirmed until notifications of the final prices are received, and such transactions are kept on credit watch with negative implications until then.
Low recoveries hit CDOs
Fitch has downgraded the ratings of ten classes of notes from ten synthetic investment grade corporate CDO transactions, based on the very low recovery prospects of the three Icelandic banks recently subject to a bankruptcy credit event - Landsbanki Islands, Kaupthing Bank and Glitnir Banki. The recent ISDA CDS Protocol credit event auction results of the senior obligations of the three banks were in the range of 1.25% to 6.625%, while the subordinated obligations were in the range of 0.125% to 2.375%.
All downgraded transactions referenced at least one of the three aforementioned Icelandic banks senior obligations, five transactions referenced two of them and four transactions referenced all three. Based on the CDS auction results, although they do not bind the transaction parties, it is likely that the final valuations of their senior obligations determined by the calculation agent for each transaction will be very low.
Consequently, the credit enhancement levels of each transaction are expected to either reduce further to negligible levels that can only further withstand the default of one to two assets in the triple-C range or single-B range before noteholders are impaired, or to a negative level that will result in losses to the noteholders. On average these transactions currently have around 4% of the portfolio in the single-B rating category and 2% in the triple-C or below rating categories.
Rating activity surveyed
Rating activity in Q308 remained significant and predominantly negative among global structured securities rated by S&P. As has been the case in recent periods, rating performance in the third quarter continued to reflect the overall distress in the global financial markets and mirrored the credit quality of the collateral underlying the rated deals.
Disruption in the financial services sector added to the credit challenges in the quarter, and the 15 September bankruptcy filing of Lehman Brothers Holdings had a particularly negative effect on rated CDO transactions. Downgrades among US RMBS again exceeded 8,000 and the upgrade-to-downgrade ratio among North American CMBS compressed to 0.11 to 1, its lowest level thus far in 2008. While downgrade activity among US ABS decelerated in the quarter, upgrades slowed to a crawl, as the 14 raised ratings represents a record low for a specific quarter.
Downgrades outnumbered upgrades by more than 4.7 to 1 in Europe, and CDO transactions experienced almost 80% of the region's lowered ratings. The downgrade activity in Australia and New Zealand was also dominated by the CDO sector, while rating actions on various bond insurers drove a significant amount of negative actions on emerging market transactions.
The operating landscape for US real estate companies also grew cloudier during the third quarter: many outlooks on REITs and real estate operating companies remain stable, but homebuilders saw another round of downgrades amid continuing oversupply conditions.
CS & AC
