Contents

CDS

Index growth

Tradable sector CDS interest stirs

A growing interest in using sector CDS indices for hedging purposes is stirring among institutional investors and dealers alike. The interest comes as exchanges push for enhanced CDS clearing and Washington calls for more transparency in all derivatives markets.

"We see indices as a good way to capture movement in a group without the risk of just one name," says one hedge fund manager, who has yet to participate in the CDS market but expects to in the coming months. Another CDS investor expects interest to eventually grow for CDS indices almost as much as it has for exchange-traded funds (ETFs).

Sector CDS indices indeed were designed to facilitate investors and dealers looking to put on risk mitigation basket trades with CDS or options. They are currently more used, however, as research points to articulate dealers' perspectives to their buy-side clients.

S&P's CDS US Homebuilders Select 10 Index, though, is close to being utilised as a trading vehicle with a dealer, according to J.R. Rieger, vp of fixed income indices at S&P Indices. The firm launched four sector US CDS indices last month to address interest from investors for basket-type products (see SCI issue 191).

The Consumer Discretionary Select 20 Index, Consumer Staples Select 10 Index, Energy Select 10 Index and Health Care Select 10 Index were created based on observations of liquidity in the CDS market, notes Rieger. These build upon S&P's initial foray into CDS indices in 2008 with its S&P 100 CDS, US investment grade and high yield indices.

"It gives the market an opportunity to look across the capital market structure at both the equity sectors, as well as the more liquid entities within those sectors from a CDS perspective," he adds.

S&P plans to keep the indices at the same size in which they launched. Rieger continues: "We could have designed our CDS sector indices to be broader in number of entities...but when we looked at that we saw, the liquidity of the basket actually declines rapidly, so we were very focused on sectors that reflected the most liquid entities within each sector."

A financial CDS index is also on the drawing board, but it is difficult for bank traders, for example, to entertain trades on such an index if they are a component of the index. It is still an index that S&P would like to do, but it is taking into account how the index might be used, says Rieger.

A potential financial CDS index may also make more sense from a global perspective, since market participants have increasingly been interested in global bank names. "We may not do it as a US sector. We have been looking at doing things more on a global perspective," Rieger says.

Other types of sector indices could also be on the horizon. "At some point in time, based on all the feedback from the marketplace, we'll be evolving our offering further to the users," he adds.

S&P's broader CDS indices, such as its S&P 100 CDS index and its US investment grade and high yield indices, are similar to Markit's indices except S&P also includes a separate calculation, or index, for what occurs in a basket of names when a credit event occurs and the name stays in the index such as its "event inclusive calculation" index. S&P's current rolling indices, which mimic the on-the-run indices, have the same constituents as the on-the-run indices, but they have a calculated total return over a longer period of time than a traditional six-month period.

"The rolling index is intended to track the cashflows as if you had exposure to the on-the-run series," Rieger explains.

KFH

ABS

Stressing out

Euro stress-test credibility questioned

CEBS released further information on the EU-wide stress tests on 7 July. While some believe the exercise will serve to stabilise the ABS market, others question its credibility.

Credit strategists at Citi suggest that the European stress tests are unlikely to wield the same stabilising influence on markets as the US stress tests did last year, with their credibility likely to be undermined by several factors. "For one, they seem rushed - even two weeks before publication date CEBS has not published the detailed criteria behind the stress tests," they explain.

The strategists add: "Second, we believe it is all but impossible to devise reasonable stress tests for sovereign restructuring scenarios. Quite simply, very few banks would ever be able to withstand a scenario of a large haircut on the debt of their own sovereign, as well as on several neighbouring sovereigns."

The exercise will involve testing 91 banks in 19 member countries, representing 65% of all EU bank assets. Banks were selected by ranking them in order of assets by country and taking at least the top 50% of banks by assets.

CEBS says the objective is to assess the overall resilience of the EU banking sector and the banks' ability to absorb further possible shocks on credit and market risks, including sovereign risks, and to assess the current dependence on public support measures. The exercise is being conducted on a bank-by-bank basis using commonly agreed macro-economic scenarios (baseline and adverse) for 2010 and 2011.

The macro-economic scenarios include a set of key macro-economic variables, differentiated for EU member states, the rest of the EEA countries and the US. The exercise also envisages adverse conditions in financial markets and a shock on interest rates to capture an increase in risk premia linked to deterioration in the EU government bond markets.

On aggregate, the adverse scenario assumes a three percentage point deviation of GDP for the EU compared to the European Commission's forecasts over the two-year time horizon. The sovereign risk shock in the EU represents a deterioration of market conditions as compared to the situation observed in early May 2010.

However, credit analysts at RBS note that CEBS' statement remains light on detail and poses more questions still. "Without knowing the exact details of the stress tests, it is hard to estimate the market reaction when the results are finally published...but at the moment the criteria seem on the soft side."

The RBS analysts also point out that there is no detail on how private sector loans, such as real estate, will be tested. However, they concede that some Landesbanks and Cajas will be included in the tests, which is "crucial for the market to see, due to the relative lack of transparency from these sectors".

"The list is comprehensive because it ranges from the big bulge brackets like BNP and Deutsche to Bank of Valletta in Malta. However, the German savings and cooperative banks are not included and we suspect some of these have skeletons in the cupboard," they add.

Citi's banks analysts conducted their own stress tests on 13 European banks, based on assumptions that are likely to be somewhat more conservative than CEBS'. They assumed a 40% haircut on Greece, 15% on Portugal, 10% on Ireland and 5% on Spain and Italy, along with a second peak in non-performing loans and a 10%-15% drop in pre-prevision income. The results show that a number of individual banks would lose a very substantial part of their tangible common equity in the stressed scenario. However, from a systemic perspective the average reduction in TCE of 23.4% seems relatively manageable.

Ultimately, for the stress test to carry credibility, some individual banks will have to look weak, according to the Citi strategists. "But we'd be surprised if more serious shortcomings in the European financial sector as a whole will be revealed. In such a scenario, there would be a need for a clear and immediate recapitalisation mechanism," they observe.

Some countries have pre-existing recapitalisation funds and allowing the EFSF to fund recapitalisations where sovereigns can't seems sensible. But the Citi strategists aren't convinced that agreement on this can be reached before the publication of the stress tests.

Nevertheless, sufficient transparency around the stress tests coupled with a lack of negative newsflow over the summer could lead to a reduction in credit spread volatility, particularly if corporate and economic fundamentals remain robust. "With the ABS market moving more or less in line with the broader credit markets, we could see some spread tightening in ABS as well, if credit market volatility subsides. Much depends on the way the stress tests are handled and, while there are signs that investors are starting to feel more optimistic about them, there is still some distance to go before the tests attain sufficient credibility to finally put concerns about the European banking system to rest," comment European ABS analysts at Barclays Capital.

CEBS notes that a stress-testing exercise does not provide forecasts of expected outcomes, but rather a what-if analysis aimed at supporting the supervisory assessment of the adequacy of capital of European banks. It confirms that the results of the stress test will be disclosed, both on an aggregated and on a bank-by-bank basis, on 23 July 2010 (see last issue).

CS

ABS

Firming up

US ABS markets seeing uptick in activity and tightening spreads

The US consumer ABS secondary market saw something of a revival last week post the 4 July holiday, even though investors remain frustrated by the dealer bid. At the same time, while there are still positives for primary issuance, demand looks set to continue to outstrip supply.

"The secondary market has been very quiet over the past week or so, in part thanks to the public holiday. But all signs are pertaining to something of a revival in activity and spreads firming back up," confirms one ABS trader.

"There had been a softening trend that had been running since the beginning of the bad news about Greece, but that began to turn around two weeks ago and in better quality paper we are getting back to where we were before the Greece news hit. Go-go on the run auto and credit card paper is all but there, but top-end student loans lag that a bit and have only been tightening for about a week," he adds.

Nevertheless, it is still a very barbelled market, with only the most liquid high quality product tightening. Anything regarded as tier 2 paper is still little moved. "There are opportunities to be had if you don't care too much about liquidity," says the trader.

Bid list activity, which had subsided in the run-up to the holiday weekend, is also picking back up. The bulk of deals appear to still be coming from 'TALF profit takers' coming back to the market and offering recent deals, having picked up some short-term outperformance.

Such lists are meeting some demand, despite their regular appearance beginning to reduce appetite, but paper with scarcity value is being seen as well. For example, the morning of 8 July saw two US$50m blocks of floorplan paper being offered, which are likely to trade extremely well because of their rarity.

At the same time, there is still extensive Street support for bids, which is a mixed blessing, according to the trader. "While it's a positive that the dealers are wiling to bid so high to keep this going, it does mean that half of what goes through the market is re-offered in a few days. The investor bid is still lower than the dealer bid, which can be frustrating for those investors who have done their homework and are ready to buy at what they see as the right price," he explains.

In the primary market expectations are positive, albeit not overwhelmingly so. Optimism was buoyed by US$5bn of new issue flow across all ABS product in a single week towards the end of June, but even those sorts of volumes are not expected to be a enough to impact the overall tightening trend as there is a fundamental concern over disappearing supply.

"The whole market is shrinking, with ABS consumer sector deals paying off faster than they can be replaced. Behind that is the fact that total credit card lines and so on have been diminishing since the start of the financial crisis," says the trader.

Notwithstanding that the rate of decrease seems to have slowed this year, market shrinkage appears set to continue for a few more years yet before there is any sign of net-net market growth. That, according to the trader, is partly due to a change in circumstances.

He says: "Securitisation is still a viable form of funding, but more expensive than it used to be thanks to things like increased capital requirements. So, a guy at, say, an auto loans company no longer sees securitisation as trumping MTNs and other products. It is now much more of a complement to other instruments, which will also diminish supply relative to the past."

MP

ABS

Landmark Islamic securitisations emerge

Two innovative sukuk came to the market this week. Cagamas Berhad launched its new Islamic CP and MTN programmes, while Emirates NBD Auto Financing prepped its first auto ABS issuance.

Moody's assigned provisional Aa2 ratings to the Y24bn Emirates NBD Auto Finance transaction. All of the notes are expected to be bought by the Japan Bank for International Cooperation (JBIC).

Of the Y24bn of notes, Y10bn will be repackaged and sold to Emirates NBD Auto Financing. The repack notes will ultimately be wrapped by JBIC for international investors with a principal guarantee.

"Emirates NBD Auto Finance is the Middle East's first true-sale securitisation of auto loans and is a landmark event in regional capital markets," says Khalid Howladar, Moody's senior credit officer.

It is the first securitisation transaction by Emirates NBD Bank (ENBD) and is secured by a revolving portfolio of auto loans to private and commercial clients in the UAE. The portfolio was purchased with money raised from the issuance and a subordinated loan from ENBD.

The revolving structure will see loan redemptions and prepayments used to originate new loans for the first three years. After that time, all principal proceeds will be used to amortise the notes and repay bondholders.

All of the notes are denominated in Japanese Yen and the currency and interest basis mismatch between the UAE Dirham-denominated auto assets and issued Yen liabilities is expected to be covered by ENBD in its capacity as swap provider. Credit enhancement is provided via excess spread and a prefunded cash reserve that provides liquidity to cover a minimum of an estimated six months' coupon, costs and associated expenses.

Some risk is posed by having all collections paid directly into the servicer's collection account, but Moody's says it is partly mitigated by a daily cash sweep from ENBD to the issuer's account, market-specific legal aspects and structural features, such as redirection of payments upon a servicer termination.

JBIC is unconditionally guaranteeing all amounts of principal for the repack notes. The repack note interest is not covered by the guarantee and so there is a cash reserve equal to 1.65% of the total outstanding balance of the receivables held by Emirates NBD Auto Finance on the closing date, which is expected to cover four months of coupon and expenses.

The guarantee will be invoked if there is a trustee notice of a cash reserve shortfall or an occurrence of a repack event of default and subsequent acceleration effected by the repack trustee.

Meanwhile, Malaysian lender and securitiser Cagamas Berhad launched a sukuk al-Amanah Li al-Istithmar under its new Islamic commercial paper and Islamic medium term note programmes. The ICP and IMTN programmes have a tenor of seven years and 30 years respectively, and a combined aggregate limit of RM5bn.

The Sukuk programmes have been rated triple-A or equivalent by Malaysian Rating and RAM Rating Services. Cagamas says Sukuk ALIm will widen investment options available to Islamic financial institutions and investors.

Cagamas president and ceo Steven Choy says: "Sukuk ALIm marks an important milestone for Cagamas as it is not only widely accepted and tradable in the secondary market, but also meets the most discerning investors' Shariah requirements."

He adds: "This reaffirms Cagamas' commitment to contribute towards the development of the Malaysian capital market and to make Malaysia a premier global Islamic financial centre. We are confident that the innovative Sukuk ALIm, jointly developed with Al Rajhi Bank Malaysia, will further set a new benchmark in Malaysia's sukuk industry."

Al Rajhi Bank Malaysia together with RHB Investment Bank have been appointed as joint principal advisers and joint lead arrangers for the sukuk programmes. Al Rajhi and Amanie Business Solutions are the Shariah advisers. The joint lead managers are Al Rajhi, RHB and RBS.

While there had been an emergence of more diversified sukuk, such as mixed asset or sukuk istithmar, this new Sukuk ALIm structure is a type of sukuk istithmar but precludes the principles of sale and buyback, trading of debt and undertaking. The term Sukuk ALIm could set the benchmark for future sukuk issuances, particularly those targeting the Middle East markets, Cagamas concludes.

JL & LB

Advisory

Hedge hunting

Ari Bergmann, principal at Penso Advisors, answers SCI's questions

Q: How and when did Penso Advisors become involved in the business of systemic risk management?
A: Penso Advisors advises on systemic risk and manages tail hedging strategies for clients. The business was established at the beginning of 2010 because there was a realisation that systemic risk is here to stay. Systemic risk hit the market in 2008 and in 2009 people were hoping it was an aberration, but by 2010 they recognised that it is a reality that impacts all assets and geographies.

Hedge funds are experts at finding good idiosyncratic opportunities, but often get swept by the headwinds of systemic risk. We find ways of navigating those headwinds.

Our clients typically allocate between 50bp-200bp a year to insurance hedging costs. We help them understand - both quantitatively and qualitatively - what the sources of systemic risk are and how they affect their portfolios, structure strategies to combat them, then implement and monitor them.

Getting a view on timing is the most difficult aspect of managing systemic risk: it is important to act quickly, but not too quickly. Therefore, you have to implement strategies that allow you to wait without costing too much.

We always focus on simple, liquid strategies because they're usually the cheapest and most efficient. The creativity is in putting the building blocks together.

Execution depends on the client. Sometimes we execute for them via a managed account platform; other clients use their own balance sheets.

There are six of us in the team: a coo, general counsel, two traders, an assistant and myself. We conduct monthly meetings with clients to review their portfolios and their hedges, but we're available for consultations on a 24/7 basis.

Q: Which market constituent is your main client base?
A: Our clients include large hedge funds, fund of funds, family offices, insurance companies and pension funds. They are diversified across the US and Europe, and we're expanding into Asia.

We advise on approximately US$30bn of assets across 10 clients. We're mostly forward-looking in terms of their portfolios, but we advise on legacy assets too.

Q: How do you differentiate yourself from your competitors?
A: We're not aware of any other company that offers advisory and hedge management tailored to the needs of a client.

I have 20 years of experience in risk management and systemic risk - this experience is necessary to identify sources of systemic risk before they arise and then identify effective hedging strategies. The strategies need to be low-cost and have a leveraged upside - both of which aren't obviously captured.

We're seeing a new phenomenon spring out of the systemic environment: tail risk funds, which are essentially hedge funds that implement some kind of negative correlation to the market. They make money when a tail event occurs.

But the worse thing than not having a hedge is to have one that doesn't perform. If a hedge isn't tailored, it gives a false sense of protection.

Q: What are your key risk concerns today?
A: Our current focus in terms of sources of systemic risk is on sovereign debt and Europe. Potential future sources of systemic risk that aren't yet being focused on are: the deficits in Japan; US municipal debt issues; and the European countries not yet affected by the sovereign crisis - the so-called 'second-wave' countries, such as Italy and Eastern Europe.

The problem with systemic risk is that it affects everything, but the beauty of it is that if you hedge any part of the chain, the chain will react in the same way. It is possible to hedge the potential aftershocks of an event, for example.

Take the case of the subprime crisis of 2007: many people made money by hedging their mortgage exposure, but they also put a lot of money at risk by doing so. Instead of doing that, we bought protection on a basket of financial institutions - including Lehman Brothers - at an average cost of 30bp because we recognised that the aftershock from the subprime crisis would be with the banks due to their exposure to the sector.

After Lehman's bankruptcy, we exited our financial institutions hedge and hedged sovereigns because we recognised that the aftershock would lie with governments as they'd backstop the banks. At that time, protection on the UK cost 9bp, while protection on France cost 15bp.

The BIS viewed sovereign credits as riskless. Indeed, many participants failed to differentiate between European countries and the fragmentation caused by sovereign credit issues.

The European stress tests are overdue, but the question is: do stress tests adequately address future scenarios? For example, the US stress tests didn't uncover the problems that US banks face in the muni space. And the Euro stress tests wouldn't have picked up the sovereign issue if they were done six months ago.

Stress tests are only able to quantify existing stress points, not potential new stresses. This is why there is a need to be proactive about the risks out there.

Governments are notoriously reactive. Perhaps one solution to these issues would be to have a government think tank that identifies potential sources of risk and comes up with possible solutions before they become a problem.

Q: What major development do you need/expect from the market in the future?
A: The next crisis will be the aftershock of this one, but - unlike earthquakes, where the aftershock is typically lower in intensity - financial crises can gain momentum. Governments are currently trying to solve the problem by pumping liquidity, but liquidity doesn't mean solvency - it delays the problem and exacerbates it. It's like having an infection and only eradicating the symptoms but not the cause.

We're coming to the end of what I term a 'super debt cycle', where all of the leverage in the market needs to shrink to size. It has been and will continue to be a painful process.

The market is going through a paradigm change: we're emerging from a leveraged world that kept growing to one where leverage needs to decrease. In this new, less levered world, creativity and the selection of credits will be of upmost importance for structured credit products.

The market will have to come up with forward-thinking products, but this will give certain players the opportunity to differentiate themselves. Alpha rather than leverage is the order of the day.

Geography will also play a role. At present, there is a dichotomy between developed and emerging markets: the perception is that the developed world is less risky than emerging markets, but this needs to be challenged.

In reality, the developed world is overleveraged and emerging markets are underleveraged - meaning that there are plenty of opportunities to be had in emerging markets. The market could look back at what worked in the developed world and apply these lessons to emerging markets.

We're already seeing the first Yuan-denominated loans being structured, which suggests that the first commodity-based loans and securitisations aren't far behind. It's conceivable that a basket of commodities could form the basis of a securitisation rather than mortgages, for example.

CS

ABS

US syndicate head hired

Brian Wiele has joined Barclays Capital as md and head of US securitisation syndicate. Wiele will be based in New York and report to Mark Bamford, head of global fixed income syndicate.

Wiele joins BarCap from StormHarbour, where he was most recently head of US ABS new issue syndicate. Prior to this, Wiele spent nine years at Deutsche Bank and ten years at Credit Suisse, where he held the same post.

ABS

Firm seeks Brazilian securitisation presence

Chadbourne & Parke plans to increase its Latin American presence by opening a new office in Sao Paulo and hiring two finance attorneys. The firm is still waiting on regulatory approvals from the Brazilian Bar, however.

Charles Johnson will join as a partner in the firm's Sao Paulo office. Johnson, who brings extensive experience on structured finance transactions in Brazil, has worked in Brazil for the past eight years. Daniel Spencer, who specialises in cross-border finance, trade finance and securitisation transactions, will also join Chadbourne.

"With the new office, we will be one of only two New York-based firms with offices in both Brazil and Mexico - the two largest economies in Latin America," comments Allen Miller, a co-head of the firm's Latin American

Advisory

Boutique adds two mds

Vincent Lima has joined Moelis & Company as md, together with Joseph Simon who joins as md and cfo. The pair will be based in the firm's headquarters in New York.

Lima will be responsible for providing capital markets advisory solutions and managing transaction executions, while Simon will oversee all finance and accounting matters.

Lima joins from Christopher Street Capital, where he was a founding partner of the US credit business and md in charge of capital markets. Previously, Lima was md at Citigroup and Salomon Brothers for 17 years.

"We have had great success providing specialised capital markets and risk advisory solutions to clients seeking unbiased, unconflicted advice," says Ken Moelis, ceo of Moelis. "As we continue to build our capabilities, Vinny will be an important addition to our team and we are delighted to welcome him to Moelis & Company."

Simon has over 25 years of experience as a senior manager of financial controls, operations and strategy, and has particular experience with financial services firms. He most recently served as cfo of monoline FSA for seven years.

Advisory

Advisory firm appoints restructuring md

Frank Jung has joined Hawkpoint's Frankfurt office as md, where he will lead the firm's German restructuring and debt advisory practice. He comes from Jefferies, where he headed its Anglo German financial restructuring practice. Previously, Jung had been an executive director at Goldman Sachs in its Anglo German distressed debt investment team.

Richard Markus and Warren Scott, co-heads of Hawkpoint's Frankfurt office, comment: "Frank has a unique insight into debt financing and restructuring in the German speaking countries, having worked with large international corporate, Mittelstand businesses and financial investors. We are pleased Frank has joined us to play a key role in helping to develop Hawkpoint."

CDO

CDO manager launches mis-selling suit

Cambridge Place Investment Management (CPIM) is suing 15 investment banks in the Massachusetts courts for allegedly mis-selling US$2.4bn worth of US RMBS between 2005 and 2007. The CDO manager claims that the banks mis-sold approximately 140 RMBS bonds to the Camber 3 ABS CDO and approximately 92 bonds to Camber 4 by "making untruthful statements in the offerings of the securities".

Rescissionary remedies and damages are sought under the Massachusetts investor protection laws. Bernstein Litowitz Berger and Grossmann has been appointed as trial lawyers.

The CDOs' claims have been assigned to CPIM to mitigate liability for any fees, costs or expenses of the litigation. The transactions will receive all recoveries after the expenses and contingency fees of BLBG and CPIM have been paid.

Among the banks cited in the suit are Barclays Capital, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Merrill Lynch, Morgan Stanley, RBS and UBS. Between 35%-46% of the loans pooled in the RMBS sold to CPIM are understood to be delinquent.

CDO

New evp for advisory arm

Kristofer Kraus has joined PIMCO's New York office as evp, where he will be responsible for new business development and relationship management for PIMCO Advisory.

Sabrina Callin, md and head of PIMCO Advisory, says: "Kristofer brings a wealth of experience in trading, valuing, structuring and selling complex assets. His addition to our team will further strengthen the services that PIMCO Advisory provides and the relationships we continue to build."

Kraus has over fifteen years of investment experience. He was most recently md at Barclays Capital, where he oversaw trading, structuring and sales for the firm's CDO and structured funds business. Kraus was previously with Credit Suisse, focusing on structured products, MBS derivatives and loan funds.

CDO

Replacement ceo for investment advisors

Prytania Investment Advisors ceo Malcolm Perry is returning to live and work in Australia. He has been ceo at Prytania since April 2007 and will now be taking up a senior banking position based in Melbourne. Prytania non-executive director Joe Cook will replace Perry as ceo this month.

"Prytania would like to thank Malcolm for his contribution over the past three years, during which time the firm has prospered throughout the credit crisis and is now well positioned to grow further as we enter the next stage of development for the financial markets," says Cook.

CDO

CRE CDO management rights acquired

CapitalSource has delegated the collateral management and special servicing rights in the CapitalSource Real Estate Loan Trust 2006-A to an affiliate of NorthStar Realty Finance Corp. CapitalSource has also sold NorthStar its equity interest, as well as the US$50m class J and US$60m class K notes issued by the CDO. The firm will retain ownership of the US$124m 2006-A trust bonds it previously repurchased, however.

CapitalSource received a total consideration of US$7m from the transaction. It will result in the deconsolidation of the 2006-A trust and derecognition of trust loans on the CapitalSource balance sheet.

As of 31 March 2010, the trust held approximately US$1.03bn of gross loans, with third-party debt outstanding of US$926m, against which CapitalSource held US$159m of GAAP loan loss reserves. Of the loans derecognised, US$507m were legacy commercial real estate loans.

"Moving this trust off balance sheet eliminates the need to reserve for over US$500m of commercial real estate loans, reduces our non-recourse debt as of 31 March 2010 by US$926m and shrinks our parent company legacy assets," comments John Delaney, CapitalSource executive chairman. "NorthStar has significant expertise in the management of the type of commercial real estate assets in the 2006-A trust."

Steven Museles, CapitalSource co-ceo, adds: "The deconsolidation of the 2006-A trust further simplifies our parent company balance sheet and accelerates the shift in relative assets between CapitalSource Bank and the parent, which are positive developments for our plan to ultimately seek bank holding company status."

As of 8 July 2010, the CDO had approximately US$101m available for investment. NorthStar expects to consolidate the assets and liabilities of the CDO at their respective fair market values as of the acquisition date.

CDS

Long/short credit fund launched

LBBW and Universal Investment have joined forces to launch a long/short absolute return credit fund. Dubbed LBBW Pro-Fund Credit, it will invest in investment grade corporate bonds and iTraxx/CDX index strategies. The fund managers will use also single name CDS, as well as index swaps.

The idea behind the fund is to use a quantitative optimisation model to exploit price differences between durations, indices, individual securities or different industries and sectors. The aim is to generate stable and sustainable yields, with low volatility.

The fund is targeting a yield of 4% over Euribor a year in volatile markets and 3% over in stable market conditions.

CDS

Research house hires derivatives director

Sean Owens has joined Woodbine Associates as director, fixed income and derivatives. He will focus on analysis of strategic, business, regulatory, market structure and technology issues in the global fixed income and derivatives markets. He will also lead consulting engagements for firms impacted by these issues.

Owens has over ten years' experience in the fixed income and currency markets as a derivatives trader. During that period, he was vp at Gen Re Securities, where he traded, structured and managed the risk for trading books within the major currencies. Prior to this, he consulted with a range of businesses on strategic and tactical issues.

Matthew Samelson, Woodbine principal, says: "Sean's background and skills will help us strengthen our offerings in fixed income and derivatives, so we're excited to welcome him aboard. Also, his experience as a trader in these areas will be invaluable as we prepare our upcoming report on execution management systems."

CDS

Credit fund wins strategic investment

SkyBridge Capital is to make a strategic investment in Viathon Capital's Whitewater long/short credit opportunity fund, which focuses on liquid debt instruments of US and European corporate issuers. The portfolio consists primarily of single-name loans and bonds selected through a fundamental credit research and corporate finance investment process.

SkyBridge's investment is being made from its SkyBridge Capital II Fund. In addition to providing Whitewater with long-term strategic capital, the firm will seek to enhance its investment by providing business-building support. SkyBridge currently has approximately US$7.4bn under management and advisory.

Viathon Capital was founded in 2009 by cio Rob Comizio. Prior to Viathon, Comizio was md at Marathon Asset Management and a senior portfolio manager in the US$2.5bn special opportunity fund, focused on high yield and crossover corporate bonds, special situations and fallen angels in the US and Europe.

Comizio says: "We look forward to our partnership with SkyBridge and leveraging the firm's business building and investment-support capabilities as well as its risk-management resources. With SkyBridge, we are able to increase our focus on the opportunities that exist throughout the credit markets."

CDS

Credit head moves over to commodities

Richard Giles, GFI Group's UK head of credit, has been appointed md and head of the firm's commodities and energy brokerage, North America. He will be based in GFI's New York office and takes over from Michael Cosgrove, who remains an md at but will be responsible for directing the firm's strategic initiatives in the North American commodities and energy sectors.

Giles previously looked after GFI's credit business in London, including single name CDS, credit indices, corporate and high yield bonds, leveraged loans and structured credit, including index tranches. He joined the firm in 1993 and has worked in currency options, energy and credit in both Hong Kong and London.

CDS

Syncora Master Agreement amended

Syncora Guarantee Inc (SGI) has entered into a second waiver and amendment to the Master Transaction Agreement of 26 April 2009, which allowed for a partial prepayment from Syncora Capital Assurance Inc (SCAI) to SGI of US$75m of a US$150m surplus note due to be paid in December 2011. This prepayment will not change statutory surplus at SGI, but it will reduce statutory surplus at SCAI by the amount of the prepayment.

The prepayment is one of several components of a plan being pursued by SGI to address its previously announced surplus and liquidity needs (SCI passim). The monoline notes that no assurance can be given that it will be successful in pursuing or effectuating the remainder of its plan in a timely manner, if at all.

Meanwhile, Syncora Holdings (SH) has announced that an amended complaint has been filed by the lead plaintiff in the putative securities class action brought against Security Capital Assurance (as SH was known at the time the action was initiated) and certain former officers of SH. Although the court dismissed all claims in the original complaint in April, it granted the lead plaintiff 90 days to file an amended complaint.

CDS

Euro OTC trade repository discussed

OTC post-trade services and data provider Xtrakter is entering into consultation with members of its user community and other market representatives to discuss the development of a European managed trade repository for all asset classes.

"Given our position as a major reporting mechanism [and] the significant changes that will emerge following the current European markets infrastructure regulation consultation, it is vitally important we consider in conjunction with members of our user community whether it is appropriate for us to develop a European managed trade repository," says Xtrakter ceo Yannic Weber.

CDS

ICE passes US$10trn in CDS clearing

ICE reports that cumulative gross notional value cleared by its CDS clearinghouses surpassed US$10trn during the week ending 2 July.

Scott Hill, ICE svp and cfo, comments: "ICE developed CDS clearing in 2009 to support the reduction of systemic risk amid significant market turmoil. Since then, ICE has cleared US$10trn in gross notional value, bringing substantial transparency and counterparty risk reduction to the CDS markets in US and Europe."

Through to 2 July, ICE Trust cleared US$6trn in CDX trades and US$272bn in single-name CDS, resulting in open interest of US$435bn. ICE Trust introduced buy-side clearing for CDX in December and expects to offer single-name buy-side clearing in September 2010.

CLOs

New replacement recovery manager for PREPS CLOs

Fitch says there is no rating impact on the PREPS series of CLOs from the appointment of CorpRec Advisory as the replacement recovery manager for the transactions. This is because the employees of CorpRec are the same team that handled the portfolio companies in the PREPS transactions at the previous recovery manager.

The previous replacement recovery manager (Capital Management Partners) was paid both senior and junior fees, the latter cut off where unpaid PDL balances exist - which ABS analysts at UniCredit note is the case in all of the PREPS deals. The personnel at CMP have since moved to CorpRec Advisory and will be paid monthly from outside the PREPS transactions and on an incentive-based format.

"The move can generally be seen as positive, as the portfolio companies should benefit from early intervention prior to the rather too common out-of-the-blue insolvency filings which have plagued the asset class," the UniCredit analysts note.

The role of the recovery manager in these transactions is to provide advice to weaker performing companies on improving their financial position and to achieve the maximum recoveries on a defaulted loan in the wake of a borrower's default. As Fitch assumes a zero recovery rate on the loans in the PREPS transactions, only the recovery manager's activity prior to a loan default is relevant to its ratings on the notes.

Fitch views positively the measures taken to improve the recovery management of the PREPS transactions, however. It notes that CorpRec will receive additional incentives to provide recovery management services, as compared to the previous recovery manager.

Most importantly, CorpRec will receive the additional payments on a monthly basis in order for them to cover costs. As the additional payments will be provided from an unrated entity outside the PREPS transactions, it is uncertain if they can be paid throughout the life of all the transactions.

Fitch views these payments as an upside to the performance of the new recovery manager. However, if these outside payments do not take place or are not covered otherwise, the level of recovery management services are likely to fall and defaults in the PREPS transactions may rise, the agency warns.

CMBS

Trading division adds CMBS team

Macquarie Group's fixed income, currencies & commodities group has expanded its credit trading division with the addition of a new commercial mortgage finance and CMBS team. The New York-based team will be led by Randy Reiff and adds an additional sector of mortgage origination, trading and securitisation expertise to the firm.

Reiff joins as md and head of commercial mortgage finance and CMBS. Mark Lebowitz and James Conopask have also been named mds. Simon Breedon and Matthew Weinstein become svps, while Andrew Flack joins as an associate.

Reiff brings 18 years of experience in investing, structuring and trading in the commercial real estate and mortgage industry. Most recently, he was president of Spartan Real Estate Capital and prior to that was global head of commercial mortgage finance and CMBS at JPMorgan and Bear Stearns.

Lebowitz brings 17 years of experience in commercial real estate securitisation and capital markets. Previously, Lebowitz was director of capital markets at Spartan, having joined from JPMorgan and Bear Stearns, where he served as head of CMBS capital markets and new issue structuring.

Conopask brings 18 years of experience in commercial real estate credit underwriting and investing. Previously, Conopask was cio at Spartan. He joined the firm from JPMorgan and Bear Stearns, where he headed institutional credit for the large loan commercial mortgage groups.

Breedon has nine years of experience in commercial real estate and investment banking, most recently with Spartan and prior to that as a senior member of JPMorgan and Bear Stearns commercial mortgage finance groups' institutional credit teams.

Weinstein has six years of experience in commercial real estate finance and CMBS trading. He joins from Spartan, where he was responsible for CMBS trading and investments. Prior to joining Spartan, Weinstein was a senior member of Bear Stearns' CMBS trading team.

Previously, Flack was at Spartan, having joined from JPMorgan and Bear Stearns, where he was a member of the commercial mortgage finance group.

Michael McLaughlin, senior md and head of Macquarie's credit trading division, says: "Randy and his team's track record in the sector and deep product knowledge will enable us to deliver an expanded offering to clients and work with them to capitalise on the opportunities presented in the market."

CMBS

New CMBS md named

Kara McShane has joined Wells Fargo as md, responsible for leading CMBS transactions to market, as well as serving as chief trader of new-issue CMBS deals. She will report to md Julie Caperton, head of asset-backed finance and securitisation.

McShane was formerly an executive at Morgan Stanley, where she ran the bank's capital markets team for structured finance products. Before joining Morgan Stanley, McShane was a portfolio manager and trader for the commercial real estate sector at Alliance Capital and at Sanford Bernstein.

CMBS

Real estate partners recruited

Eric Schwartz has joined Ranieri Real Estate as president and founding partner, together with Imran Ahmed, who joins as founding partner, advisory.

Schwartz will oversee all aspects of the commercial real estate merchant bank, while Ahmed will lead the firm's build-out of its advisory and investment management businesses. The addition of Schwartz and Ahmed continue to augment the real estate platform at Ranieri, as they join co-founder and ceo Jon Vaccaro.

Vaccaro comments: "Eric brings deep global experience and he is a proven leader in developing and implementing real estate lending innovations and structures. Imran is also a globally seasoned real estate professional, having established major real estate operations in the Middle East and South Asia. He has deep experience in principal investments, M&A, equity and debt capital markets, structured finance and corporate advisory."

Prior to joining Ranieri, Schwartz was US co-head of Deutsche Bank Commercial Real Estate (DBCRE) for ten years, where he was a senior member of the team that led the bank's build out of the US and international commercial real estate platforms to US$40bn in assets. Previously, he was a senior analyst/vp at Moody's as part of the CMBS ratings team.

Prior to joining Ranieri, Ahmed was md at DBCRE in New York, where he worked on a wide range of real estate-related projects. He has been involved with over US$100bn of transaction activity and was responsible for DBCRE's entry into the Middle East and South Asia, which led to the opening of its office in Mumbai.

CMBS

New investment manager proposed for flexible CMBS

A change in investment manager from F&C Investment Business to Ignis Investment Services has been proposed for the F&C Commercial Property Finance CMBS. The proposal was made in relation to an intended restructuring of the deal, consisting of the acquisition by UK Commercial Property Trust (UKCPT) of the entire issued share capital of each subsidiary of F&C Commercial Property Trust (FCPT), the borrower under the deal. The acquisition is to be effected through a voluntary solvent liquidation of FCPT.

F&C Commercial Property Finance is a flexible pool transaction, giving the borrower and/or its investment manager the ability to alter the composition of the property portfolio and incur additional debt, as long as the investment policy and certain covenants are satisfied.

Ignis is part of the Phoenix Group and has approximately £69bn of assets under management, of which £3.3bn are commercial property assets. The company employs around 530 employees, of which 130 are investment professionals. Moody's notes that Ignis is a reputable manager with a proven ability and experience of managing commercial real estate assets that are similar to the property portfolio underlying the transaction.

The rating agency says that in its view the intended restructuring does not negatively impact the rating on the notes.

CMBS

German 'bad bank' established

Hypo Real Estate Group has established a 'bad bank' called FMS Wertmanagement. Non-strategic assets of up to €210bn will be transferred to the entity in the second half of 2010, subject to approval by the EU and the Financial Market Stabilisation Agency (FMSA).

No information was provided about the liabilities to be transferred or timing. Credit analysts at RBS point out that Hypo applied for the approval in January, stating at the time that it contemplated transferring parts of the public finance and real estate finance portfolios of DEPFA BANK and Deutsche Pfandbriefbank. The transfer may also include assets held by DEPFA ACS BANK (Dublin), Hypo Pfandbriefbank International (Luxembourg) and Hypo Public Finance Bank (Dublin).

CMBS

CMSA-Europe adopts name-change

CMSA-Europe has changed its name to Commercial Real Estate Finance Council Europe, aligning itself with the North American association that changed its name to Commercial Real Estate Finance Council on 23 March 2010 (SCI passim). Similar in practice to North America, the Europe organisation also includes forums - collections of commercial real estate finance market participants that drive the global industry.

For Europe, forums include securities investors, lenders and servicers. Each of the forums will interact and address issues critical to its own business sector and work to achieve solutions that serve a common purpose.

As these forums collaborate, Commercial Real Estate Finance Council Europe's objectives will be to represent all forum participants, manage disparate and converging views and advocate the consensus of their positions to policy officials and to the market.

Distressed assets

Capital solutions fund closes

GSO Capital Partners has closed its Capital Solutions Fund with total commitments of over US$3.25bn. The fund's strategy is focused on providing privately negotiated capital solutions to companies in need of liquidity or significant capital structure transformation due to pending covenant violations, debt maturities, cyclical downturns in their businesses or other funding requirements.

The strategy leverages GSO Capital Partners' distressed, credit and trading expertise, along with its unique deal origination capabilities. The fund has invested approximately US$600m in seven different companies so far.

Bennett Goodman, senior md of The Blackstone Group and co-founder of GSO Capital, says: "There are many great business franchises facing liquidity issues. We're delighted to have raised a new fund of this magnitude to assist mid-market companies with their financing needs."

Investors in the fund include a diverse group of domestic and international pension funds, sovereign wealth funds, endowments, foundations and family offices.

Legislation and litigation

'Toxic mortgage-linked' class action to proceed in part

The US District Court for the Southern District of New York has ruled that a consolidated amended class action can proceed in part against Citigroup and 80 other underwriting banks. The plaintiffs - seven US pension plans and an insurance company - contend that the defendants made materially untrue or misleading statements or omissions in public offering materials associated with 48 different bond issuances between May 2006 and August 2008.

According to the complaint, Citigroup failed to truthfully and fully disclose critical information about its financial condition to investors, notably information pertaining to its "toxic mortgage-linked exposures". Specifically, the complaint alleges that the defendants made material untrue statements and omissions in the public offering materials associated with each of the bond issuances in at least six different ways.

First, the defendants failed to disclose Citigroup's exposure to US$66bn worth of CDOs backed by subprime mortgage assets. Second, they failed to properly disclose Citigroup's exposure to US$100bn in SIVs that were similarly backed primarily by subprime mortgage assets.

Third, offering materials "materially understated reserves" held for losses that might stem from Citigroup's residential mortgage loan portfolio. Fourth, offering materials failed to disclose roughly US$11bn in auction-rate securities that Citigroup had acquired and which, plaintiffs contend, had become illiquid.

Fifth, the defendants represented in all public offering materials that Citigroup was "well capitalised"; in other words, it had a Tier 1 capital ratio above 6%. Finally, each of the defendants' SEC filings represented that the firm's financial statements complied with GAAP, although - according to the complaint - the accounting of its CDO, SIVs and other "subprime exposures" all violated GAAP in various respects.

District Judge Sidney Stein granted the defendants' motion to dismiss the plaintiffs' claims pursuant to Section 12 of the Securities Act of 1933, but denied the defendants' motion to dismiss the plaintiffs' claims pursuant to Sections 11 and 15.

Section 11 of the Securities Act makes actionable any "untrue statement of material fact" in a "registration statement" or any omission "of a material fact...necessary to make the statements therein not misleading". The complaint raises three causes of action in connection with Section 11.

Section 12(a)(2) of the Securities Act makes liable any person who offers a security by means of a "prospectus which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading". The complaint raises two causes of action in connection with Section 12.

Section 15 of the Securities Act makes "controlling persons" or entities jointly and severally liable for any violations of Sections 11 and 12 committed by those within their charge. The complaint raises two causes of action in this case.

RMBS

Mezz finance house hires in securitisation

Stacey Rector has joined Patriot Capital as an associate. Most recently, she worked for Banc of America Securities in its securitisation finance (ABCP) and RMBS groups.

ABS

'Many' deals would fulfil 10% retention requirement

The current European primary market is characterised by many deals that would fulfil the 10% retention requirement voted in by Germany's lower house last week, according to European securitisation analysts at Deutsche Bank. The requirement will be applied to ABS issued after 2013 and is higher than the CRD 2-mandated 5%.

The requirement would apply to German investors, ruling out investment in ABS that don't meet the criteria. The Deutsche analysts note that many transactions would fulfil the requirement, given typical retention of junior tranches exceeding 10% and in the case of master trusts a seller share also typically exceeding 10%.

"However, recent Dutch RMBS would not pass and in addition any future revival of more comprehensive risk transfer would thus likely be without the participation of German investors," they comment. "Although such unilateral action is aimed at encouraging adoption at the EU level, we view it as unlikely to carry broader appeal. It does, however, highlight how individual jurisdictions have the option of going further than the already onerous requirements of CRD 2, 3 and 4."

ABS

Interest deferrals expected on Spanish SME deals

According to the latest sector indices published by Moody's, weighted-average 90- to 360-day delinquencies represented 1.87% of the outstanding balance of Spanish SME transactions in May 2010. This is well below the historical high reached a year ago at 2.92%.

The decrease in delinquency levels is particularly noticeable for worse performers such as the Bancaja and Pastor transactions. The decrease in delinquency levels can be attributed to both the migration of delinquent loans into the write-off buckets and the lower number of loans becoming 90 days delinquent for the first time.

The peak in delinquencies observed about a year ago has now been materialising in a surge in defaults, given the write-off definition is based on 12 to 18 months arrears in most Spanish SME deals. The cumulative default trend had reached 1.28% of original balance as of May 2010, three times as high as in May 2009 when it stood at 0.40%.

In the 2006 and 2007 vintages, defaults already exceed 1.8% of original balance. In some transactions, cumulative defaults are coming closer to interest deferral trigger levels and Moody's believes that several cases of interest deferral should be expected in 2010. Moody's indices also reveal that outstanding defaults as a percentage of original balance are still increasing in all vintages, including the oldest ones.

On 5 July 2010, Moody's placed on review for possible downgrade the triple-A ratings of notes guaranteed by the Spanish government in 10 ABS SME transactions, following the placement on review of the Spanish government's triple-A rating on 30 June 2010. The agency expects the Spanish economy to grow at a slower pace than the eurozone as a whole during the remainder of 2010 and 2011. The Spanish government's announced austerity measures - such as the 5% cut in civil service pay as part of an accelerated plan to cut the country's budget deficit - will continue to dampen domestic demand.

While the relatively weak euro exchange rate will benefit SMEs that export to non-eurozone countries, Moody's believes that export-led growth will only really pick up in Spain once unit labour costs have been sufficiently contained, as low levels of productivity continue to keep Spanish exports uncompetitive. The agency therefore maintains a negative outlook on Spanish SME deals.

ABS

Improved performance for UK credit cards

Fitch says the performance of UK credit card receivables improved in May 2010, with further reductions in charge-offs and 60- to 180-day delinquencies, as well as increases in monthly payment rates (MPR) and yield.

"The ongoing performance improvements are an encouraging sign," says Will Rossiter, associate director in Fitch's consumer ABS team. "However, the use of debt management programmes has created a pipeline of future charge-offs, which will delay any recovery for certain trusts."

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 about the levels of debt-management used in some of the trusts, which can lead to a delay in reported charge-offs and an overstatement of excess spread levels.

CDO

Municipal CDO marketed

BB&T Capital Markets is in the market with a cashflow muni CDO - the US$391.68m Custody Receipts Series 2010 Tax-Exempt Assets Pool (Multistate Non-AMT). The deal is expected to close on 29 July and has been originated by AIG Commercial Equipment Finance.

The balance sheet transaction is backed by equipment leases and bonds to state and local US municipal entities. Rated by S&P, it provisionally comprises US$95m class A-1 notes, US$80m class A-2s, US$139.37m class A-3s (all rated triple-A), US$77.31m single-A plus class B notes and US$115.68m unrated residuals.

The pool consists of 509 assets across 43 obligors. Obligor holdings are concentrated in the non-profit healthcare, radio and TV, and private schools and universities sectors.

CDO

Senior ABS CDO notes hit

Moody's has downgraded the rating of 79 classes of notes issued by 42 ABS CDOs. The rating actions are the result of deterioration in the credit quality of the underlying portfolios, including an increase in the weighted average rating factor, failure of one or more coverage tests, and exposure to underlying assets whose ratings are currently on review for possible downgrade.

The majority of the affected notes are the senior notes in the transaction structure and have overcollateralisation levels that have declined to less than 70%. In cases where the current overcollateralisation of the senior notes is greater than 70%, the transactions have a sufficient percentage of assets with ratings on review for possible downgrade - such that the agency anticipates that the senior overcollateralisation ratios will fall below70% following resolution of ratings currently under review.

CDS

Long mezz risk touted as recovery trade

Structured credit strategists at Morgan Stanley review correlation performance themes of the last six months and implications for the future in their latest research note. They point out that in the tranche space investors are braced for a cyclical slow-down.

"Correlation is considerably higher, but it's mostly junior mezzanine that has borne the brunt of the sovereign volatility," the Morgan Stanley strategists explain. "The basis is extremely positive, especially in Europe - another indication that a systemic crisis is less on the minds of investors than the overall growth concerns. CDS client volumes have made an impressive rebound in 2010."

However, the strategists suggest that the events in the Gulf of Mexico and the impact on what was considered a defensive sector have caught many investors unaware. In the research note, they attempt to draw some lessons from the episode.

"By definition, hedging an idiosyncratic event is difficult, but buying protection on equity tranches, first-to-default baskets and short-end curve flatteners are some options. Despite a good entry point in terms of correlation, wide spreads and tails saturated with financials and cyclicals make index equity tranches less viable hedges than bespoke non-financial portfolios," the strategists comment.

Meanwhile, they believe that long mezzanine risk is a good play on continued recovery, with attractive relative and absolute valuations. "We recommend iTraxx S9 seven-year 12%-22% in Europe and IG9 seven-year 15%-100% in US as our preferred systemic hedges. Europe has underperformed the US in many parts of the market and we like long iTraxx 22%-100% versus CDX 15%-100% to play for a cross-Atlantic normalisation."

CDS

Eurozone CDS market confidence returning

Fitch Solutions says that average CDS liquidity for developed market sovereigns has continued to decline since mid-June, suggesting that CDS market confidence is slowly returning to the eurozone. Since 10 March, sovereigns have moved from being the fourth most liquid to the joint least liquid sector (along with Technology) as of 9 July - with average sovereign CDS liquidity moving from 9.19 to 10.18 over this period.

"The sustained decrease in average sovereign CDS liquidity suggests that, after a period of uncertainty on the prospects for Europe's fiscal challenges, the CDS market is growing more confident towards sovereigns," says Fitch's md Jonathan Di Giambattista.

He adds: "However, there are exceptions to this broader trend, such as Spain where, despite spreads tightening 15% in the past month, CDS liquidity has jumped from trading in the twentieth to the ninth global percentile. Average CDS liquidity on France and Portugal has also moved up four and seven global percentiles respectively over the same period, with both now in the twelfth global percentile."

CDS

Positive momentum for subprime price index

The latest Fitch US subprime price index results suggest that the positive momentum seen in May continued through to the end of June, carrying the index to 9.74, representing a month-on-month increase of 3.9%.

Alexander Reyngold, Fitch senior director, says: "Overall, the index continues to reflect positive trends from US subprime asset performance. However, there are several signals emerging that may now possibly prefigure a slow-down."

Fitch's recent loan level analysis of the indices' constituents had illustrated positive signs from subprime asset performance over the months of March through to May, with 30-, 60- and 90-day delinquency levels either stabilising or improving, as well as falling three- and six-month CDRs. However, three-month CPRs increased across all vintages over May and June, and for the first time since March increases in CDRs across the 2004, 2005 and 2007 vintages were also observed in June.

"Higher credit borrowers may continue to leave the asset pool, resulting in a lower credit quality pool on aggregate. Also of note are the dramatic jumps in 30-day delinquency levels across all vintages in June," adds Fitch director Kwang Lim.

CDS

CDS liquidity scores enhanced

Fitch Solutions' CDS Liquidity Scores now provide CDS contract-level liquidity measures, in addition to the existing entity-level liquidity scores launched in 2008. This enhanced capability enables users to review market liquidity based on a variety of views and time periods; additionally, subscribers can now tailor the data files they receive from Fitch to see different cuts of the data depending on their needs.

"Sovereigns can have CDS contracts written on several different currencies," says Fitch md Jonathan Di Giambattista. "The enhanced liquidity scores can now determine which contract is the most liquid now or in the past, which was historically not an easy task."

Earlier this year, Fitch's commentary service highlighted that between June to August 2009, Greece's sovereign CDS liquidity significantly diverged from the broader developed market sovereign liquidity trend and was accompanied by the beginning of a sustained market switch into US dollars rather than euro-denominated Greek sovereign CDS contracts.

CLOs

Loan weakness reflected in CLO prices

Babson Capital Management points out in its latest quarterly newsletter that - unlike in previous periods, when moves in the CLO market lagged the loan market by as much as a couple of weeks - US CLO liabilities reacted quickly to the weakness in the loan market this quarter. This may be due in part to the particularly fast correction in the equity markets.

Like loans, CLO liability prices rose early in the quarter before weakening at the end, with mezzanine securities leading the way. At the close of Q2, typical original-issue triple-A rated CLO tranches trade around 90 cents on the dollar, down 1-2 points.

Original-issue double-A, single-A, triple-B and double-B paper are down by approximately three, five, 10 and eight points respectively. Equity was virtually unchanged on the quarter and, therefore, once again outperformed.

Secondary CLO paper worth US$3.2bn was visibly offered during the second quarter, according to Citigroup CDO research, down slightly from the US$3.6bn offered during the first quarter. Offers were once again concentrated in the senior part of the capital stack; 53% of offers were original-issue triple-A and double-A paper, nearly identical to the percentage offered during the first quarter. Equity trading increased, on a percentage basis, from 10% to 13%, while trading in original-issue double-B bonds fell from 8% to just 4% of bonds offered.

CLOs

Euro CLOs show signs of stability

Fitch says the pace of defaults and negative credit migration within European CLO portfolios is slowing.

"While Fitch still has serious concerns regarding long-term refinancing risk, there have been clear positive performance signs in 2010," says Laurent Chane-Kon, director in Fitch's European structured credit team. "Most notably, the pace of default has slowed and triple-C exposure is declining."

During 2009, Fitch observed an average of 8.5 defaults per quarter relative to four in Q110 and two so far in Q210. While the average cumulative default rate per CLO increased to 8.9% from 5.7% of target par since the rating agency's last CLO Tracker was published, the rate of defaults is slowing.

Also, CLO portfolios saw their triple-C exposure decline to 11.6% from 12.5%. Average senior overcollateralisation (OC) test results increased to 131.6% from 127.4% and double-B OC test results improved to 103.6% from 102.5%.

"Excess spread diversions and loan prices improvement boosted OC levels. Also, more recent loan restructurings have resulted in less senior debts [being written off]," says Jeffery Cromartie, senior director in Fitch's structured credit surveillance team.

He adds: "Over the long term, Fitch still expects to see more triple-C names defaulting due to unsustainable levels of leverage, but for now most CLOs are showing signs of near-term stability."

CMBS

Tension in CMBS regulatory reform outlined

A draft Commercial Real Estate Finance Council document entitled 'Best Practices for CMBS Restart' is circulating among US CMBS practitioners. According to Annaly Capital Management's latest analyst note, the document has two themes - alignment of interests and transparency.

The Annaly analysts suggest that the proposed minimum risk retention of 5% may raise borrowers' cost of execution due to FAS 166/167 accounting consolidation requirements and the requisite capital reserves imposed on those originating and retaining the risk. The Dodd-Frank bill has a provision allowing B-piece buyers/owners that conduct due diligence and consolidate the transaction to essentially own the risk and thus exempt the issuer from having to retain it. This would have the overall benefit of limiting the execution cost to the issuer and borrower, the analysts note.

They go on to point out that the issue of transparency, meanwhile, is divided between pre- and post-securitisation periods. Historically, only the non-investment grade buyer received loan-level information prior to securitisation, but now investment grade investors are asking for similar information.

The analysts suggest that the recommendation is not unreasonable, given aggressive underwriting and lax oversight by the rating agencies prior to the credit bubble bursting. But it appears that investors are seeking not only additional disclosures, but also a greater level of comfort in future collateral performance.

Various data fields in post-securitisation reporting are often unfilled or reported in a non-standard fashion. The Best Practices document supports better disclosure. In certain but not all situations this will help investors to better evaluate the securities, but it would also add to the execution costs, the analysts point out.

They conclude: "Clearly there is a tension in regulatory reform. While investors' recommendations for best practices are understandable, additional disclosure coupled with added financial and accounting regulations may result in a better designed product, but it likely will also be more expensive. An unintended outcome of these machinations may be to create more private, and thus less regulated, transactions."

CMBS

Euro CMBS bondholder communication tool launched

Savills Capital Advisors and Giltspur Capital have launched a new database for bondholders in European CMBS. The database, administered by Savills, will provide a service to enable CMBS bondholders to initiate communication with fellow bondholders in order to facilitate the efficient restructuring of CMBS transactions.

Simon Dunne, Savills' director, says: "The European CMBS sector has been severely affected by the credit crisis, with a significant increase in the number of CMBS loans going into special servicing."

John Deacon, ceo of Giltspur, adds: "Many UK and European CMBS transactions will require restructuring over the coming years and we hope to facilitate this process with the introduction of the database."

CMBS

White Tower 06-3 portfolios acquired

The Carlyle Group has exchanged contracts for the acquisition of six landmark central London properties, which were formerly part of the portfolio securing the White Tower 2006‐3 CMBS. The properties, comprising the Thames Portfolio and Alban Gate, total in excess of 1.6m square feet and currently generate over £62m of rent per annum. They have been acquired for a total of £671m.

The portfolio of six assets comprises: 60 Victoria Embankment - fully let to JPMorgan Chase; Ludgate House - fully let to United Business Media; Sampson House - fully let to IBM; Millennium Bridge House - fully let to UBS; BSI tower - fully let to BSI Management Systems; and Alban Gate - fully let to JPMorgan Chase. This acquisition was made on behalf of Carlyle's third pan‐European real estate fund, Carlyle European Real Estate Partners III, with €2.2bn of equity.

Financing for the Thames Portfolio was provided by a consortium of banks led by SG - the sponsor of the White Tower CMBS - as structuring bank. SG, BNP Paribas, Crédit Agricole and ING acted as arrangers, and ING as facility agents. AXA REIM participated in the financing of the Thames portfolio. In the case of Alban Gate, SG acted as arranger and sole book-runner.

Robert Hodges, Carlyle md, says: "This acquisition has provided us with a rare opportunity to acquire six landmark assets in strong locations, let to a number of global high quality occupiers. Whilst each property benefits from an existing secure income profile, there are considerable longer-term opportunities across the portfolio for active asset management and redevelopment, where we believe we can add significant value."

CMBS

Small rise for US CMBS delinquencies

According to Moody's delinquency tracker (DQT), the delinquency rate on loans included in US CMBS increased by 21bp in June to 7.71%. In the US, 3,986 loans are currently delinquent with a total balance of US$49.8bn.

In June, nearly 300 loans became newly delinquent, while just under 250 loans became current, worked out or disposed, creating a 49 loan net increase in the total number of delinquent loans. The net increase was the smallest for any month in 2010.

"Moody's Delinquency Tracker showed the smallest rise in CMBS delinquency rates since August 2009," says Moody's md Nick Levidy. "While this is a welcome bit of good news, it is probably best viewed as a temporary respite from the larger monthly increases we have seen in the first few months of the year and which we expect will resume in the months ahead."

LCDS

ELCDS credit event called

Markit iTraxx LevX index dealers have voted to conduct a credit event auction to facilitate the settlement of second-lien European loan-only CDS (ELCDS) trades referencing Truvo. Truvo is a constituent of LevX Subordinated Series 2 and 3.

The move follows last week's vote by ISDA's Determinations Committee to hold an auction on 15 July for CDS trades referencing the entity (see last issue).

Regulation

Fair value feedback provided

ISDA has commented on the IASB's exposure draft 'Fair Value Option for Financial Liabilities' (see SCI issue 191). The association says it welcomes and supports the key proposals in the exposure draft.

As part of ISDA's feedback, the association says it believes the definition of 'own credit' needs to be tightened to focus only on the credit risk of the reporting entity. In some circumstances the credit risk of a liability relates not to the entity but to the risks of assets which the entity holds.

An example would be a legally isolated loan securitisation vehicle, which the reporting group is required to consolidate, but does not guarantee the performance of the notes it issues. In these circumstances, ISDA believes that changes in own credit of such financial liabilities should be recorded through profit or loss, so as to avoid an accounting mismatch.

Further, since IASB's proposals are unconnected with IFRS 9, the association believes that it should be possible to apply the proposals independently of IFRS 9 and for entities to be permitted to revoke or exercise the fair value option anew when they are first applied. In addition, recycling of gains and losses to profit or loss should be permitted for early redemption or repurchase of financial liabilities.

RMBS

Private-label MBS subpoenas issued

The FHFA has issued 64 subpoenas to various entities, seeking documents related to private-label MBS (PLS) that both Fannie Mae and Freddie Mac invested in. The documents will enable the FHFA to determine whether PLS issuers and others are liable to the GSEs for certain losses they have suffered on such securities. If so, the conservator expects to recoup funds that would be used to offset payments made to the enterprises by the US treasury.

The GSEs sought to assess and enforce their rights as investors in PLS, in an effort to recoup losses suffered in connection with their portfolios. Specifically, they have attempted to determine whether misrepresentations, breaches of warranties or other acts or omissions by PLS counterparties would require repurchase of loans underlying the PLS by the counterparties and whether other remedies might be appropriate.

Difficulty in obtaining the loan documents has presented a challenge to their efforts. FHFA has therefore issued the subpoenas for various loan files and transaction documents pertaining to loans securing the PLS to trustees and servicers.

"FHFA is taking this action consistent with our responsibilities as conservator of each enterprise," says FHFA acting director Edward DeMarco. "By obtaining these documents we can assess whether contractual violations or other breaches have taken place leading to losses for the enterprises and thus taxpayers. If so, we will then make decisions regarding appropriate actions."

RMBS

GSE prepayment speeds expected to increase

Aggregate fixed rate prepayments for 30-year Fannie Mae and Freddie Mac mortgages respectively fell and increased last month. Fannie prepayments fell by 38% from 28.1% CPR to 17.5% CPR, while Freddie prepayments increased by 19% from 14.4% CPR to 17.2% CPR.

MBS analysts at Bank of America Merrill Lynch note that, overall, prepayments for new production (2008/2009) Fannie 4.5s and 5s were higher than their expectations - due to a shorter lag than they had assumed - while the speeds for higher coupons (6 and 6.5) were lower than their expectations. "For 6s and 6.5s, both involuntary and voluntary speeds were lower on [a] month-over-month basis. Across the coupon stack, the aggregate speeds for 4.5s were up 89% to 9.3% CPR due to buyouts, 5s dropped 39% to 16.5% CPR and 5.5s dropped 55% to 21.9% CPR after the spike last month due to buyouts, and 6s dropped 9% to 24.6% CPR," they note.

Freddie's higher than expected speeds were due to higher speeds for new production 4.5s-5.5s, just like Fannie Mae, the BAML analysts suggest. "The speeds for higher coupons (6-6.5s) were much more in line with our expectations. Overall, FN and FH speeds have converged and are now fairly similar across the coupons and vintages."

Meanwhile, the analysts expect aggregate 30-year speeds to increase in July by 10% due to the higher refi index, lower day count and the drop in the purchase index. The refi lag variability and the related capacity constraints at originators will be key determinants of speeds next month, they add.

RMBS

Advances made in mortgage valuations

Integrated Asset Services has released a new report on the state of the mortgage servicing industry. The report, entitled 'A New Era of Mortgage Servicing: Out of Crisis, Solutions', outlines the latest advances in valuation technology that has emerged in response to the US foreclosure crisis.

Known as 'intelligent granularity', the IAS paper asserts that this powerful new technology and process brings clarity to value estimates. "Thanks to trend-based information, decisions are already being made on REO, loan modifications and other workout scenarios from a far more informed perspective," says Ryan Tomazin, president of IAS. "I'm convinced this new technology and the firms utilising it will lead the way to a more stable and productive mortgage lending industry."

The paper outlines how, through raw computing power and proprietary algorithms, innovative mortgage services are producing 'trend lines' for virtually any segment of the marketplace. This new level of granularity is powering next-generation valuation products to look well past the largest metro areas into micro-geographies around the country.

 "From a servicing perspective, this knowledge and information should be part of any ongoing strategy, either with the borrower, with the borrower and the property or just the property," adds Tomazin. "We should see the trend line technology integrated all along the continuum, from automated valuation models to reconciliations."

RMBS

Milestone call for Aussie lender

Pepper Australia has acquired a portfolio of residential mortgage loans from Permanent Custodians in its capacity as trustee of the First Permanent Securities Mortgage Warehouse Trust. The mortgage lender has also purchased the class F certificates, residual income units and residual capital units in the Warehouse Trust and the First Permanent Super Prime RMBS Trust 2006.

The total loan portfolio held within the Warehouse Trust is A$69.1m, while the portfolio balance held in the FP Trust was A$40.1m - meaning that Pepper acquired a combined loan portfolio of A$109.2m. The loans were originated by First Permanent Financial Services, which ceased originating new loans in May 2008.

While in operation, the firm was Australia's only specialist high loan-to-value mortgage lender. To ensure the quality of the mortgage assets, First Permanent assembled a team of underwriting specialists focused solely on origination of high quality, high LTV home loans.

"This is a milestone transaction for Pepper," says the firm's md and ceo, Patrick Tuttle. "First Permanent has applied stringent credit criteria and property valuation processes to these loans, ensuring they were only made to borrowers with stable debt servicing capabilities."

He adds: "Pepper's expertise as a specialist mortgage lender and third-party loan servicer makes us well placed to assess and value whole loan opportunities of the kind presented by this First Permanent transaction. Pepper will continue to explore opportunities to acquire loan and other asset portfolios which complement our credit, third-party servicing and debt capital markets skills".

All mortgages in the portfolio are first ranking registered mortgages over property positioned in good locations within metropolitan and approved regional areas, with populations in excess of 35,000 people. The majority of the mortgage pool is located in Victoria, New South Wales, Queensland and South Australia.

Pepper exercised its call option on the portfolio on 6 July 2010, becoming the first Australian non-bank financial institution to refinance a publicly issued RMBS transaction sponsored by another issuer. A large number of Australian RMBS issuers have been unable to call their transactions since the financial crisis began (see last issue), leading to investor concern over extension.

RMBS

Dutch private placement completed

AEGON has completed the sale of €1bn triple-A rated RMBS in a private placement with institutional investors. The SAECURE 7 transaction is expected to have a weighted average life of 4.3 years and priced at par with a coupon of 135bp over three-month Euribor.

The net proceeds will be used to finance a part of the existing Dutch mortgage portfolio of AEGON.

RMBS

High Court to rule on RMBS EOD

The Trustee of Eurosail UK 2007-3BL is seeking directions from the High Court as to whether an event of default has occurred by reason of the issuer's assets being less than its liabilities. The outcome of the proceedings may increase the likelihood of a switch to the post-enforcement waterfall, according to Moody's, which would benefit some noteholders to the detriment others. The court decision may have rating implications for this transaction and certain other UK structured finance transactions that are structured in materially the same way, the agency warns.

On 27 April 2010, the investors in the deal were notified that the issuer and certain holders of the class A3 notes had expressed diametrically opposed views on the interpretation of the transaction documents. According to Condition 9(a)(iii) of the notes, an event of default shall occur if the issuer is unable to pay its debts within the meaning of Section 123 of the Insolvency Act 1986.

The class A3 noteholders contend that this EOD has occurred on the basis that the issuer's assets are less than its liabilities. The issuer's latest annual accounts show a net liability position - in part due to the insolvency of Lehman as counterparty to swaps held by the issuer - and the notes are not subject to traditional limited recourse. However, according to the latest quarterly report, all notes are paying interest and nothing is recorded in the principal deficiency ledgers.

The issuer contends that, despite the absence of traditional limited recourse, the existence of a post-enforcement call option (PECO) means that no EOD has occurred under Condition 9(a)(iii).

According to the pre-enforcement waterfall of the issuer, principal is paid to the class A1, A2 and A3 noteholders on a sequential basis. Following the service of an enforcement notice by the trustee, principal and interest is paid on a pari passu basis to all class A noteholders and no amounts are paid to junior classes of notes until all senior-ranking classes have been redeemed in full. Hence, there is an incentive for the class A3 noteholders to argue that an EOD has occurred.

Moody's says that, as the service of an enforcement notice would change the allocation of cashflows to noteholders, there may be rating implications for Eurosail UK 2007-3BL. There may also be rating implications for other full recourse structured finance instruments issued by UK-incorporated SPVs where a technical insolvency of the issuer is an EOD under the notes or transaction documents.

RMBS

Aire Valley ratings on review

S&P has placed on credit watch negative its long-term credit ratings on all the notes rated in the Aire Valley Master Trust. At the same time, the agency affirmed the A-1+ short-term rating on class 1A1 in Aire Valley Mortgages series 2007-1.

Aire Valley Master Trust's arrears and losses have increased over time and, since its last issuance in July 2008, total arrears have increased by approximately 50% - to 6.95% from 4.29%. Cumulative losses since then have also increased at a faster rate than previously.

This trust is different from many UK master trusts due to its collateral being predominantly buy-to-let or self-certified (approximately a 78/22 split between the two). S&P typically sees master trusts backed by prime UK mortgage loans, which have performed well through the economic downturn.

However, Aire Valley Master Trust's arrears are the second-highest of the trusts the agency rates. Pendeford Master Issuer, which also contains self-certified/BTL mortgage loans, is probably Aire Valley's closest peer.

Despite this, S&P says arrears in the trust have decreased recently due to the effect of any artificial increase in the arrears from the lowering of interest rates working its way out. The agency will carry out further analysis - including the potential effect of negative selection in the pool - and will resolve the credit watch placements in due course.

RMBS

US prime RMBS delinquencies rising

Fitch's latest performance metrics show that US prime RMBS serious delinquencies have risen for the 37th consecutive month. Conversely, Alt-A RMBS delinquencies declined for the third successive month, while subprime late-pays fell for the fourth straight month.

While the improvements in subprime and Alt-A RMBS delinquencies are noteworthy, the portion of borrowers who were current on their mortgage the previous month and became delinquent the next remained elevated, Fitch notes. "The persistently high roll rates indicate that the delinquency declines are more a reflection of increased property liquidation and ongoing loan modification activity than of widespread improvement in mortgage payment performance," says Fitch md Vincent Barberio. "Prime RMBS has yet to show any signs of a favourable turnaround."

California prime jumbo loan performance weakened slightly in June, with 60+ days delinquencies rising to 12.1% from 12% in May (and 7.4% in June 2009). During the first six months of 2010, Florida had the biggest jump (2.1%) of the five states, with the highest volume of jumbo loans outstanding. New Jersey was second of the five states, with a 1.6% increase over the same period.

The five states with the highest volume of prime RMBS loans outstanding (California, New York, Florida, Virginia and New Jersey) combined represent approximately two-thirds of the total sector.

Regulation

Retention requirements for ABS - part 1

In the first article of a two-part series, Paul Hastings partners Charles Roberts, Conor Downey, Ron Lanning and Diego Shin discuss the new regulatory landscape in Europe

While there has been some improvement in at least certain areas of the financial markets, the ABS market has yet to see any evidence of significant recovery since the onslaught of the credit crisis. In this current climate of suspicion, if not outright hostility, towards structured products, regulators are seizing the opportunity to propose and implement measures that will have long lasting effects on the ABS market going forward.

As with respect to the new rules being put into place, no single proposed measure will have a greater impact on the securitisation industry than the requirement that originators retain a portion of newly issued ABS. The stated purpose of this measure is to align the interests of investors with that of originators.

The rules in both Europe and the US have set retention at 5%, which may be met by the ownership of an equivalent percentage in each ABS issued tranche (a 'vertical slice') net of any hedging or other credit risk transfer arrangement, or meeting certain other retention requirements or other requirements - the standards of which differ between Europe and the US.

This memorandum explores the retention requirements both approved and proposed for both Europe and the US.

European legislation
On 1 January 2011, the European retention rules for securitisation transactions will take effect. In addition to covering retention requirements, these changes will include requirements in respect of resecuritisation, disclosure and investor due diligence in connection with securitisations and will be primarily introduced through amendments to the Basel 2 framework and the European Union Capital Requirements Directive (CRD and together with Basel 2, the 'Amendments').

In accordance with European law, the Amendments will need to be implemented into the national laws of each of the Member States. In the UK, the Financial Services Authority (FSA) will be responsible for implementing the majority of the Amendments by way of amendments to its prudential rules.

The Capital Requirements Directive
Basel 2 was implemented within the European Community (EC) by the Banking Consolidation Directive and the Capital Adequacy Directive. These combined directives are referred to as the CRD.

The European Commission has produced a series of proposals that - upon implementation - would make significant amendments to the CRD and which are called CRD II, CRD III and CRD IV. The retention requirements implemented pursuant to CRD II are set out in Article 122a of the amended Banking Consolidation Directive and will apply to credit institutions subject to Member State authorisation under said directive (save as expressly exempted, e.g. in the case of the UK credit unions and municipal banks) holding a position: (a) in any securitisations issued on or after 1 January 2011; and (b) from 31 December 2014, in any pre-January 2011 securitisations where new exposures are added or substituted after that date.

Article 122a requires that in order for such credit institutions (other than when acting as originator, sponsor or original lender) to be exposed to the credit risk of a securitisation position, the related originator, original lender or sponsor is required to have explicitly disclosed to that credit institution that it has retained, on an ongoing basis, a net economic interest of at least 5% of the securitisation in one of the following manners:

• Vertical slice - retaining no less than 5% of the nominal value of each of the tranches sold or transferred to the investors;
• Pari passu share - in the case of securitisations of revolving exposures (e.g. such as in master trust securitisations), retaining no less than 5% of the nominal value of the securitised exposures;
• A random selection - retaining randomly selected exposures, equivalent to no less than 5% of the nominal amount of the securitised exposures, where such exposures would otherwise have been securitised in the securitisation, provided that the number of potentially securitised exposures is no less than 100 at origination; or
• First loss piece - retention of the first-loss tranche in the securitisation and, if necessary, other tranches in such securitisation having the same or more severe risk profile than those transferred or sold to investors, and not maturing any earlier than those transferred or sold to investors, so that the retention equals in total no less than 5% of the nominal value of the securitised exposures.

Regardless of the actual form of the retention requirement, as above, the 5% retention must be held as a net economic interest and maintained on an ongoing basis and cannot be subject to any credit risk mitigation, short positions, other hedge or otherwise sold.

The retention requirements do not apply to:

• transactions where the securitised exposures are claims or contingent claims on or fully, unconditionally and irrevocably guaranteed by: (a) central governments or central banks; (b) regional governments, local authorities and public sector entities of Member States; (c) institutions to which a 50% or less risk weight is applied under the standardised approach; or (d) multilateral development banks;
• transactions based on a clear, transparent and accessible index, where the underlying reference entities are identical to those that make up an index of entities that is widely traded, or are other tradable securities other than securitisation positions; or
• syndicated loans, purchased receivables or credit default swaps where these instruments are not used to package and/or hedge a securitisation covered by the retention requirements described above.

Risk analysis and disclosure requirements
In addition, Article 122a requires that regulated credit institutions be able, both prior to and after investing in individual securitisation positions, to demonstrate that they have a comprehensive and thorough understanding of such investments, and have implemented formal policies and procedures appropriate to such credit institution and the risk profile of such investments. This requires such credit institutions to have in place appropriate procedures to analyse and record among other things:

• the information disclosed by originators or sponsors with regard to their risk retention;
• the risk characteristics of the securitisation position held by the credit institution;
• the reputation and loss experience of earlier securitisations of such originators and sponsors;
• the methodologies on which the valuation of the collateral supporting the securitisation is based; and
• the structural features of the securitisation that can have a material impact on that credit institution's risk position.

A credit institution that is a sponsor or originator of a securitisation shall be required to disclose to investors its level of risk retention held by it and ensure that prospective investors have available to them all materially relevant data on the credit quality and performance of the securitisation, cashflows and collateral backing the securitisation, as well as any other information necessary to conduct comprehensive stress tests on cashflows and collateral values. Failure by a credit institution to materially meet, either due to its negligence or omission, any of the above requirements will result in that credit institution becoming subject to an additional risk weight of not less than 250% of the risk weight (capped at 1,250%) which would otherwise apply to the holding of such relevant securitisation positions, with a progressive risk weight increase being imposed for each subsequent infringement.

Investment prohibitions on alternative investment funds
On 30 April 2009, the European Commission published its proposal for a directive with the purpose of establishing a framework for the monitoring and supervision of alternative investment fund managers that, among other criteria, are established or otherwise manage alternative investment funds (AIFs) which units or shares are marketed within the EU. This proposal has been subject to revisions by each of the European Parliament and the Council of Ministers.

Despite significant differences between the versions proposed by each of the Parliament and the Council, both texts would prohibit an AIF from investing in securities "that repackage loans into tradable securities and other financial instruments" of this type issued after 1 January 2011, if such securities or instruments do not meet the criteria to be set forth by the European Commission, which shall include the originator of such securities or instruments retaining a net 5% risk retention. Therefore, it is likely that there will be final rules that will have the practical effect of expanding the CRD restrictions to entities beyond simply credit institutions and encompass funds that are regulated in the EU.

© 2010 Paul Hastings. This Research Note was first published by Paul Hastings on 2 July 2010.