Contents

CDO

CSO return?

New deal eyed as more in the offing

A new CSO marketed by JPMorgan and managed by AXA Investment Managers, which has yet to get out of the starting gate, is already receiving mixed reviews. When and if the deal actually comes to fruition, it is, however, expected to receive accolades for its brave attempt at bringing a new investment grade synthetic CDO while the credit crisis embers are still smoking.

No size has yet been attached to the deal, called Aria IV, as JPMorgan and AXA are still in the process of gauging demand. Participants familiar with the offering say JPMorgan has been shopping the deal mostly to European investors, similar to the draw for its earlier series of Aria CSOs that started in 2004.

The Aria deals, like Aria II via arranger and dealer JPMorgan, incorporated several multi-currency tranches, including euro, yen and US dollars. More than 50% of the Aria portfolio consists of euro-denominated tranches, says one structured finance trader.

As one US-based trader explains, the transaction is a good way for people to take a view on credit risk and get some excess spread. "But the way the CSO market comes back, if it does, will look very different than it did before," he says.

Indeed, any new CSO has some sizable shoes to fill. The investor base - those still keeping at least one eye on this market, which all but collapsed during the credit crisis - is decidedly different than when the original Aria offerings were initiated. For one thing, investors are demanding higher attachment points per tranches, such as about 10%. They also want cleaner names in the portfolios and more diversification.

JPMorgan and AXA are at least aiming to meet these new requirements in marketing the 100- to 200-name deal, but the process has been slow. Investors are said to be interested, but not enough orders have materialised just yet. As one former CDO investor notes, JPMorgan could tranche this deal for specific global investors with different trades for different appetites.

European investors would be the natural audience for the Aria transaction, since many who have left the CDO/CSO space years ago are slowly returning looking for yield. Clients, particularly French, Asian and Middle Eastern investors, have been inquiring from dealers lately how they can get back into structured credit - more so than US, British or Irish investors.

Dealers have been filling that interest so far with partially funded synthetic deals that resemble synthetic corporates and have underlying CDS. In some of the deals, the mezzanine tranche is issued and then retained.

JPMorgan's transaction should appeal to some participants already active in the correlation space. The deal's short-dated maturities are one of the selling features, since it includes senior and mezzanine tranches with three- and five-year maturities. Previous Aria deals had three-, five- and seven-year tranches.

"When you compare that to the cash markets in securitisation, it's hard to get short-term risk like that; that's where the interest is from, on a risk taking perspective. If you take three-year risk on this portfolio, it looks like it could be attractive for certain investors," notes an asset manager.

However, some think the price guidance on the deal could be too tight. The triple-A tranche is marketed at about 100bp over Euribor, while the double-A tranche is aiming at 200bp over Euribor, according to a trader. The A2 tranche is at 200/210bp for the five-year and the double A2 tranche is at 100bp for the five-year.

Most of the tranches are structured at 7.5% for the first attachment, going up to 14% or so.

Aria's mezzanine tranches could be a draw more than the senior pieces. It's becoming easier to sell to investors looking at triple-B, double-B and equity in this marketplace, adds a second trader, since those are the participants with the cash as opposed to the higher rated credits.

As least one trader familiar with the deal says he could see the offering actually price during the summer, similar to the first Aria deal. The initial Aria, he says, had a hard time marketing when JPMorgan began shopping it in 2004. But, after gauging interest over several stable months of market activity, the deal priced during the summer.

Regardless of how long this transaction takes to actually price, other dealers are believed to be waiting in the wings to launch similar deals. UBS, for one, was cited as already marketing a similar managed CSO offering with Prudential as manager.

Of the two deals, investors say AXA's strong reputation should prevail in getting the Aria deal done first.

If both the JPMorgan and UBS CSOs go off successfully, market participants say more banks will follow suit. "I suspect there will be more bank deals. A lot of CDS structurers are sitting around in banks looking for something to do," says one CLO trader.

However, the offerings come as downgrades continue to plague outstanding synthetic CDOs. Earlier this week, Fitch downgraded 99 tranches of these securities globally that affect 87 public ratings (see also separate News Round-up story).

KFH

ABS

Strength to strength

US ABS and MBS to build on strong first quarter

Strong performance in sectors across the US ABS space in the first quarter has resulted in positive sentiment for the market moving forward. However, while CMBS has shown positive growth, concerns remain over the effect that the forthcoming Markit PrimeX launch may have on market activity.

Dan McGarvey, head of non-mortgage ABS/conduit for the Americas at RBS, explains that - despite the expiration of ABS TALF - the sector has continued to show growth, thanks in part to the strong performance of the auto sector. He says: "Last year volumes were good off the back of TALF, but volumes quarter-over-quarter show that we're up by 130% in the asset-backed sector, from Q109 to Q110. If you want to drill deeper into that, in the non-mortgage sector the auto sector drove that activity and it was a big quarter for auto volume."

But he adds: "We don't expect to see those kinds of volumes going forward; however, we do expect that auto will be a continuous and heavy ABS sector for the rest of the year. Moving forward, auto volume is expected to be a constant and floorplan will also be an interesting thing to watch post-TALF."

Similarly, the expiration of the FFELP programme did little to increase volatility in the student loan ABS market. McGarvey explains that the market's anticipation of the programme's closure was largely the cause.

"Generally speaking, the termination of FFELP was built into the market's expectations. If you look at how Sallie Mae's equity traded, there really wasn't a tremendous event. It was built into the equity of those who are involved in this and it was built into how investors were thinking about student loans within the asset-backed sector," he says.

Overall, US ABS prospects in the coming year are positive, according to McGarvey. "Looking at the very end of the quarter, across ABS, MBS and CMBS we've seen innovative transactions which three or four months ago I don't think issuers or investors would have expected. If you look at these recent innovations from a market perspective, I think it speaks volumes about what can be expected for the rest of the year," he explains.

In particular, McGarvey is optimistic about credit card ABS. "Given where some corporate spreads are at the moment, we would expect to see some card volume over the next few months."

He continues: "In most cases ABS will likely be a slightly smaller percentage or a much smaller percentage of credit card issuers' overall funding plans, but it really will be more of a question of where their unsecured and deposit levels are versus where their ABS trades. We do expect a return to volume; it's just going to be a whole different mentality as to when, why and at what level companies are going to issue."

RBS global co-head of MBS, CMBS, and ABS trading and head of US flow credit trading, Scott Eichel, is positive about the performance of the MBS sector. "The past quarter in RMBS/CMBS has been phenomenal. Price action has been strong and the account mix is changing. Much of the activity was in hedge funds in 2009 and now we're seeing the emergence of real money actively engaged in these securities. So, that's a good sign as well," he notes.

Eichel goes on to say that he believes the current favourable market conditions bode well for the emergence of new issuance in the space. "Demand for new issuance is tremendous because we're getting newly rated securities," he says. "The market is very bullish right now. If you look at the current market environment, it seems as though there are too many investors in cash who are still underinvested. As pricing continues to improve and grind tighter, I think that will open up the ability to issue non-agency securitisations. We're getting closer to that point."

Sufficient investor appetite to support new issuance is undoubtedly there, according to Eichel. In particular, he believes that CMBS continues to hold investor interest.

"We still believe that, even with the underlying fundamental issues in housing, it's still the cheapest asset class in fixed income," he notes. "If you think about it, you can buy senior secured cashflows in mortgage deals cheaper than you can buy Greece."

The reason for this is two-fold. As Eichel explains: "First, the housing sector still has a lot of issues and potential government principal forgiveness policies. Second, the fixed income landscape has basically become a non-investment grade world. There just aren't that many triple-A rated assets left. Fixed income in general has been predicated on investment grade assets, so when you do have a new deal that's newly rated, I think demand will be massive."

Despite Eichel's largely positive view for future market activity, he does point out that the launch of the new PrimeX index on 20 April may result in a period of uncertainty. Although he concedes that some market volatility is expected, he says: "I don't think we'll see tremendous volatility, but it will be interesting to keep an eye on for a couple of reasons."

He explains: "First, it finally gives a lot of investors a way to hedge away from ABX and CMBX, where they are taking a lot more basis risk. Additionally, from a leverage standpoint, if you're thinking about being long PrimeX, depending on where it's priced, you can basically receive term leverage at Libor-flat."

"Where in the world can you get that kind of financing right now?" Eichel asks. "So, that would be a positive development. It's very interesting."

JA

Regulation

Reporting rules

Market caught out by cashflow waterfall disclosure plan

The US SEC last week proposed new rules that, if adopted, would revise the disclosure, reporting and offering process for ABS. Although the market had been anticipating new requirements around loan-level data, the proposed disclosure of cashflow waterfalls came as a surprise.

"The new proposal bridges the gap between loan-level data and actually understanding the performance of an investment," explains Douglas Long, evp business strategy at Principia Partners.

In the past, a key issue was the lack of time investors had to make a decision about whether to invest in a new issue. This, in turn, spurred an overreliance on ratings instead of taking the time to build waterfalls to capture the dynamics of a securitisation structure.

However, says Long: "Doing the modelling themselves with a predefined script can give investors greater confidence in an investment because they're not having to translate pages and pages of deal documentation every time. It means they can focus more on the analysis of the deal itself rather than the individual loans behind it and only go to the loan level when really necessary."

The SEC has proposed that, with some exceptions, prospectuses for public offerings of ABS and ongoing Exchange Act reports contain specified asset-level information about each of the assets in the pool, according to proposed standards and in a tagged data format using XML. Along with the prospectus filing, the filing of a computer programme of the contractual cashflow provisions expressed as downloadable source code in Python (a scripting language) would also be required.

The move is expected to force issuers to standardise their models and assumptions and have an ongoing commitment to update them. "The aim is to make it easier and simpler to get investors back into the market. Ultimately, the barrier to entry for an investor will be much lower," Long notes.

However, he points out that questions remain around the format of the computer programme in Python, standardisation between issuers, which inputs/outputs will be used and how the programme will be delivered. While this can help provide a more level playing field, Long believes the proposals also leave room for innovation and competitive differentiation to emerge from issuers, investors and solution providers alike.

The SEC's proposals would also require filing deadlines for ABS offerings to be revised to provide investors with more time to consider transaction-specific information, including information about the pool assets. In addition, the current credit ratings references in shelf-eligibility criteria for asset-backed issuers would be repealed and new shelf-eligibility criteria established. This would include a requirement that the sponsor retain a portion of each tranche of the securities that are sold and that the issuer undertake to file Exchange Act reports on an ongoing basis, so long as its public securities are outstanding.

Finally, new information requirements for the safe harbours for exempt offerings and resales of ABS have been proposed.

The SEC says the move is designed to provide investors with more detailed and current information about ABS products and more time to make their investment decisions. "The rules we are proposing stem from lessons learned during the financial crisis," explains SEC chair Mary Schapiro. "These rules, if adopted, would revise the regulatory regime for asset-backed securities in order to better protect investors."

SIFMA expressed its support, in principle, of the SEC's efforts to increase the transparency and effectiveness of the disclosure and marketing practices for ABS. "This includes reasonable risk retention requirements that are calibrated to align the interests of securitisation market participants according to the risks presented by various asset classes and transaction types. We look forward to working with the SEC to refine the risk retention provisions and other aspects of this proposal," comments SIFMA president and ceo Tim Ryan.

Indeed, notwithstanding the extra outlay for issuers in providing waterfall models to investors, the industry has generally welcomed the SEC's proposals as part of a broader effort to de-risk securitisations. However, some question the merit of singling out structured finance for overhaul within the risk asset universe.

Of particular concern is the requirement for issuers relying on Rule 144A to provide investors, upon request, all information that would be required if a transaction were registered using Form S-1 or SF-1. This is a radical departure from current information delivery requirements in the private market and likely diminishes the attractiveness of tapping this market for many issuers, according to ABS analysts at Barclays Capital.

"In proposing this change, the SEC specifically cites the CDO market as being primarily a private market and central to the financial crisis. In doing so, it overlooks asset classes that have for years used the private markets properly," they note.

The BarCap analysts add: "Clearly, additional disclosures were required for privately placed CDOs. However, in our view, the SEC is making a sweeping generalisation about the ABS market based on the experience of private CDO transactions and applying corrective actions to asset classes that do not necessarily need them."

Public comments on the proposed rules should be received by the Commission within 90 days after its publication in the Federal Register.

CS

CLOs

Buoyant and robust

US CLO market activity in the two weeks to 13 April

The secondary US CLO market has shown a marked improvement over the past few weeks, with both appetite and prices increasing. However, despite this, the market is still unlikely to see genuine primary issuance in the coming months.

One CLO investor describes the current trading environment as fairly positive. He says: "As CLOs are reaching new highs, people are starting to look for opportunities to enhance the returns of their portfolios and are taking on risk. I think a lot of those people are seeing that the CLO market, although a small market, is pretty accretive to a portfolio's returns. So people are returning to it, and are increasingly returning to more speculative tranches within the capital structure."

Another trader calls the CLO market buoyant and robust. He confirms that there is risk appetite across the capital structure, in particular for triple-A rated paper. Generally, triple-As are said to be trading in the 90s and double-As in the 80s.

The trader adds: "The interesting part is the belly and below on the mezzanine stack - there seems to be strong appetite in double-Bs and a very good appetite for risk taking. There have been numerous BWICs and I would say even equity paper has been getting pretty good participation."

A dealer explains that much of the competitive bidding has been dependent on the quality of the bonds available. He says: "We're seeing a high demand for higher quality bonds on the CLO side and even in the subordinates; everyone is looking for triple-A or double-A CDO and CLO paper. It's hard to find and source that product, but when it does get out there it is bid competitively."

According to the trader, another factor driving the improvement of market conditions and appetite for triple-A paper is the emergence of new conservative money into the market. He notes: "There is new fund money coming into the market, which is usually allocations from vehicles, private equity and reformatted credit funds. I think the conservative money has new allocations, which explains the buy-and-hold component that is typically found at the top of the capital structure."

The investor confirms this trend. "I think as far as triple-A tranches are concerned, people have realised that these bonds aren't going to cut off payments and they really are going to pay down," he says.

As a result, the investor adds, there is growing confidence in the market, which has been bolstered by its improving results. "A lot of people who got into this market last year have been taking profit recently. People are getting out and more real money accounts are moving into the space," he reports.

The dealer confirms the profit-taking activity: "We sold some double-A CLOs back in August of last year for 45-50 cents on the dollar and we've just heard that the same name has re-traded at 70-80 cents. So, in just over a six-month period, some people have made quite a bit of money."

In terms of new issuance, there was recently 'a glimmer of hope' with the Tempus CLO (see SCI issue 179). However, the deal - along with the expected Orix, Apollo and GSO Blackstone transactions - are for the most part refinancing deals.

The trader says: "They are rumoured to be new deals, but a lot of it is driven by refinancing. A deal is taken and reorganised to give a longer average life and the coupon changes."

He adds: "Tempus was upsized slightly, which is surprising, but on the other hand there's a demand for triple-A, as it's the cheapest form of debt in these structures. Also, given the scarcity of triple-A tranches in the secondary market, there's more and more demand for triple-A pieces, so that's what's driving the mechanism for these deals."

The CLO deal expected from GSO Blackstone has a similar focus on leveraging the triple-A component. The trader explains that GSO's acquisition of the Callidus platform resulted in the addition of around nine CDOs and CLOs (see last issue).

He says: "The deals have held up well in this last crisis period, so I think that again triple-As will be what's driving the issuance. In terms of everything else, equity is trading, there's a reasonable amount of secondary out there, and people are wanting to buy up secondary equity again as well. But I think the main catalyst for this is the senior first-pay piece."

Although the market seems likely to continue to strengthen over the coming months, the prospect of genuine new issuance seems distant. Participants agree that pricing within the market is still not conducive to the emergence of a new issue pipeline (see also separate News Analysis).

The investor explains: "Short of there being increased fears of a double-dip recession, prices are going to keep tightening. The question of whether they are going to keep tightening relative to the loans is a good one. I think both senior and subordinate tranches would need to tighten quite a few points relative to collateral to make new issuance work."

"I'm venturing out to an extent and saying that it will be a while before paper is trading tighter than the underlying loans, which would make the arbitrage possible," he adds. "So, I don't think we're going to see a robust new issuance pipeline for the foreseeable future."

JA

RMBS

Faring well

European MBS activity in the two weeks to 8 April

The weeks leading up to Easter showed a flurry of RMBS activity as investors sought to prepare for both month-end and the close of the quarter. At the same time, the CMBS market has remained stable, with particular interest in mezzanine tranches.

Within RMBS, one trader explains: "We are on fairly thin volume, given that there aren't too many people around for Easter - lots of the US accounts tend to take the whole week as a break. However, in the week leading up to Easter the market was much busier. It was much more active as people were reshuffling for both month-end and quarter-end, taking some profits and repositioning."

In terms of current price levels, the RMBS trader says: "For prime triple-As I don't think things can get much tighter, but in the mezzanine space there is still some room for tightening. Granite triple-As are bid at 91.5 for euros and sterling, and the triple-Bs are in the range of a 41 bid now - those levels were similar throughout March."

The RMBS trader notes that BWIC activity remained strong towards the end of the month. After a long period of dealers dominating BWIC activity, real money accounts had begun to emerge into the space (see SCI issue 177), but this trend has reversed somewhat.

"It still seems like dealers are taking a lot of paper down; obviously, they're putting it somewhere, but I haven't seen a huge amount of end accounts in the market," the RMBS trader adds.

Overall, he believes that the market is in relatively good condition. "If anything the market is slightly better price-wise. We certainly haven't been affected by the Greece news, which is affecting equity markets and crossover."

The RMBS trader adds that new issuance is expected for the market in the near future. He says: "There's definitely going to be some primary. Lloyds TSB will have to offer a deal - Arkle is going to come with something."

Meanwhile, the European CMBS market has also fared well over the past few weeks. One CMBS trader explains that although it remains difficult to generalise, the market seems strong.

"The overall picture is stable on the senior level and pretty strong in the mezzanine. Specific bonds traded up easily by ten points for specific transactions," he says.

In the mezzanine space the CMBS trader explains that appetite is very dependent upon the quality of paper on offer. "There has been lots of tiering in the market between good transactions and transactions where there has been some kind of trouble in the collateral or in the structure. On the lower mezzanines I think what we're seeing is a grasp for yield from opportunistic buyers, but it is difficult to get your hands on good bonds," he says.

The CMBS trader believes that the appeal of the mezzanine tranches is in part due to the lack of new issuance, which has increased competition in existing notes. "This has resulted in the value being squeezed out of the senior positions," he says.

Consequently, the CMBS trader says: "CMBS remains a playing field for very specific, specialised parties and the absolute return has got to the point where they are not interested anymore - for absolute-return players Libor plus 3, 4 or 500+ is not enough. Now that the mezzanine outperforms senior, I think that play has more or less come to an end, especially as even the higher prices of mezzanine don't seem to generate any big offer amounts."

The paper that has garnered investor interest is the notes that are believed to be likely to benefit from refinancing, according to the CMBS trader. "Refinancing is still an issue, even with triple-As. If you have transactions with lots of mezzanine and B-notes below, then refinancing can be problematic," he explains.

As in the European RMBS space, the dealer presence remains a driving force in the market - although the CMBS trader believes that it is more balanced in CMBS. He says: "Dealers have been bidding up and I still believe that they are the ones who are most active in the bid lists. They've returned in order to improve their balance sheets again, but I would say that although the dealers have been able to buy, they have not been able to do so the way that they did in the bull years. Several participants have vanished from the market and I think that overall the market is pretty balanced."

Looking ahead, the CMBS trader believes that the market will remain stable, with investors taking on buy-and-hold positions. "By now I feel that most of the forced selling has materialised and everyone seems to be happy with what they have on their books or it is being analysed. There are still investors waiting for a lot of information to come from the transactions, especially given some very specific drops in value after revaluations that were pretty large and beyond anything that investors would have analysed two or three years ago."

However, the CMBS trader is bearish on primary issuance. He believes that although issuance will happen within the US CMBS and whole business space, he does not anticipate be any new issuance from Europe for the rest of the year.

JA

ABS

Strategic bond fund to focus on liquidity

The TwentyFour Asset Management Dynamic Bond Fund is set to launch at the end of April. The fund will be managed by lead portfolio managers, Gary Kirk and Eoin Walsh, and is to be distributed by Gemini Investment Management.

By focusing on liquidity, the strategic bond fund intends to position itself within the fixed income market adapting to both economic factors and the market performance of each sector. "At the moment, we believe that ABS represents one of the best relative value sectors in the fixed income spectrum, which is why the fund will initially have a relatively high allocation to ABS," says Kirk. "In a few years time, if something else is more relevant, we would reduce ABS exposure and increase the allocation to other sectors."

Kirk continues: "If we were to kick off the fund today, then we would expect to have 45% in ABS, 34% in subordinated financials, 18% in high yield and about 20% in relative value. Those percentages would change over the course of time, depending on what the economic environment dictated."

In order to adapt to market conditions, the fund has opted to place an emphasis on liquidity rather than generating higher yields. Walsh explains that the fundamental strategy will be to invest in the most liquid deals within each sector.

He says: "Instead of targeting transactions that are smaller and might therefore trade a little less frequently but have a higher yield, we'd rather look at the larger, benchmark deals which are traded by all market makers. Then, in times of stress, if we want to exit a position it's much easier to get a bid and much easier to trade in the marketplace."

Although this approach is likely to have a lower yield return, Walsh points out that a longer-term strategy is still likely to benefit investors. He says: "We think it makes sense to give up a small amount of yield in order to have greater flexibility and greater liquidity. In the short-term you might give up a small amount of yield, but investors will benefit in the medium to long term by being in the most liquid part of the market."

Walsh continues: "Over the long term, funds like these are designed to perform in any cycle in the market. So - whether you're in a recession or exiting a recession, or you're in a boom - it's essential to have the liquidity to move within various sectors. Having exposure to the most liquid names in the market helps to achieve this and gives the portfolio managers greater flexibility because of that."

TwentyFour Asset Management's focus on the long-term performance of its fund is particularly relevant in terms of managing future interest rate concerns. "If you're locked into bonds that pay interest at a fixed rate, these bonds are obviously going to underperform as rates rise," says Walsh. "We're very focused on this because, given how low interest rates are, the next move will definitely be up. It might not be in the next quarter or even in the next six months, but it will happen at some stage."

In order to hedge against interest rate risk, Walsh explains that "we will target a point on the swaps curve where we think the fund should be positioned and will execute this with a single trade. The interest rate swap market is one of the largest and most liquid there is and this approach also helps the fund to stay very liquid."

JA

CLO Managers

Manager consolidation gathers momentum

M&A activity within the CLO and CDO management space continues apace. Several managers have announced new mandates within the past week, including Prudential Fixed Income, which has been selected as replacement manager for two European CLOs originally managed by GSC Partners - GSC European CDO III and GSC European CDO IV.

GSC Partners, which also has a number of US CLOs under management, made the unusual move in February when it announced it would resign as collateral manager on the two European deals without having found a replacement manager. According to one market participant, certain noteholders were unhappy with the deals' performance and gave GSC the choice to either resign or be ousted as manager.

The assignment of the deals to Prudential adds more than €800m in AUM to the company's alternative products business. GSC III and IV are 2006/2007 vintage CLOs backed primarily by European bank loans. Prudential's London-based CLO team expects to assume full management of the transactions by the end of the month.

"We're pleased that the investors in these CLOs selected us and recognised the strength of our global platform and the expertise we bring through our Dryden deals," says Sara Bonesteel, md and head of Prudential Fixed Income's alternatives business. "We have built a platform that offers comprehensive coverage of the European credit universe and we continue to look for opportunities to grow our European business."

Stanfield Capital is, meanwhile, whittling down potential applicants looking to take over its US$4bn CLO business. Over 10 CLOs are included in the package, with managers such as Apollo, Sankaty, Babson Capital Management and Blackstone GSO rumoured to be in the running.

Cutwater Asset Management, formerly known as MBIA Asset Management, is also building up its inventory of deals under management. It is expected to take on Oceanview CBO 1, a 2002 cashflow structured finance CDO formerly managed by Deerfield Capital Management. Oceanview declared an event of default on 7 December 2009, following a decline of the class A-1 overcollateralisation ratio to below 103%.

On 3 March 2010, the majority of the controlling class elected to accelerate the transaction. As of the February 2010 trustee report, the balance of the portfolio was US$189.1m, including US$41.8m, or 22.1%, in par of assets deemed defaulted as per the transaction's governing documents.

Last year, Cutwater took on a number of CRE CDOs and SF CDOs and now has 13 CDOs under management worth approximately US$4bn. Deerfield Capital itself is also looking to build up its CLOs under management, having taken on four Columbus Nova CLOs last month.

Finally, Fitch has confirmed that ratings on the €177m Ivory CDO will not be changed upon its transfer to Chenavari Investment Managers. Asset management responsibilities for the CDO are expected to be transferred to Chenavari from Lyxor, following its acquisition of the latter's CDO business in late 2009 (see SCI issue 164).

Ivory CDO is a managed cash arbitrage securitisation of mezzanine structured finance securities - predominantly residential (28%) and commercial (23%) MBS - issued in August 2007. The transaction has a five-year reinvestment period, ending in December 2012, during which principal proceeds may be used to invest in substitute collateral.

As of March 2010, however, the CDO was failing all of its overcollateralisation tests as a result of one defaulted asset and two deferred interest PIK bonds in the portfolio, as well as overcollateralisation haircuts associated with below-investment grade collateral. As long as these tests are failing, principal proceeds are redirected to pay down the senior-most notes and the asset manager's ability to reinvest is therefore constrained.

Ivory CDO (and a similar transaction dubbed Amber CDO) were originally managed by SGAM AI before being transferred to Lyxor AM in September 2009. See CDO manager transfer database.

As of March 2010, Chenavari's AUM included US$260m in alternative assets (US$135m in corporate credit strategies, including The Chenavari Multi-Strategy Credit Fund), US$180m in ABS (including the Toro Capital I A fund) and €750m in long-only mandates, including Ivory CDO and seven collateralised swap obligations to be transferred from Lyxor. The transfer is expected to be completed in early Q210.

AC

Insurance-linked securities

More cat bonds line up

Catastrophe bond investors have been given headline details of three new deals as speculation is mounting over a possible future cat bond as a longer-term structure continues to do the rounds. Meanwhile, a new report from GC Securities has some bullish predictions for further market activity.

The three new deals are 2010 versions of previous transactions referencing US perils and investors expect to receive full information on them in the next week or so. Liberty Mutual's Mystic Re 2010 follows on from last year's US$225m quake and hurricane bond and is being brought by Aon Benfield; Guy Carpenter is leading Parkton Re II for Swiss Re, which issued the first Parkton US$200m hurricane bond in 2009; and the annual Residential Re deal from USAA is also in the pipeline, but without a confirmed arranger as yet. In recent years the role has been taken by Goldman Sachs, but there are some who believe there may be a change of lead this year - possibly a return to BNP Paribas.

Further down the line there are whispers of a completely new transaction. There is some market speculation that AIG insurance/Chartis is mulling a new offering.

Meanwhile, a contingent capital deal Evergreen from insurer Catlin, which triggers on the firm's catastrophe losses, is being shown to investors. The transaction is targeting US$100m to US$200m and thought to be looking for a close before the hurricane season starts on 1 June.

No in-depth details, such as expected loss, have yet been furnished to the broad array of investors being spoken with. Catlin had originally targeted non-specialist investors, given the unfamiliarity of the structure to insurance buyers - thanks mainly to its contingent nature and consequent lack of a set maturity date. However, some insurance-linked securities (ILS) investors are believed to be interested and would be suitable buyers because Evergreen is offering pure insurance risk, which may prove too big a challenge for some non-specialists.

Meanwhile GC Securities has published its latest quarterly review of the catastrophe bond market, which says: "As the ILS asset class continues to increase in prominence (and additional asset allocations are made to the space) issuance conditions continue to improve. For sponsors, this makes more compelling the argument for locking significant amounts of multi-year fixed price capacity. This is particularly relevant in the context of the catastrophe activity of the first quarter which included a significant earthquake in Chile and European winter storm Xynthia."

Consequently, GC believes the issuance outlook for the second quarter of 2010 is positive, with between five and ten new transactions expected (covering a wide variety of perils). It anticipates more activity later in the year, with total issuance for the year ranging from US$3bn to US$5bn.

Further, it says: "In our updates throughout 2009, we frequently mentioned the need for catastrophe bond spreads, in the aftermath of the credit crisis, to come back into rough approximation with the traditional market to spur further issuance. A great deal of progress has been made on this front, as spreads have come in better than 40% relative to the first half of 2009.

Looking forward, GC suggests that while the rate of spread tightening may moderate, net cash inflows to sector, and more than US$4bn of scheduled maturities (the majority of which are expected to return cash into the hands of dedicated ILS funds) should continue to exert downward pressure on spread levels. Sponsors have certainly taken note of this price tightening, particularly in the context of what will likely prove to be the most costly first quarter (measured by insured losses) on record, the report concludes.

MP

LCDS

Negative convexity and mergers loom over LCDX

Despite market technicals that support higher prices in Markit's North American Leveraged Loan Index (LCDX), negative convexity along with M&A pressure could impact the loan sector in the next few months, said analysts and traders on a Goldman Sachs conference call yesterday (13 April).

Recent M&A activity, such as the merger announcement this week of Mirant Corp and RRI Energy, has also driven spreads tighter in this sector. As a component of LCDX, Mirant will be another name taken away at par, says a trader on the call. The companies plan to close the merger by the end of this year.

Aside from M&A activity, companies initiating note offerings to pay down debt have also contributed to negative convexity currently.

As the trader reminds, "as we trade closer to par in overall pricing of the loan market and indices experience their NAV, or the actual cash component of the index continues to ride higher, there's no more upside left, regardless of the spread for LCDX series 12 or 13, who are going to be so negatively convex."

Still, accounts continue to put money to work in the loan and LCDX space. High yield and loan funds continue to see strong inflows. Last week there was more than US$400m flowing into high yield funds and about US$300m in loans - the highest weekly inflow on record, he says.

"We've seen some accounts come in and buy the (LCDX) index at these high dollar prices. It's not that they wanted to buy but they had to buy; they have to put money to work," he adds.

While money piles into loans as evidenced by the S&P return for loans being up over 5.5% year to date, it makes for an interesting technical in the secondary market as there is no new issue supply (in the cash market), he further says.

Another trader on the call notes that the macro picture has not changed very much despite the dollar price rise in the loan space. The LCDX index and the CDX HY index have both been trading up by about a point lately, whereas the CDX IG index is mostly unchanged. "We expect this trend to continue as people look to go down credit ratings and look to pick up incremental yield," he says.

However, the new bullet LCDX initiative is still a bit slow to start. As the first trader notes, they are finding a reluctance of accounts to buy protection on a 5-year bullet maturity that has a 250bp coupon with the prospect of being orphaned at any time.

KFH

Investors

Positioning for the future

Marjorie Hogan, senior portfolio manager at Capstone Credit Advisors, answers SCI's questions

Q: How and when did you become involved in the credit and MBS markets?
A: My first exposure to the MBS markets was in the late 1980s when CMOs were in their infancy. In 1986 I built an OAS model for First Boston, which was used to analyse relative value and estimate hedge ratios for fixed income securities, particularly mortgages.

Just as the CMO market was taking off, I moved into risk management. At this time, credit risk was not the main issue - our focus was the interest rate risk driven by the refinancing option that gave rise to negative convexity and issues of relative value and duration.

I joined Bear Stearns in 1991 to begin a mortgage derivatives trading business when most action centred on agency mortgages. Only a minor part of our business was in whole loan private-label mortgages with some credit-sensitive tranches. I began doing the earliest credit derivative transactions on mortgages involving forerunners of subprime in the mid-1990s, including 125 (underwater) mortgages.

In 1996, I was involved in executing derivatives transactions involving our earliest CBOs. Over the next few years transactions included high-yield collateral deals, emerging market bond deals, ABS CDOs, mortgage-backed market value deals and CLOs.

In 2000 I moved much deeper into the world of credit when I started making markets in CBOs, becoming the first and only such trader on Wall Street for the next several years. I moved into proprietary trading in 2005, focusing on CDOs and mortgages. The issuance markets were very healthy, both in CDOs and in exotic credit mortgages.

When mortgages were starting to show signs of stress in late 2006, I turned my attention to what I believed was a looming mortgage, credit and housing crisis. By late 2007 I was focusing on the way this financial infection would spread to other institutions and products.

Q: What are your key areas of focus today and what have you focused on during your career?
A: My focus today is on a broad swath of the structured credit space - CDOs, RMBS, CMBS and ABS. Though I've witnessed evolution and development in the markets, the elements of how to understand transactions, find value and trade bonds never really changes.

We still try to recognise the fundamental legal, market and political risks of a security, which involves a deep understanding of the collateral and the interplay of the legal structure and collateral performance. This is completely in line with what I've done my whole career, with the exception that now the main risk in the instruments is credit risk, while in the first half of my career it was interest rate risk.

Q: What, in your opinion, has been the most significant development in the credit market in recent years?
A: One significant development occurred in 1994, when the CMO market collapsed, taking down many institutions and hedge funds. Even though kitchen sink bonds were largely blamed, I believe extending-duration companion bonds, inverse floaters, low-cap floaters and leverage were culprits. That situation was primarily an interest-rate risk issue.

When the corporate credit markets collapsed in 2001, weaknesses of poorly underwritten issues and the pushing up of default rates were exposed. In the CDO market, this again resulted in hedge funds closing and large institutions exiting the CDO investment business.

The biggest difference between this crisis and earlier ones, aside from the severity, was the involvement of the government. Though Federal Reserve programmes have stabilised the markets relatively quickly, they have moved us down a path of ongoing government involvement that will be difficult and slow to unwind. It has also put the government on the hook for almost open-ended credit losses.

The big concern now is the knock-on effect in our deficit spending and our ability to fund ourselves. I believe there are a lot of unknowns regarding how this may dampen GDP and impact interest rates.

Q: How has this affected the way markets are traded and the number of market participants?
A: Surprisingly, the trading is far more concentrated than in the past. The large hedge funds have become far larger, while many smaller hedge funds have closed. The banks continue to take very large positions.

There is a lot of chatter about insurance companies outsourcing their investment expertise, which should also point toward further investment concentration. Additionally, there are more buyers today than in past crises.

In the past, holders such as insurance companies, pension funds and banks would dump positions to new buyers (hedge funds) as they were downgraded. This typically led to new buyers entering the market solely to buy up distressed assets, making liquidity very poor as these buyers first emerged.

Today, within the distressed credit space, many institutions traded these assets before they were distressed and continue to trade them now, even though they have far different risk profiles. Though this gives rise to an increase in liquidity and market participants, the money is in very concentrated hands. One result of this trend is that small or unusual positions languish, while larger or more generic positions trade tighter.

Q: Given the prevailing market conditions, where do you see opportunities arising?
A: There are great opportunities in structured credit today. These instruments are more complicated than corporate debt or individual mortgage loans, so the complexity creates a barrier to entry that produces chronically cheap assets. Over the next year, as the commercial property problems begin to work themselves out, CMBS should be a good investment area also.

Q: What major developments do you expect from the market in the future?
A: I expect some semblance of normality to slowly return to the market. Over time, secondary market levels will tighten up so the new issue market can compete and reinitiate itself.

I expect this to happen first in CMBS and CLOs. That should be a healthy development, which will allow private issuance in CMBS and additional avenues to distribute leveraged loans to resume and increase access to cheaper credit.

Regarding RMBS, I believe the market will be dominated by the governmental programmes for the foreseeable future. Eventually housing will begin to improve, foreclosure pipelines will be reduced (either through liquidation or through modifications that reclassify the loans as reperforming) and home prices will be on the mend.

The mortgage market will take the longest of all credit markets to return to a healthy private market since loan terms will have to contend with end-game modifications as phase-outs kick in. RMBS private market recovery should begin with the jumbo loan market, since it has not received governmental assistance.

I would not be surprised to see some deals completed in 2011 or even late 2010. Even though the Federal Reserve's mortgage purchase programme has ended, I do not expect there to be a serious digestion issue, particularly as the RMBS are still guaranteed by the government.

I expect it will be several years before the private mortgage market grows large enough to rival the agency market again. It could be many more years before the agencies are either spun out into the private sector or their business is largely moved back to the private sector again.

ABS

Permacap snaps up discounted assets

Permacap European Equity Tranche Income (EETI) reports that it has reinvested part of its cashflow by purchasing three rated ABS bonds for a total consideration of €700,000. The average discount to the face value of the bonds is two-thirds and the expected undiscounted cashflow of these investments is well in excess of three times the invested amount. These bonds are performing and paying contractual coupons, and are expected to mature within four to six years.

The investments include Portuguese securitisations of prime residential mortgages and Spanish ABS, backed by a diversified pool of loans to SMEs and benefiting from commercial and residential mortgages with low average LTVs.

EETI says it intends to continue to selectively reinvest part of its free cashflow in RMBS and ABS opportunities, as they arise, capitalising on the ongoing dislocation of the European securitisation market.

ABS

Illiquid assets platform enhances ABS trading

SecondMarket says it has formally launched the first centralised market for ABS, which will be run by the platform's structured products team. The move comes off the back of significant interest expressed by the SecondMarket buyer and seller bases.

Esoteric ABS - such as leased-back receivables, franchise loans, medical and heavy equipment leases, and manufactured housing - will trade on the platform, as well as the more common consumer assets.

"We have closely followed this market as pockets have remained largely illiquid and we believe our experience with an array of structured products will allow us to seamlessly integrate the broader set of ABS into our existing platform," says SecondMarket ceo Barry Silbert. "The introduction of this market was a natural progression in our effort to create a global secondary platform for illiquid financial assets."

SecondMarket has already completed a number of ABS transactions while examining the feasibility of fully launching a new market. "Over the past several months, we have seen significant buy- and sell-side interest from our market participants in a variety of securities across multiple sectors," adds Elton Wells, head of structured products at SecondMarket. "The increased demand and completion of numerous ABS deals prompted us to officially launch this new market."

ABS

Hedge fund makes ABS hire

Otaso Osayimwese has joined Ravenscourt Capital Partners, where he is understood to be working on the ABS desk. He previously held roles at JC Rathbone and Lehman Brothers.

David Sol, an ABS investor at Ravenscourt Capital, left the firm last month. He has reportedly taken on a new role at Standard Life in Edinburgh.

ABS

ABS duo recruited

Goldman Sachs is understood to have made two ABS hires in London. Rohit Sen, previously an ABS trader at Bank of America Merrill Lynch, will take on a similar role at the bank. Morten Pedersen joins Goldman's European ABS team as a desk quant, having previously worked at UBS.

A spokesperson for Goldman Sachs declined to comment on the hires.

ABS

Bank rebuilds Euro ABS strategy

UBS' European ABS strategist Srikanth Sankaran is understood to be moving to Morgan Stanley to head up its ABS research team in Europe. In his new role, he will report to Vishwanath Tirupattur, global head of securitised product strategy.

Morgan Stanley's European ABS strategy team was previously led by Sarah Barton, who left the bank in 2008 for a similar role at GLG Partners.

A spokesperson for Morgan Stanley declined to comment on Sankaran's hire.

ABS

TALF funds exceed target

Alternative investment manager Belstar Group has closed the Belstar Credit Fund and Belstar SJ Credit Fund, with combined funds of over US$280m. The funds were launched in March 2009 and have participated in both the ABS and CMBS portions of the TALF programme (see SCI issue 133). The funds aim to achieve attractive returns by investing in a portfolio of highly rated ABS and CMBS eligible for TALF financing.

The senior portfolio manager for the funds is managing partner Simina Farcasiu, who works with Jeffrey Moses, partner and director of research and analytics. "We are pleased that we exceeded our target of US$250m for the funds," says Daniel Yun, founder and chief executive of Belstar Group.

ABS

Partnership to create securitisation market access

The Business Development Bank of Canada (BDC) has formed a public-private partnership with TAO Asset Management to facilitate access to funding under the Vehicle and Equipment Financing Partnership (VEFP).

The VEFP was announced in the federal government's 2010 Budget as part of the Business Credit Availability Program (BCAP). Funded and managed by BDC, it has an initial allocation of C$500m, and will be disbursed and administered with experienced private asset-based lenders and investors .The VEFP is expected to expand financing options for small and medium-sized finance and leasing companies, increasing credit availability for dealers and users of vehicles and equipment.

"A number of small and medium-sized finance and leasing companies, although creditworthy, face challenges in accessing the funds they need to respond to business and consumer demand," says BDC president and ceo Jean-René Halde. "Increasing access to financing also provides support to the Canadian economy by helping small and medium-sized businesses acquire the vehicles and equipment they need to improve their productivity."

The partnership between BDC and TAO will provide a common securitisation structure for companies to access funding under the VEFP framework, which should be a more economical and efficient way for small and medium-sized companies to access the securitisation markets. TAO will provide structuring and administration service, and subordinated investments by TAO will support the security of BDC's investment.

"The BDC-TAO partnership will provide a further step in rebuilding investor confidence and participation in securitisation markets. We are confident that, together, TAO and BDC will bring a consistent discipline to the exercise of risk management, underwriting, due diligence and ongoing monitoring and surveillance that will ultimately create broader private sector interest and liquidity for both the senior and subordinated investments created under the partnership," says TAO chairman and founder Ken Toten.

CDO

DB tapped for credit sales co-head

Bank of America Merrill Lynch has hired Gerry Walker to co-head Americas credit sales with Steve Hollender. As co-heads, Hollender and Walker will jointly manage investment grade, structured credit, leveraged and distressed sales in the Americas, reporting to Bryan Weadock, co-head of global fixed income, currencies and commodities sales.

Walker moves over from Deutsche Bank, where he worked for more than ten years in fixed income sales. He was most recently head of US loans, high yield and distressed sales, and prior to that he was head of global loan sales and trading. Previously he worked at JPMorgan in high yield sales.

CDO

Structured credit consultancy minted

Centerline Capital Group md and Centerline Financial coo Jack Chen has launched a new consultancy called Sophrosyne. The firm provides consulting services in structured finance (including CDOs, SIVs and CDPCs), credit derivatives and operations.

In his previous roles, Chen was responsible for supporting the management of Centerline's affordable housing division, as well as for the daily operations of its CDPC. Prior to Centerline, he was coo of HillMark Capital Management.

CDS

Bank hires credit sales specialists

Deutsche Bank has appointed Casey Talbot as md and head of high grade credit sales, and co-head of credit sales within its global markets division. The bank has also appointed Faris Naber as head of non-investment grade sales and co-head of credit sales. Talbot and Naber will both be based in New York and report to Lou Jaffe, md and head of DB's institutional client group (ICG) in the Americas.

Talbot joins from Bank of America Merrill Lynch, where he was head of structured credit sales and head of fixed income, equity, currency and futures sales and trading for the US Midwest region. Naber joins from Credit Suisse, where he was md and head of high yield sales for ICG.

CDS

Credit derivatives salesman appointed

Bank of America Merrill Lynch is understood to have hired Michael Poppel as head of structured bank sales for the EMEA region. It is thought that Poppel will be based in London, reporting to head of EMEA fixed income structured solutions sales Chris Gugelmann from May of this year.

Poppel is an executive director and credit derivatives sales/marketer at Goldman Sachs.

CDS

Monoline vet joins CDS broker

CDS brokerage Traccr has hired Philippe Tromp as a non-executive director. Tromp was most recently ceo and senior md of Assured Guaranty (UK) and Financial Security Assurance (UK), where he has worked for more than 15 years. He was head of international operations and had overall responsibility for origination and underwriting activities in the ABS, municipal and public infrastructure markets of the UK, Continental Europe and Asia-Pacific regions.

"We are delighted that Philippe is joining Traccr," says Farooq Jaffrey, ceo of Traccr. "He brings a depth of experience in the credit and structured finance markets, which will be a valuable resource to help us to grow our business."

CDS

CreditTrade ceo finds new home

Electronic trading platform operator MarketAxess Holdings has appointed Paul Ellis as head of MarketAxess Europe, effective 12 April.

"Paul has the ideal background to lead MarketAxess Europe through our next phase of growth," says Richard McVey, MarketAxess chairman and ceo. "He has extensive experience in bond and derivative markets and has successfully built new businesses in the credit default swap and technology space."

Ellis was formerly ceo of CreditTrade, where he led the firm's business development. He has also previously worked for Mutant Technology and spent 12 years at Barclays, eventually rising to financial products md.

Steve Gallagher, whose role Ellis steps into, will transition into a consulting role with the company, assisting with business development initiatives. MarketAxess says Gallagher led the European business to higher levels of profitability during his three-plus years in the UK.

CDS

Analytics vet to lead portfolio risk advisory

Chad Burhance has been appointed md and head of NewOak Solutions, leading its expansion in complex structured securities to comprehensive qualification of the risk and return characteristics, sensitivities and stress testing of multi-asset class, multi-currency portfolios, including complex derivative instruments. He will also join NewOak's executive committee.

Ron D'Vari, NewOak ceo and co-founder, says Burhance is "an ideal fit with NewOak's efforts to expand its structured products and credit platform to a comprehensive multi-asset class portfolio risk advisory and system business".

Burhance was formerly md of global risk services at State Street Investment Analytics, overseeing risk and analytical services. He has more than 18 years' experience within financial services and has worked for Lehman Brothers, Citigroup and UBS.

Distressed assets

Distressed credit opportunities fund closed

New York-based Atalaya Capital has closed its third fund offering with US$250m AUM. The firm says it intends to aggressively take advantage of special opportunity investments in the small and medium credit markets, targeting the distressed banking sector.

Atalaya says its Fund III will, like the preceding Fund II, opportunistically purchase illiquid credit assets from banks, the FDIC, commercial finance companies and other financial institutions in search of liquidity. Fund III will also originate select primary private credit investments.

More than 40 banks have failed in Q110 as the pace of failures continues to outstrip last year, and FDIC chair Shelia Blair expects 2010 to see more closures than 2009. The FDIC included 702 banks with US$403bn in assets on the critical list, as of 31 December. More than US$100bn in bank assets has been seized in the year-to-date.

Atalaya closed the fund after attracting subscriptions in excess of its self-imposed US$250m hard cap after just over three months. It says investors in the fund are mainly university endowments and foundations, demonstrating a return in appetite for illiquid assets investment opportunities which did not exist last year.

Investors

Fund to focus on Euro recovery opportunities

Intermediate Capital Group (ICG) has closed its €843m ICG Recovery Fund, which aims to focus on recapitalising balance sheets of strong but overleveraged European mid-market companies seeking to delever and invest in growth.

Benoit Durteste, fund manager of the ICG Recovery Fund, comments: "Our investment teams are focused on providing flexible financing structures that facilitate the recovery and growth of private equity-backed businesses."

According to ICG, this is believed to be one of the largest pools of capital targeting recovery opportunities in Europe raised since the onset of the credit crisis. Along with ICG's co-investment and its third-party funds, the company now has approximately €1.5bn to invest in European recovery opportunities.

Approximately 30% of the fund has already been invested.

Monolines

Monoline payment claim resumption hopes dashed

Syncora Guarantee has closed the outstanding transaction that formed part of the company's restructuring, previously approved by the New York Insurance Department in July last year, that included CDS commutations and RMBS buybacks (see SCI issue 146). However, the monoline remains unable to recommence the payment of claims, which have been suspended since April 2009.

Earlier this year, Syncora Guarantee said it was moving closer to recommencing payment of claims - including all suspended payments since 27 April 2009 - and reported it was in advanced negotiations with respect to one transaction within its restructuring. The monoline said when the remaining transaction was ready to close, it would make a submission to the NYID requesting that the claims suspension order of 10 April 2009 be lifted.

In its latest statement, however, the monoline says the 1310 Order will remain in effect. Syncora says it is currently faced with significant short-term liquidity and surplus issues, and is undertaking several remediation actions designed to address these issues. As a result, the company is not in a position to request that the NYID lift the 1310 Order unless and until actions to resolve its liquidity and surplus issues are completed.

The firm notes that there can be no guarantee that its efforts will be successful or that if they are - and a request is made of the NYID with respect to lifting the 1310 Order - that the NYID will grant such a request. Syncora also warns it cannot guarantee that the NYID will not take further regulatory action, which may include commencement of rehabilitation or liquidation proceedings.

Real Estate

Fund of hedge funds adviser appointed

Ramius Alternative Solutions and Perpetual Investment Management have agreed to create a partnership through which Ramius will advise Perpetual's Multi Manager Group on its hedge funds investment activities.

Under the partnership, Ramius will work with Perpetual's Multi Manager Group to manage two separate customised fund of hedge funds products specifically designed to complement two multi-asset alternatives portfolios - the Perpetual Defensive Alternatives Fund and the Perpetual Growth Alternatives Fund. These funds invest in a range of alternative strategies, including private equity, private real estate, infrastructure, specialist credit and hedge funds.

Damien Webb, head of Perpetual's Multi Manager Group, says: "We believe that partnering with Ramius can create significant benefits and opportunities for our alternative investments funds to meet the investment objectives of our clients, specifically the high net-worth client base of Perpetual Private Wealth. Through this partnership, we will be able to take advantage of Ramius' global expertise and contacts, rigorous due diligence process and institutional platform."

Real Estate

Advisory boutique incorporated

Evercore Partners has hired Martin Cicco as senior md and head of its real estate advisory practice. The move follows Evercore's acquisition of MJC Associates, a commercial real estate advisory boutique that Cicco founded in 2007. Greg Brooks also joins as md, while Robert Klein comes in as vp.

"The addition of Marty and his team broadens Evercore's industry and sector coverage to commercial real estate, where there is a substantial opportunity for M&A, restructuring and capital raising advice as the industry continues to recover," says Evercore vice-chairman Eduardo Mestre.

Before founding MJC, Cicco spent 29 years at Merrill Lynch, rising to become vice-chairman of global commercial real estate and global head of real estate investment banking. His career has seen him involved in transactions throughout the real estate and hospitality sectors, including IPO, capital markets and M&A assignments. He will be based in New York.

Regulation

NR pair fined over arrears reporting

The UK FSA has fined David Baker, former deputy chief executive of Northern Rock (NR), £504,000 and Richard Barclay, former managing credit director at NR, £140,000. In addition, Baker has been prohibited from performing any function in relation to any regulated activity, while Barclay has been prohibited from performing any significant influence function at an FSA-regulated firm.

The FSA explains that Baker, as deputy chief executive from January 2004 and March 2008, had overall responsibility for much of this time for the firm's debt management unit (DMU), which managed its secured loan book. Despite becoming aware in January 2007 that there were 1,917 loans omitted from the mortgage arrears figures, he failed to escalate the information internally and agreed a course of action that resulted in the loans not being reported.

In addition, the FSA explains that he made misleading statements regarding these impaired loans to external stakeholders, including market analysts, quoting inaccurate figures. If the 1,917 loans had been reported as being in arrears, the figures would have increased by approximately 50%. Alternatively, if the loans had been reported as in possession, the number would have increased from 662 to 2,579 cases.

Barclay, as managing credit director of the DMU, was directly responsible for the provision of accurate management information concerning loan arrears and property possessions. The FSA reports that he knew that the firm's arrears position enabled senior management within NR, analysts and the FSA to form a view of NR's asset quality, but failed to ensure that the management information reported by the DMU was accurate - despite warning signs at an early stage. Although it is not possible to calculate the exact extent of this misreporting, if the correct figure had been reported, the arrears figures would have been significantly worse and closer to the Council of Mortgage Lenders average over an extended period of time.

Margaret Cole, FSA director of enforcement and financial crime, says: "Baker and Barclay both failed to meet the standards we require of senior individuals within FSA-regulated firms. They both held senior positions of trust within the firm, but they provided inaccurate information to the Northern Rock board and to the market."

Cole continues: "The fines we have imposed on them leave no doubt that we will take action against individuals who either fail to act with integrity or who fail to perform their roles to a high standard - this is a loud and clear message that we are serious about taking action against senior directors where they step over the line."

Both Baker and Barclay admitted their misconduct at an early stage and cooperated fully with the FSA. Both therefore received a 30% discount for early settlement. In addition, Barclay's fine was reduced on the grounds of hardship.

RMBS

SEC alleges subprime mismarking

The US SEC has announced administrative proceedings against Memphis-based firms Morgan Keegan & Company and Morgan Asset Management, and two employees accused of fraudulently overstating the value of securities backed by subprime mortgages.

The SEC's Division of Enforcement alleges that Morgan Keegan failed to employ reasonable procedures to internally price the portfolio securities in five funds managed by Morgan Asset Management, and thus inaccurately calculated net asset values (NAVs) for the funds. Morgan Keegan published these inaccurate daily NAVs and sold shares to investors based on the inflated prices.

"This scheme had two architects - a portfolio manager responsible for lies to investors about the true value of the assets in his funds and a head of fund accounting, who turned a blind eye to the fund's bogus valuation process," says Robert Khuzami, director of the SEC's Division of Enforcement.

William Hicks, associate director in the SEC's Atlanta regional office, adds: "This misconduct masked from investors the true impact of the subprime mortgage meltdown on these funds."

The SEC Enforcement Division alleges that Morgan Asset Management and Morgan Keegan employee James Kelsoe, the portfolio manager of the funds, arbitrarily instructed the firm's fund accounting department to make price adjustments increasing the fair values of certain portfolio securities, ignoring lower values for those same securities quoted by various dealers as part of the pricing validation process. It is further alleged that Kelsoe actively screened and manipulated the pricing quotes obtained from at least one broker-dealer. Kelsoe's actions fraudulently prevented a reduction in the NAVs of the funds that otherwise should have occurred as a result of the deterioration in the subprime securities market.

The SEC also alleges that Joseph Thompson Weller, a CPA who was head of the fund accounting department and a member of the valuation committee, did nothing to remedy the deficiencies in Morgan Keegan's valuation procedures, nor did he otherwise make sure that fair-valued securities were being accurately priced and NAVs were being accurately calculated.

According to the SEC's order, each fund held various amounts of securities backed by subprime mortgages and lacked readily available market quotations, and so the securities were internally priced using fair value methods to determine the amount that the funds would reasonably expect to receive on a current sale of the security. In SEC filings, the funds stated that the fair value of securities would be determined by a valuation committee using procedures adopted by the funds. In fact, the responsibility was essentially delegated to Morgan Keegan, which along with the valuation committee failed to comply with the funds' procedures in several ways.

It is alleged that from at least January 2007 to July 2007, Kelsoe had his assistant send approximately 262 price adjustments to fund accounting, which were in many cases arbitrary and did not reflect fair value. The price adjustments were routinely used, without any supporting documentation, to calculate the NAVs of the funds. Kelsoe also routinely instructed the fund accounting department to ignore month-end quotes from broker-dealers, which should have been used to validate the prices the firm had assigned to the funds' securities.

Morgan Keegan says it strongly disagrees with the decision of the US SEC, Financial Industry Regulatory Authority (FINRA) and several States to bring charges, which it believes are based on an incorrect analysis of both the facts and the law. The firm notes that it invested over US$100m into shares of two of the hardest-hit funds in order to provide liquidity for shareholders during the most difficult period of market turmoil.

"We have always held our obligations to our clients and to our regulators with the utmost seriousness. In that context, we are deeply disappointed that the agencies and states have chosen to bring these charges," says James Ritt, Morgan Keegan general counsel.

He adds: "The public anger at the near collapse of the nation's financial infrastructure is understandable. However, the actions taken today are misdirected and factually inaccurate. We intend to defend vigorously against these charges."

A hearing will be scheduled before an administrative law judge to determine what sanctions, if any, are appropriate in the public interest and whether financial penalties should be imposed.

RMBS

RMBS sponsor sells European operations

GMAC Financial Services' mortgage subsidiary Residential Capital (ResCap) - sponsor to the RMAC and EMAC NL/DE RMBS programmes - is selling its European mortgage assets and businesses to Fortress Investment Group, as GMAC looks to exit the European mortgage market. The sale will include certain loan assets - including non-performing loans - and servicing rights and the shares of the related operating entities in the UK, Germany and the Netherlands.

Securitisation analysts at Deutsche Bank note that it is difficult to anticipate exactly how RMBS will be affected by the sale, as the new owner's strategy is as yet unclear. However, they add that ResCap has so far showed a reasonable track record of honouring deal redemptions, most specifically in the EMAC NL transactions.

Separately, GMAC closed a £116m whole loan transaction in the UK at the end of March. With the combination of this whole loan transaction, the transactions with the Fortress affiliates and certain other whole loan sales that are in progress, GMAC will effectively exit the European mortgage market.

ABS

1st Financial resurfaces with ABS card deals

Two ABS credit card deals from 1st Financial Bank USA are due to price next week after initially being prepped as a TALF offering that did not materialise months ago. The transactions mark the borrower's first ABS issues this year.

The offering will consist of a US$90m 1st Financial Credit Card Master Note Trust II 2010-A deal and a US$90m 2010-B deal. Both are fixed rate offerings currently, but one could feature a floating rate coupon due to investor interest, says a source familiar with the offering. It had originally been planned as two US$100m TALF offerings.

Both deals will have a WAL of 2.1 years but the 2010-B offering will be three-months longer in duration. The issuer prefers to ladder its maturity dates with the offerings to have a certain amount of transactions due each quarter, the source says.

The deals have both senior and subordinate pieces, which include a triple A-rated US$59.175m class A tranche, a double A-rated US$11.25m class B tranche, a single A-rated US$8.1m class C tranche and a triple-B rated US$11.475m class D tranche.

Early price guidance on the offering is anticipated to be 300bp over swaps for the triple-A rated tranches. BB&T is the lead manager, while co-managers are UBS and Barclays.

With the current fixed rate coupons as the offering stands now, the credit enhancement is 41.25% for class A, 28.75% for class B, 19.75% for class C and 7% for class D tranches.

The deals follow two US$100m offerings the issuer initiated last autumn.

ABS

UK student loan ABS prospects re-emerge

Prospects for UK student loan ABS are back on the radar following an announcement by the UK Department for Business Innovation and Skills that it is looking to appoint a financial advisor on the possible sale of £25bn of student loans. UK student loans have been securitised previously through the Thesis and Honours programmes. ABS analysts at Deutsche Bank suggest that securitisation could represent an attractive funding route this time around.

The notice from the Department for Business Innovation and Skills suggests that 'structuring a repeatable model for sale' was one of the aims for the loans. "The assets would likely be able to support longer-dated securitisations that may find favour with duration-hungry UK pension funds," the analysts add.

ABS

IOSCO unveils ABS disclosure principles

The IOSCO Technical Committee has published its final report on ABS disclosure principles, intended to give guidance to securities regulators that are developing or reviewing their regulatory disclosure regimes for public offerings and listings of ABS. The committee says it hopes the principles will enhance investor protection by facilitating a better understanding of the issues that regulators should consider in developing or reviewing ABS disclosure regimes.

The principles were developed following a Technical Committee report in May 2008, which recommended that IOSCO develop international principles for ABS public offerings if existing disclosure standards and principles did not apply. A review determined the types of disclosure that would be deemed most material to ABS investors are not fully captured by existing IOSCO disclosure standards and principles.

The ABS disclosure principles provide guidance for listings and public offerings of ABS, based on the premise that the issuing entity will prepare a document used for a public offering or listing of ABS that will contain all material information that is necessary for full and fair disclosure of the character of the securities being offered or listed in order to assist investors in making their investment decision. IOSCO says the principles would also provide guidance if a document is required, either when a financial intermediary that has participated in a public offering later sells to the public the securities which were unsold in the original public offering, or when the issuer has sold securities in a private placement to any party who then resells the securities to the public.

These principles would not provide guidance for securities backed by assets pools that are actively managed or that contain assets that do not by their terms convert to cash.

Under the principles, any public ABS offer or listing document should include details on the following:

• parties responsible for the document;
• identity of parties involved in the transaction;
• functions and responsibilities of significant parties involved In the securitisation transaction;
• static pool information;
• pool assets;
• significant obligors of pool assets;
• description of the ABS;
• structure of the transaction;
• credit enhancement and other support, excluding certain derivative instruments;
• certain derivative instruments;
• risk factors;
• markets;
• information about the public offering;
• taxation;
• legal proceedings;
• reports;
• affiliations;
• interests of experts and counsel; and
• additional information.

IOSCO says the disclosure topics are intended as a starting point for securities regulators, which may wish to use some or all of them in their ABS disclosure requirements. It adds that their principles-based format allows for a wide range of application and adaptation by securities regulators.

ABS

Euro dealer floorplan ABS prepped

Preliminary ratings have been assigned to FCT Cars Alliance DFP France's series 2010-1 dealer floorplan notes. The transaction, arranged by Citi, will convert the existing FCC Alliance DFP into FCT Cars Alliance DFP France (a French fonds communs de titrisation), which will issue the series 2010-1 class A and B notes at closing to refinance a portion of the existing 2005-2 notes.

€750m of triple-A notes have been rated, alongside €36.5m of unrated class B notes. Both tranches will price over one-month Euribor.

The transaction is originated by Cogéra, which was first set up in 2005. It remains the only public dealer floorplan ABS issuer in Europe.

ABS

Singapore card ABS affirmed on extension

Fitch has affirmed the ratings of the class A and B notes of Orchid Funding Corporation - Diners Singapore, a credit card receivables securitisation originated by Diners Club Singapore. The rating actions follow the agency's assessment of the proposed extension of the S$2m monthly reduction of the transaction's programme limit. The deal's revolving period ended on 29 January and was followed by a controlled amortisation period.

In the original schedule, the programme limit - which was S$190m in January - was lowered monthly by S$2m on each settlement date in February to April, followed by the pass-through stage during which all collection from the receivables would be used to pay down outstanding notes' principal. The S$2m monthly programme limit reduction will continue for the May and June settlement dates under the proposed extension, and the pass-through stage will be delayed to commence in June. This means the programme limit will be reduced to S$180m before the pass-through stage begins.

The affirmations are based on the generally stable asset performance in 2010 year-to-date, after factoring in the impacts of the removal of network participation agreement (NPA) receivables from the underlying pool. The three-month average excess spread is expected to stabilise at 2%.

The three-month average delinquency ratio nudged up to 3.22% in March, having been at a low of 2.86% in November 2008, due to higher flow rates in the aging buckets of the receivables generated in August to October 2009. The flow rates of more recently-generated receivables have fallen, so delinquency ratios are expected to improve.

The two-month average collection rate dropped immediately in January after the NPA receivables had been removed from the securitised pool. The collection rate stabilised and rebounded to 20.85% in March, however.

The transaction is a securitisation of credit card receivables originated by Diners Club Singapore and sold to Card Centre Asset Purchase Company, an SPV, on a revolving basis. The SPV issued class A and B notes and sold them to Orchid Funding Corporation, an ABCP conduit. Although the class B notes are rated triple-B minus, ABN AMRO provides external credit enhancement via credit support and a cash reserve, so the notes are structured to be eligible for financing by the commercial paper in the conduit.

Under the rating action, S$142.7m (as of March 2010) of class A notes was affirmed at single-A rated, outlook stable (with a loss severity rating of LS-2), while S$17.6m of class B notes was affirmed at triple-B minus, outlook stable (with a loss severity rating of LS-4).

ABS

EMEA ABS/RMBS call optionality analysed

When swap counterparties in EMEA ABS or RMBS are downgraded below certain levels, assumptions about the optionality can have an effect on the valuation of a swap transaction and subsequent collateral posting, says Moody's in a new special report for the sector.

Ivo Raschl, a Moody's avp, analyst and author of the report, explains: "Moody's framework for de-linking hedge counterparty risk provides that hedge transactions are collateralised upon breach of certain rating triggers relating to the swap counterparty. If the counterparty defaults, the issuer can use posted collateral to pay for a replacement swap counterparty and/or to cover interest rate and currency mismatches in the transaction."

He continues: "The required amount of collateral depends on the value of the hedge. In many structured finance transactions, the swap notional amount tracks the outstanding pool or note balance, which leads to a direct link between the value of the swap (and the amount of collateral posted under the swap) and the likelihood that the issuer will exercise any option it has to redeem the notes."

In the report Moody's says that it has recently observed that the market value of certain swaps becomes increasingly sensitive to assumptions regarding the exercise of a call option in EMEA structured finance transactions. Raschl explains: "Assumptions regarding the exercise of call options for swap valuations are generally not explicitly outlined in the swap documentation. Any swap valuation that reflects the probability that the call option will be exercised could lead to an under-collateralisation of the swap."

The agency notes that if the swap counterparty is also the valuation agent and the seller/originator, the absence of a third-party swap counterparty or a third-party valuation agent might affect the swap valuation because of a possible lack of objective perspective on the assumptions on the probability of the call option being exercised. "Moody's views positively the use of independent third-party valuation or verification of the valuation of the swap," says Raschl, "although we do not consider this to be a full mitigant for the risk of under-collateralisation of the swap."

He continues: "The risks we describe in the report could be mitigated through the swap documentation if it provides for the swap value to be calculated on the assumption that a call option will not be exercised."

Moody's cautions that in the most extreme cases, transactions may require additional credit enhancement to achieve the highest ratings.

ABS

UK credit card MPR hits new low

The performance of UK credit card receivables deteriorated in February as the monthly payment rate (MPR) fell sharply, while charge-offs rose slightly, says Fitch.

The agency's MPR index fell to its lowest-ever level in February, dropping 220bp from its September 2009 value to 14.7%, while the charge-off index increased 20bp month-on-month to 10.6%, still below its historical 11.4% peak. The delinquency index remained unchanged for the third consecutive month at 4.6%, again below its historical peak of 5.5%.

"The low payment rate suggests the ability of consumers to repay credit card debts may have deteriorated," says Will Rossiter, Fitch's consumer ABS team associate director. "However, it must also be noted that February MPR values are impacted by the low day-count for the month, so the real impact of the economic conditions on payment rates is likely to become more evident in the next few months."

Fitch remains cautious over the sustainability of the improvements in charge-offs and delinquencies from peak levels, but believes the recent high charge-off rates experienced by credit card trusts cleared out a proportion of the portfolios' financially-distressed borrowers. Expected unemployment increases in 2010 threaten asset performance and further deterioration in the performance parameters is still regarded as likely.

The agency notes that the ongoing use of debt management programmes also presents a risk that charge-offs will continue to be delayed, affecting performance recovery for certain trusts.

ABS

Deterioration continues in EMEA consumer loan ABS

The performance of the EMEA consumer loan ABS market continued to deteriorate in February, says Moody's. The rating agency's gross default trend increased by 63% over the past 12 months with a 2.4% default rate, up from 1.5% in February 2009.

Meanwhile, Moody's delinquency trend stabilised at 0.6% for the 90-180 delinquencies over original balance. The constant prepayment rate (CPR) trend also displayed stable performance for the month and stands at 13.3%.

On 31 March, Moody's downgraded three Greek consumer loan transactions, which had been placed on review for possible downgrade in February. The agency says the downgrades were prompted by increased credit risk of the Greek sovereign.

The weak recovery in the Eurozone economy could challenge the recent stability in EMEA consumer loan ABS delinquency levels, Moody's warns. Estimated GDP growth has been revised down to 1% for 2010 and the agency expects unemployment to rise to 10.5% this year, with fiscal tightening placing pressure on consumer confidence and domestic demand remaining subdued.

Moody's outlook for EMEA consumer loan ABS is negative, with delinquency levels likely to remain elevated in 2010 as a result of rising unemployment and the lag in performance of consumer loans to the labour market.

ABS

Spanish SME ABS delinquencies stabilising

Moody's says adverse economic conditions continued to impact Spanish SME ABS in February. Delinquency levels reached their lowest levels since January 2009 at 2.06% for 90-360 day delinquencies, but remained at high absolute levels compared with pre-2008 levels, according to the rating agency's latest indices for the sector. Moody's says transactions significantly exposed to the real estate market are still suffering most severely.

The Spanish economy remained in recession and company bankruptcies continued to increase in Q409. A return to growth in GDP is expected this year, although underlying economic conditions remain weak as private domestic demand is held back by continuing increases in unemployment and export growth is hampered by low productivity.

Real estate sector weakness is expected to continue as the overhang in property supply will take years to bring back into balance. "The faltering real estate sector has already resulted in a large number of company bankruptcies," comments Moody's economist Nitesh Shah.

"The decrease in 90-360 day delinquencies is a consequence of a lower rate of new loans becoming 90 days delinquent," adds Moody's associate analyst Ludovic Thebault. "We have passed a peak in the delinquency rate and the previous 2009 peak in delinquencies should result in another peak in the write-off rates, most likely around Q210."

The economic climate is expected to continue to adversely affect asset performance in Spanish SME ABS. In particular, Moody's believes more cases of principal deficiency should be expected in Spanish SME transactions as high default levels will continue to deplete reserve funds and recoveries will take time to materialise in a weak real estate market.

Weighted-average 90-360 day delinquencies represented 2.06% of the outstanding balance of Spanish SME transactions in February 2010, compared with 2.44% a year before. Delinquencies are at their lowest point of the past 12 months, but are expected to remain at relatively high levels.

As of February, 90-360 day delinquencies were higher in transactions with more than a 50% exposure to real estate than those with exposure below 25%, with respective rates of 2.8% and 1.7%. Moody's says this illustrates the persistent relative weakness of the real estate sector.

TDA CCM EMPRESAS 1 had the highest cumulative defaults, with 8.9% of original pool balance, due to the default of a very large loan which caused a reserve fund draw on the February payment date.

ABS

More Greek downgrades noted

Fitch has downgraded 15 senior classes from 15 Greek RMBS transactions to double-A minus from double-A plus, downgraded nine mezzanine tranches, and downgraded two Greek ABS transactions to triple-B minus from triple-B plus. The rating actions follow Fitch's Greek sovereign downgrade to triple-B minus on 9 April.

Most Fitch-rated Greek RMBS tranches remain on rating watch negative, where the agency says they will remain until an assessment of sovereign risk in structured finance transactions is completed.

The two ABS transactions are covered by a direct, unconditional and irrevocable guarantee from the Hellenic Republic of Greece or a Greek central government department and are therefore credit-linked to Greece's triple-B minus sovereign rating.

Fitch says the performance to date of all the transaction has been in-line with expectations, but it believes sovereign risk has increased and may negatively impact the future performance of rated securitisation transactions. The agency says a less remote Greek sovereign default, and the macro-economic and event risks associated with it, increase the stress notes rated above the sovereign's triple-B minus are expected to withstand. All 17 affected Greek structured finance transactions have been capped at double-A minus.

CDO

SF CDO senior investors recoup 70%

The liquidation of US structured finance CDO Gennaker I resulted in a recovery of approximately 70% of the par amount for senior investors, with the class A-1A notes receiving US$331.1m out of the outstanding balance of US$478.6m. All other classes of notes suffered a 100% loss, however.

The transaction experienced an event of default on 16 April 2009 and the trustee was directed to liquidate the collateral as a post-event-of-default remedy. The liquidation took place on 29 March 2010. The transaction, a Solent Capital deal, was predominantly backed by CDOs.

CDS

Asia Pacific index prepped

As first reported in SCI issue 176, Markit has confirmed it is to launch an iTraxx SovX Asia Pacific index, tracking investor perceptions of the credit risk of a range of countries in the region. The index will start trading in early May 2010.

The index will be part of the iTraxx SovX family of CDS indices and is intended to provide market participants with a standardised tool to hedge exposure to the risk of the ten countries with the most liquid sovereign CDS in the region. The initial series of the index will include Australia, China, Indonesia, Japan, Korea, Malaysia, New Zealand, the Philippines, Thailand and Vietnam.

The Asia Pacific index will start trading as Version 1 of Series 3 for consistency with other iTraxx SovX indices and more than ten market-makers, including international and local institutions, are expected to provide liquidity.

CDS

Call for clarity on 'significant risk transfer'

AFME, the British Bankers' Association (BBA) and ISDA have written to the UK FSA outlining a number of questions and issues regarding the regulator's views on the treatment of tranche protection trades. The letter reiterates the associations' concern that discussions are progressing internationally on this issue on the basis of analysis that may not have fully taken account of all the relevant issues.

The first key message that the associations outline in their letter is that they don't understand the regulatory concern that the FSA is seeking to address. With regard to the regulator's suggestion that premiums paid should be netted against risk transferred, they say they don't agree that significant risk transfer (SRT) is a function of premium levels.

These are two separate economic events and should be analysed separately, according to the associations. The premium for a synthetic transaction will depend on a number of factors: the expected loss on the tranche protected; a premium for the protection seller; and market conditions.

In adverse conditions, or where a credit is perceived as particularly risky, the premium is likely to be high. It does not mean that the risk has not been transferred; merely that, at that point in time for that credit, the cost of transferring that risk is relatively high. The value of that transaction to the purchaser and the acceptability of the premium charged will depend on the position of the firm and will be a commercial decision for that firm.

The second key message is that the associations are unclear as to the scope of BIPRU 9, with the FSA appearing to change its approach as to the basis of determining securitisation transactions. "Previously it had been our understanding that the FSA were taking a pragmatic approach and not specifically looking for transactions to bring within BIPRU 9; i.e. that firms could make a sensible determination in line with the definition in the BIPRU glossary," they note.

It is now increasingly unclear where the FSA intends to draw the boundary, the associations add. "We would like to discuss further the FSA's views on what distinguishes a securitisation from other exposures."

The third key message highlights a number of unclear parameters in the FSA's approach that the associations wish to discuss further, while the fourth underlines firms' concerns that pre-approval from the regulator may result for all transactions. "While the current regime relies upon firms undertaking their own assessment of significant risk transfer and for appropriate senior management approvals to be sought, uncertainties ... will mean that some firms will feel unable to sign off transactions without FSA review because the consequences of a 'wrong' determination could make a transaction uneconomic," the letter explains. "Market opportunities can be very short and the time required for sign off could mean that these are lost."

Finally, the associations seek confirmation from the FSA that it is not intending to require different sign-off procedures for tranche protection trades relative to other types of transactions. They add that it would be helpful if the Basel Working Group could address this issue engaged with the industry, so that practitioners are able to explain the basis for these transactions and how firms approach the question of significant risk transfer.

CDS

Sovereign credit risk surges again

Sovereign credit risk surged once again over the past month. While headlines continue to focus on Greece, Credit Derivatives Research (CDR) chief strategist Tim Backshall suggests that this is more of a systemic crisis in developed nations than most would like to believe. CDR's Government Risk Index (GRI) jumped by almost 40% in the last month to 80bp - its highest since 25 February.

The GRI represents seven of the largest sovereign debt issuers, including France, Germany, Italy, Japan, Spain, the UK and the US. "The dramatic rise in the market's perception of credit risk among these 'most' developed nations stands in dark contrast to the performance of the less developed nations of the world," Backshall explains. "Emerging markets and CEEMEA nations outperformed very notably in the last month as worries over the double-whammy of higher rates and greater austerity start to weigh on investor's minds in deficit nations, whereas oil/commodity price strength helped the less-developed (but often surplus) nations."

This week saw the average risk among the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) move to the widest-ever level relative to the average risk of the BRICs (Brazil, Russia, India And China) and Greece now trading wider (riskier) than Dubai. Oil and gold's strength in the face of a stronger dollar further reinforce this tendency to perceive more developed nations as facing considerably more prescient risks, Backshall concludes.

CDS

CDS liquidity highlights ongoing uncertainty

Fitch Solutions reports that global CDS liquidity is still indicating lingering concerns over public finances in Europe and Greeces ability to raise funds to cover maturing debt, despite a small drop-off in risk.

Overall liquidity in Europe has seen the most pronounced drop-off, while oil and gas companies in North America are trading with the most liquidity, according to Fitch. Chile and Ireland have seen the largest liquidity uptick for sovereigns over the past month.

Fitch Solutions md Jonathan Di Giambattista says telecoms remain the most liquid among European names, signalling continued uncertainty over future prospects. Although European telecoms performed steadily throughout the credit crisis, they have underperformed the broader market recently. Di Giambattista believes the high liquidity means the market is still repricing credit risks in CDS spreads.

He also adds that Dutch professional publishers Reed Elsevier and Wolters Kluwer have seen a substantial rise in relative liquidity over the past month, possibly driven by concerns over their respective deleveraging prospects and lowering barriers to entry for academic journal businesses.

CDS

Vintage disparity as US subprime prices increase

A new Fitch Solutions report on RMBS CDS shows that while US subprime prices are continuing to strengthen across the board, disparity among recent vintages remains.

Fitch's subprime RMBS total market price index increased month-on-month by 7%, up to 8.18 as of 1 April. All vintages increased in value, with the 2006 vintage growing 15% to reach its highest level since December 2008, now pricing at 3.71.

The 2004 and 2005 vintages grew by 9% and 6% respectively. The 2004 vintage, up 4%, showed signs of improvement but at 2.14 is still pricing at its third lowest-ever value.

"The quality of subprime assts continues to differ significantly by vintage," comments Fitch Solutions md Thomas Aubrey.

The three-month constant prepayment rate for all vintages fell across the board, while the three-month constant default rate for all vintages also dropped. Fitch says this general fall in default rates is accompanied by a decrease for historical 90 day-plus delinquencies.

"While refinancing remains challenging for subprime assets, the general drop in default rates is an encouraging sign that stability is returning to the housing market," says Aubrey.

CDS

Action taken on 153 CSOs

Fitch has taken rating actions on 153 global synthetic corporate CDO transactions, downgrading 99 tranches (87 public ratings and 12 private), affirming 186 tranches (133 public and 53 private) and upgrading four tranches (all public).The agency has also assigned recovery ratings to the notes rated triple-C or below.

The downgrades reflect continued portfolio credit quality deterioration, particularly in relation to defaulted assets and those rated triple-C or below, says Fitch, with 14 reference entities subject to credit events since May 2009. Rating action for the affirmed tranches reflects low exposure to defaulted names, lower levels of negative credit quality migration and the notes' relatively short terms to maturity. Some upgraded tranches reflect credit-enhancing restructuring, which Fitch had not previously known about.

The agency expects more defaults for tranches rated triple-C, saying they have limited remaining credit support. The agency has assigned recovery ratings, mostly at RR6, for notes rated at or below triple-C to reflect those tranches' thinness and inability to withstand low levels of further potential credit events.

CDS

New OTC liquidity service launched

Xtrakter has launched XVOL, its new OTC liquidity service providing access to a range of liquidity and volume data to help users better determine the liquidity of differing OTC fixed income securities.

XVOL provides subscribers with the total volume figure for each security traded in the preceding month and a unique flag indicating the level of trading in each listed security within pre-defined bands, says Xtrakter. The service is based on the actual level of trading in the previous month and does not include synthetic data.

Yannic Weber, Xtrakter ceo, says: "Understanding the liquidity of any given instrument has never been more important. In these uncertain times XVOL allows subscribers to gauge the liquidity of an instrument, so they can make more informed investment decisions."

Unlike previously, XVOL allows Xtrakter subscribers to now pick and choose information by providing a set of ISINs instead of taking bulk files. The firm says the new service will typically offer data on between 20,000 to 30,000 securities each month, with a flexible data delivery system.

CLOs

CRA may relax CLO default assumptions

Moody's says it may relax the default stress assumptions on CLOs that it introduced early last year and is currently considering the appropriate timing and degree of such a change. The 30% default assumptions - intended to address the unprecedented stress observed in the recent credit cycle - were introduced in the rating agency's first stage review of the CLO sector.

In its most recent CLO Interest newsletter, the rating agency comments that it has been asked by CLO managers and investors whether and when CLO tranche upgrades might occur in light of improving performance trends in the asset class, as well as when it would decide to relax the 30% default probability stress. "Regarding upgrades, through our continued surveillance efforts we have been identifying candidates for further analysis and have recently placed a number of CLO tranches on review for upgrade," says Moody's. "Some key considerations for CLO ratings upgrades include trends in WAR, Caa exposure and overcollateralisation levels since the deal's last review."

The rating agency also comments that CLO managers and investors have continued concerns relating to common CLO documentation features. More specifically, managers are voicing their opinions regarding trading restrictions that arise following CLO tranche downgrades, deep-discount purchase thresholds and excess Caa haircut mechanics.

"In anticipation of new CLO issuance and the market's interest in these topics, we are making headway based on proposed alternatives from various market participants," says Moody's.

CLOs

Early liquidation for CLO's OAT strip protection

Class D2 and D3 noteholders in CELF Low Levered Partners CLO have voted for an early liquidation of their share of the transaction's OAT strips after the deal's documentation was amended to allow such an action. Class D benefits from credit enhancement provided by certain OAT strips, which were acquired on closing from the issuance proceeds of classes E and F (zero coupon notes). The proceeds from liquidation of the OAT strips at maturity would be used primarily to pay any remaining rated balance on Class D if necessary.

Moody's says the action will not affect its ratings on classes A-1, A-2, A-3, B and C. All class D subordinated noteholders have consented to waive the issuer's requirement to obtain a rating agency confirmation for the class D subordinated notes, in respect of the amendments.

The deal's amendments also dictate that, following an early liquidation of OAT strips, any remaining OAT strips that are not liquidated will, at maturity, be used solely for the benefit of those classes of class D subordinated notes that did not elect to liquidate their share of the OAT strips. The early liquidation of the OAT strips is due to take place within the next week.

CLOs

SME CLO gets replenishment constraint

The amendment to Schedule 3 of the loan receivables purchase agreement between German SME CLO Northern Blue 2009 and HSH Nordbank, effective 26 March, creates a new criterion under which the weighted average maturity (WAM) of the loan portfolio after each replenishment must not be higher than 7.6 years, calculated from the closing date. Before the amendment there was no WAM constraint for replenishments.

Moody's has determined that the amendment does not cause the current ratings on the deal to be reduced or withdrawn at this time. The agency does not comment as to whether the amendment could have other, non credit-related effects, however.

CMBS

Positive secondary as multi-borrower CMBS prices

Positive momentum was witnessed in the US secondary CMBS market late last week, following the successful launch of RBS Commercial Funding's multi-borrower CMBS - RBSCF 2010 MB1 (see last issue). The triple-A rated notes priced at 90bp over swaps, some 5bp tighter than initial expectations.

According to CMBS analysts at Barclays Capital, spreads tightened across the capital structure in secondary CMBS trading for the sixth consecutive week. They estimate that spreads on 2007 vintage last cashflow super seniors tightened by an additional 25bp-35bp on average, to 305bp over swaps. The rally continued to extend further down the capital structure as well, with a pickup in trading activity in AMs and AJs.

Meanwhile, the CMBX continued to lag the rally in cash bonds, leading to a further compression in the basis (measured by CMBX cash spread of a given tranche). "For example, in Series 4, we estimate that the CMBX-cash basis is now only 32bp, versus nearly 200bp at the start of the year," note the analysts.

CMBS

TITN 07-3 to set Euro CMBS precedent?

The special servicer appointed over both the A&A Express loan and the Lovat Lane loan in Titan Europe 2007-3 has accepted discounted principal repayment of the loans. The move could set a precedent for CMBS in Europe.

"This is the first time we can think of that discounted settlement has been accepted on a loan in a CMBS deal in Europe," explains Michael Cox, structured finance strategist at Chalkhill Partners. "However, it will be interesting to see whether it is a one-off or whether it prompts more discounted settlements in European CMBS."

The borrower will make a payment of £11.75m on the A&A Express loan "as repayment in full of all principal and interest due on the loan", despite there being a £24.3m principal balance outstanding - representing a loss of £12.8m. Cox points out that it was clear that this loan faced a significant potential principal loss.

The loan had failed to repay on its maturity date in January this year. The recent valuation for the property backing the loan was £10.85m and the main tenant in one of the two properties had exercised a break and vacated the building.

"Hence, it is perhaps not too surprising that the special servicer decided that the offer of £11.75m was a reasonable one," Cox remarks.

Meanwhile, the special servicer accepted a payment of £3.88m for the Lovat Lane loan and there will be a loss of £4.25m. Chalkhill estimates that the losses will wipe out the class G notes in the deal, as well as a good chunk of the class Fs.

The special servicing of the loan was transferred to Hudson Advisors Germany on 19 March. It is not clear whether the change in special servicer had an impact on the workout strategy, Chalkhill notes.

CMBS

More CMBS loans in special servicing

CMBS had a higher percentage of loans in special servicing through maturity defaults than the overall average in 2009, Mary Chamberlain, associate director of the Servicer Evaluations Group at S&P said on a conference call on 8 April. By mid-year, 9.1% of unresolved CMBS loans were actually due to maturity default, which increased to 13% by year-end.

CMBS loans in general accounted for 87% of maturity defaults mid-year, which increased to 95% by year-end, according to S&P. Out of the US$87bn of unresolved loans in special servicing, CMBS accounted for more than 4,000 loans or about US$59bn.

The highest percentage of unresolved assets in the S&P analysis by property type is multifamily loans. Though multifamily loans actually declined mid-year in 2009, the analysts saw an increase in office and lodging properties of unresolved assets in inventory.

The analysts found that delinquency rates clearly rose through 2009. Life insurance and pension fund loans were among those at the lower end of their charts showing delinquencies, whereas CMBS came at the higher end of delinquencies between 5%-6%.

The analysts collect the data twice a year from commercial mortgage servicers and special servicers.

Special servicers overall received a large inflow of problem loans in the second half of 2009 so that their aggregate year-end portfolios of unresolved assets were at historical highs, notes Michael Merriam, senior director at S&P. In general, special servicers resolved about 67% more loans in the second half of 2009 compared to the first half, excluding foreclosures, he says.

Average time to complete loan resolutions also increased for the second half of 2009 versus the first half.

In addition, the analysts note that upcoming maturities and imminent non-monetary defaults also contributed to loan transfer activity that was going into special servicing. As a group, these now account for nearly 60% of all transfer activity by loan count in the second half of 2009.

The transfer of loans secured by property type showed an increase to about 10% from 6% from the first half to the second half of 2009, says Merriam. The uptick in lodging loans transferred, he notes, is not surprising since it had the highest percentage of delinquencies within property type. So far for 2010 transfers, multifamily is still showing as the dominant property type.

CMBS

Volte face on Fleet Street Two

In contrast to previous guidance in February that it would not cut the ratings (see SCI issue 171), Fitch has downgraded Fleet Street Finance Two's class B, C and D notes to D and reassigned B/CCC/CC ratings respectively to the three tranches based on the revised transaction structure. The agency has simultaneously downgraded the class A notes to triple-B minus from single-A. All four note classes have been placed on rating watch negative.

The D rating primarily reflects the characteristics of the liquidity mechanism available as part of the restructuring during the extended note term. Contrary to Fitch's assessment at the date of its last comment on the issuer (4 February 2010), liquidity will only be available to the class A notes during the note term extension period. Therefore, the ratings assigned to Fleet Street Finance Two no longer address the timely payment of interest of all classes of notes, but are in accordance with the terms and conditions of the notes.

In particular, the non-payment of interest on the class A notes will cause an event of default, while the payment of interest on the class B, C and D notes is deferrable. In each case, principal is scheduled to be paid on or before the legal final maturity of the bonds in July 2017. For the avoidance of doubt, Fitch says its rating does not address the additional note margin paid on any class of notes outstanding.

The outcome of the restructuring of Karstadt still remains unclear, according to the agency. If the insolvency administrator liquidates the assets, Fitch believes that any vacated assets will be difficult to re-let and that, consequently, their value will be materially affected. Therefore key assumptions in its analysis include the length of time to achieve a re-letting on some or all of the space, costs associated with a re-letting (including letting fees and capital expenditure), rents per square metre that can be achieved in a period of stress and rent-free periods that might be required to attract new tenants.

The RWN will be resolved when Fitch has received confirmation that the interest rate cap at the loan level has been fixed for the extension period, the basis swap on the transaction is fixed for the note extension and the liquidity reserve account has been established. It expects this to be achieved at the latest by the 20 July 2010 interest payment date.

CMBS

Weak property income hurts Euro CMBS

Fitch says property income weakness was a more significant driver of negative rating action for European CMBS than for UK CMBS over 2009. Following a review of non-UK European CMBS transactions, the rating agency notes that a majority of tranches remain on negative outlook as loan defaults are expected to rise in coming quarters, primarily because of upcoming maturity dates.

Declines in property values were more pronounced in the UK, but Fitch says falls in net rental income have been more widespread in continental Europe, largely due to shorter lease terms and more volatile costs. "Regardless of which indicator is used - lease terms, operating costs or tenant ratings - continental transactions consistently display weaker income profiles," says Gioia Dominedo, European CMBS senior director at the agency. "In the best case scenario this necessitates more frequent re-letting and more intensive active management, whilst in the worst case, substantial drops in net income cause loan payment default."

While overall value declines have been more muted in Europe, three-quarters of outstanding CMBS was originated at or near the top of the market and is therefore exposed to the maximum peak-to-trough market decline.

Fitch believes that most securitised non-UK European loans would struggle to refinance today, given their current loan-to-value (LTV) ratios, which it estimates at 97% on a weighted-average basis. "Only 10% of whole loans have leverage under a potentially refinanceable 75% Fitch LTV ratio," says Charlotte Eady, European CMBS director at the agency.

So far the majority of loan defaults have resulted from declining collateral income. A growing number of loans are scheduled to mature in coming quarters, with a combination of negative equity affecting around 37% of securitised loans and weak bank lending, suggesting loan defaults will rise. With maturity shortly to become the dominant cause of default, Fitch's outlook for most underlying tranches remains negative.

CMBS

Center Parcs CMBS restructuring agreed

The class A1 noteholders of CPUK Mortgage Finance have agreed to restructure the underlying CMBS loan. Under the restructuring, the whole loan term will be extended by two years with a new loan repayment date on 5 October 2013, although the legal final maturity date of the notes (in 2018) remains unchanged.

In addition, the margin payable under the A-loan will increase by 1.76% per year and will be payable to all classes of notes. The liquidity facility structure will not change, which means that it can be drawn to cover interest shortfalls based on the increased margin.

The margin payable under the remaining portion of the whole loan will increase by 1.26% per year.

A new cash sweep provision that requires the borrower group to use 25%, 50% and 75% of excess cashflow in the next three years ending in October 2011 to 2013 respectively to repay the A-loan will also be introduced. The proceeds will be allocated pro-rata to all classes of notes, with the existing cash sweep triggers based on debt yield remaining in place.

The existing hedging will be topped up to cover the loan extension period until 2013, such that the entire facility is fully hedged.

Finally, as an additional covenant in the loan documentation, the borrowers will be required to provide an annual capital expenditure plan, as well as an additional mandatory prepayment event in case of a sale of any share capital of the borrower holding companies (Comet Holdco and Forest Holdco) where the net cash proceeds from such a sale are not retained within the group. The sponsor is currently the Blackstone Group International.

Moody's has affirmed the triple-A rating of the Class A1 notes, following a detailed assessment of the current performance of the transaction and the agreed restructuring of the financing, as well as its impact on the credit risk of the loan and the Class A1 notes. The affirmation is mainly based on the following factors: the performance of the underlying portfolio since closing with increased occupancy rate, EBITDAR and debt yield levels compared to closing; no significant change in Moody's assessment of the property portfolio value compared to closing; and overall a mildly positive credit impact of the restructuring on the credit risk of the class A1 notes.

CMBS

Multifamily delinquency rates rocket

Fitch says US CMBS delinquencies rose by 85bp to 7.14% in March because of the expected foreclosure filing of the Peter Cooper Village and Stuyvesant Town loan, with Stuy Town alone contributing 61bp. Over 13% of the multifamily-backed loans that the rating agency rates are now delinquent, compared to 8.97% in February. They are second only to hotel-backed loans, which have a delinquency rate of 17.2%.

"Both Extended Stay America and Stuy Town are driving the soaring delinquency rates for hotel and multifamily properties," says Fitch md Mary MacNeill. If the two loans were excluded from the index, hotel and multifamily loans would still lead the delinquencies at 12.38% and 9.30% respectively.

"Recent notable transfers to special servicing are indicating a future increase in office delinquencies," adds MacNeill.

CMBS

Wholesale downgrade for GRAND

Moody's has downgraded all 11 classes of CMBS notes issued by German Residential Asset Note Distributor (GRAND), affecting €5.8m of securities. The rating action follows a detailed review of the transaction, focusing on expected future cashflows from the underlying properties and anticipated values over the life of the transaction, as well as a reassessment of the default risk of the underlying REF notes.

GRAND is a refinancing of Deutsche Annington's (DAIG) and certain of its subsidiaries' indebtedness, which arose from various acquisitions of its residential real estate portfolio. The asset pool securing the rated notes is ultimately backed by approximately 165,000 residential units located throughout Germany, with concentrations in the federal states of North Rhine-Westphalia, Hesse and Berlin.

The transaction follows the principles of a secured loan structure, with the issuer using the issuance proceeds of each class of notes to purchase REF notes (equivalent to loans) from 31 REF note issuers (equivalent to borrowers) in a corresponding aggregate amount. Despite the 31 individual REF note issuers and the fact that the security structure does not provide for cross-collateralisation between the REF note issuers, the structure is effectively a single-borrower deal, according to Moody's.

In addition to the interest payment obligations with respect to the REF notes, each REF note issuer has entered into a global facility agreement, in which global LTV targets are defined that have to be met by the borrower group as a whole. Two holding companies, both subsidiaries of DAIG that ultimately own each REF note issuer and their general partners, guarantee the obligations under the global facility agreement.

The sponsor's business plan for the property portfolio includes a property sales (tenant privatisation) strategy.

Moody's says the downgrade action was prompted by the value declines of multi-family portfolios in Germany witnessed over the past two years; the difficult lending environment for, in particular, large commercial real estate loans, which results in a higher default risk of the REF notes at their maturity in 2013; and lower net cashflows and property sales than initially expected by the rating agency at closing.

In Moody's view, the default risk of the REF notes has increased compared to closing, both during the term and especially at maturity. Together with decreased property values, the agency expected loss on the REF notes has increased, but it is still low. While the current subordination levels provide protection against those expected losses, the likelihood of higher than expected losses on the portfolio has increased substantially.

Since closing, 13.2% of the REF notes have been prepaid, with the proceeds allocated pro-rata to the transaction. As a result, the senior classes of notes have not benefited from an increase in subordination levels since closing.

Distressed assets

Speculative-grade default rate declines

Moody's says the trailing 12-month global speculative-grade default rate ended the first quarter at 9.9%, down from 13% at the end of 2009. A year ago, the global default rate stood at 7.8%. The rating agency now forecasts the global speculative-grade default rate will fall to 2.8% by the end of 2010 and edge lower to 2.4% a year from now.

"Defaults in 2010 will remain few and far between as long as the high yield debt markets remain wide open for business and the global economic recovery is maintained. The trailing 12-month default rate will also be under continued downward pressure as a result of the large number of defaults that occurred in the first half of 2009 moving out of the 12-month window," says Moody's director of default research, Kenneth Emery.

The rate in the US ended the first quarter at 10.9%, down from 13.9% at the end of the preceding quarter, while in Europe the default rate fell to 7.3% from 11.6%. A year ago the US and European default rates stood at 8.4% and 5.3% respectively.

Among US speculative-grade issuers, Moody's forecasting model foresees the default rate falling to 3.1% by the end of the year and declining to 1.4% in Europe.

A total of 16 Moody's-rated corporate debt issuers defaulted in 2010 year-to-date, of which six were recorded in March. One defaulter was from Indonesia, three from Canada and the remaining 12 from the US. In the same period last year 90 companies defaulted.

Across industries over the coming year, the agency expects default rates to be highest in the consumer transportation sector in the US and the business service sector in Europe.

Measured on a dollar volume basis, the global speculative-grade bond default rate closed at 10.3% in Q110, down from 16.4% in Q409. Last year, the global dollar-weighted default rate was at 10.7%.

In the US, the dollar-weighted speculative-grade bond default rate ended the first quarter at 11.3%. The comparable rate was 16.6% in the prior quarter and 11.9% a year ago.

Moody's speculative-grade corporate distress index, measuring the percentage of rated issuers that have debt trading at distressed levels, ended Q110 at 14.1%, down from 19.5% in Q409. A year ago the index was at 52.5%.

A total of 10 Moody's-rated loan defaulters were recorded in Q110 in the leveraged loan market, eight by US issuers and two by Canadian issuers. Last year 30 loan issuers defaulted in the same quarter. The trailing 12-month US leveraged loan default rate ended the first quarter at 10.3%, down from 11.9% from the last quarter but up from 5.2% a year ago.

Emerging Markets

New legislation to boost sukuk issuance

Global issuance of sukuk looks set to benefit from legislative and regulatory developments over the next few years, but is likely to remain in line with last year's volumes for the time being. Most issuance is expected in the second half of the year, with supranational, sovereign and government-related issuers dominating the sukuk market in the first half.

"A key factor behind the recent and ongoing dominance by sovereign and government-related issuers was their need to launch a variety of funding programmes to combat declining economic activity, fiscal deficits and lower energy and commodity prices," says Faisal Hijazi, Moody's business development manager for rating services and Islamic finance. "By contrast, given the weak economic conditions, corporate entities have proved to be less able and willing to be major issuers of new sukuk - although a small number of highly rated corporate issuers did tap the sukuk market in large issuances."

A number of jurisdictions are said to already be developing legislative and regulatory initiatives to enhance their ability to venture into the sukuk market. The potential emergence of sukuk issuances from these new jurisdictions - including the UK and Asian markets such as Japan, Korea and Thailand - would be a key driver of increased global issuance.

"Such moves could also prompt other jurisdictions with similar regulatory frameworks to pursue similar efforts in this direction. In addition, the more established sukuk markets, including those in the GCC, are also likely to undergo further legislative and regulatory developments, with beneficial implications for their sukuk issuance," adds Hijazi.

Legislative steps - such as establishing the Tadawul bond and sukuk market and the imminent introduction of the mortgage and finance law in Saudi Arabia, and the approval of a long-awaited capital market authority in Kuwait - are improving the prospects of sukuk becoming an attractive issuance structure, especially for local and cross-border investors. Moody's says this was demonstrated in Malaysia last year when local currency issuances surged nearly 100% compared to the year before.

Moody's believes the sukuk market has reasonable potential in other GCC countries, including Saudi Arabia, Kuwait, Qatar and the UAE, which still lag behind in sukuk issuance when compared to their respective stock market size and the investment needs of many of their relatively sizable Shariah-compliant issuer and investor bases. Over the shorter term the agency considers the recently announced Dubai World restructuring proposal to be a positive development for the regional sukuk market, as it is credit-friendly and has wider market acceptance.

"At the same time, the sukuk market is, gradually, acquiring characteristics of maturity, including a diversity of the investor base, encompassing both institutional and cross-border investors and fund industry managers. Moreover, the diversity of sukuk issuances across different jurisdictions and rating spectrums is creating an environment conducive to active fund issuance and asset management," says Hijazi.

Indices

H210 US house price low projected

ABS analysts at JPMorgan continue to project that US home prices will bottom in H210, with peak-to-trough HPA at -32.6% for the Case-Shiller national index. "The labour market improvement is encouraging, but further additions to the already very large housing inventory from rising foreclosures remains a downside risk to home price," they note in their February Home Price Monthly Update.

The analysts also note that the US Treasury made a major step forward in the HAMP loan modification practice, embracing the concept of principal forgiveness for underwater homeowners (SCI passim). While they say this is good news for housing markets, they add that eligible borrowers could ultimately prove smaller than expected.

Home prices continued to weaken with a faster pace in February. The LoanPerformance (LP) home price index fell another 2.1% in February after an upwardly revised 1.7% drop in January.

JPMorgan notes that home prices have given back all gains since May 2009 after six consecutive monthly drops. The FHFA purchase-only index fell 0.9% in January.

However, the LoanPerformance index saw its first annual gain since December 2006, up 0.5% in February over last February. The FHFA purchase-only index and S&P/Case-Shiller 20-city composite were down 3.4% and 0.7% respectively in January.

RMBS

Uncertainty in non-agency MBS over HAMP 2.0

While the recent HAMP announcement has caused uncertainty in the non-agency RMBS space, technicals continue to show improvement, according to JPMorgan ABS analysts in a new report for the sector. Non-agency RMBS activity has seen a modest rally in recent weeks, with ABX triple-As rising by as much as 4-5 points since the Treasury's announcement of HAMP 2.0.

The JPMorgan analysts note: "We believe non-agency yields and risk premia will decline due to strong technicals and relative cheapness to other sectors (e.g. agency MBS and high yield corporates)."

A key uncertainty though is whether servicers will truly embrace the revised HAMP programme, they add. While HAMP servicers are required to run the new alternative NPV with forgiveness, they still control a number of assumptions in the NPV analysis that can make foreclosure or rate modifications more attractive. Additionally, the analysts note that second liens continue to be a lingering problem.

Existing modification programmes have completed 10,000 forgiveness modifications, largely in Alt-A and subprime, say the analysts. The average amount of forgiveness is so far US$59,000.

The analysts explain that while principal forgiveness clearly benefits senior bonds at the top of the capital structure and some mezzanine paper, the benefits will be very deal specific, depending upon the servicer, structure and collateral. They conclude: "We expect ARM resets will not have a significant impact on defaults or prepayments. With historically low rates, most hybrids are resetting down, while option ARMs should see modest payment shocks that may be averted by forgiveness mods."

RMBS

Agency CPRs anticipate buyout programme impact

Prepayment speeds in February (March data release) on 30-year Freddie Mac collateral experienced a significant month-over-month spike, following the agency's 10 February announcement to purchase "significantly all" of the 120-day or more delinquent loans from MBS pools within the month of March (SCI passim).

In aggregate, the 30-year Freddie Mac CPR hit 42.3 (an increase of 28 CPR or 195%), according to Annaly Capital Management. By coupon, speeds were: 4.5% at 5.7 (essentially flat); 5% at 28.2 (+89%); 5.5% at 49.2 (+170%); 6% at 67.2 (+250%); 6.5% at 78.3 (+355%); and 7% at 83.6 (+429%).

In comparison, aggregate Fannie 30-year speeds were down, coming in at 14.7 CPR compared to 15.4 CPR in the prior month. Across the coupon stack, Fannie Mae 30-year MBS with coupons ranging from 4.5% through 6.5% prepaid at 3.5 CPR (-26%), 11.9 CPR (-16%), 18.5 CPR (-5%), 22.7 CPR (+4%) and 22.0 CPR (+7%) respectively.

"Unlike Freddie, Fannie will be prioritising buyouts over the next several months based on 'loans in MBS having the highest pass-through rates' and 'loans having the highest unpaid principal balances'," Annaly explains. "Therefore it is reasonable to assume that speeds on higher coupon MBS will experience significant increases first in the March factor tape (April release), with the lower coupon MBS speeds increasing in the forward months as they complete their buyout programme. While detrimental to holders of MBS at a premium in the short term, the completion of Fannie Mae and Freddie Mac's combined buyout programme of delinquent loans will benefit long-term investors in MBS in that it will create a universe of higher quality assets."

RMBS

Loan ranking, LTV impact RMBS severities most

In a new special comment, Moody's has analysed the factors driving the severity of losses suffered by UK mortgage lenders on defaulted loans. The analysis reveals the increase in average loss severities and the effect that various loan and property characteristics have on overall loss severity. No rating impact is expected, however, as the average loss severities are still within the rating agency's expectations for the UK RMBS sector.

"We have analysed the loss severities of sample data on the basis of individual loan or property characteristics, repossession periods and repossession costs. However, we believe it is likely that we have not seen the worst of UK mortgage losses and that more losses still have to flow through the system," says Eli Luzac, a Moody's senior associate and author of the report.

Moody's analysed loan-by-loan loss data on over 25,000 loans relating to repossessed properties from a range of UK prime and non-conforming originators. The highlights of its findings include that average loss severity - defined as the combination of any unpaid principal, accrued interest and repossession costs over the principal loan balance at the time of sale - has increased from below 10% before 2007 to 34% in H1 2009. "In comparison, severity levels on data from the early 1990s, the last economic downturn, reached a maximum in the low 40% range" says Luzac.

He further explains that "the increase in severity can be attributed to the stressed house prices (partially due to the forced sale discount), longer repossession periods (albeit in a low interest rate environment) and relatively low levels of equity for repossessed properties".

Moody's also notes that differences in collateral characteristics can partially explain the differences observed in severities. The report reveals that loan or property characteristics - such as LTV at the time of repossession, repayment type, loan ranking, regional house price developments and occupancy type - have proven particularly significant in explaining severity levels. "Loan ranking and LTV stood out as the two most influential drivers of severities in our analysis," says Luzac.

The agency cautions that the tests it performed were not intended to conclusively validate its current UK RMBS MILAN methodology. However, it believes that the preliminary results of this study could serve as a starting point for further investigation into the various loss severity drivers of its UK RMBS analysis.

RMBS

Pre-2005 subprime RMBS on review

Moody's has placed 3,890 subprime RMBS with an outstanding balance of US$50bn on review for possible downgrade. The review action impacts over 80% of subprime RMBS issued prior to 2005 and was prompted by continued performance deterioration.

Pools backing pre-2005 seasoned subprime RMBS have paid off substantially, according to Moody's. With pool factors averaging less than 10%, the remaining loans in these pools have been put under pressure by the sharp decline in home values. Subprime annual delinquency rates have increased, averaging about 10% over the past 12 months for subprime pools originated from 2002 to 2004, against about 7% for those same pools over the prior 12-month period.

Continued negative performance is expected from seasoned subprime pools over the coming months, with impending foreclosures impacting home prices negatively. Moody's expects home prices to fall by an additional 5%-7%, reaching a bottom in the coming year. This will mean a home value drop of 17%-20% from mid-2004 levels and a 5%-10% drop from mid-2003 levels.

Subprime borrowers typically had loan-to-value ratios of around 80% at closing and are therefore increasingly subject to protracted periods of negative or very little equity in their homes. Additionally, US unemployment is still projected to peak at 10.2% in the second half of 2010. Recovery in both home values and unemployment is expected to be slow.

RMBS

BTL RMBS performance 'mixed'

The performance of the UK buy-to-let (BTL) RMBS market in the three months to February was mixed, according to Moody's latest quarterly indices for the sector. The agency's repossessions trend was stable at 0.19%, having been 0.18% in November.

Over the same time, Moody's cumulative losses trend increased to 0.20% from 0.16% and the annualised total redemption rate (TRR) trend continued to fall, down to 3.63% from 4.33%.

The UK BTL RMBS market had £21bn outstanding as of February, a decline of 4.1% over the past 12 months. Moody's says the market has historically maintained a stable performance, but has been stressed by the global recession.

No new transactions have been issued in the market since July 2008. In February 2010 the reserve fund of Ludgate Funding Series 2007-FF1 was the only UK BTL RMBS transaction to be drawn below its target level.

The Halifax house price index shows average UK house prices increased by 1.1% month-on-month in March, following a 1.6% fall in February, while Nationwide's index increased 0.7% in March, almost cancelling out its 0.8% February fall. The Halifax index was 5.2% higher than a year prior, while the Nationwide index was 9% higher.

Moody's believes a shortage of properties for sale is the primary driver of the upward trend in house prices, and that demand will remain constrained by high unemployment and tight credit conditions. The agency's outlook for UK RMBS is negative.

SIVs

SIVs' ratings affirmed

Fitch has affirmed the long-term senior notes of Beta Finance and Five Finance at single-A plus, outlook stable. Both SIVs are advised by Citi and the notes' ratings are credit-linked to the rating of the bank.