Contents

Insurance-linked securities

Smooth-ish progress

Final pre-hurricane season cat bonds line up

The last three catastrophe bond deals of the 2010 pre-hurricane season have all progressed relatively smoothly. However, they have not all ended up precisely as originally envisaged.

United Services Automobile Association's Residential Re 2010 (see SCI issue 184) priced yesterday, 25 May. The multiple US peril three-year deal was at one point targeting a total size of U$500m split over one unrated and three rated tranches, but came in at US$405m.

The US$162.5m class 1 notes priced at 660bp over Treasury money market funds, the US$72.5m class 2s priced at 890bp over, the US$52.5m class 3s at 1300bp and the US$117.5m class 4s also at 1300bp. S&P has assigned preliminary ratings to the three tranches to be rated - the class 1 notes have been awarded a double-B rating, the class 2s a single-B plus and the class 3s a single-B minus.

Meanwhile, Allianz's US$150m Blue Fin series 3 catastrophe bond offering priced on 20 May, somewhat differently than earlier expectations as keen demand surfaced for its B tranche, according to an investor. The deal was split between a US$90m A tranche and a US$60m B tranche, but original launch indications were for the A tranche to be US$100m and the B tranche to be US$50m (see SCI issue 184).

"Allianz may have found more demand for its B tranche than the A tranche and just juggled the sizes," the investor says.

Pricing, however, was in line with earlier expectations for the deal, at 1400bp over Treasury money market funds for the A tranche and 925bp over Treasury money market funds for the B tranche. The model loss transaction is led by Swiss Re Capital Markets and Aon Benfield Securities.

Other deals, in contrast, have seen downsizings and even spread widening into pricing amid the flurry of cat bond deals lately, such as Caelus Re II (see last issue) and Munich Re's Eos Wind, which priced on 19 May as expected at a downsized US$80m from US$100m. The four-year deal came in line with final guidance at 680bp over Treasury money market funds for the US$50m Class As, which reference US hurricane risk, and 650bp over for the US$30m Class Bs, which reference US hurricane and European windstorm risks. Both tranches are rated Ba3 by Moody's.

The risk modelling for the deal was undertaken by Risk Management Solutions (RMS). US hurricane losses will be quantified on the basis of a market-loss trigger prepared by Property Claim Services. European windstorm losses will be quantified using RMS's PARADEX parametric index.

"There is a degree of saturation for US hurricane risk being arrived at," notes the investor, though deals still vary considerably by issuer. "A lot of the specialist investors that represent a fairly big percentage of the market today are pretty full up and have to deal with limitations as far as managing their exposures."

This year's issuance schedule is also somewhat different than prior years. Issuers came to market much earlier this year, says a cat bond analyst.

"It used to be that there was a June/July rush. Everybody was trying to get their bonds off before 4 July; the time after which you ran the risk of issuing into a live hurricane."

KFH & MP

ABS

Decreased liquidity

US ABS market activity in the week to 24 May 2010

Despite the initial belief that the US ABS market might remain relatively immune to the current eurozone concerns, participants have witnessed a weakened market, widening spreads and decreased liquidity. New issuance is, however, expected to re-start after the Memorial Day holiday - albeit at slightly wider spreads than previously anticipated.

Elton Wells, head of SecondMarket's structured products group, explains that although last week began well, the momentum was soon lost. "There were US$3.5bn worth of deals that were priced across four transactions, primarily in the auto ABS sector," he says. "But towards the end of the week, the turmoil and volatility in the European markets hit the US market. Some of the deals needed more spread toward the end of the week to get done."

An ABS trader elaborates: "On Thursday, what we saw was a drop-off in liquidity. Spreads were between 5bp-15bp wider on the senior bonds and as much as 20bp-40bp wider on the subordinate bonds. On Friday, we managed to get some of that back."

Despite a mild recovery from Thursday's levels, Wells believes that overall the market is getting weaker. "Deals are having to be priced wider in order to get done," he explains. "And obviously I think the US market thought that it would be somewhat immune to the issues happening in Europe, but it has now carried over into the broader market."

Notable deals that came to market last week included Nissan's lease transaction, which priced 5bp wider than guidance, and the US$1bn Navistar deal that looked as if it would price relatively well but needed more spread in order to get placed at the end of the week (see also separate News story). Wells notes that Banco Santander's subprime auto deal SDART 2010-1 "fared relatively well".

Wells predicts that the rest of this week will be slow and only partly because of the upcoming Memorial Day weekend. "Some of the issuers are deciding to hold back and to wait until maybe next week to issue new securities," he says. "They want to assess what's going on with the euro issues first."

Although this week was originally expected to bring a slew of auto-backed securitisation deals in advance of the holiday weekend, with last week's market instability these expectations "came to a screeching halt, and we'll have to wait until the next week for that", says Wells. "There are at least three to five auto deals that will be coming to market next week from some of the bigger names that we've seen in the past," he explains.

The trader is cautiously optimistic moving forward. "Activity might pick up. I think we have enough clients engaged and not everyone is sitting on their hands, so we should see a step up from last week," he says.

"Long term we suspect that there will be relatively light new issuance," continues the trader. "However, some of the demand will soak up the available bonds in the Street right now, and then we'll have tighter spreads again. But at the moment there's definitely less liquidity than we've had for a while."

JA

RMBS

Wait-and-see attitude

European RMBS market activity in the weeks to 20 May

Since a dramatic market spike two weeks ago the European RMBS market has seen something of a recovery. However, the market has clearly been left shaken, as only the most liquid names have seen some trading activity and expected new issuance has been postponed. Nevertheless, in the midst of this wait-and-see game the marketing of a new RMBS transaction has begun.

Escalating concerns regarding the eurozone sovereign situation caused a dramatic but temporary spike in RMBS spread levels on 7 May. One dealer explains that this was felt particularly in the most liquid paper.

"Dutch and UK paper spiked by about 30bp," he says. "I saw some Dutch paper trade as wide as 160bp, but then all the bids came back to around 130bp-140bp in the week after, when everything seemed more stable."

In the mezzanine space a trader says that some paper traded as wide as 190bp-200bp, which he points out is wider than spreads have been all year. "I don't know how much volume was done at these levels, but I heard a rumour that it was trading there and then saw some people buy at those levels," he says.

Once the ECB support plan emerged over the weekend of 8/9 May, spreads returned to familiar levels, but since then spreads have widened again slightly over the past week. "It's difficult to grasp because we see some trades where it's clearly foreign investors from outside the euro area trying to get rid of their euro positions. It's just because they don't like the currency anymore and not because they don't like the positions," the dealer explains.

"It's mostly the bigger, liquid tranches within the RMBS space that are widening," he continues.

The dealer explains that as currency and interest rates fluctuate, institutions may be struggling to provide margin and require extra collateral. Subsequently investors are quick to sell their most liquid paper.

He adds: "It's understandable that the first thing you see is the better quality Dutch paper, because that's the only paper where you'd get a decent bid. That's what one usually sees in the turbulent periods that have come in the past two or three years."

Away from the more liquid names, trading seems to have stopped altogether. "When times get bad in the rest of the market, the RMBS space has a wait-and-see attitude," says the trader. "People are nervous, but not nervous enough to start selling and pushing prices down too much."

This wait-and-see attitude has also made itself felt in the primary market. Deals that were expected to come to market before the end of the month have been postponed until the market is more stable.

"I heard that the Fosse transaction will be pushed back," says the trader.

"There's a lot of volatility and Santander won't want to price something wide. It'll want to wait and see. It's economical for the bank to do it at the low 100s, but if they have to do it at 160-170 it would send a bad message to the market. For them and for the market, I think it would be better for them to wait," he explains.

In addition, the dealer believes that the Driver deal backed by underlying Spanish loans will be postponed until sovereign issues show more stability. "To my mind, it will be impossible to market a Spanish ABS at the moment. People first want to know how the sovereign issues will resolve before stepping into things like that."

However, the new issuance pipeline continues to grow, with the addition of the Moorgate Funding deal from Bank of America Merrill Lynch. The trader explains that the deal is backed by loans from Mortgages Plc, Wave Lending and Edeus Mortgage Creators.

"They're selling everything from triple-A right down to first loss," he says. He expects roadshows to take place in early June and pricing to take place in mid- to late-June.

JA

ABS

Senior auto ABS thrives, but subs feel contagion

A slew of auto ABS deals managed to get done in Q1 and so far in Q2, including those with subordinate tranches. However, deals with lower rated tranches today are not as lucky. Some auto ABS deals have dropped the subordinate pieces altogether, while other sponsors have cited the uncertainty of the macro environment stemming from Europe as a reason to halt their deals.

Demand is clearly focused in the triple-A tranches for most auto deals, due to the lower appetite for risk. "Investors are willing to take the triple-A bet, but when you go below the triple-As for a name like Navistar, it will be interesting to see how the deal gets done," says one auto ABS investor.

Navistar's US$919.2m truck-backed auto ABS deal that included both triple-A rated tranches and tranches down to triple-B priced last week, with all but the top tranche coming in at the wider end of guidance. The US$326m money market tranche priced in line with guidance of 7bp over Libor, while the triple-A rated US$262m A2 tranche priced at 60bp over, as opposed to guidance in the 50bp area.

The triple-A rated US$217.9m class A3 tranche came in at 85bp over, versus guidance of 70bp over, while the single-A rated US$75.2m class B tranche had guidance between 250bp and 275bp and priced at 275bp. The triple B-rated US$38.1m class C tranche had guidance in the 400bp area, but was retained.

Deutsche Bank Securities, RBC Capital Markets, Credit Suisse Securities, JPMorgan Securities and Navistar Financial Corporation led the deal.

Auto ABS in general has come through the credit crisis with only some bruises compared to other sectors. "Even with the lifting of TALF, the deals have been getting done without major issues. Spreads have tightened to almost pre-crisis levels, especially on the triple-A side," notes the investor.

Santander's Drive Auto Receivables Trust 2010-1 also priced last week. The deal's triple-A tranche was all fully placed, says another investor.

GMAC's US$703.1m ALLY Master Owner Trust 2010-3 offering, which priced on 29 April, also had a good following. The deal featured a US$450m triple-A tranche down to triple-B and non-rated tranches. But, according to the investors, the deal would not be so well-received today.

"People aggressively took down their deals, so they were able to borrow in advance. Even though they did not need it, they were able to issue since the market was what it was three or four weeks ago," says the first investor.

Even at the end of last year, auto ABS deals with subordinate tranches still did well and even thrived in the secondary markets. Amid difficult markets for issuing in late 2007 and early 2008, Ford and GMAC, for example, were not able to issue their subordinate paper, says the first investor.

"They structured double-A, single-A and triple-B tranches, but they kept it themselves because they were not willing to pay the premium that the market was asking," he says, noting that at the end of last year they were able to get some of that older subordinate paper placed.

Meanwhile, Chrysler Financial's prime auto ABS transactions had some good news lately from Moody's. The agency placed on review for possible upgrade ten tranches from five auto loan securitisations sponsored by the company.

But in the past couple of weeks investors have noticed some challenges in getting subordinate pieces sold. "People are not able to as freely issue subordinated paper as they were a month ago. The sovereign contagion is affecting a lot of players," says the first investor.

Volkswagen, for one, cancelled its €686.3m Driver Espana One auto ABS deal due to how wide spreads stretched compared to when it first began to market the offering. As the second investor notes, the deal's triple-A tranches would likely have sold well, but he does not feel the same about the issuer's subordinate pieces.

Indeed, investors say spreads on triple-A auto ABS have widened about 5bp-10bp since the European sovereign debt issues surfaced. They say more widening is on the horizon.

KFH

ABS

New Euro MMF rules to impact ABS demand

CESR has released guidelines on European money market fund ABS investments, which require the use of legal final maturities instead of expected maturities as the duration investment criterion for ABS. The new rules - which would prevent money market funds from investing in any ABS securities with a legal final maturity longer than two years - may hurt appetite for short WAL paper, European ABS analysts at Barclays Capital warn.

"In our opinion, these restrictions are onerous - specifically for ABS holdings at money market funds - and stand in contradiction to the investment guidelines that we believe to have conventionally been adopted by the fund industry," the BarCap analysts note. "We cannot exclude some limited forced selling as a result of CESR's new restrictions, but conclude that any resulting pricing pressures in the secondary market should remain minimal."

CESR says that the rationale for the new regulations is to improve investor protection, noting that investors in money market funds expect the capital value of their investment to be maintained while retaining the ability to withdraw their capital on a daily basis. In other words, it argues that money market funds should be regulated so that the funds behave as investors expect them to.

However, the analysts say that, in their view, money market funds will never be able to truly satisfy these expectations since: they are not principal-guaranteed investments and lack the mechanisms to be such investments; and they do not have a liquidity backstop and, consequently, on-demand unit redemptions cannot be satisfied under all circumstances. "Given that...money market funds will never satisfy the expectations of money market investors, it might have been wiser to educate the investors regarding what these types of investment vehicles can and - importantly - cannot provide. Focusing on regulation to make it more likely that money market funds match these expectations can only serve to cement them, which is what we expect to happen."

Further, the analysts suggest that CESR's guidelines appear to be missing some essential elements to any new pan-European regulation: a rationale for the need for European uniformity; the results of a quantitative impact study; and a grandfathering clause.

Nevertheless, it seems likely that only European ABS bonds with very short terms will be placed with money market funds in the future. However, according to the analysts, even if demand for this paper existed, the percentage of bonds in a transaction that could be structured as such is limited given the pay-down profile of the vast majority of ABS collateral.

"Only collateral with very fast pay-down speeds could support such bonds in quantity - e.g., card ABS or maybe, to a very limited extend, auto ABS. A structural solution would be to make the bonds in question putable, but so far originators have been reluctant to offer such bonds," they conclude.

CS

CLOs

'Buy' recommendations for CLO permacaps

Liberum Capital's latest Alternatives Daily publication compares the performance of the Carador, Tetragon Financial Holdings and Volta Finance permanent capital vehicles, following the release of the companies' monthly/interim management reports. Liberum analysts put forward a 'buy' recommendation on Carador and Tetragon, after the companies reported respective NAV increases of 7.94% for the quarter and 2.28% for April. The analysts also note that, with a NAV of €3.31 for April (up from €3.22 in March), Volta also reported a 'very strong' result.

The Liberum analysts describe the Carador commentary as insightful, given current market volatility. The manager - GSO Capital Partners - points out that CLO prices have been resilient so far and so Liberum believes this is a good time to test the market's appreciation of the CLO story.

"We would expect some selling in the market as investors de-risk portfolios, but we believe trends in underlying CLO cash generation continue to be positive and this will drive investment... The one potential risk on cash generation we see from a sell-off in the loan market would be the mark-to-market impact of downward moves in triple-C assets and the effect this will have on O/C tests, although we do not think the impact will be major," the analysts note.

They indicate that Carador currently trades around US$0.53, a 12% discount to NAV, and offers the highest quality access point to the strategy.

Meanwhile, Liberum has a NAV target of US$7.85 for Q410 for Tetragon. "The return this month puts the run rate at slightly ahead of expectations and is a positive for the fund. We also note circa US$4m of shares were repurchased in April, which we estimate added circa 25bp to NAV," the analysts comment.

Current portfolio assets of US$765.2m represent a valuation of around 0.48c on the dollar for their notional CLO equity tranche exposures, slightly higher than some of its peers, according to the analysts. They note that, for now, Tetragon is the only liquid access point to the strategy in the European market.

"It is likely that market volatility and selling pressure will roll into the CLO market and we would expect NAV decreases in May from peers such as Carador, who mark to market. As TFG marks to model (bar the newly purchased loan portfolio) and underlying trends continue to be positive, we would expect NAV growth to continue," the analysts say.

Finally, Liberum indicates that Volta currently trades at an attractive 36% discount to NAV. "The lower quality of assets in the portfolio compared to Carador - with greater ABS, corporate credit and European focus - are likely to be the more leveraged into any recovery/sell-off," they conclude.

CS

CMBS

UK CMBS borrower difficulties highlighted

Fitch says that the results of the 2009 De Montfort UK commercial property lending market study highlight the difficulties facing borrowers in UK CMBS transactions when attempting to refinance their existing loans. The average terms of new lending detailed in the report indicate that few existing borrowers would today be successful in obtaining replacement financing without significant additional equity contributions, the rating agency notes.

It carried out an analysis of Fitch-rated UK CMBS bonds to assess how many of the loans would meet current bank lending criteria for new financing at their scheduled maturity dates. The main limiting factor is that the new loans that banks are willing to grant have relatively low loan-to-value ratios (LTVs).

In particular, new senior debt is restricted to less than 70% LTV. This contrasts dramatically with the weighted-average (WA) current whole loan LTV on UK CMBS, which Fitch estimates to be approximately 100%.

A further, though less material, restriction on borrowers obtaining replacement financing is the interest coverage ratio (ICR) that banks require, especially when taking into account the high margins charged on junior and mezzanine debt that can easily surpass 1,000bp.

"Only 10% of the 250 loans backing UK CMBS could be refinanced at maturity by new senior bank debt at the levels currently offered by lending institutions. Even assuming that all borrowers could obtain further junior and mezzanine debt, on prevailing market terms only 16% of loans could be refinanced directly," says Gioia Dominedo, senior director in Fitch's CMBS team. "This implies that for the vast majority of loans further equity will need to be injected or the property will have to be liquidated to make the balloon repayments following their maturity dates."

The portfolio of Fitch-rated UK CMBS is skewed by a relatively small number of large, long-dated transactions that incorporate significant scheduled amortisation. These deals benefit from low exit LTVs, taking the portfolio's WA whole loan LTV at exit to 75% and so approximately 40% of the total debt amount is expected to be in line with current lending requirements by maturity.

Fitch considers UK CMBS to be particularly exposed to the restrictions of new bank lending due to the nature of its collateral. Bank lending is increasingly available for prime quality properties, albeit on much more conservative terms than those common in the boom years of 2006 and 2007.

Funding for secondary quality assets remains significantly more costly and more difficult to obtain, particularly at LTVs of over 70%. Fitch estimates that two-thirds of its rated UK CMBS portfolio is secured by secondary quality assets, which therefore have reduced repayment prospects at their maturity dates.

"The problems facing UK CMBS loans reflect those of balance sheet loans. In fact, total UK CMBS loan maturities of £2.4bn in 2010 are dwarfed by the £52.6bn of bank loans also expiring this year," says Andrew Currie, md in Fitch's surveillance team. "However, CMBS loans do not benefit from the ongoing support of the original lender that is often available to existing balance sheet loans. Lenders keen to avoid triggering defaults and losses are willing to extend and restructure existing balance sheet loans on more favourable terms than those offered to new borrowers."

MP

RMBS

Currency reallocation impacting MBS valuations, risk

The flow of funds out of the euro and other currencies into the US dollar has quickened two important trends in US RMBS: the rise of foreign portfolios as the biggest marginal buyers in the market and the increasing disconnect between MBS and swaps. According to ABS analysts at Deutsche Bank, the first trend matters for future valuations and the second for risk.

Foreign investors in March became net buyers of RMBS for the first time since June 2008 and have since become a driving force in the sector. Treasury data shows foreign investors adding US$3.7bn of agency securities in March, with anecdotal reports of steady foreign buying in April and strong buying in May.

"With the Fed on the sidelines, the GSEs handcuffed by portfolio limits and loan buyouts, and banks reducing net mortgage exposure so far this year, foreign portfolios stand to become the market's biggest marginal buyers," the Deutsche Bank analysts explain. They note that the renewed interest comes as foreign reserves in some key countries continue to rise sharply after remaining flat from mid-2008 to mid-2009.

Meanwhile, price action in US Treasuries and agency RMBS shows all the signs of currency reallocation, following the fiscal turmoil in Europe. "With the net supply of fixed-rate agency MBS down this year by US$34bn through April, a little extra demand can quickly tighten MBS. The Fed's sizable MBS portfolio and this year's heavy CMO issuance have further trimmed the market's floating supply," the analysts note.

The turmoil in Europe has also impaired the value of swaps as a hedge to MBS, since swaps increasingly reflect the credit risk of the market's financial intermediaries. "The tighter spread between MBS and swaps in recent weeks reflects more the poor performance of swaps to everything else, rather than the richening of MBS," the analysts add.

They conclude: "MBS lately has traded more consistently against the Treasury curve, arguably because the better marginal buyers of MBS - foreign portfolios and money managers - view MBS as an alternative to Treasuries. When banks and the GSEs drove the MBS bid and typically funded as a spread to swaps, the spread of MBS to that benchmark often signaled when MBS might become better bid or offered. Now it's more likely that the spread to Treasuries will drive relative value."

CS

ABS

Securitisation, equity investment completed

First Capital has completed two transactions as it moves to increase lending to small and mid-sized growth companies. The first is a securitisation, for which Guggenheim Securities served as the initial purchaser, and the second is a private equity investment by HIG Capital.

Guggenheim was the initial purchaser for First Capital's 3.5-year, US$100m term securitisation in a Rule 144A private placement that closed on 31 March. The deal included a US$90m senior tranche rated double-A by DBRS and a subordinate triple-B tranche. Structured Finance Advisors served as advisor to First Capital in the term securitisation.

HIG Capital, meanwhile, completed a US$139m investment in First Capital to double the company's common equity base. Advised by Houlihan Lokey, an affiliate of HIG purchased a majority stake in First Capital's common stock on 18 May, joined by funds advised by Morgan Stanley Alternative Investment Partners and JPMorgan Asset Management.

"The equity infusion affirms our business model, while the securitisation shows we can raise long-term funding," says First Capital chairman John Kiefer. "These two transactions make us stronger than ever and, most importantly, give us the resources to increase lending."

ABS

New hire to build SF analytics and strategy team

Dan Castro has left his role as chief risk officer at Huxley Capital Management to join BTIG in New York, where he will create a structured finance analytics and strategy group. More hires are expected soon as Castro builds his team, which will focus on providing analytical support to the fixed income sales and trading group, as well as performing a sales function on selected accounts.

Castro will report to co-head of global fixed income John Purcell, who joined a year ago to set up BTIG's fixed income team (see SCI issue 122). Before working for Huxley, Castro was GSC Group's chief credit officer and served as a portfolio manager for its structured finance group. He is also a former Merrill Lynch md and CDO/ABS strategist and senior analyst at Moody's.

ABS

Asset finance co-head appointed

Michael Wade will join Credit Suisse this summer as md and co-head of asset finance in the bank's global markets solutions group. He will join from Barclays Capital, where he has spent 15 years, most recently as head of US asset securitisation.

The new role will see Wade partner asset finance co-head Tricia Hazelwood, who specialises in term ABS. Credit Suisse says his experience in conduit financing and residential mortgage origination and advisory are expected to help capture significant opportunities in the asset finance sector.

Wade played a key role in developing the TALF programme and was the leading advisor to the FDIC in 2009 and 2010, advising on numerous distressed asset sales and the development of the FDIC's first securities issuance since the RTC.

ABS

Euro ABS sales desk expands

Citi has expanded its European ABS sales desk with the hire of Marissa Harris from Nomura Holdings. Harris will report to John Miles, head of global securitised markets sales in London, and is scheduled to start in August.

ABS

SF partner joins executive committee

Sidley Austin has added Myles Pollin to its executive committee, which exercises general authority over the firm's affairs. He has been a partner since 1991 and focuses his practice on capital markets and corporate transactions, including structured finance, funds, corporate finance and restructurings.

Pollin is co-head of the firm's New York structured finance and securitisation practice and a coordinator of restructuring and distressed investing activities. His structured finance practice includes CLOs, other repackagings and ABCP financings, and his funds practice includes representing hedge fund and private equity fund managers and fund lenders.

He is joined as a new committee member by Samir Gandhi, who focuses on private equity transactions and capital market offerings, and Michael Goldman, who coordinates the firm's insurance practice.

CDS

CDS trader joins DB

Deutsche Bank has hired Bob Keller as an md in global credit trading within its global markets division. He will report to Masaya Okoshi, md and head of investment grade credit trading in the Americas, based in New York, and will be responsible for CDS trading.

Keller joins from Jefferies & Company, where he spent a year as an svp in investment grade cash trading. Prior to Jefferies, he spent nine years at Merrill Lynch, most recently as a director in investment grade trading.

CMBS

Senior hire for due diligence team

Allonhill has hired Ross Gammill to serve as director of its new commercial due diligence offering. Gammill brings over seven years' experience in the financial services industry. Most recently he served as underwriter for Bridger Commercial Funding, where he underwrote more than US$400m in commercial bonds.

Investors

Special situations fund launched

Nuveen Investments has launched the Nuveen Symphony Credit Opportunities Fund. The new fund will leverage Symphony Asset Management's bottom-up credit analysis to identify risk-adjusted returns in both catalyst-driven and special situations across the capital structures of leveraged companies.

The fund may use derivatives to gain investment exposure and will attain current income and capital appreciation by investing in debt instruments. A substantial portion of the bonds, loans and convertible securities the fund invests in may be rated below investment grade, or of similar quality if they are unrated.

"At a time when robust and fundamental credit analysis is especially critical to constructing quality debt portfolios, we are pleased to bring this new Symphony strategy to retail mutual fund investors," says Nuveen evp Alan Brown.

Symphony's investment platform provides clients with access to senior bank loans, high yield bonds, convertible bonds and equity through hedge funds, long-only strategies and structured products. It aims to deliver consistent returns in all market conditions by focusing on analysis of earnings quality, industry trends and trading characteristics.

RMBS

MBS vet to lead FI group

Amherst Securities Group has hired Dan Hoffman as head of sales. He will be based in New York and manage the firm's fixed income sales group.

Hoffman, a veteran of fixed income and MBS, joins from RBS where he was sales md. He previously worked for Bear Stearns for 22 years and served as head of mortgage and rate sales, responsible for all residential mortgage products, ABS, commercial mortgages, CDOs, CLOs and all US rate products.

Sean Dobson, Amherst chairman and ceo, says: "With the markets continuing to show signs of improvement, we are thrilled to add such a seasoned fixed income professional as Dan. His experience and expertise, particularly as an effective sales force manager at both Royal Bank of Scotland and Bear Stearns, significantly strengthen our ongoing efforts to meet the growing needs of our institutional clients."

Trading

Hedge fund adds three credit traders

BlueCrest Capital Management has hired three new credit traders for its multi-strategy credit fund. Dario Villani, Kharen Musaelian and Stephen Waugh will be based in New York, reporting to team heads Farid Amellal and Andrew Silver.

Villani and Waugh both join from Deutsche Bank. Villani was md in global credit trading and Waugh was a director, managing the high yield and leveraged loan index tranche trading business. Musaelian joins from UBS, where he served as an md in the repositioning group for the firm.

The fund is engaged in opportunities across the full credit spectrum, with a bias towards relative value. It focuses on fundamental, relative value and convexity trading.

Trading

BNPP reorganises fixed income

BNP Paribas has reorganised the senior management within its fixed income business. The move includes some changes in credit.

Under the reorganisation, Arne Groes - who joined BNP Paribas in 2008 as global head of flow credit trading - becomes global head of distribution at the bank, responsible for all sales to financial institutions and investors. Martin Egan is appointed global head of primary markets and origination, which includes global responsibility for debt syndicate, securitisation and capital markets' origination activities. David Brunner is appointed deputy head of fixed income. All three are based in London and report directly to Frédéric Janbon, global head of fixed income.

At the same time, Christian Mundigo and Benjamin Jacquard - former global head of structured credit and arbitrage trading - are appointed global heads of credit trading, assuming joint responsibility for all global credit activities, structured and flow, as well as fixed income arbitrage. Mundigo will also continue in his current role of head of fixed income trading Americas.

ABCP

Ocala Funding mired in another court ruling

A recent Eleventh Circuit Court of Appeals ruling - that the broad statutory receivership powers of the FDIC entitle it to marshal trust property of a failed bank - has added to the uncertainty around the Ocala Funding ABCP programme (SCI passim). The court's decision vacated a preliminary injunction barring the FDIC from selling the assets of Ocala on the grounds of lack of jurisdiction.

Moody's points out in its latest Weekly Credit Outlook that Bank of America may appeal the decision in hope of a more favourable result in a higher court. Alternatively, it may await the FDIC's decision on the Ocala assets. In the meantime, the Ocala investors are suing the bank for breach of contract in a Second Circuit district court.

The rating agency says that the court decision nevertheless highlights the risk to structured finance transactions when a bank that plays a key transaction-party role, such as custodian or sponsor, later enters FDIC receivership. "The FDIC's statutory powers may delay payments or result in other losses to investors. Absent waiver or clarification of such rights by the FDIC or mitigation of such rights by the transaction's structural features, greater ratings linkage between the ABS and the key transaction party may result," it explains.

However, the decision also underscores concerns around the FDIC's proposed safe harbour regarding treatment of assets transferred to bank-sponsored securitisations (SCI passim). The proposed safe harbour contains a number of ongoing and subjective provisions that the FDIC, as receiver, could choose to evaluate at the time of a bank-sponsor's failure.

"This court decision, if unchallenged or upheld, suggests that FDIC administrative procedures may govern this evaluation with no recourse to the courts until completion of those procedures," Moody's concludes.

ABCP

MAV II offers good risk/return

Structured credit strategists at Citi have found that the single-A rated Master Asset Vehicle II (MAV II) notes, the result of the Canadian ABCP restructuring under the Montreal Accord (SCI passim), are protected from principal losses under most reasonable scenarios. The strategists undertook a statistical analysis of the 650 credits in the underlying pools and concluded that although the product is complex, an 8%-10% yield provides reasonable returns for the risk.

"The final tally for losses to noteholders will come from a combination of tranche losses, collateral losses and any liquidation of collateral because of hitting loss/spread triggers," they note. "Moreover, we think many of the positions are with Canadian institutions and may be unlikely sellers. Because of these factors, there will be a premium on the spread."

Under a worse-case scenario, where 10%-15% of triple-Bs and 35%-40% of double-Bs suffer losses, a principal loss would likely occur in the A-2 tranche but not in the A-1 tranche. But the analysts note that such a scenario is very unlikely and is almost three times the default rate that was witnessed during 1998-2004 for these rating categories.

According to the analysts, the biggest concern that investors are likely to have about the MAV II notes is the complexity of the transaction and the significant number of counterparties and assets involved. "For those who can look beyond these obstacles, the significant credit protection below the senior tranches should provide attractive returns for the risk," they note.

ABS

UK credit card, non-prime deals marketing

The European primary ABS market received a boost last week when details of new credit card and non-prime RMBS transactions emerged (see also separate Market Report). The deals - Gracechurch Card Programme Funding and Moorgate 2010-1 - are expected to price within a month.

Barclays' new UK credit card securitisation received a preliminary triple-A credit rating from S&P. The 2008-incorporated Gracechurch Card Programme Funding will issue the triple-A rated US dollar-denominated asset-backed floating-rate class A notes and will also issue unrated sterling-denominated class D notes. Barclays Bank - through its business unit, Barclaycard - issued the credit card receivables that back the notes.

S&P notes that the triple-A rating on the class A notes takes into account that the unrated class D notes will provide credit enhancement to the senior notes. The weighted-average seasoning of the trust portfolio is relatively high, according to the rating agency.

More than 76% of overall receivables in the trust are seasoned more than five years. S&P also notes that Barclaycard has consistently maintained strong underwriting and tight collection standards.

ABS analysts at UniCredit point out that it remains unclear whether Barclays will privately place or fully market the notes into the recently much-talked-about large pocket of US dollar demand. The transaction is reportedly the result of a reverse enquiry and is destined for a single buyer.

Meanwhile, the £744.3m Bank of America Merrill Lynch-underwritten Moorgate 2010-1 comprises a full capital structure with five classes of notes rated triple-A through to double-B and a reserve fund equivalent to 27.5% at launch. European asset-backed analysts at RBS note that the size of the reserve fund is probably the most they have seen in the UK non-prime RMBS sector.

The underlying mortgages were originated by Mortgages plc, Wave Lending and Edeus. The pool has a WALTV of 81% and comprises 56% self-certification mortgages and 38% buy-to-let.

The UniCredit analysts note that it will be interesting to see whether BAML manages to place not only the senior debt in order to achieve capital relief, but also whether the transaction will be placed publicly or via a private 'club'-style arrangement. The deal comes amid increasing confidence among other non-mainstream lenders, such as Kensington and Paragon, which could tap the market this year.

ABS

Mixed reception for financial reform

The financial reforms passed in the US Senate last week have had a mixed reception from industry trade associations. The CRE Finance Council broadly supports the Senate's legislation, which includes provisions that improve the construct of ABS reforms and assist a market recovery for CRE finance. However, together with SIFMA, both organisations have criticised the controversial Volcker Rule.

According to the CRE Finance Council, the Volcker Rule - which prohibits proprietary trading by banks and banking holding companies - will be a significant issue for resolution during the Senate and House reconciliation process. Specifically, there remain concerns that, depending on how it is structured, such a provision could impact the securitised credit markets, particularly the ability to hedge risk and warehouse/aggregate loans.

SIFMA president and ceo Tim Ryan adds: "There have been important, positive steps forward, including the creation of a systemic risk council and a resolution authority to ensure the orderly wind down of failing financial institutions. However, provisions like the so-called Volcker Rule would impose sweeping new restrictions on size and activities that were not a cause of the financial crisis."

However, the CRE Finance Council also notes that the legislation allows US regulators to choose the most appropriate form of retention for commercial real estate finance. In this way financial regulators have the flexibility to structure the new mandate in several ways, including a percent retention, underwriting standards and controls, or through stronger representations and warranties.

Additionally, US regulators are now allowed to consider allowing a third-party investor, in addition to the securitiser or originator of loans, to satisfy a potential retention mandate - as long as they perform due diligence, purchase a first-loss provision and retain this risk.

Patrick Sargent, president of the CRE Finance Council, says: "[The] language passed by the Senate provides important and tailored reforms that have been a top priority of the CRE Finance Council and its membership."

He adds: "As we've advocated since last year, reforms must provide certainty and confidence in order to support private lending and investing that is critical to an overall recovery in commercial real estate."

Also in the final Senate version of the regulation is a provision that would alter the process of selecting rating agencies to perform initial ratings of structured finance products. The SEC is required to establish a self-regulatory organisation - to be known as the Credit Rating Agencies Board - to determine who conducts the initial rating for any structured financial products (SCI passim). The outlook for this provision also remains unclear, as the CRE Finance Council continues to examine its potential impact.

ABS

DPR notes extended

The Series 2008-1 notes issued by International Diversified Payment Rights Company, a Cayman Island SPC, have been amended to extend the interest-only period and the legal final maturity for two years. Moody's says that the amendment has not resulted in the downgrade or withdrawal of its A1 foreign currency rating currently assigned to the Series 2003-1, Series 2004-1, Series 2007-1, Series 2007-2, Series 2007-3, Series 2007-4 and Series 2009-1 notes issued by the SPC. The rating agency believes that the proposed amendment does not have an adverse effect on the credit quality of the rated securities.

The notes are backed by future US dollar cashflows generated by the electronic remittance business of the Brazilian bank Banco Bradesco. The SPC was established for the purpose of this programme by Bradesco, which also originates and acts as servicer for the receivables.

In assessing the credit impact of the additional issuances on the outstanding series, Moody's took into consideration the strong ratio of receivables cashflows to scheduled debt service, the strong market position of Bradesco in the foreign exchange market - which serves as a proxy for Bradesco's market share in the remittance business - and other legal and structural protections provided to the noteholders.

ABS

Equipment leasing and finance confidence up

Confidence in the equipment finance market rose over the past three months, according to the Equipment Leasing & Finance Foundation. The Monthly Confidence Index for the Equipment Finance Industry (MCI-EFI) rose to 67.4 in May, up from 65.4 during April and 60.2 in March.

The index is a qualitative assessment of prevailing business conditions and expectations for the future in this sector. About 56% of the 50 diverse survey respondents say they expect business conditions to improve over the next four months, though 65% had this sentiment in April.

Slightly more than half of the respondents said they expect the same access to capital to fund business, though more than 60% had this expectation in April. The number of survey participants who said they would increase spending on business development rose a touch during May to 39% from 35% in April.

ABS

Thai political turmoil to impact ABS performance

The recent political turmoil in Thailand will likely impact the performance of credit card and auto hire purchase ABS in the country, due to business interruption and loss of employment for certain groups of obligors, according to Fitch. Being the epicentre of the recent political unrest, obligors in the Bangkok area are expected to be the most affected, while some business interruption and loss of employment are also expected in the provinces.

Despite the improvement in the delinquency rate of the credit card ABS transactions originated by Aeon Thana Sinsap since Q409, due to the economic recovery, the delinquency rate is expected to increase over the next one to two quarters partly given their exposure to obligors in the Bangkok area. For auto hire purchase transactions, Fitch expects the impact from the political unrest to be less severe, given the high seasoning of portfolios and the transactions' limited exposure to obligors originated in Bangkok area. However, the delinquency rate of two auto hire purchase transactions originated by Siam Industrial Credit (SICCO) remains high, despite the economic recovery since Q409, partly due to the exposure to the truck sector.

At present, Fitch expects the level of credit enhancements for credit cards and auto hire purchase ABS transactions to be sufficient to withstand some deterioration in the portfolios' performance. A junior tranche of a credit card transaction and one auto hire purchase transaction originated by SICCO, both on negative outlook, will have a lower tolerance to weakening portfolio performance. Fitch will continue to closely monitor the consequence of the recent political turmoil on the performance of the transactions.

The agency does not expect any rating impact on an ABCP deal (backed by residential hire purchase portfolio) and a CMBS, backed by a long-term lease of government centre project, due to the link between the transactions' ratings and the creditworthiness of the National Housing Authority - the originator for the ABCP - and the Treasury Department, the single tenant for the CMBS.

As of 26 May, Fitch maintains 17 outstanding national ratings on structured finance transactions in Thailand, including auto hire-purchase ABS, credit card ABS, CMBS and ABCP. The ratings range from triple-A(tha) to A(tha). During 2009, all ratings were affirmed, with two issues on negative outlook.

Fitch has recently assigned an international local currency issuer default rating of A minus to a credit card transaction originated by AEONTS in Thailand.

ABS

US prime auto loan ABS delinquencies decline

A 30% decline in delinquencies and losses on US prime auto loan ABS through the first four months of 2010 is due to the strong seasonal benefits of tax refunds and better recovery rates on repossessed vehicles, according to Fitch.

Fitch's 60+ day delinquency index fell by 20% in April, while annualised net losses (ANL) improved by 15% posting the third consecutive monthly decline, both over March levels. The strong performance in the prime sector marks the first time the indices returned to pre-crisis levels, while the subprime sector exhibited similar trends.

Fitch director Ben Tano says: "Stabilising economic and consumer fundamentals along with further amortisation of weaker 2007 and 2008 vintages are all benefiting auto ABS. Additionally, strong used vehicle values led to annualised net losses shrinking to their lowest levels in over two years."

Annualised net losses (ANL) fell by 50% to 1.05% in April from 2.09% a year ago, representing the lowest level for ANL since Q307. Further, the strong 2009 vintage securitised collateral is producing much lower loss rates than in the past ten years, contributing to better performance overall.

Fitch's prime 60+ days delinquency index posted a decrease of 20% in April from March, dropping to 0.51% - 13.6% lower than the same period in 2009 and the lowest level since June 2007. Tax returns benefited the consumer, with average refunds through to April 30 up 8% from the previous record year in 2009.

Despite the seasonal strength, delinquencies and loss frequency will continue to remain a concern for auto ABS transactions. With unemployment at 9.9% and other economic and consumer issues lingering in the US economy, Fitch expects a slow recovery with continued elevated unemployment through the remainder of this year.

The agency adds that ratings performance in 2010 and the outlook for the remainder of the year continues to be stable. To date, it has issued 12 upgrades in 2010 through to mid-May, versus eight through to May 2009. Fitch would expect positive rating actions to pick up pace, given the improved level of performance in the prime sector this year relative to 2009 and 2008.

In the subprime sector, 60+ day delinquencies fell 16.4% in April to 2.86%, the lowest level in two years. Subprime ANL fell 6.3% to 6.56%, returning to levels last seen in mid-2008.

Improvements in the auto ABS sector have coincided with the positive momentum present in the automobile manufacturer market, Fitch says. New vehicle sales volumes are rising, while costs are down and low inventories have granted manufacturers greater pricing power. As a result, the agency notes that the financial strength of the auto industry is improving, with most manufacturers - together with their captive finance arms - posting profits in the first quarter of 2010.

ABS

Australian ABS remains robust

Australian ABS is experiencing a limited rating impact from the softening in economic and industry conditions, which S&P says is within its expectations.

S&P's credit analyst Alisha Treacy says: "On the whole, we view the performance of ABS transactions as sound during the period, despite the rise in loans that are in arrears. In fact, the ratings were relatively stable, except for one transaction that had a few upgrades."

She adds: "We expect some uplift to the ratings if credit support continues to exceed any moderate deterioration in collateral performance."

For the remainder of 2010, while rising interest rates could result in moderately higher arrears in some ABS portfolios, the rating agency does not expect the rise in arrears to cause widespread negative rating actions. The analysts explain that this is because credit support for the transactions has accumulated as a proportion of outstanding balances - especially for senior ranking notes - due to rapid portfolio amortisation.

No new issuance of Australian ABS occurred in Q110. However, in April 2010, CNH Capital Australia Receivables Trust 2010-1 issued the first ABS transaction for the year, with a A$350m issue. A A$465m RMBS, Apollo 2010-1, is currently being marketed.

S&P notes that there are approximately A$12.4bn of ABS notes currently outstanding. It expects issuance to remain reasonably subdued for the rest of 2010.

CDO

Trups tender offer improved, lawsuit launched

BankAtlantic Bancorp has extended the expiration time and increased the purchase price of its offer to buy back twelve series of its non-publicly traded trust preferred securities, with an aggregate principal amount of US$230m. Although the firm says it has received a number of consents at the originally offered price, it was not attractive enough to obtain sufficient consents from investors in the CDOs that hold the Trups to complete the offers.

The expiration time has been extended by another month until 21 June and the purchase price for each offer has been increased to US$600 cash per US$1,000 in principal amount of each series of the Trups - an aggregate amount of US$138m if all the securities are purchased. BankAtlantic says the move reflects its desire to address the restructuring of its debt, which is an important step toward strengthening its balance sheet. BankAtlantic's capital ratios have been and remain at levels higher than regulatory 'well capitalised' levels.

The firm believes that the substantially increased offer price should be attractive to investors who wish to obtain liquidity for their investments prior to the stated remaining 24-27 years until the TruPS mature.

It has disclosed that it has filed a lawsuit in connection with Bank of New York Mellon's statement that it will not accept the offers in which it is involved without receiving a greater percentage of consents than BankAtlantic believes is required by the applicable indentures. The firm disagrees with BNYM's interpretation and is seeking a declaratory judgment and order relating to the required authorisations.

"The manner in which the trust preferred securities were pooled and then sold in tranches with inconsistent terms, the failure of institutions that issued other trust preferred securities or purchased CDOs relying on the performance of institutions issuing trust preferred securities, and the inability to directly communicate with beneficial owners have resulted in a circumstance that, unchanged, negatively impacts the company in both the short term and the long term. We believe that this is disadvantageous for everyone, including the CDO holders," BankAtlantic explains.

CDO

Nine SF CDOs liquidated

Moody's has downgraded the ratings of 13 tranches from nine US structured finance CDOs that have experienced an event of default. In each case, the trustee has been directed to liquidate the collateral as a post-event of default remedy. The rating agency has been notified by the respective trustee in each of these cases that a final distribution of liquidation proceeds has taken place (except for retention of a small amount of residual funds in certain cases).

The rating actions reflect the final liquidation distribution and changes in severity of loss associated with the downgraded tranches. The affected transactions are ACA ABS 2005-1, ACA ABS 2005-2, Cairn Mezz ABS CDO IV, Cherry Creek CDO II, McKinley II Funding, Sherwood III ABS CDO, Stack 2006-1, ZAIS Investment Grade VIII and Zenith Funding.

CDS

CESR calls for urgent legislative reform

CESR reports that dialogue between its members has been intensified, in order to assess if any further action should be taken in terms of market surveillance, especially given the decision by Germany's BaFin to introduce a short-selling ban.

CESR is of the view that structural reforms should be rapidly introduced to enhance the transparency, organisation and functioning of the bond and CDS markets that are currently largely OTC. Some preparatory steps have already been taken by CESR through the launch of its consultation on enhancing trading transparency on a broad range of non-equity instruments, including corporate bonds and OTC derivatives (SCI passim).

It is also in the process of carrying out work on possible measures to enhance the organisation and integrity of OTC derivatives markets. CESR will further complement this work by evaluating enhanced transparency for government bonds markets and related CDS in the light of recent developments, and examining the operation of these markets, including settlement.

CESR urges the European Commission to urgently adopt the planned legislative reforms ahead of its original timetable.

CDS

Broad agreement on derivatives regulation

A research report commissioned by BNY Mellon and the TABB Group has found that regulators and industry participants mainly agree on how a workable derivatives market should be structured in the future. Changes are likely to revitalise the listed and OTC markets in a way that benefits all, the two firms suggest.

The report indicates that a consensus is emerging on a global framework to reduce risk via central clearing, increase transparency with electronic price discovery and execution, and improve market stability by creating new collateral management standards. While changes to the market are expected to reduce revenue and profits in the short term, increased standardisation and volume will increase long-term revenue and profits are expected to increase.

"While market participants and regulators are at odds over certain aspects of derivative market reform, our research detected a strong movement toward creating a workable framework that will accommodate stronger regulations and risk reduction, without suffocating market activity and ongoing innovation," says Art Certosimo, BNY Mellon senior evp and ceo of alternative and broker-dealer services.

After surveying asset managers, broker-dealers and clearinghouses, the report found that 63% of respondents have already implemented changes ahead of regulatory reform - mainly in the areas of clearing, front, middle and back office operations. Central clearing is expected to reduce systemic risk for standard products by 79% of respondents, with 74% admitting that such a system will reduce profit margins.

Collateral is not currently posted or accepted when conducting OTC derivatives trades by 58% of respondents, with most expressing concern about potential changes in the types and amount of collateral used when moving from OTC to cleared environments. A move towards electronic execution for OTC derivatives products is being seen by 47% of respondents. The use of algorithms to trade OTC derivatives is also beginning to be seen.

Finally, the joint oversight of the OTC derivatives market by the US SEC and Commodity Futures Trading Commission would be a mistake, according to 58% of the survey's respondents.

CDS

Contagion concerns spark sovereign CDS divergence

Emerging market sovereign CDS liquidity continued to outpace that for developed market sovereigns in the past two weeks, according to Fitch Solutions. At the same time, the firm notes that the stabilisation of global CDS spreads did not last long, with widening caused by an unexpected sector.

Jonathan Di Giambattista, md for Fitch Solutions, says: "Sovereign CDS liquidity trends continue to suggest that the CDS market may have pulled back from eurozone sovereigns on contagion concerns and uncertainty over the broader prospects for the eurozone, which in turn has further driven liquidity to emerging market economies."

Fitch Solutions' commentary notes that the difference between its emerging and developed market sovereign CDS liquidity indices is now at its greatest level since the start of 2010, marking a notable divergence for the first time this year. Furthermore, in the past month, countries such as Greece, Portugal and Spain have undergone some of the largest drop-offs in sovereign CDS liquidity, falling by 33, 22 and 13 global percentile rankings respectively.

Fitch's developed and emerging market sovereign CDS liquidity indices closed at 8.74 and 8.47 respectively on 21 May, versus 8.84 and 8.51 two weeks previously. Overall, global CDS liquidity increased slightly over the same period to 9.80 on 21 May, versus 9.88 on 7 May.

Meanwhile, global CDS spreads widened 12.8% last week and the global five-year probability of default index increased nearly 7%. It was the basic materials sector, not sovereigns, which drove most of the negative market sentiment.

European basic materials companies suffered the most market scrutiny last week, widening by 31%. Di Giambattista comments: "Volatility in commodity prices and risks from the European debt crisis are driving the uncertainty for basic materials."

Elsewhere, CDS on consumer services companies have seen a notable rise in liquidity over the past two weeks, particularly for US issuers, and consumer services companies now account for 22% of the 200 most liquid reference entities. "Given the sensitivity to macro-economic issues, CDS on consumer services are showing more liquidity, mirroring broader market uncertainty on the global economic outlook," adds Di Giambattista.

CDS

Automated OTC processes gaining traction

OpenLink Financial has surveyed senior operations professionals at investment firms involved in OTC derivatives trading about risk management concerns in the growing electronic environment. Most respondents intend to automate post-trade OTC derivatives processes, including affirmation, confirmation or collateral management, with almost 70% starting to do so in 2010.

"As OTC derivatives markets grow rapidly, it is clear that organisations are transforming their settlement operations through automation and that organisations are at different states in this process. These initiatives become change management exercises via solutions which ultimately lead to better workflow efficiencies and controls. We conducted this survey in part to better understand how to translate the market's challenges into solutions which enable them to innovate and succeed in this rapidly changing landscape," says Ken Knowles, OpenLink financial and risk solutions evp.

Almost one-third of respondents stated that 75% of their affirmation, confirmation or collateral management processing is conducted electronically; almost a quarter that the figure handled electronically is 50%-75%; just under another quarter that electronic processing is used 25%-49% of the time; and, for the remaining respondents, electronic processing accounts for less than 25%.

The survey participants were asked to rank the level of counterparty review across asset classes achieved by their organisations as high, medium or low. Over a third had observed a high level of review, while more than half said their firm had conducted a medium level. Only 11% replied that the level of review was low.

"The need for transparency underlies all of these statistics," says Fritz McCormick, Aite Group senior analyst. "Gaps remain in affirmation/confirmation processes and counterparty review. Automating these areas, among others, will boost transparency, crucial for risk management, regulatory mandates and operational efficiency."

CLOs

European CLO OC performance lags US

Structured credit analysts at JPMorgan have released a report that surveys OC performance across European CLOs since mid-2009, following a previous such study of the US CLO market (see last issue). The report notes that European CLO performance has lagged behind that of US CLOs; however, the recent trend is towards improvement and investors should therefore pick their points of entry.

In terms of leveraged loan issuance, the JPMorgan analysts note that although January looked promising with €1bn (US$1.2bn) of issuance, sovereign risk and market malaise hindered further improvements in the sector. The new issue tally for the last 30 days stands at US$1bn versus US$27.5bn in the first two weeks of May alone for US loans.

"The lack of new collateral has made it more challenging for European CLO managers to trade into higher-quality credits, rebuild par and improve excess spread - even if prices of some of the triple-C and other portfolio holdings have risen - which has helped OC ratios," note the analysts.

There has been growth in European senior secured bonds, with transactions such as Virgin Media, Manchester United and Seat. However, the analysts note that the effect has probably been limited and recent stress has dampened the pipeline.

Furthermore, credit performance has been described by the analysts as "tepid". S&P LCD's ELLI index tracking defaults dropped by 0.4% in April to 7.4% and average defaulted balances of a universe of 146 European CLOs fell to 2.8%, compared to a prior measurement of 4.6% in January. The rise in portfolio pricing has provided some lift to the market value components of OC ratios in some cases and the portion of the European loan market trading below €80 has declined to 13.8%, down from 23.9% at year-end 2009.

In addition, the triple-C proportion remains high. In a sample of 58 European CLOs, the analysts find the average triple-C bucket is 11.8% in April, which is marginally lower than at the beginning of the year. European OC ratios have increased since September 2009, but the increases are not yet significant.

In a smaller pool of 30 managers with at least two CLOs, the analysts found that there is dispersion. The average subordinate OC gained 0.4% and is currently -0.6%. Although this is not far from passing the ratio, in the US the average subordinate covenant has been passing since January.

CMBS

Creative CMBS workout strategies emerging

A rapid increase in specially serviced US CMBS loans has brought the volume to approximately 5000 loans - totalling US$81.7bn - at the end of Q110, according to Fitch in a recent report for the sector. As special servicers continue to add staff to help manage the rapidly escalating workload, the rating agency notes that creative workout strategies have emerged.

"Special servicers are now engaging in bulk note sales, modifications into A/B notes and forbearance," says Fitch md Stephanie Petosa. "However, the majority of the loan workouts remain within the more traditional realm of extensions, modifications and foreclosures."

Fitch expects to complete annual ratings reviews for four out of the five most active special servicers by the end of the month. Additionally, the agency plans to provide an in-depth overview of current and emerging CMBS special servicing trends in its quarterly report.

CMBS

CMBS loan restructurings to increase

With many EMEA sponsors having insufficient equity to support their loans, CMBS loan and transaction restructurings were a main theme during Q110, according to Moody's in its latest surveillance report for the sector.

"Most borrowers of CMBS loans that matured during Q110 could not repay or refinance their loan, and the loans either had their maturity date extended or defaulted and underwent a subsequent restructuring rather than loan enforcement," says Viola Karoly, a Moody's analyst and co-author of the report. "Loan restructurings in order to prevent a default are also increasing, with the most notable restructuring during Q110 involving the first-ever legal final maturity date extension of EMEA CMBS notes in order to facilitate the extension of the underlying single loan."

In the report, Moody's notes that select European CRE property markets continued to improve in Q110, although much of this improvement remains limited to the prime segment (a relatively small portion of EMEA CMBS collateral). The rating agency continues to witness further market value declines, especially for properties securing distressed loans. In the current environment, loans that default are typically secured by properties with weaker characteristics.

"These characteristics further drive down their market value, even if in the overall property market property values are increasing," explains Karoly. "Several downgrades and reviews for possible downgrades during Q110 resulted from market value declines that were greater than we had expected."

"In terms of our outlook for this sector over the coming quarters, we do not expect CRE loan performance to improve and we still expect that many CMBS loans will default during their term, or at maturity," says Manuel Rollmann, a Moody's associate analyst and co-author of the report.

Moody's says that it remains sceptical of the high-value recovery in some markets over the past six to nine months. "We expect more stable-to-moderate increasing property values going forward, with a large differentiation in values between prime and secondary properties," says Thomas Babin, a Moody's associate analyst and co-author of the report. "One of our key concerns is that foreclosures stemming from an increasing amount of loans defaulting at maturity will result in more properties being sold at significant discounts, negatively impacting market prices."

CMBS

Loan impairments likely in Japan CMBS

Loans that remain unresolved for a prolonged period have an increased likelihood of impairment, according to a Moody's update of Japan CMBS loan profiles, as of end-March 2010. Additionally, the report includes a comparison of the disposition prices of properties sold in special servicing to the rating agency's initial value assumptions and profiles of loans maturing between April 2010 and March 2011.

Moody's found that loans maturing in April 2010 and thereafter amounted to about Y2.69trn. Of this amount, Y790bn is scheduled to mature between April 2010 and December 2010, Y690bn in 2011 and Y680bn in 2012 - indicating that the amount of maturing loans will remain at the same high levels seen since 2009.

Three new CMBS deals amounting to Y128bn closed between October 2009 and March 2010. Of all loans maturing between April 2010 and March 2011, the largest amount - over Y180bn - is scheduled to mature in September 2010.

Defaulting loans rose to Y270bn (for 64 loans) as of end-March 2010, from Y7bn (for three loans) as of end-September 2008. These loans comprise around 9% of the amount of defaulting loans outstanding as of end-March 2010.

Of loans that had defaulted by end-March 2010, 34 had defaulted in or after October 2009, amounting to Y140bn - the largest number and amount thus far. Moreover, because the recovery period for special servicing is lengthening, the amount of loans in default for more than one year rose, to Y78bn (15 loans) as of end-March 2010.

Selling properties at the minimum price set at the start of special servicing has become increasingly difficult, according to Moody's. Thus, special servicers are re-considering their minimum sales prices, resulting in the growing likelihood of impairment for loans that remain unresolved for a prolonged period. Amounts recovered through special servicing may fall below the agency's estimates for some deals - in which case, it may place the ratings (of junior tranches mainly) under review for downgrade.

By end-March 2010, 16 defaulted loans (worth Y161bn) had been recovered, accounting for 36% by amount and 20% by number of total defaulted loans. A simple average of the disposition price of the properties backing defaulting loans equals 72% of Moody's initial value assumptions, with properties sold at 75%-100% of Moody's initial value assumptions, constituting the largest group by number.

Operations

Court ruling sparks concern over 'Shariah risk'

Moody's has examined Shariah risk linked to Islamic financial instruments after a UK court decision highlighted a legal concern relating to potential disputes over Shariah compliance.

"Although the story is not yet over, the recent ruling in the case of Blom Bank vs. The Investment Dar (TID) has some material implications for the Islamic finance industry," says Khalid Howladar, Moody's senior credit officer.

TID, a distressed Islamic institution, wants a trial to void an Islamic finance transaction on the grounds that it was not Shariah-compliant and therefore it was never able to legally enter into the transaction. This is despite TID agreeing the transaction was Shariah-compliant at initial execution of the contract.

The rating agency believes the attempt to void this transaction in the courts is an important development for Islamic finance, regardless of whether TID is successful. Moody's has previously commented on issues throughout the sukuk industry relating to 'form over substance' (see SCI issue 135), which appears to have been important in the judge's decision.

"The impact of this latest court ruling is that, until resolved, it increases the operational risk for all transactions in which (in particular) one of the contract parties is 'legally' restricted by its charter or constitutional documents to enter only into Shariah-compliant contracts," Howladar says. "As has been shown, at times of distress, all options, regardless of ethics or moral principles, may be a legitimate consideration for the defaulting party. Such risks are a consideration in Moody's rating process because, if unmitigated, they may have implications for its risk analysis of such instruments."

Operations

Partnership to drive LINC initiative

S&P Valuation and Risk Strategies has partnered with financial services technology provider, Fiserv, to further the industry implementation of the American Securitization Forum's (ASF) Loan Identification Number Code (LINC) initiative.

ASF LINC is a unique ID for a wide range of assets that may be pooled and sold in the capital markets. The identification code captures the loan type, origination date, country of origin and randomised alphanumeric data, and it is stored in a central loan data repository administered by S&P Valuation and Risk Strategies. The ASF LINC is intended to provide investors, lenders and financial institutions a means to track a loan's performance throughout its life after securitisation.

Norwood Sloan, vp of loan servicing mortgage products with Fiserv, comments: "By partnering with S&P, Fiserv will be able to provide additional market intelligence so that our clients can make more-informed investment decisions, which can help make financial services safer and more cost-effective."

Ratings

US, Euro CRA regime compatibility examined

CESR has issued a document that examines the equivalence between the US legal and supervisory framework and the EU regulatory regime for credit rating agencies, in accordance with the European Commission's mandate of 12 June 2009. CESR concludes that, overall, the US legal and supervisory framework is broadly equivalent to the EU regulatory regime for credit rating agencies in terms of achieving what it considers to be the overall objective of "assuring that users of ratings in the EU would benefit from equivalent protections in terms of the credit rating agencies integrity, transparency, good governance and reliability of the credit rating activities".

However, there are a number of differences between the US legal and supervisory framework and the EU regulatory regime, which mainly relate to the issue of disclosure of credit ratings and the quality of credit ratings and credit rating methodologies. CESR recommends the identified differences be addressed to allow for further convergence between both regimes and considers that reducing the difference may be achieved by future regulatory amendments to the SEC rules.

In coming to this conclusion, CESR has grouped the requirements of the EU Regulation into seven areas, in relation to each of which it has assessed the ability of the US legal and supervisory framework to achieve the main objectives of the relevant EU requirements. CESR considers the US system to be stronger in some areas and weaker in others in terms of ability to achieve the relevant objectives. In accordance with the mandate, CESR says it has not taken into account any consideration of a political nature.

The seven areas are:

1. The scope of the regulatory and supervisory framework
2. Corporate governance
3. Conflicts of interest management
4. Organisational requirements
5. Quality of methodologies and quality of ratings
6. Disclosure
7. Effective supervision and enforcement.

Ratings

Ratings unaffected by counterparty change

Moody's says that the replacement of the swap counterparty for the outstanding euro-denominated notes in the Granite Master Issuer Series 2006-2 transaction does not impact the current ratings assigned to any of the notes. Credit Suisse International has replaced Banque AIG as euro currency swap provider on the Granite Master Issuer Series 2006-2 Class A5, Class B3, Class M3 and Class C2 notes.

Moody's says the swap counterparty replacement is, in this instance, rating positive due to the higher long-term rating of the new swap provider compared with the outgoing swap provider. However, the note ratings continue to be linked to the swap counterparty's ratings. The agency explains that although the principal de-linkage features are included in the swap documentation, the collateral formulas used in the credit support agreement do not comply with its published criteria.

Ratings

SF performance improves in first quarter

European SF transaction performance improved slightly in Q110, despite difficult economic conditions, says S&P. The number of upgrades rose for the first time in several quarters to 151, but they were still outnumbered by 1,155 downgrades.

The agency reports that sluggish recovery in growth, high unemployment and still-rising fiscal deficits continue to haunt European economies. Imbalances between different European economic models - northern export-driven growth and southern credit-driven domestic demand - have also become prominent as markets express heightened concerns over sovereign creditworthiness.

CDOs accounted for 70% of all S&P's downgrades in Q110, while European RMBS saw 12 upgrades in six transactions outweighed by 86 downgrades in 33 transactions. There were 52 ABS downgrades in 16 transactions, including Spanish auto ABS, UK corporate securitisations and transactions backed by loans to German SMEs, with 26 upgrades. CMBS saw 183 downgrades in 37 transactions, while ratings were lowered for 15 repack transactions.

Ratings

Japanese synthetics upgraded

S&P has raised its ratings on eight tranches relating to six Japanese synthetic CDO transactions. The deals involved are: Corsair (Jersey) No. 2; Momentum CDO (Europe); Secured credit-linked loan Louvre CDO II series 2005-3; Omega Capital Investments; Signum Vanguard; and Secured floating rate credit-linked notes series 2006-03.

At the same time, the agency has removed the ratings from creditwatch with positive implications, where they were placed on 12 May 2010. The rating actions are part of S&P's regular monthly review of synthetic CDOs. These actions incorporate, among other things, the effect of rating migration within reference portfolios, the agency says.

Ratings

US CDOs downgraded

S&P has lowered its ratings on 26 tranches from six US cashflow and hybrid CDO transactions with a total issuance amount of US$9.085bn. At the same time, the rating agency removed 16 of the lowered ratings from credit watch with negative implications and placed 10 of the lowered ratings on credit watch negative, indicating a significant likelihood of further downgrades. It also affirmed its ratings on 19 other tranches.

"[The] CDO downgrades reflect a number of factors, including credit deterioration, as well as our negative rating actions on underlying US subprime RMBS. Our credit watch placements primarily affect transactions for which a significant portion of the collateral assets currently have ratings on credit watch with negative implications or that have significant exposure to assets rated in the triple-C category... The affirmations reflect current credit support levels that we believe are sufficient to maintain the current ratings," S&P explains.

The deals involved are: Dillon Read CMBS CDO 2006-1; Duke Funding High Grade VI; Duke Funding VIII; Farmington Finance; Opus CDO I; and Triaxx Prime CDO 2006-2.

Real Estate

FDIC closes fourth structured note sale

The FDIC has closed its fourth sale of structured notes, which are backed by commercial real estate loans from 22 financial institutions that the FDIC was appointed receiver to during the period from August 2008 to March 2009. The sale was conducted through a private offering to qualified purchasers.

The US$233m of SSGN 2010-L3 notes are backed by performing and non-performing commercial real estate loans, with a related aggregate unpaid balance of approximately US$1bn. The notes were originally issued in January 2010 to the FDIC as receiver for the 22 financial institutions in connection with the creation of an LLC to hold the assets and are guaranteed by the FDIC in its corporate capacity. The FDIC still retains its 60% equity interest issued by the LLC and ColFin DB Funding - formed by entities affiliated with Colony Capital - still owns the 40% equity interest sold to it by the FDIC in January 2010.

The latest sale features three classes of notes with maturities of approximately 1.6 years, 2.6 years and 3.6 years from the closing date. The notes do not accrue interest or make payments prior to maturity, but rather are sold at a discount to their principal balance and allow investors to earn the difference between the sale price and the principal balance paid at maturity, the FDIC notes.

The timely payment of principal due on the notes is guaranteed by the FDIC and that guaranty is backed by the full faith and credit of the US.

The US$222m in proceeds generated from the sale of the notes will go to the respective receiverships of the 22 financial institutions. Thus, the sale of the notes will increase recoveries for the receiverships and recover substantial funds for the FDIC's Deposit Insurance Fund.

Barclays Capital served as the sole bookrunner, restructuring agent and financial advisor to the FDIC on the sale.

Real Estate

US CRE price decline slows

US CRE prices declined by 0.5% in March, according to Moody's commercial property price index. This follows a 2.6% decline in February, which broke a four-month run of increases. A national property type index has shown a mixed picture, with two property types recording price gains and two showing declines.

"Commercial property prices have been hovering in a range 40% to 44% below peak levels for the past eight months," says Moody's md Nick Levidy. "Prices are now 2.9% above the recession low recorded in October 2009 and at the level they were seven months ago in September."

As of the end of March, prices are down 24.9% from a year ago and 40.5% from two years ago. CRE prices are 42.1% below their peak levels of October 2007.

Repeat-sales transaction volume spiked after dipping very low in February. The number of repeat-sales nearly doubled to reach 127 observations in March, totalling nearly US$1.7bn.

The apartment property type had the strongest start to 2010, according to Moody's national property type indices, rising by 3.3%. Industrial properties also rose 0.8%, but there were price declines for offices and retail or 3.2% and 4.7% respectively.

In the top-ten MSAs, which typically account for 50% to 80% of the transactions in the national property type indices, apartment prices rose by 4.1% in Q110 and industrial prices rose 4.8%. Retail in the top ten saw prices fall by 19.3%, while offices fell by a less dramatic 7.2%.

Real Estate

Dutch housing market shows signs of recovery

Recent data on the Dutch housing market indicate that it may be starting to emerge from the difficulties that have plagued the global economic and financial markets, according to S&P's latest report for the sector.

S&P credit analyst Michael Strevens says: "Year-on-year house price declines have slowed and new home purchases are increasing. We expect slight growth in the Dutch economy over the next two years, driven predominantly by S&P's assumption that global growth will gradually pick up through 2010-2011 and that a substantial portion of the Netherlands' GDP comprises exports."

Strevens adds: "We believe rises in unemployment levels will drive the arrears levels of Dutch mortgage loans and that this could cause small increases in the Dutch RMBS arrears index, as some of these households are unable to pay their mortgages. However, positive economic indicators mean we do not anticipate that the current rising trend in arrears will be severe."

The mainly positive economic news may be replicated in the new issuance market, says S&P, although 2010 has so far seen limited activity in new Dutch RMBS issuance. The only new transactions rated by S&P this year are: Fortis Bank (two issuances through its Dolphin Master Issuer); Obvion/Rabobank Nederland (STORM 2010-I); and NIBC Bank's Dutch MBS XV.

Regulation

SEC issues offshore exemption for 17g-5

The US SEC has published an order granting temporary conditional exemption until 2 December 2010 for nationally recognised statistical rating organisations (NRSROs) from requirements in Rule 17g-5(a)(3).

The exemption is with respect to credit ratings where: the issuer of the structured finance product is a non-US person; and the NRSRO has a reasonable basis to conclude that the structured finance product will be offered and sold upon issuance, and that any arranger linked to the structured finance product will effect transactions in the structured finance product after issuance, only in transactions that occur outside the US.

The SEC adds: "These conditions are designed to confine the exemption's application to credit ratings of structured finance products issued in, and linked to, financial markets outside the US. The Commission notes that this exemption only applies to subparagraph (a)(3) of Rule 17g-5. It does not cover any other requirements in Rule 17g-5. Consequently, if an NRSRO determines a credit rating for a structured finance product that is exempt from Rule 17g-5(a)(3), the NRSRO remains subject to all the other prohibitions in Rule 17g-5."

While the SEC's temporary exemption should cover many non-US transactions, Fitch believes that it will not cover any transaction where US investors are targeted. The rating agency clarifies that any arranger who believes they are eligible for the exemption to 17g-5 should refer to the provisions of Rule 903 and 904 to ensure a structured finance transaction occurs outside the US.

Fitch requires that for the exemption, all engagement letters need to be signed and returned by the arranger to Fitch on or after 2 June 2010, the effective date of Rule 17g-5. The engagement letters must also contain compliance representations.

RMBS

ABX remittances show mixed results

May ABX remittance reports show mixed CDR performance and a drop in delinquencies. Furthermore, ABS analysts at Bank of America Merrill Lynch note that voluntary prepayments remain low, while severities show an upward bias.

Default performance varied across the ABX indices, according to the BAML analysts. Average CDRs for the 07-1 and 07-2 vintages were flat, while 06-1 printed a slight increase of 0.6% and 06-2 dropped by 1.6%.

Delinquencies continued their downward trend, which the analysts point out is consistent with loan-level roll rates. For all the indices, 60+ day delinquencies were down by 0.5% to 0.8%.

In addition, foreclosure rates dropped on average by 0.4%, while REO inventory remained flat. The analysts expect these trends to persist in the near term as REO inventory is worked out and as servicers continue to modify loans.

Severities increased slightly this month, with the 06-1 and 07-2 indices increasing by more than 2%. One-month severities came in at 70%, 73.5%, 77.7% and 82.4% for the 06-1, 06-2, 07-1 and 07-2 indices respectively. One-month severity numbers continue to move around due to lumpy liquidation rates, according to the analysts.

They point out that it is important to note that both absolute one-month and month-over-month changes in severities can vary significantly across deals. The analysts' near-term outlook is for severities to remain range-bound, with some potential upside risk given the distressed supply overhang that exists and extended timelines.

RMBS

Enforcement clarification expected for Eurosail

A legal clarification is expected in the coming weeks that could allow enforcement in Eurosail deals where there is no conflict of interest in the senior notes. The failure of Lehman as currency swap counterparty on these transactions has left them unhedged and undercollateralised due to the 10%-18% decline in sterling against the euro and a nearly 30% decline against the dollar since closing (SCI passim).

European asset-backed analysts at RBS suggest that, if successful, the clarification would allow slow-pay class A noteholders to reduce their chances of taking a loss by diverting junior note interest and excess spread to accelerate senior note redemptions. However, enforcement is unlikely until the fast-pay noteholders are repaid in full.

The deals now lacking a currency swap are forced to convert the sterling receipts from the collateral to the relevant note currency at the spot rate prior to each payment date. The decline in sterling means that the notes are paying down more slowly than was originally intended and are effectively crystallising a currency loss each time a non-sterling payment is made, the RBS analysts explain.

For senior noteholders, enforcement would provide a mechanism within the structure to stop payments of interest to junior noteholders and to prevent excess spread leaking from the deal until they have been repaid in full. However, the analysts point out that in order to move to a post-enforcement waterfall, two conditions have to be satisfied - an event of default has to occur and the required quorum of senior noteholders have to instruct the trustee to move to enforcement.

The analysts indicate that the affected Eurosail fast-pay senior notes are likely to be money-good - albeit returns and WALs depend on CPR and sterling FX rates; the slow-pay senior notes are on the cusp of recovering par, with returns and WALs also dependent on CPRs and FX; while the junior notes are effectively an interest-only strip plus an at/out-of-the-money currency call option on sterling. In the latter case, payments are at risk if senior noteholders enforce.

RMBS

Sponsor continues to support RMBS redemptions

Lloyds is understood to have made significant refinancing contributions to its Pendeford and Arkle RMBS trusts to support £1bn of redemptions on the Pendeford 2008-1 A1 notes and £3bn on the Arkle 2008-1 Series 4 this week and last.

"At the end of April, Arkle Funding 1 bank balance was £1.52bn and the Pendeford cash accumulation ledger was only £140m, suggesting that the contributions totalled approximately £2.3bn," note European asset-backed analysts at RBS. "The inability of the trusts to accumulate sufficient principal in time illustrates the stress that low CPRs place on these structures' ability to repay notes on time. However, this latest round of support only reinforces our view that programme sponsors will continue to support their trusts to enable them to redeem notes on their original expected maturity dates."

The Mound and Permanent trusts appear to be better placed to meet their note redemptions due in the next few months, however. Mound has already collected more than enough principal to pay the Mound Funding 4X 3A notes in August, while Permanent held around £750m at end-April towards just over £1.1bn of notes due in June.

RMBS

South African RMBS refinanced

Fitch has assigned final national ratings and loss severity ratings to Nqaba Finance 1's additional floating-rate notes issued to refinance the existing class A4, A5, B3, B5, C3, C5 and D3 notes.

The South African SPV issued four classes of notes to finance the acquisition of a revolving portfolio of residential mortgage loans from Eskom Finance Company (EFC). The mortgages were advanced by EFC to Eskom Holdings employees and its group companies. The payroll deductions and housing subsidy (96.05% and 71% of the portfolio of mortgage loans respectively) to Eskom employees creates a credit linkage, which Fitch says it has accounted for in its analysis.

Early amortisation of the notes would be triggered by a downgrade of Eskom's current triple-A(zaf) rating. The agency says such a downgrade would also cause it to assess the portfolio of mortgage loans with no credit given for the housing subsidy and payroll deduction for notes rated higher than Eskom's rating.

Credit enhancement for the class A notes totals 26%, provided by the subordination of the class B (4.67%), C (3.44%) and D notes (3.03%), and a subordinated loan of 14.87%. Enhancement equals 21.33% for the class B notes, 17.9% for the class C notes and 14.87% for the D notes.

Fitch analysed the collateral using a country-specific loan-by-loan mortgage default and loss model, and requested additional loan-by-loan data for all mortgage loans in EFC's book to assess the quality of origination and observed delinquencies and defaults. The agency used this data to assess the expected foreclosure frequencies for mortgage originations by EFC, which was applied to the analysis of the portfolio of loans under Nqaba Finance 1. The key driver of delinquencies and defaults for the portfolio is loans where the borrower is no longer employed with Eskom or its group companies.

The agency was also provided with data on loans currently under the repossession process or where the properties have been taken possession of and sold. This enabled Fitch to assess the recoveries from properties sold under the foreclosure process.

The class A6, A7, A8, A9 and A10 notes are rated triple-A(zaf); the B6, B7, B9 and B10s are rated double-A(zaf); C6, C7, C9 and C10 are rated single-A(zaf); and D4 and D5 are rated triple-B(zaf). Ratings for previously issued securities have been affirmed.

RMBS

Sharp rise in Japanese RMBS repurchase rates

The repurchase rate for asset classes backing Japanese RMBS has risen sharply, according to a recent report from Moody's on the performance of Japanese RMBS indices. The rating agency highlights the fact that the loan balance in the Japan performance indices has declined moderately, due not only to a drop in the number of new deals (because of the market environment), but also to a decline in the balance of existing transactions.

LTV has been stable this past year, says Moody's, after a moderate rise the previous year. TTM is still edging up, while the average loan balance per receivable is declining.

Dynamic performance, as measured by the default rate, remains stable. The delinquency ratio has been rising lately, although the repurchase rate may hold down the default rate.

The repurchase rate has risen sharply as the number of modified loans has increased. Winter bonuses and salaries have been declining since last year, resulting in a growing number of obligors applying for loan modifications, which are on the upswing also because of the Moratorium Law. Still, another rise in the repurchase rate will be limited, in Moody's view.

Average dynamic performance (as measured by CPR) from October 2009 to March 2010 was slightly lower than in the same period the previous year. Static performance, as measured by default and repurchase rates, is rising in accordance with seasoning.

RMBS

Losses continue for prime Irish RMBS

Delinquencies continued to increase in Irish prime RMBS transactions in March, says Moody's in its latest index report for the sector. 3.8% of outstanding Irish prime RMBS portfolios were more than 90 days delinquent in March 2010, compared with 2.1% in March 2009.

Loans delinquent for more than 360 days accounted for 0.9% of the outstanding portfolios in March, up from 0.4% a year ago. The total redemption rate has shown little movement since March 2009 and ended March 2010 at 4.9%, while in 2007 and earlier the value was consistently above 15%.

The rating agency notes that some portfolios have recorded up to 7.3% of loans that have been more than 90 days delinquent. Up to 2.8% of these portfolios have been delinquent for more than 360 days. Nevertheless, Moody's points out that Irish prime RMBS transactions contain only small numbers of properties that have been repossessed by the servicers.

Georgij Ludmirskij, a Moody's associate analyst, says: "While the two non-conforming RMBS transactions started recording losses in late 2008, Irish prime portfolios have not shown any substantial losses until recently. In March 2010, Celtic 12 recorded the first principal loss in the portfolio."

He explains: "However, the excess spread in the transaction was sufficiently high to cover the loss and to increase the reserve fund up to the new target balance. The reserve fund target in Celtic transactions increases by a proportion of the loans, which are more than 12 months delinquent."

House prices in the country have fallen by 33.1% from the peak reached in March 2007. The contracting economy and negative credit growth point towards further declining demand for housing and further drops in house prices. Moody's expects house prices to fall another 18% before resuming growth in Q213.

Sustained GDP growth is not expected to return before late 2010 and Moody's expects GDP to contract by 1% in 2010 as a whole. The unemployment rate is expected to peak at 13.8% in H110.

While the low interest rates have helped many borrowers to stay current, Moody's does not expect the demand for credit to increase until the labour market starts to recover in the second half of the year. Its outlook for the Irish RMBS market is negative.

As of March 2010, 18 Irish prime RMBS transactions with a total pool balance of €42.6bn were outstanding, which compares with 15 transactions with a total pool balance of €38.6bn 12 months ago. One Irish RMBS transaction closed and was rated by Moody's in April. However, it contains more than 50% non-owner occupied mortgages, and therefore is not included in the index.

RMBS

Analytics providers team up

S&P's valuation and risk strategies group will offer new investor analytics for US RMBS using the 1010data service, which provides data warehouse and business intelligence products and services to the MBS market. The partnership makes S&P's database of individual loan-level information available via 1010data's service.

"Working with 1010data, we are able to deliver a comprehensive risk management solution to investors," says Jonathan Reeve, S&P valuation and risk strategies md. "RMBS investors will now be able to perform loan-level and performance trends analyses that quickly dig down into the foundational components of their portfolios in a way that was never before possible."

The new relationship with 1010data allows investors to tailor analytics around each individual loan within a mortgage-backed portfolio, the two firms say. "Transparency is at the forefront of investors' minds and the need to easily consume robust loan-level data to track market and portfolio exposure is a key concern," says 1010data vp Greg Munves. "Working with S&P to offer this data via our proven analytics platform gives our joint customers the immediate ability to better manage risk."

SIVs

SIV hybrid senior notes downgraded

Moody's has downgraded US$2.5bn notes issued by AEGON Global Institutional Markets' (AGIM) Secured Euro MTN Programme, a hybrid with characteristics of a structured investment vehicle and structured covered bonds. Previously, the programme was downgraded to A1 on 2 March 2010, and it has now been downgraded to Aa2 and placed under review for further possible downgrade.

AGIM is an Irish incorporated company managed by AEGON USA Investment Management and AEGON USA Realty Advisors. The rating agency explains that action was taken as a result of its assessment of AGIM's current portfolio's market value risk and the support mechanisms provided by various AEGON subsidiaries.

As of 30 April 2010, credit card ABS, whole loan commercial mortgages, RMBS (prime and subprime) and CMBS sectors are the most represented in the portfolio, comprising 14%, 10%, 7% and 6% respectively. Approximately 15% of the current portfolio is comprised of cash, with approximately 3% of portfolio assets rated Caa1 or below. The current portfolio average rating quality is Baa2 and weighted average market value is 95%.

Trading

Trading ideas: no flow

Byron Douglass, senior research analyst at Credit Derivatives Research, looks at an outright short on Louisiana-Pacific Corp

Louisiana-Pacific reported disappointing earnings earlier this month. Revenue growth was anaemic at best and operational cashflow remains below expenses, even with dividends cut to zero and capex slashed.

The equity market reacted strongly to the news, with implied volatility hitting the roof; however, the credit market's reaction was muted. We recommend buying credit protection on Louisiana-Pacific.

Louisiana-Pacific reported earnings that left much to be desired, even as the economy attempts to pick itself up. The company slashed its dividend to zero back in 2008 (and it remains there). Capex is down to a trickle, coming in at only US$1.9m last quarter (compared to its highest level of US$114.2mm in the fourth quarter of 2007).

That said, LPX's cashflow is incredibly weak and is still less than total expenses (Exhibit 1). LTM interest coverage remains below zero, which is the death knell for any going concern. Though LPX managed to ride out the recession by burning cash (its cash balance is 30% its pre-crisis levels), the future for its credit spread looks uncertain at best, especially with it trading just wide of 200bp.

Post first-quarter earnings announcement, LPX's implied volatility shot upwards, with its term structure sharply inverting. Short-dated ATM vol now trades above 80% (Exhibit 2).

Our hybrid structural model implies credit spreads derived from balance sheet variables and current equity data (market cap and implied volatility). The increase in vol and drop in market cap (-35%) combine to forecast substantial credit spread widening.

Besides buying credit protection outright, selling Jan 2011 5 strike puts at a vol in the mid-70s against CDS is also a great trade, given the high vol and tight credit spread. Clearly the two markets are singing different tunes; however, given LPX's weak fundamentals, we tend to agree with the equity vol market in this case - LPX is a high risk company.

We see a 'fair spread' above 400bp for Louisiana-Pacific based upon our quantitative credit model, due to its equity implied factors, margins, change in leverage, interest coverage and free cashflow factors. Over the past year, the model's expected spread generally tracked LPX's well; however, with the recent equity deterioration and weakening fundamentals, its expected spread gapped wider while its CDS bounced along recent tights (Exhibit 3). We recommend buying credit protection on LPX.

Position
Buy US$10m notional LPX 5 Year CDS at 245p.

For more information and regular updates on this trade idea go to: www.creditresearch.com

Copyright © 2010 Credit Derivatives Research LLC. All Rights Reserved.

Note: This article is intended for general information and use, and does not constitute trading advice from Structured Credit Investor (see also terms and conditions, below, section 12).