Contents

Legislation and litigation

Limited fallout?

Plaintiffs to 'slipstream' behind SEC CDO probes

As the US SEC expands its complex securities probe on Wall Street, the regulator's publicly-confrontational stance is expected to encourage a surge of new cases in this field. However, the fallout in terms of punitive damages is anticipated to be limited.

"In the next few years I expect a lot of plaintiff lawyers to slipstream behind regulators on cases such as these, with many hoping that the regulators will have done the majority of the ground work for them," says Geoffrey Ritts, litigation attorney at Jones Day. "Claims of this type have been underway since the onset of the credit crisis. However, now it is possible that claimants will get more help from regulators."

Details emerged last week on the widening SEC probe, with Morgan Stanley's role in the arrangement of certain 'dead president' ABS CDOs the latest to come under scrutiny. Federal agencies are reportedly investigating Morgan Stanley's role in structuring the deals (named after James Buchanan and Andrew Jackson), on which the bank allegedly took short positions.

Mark Ferguson, research director at Quantifi, says he's surprised at the amount of CDO litigation activity at present. "It seems to be a case of the letter of the law versus a question of morality - making a bet on the housing market doesn't sit well with Main Street," he notes. "But the allegations go against the basic tenets of economics: people have different opinions about what will happen in the future and thus make different valuation assumptions. Looking backwards isn't much of a defence in such cases."

Ferguson points out that the market was hot for these deals when they were put together and selling protection on them made money. "Some market participants realised that the cycle was coming to an end and lower quality investors and assets were involved, so they were willing to bet against the health of the deals - probably to offset some of their own positions as well. Maybe it's right to bet against the market sometimes, particularly when the end of a cycle is approaching."

He adds: "OTC contracts are a zero-sum game - someone always wins and someone always loses. The question is why are these deals attracting attention now? Goldman Sachs obviously made a lot of money and there is political motivation to be seen as being proactive."

Morgan Stanley is alleged to have manipulated the pricing of the 'dead president' CDOs and not disclosed the constituents of the pool. "The SEC is looking for bad faith manipulation of valuations, but these structures are so complex that they defy any traditional valuations," explains Ferguson. "There are so many assumptions involved that the range of reasonable valuations is very wide. To single one out as being fraudulent is an enormous task to prove: hard documentary evidence will be necessary to prove this."

He anticipates that the fallout from the current batch of CDO suits in terms of punitive damages will be small. "I think it's a matter of an overactive focus, albeit it's too specific. Many of these trades were done, so looking at specific deals in isolation is capricious at best. What fundamental evidence is there that these specific deals, and not others, involved malfeasance?"

Another separate line of investigation includes New York Attorney General Andrew Cuomo's move to issue eight investment banks with subpoenas last week in order to determine their relationship with the rating agencies during the credit crisis. The aim is reportedly to find out whether the banks were able to manipulate ratings for certain mortgage-backed deals by misleading the rating agencies on collateral being referenced in the transactions.

However, the recent dismissal of a lawsuit by the New York Supreme Court in which Oddo Securities sued Barclays Capital over RMBS investments in the Golden Key and Mainsail SIV-lites (see SCI issue 183) could have broader implications for cases in which investors sue collateral managers over investment decisions. In this case, the New York Supreme Court determined that the plaintiff was a debt holder and therefore was not owed fiduciary duties by the collateral manager (Avendis).

"The determination that fiduciary duty was not available to debt holders is not particularly surprising," says Ritts. "But I think that sophisticated investors will have trouble presenting fiduciary duty claims against collateral managers going forward. If they want to bring claims, it will have to be on the basis of fraud."

AC & CS

Insurance-linked securities

Pension interest

New investors looking at cat bonds as deals keep rolling in

The bevy of catastrophe bond offerings that have come to market recently are garnering interest from a variety of investors, but none more so than UK pension funds. Meanwhile, three more deals have reached the pricing stage with more to follow, but there are signs that some investors' capacity is being reached.

UK pension funds, which traditionally have targeted a somewhat lower risk/return profile, have put money to work in the cat bond sector lately. "When they come in, they come in big," says a London-based investor, who purchased some of the recent cat bonds.

"UK pension funds are happy with 4%-6% returns and average between 80bp to 1% of expected loss," he adds.

Indeed, not all of the new cat bond deals have thrilled him. "For some of the cat bonds lately, even at the right price, the expected loss is too low and therefore the return - even if it's the right return - doesn't make sense," he says.

However, the investor still sees value in cat bonds, but says the alignment of those spreads with traditional reinsurance is accelerating. "Even if there is a half a percentage point difference, we would see them as being pretty much aligned. With some transactions, it may be cheaper and some transactions, it may be marginally more expensive," he notes. "Of course, I was happy to take a premium over traditional reinsurance and I was happy to benefit from very good capital market gains in the last 12 months."

Two more deals have priced and another is due to price this week, with others to follow, including some alternative structures. However, there are also signs that some investors' capacity is being reached.

First to price was Lodestone Re, the three-year US hurricane and quake catastrophe bond (see SCI issue 183), which came last week. The deal from ceding insurer National Union Fire Insurance Co of Pittsburgh, a Chartis US subsidiary, was upsized from US$250m to US$425m.

Lodestone's US$175m of Class A notes priced at 625bp over Treasury money market funds, while the US$250m of Class Bs came in at 825bp over. S&P has assigned ratings to the notes of double-B plus and double-B respectively.

Next came Nationwide Mutual's Caelus Re II US hurricane and quake catastrophe bond (see SCI issues 183 & 184), which priced yesterday, 18 May, at a reduced size. The US perils deal has been downsized from US$200m to US$185m and came in at 650bp over Treasury money market funds.

Market participants say that the deal pricing over guidance and being downsized was a result of a large proportion of investors' buying capacity for US hurricane risk being fulfilled by the flurry of recent deals. Consequently, they see nothing untoward in the changes.

Similarly hit appears to be Munich Re's four-year Eos Wind (SCI issue 183), which has been reduced in size from US$100m to US$80m. Final price guidance has been issued on the transaction at 680bp over Treasury money market funds for the US$50m Class As and 650bp over for the US$30m Class Bs.

Eos is expected to actually price in the next 24 hours or so. Further down the line and still in the book-building process are the other two deals expected to close before 1 June - Blue Fin Series 3 and Residential Re 2010 (SCI issue 184).

Meanwhile, a sidecar-style vehicle from Catlin - Long Bay Re - is still being considered by a range of investors. The structure is understood to have been enhanced by the addition of a five-year redemption option for investors to assuage concerns over the evergreen nature of the exposure (SCI issue 180). Price talk on the deal is currently in the 15%-18% region.

Finally, an added take-down for Swiss Re's Vita Capital series of mortality catastrophe bonds is being offered. Investors say the size is likely to be very small, but will undoubtedly be popular, given the non-nat cat nature of the risk.

KFH & MP

Regulation

Regulatory review

Hurdles exist on way to Basel finish line

The Basel Committee on Banking Supervision expects to issue a fully calibrated set of changes to its capital rules, which is popularly known as Basel 3, by year-end with a 2012 implementation date. The 2009 Basel 2 capital enhancements now have a reprieve until later in 2011, courtesy of US Treasury Secretary Tim Geithner and European Commissioner Michel Barnier. However, banks on both sides of the Atlantic still view the preparations as daunting.

While both Geithner and Barnier agreed in principal to having a leverage ratio for banks to help stabilise the financial system, several market participants - including the Association of German Banks - say the requirement actually forces banks to scale back their lending. "The current proposal could push banks to privilege short-term lending at the expense of long-term lending, which is going quite far in our opinion," says Bernard de Longevialle, an md at S&P.

He further explains: "If and when the leverage ratio was to become a really essential tool to assess banks' capital adequacy, this would provide a huge incentive for banks to move off balance sheet and move out from low risk, low margin activities."

The leverage ratio, which is a new consideration under Basel 3, essentially is a maximum ratio of debt to equity or minimum amount of capital per amount of assets, whereas Basel 2 capital requirements are based on risk-weighted assets. "The leverage ratio would be based on total gross assets without counting the risk weight," explains one financial institutions lawyer. "That would be a big difference, particularly for European banks."

He adds: "The US banks have had a leverage ratio requirement all along, so they already have a limit on how much gross debt they can have in relation to their capital. The European banks had risk-weighted capital requirements, but they didn't have just a flat leverage ratio."

Having liquidity requirements measured on a scale such as the global capital requirements would also be a big change under the new measures. The requirements are designed to strengthen banks' liquidity position. However, some debate exists over determining credit exposure versus liquidity exposure, according to a US-based banking executive, who notes the limit on liquidity exposure has not been regulated in the past.

Counterparty credit risk is also a new item to address with Basel 3. If it were applied today, this would have a massive impact on the brokers, in particular, and all the banks, adds de Longevialle. Basel 3's proposals call for the estimated multiplication by four to six times of counterparty risk versus the current weighting of 2% to 4% typically.

"Counterparty risk will increase significantly, but the multiple is premature to forecast such a big increase in the charge. Somewhere in the middle might be the outcome," he says.

The definition of what constitutes conduits, meanwhile, is also still an ongoing debate among banks and regulators, even for prior Basel enhancements. "The main concern up until Basel started on this subject of large exposures was whether banks could use the internal assessment approach ratings for conduit transactions. Basically, the regulators were hinting at least that this special treatment we get for conduit transactions would be discontinued, which would result in much higher capital requirements," says the banking executive.

"That's a concern on both sides of the Atlantic," he adds. "The SEC has come out and said we are not outlawing the internal assessment approach. But US banks are saying, you are not outlawing it, but you are making it impossible to use, so there's more work to be done."

Industry lobbyists, banks and other market participants argue that a conduit would not be considered one exposure as it stands currently under the Basel rules.

Banks have already provided a Quantitative Impact Study (QIS) of their ability to meet the changes in leverage and capital set forth in Basel 3. The Committee also received open comments in April.

KFH

Distressed assets

Advantage Asia

Distressed opportunities in an evolving landscape

The distressed structured credit space has evolved dramatically over the past year, which saw a general rally across asset classes. However, former Lehman Brothers bankers - Fredric Teng and Leon Hindle - believe that opportunities still exist within the space. The pair, which founded Hong Kong-based Oracle Capital last year, have launched a new fund to take advantage of these opportunities.

The Oracle Investment Fund began trading on 12 May 2010 and targets US$50m of structured credit products, with a second fund targeting non-US investors expected to follow in June. Both funds will focus on securities backed by a variety of corporate credit assets and offer a five-year investment period, with a lock-up for the first year and monthly investor redemption possible thereafter.

Oracle may trade or hold assets until maturity in order to achieve its target of 20% annual returns. In addition to portfolio management, the firm offers valuation, structuring and restructuring services to institutional investors.

Hindle explains that the changed distressed landscape requires a more sophisticated strategy in order to achieve further yields. "Up until now, it would have been relatively straightforward for guys to make money from buying anything and sitting on it - that's going to be much harder going forward because obviously we have seen [a] rally in most segments of the asset class."

However, he believes that this may result in an increased supply, as managers - who may have made some profit from marked-up assets and are concerned about the current eurozone volatility - reconsider their positions. "It's probably an interesting time for people to consider whether they want to keep holding these assets in situations where they've marked them up," Hindle says.

Operating from an Asia context offers further opportunities, according to Hindle. "A lot of this paper was distributed into Asia in the first place," he says.

Reports suggest that the Asian market may have, at one stage, accounted for as much as US$100bn worth of structured credit assets. Hindle notes that "relative to the number of hedge funds who are active in this space in the region - and the amount of staff there are in investment banks or brokers to cover that client base - I think there is a supply overhang".

He adds that Oracle enjoys a further advantage in terms of its strong connectivity within the region gained in their former careers. "We're very well connected with the investor community and the dealer community in the region," he explains.

However, Teng adds that the need to remain competitive still exists, due to interest in the region on a global level. "We are all aware that there is a lot of money looking to be deployed into Asia, away from the equity space. If we look at the fixed income space, the credit market is relatively small when compared with the US and Europe, and consequently there is a huge amount of money fighting over relatively few opportunities."

While other hedge funds in the Asia-Pacific region are reportedly struggling to win over institutional investors, Oracle has succeeded in securing institutional investor backing from the US for its first fund and has non-US backing lined up for the second. While the pair's knowledge and connectivity within the Asia-Pacific region is undoubtedly attractive to US investors, Hindle adds that Oracle's degree of familiarity with the underlying asset class makes them more attractive to Asian investors.

"For instance, the investors might want to learn more about the asset class by partnering with people like us, who are very familiar with it and hope to get some technology transfer over time," he says, referring to Oracle's valuation, restructuring and risk management expertise.

Ultimately, the pair believes that Oracle's success is due to the sophistication of their strategies. "It is primarily because we do have a fairly unique offering, which is more sophisticated than a lot of other strategies out there," says Hindle.

Teng adds: "It gives us an opportunity to attract investors that have money to allocate and are looking to diversify."

JA

CLOs

Bouncing back

European CLO market activity in the week to 13 May

The European CLO market is showing positive signs of recovery this week, following its dramatic reaction to sovereign contagion issues late last week. Although spreads widened dramatically and trading levels were extremely thin by Friday 7 May, the ECB action taken on Sunday cleared the way for steady market improvements through the week and, some believe, improved sentiment moving forward.

With the Crossover index whipsawing from the 460s to 510 and back again in the space of a week, traders characterise overall market conditions as "extremely volatile". However, one asset manager points out that secondary CLO pricing has not been severely impacted due to a decrease in general activity.

"On the selling side, there is no pressure to sell from the holders, so it's a very different situation to when we were at the peak of the crisis and there was a lot of forced selling," he explains. "Normally a five point retraction in prices would have been expected in a situation like we had last week, but this didn't really happen because none of the sellers were trying to sell."

A CLO trader confirms the lack of activity. "Pretty much no leveraged loan paper traded in the euro market because the bids that guys received were probably close to ten points off from where the market had previously been - so people didn't bother selling," he says.

The asset manager reports that although a price contraction may have occurred throughout the capital structure, levels have, for the most part, bounced back. He notes that double-As remained at around 500 DM, although there were very few takers, given the drop in bid price.

This week, offers were reportedly lifted in the low 80s. On single-As, which usually trade in the low 70s, there was a 5-6 point retraction - although bids have since come back to their original levels. Triple-Bs, which trade in the 60s and very high 50s, have also bounced back - although the manager points out that at the lower end of the capital structure the impact of the credit quality on pricing will be greater.

Nevertheless, the market this week has shown steady improvements off the back of the ECB's bailout plan announced on Sunday. "Each day seems to be stronger than the previous one," says the trader. "There have been more enquiries coming into the desk and we have traded some bonds. It's hard to say whether or not they would have traded at five or 10 points higher if we'd traded them last week. Probably not - we are pretty close to where we were before, I'm sure of that."

The rallying pricing levels and increasing activity is having a knock-on effect in terms of sentiment, according to the asset manager. "There has been tightening and activity have been quite strong," he says. "The supportive technicals and strong fundamentals seem to be playing a role there and with that sentiment improves - investors who felt uncertain last week feel more confident in terms of coming back and participating. In anticipation of that many of the market-makers have also begun to participate in order to build positions and inventory for their books."

The manager explains that dealers have begun to return to the market in anticipation of increased end account activity. He notes that end accounts, at this stage, are particularly interested in the top of the capital structure, but as prices rise interest is expected to move further down the stack.

"CLOs continue to provide considerable arbitrage when compared to the underlying leveraged loan market. That has been one of the main reasons why we've seen more real money and hedge fund participation, and of course dealers are also building positions," adds the manager.

Although both market sentiment and portfolio quality seem to be showing improvement, the trader believes that primary issuance is still not yet feasible. "When you actually look at the arbitrage on paper the index really needs to be close to 100 over to get a legitimate deal done," he says.

The trader explains that a good deal at the moment would get 250. Furthermore, a new deal with a clean pool and no triple-C assets would probably struggle to print at 150. "It's not really feasible at this stage, unless you have a sponsor that can take the equity and the triple-As down at a non-economic market level."

However, the lack of new issuance in the primary market is expected to improve tone on the secondary side. "Given the short supply and the high relative value, we will continue to see a positive trend in the market, with a lot of new money and new allocations from traditional asset managers to take advantage of the value here," the manager predicts.

JA

CMBS

Volatility persists

The US CMBS market in the week to 17 May 2010

The US CMBS market continued to feel the effects of sovereign events in Europe over the last week, with activity levels dropping and spreads widening considerably. Although continued weakening in CRE performance remains a concern, the primary market offers hope as two new deals are set to come to the market in the near future.

One CMBS analyst notes the spread widening throughout the week. "In terms of trading, the secondary market was light, but spreads widened throughout the week. Spreads probably backed up 40bp-50bp by the end of the week."

"It's been pretty volatile," confirms a trader. "We've seen benchmark triple-A 10-year bonds trade at 50bp-75bp range and the GG10 has traded as wide as 420 and as tight as 360 in the past two weeks. Right now, it's hovering at around 390," he adds.

The trader believes that the continued uncertainty surrounding sovereign issues is the chief driving factor behind the widening spreads. He explains: "The correlations right now are very high compared to stocks and to other structured products. So when we see big macro events like we're seeing overseas at the moment, shakes from the equities markets flow through to our markets."

While both market participants point to the eurozone as the cause for the market volatility, other factors have contributed to its instability. The analyst points out that problems persist in late vintage 2007/2008 transactions, which were underwritten at the peak of the market. In addition, financial reporting data from the end of 2009 continues to show weakening in CRE performance.

"This probably means that the increase in special servicing and the increase in delinquencies aren't over yet," he says.

However, the analyst points out that the increase in delinquencies offers positive news for those interested in buying distressed assets. "We have found that more and more assets are beginning to come into the market, either as single sales or through portfolio sales," he says. "So special servicers and servicers are beginning to sell their bonds and sell the loans and the properties that they own."

Meanwhile, the primary market continues to try to find its footing. "A couple of deals are due to come out in the next two to three weeks, but there hasn't been a whole lot of activity," says the analyst. "At the same time, a lot of the traditional underwriters have indicated that they are actively looking for loans to close, so that's a good sign."

Specifically, JPMorgan in the coming weeks is reportedly set to bring the largest new issue CMBS since late last year. The conduit issue, expected to be US$840m, follows last month's US$304m deal from RBS (SCI passim).

"Overall, every new issue since the end of last year has been oversubscribed and done very well," says the trader. He adds that, despite widening spreads, he expects the new deals to come in at fairly attractive levels.

Although the trader believes that market volatility is likely to persist, he is positive about the market moving forward. "I would expect things to remain choppy for as long as there are macro-issues," he says. "I think the correlation with stocks is probably going to continue until we get some CMBS-specific news that decouples it either way."

Finally, the trader points to the continued investor interest in the market in the face of volatility as a sign that CMBS is likely to enjoy a continued recovery. "We've seen investors coming in and trying to buy paper, albeit at a point or two below the offer price. I think, overall, the fact that there is money out there still being allocated to the sector is a strong positive," he concludes.

JA

CDS

BaFin bans 'naked' sovereign CDS

In a move that has been described by analysts as "spectacularly ill-timed and poorly detailed", the German regulator BaFin has banned the trading of uncovered CDS on eurozone sovereigns until March 2011. BaFin says its decision is justified by the extraordinary volatility of debt securities and the considerable widening of sovereign CDS spreads in the region.

"In this context, massive short selling of the debt securities concerned and the conclusion of uncovered CDS on credit default risks of eurozone countries were resulting in further excessive price movements, which could result in further serious disadvantages for the financial market and could jeopardise the stability of the financial system as a whole," the regulator explains. Its decision will be reviewed on an ongoing basis, it says.

Ashurst derivatives partner James Coiley says that BaFin's move is perhaps unsurprising, given the increasingly strident political tone. "The [regulator] cites recent volatility as the basis for its action, although its own recent investigation (in March) showed no evidence of large scale speculation against Greek debt, for example [see SCI issue 175]. Previous bans on short sales of equity securities have had limited-to-no observable effect, and it will be interesting to see if the same holds here," he remarks.

Coiley adds: "In the meantime, we and others will need to review the details of the legislation to determine its impact on existing transactions and new business. If nothing else, we are reminded that illegality is not a hypothetical risk for financial transactions."

Strategists at Credit Derivatives Research (CDR) note that it is challenging to describe how Greece does not warrant extremely high risk premia, given its growth expectations and huge debt load. They point out that EU government bond spreads moved before the corresponding CDS did, widened more than the CDS and remain wider than the CDS.

DTCC data reveals that there is over US$13bn in German net protection outstanding and well over US$400bn across all of the European sovereigns, according to CDR. The analysts estimate that around 70%-80% of the CDS market comprises naked positions.

At this stage, the implications of BaFin's move remain unclear. The CDR analysts indicate that if the ban extends beyond German-domiciled banks, it could potentially shut trading in European sovereign CDS down completely.

Indeed, further clarity is necessary on who is affected (geographically and institutionally) by the ban, what does naked mean (how hedged? how much underlying do you need to own?) and how can a market be made? CDR notes that BaFin's move could be a case of smoke and mirrors, but the credit market's reaction appeared to be more selling-based than it would be if there was nothing to worry about.

Certainly, the ban prompted ISDA to issue another statement about sovereign CDS (see SCI issue 176), in which the association renewed its commitment to providing regulators with complete transparency for OTC derivatives, including CDS. The association made it clear that it recognises and respects the concerns of national authorities in managing the volatility in their respective government debt markets and the role of financial regulators in taking measures to preserve the stability of their markets.

As a result, ISDA says its members are eager to work with regulatory authorities globally to address these legitimate concerns and the role of sovereign CDS in today's volatile markets. The association also notes that so-called naked sovereign CDS may be used by banks that extend credit to corporations and banks, by investors in stocks and by entities that have significant real estate or corporate holdings.

ISDA supports the many efforts of global policymakers in examining the CDS and other derivatives markets to ensure they are safe and efficient and supports proposals that will require the use of, and reporting to, trade repositories for OTC derivatives. The association points out that - in advance of the adoption of any legislation or regulation - all CDS transactions are being recorded in the DTCC's Trade Information Warehouse, which provides supervisors with visibility across the market as a whole, as well as by transaction, firm and counterparty.

CS & JA

CLOs

Latin CLO interest stirs

As private equity shops in the US help give some life to the CLO new issue queue, those in Latin America may not be far behind. At least one such Brazilian company is in the planning stages for a distressed debt product by year-end that is shaping up to be a CLO structure.

Vision Brazil Investments, an investment advisor based in Sao Paulo, Brazil, is a creator and part sponsor of the offering, which will eventually be rated, according to Oscar Vita Decotelli, head of business development at Vision Brazil Investments. The company is expected to issue in stages, with the first size likely to be around US$100m.

The structure will consist of two tranches - an equity piece and a mezzanine piece. However, Vision Brazil Investments has not yet decided on the exact currency in which it will issue and is currently in discussions.

"We're seeing a lot of interest from investors - they're in the first step right now looking towards strategic investments that have good returns," Decotelli adds.

In the past, investors were not as concerned about the underlying assets in these products, but that all changed after 2008, he says. Investors in Brazil are increasingly turning away from straight financial asset products and looking more towards products with tangible or real assets.

CLO products in Brazil had been popular before the credit crisis, since they are mainly non-recourse loans and have daily liquidity, Decotelli explains.

He believes securitisation in a similar type of straight-forward structure is coming back in Latin America. "Securitisation will grow, especially when talking about more credit and debt situations where you can isolate who is the equity and who is the debt holder," he says.

Another Latin American bank executive that launched auto securitisations in Brazil in the past also expects interest to pick up there again for these products, but first demand needs to exist for the underlying collateral and then the securitised products.

Brazil has had a relatively active RMBS market for years, but - similar to other sectors - it slowed down during the credit crisis. But Decotelli believes the sector will also eventually grow.

"I see a lot more people using the instrument...that's evolving a bit," he adds, noting there are tax-free incentives for investors to purchase the products.

"The funding for the RMBS market is coming from the banks. They have a lot of money and want to invest money in this market," adds the Latin American banker.

"We are in the beginning of this process. In a few years, it can get bigger than this," he says.

KFH

CLOs

Primus in discussions over new CLO

Primus Asset Management (PAM) is considering launching a new CLO, according to Thomas Jasper, ceo of Primus Guaranty, on a conference call on 13 May.

"We believe PAM is well positioned to complete a new transaction and we're discussing opportunities with the dealers," Jasper said. PAM managed structured credit vehicles totalling US$19.9bn as of 31 March 2010, which included US$3.5bn of third-party assets.

"The market for new CLOs is in fact reopened during the quarter, with the introduction of several new ones to the market. We're consequently shifting our focus a bit more to capturing the potential that may exist for originating new CLOs," he added. PAM's CypressTree subsidiary has eight CLOs already under management.

"Launching a new CLO would likely require us to launch an investment in the range of US$30m," Jasper said. However, he further noted that one such transaction may be within its reach, but achieving the scale they foresee would require an investment of several times that amount.

Overall, the firm is looking to increase and broaden the range of vehicles that it manages and begin the process of attracting third-party capital. It is still having discussions with strategic partners to build its asset management unit, as well as its new credit protection seller.

"We need to find a strategic partner for the project," Jasper explained.

Primus also said on the call that its single name credit default swap portfolio experienced no credit events during the quarter, despite ISDA determining that five credit events have occurred since the beginning of the year. The continued improvement in the credit markets - driven by an improving economic situation and an upturn in corporate earnings - have caused credit spreads to contract, according to Jasper.

In an effort to further de-risk Primus Financial's CDS portfolio, the firm is considering one repositioning transaction, which - if completed - would likely occur in Q2. Over the past three quarters, it completed four portfolio repositionings. As previously announced, it paid US$35m to a counterparty to terminate US$300m in notional of tranche transactions with relatively low remaining subordination.

In total, Primus Financial terminated approximately US$2.8bn of single name CDS and tranche transactions through portfolio repositioning at a cost of US$66.5m. It either restructured or cancelled tranche transactions with lower attachment points, reducing the likelihood that Primus Financial would payout under the swaps.

"We are entering into a new phase in managing Primus Financial in amortisation," Jasper added. "We will be moving to a more lightly managed approach to Primus Financial's portfolio." He noted that the firm expects to be less active than it has been historically.

Primus reported US$86.5m for Q110 GAAP net income available to common shares, versus US$106.8m for Q109.

KFH

RMBS

European extension risk concerns reignited

The non-call of CRSM 8 by First Active/Ulster Bank, although widely expected, represents the first failure to redeem an Irish RMBS transaction and marks a departure from the approach taken by all Irish sponsors up until now. European ABS analysts at Deutsche Bank note that five Irish transactions have been called since July 2007, including two Celtic deals.

"However, the experience in other jurisdictions - primarily Dutch, but notably this week France via FRES 2004-2 - as well as the normalisation that has occurred in the new issue market affirms our belief that such occurrences should be considered in the context of late call, rather than non-call," they comment.

The DB analysts suggest that opening up of parts of the primary market has changed sponsors' calculations about calling their deals; a non-call of legacy bonds increases execution risk for the sponsor's new issues, thus making it less attractive. "This is most obvious for UK prime and Dutch RMBS, where bonds can be publicly syndicated today, but even for other sectors where such a primary market opening now looks less distant this may play a role."

A significant number of deals that remain outstanding past their call dates are from funding constrained and/or weaker sponsors, for whom a call would quite simply be difficult to engineer realistically. An additional important reason for non-calls has been regulatory demands; for example, in the case of Fortis.

Indeed, a recent announcement from Fortis that the European Commission has prevented it from calling €500m of its lower tier 2 floating rate notes is said to have reignited concerns about non-call risk in Dutch RMBS. But European ABS analysts at Barclays Capital note that Dutch RMBS spreads have so far failed to react, suggesting that market participants believe any such risk is temporary, until the issues that have caused the EC to intervene have been resolved.

The analysts say they share the same view; namely, that Fortis will try to meet the calls at the first opportunity. "However, the re-emergence of the non-call issue in a jurisdiction where the situation seemed to have been resolved on that front induces some uncertainty with regards to principal payment timing, especially for those bonds with upcoming call dates, from originators having received state aid. All of which is unlikely to help the frail sentiment currently prevailing in the market," they comment.

It appears that Fortis may have breached some of the conditions attached to receiving state aid, resulting in new restrictions applied by the European Commission.

The DB analysts point out that, so far, extension risk has shown itself to be relatively idiosyncratic and thus possible to protect against through diversification. However, they note that it may become more systemic in weaker jurisdictions.

They conclude: "In such a scenario, the previous experience of bonds on average being priced at a discount to the actual extension risks may become less true in certain market pockets. UK prime and Dutch RMBS markets, where the primary market has opened fairly convincingly, will likely remain those most insulated against extension risk, which is reflected in the pricing of bonds."

CS

ABS

Bank adds to cross asset solutions group

SG has hired George Skelton as director in its cross asset solutions group in New York. Skelton will be responsible for distributing structured credit products to institutional accounts. He will report to Jean de Lavalette, md and deputy head of sales at the bank.

Skelton was most recently an independent structured credit consultant and trader. Previously, he worked as a credit structurer at Merrill Lynch and Bear Stearns in London.

ABS

Fixed income macro strategist hired

Thomas Fahey has joined Loomis, Sayles & Company's fixed income group as senior global macro strategist. He will work with director of macro strategies Teri Mason to provide analysis and perspectives on global macro conditions to fixed income investment professionals.

Fahey's new role will see him researching secular and cyclical trends affecting the macro-economic investment environment and providing top-down analysis of credit cycles and other variables for investment teams to draw on. He will work with the credit, economic, sovereign, securitised and quantitative research and risk analysis teams.

Along with Mason, the team Fahey joins consists of chief economist Brian Horrigan, economics analyst Jim Balfour and manager of strategy analytics Mike Giles. Fahey comes from Standish Mellon Asset Management, where he was senior portfolio manager in the global bond strategies group.

"He will augment our top-down research efforts by taking on a proactive role in providing global macro-investment insights and expertise to enrich the research and analytic resources managers use in their investment decisions," says Jae Park, Loomis fixed income chief investment officer.

ABS

Restructuring focus prompts hire

Clifford Chance has hired Rick Antonoff as a partner, providing extra depth to its US financial restructuring group. He joins from Pillsbury Winthrop Shaw Pitman, where he was also partner, and has more than 20 years of financial restructuring experience, particularly in structured products and real estate-related finance.

"Adding Rick to our team at this juncture supports our strategy of focusing on our areas of strength, and our financial restructuring team certainly qualifies on that count," says Craig Medwick, Clifford Chance's regional managing partner for the Americas. "Despite improvement in the US economy, we anticipate that restructuring will continue to be an area of focus for the next several years."

ABS

Law firm hires for financial services expansion

Eversheds has appointed Steven Geerlings and Paul-Michael Rebus as the law firm enhances its city banking and finance offering. Geerlings specialises in asset-based lending (ABL) and acts for ABL providers on a pan-European basis, while Rebus focuses on structured finance, securitisation and international capital markets.

Geerlings joins from Hammonds, where he was part of the corporate strategy and finance law team. He has also worked in-house at Cedelbank as senior legal counsel and director of legal affairs for Europe at GE Commercial Distribution Finance. Rebus comes from McDermott Will & Emery, where he was group head.

Eversheds finance group head Simon Waller says: "For some time now we have been looking to expand into the areas that Steven and Paul-Michael concentrate on and we are taking this opportunity to invest in two high-calibre individuals who will complement a strong existing team. This recruitment is part of our strategy to deliver growth in key areas in our City and international practice."

ABS

Structured finance partner hired

Carter Ledyard & Milburn has hired David Fernandez as partner. Fernandez will work from the Wall Street office and continue his practice in banking and structured finance.

Fernandez often serves as counsel to the underwriter, counsel to the placement agent and trustee counsel in connection with a wide variety of tax-exempt and taxable bond offerings. These offerings have included 501(c)(3) bonds, housing bonds, transportation bonds, hospital and other health care revenue bonds, civic facility revenue bonds, industrial development revenue bonds, water and sewer bonds, lease revenue bonds and tobacco securitisations.

Prior to joining Carter, Ledyard & Milburn, Fernandez was partner, finance and restructuring group at Dorsey & Whitney.

Asia

Indian global markets head appointed

Nomura Services India, based in Powai, Mumbai, has hired Anita Yadav as md and head of its global markets division. Yadav joins from Deutsche Bank, where she was desk strategist and head of credit research for Asia. She has more than 15 years of experience in capital markets and credit trading, and has previously worked for S&P, UBS and HSBC.

CDO

CDO managers sign sub-advisory pact

Pemba Credit Advisers has signed a sub-advisory agreement with Pramerica Fixed Income for five of its CDOs. Under the agreement, Pemba will benefit from Pramerica's credit research capability and strategic counsel on portfolio construction, while retaining full discretion over investment decision-making as the collateral manager.

CDS

EM md hired

Credit Suisse has appointed Stewart Whitehead as emerging markets md in charge of flow credit trading and CDS for CEEMEA. He joined at the start of the month from JPMorgan where he spent 14 years, most recently running the firm's global macro EM proprietary business. He is based in London and reports to Robin Wilson.

CDS

Credit index trader appointed

Citi has hired Haider Ali to its London office to trade credit indices. He joins from BNP Paribas, where he was European head of index trading before leaving last month, and has previously worked for ABN AMRO as co-global head of integrated credit trading. In his new role, Ali will report to EMEA head of credit trading Tim Gately.

CDS

Bank expands credit team

Deutsche Bank is expanding its global credit trading and institutional client groups with five new senior hires within its global markets division. Jared Dolce, Jason Locke, Mark Mulcahy, Nick Blewitt and John Raveche all join the firm.

Dolce joins as director in high grade credit sales and will be based in Chicago. Dolce comes from Citigroup, where he was head of Midwest credit sales. He will report to Casey Talbot, md and head of high grade credit sales and co-head of credit sales.

Raveche, who will also report to Talbot, will join as director in investment grade credit sales. He was previously an associate director in credit sales at Barclays Capital.

Mulcahy, who will join as director in non-investment grade sales, and Blewitt - who will join as a director in investment grade trading - will both be based in New York. Mulcahy will report to Faris Naber, head of non-investment grade sales and co-head of credit sales. He was previously an md at GFI Group.

Blewitt will report to Masaya Okoshi, md and head of investment grade credit trading in the Americas. Blewitt was formerly an executive director in corporate bond and credit derivatives trading at UBS.

Locke will join as a director and head of US credit trading in Asia Pacific. He will be based in Singapore, also reporting to Okoshi. Locke was previously head of US and European credit trading for the Asia Pacific region at HSBC in Hong Kong.

CDS

US credit strategy team expanded

RBS has expanded its US credit strategy team with the appointments of Edward Marrinan, Ian Jaffe and Seth Levine within its global banking and markets division in the Americas. All three will be based in Stamford, Connecticut, and report to John Richards, head of strategy for the Americas.

Marrinan joins the firm as md, head of US macro credit strategy from Alliance Bernstein, where he was senior portfolio manager for the global wealth management business. He was also a member of the Private Client Investment Policy Committee at the firm. In this role, he managed asset allocations and provided investment strategies across a variety of asset classes. Prior to that, he was with JPMorgan Securities, where he held various senior roles within its fixed income credit businesses in both the US and the UK.

Jaffe joins RBS as an md covering banks and financial institutions, while Levine joins as an svp covering insurance companies and REITS. Both join the firm from Cantor Fitzgerald, where they were desk analysts. While Jaffe covered US depository institutions, finance companies and independent broker-dealers at Cantor, Levine covered the insurance and REITs sectors.

CLOs

High yield team off to Pacific

Pacific Income Advisers (PIA) has completed a lift-out of the entire Grandview Capital Management investment management team. Tim Tarpening, evp and senior portfolio strategist at PIA, says the six-person Manhattan Beach firm - which specialises in high yield securities and bank loans - will assist in the management of the PIA core enhanced portfolios and be responsible for managing high yield separate accounts.

The three senior portfolio managers involved are Robert Sydow, Kevin Buckle and James Lisko. Sydow founded Grandview and heads PIA's high yield department. He has 22 years of high yield investment management experience and has previously worked for SunAmerica Investments and First Interstate Bancorp.

Buckle joined Grandview in 2002 as a portfolio manager from Willow Brook Capital and has also worked for SunAmerica Investments. Lisko spent more than ten years with Grandview and has previously been a senior analyst at JPBT Advisors, Western Asset Management and SunAmerica Investments. At JPBT he was also a portfolio manager, and he has worked as a director of research at Papillon Partners as well.

PIA says the acquisition comes after a long search to obtain high-yield capabilities rather than assets. Tarpening says: "We are confident in our ability to grow our assets organically and, therefore, were interested in finding a talented investment team that could assimilate into our firm culture and bring a strong investment track record."

Grandview will continue to exist solely as the advisor to its existing Waterfront CLO through to maturity. PIA expects to launch a high yield mutual fund in Q310.

CLOs

Project finance team expands

Dexia has built up its London project finance origination team with a number of recent appointments. The European bank has made four hires to the team, which focuses on the UK and Ireland, including three employees due to start work in the coming weeks.

Peter Clifton will join the firm in the second half of June as assistant director in the project finance team. His focus will be on PPP (all sectors), renewables and offshore wind. He comes from NIBC, where he worked on the Adriana Infrastructure CLO 2008-1 transaction.

Phil Ashbrook will start at Dexia in the first week of June as deputy head, joining from AIB. His focus will be on PFI/PPPs, including transport, waste and renewables.

Maarten de Jongh will join from Assured Guaranty as an assistant manager, while Aarti Gupta has already begun at Dexia, working as a manager since 10 May. The four will report to director Iain Wales, the team's head.

Investors

IG credit platform launched

IMC asset management (IMCam) has hired a team of senior investment professionals as it launches an investment grade credit corporate offering within its core European credit capability. The new four-man team consists of Rodrigo Araya, Oscar Jansen, Robert Manning and Henk Wiersma, who all join from Lombard Odier Darier Hentsch (LODH). The investment grade platform, consisting of a long/short and long-only capability, will formally launch and open to clients on 1 June.

Araya joined IMCam in April as head of investment grade credit strategies. At LODH, he was responsible for the entire fixed income business and headed up the credit business. Before LODH, he was a senior credit trader at ABN AMRO in London, where he managed global risk exposures and was involved in market-making and proprietary trading.

The rest of the team join on 1 June. Jansen becomes senior portfolio manager, having been head of credit at LODH; Manning gives up his role of head of credit research to become head of investment grade credit analysis; and Wiersma joins as senior investment grade credit analyst, having been a credit research analyst at LODH.

"The addition of this highly experienced and successful team will significantly expand the scope of asset management credit strategies delivered by IMCam to our institutional and HNWI client base," says the firm's ceo Sander Nieuwland. "We believe credit is an important area of opportunity for investors and in these turbulent markets there is a greater need for talent and experience than ever."

Investors

Permacap buyback results announced

GSO Capital Partners Employee Side by Side Fund and GSO Capital md Miguel Ramos-Fuentenebro have announced the final results of their tender offer to purchase shares of Carador (see SCI issue 182). The tender offer closed on 11 May.

The tendering parties accepted a total of 1,179,932 US dollar shares and 550,000 Euro shares validly tendered under the tender offer at the US dollar tender price of US$0.50 and Euro tender price of €0.37 respectively, representing approximately 1.2% of the issued Shares of Carador.

Investors

Investment manager acquisition agreed

Terms have been agreed for Man Group's acquisition of GLG Partners, which will create a diversified alternative investment manager with around US$63bn of funds under management. The acquisition values the fully diluted share capital of GLG at approximately US$1.6bn.

Man's board says the move will bring many strategic and commercial benefits, such as the integration of sales, structuring and operations between the two firms, expansion into new markets and the potential to bring more funds under management by combining GLG's investment offering with Man's structuring and distribution expertise. Potential cost savings of US$50m have been predicted by Man, with one-third expected to be achieved in the financial year ending in 2011 and the rest in the first six month of the financial year ending in 2012. The acquisition is expected to be earnings accretive in the financial year ending in 2012 and earnings neutral in the financial year ending in 2011.

Other expected benefits of the acquisition are greater stability in the combined performance fee prospects and the creation of new high margin products for distribution, the expansion of open-ended product offerings in onshore markets in single manager and combination formats to broaden and facilitate the raising of new assets, the build out of discretionary investment strategies and a combined product offering with an emphasis on liquid strategies.

Real Estate

B-note servicing team expands

Hatfield Philips International has doubled the size of its recently-launched B note team. The team will look after all classes of junior debt, including lenders in syndicated loans. It may be called on to replace existing special servicers as an increasing number of junior debt holders seek independent representation.

The primary and special servicer is marketing the B note services as a standalone function to junior debt holders not currently represented by a servicer or where there may be a conflict of interest with the existing servicer managing both the A and B note, or where they believe they may be better represented. The team will represent the defined interests of junior lenders with respect to events such as the rights under the intercreditor agreement, loan modification, extension or acceleration, transfers of property or equity interests, loan commencing possession actions and ensuring the existing servicer deals explicitly with the terms of the transaction.

Amanda Little, Hatfield Philips director and head of the B note team, says: "As Europe's largest servicer we are duty bound to respect the differing needs of senior, junior and mezzanine debt. However, junior lenders often feel that their needs fail to be heard when loans start to default. Our dedicated team ensures that all lenders are appropriately represented and - whilst servicers are always guided by the intercreditor deed and servicing agreements - having an independent voice ensures that all options are considered."

Real Estate

Californian real estate vp named

Franklin Templeton Real Estate Advisors (FTREA) has hired Julie Rost as private real estate vp. She is based in Rancho Cordova, California, and will be responsible for the sourcing of, and due diligence on, private real estate fund investment opportunities in the Americas. Rost will focus on a range of funds from established to emerging managers at various stages of fund formation, reporting to Marc Weidner, FTREA md.

"The emergence of new managers, combined with an uneven property market, is anticipated to result in a wide dispersion of returns among managers, making extensive due diligence all the more important," says Weidner.

"Institutional real estate investors today are looking for solutions that can provide both opportunities for diversification and the potential for attractive risk-adjusted returns," says Jack Foster, FTREA's global head and md. "Julie joins a team of seasoned professionals, which will continue to seek out successful specialist managers who can take advantage of inefficiencies and recent distress in the local property markets."

Rost has held senior real estate posts with several California organisations, including Perseus Realty Partners, where she was a director and member of the senior management team; and Eastdil Secured, where she was svp, focusing on major CRE equity, private fund structuring, joint ventures and structured finance transctions. She has also worked as a real estate investment officer for California Public Employee's Retired System.

Real Estate

White House staffer joins CRE Council

The CRE Finance Council (formerly CMSA) has hired Michael Flood as policy and research vp. He joins from the White House office of management and budget, where he was a senior programme examiner in the financial rescue unit and worked on the Obama administration's financial regulatory reform efforts. He has also worked with US Treasury staff to review the TARP investments in the financial services and automotive sectors.

Flood will be based in Washington and his new role will be to oversee and promote the CRE Finance Council's policy and research efforts with the government, policymakers, regulators and market participants. He will also work with the Council's policy committee and task forces to monitor issues, formulate organisational positions and prepare policy papers on behalf of the membership. He will report to government relations svp Brendan Reilly.

Before working at the White House, Flood held posts in Fannie Mae's commercial and single-family mortgage businesses, as compliance auditor in the financial risk management unit of KPMG and for the House energy and commerce committee.

RMBS

Usury lawsuits to set precedent?

A number of class-action lawsuits are underway in the US against RMBS trusts for alleged usurious loans made by now-defunct lenders. If the trusts are ultimately held liable, it could pave the way for other cases to be brought against securitisation trusts that may be perceived to have deep pockets, especially where the original lender is no longer viable.

Moody's reports in its latest ResiLandscape publication that an Arkansas circuit court on 5 March entered a judgment in a class-action lawsuit awarding damages against the FirstPlus 1998-3 and 4, Keystone 1998-P2 and United National 1999-1 RMBS trusts for alleged usurious loans. Four other similar class-action lawsuits naming RMBS trusts (FirstPlus 1998-2, 3, 4 and 5) as defendants are also making their way through Missouri's court system. Potential costs to the affected trusts are significant and the trustee has suspended principal and interest payments to bondholders in order to preserve funds for payment of judgments, legal fees and other costs.

According to Moody's, the Arkansas and Missouri cases centre on seasoned, second-lien, high-LTV mortgage loans that allegedly violated state usury/consumer-protection statutes. In each of the cases, the plaintiffs are seeking to hold the trusts liable for the origination violations of the lenders.

The amount of damages entered against each trust in the Arkansas case consist of two times the amount of interest ever paid on the affected loans plus additional pre-judgment interest and legal fees. For three of the loans whose interest rate exceeded 17%, the order voided the entire principal balances.

Owing to the potential costs to the trusts and because of the suspension of payments, Moody's downgraded the tranches of the affected FirstPlus trusts to Caa1. Payments on the United National trust were not suspended and so those tranches were downgraded to Ba1.

The rating agency notes that the ultimate outcome to the trusts is uncertain because - in addition to the cost of legal fees - it is unclear whether the trusts will ultimately raise a successful defence on appeal or whether court-awarded damages would be paid senior to bondholders.

Technology

Portfolio construction platform planned

Cutwater Asset Management and Calypso Technology are to work together to build a unique asset/liability management (ALM) portfolio-construction solution. The new application is being designed as a response to the chaotic market conditions of 2008 and 2009, particularly those connected to funding risk and sharp volatility of returns. The platform will be designed to provide optimal trading and portfolio solutions while increasing risk awareness.

Cutwater ceo Cliff Corso says: "Our goal for all of our clients is to minimise risk and volatility while meeting their investment objectives. We enter into this exciting partnership with the Calypso team as part of our ongoing dedication to performance and client service."

Calypso will combine Cutwater's Risk Analysis Manager (RAM) with its own evolutionary optimisation platform Galapagos, creating a multi-faceted risk budgeting, asset allocation and scenario management platform that allows Cutwater clients to explore a range of optimal investment strategies. The firms say that integrating Cutwater's risk framework into the Galapagos platform will allow clients to model a range of investment objectives, funding specifications and constraints while considering forecasts over an extended time horizon.

ABS

BoE's DWF consultative paper analysed

The deadline for submitting comments on the Bank of England's consultative paper entitled 'Extending eligible collateral in the Discount Window Facility and information transparency for asset-backed securitisations' was 30 April 2010, but the Bank has yet to release a statement on the feedback it has received.

European ABS analysts at Barclays Capital have published an analysis of the BoE's ABS transparency efforts, which suggests that they would likely succeed at modernising the European ABS market. However, they point out that the current proposal suffers from two key - and entirely avoidable - flaws.

First, while the Bank is proposing to make deal models public, the BarCap analysts believe its definition of what constitutes a 'public' model must be reconsidered. Second, as with the ECB's efforts, they believe that the BoE's incentive scheme to encourage originators to make the information the Bank seeks to be made available is in need of some attention.

There is a crucial difference between the BoE and the ECB proposals, according to the analysts. While both central banks formulate criteria for ABS bonds to be eligible as collateral for their facilities and both banks use these criteria to incentivise originators to make more information about their ABS transactions publicly available, the banks' criteria apply to fundamentally different facilities. The ECB's criteria apply to ABS bonds delivered to it as repo collateral into its open market operations.

However, at the BoE, ABS bonds have never been eligible collateral for its regular open market operations. Instead, the BoE is proposing that ABS bonds delivered into the SLS, the extended collateral long-term repo operations, and the DWF be subject to the new eligibility criteria.

ABS are already eligible collateral for the BoE's discount window. Hence, its current proposal is not seeking to broaden eligibility to ABS, but on the contrary proposes to impose stricter eligibility criteria in order to incentivise UK banks and building societies to provide more information about their securitisations to bring greater transparency to the market.

ABS

Fundamental improvement' for US credit card ABS

Major bank credit card ABS trust collateral performance for the April collection period was mixed, according to Barclays Capital's May servicer report for the sector. Although charge-offs and delinquencies showed improvement, a declining trend was seen in yield and excess spread. In addition, payment rates were mixed.

Nevertheless, BarCap analysts put more weight on the falling delinquencies and charge-offs, and believe this month's reports represent a fundamental improvement in credit performance.

At the trust level, the analysts note that most major bank card issuers reported better charge-offs and delinquencies. Lower yields overwhelmed the improved charge-offs, resulting in declining one-month excess spreads. However, three-month excess spreads rose.

BarCap expects charge-offs to continue declining through the summer, in line with recent delinquency improvements. The analysts believe that credit card default performance has turned the corner and maintain their forecast of 9.75%-10.25% for charge-offs in Q410 (down from 10.8% in Q409).

ABS

Student loan ARS buyback announced

Nelnet has commenced a fixed price cash tender offer for its outstanding senior auction rate student loan asset-backed notes and subordinate Libor rate student loan asset-backed notes of Nelnet Student Loan Corporation-1 (formerly Union Financial Services-1). The consideration per US$1,000 principal amount is US$950 for the senior notes and US$900 for the subordinate notes. In addition, Nelnet will pay all accrued and unpaid interest on the notes purchased pursuant to the offer up to, but not including, the settlement date.

The offer will expire on 1 June 2010 and settle on 4 June, unless extended or earlier terminated. The firm expects to use available cash to pay for the notes.

ABS

Deterioration continues for SA securitisation

The performance of the South African auto loan ABS and RMBS markets continued to deteriorate in Q110, according to the latest indices for the sectors published by Moody's. In addition, the rating agency holds a negative outlook for the sectors based on continued economic pressure and poor industry outlook.

The weighted-average cumulative loss trend for South African RMBS increased to 0.29% of original balance, mainly from issuers under the Blue Granite Investments and Homes programmes. The cumulative loss trend for auto loan ABS transactions rose to 1.82% of original balance in March 2010, an increase of 0.54% over the past 12 months.

Moody's 90+ days delinquency trend index has increased to 2.39% of current balance (1.01% in March 2009) for RMBS transactions and to 5.87% of current balance (4.29% in March 2009) for auto loan ABS transactions. The total redemption rate (TRR) for RMBS transactions remains on a downward trend and stood at 21.83% in March 2010, down from 26.06% one year ago. The TRR for auto loan ABS transactions increased slightly to 57.78% in March 2010.

On 22 April 2010, Moody's confirmed the ratings on the junior classes of notes issued by Blue Granite Investments No 3 and Blue Granite Investments No 4 following a review for possible downgrade. The review took into account the current performance and increased loss expectations for the two mortgage portfolios backing these transactions, as well as the build-up of credit enhancement from the structural protection mechanisms in each transaction.

Although the South African economy will expand throughout 2010, with the World Cup and spending from foreign tourists providing a boost to aggregated demand, the economic environment still remains weak and Moody's expects GDP to only grow by 2.8% in 2010. High debt-to-income ratios will continue to put pressure on borrowers' ability to pay, despite the South African Reserve Bank (SARB) cutting its interest rates by 50bp to 6.5% in March 2010.

Given the surging electricity costs (South Africa's national energy regulator agreed to grant a 24.8% annual increase in electricity tariffs for the next three years) and weak outlook for employment, consumer confidence remains weak, despite some recent improvement. Consumer spending is unlikely to fully recuperate until employment and income improve in H210.

The performance outlooks for South African auto loan ABS and RMBS are negative. This reflects the depressed economy and poor industry outlook, as well as expectations of delayed asset recoveries. Performance is anticipated to remain under pressure for 2010, continuing to be stressed compared to long-term historical trends.

As of March 2010, the total outstanding portfolio balance of Moody's rated South African RMBS transactions stood at ZAR²6.3bn, which constitutes a decline of 17% over the past year. At the same time, the outstanding balance for auto loan ABS continued to contract to ZAR4.3bn from ZAR9.5bn in the previous year. Issuance in 2010 is likely to be slow, but may see signs of improvement in H2 2010, largely driven by refinancing requirements.

ABS

Japanese ABS asset performance fairly stable

The performance of asset classes backing Japanese ABS (excluding consumer finance ABS) has been fairly stable, according to Moody's, despite the severe employment and income situation in fiscal 2009.

Furthermore, Moody's notes that the default rates in its auto loan dynamic indices have been stable. The delinquency ratios spike every January and February, but the hikes in 2010 were found to be higher than usual, albeit due only to a number of pools with higher increases than usual. Still, the default rates of these pools in February and March are within the range of the rating agency's expectations.

The delinquency ratios and default rates in Moody's instalment sales loan indices have declined moderately since 2008. Default rates, which ranged from 2% to 3% in fiscal 2007, have been stable - ranging from 1% to 2% in the past year.

Moody's believes that the declines in both are likely due to originators' more stringent screening policies (for both member merchants and borrowers), which they had tightened in advance of last year's enforcement of the Act for Partial Revision of the Act on Specified Commercial Transactions and the Installment Sales Act.

The delinquency ratios and default rates in the agency's card shopping loan indices declined temporarily and then rose again, due to the addition of a large pool comprising only revolving payment receivables. The delinquency ratios and default rates of individual pools have been stable.

The card cashing loan delinquency ratio and default rate improved slightly in the past year, with some variation in pools depending on originator. Moody's points out that the impact of the full implementation of the Revised Money Lending Business Law (MLBL) in June 2010 will need to be carefully monitored, as will other issues.

Consumer finance loan default rates are somewhat lower than at the beginning of 2009, although they have generally been high since 2006, as have delinquency ratios. Moody's notes that this is due not only to Japan's adverse employment and income situation (with no recovery in sight), but also to the consistently high payouts for overpaid interest claims and lenders' tightened credit policies.

The default rate rose markedly in March 2010 because of a surge in one specific pool. Performance needs to be carefully monitored, especially in light of the full implementation of the Revised MLBL in June 2010, says Moody's.

CDO

Zero recovery rate expected for bank Trups

S&P has published its revised assumptions for US bank trust preferred securities in Trups CDO transactions. The rating agency believes it is highly unlikely that, given current market conditions, holders of Trups issued by small and medium-sized US banks will realise any recovery after the security begins to defer payments, or after the FDIC intervenes with respect to an issuing bank or after the security defaults.

For that reason, S&P will assume a zero recovery rate for Trups issued by US banks. While its observations have mainly involved small and medium-sized US banks, the rating agency believes it is prudent to extend the treatment to hybrid securities issued by all US banks.

Generally, the collateral portfolios of bank Trups CDOs consist primarily of Trups issued by small and medium-sized US banks. Accordingly, S&P assumed a zero recovery rate for Trups issued by US banks affects all aspects of its rating analysis of notes issued by Trups CDOs.

The revised recovery assumptions apply to all Trups or hybrid securities issued by US banks that are held in the collateral portfolios of Trups CDOs. The assumptions do not apply to Trups or other hybrid securities issued by insurance companies, REITs, homebuilders and non-US banks. These criteria are effective immediately for all new and existing US Trups CDO transactions.

CDO

Risk asset removal impacts CRE CDOs

The removal of credit risk assets by asset managers resulted in lower US CREL CDO delinquencies last month but rising realised losses, says Fitch. Delinquencies decreased from 12.8% in March to 12.1% in April, but if loans that were removed from the index over the last year at a loss were included then the delinquency rate would increase to 16.9%.

"Resolving credit-impaired assets at a loss to the CDO has become a consistent trend among asset managers," says Stacey McGovern, Fitch director, who believes an increase in distressed loan buyers might be causing asset managers to pursue loan sales over modifications. "Further, not all of the credit-impaired assets are delinquent at the time of the resolution."

Total realised losses in April were approximately US$153.5m. It was the third consecutive month in which realised losses increased.

Fitch rates 35 CREL CDOs and has completed reviews of 32 of them. The rating agency says the average base-case modelled losses for these CDOs is around 35%, while total actual realised losses to date are around 5%.

CDO

Trups CDO default rates pass 13%

Default rates on US bank Trups CDOs eclipsed the 13% mark, with the addition of 11 new bank defaults last month, according to Fitch's latest default and deferral index results. In its latest default and deferral index, the rating agency found that bank default rates within Trups CDOs climbed to 13.3%, with an additional 1% of defaults recorded in April.

Fitch md Kevin Kendra says: "The rate of new bank deferrals has slowed to a quarterly rate of 77 and 58 over the last two quarters after peaking at 84 in the third quarter last year." While he points out that this may be a precursor to lower default rates, longer deferral periods and increased cure rates, "any performance improvement realised through lower levels of default and increased deferral cures may not be evident for several years".

The 11 new bank defaults (affecting 27 CDOs) bring the total to 115. With 342 banks now deferring, defaults and deferrals combined exceed 30%.

CDO

Muni CDO rating process reviewed

S&P says it is undertaking a review of the assumptions and methodologies it uses to assign ratings to municipal CDOs and US public finance transactions backed by pools of municipal securities. The agency hopes these revisions will enhance the comparability of municipal CDO ratings with those in other sectors, such as corporates and sovereigns.

The review may include S&P's default rate stresses, correlation assumptions, recovery levels and timing, event risk and model risk. It is likely to result in changes to the assumptions and methodologies used to assign ratings to municipal CDOs and to securities backed by pools of municipal securities issued by government entities. The agency expects next to publish a request for comment outlining the proposed criteria changes and will subsequently publish final criteria after taking market feedback into consideration.

CDS

CDS spreads finally tighten

Fitch Solutions' weekly risk and performance monitor reports that global CDS spreads came in for the first time in a month, but that wider trading patterns remain for most issuers. After four consecutive weeks of widening, CDS spreads tightened last week by 7.4%.

"Although initially calmed by EU and IMF bailout efforts, much uncertainty remains in the credit markets, making continued CDS spread volatility likely," says Fitch md Jonathan Di Giambattista.

CDS on European sovereigns tightened by 17.5% last week, but Monday (17 May) saw a fresh wave of widening and they are still pricing 22% wide of historical trading levels. Di Giambattista comments: "The markets are still re-pricing sovereign debt risks, with Greece, Portugal, France and Spain among the most notable movers."

CDS

Prices rebound for most subprime vintages

Fitch Solutions' latest RMBS CDS indices results show US subprime prices continuing a significant rebound, although the 2007 vintage remains a stagnant outlier. The total market price index increased for the fourth consecutive month, improving by 7% month-on-month to 8.71 at the start of May.

The 2005 and 2006 vintages have increased by 36% and 22% respectively since 1 January, while the 2004 vintage has increased by 20%. The 2007 vintage continues to perform poorly and has declined 9% since the year started.

"The performance of subprime assets continues to improve across most vintages," comments Fitch md Thomas Aubrey. "Declines in 30-, 60- and 90-day delinquencies suggest that the trend of falling default rates may continue."

Fitch loan-level analysis shows an across-the-board decline in the three-month constant prepayment rate, while the three-month constant default rate also dropped for all vintages.

CLOs

Apollo cashflow CLO priced

The ALM Loan Funding 2010-1 cashflow CLO from Apollo Credit Management priced yesterday (18 May) via Citi. The deal was upsized to US$325m from US$300m. It settles on 8 June and matures on 20 May 2020.

The deal consists of a triple-A rated US$215.4m A-1 tranche that priced at par at 170bp over Libor. The double-A rated US$11.1m A-2 tranche priced at 225bp over Libor at a dollar price of 96.11. The single-A US$24.7m B tranche priced at 230bp over Libor at 91.44. The deal also included US$72m subordinate notes.

The CLO consists of all new assets that Apollo purchased in April and May, according to one source familiar with the offering. It had previously been suggested that the deal comprised some refinanced loans (see last issue), which is not the case.

Investors in this marketplace have waited a long time to see a deal with all new loans. Citigroup's COA Tempus CLO, managed by WCAS Fraser Sullivan Investment Management, consisted of a combination of refinancings and prior positions.

A deal with new loans is a good sign for the revival of the CLO market, says the source. "It's closer to where the market hopes to be going forward," he notes.

Prior to the upsizing, the Apollo offering originally marketed with a triple-A rated tranche consisting of US$198.8m, a double-A tranche of US$10.3m, a single-A tranche of US$22.8m and an equity tranche of US$62.6m. Last week the deal had interest wrapped up for more than half of the triple-A tranche, the source adds, noting that Citi was close to getting orders for most of the other tranches as well.

Price guidance on the triple-A tranche was 170bp over Libor.

A Symphony CLO VII deal, which has since been postponed, was also originally marketed with some new loans and not just refinancings (see SCI issue 181). The Bank of America-led deal was to be managed by Symphony Asset Management.

CLOs

US CLO OC performance analysed

Structured credit analysts at JPMorgan have surveyed historical OC performance trends from senior (AAA/AA) to subordinate (double-B) US CLOs since mid-2009. The case study shows that CLO OC performance can be characterised by a nearly uninterrupted up-tick since around July 2009.

According to the survey, senior OC cushions average around 8.2% currently, up by 2.9% from 5.3% in September 2009. The standard deviation has consistently been in the 6%-8% range, so outperforming senior bonds have enjoyed double-digit cushions and proved very resilient. However, some underperformers were failing coverage tests as recently as November 2009, implying principal repayment risk up to the double-A level until that point.

Meanwhile, Class C OC cushions (typically, single-A rated) increased from 1.8% to 4.8% on average, representing stable cashflow performance. Class D OC cushions (typically, triple-B) rose from negative to positive on average by November 2009, while Class Es (typically, double-B) returned to compliance by January 2010.

"Generally speaking, when looking across the CLO capital structure in its entirety, while average month-on-month change has consistently been robust - or in the 0.2% to 0.4% range - the September to November period in 2009 shows a slightly faster uptick in OC performance, or about 0.8% to 1.0% monthly increases," the JPMorgan analysts note.

CLO portfolio exposures also changed significantly during the period. On a sector level, average exposure reduced to publishing (by 20%), building and development (by 18%), oil and gas (by 10%), while exposures increased to cable (by 30%), electronics (by 10%), telecoms (by 10%), business equipment (by 10%), utilities (by 10%) and chemicals/plastics (by 5%).

On a security level, CLO managers cut risk exposure to early defaults at different levels during the period. For example, exposure to Tribune was cut from 0.6% to 0.4% and Idearc from 0.8% to almost zero, on average. But managers noticeably increased exposure in names including FirstData (up from 0.7% to 1.0%) and Sunguard (0.7% to 0.9%) on average.

JPMorgan's case study tracks OC performance of 326 arbitrage US CLOs from 125 managers, accounting for US$160bn or about one-half of such deals outstanding. The sample's 2004, 2005, 2006 and 2007 vintage breakdowns are 6%, 15%, 31% and 34% respectively.

CLOs

Cashflow, hybrid CLO review concludes

S&P has finished reviewing US cashflow and hybrid CLO transactions after completing cashflow analysis and a committee review for each of the affected transactions. This follows changes to its methodologies and assumptions for corporate CDOs (see SCI issue 153).

The review of US cashflow and hybrid CLO transaction ratings affected by the corporate CDO criteria update covered 3,674 ratings from more than 600 transactions. Of the US CLO ratings reviewed post-update, 2,981 - representing 81.1% - were lowered.

Of the 1,281 triple-A CLO tranches reviewed under the new criteria, 304 were affirmed - mainly triple-A tranches that were senior to others within their respective CLO structures or which otherwise had a significant rating cushion before the application of the new criteria. From the remaining triple-A tranches, there were 822 downgrades to double-A. The average downgrade for US CLO triple-A rated tranche was 1.5 notches and the agency says virtually all triple-A downgrades were because of the updated criteria rather than transaction performance.

Almost all triple-A rated tranches (99.6%) retained investment grade ratings following S&P's reviews, while five were downgraded to speculative grade from triple-A. The agency says these tranches were generally from CLOs with concentrated collateral pools that had a small number of remaining obligors and which had experienced negative credit migration and defaults.

More significant downgrades were to be found further down the CLO capital structure, partly because more of those tranches had ratings affected by the application of a largest-obligor default test and partly because weak collateral performance had caused some credit deterioration. From 606 US CLO triple-B tranches, 534 were downgraded after the application of the new criteria, by an average of 3.9 notches. Among speculative grade CLO tranches, 82.8% of the ratings were lowered after the update, with an average downgrade of 3.94 notches.

CMBS

Fleet Street Two downgraded again

Moody's has further downgraded the class A CMBS notes of Fleet Street Finance Two to Baa2 from A3 and is keeping the notes on review for possible downgrade. The recently restructured transaction (SCI passim) is backed by a single commercial mortgage loan originated by Goldman Sachs Credit Partners.

The latest downgrade comes off the back of uncertainties regarding the valid existence of the borrowing entity under German law and follows an assessment of the legal opinions provided by the servicer as part of the transaction restructuring documents, says Moody's. Additionally, the rating agency has concerns over the most current publicly-available information on the tendering process for Karstadt's sale; in particular, the limited number of interested investors and a prospective buyer's requests for additional concessions (including concessions from the landlord). It also cites the delayed sale process and increased uncertainty around the implementation of the approved insolvency plan, which is the base-case assumption for Moody's current rating.

The transaction's securitised loan is a part of a large financing transaction involving a senior-mezzanine structure, where the mezzanine loan is funded outside the transaction. The senior loan and a part of the mezzanine loan share substantially the same property collateral and rental cashflows. Both loans are secured by first-ranking legal mortgages on primarily retail properties located in Germany; however, the mezzanine loan is contractually subordinated.

At closing, 100 of the 109 properties were fully let to W2005/Seven, which in turn sublet the properties to Karstadt Warenhaus, which accounted for approximately 98% of the rental income and Quelle accounting for approximately 2% of the rental income. Following the opening of formal insolvency proceedings in relation to both sub-tenants in September 2009, Quelle is currently in the process of being liquidated and properties occupied by it have already been vacated. For Karstadt Warenhaus, an insolvency plan was approved by its creditors in April 2010 (SCI passim).

According to market information, there are currently negotiations with one investor about a potential sale of the tenant taking place. Such a sale needs to be finalised by 28 May 2010. If no purchaser is found by that date, the liquidation of the sub-tenant seems to be the most probable outcome of the insolvency proceedings, according to Moody's.

As of the last IPD in January 2010, the senior loan is current. As of 31 January 2010, the Quelle sublease - which accounted for approximately 2% of the total rent - was terminated by the insolvency administrator and Quelle stopped paying rent. Karstadt, however, has continued making its rental payments.

CMBS

CMBS review results published

S&P's review of European CMBS, begun in May 2009 and covering €120bn across 188 transactions, has so far led to lowered ratings for 452 tranches in 103 transactions by an average of 4.15 rating notches. Downgrades have occurred across all rating categories, but junior rating categories have been most affected, with 64.5% of all ratings below single-A experiencing a downgrade. 2006 and 2007 vintage transactions have also been particularly vulnerable, with just over 80% of rating actions relating to tranches of notes from these years.

From the 169 tranches reviewed by 31 March, 420 tranches across 122 transactions were affirmed. While 39.9% of triple-A tranches were downgraded, this compares to 63.4% for triple-B rated tranches. The 2006 and 2007 vintages saw 59.8% of tranches downgraded, compared to 30.5% for transactions issued before those years.

While 47% of all reviewed tranches experienced downgrades, transactions secured on UK properties fared better than average with only 38.9% downgraded. Notes secured on multifamily properties were most seriously affected by S&P's review, with 72.9% of the notes having their ratings lowered.

CMBS

Sainsbury's CMBS ratings impacted

S&P has affirmed and subsequently withdrawn its credit ratings for the Highbury Finance and Dragon Finance CMBS, which are credit-linked to J Sainsbury. At the same time, it lowered its rating to double-B on BL Superstore Finance's class C1 notes and affirmed its ratings on BL Superstore's other classes. Furthermore, it has affirmed the ratings on the Eddystone Finance and Longstone Finance notes.

The action in respect of the Highbury Finance and Dragon Finance ratings follow the same action on the long-term corporate credit rating on Sainsbury. The BL Superstores transaction is not credit-linked to the rating on Sainsbury as tenant. However, in January 2010 S&P brought the rating on the C1 class in line with the rating on Sainsbury to reflect its view of the risk that tenant insolvency and restrictions on liquidity drawings could result in interest and principal deferrals for this class of notes.

S&P now considers that the credit risk of BL Superstores' class C1 note is no longer consistent with an investment grade rating since Sainsbury is an unrated entity. The agency has therefore downgraded the class C1 notes to double-B from triple-B minus and affirmed its ratings on the other notes.

The ratings on Eddystone and Longstone's notes are also not credit-linked to Sainsbury as tenant. Accordingly, S&P has affirmed its rating on these notes.

Moody's and Fitch have also withdrawn their ratings on Sainsbury at the issuer's request. Moody's has affirmed its ratings of the deals it rates (Highbury, Dragon, Eddystone and Longstone), noting that it had assumed in its analysis of the deals that Sainsbury was unrated. Fitch says its ratings on BL Superstores is not affected either.

CMBS

US CMBS delinquencies continue climbing

The delinquency rate on loans included in US CMBS increased by 60bp in April to 7.02%, according to Moody's Delinquency Tracker (DQT). The April increase was the second biggest jump in the history of the DQT, only 9bp short of the record 69bp increase in March.

April saw a net increase of nearly US$3.7bn to the balance of delinquent loans, says Moody's. During the month, 415 loans totalling US$5.9bn moved into delinquency, while 230 loans became current or worked out, reducing the delinquent balance by about US$2.3bn.

Moody's Delinquency Tracker (DQT) tracks all loans in US conduit and fusion deals issued in 1998 or later with a current balance greater than zero.

By property type, the hotel sector regained the dubious distinction of having the highest delinquency rate, rising 171bp to 12.98%. The March leader, multifamily, rose by 68bp during April to 12.87%.

The office sector continued to have the lowest delinquency rate, after a 46bp rise during the month to 4.58%. The industrial sector saw delinquencies increase by 67bp in April to 5.24%, while the rate for retail increased by 29bp to 5.86% during the month.

By region, the West saw the steepest climb in its rate of delinquencies, which rose by 115bp in April to 7.76%. The West now has a higher delinquency rate than the Midwest, which finished April at 7.49% after a 55bp increase.

At 8.76%, the South continues to have the highest rate. Its increase in April, however, was the smallest of any region, at only 31bp.

The East saw delinquencies increase by 48bp in April, to 5.62%, the lowest among the four regions.

By state, Nevada saw its rate soar after two loans backed by exhibit halls in Las Vegas moved into foreclosure. It now has a 20.02% delinquency rate after a 607bp increase, which exceeds the rate for any other state by more than 500bp.

Legislation and litigation

Senate passes rating agency amendment

US Senator Al Franken's amendment to create a ratings board to be overseen by the SEC passed in the Senate on 13 May. The proposal, which passed in a 64-35 vote, calls for a board to assign credit rating agencies to provide initial ratings in what it says will eliminate conflicts of interest.

The proposal is intended to end the conflicts of interest inherent in what is perceived as Wall Street's pay-to-play credit rating system by ensuring that a bank or financial institution can't shop around among credit rating agencies to get a product's initial rating. The amendment, which becomes part of the Wall Street Reform bill, was co-sponsored by Senators Charles Schumer, Roger Wicker, Bill Nelson and Charles Grassley.

Ratings

Most ratings improve, sovereigns still pressured

Fitch says credit ratings for most sectors are stabilising, with high grade sovereigns and structured finance excepted. The agency says rating outlooks have been stabilising since Q309, but that the recovery supporting the stabilisation is fragile and not yet self-sustaining.

"High grade sovereign credit profiles remain under pressure following the extraordinary intervention and support for the financial sector, as well as fiscal stimulus packages," says David Riley, sovereign ratings md at Fitch. "However, the deterioration in public finances primarily reflects the severity of the global recession, which has hit 'tax-rich' sectors, such as finance and housing especially hard, and driven up welfare spending."

The agency says sovereign issues are overshadowing credit markets in asset classes such as financial institutions and structured finance, but the direct risk to corporate ratings of a modest downgrade in high grade countries is limited. Corporate credit profiles will be at risk though if economic growth is hampered by fiscal tightening in countries trying to avoid a further deterioration of state finances.

The developed market base-case assumption for the Fitch-rated universe is for a slow and anaemic recovery, with a double-dip recession providing the single greatest risk to ratings. The upcoming fiscal tightening cycle, which the agency believes will be the greatest in history, could trigger such a situation.

Other credit risks include: refinancing challenges - particularly affecting high yield issuers and European CMBS transactions; significant regulatory challenges facing banks; and asset quality, with housing and commercial property values remaining weak in many developed markets.

Ratings

Decisions made on Greek ratings

S&P has lowered to single-A its credit ratings on all Greek securitisation notes previously rated above single-A, removing them from credit watch negative. The agency explains the move is in response to how increased country risk may affect Greek structured finance transactions.

The agency has also removed seven classes of notes in six RMBS transactions from credit watch negative and affirmed their ratings, while three classes in two Greek RMBS transactions and three classes in one ABS transaction remain on credit watch negative.

Regulation

Call to move forward 'carefully' with regulatory reform

Stephen Green, chair of the Institute of International Finance's (IIF) Steering Committee on Regulatory Capital (SCRC) and Group Chairman of HSBC Holdings has called on the industry to "get the principles right and start to move forward in practice" on reforming the global regulatory framework.

"No-one disputes that capital and liquidity need to be strengthened, but the macro-economic effect must be carefully calibrated," he stresses.

The IIF is finalising a set of cumulative economic impact studies, for publication on 10 June. The studies explore the impact of increased costs of capital and funding on credit and economic growth in different areas of the world.

IIF md Charles Dallara notes: "Our initial findings are sobering and suggest that, without adjustment, the proposals could have serious consequences for global economic recovery. In addition to getting the design and calibration of the new measures right, it is essential that policymakers weigh carefully the timing of their implementation, given their potentially major economic impact. Furthermore, the economic effects will be all the greater if, in addition to the core Basel proposals, we see a host of special taxes and other requirements imposed on major global financial institutions by diverse national and regional public authorities."

The IIF's submission to the Basel Committee raises many issues, such as: cumulative impact assessment and timing; capital composition; leverage; counter-cyclical measures; new liquidity framework.

RMBS

New IOS, PO indices offered

Markit has launched three additional Markit IOS sub-indices: the IOS.FN30.550.08 - 5.5% coupon, IOS.FN30.600.08 - 6.0% coupon and IOS.FN30.650.67 - 6.5% coupon indices. These are synthetic total return swap indices referencing the interest component of 30-year fixed-rate Fannie Mae residential mortgage pools.

Additionally, the company expects to launch the Markit PO index, a complementary index series to the existing IOS indices. The Markit PO indices will reference the principal component of the respective IOS pools and will follow the same transaction structure.

The indices, which are scheduled to launch this summer, include:

• Markit PO.FN30.400.09 - 4.0% coupon
• Markit PO.FN30.450.09 - 4.5% coupon
• Markit PO.FN30.500.09 - 5.0% coupon
• Markit PO.FN30.550.08 - 5.5% coupon
• Markit PO.FN30.600.08 - 6.0% coupon
• Markit PO.FN30.650.67 - 6.5% coupon.

The Markit PO indices will be priced daily and will be tradable from inception. 10 licensed market-makers are already signed up to participate in the new indices.

RMBS

FGIC expands exchange offer

Sharps SP I has reported the initial results of its offer to exchange RMBS and ABS insured by FGIC. Tenders representing US$1.16bn in eligible insured securities have been received in the offer and letters of transmittal representing another US$5.4m have been completed, although the assets have not yet been delivered. The expiration date for the tender offer has been extended from 29 April to 27 May.

FGIC has announced a net loss of US$324.1m for the quarter ended 31 March, resulting primarily from loss and loss adjustment expenses of US$361m (net of reinsurance) for the quarter. These expenses related principally to FGIC's exposure to first- and second-lien RMBS, which were insured by FGIC in 2005-2007 and whose performance continued to deteriorate during the quarter. The monoline's statutory deficit was US$1.64bn and its capital impairment was US$1.71bn, in each case reflecting an increase of US$358.6m during the quarter.

As a result of its deteriorating financial position, the condition to the closing of the offer requiring FGIC to have a minimum policyholders' surplus amount as a result of the completion of the offer and other restructuring transactions had to be revised to reduce the minimum surplus threshold. The revised threshold requires the valid tender of eligible insured securities and FGIC's completion of other restructuring transactions to result in a policyholders' surplus of at least US$220m. In order to achieve this, the monoline anticipates that approximately 72% of the aggregate unpaid principal balance outstanding of all eligible insured securities will be required to be validly tendered into the offer.

A further 11 classes of securities have been added to the offer as eligible insured securities, with an expiration date of 11 June 2010.

RMBS

RMBS default forecasts soar

Structured finance market participants are becoming more similar in their outlook and more concerned about the performance of certain RMBS mortgage collateral classes, according to a survey by S&P's independent valuation and risk strategies group. Forecasts for the collateral backing UK, European and US RMBS are largely consistent with the last survey (see SCI issue 172), but 12-month average default rate forecasts for UK RMBS collateral and average loss severity forecasts across most UK and European RMBS collateral asset classes have significantly increased.

The survey of European and US buy-side and sell-side participants was conducted in April. The first such survey took place in Q109 and the Q210 survey will be conducted in June. It is intended to improve transparency and consensus around the input assumptions market participants use when undertaking RMBS valuations.

"The Q110 survey comprises more individual transaction data than any of our previous surveys, giving us greater insight into the input assumptions investors use when valuing specific RMBS transactions," says Peter Jones, senior director of S&P's valuations and risk strategies group. "Comparing these results with our previous surveys reveals a narrowing of responses from participants, suggesting that market consensus is improving."

The survey indicates that 12-month default rate expectations have increased across all vintages of UK non-conforming loan RMBS collateral since the previous survey. The lowest reported 12-month average default rate is expected on 2004 vintage UK non-conforming mortgage loan collateral (4.31%), while the highest is forecast on the 2007 vintage (5.79%).

By contrast, reported 12-month default rate estimates for the average of UK prime RMBS collateral vintages have dropped slightly from the Q409 survey and average 12-month default rate forecasts for all vintages of Spanish RMBS collateral have also improved.

Reported 12-month default rate forecasts for the collateral behind both US prime fixed-rate and prime adjustable-rate RMBS are both in line with Q4 09 estimations, however, ranging between 2% for the early vintages and up to 10% on the later vintages.

12-month default rate expectations for lower quality US RMBS collateral are generally higher in the latest survey and are forecast to keep increasing. Monthly vectored default rate forecasts show that over the next 24 months investors forecast default rates on 2006 Alt-A fixed-rate, Alt-A adjustable-rate and Alt-A pay option ARM mortgage collateral to peak at 20%, 30% and almost 50% respectively.

Meanwhile, average 12-month loss severity forecasts for the collateral behind 2006 and 2007 vintages of UK non-conforming RMBS have returned to figures polled in the Q309 survey, at 38% and 40% respectively. Loss severity assumptions across all vintages of UK non-conforming loan RMBS collateral are now at their highest reported level (38%) since investors first took part in the survey.

Reported 12-month loss severity forecasts for Italian RMBS collateral have risen by just 0.7% since the Q409 survey and for Dutch RMBS collateral by 0.3%.

By contrast, 12-month loss severity forecasts have generally come down across all vintages and classes of US RMBS collateral, with the exception of 2004 vintage prime fixed-rate RMBS collateral, which has seen a marginal increase.

RMBS

Waterfall payment error corrected

A regulatory filing on Kion Mortgage Finance has highlighted an error in the waterfall payments for the Greek RMBS, Kion 2006-1. The filing explains that performance criteria had been incorrectly shown as not met in respect of the sequential to pro-rata pay-down of the notes.

This has occurred since the payment date in April 2009, resulting in an incorrect apportionment of the available funds. Rather than paying the class B and C notes pro-rata and pari passu, funds were applied to just the principal amount outstanding of the class A notes.

The error will be corrected on upcoming payment dates (the next one is 15 July), when the available funds will be diverted from the class A notes to pay pro-rata and pari passu the class Bs and Cs. Due to the small size of the B and C notes, analysts at Barclays Capital do not expect the correction to take many payment dates to correct.

Fitch says that its ratings on the transaction will not be affected by the incorrect pay-down of notes, as this is only likely to have a limited impact on the transaction. The trustee has informed the rating agency that the reserve fund account will now also amortise to its floor amount of €4.8m. Fitch notes that this will result in a reduction in the available credit enhancement to support the notes, but that this is in accordance with its initial expectations for the deal.

Technology

Malaysian agency to market evaluated pricing service

Interactive Data Corporation's pricing and reference data business has signed an agreement with Bond Pricing Agency Malaysia (BPA Malaysia) to make international fixed income evaluated pricing available to the Malaysian market. BPA Malaysia is the only registered bond pricing agency in the Malaysian market.

The agency's ceo, Meor Amri Meor Ayob, says: "We have seen an increased need in the Malaysian market for independent evaluated pricing, especially for hard-to-value international securities, as domestic firms seek to manage their risk exposure. Through the agreement with Interactive Data, we can now provide our clients with both domestic and international evaluated prices."

Technology

Risk management platform upgraded

Kamakura Corporation has sent out a Kamakura Risk Manager (KRM) upgrade to its clients. KRM version 7.1.2 has three main enhancements and can now use the IBM DB2 relational database management system, as well as databases from Oracle, Microsoft and others.

The new KRM also addresses the assumption of the normal distribution in risk management and allows users to supply any probability distribution for a risk factor that drives valuations. The user-defined distributions can be used in all of KRM's credit risk, market risk, liquidity risk and asset and liability management calculations. It also includes the full implementation of the Islamic Hijri calendar announced earlier this year (see SCI issue 170).

Among KRM's further enhancements are improved reporting and analysis of futures positions in both value at risk and multi-period monte carlo simulations, extra flexibility for the transfer pricing of assets and liabilities on a transaction level basis and enhanced GAAP accounting. Kamakura's multi-period simulation also provides for the liquidation of collateral at then-current market values in the event of a default by any security.