Contents

RMBS

Unclear outcome

GSE uncertainty lurks, despite performance

Despite hefty demand for MBS securities currently, much uncertainty still exists over what shape Fannie Mae (FNMA) and Freddie Mac will take after the Treasury's backstop is up for the GSEs in 2012. Investors are expected to begin evaluating the potential outcomes going into the fourth quarter.

One issue is what will happen to legacy MBS after 2012. The Treasury is likely to say that FNMA and Freddie Mac legacy MBS will have the full faith and credit of the US, according to Glenn Schultz, md at Wells Fargo Securities.

"They will be private companies securitising MBS, with an FDIC-like insurance behind them, so you will have to pay for it. I think we know where we're heading with this. We just don't have a clear path of how we are going to get there," he adds.

A new governing plan for both FNMA and Freddie Mac needs to be developed, says an MBS strategist. "It's very difficult to visualise a scenario where, at the end of 2012, the government will pull the plug on Fannie and Freddie and say OK you are on your own devices," he says. But everyone recognises that the historical model of FNMA and Freddie Mac - in which there are half private and half public constituents - doesn't really work, he adds.

Another potential development to watch is a possible reduction in the risk weighting on FNMA and Freddie Mac securities, which would essentially allow investors to hold less capital against their positions, note analysts in a Goldman Sachs research note last month. Final rule changes could have implications for the value of GSE MBS relative to Ginnie Mae securities (GNMAs), they say.

The market, however, currently considers both the debt and the mortgage obligations of FNMA and Freddie Mac as if they are essentially government guaranteed like GNMAs already. "They are not legally government guaranteed, but that is how the market is treating them," the analyst notes.

GNMA securities still trade at a premium over FNMA and Freddie Mac securities, but only slightly. GNMA 4.5% pass-throughs trade with a yield of 3.75% currently compared with Fannie Mae 4.5% pass-throughs that trade at 3.8% yield, notes the strategist.

But investors in general believe that due to the 2012 federal end date, GSE 2.5-year paper should price more attractively than longer paper. Some investors also prefer MBS at the moment compared to straight GSE debt, since they are comfortable having an asset behind something, adds the strategist.

Making sure the to-be-announced (TBA) market continues to work well once 2012 comes is also on market participants' minds. The TBA market has held up well during the credit crisis, market participants say.

But an analyst comment put out by Annaly Capital Management this week notes that since there is not enough collateral to fill the bid from the Federal Reserve's MBS purchase programme that ended on 31 March, they continue to see a problem with settlement fails in the system. The analysts suggest that because of this, agency MBS are likely to remain well bid for the foreseeable future.

Reform of the GSEs is indeed necessary to fully jump-start the non-agency MBS market as well, since over the past 18 months mostly agency originations have taken place. The non-agency securitisation market received an initial boost at least from Citigroup's jumbo MBS securitisation in April (SCI passim), when it brought a US$222.4m MBS deal backed by new mortgages. Redwood Trust was the sponsor.

The GSEs themselves have been active in improving their own securitisation programmes. Freddie Mac recently added new kinds of products available for its securitisation programme, such as multifamily senior housing and conventional structured finance transactions, as well as student loans (see separate News Round-up story).

Ginnie Mae, meanwhile, last month made a change that will help small lenders in particular in aggregating loans (see last issue). Under its new policy that will begin in July, lenders will be able to securitise single loans in Ginnie Mae multiple-issuer pools and not have to wait for a three-loan minimum that is currently the case.

"I don't think anybody's going to want to buy the single loan," notes one MBS analyst, who says it will likely be grouped together. "With the government guarantee, you don't care about it (single borrower exposure) so much, but you could end up with essentially a prepayment via default - even if you had the government guarantee on it," he says.

However, he notes: "There's good demand for Ginnie Mae securities." They are particularly popular overseas and with Asian investors due to the US government guarantee, he says.

Ginnie Mae also will allow issuance for Ginnie II multiple issuer pools to occur more frequently. Beginning in the fall of 2010, issuance can occur on a daily basis as opposed to monthly.

"Because you can issue the pools more frequently, it puts less pressure on the issuers and their credit lines and warehouse lending," according to a Ginnie Mae spokesperson.

KFH

Ratings

Business boost

TALF helps rating agency gain market share

DBRS is making inroads into the US ABS rating market, gaining market share as its competitors see less business. Moody's, S&P and Fitch have all seen decreases in market share this year, with the latter appearing to be most affected.

Moody's and S&P have long dominated the credit ratings market and each rated approximately 97% of ABS issued in 2007, while DBRS was involved in only 3%. In the year-to-date, however, DBRS' market share has grown to 25%, while Moody's and S&P have seen declines to around 80%, according to JPMorgan estimates. Fitch has seen its market share drop by a third for 2009 and 2010 against the two preceding years, down to 30% for the year-to-date.

Daniel Curry, DBRS president, explains that the turning point for his firm came last year. "The biggest reason behind us gaining market share was the Fed approving us to rate TALF transactions. Initially, the TALF programme only accepted ratings from Moody's, S&P or Fitch. In January 2009 we asked the Fed to consider opening the programme up to other rating agencies, including ourselves," he says.

After consulting the market and reviewing DBRS' rating methodologies, the Federal Reserve Bank of New York approved the agency in December as a TALF-eligible rating agency, allowing it to be involved in the last round of issuance. Curry says: "We rated about half of the transactions that were done in that round, and that really introduced us to the ABS market in a way we couldn't have done without them. We have managed to stay somewhat involved, which is very encouraging."

Some in the market have a different explanation for DBRS' increased activity, with the agency's willingness to rate non-performing loans (NPLs) also cited. FTI Consulting's Hansol Kim says: "It appears that DBRS is 'gaining' market share in the NPL sector, because they are the only game in town. Investors go to them because they need a rating, normally as a pre-requisite to acquisition. The investors will have already done most of the credit work themselves."

DBRS says it has rated some NPL deals, which involved restructuring existing portfolios for institutions, but that it is not its strategy going forward. "There is not a lot of value in these portfolios, so there is limited utility in that exercise for a lot of institutions. But the scale of the problem was so significant that there was a lot of interest in that. I think though that most of the work there has actually been done," says Curry.

The agency says it has also worked on some re-REMIC transactions, but those too are winding down as a more traditional new issuance market re-emerges.

Although DBRS is now involved in a higher percentage of ABS deals than in previous years, it also concedes that volume remains low. "We were aware of 58 transactions through to the end of April, whereas back in 2007 the markets were huge. It's a pretty tough market," Curry notes.

Tough market or not, DBRS is improving its performance. A new report by JPMorgan says that Moody's and S&P retain their lead in the market, but "DBRS and Fitch have become increasingly interchangeable as the 'other' rating agency". DBRS believes Moody's and S&P are too well established to be displaced, but that investors are looking for more opinions, given the recent rating performance.

Curry says: "Fitch has done a nice job of becoming a more significant player. I think the question for us is how many rating agencies will the market support? Obviously, we are hoping at least four and it may be many more than that, but it remains to be seen. There is still a huge percentage of investors out there who have Moody's and S&P written into their investment guidelines and will always want those ratings."

Nevertheless, DBRS plans to expand its business into European ratings and will reopen its London office over the summer. The agency says it is currently working with regulators to ensure it re-enters the market in a way that is consistent with new regulations. Curry disagrees that investors do most of the credit work themselves and says rating agencies still have an important role to play.

"There is still such a wide variety of assets out there that people are looking to securitise that there is a huge amount of information that has to be processed and it is going to be difficult for a lot of investors to do that on their own," he explains. "I think they will need to lean on rating agencies, so I don't think the industry is going away. Having said that, I think the industry has a lot of work to do to rebuild trust and that will take time."

Fitch, despite appearing to be the biggest losers in DBRS' expansion, agrees that the market still needs its rating agencies. A spokesperson at the rating agency says: "Fitch's US ABS ratings have been extremely resilient throughout the crisis and the agency believes its rigorous analytical approach will continue to serve investors well in this sector."

JL

CLOs

Mixed messages

Secondary CLO market activity wanes, but new deal prices

Sovereign contagion continues to weigh heavily on the CLO market in both Europe and the US. Unsurprisingly the US has fared considerably better over the previous weeks as European traders step back from market activity. However, despite the growing concerns within the sector and predictions of a long slow summer in the secondary market, Goldman Sachs has brought the third new deal of the year to market.

The new US$450m CLO priced on 28 May and consists of a triple-A rated US$250m piece and a US$200m equity portion. Goldman Sachs arranged the deal for collateral manager Doral Money, while Babson Capital Management serves as collateral adviser. In addition, market rumour suggests that Bank of America Merrill Lynch and Morgan Stanley are working on CDO deals to be brought to market later this year.

Talk of new issuance comes in stark contrast to the current secondary market conditions. Sovereign debt issues in the south of Europe continue to play a large part in the decrease of trading activity and widening of spreads.

"What has created more angst is news coming from Hungary," adds a CLO trader. "The market fragility is front and centre and is hitting the Euro CLO sector the hardest."

The trader notes that double-A paper has fallen 10bp-15bp from its pre-Greek crisis highs in the 70s and is currently trading in 50-60 range. In addition, he points out that this drop is considerably greater than the fall in the US.

"For European participants, there is worry," he says. "And even the few remaining brave souls have said they would rather look at US paper because they feel that they know the curve, the cyclicality and defaults. The US legal mechanisms are a lot more time-tested, which has been factored in as well."

The trader estimates that 60% of European bid lists are not trading at all, as both US and European participants turn to the US markets. He explains: "The structures in Euro CLOs tend to be lumpier and more concentrated; there are multi-jurisdictional exposures and a lot fewer time-tested managers. There is a perception that credit intensity is less in Euro portfolios and that pricing isn't as deep. Therefore the participation in pricing has been skewed towards the US."

Despite outperforming the European market, US CLO trading remains under considerable pressure. The trader estimates that as much as 40% of US bid lists are not trading.

"The participation rate is better, but the natural buyer base has thinned out considerably and the balance sheet banks have slowed down their participation in BWICs," he says. "A handful of people are still playing, but there is a lot of selectivity going on and tiering of managers."

In a 4 June report on the sector, JP Morgan structured credit analysts note: "Senior pricing has held up with some weakness lower down, which has created a steeper credit curve." The trader confirms that at the top of the capital structure prices are 2bp-5bp off, while lower down in the capital stack things have fallen by 7bp-10bp.

In equity and double-B tranches he adds that pricing is as much as 10bp off from levels a few weeks ago. The JPMorgan analysts add: "On the whole, mezzanine and subordinate prices are five to 15 points lower than in April."

The trader believes that a substantial improvement in market tone is unlikely until eurozone concerns subside. "We have a difficult period until we find out more about the recovery on both the Euro and US side," he says. "We have a rough summer ahead."

JA

RMBS

Weighed down

Secondary and primary markets hindered by broader concerns

US RMBS trading over the previous two weeks has remained quiet in the face of continued volatility in the broader markets. Economic and political pressure continues to weigh on the secondary markets, while concerns over financial reform and regulation threatens to potentially hinder new issuance.

One RMBS analyst notes: "It has been more anaemic in the sense that there aren't a lot of people willing to add risk. Trading volumes have definitely been low and people have been waiting on the sidelines."

The shorter week and earlier market close late last week is believed to be part of the reason for the lower trading volumes. In addition, the analyst points out that there was more selling the previous week, meaning that "people who wanted to de-risk had sold by then".

As a result, the analyst notes that generally dealers remain long, while taking a wait-and-see approach to the market and broader economic issues. "The most telling thing is that dealers are long with quite a lot of inventory and not necessarily moving it so easily," he says. "If that persists, I think we'll see continued pressure on prices."

Elton Wells, head of SecondMarket's structured products group, adds that the stall in activity is also a result of buyers dropping their bids in the hope of capitalising on the continued volatility. He says: "We have continued problems with all the overseas military issues in Israel, and North and South Korea, the sovereign debt crisis, financial regulatory issues, BP's oil issues - every negative thing that is happening out there is being used by buyers to their advantage and as a reason to lower their bids."

He notes that while bids on spreads have widened out by 2bp-5bp from two weeks ago, sellers expect the same prices as previously seen. "As a result, the sellers aren't willing to sell, which is why we're seeing a decrease in activity."

Wells adds that the improved tone indicated in the equity and credit markets should result in an increase in RMBS activity by next week. Indeed, the analyst indicates that market sentiment is "cautiously optimistic".

He continues: "If it stays stable for long enough, I think we'll start to see a slow grind tighter all over again. PPIF managers have been waiting for opportunities to buy, and I think they're sitting there waiting."

However, the analyst adds: "Until some of the volatility subsides, I think people are going to keep on the sidelines more than they would have a few months ago."

Moving forward, Wells believes that the focus will remain on the secondary market, due to continuing concerns regarding financial regulatory reform and the impact of that on new issue RMBS. "I don't think that we're going to see a new issue RMBS for a while, because people are still focused on what the requirements are going to be for new issue RMBS," he says. "For now, the focus is very much on the secondary side."

However, the analyst notes that there is talk of RMBS issuance coming to market in July or August of this year. "I wouldn't be surprised to see a deal coming out of one of the big shops like JPMorgan, Bank of America or maybe Barclays in the next month or two. They're all trying to test the waters."

JA

ABS

Private equity eyes timeshare securitisations

Private equity funds are currently buying pools of timeshare loans, which could eventually be securitised, say structured finance sources. The funds are looking at a variety of loans, but the smaller regional loans are the most targeted.

"Some of the smaller regional timeshare developers are running into trouble. They really don't want to have their capital tied up in real estate. They sell the timeshares, but they don't want to hold the debt anymore than a mortgage company would," notes one source.

The funds are getting a good price on the loans, he adds. Securitisation, he says, is a possibility.

Private equity and other fund money is ripe for the timeshare sector. Securitisation is a way out for the larger developers, but the cost can be prohibitive for the smaller ones. Typically only the larger timeshare developers have been able to come to market with ABS offerings in the post-credit crisis environment.

But smaller timeshare developer Silverleaf Resorts, which was an active issuer in the past, managed to get its Silverleaf Finance VII 2010-A offering priced on 1 June. UBS Securities led the US$151.5m timeshare deal. The US$73.9m single-A rated tranche priced at 400bp over swaps, its US$28.1m triple-B rated tranche priced with a 10% yield and its US$49.5m double-B rated tranche priced with a yield of 16.25%, according to a syndicate source.

The deal follows a transaction from larger issuer Wyndham Worldwide, which brought the US$300m Sierra Timeshare 2010-1 Receivables Funding offering in March (see SCI issue 176). The advance rate on the deal was 72.25% and it carried a coupon of 4.48%.

More timeshare deals are expected to come this year from larger issuers, like Wyndham again as well as Diamond Resorts and Marriott, which have been active in the market post-crisis. But deal flow and the size of offerings are going to be smaller than in previous years simply due to inventory being lower.

"They are proceeding more slowly than in the past, due to the sales," says the source.

KFH

CDO

Moody's ceo says compensation not linked to deals

Compensation at Moody's is not tied to the number of securities analysts rate, the number of companies they follow or the share that is gained or lost in the market, according to its chairman and ceo Raymond McDaniel at the Financial Crisis Inquiry Commission's (FCIC) hearing on 2 June over the rating agency's role in the credit crisis. The comments come in response to earlier accusations by former Moody's employees at the hearing that the brisk deal flow in the CDO and structured finance area, along with management's push to increase market share, kept a lid on analysts' objections over questionable offerings.

Eric Kolchinsky, former Moody's team managing director for US derivatives, says often times analysts did not have time to do meaningful research on the deals. Kolchinsky and other former employees cited lack of staff as another hindrance in doing their job.

"I care about market share. I care about market coverage as much as I care about market share. Even if that coverage is produced on an unpaid basis, I still want to have market coverage. But I also care deeply about ratings quality," McDaniel said.

Going forward, he noted: "The ability to measure ratings statistically over a multi-year period is something we can do. We think it's going to provide good incentive alignment for our senior managers."

Warren Buffett, chairman and ceo of Berkshire Hathaway, however, did not see any immediate need to point fingers at the rating agencies as a contributor to the credit crisis. "Part of any huge bubble is excessive leverage. It's very hard to define leverage. The size of the pop of the bubble was accentuated in an enormous way because of the leverage that existed in the system. Some of it was hidden in off balance sheet type of things," he commented.

FCIC officials described their perception of the race for market share among the rating agencies as deals moving along a conveyer belt. The bipartisan commission is using Moody's as a case study. Its investigation into the credit crisis is ongoing.

KFH

CDS

Counterparty criteria to impact derivatives

The biggest impact from S&P's proposed changes to its counterparty criteria is on securities with derivative obligations, according to Francis Parisi, chief credit officer, global structured finance at S&P on a conference call regarding methodology and assumptions for counterparty criteria.

Triple-A or double-A rated securities would be the most affected, Parisi said. "We expect minimal impact on mezzanine bonds or bonds with lower ratings."

The changes, via S&P's request for comment, come about in response to the dislocation in the capital markets. The agency's counterparty criteria, it says, potentially enables it to assign a structured finance rating that is higher than the rating of the counterparty itself since its rating is based on the principle that counterparties commit to replace themselves when ratings slip below a minimum eligible rating.

The new S&P proposal calls for referencing long-term ratings of a counterparty, as opposed to short-term ratings, as the guiding mechanism. According to Parisi, using the long-term ratings "provides greater refinement as far as the movement of rates over time and also provides greater transparency from a surveillance point of view".

S&P says the new criteria for derivative obligations consists of the replacement trigger taking place at the higher rating and eligible collateral to be only cash or sovereign government securities. For triple-A rated notes, the new proposal would set the minimum without collateral at single-A, with collateral at single-A minus and trigger replacement at triple-B plus, which represents a tightening of the replacement trigger.

The agency is also proposing alternative guidelines for posting collateral if a counterparty does not provide termination provisions for failure to replace, provide external markets and/or provide external verification by an audit firm.

For those securities currently outstanding where neither the counterparty rating or the collateral amounts meet the proposed criteria, S&P would expect to take rating actions unless there were mitigating factors that might be addressed in its analysis. For those securities where the counterparty rating is high enough or the collateral amount currently satisfied the proposed criteria, S&P would allow participants up to 12 months to modify their documentation.

Questions arose on the call about whether S&P should consider capping increases in the volatility buffer if swap counterparties were trying to replace themselves and couldn't find a bid after about three years. "By being more reasonable, you're more likely to allow counterparties to replace themselves and protect the noteholders better," one caller observed.

"What we're trying to do here is to say that we do understand that some counterparties may find that the collateral levels are too high. In which case, they replace at the higher level. But for those that want to continue to participate down to triple-B plus, then these are volatility buffers we consider applicable," says Irene Ho-Moore, criteria officer in EMEA structured finance at S&P.

S&P previously updated its criteria in October of 2008 and April of 2009.

KFH

CMBS

JPMorgan's CMBS comes tight for investors

JPMorgan's US$716.3m CMBS offering - which marks the second CMBS transaction to come to market this year following RBS' US$309.7m deal in April - is marketing at tight spread levels, according to investors. The deal has yet to price.

Three of the triple-A rated tranches on the JPMCC 2010-C1 transaction total US$608.9m, but the offering also includes double-A, single-A and triple-B rated tranches. The largest tranche, which is primarily five-years, has guidance at 125bp over swaps.

"If I can get a super senior with much more credit subordination - I think this one is in the low teens, whereas I can get 30 or 30+ for a seasoned A4 or A2 tranche at 25bp wider - I think it's going to be a tough sale," one investor says.

"They are making a pitch that the current underwriting standards are so much better than the deals that have come before that they don't need as much credit subordination," the investor adds. The demand seems to be there, so it may price at those levels, he notes.

JPMorgan and Ladder Capital Finance originated the 36 loans in the deal that are on 96 properties. PNC Bank subsidiary Midland Loan Services is the servicer.

While the amount of loans in this deal is higher than RBS' offering last April, investors say the comparatively low number of loans still provides some concentration risk compared to offerings in previous years. "It's just 36 loans. That in and of itself has reduced the diversity," another investor says. RBS' deal consisted of six loans on 81 properties.

Still, investors are positive about any signs of life in the sector. "Having the new deal come is very positive. Price discovery is a good thing," the other investor adds. RBS' US$222.09m five-year tranche priced at 90bp.

The sizes of deals going forward are likely to also fall under US$1bn, especially with the smaller origination flows, he notes.

KFH

Regulation

Waterfall transparency

Tania Fago, senior product manager at Quantifi, comments on how the ABS market could benefit from independent data description of waterfalls under the SEC's new disclosure proposals

On 7 April 2010 the SEC proposed rules to amend the offering process, as well as tighten the disclosure and reporting requirements for ABS. The proposed changes are designed to increase transparency and thereby improve investors' understanding of these financial products, which have traditionally been more opaque.

Specifically, the SEC proposals would:

• require the filing of a computer programme that gives effect to the waterfall
• require the filing of tagged computer-readable, standardised loan-level information
• provide investors with more time to consider transaction-specific information
• repeal the investment grade ratings criterion for ABS shelf-eligibility
• increase transparency in the private structured finance market
• make other revisions to the regulation of ABS.

This article examines the SEC proposal to require the 'Filing of a Computer Program That Gives Effect to the Waterfall Provision of the Transaction'. The waterfall dictates how the cash collections, losses and administrative expenses are distributed to the investors in the various tranches of the ABS. This computer programme would be in addition to the filing of a prospectus for an ABS transaction, which currently includes only a narrative description of the waterfall.

In general, Quantifi is in agreement with the following two points, which we consider to be the ultimate goals of the SEC proposal regarding tightened waterfall disclosure:

(i) full transparency of the waterfall
(ii) availability of sophisticated tools to undertake detailed and relevant risk analysis.

Beyond these general goals, the SEC's proposal to require the disclosure of a Python computer programme that demonstrates the effect of the priority of payments 'waterfall' is generating significant discussion among a number of market participants - including issuers, investors, software vendors and financial engineers.

While some of the attention is centred on how the Python language compares to other languages, such as XML, Perl, Java, C-Sharp, etc., Quantifi is focused on the bigger picture. We suggest that a solution separating the description of the waterfall from the programme that generates the cashflow of the waterfall would more appropriately achieve full transparency and availability of sophisticated solutions.

Although we think separation is more important than the ultimate language chosen, for illustrative purposes, we will assume an XML extension is used for the waterfall description and Python is used to demonstrate the execution of the waterfall. We believe that there are practical and useful applications to these complementary technologies and that the marketplace could benefit if the SEC considered disclosure where both forms were required.

In order to disclose both Python and XML most usefully, we propose that the concepts of (i) the description of the waterfall and (ii) the programme that demonstrates the execution (or effect) of the waterfall be separated. The Python programme would operate on the XML data description. We believe that such a separation best achieves the goals of full transparency and availability of sophisticated tools.

XML is a logical language to use for reporting the data description of the waterfall because it provides an independent description of the waterfall, which will ensure that the waterfall disclosures will not only remain relevant over time but also facilitate implementation in robust risk management techniques and systems. Python, among other languages, is an attractive language to use for a programme that operates on the waterfall's data description because it could be executed directly.

XML data disclosure will enable more sophisticated analysis, including advanced risk management and hedging practices. These methods could be accomplished via the integration of the XML data description into more powerful programmes. Such programmes would have a greater computing capacity and be able to more easily evolve with market practices.

A waterfall execution programme that attempts to capture all of the important risk management factors today may become irrelevant in the future or cause market participants to ignore critical factors that were not foreseen or incorporated in the original programme. For example, during times of prosperity, it may have been difficult to foresee the increased focus on triple-C buckets or discounted asset purchases that occurred in the more recent tumultuous times.

However, such an execution programme could still be useful if the scope were limited to a small set of functions, such as trade pricing/agreement between two parties or simple waterfall verification/analysis. Limiting the scope of the programme will also help to lower the effort required to issue a new security.

In order to facilitate further discussion, we have highlighted several advantages and considerations of a waterfall specification in executable Python versus XML extension.

Python

A Python script, as proposed, will attempt to encapsulate: (i) description of the waterfall structure and (ii) implementation of the waterfall (or in other words, execution of the operations outlined in the data description).

Advantages:

• It will be able to represent any waterfall structure
• Once written, Python code would be executable directly, as it would not need to be amended to be compatible with the computer. This is a key advantage of an open source programming environment
• Potentially less work upfront because the programme will likely be done on a deal-by-deal basis rather than identifying common waterfall structures upfront.

Considerations:

• A Python specification will likely be difficult to inspect, verify or understand because of the complexity inherent in modelling the execution of complex waterfalls. This complexity will, in practice, cause a Python specification to be less transparent and closer to a 'black box' system
• Specifying both the description of the waterfall and implementation of the operations will restrict the ability to do more detailed analysis and risk management (note that specifiying the operation of the waterfall is limiting, regardless of what programming language is chosen)
• Python specifications will likely end up being a 'best effort' black box and potentially something that is not reliable enough to incorporate into risk management systems
• Vendors that develop software will have difficulty incorporating the Python script from a technology and legal perspective, as they will be delivering software that depends on waterfall executables for which they do not own the IP, cannot verify, be responsible for and warranty in any way
• Software typically contains bugs. Each new deal is likely to incorporate bugs that will need to be managed.

XML extension

XML extensions are a flexible way to create common information formats to share data description of the waterfall.

Advantages:

• Very straightforward to process, easily portable and flexible enough to describe all necessary waterfall structures
• Specifying only the description of the waterfall gives users flexibility through appropriate programmes acting on it to perform any detailed analysis and testing that is required by the marketplace. Additionally, as these requirements change over time, the programmes may be independently changed without affecting the waterfall descriptions disclosed at issuance
• Transparent because it is: (i) likely to be simpler and (ii) programmes operating on the waterfall will provide outputs, logging, etc. that most closely matches the user's requirements. Risk management techniques will be more easily developed and applied as the programmes acting on the waterfall descriptions will be designed to work with and within the necessary risk management systems. The programmes can change easily as these risk management systems and techniques change.
• Preferential for vendors from both a technology and legal perspective because they will own the IP for the implementation of the waterfall
• A SIFMA XML representation of cash CDO trustee report details already exists, as it was proposed back in the 2005-2007 timeframe
• The proposal and effort previously put into the SIFMA XML representation could serve as the preliminary point for the SEC proposal, with additional time spent factoring in the constructs to illustrate the waterfall - something that was omitted from the SIFMA work.

Considerations:

• A significant amount of work is required upfront relating to all the tagging of terms and data, including testing and validation
• It is able to represent most waterfalls, in particular simpler ones, but not all waterfalls. However, in the foreseeable future there will be a finite number (10-15) of waterfalls, which will be simple and therefore easily supported by a language such as XML. Also, the versatility of XML will over time enable it to model any XML structure
• Bugs may exist in the representation of each new waterfall structure; however, these would be resolved at the software vendor level for each limited number of waterfall type rather than for each new deal
• An external programme is required to perform analysis. We believe that this omission is actually an advantage, but it is useful to point out that users will be unable to perform analysis based solely on the items in the disclosure.

Quantifi is well positioned to respond quickly and effectively to whichever language and approach is adopted by the SEC. However, as highlighted above, we believe market participants will benefit most from an independent data description of the waterfall. Recognising the separation between the data description and the programme executing on it will greatly improve the effectiveness of these disclosure requirements, especially as markets, methodologies and models continue to evolve.

Quantifi has also been working closely with the Risk Management Association's Securitization Risk Roundtable (SSR) to respond to the SEC proposal. The roundtable has been focusing its efforts on responding to the proposed waterfall disclosure requirements. SRR is an organisation that identifies key risk issues facing the securitisation industry and recommends actions to regain marketplace confidence.

Trading

Navigating the post-crisis landscape

Evan Schwartzberg, head of sales and trading, and Mathew Van Alstyne, head of research at Odeon Capital Group, answer SCI's questions

Q: How and when did Odeon Capital Group become involved in the structured finance market?
MVA: Odeon Capital Group launched a year ago with six people and now has a head-count of almost 40. We're a full-service boutique broker-dealer, with over US$2.5bn in transaction volume so far.

Our expertise is in distressed corporate credits and structured products, ranging from student loan ABS, through to CMOs and XXX securitisations. Together with research and sales and trading platforms, Odeon has an investment banking department that is currently working on structuring a number of deals.

Evan and I have known each other for over six years: I was a client of his at Ore Hill. We saw that the financial crisis was coming and thought that it would be an opportune time to focus on esoteric assets.

Q: What are you focusing on at the moment?
ES: One area we're focusing on at present is what I term 'orphan instruments'. These bonds may crop up in many different sectors, but Evan Schwartzberg                                           franchise securitisations are a good example of them. There are few issuers in the franchise ABS sector and only a small number of deals outstanding, so it doesn't necessarily make sense for the major dealers to follow them - hence, they're very illiquid.

MVA: We're pretty unique in focusing on these types of assets, as well as being unique in having a deep bench of research expertise behind our offering. Typical brokers-dealers tend to only focus on one asset class, but we're aiming to provide relative value analysis across and between sectors because our client base does business in multiple sectors.

Q: How else do you differentiate yourself from your competitors?
MVA: All the big investment banks are value-added because of their balance sheet-based liquidity, but our competitive edge is that we offer value in terms of research-based educational liquidity. We're also conflict-free, which means we can serve both sides of the client base.

ES: We focus on products that are hard to value and hard to understand. Odeon employs several analysts that have structuring and rating experience - and can therefore educate clients where necessary - as well as modelling expertise.

Q: Which challenges/opportunities does the current environment bring to your business and how do you intend to manage them?
MVA: Whereas before the financial crisis hit liquidity chased places where investors felt they had to be invested, now they are being much more selective. A year ago, it was possible to buy almost anything and make money, but now investors need a solid thesis as to why they should invest. There has to be a reason beyond the yield, for example, in order for an investor to invest their money somewhere.

The new post-crisis landscape requires specific knowledge and good client relationships allow us to help clients take advantage of opportunities. Many investment opportunities may have great stories, but perhaps the client doesn't have time to focus on these issues. We can both help clients manage these opportunities and, conversely, find opportunities for other investors.

Mathew Van Alstyne                                         However, we try hard not to think for our clients. Our aim is to help them make their own information-based investment decisions.

ES: The market is going through a very volatile period at present, but volatility creates opportunities and rewards for nimble investors. Many portfolio managers are reassessing their books and checking whether being in those positions still makes sense.

Volatility provides an opportunity to switch into different asset classes or ratings levels, for example. Some investors will want to create a different risk profile.

Risk assets have generally risen in value over the last year, typically accompanied by an increasing amount of fear about investing in them. The distressed story isn't as obvious as it was a year ago and so investors in this asset class need to know where to look. We offer the skills and tools to uncover and analyse these opportunities.

There are lots of start-up boutiques in the distressed space and banks are also beginning to have a capability in this area. But we're looking to ramp up and grow our business, both in the US and internationally. We expect to increase our research capabilities, for example, particularly around corporate and structured product research.

Q: What major developments do you need/expect from the market in the future?
MVA: A number of different aspects of legislation are being debated in the House and the Senate, which will obviously impact the market and corporate landscape going forward. There are so many moving pieces that we have to be extremely proactive in identifying value-added opportunities.

ES: Assets that we tend to like are secured, but we'll move with the market. As we see asset classes becoming more attractive, we'll expand into them.

Essentially, yield and structural/asset characteristics are what make an investment attractive. It is important to ensure that the worst-case downside risk isn't removed from the upside reward, but we try to be proactive in seeing these opportunities emerging and letting our clients know what we think.

For example, Europe is an area that many are obviously focusing on at the moment because of the sovereign issues. But opportunities are harder to find in the region for US-based boutiques and an area we'd like to focus on as our US client reach can help bridge that gap.

CS

ABS

ASF examines regulation, makes appointments

The American Securitization Forum (ASF) met yesterday (8 June) to discuss regulatory issues facing US ABS. It has also appointed Armando Falcon as senior policy advisor and elected its board of directors.

Falcon is currently chairman and ceo of Falcon Capital Advisors. From 1999 to 2005 he served as director of the Office of Federal Housing Enterprise Oversight and as general counsel for the House Banking and Financial Services Committee. He will advise the ASF on reform of the US housing market, government sponsored enterprises and the hot topic of securitisation regulation.

"We are extraordinarily pleased to be working with Armando," says Tom Deutsch, ASF executive director. "He brings a wealth of relevant experience to the forum as we continue to work with policymakers to revive the securitisation markets and restore credit flows to American businesses and consumers."

The ASF's annual meeting in New York discussed issues ranging from FAS 166/167 to the SEC's rule 17g-5 (SCI passim). ASF chairman Ralph Daloisio declared that the FDIC's proposed safe harbour provisions, SEC's rule 17g-5 and Reg AB II and the proposed Franken Amendment (see SCI issue 185) are the most pressing concerns facing the forum.

Daloisio called for clarity in regulatory reform and said such reform would be best handled by the lower regulatory bodies that are closest to the issues. He said directives issued by federal legislators could not be as efficient.

On the board, Daloisio continues as chair until 2012, while Credit Suisse md Tricia Hazelwood will also serve a two-year term as deputy chair. William Moliski, Redwood Trust md, and Cameron Cowen, Orrick, Herrington and Sutcliffe partner, were elected as treasurer and secretary respectively. President of 1st Financial Funding, Gregg Silver, remains evp.

"I'm pleased to be continuing as Chair of the ASF at this particular time," Daloisio comments. "We're reaching a critical stage in reopening the securitisation markets and, hopefully, we'll be getting credit flowing again to Main Street in the near future."

CDO

Merger results in CDO manager transfer

BNP Paribas Asset Management (BNP) has succeeded Fortis Investment Management France (Fortis) as portfolio manager on the Titian CDO transaction. The move follows the full merger of Fortis into BNP, including the transfer of all its assets and liabilities. BNP says that all contractual rights and duties of Fortis under the portfolio management agreement were taken over unchanged.

S&P has confirmed that the merger and the resulting change in the identity of the portfolio manager will not result in a downgrade or withdrawal of the deal's ratings.

CDS

Former Lehman team reassembles

G2 Capital Markets, a subsidiary of G2 Investment Group, has acquired the former Lehman Brothers' private placement and illiquid credit trading team. They will be in familiar company, joining an existing group of former Lehman executives who have come to G2 since its inception.

The esoteric credit trading team specialises in analysing, marketing, trading and settling illiquid credit securities. It trades an array of illiquid assets, including private placements, ETCs, credit tenant leases, project finance, emerging market corporate and other structured credit products. The team is led by senior partners Scott Best, James Gregorek and Larry Taylor.

"By pulling all of the less liquid asset classes together, this team literally invented a business and we are excited to have them at G2," says Todd Morley, G2 Investment Group founder and chairman. "While at Lehman they simply dominated the market with a market share that was a multiple of the nearest competitor. We expect them to have an immediate impact on our trading franchise and on our new issue origination and distribution."

Best spent 14 years at Lehman, creating and running its esoteric credit trading business. Gregorek spent 21 years at Lehman, leading the esoteric sales and trading business.

Finally, Taylor spent 15 years with DLJ and Credit Suisse's high yield group. He has broad credit experience, including transport, services, builders, utilities, industrials, sovereigns and project finance.

"Jimmy and I are very excited to 'put the band back together' and, with Larry's unparalleled credit expertise and longstanding relationships in the high yield and distressed communities, we expect to continue our career-long mission to serve our clients, provide them with liquidity and ideas and make them incredibly effective in their roles," says Best.

He adds: "We had an opportunity to go to a number of bulge bracket firms, but we chose G2 because we want to play a part in building something great from scratch. Todd Morley has done it before with Guggenheim and we believe he will do it again with G2."

CDS

Five hires to credit sales, trading teams

RBS Securities has expanded its US flow credit sales and trading teams within its global banking and markets division in the Americas. The five new hires to the Stamford, Connecticut, office are Robert Williams, Michael Regan, Seth Bernstein, Richard Joyce and Tom Daly.

Scott Eichel, global co-head of MBS, CMBS and ABS trading and head of US flow credit trading at RBS Securities, says: "We are committed to providing our clients with the best execution, pricing and coverage across the credit markets. These new appointments are very seasoned, highly-experienced market professionals who epitomise the calibre of talent we are committed to bolstering our credit sales and trading teams with."

Williams and Regan join as credit trading mds, reporting to Sean Murdock, md, US flow credit trading for the Americas. Williams joins from Mizuho Securities, where he was executive director focusing on banks and finance companies in its credit trading group. He was previously a Bear Stearns cash bonds trader, before switching focus to cash bonds for automobile companies and CDS.

Regan comes from Christopher Street Capital, where he was responsible for credit trading. He has also spent seven years at Deutsche Bank, where he was head of credit trading, and 16 years with Merrill Lynch.

Also reporting to Murdock is Seth Bernstein, who joins as credit trading svp. He was most recently a vp at Morgan Stanley, where he worked on its high yield credit trading desk as a primary market maker and risk manager. Before that he held positions in Morgan Stanley's high yield bond sales and collateral management groups.

Joyce and Daly both join as credit sales mds, reporting to Anthony Britton, head of credit sales for the Americas. Joyce joins from BTIG, where he was credit sales md. He previously spent five years at UBS and 13 with Goldman Sachs, holding credit sales posts with both firms.

Daly leaves his role as credit sales md for GFI Group. He previously spent almost five years at Deutsche Bank covering investment grade accounts. Before that, Daly was a founding principal and managing partner of Quixote Capital Management, having started his career at Salomon Smith Barney.

"Clients have long relied on RBS' strong fixed income franchise and expertise to help them navigate the financial markets," says Richard Tang, RBS Securities head of fixed income, equity and FX sales, Americas. "The addition of Tom and Richard to our high grade credit sales desk further strengthens our firm's position and distribution capabilities across the debt capital markets and reinforces our continued commitment to helping our clients achieve their financial objectives."

CDS

Head of global credit strategy hired

BNP Paribas Asset Management has hired Martin Fridson as global credit strategist. Fridson is a high yield specialist with more than 30 years of experience in the industry and joins the global credit investment team from Fridson Investment Advisors, where he was ceo. Fridson will be based in New York and become head of strategy within global credit, responsible for building the team's research effort and framing macro views for the team's mandates.

The global credit team will consist of 22 credit analysts, representing all of BNP Paribas' credit management expertise, with the goal of bringing focus to and driving performance in the various credit offerings. The global credit team is led by Maryam Muessel, former coo of alternatives and solutions at Fortis Investment Management, and comes under BNP Paribas' fixed income division.

Fixed income and money markets cio, Nicolas Chaput, says: "In 2010, we have seen strong interest from our clients in credit products, in particular high yield strategies. With Martin joining forces with the BNP Paribas Asset Management team, we will gain a deeper understanding of the credit market dynamics and we believe that this will have a positive impact regarding the performance of our clients' portfolios."

CLOs

Changes to permacap's operations proposed

Permacap vehicle Carador is set to propose a number of changes to its operations at its 30 June AGM.

First, a change in name to 'Carador Income Fund' has been proposed to reflect the company's distribution policy, whereby all net income is distributed as quarterly dividends. The investment manager believes that the discretion to make distributions out of realised and unrealised capital gains net of realised and unrealised capital losses will allow it to continue to identify attractive investment opportunities in senior notes, while maintaining an appropriate level of distributions to shareholders. Accordingly, it is proposed that the Articles of Association be amended to change the distribution policy of the company accordingly.

Second, it is proposed that the ability to charge fees and expenses to capital be introduced. Currently, Carador charges its fees and expenses to income only.

In light of the split of the company's recent returns between income and capital, the directors consider that charging full fees and expenses - including any potential performance fee due to the investment manager - to income in these and similar circumstances in the future could negatively affect future distributions to shareholders. The ability to charge fees and expenses to capital may consequently assist the company in maintaining an appropriate level of distributions to shareholders. However, the directors warn that the charging of fees and expenses to capital may have the effect of lowering the capital value of shareholders' investments.

Finally, the base currency of the company shall be changed to US dollars from euros in order to match the primary currency of denomination of its assets. As at 30 April, 23.83% of Carador's portfolio was invested in euro-denominated assets.

Investors

Credit business expands in new direction

BlueBay Asset Management has hired Mark Dowding to lead the development of a European government bond business at the firm. He joins as senior portfolio manager and will co-head the European investment grade team with Raphael Robelin, BlueBay's head of investment grade credit. Robelin will focus on corporate bonds, while Dowding will focus on government bonds.

Dowding joins from Deutsche Asset Management, where he was European head of institutional fixed income, and has previously worked alongside Robelin at Invesco. He will arrive in early September, after which the firm will launch funds in both the European government bond and European aggregate space, with the latter product combining sovereign and corporate credit.

Hugh Wills, BlueBay ceo, says: "BlueBay is launching a European government bond business to capitalise on the significant opportunity that the firm sees in offering investors new generation government bond and rates products. Mark Dowding's expertise will complement and leverage that of existing BlueBay teams in ensuring the firm is well placed to access the opportunity on behalf of its investor base."

BlueBay says Dowding's appointment marks an important strategic development, with recent macro developments introducing a significant credit element to the management of developed market government bonds. The firm believes investors will need their portfolio managers to have high quality credit skills and says it is positioning itself to provide "high performance, new generation products" in the redefined asset class.

ABS

Private placements keep Euro ABS ticking over

Five European deals closed over the last week, but they were either privately-placed, retained or restructured. While the fact that ABS are still being issued is positive, the nature of the placement isn't helping the current funding malaise in the region.

European ABS analysts at Barclays Capital note that private issuance means placement with a small number of investors, which signals that interest in the asset class is not broadening. "Furthermore, it can also lead to limited liquidity in the secondary market as the performance of these transactions is not widely followed," they add.

The private placements comprised a UK credit card ABS and UK and Dutch prime RMBS, while a Spanish RMBS was retained and a Dutch RMBS restructured. Lloyds Banking Group privately placed the senior notes of its £1.93bn Penarth Master Issuer 2010-1 notes, backed by UK credit card receivables originated by the Bank of Scotland. Rated by Moody's and Fitch, the transaction comprises £1bn triple-A rated class A1 notes, £500m triple-A rated class A2s, £200m Aa3/A+ class B1s and £228m Baa1 class C1s.

Lloyds placed another deal - the US$3bn Permanent 2010-2 - with a single investor, which took down four class A tranches with WALs ranging from three to five years at 140bp and 150bp over.

Obvion also privately placed, with a single investor, the €950m 4.3-year class A notes from its Storm 2010-II programme. The triple-A rated notes came at 118bp via Rabobank.

Finally, Caixa Catalunya issued and retained the Hipocat 20 RMBS, featuring a single triple-A rated tranche worth €639m.

Meanwhile, Deutsche Bank last week launched and priced a €1.62bn prime Dutch RMBS restructuring. The Hermes XV transaction, originated by SNS Bank, contains five classes of notes (A-E). Class E, with an initial principal balance of €26.1m, was placed in 2008.

Initial principal balance is €1.5bn for the class A notes, €9.75m for the class Bs, €43.65m for the class Cs and €38.65m for the class Ds. The class A notes were privately placed with a club of investors, while classes B-D were retained.

The class A notes priced at 130bp over three-month Euribor and have a weighted average life (WAL) of 4.16 years. Classes B-D all have a WAL of 4.83 years, with the class Bs pricing at 60bp over three-month Euribor, class Cs at 110bp over, Ds at 180bp over and Es at 975bp over. All notes are priced to a 6% CPR and call date of April 2015.

ABS

CESR warned over ABS trade dissemination

The Association for Financial Markets in Europe (AFME), the British Bankers' Association (BBA) and ISDA have jointly responded to the 7 May consultation paper on CESR technical advice to the Commission in the context of the MiFID Review - Non-equity markets transparency. Among other issues, the letter outlines a number of concerns about disseminating trade information in the securitisation markets.

The three associations point out that many structured finance products are priced using proprietary models and that publication of the prices generated by these models for rarely-traded instruments will not serve as a price discovery vehicle. They note that dissemination of such trade information could have the effect of disclosing proprietary information to the detriment of dealers.

"Disseminating trade information may negatively affect market participants whose trades are revealed to the market, often before these trades can be executed in their entirety. This is especially the case in markets that are not and cannot be electronically integrated and lack the firm quote and price protection regulations of integrated markets," the letter says.

Further, the associations warn, dissemination of trade information could - especially for more liquid structured finance products - create the opportunity for prices to be artificially ratcheted up or down as material information about market activity is conveyed to participants, who could then buy or sell in advance of the completion of the intended transaction. "As market participants trade on the information, prices would fall ahead of sellers and rise ahead of buyers. Thus, investors would pay more for the bonds they purchase and receive less for the bonds they sell. The adverse market movements precipitated by additional trade transparency would negatively impact investors."

Finally, in the current market environment, post-trade transparency may serve to freeze market participants and cause further illiquidity in the market, according to the letter. Market participants may not wish to have their positions marked on the basis of a single trade in the market, particularly in an overly depressed or already-illiquid market. Mandatory reporting of these trades may cause these market participants to refuse to trade.

The associations believe that the industry should study whether certain structured finance products (SFPs) have characteristics that would benefit from such a post-trade transparency regime. "We further suggest that the industry study how to effectively disclose to all secondary market participants those cashflow assumptions that typically influence the value of an SFP, particularly changes in those assumptions. Furthermore, we suggest analysing the trading activity of the most liquid benchmarks and standardised SFPs to see what information from these transactions could be disseminated to market participants," the letter explains.

ABS

Indian retention requirements proposed

The Reserve Bank of India has published draft guidelines on minimum holding periods and minimum retention requirements for securitisation transactions undertaken by non-banking financial companies. The guidelines modify the guidelines issued on 1 February 2006 and also introduce two new aspects; namely, defining a minimum holding period before selling an asset to an SPV and retention of a minimum portion of the loan prior to securitisation.

For assets with a maturity up to 24 months that have periodic repayment schedules, the minimum holding period is nine months from the date of disbursement or first instalment of interest/principal; for assets with bullet repayments, it is 12 months. The minimum retention requirement for these assets is 5% of the book value being securitised.

For assets with a maturity of more than 24 months that have periodic repayments, the minimum holding period is 12 months; no securitisations of bullet assets with such tenors are envisaged. The minimum retention requirement for these assets is 10%.

Comments on the guidelines may be sent to the RBI within 21 days from 3 June.

ABS

Impact of cajas consolidation unclear

ABS analysts at Bank of America Merrill Lynch anticipate the impact on Spanish ABS of consolidation among the country's savings banks to be limited, especially given that most of the paper issued in Spain is held domestically. However, they note that a deeper look at the issue is necessary to understand any potential ripple-effects.

The Spanish cajas have historically been active issuers of securitisations backed by pools of mortgages and consumer credit, issuing around €300bn since 2003. BAML predicts that 35%-45% of the cajas will cease to exist under the government's restructuring programme, leading to closure of 24% of their branches and a 17% decline in their headcount.

According to the analysts, the direct and indirect consequences for the Spanish structured finance markets include: reduced lending from the cajas and thus reduced mortgage availability; increased NPL supply; servicer replacement and short-term operational risk issues; and swap provider replacements or confirmations. They note that it is impossible to gauge the effect of the cajas' reform on ABS transactions until it is clear which cajas are merging together and what the rating of the new entity will be, as well as which cajas may be declared insolvent and what the subsequent steps might be.

ABS

EU CRA proposals gather momentum

The European Commission (EC) has put forward amendments to the EU rules on credit rating agencies (CRAs). The EC has also launched a public consultation on reforming corporate governance in financial institutions and pledged to table the remaining financial reform proposals in six to nine months. The proposals, as well as plans for bank resolution funds, will be presented at the G20 summit in Toronto on 26-27 June.

The EC says its objectives for CRAs are ensuring efficient and centralised supervision at European levels, and increasing transparency on entities requesting ratings so that all agencies have access to the same information. It says these changes would create better supervision, increase CRA competition and improve investor protection.

José Manuel Barroso, EC president, says: "The Commission is launching the final push to complete the EU's financial services reform. This is part of our wider agenda to stabilise, consolidate and restore sustainable growth to the European economy."

CRA ratings can be used all around Europe without being tied to a particular territory, so the EC proposes a more centralised system of supervision at EU level. Proposed changes would see the new European supervisory authority - the European Securities and Markets Authority (ESMA) - given exclusive powers of supervision over CRAs registered in the EU. Subsidiaries of such CRAs as Fitch, Moody's and S&P would be included in this remit.

ESMA would have powers to request information, launch investigations and perform on-site inspections. Issuers of structured finance instruments - such as credit institutions, banks and investment firms - will have to provide all other interested CRAs with access to the information they give their own CRA, in order to enable them to issue unsolicited ratings. The EC says its measures would simplify the environment CRAs work in and give them easier access to the information they need.

The EC's proposal will now pass to the EU Council of Ministers and the European Parliament for consideration. The new rules could come into force in 2011.

New EU-wide rules putting in place a common regulatory regime for the issuance of credit ratings, fully applicable from December, requires all CRAs to register if they want their ratings used in the EU. The agencies will have to disclose the methodology and internal models and key rating assumptions they use to make their ratings.

Internal market and services commissioner, Michel Barnier, says: "The changes to rules on CRAs will mean better supervision and increased transparency in this crucial sector. But they are only a first step. We are looking at this market in more detail."

He concludes: "On corporate governance, I am convinced that true crisis prevention starts from within companies. If we are to prevent future crises, financial institutions themselves need to change. We need to ensure more effective internal controls, promote better risk management, strengthen the role of supervisory authorities and existing rules on sound remuneration policies should be implemented quickly to help curb excessive risk-taking."

ABS

Hydrocarbon royalties deal marketing

A US$150m Argentinean oil and gas royalties securitisation is marketing. Moody's has assigned provisional ratings of Ba3 (global scale) and Aa1.ar, and Ba2/Aaa to the Fideicomiso Financiero Chubut Regalias Hidrocarburiferas I VDF A and VDF B notes respectively.

The debt securities will be issued by Banco de Valores, acting solely in its capacity as issuer trustee, and are backed primarily by hydrocarbon royalties to be paid by Pan American Energy (PAE). PAE has been awarded the production concession for certain areas in the Province of Chubut, in accordance with the Argentine Hydrocarbon Law and an extraction agreement.

The Province should appoint a successor concessionaire if the extraction agreement with PAE is terminated. The successor concessionaire will have the same obligations to this transaction as PAE, Moody's notes.

The rating agency has evaluated the sufficiency of the estimated oil and gas production of PAE during the life of the transaction. It has also stressed the domestic oil and gas prices that are used to calculate the royalties' payments.

Moody's notes that while the production is concentrated in Cerro Dragón, the area does consist of many different fields that are in various states of exploitation maturity. PAE has a sound track record as an operator in the Cerro Dragón area.

Royalty payments are made in Argentine pesos and the rated notes are either payable in US dollars (VDF A) or in Argentine pesos but linked to the US dollar (VDF B). In both cases, a devaluation of the Argentine peso may reduce the amount of US dollars available to repay the VDF.

Domestic hydrocarbon prices were stressed to evaluate the sufficiency of the cashflows under higher stress scenarios. For example, the transaction can withstand a drop of 60% in the price of oil and gas from Moody's base case of US$32/bbl and still pay on a timely basis.

ABS

Student loan ARS tenders gather pace

The Student Loan Consolidation Center Student Loan Trust I (SLCC I) has commenced a cash tender offer to purchase up to US$450m aggregate principal amount of its outstanding auction rate student loan asset-backed notes, senior series 2002A and 2002-2A. The tender offer consideration payable for each US$50,000 principal amount of notes validly tendered will be determined pursuant to a Dutch auction.

Each holder tendering notes in the offer will specify a bid price within a given range, which is the minimum consideration they are willing to receive for those notes. Any holder tendering notes without specifying a bid price will be deemed to have specified US$41,500 per US$50,000 principal amount of notes.

Route 66 Ventures will pay an early tender payment of US$1,500 for each US$50,000 principal amount of notes. This early tender payment is only available for holders that validly tender by 15 June.

Following the expiration of the tender offer, notes validly tendered at the lowest bid price will be accepted first as necessary and will continue to be accepted at the related bid price in ascending order of such bid prices. SLCC I will only purchase a principal amount of notes in the offer up to its US$450m tender cap.

The trust will pay accrued and unpaid interest on all notes tendered and accepted for payment from the last applicable interest payment date up to the settlement date for the tender offer. It currently expects the settlement date to fall between 30 June and 6 July.

The tender offer expires on 29 June, unless it is extended or earlier terminated. Tenders may be made at any point prior to the expiration time.

Nelnet has, meanwhile, accepted for purchase the principal amount of the outstanding senior auction rate student loan asset-backed notes and subordinate Libor rate student loan asset-backed notes of the Nelnet Student Loan Corporation 1, which were validly tendered according to its fixed price cash tender offer for them (see SCI issue 185). The offer expired at on 1 June.

Payment for the notes is expected to be made today, 4 June. The aggregate consideration for the notes accepted for payment, excluding accrued and unpaid interest, is US$62.75m.

ABS

Tighter controls required to reduce reporting errors

A number of reporting errors have been made in Asia ex-Japan by originators and servicers regarding their securitisations in the past year, says Fitch. Reporting errors have been found in asset performance data and payment accounts, with five asset performance reporting errors made across four transactions.

Errors in ABS asset performance figures include the erroneous application of formulae and incorrect data input in aging buckets. Five ABS and RMBS transactions had incorrect payment amounts, where mistakes were mostly related to rounding errors. Fitch also reports a noticeable time lag in the circulation of performance reports for one outstanding Singaporean CMBS transaction.

"Accurate calculation and reporting of transaction performance ratios are crucial to investors and Fitch's analysis, as the agency relies heavily on data provided by the originators/servicers when monitoring deal performance," says Alison Ho, head of Fitch's APAC structured finance performance analytics team.

She adds: "The agency believes that tighter internal controls and the separation of data input and validation by servicers could prevent the recurrence of the sort of errors that Fitch discovered in the monthly reports."

The agency believes reporting errors could largely be avoided if originators and servicers introduce tighter internal controls and implement clear internal guidelines for the calculation and reporting of data prior to transaction closing. It suggests that data input and data validation roles should be separated.

ABS

Euro ABS surveillance platform prepped

Markit and Cairn Capital are to launch the Markit ABS Performance Monitor platform. This service will combine Markit's ABS surveillance capability with Cairn's advisory and credit market knowledge to provide performance monitoring for European ABS.

Users of the platform will have access to one-page deal summaries, both current and historical, with the ability to drill into details, such as comparable key performance indicators, recalculated credit enhancement and excess spread, collateral stratifications, bond payment information and comprehensive documentation.

David Littlewood, director of Cairn, says: "We have spent the last few years building our own European ABS performance data, drawn from trustee and servicer reports, to support our asset management and advisory businesses. By joining forces with Markit to develop the European ABS Performance Monitor, Markit and Cairn have created a product that incorporates extensive input from both a market participant and a leading data provider."

CDO

Monoline commutes remaining ABS CDOs

Ambac Financial Group has commuted all its remaining US$16.4bn of ABS CDO exposure. The commutation agreement provides that Ambac Assurance Corporation (AAC) will pay in aggregate US$2.6bn in cash and US$2bn of newly issued surplus notes of AAC.

The surplus notes have a scheduled maturity of 7 June 2020 and interest is payable at the annual rate of 5.1%. All principal and interest payments will be subject to the prior approval of the Wisconsin state commissioner of insurance.

Certain CDOs with par or notional amounting to approximately US$1.4bn were commuted for cash payments of US$96.5m and more exposures with par amounting to a maximum of around US$1.5bn are expected to be commuted in the next 12 months, for a maximum amount of approximately US$115m of cash plus US$60m of surplus AAC notes.

Ambac's latest 8-K filing reiterates the continuing liquidity difficulties faced by Ambac Financial. The holding company relies on dividends from Ambac Assurance that appear unlikely to be received in the foreseeable future.

Ambac believes that Ambac Financial has enough liquidity to satisfy liquidity needs through to the second quarter of 2011. However, it also states that as early as the second quarter of 2010, it may decide not to pay interest on its debt.

An ad hoc bondholders' committee is understood to have been established, with the likelihood of a debt for equity swap being executed.

CDO

Small business methodology scrutinised

A number of updates are being considered to the methodologies and assumptions S&P uses to rate US securitisations backed by small business loans. The scrutiny of the agency's Small Business Portfolio Evaluator (SBPE) model follows recent performance trends for small business loans and changes that S&P introduced to its CDO Evaluator (SCI passim), which shares the same portfolio default simulation framework as the SBPE.

S&P uses its SBPE model to assess portfolio default risk in small business loan pools, using data from the US SBA's loan guarantee programme to derive loan-level default probabilities. Lending to small businesses remains depressed while the economy slowly recovers, and the combination of tight credit and slow recovery has led to continued high levels of small business loan delinquencies and defaults. If the SBA default statistics are updated in such a way as to make S&P revise its portfolio default outcomes, the agency says it will update its SBPE model accordingly.

The local nature of small businesses causes tight correlation between assets and regions. The housing market declines particularly affected the Southwest of the US and Florida, while auto manufacturer bankruptcies were felt hardest in the Midwest. S&P is reviewing its correlation assumptions for its SBPE. Changing these assumptions would cause different portfolio default outcomes.

Existing criteria will continue to be applied until the review is concluded and any criteria changes are published.

CDO

Moody's launches structured credit publication

Moody's has launched a new quarterly newsletter called Structured Credit Perspectives. The publication will include the rating agency's views on credit issues and news, as well as performance metrics in structured credit asset classes such as CSOs, SF CDOs, Trups CDOs, derivatives product companies, market value CDOs and municipal CDOs. Each edition will also include a section providing new performance data from several asset classes.

"This new publication meets the needs of market participants for thoughtful analysis on a wide range of asset classes we cover," says Moody's senior md Yuri Yoshizawa. "In doing so, it complements our CLO Interest newsletter."

The first issue introduces the new Moody's CSO 100 Index, highlighting trends and tracking credit performance of CSO portfolios by focusing on the 100 most referenced Moody's rated corporate names. Key findings include a stabilisation of ratings quality and that CSO portfolios continue to be heavily concentrated in a few industries.

Other highlights of the issue include a report on the quantitative effect on current CSO Aaa ratings from changes in key credit risk metrics in the portfolios, commentary on the Greece crisis' effect on CDOs, the Dante ruling's impact on CSOs and event of default risk in Trups CDOs.

CDS

Call for limiting leverage in muni CDS

California state treasurer Bill Lockyer has called for the adoption of federal and international rules to limit leverage in the trading of municipal CDS, to help prevent naked derivatives trading. The move follows his receipt of responses from six Wall Street investment banks to a request for further information on these banks' muni CDS activity that he issued last month (see SCI issue 184).

"The municipal CDS market, when used by bondholders to hedge risk, can benefit issuers by increasing demand for bonds," Lockyer says. "But naked trading of CDS by investors who don't own California bonds poses a potential danger to taxpayers."

He adds: "Unchecked speculation opens the door to market manipulation that could artificially inflate perceived credit risk and increase taxpayers' borrowing costs on bonds. Reducing leverage opportunities will make it harder for speculators to game the system and hurt taxpayers."

Lockyer has called on Congress to include legislation on a ban on naked trading of municipal CDS to be included in its financial regulatory reform. If Congress does not impose a ban, he says effective and enforceable capital requirements to reduce leverage would be a significant step to prevent abuse in the market. Provisions to impose tougher capital and margin requirements on swap market participants are already being considered and could go some way to providing the protection Lockyer seeks.

Of the six banks, Bank of America Merrill Lynch, Barclays Capital, JPMorgan and Morgan Stanley reported that they had engaged in no speculative bets against California credit for their own accounts between January 2007 and May 2010. Citigroup had two proprietary trades with US$10m face value, while Goldman Sachs had four trades in 2008 with US$35m face value and three open positions, but disposed of its proprietary trading desk in January 2009.

All six banks said they had no knowledge of their California CDS clients' motivations and were unable to provide information about the extent to which their market-making activities facilitated naked trading. Barclays said it lost US$2.7m from market-making in California CDS, while JPMorgan reported it earned US$4m. The other four banks did not provide information on their income from market-making.

Lockyer says the responses confirm that the effect of CDS trading on California bond prices is not currently significant enough to cause concern. Furthermore, he says the banks themselves have not bet against the credit quality of California GO bonds to any meaningful extent. He says there remains a lack of information about the extent to which the banks facilitate naked trading.

From 2011, Lockyer's office will require all 86 firms in the state's bond underwriter pool to file quarterly reports on their municipal CDS market activity.

CDS

Ambac CDS settle lower than expected

The final results of Ambac Assurance Corp's CDS credit event auction were released on 4 June. The inside market midpoint was 27.5, while the final price was determined to be 20.

The net open interest was US$300.098m to sell. Fourteen bidders participated in the dealer inside markets. BNP Paribas had one of the highest bid/offers at 28.5/31.5, while UBS Securities had one of the lowest at 23/25.

According to structured credit strategists at Citi, the final price of 20% was substantially lower than the projected recovery going into the auction - 30.5% (mid-market). They suggest that this disparity was driven by holders of distressed RMBS wrapped by Ambac (the cheapest to deliver obligations) taking advantage of the jump in recoveries after the credit event and unloading their positions prior to the auction.

"Hence, the auction was dominated by the basis investors (holders of wrapped RMBS against the ABK triple-A CDS), which had a lot of bonds to deliver, creating a large open interest to sell and depressing Ambac's final recovery. The auction results bring the monoline recoveries into question and the traded levels have dropped," the strategists note.

ABK and MBIA double-As are somewhat different, since there are a limited number of deliverables. But for MBIA triple-As (and, to a lesser degree, for AGO/FSA since their RMBS exposure is limited), the strategists warn that such events may be repeated and the traded recoveries might be too high.

ISDA determined on 26 March that a bankruptcy credit event occurred in respect to Ambac Assurance Corporation. Ambac marks the sixth CDS credit event auction held this year, beginning with Financial Guaranty Insurance Company (FGIC) in January. This compares with 45 auctions last year.

CDS

Call for quicker European CDS action

A joint two-page letter has been sent by French President Nicolas Sarkozy and German Chancellor Angela Merkel to José Manuel Barroso, calling on the European Commission president to ban naked CDS on sovereign bonds. The two leaders want proposals on short selling and sovereign CDS to be ready by the middle of July, rather than October as planned.

The letter says: "The return of strong volatility in the markets makes it necessary to question certain financial methods and certain products, such as naked short-selling and CDS."

It also calls on the European Commission to "consider the possibility" of a ban at the European level of naked short sales on all or certain shares and bonds, and on certain naked CDS on sovereign securities.

The regulator BaFin unilaterally banned naked CDS within Germany last month (see SCI issue 185), arguing that speculation was exacerbating the European debt crisis. France has not yet followed suit, despite Sarkozy's vocal support for greater regulation.

CDS

Subprime prices rise to 18-month high

Fitch Solutions reports that US subprime CDS prices have increased to levels not reached since December 2008. Fitch's subprime RMBS total market price index increased by 7.6% month-on-month to reach 9.37.

"Subprime asset quality has not only stabilised, but begun to improve significantly - a far cry from the historic lows at the beginning of 2010," says Fitch Solutions md Thomas Aubrey.

All vintages exhibited growth, with the 2004 and 2006 vintages rising by 10% and 14%, marking improvements since the start of the year of 27% and 57% respectively. The 2005 vintage improved by 2%, while 2007 jumped by 12% - although the latter remains almost flat since the beginning of the year.

Loan level analysis of the indices' constituents showed improved 60- and 90-day delinquency levels across all vintages, while three- and six-month constant default rates fell. The three-month constant prepayment rate improved slightly across all vintages, which Fitch says may prefigure a slowdown in the price index increase.

Aubrey comments: "Higher quality borrowers may leave the pool, resulting in a lower credit quality pool on aggregate."

CDS

Global CDS liquidity declines

Fitch Solutions says global CDS liquidity declined in the past two weeks, partly due to short trading weeks in the UK and US. Emerging market sovereigns are still trading with greater liquidity than their developed market peers, however.

"The sovereign CDS liquidity trends seen in recent weeks continue to persist, suggesting the CDS market may have pulled back from eurozone sovereigns," says Jonathan Di Giambattista, Fitch Solutions New York md.

He adds: "The global liquidity ranking for European sovereign CDS has fallen significantly since March; however, spreads continue to widen, indicating a very high degree of market uncertainty on future prospects for the eurozone."

Fitch's developed sovereign CDS liquidity index closed at 8.87 on 4 June, from 8.74 two weeks previously. Liquidity for emerging market sovereigns worsened to 8.62, from 8.47. Overall global CDS liquidity decreased to 9.88 from 9.8.

There was also a decline in liquidity for oil and gas companies, which had traded with the most liquidity of any sector since the start of the year. They are now trading, on average, with the same liquidity as CDS referencing telecommunications companies.

"Booming mergers and acquisitions activity within the telecom sector is likely driving CDS market uncertainty on industry prospects, thus contributing to heightened CDS liquidity. In particular, emerging market telecoms have seen a substantial surge in M&A whilst, over the past month, CDS liquidity for telecommunications companies domiciled in Asia moved up, on average, five global percentile rankings," comments Di Giambattista.

CDS

Troubled companies index deteriorates

The Kamakura index of troubled public companies deteriorated significantly in May after improving in 12 of the previous 13 months. The index leapt from 9.46% in April to 10.30% in May.

Kamakura's index peaked at 24.3% in March 2009, but the intra-month value had since fallen to as low as 9.09% (SCI passim). May saw better credit conditions than 67% of months since the index's inception in January 1990 and the index is still 3.36% better than its 13.66% historical average.

The percentage of the global corporate universe with default probabilities between 1% and 5% in May was 6.98%, an increase of 48bp. The percentage of companies with default probabilities between 5% and 10% was 1.62%, the percentage between 10% and 20% was 1.01%, and the percentage of companies with default probabilities over 20% was 0.69% of the total universe.

CLOs

Second Indian MFI CLO closes

IFMR Capital has concluded a R339m multi-originator micro-loan securitisation with three Indian microfinance institutions. IFMR Capital Mosec II issued two tranches backed by 36,972 micro-loans that were originated by Sahayata Fintrade, Satin Creditcare and Asirvad Microfinance.

One of India's top mutual funds subscribed to the senior P1+(so) rated tranche and IFMR Capital invested in the subordinated piece. The deal follows soon after another microfinance securitisation from earlier this year (see SCI issue 168), which IFMR also closed.

The portfolio pooling allows smaller microfinance institutions to access debt capital and investors to diversify risk. Mutual funds have not been traditional microfinance investors, so their investment in the transaction demonstrates the ability of the multi-originator structure to meet the needs of even the most demanding investor, says IFMR.

"We're immensely pleased that with just the second multi-originator transaction we have facilitated mutual fund investment in the primary issue and a much lower market linked cost of funding for our partners. This gives us the confidence to set the bar even higher for future transactions," says IFMR Capital ceo Sucharita Mukherjee.

CLOs

Further CLO upgrades expected

Moody's has followed S&P's lead in reversing its earlier downgrades of US CLO tranches, according to structured credit strategists at Citi.

The analysts point out that, since the beginning of May, Moody's has upgraded 105 tranches across 23 deals ranging across the entire spectrum of vintages. Most of the upgrades were focused on the mezzanine tranches, which is the part of the capital structure in which Moody's downgrades were particularly harsh, according to the Citi strategists.

The number of upgrades so far by either agency represents only a small fraction of the CLO universe, but the strategists believe that recent upgrades mark the beginning of a positive trend in CLO-tranche rating actions. Furthermore, the analysts point to improving CLO performance metrics and bonds in many transactions possessing similar characteristics to those bonds that have been recently upgraded as evidence of further potential CLO upgrades in the near future.

Upgrades of junior mezz are particularly likely, believe the strategists. They point out that there is a lot of room for rating upgrades, given that more than 200 originally rated triple-B and double-B tranches were downgraded to Ca and below, but have since resumed paying interest.

CMBS

Freddie targets affordable properties for securitisation

Freddie Mac hopes to add targeted affordable properties to the growing list of financing products eligible for securitisation, according to a spokesperson at the company. The ones for inclusion are "on the horizon", she says.

The GSE, which settled its first multifamily MBS K certificates in June 2009, added multifamily senior housing mortgages and conventional structured finance transactions to the eligible list for securitisation last week. It also recently added student financing products to the list.

"It was always our plan to make more of our products eligible for securitisation and that's the direction we're heading in," the spokesperson adds. Securitisation accounted for about 70% of Freddie Mac's conventional mortgage volume in Q110.

"When lenders and borrowers use the securitisation path instead of holding a portfolio, it's better pricing for them," she continues.

Freddie Mac plans to bring six issuances of K certificates a year, with each about US$1bn in size. The GSE started using the programme more regularly after an initial start a few years ago, says the spokesperson. "For years we didn't do it and now it's one of our regular products," she adds.

CMBS

CMBS loss severities soar

The inventory of US CMBS loans in special servicing is at an all-time high and likely to tread higher, despite loan resolutions increasing in 2009, says Fitch. Cumulative average loss severities for Fitch-rated CMBS through the end of last year reached 37.2%, with loss severities for 2009 alone reaching 57%.

"Loss severities are expected to remain above the current cumulative average through 2011," says Fitch md Mary MacNeill. "Assets liquidated in the current economic environment will be those not likely to see cashflow improvement from an extension or modification."

The average time to resolution remained at 19 months, with modifications helping to move loans through special servicing more quickly. "Assets will take longer to resolve as special servicers continue to see high volumes of underperforming loans," adds Fitch senior director Richard Carlson. "Continued high inventory and the declining frequency of modifications means there is no relief is in sight."

Loss severities in 2009 were 58% for multifamily, 48.2% for retail, 56.9% for office, 48.8% for industrial and 81.9% for hotel. Fitch reports that the largest loan resolution methods last year were REO dispositions, discounted payoffs and note sales. The agency expects higher loss severities for all property types this year and its overall view of CMBS remains negative.

RMBS

GSE buyout impact normalising

ABS analysts at Bank of America Merrill Lynch forecast Gold 30-year prepayment speeds to increase by 10% in June, due to higher day count and a 5% increase in the MBA refinance index.

"For Fannie Mae, buyouts will normalise for most of the coupons as one-time buyouts are now left only for 4.5 and lower coupons," the analysts notes. "In Fannie Mae hybrid ARMs, we expect the highest prints to be for pools with net coupons less than 5%, due to scheduled buyouts of seriously delinquent loans, just like for the fixed rates. We expect the aggregate Freddie Mac hybrid ARM speed to gain about 10%-20% next month, with higher coupons gaining more than lower coupons."

Aggregate fixed rate Freddie Mac prepayments for 30-year mortgages declined from 16% CPR to 14% CPR last month, in line with expectations. The aggregate speeds for 4.5s were down by 3% to 5% CPR, 5s were down by 16% to 12% CPR, 5.5 were down by 13% to 20% CPR and 6s were down by 8% to 24% CPR.

At the same time, aggregate fixed rate Fannie Mae prepayments for 30-year mortgages dropped by 3% from 28.9% CPR to 28.1% CPR over the last month, which was again in line with expectations. Across the coupon stack, the aggregate speeds for 4.5s were flat at around 5% CPR, 5s jumped 88% to 27.3% CPR and 5.5s jumped 121% to 48.6% due to buyouts, while 6s dropped by 61% to 27% CPR after a spike last month due to buyouts.

However, aggregate Fannie Mae hybrid ARM prepayments for May surged by 30% from 42% CPR to 54% CPR, driven by a sharp increase in buyouts of seriously delinquent loans. Across the coupon stack, buyouts during the month were in line with serious delinquency levels for 5% and higher pool net coupons, according to the BAML analysts.

The aggregate Freddie Mac hybrid ARM prepayments slowed 8% from 28% CPR to 26% CPR, in line with the analysts' expectation of a 10% decrease from the previous month.

RMBS

IOS relative value analysed

In a recent examination of valuations across the Markit IOS index stack, ABS analysts at Barclays Capital suggest that fears of large-scale servicer selling have proven to be unfounded, with the sub-indices trading at a price multiple in the mid-90s to comparable trust IOs. This is very close to where they started three months ago, according to the analysts.

The report finds the middle of the IOS coupon stack to be cheap to the wings, based on OAS and hedged carry frameworks. Loss-adjusted yields on IOS are reportedly in the 4%-7% range in BarCap's base-case prepayment projections.

In addition, the analysts examine valuations on the IOS coupon stack across various underwriting scenarios and conclude that the middle of the stack looks cheapest. Higher-coupon IOS, particularly 6.5s, look rich - barring a stronger-than-expected pick-up in employment and housing.

Meanwhile, the analysts note that lower coupons (4.0s and 4.5s) look rich on an OAS framework, but concede that this framework is not the best way to value these IOS. They explain that prepayment models may, for example, ignore the effect of nominal mortgage basis widening in a sharp rally.

The analysts estimate that swap rates would have to rally by 115bp before IOS 4.0s saw significant refinancing (25bp rate incentive). Therefore BarCap recommends a long IOS 4.0s position hedged with an out-of-the-money receiver swaption.

The report also indicates that credit-impaired inverse IOs are trading relatively cheaply, given uncertainty about involuntary prepayments. The analysts believe that short IOS 6.5s is an attractive way to hedge the credit risk in the agency space. As a result, they recommend going long credit-impaired inverse IOs, hedged with short IOS 6.5s, to monetise the mispricing in the two sectors.

Furthermore, the realised volatility in mortgage current coupons have been much lower than in swaps and the analysts expect this pattern to continue. Consequently, they like being short gamma in mortgages and recommend expressing this via long IOS 5.5 hedged with pass-through bonds.

RMBS

May remits show continued non-agency improvements

May remits indicate that current-to-delinquent rolls continue to improve across the non-agency RMBS sectors, according to ABS analysts at Barclays Capital.

The analysts note that subprime rolls declined by 20bp-30bp month-on-month for later vintages, despite worse seasonals. The seasonal trend reversed to negative in April, following positive seasonals from January to March. Roll rates also declined noticeably for prime sectors and are expected to remain flat or improve for two more months before worse seasonals kick in.

The increase in 30-day to current cure rates last month also reversed, the analysts observe. "This could be partially attributed to slower modification activity and weaker seasonals. This has little bearing on eventual performance as most previously delinquent borrowers will default without a modification," they explain.

In terms of liquidations, both 60+ to foreclosure and foreclosure to REO roll rates declined. The analysts point out that any bottlenecks to foreclosure are likely a result of servicers ramping up the systems for the new HAMP waterfall and ensuring that borrowers are ineligible for modification before proceeding with foreclosure.

Liquidation speeds nonetheless decreased, with subprime CDRs one to two points slower than the previous month's levels. Modifications are anticipated to remain a drag on default rates as servicers begin to implement the new HAMP waterfall.

Finally, voluntary prepayment speeds fell in prime and Alt-A sectors by one to two points, while subprime and negative amortisation speeds remained mostly flat. "In the absence of any credible refinancing option, we continue to forecast low single-digit prepays for lower-quality subprime and option ARM collateral in the near term," the analysts conclude.

RMBS

Data providers link up in RMBS

CreditHorizons for Securities, which delivers Experian's consumer credit information for non-agency MBS deals and launched last month (see SCI issue 184), now offers the ability to link consumer credit data to Lewtan's private-label deal library, ABSNet Loan. It expands the offering to a broader base of non-agency RMBS investors, the two firms say.

"Experian is committed to providing the market with insightful, relevant and transparent data," says Ethan Klemperer, Experian Capital Markets general manager. "By enhancing CreditHorizons for Securities with Lewtan's robust loan-level database, we are able to deliver consumer-centric information to an even greater population of market participants."

The two firms note that linking consumer credit data to loan-level data provides an additional set of influencers to help investors better predict delinquency and default probabilities, obtain more granular data about underlying collateral, and understand how consumer trends impact their RMBS portfolios. Experian says that by using a proprietary matching algorithm developed by its credit and industry experts, it has achieved a high consumer-to-loan match rate in linking to Lewtan's data.

"Lewtan shares Experian's commitment to providing further transparency and clarity to the securitisation marketplace," says Ned Myers, Lewtan chief marketing officer. "We feel this relationship brings a depth of data about the borrower, the loan and the property value, which will help restore investor confidence by enhancing the sophistication of credit analysis that can be performed. This solution provides greater insight towards delinquency and loss forecasting, pricing strategies and for making RMBS buy and sell decisions."