Contents

Whole business securitisations

Both sides of the equation

Whole business securitisations attractive to both investors and originators

The placement of a new BAA whole business securitisation (WBS) last week (see separate News Round-up story) could signal the reopening of the asset class, in spite of recent poor performance across some existing deals in the sector. Certainly, WBS structures seem to meet requirements from both investors and originators in a post-crisis environment.

"As the securitisation market begins to open up, the first transactions will inevitably be simple, safe, low-levered and with assets/originators that are well-known. WBS fits all of these criteria," says Conor Downey, partner at Paul Hastings.

Furthermore, it will be a while - perhaps even two years - before bank-led, as opposed to originator-led, securitisations reappear, although there may be a handful of opportunistic issuances in between. "It is clear that there is less credit available for owners of assets; therefore, they will likely be compelled to be more innovative about how they fund themselves," Downey continues.

He adds: "WBS structures are one way of achieving this, especially given the cross-over with demand from pension funds and insurance companies looking for long-dated, fixed rate investments. The oversubscription by corporate credit investors of the Tesco and Land Securities deals earlier this year [SCI passim] is an indication of this potential demand."

Michael Cox, strategist at Chalkhill Partners, confirms that appetite remains for certain types of WBS deals - typically backed by assets such as utilities or funeral homes - because they are highly regulated and stable or perform well and offer diversification. He adds that taps of existing deals in these industries are a "definite possibility" in the future.

In contrast, all existing pub WBS issuers have suffered a fall in EBITDA and so don't necessarily have the capacity to issue new debt from the existing securitisations. In any case, the pubs' priority appears to be reducing or refinancing their bank debt.

"There will need to be a sustained improvement in performance, as well as spread tightening before new pub issues can be launched. By way of comparison, Enterprise Inns indicated that bank debt can currently be raised at 200bp upfront and 300bp-350bp over Libor for the term, which is more attractive than securitisation spreads (that are trading between 250bp to 800bp+ over gilts, depending on the issuer and where you are in the capital structure)," Cox explains.

The decline in pub performance began with the introduction of the smoking ban in 2007, but the slow-down in consumer spending has since led to a significant drop-off in drinking in pubs (see separate News Round-up story for more). However, certain pubs have nonetheless been able to differentiate themselves in this environment, according to Cox.

"Tenanted and wet-led pubs (for example, those in the Enterprise, Punch and Unique transactions), in particular, have suffered because they are tied to buy beer from the pub company at above open-market prices," he observes. "Managed pubs, on the other hand, typically have more flexibility in terms of pricing and introducing targeted offers to keep customers coming in - though their margins have also been under pressure due to high costs of energy and food. The Mitchells & Butlers deal has performed the best because of the higher quality pubs in the portfolio and the company's ability to compete effectively on price."

At the other end of the scale, the Globe WBS deal has underperformed dramatically, with EBITDA reportedly hitting £19m (as opposed to a target of £36m) before it was forced into default by supplier and asset manager Heineken. Although Cox suggests that most investors who bought into the transaction knew there were some existing issues with it, Globe has served to create negative sentiment for traditional WBS issuers more broadly.

But Downey indicates that investors should be able to look past the poor performance of some of the pub deals, as well as the troubled Welcome Break and THPA transactions. "There is an awareness that WBS transactions have exposure to certain industry-related and operating risks, so it is important to take this into account in terms of risk premia. Poor performance is a function of the underlying assets rather than the product."

New WBS issuance in industries away from pubs, funeral homes and the utilities could be limited by the difficulty in finding suitable underlying corporates, however. Typically, a business would need to demonstrate its stability and viability for the next 30 years.

"One potential type of deal we could see is for property assets to be refinanced via long-dated amortising deals, similar to the Meadowhall Finance transaction, which rely on cashflows rather than property values," notes Cox. "Alternatively, a company may need additional support to get the required ratings to tap the capital markets and so could offer a security package along with a bond. This isn't technically a WBS, but it is a good example of putting a structure around an asset to get investors comfortable with it."

But, he adds, the question is ultimately whether WBS will provide enough debt to refinance suitable candidates, given that they have probably raised higher leverage through other methods in recent years.

In terms of whether WBS can support the wave of refinancings due over the next several years, Downey notes that some structures allow bank loans and securitisation bonds to be ranked alongside each other. "It may be that arrangers of debt look for different pockets of demand across several markets and have a mix and match approach to placing it. Certainly, internal risk managers will no longer allow banks to be exclusively reliant on securitisation, so they will have to find multiple exits for their originations," he concludes.

CS

Emerging Markets

Wake-up call

CDS market wobbles on Dubai credit concerns

Sovereign default risk hit the headlines last week - but not in connection with Greece, as the market had anticipated (see last week's issue). The standstill on Nakheel debt repayments sparked concern about a potential Dubai sovereign credit event and the re-emergence of systemic risk, which appears to have now largely dissapated. However, the move is expected to have a broader knock-on impact on the commercial real estate sector (see separate News story).

With the US and the Middle East on holiday last week, credit strategists at BNP Paribas noted the difficulty at that stage to determine whether the sharp market reaction to the Dubai news was down to the lack of liquidity or rather the beginning of a larger correction. "The market has so far ignored the warning signals of rising debt levels and budget deficits at the sovereign level, but maybe all it needed was a wake-up call - and Dubai may have just been that call. The coming weeks will tell whether we go back to a liquidity-driven bull market for risky assets or risk aversion takes hold of the markets again," they added.

The Dubai government on 25 November surprised the market by asking Dubai World and Nakheel investors to extend the maturity on US$3.5bn of bonds due to mature in December until at least 30 May 2010. The emirate had been expected to use the proceeds of a US$5bn bond sale to Abu Dhabi banks for the redemption.

The emirate's CDS blew out by around 270bp to 580bp on the news, with the SovX index also widening on contagion fears related to Middle East exposure. Greece, in particular, gapped 20bp wider on Friday, pushing SovX intrinsics up to 70bp (and accounting for a full 20% of SovX risk, according to analysts at Credit Derivatives Research).

The UAE central bank on Sunday moved to prevent a potential liquidity crisis by announcing that it stands behind domestic and foreign banks operating in the region, by providing funds at 50bp above the local interbank rate. This, combined with Dubai World's announcement yesterday (1 December) that it will restructure US$26bn of its US$60bn debt, drove credit spreads tighter from their Friday wides - although they remain marginally wider than before 25 November.

No official decision has yet been made on the treatment of investors that insist on having their money repaid in December. The BNP Paribas strategists point out that if a voluntary restructuring is accepted by investors, CDS on Nakheel and Dubai World will not be triggered. If, on the other hand, a credit event occurs on Nakheel, it is unclear whether Dubai World's CDS would be affected - despite the existence of guarantees by Dubai World on the 2009 Nakheel bond.

However, these CDS rarely trade, with the market being more concerned about a possible credit event on the Dubai sovereign and the re-emergence of systemic risk. But the BNP Paribas strategists note that these concerns appear to be misplaced, as the Nakheel prospectus clearly states that "the Government of Dubai does not guarantee any indebtedness or any other liability of Dubai World". As such, a credit event on Nakheel or Dubai World should not automatically trigger Dubai's sovereign CDS.

RBC emerging markets research analysts observe that holdership of Nakheel debt is difficult to ascertain - although this is the factor that they believe will help determine whether there is any real lasting contagion to the rest of the global financial system. "Our best guess is that hedge funds and dedicated emerging markets investors were never heavily involved in investing in Dubai or related debt," they note. "Thus, it's likely banks and real money crossover investment grade investors are the primary holders of this debt. Given how far and wide these bonds were likely placed and the fact that the losses associated with a restructuring are likely only going to amount to a small portion of the face value, the losses for investors in aggregate look painful but certainly manageable."

Indeed, the events in Dubai do not represent significant systemic risk to emerging markets nor the broader global financial system, the RBC analysts suggest. "Our base-case view is that this will have a sharp though transient impact on markets, with the largest impact felt amongst Dubai and other Gulf markets, waning steadily as one geographically moves further out. The one exception to this is the widely noted case of the UK, where there may be some material concentrations of bank lending exposures."

The Dubai government has reportedly held the line that creditors were responsible for their lending decisions and should have better differentiated between the credit risk of the state and state ownership of companies. According to the BNP Paribas strategists, this questions the issue of 'implicit' versus 'explicit' support when evaluating sovereign risk, which should lead to greater dispersion of credit spreads in certain highly leveraged emerging markets and possibly some developed markets.

They conclude: "From our perspective, this distinction should be evaluated on a case-by-case basis because state ownership (and management) is not the same as an enforceable state guarantee. Absent a state guarantee, the next best option to consider is whether or not there is an explicit item in a sovereign budget that will recapitalise a sovereign entity in case of losses."

CS

CDS

Policymakers urged not to 'stifle' the CDS market

Streamlining trading and reducing complexity in the CDS market has made it easier to participate in and regulate, according to a new report - 'Counterparty Risk in Non-standardised Credit Default Swaps Market' - from Celent.

The report stresses that policymakers should refrain from introducing a penalty for using non-standardised CDS products because they are vital to the efficient functioning of the credit markets. Further, while it acknowledges that higher overall capital requirements can be useful to account for any residual counterparty risk, Celent says it is important that any mandatory requirements do not stifle the functioning of the CDS market.

With respect to regulatory authorities, Celent points out that in both the US and Europe there is no clear demarcation of power with regard to the CDS markets. This is also due to the highly complex and international nature of these products. It says there needs to be greater effort to ensure that there is no interference or friction due to overlap in regulatory powers of different financial regulators, both nationally and internationally.

Another key finding of the report is that circularity within the system increases counterparty risk. The leading banks/dealers in the OTC derivatives markets are the main buyers and sellers of CDS, so the chances of having them as a counterparty are quite high.

They are also among the main non-sovereign reference entities, while some of them have been bailed out by their governments, which are among the leading sovereign reference entities. Hence, there is a lot of interconnectedness in the CDS market that has to be considered when analysing counterparty risk.

Indeed, the interdealer market counts for around 84% of CDS volumes. This highlights the concentration of the market among a few players.

Meanwhile, single name CDS are shown to remain an important part of the market. While the volume of index CDS rose after the crisis, single name CDS count for 61% of the overall volume at the end of 2008. Hence, there is a need to address the counterparty risks involved in these non-standard CDS, according to Celent.

Consequently, a further key finding of the report is that collateral management needs to be enhanced. In a number of instances involving smaller banks and other players, the level of collateralisation has been found to be low.

Almost a third of credit derivatives transactions have employed no collateral. This situation has to be improved to ensure that there is an inherent check in the non-standardised CDS market. The frequency of mark-to-market on the collateral should also be increased as much as possible, Celent notes.

Furthermore, trade reporting is one way to monitor counterparty risk in the non-standardised CDS market. Daily reporting of individual transactions to the regulatory authorities and central data repositories and aggregate measure reporting to the public will help build an important check into the system.

Celent also suggests that measures such as total notional outstanding and gross market value are not relevant. Rather, they should be replaced with net notional value, which reflects the maximum outgoing in case of a default, and net market value - which is a measure of the counterparty risk any single market participant is exposed to. Reporting systems should be modified for the participants to provide these values instead, in the firm's opinion.

CS

CMBS

Dubai World's CMBS impact limited for now

The Dubai World debt crisis has had a limited impact on the global CMBS markets so far, although some industry observers note that it may have indirect consequences for the asset class. To date, rating actions have been taken on one CMBS and one ABS, as a result of the crisis.

Fitch has downgraded the Class A (from single-A plus to triple-B minus), B (from single-A to double-B) and C (from triple-B to single-B) notes of UAE CMBS Vehicle No. 1 and assigned negative outlooks to all three tranches. At the same time, the rating agency has downgraded Thor Asset Purchase's US$2bn floating-rate notes due 2036 to triple-B minus from single-A minus and placed them on rating watch negative. The rating actions reflect its view on Dubai's weaker credit fundamentals, particularly in light of the Nakheel restructuring (see also separate News Analysis).

According to Fitch, the proposed standstill on Dubai World and Nakheel obligations is a major negative shock to sentiment in Dubai, the UAE and the region more generally, where sovereign support has traditionally been strong. While the ratings of UAE CMBS Vehicle No. 1 are not linked to the sovereign, the rating action reflects the agency's expectation that the shock will further raise volatility in the commercial property sector, which has been under considerable stress throughout the global financial crisis.

Thor Asset Purchase is a cashflow securitisation of existing and future electricity and water receivables originated by Dubai Electricity and Water Authority (DEWA). The rating of the notes is closely linked to the government of Dubai and reflects the strong link between DEWA and the government of Dubai.

DEWA's rating was downgraded to triple-B minus from single-A minus on 26 November. The outlook for the firm is negative.

Moody's placed the four classes of CMBS notes issued by UAE CMBS Vehicle No. 1 on review for possible downgrade.

The Dubai debt crisis initially had an effect on secondary US CMBS prices, with spreads on 10-year super seniors from recent vintages moving out by 25bp on Friday 27 November. But those fears now appear to have been allayed.

"There was no pain and suffering in the CMBS market on Monday (30 November), as spreads finished the day flat or slightly tighter," note CMBS analysts at Trepp. "CMBS spreads widened considerably on Friday following the announcement of the Dubai debt restructuring, but volume was negligible and trading desks were sparsely populated. That led to some worry that the weakness in CMBS would spill over into Monday."

They continue: "Those fears proved unfounded as traders largely shrugged off the news and the market held steady. The benchmark GSMS 2007-GG10 A4 finished in the range of 635bp to 640bp over swaps."

However, European CMBS servicer Hatfield Philips has warned that Europe may suffer a 'double dip' in the commercial real estate market in 2010, with Dubai World's debt crisis a potential catalyst. Combined with the recent price rises in commercial property, the crisis could lead to a rush of property owners marketing their properties in the spring and summer of 2010 - leading to an oversupply and thus pushing prices lower than at the end of 2009.

Matthew Grefsheim, director, special servicing at Hatfield Philips, comments: "A double dip, while not guaranteed, is a real possibility and this has been heightened by the recent news regarding Dubai World. What we hope to see is a gradual return of liquidity and not a sudden surge, as this could depress prices across the board and could pose a threat to any loans and therefore properties that are already in default."

He notes that while the European CMBS market may see some indirect impact from the Dubai crisis, he is not aware of any direct impact. "Dubai World's problems may have little or no direct impact; however, the question is: how many more situations like this are waiting to happen?"

Grefsheim continues: "Over the last few months, there's been a certain amount of excitement on the European commercial property front due to lack of supply of prime properties. Those properties that are available have been competitively bid. However, Dubai's debt restructuring could mean that investors that have been bidding may decide to pull back on concerns over risks. Plus, banks and other holders of commercial real estate that have been waiting for prices to keep on rising may decide that prices are not going to go up any further and sell up."

From a servicing point of view, prime, tenanted properties with relatively stable lease profiles remain an attractive investment. However, properties that are not of such good quality - many of which are referenced in European CMBS - are more challenging, according to Grefsheim.

"Special servicers are coming under a lot of pressure to hold certain loans, but in some cases a sale may be the best option. How the market receives this inflow remains to be seen," he concludes.

AC & CS

CMBS

US CMBS delinquencies soar

Two new reports have been released, which highlight soaring US CMBS delinquencies.

According to the December Trepp Delinquency Report, CMBS spreads reversed course and widened during November, as delinquencies continued their steady climb - with the lodging sector leading the way, topping 14%. Multifamily CMBS delinquencies jumped over a full percentage point to 8.78% at the end of November, while retail, industrial and office CMBS delinquencies registered smaller increases, Trepp says. Overall, delinquencies are up over 550% from just a year ago.

Meanwhile, Realpoint data shows that in October 2009, the delinquent unpaid balance for CMBS increased slightly to US$32.55bn from US$31.73bn a month prior. This delinquent unpaid balance is up by 504% from one year ago, when only US$5.39bn of delinquent balance was reported for October 2008, and is now over 14 times the low point of US$2.21bn in March 2007.

An increase in four of five delinquent loan categories was noted in September, with a decline experienced in the 60-day bucket. Despite such decline, the distressed 90+ day, foreclosure and REO categories grew in aggregate for the 23rd straight month - up by US$2.36bn (12%) from the previous month and over US$18.77bn (572%) in the past year (up from only US$3.283bn in October 2008).

The total unpaid balance for CMBS pools reviewed by Realpoint for the October 2009 remittance was US$810.9bn, up from US$805.34bn in September, which was affected by some servicer and trustee reporting delays.

The resultant delinquency ratio for October 2009 of 4.01% (up from the 3.94% reported one month prior) is over six times the 0.54% reported one-year prior in October 2008 and almost 14 times the Realpoint recorded low point of 0.283% from June 2007, notes the firm. The increase in both delinquent unpaid balance and ratio over this time horizon reflects a steady increase from historic lows in mid-2007.

"Overall, following the correction of the GGP-sponsored loans in July and the average growth month-over-month, we now expect the delinquent unpaid CMBS balance to continue along its current trend and grow between US$40bn and US$50bn before the end of 2009/first quarter of 2010," says Realpoint. "Based upon an updated trend analysis, we now project the delinquency percentage to grow between 5% and 6% through the first quarter of 2010 (potentially approaching and surpassing 7%-8% under more heavily stressed scenarios through mid-2010)."

"This outlook is mostly due to the reporting of several large loans from recent vintage transactions that continue to show signs of stress and default, along with continued balloon maturity defaults from more seasoned transactions," the firm adds.

In addition, while Realpoint maintains its negative outlook for both the retail and hotel sectors for the remainder of 2009 and into 2010, it is closely monitoring the negative trends surrounding several large struggling multifamily loans that have near-term default risk and the lack of steady new issuance to offset the continued increases in delinquent unpaid balance.

AC

CMBS

Call for property differentiation in future CMBS

In order to avoid inflated valuations of second-tier properties in the future, only prime category properties should be securitised via CMBS structures, according to ABS analysts at SG. A number of outstanding portfolios within platform CMBS include a blend of prime and subprime commercial property, resulting in significantly different rating outcomes depending on the amortisation of the loans.

"More precisely, as we differentiate between prime and non-conforming in residential MBS, portfolios in CMBS should be differentiated between prime and others," the SG analysts suggest. "However, this would be at the property level rather than the borrower or loan level."

They point to recent rating actions in CMBS, with the majority of affected deals being backed by UK portfolios of second-tier properties. For example, the value of the property securing the Market Way loan in Eclipse 2005-2 (Bellatrix) is down by 70.3%, while the secondary shopping centre securing the Peacock Place loan in Titan 2006-CT1 reported a 79% fall in value.

"Aside from any refinancing concerns that these changes imply, the question of pricing of these properties throughout the cycle is critical. We wonder if these kinds of properties, which exhibit such volatility in prices, are suitable for securitisation," the analysts argue.

They note their surprise at the severity of some senior downgrades linked to the very significant deterioration of market prices of some underlying properties. "We reckon that some of these valuations, in particular of second-tier properties, were somewhat inflated [at the time of deal closing]."

S&P last week downgraded 38 European CMBS tranches and affirmed 54 ratings. At the same time, it removed from, kept on or placed on credit watch negative some of these ratings.

The rating changes result from the agency's assessment of the effect on these transactions of the unprecedented events in European real estate, including drops in property values in some markets that have exceeded those of the 1930s. "The difficulties for European banks and their real estate exposure have contributed to a shortage of real estate debt capital and we believe this could endure for a substantial period of time," says S&P. "Although borrower net operating income has generally held up, we believe economic difficulties will continue to exert downward pressure on debt service coverage ratios."

The agency notes that the market remains under severe stress, with no obvious refinancing route for more than one-third of outstanding debt in European real estate finance. It expects to resolve most of the remaining outstanding credit watch placements over the next two months and to complete the process by the end of January 2010.

CS & AC

Listed products

Participation rights

Jonathan Cohen, ceo of T2 Advisers, answers SCI's questions

Q: How and when did T2 Advisers become involved in the structured credit market?
A: T2 Advisers serves as the investment adviser to Greenwich Loan Income Fund (formerly known as T2 Income Fund, before a resolution was passed to change its name at an EGM on 16 October). We are based in Greenwich, Connecticut, but the fund is a closed-ended investment company listed on the London Stock Exchange's AIM market and so most of our investors are based in the UK. The vehicle launched in August 2005 with a £38m institutional offering.

The Greenwich Loan Income Fund portfolio consists of corporate loans, almost all of which are held within its CLO subsidiary, T2 Income Fund CLO 1. Only one investment - among 69 companies in which the fund has invested - has defaulted on payments during the life of T2.

The portfolio is relatively concentrated, with 54 debt obligations currently held across a range of sectors. The vast bulk of the portfolio, approximately 85% as at 30 June, is held in first-lien senior secured debt.

The income notes of the CLO are owned by the public entity. The reason for creating the CLO structure was to efficiently leverage the fund's balance sheet over a long period.

If the CLO buys a position, it shows up on the balance sheet of the public entity as the fund retains the residual economic value of the entire capital structure. The CLO is actively managed and has a 12-year term, with approximately 10 years currently remaining until maturity.

Greenwich Loan Income Fund was established with the notion of investing in corporate loans, with a focus on middle market debt issuances. It became apparent that there was a disconnect in risk-adjusted prices between middle market loans and those from larger firms, and so we thought there was an opportunity to step in and take advantage of that delta.

We are able to source deals by leveraging our relationships with US and global agent banks and private equity funds.

Q: What, in your opinion, has been the most significant development in the credit market in recent years?
A: The dislocation in credit markets has been the most interesting event to happen in memory in these markets.

Q: How has this development affected your business?
A: We believe that the recent rally has produced more attractive opportunities in the middle market than with large corporate issuers. However, I'm somewhat sceptical about current prices for larger corporate syndicated loans.

We see that the liquidity premium has been amplified over the last few quarters, in part because pools of capital are lumpier (generally making fewer but larger investments), which means that market participants have to buy larger issues. Additionally, a less certain market overall means that participants will more highly value the benefit of liquidity with respect to any particular investment.

Managing the Greenwich portfolio has become more challenging, but also more interesting as a result - to the extent that there are buy-and-hold opportunities which create a compelling arbitrage versus a seller's need to generate near-term cash, we believe we are well-positioned to participate in those types of situations. This dynamic may be particularly evident for the less liquid obligations of middle-market issuers.

Q: What are your key areas of focus today?
A: We believe we can generate advantageous total returns on assets that are available at meaningful discounts, but these assets aren't easy to find. We continue to look opportunistically for liquidity-based investments, specifically focusing on issuers with good management track records and lower counterparty risk in terms of their customer base. We believe that this is an especially important consideration in light of the current economic uncertainty.

Q: What is your strategy going forward?
A: At a macroeconomic level, we believe that the number of middle-market opportunities is likely to increase as liquidity premiums continue to rise and so it's an interesting time to be active in these markets. In terms of demand, the syndicated corporate loan market is a broadly interesting sector for institutional investors. Many are aware of the market but don't participate in it because the sector is typically less accessible than other markets, so being able to participate via a listed vehicle may be an attractive concept.

From a timing point of view, we believe that concern over worsening fundamentals (lower GDP figures, increased unemployment rates and, inevitably, increased corporate loan default rates combined with lower recovery rates) into the early part of 2010 could cause loan prices to retrace at least some meaningful portion of their upward move over the last six months. We believe that such a retracing could create some compelling buying opportunities.

Q: What major developments do you need/expect from the market in the future?
A: The market has come roaring back with surprising strength since the financial crisis erupted and we're at an interesting juncture now. There has been a general push back against complex products, with the complexity discount widening in recent months.

At the same time, the most relevant macroeconomic trend may be a coming transition in terms of government actions in the market. Fundamental analysis is likely to become more dependent on the extent to which the recent extraordinary levels of government participation in the markets either continues or is withdrawn.

While the market seems comfortable with the sustainability provided by governmental support and wants to believe that the situation has stabilised, it's very difficult to predict the extent or duration of that stability. This really depends on the exogenous participation of governments: their current levels of involvement are essentially unprecedented. That involvement is dictating, to some significant extent, the flow of funds across almost every major financial market and it remains to be seen whether this ultimately benefits or harms the market and over what timeframe.

For my part, I'm especially concerned about the prospects for continued declines in the value of the US dollar and (by definition) inflation, given the enormous amount of debt the US government owes and the rate at which it is increasing. As a debt manager, the close relationship between currency production and credit pricing levels must be seen as an inevitability.

CS

Alternative assets

Acquisition to enhance fund administration services

State Street Corporation is expanding its global fund administration and alternative servicing capabilities with an agreement to acquire Mourant International Finance Administration (MIFA) in a cash transaction. Pending regulatory approvals and other closing conditions, the transaction is expected to close in the first quarter of 2010. State Street expects the transaction to be slightly accretive to 2010 earnings, excluding one-time costs.

Jay Hooley, president and coo of State Street, says: "As alternative asset classes have become more mainstream, our institutional customers plan to continue to expand their use of this asset class. This acquisition will bring a wider and more comprehensive product offering to our existing and new customers and further develop our servicing footprint in Europe and Asia where expanded capabilities, including enhanced real estate servicing, better enables us to offer customers a full breadth of solutions for all of their business needs."

Jack Klinck, evp and global head of State Street's alternative investment solutions team, adds: "MIFA's team of professionals will augment our existing alternative and private equity operations. As a result, State Street is well-positioned to continue to grow its position in the increasingly important alternative asset segment."

State Street currently has more than US$420bn in alternative assets under administration and provides fund accounting, fund administration, risk and credit services to hedge fund managers, private equity managers and institutional investors.

CDS

Bank hires senior credit strategist

RBC Capital Markets has hired Simon Ballard as a director and senior credit strategist. Ballard will be based in RBC's London office and will report to Roger Appleyard, head of global credit research at the firm.

Ballard joins RBC Capital Markets with over 20 years' market experience, most recently at Creditsights, where he was head of European credit strategy. Prior to this, he held credit strategist roles at ABN AMRO Asset Management, BNP Paribas and Bear Stearns.

Appleyard says: "Simon's hire is part of our plan to build out our global cross-asset class research platform. Simon will be focused on credit strategy in the euro and sterling markets, enhancing our existing fixed income research offering."

CLO Managers

Subordinated CLO management fee waived

New Amsterdam Capital Management has entered into a deed of waiver relating to the subordinated collateral management fee on the NAC Euro Loan Advantage I deal, effective as of 27 October. Moody's has determined that the deed and the performance of the activities contemplated therein will not cause the ratings of the notes to be reduced or withdrawn.

Investors

Initial closing announced for penultimate PPIF

Marathon Asset Management has completed an initial closing of a Public-Private Investment Fund (PPIF) established under the Legacy Securities Public-Private Investment Program (PPIP). Marathon is partnering with Blaylock Robert Van - a full-service, minority-owned investment banking firm.

To date, PPIFs have completed initial and subsequent closings on approximately US$5.07bn of private sector equity capital that has been matched 100% by the US Treasury, representing US$10.13bn of total equity capital. The Treasury has also provided US$10.13bn of debt capital, representing US$20.26bn of total purchasing power.

An initial closing for the remaining PPIF mandated under the PPIP is expected to be announced soon. Following an initial closing, each PPIF has the opportunity to conduct additional closings over the following six months to receive matching Treasury equity and debt financing, with a total Treasury equity and debt investment in all PPIFs equal to US$30bn (US$40bn including private investor capital).

Legislation and litigation

Promotions for structured finance lawyers

Latham & Watkins has elected 23 associates to the partnership, with 13 associates elected to the role of counsel, effective as of 1 January 2010.

Among the attorneys elected to the London-based partnership is Vladimir Maly, a finance attorney specialising in cross-border derivatives transactions.

In the Washington DC-based practice, newly elected partner Christopher Brown will focus on private equity finance. Jeffrey Chenard has also been made a partner in Washington, with a focus on representation of private equity sponsors in acquisition financings and other leveraged loan transactions. The pair represents borrowers and lenders in secured loan, cashflow and asset-based loan, mezzanine loan and subordinated debt transactions, loan commitments and private equity fund bridge loan facilities.

Among the associates elected, is Doha-based counsel Olivier Vermeulen. He has a particular focus on real estate financing, leveraged finance, structured finance, debt restructuring, Islamic finance and banking regulatory matters. He advises companies, as well as financial institutions and investment funds.

Technology

Valuation service tie-up for Japan

Numerix has entered into a partnership agreement with Nomura Research Institute (NRI) to provide valuation services for NRI's Japanese client base. As part of the service, NRI will provide clients with month-end price and risk calculations for structured notes using Numerix Portfolio.

NRI will initially make the service available to all Japan-based clients and plans to eventually expand the service to include other major Asian countries.

ABS

First ABS closed under Canadian TALF

DBRS has finalised the ratings on what it believes to be the first transaction to close under the Canadian Secured Credit Facility (CSCF) on 30 November - CNH Capital Canada Wholesale Trust's Series CW2009-1. The rating agency considers this transaction to be a positive step for the Canadian equipment and auto ABS market.

Under the CSCF programme, which provides up to US$12bn in support of the financing of vehicles and equipment, the US$300m Series CW2009-1 Class A notes were purchased by the Business Development Bank of Canada (BDC). Since it is a requirement that any notes purchased by the BDC under the CSCF programme be rated triple-A, only the Series CW2009-1 Class A notes are eligible. The Series CW2009-1 Class B notes (rated single-A) were issued privately by CNH Capital Canada Wholesale Trust as subordinated notes in the structure.

The CSCF programme was created in the 2009 federal budget as part of a response to improve access to financing for Canadian households and businesses in the face of a harsh economic climate. The final phase of the programme was settled on 17 September 2009, when revised pricing and access terms were announced by the BDC.

According to the bank: "CSCF funds will be offered on a 'first-come, first-served' basis until 31 March 2010, to provide continued support for participants in the auto and equipment financing sectors. The facility is offered to all participants at 150bp above Government of Canada funding costs."

ABS

2010 Euro ABS supply could reach EUR150bn

European primary ABS issuance in 2010 can be expected to range from €50bn to €150bn, according to ABS strategists at BofA Merrill Lynch Global Research. In their European Structured Finance Annual Review, the strategists suggest that the structured finance market will enter the New Year with the hope for further recovery and growth, but that it will continue to face formidable challenges associated with the investor base and the need to grow it - internally and internationally. Targeted regulatory changes, overlapping rating and regulatory requirements, and continued (albeit at a slowing pace) rating transitions will also be a hurdle.

"The structured finance markets will seek to find their new supply, demand and pricing equilibrium, while continuing to struggle with legacy bond overhang," the analysts write. "We think both covered bond and SF bond markets will face the challenge of functioning on their own, as the government support is gradually withdrawn. Their performance will heavily depend on the macroeconomic and regulatory situation; for the former because of its link primarily to the strength of the banks and for the latter because of the dependence of their pool performance on state of consumer and housing markets, and on availability of liquidity in the financial system."

The analysts expect European full-year 2009 volumes to be in excess of €320bn for structured finance and €120bn for covered bonds.

ABS

Storm recovery ABS completed

The CenterPoint Energy restoration bond company has closed a US$664.8m securitisation to recover costs that CenterPoint Energy Houston Electric incurred in 2008 to restore service following Hurricane Ike. The bond offering recovers US$643m in distribution restoration costs approved by the Texas Public Utility Commission (PUC), plus carrying charges since 1 September 2009 and certain bond issuance costs.

Issuance of these bonds was made possible by Texas legislation enacted in April 2009 that permits use of securitisation financing to recover costs following hurricanes and other natural disasters in an effort to lower costs to consumers. The legislation authorises the PUC to determine the recoverable costs related to service restoration and to issue a financing order authorising the issuance of the bonds.

The principal and interest on the bonds will be recovered through a surcharge added to the electric delivery rate paid by retail electric providers (REPs) to CenterPoint Energy Houston Electric for power delivered to Houston-area customers. The monthly surcharge for a residential consumer using 1,000 kwh will be US$1.76 and will be assessed to REPs for 13 years.

The surcharge is reduced by a credit of US$0.71 related to deferred taxes associated with storm restoration costs. The effect of these two items will result in a net cost of US$1.05 for residential service.

Marc Kilbride, vp and treasurer for CenterPoint Energy, says: "Issued at very favourable interest rates averaging 3.72% (on a time-weighted basis), these low-cost storm recovery bonds are expected to save consumers approximately US$417m over the next 13 years compared to traditional ratemaking carrying costs of 11.075%. We appreciate the leadership and support of Governor Perry and members of the Texas Legislature for enacting this new legislation that enabled us to issue these bonds, as well as the hard work of chairman Smitherman, PUC members and staff for getting these bonds to market quickly on such favourable terms."

ABS

Update for Japanese ABS performance indices

Moody's has updated the performance indices for Japanese ABS in its latest report for the sector.

The report says that the delinquency ratio, default rate and repurchase rate in the auto loan dynamic indices have been stable. The delinquency ratio and default rate in the installment sales loan indices have also been relatively stable in the past year.

However, the delinquency ratio and default rate in the card shopping loan indices have risen moderately, due to increases in the delinquency ratios and default rates in some of the transactions with a high proportion of revolving payment receivables in the underlying pool. Thus far, these default rate increases have been roughly within Moody's initial expected ranges.

Additionally, consumer finance loan delinquency ratios have been high since 2006. The default rates have been declining for the last half year but remain as high as in the first half of last year for a number of reasons, including the consistently high amounts paid out for overpaid interest claims and lenders' moves to tighten credit policies.

CDS

New credit event called on Thomson

A bankruptcy credit event has been called on Thomson, following the opening of a 'sauvegarde' proceeding by the company on 30 November. ISDA's EMEA Determinations Committee also voted to hold an auction for Thomson. This follows the auctions held on 22 October in respect of Thomson as a result of a restructuring credit event (SCI passim).

Separately, a Determinations Committee decision is pending on whether a failure to pay credit event has occurred in connection with Hellas Telecommunication (Luxembourg) II. The grace period for the firm ended on 15 November.

Meanwhile, written materials have been submitted to the external review panel on behalf of both the 'no' and 'yes' positions in connection with a possible Cemex restructuring credit event. The move comes ahead of the panel's deliberations, which are expected to occur later this month (SCI passim).

CDS

CDS pricing service to include Asia close

Fitch has extended its CDS pricing service to include consensus pricing data that captures Asian market closing prices. This will provide enhanced transparency on the CDS pricing of entities traded in Asian markets and further improve both users' risk management processes and their insight into the global CDS market, the agency says.

The new service covers sovereign and corporate CDS names and will be delivered to users as an additional file, sent to coincide with the closing of Asian markets. It is based on the same methodology and stringent data cleaning rules as Fitch's existing end-of-day CDS pricing files, and uses pricing data from the member banks of Fitch's global pricing services consortium. These banks provide Fitch with pricing information on a variety of structured finance and fixed income derivative assets.

Jonathan Di Giambattista, senior director of Fitch Solutions in New York, says: "The new Asia close service is a natural extension of Fitch Solutions' CDS pricing service and will provide users with even greater insight into the direction of credit risk to help them make informed investment decisions."

CLO Managers

CLO managers' collateral purchases/sales assessed

So far in 2009, S&P-rated US CLO managers have made gross purchases amounting to approximately US$60bn in collateral assets and have made gross sales of approximately US$35bn, according to new research from the rating agency.

Year-to-date, the healthcare sector has had the greatest net inflow (that is, the greatest positive difference between purchases and sales within the sector), while the auto sector has had the greatest net outflow (the greatest negative difference between purchases and sales within the sector). Business equipment and services, telecommunications, chemicals and plastics and retailers (with the exception of food and drug) also feature in the top-five net sector purchases, while lodging and casinos, building and development, radio and television and equity REITs and REOCs feature in the top-five net sector sales.

"The exit of CLO managers from the auto, media and entertainment, and building and development sectors is consistent with both the economic impact these sectors have sustained and the significant number of downgrades and defaults in these sectors earlier this year, in our view," says S&P. "In our opinion, these sectors suffered in the generally weak economy and market participants may be questioning the long-term outlook for many companies in these sectors."

The rating agency observes that the telecommunications and healthcare sectors have been relatively stable in 2009. For example, HCA Inc was the second-highest exposure (by principal amount) across S&P's rated universe of US CLO portfolios as of Q309 and was also the largest single purchased obligor across all of its rated US CLOs year-to-date on a gross basis (i.e. the purchase without taking into account the sales).

CLOs

Fortis brings SME loan-backed master trust

Fortis has issued €8bn of notes from its newly-established Esmee Master Issuer programme. Esmee is the first SME loans-backed notes programme established by Fortis Bank in Belgium.

Under this programme, Esmee may from time to time issue Class A, B, C, D and E, F and G notes to fund purchases of additional receivable pools or to redeem other outstanding notes, subject to fulfillment of some repayment tests.

As of October 2009, the provisional pool of underlying assets comprised a portfolio of 148,360 loans granted to 84,235 borrowers, according to Moody's. The portfolio has a weighted average seasoning of 2.97 years and a weighted average remaining term of 8.42 years. Around 80% of the initial provisional portfolio is investment credits - i.e. loans to Belgian corporates - for financing investments with a term between two and 30 years.

Geographically, the pool is well diversified, with Antwerpen accounting for 17% of the exposure, West-Vlaanderen 17% and Oost-Vlaanderen 15%. Around 24% of the portfolio is concentrated in the construction, building and real estate sector.

At closing, the servicer will randomly select the loans from the provisional pool, after having eliminated receivables that are more than 30 days in arrears.

CLOs

Manager reaches agreement on note cancellations

A majority of the controlling class of noteholders of KKR Financial CLO 2005-2 has agreed not to challenge the July 2009 surrender for cancellation, without consideration, of US$64m of mezzanine notes issued to KKR Financial Holdings by CLO 2005-2. In exchange, the firm has agreed to certain arrangements, including to refrain from undertaking a comparable surrender for cancellation of any other mezzanine notes or junior notes issued to it by CLO 2005-2.

In addition, KKR has agreed with these noteholders that - for so long as no challenge is brought to its prior surrender of notes in any of its CLO transactions - the firm will not undertake a comparable surrender for cancellation, without consideration, of any mezzanine notes or junior notes issued to it by KKR Financial CLO 2005-1, KKR Financial CLO 2006-1, KKR Financial CLO 2007-1 or KKR Financial 2007-A.

CLOs

Upgrades, downgrades for CLO after asset sales

Moody's has upgraded the Class A-1, A-2, B and C notes of Marathon CLO I, reflecting the significant improvement in overcollateralisation for the notes following the recent sales by the issuer of US$217.5m in par amount of collateral. The issuer executed the sales during the period between 18 September and 16 October at a weighted average price of 90.7%. The sales - primarily characterised as sales of credit risk obligations as defined by the indenture, with a small number of discretionary and credit-improved sales - comprised approximately two-thirds of the outstanding portfolio par in September.

The sale proceeds, together with certain other principal and interest collections, were reported as being applied to the partial redemption of the Class A-1 and Class A-2 notes in relation to the cure of coverage test failures. Specifically the Class A-1 and Class A-2 notes were reduced by 85%, significantly improving the overcollateralisation coverage for the Class A, B and C notes.

The pro forma Class A/B OC ratio after the asset sales is estimated at 189.58% versus 116.80% reported in the September trustee report. Similarly, the pro forma Class C OC ratio is estimated at 133.74% versus 108.56% reported in the September report.

At the same time, Moody's downgraded the transaction's Class D and E notes, reflecting the resolution of the review for downgrade placed on the notes on 10 November. The downgrade action is a result of credit deterioration of the portfolio after the asset sales, which is reflected through an increase in the weighted average rating factor and an increase in exposure to obligations rated Caa1 or below by Moody's or triple-C plus or below by S&P.

The pro forma weighted average rating factor of the pool is 3915, an increase of 15% over the WARF level of 3400 reported in September 2009. The pro forma exposure to triple-C or Caa rated assets has increased to 28.5% of the underlying portfolio versus 21.5% in September.

The increase in CCC/Caa asset exposure has also increased the excess truiple-C or Caa haircut percentage applied to the OC ratios. In contrast to the improvement of the Class A/B and C OC ratios, the haircut is large enough to more than offset the benefits from delevering caused by the collateral sales, Moody's notes.

On a pro forma basis, the D and E OC ratios continue to fail their respective OC triggers, despite slight improvement versus OC levels prior to the asset sales.

CMBS

No rating impact from Borders' bankruptcy

Book store chain Borders (UK) has entered into administration. Such a move may have a negative effect on three UK CMBS (see also last week's issue).

According to research from Chalkhill Partners, Borders is a tenant in properties backing the Metro Loan in Epic Culzean, comprising 2.9% of the rent roll. This loan is at its covenanted ICR of 1.15x. The Metro loan is the largest in the pool, comprising 73% of the deal.

Borders is also one of the biggest tenants in the property backing the Chapelfield loan in Eclipse 2006-4. The loan is only barely above the ICR covenant of 110% at 111%. The Chapelfield loan is the largest in the deal at 27% of the pool.

MCR has been appointed administrator of the firm. All stores currently remain open for business as normal while the administrators undertake a review of the company's affairs and seek a purchaser for all or some of the company's stores, in which there has already been interest.

Moody's says that out of the CMBS deals it rates, Epic Culzean, Eclipse 2006-4 and REC Retail Parks rely to some extent on rental income from Borders UK. The rating agency notes that at present the current tenant contribution as a percentage of the total rental income of each transaction ranges between 0.7% and 2.1%. At the loan level for multi-borrower transactions, the percentage of rental income contributed by Borders UK is not higher than 3.5%.

Moody's has analysed the affected loans to assess whether a potential adverse performance of Borders UK (in terms of rental arrears and/or vacating the properties) would significantly increase the assumed default risk of the securitised loan. For loans where the default risk could increase, it analysed the impact of such increased default risk on the assigned ratings of the notes.

Based on this analysis and on the information available, the agency is of the opinion that its current ratings on the outstanding notes should not be negatively impacted by such potential adverse performance of Borders UK. However, the outstanding ratings of affected transactions could become more sensitive to further adverse developments, it says.

CMBS

Liquidity strong in Singapore CMBS

Singapore CMBS transactions are enjoying strong cashflow from their underlying properties, according to Moody's. With two transactions needing to be refinanced in 2010 and the economy showing signs of gradual improvement, the agency anticipates that they will be able to obtain the necessary funding by their expected maturity dates.

According to Moody's quarterly report for the sector, most transactions enjoy at least four times actual debt service coverage ratio and appraisers' loan-to-value ratios are in the 16%-32% range.

Marie Lam, a Moody's vp - senior credit officer and co-author of the report, says: "Singapore's office sector is under pressure, as there is an abundant supply of office space in the core central business district coming on stream in 2010 and 2011. However, this is not expected to have a large negative impact on the CMBS transactions as leases that are due for renewal were contracted a few years ago when the rents were still low. Hence, there is a healthy cushion for rental deterioration."

Singapore's industrial building sector is also under pressure because of the large availability of industrial space. It is further exacerbated by the dampened demand from the manufacturing sector, which was still shedding jobs in 3Q09. While there will be pressure on those leases in the CMBS transactions that are due for renewal, the impact will not be substantial as the influence of the high-tech buildings - whose rental and occupancy rates have been hit hard - does not play a significant role in the transaction, says the report.

Jerome Cheng, a Moody's vp - senior credit officer and co-author of the report, says: "In the retail sector, the take-up in retail space has been healthy. With confidence gradually coming back, we expect rental rates to stay at around the current level without any drastic downward pressure. Suburban malls may even see higher than current rents and lower than current vacancy rates as some of them are gradually completing asset enhancement work."

Moody's is also reviewing the liquidity sufficiency of the outstanding CMBS transactions to ensure investors get paid on a timely basis in case of any cashflow disruption.

Distressed assets

Troubled companies index jumps

The Kamakura index of troubled public companies increased in November for the first time in the last eight months. The index jumped from 10.68% in October to 11.45% in November.

Kamakura defines a troubled company as a company whose short-term default probability is in excess of 1%. The index reached a peak of 24.3% in March.

Kamakura's president Warren Sherman says: "It is too early to tell whether the strong improvements in credit quality we've seen recently have come to an end."

The rated firms showing the largest increase in short-run default risk in November included YRC Worldwide, US Concrete, Ambac Financial Group, Bank of Ireland, Allied Irish Banks and Citadel Broadcasting. Ambac and Citadel Broadcasting also were among the biggest increases in credit risk last month, along with CIT, which defaulted the next day after the index was reported.

Documentation

Investors reject CLO documentation changes

The manager of Neptuno CLO I has failed to gain enough investor support to make amendments to the transaction's documentation. A notice to noteholders in May proposed amendments in relation to the definitions of eligible investments, discount obligation, high yield bond, mezzanine obligations and par value test excess adjustment amount, the insertion of the definition 'investment grade bond' and the amendment to the eligibility criteria and the portfolio profile tests (each as defined in the trust deed dated 19 December 2007).

The proposed resolution was not passed due to insufficient support. Neptuno CLO 1, a €500m cash CLO that invests in senior and mezzanine leveraged loans and high yield bonds, was issued in April 2007 with Caja de Ahorros y Monte de Piedad de Madrid as manager and Barclays Capital as arranger.

Indices

Moderating default rates for ABX?

ABX remittance reports for the November distribution date suggest moderating default rates across indices. According to ABS analysts at Barclays Capital, the most noticeable trend was a 1.2-point aggregate decline in loss severities, after several months of stability.

Severities changed by +2.44, -3.37, -2.80 and -1.14 points for the 06-1, 06-2, 07-1 and 07-2 series respectively. "While we expect lengthening time-in-foreclosure to increase severities over the medium term, loans being liquidated at present were generally not subject to foreclosure bottlenecks. Improved recoveries could reflect strong home price appreciation in October (unlikely, in our view), curtailed servicing advances or just statistical noise," the analysts note.

Meanwhile, 60+ day delinquencies increased by roughly 85bp-105bp, driven by large increases in the 90+ bucket. Cumulative losses also continued to rise at a steady pace to reach 10.1% for the 06-1 and roughly 14%-15% for the remaining indices. 07-2 losses have now outpaced all the other indices, even though it's the least seasoned of the series.

Investors

Third tender launched for UCI bonds

BNP Paribas has announced its third tender offer for Class A notes from the UCI Series 8 to 17 transactions. The offer is open from 7 to 11 December, with the results expected to be announced on 14 December for settlement on 30 December.

Ratings

DSB deal ratings unchanged

In contrast to Moody's, which downgraded the senior notes of the Chapel and Monastery deals due to the bankruptcy of DSB (see SCI issue 161), S&P announced that ratings in securitisations backed by loan portfolios originated by DSB Bank are unchanged. According to the agency, the DSB bankruptcy receiver has agreed with the issuer to continue servicing the loans and transfer the proceeds to the issuer.

The servicing activities of DSB have been restored and this arrangement will remain until Q210 when a back-up servicer takes on the role. The payments will be held in a segregated account at Fortis and, since mid-November, daily transfers of proceeds to the issuer have been re-established.

The moratorium that came into place when DSB was declared insolvent has been suspended by the post-bankruptcy agreement and, according to S&P, Chapel 2003-I and Monastery 2004-I are still making note payments.

Real Estate

S-REITs' DRPs to improve ratings

The recent proposal by some Singapore REITs (S-REITs) to implement distribution reinvestment plans (DRPs) for their unit-holders is positive from a ratings standpoint, though their efficacy in cash retention remains limited, according to Fitch. In a new special report the agency discusses some of the aspects of DRPs, noting that while they improve credit profiles, they are not expected to lead to a positive rating migration in the S-REIT sector.

Fitch notes that a high percentage participation in a DRP from existing unit-holders can improve an S-REIT's liquidity profile. However, given that the proposed DRPs may provide unit-holders with an option to receive distributions in cash or in units, or a combination of both, the amount of cash that might be retained from a non-underwritten offering may be relatively immaterial.

Peeyush Pallav, director of Fitch's REIT team, says: "The option at the hands of the investors in a DRP implies that investors may choose not to participate, especially when the prevailing market sentiment may be negative and equity markets are unfavourable. The DRP may be ineffective when the S-REIT most needs it."

While DRPs are viewed as ratings positive, their inclusion in S-REITs is not expected to be a primary rating driver. Fitch will not factor in any additional cashflows for the purpose of its ratings analysis for a non-underwritten DRP offering, on account of the limited cash retention potential.

Regulation

Self-regulation enhanced for OTC derivatives markets

ISDA has developed a governance structure for the privately negotiated derivatives industry's market practice and post-trade activities. The Association says the governance structure will determine the industry's relationships with other stakeholders, including regulators and vendors, as well as other infrastructure providers. In particular, the governance structure relates to where responsibility and ownership lie for the strategic direction of market practice and post-trade activities, and which groups are responsible for liaising with regulators and at what levels.

Robert Pickel, executive vice chairman at ISDA, says: "The magnitude and pace of change and re-engineering in the market practice and post-trade arenas have precipitated the need for ISDA to form a governance structure that provides oversight to the agenda of work and development. By emphasising such a structure, the industry believes it can represent both sell- and buy-side interests in a cohesive and comprehensive manner to the regulatory community."

The industry governance structure is a three-layered structure comprising the ISDA Industry Governance Committee (IIGC), the Steering Committees (SCs) and an implementation layer made up of both Implementation Groups (IGs) and Working Groups (WGs). The IIGC is at the head of the governance structure and will oversee all strategic market practice and post-trade issues in the privately negotiated derivatives market. The committee will have strong buy-side representation, ISDA notes.

Meanwhile, the SCs will consist of four committees related to individual asset classes - specifically, rates, equities, credit and commodities - and two that operate at the cross-product level (operations and collateral). These groups draw authority and receive strategic direction and guidance from the IIGC regarding all issues that cannot be resolved at this level.

Each of the product-related SCs brings senior business management representation at the asset class level, focusing on business and market practice issues. The Operations and Collateral SCs are made up of senior figures from those respective fields.

The IGs and the WGs that make up the implementation layer are responsible for the tactical implementation and delivery of the agenda determined for the industry by the IIGC and the SCs.

ISDA published this OTC derivatives industry governance document after extensive consultations with its members and industry constituents, such as SIFMA and the MFA.

RMBS

Dutch RMBS on offer

Delta Lloyd's Arena 2009-1, a €904.5m prime European RMBS, went subject yesterday (1 December) and is reportedly fives times oversubscribed. Natixis, Rabobank International and RBS are lead managers on the deal.

The transaction is rated by Moody's and S&P. Guidance for the triple-A rated €189m Class A1 (two-year WAL) and €643.5m Class A2 (4.9-year WAL) notes is 120bp area over one-month Euribor and 150 area over respectively. These notes are being offered to third-party investors, while the Class B to Class F notes will be retained.

Weighted average seasoning of the portfolio is 29 months.

Securitisation analysts at Deutsche Bank note that although Delta Lloyd has to date exercised deal calls, allaying investor concerns regarding extension risk will be key to placing the deal successfully (with material step-ups a possible option).

RMBS

Drive to make temporary loan mods permanent

The US Treasury and Department of Housing and Urban Development (HUD) have launched a nationwide campaign to help borrowers that are currently in the trial phase of their modified mortgages under the Obama Administration's Home Affordable Modification Program (HAMP) convert to permanent modifications.

More than 650,000 borrowers have been helped by the programme thus far. Roughly 375,000 of the borrowers that have begun trial modifications since the start of the programme are scheduled to convert to permanent modifications by the end of the year. The Treasury and HUD will now implement new outreach tools and borrower resources to help convert as many trial modifications as possible to permanent ones.

"Encouraging borrowers to move through the process of converting trial modifications to permanent modifications remains a top priority for HUD," says HUD assistant secretary for housing and FHA commissioner David Stevens. "As a part of our continuing efforts to improve the execution of the HAMP programme, HUD is committed to working with servicers, borrowers, housing counselors and others dedicated to homeownership preservation to improve the transition of distressed homeowners into affordable and sustainable mortgages."

As the first round of modifications reaches the time to convert, the administration has identified several strategies for addressing the challenges that borrowers confront in receiving permanent modifications. In addition, the administration has taken several steps to make the transition from trial to permanent modification easier and more transparent.

RMBS

ASF's LINC project gains industry support

Clayton Holdings has lent its support to the ASF and S&P FIRM's jointly developed LINC project (SCI passim). The analytics firm says that it will update its systems to accommodate the new 16-digit, smart code by the end of the first quarter of 2010.

The new loan identification system will provide a critical source of information for RMBS investors, enabling them to access loan-level data regardless of when or where the assets were securitised, the firm notes.

Paul Bossidy, ceo of Clayton Holdings, says: "The new code is an important step to providing the kind of transparency that will be needed to restart the non-agency securitisation market. It will give investors an important new tool to track and analyse underlying collateral, much the way CUSIP numbers are used with bonds. Clayton has been working closely with ASF and Project RESTART, and this new code is one of the first deliverables of that initiative."

Tom Deutsch, deputy executive director of the ASF, says: "ASF Project RESTART seeks to increase transparency in the securitisation markets by improving investors' access to important loan-level information. Implementation of the global ASF LINC is a critical milestone in striving toward this goal, as it will provide investors for the first time with the ability to track a loan throughout its lifecycle."

Deutsch adds: "We appreciate the many industry leaders like Clayton, who recognise the value of this new initiative and commit to its implementation."

RMBS

EMS precedent for other Dutch RMBS?

ABN AMRO is to call EMS III on 29 December 2009, after deciding to not call the deal on its first redemption date in September. However, EMS IV will be called on its first call date in December.

Securitisation analysts at RBS suggest that the decision to call the transactions may serve as a precedent for other Dutch RMBS that were not called on their first call dates, including Delphinus 2004-II, Delphinus 2003-I and Beluga 2006-1. They add that investors should factor in a higher probability of early call into the valuation of these notes.

The EMS deals have both performed well, maintaining fully funded reserves, zero (with respect to EMS III) or marginal (0.05% for EMS IV) losses and arrears of 0.23% and 0.21% respectively.

RMBS

Taiwanese RMBS unaffected by tax legislation

The ratings on two Taiwanese cross-border RMBS transactions are not immediately affected by the announced change in Taiwan's withholding tax legislation, according to S&P. On 28 October 2009, the government announced an amendment on the withholding tax rate in Taiwan that will take effect on 1 January 2010.

S&P expects that the amendment will result in additional cash outflows for the transactions, as the offshore SPVs of the transactions will be subject to a withholding tax of 15% from 2010, from the current rate of 6%. Despite the higher expected cash outflows, the agency believes the extra costs can be absorbed through the transactions' excess spread or accumulated credit support.

Hsinchu International Mortgage Loan 1 and Hsinchu International Mortgage Loan 2 are ultimately backed by a portfolio of residential mortgage loans denominated in Taiwan dollars and originated by Standard Chartered Bank (Taiwan).

RMBS

Recovery prospects analysed for UK prepayment rates

Prepayment rates on UK mortgages may slowly begin to rise if UK house prices continue to recover and the interest rates on different mortgage products start to normalise, according to an S&P report.

S&P credit analyst Andrew South says: "Prepayment rates in the UK mortgage market have fallen significantly over the past 18 months, constrained by a combination of borrowers' lack of ability and willingness to switch mortgage products."

He continues: "As house prices have fallen, equity positions have eroded, meaning fewer borrowers qualify for new loan products. Even borrowers with sufficient equity to consider refinancing have little incentive to do so as mortgage rates offered on new loans have become less competitive relative to rates paid on existing loans."

S&P believes the prospects for any recovery in prepayment rates therefore depends on how these factors evolve. South explains: "In our view, if house prices continue to recover at a modest rate from the lows posted in the first half of 2009 and if mortgage lending normalises over the next 18 months, then prepayment rates will gradually improve over the coming months, with a possible sharper up-tick in late 2010. However, if house prices undergo a 'double dip', ultimately leading to a 35% peak-to-trough correction some time in 2010, prepayment rates would remain depressed for the foreseeable future, as disproportionate numbers of borrowers struggle with low or negative equity."

South adds that in either scenario, some master trust structures in the UK prime RMBS sector may continue requiring additional originator support if they are to meet the scheduled maturity profiles of the issued notes.

RMBS

MILAN methodology for Australian RMBS refined

Moody's has published its updated MILAN methodology for rating Australian RMBS. At the same time, the agency says that the refinements in themselves will not lead to any rating actions.

Irene Kleyman, a Moody's analyst and the author of the report, says: "The key goal of the update was to refine our model assumptions, using a detailed analysis of the Moody's database of about one million Australian residential mortgage loans. In addition, we have incorporated insights gained from the global financial crisis, including from other jurisdictions."

As part of this update, the agency reviewed and re-confirmed its default frequency assumptions on the basis of expanded mortgage insurance claims data. In response to greater price volatility, it also increased house price stress by 5% for most states.

Kleyman adds: "A number of changes have been further made to account for more a granular analysis. For example, historically, loan concentration analysis has been on a state-by-state basis, but we have moved to incorporating statistical regions, as defined by the Australian Bureau of Statistics. This should give us a clearer picture of where geographic concentration risks are present."

She concludes: "Finally, we would note that Australian RMBS transactions continue to perform in line with expectations. There has been no Aaa downgrades or any downgrades due to performance reasons."

RMBS

Delinquency ratio for Japanese RMBS rises

Moody's has released its updated performance indices for Japanese RMBS in its latest report for the sector. In the report, for April-September 2009, the ratings agency says that the delinquency ratio for its Japanese RMBS index pool has been climbing slightly recently, while the average for the default rate was steady when compared to the same period a year ago.

The rise in the delinquency ratio is very likely due to delinquencies during the summer bonus season and the lengthening in the index pool's seasoning. But, at this point, the impact of the economic downturn on residential mortgage loan pools would seem to be limited, Moody's notes.

In addition, the balance for the pool declined due to the fall in new deals and the falling balance for existing transactions.

Also included in the report are the following:

• Of the dynamic attributes, LTV showed a gradual uptrend, although it has been steady for the last few years. TTM continued to edge upwards, while the refinancing ratio and the average loan balance per receivable fell slightly.
• Average dynamic performance - as measured by the prepayment rate - was slightly lower than the same period a year ago.
• Static performance, as measured by default and repurchase rates, rose in accordance with seasoning.

RMBS

Defaults to increase in Spanish RMBS

Spain's ongoing economic woes are holding back any recovery in the country's mortgage loan market, according to a new report from S&P.

"Recent improved borrower affordability appears to have in part reversed the spike in delinquent loans. However, any recovery in the mortgage market is likely to be a distant prospect, in our view, so long as the recession continues and unemployment rates remain high," it says.

S&P believes this has implications for the collateral behind Spanish RMBS transactions - and it currently foresees some room for further delinquency and default growth in the near future. During 2009, historically low interest rates and decreasing house prices in the case of new mortgage borrowers have significantly improved borrowers' financial positions, in the agency's view.

"We have observed that affordability is now much closer to the levels recorded during the growth period at the start of this decade, although the economic environment is significantly worse," it notes. "In our view, future improvements in affordability may be possible only if there are further house price decreases and, more importantly, a more stable economic environment. Q309 data for Spain seems to indicate that this may be some way off. By the end of September, the country continued in recession after four consecutive quarters of negative GDP growth and unemployment rates are edging towards 20%."

Compared with the previous recession in the 1990s and the levels of unemployment at that time, S&P's current expectation is that mortgage loan quality is unlikely to significantly worsen - but it does expect delinquencies and defaults to continue increasing during 2010 and to stabilise toward the end of the year. This expectation is despite S&P's forecast increase in unemployment to 21% in 2010 and could change if, for example, interest rates increase.

RMBS

Australian RMBS delinquencies fall in Q3

Australian mortgage borrowers' ability to repay their mortgages - as measured by delinquency rates - continues to improve, despite a backdrop of increasing interest rates, according to a new report from Moody's.

Arthur Karabatsos, a Moody's vp and senior analyst, says: "This is because the overall rate reductions since September 2008 mean borrowers are still enjoying significantly lower repayments, and unemployment is still relatively low and is expected to peak at levels much lower than forecast at the start of the global credit crisis."

Specifically, prime mortgage delinquencies greater than 30 days decreased to 1.14% from a historical high of 1.63% in January. Non-conforming mortgage delinquencies greater than 30 days also decreased to 11.47% from a historical high of 17.44% in January.

The report also notes that investors are slowly returning to the market, as evidenced by Members Equity executing deals without the need for government assistance via cornerstone investments by the Australian Office of Financial Management (AOFM).

Technology

Analytics platform enhanced for the buy-side

Interactive Data Corporation's fixed income analytics business has released a new service. BondEdge Asset Manager is designed to assist portfolio managers and analysts at asset management firms manage relative risk and reward versus leading fixed income indices and liability benchmarks.

Keith Webster, md of Interactive Data fixed income analytics, says: "Heightened volatility of total returns dispersion between bond sectors and quality cohorts have underscored the need for enhanced granular portfolio versus benchmark risk analysis and performance attribution tools. In addition, certain regulatory and accounting changes have heightened focus on the closer matching of portfolio and corresponding corporate pension liability risk characteristics. The analytical enhancements delivered with this latest release of BondEdge are a reflection of feedback provided by asset manager clients."

BondEdge Asset Manager includes enhancements to factor-based performance attribution for taxable and tax-exempt portfolios, and benchmarks and liability-driven investing analysis. Portfolio versus benchmark stress testing tools, 'what-if' analytics for pre-trade simulations and automated, flexible presentation style reports and graphics are also included.

BondEdge comprises an extensive structured finance deal library, cashflow engine and term structure and prepayment models, enabling clients to generate dynamic risk measures and asset cashflows for agency and non-agency RMBS, as well as ABS and CMBS.

Technology

Valuation service empowered by grid computing

Pricing Partners' Price-it Valuation is now powered by grid computing to accelerate the pricing speed for its Price-it Online valuation service. Integrating grid computing technology into the valuation tool is expected to improve Price-it Online's usability to eliminate time-out interruption, speed up the valuation report generation and guarantees the pricing process if performed under a secured network. Price-it Online users are able to simultaneously price multiple deals or execute various simulations and therefore benefit from a substantially reduced workload.

Kodjo Klouvi, quantitative computer engineer at Pricing Partners, says: "By focusing on the features most commonly used in grid computing, we obtain optimal utilisation of the underlying infrastructure. The valuation of our clients' derivative portfolios is much faster. The grid computing technique allows Pricing Partners to offer our clients high quality services."

Whole business securitisations

BAA closes WBS

BAA has issued a £700m WBS from its BAA Funding multi-currency debt programme, offering a coupon of 6.75% with a maturity of 2026. The transaction priced at gilts plus 270bp (guidance was 280bp-290bp) and is believed to have been placed with a number of third-party investors. Fitch and S&P rated the deal - which was marketed by BNP Paribas, Citi, HSBC and RBS - single-A minus.

One European ABS trader suggests that, given BAA Funding will be a constituent in the index, some investors would feel they'd have to participate in or take a view on the transaction. He also points to potential pent-up demand from different groups of accounts, who like BAA as a corporate credit.

Whole business securitisations

UK pub securitisations remain under pressure

The UK pub sector is likely to continue to experience difficulties in 2010, according to a new report from S&P.

"For almost a decade, the UK pubs sector has performed steadily, with limited historical ratings volatility and few upgrades or downgrades," says S&P surveillance analyst Roneil Thadani. "However, subsequent to 2007, we've observed a gradual decline in the performance of the underlying collateral in the pub securitisations that we rate [see also separate News Analysis]."

On-trade beer sales decreased by about 6.4% in the 12 months to 30 September 2009, according to the British Beer & Pub Association. This is considerably above the historical trend rate of decline. Furthermore, in October, with the lowering to single-D of Globe Pub Issuer's class B1 notes, S&P recorded the first default of a pub securitisation that it rates in an 11-year history with the asset class.

"In our view, long-term business risk pressures, such as decreasing on-trade beer volumes, tough off-trade competition, susceptibility to minimum wage pressures and sensitivity to cyclical consumer spending, continue to affect all the pubs that we rate," says the rating agency. "The recession, changes to consumer behaviours since the 2007 smoking ban, consecutive bad summers, elevated food and utility costs, and significant increases in alcohol duties have added to the problems that pub securitisations face."

"In general, we believe that the pub industry will continue to be under pressure for the next 12 to 18 months as rising unemployment and weak consumer confidence constrain revenues, although year-on-year growth figures should start to benefit from easier prior year comparatives," Thadani concludes.

Trading

Trading ideas: high octane

Byron Douglass, senior research analyst at Credit Derivatives Research, looks at an outright long on Chesapeake Energy Corp

Chesapeake Energy cut its hedge book to less than 25% of planned 2010 capacity, versus more than 75% in 2009, while gunning to increase production in the neighborhood of 8%-14% over the next two years. We admire the company's aggressive stance and believe its balance sheet warrants the move.

Relative to comparable issuers, Chesapeake's fundamentals leave its CDS spread undervalued. We recommend selling protection on Chesapeake.

Increased production and solid liquidity will help reduce the risk entailed from the company's greater exposure to the natural gas market and drain on capital resources. The company recently announced it reduced its hedge book to cover less than 25% of 2010 output, while planning on increasing production by 8%-10% in 2010 and 12%-14% in 2011.

Chesapeake is escalating its exposure to the natural gas market at a time when it may have hit rock bottom. Natural gas rallied more than 100% since hitting lows this past summer (Exhibit 1).

Management's aggressive stance puts a serious strain on capital resources, as cap-ex was US$2bn for the last quarter, which is a bit concerning. However, Chesapeake's liquidity positioning allows for the bold manoeuvre, as cash and cash equivalents sit at US$3.1bn (US$520m in cash and the rest in three revolvers). The company does not have any other debt due until 2013.

We did a cohort analysis on comparable Energy issuers with Chesapeake Energy. El Paso and Pioneer Natural Resources credit spreads trade at fair, allowing for a relative comparison of fundamentals and spreads with Chesapeake.

As Exhibit 2 shows, Chesapeake's latest quarterly debt-to-EBITDA level is in line with Pioneer and roughly half that of El Paso's; however, Chesapeake's CDS trades wide of El Paso (five-year CDS at 530bp) and 350bp wide of Pioneer (five-year CDS at 210bp). After accounting for Chesapeake's capitalised interest expense (roughly 75% of total), its interest coverage falls right in the range of Pioneer (5.2x) and is 2.5x greater than El Paso's.

From a debt to market capitalisation perspective, Chesapeake is again more comparable to Pioneer than El Paso. El Paso's leverage comes in at a high 200%, versus 87% for Chesapeake and 65% for Pioneer.

The overwhelmingly clear conclusion is that Chesapeake's credit risk level is closer to that of Pioneer and therefore its CDS should trade at a tighter level. We expect a spread level of 350bp for Chesapeake Energy.

We also like the trade from a technical perspective. Over the past month, higher yielding E&P credit spreads widened by 1%2-18%, while their IG counterparts tightened. We expect a reversion of the trend.

Also, given the long nature of the position, three months' worth of carry will offset roughly 35bp of spread widening. That being said, we are well aware of the possibility of significant volatility on the position, given the company's increasing exposure to the natural gas market.

Natural gas tends to trade with a high implied volatility in the range between 50% and 100%. We thus set a stop loss on the trade at a level of 650bp (Exhibit 3).

Position
Sell US$10m notional Chesapeake Energy Corp 5 Year CDS at 545bp.

For more information and regular updates on this trade idea go to: 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).