Contents

Distressed assets

Appropriate strategies

Credit spread tightening drives distressed opportunities further afield

Tightening spreads mean that distressed credit investors are, at present, having to look further afield for opportunities. The debate about what an appropriate vehicle for such investments should look like continues, however.

"Spreads in credit are, in general, too tight at the moment," confirms Aogán Foley, md at Incisive Capital Management. "We've yet to see a lot of loan defaults play out in CLOs, and our watch list of names continues to grow."

In addition, he says, some of these loans are expected to have low recoveries. "People are being a lot more realistic on workouts - which is good - but there's plenty of volatility to come. I don't expect that spreads will blow out to a huge extent, but current prices will likely soften."

Neil Basu, managing partner at Pearl Diver Capital, agrees that CLO prices have gone up too far, too fast. "We have not necessarily seen any underlying improvements and we still don't know the full impact of the rating downgrades. We therefore expect volatility in the short term. We have already seen a small amount of softening in the past couple of weeks, particularly in the double-A space," he notes.

Nevertheless, he reports that there are still some 2005-2006 vintage CLOs available where the default assets and the triple-C bucket are lower than 2%-5%, with significant OC cushions. "Such deals are difficult to find and in some instances expensive, but they are out there."

According to Loic Fery, managing partner of Chenavari Credit Partners, the main theme in the market at the moment is focusing on credit and looking at the best way to express a view, whether this is through CDS or bonds. "We believe it's possible to make money in credit by not necessarily being long. We can achieve a profit with low volatility by maintaining a neutral view and adjusting our positions with CDS."

He says that there are mainly two ways to approach credit opportunities in the current environment - each with different risk/return profiles. First, is a directional strategy that may include illiquid credits and may lead to a J-curve type of return, as these strategies could sustain volatility in the next one to two years.

Second, is implementing a market-neutral relative value approach, involving liquid strategies with less or no sensitivity to corporate spreads. The first approach entails structural analysis and an exit in several years, whereas the second entails focusing on dislocation in the liquid space - mainly CDS curves - and allows a much better liquidity profile.

"While it is possible to generate high return while staying in the liquid space, you need to make sure that you are properly compensated if you play in the illiquid space, as some areas start to be expensive," Fery explains. "The illiquidity premium is definitely greater in areas that aren't overcrowded. By buying assets at a few cents on the dollar, you include a very interesting 'optionality' in a portfolio."

The fundraising process can, on a simplistic level, also be split into two camps, according to Basu. "The private equity/sovereign wealth fund side that want ultra high returns, but that are willing to let you harvest returns over time; and the other side, primarily hedge fund of funds/high net-worth retail/family offices accessed through private banking channels etc, who prefer high liquidity but are ready to work with more modest return targets. It is harder to make a strategy work in the cash distressed structured credit space for the second type of investor because of their liquidity requirements," he says.

Indeed, for distressed credit investments, it is more about having the right combination of lock-up, redemption notices, gates and exit fees, rather than having the right lock-up structure per se. Fery concludes: "The link between assets and liabilities needs to be real - investors should be able to gauge the liquidity constraint on the fund with the liquidity of the fund underlying."

CS & AC

Regulation

European Communication

Call for more details around EC derivatives proposal

The European Commission has adopted a Communication on ensuring efficient, safe and sound derivatives markets, which the industry has welcomed at the same time as recognising that further details are needed. The Communication calls for the introduction of standardisation, central data repositories, central counterparty (CCP) clearing and trade execution on public trading venues.

Andre Allee, derivatives partner at Simmons & Simmons, notes: "We're pleased to see that the EC wants to consult with the industry on this and appears to be using a joined-up approach with US regulators. We're also pleased that the Commission isn't supporting George Soros' call to outlaw CDS altogether and that it recognises the importance of the derivatives market."

The Wholesale Markets Brokers' Association (WMBA) also welcomes the increased level of co-ordination between US and European regulatory and supervisory bodies. It says this is crucial because of the global nature of the OTC marketplace and the essential role it plays in the generation of wholesale financial markets products, which are used widely in developed and emerging economies. Regulators, especially in Asia, will also be keenly aware of the effect of changes made in North America and Europe and their support for any global measures will be important, the WMBA adds.

However, the Association's chairman David Clark notes: "It is likely that in order to implement the proposals outlined in the paper, changes to the capital adequacy regime will need to be agreed. In principle, this should be achieved through changes in the Basel 2 arrangements; otherwise, regional attempts to change capital adequacy requirements would lead to regulatory arbitrage and an uneven playing field."

Allee also points out that a number of grey areas in the Communication require further clarification. For example, one primary concern about the introduction of CCPs for credit derivatives is the cost to market participants in terms of establishing them and operating them on an ongoing basis.

"There is little detail about margining requirements and the extent of capitalisation needed. The briefing talks about the need to be 'amply capitalised', but what does this mean in practise and who will bear the cost?" he asks.

Allee continues: "The initial paper indicates that a single CCP would be required within the EU, but the accompanying technical briefing encourages competition. It also suggests that the CCPs in the US operating alongside EU CCPs are a workable solution, yet it is unclear how this will operate in practise."

Equally, further details are needed around what 'standardisation' actually means with respect to CDS contracts. While it is clear that the Commission isn't seeking to define what a standardised contract is, it remains unclear what the implications are for trades that can't be cleared through a CCP.

"The paper indicates that one consequence for trading non-standardised contracts or contracts that are standardised but can't be cleared could be less favourable regulatory capital treatment," Allee explains. "We need to see the details about how this would affect those that aren't subject to regulatory capital treatment."

EC internal market and services commissioner Charlie McCreevy comments: "Derivatives markets play an important role in the economy, but the crisis has shown that they may harm financial stability. As regards credit default swaps (CDS), industry has committed to clear CDS on European reference entities and indices on these entities through one or more European CCPs by 31July 2009. I expect industry to move clearing of CDS to any European CCP that has received regulatory approval for clearing indices and single names by that deadline." If the industry is unable to deliver on this commitment, the Commission says it will have to consider other ways to incentivise the use of CCP clearing.

In its proposal the EC says that standardisation could be achieved by encouraging broader take-up of standard contracts and electronic affirmation and confirmation services, central storage, automation of payments and collateral management processes. This requires investment and it may therefore be necessary to incentivise this investment, it notes.

It envisages that central data repositories will collect data on, for example, the number of transactions and size of outstanding positions in order to increase transparency and knowledge, as well as contributing to operational efficiency. CESR is undertaking a feasibility study for a data repository based in the EU.

Finally, for standardised derivatives that are cleared by a CCP, the EC questions whether the trading of these contracts should take place on an organised trading venue where prices and other trade-related information are publicly displayed. "This would improve price transparency and strengthen risk management," it notes. "However, it could come at a cost in terms of satisfying the wide diversity of trading and risk management needs."

The Commission says it will examine, taking into account the bespoke and flexible nature of OTC derivatives markets and the regime applicable to cash equities, how to arrive at a more transparent and efficient trading process for the instruments. Consequently, it will further assess: the channelling of further trade flow through transparent and efficient trading venues, as well as the appropriate level of transparency (price, transaction, position) for the variety of derivative markets trading venues.

ISDA says it strongly supports a number of the Commission's goals, including increased transparency, as well as the development of options for users of OTC derivatives to undertake their business in "the most prudent and efficient manner and to the highest standards of commercial conduct". The Association welcomes the development of clearing and settlement arrangements, which would provide the benefits of choice and flexibility to participants within the sound industry framework developed by ISDA over the past 25 years; a framework that benefits from the significant counterparty credit risk mitigants of legally enforceable netting and collateral arrangements.

"ISDA welcomes the Commission's Communication, as the Association has a strong interest in the central clearing of CDS as one part of a strong and healthy market. At the same time, ISDA values recognition by regulators of the continuing need for bilateral customised transactions, which by their nature are not suited for clearing," notes ISDA ceo Robert Pickel in a statement.

The Association believes that those exposed to credit risk should have the option to choose the type of transaction that best suit their business and risk management needs, as works so well for customers in the equity, interest rate, commodity and FX sectors. Removing that flexibility, such as by forcing bilateral participants to trade on an exchange or otherwise limiting the availability of customised risk management solutions, would be a step backwards, it concludes.

CS

CMBS

Portfolio sale could bring firsts for Euro CMBS

Max Property has reportedly bid to purchase the EPIC (Industrious) CMBS portfolio for around £250m-£270m, down 60% from the original £655m value at issuance in September 2006. The 130-building portfolio consists of secondary quality industrial and warehouse properties located around the UK.

Based on this possible purchase price and the current rents of around £38m, the initial yield would be approximately 15% compared to a 6% yield at issuance, according to CMBS analysts at Barclays Capital.

ABS analysts at SG believe that the dramatic fall in prices reflects the relatively poor quality of the properties backing the notes, as well as the size and timing of the portfolio liquidation. "Although we do not envisage a rapid recovery in this sector, we expect only a limited number of transactions to face a similar situation in coming months," they note. "The low 5% yields we saw in the bull market were unsustainable, but the very high yield of about 15% for this purchase is also not sustainable in the medium term, as it does not reflect average UK CMBS property prices, due to the inferior quality of the portfolio."

While a high level of uncertainty surrounding the pending sale remains, if it is successful the deal could bring a number of firsts to the European CMBS market. "With £300m outstanding on the Class A bonds, this would be the first time that a most senior class of bonds will suffer a loss," explain the BarCap analysts. "This loss to the Class A could be between 10% and 20% of principal. Also, another first could be that all junior classes (B through F) in a European CMBS deal could be expected to suffer a 100% loss."

CS

RMBS

Repo for Russian RMBS?

The first of what is expected to be a number of Russian RMBS hoping to take advantage of the Russian Central Bank repo facility (see SCI issue 132) has emerged. JSC VTB Bank's transaction, dubbed National Mortgage Agent VTB 001, comprises three classes of notes - two of which have been assigned ratings by Moody's.

These are the Rbs9.99bn A3 rated Class A notes and the Rbs2bn Ba1 Class Bs, both due in 2039. The proceeds of the issuance will be used to refinance the purchase of a portfolio of mortgage certificates (zakladnaya) with rights to receivables arising from Russian rouble-denominated mortgage loans originated by VTB in 62 regions of the Russian Federation. The portfolio will be serviced by VTB, with all transaction documents governed by Russian law.

According to Moody's, the underlying has favourable characteristics, such as a moderate weighted average LTV of 49.7% and low weighted average loan size. There is also credit enhancement provided by subordination, excess spread and non-amortising special, commingling and legal reserves.

The pool consists of fixed rate loans secured by mortgages on 11,575 residential properties. A significant share of the properties is originated in the following regions: Moscow and Moscow Region (accounting for 18.6% of the pool), St. Petersburg (6.3%), Kemerovo Region (5.8%), Tyumen Region (4.4%), Novosibirsk Region (4.3%), Sverdlovsk Region (4.0%), Republic of Altai (3. 6%) and Republic of Bashkortostan (3.5%).

The key parameters used by Moody's to calibrate the loss distribution curve for the deal are a Milan CE of 14.2% and an expected loss of 4%.

CS

SIVs

SIV asset disposals near completion

Fitch has calculated that the SIV market has disposed of approximately 95% of the US$400bn of assets under management held at the peak of the market in July 2007.

"Initially there were significant market concerns that the failure of the SIVs would result in a mass fire sale of assets," says Glenn Moore, director in Fitch's European structured credit team. "Although substantial, the asset disposals have been relatively orderly over the past two years. As the process comes to a close and the oversupply of assets from the SIV sector is removed, this is one less factor weighing on structured finance valuations."

The deleveraging of the SIV market has been substantial (SCI passim). It took the SIV sector 21 years to grow to US$400bn of assets under management and less than two years to dispose of the majority of them. This contraction came at a significant cost to SIV investors, according to Fitch.

Capital noteholders have generally suffered a 100% loss. In cases where the SIVs were unable to consolidate or restructure the senior note, investor losses averaged 50% - although there has been considerable variation, ranging from negligible losses to losses approaching 100%, the agency notes.

"Initially the SIVs disposed of assets through open market sales, exchanged assets for SIV notes with existing investors and entered repurchase agreements in an attempt to repay the senior investors as their notes fell due," says Moore. "However, the continued market value decline of the asset prices combined with the closure of the capital markets eventually signified the end of the SIV sector."

Of the 29 SIVs operating at the height of the market, five were restructured; seven defaulted on payments to their senior notes; 13 were supported by the sponsoring bank (a number of which have since delivered); and Fitch estimates that the remaining four SIVs have also delevered.

CS

Whole business securitisations

Utilities roll out WBS deals

Two UK utility companies - Wales & West Utilities (WWU) and Yorkshire Water - have tapped the securitisation market within a month of each other. The move could signal a new whole business issuance trend after a two-year hiatus for the sector.

WWU's £250m transaction - dubbed Wales & West Utilities Finance (WWUF) - priced at 6.25% at the end of June, while Yorkshire Water's Yorkshire Water Services Bradford Finance (YWSBF) deal is expected to price next week.

Moody's assigned a Baa1 rating, with a stable outlook, to the 12.4-year single-tranche WWUF transaction. The agency says that the rating is aligned with the existing Baa1 rating on WWU's £1.1bn senior secured facilities, which primarily reflects the company's very low business risk profile as monopoly provider of gas distribution services in its licensed area.

"The utility's business is conducted within a regulatory framework that Moody's regards as well-established and generally transparent, thus providing a good degree of stability and predictability of cashflows," analysts at the agency explain. "At the same time, the rating is constrained by the company's moderate credit metrics stemming from the highly leveraged financial structure adopted in 2005, which resulted in a net debt to RAV ratio of 77% at 31 March 2009."

Issuance proceeds will be used to refinance a portion of the senior secured facilities, which were extended until 2015. Barclays Capital, Commerzbank, HSBC and RBS are arrangers on the deal.

Meanwhile, the size and structure of the YWSBF transaction have yet to be confirmed. All three agencies have assigned provisional single-A minus ratings to the Class A notes, but it remains unclear whether the deal will benefit from a junior Class B tranche. HSBC, RBS and Santander are arrangers, with closing anticipated by the end of the month.

Analysts at S&P suggest that the Class A debt to be issued under the securitisation could be RPI index-linked bonds. "These bonds are designed to pay a low coupon (based on a real interest rate), while the principal is indexed each year in line with inflation," they note. "Index-linked financing allows for lower debt servicing costs (and therefore higher debt capacity) for utilities like YWS, in return for an increase in refinancing risk. However, this increase is less pronounced for regulated water utilities that also have their RCV (regulated capital value) and their revenues linked to inflation in a context of expected stable regulation and increasing capital expenditures (and hence, RCV)."

The aim of the Yorkshire Water deal is believed to be to prevent special administration, as the company would then be run in the interests of creditors and customers, rather than just in the interests of creditors.

The S&P analysts point out that Yorkshire Water benefits from an established and supportive regulatory system. The five-year regulatory framework used by Ofwat aims to provide companies with transparent and predictable cashflows that are sufficient to finance their operations - provided that specified, pre-agreed operational and financial targets are met.

The regulatory process does present reset risk every five years, however. Consequently, Yorkshire Water's financial strength - and therefore credit quality - could be affected between one regulatory period and the next, although Ofwat has the duty to assure that companies can finance their regulatory operations.

CS & JA

ABS

Combined law firm to service securitisation market

Law firms Bingham McCutchen and McKee Nelson are set to combine by 1 August and will offer services relating to restructuring and insolvency, complex securities, structured finance and capital markets.

Bingham chairman Jay Zimmerman says: "This is the right combination at the right time. Legal and regulatory lines are being redrawn and are intersecting in ways they never have before. There is a need for a sophisticated integrated approach in helping financial services clients efficiently navigate this changing environment."

Co-ceo of McKee Nelson Reed Auerbach adds: "Bingham is undisputedly a leading provider of services to a broad range of financial services firms, including banks, private equity firms and insurance companies. As the needs of these clients have begun to increasingly overlap, putting our strengths together - and building upon them - makes great strategic sense for our clients and our firm."

William Nelson, co-founder and co-ceo of McKee Nelson, also notes: "As cooperation among the US, Europe and Asia on the legal, financial and regulatory fronts increases, Bingham's depth of knowledge and global reach will be critically important to our clients."

The combination will bring together Bingham's 1000 lawyers in 12 offices in the US, the UK and Asia with McKee Nelson's 120 lawyers, located in New York and Washington, D.C.

CDS

Nomura directors leave posts

Directors in CDS trading at Nomura in London - Gareth Hawes, Lee Richardson and Gareth John - are believed to have left the firm. A spokesperson for the bank declined to comment on their departure.

CDS

ICE Trust updates on Q2 performance

IntercontinentalExchange has released its June and Q209 futures volume and OTC commissions figures. Revenues from its OTC CDS execution, processing and clearing were US$44m during the second quarter of 2009, up by 16% over the first quarter of 2009. ICE Trust also reports that it has cleared US$1.3trn notional in CDS indexes since the clearing house launched in March 2009.

Emerging Markets

EM fund to capture new infrastructure opportunities

A new fund from PIMCO aimed at emerging markets is set to be managed by evp Brigitte Posch. The PIMCO Emerging Markets and Infrastructure Bond Fund seeks to capitalise on developing nations' expected sharp increase in spending on energy, transportation, water and waste treatment, telecommunications, public housing and development banks.

Posch explains: "Emerging markets are capturing a bigger slice of global growth, thanks to their ongoing economic development and improving creditworthiness, and we believe that national infrastructure is a strategically important area of opportunity in the sector. The Emerging Markets and Infrastructure Bond Fund is structured as a truly global offering designed to provide investors access to this sector as EM becomes an increasingly important part of their broader asset allocation strategy."

Posch joined PIMCO last September (see SCI issue 102) from Deutsche Bank in New York, where she was md and head of LatAm securitisation and trading.

Investors

Australian fund realigns investments

REST Superannuation has announced that during the June 2009 quarter it invested A$150m with Babson Capital Management and A$75m with The Putnam Advisory Company, while redeeming its investment of US$350m in the Mesirow Absolute Return Fund. The fund says that funding for the Babson and Putnam investments has come from its own cashflow.

Damian Hill, REST ceo, explains: "These investments continue our programme of targeting structured credit securities and present the prospect for attractive, equity-like returns for our members over a three- to five-year investment timeframe. Consistent with REST's investment philosophy, these investments are being undertaken as part of a diversified portfolio of exposures to the credit markets within the growth alternatives sector."

Approximately US$150m of the proceeds from Mesirow were reinvested with existing managers in the absolute return asset class with the remainder retained in cash.

Monolines

Assured completes FSA acquisition

Assured Guaranty has completed its acquisition of FSA Holdings from Dexia. Under the terms of the agreement, the purchase price paid by Assured was approximately US$546m in cash and approximately 22.3 million common shares of Assured. Dexia will own approximately 13.9% of Assured's issued common shares, as a result of this transaction.

Dominic Frederico, president and ceo of Assured, says: "With this highly accretive acquisition, we have created a compelling value proposition for our customers, shareholders and employees with significant opportunity for growth. Importantly, these are the two companies that have come through the financial crisis in strong capital positions due to their strict underwriting discipline. By continuing to operate them as two separate platforms, we can provide the financial strength, flexibility and product diversity that will help issuers achieve cost-efficient market access and provide investors with increased stability and liquidity."

Sean McCarthy has been named president and coo of Assured Guaranty US Holdings, the holding company for the monoline's direct business units, FSA and Assured Guaranty Corp.

The company's executive team also includes Michael Schozer, president of Assured Guaranty Corp; Robert Mills, cfo; James Michener, general counsel; and Robert Bailenson, chief accounting officer, who continue in their respective positions. In addition to its direct business headquarters in New York City, the combined companies will have offices in San Francisco, London, Sydney, Tokyo and Bermuda.

Robert Cochran, former chairman and ceo of FSA Holdings, states: "I believe that joining the human and financial resources of these two companies will create a strong leader in the bond insurance industry. Both companies have kept their promises to insured bondholders through this unprecedented financial turmoil. As the most highly rated non-governmental (and non-TARP-supported) financial institutions standing, they will play a much needed role in the capital markets."

Monolines

Syncora board members re-elected

Syncora Holdings has re-elected members of its board of directors to serve for a further three-year term. At the Annual General Meeting of its shareholders on 24 June, Michael Esposito, Robert White and Grant Gibbons were re-elected. Bruce Hannon did not seek re-election, according to the monoline.

Operations

Multifamily servicing platform expands

CWCapital will expand its national multifamily lending platform through the acquisition of Sierra Capital Partners.

Sierra Capital Partners was founded in 2003 by Trent Brooks and Bryan Frazier. Over the past 15 years, Brooks and Frazier have been directly involved in providing over US$12bn in multifamily financing, with a focus on conventional and tax-exempt debt financing, throughout California and the West Coast.

Michael Berman, president and ceo of CWCapital, says: "We considered many alternatives as to how to expand our platform on the West Coast. When we met with Bryan and Trent we knew their business philosophy and deep client relationships were a solid fit, making the decision to join our platforms an obvious one. ...we feel very confident that their relationships and reputation will be a tremendous asset as we further develop a leading full-service West Coast lending platform."

Brooks will now serve as md and a member of the CWCapital loan committee, and will work directly with president and the firm's ceo Michael Berman in shaping the strategic vision of the CW multifamily lending business. Brazier will serve as md, working with Donald King, national programme director, and is directly responsible for the growth and development of CW's west coast multifamily lending platform - securing a dominant market share in the western region of the US.

Brooks adds: "We are very aligned with CWCapital's commitment to customer service, dependability and adding value as a full service lender. We will continue to serve multifamily investors by combining our specialised expertise with a broader menu of financing solutions. The transaction comes at a great time for borrowers as we join the resources of CWCapital and Sierra Capital to create the premier multifamily lending platform in California and the Western Region."

With this acquisition, the CW agency lending platform employs 130 professionals in 10 locations across the US.

Operations

New DTCC hire to spur global reach

The DTCC has appointed a new md for the company and a new general manager of its Trade Information Warehouse. Stewart Macbeth will be joining the company at the DTCC's London office and will be responsible for all aspects of the day-to-day operations and development of Warehouse services globally. He reports to Peter Axilrod, md, DTCC business development and Deriv/SERV.

Macbeth has over 15 years of OTC derivatives industry experience, most recently as md, global head of operations risk and business architecture at UBS. The role included managing credit derivatives support activities, which encompassed designing and implementing settlement and confirmation applications.

Michael Bodson, executive md of business management and strategy at DTCC, says: "Having someone with Stewart's extraordinary experience and extensive knowledge of this complex market positions us well to expand the benefits of DTCC's central repository with services for CDS and to determine the extendibility of the Warehouse to other OTC derivative asset classes."

Ratings

CBO collateral manager replaced

S&P has issued a preliminary rating confirmation in connection with the substitution of LibertyView Capital Management as the replacement collateral manager for SKM-LibertyView CBO I. If the proposed change is finalised, LibertyView Capital Management will assume the collateral management responsibilities previously performed by Lehman Brothers Asset Management. A rating confirmation reflects the agency's opinion that the change in collateral manager will not, by itself, cause the current ratings on the transaction to be lowered or withdraw.

RMBS

Broker-dealer targets Asian RMBS

A new financial services subsidiary is set to launch in the Asian RMBS market. Amherst Holdings has established Amherst International Limited (AIL) in Hong Kong to facilitate business with institutional investors throughout Asia and to leverage Amherst's knowledge of fixed income securities, particularly in RMBS.

This is Amherst's first international venture and will be lead by veteran banker Paul Kan, who will serve as md. Kan joined Amherst from Lehman Brothers' Hong Kong office, where he worked for several years as an svp and the senior trader of MBS and securitised products for Asia.

Sean Dobson, ceo of Amherst Holdings, says: "We see a tremendous potential to grow our business in Asia and establishing a presence in Hong Kong gives us an important inroad into that market. Paul brings impressive fixed income experience and an incredible knowledge of the investor landscape in Asia."

AIL's initial focus will be facilitating securities transactions in the US between Asian accounts and Amherst's broker-dealer affiliate, Amherst Securities Group. The firm plans to hire additional sales people to serve customers throughout Asia, with a focus on China, Taiwan and Japan.

Technology

Analytics providers join forces on loan-level data

ABS/MBS analytics provider 1010data is to offer Lewtan Technologies' ABSNet Loan data to its customers.

"Our decision to provide investors and other securitisation market professionals access to ABSNet Loan data through the hosted 1010data offering was an easy one. The flexibility and data processing power that 1010data provides allows us to reach the most sophisticated analysts," comments Ned Myers, chief marketing officer of Lewtan.

He adds: "With the continued instability of both the housing and securitisation markets, making loan-level data available through as many avenues as possible was very important to us. 1010data brings a wealth of technology and mortgage experience."

Trading

Electronic platform expands into ABS/CMBS

Beacon Capital Markets is set to add trading in non-agency MBS, ABS and CMBS to its electronic marketplace from 10 July. The move marks a significant expansion of the firm's Trade Discovery Platform, it says, which has been trading agency MBS since launch in April 2008.

"The addition of non-agency MBS, ABS and CMBS trading is a natural step in the growth and development of our platform," says Rob Barsky, coo and co-founder of Beacon Capital Markets. "Market participants have urged us to add these less liquid securities to the platform and, given the challenges in the current market, we believe the timing is right to offer this expanded line up."

Trade Discovery is exclusively dedicated to trading the full range of MBS and ABS for both the buy- and sell-side. "Our customers are receptive to our trading model and, in this environment, have found it an excellent way to conduct price discovery," adds Barsky. "We think this is an important time to release trading in these securities as the Administration advances its PPIP programme using a funding mechanism like the successful TALF programme. Holders of so-called legacy bonds will want to make those available to the new sources of investment coming to market, explicitly to own those bonds."

The platform entails Beacon acting as executing broker for all non-agency MBS, ABS and CMBS trades, while Broadcort - a provider of clearing and settlement services and a division of Merrill Lynch - will clear and settle the trades. Market participants can locate and trade non-agency MBS and ABS using search methods specifically fine-tuned for these securities. Trades are negotiated anonymously and automatically captured, creating an electronic audit trail.

"Our platform is focused on providing price discovery and efficient executions," continues Barsky. "Particularly at a time when market participants face challenges trading in these markets, our platform represents a tool providing more efficient access to pools of liquidity."

Trading

Manager names syndicate head for sales unit

Aladdin Capital has appointed Carlyle Peake as coo and global head of syndicate for the firm. He joins from Merrill Lynch, where he was md and head of emerging markets syndicate. Peake will be based in Aladdin's Stamford, Connecticut offices and report directly to Neal Neilinger, vice-chairman and chief investment officer of Aladdin, and Steve Mandella, cfo and coo of Aladdin Capital Holdings.

Neilinger says that Peake's depth of experience will be an invaluable asset to Aladdin as it builds out the sales and trading division of the business and help position the firm for sustained and scalable growth.

Peake was at Dresdner Kleinwort from 2004-2007 as md and global head of syndicate, where he was responsible for the origination, structuring, marketing, pricing and execution of all investment grade, corporate, financial, high yield and emerging market issuance.

Trading

New md at DBS

DBS has hired a new md to focus on the Asian market. Kenny Chong will join the bank as md and head of Asian high yield and Asian corporate flow trading.

In a statement DBS says: "He will help us in expanding the Asian fixed income business and facilitate client flow business."

Chong was previously md at Credit Suisse and head of a team that traded in high yield bonds and credit derivatives in Asia ex-Japan. He left Credit Suisse in December.

Trading

Broker looks to South America for growth

Mark Webster, formerly executive md and general manager for Asia at BGC Partners, is moving to New York in the newly created role of executive md and general manager for the Americas. He will be responsible for building the broker's business across the region and expansion into new product areas, both organically and through acquisition.

Webster comments: "Our acquisition of leading Brazilian broker Liquidez closed last month and we are very excited about the opportunities that this offers for further expansion into South America, both to offer our existing products to customers in the region and to give our global customers access to products from Brazil and other regional markets. There is also significant scope for growth in North America and I look forward to building the team here as we look at new areas including equity derivatives, energy and listed products, as well as continued expansion in our core areas of rates, credit and foreign exchange."

Leonard Harvey, who joined BGC from Tullett Prebon, has assumed the position of md and general manager for Asia. At Tullett, Harvey was ceo, Asia-Pacific.

ABCP

Renewed MMF interest in ABCP

Money market fund (MMF) managers are showing an increased interest in ABCP since the significant reduction in their exposure in mid-2007. According to Fitch, this is in light of improvements to direct and indirect counterparty diversification and secondary market liquidity. Although no material reallocation has yet taken place, the agency believes that these key considerations are being taken into account by European MMFs.

Senior director in Fitch's fund and asset management rating group Aymeric Poizot says: "ABCP remains an eligible asset class for MMFs, given its creditworthiness; nevertheless, it may expose MMFs to counterparty concentration and, in the absence of material State support schemes in Europe, liquidity risks."

Fitch's report highlights that consideration should be given to the different types of ABCP, the sponsors, liquidity providers, the features of the liquidity support, the dealers and transparency with respect to collateral. In the agency's view, the nature of the liquidity provision, whether full or partial, is an essential consideration as it directly influences exposure to the credit risks of the collateral.

In the absence of a material State liquidity support scheme in Europe, investors in European ABCP do not have the same level of liquidity support as US investors. In that context, investors will seek a balance between investments in European ABCP programmes and the liquidity profile and redemption risks of their funds.

ABS

Capital One forgoes credit enhancement

Moody's has downgraded the Class C and D notes from Capital One Multi-asset Execution Trust (COMET) to Ba1 from Baa2 and to B1 from Ba2 respectively. The agency cited an increase in the trust charge-off rate and a decrease in the principal payment rate over the past year.

Unlike other credit card issuers (SCI passim), Capital One chose not to add extra credit enhancement to the trust to avoid possible rating downgrades. The company reportedly believes that existing credit enhancement is in line with other card issuers and that collateral performance is stabilising. However, the free option to support the trust at a later date remains in place.

ABS analysts at Barclays Capital note that spreads on COMET bonds have initially held stable as the market digests the rating actions. "While adding credit enhancement enables a trust to withstand a higher level of charge-offs, the extra enhancement truly adds value only in an early amortisation scenario," they comment. "Thus, we believe that issuer support of credit card trusts is more important when related to bolstering yield to avoid early amortisation - an intervention that we expect Capital One would undertake, should the need arise."

ABS

European auto ABS delinquency on the rise

Delinquency rates in European auto ABS indices have increased by 58bp during Q109, compared with their levels at the end of Q4, according to S&P. Loans more than 90 days in arrears increased by 19bp to 1.44% in March 2009, from 1.24% at the end of Q4. The increase is mainly driven by the Spanish auto ABS sector, where loans more than 90 days in arrears increased to 3.29% at the end of Q1 from 2.67% at the end of Q4.

The monthly loss rate averaged 0.14% in Q1, up from 0.10% for Q4. The annualised monthly prepayment rate continued to decrease, averaging 9.20% in Q1, down from 9.81% recorded in Q408. The effective monthly yield averaged 9.10% in Q1, down from 9.32% in Q4.

Since S&P's last European auto ABS index report, ratings in one Portuguese and in one German deal were raised due to good performance, and the ratings in a Russian deal were lowered due to a review prompted by the downgrade of the Russian Federation.

Cars Alliance Funding, a European dealer-floorplan deal originated by RCI Banque, was placed on watch negative. This came in light of a review of the application of dealer-floorplan ABS assumptions to European jurisdictions and markets.

In June the Class A notes issued by Globaldrive Series F were also placed on watch negative due to counterparty-related risk. Finally, junior tranches in two Spanish auto ABS transactions were placed on watch negative due to deterioration in performance.

Meanwhile, four new transactions were rated during Q1, with a total issued amount of €1.55bn. Two of these transactions were originated in Germany: Private VCL 2009-1 and Globaldrive German Lease 2009-A B.V. The third transaction, MANTAB Funding, was originated in the UK. The fourth transaction, LTR Finance No. 7, was backed by auto loans from both Spain and Portugal.

CDO

Capmark tweaks CDO documentation

Capmark, the collateral administrator for a number of CDOs, is intending to amend transaction documents of 11 CDOs. The proposed amendment removes the requirement that Fitch provides a rating agency confirmation with respect to any proposed action or matter.

Fitch says that this move would not adversely impact its ratings of the CDO liabilities. The agency adds that the proposed amendment is entirely consistent with Fitch's view that it remains the exclusive responsibility of the noteholders to perform their own risk analysis of any proposed action or matter with respect to the CDOs. It expects to be notified by the trustee when or if the amendment is executed.

The affected CDOs include: Blue Bell Funding; Crest G-Star 2001-1; Crest G-Star 2001-2; G-Star 2002-1; G-Star 2002-2; G-Star 2003-3; G-Star 2004-4; G-Star 2005-5; G-Force 2005-RR; G-Force 2005-RR²; and G-Force 2006-1.

CDS

One credit event determined, another dismissed

ISDA's Americas Credit Derivatives Determinations Committee has resolved that a failure to pay credit event has occurred in respect of Lear Corporation, after the company announced that it expects to default on US$38m of interest payments on its 8.5% and 8.75% notes. The Committee has also voted to hold an auction for Lear Corporation.

It has, however, dismissed LBBW's request regarding a Union Fenosa succession event in connection with its merger with Gas Natural.

Separately, Morgan Stanley has asked ISDA to confirm whether a failure to pay credit event has occurred in respect of Bradford & Bingley's LT2 6.625% bonds, which were due a coupon on 16 June. This follows L&G's request for clarification on 22 June as to whether a bankruptcy credit event had occurred (SCI passim). ISDA's response to L&G's request has been postponed to July, so a response to both requests could be provided.

CDS

CDS compressions continue

CDS dealers have terminated credit default swaps with a notional principal value of US$9trn in the first half of 2009. TriOptima offered 30 triReduce CDS compression cycles over the period.

Dealers have been making continued efforts to meet their commitments to international regulators in terms of reducing risk and managing their counterparty risk positions, the firm notes. In 2008 those efforts resulted in the termination of US$30.2trn of CDS notional outstandings through TriOptima.

Ulf Andersson, business manager for triReduce, says: "We are working with the dealer community to ensure that they achieve the goals that they have set for themselves in risk management."

He continues: "First-half 2009 results underscore the significant reductions that have also been reflected in declining outstandings reported by the BIS and the DTCC Trade Information Warehouse. While we will continue to offer CDS compression cycles, notionals terminated may slow down due to the overall reduction in outstandings achieved through triReduce last year and this year."

CLOs

European CLOs stress tested

Fitch says that investment grade European CLO tranches will not suffer losses if the agency's average default and base-case recovery assumptions occur. The agency notes, however, that CLOs are highly sensitive to recovery rate assumptions. In recent months Fitch has observed that defaults and exposure to triple-C and below rated assets have increased and recoveries are under pressure.

In a new study the agency stress tests a sample of its European CLO portfolio, applying five default stress scenarios to the deals. Under Fitch's base-case recovery assumptions, all rated tranches can withstand the default of the average CLO exposure to assets rated triple-C and below, including assets rated single-B minus on negative outlook or rating watch negative.

The five scenarios saw cumulative defaults of 9.1%, 18.2%, 25%, 50% and 65% (the first three over two years, the latter two over five years) set against three recovery scenarios:

• base case scenario - the current weighted average recovery rate (WARR)
• medium recovery rate scenario - 30% relative haircut to the WARR
• severe recovery rate scenario - 50% relative haircut to the WARR.

Fitch's average default expectations fall between scenarios two (18.2%) and three (25%). Scenario three sees no losses at CLO tranches rated triple-B or higher.

However, if the medium recovery scenario is applied to scenario three, two-thirds of triple-B rated tranches would experience losses. No losses would be evident in higher rating categories.

"Double-A and above rated tranches start to exhibit losses under scenarios where defaults are assumed to exceed cumulative historical 10-year default peaks combined with medium or severe recovery rate stresses," says Jan Bockelmann, associate director in Fitch's structured credit team. "This analysis highlights that CLOs are highly sensitive to recovery rate assumptions. However, there is no reason why individual transactions should not outperform the market or suffer less defaults than their peers."

CLOs

Sharp drop for recovery rates

Recovery rates on defaulted US bonds and loans have dropped sharply in 2009, averaging just 21.8% and 57.5% respectively, according to a new Fitch study. This occurred as the US high yield default rate - which a year ago stood at just 2.4% on an annual basis - soared to 9.5% in the first six months of 2009.

"The weak economy and still difficult funding conditions are having an unwelcome dual negative effect on credit losses - driving up corporate defaults and simultaneously depressing recovery rates," explains Mariarosa Verde, md and head of Fitch credit market research.

Companies in Fitch's study that defaulted and filed for bankruptcy from 2000-2006 on average emerged from bankruptcy with just 35% of their pre-bankruptcy debt and 53% of their pre-bankruptcy asset value. "Defaults occurring in this downturn will very likely experience worse results, with deeper debt and asset value discounts," adds Verde.

Similar to the last downturn, recovery rates are being affected by cyclicality and industry-specific challenges. But there are also new stresses related to the nature and severity of the current downturn and market developments leading up to this recession.

Aggressive underwriting in the leveraged finance market from 2005-2007, for example, is playing a role in current recovery trends, especially with respect to loans. Loan recovery rates in 2009 are running well below historical levels, even lower than those associated with the 2001-2002 period.

"The average 30-day price of defaulted bonds and loans from 2000-2006 was 31% and 72% of par respectively for companies in Fitch's study," says Eric Rosenthal, senior director of Fitch credit market research. "At emergence, the same bonds and loans traded at 41% and 81% of par respectively."

Market prices fell so precipitously in the last turbulent quarter of 2008 that on a mark-to-market basis defaults in the first part of 2009 have resulted in limited incremental losses. Fitch finds that while the average bond recovery rate through May was just 21.8% of par, at the beginning of the year the same bonds were already trading at a very low 25% of par.

Fitch believes that defaults and grim recovery rates will not ease in 2009. The US high yield default rate is expected to end the year in a range of 15% to 18%.

CLOs

Supplemental risk measures for CLO/CDPC sectors

Moody's has published two reports showing how its supplemental risk measures for structured finance transactions - V scores and parameter sensitivities - will work in practice within the global cashflow CLO and corporate super-senior CDPC sectors.

The agency expects V scores for typical transactions in these two sectors to reflect medium/high assumption variability. Moody's also provides an example of how parameter sensitivities would affect a CLO: if an average default probability of 25% and recovery rate of 45% were used in determining the initial rating of a sample cashflow deal and these were then changed to 33% and 40% respectively, the initial model-indicated rating for the senior certificates might change from Aaa to Aa3.

CLOs

Deterioration moderates for Euro CLOs

The performance of European CLO transactions is still deteriorating, but the level of deterioration in some metrics - such as the level of defaulted assets - appears to have moderated, according to S&P's May 2009 European CLO Performance Index Report. The index provides aggregate performance statistics across the European cashflow CLO transactions that it rates.

The report divides the CLOs' performance information into four cohorts issued in a specific vintage year from 2004 through to 2007. In May, all four cohorts saw an increase in the percentage of assets rated in the triple-C category.

All four cohorts also experienced significant increases in the percentage of defaulted assets held in their collateral portfolios from the end of 2008 to the end of March 2009. However, the situation appears to have stabilised over the past couple of months, the agency notes.

All of the cohorts have experienced deterioration in their overcollateralisation test results over the past several months due, in S&P's view, to the deteriorating credit quality of the assets in the collateral portfolios. In the agency's opinion, this has resulted in the downward rating migration of those assets and defaults of corporate loan issuers in CLO portfolios.

CMBS

CMBX remits skewed by GGP bankruptcy

CMBX credit performance in June deteriorated alarmingly at first glance, according to CMBS analysts at Barclays Capital. The average 30+ day delinquency rate jumped by 121bp, to slightly over 4% for the month. However, the majority of loans that were newly delinquent are GGP bankruptcy-related loans.

Stripping those loans out, the overall delinquency rose by only 26bp, to 3.07% - slightly slower in pace than the past few months. "The reason for stripping out the GGP bankruptcy loans is that most of these loans were delinquent as a result of bankruptcy filing and not underlying credit performance issues," the analysts note.

Most of the GGP properties are actually covering debt service, but the bankruptcy court ordered on 14 May that each secured lender would be entitled to "interest, but not any amortisation, at the pre-petition non-default rate" (SCI passim), thereby causing all amortising loans to be delinquent. The difference is especially apparent for CMBX.1, as the ex-GGP delinquency rate is less than half that when GGP loans are included, the BarCap analysts note.

Delinquencies continue to be led by the hotel sector. Unlike in May, hotel delinquency in June was led by the mid-service sub-sector, followed by the limited and full-service sub-sectors.

CMBS

Uncertainty around CMBS servicer actions in default

Fitch says in a new report that uncertainty remains regarding the course of action UK CMBS servicers will follow when borrowers fail to repay commercial property loans.

"By design, governing documents leave discretion in the hands of servicers to act as they deem appropriate to maximise recoveries," says Euan Gatfield, senior director in the European CMBS group at Fitch. "However, the interests of senior noteholders, who would typically prefer to see swift action confining losses to classes subordinate to them, may run against the preferences of investors in the junior classes, including the 'controlling class' with supposed 'next-loss' exposure. Although the servicer can stand back from such conflict, it may prefer to defer enforcement where possible in the hope that property values recover."

Legal bond maturity represents a final deadline for recovery. Fitch expects that every effort will be made by servicers to complete resolution by legal bond maturity and rates for repayment by this date. Any attempt to extend this date would be considered a coercive debt exchange corresponding to a bond default, the agency notes.

"Servicers will need to sell property sooner or later and, although delaying the inevitable holds out hope for a recovery in values, it risks issuers being held to ransom by buyers and treated as forced sellers," Gatfield explains.

Hatfield Philips International (HPI) is the latest CMBS servicer to be impacted by the downturn. Fitch downgraded its UK primary and special servicer ratings to CPS2-/CSS2-, due to what the agency says is "persistently high staff turnover" - noticeably higher than its European peers - and the recent downgrade of US parent company LNR Property Corporation.

ABS analysts at SG note that the role of CMBS servicers in Europe remains untested so far, but the biggest impact of such a downgrade would most likely be on the creditworthiness of advances potentially made by the servicer on interest and principal payments. "However, European CMBS include a liquidity facility, which is generally large enough to offset potential shortfalls during an enforcement period, as we think is the case at present," they add. "We therefore consider that such a downgrade will have a very limited impact on CMBS ratings where HPI is acting as a servicer."

CMBS

Small business deals on review

S&P's planned revisions to its CMBS rating methodology have also impacted the small business securitisation sector. 114 classes from 33 transactions have been placed on credit watch with negative implications by the agency. In addition, 58 classes will remain on watch negative due to performance reasons.

The classes that are not affected by the revised CMBS criteria are interest-only classes or small business loans that have no significant real estate acting as collateral, such as securitisations of loans used for medical equipment or practice acquisition.

Distressed assets

Scaled-down PPIP launch imminent

The US administration is imminently expected to reveal further details about its Public-Private Investment Program (PPIP), which was announced in March (SCI passim). The scheme was originally anticipated to have two separate sub-programmes: one for legacy loans and one for legacy securities. But the legacy loans part of the PPIP has been postponed indefinitely, with a significantly scaled-down version of the legacy securities plan now expected to be revealed.

The US Treasury will likely invest only about US$10bn of the US$50bn it said it would make available in March. Private investors will put in as much capital and, with a maximum leverage of 2-to-1 allowed under the securities plan, the purchasing power will initially not exceed US$40bn.

Credit strategists at BNP Paribas suggest that the limited amount of leverage allowed by the plan means that the value of the FDIC guarantees will be low. "With a much smaller subsidy compared to the legacy loans programme, private investors will not be able to pay much more than fair value for the securities they intend to purchase, providing little incentive for the banks holding them to sell," they note.

Distressed assets

German 'bad bank' created

The German parliament has passed the country's proposed 'bad bank' legislation (SCI passim). Contrary to speculation, the law won't allow significant write-backs by back-dating the to-be-transferred problem assets to the bad bank, according to credit strategists at BNP Paribas.

Under the ruling, the asset transfer value has been set at the highest of: 90% of the book value of the asset at end June 2008, 90% of the book value of the asset at end March 2009 and the actual economic value of the asset at the date of transfer. Three bad bank models are envisaged: one intended for banks, one intended for landesbanks and one to be set up by regional governments if they wish.

"The differences between these are that the model for banks will only accept structured credit products, whereas the two other models will also accept more traditional loans. An additional difference is which authorities will bear the losses and how the participating institutions will pay for the aid provided," the strategists explain.

Emerging Markets

Emerging markets limited by legal frameworks

Structured finance ratings in emerging markets remain constrained by the lack of legal frameworks covering securitisation in these markets, according to Fitch. The agency has published a criteria report that includes a list of country 'challenge factors' (CF) used to determine the likelihood that securitisation transactions may be challenged in the local courts of an emerging market jurisdiction.

CFs are indicators of the relative strength of a country's overall legal framework for securitisation and, in combination with Fitch's country ceilings (CC), provide limits to emerging market structured finance ratings on a country-by-country basis.

Jaime Sanz, senior director, Fitch's European structured finance group, explains: "Fitch uses its CF and CC caps to ensure that transactions from jurisdictions and originators which are inherently volatile and subject to strong event risk will not reach rating levels, which should be reserved for stable and resilient transactions."

He adds: "The emerging market universe encompasses a wide variety of countries, some with relatively developed markets and institutions and some where the structural weaknesses are by definition incompatible with high rating levels."

Indices

All-time high for loan index default rate

The default rate of the S&P/LSTA Leveraged Loan Index has increased to 9.18% by principal amount, following missed coupon payments by Express Energy and Panolam. The rate reaches an all-time high with the two defaults, from 9.15% at month-end. However, the default rate by number of loans fell to 6.12% from 6.21% at the end of June.

Express Energy's five-year credit facility was originally US$325m, while Panolam's was less than US$200m.

The two issuers are the first defaults of the month and of the third quarter. There have been 36 index defaults in the year to date.

The shadow default rate is 10.57% by amount outstanding, according to LCD. The volume of credits on the shadow default list now stands at US$8bn.

Indices

Troubled company index improves

The Kamakura global index of troubled companies decreased by 2.4 percentage points to 16.4% for the month of June. This is the third consecutive dramatic improvement in the index after reaching its worst point of 24.3% in March of this year.

Credit conditions are now better than credit conditions in 30.4% of the months since the index's initiation in January 1990. In March, by contrast, credit conditions were better than only 3.6% of the monthly periods since 1990. The absolute number of firms in the 'over 20%' default probability category declined by 98 firms to 380.

Kamakura's president Warren Sherman says: "In recent press releases, Kamakura identified Eddie Bauer Holdings and Barzel Industries as showing very high increases in default risk. Both firms defaulted in June. During the month of June, the rated public companies showing the sharpest rise in short-term default risk were Sistema JSFC, Radio One, McClatchy and Entravision Communications."

In June, the percentage of the global corporate universe with default probabilities between 1% and 5% decreased by 1.3 percentage points to 10.7%. The percentage of companies with default probabilities between 5% and 10% was down 0.3 percentage points to 2.7%, while the percentage of the universe with default probabilities between 10% and 20% was down 0.4 percentage points to 1.6% of the universe. The percentage of companies with default probabilities over 20% was down sharply by 0.4 percentage points to 1.4% of the total universe.

Indices

US ...

The latest credit card indexes from Fitch reveal that US consumers continue to fall behind and default on their credit cards at record rates, with excess spread contracting to levels not seen in more than 10 years. The results show Fitch's three-month excess spread index falling below the 5% threshold for the first time since November 1998.

Michael Dean, md at Fitch, says: "Excess spread remains a key measure of credit card ABS performance as it protects credit card ABS investors against early amortisation and potential losses. The declines we have seen recently have been muted somewhat by issuers' actions to offset the rapidly rising charge-off environment and current levels, while low by historical measures still provide a healthy cushion against higher charge-offs going forward."

Despite the latest index results, Fitch continues to expect current ratings of senior tranches to remain stable, given available credit enhancement and structural protections afforded investors. The outlook for subordinate tranches, however, has become increasingly negative, particularly given recent delinquency and personal bankruptcy filing trends.

At 10.44%, June's charge-offs are 62% higher on a year-over-year basis. Meanwhile, 60+ day delinquencies reversed course to set yet another record high at 4.45% this month after dropping 7bp in May - the first improvement seen in five months. Given delinquency and bankruptcy trends, Fitch expects charge-off increases to decelerate in the coming quarter, although actual improvements are not foreseen at this time.

"Issuers have successfully implemented pricing initiatives over the past three quarters," says Cynthia Ullrich, senior director at Fitch. Also, the low interest rate environment benefits excess spread, as low one-month Libor rates are holding down the cost of funds.

During this month, six trusts are trapping excess spread: BA Master Credit Card Trust II Series 1999-J, 2000-E and 2001-C; Capital One Multi-asset Execution Trust Series Class D; Chase Issuance Trust Class C; First National Master Note Trust Series 2008-3; National City Master Note Trust 2008-1, 2008-2 and 2008-3; and Washington Mutual Master Note Trust, WaMu Card Series.

Meanwhile, losses among the bankcard trusts in S&P's US Credit Card Quality Index (CCQI) also reached a record-high 10% in May 2009, as unemployment continued to rise. Although the 70.9% year-over-year increase in unemployment - which hit 9.4% in May - was slightly higher than the increase in US CCQI losses (at 66.8%), the rise in losses over the past six months exceeded the increase in unemployment by 11.1 percentage points (49.3% versus 38.2%).

Losses for US retail cards and for the trusts in S&P's Canada CCQI also increased, advancing to 12.2% and 5.7% respectively - the highest levels seen since the agency started tracking these receivables in January 2000. Based on its chief economist's baseline and pessimistic unemployment forecasts of 10.6% and 12.7% over the next 12 to 18 months respectively, S&P assumes CCQI losses will likely average a range of 10.5%-12.5% this year and remain in this range for the next 12 to 18 months.

Investors

Euro ABS BWIC activity continues

BWIC activity in Europe has continued apace this week. Of particular note was a list of predominantly Italian consumer ABS notes of up to around €180m, a few smaller-sized mixed BWICs containing RMBS and ABS notes from various jurisdictions, and a single-tranche BWIC for the Deco 2005-E1 notes.

Activity in US dollar-denominated UK prime RMBS tranches has also increased as investors seek to take advantage of price concessions versus euro-denominated paper. According to the RBS ABS strategy team, spreads in UK prime names tightened by around 20bp over the last week and were seen at around 230bp/220bp for Arkle and 475bp/450bp for Permanent Master Issuer paper.

Operations

TALF ABS/CMBS July operation announced

The Federal Reserve Bank of New York has announced the 7 July non-mortgage-related ABS TALF operation and the 16 July TALF operation for newly-issued and legacy CMBS. Additionally, the Fed has released a TALF CMBS operation schedule for August and September, further details on legacy CMBS and net carry, revised administrative fees and other revised TALF-related materials detailing technical adjustments to the TALF programme.

The subscription date for CMBS is 16-24 July. Three- and five-year loans will be offered. The administrative fee is set at 20bp.

For newly issued CMBS with average lives beyond five years, collateral haircuts will increase by one percentage point for each additional year (or portion thereof) of average life beyond five years. For legacy CMBS with average lives beyond five years, base dollar haircuts will increase by one percentage point of par for each additional year (or portion thereof) of average life beyond five years. No CMBS may have an average life beyond ten years.

Meanwhile, the closing date for the non-mortgage-related ABS TALF operation has been set at 14 July. Rates are 1.7764, 2.3285 and 2.9345 for fixed rate loans with less than one-year WALs, one- to two-year WALs and two- to three-year WALs respectively. Floating rate loans are set at 1.30188.

US$5.4trn of loans were requested, with the mjority being in the auto loan, credit card and student loan sectors.

Ratings

Subprime/Alt-A projected loss assumptions refined

S&P says it is refining its methodology and assumptions for estimating projected losses for US RMBS transactions backed by subprime and Alt-A collateral issued in 2005, 2006 and 2007. Under the changes, the agency intends to apply transaction-specific loss severities when available. In the absence of these, it will apply certain other vintage- and product-specific loss severity assumptions.

In addition, S&P has raised its remaining 2005, 2006 and 2007 Alt-A and subprime loss severity assumptions to reflect additional market value declines and the increasing inventory of real estate-owned properties. When actual data are not available or are insufficient, it will use certain new loss severity assumptions.

To determine whether it needed to adjust its Alt-A default assumptions, S&P evaluated each individual structure by comparing the current foreclosure frequency projection against the current delinquency pipeline. For those transactions where the performance had deteriorated faster than the agency's original projections based on its default curves, S&P re-calculated its default estimates using the latest delinquency data.

The agency is updating all of its 2005, 2006 and 2007 deal-specific subprime default projections. In aggregate, its remaining default projections for these years, as a percentage of the original pool balances, are approximately 11%, 30% and 49% respectively.

As a result of the increased default and loss severity estimates, S&P has also raised its 2005, 2006 and 2007 vintage subprime and Alt-A lifetime loss projections. These changes affect the projected losses on the collateral securing outstanding subprime transactions as follows:

• 2005 vintage losses have increased to approximately 14% from approximately 10.50%;
• 2006 vintage losses have increased to approximately 32% from approximately 25%; and
• 2007 vintage losses have increased to approximately 40% from approximately 31%.

In terms of Alt-A transactions, these changes affect projected losses on the collateral securing outstanding deals as follows:

• 2005 vintage losses have increased to 10% from 7.75%;
• 2006 vintage losses have increased to roughly 22.50% from 17.30%; and
• 2007 vintage losses have increased to approximately 27% from 21%.

Ratings

... and UK card charge-offs continue at record rate

Fitch says that increases in delinquencies and charge-offs among UK credit card trusts resulted in the Fitch indices tracking these performance variables reaching new heights in May 2009. The deterioration reflects the continued tough economic environment in the UK and its impact on the ability of cardholders to make repayments on their credit card debts. The agency expects further performance deterioration through the remainder of 2009, as the economy is expected to remain challenging, which is likely to add further pressure on the ratings of UK credit card ABS transactions.

Fitch's 'Credit Card Movers & Shaker (UK) - May 2009' report shows how each of the UK credit card master trusts reported either stable or increasing 60-180 day delinquencies in May 2009, causing the Fitch Delinquency Index to record another increase to 5.5%, 10bp higher than its April reading. Recent increases in delinquencies are also beginning to be reflected in charge-offs. The Fitch Charge-off Index (Fitch CI) increased to 9.1% in May from 8.6% in April, marking another historical high for the index.

There was an improvement in the Fitch Yield Index (Fitch YI) to 20.0% in May from 19.4% in April, with the CARDS I and CARDS II trusts reporting notable increases in yield of 1.3% and1.4% respectively. However, the Fitch Monthly Payment Rate Index (Fitch MPRI) recorded a fall of 10bp to 15.4% in May.

The yield improvements were offset by the increase in charge-offs, however, resulting in the Fitch Excess Spread Index (Fitch ESI) falling again in May, down 20bp to 6.6%, from its April value. Of the trusts included in the Fitch ESI, each of the six series issued from the Sherwood trust reported three-month average excess spread values below its series' respective trapping triggers. The Pillar2004-1 series also reported excess spread below its trapping trigger; however, this series is now paid in full.

Ratings

SIV's ratings withdrawn

Following the distribution of the sale proceeds of Whistlejacket's portfolio, Moody's has withdrawn the ratings it assigned to the SIV's Euro and US MTN and CP programmes. Whistlejacket cannot issue further debt from its senior debt programmes.

Ratings

Japanese ABS underlyings deteriorate

S&P notes deteriorating trends in the performance of major types of underlying assets in Japanese ABS, most notably impacted by the slowing of the global economy since autumn 2008. Uncertainties remain over the performance of these assets in the coming year (Q209 to Q110) and the outlook is negative in tone, although this varies by asset type, the agency says.

As the business environment for cashing and consumer loan receivables remains stressed by high rates of claims for refunds of overcharged interest and the phased implementation of the revised Money Lending Business Law, S&P is of the view that the performance of this asset type may deteriorate. Auto loan receivables have shown relatively stable performance, but the agency envisages a slightly negative outlook in the coming year due to weakening consumer credit quality caused by the recession. Equally, the performance of shopping credit receivables may also weaken slightly due to deterioration in consumer credit quality, while the performance of equipment lease receivables may continue to deteriorate as the corporate business environment remains stressed by the recession.

The impact of the deteriorating performance of the underlying assets on the ratings on ABS transactions will vary depending on the issuance year and structural enhancement measures incorporated in transactions, S&P explains. Consequently, the agency focuses on the performance outlook of underlying assets and does not refer to the outlooks on the ratings.

RMBS

RMBS delinquency performance diverges

Analysis of the May reporting period suggests that delinquency performance is beginning to diverge between credit cohorts, according to ABS analysts at Wachovia Securities.

"The theme of the divergence appears to be first in/first out," they note. "Subprime transition rates appear to manifest delinquency burnout, while the Alt-A/B and prime credit cohorts exhibit higher transition rates to seriously delinquent and foreclosure and REO states."

Severity and cumulative loss statistics also illustrate the ongoing divergence between the prime, Alt-A/B and subprime credit cohorts. "Again, the Alt-A/B sector highlights the degree to which the Alt-B behaves like the subprime wolf in a sheep's clothing. Loss severity statistics, well north of 100% in the aggregate, in the Alt-A/B sector make the subprime experience look tolerable by comparison," the analysts add.

Cumulative loss statistics continue their ascent in the 2006 through to 2007 vintage cohorts, but appear to decline in the 2005 Alt-A/B and subprime credit cohorts. The analysts conclude that this is due to recoveries.

RMBS

Buyback for MoD, Britannia RMBS

Annington Finance No 4 is holding tender offers - due to expire on 8 July - for the Class A and B1 zero coupon notes and the Class B3 FRNs, with the buyback of the latter notes standard practice in periods when the FRNs are priced below par. £1.4m of cash is reportedly available to purchase the Class A notes, £942.6m for the Class B1 tranche and £15.5m for the Class B3 notes.

Britannia Building Society has launched a tender offer to buy back the Class A2 tranches of the Leek 17, 18 and 19 deals up to an amount of £100m. The prices for Leek 17 vary between 78.5% and 84.5%, for Leek 18 between 74.5% and 80.5%, and for Leek 19 between 71% and 77%. The offer will expire on 16 July.

Meanwhile, Rabobank's buyback of Storm RMBS notes saw €51.9m of Class A notes tendered for prices ranging between 97% and 89.5%, €7.5m of Class Bs at between 91% and 84.5%, €14.2m of Class Cs between 78% and 73.5%, €21.3m of Class Ds between 79% and 70%, and €291,600 of the subordinated Class Es from Series 2007-1 for 98.5%.

RMBS

NC RMBS losses not as severe as expected

The latest article in the Barclays European Stress Testing (BEST) series revisits the UK non-conforming sector.

"Investors continue to express concerns about possible US subprime contagion to UK non-conforming RMBS," ABS analysts at the firm note. "However, our stress testing results show that this sector should not suffer losses nearly as severe as investors fear."

Since Barclays Capital's previous stress test of this sector, the analysts have tripled the bond coverage to 323 tranches across 41 transactions, evolved their methodology, refined each of their four key assumptions and taken into account the most recent performance data. The results show that even in the analysts' severe stress scenario, a stress they perceive to be greater than a rating agency triple-A stress - in which GDP contracts for a further year, unemployment hits 14% and house prices fall a further 20% - almost 50% of triple-A rated bonds suffer no losses. Under their base stress, no AAA/AA/A bonds suffer any loss.

Following the results of the stress tests, the BarCap analysts have provided a list of bonds with their fundamental credit recommendations based on potential losses. "A bond that survives with no loss in our severe stress scenario is a positive fundamental recommendation and any bond that suffers a loss in our base stress is likewise a negative fundamental recommendation," they explain. "Unsurprisingly, the senior notes dominate our positive recommendations, and junior notes our negative recommendations."

RMBS

Improvement for Australian RMBS arrears

Arrears on residential mortgage loans underlying Australian prime RMBS were 4bp lower in April 2009, dropping to 1.62% from 1.66% in March 2009, according to S&P's Mortgage Performance Index (SPIN).

Subprime RMBS arrears dropped to 16.27% in April 2009, from 16.46% in March. Subprime loans in arrears greater than 90 days are still above 10%, reaching 10.02%, however.

Loans underlying the 2005 and 2006 RMBS vintages are the most affected, according to the agency, with greater-than-90 days' arrears at 11.91% and 10.96% respectively. In total, these two vintages constitute 55% of all loans underlying subprime RMBS in the country.

S&P credit analyst Vera Chaplin says: "From February to April 2009, the SPIN fell a total of 22bp from an all-time high of 1.84% in January 2009. We believe this could be due to the financial relief provided to borrowers from the government stimulus packages and easing of monetary policy. However, if the economy worsens, we consider that potentially rising unemployment levels could trigger a rise in arrears again."

She adds: "Arrears on lo-doc loans that underlie prime RMBS actually experienced a small rise in April. On the other hand, the percentage of lo-doc loans that are in arrears greater than 90 days were effectively flat during 2009, after climbing steeply during 2008. We believe any further contraction in economic activity could put greater stress on lo-doc borrowers."

While subprime arrears have fallen 82bp in the past four months, in real terms the figure is closer to a drop of A$100m, S&P notes. Arrears in real terms were virtually steady in the last four months of 2008.

RMBS

Downgrade/negative outlooks for South African RMBS

According to Fitch, the South African structured finance universe has experienced its first note downgrade in Q209. During the period, the agency formally reviewed the performance of nine structured finance transactions. As a result, it initiated one rating downgrade relating to an RMBS transaction and revised the rating outlooks from positive to negative on seven tranches of notes, with respect to three separate RMBS deals.

The rating downgrade affected one speculative-grade note of the Ikhaya 2 RMBS transaction. The note was downgraded because the three-month-plus arrears in the transaction are high and the trend appears to be increasing.

With respect to the outlook revisions, the agency's concern also surrounded the increasing trend in three-month-plus arrears in connection with these transactions. However, apart from the tranche that was downgraded, Fitch sees no immediate reason for further rating action at this time.

The effects of the global economic slowdown continued to be felt during Q209 in South Africa and further effects are expected to be felt in the coming months, which increase the likelihood of rating actions during 2009. South African ratings in respect of securitisation transactions, however, remain stable overall.

Technology

CDO software to comply with DTCC guidelines

An enhanced version of Deloitte's CDO Suite product has been released. The new offering supports the data format guidelines of the DTCC's loan commitment position reconciliation service.

The platform acts as an asset administration, compliance and reporting system, and is designed to support a number of portfolio structures, including hedge funds and CDOs. It helps clients to automate syndicated loan processing and allows users to generate the data files needed in order to post their loan positions to DTCC's reconcilement service, the firm says.

Hillel Caplan, a partner with Deloitte's securitisation services group in New York and the leader of its CDO Suite practice, says: "Improving operational efficiency and data accuracy in the syndicated loan market are key issues for market participants. We have therefore added support for DTCC's Loan/SERV data format guidelines to CDO Suite as a convenience for our clients and in response to client requests asking us to incorporate this feature into our product."

Trading

Trading ideas: turning the corner

Byron Douglass, senior research analyst at Credit Derivatives Research, looks at an outright long trade on Smithfield Foods Inc

Talk of green, brown and wilted shoots have elevated the financial press to speaking in terms of derivatives, which we certainly enjoy. When analysing companies for long/short trades, we do in fact look for inflection points or changes in momentum, as entering trades at these points can lead to substantial outperformance.

Smithfield Foods' fundamentals, though experiencing weak absolute levels, are on the mend. Signs from the equity market also share the sentiment and therefore we recommend selling credit protection on the company.

Smithfield Foods reported earnings earlier this month and a bottoming out looks evident. The company's debt load has been reduced from a high of US$4bn to its current level below US$3bn over the past year (see exhibit below) - which is impressive, given the surrounding economic uncertainty.

The company also placed US$625m of senior secured notes at the end of June to repay existing debt, while also in the process of arranging a new US$1bn asset-based credit facility. Even with revenues falling to recent lows, Smithfield's operating margins ticked upwards (see below exhibit).

We expect this to be the bottom of its margin fall. Our biggest concern with the company is its ability to improve profitability into the remainder of the year. The company's interest coverage levels and margins are extremely low; however, we believe they will turn up.

Smithfield's equity price and implied volatility exhibited strength in recent weeks, which will likely lead to credit outperformance. High yield debt is highly correlated to moves in a company's equity price as their positioning in the capital structure is similar.

Smithfield's stock now trades just below US$14/share, after hitting a low of US$5.40 back in November, giving the company a market cap of around US$2bn. Its three-month implied volatility trades at 60%, which is down substantially from the high of 200% set late last year (see exhibit below). We do not believe the improvement in equity signals is fully reflected in Smithfield's credit spread.

We see a 'fair spread' of 670bp for Smithfield Foods based upon our quantitative credit model, due to its equity-implied factors, change in leverage and accruals factors. Throughout 2008 and up until May, we expected Smithfield's CDS to trade wider; however, our view changed when the company's latest earnings led to a substantial improvement in Smithfield's equity valuation. We expect a rally in its credit spread of roughly 300bp.

Position
Sell US$10m notional Smithfield Foods Inc 5 Year CDS at 14.5% and 500bp running.

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).