Contents

ABS

Overhang overture

New structures anticipated to deal with legacy assets

Banks are estimated to hold 80%-85%, or €550bn in volume, of outstanding European legacy ABS as at mid-June. However, there is expected to be some forced selling of these positions in the coming months.

So far, there hasn't been much pressure for financial institutions to begin dealing with their legacy ABS assets, given central bank repo and liquidity facilities. But budget issues will likely make it harder for central banks to continue supporting the market in this way. This, combined with regulatory change, could result in some forced selling by banks and insurance companies of assets that are no longer efficient to hold on balance sheet.

Indeed, some market players are already anticipating how legacy ABS assets could potentially be dealt with once banks and insurance companies begin unloading them from their balance sheets. According to Jochen Felsenheimer, co-head of credit at Assenagon, the basic issue is who should buy such assets.

"The structured credit market is skewed because there is no natural buyer for synthetic CDOs, for example. Some interesting trade ideas can be created around the fact that the traditional buyers are no longer around," he says.

Felsenheimer adds: "Regulatory change applies to all banks, so all market players will be in the same situation; therefore, it is necessary to create something new. This is the interesting part of the opportunity: when banks and insurance companies have to begin forced selling. If many holders of ABS want to exit the market through the same small door, pricing will have to be reduced significantly."

Alternatively, a wrap could be structured around an asset to provide a certain payout or it could be tailored in different formats for different investors. For instance, Assenagon has been offered certain correlation trades hidden behind a net basis package. Such positions are being unwound by banks ahead of regulatory change making them unattractive to hold.

There are other areas where a lack of liquidity would make mispricing attractive, such as certain correlation exposures and cash ABS bonds, where the focus of government intervention on the senior tranches has raised the expected loss of the junior tranches. Another opportunity could be via capital structure arbitrage trades, where many single names don't trade efficiently but it is possible to replicate them synthetically with a payoff profile that's cheaper than in cash. For example, recovery swaps on Greece were trading at the same levels as long-term Greek bonds during the sovereign crisis.

However the opportunity is structured, Felsenheimer stresses that the emphasis should be on the combination of the wrap and the underlying trade. "The format will be driven by investor appetite: there are many interesting trades, but it is important to put the right idea together with the right format," he explains.

He adds: "Many investors prefer to buy into funds because they have direct access to the underlying assets and there is little risk of default. We're working more on the special fund side to create client-driven trades; for example, for those who aren't able to execute trades themselves. There is some market risk involved in these strategies, but I think it's worth it."

In addition, Felsenheimer suggests that generally taking an active trading approach is necessary in order to identify opportunities post-crisis. For example, in the case of CDS basis trades, it is a question of exploiting the excess from brokers on both sides.

He notes: "It is possible to source a triple-B US basis package for 175bp-200bp from the same dealer, but if you tap different brokers for the CDS and the bonds, you can source it for around 225bp. Similarly, you could sell bonds that are clean and easy to analyse for 175bp and bonds that need a bit more analysis or aren't in a main currency for 250bp."

CS

RMBS

Repressing recidivism

Latest HAMP figures show low redefault rates, but may not tell whole story

The recidivism rate for permanently modified HAMP loans has been published for the first time by the US Treasury Department (see separate News Round-up story). Recidivism rates appear to be extremely impressive, with only 7.7% of loans modified in Q309 slipping back into delinquency nine months down the line. Not everybody is convinced by the figures, however.

ABS analysts at Barclays Capital concede that HAMP is experiencing fewer redefaults than prior modifications, but suggest that the Treasury's data "are misleading and fail to capture the full magnitude of redefaults from these modifications". Just how effective HAMP has really been remains a divisive issue.

The reason the figures are misleading is that they ignore loans more than 90 days delinquent, which are cancelled under HAMP. On top of this, Jim Shallcross, Declaration Management & Research's director of portfolio management, believes it is too soon to read much into the data and is yet to be convinced by the programme.

Shallcross says: "Our data says it has been anywhere from 45%-65% going back into default. But it also depends on the time period, because with a shorter time period the figures will fluctuate more. With any housing data you have to be careful about looking at data trends over a short time period because it does fluctuate a lot."

"Analysis is an art rather than a science, so presentation really does matter," notes Ron D'Vari, ceo of NewOak Capital Management. "The fact is the relative performance has been getting better because servicers have more leeway to deal with borrowers. There are also better ways to screen the borrowers and there is more experience with better, well defined processes."

Even if the extent of improvement is contested, the consensus is that HAMP is seeing better performance than previous modifications. One explanation is that the programmes have learned lessons as they have evolved.

D'Vari says: "I think a lot of why the recidivism figures are so low is to do with the modifications in the programme that made it more practical for true negotiations with the borrowers. The changes made it easier to identify who is real and who is not, because some people in the past were looking at these programmes as free rent. Being able to weed those guys out should have been the main goal to start with and I think we are now approaching that."

Another explanation for HAMP's success is that the programme has played an important role in stabilising house prices. ABS analysts at Bank of America Merrill Lynch believe this is where HAMP's real achievements lie.

They note: "We have asserted many times in the past that the MHA programme has both an explicit goal to help 3-4 million borrowers and an implicit goal to make liquidations orderly. It can be argued that the programme may not have been that successful when measured against the explicit goal. However, the programme has been very successful based on the implicit goal, in our view, and has been one of the key reasons for stabilisation in home prices."

Shallcross explains that even when HAMP modifications are not successful, they buy time for the housing market to recover and keep those houses off the market until it comes back up. However, this may be the extent of their achievement. Stretching the time before foreclosures, if nothing else, enhances the chances of being able to liquidate into a strengthened market.

He says: "HAMP has had a great temporary effect in that most of those borrowers would have defaulted and gone into liquidation, which has been prevented. The major effect is that the programme has allowed banks to keep homes off the market that they would otherwise have been aggressively selling, which would have pushed house prices that much lower. It has prevented a vicious cycle from occurring, where people are selling homes and there are more delinquencies and foreclosures and that cycle feeds on itself."

Just how strong the current US housing market is remains debatable, however. Although prices have largely stabilised, a recent report by Fitch suggests that a further 10% drop should be expected (see SCI issue 192). The other factor is that the picture is not the same throughout the nation and regional variations remain relevant.

D'Vari says: "House prices are stabilising, but they have not necessarily floored. That means it will be idiosyncratic with no single direction. Better assets and better locations are going to be firming up, with New York a good example - despite being hit by the financial crisis, alternative demand has helped."

Shallcross agrees: "Our outlook is that it is dependent on the area. Some weaker areas like California are doing the best. We see another 10% drop in the housing prices in the next 12-18 months. Certainly the rate of decline is slowing, but unemployment [which must come down for house prices to stabilise] remains high."

If not a resounding success, the consensus is that HAMP has made a positive contribution to the US housing market. Quite how beneficial PPIFs have been is less clear. A SIGTARP report to Congress shows PPIP funds have raised US$29.4bn with Treasury assistance (see also separate News Round-up story), some way short of the US$40bn buying power that the programme could have had.

Whether the PPIP programme was needed at all has been debated since its inception (SCI passim). Even now the market is not convinced that PPIP funding has been important.

Shallcross says: "I think it was largely unnecessary as demand was coming back and the programme has really just benefited those who are participating. It has not played a big role in propping up the market because there has been plenty of interest in the sector from sources outside of the programme, so in that regard it was not necessary. It did not do anything to generate new issuance. I think TALF probably had more impact and was a much better programme for the sector."

Only US$16bn of the US$29.4bn raised has been deployed, with 85% of that amount invested in RMBS. When and how the rest of the capital will be spent remains unclear.

D'Vari is not convinced that the entire sum will end up being used. He says: "Some of their US$29.4bn was probably going to be spent in commercial mortgage securities, but the market went up faster than most people expected, so some of those managers are probably anticipating slowing down their purchases and waiting for a better market. The problem with concentrated capital is people know you have that money so everything gets marked up."

He adds: "The other thing is people may not want to use as much leverage as they initially thought they would. With the initial run-up in prices, they may have printed enough return to keep their investors happy and it is always a good idea to give a little back. It shows discipline and comes in handy the next time they try to raise capital."

As with PPIFs, HAMP's role in US RMBS is contentious. Ignoring 90-plus day delinquent loans in the programme may be artificially reducing the recidivism rate, but HAMP is being more successful than earlier attempts were. The extent to which modifications are the cause of the improvement is still unclear, however.

D'Vari remains sure the programme has been positive. He says: "HAMP has helped the problem to some extent in the absence of a market alternative solution. So we view the programme overall has been a positive rather than a negative. A market solution would probably have been faster but caused more initial pain."

Shallcross, however, remains more reserved in his praise for loan modifications. He concludes: "We are sceptical that they work. They are not negative for the market, but they are not a panacea either. These modifications do not address the issue of affordability. Until you write down some of the balance of the loan, you do not really make any inroads."

JL

Regulation

Increased transparency?

Stress-test positives outweigh negatives

CEBS published the results of the European stress tests on 23 July, indicating that seven banks had failed them. Although the tests were seen to fall short in many respects, most market participants appear to have a positive view of the outcome.

"The stress tests have to be seen as positive for the market: it will help to recapitalise the smaller players with weak capital bases and even help/accelerate the consolidation process across the international banking sectors. Disclosure will help, as it adds transparency and could unveil the origination practices of the banks, helping to distinguish between the good ones and bad ones," says one structured credit investor.

He adds that he views the stress tests as a 'systemic test' without any strict relationship to the ABS sector. In other words, in the case of weaker-than-expected results, the negative impact is general and not asset-specific.

Credit analysts at Barclays Capital suggest that, on one hand, the tests exceeded expectations concerning disclosure of sovereign bond holdings. On the other hand, however, the tests were not stringent enough and the banks that barely passed will likely be perceived as being undercapitalised. The BarCap analysts expect poor spread performance from those names going forward.

"In our view, the positives (creation of transparency) outweigh the negatives (too little forced capitalisation)," they add. "The majority of European financial risk in credit indices has been issued by banks that cleared the tests by a wide margin, where capitalisation is not a concern and where transparency is a key positive. The risk to our view is that, while systemic fears are likely to subside, the soft-handedness of the stress tests is likely to leave concerns over the capitalisation of some specific institutions - and that these idiosyncratic problems become so large that they overwhelm the systemic benefits."

ATE Bank, Banca Civica, Caixa Catalunya, Caja Espana, Caixa Sabadell, CajaSur and Hypo Real Estate failed the stress tests. The banks' capital ratio dropped below 6% in the adverse stress scenario, with an overall shortfall of €3.5bn of Tier 1 capital. For these banks, restructuring and recapitalisation measures are available and will be implemented shortly.

In addition, three banks reported a Tier-1 ratio of 6% in the shock scenario, exactly the minimum hurdle rate.

In total, aggregate impairment and trading losses under the adverse scenario and additional sovereign shock was shown to amount to €566bn over the years 2010-2011 under the tests. The aggregate Tier 1 ratio under the adverse scenario would decrease from 10.3% in 2009 to 9.2% by the end of 2011 (compared to the regulatory minimum of 4% and to the threshold of 6% set up for the stress test exercise).

The aggregate results depend partly on the continued reliance on government support for 38 institutions in the exercise, CEBS notes. The aggregate Tier 1 ratio incorporates approximately €197bn of government capital support provided until 1 July 2010, which represents 1.2 percentage points of the aggregate Tier 1 ratio.

One area of the stress tests in particular sparked discussion among analysts; namely, the fact that the sovereign shock scenario was applied only to outstanding trading book exposures. Hence, the majority of sovereign debt exposures of European banks was not captured by the test, given that a 10:90 distribution of holdings between trading books and banking books is fairly typical.

Structured credit strategists at UniCredit point out that such a procedure appears to be "not very stressful". "While this is consistent with the previously announced policy of 'no governmental default', not stress-testing government exposure in banking books does not add to transparency in the banking system," they explain. "Investors would have considered information about stress test results in banking books very valuable and it would have helped to stabilise sentiment massively."

For ABS securities in particular, the adverse scenario stresses included a four-notch ratings downgrade (and consequent increase in risk weighted assets) for securitisation exposures and the assumption that CRD 3 will be in place from 31 December 2010 onwards, with the proposals relating to the treatment resecuritisation taken into account.

Markit published an overview of European bank CDS liquidity ahead of the stress test results being released. The report outlined the performance, country-by-country, of selected banks in the CDS market.

A total of 61 banks were included in the report; less than the 91 institutions tested because many of the smaller banks don't trade, or rarely trade, in the CDS market. Each name has a liquidity score ranging between one and five, with one being the most liquid.

The report indicated that many of the banks included are quite illiquid. Unsurprisingly, the majority of the riskiest banks are shown to be in the eurozone's periphery - namely, Greece, Ireland, Portugal and Spain.

"These banks have direct exposure to sovereign risk through their holdings of government bonds. They are also exposed to slowing domestic economies brought about by fiscal austerity," Markit explains.

The Greek banks included in the report have a liquidity score of four, while the Irish banks have a liquidity score of 2-3, Portugal 1-4 and Spain 1-5. This compares to a liquidity score of one for the UK banks included in the report.

The disconnect between the market view of risk and the rating agencies was also apparent in the report through comparing Markit's implied ratings with the average rating taken from S&P, Moody's and Fitch. For example, Ireland's banks are rated around single-A, but are trading in junk territory.

CS

CDO

On a roll

Robust US CLO secondary market sparks activity across CDO sectors

Last week saw enthusiastic secondary market trading across a range of US CDO sectors. The activity follows on from the successful sale of a major CLO BWIC the previous week.

"CLOs are robust," confirms one trader. "For example, a US$40m-US$45m ten item list traded 21 July and it was well received - the price prints were very nice."

Prices ranged from junior triple-As in the mid-70s to single-As in the low-60s. Such paper is likely to remain common, according to the trader.

"Levered funds are trying to take P&L gains, which can amount to 20, 30 or even 50 points, so they are sellers of single-A and double-A paper," he explains.

At the same time, there is plenty of buyer interest across the capital structure. "Conservative money, such as pension funds and insurers who have buy and hold strategies, are buying now and that tends to be at the upper end of the capital stack. Meanwhile, the levered funds are now looking for higher IRRs and that means some single-A and triple-B paper, but there's a line out of the door for double-B and equity," says the trader.

However, the Street bid has disappeared somewhat. "The big houses are loaded up, so typically aren't buying as much," the trader adds.

Investor interest in CLOs is having a knock-on effect in ABS CDOs. Even after 22 July saw an US$180m-US$200m ABS CDO BWIC opportunistically offered in the hope of getting a good bid on the back of broad demand, there were high hopes for the sale of the structured credit portfolio from Ridgeway Court collateral (SCI passim) on 23 July.

The Ridgeway portfolio contained US$575.74m CDO, CRE CDO, Trups CDO and CLO assets, but only contained a few first-pays, which led some to question how well it would trade. However, demand was expected notwithstanding that the investor universe is a lot thinner for ABS CDOs than CLOs.

In the end though, the low quality of many of the tranches is understood to have put some investors off, but the CLOs being offered did garner interest. Traders could not confirm precise details as the trustee doesn't release covers.

Nevertheless, the trader is also confident about other CDO asset classes, given current market conditions. "CRE CDOs are on fire - they're following the uptick in demand for CMBS where there is limited new CMBS supply and spreads have moved quite a way in, but there is still hedge fund money looking for CRE paper."

As a result, the trader says: "Good CRE CDO first-pays are trading in the 70s - a long, long way from where they once were. Trups CDOs are also seeing demand, but it's even more of a mixed bag there, with first-pays getting some value, but prices really falling off for second-pays."

The robust nature of the CDO market last week is seen as a consequence of the previous week's bid list for the liquidation of Stanton CDO I, a 2003 vintage US$489m CDO-squared. The portfolio comprised mezzanine risk with a few senior tranches of CLOs and some CSOs, ABS, Trups and CRE.

In a report published on 19 July covering the Stanton auction, structured credit analysts at JPMorgan note: "Levels were more resilient than expected and, anecdotally, participants seemed disappointed with how little they were able to buy - suggesting robust competition and proving that there is demand for CLO product. Average-to-high quality single-As and triple-Bs covered in the 700bp-850bp and 950bp-1,150bp ranges, with weaker bonds further back."

The analysts add: "It's not clear yet whether this will be a defining moment a la Whistlejacket (which in 2009 helped precipitate the rally), but in a similar vein some confidence has returned, a level of price transparency and investor depth established, and opacity and illiquidity reduced, to an extent."

But they warn that overall CDO bid-list volumes are declining. JPMorgan estimates a cumulative BWIC volume of US$21.5bn for 1H10 - an average US$3bn-US$4bn run-rate per month, which dropped to US$2bn per month in May to July.

MP

RMBS

Positive tone

European RMBS market eases past stress tests and moves tighter

The European RMBS secondary market has seen seasonally-typical thin volumes over the past week or so. However, a return of some stability to the sector is generating a positive attitude.

"Summer is definitely here - we're seeing low to no volumes," confirms one trader. Nevertheless, an investor says: "The market is exhibiting some reasonably positive tone."

That tone is primarily because the European stress tests (see separate News Analysis) are now out of the way, the investor explains. "There had been some uncertainty how it was going to go. If most banks passed with flying colours that would have been taken as a bad sign - the fudge would have been fudged too much."

However, he adds: "The reality was that on a relative basis we all knew most would be OK and, even if some participants thought specific banks should have failed that didn't, they have got on with it anyway. So, we now have a certain level of stability, which has driven a positive tone across all markets and that has been reflected in ABS."

The market's progression from volatility to stability has proved a good fit with the investor's strategy. He explains: "We took the opportunity over the last few months during the volatility driven by sovereign and regulatory concerns to collect and hold all the cash that came our way, including bond redemptions and pay-downs."

He continues: "We've since used some of that to buy high-end short-term UK and Dutch prime paper. Then this week, post the stress tests, we've been buying more higher yielding paper in a targeted way - we're not talking about 2007 triple-Bs but Holmes triple-As, Granite double-As and 04/05 non-conforming and the like."

Despite such paper offering "reasonable value", the investor says: "Finding it and buying it wasn't that hard. There are less BWICs than earlier in the year, though still quite a few of them, but now most of the major dealers are making markets in this kind of stuff."

However, the interdealer market is still quiet. "We're hearing a lot about Street activity, but not seeing any evidence of it," says the investor. "There's perhaps a suspicion that it's rumours to start rumours that may lead to trades."

In the meantime, the trader reports: "The market as a whole just grinds tighter with the top tiers still being strongest bid." Granite-triple As, for example, traded at 93 yesterday, 28 July - the highest price seen for some months - and was still being offered at the same level this morning.

MP

CLOs

Timing of LCM CLO deal questioned

As Bank of America Merrill Lynch markets a US$300m CLO for LCM Asset Management, market participants are questioning the timing of the offering since spreads have widened lately. The LCM offering (see last issue) consists of a US$212m triple-A rated tranche and US$47m of equity.

"When they launched it, the triple-As had widened out and the double-As widened out over the last two months...it's surprising that they came out now," says an investor, who expects the deal to actually price in September. "It's basically the middle of the summer. It's not a good time to be launching a deal."

The offering is expected to include a combination of some new loans and some repackaged loans, according to investors. "I don't think they are collapsing an old deal...but I wouldn't be surprised if there is a potential roll up of an older transaction or some kind of older collateral. It doesn't seem like there is enough pure issuance out there to fund a brand new transaction from the start," says a second investor.

Initial price guidance for the triple-A tranche is 160bp, but it is not clear whether there will be a discount factored in, notes the second investor. "One-sixty seems on the tight side," he adds.

The deal follows Golub Capital's US$300m mid-market loan CLO offering, which closed last week (see last issue). The triple A-rated tranche priced at 240bp, which was on the high end for the tranche but priced fairly, note the investors.

The underlying collateral of the offering, however, had more yield to the deal than if it was broadly syndicated. Some collateral priced at the 600bp level, for example.

The Golub offering follows a trend that a lot of market participants are seeing, in which managers are taking back part of the deals. In the Golub deal, the equity and the double-A rated tranches were both taken by Golub, according to the second investor.

Finding buyers of the equity tranches remains a challenging component of the deals lately, since the equity portion is such a sizable portion of the deals. Indeed, there is still a trade-off between alternative investments.

"You have to accept returns of somewhere between 12%-15% on a risk-adjusted basis is where equity is generally yielding...it's hard to direct capital at that level into a vehicle that's locked up as much as CLOs are," notes the second investor.

Expectations, though, are also rising for more US deal flow come autumn and at least one European CLO to emerge by the end of the year as well. "People are a lot more comfortable the last couple of weeks with the banking risk in Europe and the sovereign risk is a lot less," says the second investor.

But even a relative CLO return is still far out on the horizon. "Europe seems at least a year behind in the cycle, which means new issue CLOs will take longer on a comeback, but it will come back," he says. "Liability spreads are wider in Europe."

KFH

RMBS

GSE reform debate reignited

SIFMA was among a number of parties that delivered comment letters to the US Treasury last week, in response to a request for comments on reform of the country's housing finance system. The move appears to have reignited the debate about the future of the GSEs.

For example, Moody's says in its latest ResiLandscape publication that it expects the US government to keep supporting the GSEs. The agency believes GSE reform may take a long time to develop and that bondholders will continue to benefit even after reform, thanks to the government's desire to maintain funding for the 30-year fixed rate mortgage.

GSE reform will likely be a drawn out process with a lack of consensus, as Congress balances taxpayer cost against damaging the housing market. The agency does not expect much progress on the issue until after the November elections, leaving a one-year window before the presidential election cycle begins.

Should Congress defer GSE reform to after the next presidential election, Moody's says reform legislation in 2013 will take the form of modest change rather than extensive restructuring. GSE performance and the housing market should both have improved, which will limit the urgency of reform.

There should still be a role for 30-year fixed rate mortgages, which the government will want to keep available and will have to be involved with, as Moody's says banks do not want to fund interest rate risk associated with such mortgages. The agency says the level of support that GSEs give will be important in keeping mortgage rates down and mortgages available.

Alternatives could be modest changes to the way GSEs currently function, such as a different ownership structure, to more extensive changes that reallocate activities to other parties. Certain GSE business activities, such as guarantees on certain types of loan, may also be restricted to limit their risk profiles.

Moody's says an extreme scenario could see the government provide an outright guarantee of debt issued by any financial institution that qualifies as a GSE. The depletion of the capital of the GSEs would be the sole event triggering the government guarantee. The agency says this scenario could see many companies becoming GSEs, potentially distributing mortgage credit exposure more fully, which would reduce systemic risk.

In its letter, SIFMA expresses its support for some form of continued government support for the mortgage finance industry. Without the benefit of government support, SIFMA believes that mortgage credit would be both less available and more expensive, making it more difficult for consumers to obtain loans and realise the goal of home ownership while dampening the economic benefits provided by a robust housing market.

"The mortgage finance industry impacts multiple aspects of the economy in the US," said Tim Ryan, SIFMA president and ceo. "While recognising that there is no single right answer to GSE reform, it is critical that, in addressing this complex task, the benefits to consumers and the economy which are created under the current system be preserved. We encourage policymakers to fix what's broken without dismantling the aspects that have provided efficient, cost-effective lending and benefits to our economy for the last 30 years."

SIFMA noted in its letter that the issues for policymakers to consider include: how liquid secondary markets for loans and MBS would be, the breadth of products that would be offered to consumers, the capacity of lenders to extend credit, whether national lending markets could be sustained or if regional pricing differentials would reappear and, ultimately, the cost and affordability of credit to consumers. Accordingly, policymakers need to determine what they want from the mortgage markets before they can address what to do with the GSEs or the broader infrastructure of mortgage finance, the association says.

SIFMA's Task Force believes that the TBA market is the key to a successful, liquid, affordable and national mortgage market, as well as ensuring a sufficient level of capital is available to banks to lend. Some form of an explicit government guarantee on MBS will be required to maintain the liquidity of the TBA MBS markets, according to the association. There are a number of permutations of a guarantee, but ultimately a government insurance wrap of the MBS that stands behind any private sector insurance or other corporate guarantees, as a catastrophic backstop, may be the most efficient means to achieve this goal.

The association further points out that while portfolios are necessary at some level for purely operational reasons (assuming GSEs or similar entities exist), moving beyond this operational level presents a number of challenges and choices for policymakers. If there is a goal to provide a mechanism to smooth out volatility of mortgage rates, portfolios are one way to accomplish this.

Finally, SIFMA notes that the resolution of the conservatorships of the current GSEs will clearly be a challenge. Task Force members believe that the government must clearly state intentions with respect to legacy GSE issues prior to and during any transition. Bifurcation of markets into pre- and post-reform markets should be avoided.

The positions were developed by SIFMA's GSE Reform Task Force, a group comprised of SIFMA members involved in all aspects of mortgage lending, which was formed in late 2009 to discuss and develop shared views on what are the most critical aspects of GSE reform for secondary mortgage markets.

CS & JL

ABS

AmeriCredit's securitisation practices to stay

General Motor's acquisition of AmeriCredit will not alter the securitisation practices of the subprime lender, executives at GM said on a 22 July conference call. AmeriCredit will maintain its own direct access to the capital markets for its financing requirements.

"AmeriCredit has a strong securitisation record...we don't foresee changing the funding level at all," confirmed Chris Liddell, GM vice-chairman and cfo. "It's a manageable and targeted investment."

Responding to questions over its company's ratings, AmeriCredit's president and ceo Daniel Berce said securitisation ratings are dependent more on the assets than the holding company. "We have a great track record accessing that market," he added.

According to GM's Liddell, there's plenty of opportunity in the non-prime area. After the acquisition, GM sees its target penetration level going up.

On the leasing side, it expects to be higher than its current 7% penetration rate. In addition, GM said it feels comfortable with AmeriCredit's balance sheet.

GM also stressed that its relationship with Ally Financial (GMAC Financial Services), which also provides financing for GM products, is still very important to the company. The acquisition, which is valued at US$3.5bn, is expected to close by the end of Q410.

ABS

FI sales and trading platform expands

BTIG continues to expand its US fixed income sales and trading platform with the addition of three directors - Irene Fan, Tim Sumner and Brian Danahy.

Fan joins BTIG's San Francisco office as a director in the fixed income sales structured products group. She has been providing sales coverage to institutional clientele for over 15 years, most recently with Jesup & Lamont Securities and KBW.

Sumner joins BTIG's Boston office also as a director in fixed income sales structured products group. Sumner brings 14 years of experience in both fixed income sales and trading. He was previously with Piper Jaffray in the institutional credit/structured product sales group.

Finally, Danahy joins BTIG's Boston office as a director in the fixed income high grade sales team. He brings more than 10 years of experience in fixed income sales and trading. Most recently, Danahy was in the institutional fixed income sales group at Piper Jaffray.

ABS

Bank beefs up in sales

Nomura has announced three senior appointments. Guy Cornelius and Raffaele Ricci have been named co-heads of fixed income sales for EMEA, while Eng Chien Chan becomes md and head of the firm's corporate sales and risk solutions platform for Asia ex-Japan.

Cornelius and Ricci will be based in London and report to Georges Assi and Kieran Higgins, co-heads of fixed income in EMEA. The pair will be responsible for the structured sales forces across all of Nomura's fixed income products and geographies in the EMEA region. They will define the strategy for the firm's client franchise and partner with the bank's trading, structuring and research functions.

Cornelius has over 20 years of industry experience and joins Nomura from Evolution Securities, where he was head of fixed income. Prior to this, he worked as a senior relationship manager at Lehman Brothers, focusing on global top-tier accounts across the institutional investor and hedge fund client bases.

Ricci joined Nomura in 2008 and most recently held a dual role as head of solutions sales and co-head of sales for Southern Europe and the Middle East. He has nearly 20 years of industry experience and has led highly successful teams in each of his roles, the bank says.

Meanwhile, Chan will be based in Hong Kong and report to Samir Bhandari, co-head of fixed income sales, and Patrick Schmitz-Morkramer, head of investment banking for Asia ex-Japan. He will spearhead a newly-combined sales and marketing platform that provides event-driven and tactical risk management strategies to corporate clients in the region. Based in Hong Kong, Chan will manage over 30 professionals covering clients across Southeast Asia, Hong Kong, China, Taiwan, Korea and Australia.

Chan joins Nomura from Credit Suisse, where he was head of fixed income sales for Southeast Asia and India. Prior to that, he worked at Citigroup from 1998 to 2006, holding various roles including head of sales and structuring for China.

ABS

US boutique boosts sales force

Odeon Capital Group has appointed Ronald Tesmond as svp. The move comes as the firm opens a new office in Boca Raton, Florida.

Tesmond will lead the new office's sales and trading initiatives, which span traditional and esoteric asset classes. Described as a veteran of both the buy- and sell-side of the fixed income business, Tesmond's investment career spans nearly two decades. He specialises in structured products, portfolio management, security valuation and trading, and most recently was vp at ACP Securities.

Odeon's new office will serve as a launching point for future sales, trading and research development across Florida and the US south east. This will be the third location for Odeon and marks the second expansion for the New York-based firm in under a month.

"The deep talent pool in South Florida made it an obvious choice for a new location as we look to bolster our top-in-class staff and further expand our full-service model nationwide," says Evan Schwartzberg, Odeon ceo.

ABS

Structured products pro to lead research services

Fitch Solutions has appointed Neil Smith as md of its research services group in New York. Smith will be responsible for further developing the group's commercial activities, reporting to London-based Fitch md Thomas Aubrey.

Smith joins Fitch from Bank of New York Mellon (BNYM), where he ran the bank's global provision of fixed income products and services for institutional clients in the structured products and project finance sectors. Before joining BNYM in 2007, he was md and senior investment officer at Citigroup Alternative Investments in New York and a director at Citigroup Credit Structures in London.

ABS

Two new partners for Jersey law firm

Law firm Carey Olsen has announced the promotion of both Robert Milner and Simon Marks to partner in the Jersey corporate and finance practice area.

Marks joined Olsen in 2006 and works on structured finance, corporate and tax law. In particular, he has advised on a variety of tax-related structured finance matters and securitisation transactions.

Milner joined Olsen in 2005 and specialises in finance and fund structures, with particular focus on vehicles aimed at institutional and sophisticated investors. He also advises an international base of clients and lenders where property-holding structures involve Jersey vehicles.

ABS

Advisory services subsidiary sold

Ambac Financial Group has completed the sale of its advisory services subsidiary, RangeMark Financial Services, to the firm's management. The monoline says it will continue to contract with RangeMark for certain valuation services for a period of time, however.

CDO

NY Fed enhances supervisory practices

The Federal Reserve Bank of New York has appointed Sarah Dahlgren as head of bank supervision and Roseann Stichnoth as head of its special investments management group (SIMG).

Dahlgren has been in charge of the SIMG since January 2010 and will move to bank supervision in September to spend the remainder of the year working with William Rutledge, the current head of bank supervision, before taking over in January 2011 when Rutledge retires. She will be tasked with pushing forward the changes already underway in the Fed's bank supervision group and to ensure that its supervisory practices keep pace with the ongoing evolution of the financial system.

The appointment comes as the Federal Reserve System implements an enhanced framework for supervising large banking organisations. The framework integrates the insights and analyses generated across a range of disciplines in order to bring a systemic perspective to the supervision of both individual firms, as well as to the process of identifying broader risks to financial stability.

Stichnoth is being promoted to evp and will succeed Dahlgren as head of the SIMG in September 2010. She is currently svp in charge of the TALF programme.

The SIMG, formed in January 2010, is responsible for managing the investments resulting from the special lending facilities created in the course of stabilising AIG and Bear Stearns. It has two business lines: AIG relationship management and investment support office, which is responsible for the Maiden Lane facilities.

CDS

Structured credit trading vet hired

UniCredit has appointed Tim Armitage as an md in London. He was previously senior md and European co-head of structured credit trading at Bear Stearns.

CDS

Cleared CDS salesman hired as md

After winning his CDS insider-trading case with the US SEC, Jon-Paul Rorech is believed to be joining UBS in August as md in its hedge fund credit sales department.

Rorech, who was on paid administrative leave from Deutsche Bank, previously worked as a CDS salesman before being charged with passing confidential tips to a Millennium Partners hedge fund investment manager (see SCI issue 135). The SEC is reportedly considering an appeal of the verdict.

CLOs

Credit fund names new managing partner

Jack Yang has joined Onex Credit Partners (OCP) as managing partner, bringing over 25 years of credit market experience and business leadership to the firm. He was formerly the managing partner of Highland Capital Management.

"Jack brings an extraordinary track record of building and managing world-class credit businesses," says Gerald Schwartz, Onex' chairman and ceo. "We have known Jack for several years and are delighted to have him join the Onex Credit Partners' management team. This reflects our commitment to further developing our credit investing platform, which is an excellent complement to our core private equity activities."

Yang joined Highland in 2003 to establish and lead its business development initiatives and head its New York office. He was a director of Highland Capital Management Europe and president of the firm's affiliated broker-dealer.

Prior to joining Highland, Yang spent eight years at Merrill Lynch, most recently as md and global head of leveraged finance products within global debt markets. While at Merrill Lynch, he was the head of strategic, cashflow and asset-based lending. He also played a significant role in the firm's distressed investments and CLO activities.

CLOs

Certain CLO duties delegated

Neuberger Berman Fixed Income has delegated certain loan amendment administration services for two CLOs to Cortland Capital Markets Services. Neuberger, formerly Lehman Brothers Asset Management, is transferring duties on Premium Loan Trust I and LightPoint CLO 2004-1.

Both transactions were initially structured to allow the collateral manager to delegate any and all duties to third parties. Neuberger has entered into an agreement with Cortland to delegate some loan amendment administration services, including the review and approval of amendments, subject to guidelines. As collateral manager, Neuberger will provide ongoing review and oversight of the process.

CMBS

CMBS vet finds new home

Arvind Bajaj has joined The Lightstone Group in New York as evp of investments. He will oversee and manage the firm's acquisition efforts, capital markets activities and investment strategies.

Bajaj has over 20 years of experience building successful commercial real estate franchises and was most recently managing principal with Park Hill Real Estate. Prior to this, he was md at Credit Suisse, serving as head of European commercial real estate finance and head of Middle East real estate. Bajaj started his career at Morgan Stanley in a variety of commercial real estate positions, based in both London and New York.

Investors

Asia Pacific investment head named

PIMCO has appointed Ki Myung Hong as md and head of the Asia Pacific region. Hong will also oversee the firm's business in the Hong Kong, Singapore, Sydney and Tokyo offices, reporting to Douglas Hodge, PIMCO's coo.

Hong has 27 years of financial services experience and most recently held senior positions for the Asia Pacific region with Bank of America Merrill Lynch based in Hong Kong, including regional vice chairman and president of Asia Pacific. Previously, he was Asia co-head of credit and rates at JPMorgan in Hong Kong.

Investors

PPIF portfolio composition unveiled

Western Asset Mortgage Defined Opportunity Fund has disclosed its portfolio composition, as of 30 June 2010. The fund intends to invest in MBS directly and indirectly through a separate US$68m investment in a public-private investment fund formed in connection with the legacy securities PPIP.

The US$242.97m 5.02-year portfolio comprises 95.9% RMBS (made up of 42.5% prime, 37.7% alt-A and 15.6% subprime collateral), 1% CMBS, 0.9% ABS and the remainder accounted for in cash. Of the collateral, 17% is rated triple-A, 6.2% double-A, 4.8% single-A, 9.2% triple-B, 6.7% double-B, 12.4% single-B, 35.8% triple-C, 6% double-C, 0.4% single-C and 1.6% single-D. The investment manager says it has assigned its own ratings to securities not rated by S&P, Moody's or Fitch, rating 0.9% of the portfolio as equivalent to triple-A.

Operations

Risk manager joins mortgage servicer

PHH Corporation has appointed Smriti Laxman Popenoe as evp and chief risk officer. Popenoe will be responsible for the design and implementation of an enterprise-wide risk framework and will work with the company's business units to identify, effectively manage and mitigate credit, market and operational risks. Joining the firm in September, she will report to Jerry Selitto, president and ceo.

Popenoe joins PHH from Washington advisory firm, TriSim, where she was principal. Prior to joining TriSim, she spent three years with Wells Fargo as svp of the firm's balance sheet management, and led the team responsible for a US$130bn investment portfolio, including RMBS, ABS, CMBS and whole loans.

RMBS

Subprime misrepresentations costs bank US$7.5m

FINRA has fined Deutsche Bank Securities (DB) US$7.5m for negligently misrepresenting delinquency data in connection with the issuance of subprime securities. FINRA found that DB negligently misrepresented and underreported the percentages of mortgages that were delinquent in the prospectus supplements of six subprime RMBS issued in 2006.

The firm also failed to correct errors by a third-party vendor and servicers, which underreported the historical delinquency rates of the mortgages in connection with its offer and sale of 16 additional subprime MBS issued in 2007. Additionally, DB failed to establish a system to supervise its reporting of required historical delinquency information.

"It is critically important that firms provide accurate information for their customers to use in evaluating investments," says James Shorris, FINRA evp and acting chief of enforcement. "Future returns on subprime securitisations are affected by mortgage holders who fail to make loan payments. Delinquency rates constitute material information for investors. DB's failure to ensure that the delinquency information was accurate is an unacceptable failure to meet this important obligation."

In settling this matter, DB neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

RMBS

Ex-Northern Rock exec fined for misconduct

The UK FSA has fined David Jones, former finance director of Northern Rock (NR), £320,000 and prohibited him from performing any function in relation to regulated activity. The original fine of £400,000 was reduced by 20% for settling in Stage 2 of the FSA's executive settlement procedures.

From 2005, NR staff were said to be under pressure to report arrears figures at half of the Council of Mortgage Lenders average. Jones's misconduct began in January 2007 when he agreed, along with David Baker (former NR deputy ceo), to allow false mortgage arrears figures to appear in NR's 2006 annual accounts; where reporting the correct figures would have either increased arrears by over 50% or possessions figures by approximately 300%.

For nearly a year, Jones was responsible for the continued misreporting of arrears and possessions figures on a monthly basis to NR's assets & liabilities committee (ALCO) and, on a quarterly basis, to the CML.

Margaret Cole, FSA director of enforcement and financial crime, says: "Even though other senior directors within the firm were involved in the misreporting of arrears and possessions figures, as a senior director himself and as an FSA authorised person, Jones had a duty to reveal the true position to the public and to important internal committees."

ABS

Sallie Mae concerned over CP market

SLM Corp said on its 21 July conference call that it remains concerned over the liquidity in the commercial paper market and its funding next quarter.

"The CP-Libor spread was very favourable in Q2. As we start Q3, that has reversed," said Jack Remondi, vice chairman and cfo at SLM Corp. "This is an area where we continue to have some concern - the 90-day finance CP marketplace is shrinking and that just raises concern."

The amount of paper that is being issued in the market is exceedingly low, he added, prompting carry-over rates. Sallie Mae is assuming a CP-Libor spread of 10bp for the second half of this year, which is worse than Q2's 3bp spread.

"It is something we are paying close attention to. We addressed this as best we can by hedging to different entities than three-month Libor," Remondi explained. "We are decreasing our exposure...we would very much like to see a permanent fix to this."

The firm, however, is more satisfied with its recent cost of funds in its FFELP securitisations. During the quarter, Sallie Mae completed a FFELP securitisation at a cost of 40bp over Libor, which the firm says will contribute to an improved cost of funds going forward.

On the lending side, the company originated US$3.1bn of FFELP loans in the quarter, which is a decrease of 16% over the year-ago period. Going forward, it expects to sell more FFELP loans, with those in Q4 expected to generate US$315m in revenue. By the end of this year, Sallie Mae hopes to further enlighten shareholders over the future of its FFELP's programme.

Over the past two weeks, Sallie Mae completed two private student loan ABS transactions (SCI passim), where it refinanced an existing private loan securitisation and securitised previously unencumbered private loans. The offerings were also placed with new investors.

The deals improved the company's overall advance rate. "The end result of these transactions is that we raised additional liquidity of US$1bn and improved our overall funding mix," says Remondi.

ABS

Issuers given six-month Reg AB reprieve

The SEC Division of Corporation Finance on 22 July issued a no-action letter that provided some relief to ABS issuers, following the backlash created by the repeal of Rule 436(g) of the Securities Act the day before (see also separate News Analysis). The Rule exempted NRSROs from expert liability and its repeal - under the Dodd-Frank Act - sparked concern about the impact of providing written consent to include ratings in prospectuses.

Before the Reform Act was passed by Congress, the inclusion of credit ratings was the industry standard, as required under current provision of Reg AB and to fulfil the standard of no material omission of facts. Typically, the rating section of a prospectus includes language indicating that, as a condition of issuance, the offered securities receive specific ratings. But the rating agencies now believe they cannot provide consent without further study.

The SEC's no-action letter allows credit ratings to be omitted from registration statements filed under Reg AB for a period of six months. It states that "[i]n order to facilitate a transition for asset-backed issuers, the Division will not recommend enforcement action to the Commission if an asset-backed issuer as defined in Item 1101 of Regulation AB omits the ratings disclosure required by Item 1103(a)(9) and 1120 of Regulation AB from a prospectus that is part of ar egistration statement relating to an offering of asset-backed securities".

The no-action position expires with respect to offerings commencing with an initial bona fide offer on or after 24 January 2011. However, presumably at the end of the six-month period, market participants will be faced with the same concerns that froze the market following the passage of the Dodd-Frank Act.

"Until the regulators/lawmakers and ABS market participants come to a mutually agreeable solution, the repeal of the Rule has the potential of reducing new issue volume, shifting a portion of funding from the public ABS market to either the144A ABS market or another alternative funding source," ABS analysts at Bank of America Merrill Lynch noted before the no-action letter was issued. "144A transactions do not need the consent of the rating agencies to include ratings in the offering documents. Limiting ABS issuers to the 144A market will reduce the available investment alternative for many investors."

They point out that a significant portion of consumer and commercial ABS has been issued in the public market and that many investors cannot participate in the 144A market. "A shift to the 144A market has the potential of increasing funding cost to issuers and, consequently, consumers. Instead of seeing their funding cost rise, some issuers may reduce origination volumes."

ABS

Details emerge on Ford ABS deal

Ford Motor Credit's US$1.082bn prime auto ABS transaction, which was delayed due to the impasse over credit ratings on ABS sales documentation, is marketing. The SEC issued a no-action letter that offered a six-month reprieve for ABS issuers on ratings last week (SCI passim).

The deal - Ford Credit Auto Owner Trust 2010-B - should be well-received since there is a lot of pent-up demand for ABS paper, says an investor.

The largest tranche is US$369.3m, which Fitch expects to rate triple-A. Other tranches that Fitch expects to rate triple-A include a US$213.30m tranche and a US$150.49m tranche.

The deal also has a US$275.43m money market tranche. A double-A US$31.84m tranche, a single-A US$21.23m tranche and a triple-B US$21.23m tranche are also included in the transaction.

The offering is due to price this week and close on 4 August, notes the investor. Bank of America Merrill Lynch is among those leading the deal.

According to Fitch, longer-term loans in 2010-B comprise 39.7% of the pool, higher than the 38% in Ford's 2010-A offering but a decline from its 2009-C and its 2009-B deals, at 44.3% and 43% respectively. The weighted-average FICO score in 2010-B is 717, a slight decline from 720 in 2010-A and 2009-D. The portion of the pool that is comprised of trucks totals 71.1%, which is also a slight decline from other offerings.

A slew of auto ABS deals is unlikely to follow Ford's deal, however. As another investor says, if market participants do not have to come to market during the six-month reprieve, they most likely will sit out.

ABS

Electricity tariff bonds prepped

The Spanish government has confirmed that it plans to issue electricity tariff bonds as soon as all of the technical preconditions are met in September. No specific target size was given, but the government says that the securitisation tranches will be issued gradually so that the market can absorb them.

The bonds will be issued through a Titulizacion de Activos SGFT fund and are likely to have some sort of government guarantee. The pool comprises €10bn of collection rights already assigned for the 2001-2008 period and €9.5bn of collection rights yet to be assigned for the 2009-2012 period.

The originators are Endesa, Iberdrola and Gas Natural. BBVA, BNP Paribas, Credit Agricole, Deutsche Bank, Goldman Sachs and Santander are believed to be lead managers on the transaction.

ABS

Timeshare ABS completed

Wyndham Worldwide Corporation has completed its second term securitisation this year - the US$350m Sierra Timeshare 2010-2 Receivables Funding. The 144A transaction comprises US$286m single-A rated and US$64m triple-B rated vacation ownership loan-backed notes, with coupons of 3.84% and 5.31% respectively. The advance rate for this deal was 83.25%.

Tom Conforti, Wyndham evp and cfo, says: "This transaction reflects the continuing signs of strength in the ABS market, evidenced by higher advance rates and the ability to issue subordinated bonds at attractive financing rates."

He adds: "We are pleased with the execution of this transaction, which demonstrates continued investor interest and support of our timeshare business and strong receivables profile."

ABS

Equipment finance activity up on month

The Equipment Leasing and Finance Association reports new business volume for the month of June rose by 25% to US$5.5bn from US$4.4bn. Its Monthly Leasing and Finance Index (MLFI-25) also increased 6% versus the same period in 2009.

The Association says after 20 consecutive months of declines business volume has shown positive year-over-year growth each month during Q2.

Receivables over 30 days also declined 3.3%, down from 4% in the prior month. Charge-offs, while increasing slightly from the prior month, revealed a steep decline versus the year earlier period.

"Based on our data, the equipment finance industry continues to show gradual but steady growth," says William Sutton, ELFA president. "Demand for capital equipment seems to be strengthening, albeit at a slow pace, and credit quality is slowly improving as well."

ABS

US credit card charge-offs continue to fall

According to Moody's latest credit card indices report, charge-offs on US credit cards declined for the third consecutive month in June. Finishing at 10.28%, 43bp below their May level, the additional month of decline is further evidence that the peak in credit card losses for this credit cycle has passed, the agency says.

Moody analyst Jeffrey Hibbs says: "Our base-case expectation is that the unemployment rate will plateau during the second half of the year at 10%. This forecast, combined with the steady improvement in the delinquency rate throughout the spring, leads us to believe that charge-offs have peaked and will gradually decline in the final two quarters of the year."

June also marked the first time since December 2006 that credit card performance has improved over the same month the previous year. In June 2009, charge-offs were 10.76%.

The delinquency rate also fell for the eighth consecutive month to 5.08%, the lowest monthly rate since November 2008. The early-stage delinquency rate fell to a single basis point during the month to 1.25%.

Hibbs adds: "Overall, compared to a year ago, delinquency trends are clearly improving across the industry and are consistent with our expectation for lower charge-off rates in the months ahead."

The agency expects these elevated levels of excess spread to wane later in the year, however. This is due to the implementation of Credit CARD Act rules in August limiting penalty fees and the eventual expiration of some issuers' principal discounting initiatives, placing some downward pressure on yields.

ABS

Positive performance reported for prime auto ABS

According to Fitch, US auto loan ABS is continuing to defy historical seasonal patterns at a time of the year when loss levels typically start to increase. Prime auto loan ABS loss levels declined last month by 23%, while subprime losses fell 13% month-over-month.

As a result of the positive loss and delinquency performance in 2010, Fitch has upgraded 30 classes of prime auto loan ABS through June, compared to eight in 2009. No negative rating actions have been issued in the sector in 2010 to date.

"Improved underwriting on recent vintages, strong recovery rates and structural features continue to benefit transaction performance," says Fitch senior director Hylton Heard.

Annualised net losses (ANL) for the agency's prime auto loan ABS index (totalling US$45.57bn issued from approximately 75 transactions) dropped for the fifth consecutive month to 0.67%. June's result is 60% below 2009 and notably down from record highs produced in early 2009. The June loss rate demonstrates that losses have returned to historical levels consistent with loss levels in June 2007-2005, Fitch notes.

Despite stable delinquencies and lower losses, "weak employment continues to affect many consumers and may pressure auto ABS performance", adds Heard.

The wholesale vehicle market is healthy, with high used vehicle values - despite some signs of softening in the past two months - keeping loss severity low relative to recent years. Used vehicle values are holding up as the current dynamics of the new and used vehicle markets remain positive, including limited new vehicle supply, low new vehicle inventories, production levels and relatively healthy demand for used vehicles.

ABS

EMEA asset performance stabilising

According to the latest Fitch report on the sector, asset performance and ratings outlooks for EMEA structured finance continue to stabilise. However, a further improvement in outlook may require more evidence that the risk of a double-dip recession has receded. The agency also notes that transaction structures continue to offer protection against further negative rating action, even if some further asset deterioration occurs.

Philip Walsh, Fitch EMEA md, says: "Transaction structures are working the way they were intended to work. The available credit enhancement through subordination generally provides sufficient protection against asset deterioration, with senior notes in particular benefiting from deleveraging."

In terms of asset performance, the agency remains cautious regarding retail and corporate credits, particularly in those economies that are the subject of more severe fiscal tightening measures. Some fears of a double-dip recession remain, but negative rating outlooks are focused on the more subordinated tranches, reflecting the reverse sequential allocation of losses in the majority of transactions.

The report concludes that no sub-sectors have moved from stable to stable/negative or negative outlook for the first time since this series of quarterly reports began in October 2008.

Asia

Korean ABS performance boosted

Moody's reports that Korea's improving employment market, combined with beneficial asset attributes in RMBS and ABS transactions is contributing to the performance of both asset classes in the country. Together with structural features, Korean transactions are well protected against potential deterioration in asset performance, the agency notes.

"If we were to identify one factor driving Korean assets' strong performance, it would likely be the low unemployment rate," says Marie Lam, a Moody's senior credit officer. "Although this is particularly true for unsecured credit cards and auto loans, it also applies to secured mortgage loans. In addition, low loan-to-value ratios of the mortgage loans further subdue delinquency rates."

She adds: "Sequential payment priorities in most RMBS transactions gradually increase subordination level for the senior tranche. Meanwhile, credit enhancement of around 22% for credit card ABS and 16% for auto loan ABS provide a substantial cushion against potential asset performance deterioration."

Counterparty risk is also less apparent in Korean transactions, according to Moody's. For example, back-up servicers that are at least A2 rated are present in all transactions, while there are fully funded reserve funds to address cashflow disruptions in case of servicer transitions.

CDO

Wrapped CDOs fill auction pipeline

A further two ABS CDOs previously insured by Ambac - Diversey Harbor and Lancer Funding - are to be publicly auctioned, following the liquidation of Ridgeway Court (SCI passim) last week. Indeed, structured credit strategists at Citi believe that more such liquidations will take place over the next couple of months, releasing significant amounts of CRE CDO, Trups CDO and CLO collateral onto the secondary market.

The Citi strategists estimate that the 10 largest Ambac-insured ABS CDOs on which CDS contracts have been commuted account for US$17.24bn of collateral. MBIA, meanwhile, is understood to have liquidation rights on 25 ABS CDOs holding around US$30bn of assets.

The currently prevailing view in the market is that MBIA has a year or two of life before it runs out of capital, according to the strategists. "We also notice that some banks who we believe have significant exposure to MBIA on ABS CDO contracts have started to increase their provisions," they add. "To us, this suggests that the timescale for the commutation of credit default swaps on MBIA-insured ABS CDOs is not a very long one, as the two parties converge to a transaction. Once the contracts are commutated, the currently MBIA-insured deals will likely repeat the liquidation path of the previously AMBAC-insured deals, resulting in more supply for CDO secondary."

CDO

CRE CDOs repurchased, recollateralised

Resource Capital Corp has disclosed that during the quarter ended 30 June it purchased US$36.1m par value of notes issued by its consolidated CDOs for US$19.7m - a 45.5% discount to par, resulting in a gain of approximately US$16.4m. In addition, since 30 June the REIT has purchased US$20m par value of notes issued by its consolidated CDOs for US$13.7m - a 31.3% discount to par, resulting in a gain of approximately US$6.3m.

Resource Capital also reports that during the quarter ended 30 June it bought through its CRE CDOs CMBS of US$7.5m par value at a discount to par of 27.6%. In addition, since 30 June the REIT bought through its CRECDOs additional CMBS of US$10m par value at a discount to par of 20%. The combined net discount of US$4.1m improved the asset collateralisation in its CRE CDOs and these purchases provide a weighted-average annual yield of approximately 7.2%, the company notes.

CDO

Trups swapped out of Taberna transactions

Trups have been swapped out of Taberna Preferred Funding II, III and IV under supplemental indentures. Crescent Real Estate Equities Limited Partnership was an underlying asset swapped out of all three transactions, while Taberna III and IV also had Gramercy Capital Corp (GKK) swapped out.

Taberna II held US$36.86m of Crescent Trups, Taberna III held US$28.13m and Taberna IV US$10m. The collateral manager, TP Management, opted for an early redemption of each of the Trups for around 15% of the original face amount in three-month US Treasury bills.

Taberna III also saw US$28.12m of GKK Trups exchanged for replacement securities from Gramercy Real Estate CDO 2005-1, 2006-1 and 2007-1 in the total principal amount of US$28.13m and three-month Treasury bills in the total amount of US$2.68m. Taberna IV's GKK Trups were swapped for US$24.38m of replacement securities from the same Gramercy CDOs and US$2.32m of three-month Treasury bills.

Moody's says the supplemental indentures received the consent of the majority of the controlling class and hedge counterparty and the agency will not withdraw or reduce the deals' ratings. Payments were made by Barclays Capital Real Estate Finance.

CDS

Succession events mulled

Two succession event determinations are being mulled by ISDA's Determinations Committees.

The Americas Determinations Committee is debating whether a succession event has occurred with respect to BJ Services Company. On 28 April Baker Hughes Incorporated, BSA Acquisition and BJ Services Company merged. BJ Services Company is the surviving entity of the merger.

Separately, UBS has asked ISDA's EMEA Determinations Committee to determine whether a succession event has occurred with respect to Fortis Bank (Nederland). Fortis Bank (Nederland) merged into ABN AMRO Bank on 1 July, with ABN AMRO the surviving entity.

CDS

CDS data availability expanded

The DTCC has expanded its public CDS data, providing more detailed market segmentation information on the largest corporate and sovereign CDS. This data will enable the public to assess key characteristics of these CDS contracts more efficiently, the DTCC says.

The new information will cover the type of market, sector and ISDA Determinations Committee region for each single name reference entity.

The DTCC will also post a new table showing traded activity on a weekly basis initially for the top 1000 single name reference entities. This table is an extension of a report released last June and can be used to understand contract liquidity better.

Similar to the data issued in June, the table will show traded activity levels and exclude certain contractual booking events that are not representative of price-making activity. Further enhancements will continue to be made to enrich the data for asset types, such as indices and tranches.

Stewart Macbeth, DTCC manager, says: "We have seen considerable interest among market observers in getting a better view on the types of contracts and sectors that make up the largest portions of the CDS market, and see continued interest in volume levels. Adding these specific classifications to the gross and net notional values and number of CDS contracts already published will enhance the ability of the market to assess these contracts as part of a sector group or region."

Separately, ISDA is updating its first-to-default template to allow convertibility into a standard terms format document so that such transactions can be confirmed in the DTCC warehouse. The move is part of a general update project the association is undertaking this year to reflect the changes in the Small Bang Protocol.

CDS

ABX CDR decrease reverses

The latest ABX remittance data indicates that CDR levels have increased slightly on the month, after falling for a year. ABS analysts at Bank of America Merrill Lynch note that average values for each index were flat up to 1.4 points.

The trend for about a year has been falling CDR levels, which began levelling off a couple of months ago. It is not yet clear whether this current rise is a fluctuation or the start of a new trend, but the BAML analysts remain cautious on the prospect of increased liquidations due to faster loan modification processing.

There was a decrease in loans 60-plus days delinquent this month, but the rate of decrease slowed compared to last month, which may reflect that the improvement in distressed levels is partly seasonal. Loss severities increased by an average of 0.9 points, with the 06-1, 06-2, 07-1 and 07-2 indices at 71.7%, 73.2%, 78.8% and 78.1% respectively.

The analysts indicate that the increases in severities are probably monthly fluctuations, as last month's drop was by a similar amount. Severities on BSABS deals were a lot higher this month, however, reaching 146% for the 07-1 index and 105% for the 07-2 index - which is attributed to the passing through of forborne principal on modified loans to the trust as a loss.

Modification rates across indices increased by an average of 0.2 points to 1.36% for 06-1, 1.56% for 06-2, 1.5% for 07-1 and 1.64% for 07-2. Modification rates are expected to rise a little more as HAMP trials become converted and a portion of those that fail HAMP trials are expected to receive non-HAMP private modifications.

Clearing

Client OTC clearing service launched

Goldman Sachs has launched a derivatives clearing services (DCS) business, providing clients with an OTC clearing service for interest rates, credit, foreign exchange, equities and commodities. DCS is an agency business designed to streamline clients' derivatives clearing experience across products, asset classes and regions. The business is built upon the firm's prime brokerage and futures clearing platforms to provide an integrated suite of tools and reporting for users.

CLOs

CLO equity holders benefit from Libor floor

CLO equity is proving to be a significant beneficiary from low US interest rates.

Structured credit strategists at Citi point out that the replacement of loans in CLO portfolios with new loans, most of which have Libor floors, has resulted in roughly 25% of US CLO collateral now having an average Libor floor of 2%. With no such floor on the cost of liabilities, the entire benefit of the higher collateral spread (once all OC tests are cured) goes directly to equity holders, they note.

"A back-of-the-envelope calculation suggests that the benefit of the floor is roughly 6% of additional annual payments to CLO equity holders, on top of an equal amount attributable to wider loan spreads. Throw these two factors on top of the additional par built up in many CLOs and it should not surprise that equity in many deals are paying an annualised coupon close to 25% and sometimes even 30%," the Citi strategists comment.

With loan repayments continuing and interest rates in the US expected to remain low for the foreseeable future, CLO equity should continue to reap a current yield in the high-20s to low-30s. "In our view, a right place to be for aggressive investors looking for high returns with limited duration risk," the strategists conclude.

CMBS

CRE Finance Council cautious on Dodd-Frank

As President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law on 21 July, the CRE Finance Council noted that there remains much uncertainty and concern over the impact of the new mandates on credit availability.

"The CRE Finance Council recognises the importance of many facets of the recent reform measures, but it's critical that financial regulators carefully coordinate and customise rules to provide much needed certainty and confidence," says Lisa Pendergast, president of the CRE Finance Council.

The Council will continue to work with financial regulators and policymakers to ensure that new rules provide a framework for a lasting commercial real estate recovery.

The bill included language from both the House and Senate versions that had been priorities for the Council, such as intending to address the unique nature of commercial real estate finance and in promoting a coordinated regulatory approach.

CMBS

Tale of two carehome CMBS

The restructuring of two Titan CMBS deals illustrate the potential outcome disparities for two seemingly similar transactions. While the standstill period on TITN 07-1 (NHP) was further extended to September (by which time the loan will have remained in suspension for nearly two years), Four Seasons opted instead to better its incentive offering on TITN 06-4 FS.

If Four Seasons' proposal is accepted, class A1 noteholders will receive a coupon comprising 375bp in cash plus an additional 200bp in cash and 200bp compounding, unless at least £100m of notes have been redeemed by January 2012. Previously, it had been 375bp plus 100bp if the redemption had not taken place.

Class A2 noteholders will receive 500bp in cash and 450/500bp toggle plus an additional 400bp on the toggle, unless the £100m principal redemption on the class A1 notes has taken place. Previously, it was 500bp in cash, 250/300bp toggle and an extra 100bp on the toggle if the redemption had not taken place.

Analysts at Chalkhill Partners suggest that the coupon increase will presumably increase the potential returns for bondholders and make a refinancing more likely. "It will focus management's attention on the need to refinance quickly and also make a range of different refinancing options more attractive than sticking with the existing financing package," they note.

European asset-backed analysts at RBS suggest that the differences in the structures of the TITN 07-1 NHP and 06-4 FS care home deals go some way in explaining the seemingly different creditor-borrower balance of power. "In the case of 06-4 FS, the deal has (somewhat uniquely) greater recourse to the underlying business, given that the majority of the homes are directly operated by the borrower, whereas NHP is effectively a propco transaction with the majority of the assets operated by Southern Cross," they note. "Restructuring actions in the Four Seasons deal therefore arguably better reflects the borrower's greater direct exposure to creditors or, put differently, the ability of creditors to extract greater economic (both operating and asset-based) value."

CMBS

CMBS delinquent unpaid balance continues to rise

The delinquent unpaid balance for US CMBS increased by US$3.11bn in June 2010, up to US$60.45bn from US$57.34bn a month prior, according to Realpoint's latest Monthly Delinquency Report.

Four of the five delinquency categories increased, while the 60-day category reflected a US$2.06m decrease from the prior month, offset by further credit deterioration in all other categories. This included a US$3.2m increase in the 30-day category.

Overall, the delinquent unpaid balance is up 111% from one year ago and is now 27 times the low point of US$2.21bn in March 2007. The distressed 90+ day, foreclosure and REO categories grew in aggregate for the 30th straight month - up by US$2bn (5%) from the previous month and US$30.71bn (214%) in the past year.

The total unpaid balance for CMBS pools available for review for the June 2010 remittance was US$784.86bn, down from US$788.7bn in May 2010. Both the delinquent unpaid balance and delinquency percentage over the trailing twelve months are trending upwards, according to Realpoint.

The resultant delinquency ratio for June 2010 of 7.7% (up from the 7.27% reported one month prior) is over two-times the 3.5% reported one-year prior in June 2009 and over 27 times the Realpoint recorded low point of 0.283% from June 2007.

CMBS

Aussie CMBS downgraded on restructuring

S&P has lowered the ratings on five classes of notes issued by Becton CMBS No 1, following a review of the deal's restructuring. The ratings remain on credit watch with negative implications.

The restructuring involves moving the scheduled maturity date to 31 Jan 2011 from 18 July 2010, with repayment milestones in September 2010 and November 2010. It also includes increases to the margin payable on each class of notes. This revised tail period is less than S&P's criterion for Australian CMBS transactions, which is a minimum of 24 months.

The downgrades reflect the agency's opinion of the uncertain timing, strategy and heightened execution risk associated with repayment of the notes on or before the legal final maturity date. The size and composition of the remaining asset pool has been a key consideration in the rating analysis, it says.

The agency notes that proceeds from previous asset sales were used to pay class A noteholders, as well as swap termination costs of A$7.66m. As the termination costs were larger than expected, the class A noteholders have been paid less than estimated. Further, the total extent of the swap termination costs was not contemplated in the original analysis, since the terminated swap was entered into after the transaction closed and extended beyond the legal final date on 18 January 2012.

The credit watch is likely to be resolved either by a rating affirmation and withdrawal, if a repayment of the securities is completed; or by lowering the ratings on the securities at any time, if the agency believes there is an increasing prospect of the repayment or refinancing not being achieved prior to the legal final maturity date of the notes.

CMBS

Challenging month ahead for US CMBS

According to Fitch's latest US CMBS newsletter, eight US CMBS loans are due to mature next month and - with balances greater than US$20m - are likely to default. Two-thirds of these Fitch-rated loans were originated in 2005.

"These five-year interest-only loans with below market rates are proving to be difficult to refinance in today's lower leverage and higher mortgage rate environment," says Adam Fox, Fitch senior director.

Despite the agency's concerns about near-term maturities, it does not expect negative rating actions for recent vintage transactions, however. Fox adds: "Fitch's surveillance methodology already recognises 100% of potential losses from near-term maturing loans that do not pass a refinance test."

Of the 772 Fitch-rated fixed-rate CMBS (representing US$7.7bn) slated to mature between 1 August and the end of this year, 93 loans representing US$1.7bn (22.9%) are in special servicing. The lack of liquidity in the market for refinancing maturing mortgages raises the likelihood of a special servicing transfer for a modification or extension.

CMBS

Euro CMBS hit by first loss allocations

According to Moody's latest surveillance report for the sector, the first loss allocations since the start of the financial crisis occurred on EMEA CMBS notes during Q210.

Moody's analyst Lifang Chen confirms: "Three large multi-borrower transactions were affected where one or more loans were liquidated following either a discounted loan pay-off or a property sale at a price substantially below the outstanding loan balance."

Only Moody's non-rated junior notes have been impacted and loss allocations in the synthetic single borrower transaction, Epic Industrious, with £473m outstanding notes, have yet to occur. The sale of the underlying portfolio was completed in October 2009, but final loss determination has not yet been made. The loss on the most senior class in this transaction is expected to range between 30% and 40%, Chen says.

The total number of loans in special servicing remained the same as in Q110. "This is, however, not a reflection of loan performance improving but rather the result of the first loan work-outs being finalised in Q210," explains Moody's analyst Stephan Ebe. "Nevertheless, it is worth noting that since the beginning of the year, six loans have left special servicing following either a cure of the default event or a restructuring or a repayment of the respective loan."

With a significantly increasing number of loans reaching maturity over the next quarter, the agency expects loan defaults and the number of loans being transferred into special servicing to continue increasing. This will also lead to an increase in loan foreclosures and loss allocations in transactions over the coming quarters.

No Moody's-rated classes in EMEA CMBS transactions were upgraded during Q210. A total of 24 tranches in ten transactions were downgraded, mainly for loan-specific performance reasons. 25 classes of notes in 11 transactions remained on review for possible downgrade and five classes in one transaction remained on review for upgrade at the end of Q210.

The report concludes that the number of downgrades in the sector is expected to outweigh the number of upgrades over the next 12 to 18 months.

CMBS

Gulf spill to have no immediate CMBS ratings impact

Based on an analysis of what effect the Gulf spill is having on commercial real estate collateral, S&P does not expect an immediate credit impact on CMBS ratings for the deals it looks at. The agency notes, however, that there may be an increase in loan delinquencies and loan transfers to special servicers over the next few months, especially within the lodging sector.

But to date, it has not initiated any rating actions as a direct result of negative property performance related to the Gulf oil spill. Specifically, the analysts have identified 252 CMBS loans secured by 302 properties with an outstanding allocated loan balance of approximately US$1.61bn in areas currently affected by the oil spill. The properties serve as collateral in 165 CMBS transactions S&P rates.

While the lodging sector accounts for just over 10% of the US$1.61bn CMBS exposure by property type, retail comprises just over half of the total, with the three largest loan exposures secured by retail properties.

Hurricane Ike, however, had significant impact on the Gulf Coast region when it made landfall in September 2008. By contrast, it affected 1,700 loans in S&P's rated CMBS transactions totalling about US$13.4bn.

Investors

PPIF activity revealed

Further details on PPIP fund activity have emerged in a new SIGTARP report. Final capital raised by the various PPIP funds is US$7.4bn of private equity, which - taken with US$7.4bn of Treasury equity and US$14.7bn of Treasury debt - totals around US$29.4bn of buying power.

The total is short of the US$40bn of maximum buying power the TARP programme could have. Barclays Capital ABS analysts suggest that is a reflection of tightening yields in the non-agency MBS market and the difficulty of raising money at 12% PPIP yields as opposed to 18% PPIP yields.

Of the US$29.4bn raised, the eight PPIP funds have spent US$16bn. RMBS has been far more popular than CMBS, with US$13.5bn used for the former while only US$2.5bn has been used for CMBS. Again, the BarCap analysts attribute this difference to relative yields.

The report shows a preference for higher copon bonds, as 45% of funds within RMBS have been allocated to alt-A and 38% to prime, with only 10% allocated to subprime and 7% to option ARMs. Of this collateral, 26% is 60-plus days delinquent.

The performance of funds varies widely, from 4.5% net return since inception to over 25%. However, the analysts caution that it is hard to benchmark performance with the averages for the broader market because of the levels of utilisation of funds and leverage. The fact that the funds started investing at different points also contributes to this difficulty.

As of 30 June, the funds have another US$13.4bn to invest. The analysts expect PPIP funds to provide some price support for the broader market. They say demand technicals are strong and PPIPs will add to this, for the next few months at least.

Investors

Improvement expected across RMBS

The most recent Fitch Ratings/Fixed Income Forum Survey of Senior Investors, conducted in June, finds some surprising resiliency in investor sentiment on growth prospects and the pace of the credit recovery in the US.

In the aftermath of the sovereign debt crisis in Europe, most investors surveyed now predict weak or very weak growth for Europe over the next year. However, opinions surrounding US and emerging market economic activity remained virtually unchanged from the Fitch/FIF January survey.

In June, only 2% of investors surveyed believe that the US would slip into another recession, with most expecting GDP growth in a range of 2%-3%, nearly identical to responses offered in January.

For the first time in several years, a majority of survey respondents said they expected some improvement across prime mortgage-backed bonds, while investors expecting significant credit deterioration across CMB issues fell to the lowest level in two years. Across all asset classes, the share of investors expecting significant credit deterioration fell to less than 10%. Investors remained constructive on the corporate and ABS sectors, although opinions surrounding corporate fundamentals, spreads and issuance were tamer than in the January survey.

Despite expressing some scepticism on the topic of financial regulation, two-thirds of investors surveyed said that lending conditions would loosen over the coming year and a similar number said that capex will be a moderate or significant use of corporate cash - the highest share in two years.

Ratings

Fitch comments on unsolicited ratings issue

Fitch has commented on the recent regulatory initiatives in the US and Europe that make it increasingly possible for rating agencies to assign credit ratings, without the cooperation of the relevant issuer or arranger. Historically, the agency has been typically constrained to issuing sector or geographic level commentary on transactions or structures which have a significantly different credit opinion to that of their public ratings.

However, although the new regulations give more flexibility, the agency does not expect to assign unsolicited ratings on a frequent basis. "The agency will typically only assign unsolicited ratings where there is strong investor interest and it has a materially different credit opinion on a transaction compared to those expressed by mandated rating agencies," says Ian Linnell, global head of Fitch's structured finance group.

He adds: "In addition, for benchmark transactions, either in a particular sector, country or product, we will consider using the additional information to issue more research reports, as well as the possibility of assigning ratings."

The ability to assign unsolicited ratings in structured finance has been made possible by the US SEC, which has adopted an amendment to Rule 17g-5 relating to rating agencies registered as Nationally Recognised Statistical Rating Organisations (NRSROs).

Regulation

Agreement reached on Basel reforms

The Group of Central Bank Governors and Heads of Supervision has met to review the Basel Committee's capital and liquidity reform package (see last issue). The Group says it reached a broad agreement on the overall design of the capital and liquidity reform package. It will finalise the regulatory buffers before the end of this year and has agreed to finalise the calibration and phase-in arrangements at its meeting in September.

Credit analysts at RBS note that the original reform proposals are slowly but surely being watered down to the banking sector's benefit. "The definition of capital is ultimately more relaxed and there are longer implementation periods as well. This is overall a pretty big positive for the banks in nearly all of the amendments," they comment.

President of the ECB and Group chairman, Jean-Claude Trichet, says: "The agreements reached [on 26 July] are a landmark achievement to strengthen banking sector resilience in a manner that reflects the key lessons of the crisis."

He confirms: "The Group of Governors and Heads of Supervision have ensured that the reforms are rigorous and promote the long-term stability of the banking system. We will put in place transition arrangements that ensure the banking sector is able to support the economic recovery."

In reaching their broad agreement, the board considered the comments received during the public consultation on the Basel Committee's proposed reforms, which were published in December 2009. They also took account of the results of the Quantitative Impact Study, the assessments of the economic impact over the transition and the long run economic benefits and costs.

The committee will issue publicly its economic impact assessment in August and will issue the details of the capital and liquidity reforms later this year, together with a summary of the results of the Quantitative Impact Study.

Meanwhile, the BIS has published a working paper on the design of countercyclical capital buffers. Its main empirical contribution is to analyse conditioning variables that could guide the build-up and release of capital, the BIS says.

A major distinction for countercyclical capital schemes is whether conditioning variables are bank-specific or system-wide. The evidence presented in the paper indicates that the idiosyncratic component can be sizeable when a bank-specific approach is used.

This makes a system-wide approach preferable, for which the best variables as signals for the pace and size of the accumulation of the buffers are not necessarily the best for the timing and intensity of the release. The credit-to-GDP ratio seems best for the build-up phase, according to the paper.

"Some measure of aggregate losses, possibly combined with indicators of credit conditions, seem to perform well for signalling the beginning of the release phase," it says. "Nonetheless, the analysis indicates that designing a fully rule-based mechanism may not be possible at this stage, as some degree of judgment seems inevitable. A parallel exercise indicates that reducing the sensitivity of the minimum capital requirement is an important element of a credible countercyclical buffer scheme."

RMBS

HAMP recidivism exceeds expectations

The US Treasury Department has issued its first report on recidivism rates for loans that have been permanently modified. MBS analysts at Bank of America Merrill Lynch indicate that the rate so far has been far better than expected (see also separate News Analysis).

The recidivism rate for loans permanently modified in Q309 was only 7.7% for 60-plus days delinquent nine months after modification. The rate after six months was 5.8% for loans permanently modified in Q409.

The BAML analysts note that their position on expected recidivism rates for HAMP permanent modifications was far more optimistic than the rest of the market, but even they are surprised by the performance of the modifications. BAML had expected HAMP modifications to be better than IndyMac modifications, which had a recidivism rate of 30% for 60-plus days delinquent loans.

Another finding of the Treasury report is that 520,814 borrowers failed trial modifications. The analysts believe the HAMP programme has been very successful at making liquidations orderly and stabilising home prices, even if its more explicit goal of helping four million borrowers has been less successful.

They note that, of the borrowers who have failed trial modification, 45% are receiving alternative modification and 32% are awaiting action. Of the 538,577 not accepted for a HAMP trial, 19.5% are now current.

The analysts maintain an overweight on non-agency MBS and suggest that PPIP managers' performance has been impressive, with cumulative net performance of between 4.3% and 25.6% across managers. RMBS has been the destination for 85% of funds, far outshining CMBS.

RMBS

CPR spike points to rising Irish loan mods

Q210 prepayment rates in the Kildare 2007-1 RMBS shot up to 13.87%, a significant increase from 3.43% in the previous quarter, caused by the servicer repurchasing a large number of interest-only loans from the pool. The move follows the buyout of 421 loans from the Fastnet 2 pool as the legal maturity of the mortgages exceeded the date specified in the deal's legal documents, which led to a sharp increase in prepayment rates.

The Kildare A2 note saw a June principal payment of US$113.36m versus US$56.4m in March. Based on the figures in the March 2010 and June 2010 investor reports, ABS analysts at Barclays Capital estimate that about 2.8% of the pool was repurchased.

The reason behind the repurchase for the Kildare deal appears to be different to that of Fastnet, however, because it is related to loan modifications. "It seems reasonable to assume that loan modifications are taking place because borrowers are finding it difficult to keep up with their monthly mortgage payments," the BarCap analysts explain.

They add: "If this is indeed the case, then it would not be surprising to find an increasing accumulation of loans in the higher arrears bucket, given that repossession rates in Ireland have remained subdued so far. This is a problem that can be addressed by modifying the loans and thereby boosting the cure rates or, as in the case of Kildare, repurchasing the loans post-modification and thereby boosting prepayment rates."

Loan modifications are usually aimed at giving the borrower more time to make the payments, which generally means lower monthly payments and possible extended mortgage lives. However, Kildare 2007-1's CDR has been steadily increasing since November 2009.

"It is not clear whether this repurchase of interest-only loans is a one-off or if it is likely to be repeated. If it turns out that loan modifications in Ireland are on the rise, we suspect that the probability of more such repurchases (in the same pool or across different pools) would be non-negligible," the analysts note.

Moody's recently placed a number of Irish RMBS transactions on review, citing rapidly rising delinquencies, particularly in the 90 days or more arrears bucket.

RMBS

More Greek deals downgraded

Fitch has downgraded two RMBS tranches and affirmed 36 others from its rating universe of 14 Greek RMBS transactions. The agency has additionally removed 31 tranches from rating watch negative and assigned various outlooks.

The rating actions follow the 20 July publication of Fitch's criteria addendum for Greece, which incorporates the agency's assessment of sovereign risk considerations in Greek mortgage asset performance (see last issue).

Two junior Greek RMBS tranches (Themeleion III and Estia III) have been downgraded due to inadequate build-up of credit enhancement and Fitch's negative view of certain collateral characteristics in these two pools. Several mezzanine and junior tranches have been assigned negative outlooks, signifying the agency's view of the economic outlook in Greece. All three tranches of Grifonas Finance No. 1 have been assigned negative outlooks, reflecting the increased sovereign dependency of this transaction, due to the borrowers' civil servant status and deal servicing undertaken by public sector entities.

The ratings of senior Greek RMBS tranches have been capped at double-A minus, six notches above Greece's sovereign rating. All senior tranches remain on negative outlook in line with the outlook of Greece's sovereign rating.

Greek MBS represent €7.5bn of rated debt, issued by seven domestic financial institutions and secured by prime residential mortgage loans originated across the country. Although the performance of Greek securitised portfolios to date has been in line with Fitch's initial expectations, the rating action reflects the agency's forward-looking view on the general economic outlook in Greece, the implementation of sizeable austerity measures and uncertainty surrounding the future performance of Greek mortgage loans.

RMBS

Rating error corrected

S&P has reinstated its triple-A credit rating on Eurosail 2006-3NC's class A3c notes. At the same time, it withdrew its triple-A rating on the class A3c detachable coupons (DACs). The move follows the incorrect withdrawal of the class A3c note ratings instead of the class A3c DACs' on 7 July.

The rating on the class A3c DAC has been withdrawn as the security has expired.

RMBS

Enhancements made to valuations service

S&P Valuation and Risk Strategies has added a number of enhancements to its valuations offering. The firm says the new enhancements will make it easier for customers to gain a better perspective on interpreting yield changes.

These enhancements include expanded yield curve data across the US, Europe and Asia. Another new feature enables terms and conditions data users to have a direct link to both the EMMA and EDGAR databases for official statements and secondary market disclosures.

Improvements have also been made to the S&P global credit portal's structured finance advanced search capabilities by adding the ability to search using RMBS and whole business securitisations as the asset class designation. Another major enhancement is the ability to download current pricing files using either a list of identifiers across asset classes or by using the advanced search function.

"Investors want more information, in an easy-to-use format available across multiple asset classes," says Frank Ciccotto, S&P Valuation and Risk Strategies svp. "By increasing the information displayed around our evaluations and improving the access to underlying research, we are helping customers improve price defensibility and transparency."

SIVs

SIV note ratings withdrawn

Moody's has withdrawn its ratings on notes issued by seven SIV and SIV-lite programmes because it believes it has inadequate information to maintain their credit ratings. The rating action has affected: the US and Euro CP programmes of Mainsail II; the Euro/US CP and MTN programmes and mezzanine capital notes of Axon Financial Funding; the Euro/US CP and MTN programmes of Orion Finance; the Euro/US CP programmes of Golden Key; four classes of mezzanine floating rate notes issued by Duke Funding High Grade II-S/EGAM I; the Euro/US CP and MTN programmes and Euro/US mezzanine capital notes and combo notes of SIV Portfolio and Cheyne Finance; and Euro/US/Australian dollar MTN programmes of Sigma Finance.

Technology

Risk system integrates CMBS deal library

The Kamakura Risk Manager (KRM) enterprise risk system now offers direct access to Trepp's CMBS deal library. This includes access to the integrated simulation in KRM interest rate risk, GAAP net income, market risk, credit risk, liquidity risk, stress testing and capital needs for portfolios that include CMBS-related structured products.

David Boldon, Kamakura's Washington DC representative, says: "Adding KRM access to the Trepp CMBS deal library will result in a dramatic increase in the accuracy with which KRM can analyse the GAAP net income, cashflows, stress tests and default risk of portfolios which contain CMBS exposure. This analysis is reflected consistently in the integrated interest rate risk, market risk, credit risk, capital analysis, liquidity risk analysis, Solvency II and Basel 2 and 3 analytics in KRM."

Separately, Kamakura Corporation and Sumisho Computer Systems have announced an alliance to distribute the Kamakura enterprise-wide risk management system, Kamakura Risk Manager, in Japan.

Yoshinori Imai, svp in the Financial Systems Solution Unit of Sumisho Computer Systems, says: "The impact of the September 2008 'Lehman Shock' in Japan has brought risk management to the forefront of management concerns in the financial services industry in Japan. Japanese institutions require the best available risk management technology and business partners who know Japanese markets and Japanese financial institutions."

Technology

Pricing and risk analysis tool enhanced

Quantifi has released the latest version of its pricing and risk analysis software, version 9.4. The new features in the latest release include expanded asset coverage for CLOs and innovations that support recent changes to the OTC markets, including new Asian standardised CDS contracts.

Quantifi ceo Rohan Douglas says: "With the passage of the Dodd-Frank bill in the US and the potential impact of Basel 3, the OTC markets are adapting to increased volatility and regulatory scrutiny. Consequently, the need for accurate, robust, intuitive tools for valuation and risk management has never been higher. V9.4 is a major release and enables our clients to effectively and proactively address rapidly changing market, operational and regulatory requirements."

Technology

SaaS version of risk surveillance platform offered

Principia Partners has launched a software-as-a-service (SaaS) version of Principia SFP. The valuation, investment analysis and risk surveillance platform is now accessible as an integrated web-based service to manage vanilla and structured derivatives, as well fixed income and structured credit investments.

Swaps Financial Group was an early adopter of the solution. Peter Shapiro, md of the firm, says: "Principia allows us to perform the independent valuations, portfolio analysis and risk assessment needed to ensure our clients get the best pricing and terms from derivative dealers and the on-demand transparency to manage their portfolios."

Trading

Trading ideas: time for a fill-up

Dave Klein, senior research analyst at Credit Derivatives Research, looks at a capital structure arbitrage trade on Valero Energy Corp

Valero Energy's CDS has been on a roll this month. After the company's CDS hit tights in April along with equity highs, both securities sold off with the rest of the market.

Recently, Valero's CDS recovered, while its equity remained at the low end of the tight channel in which it traded since March 2009. Now is an excellent time to take advantage of the company's credit-equity disconnect.

Exhibit 1 charts Valero's five-year CDS and equity price (reversed axis) over the past six months. Throughout most of the period, the two securities traded in line with each other, improving and deteriorating together. However, since late June, VLO's equity deteriorated to close to recent lows, while its CDS showed strong improvement.

Exhibit 2 charts Valero's market and fair CDS levels (y-axis) versus equity share price (x-axis). The square shows current market levels. The yellow triangle indicates current fair values for equity and CDS based on their recent trading relationship.

Our empirical equity-CDS model clearly points to an increase in share price, coupled with a widening of CDS spread, as indicated by the green arrow. Our directional credit model points to CDS widening in line with our empirical fair value based on weak interest coverage and earnings. Some factor rankings in the directional model will likely change with the release of the company's earnings.

Exhibit 3 provides another view of our equity-CDS model's estimate of fair value, charting market and fair CDS levels over the past six months. Since late April, VLO's equity initially outperformed its credit but recently lagged as its CDS rallied. Valero's equity is outperforming and we expect earnings results will be a further catalyst to bring credit and equity back together.

Risk analysis
The main trade risk is that the name begins trading under a different regime and the current equity-CDS relationship no longer holds. Each CDS-equity position does carry a number of very specific risks.

Recovery and 'default' stock price assumption: In the default scenario the cheapest-to-deliver CDS obligation may have a different than expected market value and the stock price might not fall as assumed.

Corporate actions: Spin-offs and private equity buyouts, for instance, could radically change the equity-CDS relationship, leaving investors with a mishedged position.

Government actions: Bailouts, stimulus packages and other governmental interventions have distorted the credit-equity relationship among certain names.

Mark-to-market: Relative mispricing may persist and even further increase, which could lead to substantial return fluctuations.

Position

Buy 72,800 shares Valero Energy Corp @ US$17.53.

Buy US$10m notional Valero 5Y CDS @ 180bp.

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

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

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