Contents

RMBS

Signs of life

Several domestic Russian RMBS in the pipeline

A number of Russian mortgage originators are preparing RMBS that they hope will be eligible for the Russian Central Bank repo facility. Originators are in talks with the Agency for House Mortgage Lending (AHML) - the Russian equivalent of Fannie Mae - which announced late last year that it would buy senior RMBS paper from originators in order to repackage it into a repo-eligible security.

So far, only the Moscow Bank for Reconstruction and Development (MBRD) has publicly stated its intent to issue an AHML-guaranteed RMBS - although several other deals are expected to be issued in the coming months. "We are currently involved in the preparation of two RMBS transactions that are due to be repo'ed with the Russian Central Bank later this year," explains Dmitry Sobolev, senior associate at Avakian, Tuktarov & Partners. "I expect that several deals of this type are likely to be seen in the near future, but the process of getting the deals completed is lengthy and very much dependent on agreements from the AHML - it may be five months before we see the first repo-eligible RMBS deal completed."

Irina Penkina, associate director of structured finance at S&P, confirms that she is also seeing plans by various originators that are hoping to issue domestic RMBS to be included on the Lombard list (a list of eligible issuers accepted by the Russian Central Bank for repo facilities). "We therefore see some potential for domestic RMBS," she says. "The first deals could be issued before the end of this year: banks such as VTB 24, Gasprombank and Sberbank may be in a position to securitise large mortgage books."

In order to repo an RMBS with the Russian Central Bank, the deal must obtain a minimum rating from one of the main rating agencies, a sovereign guarantee or a guarantee from the AHML. Michael Hoelter, director in Fitch's emerging markets structured finance group, says that issuers may tend to favour the AHML guarantee over getting a rating, as it might be easier to obtain. However, he suggests that, while a number of originators are preparing for the guarantee scheme with AHML, they may not necessarily use it.

"Activity in Russian RMBS is still likely to be very limited," he says. "Issuance for the Russian Central Bank repo facility will by far not be as high as that seen for the European Central Bank repo system. I expect that the new repo deals will be relatively small, around US$50m to US$150m, and for cost reasons I don't expect the top-tier banks to issue RMBS for repo-purposes - especially if they are foreign-owned."

He adds: "I therefore expect issuance to come more from the second- and third-tier banks, who are in need of liquidity."

The size of the transactions will depend on the pools of mortgages on the originator's balance sheet. Since September 2008, there has been very little mortgage origination in Russia, meaning that mortgages which are eventually securitised will have been originated in 2007 and early 2008.

Away from repo-eligible RMBS, the securitisation market in Russia is expected to remain frozen until investor appetite returns and, more importantly, the legal infrastructure for securitisation advances. Just last week the general securitisation law was admitted to the state Duma: this was a draft of the securitisation law initiated by the Association of Regional Banks of Russia and prepared in connection with all major market participants.

"The securitisation market is only likely to restart once the necessary legal infrastructure is in place," notes Sobolev. "At the moment, it is far too expensive to structure deals, as so much credit enhancement is required to overcome the concerns of the rating agencies."

However, once the securitisation law is eventually implemented, a widening of assets that are securitised should be expected. "I believe that the securitisation of infrastructure finance may take off before the rest of the securitisation market in Russia, as infrastructure finance is one of the Russian government's main concerns at the moment," concludes Sobolev. "There are already initiatives from some banks to arrange infrastructure securitisations."

AC

Operations

TALF round two scrutinised

Lower loan requests a cause for concern?

Loan requests for the second round of TALF financing were substantially lower than those made in the initial round. While some structured credit market participants see this development as a positive for the programme, there is also unease over potential government restrictions on investors that become involved in the scheme.

A total of US$1.71bn worth of loans were requested at the 7 April TALF facility, split between auto ABS (US$811m) and credit card ABS (US$896.8m). This compares with the US$4.7bn worth of loans requested during the 17-19 March TALF operation.

The drop in demand for TALF loans is a result of a combination of factors, according to Ron D'Vari, principal at NewOak Capital. "First is the supply and demand issue," he says. "Issuers of the TALF-eligible securities face numerous documentation requirements in order for their deal to be eligible. Added to that is the fear of misrepresentation of the assets: the amount of quality control that has to go into the origination processing and underwriting of these deals is huge; plus they are relying on a quality control infrastructure for production that is not yet properly in place."

However, D'Vari adds: "These issues are keeping the market supply of TALF deals down - but this is a legal and process issue, not a political issue. There's also the issue of pricing."

TALF-eligible deals are pricing at much tighter spreads than where comparable deals are trading in the secondary market. Buying at par and at a lower spread, combined with leverage, may therefore not fit the investment mandates of some accounts considering taking part in the scheme.

Many potential investors in the programme also remain unconvinced about TALF and all its variations because of government intervention fears. One structured credit investor confirms that a number of banks and hedge funds have been put off dealing with the US government because of the potential restrictions on pay, recruitment and foreign visas.

"Restrictions imposed on the actual holder of a TALF security/loan may put some investors off; e.g. not being able to transact from 31 December 2009. Any restriction is a concern for an investor at the moment - and committing capital for three years may be considered too long," agrees D'Vari.

But Ricardo Diaz, partner at Kensington Blake Capital, suggests that the lack of loan requests this time around implies that the TALF programme is successful. "From my point of view, TALF is working very well," he says. "The fact that 100% of investors didn't take up the offer of a loan from the TALF is a positive sign. It indicates that there are plenty of people out there that are able to invest with pure cash, without the need for leverage."

Diaz adds: "You also have to take into account that the total amount issued in TALF transactions in the latest round was lower than the first round - that will also go some way to explaining why the demand for TALF loans was lower this time round."

Whether TALF achieves what it is intended to will only be seen as the programme progresses throughout the year. "At this rate, TALF is not going to have as large an impact as we need to have to bring the securitisation markets to a new normal status and get the credit flowing to the borrowers," concludes D'Vari. "It's good that the TALF programme is in place, but the sufficient conditions for a return of a 'normal' market will take time."

AC

ABS

Gathering pace

European ABS buyback activity set to increase

ABS buybacks are gathering pace in Europe, as issuers look to take advantage of the deep discounts currently on offer. However, the success of such tenders appears to hang on the level of losses that are expected to impact the notes.

For example, Terra Firma last week offered to buy bonds across the capital structure of its GRAND 2006-1 CMBS, with maximum prices ranging from 70% for the triple-As to 30% for the triple-B minus notes. There were no sellers at the senior level, but around €285m of junior bonds were offered at the discounted prices.

One ABS trader notes that triple-A noteholders generally considered the offer to be too low. "Most such paper is held by banks and so they're happy to hold it to maturity and redeem it par, rather than take a hit now," he explains. "But mezzanine investors were happy to submit at such low levels because they'd get less than 10% for the paper in the secondary market, given that it's difficult to sell, or potentially face having the position wiped out if losses begin eating into the capital structure."

Another significant tender offer to hit the CMBS market last week was Canary Wharf Group's bid for £119m in Canary Wharf Finance II bonds. £26.1m double-A rated notes were bought back at 46.8%, £35.3m single-As at 30.3% and £58.3m triple-Bs at 21.6%.

ABS analysts at SG agree the results of these buybacks indicate that senior investors consider themselves to be well protected, whereas junior noteholders are much less confident, with many deciding to participate in the tender offers to recover some of their funds early. The analysts suggest that both tender offers confirm the current prevailing opinion in the CMBS market.

"There is strong concern about future developments in the real estate market and particularly about the refinancing of certain transactions. However, this may be offset depending on the level of credit exposure of the notes held (as shown by the ratings) and also on the timeframe for refinancing. GRAND, for example, is due for refinancing in 2014," they explain.

As well as looking to cancel the debt and then book the difference between the discount and par as profit, the trader notes that issuers are using buybacks to rationalise their issuing vehicles - as is the case with a number of Italian and Spanish issuers, which have quietly been tendering for triple-A RMBS paper. He adds that such action supports secondary market prices across other deals.

Securitisation analysts at Deutsche Bank believe that buybacks are likely to continue proving attractive for both originators and junior noteholders looking to exit at better than market prices. "We anticipate such actions to continue and, while the bids will no doubt remain heavily discounted, this is a new 'investor base' for the dislocated junior ABS market. [The] non-call of Belgian RMBS ATOM, however, served to illustrate that sponsors have less appetite for buying back their bonds at par."

CS

Indices

Positive returns continue for hedge fund index

Both gross and net monthly returns for February 2009 in the Palomar Structured Credit Hedge Fund (SC HF) Index remained in positive territory, after posting positive returns last month for the first time since May 2008.

The latest figures for the index were published this week and show a gross return of 0.57% and a net return of 0.4% for the month of February (compared to 2.34% and 1.99% respectively in January). However, the gross and net indices still show negative annualised returns since outset of -9.48% and -11.26%. For more Index data click here.

The objective of the Palomar SC HF Index is to produce an index that represents the risk and return of investable hedge fund investments in the structured credit area. It currently tracks 18 funds and represents over US$7.5bn of assets under management.

The index aims to provide a monthly measure of the performance of the universe of open, investable structured credit hedge funds. The Palomar SC HF Index is calculated in two formats - as gross asset value and as net asset value.

The Palomar SC HF Index is calculated by the Centre of Alternative Investments of the Zurich University of Applied Sciences and run by Palomar Capital Advisors. It is published exclusively by Structured Credit Investor.

Palomar Capital Advisors is a financial advisory firm specialising in structuring, managing and placing alternative investment products, specifically credit-related securities. It is an independent firm based in Zurich, Switzerland, owned and controlled by its investment professionals.

CS

Trading

Bond pricing framework unveiled

Quantitative strategists at SG have developed a government-guaranteed bond pricing framework that takes into account both government and issuer default risk. The issuance of debt guaranteed by the state under last year's bank bailout plans marks the launch of a brand new asset class in the bond market and provides investors with new relative value opportunities (SCI passim), the strategists note.

"Government-guaranteed bonds are fairly complex products, as they depend on both government and issuer credit risk," they explain. "We will quantify default risk by using the concept of default probability. This measures the risk of an issuer defaulting on its debt at a given horizon."

It is difficult to use history to estimate default probability, especially in the case of sovereigns, which rarely default on debt payments. The strategists therefore prefer to use market prices to calculate implied default probabilities, and explain how to calculate government default risk either from credit default swap spreads or from bond prices. They then look at how to measure the risk associated with the issuing counterparty, before combining the two in order to price government-guaranteed bonds.

Within this framework, the strategists propose three models with varying levels of complexity. The first model consists of pricing the bond directly, with no further assumptions concerning the liquidity premium or potential additional risks linked to the nature of the guarantee.

The second model is designed to fit the market on average and is referred to as a market model, whereby a premium is added to price the liquidity of government-guaranteed bonds. Finally, the third model proposes an explanation for differences in liquidity risk premia.

The strategists conclude that, at the time of writing, the Lloyds and Barclays issues, Austrian KA bonds and SFEF guaranteed bonds are expensive versus model, while some German issues, BOS and Dexia bonds are cheap versus model. To find out more, see the Research Notes article in next week's issue of SCI.

CS

Operations

The intelligent corporate services provider

Katherine Saville-Barwood, senior transaction manager at TMF Structured Finance Services, explores the value of an intelligent and proactive corporate services provider

Traditionally, special purpose vehicles (SPVs) established for structured finance transactions and the corporate services providers who maintain them have adhered to the mantra of being seen but not heard. However, the momentous market events of the past twelve months have altered the financial landscape immeasurably and issuers are now being called to the table and asked to speak up.

Securitisation is an invaluable financial tool which has been around since the early 1970s. A successfully structured and properly executed transaction provides an optimal result for both originator and investor.

Amongst other benefits, the originator can access cheap funding, increased cashflow and risk transfer. The investor obtains a bankruptcy remote investment, which may provide an exact asset versus liability match and, potentially, increased and cheaper credit.

The technology of securitisation has developed significantly over the past three decades. The first transactions in the 1970s were structured around financing of mortgage pools. This then extended in the 1980s to the first classes of non-mortgage loans, primarily car loans and then credit card receivables.

The 1990s saw the market moving into insurance and reinsurance and the issuance of such diverse products as catastrophe bonds and reinsurance sidecars. By December 2008, US$8.7trn of assets globally were funded by securitisation.

However, while securitisation technology has become increasingly sophisticated, the SPVs themselves have regressed. When CDOs first came to the market, the directors were required to approve via board resolution the decisions of the relevant investment manager.

This involved undertaking, amongst other tasks, qualitative decisions on SWOT analyses; a situation unthinkable in the CDO issuances of early to mid-2008. TMF Structured Finance Services (TMF SFS) was among the first corporate services provider to break into the CDO market and our managing directors have direct experience of this more skilled hands-on role.

Indeed, as time has passed all parties have continuously worked towards a situation where SPVs have only the limited substance required in their jurisdiction of issuance to satisfy structural, tax or legal requirements. The effective delegation of functions from the issuer to other deal parties has been key to a well structured deal. It was unthinkable that any of these deal parties and particularly the banks who were appointed to critical roles, such as swap counterparty, would ever make a sudden departure from the market.

Arise, the brain-dead issuer
In consideration of the increasingly limited functions of the issuer, corporate services providers have been forced to operate under fixed-fee agreements, with intense pressure from arrangers to keep such fees to a minimum. After all, if you have been successful in creating a black box issuer with minimal functionality, then why pay more than the bare minimum to set up and maintain your structure? For some parties, quality of services came a poor second to profit.

TMF SFS has always believed that this attitude is short-sighted and feels that current market conditions have proven this to be the case. There is a distinction between the issuer and the corporate services provider who stands behind it. While it may be beneficial from a structuring perspective for the SPV to be brain-dead, the party servicing it should most certainly not be!

From the initial review of transaction documents, through the lifetime administration of a deal to the close at maturity, all deal parties benefit from a quality corporate services provider who can bring some added value to the transaction. Fees should reflect this.

At the same time as being stripped of any real substance, issuers' liability has been increased. The rationale for this development lies in the limited recourse provisions of securitisation transactions.

Any claim against the SPV should be drafted as being strictly limited to the assets of the structure. Such ring-fenced protection has made it the obvious party to accept liability for matters such as the accuracy of offering documents and, indeed, to indemnify all other deal parties in carrying out their delegated functions.

However, personal managing directors' liability remains unlimited in respect of their responsibility for the proper running and maintenance of the company in the relevant jurisdiction. It is therefore important that managing directors have the proper qualification and experience to perform their role, irrespective of the safety net of directors' insurance.

The collapse of Lehman Brothers in the autumn of 2008 threw up the first real challenge of the credit crisis for issuers and the corporate services providers who maintain them. Overnight, a major market player disappeared, leaving associated securitisation transactions without a key deal party.

Lehman had worn many hats; for example, as arranger (setting up and traditionally overseeing the deal to maturity), issuer, swap counterparty, investment manager and portfolio servicer. The impact of its entrance into administration needed to be properly assessed.

The first task for corporate services providers was to identify the scale of the problem that faced them. A thorough analysis of all administered SPVs and the functions that Lehman had played had to be undertaken. This is clearly within the standard remit of the corporate services provider and posed no problem to those with good record-keeping procedures.

The next step was rather more complicated and required the sort of proactive approach and skill-set that one would not expect from a 'black box' entity; the transaction documentation had to be thoroughly reviewed and the effect of a deal party entering into administration ascertained. A thorough consideration of issuers' obligations in these circumstances was clearly key to this analysis.

Prior to the disappearance of Lehman, this analytical legal role would be -coordinated by the arranger, who would either instruct the issuer themselves using their in-house counsel or coordinate some external advice from deal counsel. However, in this new world without Lehman the issuer did not have the comfort of the guiding hand of the arranger and was forced to approach deal counsel directly.

It was at this point that issuers began to realise the true misfortune of their situation. Issuers' counsel are also typically appointed to the arranger and, when approached about acting for the issuer in these circumstances, almost inevitably cited a conflict of interest and refused to act. Counsel who were not conflicted queried how they would be paid.

Were the issuers' legal expenses included in the pre- or post-acceleration waterfall? Unfortunately, the answer to this question was frequently, "No".

So, in a situation where the issuer is left without its original counsel and/or the means to engage and pay for new counsel, what should it do? Here we see the absolute conflict between the black-box function of the issuer as carefully drafted and honed over the years and the proactive role being forced on the corporate services provider standing behind the vehicle, by the absence of an arranger with no recourse to the comfort of guidance from counsel.

For those corporate services providers, such as TMF SFS, who had been prudent enough to include lawyers on their staff, an initial in-house review of the documentation could be undertaken. The importance of this in-house functionality is particularly crucial when you consider the timing issues around some of the issuers' obligations and that the consequence of inactivity during a cure period could lead to an issuer's event of default. The plight of those unfortunate corporate services providers without such legal staff is certainly more likely to be played out in front of all of us in the courts over the next few years.

The big surprise that has come to many corporate services providers after undertaking this in-house review is just how far the obligations of the issuer extend. The drafting of the transaction documents reflects the fact that no-one thought the unthinkable; there simply is no provision in terms of issuers' protections for a deal party and particularly one of Lehman's size, carrying out the roles that it did, to disappear overnight.

Replacement and termination provisions do not provide solutions for the issuer (although they do often provide noteholders with a direct cause to demand action from the issuer). These clauses are typically drafted to refer to the delegates' obligation to select their replacement; impossible in a situation where the delegate is no longer functioning, leaving the corporate services provider on behalf of the issuer in a position of being forced to find a replacement deal party.

The concept of a corporate services provider sourcing an alternative swap counterparty, portfolio servicer or investment manager on its own initiative and using its own industry contacts would have been laughable 12 months ago, yet we have found ourselves doing just this within the last six months. Questions as to the desirability of or indeed the issuers' suitability to carry out this role seem to have fallen away as parties rush to rescue transactions with any residual value.

Should the issuer fail to source this alternative party, they will have failed to perform their contractual obligation under the transaction documents. Further, as delegation is only effective for so long as the delegate exists and, upon ceasing to exist, the obligation to perform the specified function reverts directly to the contractual party making the appointment - i.e. the issuer - the issuer finds itself potentially in default under the terms and conditions of the notes (e.g. issuer's continuing breach of obligations).

In such a situation, the issuer can only look enviously to the protections of the trustee, who will not act without a direction from noteholders and an indemnity. The issuer is, of course, protected to some extent by limited recourse.

However, reputational risk is always a concern to any quality corporate services provider and this alone is enough to give the conscientious amongst us serious cause for concern. The best an issuer can hope for in these situations is an interested party who is willing to indemnify the issuer and its agents for any actions it takes in accordance with that party's wishes. Such indemnities are being sought wherever possible as a matter of course and can also provide for the issuer to appoint and pay for counsel.

As the market situation has continued to deteriorate, the issuer has found itself being called upon to act more and more. It is no longer uncommon for a corporate services provider to receive a call or email from a noteholder directly or from a party acting on their behalf.

The proactive review of transaction documentation to assess obligations and potential liabilities, and the drafting and service of notices seems to have become commonplace. Corporate services providers are sourcing replacement account banks, directing the process of amendments via noteholder consent and indeed, with the benefit of an indemnity or a well-drafted waterfall, appointing counsel directly.

Irrespective of the level of fees initially paid, corporate services providers are now faced with an enormous gap between the un-envisaged cost in terms of staff's time spent on the above and the fees actually being paid (if indeed there is still a source of payment). As stated above, with the limitation of the issuer's functionality came an immense pressure to reduce fees to a fixed minimum and now corporate services providers are being forced to make up the difference, with no hope of reimbursement unless there is provision for time-spent fees in their appointment documentation.

The old argument that the issuer is brain dead does not wash in today's climate; issuers have obligations and interested parties will make sure that the relevant corporate services providers fulfill them. One only wonders how those who were paid peanuts have been faring in this challenging new world.

So, what does the future hold if and when the securitisation market makes a comeback? We believe that parties' experiences through the market downturn will lead to a demand for better quality services providers.

Questions will be asked about procedures, in-house capabilities and provision for the unexpected. Fee structures should be amended to reflect this, and corporate services providers should be properly rewarded in the event of being asked to take significant action on a transaction.

At the same time we believe that issuers will aim to increase protection under the deal documents. Delegation and termination provisions must be extended to cover all possible scenarios. Further, the issuer will certainly require its legal costs to be included high in the waterfall and may even start to look for provisions similar to the trustee in terms of noteholder consent and indemnification prior to taking any action.

Any issuer who does not push for these provisions clearly has not properly engaged in and learnt their lessons from this tumultuous period. Deal parties should remember that an intelligent corporate services provider, like TMF SFS really is worth the money.

CDS

Embracing change

Jamie Cawley, ceo of IDX Capital, answers SCI's questions

Jamie Cawley

I established a voice-broking operation in New York called Axiom, which I ran until 2005. At that time, I believed that technology could be leveraged to deliver live execution prices to the inter-dealer community, thereby reducing costs and enhancing transparency. The aim was to also clean up the settlement process.

However, there was a strategic difference of opinion at Axiom and so I went on to found IDX Capital. We built a live execution platform and deployed it to the New York market.

Q: What is your strategy?
A: CDS trading is a sales-driven business and so we set out to anticipate client needs both on a day-to-day basis as well as at an operational level. The business has taken off - we've had a record first quarter, where volumes went through the roof. This is evidence of having a clear plan in an unclear environment, as well as aligning ourselves with our customers' needs.

We also developed a consortium called V10, which was designed to create a dialogue with dealers around the issue of straight-through processing and potentially creating a jointly-owned broker-dealer. But, given the timing, the discussions went sideways.

Q: How do you differentiate yourself from your competitors?
A: We differentiate ourselves by only focusing on CDS. We occasionally execute cash corporate bonds as a service for customers looking to put on basis trades to profit from market dislocation.

We have been offered opportunities in equities, convertible bonds and corporate bonds, but we passed for strategic reasons - namely, that these asset classes tend not to be revenue-growth businesses and so could dilute our revenues. While the free cashflow and diversification potential of these other asset classes can be seductive, we don't want to lose focus.

Q: Which challenges/opportunities does the current financial environment bring to your business and how do you intend to manage them?
A: As a marketplace, credit derivatives have grown exponentially both in volume and diversification over the past few years, notwithstanding the challenges of 2008-2009. We expect the business to continue growing, while perhaps not in the same trajectory, by at least 20%-30% compound growth over the next two years. Although our current focus is on servicing clients in New York, we have plans to eventually establish a business in London as well.

The challenge for us is to endure the current volatile environment. We lost five customers last year and the risk profiles of the remainder have changed significantly.

Having said that, we added three new clients at the end of March. So it will be interesting to see how our client base evolves going forward.

Q: What major developments do you need/expect from the market in the future?
A: The big question is: what will 'credit derivatives 2.0' look like? Ultimately, I expect the market to be broader, deeper and less levered. We believe in simple precepts, including transparency and fair dealing, and anonymous execution at low cost.

Increased transparency and regulation is a good development for the CDS market. It has been shown to operate neither efficiently nor rationally by the excesses of the last few years. If measured and well thought-out, regulation has significant benefits in terms of levelling the playing field and creating 'one price for all'.

The initial response from the industry to criticism following Lehman Brother's default was counterproductive - it only served to bring about the ire of the general public. In hindsight, there should have been a more proactive dialogue with governments and regulators about recognising the fact that systemic risk can pose threats to the broader financial markets and the economy, as well as the need to mitigate counterparty risk. By embracing change, Wall Street can help mould the final outcome.

It is challenging for governments to balance systemic risk and moral hazard, however - it requires long-term solutions. One solution is, of course, to create CDS central counterparties.

It would have been difficult to create a CDS CCP four or five years ago because the appropriate market data wasn't available. There is no reason why such data can't come from ECNs, for example, as well as dealers and the buy-side in the future - providing it is broad-based and statistically sound.

About IDX Capital
IDX Capital is a fast-growing inter-dealer broker of credit default swaps operating in the OTC market and catering to the world's premier financial institutions. IDX currently services the New York marketplace, with plans to expand into the European and Asian markets. IDX is licensed by the FINRA through its subsidiary to act as an agent - matching market dealers in the wholesale market - for a fee.

CS

Boutique hires distressed trading trio

The latest company and people moves

Maxim Group has enhanced its leveraged finance group with the recruitment of Sharie Loeffler, Catherine Yelverton and Kevin Cohen. The group will be based in Maxim's New York office.

Loeffler, who was appointed as md and head of the firm's leveraged finance group, brings a decade of distressed credit sales and trading experience to Maxim Group. She began her career at Davidson Kempner Partners as a distressed credit analyst and trader. Prior to joining Maxim Group, she spent four years on the distressed/par leveraged loan sales and trading desk at Goldman Sachs.

Yelverton will also serve as an md, responsible for trading bank loans and high yield bonds in the retailing, food, restaurant, consumer products, cable/wireless, media/broadcasting, technology and paper & packaging sectors. Prior to joining Maxim Group, she was md and global head of loan trading/high yield trading for ABN AMRO Bank. Previously, she was md - European high yield trading for Paribas Corporation in London.

Meanwhile, Cohen brings a decade's worth of debt and equity research experience to Maxim Group, and will trade bank loans and high yield bonds in the home building, REIT and building products sectors. He began his career at Donaldson Lufkin & Jenrette as an equity analyst covering REITs.

In 2005, Cohen joined Banc of America Securities as a senior publishing analyst in its leveraged finance group, covering the paper/packaging and metals/mining sectors. He later moved to the special situations/distressed debt desk.

The appointments are part of an ongoing expansion of Maxim Group's fixed income capital markets business, which has included the recruitment of multiple senior-level executives in the space, with expertise in corporate debt, mortgage securities and asset-backed securities.

Institutional broker expands into credit
Bay Crest Partners, an independent institutional brokerage and boutique equity research firm specialising in equity and equity options trade execution, is to develop a fixed income trading team to complement its existing trading businesses. The fixed income team will provide sales and trading services in the credit markets, covering a variety of credit-related products.

Sean Rice joins Bay Crest as md of fixed income trading, responsible for building the team and developing the business. The firm plans to add ten employees to the fixed income division within the coming months.

Rice previously served as md and head of product management, structured products at UBS. Prior to that, he was md, head of product management and structured credit at Bank of America Securities, where he developed, staffed and implemented a product management function within the structured products business.

"Increasing liquidity in the corporate and structured credit markets, impending changes in the credit default swap market and the availability of best-in-class fixed income talent all present tremendous opportunities for Bay Crest in the credit markets," comments Rice. "Bay Crest is exceptionally well-positioned to add value in the fixed income markets through sourcing liquidity and providing the discreet and efficient execution that our clients have come to expect."

CDO valuations firm launched
James Stehli, Robert Morelli and Saro Cutri have established a new CDO valuations service called Sirona Advisors, a division of AK Capital, where they have been named managing partners. Stehli was previously head of the global CDO group at UBS, while Morelli was head of RMBS CDOs and Cutri was an MBS trader at the bank.

CDO structurer joins investment manager
Bill Seery has joined Value Alpha Investment Management (ValAlpha) as a principal. ValAlpha is an investment management company that creates investment funds based on quantitative parameters and computer-based asset selection.

Seery was previously a principal at Allianz Risk Transfer, where he worked for 11 years. His roles included managing structured securities; entertainment investing and lending; CDO asset management and structuring; and real estate lending and workouts.

Emerging market recovery fund prepped
Ashmore Investment Management has launched the Ashmore Global Consolidation and Recovery Fund (AGCRF), established with the objective of maximising the recovery value of less liquid or other financial assets in emerging markets. The fund will provide a vehicle for investors, such as financial institutions, to contribute some or all of their existing holdings of such assets. It will also be offering new capital the opportunity of taking advantage of the resultant investment opportunities.

The fund is Guernsey-domiciled and will open quarterly for further subscriptions. It will have a life of at least five years, with redemptions available after the third and fourth anniversaries with applicable redemption charges.

UBS has committed certain assets to the fund at its inception, as the core seed investor. Working together, Ashmore and UBS intend to grow the fund through further subscriptions by banks, insurance companies, funds/fund managers and other investors among their existing and new clients. Subscriptions can be made by way of in-specie transfer of emerging market assets and/or in cash.

In 1999, in similar circumstances of illiquidity after the financial crisis of 1998, Ashmore launched the Ashmore Russian Consolidation and Recovery Fund, which went on to achieve gross returns of 103.9% annualised until its conversion in May 2002 into an open-ended fund.

Mark Coombs, Ashmore's chief executive, comments: "Just as in 1999, we are offering the opportunity to financial institutions, including other funds and their investors/LPs who may be exiting/reducing their emerging market commitments, together with any other investors, of addressing some or all of their emerging market balance sheet exposures. Crucially investors will maintain the upside as asset prices recover and, most importantly, they will not be selling at the bottom. They will also benefit from Ashmore's knowledge, experience and proven track record in consolidating such assets and adding value, acting as an objective, unrelated third-party in managing recovery and maximising returns over the next 3-5 years."

Distressed loan venture clinched
Deerfield Capital Management has entered into a new investment venture with Pegasus Capital Advisors, which involves the firms committing to invest US$75m and US$15m respectively, primarily in corporate bank loans and other senior secured corporate loans that they believe are priced at attractive levels.

Jonathan Trutter, Deerfield's ceo, comments: "Our partnership with Pegasus is indicative of our belief that the current market environment provides an unprecedented opportunity to purchase high quality loan assets at extremely low prices. We believe that DCM's long track record and experience in investing in the bank loan market, combined with Pegasus' diverse operating advisor industry knowledge and substantial credit underwriting experience, will produce attractive risk-adjusted returns."

Craig Cogut, Pegasus' founder and co-managing partner, adds: "We view the well-regarded DCM fixed income platform as a dynamic way to cautiously access the unusually attractive investment opportunities created by the dislocation of global financial markets."

Asset manager names new evps
PIMCO has promoted 12 employees to the position of evp, 24 to the position of svp and 42 to the position of vp. Luke Drago Spajic and Alfred Murata are among the newly-named evps.

Spajic is head of pan-European credit and ABS portfolio management, based in London. Prior to joining PIMCO in 2007, he was executive director and trader on the global macro proprietary trading desk at Goldman Sachs. Previously, he worked for Highbridge Capital, a division of JPMorgan.

Murata is a Newport Beach-based portfolio manager with the mortgage- and asset-backed securities team. Prior to joining PIMCO in 2001, he researched and implemented exotic equity and interest-rate derivatives at Nikko Financial Technologies.

REIT embarks on alternative investment strategy
New York Mortgage Trust has closed a US$9m initial investment in deeply discounted notes issued by Cratos CLO I, marking the company's first investment under its alternative investment strategy. The CLO's portfolio consists of US$467m par amount of senior secured corporate loans extended to more than 75 different borrowers and is diversified by industry, geography and borrower classification. The investment was completed in connection with the acquisition by JMP Group, the company's largest stockholder, of the CLO's investment adviser Cratos Capital Management.

New York Mortgage Trust's investment in the CLO was conducted through Hypotheca Capital, the company's taxable REIT subsidiary. Hypotheca Capital maintains an approximately US$64m net operating loss carry-forward and the company expects to utilise a portion of this to offset taxable income generated by these assets. The company's investment in these assets will be managed by Harvest Capital Strategies, the investment advisor to Hypotheca Capital and a wholly-owned subsidiary of JMP Group.

Steven Mumma, the company's ceo, comments: "This is the first transaction in our previously announced alternative investment strategy focused on opportunistic investments in alternative financial assets that we believe are likely to generate attractive risk-adjusted returns and is consistent with the sourcing relationship contemplated by our relationship with JMP Group. Based on the results of the substantial due diligence completed by the company and JMP Group's acquisition of the CLO's investment adviser, we believe that this investment will provide attractive risk-adjusted returns for our alternative investment portfolio and should allow us to utilise a portion of our net operating loss carry-forward."

The acquisition of Cratos Capital Management parent sees Cratos staff Bryan Hamm, Craig Kitchin and Fred Passenant (and their colleagues) move over to JMP. Their corporate credit expertise is expected to enable JMP to capitalise on the attractive investment opportunities available today in corporate loans and distressed debt.

Fixed income sales head appointed
Bank of America Merrill Lynch has appointed Bryan Weadock to its global markets group as head of Americas fixed income sales. Weadock was most recently head of investor client management at JPMorgan in New York. He will report to Mike Meyer, global head of sales for the global markets platform.

Bank of America Merrill Lynch fixed income products include corporate bonds, syndicated loans, municipal financing, asset- and mortgage-backed products, rates, currencies and commodities.

Weadock has spent the last 17 years at JPMorgan and, prior to his most recent appointment, he was head of North American fixed income sales for four years. Weadock's other senior sales roles include head of US credit sales and head of US high grade credit sales. He joined JPMorgan in 1992 as a bank analyst in credit research.

DTCC and Markit link loan services
The DTCC and Markit have announced that they are working together to automate syndicated loan reconciliation for institutional investors and other buy-side firms by creating a link between DTCC's Loan/SERV Reconciliation Service and Markit's Wall Street Office (Markit WSO) loan management system.

DTCC's Loan/SERV Reconciliation Service automates and streamlines the processing of commercial loans by enabling agent banks and lenders to view and reconcile loan positions on a daily basis. Prior to the launch of this service, lenders and banks reconciled loan positions independently of one another - a process prone to errors, miscalculations and delays.

Markit WSO provides institutional investors with a range of services for managing loan portfolios, including an accounting system for recording loan trades and principal and interest payments, as well as real-time data and pricing on global syndicated loans.

Markit will provide customers with a loan position file for upload to DTCC. This position file will enable Markit WSO customers to access the Loan/SERV Reconciliation Service and compare their loan positions with those of the agent banks. Transactions and balances that do not match will be highlighted so both parties can quickly correct differences.

OppenheimerFunds investigated over MBS investment
Law firm Berman DeValerio is investigating whether investors in certain bond funds managed by OppenheimerFunds, a unit of Massachusetts Mutual Life Insurance Co, can recoup losses caused by what it describes as 'risky investments' in MBS and related derivatives. The firm's investigation centres on the Oppenheimer Core Bond Fund, which posted losses of more than 40% in the 12 months prior to 31 March 2009, according to the OppenheimerFunds website.

"We contend the Core Bond Fund lost significantly more than many peers because it had large holdings in mortgage-backed securities, credit default swaps and total return swaps that plummeted in value when the real estate market fell," says Jeffrey Block, a partner with Berman DeValerio in Boston. "Oppenheimer failed to properly disclose to investors that they faced outsized risks in seemingly conservative funds."

Oppenheimer is alleged not to have disclosed the high-risk nature of certain of its funds' holdings to US states that used the company to manage parts of their 529 college savings plans. State officials in Illinois, Maine, New Mexico and Texas are investigating Oppenheimer, while Oregon has filed a lawsuit against the company. Angelo Manioudakis, who managed the Oppenheimer Core Bond Fund, resigned in December.

CS, AC & MP

Big bang sees over 2000 sign up

A round-up of this week's structured credit news

ISDA reports that the 2009 ISDA Credit Derivatives Determinations Committees and Auction Settlement CDS Protocol (the 'big bang') have been successfully implemented (see also separate News Analysis). 2023 parties adhered to the Protocol, which closed on 7 April. This represents the final step in the process known as 'hardwiring', or the incorporation of auction settlement terms into standard CDS documentation (SCI passim).

"The successful implementation of our Big Bang Protocol constitutes a major achievement for ISDA and for the industry," comments Robert Pickel, executive director and ceo, ISDA. "Hardwiring is central to the many improvements ISDA and the industry are making in the ongoing refinement of practices for the efficient, liquid and transparent conduct of the CDS business. In adapting a tactical solution, ISDA has helped develop a strategic direction for the industry."

The new terms, which are contained in ISDA's 2009 March Supplement and incorporated into existing CDS documentation by the big bang protocol, include the following:

• First, the supplement adds the concept of auction settlement as a settlement method that will eliminate the need for credit event protocols to cash settle CDS transactions.
• Second, it incorporates the resolutions of the Determinations Committees into the terms of standard CDS contracts, which will make binding determinations for issues, such as whether a credit event has occurred; whether an auction will be held; and whether a particular obligation is deliverable.
• Third, the Supplement adds credit event and succession event 'look back' provisions (or backstop dates) into the CDS documentation that institute a common standard effective date for CDS transactions. Under the big bang protocol, these 'look back' provisions will come into effect for legacy transactions on 20 June 2009.

In combination with the changes in market practice that support standard coupons for CDS, these developments will introduce greater certainty to transactional, operational and risk considerations for treatment of CDS, ISDA says. Structured credit strategists at Barclays Capital also expect the move to improve liquidity in single name CDS, allowing market participants to better express fundamental views on the 'haves' and 'have nots' through the CDS market.

FASB releases additional fair value guidance
The FASB has issued three final Staff Positions (FSPs) intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities. FSP FAS 157-4, 'Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly', provides guidelines for making fair value measurements more consistent with the principles presented in FASB Statement No. 157, Fair Value Measurements. FSP FAS 107-1 and APB 28-1, 'Interim Disclosures about Fair Value of Financial Instruments', enhances consistency in financial reporting by increasing the frequency of fair value disclosures, while FSP FAS 115-2 and FAS 124-2, 'Recognition and Presentation of Other-Than-Temporary Impairments', provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities.

According to Espen Robak, president of Pluris Valuation Advisors, the revisions will strengthen the standard. While many details still need to be worked out, the final revisions reaffirm that the measurement goal of fair value is the exit price - or the price that would be paid based on market conditions on the day the asset is being valued. He says that this approach prohibits companies from taking a 'longer view' and valuing assets based on their own, more optimistic, views of what market conditions might be like in the future.

The new FSP also states explicitly that "a reporting entity's intention to hold the asset or liability is not relevant in estimating fair value" - an important clarification for many companies, Robak notes. A new, improved example of how FAS 157 should be implemented also indicates that the FASB favours using transaction data, even when transactions are sporadic and irregular, but with adjustments and analysis based on current market conditions.

"The issuance of these final FSPs follows a period of intensive and extensive efforts by the FASB to gather input on our proposed guidance [see last week's issue]," states FASB chairman Robert Herz. "We received over 600 written comment letters, many emails and held many face-to-face meetings and other discussions with a broad range of affected constituents."

He adds: "Our careful consideration of the input resulted in some changes in the final documents from the guidance first proposed. The changes include a number of new disclosures relating to the determinations of fair value and to estimated credit losses and credit exposures. Virtually all of the investors providing input expressed the need for greater transparency by banks. Taken together, these three new documents require significantly expanded and enhanced disclosures."

FSP FAS 157-4 relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms what Statement 157 states is the objective of fair value measurement - to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions. Specifically, it reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive.

FSP FAS 107-1 and APB 28-1 relate to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet of companies at fair value. Prior to issuing this FSP, fair values for these assets and liabilities were only disclosed once a year. The FSP now requires these disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value.

FSP FAS 115-2 and FAS 124-2 on other-than-temporary impairments is intended to bring greater consistency to the timing of impairment recognition, and provide greater clarity to investors about the credit and non-credit components of impaired debt securities that are not expected to be sold. The measure of impairment in comprehensive income remains fair value. The FSP also requires increased and more timely disclosures sought by investors regarding expected cashflows, credit losses and an aging of securities with unrealised losses.

More effective ways of solving the crisis?
The Congressional Oversight Panel (COP) has released its April oversight report, entitled 'Assessing Treasury's Strategy: Six Months of TARP'. The report indicates that, based on historical experience, liquidating troubled banks and firing certain executives could be a more effective way to solve the crisis than the actions undertaken so far.

The report notes that all successful efforts to address banking crises in the past involved these types of actions, as they provide clarity relatively quickly. It also suggests that the US Treasury potentially "fails to acknowledge the depth of the current downturn and the degree to which the low valuations of troubled assets accurately reflects their worth. The actions undertaken by Treasury, the Federal Reserve Board and the FDIC are unprecedented. But if the economic crisis is deeper than anticipated, it is possible that Treasury will need to take very different actions in order to restore financial stability."

However, as credit analysts at BNP Paribas point out, there was strong disagreement within the five-member panel, with two members dissenting from the entire report. "Whatever the course of action the Treasury will take with the problem banks is likely to depend heavily on political considerations, which in our view leaves all options on the table at this stage," the analysts note.

The COP focused on six historical experiences: (1) the US Depression of the 1930s; (2) the bank run on and subsequent government seizure of Continental Illinois in 1984; (3) the savings and loan crisis of the late 1980s and establishment of the Resolution Trust Corporation; (4) the recapitalisation of the FDIC bank insurance fund in 1991; (5) Sweden's financial crisis of the early 1990s; and (6) what has become known as Japan's 'Lost Decade' of the 1990s. According to the panel, a review of these historical precedents reveals that each successful resolution of a financial crisis involved four critical elements:

• Transparency: swift action to ensure the integrity of bank accounting, particularly with respect to the ability of regulators and investors to ascertain the value of bank assets and hence assess bank solvency
• Assertiveness: willingness to take aggressive action to address failing financial institutions by taking early aggressive action to improve capital ratios of banks that can be rescued and shutting down those banks that are irreparably insolvent.
• Accountability: willingness to hold management accountable by replacing - and, in cases of criminal conduct, prosecuting - failed managers.
• Clarity: transparency in the government response, with forthright measurement and reporting of all forms of assistance being provided and clearly explained criteria for the use of public sector funds.

"Historical precedents always involve some differences from the current crises. Nonetheless, experience can provide an important comparison against which current approaches can be tested," the report explains.

It continues: "By offering this assessment of Treasury's current approach and identifying alternative strategies taken in the past, the Panel hopes to assist Congress and Treasury officials in weighing the available options as the nation grapples with the worst financial crisis it has faced since the Great Depression."

Ambac IFSR downgraded to junk
Moody's has downgraded to Ba3 (outlook developing) from Baa1 the insurance financial strength ratings of Ambac Assurance Corporation and Ambac Assurance UK Limited. The agency also downgraded the senior debt of Ambac Financial Group to Caa1 from Ba1. The rating action concludes a review for possible downgrade that was initiated on 3 March 2009.

Ambac Financial Group responded to the move by stating that, while it believes that Moody's is entitled to its opinion of Ambac's financial strength, it notes that this is the tenth such opinion change since January 2008. In the intervening time the insurer says it has taken a number of steps to move its business model forward, given the significant changes in the marketplace. In particular, the monoline has been actively refining its risk management and remediation capabilities, preparing to launch a well-capitalised municipal-only financial guarantee subsidiary and developing business opportunities that capitalise on the current market dislocation.

"Ambac is confident of the strength of the financial guarantee business model which is founded on aggressive risk mitigation, organic risk delevering and claim payment obligations that reflect scheduled principal and interest over the lives of the transactions," the monoline comments. "Ambac will continue to execute a thoughtful, well-developed strategy to continue to serve issuers, create long-term shareholder value and maintain its critical role in the global capital and credit markets."

According to Moody's, the downgrade of Ambac's ratings primarily reflects weakened risk-adjusted capitalisation, as loss estimates on RMBS securities have increased significantly (particularly with respect to Alt-A transactions). These higher loss estimates increase the estimated capital required to support Ambac's sizable direct RMBS portfolio (including securities owned, as well as securities guaranteed) and also the insurer's large portfolio of ABS CDO risks. The rating agency notes that the claims-paying resources of Ambac remain above its expected loss estimates for the firm, though this cushion has been significantly eroded and losses in more severe stress scenarios would exceed available resources.

Ambac recorded a statutory net loss of US$4bn for 2008, ending the year with US$1.6bn in policyholders' surplus only after giving effect to US$2bn of new capital raised during the year. Qualified statutory capital, comprised of policyholders' surplus and contingency reserves, stood at approximately US$3.5bn at year-end 2008, but remains vulnerable to increases in case loss reserves over the near to medium term, based on Moody's expected loss estimates. Furthermore, Ambac's current impairment provisions for ABS CDOs are highly sensitive to estimates of future cashflows on underlying CDO collateral and projections of the timing of claims payments many years into the future.

In Moody's view, Ambac's liquidity risks associated with its investment agreement business have been largely contained due to inter-company asset purchases and lending, with approximately 93% of investment agreement liabilities collateralised. However, the credit profile of Ambac Assurance's investment portfolio has deteriorated due to the purchase of structured finance assets from the financial services business.

At year-end 2008, the market value of the monoline's consolidated invested assets was approximately US$2.5bn below amortised cost, with much of the difference attributable to RMBS assets. While Moody's believes that large liquidity premiums contribute to this differential, it also expects some further loss to principal based on its ratings on these securities.

Ambac is steadily de-leveraging through natural portfolio run-off, high levels of refundings and via commutations of credit default swaps on ABS CDOs. However, downward credit migration in the firm's insured portfolio outside its mortgage-related exposures has largely offset the positive capital accretion benefits associated with the de-leveraging process to date.

In addition to reduced capitalisation, Moody's also cites deterioration in other key rating factors as dislocation in financial markets - and in Ambac's situation - have persisted. These include the monoline's weakened business position and constrained financial flexibility. Taken together, Moody's believes that these factors limit Ambac's ability to effectively counter the company's weakened capital position.

Moody's states that Ambac's developing outlook reflects the potential for further deterioration in the insured portfolio as asset performance develops over the intermediate (6-18 month) term. It also incorporates positive developments that could occur over that time, including lower variability in mortgage-related asset performance, the possibility of commutations or terminations of certain ABS CDO exposures and/or successful remediation efforts on poorly performing RMBS transactions.

Retranched LCDX hedging opportunities analysed
Today's (15 April) LCDX.10/LCDX.12 tranche roll is expected to retranche the index into 0-8%, 8-15%, 15-30% and 30-100% tranches (see SCI issue 125), thereby providing opportunities for investors to sell protection on senior LCDX tranches once again - the 15-100% tranche having long since lost that allure, according to structured credit analysts at Barclays Capital. They provide price guidance on where the 30-100% should trade, given where the LCDX index trades, in a recent research note.

With the LCDX.12 index expected to trading at about 73 points, the analysts suggest that it makes sense to compare it to the 30-100% tranche. Both trades can absorb similar amounts of losses before losing principal and should therefore provide similar buy-and-hold returns.

They calculate the breakeven constant annual default rate (CADR) for the LCDX index and then apply it to infer the spread at which the 30-100% tranche must trade for investors to break even on that tranche as well. The analysis ignores the effect of correlation on the 30-100% tranche, but - with expected losses well within the tranche - the analysts believe it should trade like the index and have little sensitivity to correlation.

Assuming that the LCDX.12 index trades at US$73 with a 500bp running annual coupon, BarCap finds that the breakeven CADR would be about 25% if the recovery rate for single name LCDS is at 40%. At this breakeven, a fair spread of 500bp for the 30-100% tranche can be inferred.

If the same CADR and recovery rate for a typical CLO deal is applied, the fair price for a straight Aaa CLO tranche (25-100%) is about US$75, according to the analysts. This is reasonably in line with where current Aaa tranches trade in the secondary CLO market.

"Depending on the actual level of the tranche once it starts trading, investors can use our estimate (or, at least, the methodology) for the 30-100% tranche to gauge its attractiveness relative to the index or Aaa CLO tranches," the analysts conclude. "However, this initial analysis is simplistic. There are significant differences in portfolio quality, structure, maturity, liquidity, funding costs and investor base that would also have to be taken into account when deciding on the relative attractiveness of trades."

'Bad bank' for Germany?
Germany has become the latest country to begin preparing a 'bad bank' system. However, in this case the scheme will allow banks to offload performing illiquid (but not 'toxic' assets) into separate entities, which will then be funded by the state to a maximum of €200bn. Consequently, sub-prime and Alt-A RMBS, junior tranches of CDOs and monoline basis risk is expected to remain with the banks, so the shareholders take the pain.

Analysts suggest that the scheme will be less helpful to the Landesbanks, given that they were typically more active at the lower end of the structured risk spectrum, than for example Commerzbank. What exactly constitutes illiquid but not toxic assets as yet remains unclear, however.

Deadline given for monoline's remediation
Pursuant to Section 1310 of the New York Insurance Law the New York Insurance Department (NYID) has issued an order stating that, without limiting its power to institute rehabilitation or liquidation at an earlier date, Syncora Guarantee is to take such steps as contemplated by the monoline's plan to remediate its policyholders' surplus deficit and restore its minimum surplus to policyholders - including the 2009 MTA and RMBS tender offer (SCI passim) - by no later than 29 May 2009. Additionally, in the event that Syncora Guarantee has not successfully completed such a comprehensive restructuring, the order also states that from 26 April 2009 it will suspend payment of all claims and otherwise operate only as necessary to effectuate such remediation and restoration.

As of 31 December 2008, Syncora Guarantee's reported policyholders' surplus deficit was approximately US$2.4bn. If a comprehensive restructuring is not achieved and the monoline is placed into rehabilitation or liquidation, any preferential payments may be subject to recapture by its rehabilitator/liquidator, the NYID warns. Moreover, although Syncora Guarantee believes it has sufficient funds to pay current claims, continued payment on current claims may deplete its financial resources necessary to effect a comprehensive restructuring at the levels of commutation payments contemplated by the 2009 MTA.

Syncora Guarantee has been engaged in negotiations with certain counterparties to credit default swap transactions insured by its financial guarantee insurance policies on the terms of a master transaction agreement (MTA), pursuant to which certain of the counterparties would effectively terminate the contracts. The monoline is negotiating the definitive documentation of the 2009 MTA with all of the significant counterparties, as well as a tender offer from the BCP Voyager Master Funds SPC for 56 classes of insured RMBS. A condition to the 2009 MTA requires Syncora Guarantee to achieve a certain level of acceptances under the RMBS tender offer, which has not yet been achieved.

Syncora Guarantee intends to assess the progress made on the finalisation of the 2009 MTA, the level of acceptance achieved in the RMBS tender offer and the likelihood that a successful comprehensive restructuring can be achieved by 26 April. If a comprehensive restructuring has not been achieved by then, the monoline shall either: (i) suspend all claims payments until such time as the comprehensive restructuring is consummated or it determines that such a comprehensive restructuring is no longer reasonably possible (at which time Syncora Guarantee would tender its consent to rehabilitation to the NYID); or (ii) tender its consent to rehabilitation to the NYID and, in contemplation of the institution of such proceedings and to preserve assets for the benefit of all policyholders, immediately suspend all claims payments until such time as the comprehensive restructuring is achieved or an order is entered under Article 74 of the New York Insurance Law.

Speculative-grade default rates rise sharply
Global speculative-grade default rates rose to 7% in March from 4.1% in February, according to Moody's, with 35 issuers defaulting last month - the highest number of defaults in a month since the Great Depression. The majority of these were by issuers in the media, chemical, high tech and beverage, food & tobacco industries.

Most of the defaults were in the US, where the rate was 7.4% in Q109 (compared to 4.5% in Q408). However, European rates are also picking up sharply, standing at 4.8% in Q109 (2% in Q408).

Moody's now expects global default rates to peak at 14.6% in November 2009, but warns that under its pessimistic scenario it forecasts a 17% rate (compared to 12.6% under its optimistic scenario). Geographically, Europe should end up faring much worse than the US as far as default rates are concerned: the rating agency expects a peak of 21.2% in Europe, compared to 14.1% in the US.

US$76.1bn CRE CDO/Re-REMICs on review
S&P has placed 1,297 classes from 168 CRE CDOs and re-REMICs on credit watch with negative implications. These tranches have an aggregate outstanding of US$76.1bn. Including the ratings previously placed on credit watch negative, a total of 1,368 ratings from 170 transactions are now on credit watch negative, and the affected classes have an aggregate outstanding balance of US$78.7bn.

The credit watch negative placements on the CRE CDO and re-REMIC transactions reflect their exposure to the CMBS with ratings placed on credit watch negative on 7 April, according to S&P. The agency placed almost all of the outstanding ratings on CRE CDO transactions on credit watch negative due to its expectations of additional deterioration in the credit profile of the transactions and the general economic environment.

"CRE CDOs are generally collateralised by highly leveraged debt secured by properties that are highly transitional in nature," it comments. "S&P has observed that the aggregate percentage of assets classified as credit risks or defaulted in this segment has almost quadrupled since September 2008, when it stood at 3.5%. We expect additional deterioration going forward, as we believe it will be increasingly challenging for collateral properties to stabilise in the current economic environment."

US CLOs fail O/C tests further up capital structure
The performance of US CLOs continued to deteriorate in recent months as downgrades pushed more speculative-grade corporate issuers into the triple-C range and in some cases into default, reducing CLO O/C ratio test results, S&P reports. As such, the subordinate O/C ratio tests of many transactions fell out of compliance, or got closer to being out of compliance, and equity payments in many transactions will likely be diverted to pay down senior notes on the next payment date.

Additionally, S&P says a small number of CLO transactions are also failing the next O/C test up their capital structure and may divert interest payments not only away from equity, but also away from the most subordinate class of debt.

In some cases, managers have purchased assets at a discount to support O/C ratios. To purchase discounted assets, managers have generally used various strategies to navigate around discount purchase provisions that require assets purchased at a significant discount to be carried at purchase price rather than at par for purposes of calculating the O/C tests (SCI passim).

"In our view, however, this may ultimately place additional pressure on the senior CLO note ratings as interest cash that would otherwise be used to delever the senior notes is released to the equity class holders," S&P concludes.

TRUP CDO/combo notes hit
Moody's has downgraded 62 tranches across 13 trust preferred (TRUP) CDOs. The downgrades are prompted by the exposure of these TRUP CDOs to trust preferred or subordinated debt issued by real estate investment trusts (REITs), real estate operating companies, homebuilders, CMBS and real estate-related loans.

In April 2008, Moody's downgraded most REIT TRUP CDO tranches due to the increasing likelihood of defaults and low expected recoveries for mortgage REITs and homebuilders. Due to the continued credit crisis and weak economic conditions, defaults and interest payment deferrals for all collateral types backing REIT CDOs are expected to be worse than previously anticipated. Moody's believes the weak economic environment will continue throughout this year, resulting in more defaults and low recoveries in this area.

The agency has also downgraded 14 combination note securities from 10 deals whose underlying components are significantly linked to bank and insurance trust preferred (TRUP) CDO tranches. The ratings of the combination notes' underlying components were updated on 27 March 2009, with the rating actions being the result of an analysis primarily based on the weighted average rating of the component ratings.

Loss expected for EVVLF MTNs
Moody's has downgraded the US$26m MTNs outstanding issued by Eaton Vance Variable Leverage Fund (EVVLF) from Caa3 (on review) to Ca.

EVVLF has been in enforcement since 14 October 2008, at which time it had US$456m in outstanding MTNs. The SIV has been liquidating its portfolio and using the proceeds to pay its outstanding debt, of which approximately US$430m has been paid down.

EVVLF expects to make a final distribution within a week in the approximate amount of US$16m, but this is less than the US$26m owed and will result in a nearly 40% loss to the remaining MTNs. Moody's further explains that the Ca rating is consistent with this known loss to the remaining MTNs.

The rating of the capital notes (US$209m currently outstanding) remains C. No recoveries are expected for these securities.

Monoline terminates Ram Re exposures
Ambac Financial Group has confirmed that it has terminated all reinsurance transactions with RAM Reinsurance Company effective on 8 April 2009. The termination reflects the recapture of approximately US$7bn of par outstanding, of which approximately two-thirds is classified as public finance exposure. The remainder of the portfolio, approximately US$2.4bn, is comprised of structured finance exposures, including approximately US$500m of US RMBS.

The economic result will be a settlement payment from Ram Re to Ambac in the amount of approximately US$97m. The estimated present value of future installment premiums associated with this business amounts to approximately US$60m, the monoline says.

Greg Raab, Ambac chief risk officer, comments: "This transaction confirms Ambac's commitment to reduce outstanding reinsurance exposure. In so doing, we are reducing counterparty risk, enhancing liquidity and earned premiums, and improving our risk-based capital position. In addition, the recapture of reinsurance from lower rated counterparties has a positive overall impact on rating agency capital, which applies increasingly onerous haircuts to reinsurance from BBB/Baa or lower rated reinsurers."

Downgrades likely for triple-A MV CDO tranches
Moody's has issued a request for comment on proposed changes to the modelling parameters and advance rates it uses when rating market value (MV) CDOs backed by corporate debt instruments. It expands upon Moody's re-evaluation of the sufficiency of advance rates used in MV CDOs in view of unprecedented volatility and illiquidity in the financial markets.

The agency notes that, given the high degree of illiquidity recently observed in the market, the potential for a temporary market shutdown is no longer as remote as market data previously suggested. It has thus concluded that the potential need to liquidate collateral in a market that could effectively cease to function, even temporarily, may be incompatible with the assignment of a Aaa rating to MV CDO liabilities as they have been structured in the past. In the absence of compelling reasons to modify the changes presented in the request for comment, implementation will include the immediate downgrade of current Aaa-rated tranches to a level of Aa1, on review for possible further downgrade.

"Should a market shutdown occur, there is the possibility that an MV CDO transaction that is unable to maintain its overcollateralisation requirements might be unable to liquidate its collateral for a prolonged period of time," says Eun Choi, a Moody's md. "Hence the potential need to liquidate collateral in a market that could effectively cease to function even temporarily may be incompatible with the assignment of a Aaa rating to MV CDO liabilities as they have been structured in the past."

Moody's has ratings outstanding on 35 MV CDOs, consisting of both US dollar-denominated and euro-denominated transactions. The ratings address a total of nearly US$22.5bn and over €800m in securities.

Role of central banks analysed
The IMF has published a working paper entitled 'Financial Stability Frameworks and the Role of Central Banks: Lessons from the Crisis'. It sets out general principles for the design of financial stability frameworks, starting from an analysis of the objectives and tools of financial regulation.

The paper then offers a comprehensive analysis of the costs and benefits of the two main models that have emerged for modern financial systems: the integrated model, with a single supervisor outside of the central bank; and the twin-peaks model, with a systemic risk regulator (central bank) on the one hand and a conduct of business regulator on the other.

The paper concludes that the twin-peaks model may become more attractive when regulatory structures are geared more explicitly towards the mitigation of systemic risk, including through the introduction of new macro-prudential tools that could be used alongside monetary policy to contain macro-systemic risks; through enhanced regulation and special resolution regimes for systemically important institutions; and a more holistic approach to the oversight of clearing and settlement systems. However, since the optimal solution may well be path-dependent and specific to the development of financial markets in any given country, a number of hybrid models are also discussed.

Mortgage secondary market analysis tool launched
To improve visibility into the hidden risk of many of the mortgage assets currently plaguing the financial system and capital markets, TransUnion has developed a new solution called TransUnion Consumer Risk Indicators. This solution, developed in cooperation with First American CoreLogic, makes available previously-missing information for mortgage secondary market risk analysis and modelling, the two firms say.

The TransUnion Consumer Risk Indicators for RMBS and whole loans bring comprehensive, current and historical loan-level consumer credit information to the mortgage industry for in-depth risk analysis. This includes hard-to-find information, such as complete adjustable-rate mortgage exposure (beyond the loan in question) and the consumer's capacity to pay. This data is already proven to predict risk and consumer behaviour for numerous lending products, such as mortgages, auto loans and credit cards, but has previously been unavailable for mortgage-backed securities.

"Billions of dollars in mortgage securities were traded without visibility into the risk of the underlying borrowers of the loans backing the securities, focusing instead on pool-level home price appreciation (HPA) and initial loan-to-value (LTV)," comments Jeff Hellinga, president of TransUnion's US information services division. "This was sufficient as long as property values continued to rise. But now, with the collapse of the housing market, direct insight into the actual risk of the underlying borrowers is critical. This is particularly relevant, given the recent creation of the Public-Private Investment Programme (PPIP), which is designed to draw private capital into the market to facilitate price discovery of legacy assets, and the expansion of other government programmes, such as the Troubled Asset Relief Programme (TARP) and the Term Asset-Backed Securities Loan Facility (TALF)."

"Sophisticated traders and investors are always looking for an information edge, and these solutions provide that - enabling early adopters to capitalise on the superior insights generated," adds George Livermore, ceo of First American CoreLogic. "In pre-release reviews with select hedge funds and investment banks, we have received very positive feedback on the RMBS and whole loan solution set."

The TransUnion Consumer Risk Indicators for RMBS incorporates sophisticated proprietary matching algorithms jointly developed between First American CoreLogic and TransUnion. These algorithms link individual loans within non-agency MBS to the consumer credit information of the specific borrowers of those loans. Additionally, these algorithms create high rates of matching and high confidence levels in those matches, due to the methodology and data used to create them.

This information illuminates the credit risk a borrower represents (beyond just the loan data available in a given security) and is superior to other types of consumer credit information generally available, according to the two firms. It also allows investors to directly tie the newly-available consumer credit information to the First American CoreLogic LoanPerformance Securities Database, which spans subprime, Alt-A, option ARM and jumbo securities and represents over US$1.8trn in loan-level data or 96% of all non-agency securities. While results will vary from portfolio to portfolio, initial TransUnion analysis shows an improvement in default predictions of more than 15% over current predictive methodologies.

Correlation independent of tranche maturity
As a series of major US and European companies prepare to report their results, structured credit analysts at UniCredit indicate that the earnings situation is the next litmus test for the viability of current investor optimism. Macro-economic forecasts are still in the process of being revised down, they note, as indicated by the FOMC projections revealed in the minutes of the March Fed meeting.

Although zero GDP growth is generally expected around the last quarter of the year, the credit cycle appears to be still picking up speed. In terms of what this means for the tranche market, correlation is now essentially independent of tranche maturity, the analysts say.

The most traded tranches refer to Series 9 of both iTraxx Main and CDX.NA. "In particular, the 10-year base correlation curve moved down. Since March, a former trend reversed and now the iTraxx junior mezz tranche is losing some value, while equity and super-senior pieces were moderately picking up some expected loss again recently," the analysts add.

Discounted securities accounting practice questioned
Fitch discusses the CLO market practice of accounting for discounted securities at par in a new report. The agency believes that with leveraged loan prices under considerable pressure due to withdrawal of liquidity from credit markets and credit deterioration of many lowly rated and leveraged borrowers, this approach is questionable.

"The change in the CLO landscape has created significant challenges for issuers to manage credit under structural terms that were established during a more benign time," says Elizabeth Nugent, senior director in Fitch's structured credit team. "Today, CLO managers are seeking approval from noteholders and rating agencies for changes to the structural terms of their transactions regarding discounted security thresholds in order to adapt to the current market environment. Fitch encourages investors to review amendments carefully to determine if changes are in their best interest before providing consent."

As a matter of policy, Fitch is not a party to the governing documents and has no role in approving proposed changes to the structure. The agency does not prescribe particular structural features in its rating criteria. Instead, Fitch opines on the structural features presented and incorporates its opinion in the ratings assigned to the notes.

Furthermore, given the evolution of leveraged loans from a relatively illiquid asset class at the inception of the CLO market to a more actively traded credit product, Fitch questions the practice of accounting for all loans at par regardless of the discounted purchase price threshold. In the report, entitled 'Credit Considerations for Discounted Securities', the agency outlines the danger of always accounting for discounted securities at par and explores some analytical alternatives to quantify the risks to noteholders.

Source code solution released for pricing tool
Pricing Partners has released a source code solution for its 'Price-it' derivatives valuation software. Called 'Price-it Source Code', the new solution provides access to Price-it analytics as well as a development platform, thereby enabling clients to speed up the creation and development of their own pricing library.

The solution is based on a generic scripting payoff language, encompassing a next-generation plug-and-play architecture with cutting edge pricing models. It is a C++ library, with approximately 1200 classes and 600,000 lines of code, including API interfaces for standard Dll, Excel Xll, Com Dlls, Java JNI, XML, Misys Summit and Lexifi softwares. It comes with a suite of testing environments and an auto-generation tool to rapidly export functions.

Pricing Partners ceo Eric Benhamou says: "In the field of financial software providers, Price-it Source Code is a unique solution. Indeed, it is very exceptional that a software editor distributes a commercial solution with the corresponding source code. It is Pricing Partners' philosophy to provide our clients [with] total flexibility and help [them to become] experts with our software solutions."

Lender outsources management of mortgage defaults
Abbey National has announced that it intends to improve the management of early arrears activity for its UK mortgage portfolio by engaging Westcot Credit Services to manage 25% of its new mortgage defaults, with effect from 6 April 2009. Westcot will be responsible for debt recovery and customer rehabilitation through the handling of inbound and outbound telephone calls and payment processing from its offices in Saltcoats, Scotland.

The firm will use Abbey's existing IT systems that are already in place due to an existing similar agreement related to the lender's unsecured personal loan portfolio. All mortgage loans will revert back to Abbey when they have reached 90 days in arrears, and no litigation will be completed by Westcot staff.

Fitch says that it is too early to assess the impact of this change on the Holmes master trust programme. "Given the heightened importance of servicing in the current environment and the scale of Westcot's involvement, Fitch will closely monitor the practical impact of the arrangement," says Peter Dossett, associate director in Fitch's European structured finance team.

Westcot has limited experience of collecting on residential mortgages. However, Abbey has provided specific training and has had two members of staff located on site at Westcot in the lead-up to the arrangement going live. The Abbey staff will remain in Westcot's offices for a further period of time following 6 April.

Abbey has further mitigated concerns with the outsourcing to a less experienced partner of a suite of monitoring measures and by only giving Westcot 10% of new arrears cases in the initial stages of the outsourcing contract, before ramping up to a planned 25% in the future.

"It is not necessarily a surprise that a large prime UK mortgage lender is outsourcing some of its collections activity in the current market conditions," adds Robbie Sargent, director in Fitch's European structured finance team. "Abbey has chosen a company whose management has prior experience in the mortgage market; however, Westcot's staff have a relative lack of experience of the sector. Fitch understands that Abbey has implemented a strict monitoring regime, and Westcot's previous experience collecting on the Abbey unsecured portfolio does provide a degree of comfort."

Challenges ahead for Canadian structured finance
The outlook for 2009 suggests that the current economic environment will continue to be difficult and that there will be further challenges in the financial markets, says DBRS in a study issued today. In 'Fundamentals of Canadian Structured Finance: 2008 Year in Review and Outlook for 2009', the agency notes that 2008 saw a continuation of the difficult capital markets in Canada that began in 2007.

"The structured finance market in 2008 can be characterised by a divergence in the performance of the underlying assets supporting the securities and investors' appetite for exposure to these securities," says Scott Bridges, svp of Canadian structured finance at DBRS. "While asset classes generally performed within historic ranges, the overall level of new issuance dropped dramatically."

The combined securitisation market, excluding assets affected by the Montréal Accord and term-matched floating-rate notes, fell by C$27bn, or 20.6%, from C$131.2bn in December 2007 to C$104.2bn in December 2008. This decline was led by auto finance, which fell by C$16.1bn from its 2007 level to C$23.3bn as of 31 December 2008.

Overall, the market share of auto-related transactions declined from 30.1% in 2007 to 22.4% in 2008. As a result, credit card receivables overtook auto-related finance, becoming the largest asset class in the overall market.

"The latter part of 2008 saw a severe downturn in the Canadian economy," continues Bridges. "The early signs of deterioration in the performance of the assets supporting the rated notes included increases in credit card charge-offs and declines in auto lease residual values." Overall performance of the asset pools in the Canadian market, however, remained positive and was within the stressed parameters considered during analysis for the initial transaction ratings.

And, while market recovery in 2009 appears ambitious, the federal government has announced a number of initiatives to support the securitisation market by providing much-needed liquidity to fund consumer obligations. DBRS points out that these programmes, combined with the performance of the underlying assets and the enhanced disclosure and transparency for ABS and ABCP transactions, should help improve the demand for these types of products.

Government move to have limited impact on Australian RMBS
Fitch has reviewed the Australian government's announcement on 'Relieving Mortgage Stress', outlining options the major banks have available to them in dealing with borrowers in financial difficulty and the impact this has on Australian RMBS transactions.

"Many of the major banks have previously incorporated some or all of these measures that were announced by the Australian government in dealing with borrowers in financial difficulty. While some of the options available may impact an individual loan's repayment speed or increase the overall loss severity of an individual loan, the number of these loans across all lenders and their respective RMBS transactions will remain small - even taking into account the expected rise in unemployment. Fitch expects the impact of this on RMBS transactions to be limited," states Claire Heaton, associate director, structured finance at Fitch in Sydney.

European synthetic CDOs impacted
S&P has taken credit rating actions on 17 European synthetic CDO tranches following recent rating changes on the underlying collateral or a dependent party in those deals. Specifically, the agency: lowered its ratings on seven tranches; lowered and removed from watch negative its ratings on three tranches; lowered and kept on watch negative its ratings on four tranches; lowered and placed on watch negative its rating on one tranche; raised its rating on one tranche; and placed on watch negative its rating on another tranche.

CS & AC

Trading

Trading ideas: the good and the bad

Byron Douglass, senior research analyst at Credit Derivatives Research, looks at a capital structure arbitrage trade on Goodyear Tire & Rubber Co

Taking long positions in the high yield market on an outright basis is highly idiosyncratic to the company of choice. Hedging beta risk is difficult and therefore we like to find mispricings within the capital structure to offset risk. Goodyear Tire's balance sheet and financial positioning lead us to sell credit protection at a high level of 21.5% upfront; however, such a trade is highly risky, given the current economic environment.

Digging further into the company's relative valuation down the capital structure shows that its equity is mispriced though in the opposite direction. We recommend taking a long credit, short equity position on Goodyear through the use of put spreads as a way to offset the negative P&L associated with a company's slide into bankruptcy. We believe that the trade will benefit from either a short-term convergence of its equity and credit valuations or a more medium-term rally of its credit.

Back in February Goodyear announced disappointing fourth-quarter earnings; however, this was followed by management's decision to further reduce headcount, capex, inventory levels and possibly sell non-core assets. Goodyear's combined US$1.8bn in cash and US$1.2bn available on existing credit facilities will be enough to allow the company to survive the deepening recession. After its US$500m note matures this December, the company does not have any debt due until 2011.

Our biggest concern is that, given its earnings expectations and proposed capital expenditures for 2009, the company will have negative cashflow that will drain down its current liquidity position. We believe that, given the substantial inherent credit risk of Goodyear's profile, rather than taking an outright long credit bet, we also recommend buying short-dated put spreads.

On the credit side, we see a 'fair spread' of 750bp for Goodyear based upon our quantitative credit model. The model ranks each issuer on a scale of 1 to 10 using eight factors (1 = poor credit, 10 = good credit).

Goodyear's change in leverage and slight down-tick in equity-implied default probability is driving the recent change in our expected spread. Our credit model turned bullish on Goodyear over the past couple weeks. Exhibit 1 shows a time series of Goodyear's spread and expected spread, and the current difference remains greater than 400bp.

Exhibit 1

Given that the difference between MFCI expected and market CDS is driven mainly by equity factors, it is not surprising that our shorter-term CSA model also points to a dislocation between equity and credit. The CSA model points to a substantial drop in the price of Goodyear's stock, along with a rally in its CDS.

The model takes into account equity-implied volatility, equity market cap and CDS levels. Exhibit 2 shows the extent of deviation of Goodyear's equity price away from fair. We believe that buying put spreads on a long credit position is the best way to play the opportunity.

Exhibit 2

We use a scenario analysis to size the trade effectively. Our goal is to allow the put spreads to offset potential losses accompanied by possible further deterioration of the asset value of the company while maximising expected gains relative to the standard deviation of possible outcomes. Please keep in mind that there is plenty of subjectivity involved in scenario analysis.

We settled on the following five scenarios for a three-month time horizon. Exhibit 3 plots out several of the expectations:

1. MFCI convergence: stock remains at current level and CDS rallies to expected spread - likely
2. Divergence continues: stock rallies and CDS widens - unlikely
3. CSA convergence: stock and CDS go to their short-term CSA levels - highly likely
4. Both deteriorate: stock drops to US$5 and CDS widens to 32% upfront - possible
5. Bankruptcy: stock to zero and CDS recovers 30% - highly unlikely.

Exhibit 3

Given the payoffs of the listed scenarios, we find that buying 600 put spreads is the optimal size against US$1m notional in CDS.

Sell US$1m notional Goodyear Tire & Rubber Co five-year CDS protection at 21.5% upfront and receive 500bp running.

Buy 600 July 09 5-7.5 put spreads at US$0.97/spread.

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

Copyright © 2009 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).