Contents

ABS

Experience required

ABS recruitment trends assessed

As confidence gradually returns to the structured finance market, the associated job market is also seeing increased activity as banks look to rebuild in certain areas. However, demand is still centred on those with experience in structured finance or structured credit, rather than on fresh talent.

"At present, most demand in the structured finance field is focussed on valuations, structuring (restructuring) and trading roles," says Ikenna Iroche, consultant at Correlate Search in London. "Many of the banks are still looking to offload legacy positions, so client-savvy traders with the ability to find and negotiate with suitable buyers of these assets are particularly sought after."

He adds: "On the more traditional sell-side, however, there is not so much demand for pure sales roles, although there are opportunities for true product specialists in product management roles which involve marketing to key investors."

A second London-based head hunter reports that the bigger banks, such as RBS and Lloyds, have been hiring for structured finance roles, but this is more to do with replacing people who have left. In terms of level, there have been a few senior hires but most are at a more junior level.

"In sales, there's still latent capacity in a lot of the teams: teams that could be doing twenty deals a year are only doing five, so there is not very much hiring," he says.

UBS, Bank of America Merrill Lynch and Morgan Stanley have also been taking on a number of new hires in this sector in the past few months, with recent examples including Rohit Sen moving to BoAML from Goldman Sachs as an ABS trader and Matt Zola joining UBS to run global structuring within securities distribution (SCI passim).

"They want people who really understand the nitty-gritty and how things work - they are not looking for people that are new to the game," the second head hunter confirms.

It's a similar story in the US. According to Chadrin Dean, consultant at Integrated Management Resources, there has been a definite uptick in demand for those with backgrounds in structured credit in New York in the past couple of months. "There's demand for both buy-side and sell-side roles, mostly for the repackaging, analysis and pricing of legacy assets with the majority of demand coming from banks and hedge funds," he says.

Other roles are seeing limited hiring activity. Demand for structurers of new transactions is still lagging and, given that the primary market has not yet re-gained a lot of momentum, banks are hesitant to hire in anticipation of a rebound.

"It's worth remembering that when the crisis initially hit, many banks re-allocated structured finance staff to other parts of the business and may want to examine the internal talent pool before looking outside," comments Iroche.

Dean adds: "In some cases banks will look to the internal talent pool, but generally only for very junior roles. External searches will be used for levels such as vp and directors."

Analyst and strategist positions are seeing some degree of hiring activity, with one recent example being Bank of America Merrill Lynch's appointment of Srikanth Sankaran from UBS to head up its ABS research team in Europe (see last issue of SCI).

"There is quite a balance in terms of the candidates that are in demand, but we are beginning to see more analyst roles," says the second head hunter. "However, I think we need the election out of the way before anything can go forward. There are many issues which must be resolved, such as whether regulation will be light touch or will it be intense. I think there are a few people who are waiting until September or October to re-evaluate hiring policy.

Indeed, the question of banker compensation is still under the spotlight and remains politically charged. However, while new legislation limiting bonus payments has, to some extent, been mitigated via higher base salaries, banks are not being as competitive with compensation as the levels that are being reported, according one headhunter.

"In terms of new hires, institutions are not willing to over-pay. There are some banks who have adjusted salaries and some that haven't. Very rarely is an institution willing to pay a far higher salary to bring someone on board where the present employer has adjusted the overall compensation balance in favour of salary but the new employer hasn't," he says.

"It is not an issue yet because at the moment we are moving people to better institutions so most candidates are willing to forego a higher salary because the bonuses will be higher," he adds.

Dean concludes that banks are not necessarily being as aggressive on salaries as before the crisis. "There's a lot of advantageous hiring going on for those that accepted lower salaries for positions during the crisis," he says."New compensation levels are therefore not always higher than they were pre-crisis. Plus, there's not a huge bid: there's plenty of supply for places."

AC/JL

Legislation and litigation

Market reaction

Goldman CSO fraud hard to prove

The SEC's decision to bring fraud charges against Goldman Sachs in relation to Abacus 2007-AC1 CSO (see News Round Up) immediately roiled share and CDS markets. But it does not appear on the surface that the structured finance markets will have any long-term impact from the case.

CDS on Goldman widened 41% following the SEC's announcement, according to Fitch Solutions, while regional banking CDS spreads moved wider in North America (4.3%) and Europe (1%). Spreads have since eased back after confidence was restored on a Goldman analyst call.

While analysts at JPMorgan suggest the news may cause near-term volatility in secondary CLO prices (see News Round Up), a CDO trader says he would be very surprised if the news moved the structured finance market in any way shape or form on the secondary side. "There's been more of an effect on the financial stocks than anything else. There may be an effect on any primary issuance waiting to be issued, but there's still some time to go before we see that."

He adds: "People are obviously keeping an eye on developments. But this is an old story - it's been out there for a while. It's also one deal: it seems like a contained issue."

At issue is whether the transaction's criteria did indeed outline how the assets were selected, which is common in most synthetic CDOs. "Most of the deals will say that the manager that is responsible for acting on behalf of the issuer with respect to the selection has full rights to delegate any of the ability to select to anyone else," says one structured finance lawyer.

Goldman said in a statement that it provided extensive disclosure to investors IKB and ACA and that it never misrepresented hedge fund investor Paulson's involvement. "They are accusing Goldman of not providing enough disclosure but I bet it says clearly that the collateral manager may be shorting on behalf of other people," he notes.

Adds a second derivatives lawyer: "It seems like a tough case for the SEC to bring. The disclosure is pretty robust. Institutional investors were provided detailed information on every single asset that was in their pool." However, if there is evidence that Goldman trader Fabrice Tourre colluded with Paulson to put a deal together that would be healthier for the shorter than the noteholders, then that would be fraud, he notes, but it would be fraud on the part of the person, not likely Goldman.

With this Abacus CDO, the SEC charges that specific securities were picked for inclusion that were considered to be most profitably positioned for Paulson (helped by ACA's asset selection process).

"We won't judge this but critically, this is what happened in every deal," says Tim Backshall, chief strategist at CDR. "Every deal contained a set of deals that were efficient in order that the fees generated were high. The neutral third party aspect of the deal is worrisome for GS but realistically it is more about the public exposure of the selection process than it is specific to the names selected."

"If Paulson actually did the selection and ACA was not involved in the process, that would be an important disclosure," adds the second lawyer. "But I don't know they (SEC) are going to be able to prove that," he says. "ACA did certify their analysis. They had the final say over selection and determined that the portfolio had those characteristics."

But even if they did prove some of the wrongdoings suggested, the SEC may still have a difficult case. For this transaction, there's no section 11 or section 12 liability as in a regular securities offering, where a person can recover damages from an issuer if there was a misstatement, something omitted, or there was an untrue statement of a fact, adds the second lawyer.

The short selling disclosure is also questionable. "The notion that there should have been disclosure that there was a short seller doesn't have any disclosure value in that. By definition of the structure, you have to have a short seller looking to short. It's the way the structure works," says the second lawyer.

Some indeed say the case is a bit far reaching on the part of the SEC. "They need to make some gesture to get the banks in line to retain some of their power. Who better to go after than the golden child? Goldman also could survive the assault without causing another financial meltdown," notes the first lawyer.

According to Backshall, anyone who understands or structured any CDO (cash or synthetic, MBS or corporate) in the past knows very well that the selection of the underlying portfolio is implicitly one of 'adverse selection' - in its simplest form, a person wants to pick the most efficient names - the names that have the widest spread per rating (or spread per risk factor) that can be optimised to create a large excess spread in the deal.

Reacting to comments that GS was long this deal, Backshall comments that this is again entirely irrelevant as in almost all cases the issuer (GS in this case) held some of the most junior parts of the deal as they were the riskiest and hardest to sell/market to end-users.

"Of course, GS scraped a handsome fee from the deal (in excess spread) and would have made a fortune on the underperformance of the better-rated tranches even if they lost all of a small part of the most junior tranches," he adds, noting that this was apparently a deal within the AIG book and so any losses Goldman faced on the most junior tranches were probably bailed out at 100%.

According to strategists at CDR, the case is more about the public exposure of the adverse selection process involved, a rising lack of trust of the financial industry (more specifically in these more complex securities) and finally a leg-up for any Volcker rule or FINRA regulation.

AC/KFH/JA

ABS

Strong rally

European ABS market activity in the week to 15 April

Sentiment within the European ABS market is overwhelmingly positive. A strong rally dominated the top half of the capital structure over the last week, with further new issuance expected within the next few months.

"There's definitely been a rally - everything is moving up," says one trader. He notes that Granite, for example, is trading at the highest levels since the crisis at around 93.

The trader explains that there are multiple reasons for the increasingly positive sentiment within the ABS space, in particular recent positive news around Greece. "That's sparked a rally in equities and credit, and on the back of that our market has been woken from its slumber," he says.

An ABS dealer agrees that the wider rally has had a direct impact on ABS. "I think ABS has been relatively cheap for a while now and people are realising this more and more, which is why increased interest in the sector is coming in," he observes.

The dealer explains that UK non-conforming RMBS and CMBS are the sectors gaining increased attention, with a particular interest in the senior part of the capital structure. "As things become tighter, I think people will start looking at things with a higher yield, such as CMBS or UK non-conforming. The compression there is yet to happen. In CMBS in the last few weeks the mezzanine has been rallying and, with that happening, the senior bonds were starting to look cheap," he says.

In addition, the dealer explains that the increasing presence of real money accounts in the market is a positive development, as it not only indicates improved market conditions but may contribute to the rise in price as supply becomes limited. He explains that "while hedge funds and prop desks tend to trade in and out of funds, the real money tends to keep notes for a longer period of time so it means that bonds are moving out of circulation".

At the same time, the dealer says: "There have been a couple of new issues coming in, which have been very positive for market sentiment, as it's made people realise that ABS is here to stay. People who were a bit sceptical as to whether they would enter the market again are probably more positive now."

In particular, the new auto ABS transaction from Volkswagen, which is arranged by Citi and backed by Spanish auto receivables has garnered attention. The dealer says: "The Volkswagen ABS new issue is interesting, as it's a new jurisdiction for all of us to try to price. It will be interesting to see at what levels people are starting to talk because the German deals have been trading very tight, with bids now at 65bp-70bp over. Being a Spanish deal though, there will be some concerns with the jurisdiction being quite different to Germany."

However, the trader believes that the deal will be received well - although he does concede that it is likely to trade 15bp-25bp wider than comparable German paper. He says: "There is investor demand for diversification and new issues, which tend to have better quality credits and more work done on the underlyings. Spanish RMBS continues to trade well when compared to the assumed credit risk. So, if the RMBS can be traded well, I don't see any reason why autos can't."

The trader suggests that market chatter regarding further new issuance is to be believed. He says: "I don't believe that there is smoke without fire, so there's definitely going to be some new issuance. The key question is timing - whether it will be in the next two months or the next six months. I think it's going to happen sooner rather than later."

He continues: "I've heard that Paragon's equity has jumped up based on anticipation that it will re-enter the new issue business. I think within the next two months you will hear some confirmation about prime new issuance coming from the market too. We'll then see how the secondary market behaves off the back of that."

JA

Trading

US CMBS rally accelerates

US CMBS market activity to 19 April

The secondary US CMBS market has experienced an escalating rally over the past few weeks with last week in particular being described as both 'extraordinary' and 'explosive' by market participants. However, as the tightening in prices causes investor interest to move down the capital structure, concerns over AG and AM tranches are beginning to mount.

In terms of pricing, a CMBS dealer says prices range from low to high 100bps for short and clean super-senior paper, although even within senior tranches that level can move all the way to 500bp over treasury securities.

"Every deal is a little different and can depend on a hundred different factors. Most of the JMPC deals are performing well, but I would say that this is more an example of functional liquidity based on the size of the issuer than on the underlying quality of the transactions," he says.

The market rally has been driven by several factors. "First of all, it's based on the macro environment and sentiment turning positive," says one dealer. "People are short so as the market turns, clients started covering and the dealers got short and then dealers had to cover... it propelled the prices dramatically higher."

The trader adds: "I think the CMBS market was lagging a bit behind the other sectors so there is a little bit of catch up involved. It's all of these things combined."

The rally has also been attributed to people shifting allocation from other sectors into the CMBS space. "Even in the shortest cleanest highest grade paper, nothing has really broken through 100bp," says the dealer. "We're still in the 100bp-200bps over Treasuries. There's very little in the consumer ABS market to match that without going into mortgage securities. The street is pretty unanimous that the rally is going to continue."

The trader confirms this, noting that people chasing relative value are coming into the CMBS market now that sentiment has taken a positive turn. "People are coming into the CMBS market and it's catching up," he says.

Positive sentiment is also encouraging many investors to venture away from triple-A paper. "People initially had a lot of focus on the super-senior triple-As which have tightened and people have gradually become more comfortable with the AM tranches and then AJ saw a lot of activity". He adds: "I think that as those bonds rally people will begin to focus on double-A bonds and progressively lower until they realise that they are not on firm ground."

Off the back of this increased interest certain analysts have cautioned that investors need to be selective in AJ or AM tranches - senior tranches structured to take a little more risk above the other seniors.

Just last week, an old Lehman Brothers shelf which had an AJ tranche that went into shortfall, notes the dealer. "It didn't exactly miss an interest payment but it couldn't pay the full amount so there was an interest shortfall where they had to issue investors an IOU."
It seems that market sentiment has remained un-rattled by the development, however. The trader explains that although this was the first interest shortfall it is unlikely to be the last. "It wasn't totally unexpected" he says. "Right now the mood is pretty positive so in a worse environment it might have had more of an impact on sentiment".

Moving forward the dealer believes pricing could potentially tighten to about half of the current trading levels in the very long-term, but adds that refinancing and the performance of fundamentals remains a potential concern. "Refinancing is not as easy as it was in 2006 and so many enterprises just won't qualify for refinancing. There are still some fundamental health issues that make me wonder how tight things can go," he says.

However, the trader believes that these factors are unlikely to dampen spirits. "Bad news continues to come out of the market in terms of fundamentals, delinquencies are going up and loans are becoming delinquent. But that's what people are expecting. So the question really is whether it s going to be better than what people are fearing," he concludes.

JA

ABS

ILFC likely to wait on securitising

International Lease Finance Corporation (ILFC) increased the limit on liens of its consolidated tangible net assets to 35% from 12.5%, which will give the aircraft leasing company more flexibility to issue secured debt. But that strategy is not likely to include securitisation of aircraft leases anytime soon.

ILFC would not comment on any plans to securitise. However, the company still has order book positions coming that they need to finance as well as some pre delivery payments coming due, says a source familiar with the company.

Banks have also agreed to amend ILFC's US$2.5bn revolving unsecured credit facility that matures in October 2011 to a US$2.155bn facility that matures in 2012 and amend its US$2bn facility due October 2010. According to Pamela Hendry, senior vice president and treasurer at ILFC, other banks have not agreed to amend the remaining US$345m on US$2.5bn facility.

"By rolling the revolver, they keep all their assets. They've basically bought themselves time on that," says the source.

Though aircraft-leasing collateral is still considered a good bet for investors, ABS spreads are not as good as pre-crisis levels just yet, he says.

ILFC initiated its first lease portfolio securitisation in 2003 when it surfaced with Castle Trust 2003-1, though parent AIG was cited as buying most of the US$837m offering at that time. The largest tranche was a US$696m double-A rated tranche.

Participants still expect an aircraft leasing securitisation to come to market but have put more confidence in peers RBS Aviation or Textron in actually getting a deal done. "They (RBS and Textron) are willing to just leave the aircraft inside the securitisation...where ILFC's business was buying big blocks of airplanes wholesale and then selling them in large retail sales, which was a bit constraining," says the source.

ILFC's next big move to free up cash is expected to be another sale, similar in size to its US$1.67bn portfolio sale to Macquarie Group earlier this month. ILFC also raised cash through secured term loan financing and unsecured debt offerings last month.

KFH

CLOs

Further clarity on Moody's CLO plans

Moody's has provided further details on its plans to potentially relax the default probability stress assumptions on CLOs that it introduced early last year. As reported in the last issue of SCI, the rating agency is currently considering the appropriate timing and degree of such a change to the 30% default assumptions, which were introduced to address the unprecedented stress observed in the recent credit cycle.

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.

Elaborating further on the topic, Yvonne Fu, md at Moody's, says: "We are considering relaxing the 30% default stress assumptions on CLOs, but it is not a foregone conclusion. There are many factors behind our considerations and it is a matter of if, and when we decide to do it."

She adds: "We want to make sure that the improvement in the macro environment is more certain - we are doing a lot of analysis around the subject. The 30% default probability stress was always meant to be something that would reflect a forward-looking view of the market, with the understanding that it would be open to change."

Regarding CLO upgrades, Moody's notes that through its continued surveillance efforts it has been identifying candidates for further analysis and has recently placed a number of CLO tranches on review for upgrade. Some key considerations for CLO ratings upgrades include trends in WAR, Caa exposure and overcollateralisation levels since the deal's last review.

Relaxing the default probability assumptions would not, as a standalone course of action, necessarily result in upgrades, however. "It is hard to predict upgrades off the back of potentially relaxing default stress assumptions - there are other elements to consider," says Fu. "It would be too simplistic to say that changing one assumption when analysing the ratings of a deal could result in upgrades."

Moody's says that in meetings with CLO managers and investors, concerns have been voiced over certain features of CLOs that have proved problematic during the crisis (e.g. trading restrictions following tranche downgrades or deep-discount purchase thresholds). However, Moody's says it has been approached with new CLO structures that continue to include those features.

"Although we've not been approached with a lot of new deals, some of them contain the same features that many managers have been complaining about in the past year or so regarding manager flexibility," says Danielle Nazarian, svp at Moody's.

In anticipation of new CLO issuance and the market's interest in these topics, the rating agency says it is making headway based on proposed alternatives from various market participants.

AC

Insurance-linked securities

Johnston Re cat bond markets

Guy Carpenter is marketing Johnston Re, a US hurricane catastrophe bond offering for ceding reinsurer Munich Re and issuers the North Carolina Joint Underwriters Association (NCJUA) and the North Carolina Insurance Underwriters Association (NCIUA). The transaction is part of a group of public and private deals coming to market over the next week or so ahead of the hurricane season.

The two-tranche Johnston Re, currently targeting a total face value of US$200m, has price guidance at 600bp-650bp over Treasury money market funds for each tranche, say investors. S&P has assigned a double-B minus preliminary rating to the transaction's three-year series 2010-1 class A and B notes.

The offering began to roadshow this week and will in part replace the Parkton Re US$200m hurricane bond deal from last July. Parkton Re priced at 1050bp over Treasury money market funds and involved Swiss Re as ceding reinsurer and covered 16.67% of the hurricane losses of the NC JUA/IUA.

As with its predecessor, the ceding reinsurer's role in Johnston Re is to be responsible for the premium payments due under the retrocession agreement in place between it and Johnston Re. Covered losses will not be directly linked to Munich Re America's exposure in the covered area (North Carolina); rather, they will be based on the losses of the NC JUA/IUA.

The majority of the other new deals in the pipeline are from repeat cat bond issuers, though there are whispers of new participants mulling offerings (see SCI issue 180). Tight new issue spreads continue to be a draw for issuers currently.

"The pricing in the traditional market is allowing for continuing capital markets play, even though we have not had as many catastrophes recently, like Katrina," adds an attorney that specialises in ILS.

Smaller size offerings, such as those that price in the US$100m range, are also finding willing investors despite tight spreads currently. However, one investor notes that while issuance seems to be decent enough, he expects overall issuance to be short of upcoming maturities. There is still potential, however, for new cat bond issuance to slowly head back to 2006/2007 levels, or at least hit more than US$4bn or so in aggregate for the year, says another investor.

KFH

Investors

BlueMountain positions for post-crisis opportunities

While many credit hedge funds have failed to emerge from the financial crisis intact, those that have weathered the economic volatility are beginning to develop innovative strategies in order to adapt to the changed landscape. As previously reported in SCI, BlueMountain Capital Management has raised more than US$250m for three new funds in order to capitalise on what it sees as 'compelling opportunities' within the post-crisis market. In addition, the firm plans to launch a multi-client ABS fund by the end of Q3 this year.

The newly-launched funds are the BlueMountain Long/Short Credit Fund, the BlueMountain Distressed Fund and a single-client fund focused on securitised investments, with each offering targeted strategies for an area in which BlueMountain believes there to be new opportunities.

Co-founder and president of BlueMountain, Stephen Siderow comments: "Each of the three broad set of opportunities and strategies are things we've been doing for years in our multi-strategy flagship credit fund. Because this is something we do already, the decision to create the funds was really a combination of investment opportunity and investor demand."

Siderow points to the greater price dispersion evident in the current market from pre-crisis levels as one particular development that offers opportunities in terms of long-short investment. "There is greater opportunity to distinguish between the performance of different companies and make investments based on those that you think will outperform relative to those that you think will underperform" he explains.

"We think that now the stories are going to be dispersed, individual, idiosyncratic, credit stories. Some companies are going to do well because they didn't over-leverage themselves and have sound business models, are led by a good management, are in the right sectors, and have the right types businesses in place that can withstand this uncertainty; and other companies just don't."

In the distressed space, Siderow believes that a continuous stream of restructurings is likely to continue offering opportunities to distressed investors. In addition, he points out that the current default cycle is the first to occur with both a large and developed structured credit and CDS market. "We want to take advantage of the fact that even within distressed we can invest long and short and be less directional; and that we understand structured investors and how they might influence a restructuring procedure" says Siderow.

Although Siderow believes that there remains a need for traditional distressed investment approaches, he adds that while their approach is different, it is an approach that can compliment more traditional approaches for someone's portfolio.

Another opportunity that Siderow believes has emerged as a result of the financial crisis is the increased space in the market for those providing non-mortgage-backed ABS financing.

"Part of the opportunity in the consumer financing space is really the retreat of the traditional players such as CIT, GE Capital and others who used to provide the financing for things like auto loans and student loans, trade finance and credit cards and provide those facilities" he explains. He adds that with the correct pricing, the consumer ABS space is an area in which has the potential to be very profitable.

Moving forward, Siderow predicts that the hedge funds that have emerged from the crisis will be at an advantage in terms of profiting from the investment opportunities that the crisis has created on the one hand and flows from large institutional investors on the other.

"The opportunities created by the fallout from the financial crisis are compelling, but asset managers need strong fundamental, quantitative and technical skills to exploit them effectively," he concludes.

JA

ABS

EM partner switches firm

Peter Darrow has joined DLA Piper's corporate finance practice as a partner in New York. He comes from Mayer Brown, where he was a banking and finance group partner for 25 years. He was also co-chair of Mayer Brown's Latin American practice.

Darrow will focus on New York and key Latin American markets, representing issuers, underwriters and placement agents in cross-border securities offerings, including structured finance transactions in emerging markets.

ABS

Moody's analyst returns for new role

Moody's has rehired Andrew Jones, 17 years after he last worked there as a senior analyst for RMBS and home equity securitisation. He will be based in New York and is understood to be taking up a newly-created role enhancing structured finance research. Jones will report to Douglas Lucas, group md for research at the firm.

Since his first stint at Moody's Jones has worked for Duff & Phelps and DBRS, amongst others, and rejoins the agency from Optimal Asset Solutions.

ABS

Barclays veteran changes allegiance

Clydesdale Bank in London has appointed Stuart Trussler as director in its corporate and structured finance team. He joins from Barclays, where he spent 27 years, most recently focusing on structuring finance packages to support mergers and acquisitions and helping corporates with their day-to-day needs.

ABS

SIFMA names new securitisation head

The Securities Industry and Financial Markets Association (SIFMA) has appointed Richard Dorfman as md and head of the SIFMA securitisation group. Dorfman joins from the Federal Home Loan Bank of Atlanta, where he was president and ceo.

SIFMA president and ceo Tim Ryan comments: "With this addition, SIFMA is even better positioned to address the securitisation issues that are currently the focus of regulators and policymakers in Washington."

CDS

Quantitative modelling specialist hired

Prudential Fixed Income has hired Bjorn Flesaker as md and head of quantitative modelling. His role is to lead quantitative research and the team that develops models to assist traders and portfolio managers in identifying investment opportunities. Flesaker now reports to md and head of quantitative research and risk management Arvind Rajan.

Flesaker most recently worked for Bloomberg as a credit derivatives business manager, and has also worked for Morgan Stanley, MBIA, Bear Stearns and Merrill Lynch. He has more than a decade of experience in fixed income quantitative research.

CLO Managers

Brigade Capital wins CLO mandate

Brigade Capital Management has taken on collateral manager duties for Camulos Loan Vehicle I, a CLO which had previously been managed by Camulos Capital since its inception in February 2008.

The New York-based asset manager has given written acceptance of the rights, title, interest and obligations of collateral manger to take on the US$731m deal, which in 2008 consisted of US$555m 6.1-year triple-A notes, US$46.7m 7.6-year Aa2/AA notes, US$31.5m A2 notes, US$205m Baa2 notes and US$24.5m Ba2 notes. The transaction was arranged by Morgan Stanley.

Brigade already holds one CLO among its US$6.5bn of AUM - Battalion CLO 2007-1 - which is worth US$500m.

Moody's has determined that Brigade's appointment will not cause any ratings to be reduced or withdrawn on the transaction.

CLOs

CLO investor recapitalised, top staff replaced

Saratoga Investment Advisors and CLO Partners are to purchase a minority stake in GSC Investment Corp as part of a US$55m recapitalisation plan. GSC - an investor in leveraged loans, mezzanine debt issued by US middle-market companies, high yield bonds and CLOs - has been in default under its credit facility since last July.

According to GSC, the recapitalisation plan includes Saratoga and CLO Partners purchasing approximately 9.8 million shares of common stock of GSC Investment Corp for US$1.52 per share under a definitive stock purchase agreement for a minority investment, pro forma for the issuance of the new shares, of approximately 37% of GSC's equity. The recapitalisation plan also includes a commitment from Madison Capital Funding to provide GSC with a US$40m senior secured revolving credit facility.

Saratoga and CLO Partners are entities wholly- or majority-owned by Christian Oberbeck, md of Saratoga Partners, an affiliate of Saratoga. GSC's current ceo Seth Katzenstein, cfo Richard Allorto and vp, secretary and chief compliance officer Eric Rubenfeld will be replaced by corporate officers of Saratoga following the recapitalisation.

Upon the closing of the transaction, GSC will immediately borrow funds under the new credit facility that, when added to the US$15m equity investment, will be sufficient to repay the full amount of the company's existing debt and to provide the company with working capital thereafter. Since July of 2009, GSC has been in default under its existing credit facility and has received multiple letters from its lender, Deutsche Bank, New York Branch, reserving the lender's right to seek remedies for the existing event of default, including foreclosing on the collateral securing the existing credit facility.

Under the terms of the stock purchase agreement and subject to approval by the company's stockholders, Saratoga will replace GSC Group as GSC Investment Corp's external investment manager and administrator.

CMBS

CRE partner joins law firm

Steven Smith has joined law firm Perkins Coie as partner and will be in charge of the real estate group's new office in Dallas, Texas. Smith's real estate and commercial law practice focuses on real estate workouts and lending and Perkins says his addition will bolster its representation of CMBS special servicer clients, many of which have offices in Dallas.

Smith's work with real estate clients includes the representation of CMBS special servicers as well as conduit and other lenders involved in CRE financing. He also has experience of defeasance transactions, assumptions, loan modifications, REMIC tax issues, pooling and servicing agreement compliance and review, receiverships, foreclosure, bankruptcies, asset dispositions, litigation and loan sales.

Emerging Markets

DB hires in EM credit

Deutsche Bank's emerging markets business has made a number of hires in Sao Paulo and Mexico City. Rodrigo Rocha joins as director and head of credit syndication for Brazil within debt capital markets (DCM). He has 14 years of experience and joins from Credit Suisse, and will report to Nuno Correia. Also reporting to Correia, and jointly to Brad McKee, is Christian Lara, who joins as DCM sales vp. Lara comes from JPMorgan.

Also joining the Sao Paulo office is Alex Coutinho, who comes from Spinnaker Capital to become director in global markets structuring and credit.

Two new recruits will report to Claudio Holanda, Brazil director for local emerging markets fixed income trading. The first is Jose Luis Azevedo de Oliveira, who joins from Banco Itau to become vp in Holanda's department, as does Frederico Massote who leaves his post at Santander.

Jorge Classing, who leaves Bank of America to become director of Mexico's emerging markets fixed income trading branch, will report to Luis Betancourt.

Investors

Cairn takes on credit fund and staff

London-based credit asset management and advisory firm Cairn Capital has assumed management of the Credaris Credit Fund, which pursues a liquid long-short strategy in European corporate credit.

The five-strong investment team managing the fund has also joined Cairn. The team members transferring are principal portfolio manager Sam Cowan, who worked for Cairn previously, the fund's principal architect Graham Neilson who becomes chief investment strategist at Cairn, Beth Fusco and Helen Rodriguez who both join Cairn's research team and Lindsey Hobday who will join Cairn's investor relations team. Credaris ceo Andrew Donaldson will not transfer to Cairn, but he does remain on the fund's board of directors.

Cairn ceo Paul Campbell comments: "The fund will complement our product offerings in European ABS, hybrid bank capital and UCITS."

Regulation

ISDA names risk, reporting head

ISDA has appointed David Murphy as head of risk and reporting. He will be based in London and report to ceo Conrad Voldstad.

ISDA says Murphy will manage risk management and financial reporting, including its initiatives in relation to the Basel capital framework and regulatory capital requirements. He was previously founding principal of structured products consulting firm Rivast Consulting and before that he was coo at Merrill Lynch's reinsurance group.

Structuring/Primary market

LAMCO to go ahead

Lehman Brothers Holdings has gained US court approval to establish a new asset management firm, dubbed LAMCO. The move comes after its initial plan was slammed by eight dealers.

Under the restructuring, the Lehman estate will split into two businesses: LAMCO, which will manage its illiquid assets (real estate, private equity, derivatives and corporate loans) for five years; and the parent company, which will manage claims arising from its Chapter 11 filing. LAMCO is understood to have 455 employees.

Trading

ABS trader promoted

Deutsche Bank has promoted Pius Sprenger to head of trading for ABS and CDOs. He takes over from Greg Lippmann, who the bank says will remain a DB employee and be involved in the transition.

Sprenger was previously DB's head of European ABS trading, based in London, and worked for Morgan Stanley and Lehman Brothers before joining DB in 2004. Lippmann is widely expected to soon join an investment bank set up by former DB global markets head Fred Brettschneider.

ABS

Euro/US SF yield disparity still exists

European structured finance bonds continue to offer greater yield than comparable US SF bonds, according to ABS analysts at Bank of America Merrill Lynch. The analysts note that most sectors of the US SF market experienced significant spread contraction in part due to government support programmes and abundant liquidity. Although the Euro SF market did benefit from the general improvement in credit markets, the analysts point out that it did not experience spread compression to the same degree as the US. As a result Euro SF spreads remain wide - to a different degree by sector - of their US comparables.

In terms of credit card ABS the analysts maintain that UK credit card ABS presents an attractive investment proposition at the senior level. The reasons for this are three-fold: First, credit card lending offers more options for lenders to manage risk than in mortgage lending. Secondly, the average life of securitised product is structured to be relatively short and when performance deteriorates, amortisation triggers may be hit. Given the relatively high payment rates, the liabilities should be repaid very quickly. Finally, while the analysts believe the sector is likely to suffer from further deterioration, the senior notes of most UK trusts have sufficient credit enhancement to withstand the expected deterioration as long as the originator views the credit card lending business as vital, which is what they think is the case for all UK master trusts.

The analysts also note that the dynamic in the CLO sector between Europe and the US was somewhat different due to the lack of direct government support in either and more pronounced continuity in investor bases. The analysts note that European CLO assets are trading slightly weaker than their US counterparts at the triple-A level and much weaker at double-A and single-A level.

"This is at a time when the comparables on the European market have enjoyed somewhat sizeable spread compression (excluding CMBS). This leaves European CLO senior mezz trading at discount to US counterparts. In addition, in comparison to some other mezz SF bonds in Europe, it lags the compression," they say.

BoAML also point out that in 2008 US CMBS widened earlier and to a greater extent than European CMBS. However, since then US CMBS have recovered much faster and to a greater degree than European CMBS. "The effect of TALF stimulus likely contributed to this difference. As a result, European CMBS offers additional yield of around 200bp-300bp over US CMBS, which is likely to appeal to some US investors," they conclude.

ABS

Sallie Mae exec says consolidation expected

Jonathan Clark, evp and treasurer at Sallie Mae, says in the wake of the government-backed FFELP programme going away, industry consolidation is expected. Clark was among a group of panellists at Fitch's US consumer ABS conference in New York on 14 April.

Sallie Mae's Clark says he expects there to be fewer players in the industry of private credit as a whole, for origination and ownership of the loans. He expects this shrinkage to continue for the next 18 months. Sallie Mae, along with Great Lakes, Nelnet and AES/PHEAA, is among those that service FFELP loans.

The agency came under attack at the conference for funding its new origination with deposits. If it continues to fund with deposits, a potential duration mismatch could occur, notes Meghan Neenan, senior director at Fitch.

The lender, which has been a frequent issuer of ABS deals under the TALF programme, last month brought a US$1.55bn ABS offering. That offering was also cited at the conference as having too much TALF investor interest compared to non-TALF interest. As one panellist noted, the deal had about 80% of investor interest from TALF investors and only 20% from cash investors.

Still, Sallie Mae says the company has several positive initiatives going for it. Earlier this year, the company created an alternative Smart Option Student Loan programme, which requires students to make interest-only payments while they are at university and during the six-month separation period to avoid capitalised interest.

Also helping the company, Sallie Mae says it increased FICO score cut-offs and eliminated its non-traditional university segments, which were institutions that did not perform well historically.

"The consumer is clearly under stress and will continue to be," says Clark. "Our portfolio has, given all the moving parts, actually performed quite well."

ABS

VW offers Spanish auto notes

Volkswagen (VW) Finance - stalwart of the German auto ABS sector - is offering investors ABS notes backed by Spanish auto receivables. If successful, the €686m Driver Espana One will become VW's first public ABS in Spain.

The transaction will follow the structure of VW's German Driver transactions that have proved popular with investors in the past (SCI passim). Ratings have been assigned to two classes of notes: class A, rated triple-A by Fitch and S&P, is sized at €622.5m; and class B, sized at €63.75m, has been split-rated A+/A. Both classes will be offered over one-month Euribor.

The transaction has been arranged by VW and Citi and is underwritten by Citi, HSBC, JPMorgan, Commerzbank and RBS. A roadshow is due to start next week.

The deal is backed by a static pool of auto loans granted to individuals and SMEs in Spain. The transaction will start to amortise from closing.

The provisional portfolio consists of 147,147 loan contracts, with an outstanding aggregate discounted principal balance of €1.24bn. According to Fitch, it is highly granular with a top-10 debtor concentration of 0.06% and has a weighted average seasoning of 20 months. The loans have been granted by VW Finance to buyers of new (89.6%) and used cars (10.39%).

ABS

Spanish electricity tariff ABS closed

Notes issued by Alectra Finance, a Spanish electricity tariff deficits transaction, have been assigned final triple-A ratings by Moody's and Fitch. This is a securitisation of the payments made by the Spanish Comision Nacional de Energia (the CNE) relating to the compensation entitlement that arose as a result of the funding by certain Spanish electricity utility companies of a deficit arising from settlement of the costs of regulated activities in the Spanish electricity sector in 2005.

Through a series of prior assignments, the issuer has acquired a portion of the 2005 tariff deficit amounting to 40.02% of the total recognised amount of the 2005 tariff deficit. This share accounts for approximately €1.2bn as of the closing date.

The issuer's collection rights have been enacted by a series of Spanish Royal Decrees and further detailed in corresponding ministerial orders. In addition, the enactments oblige the Spanish Ministry of Industry, Tourism and Trade to include a surcharge on the regulated tolls paid for access to electricity grids in order to recover on a linear basis the 2005 tariff deficit by 10 April 2021.

The effect of this, along with the details set out in relevant ministerial orders on the recovery mechanism of the 2005 tariff deficit, is that any repayment due on the 2005 tariff deficit which, for any reason, is not made during any year would simply result in the 2005 tariff deficit surcharge for future years being increased to recoup the corresponding shortfall in order to repay the 2005 tariff deficit by the final maturity date.

ABS

APAC upgrades match downgrades

Fitch downgraded 25 Asia Pacific securitisation tranches (including public, private, international and national ratings) in Q110 and upgraded 24, while affirming 226.

"The main drivers behind the highest upgrade to downgrade ratio for two years were fewer downgrades to Japanese CMBS plus special servicing activities, combined with properties selling faster than in the previous 12-18 months in Australian RMBS [see separate News Round-up story]," says Alison Ho, senior director and head of performance analytics in Fitch's Asia Pacific structured finance team.

"Most of the downgrades were to junior classes of Japanese CMBS, which were downgraded to triple-C or below, as losses look increasingly likely, while special servicing and an improvement in the general property market played a role in improving the asset performance of two Australian non-conforming RMBS transactions," Ho adds.

The downgrades were spread across the Asia Pacific regions and sectors. Three credit-linked Japanese ABS, two Singaporean ABCP tranches and one Australian non-conforming RMBS tranche were downgraded in Q110, as were eight Japanese CMBS trust beneficiary interests (TBIs). Four publicly-rated CDO tranches were downgraded to D during the quarter, following the receipt of valuation notices confirming losses.

Seven of the upgrades related to two Australian non-conforming RMBS and one Australian ABS transaction, although five of the eight upgraded tranches are still rated below triple-B. One class of Japanese CMBS TBIs was upgraded following the prepayment of a loan, which Fitch had expected to default. Half of the upgrades were privately rated Indian transactions.

Fitch has lowered the number of Japanese CMBS tranches on rating watch negative to 22 at the end of March and to 14 by mid-April. At the end of Q110, Japanese CMBS accounted for almost half of the Asia Pacific SF ratings with negative outlooks, with the bulk of the remainder on junior classes from Australian prime RMBS.

ABS

Concerns continue despite Spanish SF stabilisation

Fitch says arrears have begun stabilising across more Spanish structured finance sectors, but the agency's performance outlook for the rest of the year remains cautious.

Fitch's Spanish RMBS 90-days plus arrears index improved to 2.02% in December 2009, from 2.51% the previous quarter and 2.14% a year earlier. The Bank of Spain reported a decline in the non-performing loan ratio for residential mortgages to 2.89% in Q409 from 3.05% in Q309. The ratings agency says it has seen similar trends in the SME CLO and consumer ABS segments.

"The pace of credit deterioration should ease through the end of the year as transaction sponsors continue to reinforce servicing platforms and the economy returns to modest growth in the second half of the year," says Spanish SF md Rui Pereira. "However, high unemployment and weak prospects for a recovery in the labour market, coupled with the ongoing correction in the housing market and the medium-term risk of rising interest rates will continue to hamper transaction performance."

Improvement is being driven by low interest rates easing debt service, the growing use of loan modification and restructuring initiatives, and loans that have actually rolled out of arrears buckets into default, says Fitch.

Vintage has proved an important factor in performance, as older deals with more traditional risk profiles continue to perform within expectations but recent vintage transactions have exhibited significantly worse performance. Fitch says these transactions account for the majority of downgrades in recent years, and it expects this performance differentiation to continue. If arrears pipelines do not stabilise and recovery realisation does not improve, then the agency says further downgrades may take place.

ABS

Strong quarter for Indian ABS

Fitch says it has affirmed 17 publicly-rated series of Indian structured finance transactions in Q110. Single loan sell-down transactions accounted for 13 of the affirmations, following the affirmation of the underlying obligor Shriram Transport Finance's (STFCL) national long-term and short-term ratings.

The other affirmations were of purchaser payouts issued by STFCL and SREI Infrastructure Finance, based on the level of available credit enhancement and the amortisation level of the underlying assets, which continue to perform in line with Fitch's expectations.

"The affirmed ABS transactions continue to perform as expected with credit enhancement increasing as pools amortise with low default rates," says Jatin Nanaware, Asia Pacific structured finance associate director at Fitch.

The agency says its outlook for Indian structured finance transactions remains stable.

CDO

UBS marketing new CSO

UBS and M&G are in the market with a new CSO dubbed Ocelot III, according to an investor. As previously reported in SCI (see SCI issue 180) dealers, including UBS, have been waiting in the wings with potential CSO issuances, while JPMorgan and Axa have already been testing investor appetite for their CSO, Aria IV.

The 'conservatively structured' Ocelot transaction will reference 130 equal-weighted investment grade corporate names spread across 26 industries and 20 countries, with a 45% US concentration and less than 10% non US, non-EU concentration.

The transaction is understood to offer tranche widths of 5% and 10% and offer a coupon of 1%-2% over Libor/Euribor. It has a maturity of 4.5 years.

CDO

Bank Trups CDO defaults, deferral times up

Fitch says seven new bank defaults caused US bank Trups CDO default rates to hit 11.6%. There are 103 bank issuers in default at present, representing around US$4.4bn across 81 Trups CDOs. Fitch md Kevin Kendra says negative Trups CDO pressure will continue because of underperformance among small and medium-sized US banks.

Bank deferral rates climbed by 1.5% to 17.7% this past month, bringing the total to 330 banks in deferral. There has also been an increase in the amount of time banks are deferring interest payments on their Trups.

Time spent in deferral among the 330 banks rose to 241 days, which indicates the deferral rate is increasing faster than the deferral-to-default rate. Fitch observed one example in the past month of a deferral curing and resuming Trups payments rather than migrating to default.

CDS

Determinations Committees kept busy

A number of ISDA Determinations Committee (DC) decisions have been made in recent days.

First, the EMEA DC has determined that a succession event has occurred in connection with Nordic Telephone Company Holdings. The date of the succession event has been determined as 5 March and Nordic Telephone Company Administration is the sole successor.

Second, the Americas DC has agreed to delay until 7 May determining whether a succession event has occurred with respect to Burlington Northern Santa Fe Corporation. Goldman Sachs believes a succession event occurred on 12 February 2010 when the reference entity was merged into a subsidiary of Berkshire Hathaway. The firm was renamed Burlington Northern Santa Fe LLC upon the consummation of the merger.

Finally, the Japan Airlines Corporation credit event auction has been scheduled for 22 April.

The final settlement price for the McCarthy and Stone auction, meanwhile, was determined on 15 April to be 70.375, with six dealers submitting inside markets. Due to a zero net open interest, there was no subsequent bidding period and the inside market midpoint value was determined as the final price.

CDS

Basel 2 CVA proposals analysed

The Basel Committee's comment period on its consultative paper, 'Strengthening the resilience of the banking sector', ends today. The occasion has drawn comment from S&P regarding counterparty credit risk (CCR).

The rating agency's view on the Basel Committee's proposal to increase capital requirements for CCR exposures is that:

• The standards it sets out could have significant effects on the derivatives markets and on financial institutions with large derivatives sales and trading businesses.
• Although certain proposed measures - such as the introduction of the stressed Expected Positive Exposure - are consistent with its view that risks in the trading book deserve higher capital charges, the agency notes that Basel's proposed calibration of Value at Risk (VaR) on credit valuation adjustments (CVAs) suggests stress events that would go far beyond the loss experience of the past 24 months.
• The overall ratings implications won't be clear until there is a final version of the framework, which is expected later in 2010.

According to the rating agency, the Committee's proposals on CCR - particularly concerning CVAs - could multiply the risk-weighted assets (RWA) and the capital required for CCR by four to six times the current amounts. S&P adds that the additional capital requirement could be greatest for financial institutions with large derivatives sales and trading businesses.

Because of this potential multiplier effect on the capital required for trading OTC derivatives, S&P believes that the Basel proposals concerning CCR have potentially significant implications for the behaviour of derivatives markets in the medium term. They could, for example, favour the use of qualified clearing houses as counterparties for derivatives contracts. This could alleviate the extra capital burden for banks, but raises questions about clearing houses' capacity to support the risks.

S&P sees the general thrust of the proposals concerning CCR as being generally consistent with its Risk Adjusted Capital Framework and points out that the crisis demonstrated that asset correlations among financial institutions were higher than originally estimated, with most institutions simultaneously affected by market-price volatility. Likewise, so-called 'wrong-way' risk materialised, particularly among financial guarantors whose creditworthiness eroded simultaneously with the value of the assets that they guaranteed.

Furthermore, the rating agency believes that for some financial institutions, the losses taken via CVAs in 2008 and 2009 were substantial and were not captured by the Basel 2 framework. S&P says that the proposal to introduce a stressed VaR on CVAs appears to address the apparent shortcoming in Basel 2 on this point.

Nonetheless, the agency indicates that there may be a risk that using a regulatory scaling factor of at least three times would go far beyond the loss experience of the past 24 months, according to its preliminary estimates. It could potentially create unintended consequences, S&P warns.

CDS

Vendor introduces CDS liquidity signals

CMA has published a review of liquidity signals in the CDS markets - the first in a series of white papers by the vendor addressing issues of interest and concern to OTC credit market participants. The report examines the relationship between OTC credit market quoting activity and CDS spread movements and focuses on two case studies: the fall of Lehman Brothers and the recent credit crisis in Greece.

The paper also introduces CMA's new market activity indicators, which provide CDS market information that is not contained in CDS price levels but can have a significant and valuable impact on counterparty credit assessment. "In order to fully comprehend the market dynamics surrounding specific reference entities, it is important to monitor the price of protection in conjunction with information on the size and scale of market activity around a particular credit," the report explains. "By monitoring sudden drops or rises in market interest in a given credit, one can gain a much better understanding of how CDS market players are reacting to new information. More importantly, one can gain this understanding in the early stages of credit deterioration, or optimally, prior to it."

Levels of market activity can be much more reactive to new information than price levels and can provide a leading indicator of future price movements, according to CMA. Alert signals can be produced, bringing an affected counterparty's name to the attention of risk managers. Such alert signals, if processed on a timely basis, can improve an institution's ability to trigger ad-hoc assessment of a particular counterparty or credit, and potentially adjust their exposure before the potential credit deterioration.

The measures presented in the report are based on patterns of information flow between CDS market makers and investors. Market activity can be measured in terms of how often and how many market-makers send indicative quotes to CMA's clients or how many of CMA's clients see a minimum threshold of quoting activity in a given reference entity. These market activity indicators are published daily as an integral part of CMA's CDS pricing information service.

"We assume market-makers will provide indicative quotes more frequently and to a wider range of clients when facing increased trading activity in a particular reference entity. Even if the consensus price of CDS protection remains generally unaffected, increased quoting activity may signal that a larger segment of the market has begun to take a view on, or an interest in, the underlying credit," CMA says.

CLOs

Small EM synthetic CLO rated

Moody's has assigned triple-A ratings to €39m of notes issued by Terra II Senior CLO - a synthetic balance sheet CLO sponsored and arranged by Citigroup Global Markets.

The rated notes represent a fixed percentage of a 2% mezzanine tranche, with a 25% attachment point, and reference a pool of predominantly Asian and other emerging market corporate loans. The issuer will bear a fixed percentage of the credit losses in the reference portfolio that exceed the attachment point and will make credit protection payments amounting to no more than €39m under the CDS.

The CDS has a scheduled termination date in March 2015 and a maximum reference portfolio notional amount of €3bn. During the CDS term, Citibank London can replenish the reference portfolio with new obligations, subject to the satisfaction of certain replenishment criteria.

CLOs

CLO amends interest proceeds definition

Sandelman Finance 2006-1 has entered into an amendment to the indenture that revises the definition of interest proceeds and includes certain other changes, such as to the transfer and resale provisions. Under the amendment, the collateral manager will no longer have the discretion to reallocate to interest proceeds principal proceeds that are in excess of a loan's outstanding principal balance.

Moody's has determined that the performance of the activities contemplated within the amendment will not result in the withdrawal, reduction or other adverse action with respect to the current ratings of the CLO. The rating agency says that the amendment is not inconsistent with its current rating methodology for CLOs.

CLOs

CLOs amended to include workout securities

A raft of CLO issuers have entered into supplemental indentures that allow them to create one or more subsidiaries, which will be able to own certain workout securities that the issuer itself could not own without endangering its tax status. These amendments were made pursuant to Section 8.1 of the indenture, which allows changes to the indenture without investor consent in order to avoid negative tax treatment, so long as certain conditions are met.

The affected CLOs include nine series of Ares CLOs, three series of Ares Enhanced Loan Investment Strategy, Olympic CLO I and Whitney CLO I.

Moody's has determined that these amendments will not cause the current ratings on the notes to be reduced or withdrawn. It does not express an opinion as to whether the agreements could have non-credit related effects.

CMBS

Private placement for Dutch CMBS tap

Vesteda, the Netherlands residential property investment fund, has launched a €350m CMBS tap issue from its Vesteda Residential Funding II programme. This is understood to be the first European CMBS transaction of 2010 as well as the first Dutch CMBS issue since the start of the financial crisis in 2007.

The portfolio of underlying assets is rented multi-family apartment blocks and houses in the Netherlands. The issue comprises €350m of A7 notes rated triple-A by Fitch, S&P and Moodys. ABN AMRO acted as sole lead manager for the transaction and Bishopsfield Capital Partners as rating adviser. The notes have been placed with a single investor via a private placement and are underwritten by ABN AMRO.

"Vesteda is a new client for ABN AMRO and this transaction underlines our strong commitment to the Dutch real estate and securitisation markets," comments Albert van Welderen Rengers, svp of ABN AMRO.

Vesteda is due to redeem the transaction's class A2 notes later this month and will use proceeds from the new class A7 notes, as well as a prepayment made by the borrower.

CMBS

NAMA transfer for Opera CMH loan

The junior loan in CMBS Opera Finance CMH - a CMBS predominantly backed by Irish real estate loans - is to be transferred to the Irish National Asset Management Agency (NAMA) later this month, according to a notice released on 15 April.

The move has prompted a revaluation of the properties backing the deal and resulted in a valuation of €342.19m as at 30 November 2009 and therefore an LTV of 110%. Michael Cox, structured finance strategist at Chalkhill Partners, notes that this is in stark contrast to the valuation as at 30 June 2009 of €534.99m, which had suggested an LTV of 70%.

OPERA CMH is the only CMBS deal with significant exposure to the Irish commercial real estate market; hence, it is no surprise that the value of the properties has fallen substantially. There is no LTV covenant on the senior loan, but there is on the junior loan.

"Although we have not seen the level of the covenant disclosed anywhere, it seems highly likely that a breach of that covenant has now occurred," says Cox. "However, our read is that the junior lender would now be prevented from taking action as a result of the new valuation, and we doubt it would be in its interests to do so, even if it was permitted. The loan is not due until January 2013 and, given the income from the properties seems reasonably strong, we think the most likely scenario is for the loan to run until at least that date."

CMBS

US CMBS delinquency increase 'largest on record'

The delinquency rate for US CMBS recorded its largest increase on record, rising by 69bp in March to 6.42%, according to Moody's. The agency notes that 45bp of the increase was due to the US$3bn Peter Cooper Village and Stuyvesant Town loan moving into delinquency. The balance of delinquent loans increased by US$4.3bn in March, with 343 loans becoming delinquent.

"Excluding the outsized impact of the Peter Cooper/Stuyvesant Town loan, the pace of the increase in delinquencies for multifamily and hotel loans has moderated over the past several months. The delinquency rate for properties with longer lease terms, on the other hand, such as office and retail, has continued to accelerate over the same period," says Moody's md Nick Levidy.

He adds: "We expect this trend to continue, with the performance of multifamily and hotel properties bottoming out this year and that of office and retail continuing to deteriorate for several more quarters."

Moody's says the Peter Cooper Village addition caused the multifamily loan delinquency rate to leap by 283bp in March to 12.19%, making it now the worst-performing sector, but that the number of delinquent multifamily loans only increased by eight. The four other property types also saw rates rise - by 35bp to 5.57% for retail, 14bp to 4.12% for office properties, 63bp to 11.27% for hotels and 30bp to 4.57% for industrial.

The East is still the best-performing region in the US, despite the addition of the loan backed by Peter Cooper Village to the delinquent balance. The rate for the East rose by 154bp to 5.14%, whereas delinquencies rose by 26bp to 8.45% in the South, 29bp to 6.61% in the West and 32bp to 6.94% in the Midwest.

CMBS

'Drastic' rating action for Eclipse 06-3

In what has been described as a 'drastic' rating action, Fitch downgraded the class A notes of Gemini (Eclipse 2006-3) from triple-B minus to triple-C. As part of the same action, the agency also downgraded the transaction's class B and C notes from BB/CCC to CCC/CC respectively, and affirmed its class D and E notes at double-C.

Structured finance strategists at Chalkhill Partners suggest that the action goes further than necessary. "While we can understand that an investment grade rating may be inappropriate on a bond where the LTV is greater than 100%, we think it is far from a foregone conclusion that the class A notes will default. While the deal arguably stands out as one of the weakest in the European CMBS sector, there are others that are not much better, and we cannot help wondering whether there may be further cuts of senior notes to junk status by the agency," they note.

Fitch explains that there has been a fall in net operating income (NOI) by some 19% since the January 2009 interest payment date. The agency estimates a fall in property value of around 40% since the portfolio was last valued in September 2008.

Note collateral consists of a £850.4m interest-only senior loan originated in November 2006 by Barclays Bank. The collateral is secured, along with a £105.8m junior loan, on 34 generally secondary quality properties.

The vacancy rate has risen to 13.1% from 7.8% of the estimated rental value since the January 2009 IPD, due to a combination of lease roll-offs and tenant administrations. As a consequence, in the last two IPDs, NOI generated by the portfolio has fallen below the level needed to service interest on the senior loan.

As of the January IPD, £2.44m had been drawn down under a £64m liquidity facility in order to top-up senior loan interest, increasing note leverage. The servicer, CBRE, anticipates that senior interest shortfalls will continue in the order of £2.5m to £2.8m for the next three IPDs, further increasing transaction leverage.

Moreover, an additional 10% of income will roll-off by 2012 unless tenants on leases due to break or expire elect to renew. The risk of continued falls in income may force the servicer to bring forward the liquidation date.

However, there are senior and junior borrower-level interest rate swaps in place. The senior swap matures in July 2026, ten years after loan maturity and seven years after bond legal maturity. Potential swap breakage costs, currently estimated by the servicer on 24 March at £127.7m, would rank senior to loan principal.

CMBS

Monthly updates for EMEA CMBS specially serviced loans

As the number of loans going into special servicing increases, Moody's has launched a new monthly publication analysing special servicing loans that back EMEA CMBS, which it hopes will increase rating transparency.

The rating agency says its report will explain why a loan is transferred into special servicing, the loan's current status, and Moody's observations about the focus of the special servicer's work-out strategy. Moody's says the report lists key data for all loans in special servicing on a loan-by-loan basis.

Indices

PrimeX launch imminent

PrimeX, a new series of CDS indices referencing triple-A bonds in the US prime RMBS sector, is scheduled to launch next week. Twelve dealers have signed up to participate in the index thus far.

PrimeX consists of four sub-indices: PrimeX.FRM.1, PrimeX.FRM.2, PrimeX.ARM.1, and PrimeX.ARM.2. The aim of each index is to provide a standardised, diverse and transparent tool to gain exposure to securitised fixed-rate and hybrid ARM loans, with fixed and hybrid ARMs to be separated in order to enable investors to better manage the prepayment and credit risks.

The PrimeX cash flow structure is identical to the ABX in that it follows the ISDA 'pay as you go', with two exceptions: firstly, interest shortfall in PrimeX is not capped; and secondly there are no implied writedowns on the PrimeX index constituents.

In a recent analysis of PrimeX, securitisation analyst at Deutsche Bank note that ARM loans have worse credit performance than fixed rate loans and note that FRM.1 and FRM.2 indices exhibited better credit performances than ARM.1 and ARM.2 sub-indices, respectively.

The analysts also point out that unlike the ABX index for which there was a decline in serious delinquency rates in March, the PrimeX serious delinquency rate continues to rise. "However, the rate of increase of serious delinquencies has declined since the end of 2008 across all non-agency credit spectrums, indicating the stabilisation of outstanding distressed inventory," they say.

The analysts continue: "Voluntary prepayments for the PrimeX series have been in the 12-15 range with tight variance in each of the past few months. This is in a sharp contrast to the voluntary prepayments of subprime loans that have been close to zero."

While ABX CDRs are in the 13-16 range, the analysts note that the aggregated CDR of PrimeX has been slightly over 3%. They note that it is evident that ARM loans have higher CDRs than fixed rate loans, and that prime loans from later vintages exhibited higher CDRs.

They add that the PrimeX has significantly lower loss severity than the ABX index. "This is primarily due to the significantly large average loan size in PrimeX. Similarly, ARM loans have larger loans size than fixed rate loans. Consequently, ARM series have lower loss severity than fixed rate series, assuming the same vintage years," they note.

Legislation and litigation

SEC brings fraud charges against GS

The Securities and Exchange Commission (SEC) on 16 April filed securities fraud charges against Goldman Sachs and one of its employees - Fabrice Tourre - for making material misstatements and omissions in connection with a synthetic CDO that GS structured and marketed to investors.

The deal, Abacus 2007-AC1, was tied to the performance of subprime RMBS and was structured and marketed in early 2007. According to the Commission's complaint, the marketing materials for Abacus 2007-AC1 - including the term sheet, flip book and offering memorandum for the CDO - all represented that the reference portfolio of RMBS underlying the CDO was selected by ACA Management , a third party with expertise in analysing credit risk in RMBS.

The SEC alleges that, undisclosed in the marketing materials and unbeknownst to investors, Paulson & Co "with economic interests directly adverse to investors in the Abacus 2007-AC1 CDO" played a significant role in the portfolio selection process. It further alleges that after participating in the selection of the reference portfolio, Paulson effectively shorted the RMBS portfolio it helped select by entering into CDS with GS to buy protection on specific layers of the deal's capital structure.

"Given its financial short interest, Paulson had an economic incentive to choose RMBS that it expected to experience credit events in the near future," says the SEC in a statement. "GS did not disclose Paulson's adverse economic interest or its role in the portfolio selection process in the term sheet, flip book, offering memorandum or other marketing materials."

The Commission suggests that Tourre was principally responsible for the CSO. According to the Commission's complaint, Tourre devised the transaction, prepared the marketing materials and communicated directly with investors. Tourre is alleged to have known of Paulson's undisclosed short interest and its role in the collateral selection process. He is also alleged to have misled ACA into believing that Paulson invested approximately US$200m in the equity of the deal and, accordingly, that Paulson's interests in the collateral section process were aligned with ACA's when in reality Paulson's interests were sharply conflicting.

The deal closed on April 26, 2007. Paulson paid GS approximately US$15m for structuring and marketing the deal. By 24 October, 2007, 83% of the RMBS in the portfolio had been downgraded and 17% was on negative watch. By 29 January, 2008, 99% of the portfolio had allegedly been downgraded. Investors in the liabilities of the transactions are alleged to have lost over US$1bn. Paulson's opposite CDS positions yielded a profit of approximately US$1bn.

The Commission's complaint, which was filed in the United States District Court for the Southern District of New York, charges GS and Tourre with violations of Section 17(a) of the Securities Act of 1933, 15 U.S.C. §77q(a), Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §78j(b) and Exchange Act Rule 10b-5, 17 C.F.R. §240.10b-5. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest and civil penalties from both defendants.

The Commission's investigation is continuing into the practices of investment banks and others that purchased and securitised pools of subprime mortgages and the resecuritised CDO market with a focus on products structured and marketed in late 2006 and early 2007 as the US housing market was beginning to show signs of distress.

In response to the SEC charges, GS says it lost more than US$90m on the transaction and would not design a portfolio to lose it money, adding that investors were provided with extensive information which made them aware of the risks.

GS says the MBS portfolio was selected by ACA, which invested US$951m in the transaction and had the largest exposure, after a series of discussions. GS says Paulson & Co was involved in the discussions. It also says it never disclosed to ACA that Paulson was going to be a long investor because market practice dictates that the identities of buyers and sellers are not revealed to each other.

Paulson, while not the subject of any charges, also released a statement. Paulson says it was not involved in the marketing of any Abacus products to third parties and that ACA had sole authority over the selection of all collateral in the CDO. Paulson says the securities were rated triple-A and notes that there were at least 20 transactions in GS' Abacus programme other than the one which is subject to the SEC's complaint.

Following preliminary investigations the UK's Financial Services Authority (FSA) has also decided to commence a formal enforcement investigation into GS in relation to the SEC allegations. ‪The FSA will be liaising closely with the SEC in this review, it says.

Legislation and litigation

California steps up Moody's legal action

Legal action is being taken against Moody's by the California Attorney General in order to force the ratings agency to explain why it gave its highest ratings to "risky and toxic" RMBS. Attorney General Edmund Brown accuses Moody's of withholding evidence documenting its role in the housing and Wall Street crisis.

Brown's action comes seven months after the Attorney General subpoenaed Moody's, but the firm has refused to comply. The subpoena issued seeks to determine whether Moody's knew that the triple-A ratings it gave to high-risk securities weren't warranted; whether Moody's made fraudulent representations about the quality of its ratings; whether Moody's made fraudulent representations concerning the independence of its ratings; whether Moody's conspired with companies it rated to the detriment of investors; whether Moody's profited from giving inaccurate ratings to some securities; and whether Moody's compromised its own standards and safeguards in order to increase its own profits.

"A central question in the aftermath of the financial meltdown is whether Moody's gave investment banks and other securities packagers unwarranted high ratings at the expense of investors, who depended upon the integrity and independence of Moody's ratings," Brown says.

He continues: "By taking this step, I intend to stop Moody's from ignoring the state's subpoena. The people of California have the right to know how this credit rating agency got it so wrong and whether it violated California law in the process."

Legislation and litigation

AIG mulls possible legal action against GS

AIG is considering legal action against Goldman Sachs in order to recover losses incurred on US$6bn of CDOs similar to the one that has resulted in fraud charges from the SEC, according to reports.

AIG lost an estimated US$2bn on CDO obligations from Abacus transactions and is understood to be reviewing the relevant documentation. Although AIG has not announced any legal action, it is believed that the SEC's action against Goldman Sachs may well lead to similar action taken by investors who lost money in the financial crisis.

Operations

Panel rues HAMP's lack of progress ...

The Congressional Oversight Panel (COP) has released its April report, evaluating TARP foreclosure mitigation programmes. While praising recent changes to the mortgage modification programme, which aim to reach more homeowners, it suggests that the US Treasury is not making enough progress with its foreclosure programmes.

The COP says the "Treasury's response continues to lag well behind the pace of the crisis", and criticises the Home Affordable Modification Program (HAMP), which it says has not done enough to address foreclosures caused by unemployment or negative equity. Nearly one in four homeowners with a mortgage has negative equity and 2.8 million homeowners received foreclosure notices last year, according to the report. The panel is concerned that home values in many metropolitan areas are still falling sharply, but does note that stabilisation has begun in some regions.

Since early 2009, the COP says the Treasury has initiated six programmes - each more generous to borrowers, lenders and servicers than the last - and worries that establishing such a pattern is encouraging lenders and servicers to delay modifications as they wait for the next, more generous, programme. It also questions HAMP's sustainability, because although mortgage payments are reduced under the programme, the total amount repayable is not. The COP believes this is merely drawing out the time until borrowers redefault rather than preventing foreclosures, at great public expense.

The COP also notes that the Treasury's individual foreclosure programmes are funded to a tune higher than the amount set aside for foreclosure prevention and sees this as an important accountability issue, calling on the Treasury to be stricter with its expenditure.

Ratings

Improved outlook in seven SF sectors

Fitch says a number of structured finance sectors across EMEA are starting to benefit from the muted global economic recovery, but warns that exceptions remain. "The ratings outlook has improved for seven sub-sectors since the start of the year, while only one sector reflected an increasingly negative outlook. This is in line with Fitch's view that the outlook for several asset markets is stabilising," says European SF md Philip Walsh.

Greek and Italian consumer ABS are identified as most notable of the troubled sectors over the last few months. For the first time Fitch has made a clear distinction between prime CMBS in the UK and non-prime CMBS, as the former shows good recovery but the latter continues to cause concern.

Russian RMBS and ABS are improving sectors, buoyed by improvement in the wider economy. Transactions exposed to auto residual values have also shown some improvement, the ratings agency says.

Real Estate

US CRE prices drop after short rally

US CRE prices declined by 2.6% in February according to Moody's commercial property price index. It is the first month-to-month decline in four months and nationwide prices are now 41.8% lower than their October 2007 peak, but 3.4% higher than their October 2009 low.

"From November to January, CRE prices increased by an aggregate 6.3%," says Moody's md Nick Levidy. "As noted in our previous reports, however, we did not feel that these increases were sustainable in the short term, particularly given current low transaction volumes. With continued low volume in February and a larger proportion of repeat-sales sales considered distressed, it is unsurprising that prices have once again headed lower."

Moody's says transaction volume declined 10% as measured by US dollars between January and February, and declined 30% by count. The proportion of all repeat-sales classified as distressed increased from 4% in 2008 to nearly 20% for calendar 2009, and climbed to just under 32% in February.

RMBS

Euro RMBS pipeline builds

Lloyds TSB is set to launch its latest UK prime RMBS transaction from the Arkle Master Trust, with Lloyds Corporate Markets to serve as sole arranger and joint lead manager and Citi and RBS as joint lead managers.

ARKLE 2010-1 is expected to offer triple-A and A1+/P-1/F-1+ rated notes across a combination of sterling, Euro and US dollar- denominated classes in RegS and 144A format, with both fixed and floating rate notes on offer. It is expected to be launched and priced in the near future, depending on market conditions.

Currently the Euro RMBS market is showing signs of strong rally. As mentioned last week in SCI, Granite is currently trading at its tightest levels since the financial crisis at 93bp.

In addition, a trader disclosed to SCI (see Friday 16 April breaking news archive) that there is chatter in the market of further new issuance. He suggested that non-conforming RMBS issuer Paragon could be next in line to bring a new deal, noting that Paragon's equity has jumped in anticipation that they will start new issue business (see also SCI issue 169).

RMBS

... while latest report is criticised over redefaults

The Association of Mortgage Investors (AMI) says it believes that homeowners need a programme designed to help homeowners stay in their homes and rebuild equity. It has criticised the Home Affordable Modification Program's (HAMP) March report released by the US Treasury.

The association says issues of affordability, negative equity and servicer conflicts of interest must all be addressed. It believes overall debt must be reduced as the only way to minimise the risk of default.

Micah Green of Patton Boggs, acting as AMI spokesman, says: "The March HAMP report is more bad news for homeowners and more evidence that the root causes of homeowner defaults have yet to be addressed. Unfortunately, this news was predictable. Since the inception of the programme, we have been concerned that the risk for redefault is extremely high since the majority of homeowners who are in permanent HAMP modifications are still paying nearly 60% of their income to support all debt payments."

The Treasury's report indicates that homeowners are having to devote 61% of their pre-tax income to debt payments - a trend which AMI says is unsustainable for homeowners. "Until the affected homeowners have the flexibility to stay in their homes and support their families - something too many of them can't do today - this problem will continue to prevent an economic recovery," says Green.

AMI says any solution must allow homeowners to reduce debt payments on all their obligations and suggests changing tactic from a short-term modification plan towards one of principal reduction and refinancing, with first and second liens participating in the programme. Two key current flaws highlighted by the AMI are the fact that trial loan modifications were offered without any verification of homeowners' incomes and the conflicting interest presented by the high value of second liens on banks' balance sheets, which are at levels that AMI says could never be realised in the capital markets.

RMBS

Servicing uncertainty for RMAC/EMAC deals

Uncertainty over the future servicing quality for GMAC's European RMBS deals has increased as a result of the sale of GMAC's European mortgage operations to Fortress (see last issue of SCI), according to securitisation analysts at RBS.

Although the servicing rights are held by the GMAC companies being sold, the servicing is largely subcontracted to third party servicers: HML in the UK, Stater and Quion in the Netherlands, and Kreditwerk in Germany. "On the one hand, we could say that acquisition returns could be improved by cutting servicing costs, which would of course bring with it risks of suboptimal servicing performance, whether because of related under-resourcing or, say, potential servicing transfers to cheaper but less experienced counterparties," says RBS.

"On the other hand, maximising the value extraction from the purchase may centre around a more aggressive approach to delinquency management and borrower collections (positive for RMBS), though we would note the limited scope in doing this given regulators oversight and scrutiny," it adds.

Meanwhile, Moody's says it does not expect the credit quality of GMAC's European RMBS deals to be affected by the sale of the business to Fortress. However, it says several questions remain over the future of the European GMAC businesses, including whether the duties and obligations of the acquired companies remain in effect after the acquisition. The rating agency notes that transaction documents were typically executed with the acquired companies, and it does not expect the change of ownership to affect the obligations of these parties.

The agency also asks whether the infrastructure and team quality at the acquired companies remain in place, or if the change of ownership impact the acquired companies' ability and willingness to comply with the purchase obligations under the put and call features in certain transactions, (eg, E-MAC NL 2003-I, which is currently on review for downgrade). At present, Moody's believes the acquisition will not affect the likelihood of a repayment in these transactions, which it already assumed to be very low.

"Subject to these points being confirmed, we do not expect a credit impact on the RMBS," says Moody's. "The change of ownership will substitute a rated company (ResCap, which is itself a subsidiary of a rated bank, GMAC) with a non-rated private equity concern, but our credit analysis did not place any value on potential support from the parent company."

It adds: "Indeed, the sale confirms our view that the acquired companies were no longer strategic to ResCap once it exited the residential mortgage origination business in 2008. In addition, the very low creditworthiness of ResCap meant that their ability to support the transactions was impaired.

RMBS

No arrears impact for Granite ratings

Fitch says the ratings of 18 securitisations containing mortgage loans originated by Northern Rock, most notably those from the Granite Master Trust, are not affected by the bank's misreporting of arrears figures in 2007. The arrears of 0.68% were misstated as 0.42%.

The historical performance of an originator's mortgage loans forms a key part of Fitch's rating analysis, but the agency says the misstatement of arrears occurred on a small enough scale not to affect its analysis because the corrected arrears levels were well within its base-case assumptions for UK prime lenders. Had the actual level of Northern Rock's arrears been reported to Fitch in the original data, the agency says it would not have resulted in a material change to its analysis or approach to loans originated by the lender.

Fitch has not taken any negative rating action on any notes issued from the Granite Master Trust, despite an increase in arrears over the last two years. Loans in arrears by three or more months now account for 5.37% of the outstanding loan balance.

The agency says it has no concerns over the arrears reporting for any securitisations containing loans originated by Northern Rock, as the current arrears figures are now correctly reported. However, it is seeking information from the lender on the accuracy of its historically reported arrears figures for Granite Master Trust. There will be no rating impact, the agency says, but historical performance indices would be revised.

RMBS

Australian, New Zealand performance 'relatively strong'

Fitch says 95 publicly-rated tranches backed by assets in Australia or New Zealand were affirmed during Q110, while eight were upgraded and one was downgraded.

"The increased ability to sell properties combined with the special servicing activities has resulted in improved asset performance for two Mobius non-conforming RMBS transactions, leading to the relatively strong upgrade number in the first quarter," says Natasha Vojvodic, senior director and head of Fitch's Sydney structured finance team.

"The rise in Australian variable home loan rates, as a result of the Reserve Bank of Australia's official cash rate increases, is expected to negatively impact on asset performance across all RMBS in the coming quarters - though negative rating actions for conforming RMBS transactions are not expected as a result of this," she adds.

Fitch also upgraded the class A notes from Mobius ELR-01 Trust, following legal proceedings by the Australian Competition and Consumer Commission (ACCC) relating to the failed Bill Express electronic product, promotion, sales and bill payment network. The ACCC action resulted in low payments, having earlier threatened to make the trust refund substantial amount to TBI obligors. This, coupled with the continued pay down of the notes, has been beneficial to the class A notes.

Secondary markets

Near-term CLO volatility possible

Near term volatility may come into play in the secondary US CLO market following Friday's announcement of legal action taken against Goldman Sachs and continued concerns regarding sovereign risk, according to CDO analysts at JPMorgan.

However, the analysts note that opportunity still exists within the mezzanine and subordinate space for total return and in senior bonds for relative value versus ABS and corporates. "In the context of the resurgent leveraged credit market, the lack of new CLO supply and the wider spreads we view CLOs as fundamentally cheap and would buy on dips," they note.

According to JPMorgan, the CLO market remained firm after Friday's volatility and last week's gains: Levels currently stand at 165bp for superseniors (vs. JPMorgan's 100bp target), 215bp for triple-As (150bp target), US$80 for double-As (US$90 target), $70 for single-As (US$80s target), $60 for triple-Bs (US$70s target), and US$45 for double-Bs (US$60s target)."

Two primary US CLOs have entered the pipeline last week. The first will be managed by Symphony Asset Management, and the second by Apollo Management.

ABC's of Credit

Byron Douglass, senior research analyst at CDR, looks at a long opportunity on AmerisourceBergen

The prospect of generating trading gains from spread tightening is diminishing quickly as the credit market tops out. AmerisourceBergen's CDS spread widened more than 50% from its tights along with the recent underperformance of the CDS market. Given the company's strong liquidity, rising revenues, stable margins and increasing free cash flow, the company's CDS offers a good long opportunity.

AmerisourceBergen's fundamentals look solid from just about every angle. The company's revenues have not missed a beat for several years. Its sales for Q409 of last year hit a record breaking US$19.3bn, up 11.5% year-on-year.

AmerisourceBergen (ABC) runs a tight ship due to its incredibly tight margins. Operating margins run around 3% which does not leave much room for error; however, history indicates that the company does this with extreme skill. As Exhibit 2 demonstrates, ABCs LTM total expenses (cap-ex, interest coverage, and dividends) remained between US$200m and US$300m for years. And on an even more positive note, ABCs rising revenues led to increasing cash from operations and free cash flow. Its latest LTM FCF was just shy of US$800m.

On the liquidity front, ABC maintains US$980m in cash and equivalents against total debt of US$1.38bn. The company also maintains multiple bank and receivable facilities with plenty of availability. Clearly, running into a liquidity crisis is a remote possibility. The biggest concern is management's desire to shift value from credit to equity through share buybacks. As long as they use cash available rather than levering up to do so, the risk is not great enough to back away from the trade. ABC runs its leverage (debt to EBITDA) around 1.2x. If it remains in this arena, then we are satisfied.

We expect AmerisourceBergen's spread to drop to 55bps. The expectation, based upon our quantitative credit model, is due to its ultra tight equity implied spread, stable and high interest coverage, strong liquidity, and increasing free cash flow. ABCs credit spread more than doubled since last year when it traded as tight as 35bp. Until ABCs recent spread widening, its expected spread level tracked the traded with precision. Only since its widening to 75bp did the traded level pass through the expected spread. ABC's CDS now trades at its yearly wide level and is more than 20bp cheap to fair value.

Position

Sell US$10m notional AmerisourceBergen Corp 5 Year CDS at 75bp.