Contents

Trading

Hedging hangover

Little awareness of policymaker impact on risk management

The spread differential between deals that are TALF-eligible and those that aren't reflects the US government's impact on the ABS market. However, there appears to be little awareness of the need to factor this in to portfolio valuations and risk management approaches more broadly.

"The concept of forward-looking strategic risk management is increasing in importance," says Gene Yeboah, former head of quantitative credit strategies and risk at Schroders. "But it's surprising that portfolio managers aren't more aware of the need to insulate portfolios against government influence on the market. Most appear to be preoccupied with the solution rather than the impact the solution is having on pricing and valuations."

Brian Weber, senior associate  at Houlihan Smith & Co, agrees that traditional pricing and risk management principles need to be reconsidered in light of government intervention in terms of digging down to the micro-management of risk. "For example, by revisiting the application of hedges that - while effective in normal markets - are now ineffective due to the change in correlations brought about by government interference," he notes.

The return on equity of a levered TALF investment can be seen as being equal to the net portfolio return (in other words, gross return minus borrowing cost) divided by the investor equity. A recent PIMCO client note suggests that this asymmetric payoff has resulted in many recently issued TALF-eligible securities outperforming their non-TALF eligible counterparts by a significant margin.

"Since the loan for each security is separate from the loans and asset values of all other securities, a portfolio of levered TALF holdings is a portfolio of puts. It is easy to understand the asymmetric impact of this on security prices, since a portfolio of put options is much more valuable than a put on the portfolio," Vineer Bhansali, PIMCO md and head of analytics for portfolio management, writes in the note.

Similarly, with the announcement on 20 May that CMBS would become eligible for TALF, CMBXAAA indices jumped up by 5.9%. Initially other CMBS securities also showed similar price gains, but those that were not eligible for public funding immediately started to lose their gains.

In essence, when there is a shift away from the free market system to some form of regulation or interference, the paradigm for pricing both securities and derivatives also shifts. "The new paradigm significantly alters the completeness of market conditions and destabilises the risk-neutral pricing framework. The likely interference of the government in this scenario certainly affects the discount factors, probabilities associated with possible payoffs and is likely to skew the distribution," Yeboah explains. As such, the need to hedge the tail of the distribution becomes consequential.

Bhansali indicates that to hedge against the risk resulting from the actions of a public participant, the market would either need securities that adjust immediately to their actions or a blanket guarantee that the public participant would mitigate any risk arising from its own actions. But Weber says that, while financial markets have been extremely innovative in the past, right now there isn't a clear way of measuring losses that could be attributed to government intervention in the market.

Yeboah points out that in order to hedge appropriately it would be necessary to replicate the risk - a significant challenge, given the limited universe of instruments available. He suggests that the range of macroeconomic indices - which are highly correlated with policymakers' actions - developed by Yale University Professor of Economics Robert Shiller and his associates could be one solution. This would involve creating options on the indices and using them as a hedge for government actions.

"Despite the fear of derivatives in general, they do serve a great need and this is a typical example. But any progress is premised on portfolio managers adopting the idea and providing liquidity for the instrument. The more the government interferes in the market, the stronger the need becomes to make risk management more strategic," Yeboah observes.

In the absence of such solutions, the PIMCO note suggests that absolute valuation of securities should take precedence over relative valuation because there is considerable uncertainty as to which security can be targeted for a new paradigm price. Equally, since security prices are likely to reflect the prevailing macroeconomic conditions, the relevance of economic intuition in pricing models becomes even more important. Finally, identifying the key factors relevant for risk management should take precedence over forecasting returns, volatilities and correlations.

CS

Documentation

'Small bang' approaches

European CDS convention changes unveiled

Two key initiatives for the European CDS market were announced on Monday: the move to trading fixed coupons for certain European CDS contracts and the implementation of the 'small bang'. The changes - which bring European contracts in line with their US counterparts - are expected to increase transparency, improve liquidity and facilitate the move towards central clearing.

As of 22 June, new single name European CDS trades can use fixed coupons of 25bp, 100bp, 500bp or 1000bp alongside an upfront fee. Additional coupons of 300bp and 750bp will also be available for the re-couponing of existing trades.

Investment grade names are likely to trade at 100bp and high yield names at 500bp - similar to what has been seen in the US since the implementation of the 'big bang' (SCI passim). It is anticipated that certain names will eventually become associated with certain coupons.

"The 25bp, 100bp, 500bp or 1000bp coupons are a compromise of the two to eight coupons that were discussed," says Jeff Kushner, ceo of BlueMountain Europe. "The European market is going to have a need for more coupons than the North American market, given that restructuring will remain in the contracts as a credit event. However, at this stage I don't believe the 1000bp coupon will be widely used."

It is now two months since the CDS 'big bang' was introduced, along with the adoption of the standard North American corporate (SNAC) CDS contract. The implementation of both initiatives has run relatively smoothly, although from a buy-side perspective issues are said to remain over the benefits and costs of re-couponing old trades.

Liquidity in the North American CDS market does not appear to have improved dramatically either, but a number of industry participants suggest that the illiquidity is incidental to the SNAC implementation and expect it to improve going forward.

"Since the implementation of the SNAC two months ago liquidity has stayed flat in the US," comments Kushner. "In the same period liquidity has seemed to decline in Europe."

The big bang protocol eliminated restructuring as a credit event for North American CDS contracts. However, the small bang protocol - to be implemented at the end of July - will hardwire the auction mechanism for restructuring, given that many European jurisdictions don't offer the ability to restructure through bankruptcy as is the case in the US under Chapter 11 (see SCI issue 137).

The protocol will define maturity buckets for deliverables following a restructuring credit event. The ISDA Determinations Committee will decide if at least one auction should be held, as well as deciding which buckets would have an auction based on debt issuance and the volume of triggered contracts. The Determinations Committee will also decide the deliverables for each auction bucket.

The small bang will also include a 'use it or lose it feature', whereby if an auction is held, trades that are not triggered before the auction will not be able to be triggered afterwards.

However, there remains the possibility that, following a restructuring credit event, certain contracts will be triggered while others are not, presenting issues for central counterparties in terms of matching their own books. Discussions are ongoing to address this 'optionality' in terms of triggering the contracts.

ISDA will publish the term sheet for the new protocol next week. This will be followed by a comments period and an adherence period in the weeks of 13 and 24 July respectively. The anticipated start date of the small bang is 27 July.

AC

Regulation

Reform agenda

But already-available disclosure largely ignored

European securitisation practitioners have urged policymakers to base regulatory reform on economics rather than politics and on transparency rather than control. But, at the same time, it appears that some forms of disclosure that are already available to the market are largely being ignored by investors.

"Amid all the discussion around transparency and disclosure, some participants appear to have overlooked the fact that there is already significant disclosure," says Ronald Thompson, global head of ABS strategy at RBS. "For example, SEC Reg AB requires disclosure of securitised issues, including international issues sold into the US, but very few investors domestically or internationally actually review the information provided."

However, he concedes that one area that needs improved, standardised disclosure is around CPR calculations, which tend to differ between issuers in terms of exclusion or inclusion of scheduled versus unscheduled payments. "Equally, a common standard would be helpful in dealing with the distortions that can be caused by the interest rate environment. In the UK, overdue amounts are divided by the current amount to figure out the amount of arrears. Arrears are therefore distorted on variable rate payments in both falling rate environments - when they appear artificially higher - and in rising rate environments, when they are artificially lower."

Thompson stresses that now is the time for investors to demand that these sorts of improvements are made. Unsurprisingly, transparency was a major theme at the IMN-ESF Global ABS conference last week (see last issue), where regulators were called upon to consider the wider impact that their decisions could have on the securitisation market.

"Any increase in transparency is obviously a positive step for the market, but European regulators appear to be overly focused on control and not enough on transparency," Reto Bachmann, co-head of European ABS research at Barclays Capital, argued on one panel. "The market needs regulations that are based on economics and not on politics: they shouldn't be created under the assumption that regulators know what's best for the market. I would say around 80% of their time should be spent on looking at what happens when things go wrong."

He added: "Unfortunately, the current environment is extremely political and so the regulators feel pressured to act quickly. But, if you're in a situation where changes are being rushed through in the middle of a crisis, you'll end up creating bad regulations because there is no time to think things through."

The European Commission's recent amendments of the Capital Requirements Directive were the target for much of the criticism directed at regulators, particularly the onus on investors to monitor whether originators are actually retaining 5% of their securitisations (SCI passim). Bachmann indicated that since originators won't be able to retain the required 5% if the position suffers a loss, the danger is that investors may be exposed to punitive risk weights.

"It seems like risk weights are being used as a punishment, but the wrong segment of the market is being punished - investors don't have control over originators' behaviour. What happens if the originator and/or servicer is no longer able to provide the due diligence information?" he asked.

Another concern is the pro-cyclical affects of regulation on the market. For example, if an originator doesn't maintain the 5% requirement, the punitive risk weighting for investors could result in a bank suddenly having to find new capital - which brings systemic risk back into play. Equally, banks are perceived to be responsible for liquidity in the system, but whichever measure is used to gauge liquidity will change with the cycle - so inevitably banks will end up setting aside more capital in a downturn.

"This illustrates the problem of relying on superficial common sense without thinking of the wider impact any decision could have on the market," Bachmann remarked. "Banks are the core investor base for European ABS, so - in order for the market to be revitalised - it is vital to figure out how banks can be regulated without harming the ABS market."

Gordon Haskins, head of transaction execution, securitisation at RBS, reckons that bank originators will probably find that they can satisfy the 5% requirement rule under the CRD (given that many were doing so already to keep 'skin in the game'). But he suggests that it will be difficult for non-bank originators to comply.

"Furthermore, investors will be obliged to monitor what originators are doing/have done, which throws up challenges in terms of how information is disclosed," Haskins continues. "For example, will there now have to be a requirement in transaction covenants to state originators' intention to retain? And how will investors actually monitor the retention of this piece from a practical standpoint?"

However, such issues are unlikely to be tested until the market sees a re-emergence of primary issuance. Thompson points out that the flipside to demands for increased transparency and disclosure is that an increase in consumer asset rates is necessary for deal economics to work.

"Otherwise there won't be enough juice to cover the costs, including such additional disclosure and new regulatory and rating agency requirements. This increase in margin will likely be highly controversial, given current political pressure to help consumers," he concludes.

CS

Operations

UK guaranteed RMBS notable by absence

The UK government unveiled its £50bn ABS guarantee scheme (ABSGS) on 22 April, but there is still no sign of guaranteed deals coming to market (SCI passim). S&P has released a report in which it examines the possible merits of the scheme from both originator and investor perspectives.

The concept of government guarantees for UK ABS was first mooted in the Crosby report on mortgage finance last November. The scheme complements previous policy measures to support lending in the UK, including the credit guarantee scheme (CGS) for unsecured debt, and is intended to improve banks' and building societies' access to wholesale funding markets - ultimately supporting lending to creditworthy borrowers.

"In our opinion, the likelihood of the scheme succeeding in its aims hinges on three key areas: originators' motivations to participate, investor interest in government-guaranteed RMBS and various implementation considerations," says S&P credit analyst Andrew South.

In its current form, the ABSGS makes available two types of government guarantee for highly-rated RMBS: a credit guarantee or a liquidity guarantee. Under the credit guarantee, the government protects RMBS investors against default of the RMBS bond. Under the liquidity guarantee, the government seeks to reduce extension risk.

South says: "The ABSGS could potentially help UK originators return to RMBS for funding, given the choice of implementation options, including broad eligibility in terms of structure type. In particular, we believe the inclusion of the liquidity guarantee more directly addresses the current concerns of the existing RMBS investor base."

However, a key downside to the programme is that it does not apply to specialist, non deposit-taking lenders, nor to mortgage loans made to more marginal borrowers such as those with an adverse credit history. "It is arguably these areas of the market that require the greatest support in the current environment, especially given that an increasing number of borrowers will find themselves in this position," he notes.

Furthermore, there is also clear overlap in applicability between the existing CGS for unsecured funding and the ABSGS. Given current secondary spreads in UK RMBS and the relative costs of the two guarantee schemes, it is difficult to envisage the ABSGS in its current form providing materially greater benefit to originators in funding new mortgage loans than the unsecured CGS already does.

"Nevertheless, we believe there continues to be considerable interest in finding a practical use for the scheme and that discussions between issuers, investors and HM Treasury are ongoing," South concludes.

AC

RMBS

Countrywide executives charged with fraud

The US SEC has charged former Countrywide Financial ceo Angelo Mozilo and two other former executives at the firm with securities fraud for deliberately misleading investors about the significant credit risks being taken in an effort to build and maintain its market share. Mozilo was additionally charged with insider trading for selling his Countrywide stock based on non-public information for nearly US$140m in profits.

The SEC alleges that Mozilo, along with former coo and president David Sambol and former cfo Eric Sieracki, misled the market by falsely assuring investors that Countrywide was primarily a prime quality mortgage lender that had avoided the excesses of its competitors. The enforcement action alleges that from 2005 to 2007, Countrywide engaged in an "unprecedented expansion" of its underwriting guidelines that enabled it to write increasingly riskier loans, which these senior executives were warned might ultimately curtail the firm's ability to sell them. Countrywide was required to disclose these important trends to its investors in the Management Discussion and Analysis portion of its SEC filings, but failed to do so.

"This is the tale of two companies," comments Robert Khuzami, director of the SEC's division of enforcement. "Countrywide portrayed itself as underwriting mainly prime quality mortgages using high underwriting standards. But concealed from shareholders was the true Countrywide, an increasingly reckless lender assuming greater and greater risk. Angelo Mozilo privately described one Countrywide product as 'toxic', and said another's performance was so uncertain that Countrywide was 'flying blind'."

According to the SEC's complaint, filed in federal district court in Los Angeles, Countrywide's annual reports for 2005, 2006 and 2007 misled investors in claiming that it "manage[d] credit risk through credit policy, underwriting, quality control and surveillance activities". Its annual reports for 2005 and 2006 falsely stated that the firm ensured its "access to the secondary mortgage market by consistently producing quality mortgages". The annual report for 2006 also falsely claimed that Countrywide had "prudently underwritten" its Pay-Option ARM loans.

The SEC alleges that Mozilo, Sambol and Sieracki actually knew, and acknowledged internally, that Countrywide was writing increasingly risky loans and that defaults and delinquencies would rise as a result, both in loans that the firm serviced and loans that the company packaged and sold as MBS. Countrywide is charged with developing what was internally referred to as a "supermarket" strategy that widened underwriting guidelines to match any product offered by its competitors. By the end of 2006, its underwriting guidelines were as wide as they had ever been, and the firm made an increasing number of loans based on exceptions to those already wide guidelines, even though exception loans had a higher rate of default.

The SEC's complaint further alleges that Mozilo believed that the risk was so high that he repeatedly urged that Countrywide sell its entire portfolio of Pay-Option loans. Despite these severe concerns about the increasing risks that Countrywide was undertaking, Mozilo, Sambol and Sieracki hid these risks from the investing public.

Meanwhile, Mozilo established four executive stock sale plans for himself in October, November and December 2006 while he was aware of material, non-public information concerning Countrywide's increasing credit risk and the expected poor performance of Countrywide-originated loans. From November 2006 through to August 2007, Mozilo exercised more than 5.1 million stock options and sold the underlying shares for total proceeds of nearly US$140m, pursuant to written trading plans adopted in late 2006 and early 2007.

The SEC's complaint seeks permanent injunctive relief, officer and director bars, and financial penalties against all of the defendants and the disgorgement of ill-gotten gains with prejudgment interest against Mozilo and Sambol.

CS

Trading

CDS auction-based trading strategies revealed

As the number of credit event auctions has increased in recent months, certain trends have begun to emerge around distinct groups of investors dominating auction dynamics. In their latest research report, structured credit strategists at Barclays Capital outline a number of auction-based trading strategies that can be used by current holders of CDS risk, as well as those looking to use the auction to take a view in distressed bonds.

The strategists broadly categorise the different auction participants into three groups: outright risk holders, basis holders and structured/correlation holders. In terms of outright risk holders, the report indicates that investors should submit limit buy orders in Phase II of the auction process with large imbalances to sell.

"This strategy can be a good way to pick up bonds at a significant discount to market prices in the days preceding and following the auction, as substantial sell imbalances - common in names held heavily on basis - lead to low auction prices," the BarCap strategists note. In addition, under these circumstances bonds tend to weaken, especially in the days leading up to the auction, which could signal an opportunity on the short side.

Meanwhile, most of the basis holders in a defaulted name will typically deliver their bonds into the CDS auction, since in doing so they are guaranteed to recover par. Thus, for names that are held in large proportion on basis, BarCap expects to see an imbalance towards selling bonds, which could depress recovery rates.

However, the strategists point out that taking advantage of this effect prior to Phase I of the auction requires knowledge of which names are held predominantly in basis packages. While it is impossible to know for sure, certain data provide hints.

A basis package must increase the net CDS notional on that name. Therefore, the net CDS published by DTCC represents an upper bound on basis, and names with high net CDS relative to bonds outstanding are good candidates. For those names, shorting bonds going into the auction and buying them back in Phase II could be a sensible way to take advantage of the positive supply imbalance, the BarCap strategists add - with upside represented by the downward pressure coming into auctions.

Similarly, the presence of single name CDS in CDO tranches can also help clarify the proportion of single name protection held in basis packages. Dealers sell single name CDS on these names to hedge the purchase of CDO tranches, with this activity in general increasing the net CDS notional on those single names. However, as a company approaches default, correlation desks may buy back protection, thus lowering the net notional.

In addition to playing a major role in determining net notionals, correlation desks are important for CDS auctions, according to the BarCap strategists. "In past auctions, we believe they have accounted for a majority of the orders to buy bonds in Phase I," they explain. "The reason is that many synthetic CDOs do not settle defaults until 60 or even 90 days after the trigger. In order to be immune to price action between the time of the auction and the settlement date, a correlation desk will want to own bonds. Once again, knowing how often a name has been referenced in synthetic CDOs is helpful to gauge this interest."

CS

ABS

Euro ABS fund minted

P&G Alternative Investments is launching the P&G ABS (UCITS) Fund - a fund that will invest exclusively in European investment grade ABS. P&G's fund will target predominantly triple- and double-A rated tranches, with a high degree of diversification. The portfolio is expected to invest in more than 20 different securities, of which 80% will be triple-A rated by one or more rating agencies.

P&G says there will be no interest rate exposure, with all securities either FRN or swapped into FRNs. Furthermore, there will be no exchange rate risk as all securities will be denominated in euro or swapped via cross-currency swaps.

The fund will not employ leverage: the only allowance to debt is 10% to cover a temporary imbalance in liquidity, in accordance with UCITS regulation. The maximum exposure on a single name is 10% of NAV and the sum of all exposures above 5% shall be less than 40% of NAV.

The prospective portfolio will have a credit quality in excess of AA/AA- for a discount margin of 500bp-550bp.

Alternative assets

Three more firms settle ARS charges

The US SEC has announced finalised settlements with Bank of America, RBC Capital Markets and Deutsche Bank to resolve its charges that the firms misled investors regarding the liquidity risks associated with auction rate securities (ARS) that they underwrote, marketed or sold. The settlements provide nearly US$6.7bn to approximately 9,600 customers who invested in ARS before the market for those securities froze in February 2008.

"Through these latest settlements and prior ARS settlements with other firms [Wachovia, Citi, UBS and Merrill Lynch] entered into by the Commission, more than US$50bn in liquidity is being made available to tens of thousands of customers, so they can get back all of the money they invested in auction rate securities," says Scott Friestad, deputy director of the SEC's division of enforcement.

According to the SEC's complaints, filed in federal court in New York City, Bank of America, RBC and Deutsche Bank misrepresented to certain customers that ARS were safe, highly liquid investments that were comparable to money markets. The SEC alleges that in late 2007 and early 2008, the firms knew that the ARS market was deteriorating, causing the firms to purchase additional inventory to prevent failed auctions. At the same time, however, the firms knew that their ability to support auctions by purchasing more ARS had been reduced, as the credit crisis stressed the firms' balance sheets.

The SEC's complaints allege that Bank of America, RBC and Deutsche Bank failed to make their customers aware of these risks. In mid-February 2008, all three firms stopped supporting the ARS market, leaving their customers holding billions in illiquid ARS.

The settlements will restore approximately US$4.5bn in liquidity to Bank of America customers, US$800m in liquidity to RBC customers and US$1.3bn in liquidity to Deutsche Bank customers. Without admitting or denying the SEC's allegations, the firms agreed to be permanently enjoined from violations of the broker-dealer fraud provisions and to comply with a number of undertakings. These include: offering to purchase ARS at par from individuals, charities and SMEs that purchased ARS from the firm, even if those customers moved their accounts; using their best efforts to provide liquidity solutions for institutional and other customers and not taking advantage of liquidity solutions for its own inventory before making those solutions available to these customers; and paying eligible customers who sold their ARS below par the difference between par and the sale price of the ARS.

Alternative assets

TRUPS buyback sees Kodiak sub notes cancelled

Feldman Mall Properties (FMP) has completed a transaction with the Kodiak CDO I and II transactions that sees it purchasing 1,140 preferred securities (with an aggregate liquidation amount of US$28.5m) of FMP Statutory Trust I, a Delaware statutory trust and an indirect subsidiary of the company, whose TRUPS form part of the CDOs' underlying. The purchase price for the TRUPS was comprised of US$1.m and 1.2 million shares of the company's common stock.

The TRUPS and the common securities of the trust will be cancelled and the trust liquidated and dissolved, which will also result in the cancellation of the US$29.4m in aggregate principal amount of the unsecured fixed/floating rate junior subordinated notes issued by the company's operating partnership subsidiary due April 2036, which are held by FMP Statutory Trust.

FMP says it used a portion of the proceeds from its sale of the Colonie mall to fund the transaction. As a result, the company anticipates that it will recognise a gain on the retirement of these preferred securities.

Meanwhile, FMP has named John Dougherty as svp and general counsel. He recently retired as a partner of Stradley, Ronon, Stevens & Young, where a major portion of his practice was transactional in nature, both corporate and real estate.

Thomas McAuley has resigned from FMP's Board of Directors. He joined the company during 2008, being nominated by Inland American Real Estate Trust, pursuant to the terms of the company's Series A Preferred Stock. A board member to replace McAuley has not yet been named.

CLO Managers

CDO's management duties transferred

BAREP Asset Management has transferred the management of Lafayette Sovereign CDO 1 to Société Générale Asset Management. BAREP, previously a fully owned subsidiary of SGAM and SGAM Bank, merged with SGAM on 2 June 2009. BAREP (acting in its capacity as collateral manager of Lafayette Sovereign CDO I Limited) transferred to SGAM all of its rights and obligations in accordance with a supplemental trust deed signed by all parties.

The transaction is exposed to a portfolio of US dollar-denominated emerging market sovereign debts predominantly held through cash exposures, but also through synthetic securities. The end of the reinvestment period was in 2006, so this transaction is now deleveraging.

Moody's says ratings on the Moody's-rated securities issued by Lafayette Sovereign CDO will not be downgraded or withdrawn solely as a result of the transfer

CMBS

Real estate firm makes strategic hires

Commercial real estate investment firm M West Holdings has hired Andrew Paulson as asset manager and Matthew Ellis as vp.

Ellis joins the firm with extensive experience in real estate lending and structured finance. He has worked at Wachovia Securities for the past seven years and most recently held the position of vp of originations, located in its Los Angeles office.

In his new role, Ellis will source and underwrite prospective investments in Southern California, the Pacific Northwest and Texas. He will also be charged with sourcing joint-venture equity and will play a major role in refinancing the company's existing holdings.

Paulson moves over from American Realty Advisors. While at American Realty Advisors, he managed over US$250m in core office, industrial and multi-family assets in several major markets.

CMBS

CMBS servicer acquired

Capita has acquired the European loan administration, asset management administration and CMBS administration services of Capmark Financial Group for a cash consideration of approximately £10m on a cash-free, debt-free basis. The acquired businesses include Capmark Services Ireland Limited, Capmark Services UK and Capmark Asset Management (collectively Capmark Services Europe). The companies provide administrative services for CMBS, commercial mortgages, commercial property loans and asset managers from offices based in the UK, Ireland and Germany. The acquired companies, which have approximately 110 employees, will become part of Capita Fiduciary Group, which has had a presence in Ireland since May 2007.

CMBS

New CMSA president appointed

Pat Sargent has been appointed president of CMSA for the upcoming year. Sargent is a partner with Andrews Kurth, and a member of the real estate and structured finance and securitisation practice groups in the firm's Dallas office. He replaces outgoing president Chris Hoeffel.

Sargent is a member of the board of governors of CMSA and also serves on the board of governors for the Mortgage Bankers Association and the board of the Chartered Realty Investor Society.

Distressed assets

Dislocation fund set to launch next month

Chenavari Credit Partners is set to launch its stand-alone credit opportunity fund - the Chenavari Credit Dislocation Fund - on 10 July. The firm has been managing credit strategies within the WestLB Mellon Horizon Total Return Fund multi-manager platform since October 2008 and the move means that the fund will now be directly available to investors. Chenavari's annualised performance is over 31.5% since 20 October 2008, with no negative monthly performance.

Emerging Markets

Bank buys stake in structured credit manager

Saxo Bank has purchased 51% of the share capital of emerging market fixed income manager Global Evolution, and the entire share capital of European corporate bond manager Capital Four Management. Global Evolution is also the manager of structured credit assets.

The purpose of the acquisitions is to strengthen the companies' distribution power and long-term positions as suppliers of asset management products in each of their niche areas. The acquisitions mean that portfolios (AUM) worth around DKK14bn are managed by Saxo Asset Management. Saxo Bank will exercise its ownership in such a way that the two teams can retain their own character and autonomy in the investment process.

"The company's goal is to be a Nordic power house within asset management, and we are pleased to play an active part in the achievement of this ambition," says ceo of Global Evolution, Søren Rump. "Saxo Bank's international profile and very high level of ambition is something that is really attractive for us. In distribution terms, we anticipate gaining much from Saxo Bank's commercial platform and the bank's wealth of offices around Europe, Asia and the Middle East."

Investors

Manager plans two TALF strategies

Standish Mellon Asset Management, the fixed income specialist for BNY Mellon Asset Management, is to offer two investment strategies that will enable its clients to invest in TALF securities. The first of the strategies will target new issues of consumer ABS and CMBS, and the second is designated as an Expanded TALF strategy: this will include legacy assets such as non-agency CMBS, consumer ABS and non-agency RMBS.

Standish expects to begin investing client money by early July. "We believe that investors who are the early buyers of ABS in the TALF programme have the potential for the biggest gains," says Desmond Mac Intyre, president and ceo of Standish. "As more money flows into these investments, the overall spreads should tighten and the opportunities for strong returns will diminish. However, it is important to remember the TALF programme is essentially a buy-and-hold strategy, which is dependent on strong upfront securities selection and price discovery."

Tom Graf, md of structured products and global workout solutions at Standish, says: "We view the TALF initiative as having the potential to be the most successful of the government programmes aimed at resuscitating financial markets. It is among the least expensive programmes, has already established strong momentum and continues to have growing participation. We stand ready to structure strategies to meet various client needs as they seek to invest in this programme."

Investors

Risk management head appointed

SPM has named Marc Holtz as md and head of risk management. He will help develop, maintain and manage the quantitative models that will enable SPM continue to most effectively manage market risk.

"We have always placed a heavy emphasis on managing our risk across all asset classes and vehicles, and Marc will enable us to continue doing so as effectively as possible," says Don Brownstein, ceo and chief investment officer at SPM.

Previously, Holtz was an adviser to the ceo at monoline CIFG. While there, he led the effort to develop and execute alternative reinsurance strategies and products, and oversaw the development and implementation of quantitative risk management models and systems. Before his time at CIFG, Holtz was an md at Dresdner Kleinwort Wasserstein and at UBS, where he was co-head of a team that developed, marketed and executed customised fixed income and equity products.

"SPM has proven itself to be a forward-thinking and successful manager that puts a tremendous premium on risk management," adds Holtz. "While many others in the industry are feeling the pain of rapid deleveraging and losses, SPM has been able to use its expertise and strict risk controls to avoid much of what is ailing others."

Investors

Dynamic investment strategy launched

PIMCO has launched its Global Advantage Strategy, which is designed to help fixed income investors seize opportunities created by dramatic shifts in the global economy. The strategy will invest in a broad range of fixed income instruments and is benchmarked against the recently launched PIMCO Global Advantage Bond Index (GLADI).

The strategy is co-managed by PIMCO's co-chief investment officer Mohamed El-Erian and evp Ramin Toloui. "The world is in the midst of dramatic transformations in growth drivers, wealth dynamics and institutional arrangements," says El-Erian. "The Global Advantage Strategy is part of PIMCO's ongoing effort to provide solutions to investors as they navigate this new environment."

PIMCO says the new strategy is motivated by the recognition that a range of evolving dynamics - including those between governments and markets, between developed and developing countries, and between domestic and non-domestic investors - will critically influence investment outcomes in coming years. "This strategy is designed to help position fixed income investors for both that journey and the ultimate destination," adds El-Erian.

The strategy's launch follows the introduction of GLADI, a new fixed income index that offers forward-looking exposure to the global fixed income markets and goes beyond traditional market capitalisation-based approaches to indexing. GLADI covers opportunities in nominal and real assets, as well as cash and derivatives markets and employs a weighting system based on gross domestic product that incorporates a degree of counter-cyclical rebalancing - as bond prices tend to be inversely related to GDP growth rates - and is designed to avoid allocating too heavily towards overpriced securities and heavily indebted issuers.

GLADI is administered and calculated independently from PIMCO by Markit.

Operations

ICMA appoints new ceo and president

The International Capital Market Association (ICMA) has appointed Martin Scheck as chief executive and René Karsenti as president, effective 1 August 2009.

Scheck will lead ICMA's activities in promoting the development and efficient functioning of the international capital market. He has been a board member of ICMA since 2004 and is the chairman of its audit, compliance and governance committee. He joins the association from UBS, where he is currently md and head of Swiss fixed income since 2001.

Karsenti, who has held the post of executive president at the association since May 2006, will become its president, with primary responsibilities to represent ICMA's interests in its interaction with governments, regulatory bodies, other trade associations and international organisations together with Scheck.

RMBS

RMBS fund offered to wider investment community

TwentyFour Asset Management is launching a new fund that will invest in RMBS.  The Monument Bond Fund, which will be a UK-authorised UCITS III fund, will provide stable and predictable income with a high degree of capital preservation, it says.

The fund is understood to be the first dedicated RMBS fund that will be offered to the wider investor community, rather than solely institutional investors. The fund's minimum permitted rating is double-A minus, with the majority of the fund's securities to be rated triple-A.

Mark Holman, one of the managing partners at TwentyFour says: "We all know fixed income outperforms when interest rates fall and bond prices rise, but now with base rates at 0.5% and the Treasury pouring money into the economy, it would be prudent to assume the next trend in rates will be upwards. The Monument Bond Fund takes advantage of the excellent opportunities in the fixed income market, offering a very attractive yield while remaining focused on capital preservation."

With over 1000 eligible RMBS in the market, the fund will look at making a diverse range of investments. In geographical terms it will only look at mortgage pools originated in the UK, Europe and Australia.

TwentyFour has appointed Gemini Investment Management as its appointed representative for the distribution of the Monument Bond Fund within the UK.

Technology

Pricing Partners and Thomson Reuters team up

Pricing Partners has confirmed its choice of Thomson Reuters DataScope to feed its independent valuation platform with accurate market data. Pricing Partners uses Thomson Reuters' market data to calculate independent valuations using its proprietary pricing model.

In an attempt to bring more transparency on OTC derivatives and structured products, Pricing Partners launched in October 2008 Price-it online, an independent valuation platform based on its cutting-edge models and analytics Price-it library. The platform was recently selected by Prime Source to extend its valuation service offering.

Trading

Knight readies Euro credit platform

Knight Libertas UK has established a European credit sales and trading team based in London. Effective immediately, Neil Robertson, Andrew Linford, Tom Goodale, James Holdsworth, Simon Marriott, Spencer Harman, Daniel Cohen, Michael Levy, Nigel Perry, David Fenwick, Kayyor Rao, Justin Perry, Andrew Carrie and Geoff Capell have joined the institutional fixed income broker-dealer.

Knight Libertas UK provides secondary market liquidity and credit-based analysis across a broad range of fixed income securities, including investment grade and high yield bonds, bank loans, emerging market credit and sovereigns. Robertson has been named md of Knight Libertas UK and is responsible for managing the European credit sales and trading team, reporting directly to Gary Katcher, evp and head of global institutional fixed income at Knight Capital Group.

Among the individual team members, Robertson and Linford - both ex-UBS - handle investment grade real money sales, Goodale (ex-Calyon) and Holdsworth (ex-UBS) lead investment grade hedge fund sales, while Marriott and Harman (both ex-UBS) cover high yield sales. Fenwick and Rao (both ex-UBS) complete the investment grade sales team, while Justin Perry (ex-Lehman) is a member of the high yield sales team.

Cohen (ex-Morgan Stanley), Levy and Nigel Perry (both ex-UBS) will run trading, with Cohen focusing on high yield, Levy trading investment grade and crossover bonds across sectors, and Perry handling financials. Carrie (ex-Cheyne Capital) is Knight Libertas' desk analyst in Europe, covering investment grade and high yield, and Capell (ex-UBS) oversees operations.

The firm expects to add staff in sales, trading, research and capital markets to meet client needs.

Trading

Pair named for trading and advisory

Investment bank Westwood Capital and its advisory affiliate, Westwood Capital Advisors, have hired John Ogle and Jasjit Singh to join their New York-based office as mds to expand operations in fixed income securities advisory, trading and management.

Westwood has ramped up its operations to meet demand from holders of distressed MBS, ABS, CDOs, CDS and other structured and derivative fixed income securities, both cash and synthetic, for expert valuation, disposition and runoff administrative services. Ogle and Singh will head the firm's fixed income advisory and trading practice departments, bringing nearly 25 years of combined experience in trading, risk managing, structuring, modelling and valuing of complex structured securities.

Prior to joining Westwood, Ogle was with Deutsche Bank, where he traded and managed a multibillion-dollar portfolio of CDS, as well as CDOs, CLOs, CMBS, RMBS and ABS. He previously handled proprietary trading at Morgan Stanley, where he traded and managed asset-backed bonds, repackagings and residuals from the securitisations of esoteric assets, including aircraft leases, auto loans and whole loans of fixed rate private student loans.

Singh previously managed the North America proprietary structured credit trading book at Lehman Brothers principal strategies division from 2006 until 2008, demonstrating an excellent P&L track record, even in challenging markets. Before joining Lehman Brothers, he was with Deutsche Bank, where he served as risk manager for the loan book and a hedge book of CLOs and credit derivatives.

CDPCs

CDPC downgraded, rating withdrawn

S&P has lowered its issuer credit, senior debt, senior subordinated debt and preferred share ratings on Primus Financial Products. The agency's outlook on Primus was negative. It subsequently withdrew its rating on the CDPC at the issuer's request.

The lowered ratings reflect further deterioration in the ratings on the reference entities on which Primus sold credit protection through credit default swaps, S&P says. Based on the 4 May 2009 report that the agency received from Primus' manager, Primus has failed the capital model tests that it is required to pass in order to maintain its current ratings.

S&P's outlook on Primus was negative because the agency believed that the fundamental economic and business conditions for this fully ramped CDPC had deteriorated significantly since its ratings were first assigned. Primus is currently operating in continuation mode, which means that it cannot enter into new CDS unless those swaps reduce its required capital (SCI passim).

CDS

Auctions continue apace

The final result of the HLI Operating Company LCDS auction yesterday, 9 June, was 9.5. Nine dealers participated in the auction.

At the time of writing, the initial result for the JSC BTA Bank auction was 22.25. An auction for Georgia Gulf is also scheduled for this afternoon.

Meanwhile, ISDA's determinations committee has determined that a bankruptcy credit event occurred in connection with Joint Corp, but has voted against holding an auction.

CDS

GM net funds transfer confirmed

To dispel concerns about the impact that GM's bankruptcy filing may have on the market and its risk exposure to CDS, the DTCC has confirmed that the net funds transfers between net sellers to net buyers of protection on GM debt are expected to be in the US$2.2bn range at most (see last week's issue). This estimate is based on data in DTCC's Trade Information Warehouse, whose records indicate the gross notional value of CDS single name reference entities on GM amounts to approximately US$35.3bn as of 29 May.

This figure nets down to approximately US$2.2bn in net notional value, which depicts more accurately the market's exposure to the GM bankruptcy and what the ultimate payment obligations may be between counterparties, the DTCC says. Ultimate exposure may be less, depending on the recovery rate on the underlying debt as determined by the industry auction scheduled for later this month.

CLOs

Rally in CLOs continues

US indicative CLO spreads are continuing their tightening trend. According to figures from JPMorgan structured credit research, triple-As tightened by 50bp last week to 700bp, double-As have increased by US$10 to US$45 and single-As by US$5 to US$20, while triple-Bs and double-Bs are unchanged at US$8 and US$5 respectively.

The analysts report that several lists in the US market have traded well, with client interest continuing to grow for single-As to triple-As. They also comment that at the Global ABS conference in London last week there was a more constructive tone for CLOs than during JPMorgan's Paris conference in March.

Meanwhile, some investors have set up or are in the process of creating funds to invest in triple-A CLO tranches, with a renewed focus in double-As. "On double-As, client opinions were fairly split," the analysts note. "Some believe prices have another 5-10 points of upside; others feel the rally is overdone. However, most thought it was unlikely prices would retrace back to lows (US$20s earlier this year)."

CMBS

Fitch CMBS downgrades to average two notches

While rating actions across the capital structure of many recent vintage US CMBS transactions will be substantial, mezzanine and super-senior triple-A rated classes are expected to stay triple-A for the foreseeable future, according to Fitch, as it continues its review of 2006-2008 fixed-rate conduit and fusion transactions. While rating actions on the most senior tranches are not anticipated, the agency expects to downgrade approximately 75%-85% of subordinate triple-A (AJ) classes from these recent vintages as a result of its revised loss forecasts. Downgrades across all classes are expected to average two rating categories.

Fitch assumes the following factors in forecasting losses: peak-to-trough value declines of 35%; immediate and sustained income declines of 15%; and current loan performance is recognised through detailed reviews of the 15 largest loans, 'Fitch Loans of Concern' and specially serviced loans. Assuming no property performance recovery, potential losses average 7.5%, with transactions from the 2007 vintage reaching 13.5% or higher.

However, under Fitch's stress analysis 50% of these losses will not occur until maturity, which in many cases is seven to nine years away. Therefore, the agency believes that it is premature to take rating actions that assume the full maturity loss.

"With seven to nine years of remaining term, there is significant uncertainty regarding the timing and magnitude of ultimate maturity losses," says Fitch md and US CMBS group head Susan Merrick.

Fitch's stress analysis and rating actions will account for immediate and full recognition of potential term losses combined, initially, with 25% of the maturity losses. "In subsequent rating reviews, the proportion of maturity losses considered in the stress analysis and rating actions will increase with the full extent of maturity losses taken into account at least two years prior to a loan's maturity," adds Merrick.

Losses under Fitch's stressed analysis average approximately 4.9% for recent vintage transactions, while certain deals - particularly those from 2007 that contain large concentrations of loans with pro-forma underwriting - may reach as high as 10.2%. This will impair credit enhancement to most junior triple-A (AJ) classes, leading to their downgrade.

Should potential term and maturity losses ultimately be realised, mezzanine triple-A (AM) classes from certain 2007 vintage conduit transactions would likely be at risk for downgrade. However, given the long remaining term to maturity of loans in these vintages, Fitch believes it is premature to take negative actions at this time. But these AM bonds are nonetheless expected to be assigned negative rating outlooks at the conclusion of the agency's initial review.

CMBS

CMBS servicer criteria updated

Fitch is updating its US CMBS servicer rating criteria to reflect current commercial real estate market conditions and their effect on mortgage servicing, which is expected to result in moderate rating movement for certain servicers.

"The experience of the servicer's management and staff and their financial strength is more critical now with the CMBS market becoming increasingly vulnerable," says Fitch md Stephanie Petosa. "While the methodology changes represent more of a sharpening of certain key elements rather than wholesale changes, various servicers will be both upgraded and downgraded upon the changes."

The first change to the criteria addresses the servicer's financial rating. While a CMBS servicer rating is primarily a skills rating, financial condition of the servicing entity is important, especially during challenging economic times. Therefore, Fitch plans to increase its financial weightings for both master and special servicer ratings to better reflect its significance.

The second criteria change is related to employee experience. The maturity of the CMBS market has caused Fitch to revisit its assessment of employee experience levels, particularly as it relates to senior and middle management. Fitch views favourably servicers whose management teams have experienced full real estate cycles and plans to increase its scoring hurdles in management experience to reflect this view.

Finally, due to the increased complexity of recent vintage CMBS servicing, Fitch plans to emphasise the servicer's participation in the CMBS market over the past few years. Several Fitch-rated servicers have not participated in the recent CMBS servicing market. Other servicers have been challenged to address loan level issues with the quality CMBS market participants have come to expect.

These factors will be more formally accounted for in Fitch's future CMBS servicer ratings, the agency says.

Correlation

Equity correlations increase

The speed of junior tranche tightening in Europe has caused equity correlations to increase, in contrast to what is typically observed as reference spreads are lowered, according to credit derivatives strategists at Banc of America Securities - Merrill Lynch. With the five-year index reference fixed at 120bp, 0%-3% correlation currently stands at 43.2% - a level similar to early April when the reference was 180bp. In addition, the dispersion metric for the overall S9 portfolio is actually 5% higher on the week.

"While we ourselves have recently advocated long risk exposure in the five-year equity tranche, a continuation of the pace of its out-performance versus single names may eventually lead us to prefer high-delta shorts here, particularly if portfolio spreads fail to compress further," the strategists note. "In the meantime, we continue to monitor the relationship between the index and equity correlations across tenors."

Documentation

Rating agencies call for greater disclosure

Fitch says it believes the ECB's recognition that the quality of information provided by originators needs to be improved will be a significant factor in the revival of the structured finance industry and the re-entry of investors to the market. At the same time, enhanced data quality and availability are among the important considerations that Moody's comments on in a new special report that looks at how EMEA servicer/investor reports for ABS and RMBS transactions could be improved. These enhancements would help market participants to better monitor the transaction, ensuring that any early warning signals are immediately identified, the rating agency says.

High on the list of priorities is the ongoing provision of more granular portfolio and performance information to allow for improved surveillance of transactions by both investors and rating agencies. Portfolio-level data is typically the key high-level tool for portfolio analysis, given the complexities of assimilating granular information containing thousands of data points. However, loan-level data will be increasingly important to help isolate and understand performance issues, as more transactions face difficulty.

"Obtaining meaningful granular, loan-by-loan data on an ongoing basis post-closing from originators can often be a challenge, especially for RMBS," says Stuart Jennings, structured finance risk officer for EMEA and APAC at Fitch. "Getting such information is important for performance assessment on an ongoing basis - for example, in determining whether particular segments of a portfolio are contributing more to performance issues."

Where such information is lacking, Fitch analysts make reasonable conservative assumptions regarding a portfolio's performance expectations, which can lead to more adverse rating action than if information were available on a more granular basis. In extreme instances, if insufficient information is delivered to help explain how performance is developing, the agency may ultimately have to withdraw the ratings concerned.

Fitch says it has been consulting with the ECB in recent weeks in the development of reporting templates for RMBS. The agency's comments follow calls by Francesco Papadia, director general at the ECB, for greater transparency regarding the transactions the ECB accepts as collateral and suggestions that new ECB requirements regarding reporting could include more granular information and, possibly, loan-by-loan information.

The agency believes that originators are sufficiently well-equipped to provide more granular information and is sceptical of claims that confidentiality issues may prevent their provision. "Originators are typically able to provide a loan-by-loan pool analysis at the time of closing, when it is necessary to be able to form an initial rating opinion and allow for the funding to be established. In addition, when such granular information is requested by Fitch in the context of a surveillance review or an assessment of performance issues, such information is usually available," says Jennings. "It seems therefore that systems constraints or confidentiality issues do not prevent the provision of loan-by-loan information."

He continues: "There may be objections based on resource constraints to the provision of such information on a more regular basis. However, such regular granular information is going to be increasingly needed, as performance deteriorates, to help isolate and understand where pressure points are arising and help formulate robust expectations for future performance."

In the Moody's report, entitled 'Investor/Servicer Reports: Important Considerations for Moody's Surveillance of EMEA ABS and RMBS Transactions', the agency says that ideally there should be a single comprehensive report that contains all of the relevant information/data, which is made available at least quarterly on a public website to investors and other market participants by a specified date. "In addition, the transaction documents should include a clear and detailed timeline of calculation and reporting processes that enables all investors and interested parties to understand the dates on which calculations are made and data are reported," says Carine Kumps-Feniou, a Moody's avp - analyst and author of the report.

The agency believes that these considerations should generally facilitate the surveillance by investors and other market participants of the performance of a transaction with greater accuracy, thoroughness and in a timely manner. "In turn, it will help us maintain and improve our assessment on the credit quality of the transaction," Kumps-Feniou adds.

The rating agency also cautions that if it does not receive regularly updated performance data of an acceptable quality, it is difficult to maintain the rating of the notes. "Alternatively, it may become necessary to review the rating of the related notes for possible downgrade," Kumps-Feniou explains. "This will be analysed on a case-by-case basis through Moody's rating committee process."

Documentation

CMBS addresses lost liquidity facility

German CMBS Bluebonnet Finance is in discussions with Moody's, Fitch and S&P concerning the proposed establishment of a cash reserve account, having lost its liquidity facility in April this year. The cash reserve - funded out of receipts of principal received by the issuer - will be maintained by Citibank.

The aim of the proposed cash reserve is to provide the issuer with a source of liquidity in much the same way as the original liquidity facility, and it is hoped it will reverse recent downgrades on the bonds by rating agencies. The proposal, if approved by the rating agencies, would also require the approval of the trustee and the noteholders, as well as certain other parties to the transaction documents.

Indices

Index/tranche re-risking spikes

The latest DTCC CDS data indicates that index and tranche markets saw nearly US$1trn of re-risking - which analysts at Credit Derivatives Research describe as 'enormous'. Single names saw around a US$100bn de-risking.

The analysts point to rumours of a major liquidation of a correlation-trading firm that was forced to unwind, which seems evidenced by significant skew compression in investment grade indices, as well as major gaps tighter in high yield and investment grade. "The size of the index re-risking seems to indicate significant leverage (i.e. an index-overlay hedge on a long credit tranche position)," they note. "This could also help explain some of the moves in the major tail names like AIG."

Indices

Counterparty risk drops to pre-Lehman lows

Counterparty risk among the largest OTC derivative market-makers fell the week ending 29 May to its lowest levels since before last year's failure of Lehman Brothers, according to Credit derivatives Research. As US banks continue to take advantage of the unprecedented strength in the equity and credit markets to raise capital, investors have marked down their default risk significantly. The CDR Counterparty Risk Index (CRI) fell by over 10% that week alone to around 135bp at the close on Tuesday 2 June. The tightest levels since 10 September 2008.

"All the TLGP-backed issuers are trading with less risk than before the initial CPP injections were made, with the ex-brokers (Goldman Sachs and Morgan Stanley) having made the largest improvements since then," analysts at the firm note. "This week saw credit spreads tighten across all the members (except Citigroup) of the CRI, with European and US bank risk converging further as US bank risk (on average) fell below 200bp for the first time since before Lehman's failure."

Citigroup remains the stand-out among the CRI members, with its spread at around 350bp (more than 150bp wider than the next riskiest member) as it widened by 15bp on the week. "This is interesting, since it remains the most implicitly government-backed of the major financials in the US. The fact that its stock also fell the most of the CRI members this week (down almost 7%) reflects investor concern that Citi's weakness is systemic and that it is unlikely to earn or self-fund its way out of this situation," the analysts add.

Many of the rest of the CRI members trade at surprisingly tight credit spreads now. Morgan Stanley and Goldman Sachs were the week's best performers of the US members: both saw risk drop by over 14% to 200bp and 120bp respectively. BNP Paribas was the CRI's best overall performer, with an almost 18% fall in risk to a mere 61bp - the least risky credit among the CRI members.

Monolines

MBIA/National downgraded

S&P has lowered its counterparty credit, financial strength and financial enhancement ratings on National Public Finance Guaranty Corp to single-A from double-A minus and removed them from credit watch, where they were placed on 18 February 2009, with developing implications. The outlook on National is developing.

At the same time, the agency lowered its counterparty credit, financial strength and financial enhancement ratings on MBIA to triple-B from triple-B plus. MBIA Inc's counterparty credit rating was also downgraded to double-B from double-B plus. The outlook on MBIA and the holding company is negative.

The downgrade of National reflects S&P's view of both its uncertain business and capital-raising prospects. The company's capital adequacy is marginally below the agency's double-A standard.

Management's stated goals are to raise additional capital to bolster National's current resources and effectively ring-fence National from MBIA and its more volatile book of business. However, the ring-fencing actions it has taken so far have had limited impact in that S&P views National as no more or less ring-fenced than any typical bond insurance subsidiary operating in a consolidated group. In addition, the legal challenges the company faces as a result of its restructuring (SCI passim) are, in the agency's opinion, an impediment to both business prospects and capital-raising efforts.

S&P says it downgraded MBIA because of increased loss assumptions on its 2005-2007 vintage direct RMBS and ABS CDOs, and a change in the assumed tax benefit of tax-loss carry-forwards. "It is our view, based on its tax share filing status, that MBIA Inc will not be able to fully realise the tax benefit of MBIA's operating losses. The effective tax rate we used in determining after-tax losses was 20% compared with the 35% we cited in February 2009," the agency notes.

The outlook on National is developing. S&P could raise the rating if there is a favourable resolution of the current litigation, which in turn could facilitate capital-raising efforts and lead to more tangible separation of National from MBIA and MBIA Inc. Improving business acceptance could be an outgrowth of these developments, which could lead to a rating in the double-A category. Alternatively, an ongoing lack of market acceptance and continued weak financial flexibility could result in a downgrade to the triple-B category.

Meanwhile, the negative outlook on MBIA reflects the agency's view that adverse loss development on the structured finance book could continue. A revision of the outlook to stable will depend on, among other factors, greater certainty of ultimate potential losses as well as the orderly runoff of the book of business.

Tom McLoughlin, National's ceo, says that the firm regards the rating action as a temporary setback. "We remain committed to the US public finance market and plan to raise additional capital for National as soon as circumstances reasonably allow, with the goal of achieving the highest possible ratings over time to meet the municipal market's demonstrable need for credit enhancement," he adds. "National will vigorously contest the litigation that S&P references in its decision and is moving to dismiss the lawsuits as we believe they are baseless and directly challenge the approvals of the New York State Insurance Department."

Operations

Serious concerns remain over stress testing

The US Congressional Oversight Panel (COP) has released its June oversight report, entitled 'Stress Testing and Shoring Up Bank Capital', which examines the recent stress tests conducted on America's 19 largest bank holding companies (BHCs). The report examines how effectively Treasury and the Federal Reserve conducted the recent bank stress tests, specifically reviewing the government's economic assumptions, its methods of calculating bank capitalisation, its release of information to the public and whether the stress tests should be repeated in the future. To help make these assessments of the stress tests, the panel engaged two internationally renowned experts in risk analysis, University of California at Berkeley professors Eric Talley and Johan Walden, to review the stress test methodology.

The Panel finds that, on the whole, the stress tests were based on a solidly designed working model. However, serious concerns remain, and the report offers several recommendations for consideration moving forward:

• The unemployment rate climbed to 9.4% in May, bringing the average unemployment rate for 2009 to 8.5%. If the monthly rate continues to increase, the 2009 average may exceed the 8.9% assumed under the more adverse scenario, suggesting that the stress tests should be repeated if that occurs.
• Stress testing should also be repeated so long as banks continue to hold large amounts of toxic assets on their books.
• Between formal tests conducted by the regulators, banks should be required to run internal stress tests and should share the results with regulators.
• Regulators should have the ability to use stress tests in the future when they believe that doing so would help to promote a healthy banking system.

COP says its report strives to provide Treasury and the Congress with the necessary context and comparative analysis to understand the possible policy choices.

Operations

Legacy loans programme postponed

The FDIC has announced that development of the Legacy Loans Programme (LLP) will continue, but that a previously-planned pilot sale of assets by open banks will be postponed.

FDIC chairman Bair states: "Banks have been able to raise capital without having to sell bad assets through the LLP, which reflects renewed investor confidence in our banking system. As a consequence, banks and their supervisors will take additional time to assess the magnitude and timing of troubled assets sales as part of our larger efforts to strengthen the banking sector."

As a next step, the FDIC will test the funding mechanism contemplated by the LLP in a sale of receivership assets this summer. This funding mechanism draws upon concepts successfully employed by the Resolution Trust Corporation in the 1990s, which routinely assisted in the financing of asset sales through responsible use of leverage. The FDIC expects to solicit bids for this sale of receivership assets in July.

Bair adds: "The FDIC will continue its work on the LLP and will be prepared to offer it in the future as an important tool to cleanse bank balance sheets and bolster their ability to support the credit needs of the economy."

Operations

Legacy RMBS for TALF still under discussion

There is no firm decision as to whether TALF will eventually include legacy RMBS, Federal Reserve Bank of New York president William Dudley is reported to have said at a conference in New York last week. At the end of May the Fed said it would accept legacy CMBS under the programme - prompting further tightening of spreads on the asset class.

Operations

Expanded definition of valuation risk necessary

Thomson Reuters and Aite Group have announced the results of a study indicating that transparency and integrity must be at the centre of any business during the current volatile marketplace and conservative regulatory climate. The new report, entitled 'Getting a Mark is no Longer Enough: Valuation Risk Goes Beyond Pricing', finds that today's market challenges require an expanded definition of valuation risk.

The days of treating the valuation process as a pricing or reporting function are long gone, according to the report. Attaching an accurate price to a security is only one aspect of valuation risk (see also separate News Analysis).

"Capital-at-risk participants and regulators must now equally consider underlying security data, as well as embedded credit and systemic risk. As such, the realisation of the new market paradigm of increased market volatility and interconnectedness between trading parties forces organisations to require more transparency in order to minimise valuation risk," the report concludes.

The research study focused on gathering feedback on the operational 'pain points' for senior managers working on valuations, risk and data management functions. They identified current challenges with valuation risk in three areas: valuation, transparency and compliance. Reponses from buy-side and sell-side firms, risk managers, fund administrators and pricing and valuation vendors revealed their priorities to be concentrated on improving the data environment, pricing workflow and risk management and compliance enhancements.

Validating pricing vendors and the diversity of pricing and evaluation sources also are key. Deeper integration of counterparty and credit data into workflow was cited as important, along with a review of the data management environment to identify key tactical areas of improvement and strategic shortcomings.

Operations

Government urged not to force OTC derivatives on exchange

In testimony before the US House of Representatives Subcommittee on Capital Markets, Insurance and Government Regulation, ISDA executive director and ceo Robert Pickel addressed public policy considerations regarding the OTC derivatives business.

"The OTC derivatives industry is an important part of the financial services business in this country and the services we provide help companies of all shapes and sizes," he said in his testimony. "Let me assure you that we in the derivatives industry do recognise the challenges that we face as we seek to enact a comprehensive and prudent system of regulatory reform."

In his testimony, Pickel outlined ISDA's and the industry's strong commitment to identifying and reducing risk in the privately negotiated derivatives business. Among other things, he emphasised that OTC derivatives offer significant value to the customers who use them, to the dealers who provide them and to the financial system in general by enabling the transfer of risk between counterparties. Consequently, it is essential to preserve flexibility to tailor solutions to meet the needs of customers.

Efforts to mandate that privately negotiated derivatives business trade only on an exchange would effectively stop any such business from being conducted, ISDA notes. Requiring exchange trading of all derivatives would harm the ability of American companies to manage their individual, unique financial risks and ultimately harm the economy.

Pickel concluded his testimony by stating that ISDA and the OTC derivatives industry are committed to engaging with supervisors globally to expand upon the substantial improvements that have been made in the business since 2005. The Association recognises that further action is required, and pledges its support in these efforts. It says it believes that much additional progress can be made within a relatively short period of time.

Operations

Banks set to repay TARP funds

10 banks are set to repay TARP funds in full plus interest, with the total proceeds set at US$68bn. The US Treasury didn't specify which banks will be doing so, but there is speculation that JPMorgan (with US$25bn), MS and GS (US$10bn), USB (USD6.6bn), CapOne (US$3.6bn), Amex (US$3.4bn), BB&T (US$3.1bn), BONYM (US$3bn), STT (US$2bn) and Northern Trust (US$1.6bn).

It remains unclear whether the banks may also have to repurchase the warrants issued to the government as part of TARP programme in order to have the executive pay restrictions and so on lifted. The total current fair value of the warrants across the 10 banks is roughly US$5.1bn.

Operations

DTCC calls for single trade repository

The DTCC has called for maintaining a single trade repository for OTC derivatives contracts during testimony before a subcommittee of the US House Financial Services Committee.

Larry Thompson, DTCC general counsel, said: "We are concerned that some in the OTC derivatives market may assume once a trade guarantee is provided through a central counterparty (CCP), there may be less need for a central registry to track the underlying position data. We reject this view, based on our long experience managing the risk flowing from the failure of a single member firm. At the critical juncture of a firm failure, knowing the underlying position data of multiple transactions in a timely manner will be significant in providing transparency to regulators - and in protecting confidence in the market itself. We believe the role of having a central repository should be reinforced as a matter of public policy."

The DTCC believes that maintaining a single trade repository for OTC derivatives contracts is an essential element of safety and soundness for the market for two primary reasons. First, it helps assist regulators in assessing systemic risks, thereby protecting investors and financial markets. Second, as a practical matter, it provides the ability from a central vantage point to identify the obligations of trading parties, which can speed the resolution of these positions in the event of a firm failure.

Ratings

Impact of CMBS methodology changes detailed

S&P has published a report detailing the impact that its recently proposed methodology and assumption changes would have on rated US CMBS. Because the proposed revisions represent a significant change in the method by which credit enhancement is determined for CMBS transactions, S&P has assessed the potential impact of the proposed methodology on nearly its entire rated portfolio, including 47,755 fixed-rate loans securitised in 402 rated conduit and fusion CMBS transactions.

The agency says it used a broad approach in its analysis, but believes the method provides a good indication of the potential magnitude the proposal will have if they adopt it. The proposed methodology details triple-A credit enhancement levels that S&P believe are sufficient to withstand an extreme economic downturn without defaulting.

"In our analysis, transactions from the 2007 vintage are likely to experience the greatest impact if the criteria are adopted; many tranches currently rated triple-A with 30% credit enhancement would likely be downgraded," says S&P. "Under our triple-A stress, losses from this vintage range from 12.3% to 60.4%, but these loss rates are commensurate with an extreme economic downturn and do not represent our expected case."

The rating agency explains that shorter weighted-average life triple-A classes benefit from structural protection and would likely perform better than longer-weighted average life triple-A classes. Of the five-year classes from 2005-2007, 25% of the 2005 deals, 10% of the 2006 deals and 25% of the 2007 deals are potentially at risk for downgrade based on S&P's analysis.

"Ten-year super-duper (30% credit-enhanced) classes have a higher potential for downgrades than the shorter weighted-average life classes," S&P adds. "The ratings on older vintages (2000-2004) - which were issued well before the peaks in valuations (2007) and effective rents (2008), and generally utilised stricter underwriting standards than more recent vintages (2005-2008) - saw less downward movement on average in our analysis."

Ratings

CDOs dominate Asia ex-Japan rating activity

CDOs still continue to dominate reported rating activity in Asia (excluding Japan), according to S&P, although the number of rating actions reported for quarter ended March 2009 was less than for Q408. Outside of CDOs, there was only one rating action reported during Q109 among Asian (excluding Japan) structured finance transactions.

Apart from CDOs, all other asset classes in this region have had minimal ratings activity during Q109. The ABS class reported one downgrade during this period.

CDOs in Asia (excluding Japan) experienced 158 downgrades in Q109, compared with 299 downgrades in Q408. By comparison, the number of downgrades reported for this asset class in the first quarter of 2008 was 19. Only four upgrades were reported for this asset class during Q109.

Ratings on earlier vintages of synthetic CDOs have experienced lower rating migration and proved to be more resilient than those issued between 2006 and 2008, according to S&P. Most of the triple-A ratings as at 1 April 2009 are still concentrated in tranches from vintages before 2006.

By comparison, the number of ratings in the triple-C category is more concentrated in 2006, 2007 and 2008 vintages. Similarly, defaults are greater in the 2007 and 2008 vintages.

The rating migration of CDOs in this region over the 12 months ended April 1, 2009 has been quite significant. For example, in April 2008 32% of CSO and CDO repack tranches in Asia-Pacific (ex-Japan) were rated triple-A and about 99% of all tranches held investment-grade ratings as at April 2008. As at April 2009, about 8% of all remaining CSOs and CDO repacks remain triple-A rated and approximately 43% of outstanding ratings remain in the investment-grade range, which is a 56% drop from a year ago.

This downward rating migration reflects the increased stress on corporate ratings in 2008 as a number of corporate names commonly referenced in the synthetic portfolios - including Lehman Brothers, Fannie Mae, Freddie Mac and the Icelandic Banks - experienced credit events. Synthetic corporate CDOs have also been adversely affected by downgrades of key supporting parties in the transactions, which include: financial institutions as swap counterparties and/or issuers of authorised investments in transactions; and monoline insurers as issuers or guarantors of authorised investments in transactions.

Ratings

Increased ratings transparency targeted

As part of its efforts to increase transparency around its ratings process, S&P has published 'Understanding Standard & Poor's Rating Definitions'. This publication further promotes greater understanding of ratings, including differences among the various rating categories, the agency says.

Ratings embody multiple factors that compose the overall assessment of creditworthiness. The primary factor in S&P's analysis of creditworthiness is likelihood of default - although payment priority, potential repayment following default and credit stability are factors that can also play a role in its assessment of credit risk. The article also highlights the economic stress scenarios it uses as part of calibrating its criteria for various ratings categories across sectors.

Ratings

German MVD/indexation assumptions revised

Fitch has published its revised market value decline (MVD) and indexation assumptions for rating German RMBS and German mortgage covered bonds. This follows a comprehensive review of its approach to derive MVD assumptions for German transactions, including a six-week comment period that allowed market participants to provide feedback regarding the proposed changes, published as an exposure draft in February.

Fitch proposed the update to its MVD analysis after reviewing historical data of forced property sales in Germany. The updated analysis has resulted in significantly higher MVDs being assigned, especially for weaker economic regions. The revised MVDs considerably increase the loss severity assumptions for foreclosed residential properties securing defaulted mortgage loans in Germany.

"Market participants welcomed the methodological changes Fitch has introduced for deriving German MVDs in their feedback to the agency," says Susanne Matern, senior director and head of Fitch's structured finance team in Frankfurt. "The changes were acknowledged to better address the varied characteristics of the German housing market, especially its comparatively high degree of illiquidity."

The main methodological change is to base MVD assumptions on historical foreclosure data available instead of historical property price data based on indices. The agency believes that this data is the best predictor for deriving the expected decline in the value of a property in a forced sale scenario.

"In addition to the positive feedback regarding the use of historical foreclosure data, market participants also viewed the approach to determine regional specific MVDs, based on differences in purchasing power rather than geographical regions, as more effective," adds Gabriele Herbst, director in Fitch's structured finance team in Frankfurt.

Purchasing power is a widely accepted indicator for a region's economic performance and proves to be a good indicator with regard to the extent of foreclosure proceeds achievable in a forced sale scenario. It reflects existing regional discrepancies between rural and metropolitan areas, and weak and strong economic regions in Germany.

The criteria revision forms part of a comprehensive review of German RMBS criteria. The extent of any potential rating actions will ultimately depend on the conclusions reached following the agency's review.

Regulation

Capital raising likely for Fair Value Coalition banks

Credit strategists at BNP Paribas suggest that retained earnings are unlikely to be enough for the banks involved in the 'Fair Value Coalition' to avoid raising more capital. The Coalition is lobbying for a delay in mark-to-market accounting rules that would force banks to bring some of their off-balance sheet vehicles back onto their books next year.

The delay would help the banks avoid raising additional capital in the hope that profits will build up fast enough to compensate for losses on legacy assets. But the strategists note that the exceptionally strong results the banks posted in Q109 are likely to be just that - exceptional - and will likely prove to be unsustainable in the medium term.

"In most cases, strong earnings came from trading and primary market activity; however, with the market normalising, bid-offer spreads and fees are coming down towards more normal levels, making it harder for banks to make easy profits," the strategists argue. "Other business lines, such as securitisation and M&A, remain very weak and may not be able to contribute enough to the bottom-line to compensate for weaker trading revenues. This could be why banks are so keen to push any additional capital requirements as far back as possible, while they keep on playing for time."

RMBS

Relative value shifts to non-agency MBS

ABS analysts at Wachovia note that the relative value advantage has shifted from the agency MBS market to the seasoned prime non-agency market and consequently recommend that investors consider reducing their exposure to the agency MBS market and selectively increasing their prime non-agency exposure.

"We are negative on the agency MBS basis and believe that the Federal Reserve's mortgage purchase programme will be unable to influence mortgage origination rates lower," the analysts say. "Our analysis of its portfolio suggests that the Fed holds 90% and 59% of the available 4% and 4.5% coupons (30-year and 15-year) respectively. Of those holdings, 19% are for July or August delivery."

Despite the Fed's efforts and the technical richness of the 4% and 4.5% stack, the best delivery for mortgage originators is in the 4.5% coupon, the analysts point out. Thus, although 4% coupons are rich in the forward months, they don't represent the best execution.

Meanwhile, there is growing concern that an increase in mortgage rates may stall the housing recovery. But the Wachovia analysts point out that the MBA affordability index currently stands at 174 - its highest reading since inception.

"This suggests that the housing market likely can withstand modest increases in mortgage rates and still sustain its recovery," they conclude. "In our opinion, Federal Reserve policy should not try to exert undue influence on mortgage rates. If it tries too hard, we believe the Fed could create a situation in which the private market has a harder time adjusting once government support is withdrawn."

RMBS

Portuguese RMBS performance under pressure

Fitch says in a special report that mortgage credit performance related to Portuguese RMBS is likely to come under pressure in coming months as the country's economy is expected to experience a severe downturn during the second half of 2009. Following high growth in the 1990s, Portugal's mortgage market slowed significantly during the first quarter of 2009. The introduction of non-standard products in recent years, combined with an upward trend in average LTV ratios, has adversely affected the credit profile of recent Portuguese RMBS transactions.

"Although lower interest rates have benefited borrowers' affordability, weakening economic fundamentals and depressed housing conditions may increase arrears and defaults in Portuguese RMBS," says Federica Fabrizi, a director in Fitch's European RMBS team.

The agency expects nominal Portuguese house prices to decrease moderately during the remainder of the 2009. However, the agency notes that the country's banking system remains strong, profitable and well capitalised. But it believes that the current economic downturn may prove to be the deepest Portugal has experienced in the last fifteen years.

SIVs

SIV ratings withdrawn

S&P has withdrawn all its outstanding ratings on SIVs Asscher Finance and Cullinan Finance upon the request of the vehicles' manager, Halbis, which is part of HSBC. The agency notes that the vehicles do not have any outstanding debt.

Structuring/Primary market

Bad bank for Granite?

Rumours are circulating that Northern Rock's restructuring will involve the best assets being carved out to set up a new company, while the remaining assets (possibly including the Granite master trust) would be moved into a 'bad bank' and allowed to run off. Given that Granite assets are ring-fenced and are already running off, ABS analysts suggest that such a division should make no difference to investors. The key factor is likely to be the quality of the servicing and the collections processes, which are likely to continue to be run by Northern Rock, and whether the interest rate setting process influences future CPRs.

There is an outside chance that the trust could be wound up (for example, by calling the notes) to release the over £3bn of seller share trapped in the structure, but that could be difficult to achieve until the trust has reduced substantially in size, the analysts note.

Technology

PDS expanded to include EMEA ABS

Moody's Analytics is expanding its coverage of Moody's Performance Data Services (PDS) to include ABS in the EMEA region. This significant enhancement of PDS capabilities reflects Moody's commitment to the EMEA structured finance market, the agency says, and follows the introduction of EMEA RMBS coverage within PDS in November 2007.

Moody's PDS allows clients to undertake a more efficient, accurate and effective surveillance process by providing access to structured securities' performance data in an easy-to-use online monitoring platform or a raw data feed, according to the agency. This tool provides investors and other market participants in the EMEA structured finance market with an early-warning system to identify changing risk and performance trends in ABS and RMBS.

"Our introduction of EMEA ABS coverage within PDS will deliver high-quality data that will help our clients make better decisions while saving valuable time and resources," says Gus Harris, executive director of Moody's Analytics. "PDS includes the same data that Moody's own surveillance analysts use to monitor the credit risk of structured finance transactions."

Moody's PDS data is based on information that the agency receives from servicers and trustees, which analysts then clean and standardise for accuracy and comparability. By providing factual and accurate performance metrics - such as delinquencies, losses and excess spread - PDS helps clients to quickly assess the real size and impact of current market developments, enabling them to make more informed decisions. PDS also helps meet the need for early warnings by providing a customisable alerts system based on performance metrics reaching key thresholds.

Technology

Technology news

CLEAN MBS model patented
Andrew Kalotay Associates has been granted a patent for its CLEAN MBS model. CLEAN - coupled lattice efficiency analysis - determines refinancing based on mortgagor credit and then discounts the resulting cashflows using the MBS issuer's credit. The approach allows for exceptional speed - 14,000 securities per minute, or roughly 100 times faster than the competition - without compromising accuracy, the firm claims.

By tracking mortgagors with a higher propensity to refinance, CLEAN automatically captures 'burnout' (refi fatigue following periods of low interest rates). In addition, its option-based approach ensures consistency with the valuation of callable agency debentures.

"A major breakthrough is that our prepayment model is truly market-implied. We calibrate to current TBA prices and mortgage rates, in contrast to the conventional backward-looking models," comments Andrew Kalotay, the firm's founder.

Credit risk solutions launched
Misys has released Misys Credit Risk Vantage, which was initially developed as a new component for Misys Risk Vision to provide additional key credit risk modelling functionality to that already offered by the solution. Misys Credit Risk Vantage brings financial institutions an additional straightforward model to reduce parameter uncertainty within their business, the firm says.

The new solution is available both as standalone as well as integrated with other Misys solutions to give customers a simple auditable actuarial model that can interoperate with other systems, offering the customer much more choice to measure and manage portfolio risk. "We have developed Misys Credit Risk Vantage in response to customer requirements to have more than one way of modelling risk, taking into account the balance that is needed between speed and accuracy," comments David Stewart of the Misys Risk Group. "They frequently are hampered with not accurate enough views of their total exposure - the new solution provides them with this benefit."

As one of the key solutions of the Misys Risk Group, Risk Vision is a functionally advanced system delivering risk measurement for the banking and trading book, stress testing, advanced risk modelling and real-time risk control via the highly flexible 'Exposure and Limit Management' module - which is fully integrated with the risk calculation engine at enterprise and departmental level. Risk Vision takes into account the interactions between market and credit risk, and it has advanced pattern analysis techniques to identify patterns of stress and the capture of tail dependencies with a view to the modelling of credit derivatives and the measurement and management of contagion.

Trading

Trading ideas: deeper and deeper

Byron Douglass, senior research analyst at Credit Derivatives Research, looks at an outright long on Parker Drilling Co

Parker Drilling's management last week held an Analyst Day, with the intention of increasing its exposure and parading its laudable turnaround. Taking a look at the presentation, combined with its improving fundamentals, leads us to recommend an outright long credit trade on the company.

Given looming inflationary pressures, we believe that there will be more upward pressure on commodity prices, which will positively affect Parker's utilisation rates. The company maintains a solid liquidity cushion relative to its total debt and its market capitalisation tripled in the past few months; therefore, we recommend selling protection Parker Drilling.

First-quarter results for Parker Drilling were unnerving at best. Utilisation rates on its Gulf of Mexico rigs collapsed to 25% from 77% in Q108, while its International Drilling rates managed to creep up to 79% from 73%.

However, given the uncertainty, we do find rays of light emanating from the company's situation. First, its cash-to-total-debt ratio remains well above 30% (Exhibit 1). Parker's cash holdings top US$148m against debt of US$446m, which puts it in a good spot to withstand ephemeral cash crunches, but not much more.

Exhibit 1

Since the first quarter of the year, crude oil prices rebounded, breaking US$70 last week for the first time since October 2008. The increase in crude will help to hold utilisation rates up over the remainder of the year.

In response to the turnaround on the economic situation, Parker' market capitalisation tripled to nearly US$600m (Exhibit 2). The increase in Parker's stock price greatly reduced its market-implied credit risk, more so than the actual decrease in its credit spread. Therefore, we take this as another signal to sell protection on Parker.

Exhibit 2

The biggest concern we have for the company is the future of natural gas. The price of natural gas actually decreased over the same time-period of the crude rally.

This will provide an offsetting downward pressure to utilisation rates into 2010. Due to mercurial commodity prices, we will keep a tight leash on the trade as future swings in natural gas and crude oil prices unfold.

We see a 'fair spread' near 200bp for Parker Drilling based upon our quantitative credit model due to its accruals, cashflow, liquidity and change in market cap. The model ranks each issuer on a scale of 1 to 10 using eight factors (1 = poor credit, 10 = good credit). Parker's CDS traded in a fairly tight range relative to its expected spread for the majority of 2008 until late in the year when its spread blew out above 1200bp.

While the spread recovered in step with the rebound in crude oil, its expected spread has also tightened 500bp (Exhibit 3). We believe it represents a good opportunity to take a long position in the credit with the potential for spread outperformance.

Exhibit 3

Sell US$10m notional Parker Drilling Co 5 Year CDS protection at 3.5% upfront.

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).