Contents

Investors

Investor views

Surveys show positive signs, but growth could be being stifled

Two new surveys indicate that current investor views in the ABS and CLO sectors are primarily positive for the medium-term. However, the concentration of legacy ABS in too few hands could be limiting the growth of the European investor base.

The current caution among issuers and arranging banks for new public ABS issuance does not extend to investors, according to a survey of 26 investment managers and investment advisers active within the European market undertaken by Bishopsfield Capital Partners. 62% of survey respondents believe new issuance will be higher over the next 12 months than in the past year, while 80% believe new issues will achieve stable or tightened credit spreads.

"Given the spread range on 3- to 5-year triple-A European RMBS has already tightened from 350bp-650bp to 120bp-280bp during the last year, the confidence among investors who participated in the survey during the last fortnight implies a return to pricing last seen prior to the collapse of Lehman Brothers," Bishopsfield observes.

The confidence of European ABS investors is also reflected in relation to governmental intervention. The majority of survey respondents do not see a need for a US-style TALF programme to kick-start the European ABS public market.

Only a minority of survey participants indicate a preference for fresh new issuance. The majority of ABS investors are equally happy to consider relative value among existing issuance, versus more thinly priced but firmly untainted primary issuance, according to Bishopsfield's survey results.

However, European asset-backed analysts at RBS estimate that some 80%-85% of outstanding legacy European ABS and RMBS, totalling around €550bn, continues to be warehoused by the original holders of the risk - mostly banks or their 'bad-bank' subsidiaries. They point to the stark difference between the European and US markets, where programmes like the PPIP have facilitated a better redistribution of legacy product into newer investors.

"We would argue that this sticky overhang of largely bank-held legacy ABS has served to stifle the development of new investor pockets in Europe, as any meaningful flows (or indeed price discovery) of legacy assets has not really happened," the RBS analysts note. "This [is] in turn explained of course by bank unwillingness to crystallise market losses on disposals. It is not surprising therefore that the bulk of any demand in the primary market today is naturally limited to the few legacy players not full on ABS as an investment class."

The concentration of the buyer base means that the profile of primary issues is heavily influenced by the appetite of only the few, which the analysts believe explains the dominance of the most vanilla, high quality UK and Dutch prime RMBS and German auto ABS in the primary market. Collectively these asset types account for 90% of post-crisis issuance, with UK and Dutch prime mortgages comprising 49% and 32% respectively.

Conversely, the lack of primary issuer or asset class diversification is likely a significant deterrent in attracting other legacy ABS investors back into the market, given existing single name or asset limits.

Meanwhile in the CLO space, JPMorgan's latest CDO Client Survey indicates that investor positioning appears constructive for the medium term, with the majority of investors surveyed (51%) wishing to add risk, 38% wishing to hold and 11% reduce their positions. 150 clients responded to the survey, the bank says.

Of the investors looking to add risk, about half wished to add CLO debt and equity, with the other half looking at debt only. Structured credit analysts at JPMorgan note that the portion looking to add debt and equity has increased from the 17% reported in the previous survey, suggesting that more investors are looking at equity than before.

In terms of concerns/risks for CLOs, financial regulation ranks first (79 votes), lack of primary second (66 votes) and fundamental deterioration third (54 votes). While regulation ranking so high isn't so surprising, the analysts are a little more surprised that fundamental deterioration was ranked third.

With regard to how triple-A CLO relative value stacks up to the ABS, RMBS, CMBS and high grade corporate asset classes, the majority of respondents in the survey believe that triple-A CLOs are currently cheap. Feedback was most positive for CLOs versus high grade corporates and least positive versus CMBS.

One question asked what spread/return on US triple-A CLOs, European triple-A CLOs and equity would be considered attractive in a distributed primary transaction. For US triple-As, on average the desired spread is 175bp-200bp; for European triple-As, it was 200bp-225bp; and for equity, the majority saw returns of 12%-15% attractive.

The final question was on how to improve the CLO market's longer-term viability. Investor expectations appear to be unchanged from the previous survey: structural resilience leads, followed by portfolio transparency and secondary liquidity.

MP

CMBS

Against the tide

US CMBS spreads widen in face of improving fundamentals and tight new issue

US CMBS spreads have widened over recent weeks on the back of equity market volatility, despite the consistent improvement shown in the CMBS sector's underlying fundamentals. Notwithstanding the widening, JPMorgan's new CMBS deal (see SCI issue 188) has priced at or close to original guidance.

The US$716.3m JPMCC 2010-C1 transaction is backed by 36 loans secured by 96 properties. The US$416.12m triple-A rated 4.53-year tranche priced at 140bp over swaps, the US$131.3m triple-A 6.76-year tranche came at 160bp over, the US$16.1m double-A 9.98-year tranche at 250bp, the US$26.9m single-A minus 9.98-year tranche at 345bp and the US$14.3m triple-B 9.98-year tranche at 440bp.

However, the CMBS market has seen decreasing trading volumes over the past few weeks and one trader explains that bid list activity in particular showed a drop off from the levels experienced in late April when spreads were more stable. "GG10 paper has been trading at 410bp over swaps for a couple of days now, which has widened out from 275bp earlier this year. Initially, things slowly widened out to the high 300s and we're now back to 410," he explains.

However, the trader adds that although trading on behalf of investors seems to have paused, interest in the sector remains. "We definitely saw investors move a bit to the side," he says. "But they weren't actively selling bonds or lightening up on risk - investors are not looking to exit the CMBS market. If anything we saw folks who were on hold or moderately looking to layer in and add bonds at two to three points lower than they had them in April."

Brian Lancaster, head of MBS, CMBS and ABS strategy at RBS, explains that the continued investor interest in the sector is due to commercial real estate performance. "We're seeing initial signs of improvements in terms of the underlying fundamentals," he says.

In a recent RBS report for the sector Lancaster describes the widening of spreads as a trend linked to the wider economic environment rather than a reflection of the health of the market itself. "We believe that there is a disconnect between CMBS and current underlying fundamentals," he says.

"Even as US commercial real estate fundamentals are beginning to stabilise and CMBS securitisations restart, CMBS spreads are becoming increasingly correlated with equity market volatility, global events, as well as other markets, such as ABX - a process we believe is likely to continue," Lancaster adds. He therefore suggests that investment strategies moving forward should continue to take into account macro considerations.

Lancaster is also positive on potential new CMBS deals. "The new issuance that is due to come to market is exciting," he says. "The JPMorgan deal is a positive thing for the market generally as it's another step towards being more conduit-like, in that it has subordinate collateral and is a larger deal with more borrowers."

Despite the slower market and persistent macro concerns, the transaction is believed to have received a generally positive reception. "I think it's been received well and will price on time," says the trader. Another dealer adds: "There's a shortage of investable paper and to that extent it will get sold."

He continues: "It's probably going to price fairly in relation to what the market is willing to pay for the respective tranches. Clearly if this had gone pre-6 May it would have priced tighter. But I think it will price in the area of the price talk, perhaps wider but not significantly so."

Moving forward, Lancaster notes that more securitisations can be expected. "At this juncture, there is US$5bn of collateral teed up for future deals in the coming months."

Although the market has become correlated to the general equity markets, Lancaster adds that CMBS has outperformed external indicators and he is therefore positive about sentiment within the investor base. "I think a lot of managers like CMBS and feel that there is momentum in the market and in the economy. CMBS still looks attractive in terms of yield compared to corporate bonds, which is important."

However, he says: "Against the very positive background, there are also macro issues out there. Investors are still positive, but they're looking over their shoulders."

JA

ABS

ABS index plan sparks shorting fears

Markit has announced that it plans to launch an iBoxx ABS index in Q310. The move has sparked concern that a one-sided market, like that perceived of the ABX index, could emerge in Europe as a result.

Indeed, one ABS strategist suggests that the iBoxx ABS index could provide a way to short the European ABS market. "The index is supposed to be non-tradable, but how long will that last in a market hungry for ways to express a view? I expect the rise of a synthetic market to allow active trading of an index that is supposed to merely add transparency to a fairly opaque market," he says.

But European securitisation analysts at Deutsche Bank note that the new index joins the many initiatives "currently labouring to improve transparency" in the market. "A broad index allowing for comparison of total returns in the asset class and also with other non-ABS sectors will be positive for the market, in our view," they comment.

The index will track the performance of the European floating-rate ABS market, enabling market participants to better understand the available returns and measure the relative performance of their portfolios, the firm says.

The index will be rules-based and its pricing will be drawn from multiple dealer price contributions. 19 institutions have so far agreed to contribute bond prices. Independent buy-side and sell-side advisory committees will provide guidance on issues such as index function and advancements.

Schroders head of ABS Chris Ames says: "We believe the launch of the Markit iBoxx ABS index will be an important step in promoting overall transparency for risk and returns within the European ABS asset class. The objective multi-contributor pricing model supported by the broad dealer community will go a long way to making this index the benchmarking standard for the market."

The index will have ten standard sub-indices benchmarked for euro, sterling and dollar investors, each tracking total returns from January 2007. As well as Markit iBoxx ABS, CMBS and RMBS, there will be Dutch, Italian, Spanish, UK prime, UK non-conforming and UK buy-to-let RMBS, as well as UK CMBS sub-indices.

The strategist indicates that many challenges lie ahead for the index, noting as an example that the original vision for a UK prime RMBS index (ERMBX) did not allow investors to choose particular vintages, due to the dynamic nature of the underlying master trusts. Equally, a narrow index of buy-to-let RMBS will focus predominantly on one issuer (Paragon), given its number of outstanding issues compared with others such as Capital Homeloans.

CS & JL

CDO

Tail risks drive CSO valuation divergence

CSO valuations appear to have decoupled and diverged in recent months, driven by the mixed to positive performance of stressed fallen angel names compared to a weaker broader credit market. Structured credit strategists at Morgan Stanley observe stronger relative performance in CSOs referencing US credits versus European credits, owing to healing tail risks in the US and an increase in some European tail risks.

However, a valuation premium for complexity remains, according to the Morgan Stanley strategists. Typical distressed US CSOs with two to three years remaining until maturity are trading in the 60% range, offering no-default IRRs in the high teens. Distressed CSOs with European-focused portfolios tend to trade in the high 70s. Comparable index tranches or high yield assets are yielding in the low teens and high single-digits respectively.

"Short-dated US CSOs with distressed financials and HY exposure have done quite well year-to-date as short-end spreads continue to normalise," the strategists note. "For example, some of the 2.5-year to 3.5-year US CSOs are up as much as 10%-15% year-to-date, which is better than the equivalent IG9 five-year mezzanine PO, which is up just under 6%. In contrast, some European CSOs are flat or down 10% year-to-date, especially the slightly longer-dated ones."

Having analysed current spreads on the top 100 corporate obligors based on roughly 1,000 US CSOs, the strategists observe that although the average spread for this basket of 100 names has tightened in line with the broader market, there are still five names trading wider than 1,000bp and 14 wider than 500bp. "This would suggest that many bespoke deals still contain at least some tail risk relative to the market, mostly in the form of financials and LBOs. While tail credits outperformed in 2010 as well, we still see further room to go and expect this theme of tail convergence to the rest of the portfolio to continue in 2010."

CS

CLOs

CLO manager divergence to deepen

The European CLO asset management industry will become more concentrated as investors selectively allocate new funds or transfer existing CLOs to a few top-tier managers, says Fitch. While the outlook is improving for the top-tier managers, the agency believes those who entered the market opportunistically in 2006-2007 will stagnate.

Although the market has been largely static since the collapse of CLO and leveraged loan issuance and deteriorating performance in 2008-2009, Fitch notes signs of new business activity from a select group of well-established, large, active CLO managers. As the leveraged loan market rallies and CLO new issuance market returns to life, this group is leaving behind a lower tier of less committed 'zombie' CLO manager, which entered the market at its peak a few years ago.

"The CLO asset management industry is now bifurcated between a select top-tier of large, active managers [that] are engaging with new business opportunities and a larger lower-tier of passive, smaller, uncommitted 'zombie' managers, which are effectively letting their platform slowly wind down," says Manuel Arrive, Fitch fund and asset management rating group senior director.

So far, only eight European CLOs have been transferred, with four managers leaving the market as a result. Fitch estimates half of the 64 remaining European CLO management platforms show little or no commitment to the business, having failed to reach critical mass.

"Under current market conditions, Fitch estimates that, on a standalone basis, a CLO management platform needs four CLOs of average size (i.e. more than €1.5bn CLO assets under management in total) to be profitable," says Alastair Sewell, associate director at the agency. "Assuming average CLO performance, this means that around 65% of existing European CLO platforms may be in the red."

Most CLO managers have made few or no strategic changes to adapt their business models, despite their reduced profitability and absence of new issuance since 2008. Fitch says only a handful of leading managers has been able to expand beyond CLOs into funds or segregated accounts. A very small number has diversified into other related credit asset classes, such as high yield or structured credit.

Fitch expects the better prospects and improving performance for the leveraged loan and CLO market to result in subordinated CLO fees being turned back on, which will improve CLO platforms' economics. This will mean fewer distressed sellers and less incentives for managers to acquire other CLOs to maintain revenues, resulting in a continued slow pace of consolidation.

JL

CMBS

No single issuer CMBS expected for DDR

After the six-month long process in dealing with the underwriters and Federal Reserve on its US$400m TALF-eligible CMBS deal last year, Developers Diversified Realty has no interest currently in going through a securitisation again as a single issuer, says David Oakes, senior evp and cfo at the firm.

 At the time of DDR's offering last year, the unsecured markets were closed to the REIT, says Oakes. This year, however, it issued US$300m senior unsecured notes in March.

 The CMBS market is dramatically different today than a year ago, he says. "We're not necessarily pushing for higher loan-to-value."

 Any future CMBS offering involving the grouping of collateral from DDR and other market participants would follow market rumours already circulating about Starwood Property. The REIT is expected to join forces in supplying collateral for a Goldman Sachs CMBS deal that is expected to come in the coming weeks.

KFH

RMBS

Limited future for Euro RMBS?

Mortgage credit across Europe could become further constrained or more expensive when government and central bank support schemes wind down, according to S&P in a recent report for the sector. The report examines the role of securitisation in mortgage funding as European mortgage lenders potentially come under renewed funding pressure.

S&P notes that in the past few years traditional RMBS investors have shunned the asset class and central banks have instead stepped in on a large scale, accepting RMBS as collateral for loans to the banking system. However, when financial markets normalise and government-supported funding winds down, the rating agency believes that long-term mortgage funding could be headed for difficult times. The report says the return to favour of RMBS with private investors remains tentative.

S&P believes that the substitution of central banks and governments for private-sector investors has exacerbated the maturity mismatch of the European banking sector. RMBS-backed borrowings from central banks are relatively short term, while the mortgage loans they finance are long term.

If central banks were to close down their RMBS-backed lending built up over the past two years, European mortgage lenders that face funding redemptions of central bank programmes will, according to S&P, have to raise corresponding new funds and/or shrink their assets to compensate.

It says European banks would be hard-pressed to find an equivalent volume of replacement long-term funding. The rating agency expects that at the least the rates that banks would have to pay for such long-term funds would result in a significant negative yield on the mortgage portfolios financed by the new borrowings.

In the medium term, S&P believes that European RMBS appears to be headed for a decline from the unusually high current levels outstanding, given their use in central bank liquidity schemes. The agency points out that a new equilibrium looks ready to emerge among niche lenders and investors.

However, the agency notes that the current funding squeeze also presents an opportunity for market participants to rebuild RMBS in a new form. In some cases, institutions that had previously not securitised have constructed RMBS infrastructures to access central bank liquidity lines and therefore may have opened up the possibility of selling RMBS to private investors over the longer term.

S&P believes that RMBS will continue to play a role in helping European banks to fund their mortgage portfolios. However, the extent to which it does so will depend on how central banks, investors, lenders and financial regulators respond to the ongoing tightness in funding.

JA

CMBS

Changing times

CMBS sees increasing mezzanine focus

A mezzanine focus and a competing origination market is how market participants described the current US CMBS market compared to previous years, according to panellists at the CRE Finance Council's annual convention in New York.

As one panellist noted, the market has become divided into the "have's" and "have less". In the past, what was needed to get deals done was great credit, great leases and good real estate. But over time the market demanded just some of those qualities and eventually only one of those qualities to get a deal financed, he said.

CMBS deals are increasingly centred on appeasing mezzanine investors. "Now you have to place the mezzanine first in deals compared to years ago," said one conference panellist. "At least in 2006 and 2007, you didn't have to syndicate the mezz."

He is thankful, however, that there are a lot of funds out there looking to buy in this sector, since the market did not have this "pocket of money" in prior years. He recently did a deal where the mezzanine investor clearly enhanced the execution, he said.

But others remain concerned over the amount of mezz investors out there. One issue raised at the conference was the supply imbalance of money versus deals. It's not whether there is enough money to get the deals done, but that - if there is a flood of deals - will there be enough mezzanine investors, a real estate broker asked.

While CMBS issuance returned in dribbles last year with the assistance of the Fed's TALF programme, a fully-fledged market is still expected to be further out on the horizon. Hindering efforts is uncertainty over how much property values could still deteriorate. About US$1trn of the US$2.7trn commercial real estate debt outstanding is coming due over the next three years, according to data presented at the conference.

Despite the few CMBS deals already, the lack of issuance continues to be a far-reaching problem. "The real headwind is not that there is three or four bidders on a deal, it's just the lack of deal flow," another panellist at the conference remarked. Price discovery is a common theme seen currently among industry participants.

Securitisation, when it occurs, is viewed by a majority of the real estate participants in attendance at the conference as positive, as well as a good funding source for REITs, in particular. But one distressed asset investor noted that lately "capital markets got a little bit ahead of the fundamentals".

Aggregating enough loans in general for a pool is a challenge. Commercial mortgage lenders themselves are faced with a myriad amount of refinancings that have taken place. Other lenders such as life companies have become more comfortable with where they are in the lending cycle, panellists agreed.

But one market participant noted how much worse some commercial loans are compared to other more stable property loans. "You don't get out of a failed construction loan overnight," he said.

There are no easy answers for the current lending environment, a banker added. "We look at multiple strategies (in dealing with debt maturities)," he said.

Still, on a relative value basis, CMBS and whole loans are attractive to investors, according to Michael Moran, senior portfolio manager at Allstate Investments. "We quite frankly have to have our balancing of where else can we go with those numbers and does it make sense to be adding to the portfolio at those rates. At some point, it becomes a loan to value discussion," he said.

But he added: "As we look at opportunities, it's very competitive. It's a result of low transaction costs in the marketplace, low supply of right-sized mortgages coming to market."

The whole loan market itself is facing some headwinds on the regulatory front when participants have to mark whole loans to market, but any changes would not have to occur for the next couple of years.

KFH

Secondary markets

Open to interpretation

Searching for transparency and liquidity

The twin themes of transparency and liquidity were reflected upon in many of the panels at this year's IMN Global ABS conference. However, interpretations of what the terms actually represent varied.

Jim Irvine, head of structured products & advisory at Henderson Global Investors, observed: "I would say that, aside from certain transactions in Italy and perhaps Spain, data is available to investors and further initiatives will add to this. I do not believe that there is a general lack of transparency in terms of information availability. For the most part, the information is there."

But another panellist suggested that there's too much focus on transparency at present. "I believe that increasing transparency is a red herring in terms of drawing investors back to the ABS markets," he remarked. "The information is there, but pre-crisis investors did not perform the due diligence necessary and bought based only on the opinion of rating agencies. I believe that the real problem is a lack of confidence and, as a result, a reluctance to make general ABS allocations, aside from credit card and auto ABS."

Paul Colonna, president and cio, fixed income, at GE Asset Management, pointed out that many questions still surround residential mortgages, for example. "While markets have performed as expected with regards to auto and credit card ABS, there is a lot of uncertainty about mortgage-backed bonds. I think this will continue for the next few years."

Massimo Ruggieri, md at Deutsche Bank, agreed that investors need to become comfortable with the underlying risks in order to come back to the market and see that the market has proven to be robust. He stressed that the way to ensure investor confidence is to increase the focus on transparency.

However, Peter Nowell, head of ABS & ILS trading at BNP Paribas, noted: "What investors want is a longer lead-time, not a return back to the days when deals were announced on a Monday and had priced by the Tuesday or Wednesday. Investors need one to two weeks to perform the proper credit work that in the past they had left to the rating agencies to do."

He added: "In terms of transparency, I think that in Europe banking confidentiality laws need to be harmonised by the EU so that information is accessible."

But another panellist warned about the potential for information overload. "If the lead-time is too long, then this will result in less liquidity in the market. While we take longer to analyse loan-level data of primary issuance, what is important in terms of transparency for the secondary market is the standardisation of data. This will enable investors to process information quickly and maintain market liquidity."

In terms of liquidity, one reason given for the current lack of market depth is because few want to sell at present. It was suggested that the dealer community has absorbed what sell-side activity there has been and so has provided enough liquidity.

Alex Lazanas, director and co-head of ABS sales & trading at Evolution Securities, commented that it's just as difficult now to find a bid as it was to find an offer six months ago. "Speed of execution, market depth and the bid/offer spread are what define liquidity. The only thing that has changed recently is the bid/offer spread," he said.

But Craig Tipping, md and co-head of Jefferies International's mortgage & ABS group, suggested that while the European market has traditionally been buy-and-hold, investors' mindset and mandates need to change in order to facilitate liquidity. "They need to adopt more of a trading mentality, like in the US, where end accounts switch positions and actively manage their portfolios. The valuations required by buy-and-hold investors ultimately constrain liquidity because the valuations typically lag the market," he said.

Tipping pointed out that a grey area is developing around whether a trading desk is focused on prop or flow trading. Dealers should shoulder some of the volatility because they are often guilty of front-running a rally, which results in a larger correction than was necessary, he noted.

There was agreement that the rise of agency brokers over the last few years has facilitated liquidity in the securitisation market, serving to drive the bid/offer spread tighter because of their low cost base. In addition, there is no conflict of interest because they don't take positions.

"The agency broker model is here to stay: the bid/offer remains wide, so we can add value here. Dealers are doing a good job providing liquidity in benchmark names, but not necessarily in esoteric names, which is another area where we can add value," Lazanas observed.

Tipping agreed that the agency broker model will evolve, as consolidation in the sector occurs and their focus on illiquid/bespoke assets increases.

CS & JA

ABS

A benchmark solution

Brian Upbin, director, index research, and David Tattan, vp, index and portfolio and risk solutions at Barclays Capital, answer SCI's questions

Q: How and when did Barclays Capital become involved in ABS indices?
BU: Barclays Capital publishes the leading family of broad-based fixed income and inflation-linked benchmarks for global investors. Fixed rate ABS have long been eligible for many of our flagship aggregate indices and as standalone ABS benchmarks for dedicated ABS investors.

In 2004 we broadened our ABS index platform to also offer investors floating-rate euro and sterling ABS benchmarks, in addition to the fixed rate ABS indices that were part of our Aggregate index family. Investors in this space were already users of our benchmark indices and were seeking a more complete total return measure for this asset class.

Earlier this year, we launched a blended multi-currency ABS index family that combine both our existing Euro and Sterling indices into a single pan-Euro ABS index family that includes both fixed rate and floating rate indices (see SCI issue 178).

So our ABS index offerings have been provided continuously for investors for quite some time. What was initially part of the Lehman Brothers benchmark index family was acquired and combined with the Barclays Capital index family in 2008 and rebranded as Barclays Capital Indices.
Brian Upbin                              

Q: Which market constituent is your main client base?
BU: Our client base is quite broad as the indices are useful both as performance targets for investors who explicitly want to measure their portfolio returns against an index and on an informational basis. There's a tremendous value in offering measures of broad market returns, sub-segments returns and security-level pricing, valuations and analytics for performance and risk management purposes.

The broad-based appeal of our indices is also reflected in the types of clients who use the indices. We deal with asset management firms and insurance companies, and we've also seen a lot of interest from the hedge fund community, as they're becoming more active participants in the ABS market. In particular, we're also getting a lot of interest in this index offering from the asset-owner side.

In terms of functions within firms, we're seeing demand across the board, including portfolio managers, research analysts, performance analysts and risk managers.

There are a lot of different functions even within a firm who are using the index on a day-to-day basis. We don't have a single target market - the indices are meant for broad-based usage for however they may be more useful within an organisation.

Q: How do you differentiate yourself from your competitors?
DT: The Barclays index platform already stands apart from the crowd. We differentiate ourselves from our competitors by the fact that we are a truly-global index provider with a proven track record of high quality analytics spanning 35 years. We produce approximately 30,000 indices every day and these form a comprehensive road-map to the global fixed income markets.

The pan-European ABS indices are small but very important parts of the Barclays Capital indices offering. We believe linking our proven index expertise with the fact that Barclays Capital is a global leader in securitised products is a very powerful combination.

BU: We see interest in these new ABS indices not just from dedicated ABS investors, but also from investors who deal with multiple fixed income classes. The fixed rate component is a subset of our broader-based aggregate indices, so we do see a lot of crossover index users who are already using Barclays Capital indices for their fixed income investments.

DT: Another differentiating factor is that we also offer custom versions of the pan-European ABS indices as many of our clients may only invest in particular parts of the European ABS market. This bespoke index service is an important factor.

Q: Which challenges/opportunities does the current environment bring to your business and how do you intend to manage them?
DT: For us, the ABS market challenges and opportunities are one and the same. Access to accurate analytics, pricing information on the less liquid parts of the market and a unifying portfolio management platform to accurately monitor Euro ABS credit and prepayment risk versus a widely-followed benchmark index are challenges that we face head on and also what sets our product offering apart.

BU: The challenge and the opportunities are both reflected in the demand we have seen for our indices thus far. Having built and maintained this index family for several years, we see how useful this data is for our clients on a day-to-day basis and how we are able to help bring clarity to the ABS market for investors to see both the performance characteristics and the risk characteristics of the asset class. The opportunity is clear.

The primary challenge is that this asset class is a more complex market than some of the traditional fixed income markets that we measure. It's a challenge we embrace and a primary reason that investors look to an index provider like Barclays Capital with significant indexing and market expertise.

Q: What major developments do you need/expect from the market in the future?
DT: When the European ABS market was first developing, there was much less focus on credit risk and prepayment risk - it was basically a buy-and-hold market. Things have changed and investors are out there trying to pick up distressed names and yield, just as they would do with corporate bonds.

They're asking for risk and portfolio management tools like Barclays Capital POINT to help them. We expect demand for portfolio management tools to help manage risk and to help outperform the European ABS benchmark indices.

BU: Overall, Barclays Capital has a heavy investment in its index and POINT platforms. We know that it's an important service for our index users and they depend on it for multiple stages of the portfolio management process. We are continually investing in our platform to offer not just ABS investors, but also other market participants, the products and solutions needed to measure, quantify and asses portfolio risk and returns.

JA

ABS

Trio hired for SF strategy group

BTIG has hired a further three people to its new structured finance analytics and strategy group, which is headed by Dan Castro (see SCI issue 186). Glenn Costello, Jennifer Pariseau and Emily Chiang have joined the firm.

The new team will provide analysis and support to the fixed income sales and trading teams with a focus on MBS and ABS. It will also work directly with the firm's institutional clients to give assistance and advice on ABS trading and portfolio management decisions.

"We continue to see a huge opportunity in fixed income and are constantly looking to expand our product offering to match our clients' needs," says Scott Kovalik, BTIG co-founder. "With the increased demand for structured products - and in particular ABS - we saw this as a great opportunity to solidify our position in the structured product space."

Costello, a veteran mortgage-bond analyst who served alongside Castro at Merrill Lynch, joins from Fitch as md. Pariseau becomes a director at BTIG and has worked at West Side Advisors and Bear Stearns. Like Castro, she joins from Huxley Capital Management.

Chiang joins as a structured finance desk analyst from GSC Group, where she was an investment analyst focusing on ABS, CDOs and RMBS. She has more than 10 years of experience from time spent at Credit Suisse First Boston and JPMorgan.

In addition to recruiting Castro's team, BTIG has hired Forrest Kontomitras, Omar Buttari and Gregory Ikhilov as directors in its structured products group.

Kontomitras has more than 25 years of experience in sales and trading and specialises in credit sensitive, cashflow assets for institutional investors. He leaves E J De La Rosa & Co, where he was director of structured products.

Buttari has 18 years of experience in fixed income sales and trading. He too joins from De La Rosa. Ikhilov previously traded RMBS for Nomura Securities and Bank of America and Merrill Lynch before that.

ABS

New SF team formed

Sandler O'Neill and Partners has hired Carlos Mendez to lead its newly created structured finance group, based at the firm's New York headquarters. As head of structured finance, Mendez will be responsible for arranging new term funding and alternative capital solutions and will advise clients on current recapitalisation requirements.

Mendez was most recently senior md in the capital markets division of Institutional Credit Partners. As a founding member, he led the expansion of its broker-dealer operations in the US and Europe. Prior to Institutional Credit Partners, Mendez was a director in the structured finance group at Guggenheim Capital Markets.

In addition to Mendez, Joshua Eaton, Andrew Mauritzen and Chris Howley have joined Sandler O'Neill as mds and will serve as the initial members of the structured finance group. Both Mauritzen and Howley join from Institutional Credit Partners where they were previously mds, while Eaton joins from Dune Capital Management where he served as general counsel and co-coo.

"With the banking system under continued duress and financial regulatory change forthcoming, the manner in which depository institutions operate is evolving rapidly," says Alan Roth, principal and head of RMBS/ABS sales and trading at Sandler O'Neill and Partners. He adds, "As a result, companies reliant on bank funding will need to rethink how they finance themselves. With the establishment of our structured finance group, Sandler O'Neill will be able to provide capital market solutions that facilitate growth and provide a competitive advantage for our clients."

ABS

Fresh wave of Stamford hires announced

RBS Securities has made three additions to its MBS, CMBS and ABS strategy team within its global banking and markets division in the Americas. They follow a contingent of five new hires to the same division announced only days ago (see last issue).

Sarah Hu joins as prepayment strategist, Ying Wang comes to the firm as residential credit strategist and Richard Hill becomes CMBS strategist. All three will be based in Stamford, Connecticut, and report to Brian Lancaster, md and head of MBS, CMBS and ABS strategies.

Hu will primarily work with agency residential security strategist Greg Reiter. Her role will be to develop prepayment strategies in the agency MBS and CMO markets. She has previously worked for Freddie Mac and SunTrust Mortgage, where she managed risk models for prepayments, interest rates and pricing models.

Wang will work with Paul Jablansky and Desmond Macauley, respectively senior consumer ABS and non-agency residential strategist. They will develop investment strategies in the non-agency MBS and consumer ABS markets. She was most recently a fixed income specialist at Interactive Data Corporation and has previously worked for Barclays Capital, Credit Suisse and JPMorgan.

Hill's new role will see him focus on the CMBS and CMBX markets with Lancaster. He joins from Bank of America, where he was part of the corporate treasury team.

"These appointments compliment the build-out of our MBS, CMBS and ABS strategy team over the last eight months and demonstrate the importance RBS places on providing our clients with the best possible investment strategies in these particularly volatile markets," says Lancaster.

ABS

European securitisation vet moves

 UBS Investment Bank has appointed Mark Graham as head of EMEA securitised products. He joins the firm from Verulam Capital, where he was ceo.

Graham's previous posts include head of European securitsation for Deutsche Bank, European head of whole business securitisation for Morgan Stanley, associate director for European mortgage securitisation at ING Barings and UK mortgage securitsation associate at Bear Stearns, where he started his career.

ABS

South American expansion for Calypso

Calypso Technology has entered into a value added reseller agreement with Fundação Centro de Pesquisa e Desenvolvimento em Telecomunicações (CPqD) to enhance the Calypso product and services offering in Latin America. Under the arrangement, CPqD will become Calypso Technology's partner in Brazil.

Calypso's partnership agreement with CPqD follows last year's arrangement with CPQi, an integration services company, to deliver implementation and related services across the continent.

Claudio Violato, CPqD technology vp, says: "Today, the Brazilian capital market is one of the fastest growing capital market regions in the world, and its participants require advanced trading and risk management systems - such as the Calypso system - to keep pace with the dramatic change and growth."

CDS

Matrix launches second UCITS III fund

Matrix has launched its second UCITS III fund, hot on the heels of last month's Matrix Asia UCITS Fund. The new Matrix Lazard Opportunities Fund is managed by Matrix Money Management, with Lazard Asset Management as sub investment manager. The Lazard team, headed by senior portfolio manager Sean Reynolds, is targeting absolute returns through a combination of capital appreciation and income.

The fund's strategy is to generate returns through convertible arbitrage and special situations and event-driven investing. The strategy aims to take advantage of situations where the team believes a security's price diverges from its expected value and aims to provide risk-adjusted returns that are superior to broad equity and credit benchmarks.

Reynolds says: "The Matrix Lazard Opportunities Fund provides a unique vehicle for investors seeking an on-shore regulated fund that uses our convertible arbitrage and special situations, event-driven investment approach."

He adds: "The investment team believes that the recent stock market sell-off has dramatically increased the strategy's opportunity, especially in shorter-dated credit securities offering attractive equity exposure."

Chris Merry, Matrix Group ceo, comments: "Stuart Ratcliff, cio of our in-house investment team, has invested in the Lazard Rathmore Fund - the hedge fund on which the new UCITS fund will be modelled - on behalf of our own funds of hedge funds. They first invested in July 2009 and over the period from investment to the end of May 2010 the fund has produced performance of 29.2%."

The Lazard Rathmore Fund is an offshore fund outside the UCITS framework, with smaller administration costs than the Matrix fund can expect.

CMBS

CRE finance team expands

Guggenheim Securities has hired Robert Brennan and Anand Gajjar to its commercial real estate finance group as senior mds. Brennan will lead the group and report to Ron Iervolino, head of fixed income sales and trading at the firm.

Brennan joins Guggenheim from Credit Suisse, where he spent 18 years and was the global head of the real estate finance and securitisation business. A 27-year veteran of Wall Street, Brennan has served in many roles, including trading, structuring and investment banking.

Gajjar also joins Guggenheim from Credit Suisse, where he spent 15 years and was most recently a senior member of the real estate finance and securitisation group. During his tenure with Credit Suisse, Gajjar launched and built-out numerous commercial real estate businesses and products.

CMBS

Senior hire for CRE business

Brian Clark has joined Clayton Holdings as senior md and business development officer for the company's CRE business. He will report to business development evp Tom Donatacci and work in Ed Robertson's CRE team, helping financial institutions, CRE owners and investors with portfolio and property valuation services as well as strategy development.

Clark has more than 15 years of experience, including serving as Merrill Lynch's alternative assets group head of real estate hybrids. In a previous role at ING, he established and led a distressed commercial whole loan desk.

"Over the past few years we've seen a vast change in the commercial real estate market with a drastic tightening of credit and record amounts of CRE debt coming due," says Donatacci. "As the traditional debt markets shift, adding a business development leader with the breadth and depth of experience that Brian has will enhance Clayton's ability to provide valuable solutions to its CRE clients."

CMBS

SF lawyer added to real estate practice

Law firm Jones Day has hired Richard White to its Atlanta office as a partner in the real estate practice. White joins Jones Day from Kilpatrick Stockton.

White focuses his practice on structured finance and servicing matters relating to CMBS and RMBS. He represents servicers and special servicers in all aspects of CMBS servicing, with particular emphasis on pre- and post-securitisation servicing and asset management issues - including loan modifications and restructurings, as well as the purchase, sale and transfer of servicing rights.

In addition, White represents banks and other entities in all aspects of the acquisition and disposition of commercial and residential mortgage loans. He has experience in the acquisition of pools of performing and non-performing residential and commercial mortgage loans from almost every major Wall Street-based holder of such assets.

CMBS

CRE Finance Council president announced

CRE Finance Council has announced the succession of Lisa Pendergast as president of the organisation from June 2010 until June 2011. Pendergast follows Patrick Sargent, who served as president over the past year.

Pendergast is an md in Jefferies' fixed income division MBS/ABS/CMBS group and is responsible for strategy and risk for CMBS and other structured commercial and multifamily real estate products. Prior to Jefferies, she was an md in the fixed-income strategies group at RBS Greenwich Capital, where she worked for eight years.

Emerging Markets

Global EM products head appointed

Sudip Thakor has changed roles within Credit Suisse, moving from the investment bank to the asset management division as md and head of global emerging markets products. He will be based in New York at first, before moving to Singapore next year, reporting to Neil Harvey, Asia Pacific and global emerging markets head.

Credit Suisse has identified the development of its emerging markets platform as a strategic priority. Thakor's role will be to focus on product development and marketing, working alongside the global asset management teams led by Alastair Cairns and Eileen Dowling.

Thakor will be responsible for developing opportunities in private equity, real estate, hedge funds and ETFs within the emerging markets. He is also charged with strengthening the bank's alternatives platform in EMEA and Asia.

In his previous role, Thakor led the global structuring group in the fixed income department and served on the fixed income operating committee and global emerging markets management committee. He has held several emerging markets roles in both New York and Singapore since joining Credit Suisse from Bankers Trust Company in 1997.

Legislation and litigation

Securities law counsel elected

Richards, Layton & Finger has elected Weston Peterson to the position of counsel and Marcos Ramos as a director of the firm effective 1 July, 2010.

Peterson will concentrate his practice on the use of Delaware trusts organised as investment companies, where he advises clients with respect to entity formation, capital raising transactions, fiduciary duty issues, fund reorganisations and acquisitions, defensive planning, proxy contests and shareholder meetings. Prior to joining the firm in 2005, Peterson practiced as an M&A and securities law attorney in the New York offices of Jones Day and O'Melveny & Myers.

Ramos will serve as a member of the firm's bankruptcy and corporate restructuring department and will focus on preference and fraudulent transfer litigation, as well as contested matter and other bankruptcy proceedings.

RMBS

Broker hires former Bear Stearns MBS team

Independent broker-dealer Braver Stern Securities has added five new MBS hires, who formerly worked at Bear Stearns. They will be based in its new Midwest office in the Chicago area.

David Connelly, a 25-year veteran of Bear Stearns' MBS department, will become a member of Braver Stern's management committee. He was most recently a senior md at Guggenheim Securities, responsible for managing the Chicago office.

Other hires formerly from Bear Stearns include Brian Vanselow, JP Gagne, Kevin Smith and Mike Piper, which will join in mortgage sales. They also hail directly from various positions within Guggenheim's mortgage practice.

Cliff Sterling, md in fixed income sales at Braver Stern, says: "We are excited about this talented group of individuals joining our team. They will significantly expand our distribution capability and help to develop our relationships with the important Midwest market."

Additionally, Braver Stern also hired another Guggenheim executive to be based in New York. Andy Lorimer joins as CDO/CLO trader. Prior to Guggenheim, he worked at Resource America.

RMBS

Five hired for fixed income expansion

Janney Montgomery Scott has made five additions to its fixed income team. The new arrivals follow another five hired to the fixed income team in March (see SCI issue 177).

New additions to the Philadelphia headquarters are Wayne Wales and Dan Herbst. Wales has nearly 25 years of experience trading and selling MBS, and joins from Stifel Nicolaus where he was fixed income sales first vp.

Herbst has over 12 years of retail fixed income experience and becomes a retail mortgage trader for Janney, joining the retail trading team in the servicing of the taxable fixed income needs of the firm's private client group. His most recent role was senior MBS trader at LPL Financial, where he covered the largest independent advisor force in the US. He has previously worked for Edward Jones & Co.

Mike Festa, Dan Lang and Brian Doherty join Janney's Boston office. Festa joins as director of institutional sales and both he and Lang come from Keybank Capital Markets. Doherty has nearly 15 years of industry experience, holding the post of fixed income sales vp at Raymond James & Associates, Daiwa Securities America and Goldman Sachs subsidiary Spear, Leeds & Kellogg.

"These are game-changing hires, who bring top expertise and a diverse network of relationships to our firm," says Steve Genyk, md and head of fixed income at Janney. "Their combined experience and track records are tremendous assets for our fixed income clients."

Trading

Fixed income team expands into Europe

Cantor Fitzgerald has expanded into the fixed income, ABS and structured credit markets in Europe, with new hires in the UK, Italy, Ireland and Germany.

The trading team will be lead by Emmanuel Androulidakis who has joined as the European head of the structured credit desk, responsible for non-US ABS/MBS trading. Androulidakis will oversee the building of a dedicated structured credit trading and distribution team covering all European asset classes. Previously, Androulidakis ran the RBS ABS/MBS desk in London and prior to this he was at Mellon Capital Markets where he structured RMBS deals.

Bjoern Bauermeister joins Androulidakis' team as a director focusing on trading non-US ABS and MBS. Prior to Cantor Fitzgerald Bauermeister served on BNP Paribas' ABS trading desk where he was the sole market maker for European ABS, MBS and CDOs, as well as CDS of ABS.

Faten Bizzari joins as the head of European CRE debt trading focusing on distribution platforms including CMBS and real estate loans. Bizzari joined from HBOS Treasury where she was head of investment credit overseeing £48bn of ABS.

The new sales team for UK and Ireland structured credit consists of Vanessa Bradford and Lucinda Broad. Bradford will serve as head of UK and Ireland structured credit sales and joins from Lehman Brothers where she was head of hedge fund sales for European structured products. Broad joins Bradford's team as vp for UK and Ireland structured credit sales and was previously with BNP Paribas in structured credit syndication and debt capital markets origination.

Focusing on Italian accounts, both Alessandra Frontini and Michela Molendi join as mds on the ABS/IG team based in Milan. Previously, Frontini was at Morgan Stanley in credit sales, while Molendi was at Dresdner in fixed income sales and Banca Commerciale Italiana as fund manager.

For Germany and Austria, Martin Hellmich and Bjoern Schuck join as md and director respectively. Both were previously with DekaBank where Hellmich was head of treasury and Schuck was responsible for developing and marketing structured products.

In the Iberia region Dacil Acosta joins the ABS/MBS sales team and Jacques de Lezardiere joins the structured credit team. Acosta was most recently in fixed income sales at Mitsubishi UFJ Trust where she also covered institutional clients in Spain and Portugal. Lezardiere joins from MarketAxess in London where he was in sales and in charge of France, Geneva and Monaco.

ABS

Structured credit trading platform ready

BNY Mellon has launched its real-time auction marketplace where buyers and sellers of fixed income securities can transact with each other anonymously. The anonymity should encourage reverse enquiry, best execution, transparency and liquidity (see SCI issue 184).

Structured Credit Connection grants access to collateral and loan level data, as well as integrated analytical systems designed to improve marketplace confidence for all types of structured credit securities, including those with less liquidity. "Currently, there is no single market for buyers and sellers that provides reliable and transparent information and loan level data for fixed income securities," says BNY Mellon financial markets and treasury services ceo, Karen Peetz.

She adds: "Structured Credit Connection unites participants anonymously in a single marketplace and provides them with access to data and tools they can use to evaluate their securities. This will greatly enhance the clarity around the securities being traded and participants' confidence in the overall auction process."

Clients can also use Structured Credit Connection to conduct high-level portfolio analysis and monitor overall market activity. Trading and execution services are provided through BNY Mellon Capital Markets.

ABS

TARP repayments exceed outstanding funds

TARP repayments to taxpayers have, for the first time, surpassed the total amount of TARP funds outstanding, according to the May monthly TARP report from the US Department of the Treasury. The Treasury's report showed that, through to the end of the month, TARP repayments had reached a total of US$194bn, which exceeded the total amount of TARP funds outstanding by US$4bn.

Assistant secretary for financial stability Herb Allison says: "TARP repayments have continued to exceed expectations, substantially reducing the projected cost of this programme to taxpayers. This milestone is further evidence that TARP is achieving its intended objectives: stabilising our financial system and laying the groundwork for economic recovery."

The report notes that TARP repayments officially surpassed total TARP funds outstanding in May when the Treasury completed its sale of 1.5 billion shares of Citigroup - a transaction that provided gross proceeds of US$6.18bn to taxpayers.

In addition to the US$194bn in TARP repayments, the report showed that taxpayers have also received a further return on TARP investments of US$23bn through dividends, interest and other income. Overall combined TARP revenues totaled US$217bn through to the end of May.

The overall projected cost of the TARP programme has declined dramatically as repayments to taxpayers continued to exceed expectations, says the report. In May, Treasury notified Congress that the projected lifetime cost of TARP has decreased by US$11.4bn to US$105.4bn since the 2011 President's budget. Previously, the Administration estimated the cost of TARP would be US$341bn.

Going forward, over the life of the programme, additional TARP expenditures beyond those that have occurred through May 2010 are expected to be made for housing initiatives and other programmes, such as those to assist smaller banks and the securitisation markets. But the Treasury still expects that repayments will continue to exceed outstanding amounts.

ABS

Relative value indicator introduced

ABS analysts at Wells Fargo have introduced a relative value indicator (RVI), which is designed to be a technical measure of relative value at the sector level in the consumer ABS market. The RVI uses short- and medium-run spread trends and the volatility of spreads to construct an index to determine when spreads have moved away from fair value.

"In our opinion, statistical gauges, such as the RVI, can add quantitative support to our qualitative views of value and fundamental credit analysis," the analysts explain.

The rich/cheap indicator index moves between approximately +1.0 (cheap) and -1.0 (rich). Readings beyond +/- 1.0 are possible, but rising volatility eventually catches up and creates limits, even in periods of extreme spread movements, according to the analysts.

Index values are calculated for each consumer ABS sector and can be extended to cross-sector spread differentials or credit spread differentials within each sector. At present, the RVI suggests that the credit card sector seems to be on the tight side of fair value. Prime auto, subprime auto subordinated bonds, equipment, rate reduction and student loans are beginning to signal better relative value on a technical basis, however.

"This recommendation from our technical model would be consistent with our fundamental view that credit and structure are still positives for consumer ABS, but investors should be prepared for near-term volatility in spreads," the analysts conclude.

ABS

Deposit set-off exposure mitigated

The implementation of UK deposit protection later this year for eligible bank deposits on a gross, rather than the current net basis, will mitigate deposit set-off exposure in UK structured finance transactions and covered bond (CVB) programmes, according to Fitch. As a result, when the broader protection takes effect on 31 December 2010, the rating agency says it will no longer consider eligible bank deposits, up to the £50,000 cap, in its analysis for affected transactions and programmes.

The UK's Financial Services Compensation Scheme (FSCS) provides compensation to a depositor in the event that a deposit-taking institution enters into insolvency and deposit balances are lost. The rating agency explains that deposit set-off risk is important with respect to its analysis of SF transactions and CVB programmes because its analysis typically assumes the originator will become insolvent and therefore any losses that might arise from insolvency need to be accounted for during the rating analysis.

Due to the lack of directly applicable statute or case law, transaction and programme legal opinions have been unable to provide an unequivocal view with respect to whether obligors are able to validly apply set-off, explains Fitch. The agency is comfortable that legal set-off risks with respect to deposits made by obligors, subsequent to the receipt of notification to borrowers of the transfer of receivables, are adequately addressed. However, it has thus far assumed that set-off risks exist in relation to deposits made prior to the receipt of notification and that remain outstanding at the time of an originator's insolvency.

The FSCS announced in July 2009 that it would provide protection for the gross amount of eligible deposits, effective from 31 December 2010. Fitch explains that depositors will not need to set off balances that they owe to the deposit-taking institution before receiving compensation for lost deposits under the expanded scheme.

Currently, the scheme's rules only provide for depositors to be compensated net of any debts owed. Given the net pay-out rule, Fitch has not previously considered the scheme to mitigate set-off risk in SF transaction and CVB programmes and assumed that borrowers would set off the deposits against the debts sold to relevant securitisation SPVs or covered bond LLPs.

Under the scheme, deposits of £50,000 per depositor (natural persons and small entities) are eligible for protection. The scheme aims to make compensation payments within seven days of a bank's insolvency and is required to do so within 20 days, thereby minimising the liquidity impact upon depositors. It will not mitigate set-off risks for deposits in excess of £50,000, deposits under certain off-set mortgages, claims arising under mortgages with additional drawdown features and potential other claims against the originator.

In the period until 31 December 2010, Fitch will continue to analyse set-off exposure in new transactions and programmes on a case-by-case basis taking into account factors such as the size of the exposure and the short-term strength of the deposit-taking entity. For certain transactions and programmes with a very strong originator and/or limited set-off exposure, the upcoming changes (combined with existing partial mitigation) may be deemed adequate to mitigate set-off risks (for eligible deposits up to £50,000) in the absence of specific structural enhancements.

ABS

Dealer floorplan ABS to stabilise

Fitch says that now US auto dealers are showing profits, the performance landscape is likely to improve for the already resilient US dealer floorplan ABS sector. The turnaround for dealers follows several years of declining profitability and mounting pressures.

"Dealer floorplan transactions were already exhibiting resiliency to the recent credit crisis and financial strain over the last two years," says Fitch senior director Hylton Heard. "Recently improved auto sales and subsiding dealer costs are likely to further stabilise performance trends."

Fitch's outlook for dealer floorplan ABS ratings through 2010 remains stable, with performance metrics for the year having strengthened. Higher monthly payments rates, increased purchase rates, lower levels of delinquencies and agings, as well as fewer dealer defaults and overall loss levels all inspire confidence.

Certain concerns do linger, however. Fitch says it is most worried by the state of the US economy and its slow recovery, the current low level of auto sales compared to historical levels, the intensely competitive environment and ongoing dealer pressures such as access to credit, expenses and profitability.

Weakness in other non auto-related sectors, such as marine and recreational vehicles, also pose problems for manufacturers and dealers tied to non-auto or diversified equipment dealer floorplan ABS, the agency says.

ABS

UK credit card performance 'mixed'

The performance of UK credit card receivables was mixed in April 2010, according to Fitch, with the positive impact of a reduction in charge-offs offset by sharp falls in yield and monthly payment rates (MPR).

In a recent report, Will Rossiter, associate director in Fitch's consumer ABS team, says: "Despite the drops in the charge-off levels, the further reductions in the monthly payment rates continues to suggest that the ability of UK credit card borrowers to service their overall debt levels remains under stress. Further increases in UK unemployment are expected to continue to impact UK borrowers throughout the remainder of 2010."

The Fitch MPR Index dropped significantly, by 260bp to 15.4%, some of which was attributable to day-count variations between March and April and with each of the trusts included in the index reporting a month-on-month decline in MPR. Similarly, the Fitch Yield Index also reported a large overall month-on-month drop of 90bp, falling to 22%.

In contrast, the analysts note that both the Fitch charge-off index and the Fitch 60 to 180 day past due delinquency index improved month-on-month in April 2010, with the charge-off index declining by 120bp to 10.5% and the Fitch delinquency index dropping 10bp to 4.3%. As a result of the drop in charge-offs reported by almost each of the trusts included in the index, the Fitch excess spread index remained elevated, with a month-on-month increase of 60bp to 7.7%.

While Fitch regards the improvements in the overall charge-off and delinquency levels as positive signs for the performance of the credit card trusts, the agency remains concerned regarding the levels of debt-management use in some of the trusts, which can lead to a reduction in reported charge-offs and an overstatement of excess spread levels.

ABS

Spanish SME delinquencies stabilise

Spanish SME delinquencies recorded their lowest level in April since December 2008, according to a report by Moody's.

Weighted-average 90- to 360-day delinquencies represented 1.87% of the outstanding balance of Spanish SME transactions in April this year, compared to 2.84% in April 2009. Although this marks a definite improvement, Moody's notes 90- to 360-day delinquencies averaged 0.38% from January 2004 to June 2008.

The previously high level of delinquencies rolled into a high volume of write-offs, which in turn resulted in reserve fund draws and amortisation deficits. April saw 52 reserve fund draws, compared to 48 the month before - although they were to a large extent expected, given the deterioration of performance over the past two years.

Asia

Asian corporate default rate set for sharp drop

The default rate among non-financial corporates in Asia Pacific ex-Japan will drop sharply in 2010, according to a recent report from Moody's, which continues a trend that began at the beginning of this year.

Clara Lau, a Moody's group credit officer, says: "Accordingly, the speculative grade default rate is expected to fall to about 3.5% by end-2010 from 17% in 2009, based on Moody's Credit Transition Model (CTM)."

She adds: "The projection is in line with the global default rate forecast to fall to 2.4% by end-2010 from 13% at end-2009. This scenario incorporates Moody's base-case assumption of continued economic recovery and generally stable credit spreads through 2010."

The sharp expected decline in the default rate for Asia Pacific reflects a significantly better credit market environment and progressively improving economic conditions in the region, according to Lau. "This situation, is in turn, reflected in two key assumptions embedded in the CTM - a materially lower high-yield spread forecast and declining unemployment rates."

Furthermore, a better rating mix for 2010 - reflecting a stabilising credit trend - is contributing to the lower estimated default rates. The average rating for the rated high-yield issuers is B1, a notch higher than last year.

Further contributing to the lower default rate is the overall increased accessibility by the region's speculative-grade companies to the bank and capital markets, says Lau.

Looking back, in 2009 non-financial corporate rated defaults for the region surged to a record 11 cases, while the volume of defaulted debt was around US$3.5bn - up from US$100m in 2008 and a complete absence of defaults during 2004-2007.

CDO

Investors beware junior note cancellations

A recent decision by the Delaware Court of Chancery involving Concord Real Estate CDO 2006-1allowed cash to continue to flow to equity holders rather than shifting to senior noteholders upon failure of par value coverage tests, potentially increasing losses at the top of the capital stack while reducing losses at the bottom. In its Weekly Credit Outlook, Moody's warns that the ruling may lead to junior note cancellations in other structured credit transactions.

To avoid failing the par value test, the CDO's sponsor delivered several junior notes that it owned to the CDO co-issuers for cancellation. The court rejected a challenge by the trustee and held that the junior noteholders can surrender their notes, absent a direct prohibition in CDO documentation.

"The use of the cancellation technique approved in the ruling could significantly impact structured transactions with par value coverage tests," Moody's explains. "If sponsors are able to avoid par coverage value test failures by cancelling certain classes of notes, senior noteholders are much less likely to benefit from the diversion of cashflows as the underlying asset portfolio deteriorates. As a result, the senior notes may experience greater losses because they will remain outstanding for longer than previously expected."

Conversely, junior notes may experience lower losses because they will receive cashflows that would otherwise have shifted to the senior notes.

CDO

CRE CDO delinquencies continue to decline

Delinquencies for US CREL CDOs again declined slightly last month as asset managers continue to both extend loans and trade out credit risk assets, according to the latest US CREL CDO delinquency index results from Fitch. The May 2010 delinquency rate decreased to 11.6% from 12.1% in April.

45 loan extensions were reported in May, including four former matured balloon loans. Three previously delinquent assets were disposed of by asset managers at losses ranging from 20% to 99.8% of par.

In May, total realised losses on credit risk assets were reported at over US$50m. "Many troubled assets disposed of at losses this past month were not yet considered delinquent," says Fitch director Stacey McGovern. "The CREL delinquency index may understate the extent of credit risk assets as managers continue to pursue resolutions and/or trade out potentially troubled assets at losses to par, often prior to actual default."

CDS

Equity tranches to see more protection buyers

CDS market participants in Europe are slowly contemplating buying more protection on equity tranches. The move has not been large in the correlation markets, but according to one strategist, a stronger equity tranche focus is expected.

Senior tranches have typically been used to hedge against credit spread widening, but participants could shift to equity tranches if the sovereign debt crisis lingers, says the strategist. "We have some clients starting to look at equity tranches to buy protection on the most junior part of the capital structure to hedge themselves against some defaults," he says.

Over the past couple of weeks, spreads on equity tranches have indeed widened more than usual compared to the iTraxx Europe index itself, says the strategist. At the beginning of May, equity tranches were paying at 26% and now they are around 42.5%, he adds.

Spreads in the iTraxx Europe super senior tranches have also widened since the start of the year as tranche selling in the sector abated. The super-senior tranche, in particular, has been a common way to put on a position about a judgment on the financial sector amid the credit crisis.

But overall interest in the tranches has remained strong. "In the tranche market liquidity has improved significantly over the past couple of weeks," the strategist adds.

CDS

Succession events reviewed

Credit Suisse has asked ISDA's EMEA Determinations Committee to determine whether a succession event has occurred on Cable and Wireless (C&W). The request follows C&W's demerging of its UK/European operations into a separate company called Cable and Wireless Worldwide. C&W was left holding only the emerging markets telecom operations, which were transferred to a new holding company called Cable and Wireless Communications. As part of this demerger, several obligations were transferred to Cable and Wireless Worldwide.

Separately, the EMEA Determinations Committee has determined that a succession event occurred with respect to Nordic Telephone Company Administration on 12 April. The sole successor is Angel Lux Common.

CDS

Call for new counterparty risk strategies

Given the current environment of capital scarcity and increased volatility, firms should look to achieve higher responsiveness to counterparty credit deterioration, attain full reuse of collateral across products, minimise overcollateralisation and realise funding efficiencies, according to Celent in a new report.

The report found that despite ongoing emphasis to retool and upgrade capabilities in capital management, there remains considerable scope for improvement in the operational and technological aspects of this process. Furthermore, the need for a firm-wide collateral management system (CMS) has become critical in order to enable firms to achieve new levels of efficacy and responsiveness in credit risk mitigation efforts.

In terms of advanced features and technology, SunGard and Algorithmics stand out as leading vendors, according to Celent. Despite having some way to go in terms of providing clients with out-of-the-box collateral optimisation, these firms have a clear road map and demonstrable product experience around collateral optimisation functionality says the report. Lombard Risk is a notable contender for advanced functionalities, with asset class coverage that includes listed derivatives such as those for futures and options margining.

For the breadth of functionality dimension, SunGard, Sophis and Algorithmics demonstrate the broadest coverage across various asset classes, as well as a wide functional footprint across the stages of the collateral management lifecycle, the report finds. In particular, Celent notes that solutions from SunGard and Algorithmics closely align with broader risk management offerings related to market, credit, liquidity and counterparty risk and exposure monitoring.

Sophis provides wide front-to-back product coverage, ranging from cash-based products and equity to hybrid structured products and even energy and metals. This provides cross-asset support for the client in its trading and portfolio management in line with its collateralisation functionality.

In terms of client base, Algorithmics, Misys and Lombard Risk have the highest number of unique customer installations, says Celent, while Algorithmics and SunGard stand out in their track record of delivering to diverse client groups' requirements as well as their ability to provide localised support/services.

Overall, Celent finds that while most of the solutions provide support for core activities, gaps are noticeable in a number of areas. First, end-to-end solutions that can cover all the departments and across the collateralisation lifecycle are not available. Second, coverage of all the asset classes is still lacking in some solutions. Lastly, collateral optimisation techniques are not very evolved.

CDS

CDS volumes outstanding decline

The BIS Quarterly Review for June 2010 attributes the recent surge in volatility in global financial markets to a loss of investor confidence, due to fiscal concerns and the risk of weaker growth. The European rescue package bought a temporary reprieve from contagion in euro sovereign debt markets, but market concerns about the economic outlook remain, according to the BIS.

The Review shows that positions in OTC derivatives increased modestly in the second half of 2009. Notional amounts outstanding edged up by 2% to US$615trn by the end of December.

Exceptions to the upward trend were OTC derivatives on commodities and credit default swaps, whose volumes outstanding fell by 21% and 9% respectively. Reporting banks' gross credit exposures - which provide a measure of counterparty risk - fell by 6%, after an 18% decline in the first half of 2009.

Clearing

ISDA says some derivatives not eligible for clearing

In a statement following the release of the European Commission's consultation papers on OTC derivatives, ISDA says some derivatives are simply not eligible for clearing. But it strongly supports the principles that clearing houses should be robust.

ISDA also supports proposals that will require the use of, and reporting to, trade repositories for OTC derivatives. "The industry's goal is to provide supervisors with a complete view of the OTC derivatives market, both cleared and uncleared trades, across transactions, firms and counterparties," it notes.

Approximately US$9trn of CDS trades and over US$210trn of interest rate swaps have been centrally cleared, according to ISDA. The organisation and 14 large market participants in September 2009 committed to clearing 95% of new eligible CDS trades and 90% of new eligible IRS.

In addressing the attention paid to sovereign CDS and the extent to which naked sovereign CDS dictates prices of underlying bonds, ISDA also comments that it is "...difficult to believe that the far smaller CDS market has had an undue influence on cash bond markets that are 70 times bigger".

The EC's consultation focuses on possible measures to enhance the resilience of derivatives markets, as well as options to be considered for a future proposal that would deal with potential risks arising from short selling and CDS.

CMBS

Full repayment likely for White Tower senior notes

The execution of Carlyle Group's sales bid of about £700m for a group of six properties backing White Tower 2006-3 could pay off nearly the full balance of the deal's senior notes, Moody's notes in its latest Weekly Credit Outlook. The senior Baa1 rated notes have a current balance of £632m, reflecting a note-to-property value of 68%. The Carlyle bid is about 5% less than CBRE's asking price for the properties, however.

"The sale is a credit-positive development for senior noteholders, especially because the sequential allocation of liquidation proceeds means that every pound of recovery benefits solely them. Also credit positive for senior noteholders is the favourable timing, with recovery proceeds starting to come in more than two years before the legal final maturity of the notes in October 2012," Moody's explains.

Indeed, the potential sales give comfort to holders of the senior notes rated by Moody's that the transaction will likely pay the notes in full. In contrast, junior noteholders are much more exposed to the volatile market sentiment, which makes recovery estimates uncertain. Holders of unrated notes face the possibility that significant losses may crystallise.

CMBS

Blue City tender offer completed

Essdar Investments has completed its tender offer to acquire the class A floating rate senior secured unrestricted notes issued by Blue City Investments 1, in what it describes as a significant step for its regional distressed debt strategy. Essdar Capital acted as the financial adviser to the tender offer for the CMBS notes backed by the stalled Oman Blue City project.

Notes with a principal amount as of 7 November 2006 of US$588m have been acquired at an average discount of 37.15% from their face value. Essdar now holds over 99% of the notes, representing US$655m in original face value.

Essdar chairman Hamad Abdulla Al Shamsi says: "We are very proud of the completion of this transaction by Essdar. This investment is a landmark transaction in regional distressed debt and is a significant step towards Essdar's regional strategy. Essdar will continue to provide innovative investment strategies in equity and debt capital markets."

Essdar says it aims to be one of the finest regional financial advisory, asset management and investment firms. The foundation of its approach is to leverage the combined strengths of its stakeholders and focus on its core competencies in sovereign advisory, complex debt restructurings, structured finance and investment solutions.

Mohamad Sotoudeh, Essdar ceo, adds: "With the credit crunch, more and more entities are finding it difficult to refinance. Essdar's strategy is to look at such businesses and develop and execute a strategy which can extract value for our investors and the businesses."

CMBS

Mall Funding restructuring proposed

A restructuring has been proposed for the Mall Funding CMBS, comprising: a three-year loan extension from April 2012 to April 2015; an extension of the legal final maturity of the notes until 2017 to retain a two-year tail period; a cash injection of £155m; a 50bp margin increase on the notes; and mandatory amortisation and a revised LTV covenant to encourage de-leveraging over time.

In connection with the loan restructuring, unit holders in the fund will be asked to vote on an extension of the fund until 30 June 2017, according to Chalkhill Partners. A committee of noteholders representing approximately 45% of the notes has been involved in the negotiations. A vote on the proposal will be conducted on 5 July.

Fitch says that the restructuring proposal is not considered a coercive debt exchange (CDE), according to its CDE criteria for structured finance transactions. In the absence of mitigating factors, the maturity extension could have been considered as materially impairing the economic position of the noteholders and therefore constituting a CDE. However, the rating agency believes that other terms of the restructuring proposal sufficiently mitigate the negative impact of the maturity extension.

CMBS

FS2 uncertainty remains, despite Karstadt sale

The announced sale of Karstadt has no immediate rating impact on Fleet Street Finance Two's (FS2) class A to D CMBS notes, according to Fitch. The rating agency placed the notes on rating watch negative (RWN) on 12 April 2010, pending further clarity regarding the then proposed sale of Karstadt and its impact on the CMBS transaction (SCI passim).

Karstadt's creditor assembly accepted the bid of Nicolas Berggruen, one of three bidders, on 7 June 2010. The other bidders were Triton, a private equity firm, and Highstreet, the borrower of FS2 and owner of the majority of Karstadt's department stores. The sale of the entire Karstadt business is one of the preconditions for the approval, and consequently the implementation, of the insolvency plan announced by the insolvency administrator in March 2010.

Public sources report that Nicolas Berggruen signed the relevant purchase contract on 7 June 2010. However, Fitch points out that uncertainty remains regarding the completion of the sale, as Berggruen has sought rent reductions beyond those already approved by bondholders in February 2010 in the course of the transaction restructuring. The extent of rent reductions envisaged by the new owner is still unclear, but any further reductions impacting the collateral of FS2 are expected to require the agreement of the transaction's noteholders, explains the rating agency.

Highstreet has reportedly proposed to meet with Berggruen by the end of this week to get more clarity on his expectations. If no agreement can be reached, there is a strong risk that Karstadt may still be liquidated.

Fitch notes that, despite the announced sale, there are still many uncertainties surrounding the implementation of Karstadt's insolvency plan, which is why the transaction remains on RWN. The rating agency explains that it will resolve the rating watch once the February 2010 restructuring is complete and all the relevant documents have been reviewed by the agency. Furthermore, Fitch expects to receive definitive and more detailed information regarding the outcome of Karstadt's sale, especially relating to potential further rent reductions, before resolving the RWN.

CMBS

Appraisal reductions continue for US CMBS

May saw 251 US CMBS loans assigned first-time appraisal reductions, totalling almost US$3bn in face amount, according to Trepp estimates. Of particular concern are 19 loans with balances greater than US$30m, which have experienced an average appraisal reduction of 31.5%.

The largest one - the US$190m Montclair Plaza loan that represents 5.36% of WBCMT 2006-C28 - was hit with a reduction of US$53.3m or 28% of the loan balance. Two others - the Tri-County Mall in Cincinnati and the Springfield Mall in Springfield - have both been in special servicing since late 2009 and had appraisal reductions north of 60%.

Meanwhile, the Trepp database has identified 139 loans as having resolved with losses in May, with outstanding loan balances ranging from US$32.3m to under US$500,000. In total, the loan balances totalled just under US$700m prior to being liquidated. These loans recovered about US$375m for an average loss severity of 46%.

Of note, the US$15.47m Normandie Holdings Portfolio I loan - which was part of the CSFB 2005-C4 pool - experienced a loss of US$16.68m or 108% of the loan balance.

CMBS

CMBS buy-back results announced

Land Securities has announced the results of its £300m tender offer for the Class A9 notes of Land Securities Capital Markets. £253.781m were bought back at a price of £1,017.96 per £1,000 face value at a 0.529% reference yield and a 125bp spread, according to ABS analysts at UniCredit. All notes submitted were purchased, with the offer settling on 15 June.

CMBS

CMBS rating actions revealed

S&P has published a summary of the rating actions resulting from its review of conduit and fusion CMBS.

"The criteria changes represented a significant update to our methodologies and assumptions for determining credit enhancement levels and ratings for conduit and fusion CMBS," says S&P credit analyst James Digney. "The core of our approach was establishing a credit enhancement level sufficient, in our view, to enable triple-A rated tranches to withstand market conditions commensurate with an extreme economic downturn without defaulting."

At the time of the criteria update in June 2009, S&P determined that the revisions could affect 3,570 of the 4,467 total outstanding ratings on these 217 transactions. The agency placed or maintained all 3,570 of these ratings on credit watch negative following the criteria announcement.

As of 27 May 2010, S&P had resolved all of the outstanding credit watch negative placements. It downgraded 3,052 of the classes on credit watch negative, affirmed the ratings on 511 and upgraded the remaining seven. The agency also downgraded an additional five classes that were not on credit watch negative.

The criteria update had a significant impact on recent-vintage (2005-2008) CMBS ratings. Overall, 33% of the downgrades affected the 2007 vintage, 27% affected the 2006 vintage and 23% affected the 2005 vintage.

Of the 196 super-senior classes that S&P downgraded, 16 (8%) were from the 2008 vintage, 123 (63%) were from 2007, 40 (20%) were from 2006 and 15 (8%) were from 2005. The remaining two downgraded super-senior classes were from 2004.

CMBS

US CMBS loan delinquencies keep increasing

The US CMBS loan delinquency rate increased by 48bp to 7.5%, according to Moody's delinquency tracker (DQT). Despite the rate of increase tailing off in each of the last two months, the agency expects the delinquency rate at the end of 2010 to be around 9%-11%, up from the previous expectation of 8%-9%.

Moody's DQT tracks all loans in US conduit and fusion deals issued in 1998 or later with a current balance greater than zero. The agency says its slightly more negative view is the result of stubbornly high US unemployment, the potential impact of European sovereign debt problems on the US economy and ongoing difficult conditions for some CMBS sectors.

"While certain property sectors, such as multifamily and hotels, are starting to show signs of improvement along with the broader economy, other sectors like office and retail have lagged national economic trends and most likely have more pain ahead," explains Moody's md Nick Levidy.

May saw 349 loans become newly delinquent, which brought the total number of currently delinquent loans to almost 4,000, with a balance of US$48.8bn. A year ago there were 1,800 delinquent loans with a balance of US$15.5bn and the DQT stood at 2.27%.

The hotel sector continues to have the highest delinquency rate. It ended the month at 13.25% after increasing by 27bp. Multifamily ended the month as a close second, rising 26bp to 13.13%.

Retail rose 24bp to 6.10%, while the office sector no longer has the lowest delinquency rate after it increased by the most, rising 101bp to 5.59%. The industrial sector saw delinquencies rise by only 6bp, so it now has the lowest rate at 5.29%.

Regionally, the West saw the steepest climb, rising 87bp to a delinquency rate of 8.63%. The South's 73bp increase to 9.49% ensures it retains the highest rate, while the East has the lowest rate of 5.73% after a rise of 11bp. The Midwest saw delinquencies rise by 74bp to 8.23%.

Nevada is the state with by far the highest delinquency rate. An increase of 263bp has taken its delinquency rate to 22.66%, but no other state has a rate higher than 15%.

CMBS

CMBS presales enhanced

As new US structured finance transactions begin to emerge, Fitch says it has enhanced its presale reports for new CMBS transactions to provide even greater transparency. The first of these reports was released to the market on 9 June for an upcoming JPMorgan CMBS multiborrower deal (JPMC 2010-C1).

"The presale will provide investors with some of the benefits of a seat at the credit committee through access to key rating drivers, and in-depth analytical notes and commentary on cashflow analysis and site inspections," says Huxley Somerville, group md and head of Fitch's US CMBS group.

The new presale features include:

• Ratings sensitivities indicating expected bond performance based on changes to property level metrics;
• Deterministic tests that ensure the ratings withstand 'what-if' scenarios; and
• Drivers of the variance between issuer cashflows and Fitch cashflows on every loan it reviews.

At the loan level, Fitch has increased the number of full loan write-ups to the largest 15 loans in a pool up from the top-10.

Regulation

Reg AB proposal prompts reporting enhancements

BNY Mellon has introduced new modelling and reporting capabilities in response to the SEC's proposed changes to Regulation AB for ABS. The firm plans to offer issuers waterfall models in the Python programming language, loan-level details in XML, a cashflow projection engine that supports loan-level default and prepayment modelling, and a desktop application making models and data publicly accessible to users world-wide.

The SEC has proposed that materials for public offerings of ABS contain specified asset-level information about each of the assets in the pool (SCI passim). The asset-level information would be provided according to proposed standards and in a tagged data format using XML. In addition, the SEC would require the filing of a computer programme of the contractual cashflow provisions expressed as downloadable source code in Python, a commonly used open source interpretive programming language.

Douglas Magnolia, md at BNY Mellon's QSR management unit, says: "If these proposed changes are adopted, issuers of asset-backed securities will need to comply with complex reporting requirements that they are not currently equipped to meet. We believe we are the first company to develop this capability and we look forward to working with clients in the future, should the proposed changes become law."

RMBS

Ginnie Mae creates new MH MBS programme

Ginnie Mae has created a new MBS programme for manufactured home loans. It is currently accepting applications for participation as issuers of MBS backed by new Title I manufactured home loans. Those issuers who are currently approved to issue MH securities have to re-apply in order to participate in the new programme, however.

All approved issuers will be required to maintain a minimum adjusted net worth of US$10m plus 10% of the amount of MH MBS outstanding. Other new features include having the programme apply to pools backed by loan collateral from which the loan application date is 1 June 2009, and thereafter, in order to reflect the effective date of FHA's newly revised Title I programme.

Issuers, however, must provide to Ginnie Mae, at pooling, an acceptable FHA loan application date or the loan will be rejected. New programme guidance will be out no later than 1 September 2010.

The programme was created in response to recent changes in the FHA's Title I programme for manufactured housing and in support of the Housing and Economic Recovery Act of 2008. The programme is designed not only to fulfil the needs of borrowers and lenders, but also to provide for prudent risk management, according to a statement from Ginnie Mae.

RMBS

Debut RMBS for New Zealand lender

NZF Group has launched its first RMBS, the NZ$100m NZF Mortgages Series 2010-1, via Westpac. The transaction is the first New Zealand RMBS to close since 2007 and features a pool of seasoned residential mortgages, all with 100% mortgage insurance cover provided by Genworth Financial.

Rated by S&P, the deal comprises NZ$87.8m triple-A rated 2.7-year class A1 notes (that priced at 175bp over the New Zealand three-month forward rate agreement), NZ$9.1m triple-A rated 2.7-year class A2s (260bp over), NZ$2.5m double-A minus five-year class Bs and NZ$0.6m unrated five-year class Cs. The placement was reportedly a reverse enquiry from a small group of institutional investors.

The underlying pool consists of 348 loans (41.8% of which are low-documentation), secured by 403 properties and with a weighted average LTV of 73.4%.

RMBS

US mortgage credit shows improvement

While subprime delinquencies decreased and transition rates improved during May, prepayments have dropped slightly, according to Bank of America Merrill Lynch in its latest mortgage credit round-up.

Fixed rate jumbo prepayments dropped slightly, moving from 14.1% to 13.3%, according to ABS analysts at the bank, while the rest of the sectors remained unchanged. Given the recent rally in rates, BAML's model is reportedly projecting an increase in fixed jumbo voluntary prepayments in the coming months.

The increase is more pronounced in cleaner, earlier vintage collateral, the analysts point out. For example, 2005 vintage fixed rate jumbos are projected to prepay at 23.4% CRR over the next 12 months versus BAML's previous projection of 7.5%.

This is compared to an increase of only 4%-5% CRR for the 2006 and 2007 vintages. The model is also forecasting a modest increase in jumbo ARM and alt-A speeds.

Early stage transition rates continued to improve during the month and were down across sectors, according to the report. The analysts explain that after realising sizeable improvements since the start of the year, current to 30 transition rates in the subprime sector look to be levelling off, which is consistent with historic seasonal trends that typically show improvements in the first months of the year.

However, the analysts are encouraged by the decrease in prime current to 30 transition rates. Both the 2006 and 2007 prime fixed rate vintages declined by approximately 10% from the previous month and, while it is still too early to call a definitive turnaround, the analysts say that it is consistent with trends in lower quality segments.

Furthermore, subprime ARM 60+ day delinquencies dropped by another 80bp to 53.5%, according to the report. Declines were muted in the fixed subprime, Alt-A and option ARM segments, while prime delinquencies rose slightly by 19bp.

Foreclosure rates declined as loans were pushed to REO or liquidated through short sales. But severities inched up in prime, Alt-As and option ARMs, reversing some of the improvement seen in the prior month. Subprime severities declined by 2.5% and 0.5% for the fixed and ARM segments respectively. The analysts expect severities to remain range-bound over the coming months as extended timelines counterbalance improvements in the housing market.

Technology

CVA, counterparty risk solutions launched

Quantifi is set to enhance its existing software suite with the release of two new products - Quantifi CVA (credit valuation adjustment) and Quantifi Counterparty Risk - which are currently in beta testing with a select few clients.

The Quantifi CVA pricing tool allows traders and risk managers to price new trades to help them identify the risk dynamics on the desk at the point of trade and to effectively hedge counterparty risk. Quantifi Counterparty Risk will enable financial institutions to manage counterparty and market risk and effectively address CVA accounting requirements and evolving regulatory capital standards, including the new guidelines for securitisations.

David Kelly, director of credit products at Quantifi, says: "The ability to correctly price and manage counterparty risk is a key priority for financial institutions as they look to establish best practice in the pre- and post-trade management of CVA."

He adds: "Quantifi CVA is a unique product in that it offers the flexibility to calibrate all input parameters and calculate sensitivities, thereby enhancing transparency and pricing quality. Furthermore, both Quantifi CVA and Quantifi Counterparty Risk can be easily deployed and are intuitive to use."

Whole business securitisations

Hybrid WBS closed

Porterbrook Rail has closed a hybrid whole business securitisation. Porterbrook Rail Finance comprises two debt tranches and partially refinances £1.5bn of acquisition debt.

The transaction features some securitisation structural features, such as a restricted payment covenant and restrictions on acquisitions/disposals, but comes with a single S&P triple-B rating and was marketed as corporate bullet debt. European asset-backed analysts at RBS note that although they generally consider the industry fundamentals to be robust, the deal's liability structure does not perfectly reflect the wasting nature of the assets. "Without amortising debt or with some covenant to ensure leverage remains commensurate with the asset base (such as the NPV of capital rent test included in the existing bank debt), there is inherent exposure to management's ability and incentives to replenish the asset base over the life of the deal, in our opinion," they observe.

However, the analysts suggest that the bonds seem attractively priced relative to comparably rated long-dated credit, clearing at around 300bp over Gilts.