Contents

ABS

Primary positives

Healthy outlook for European new issuance

The successful pricing of Santander's Fosse Master Issuer 2010-4 RMBS has been taken as a positive sign for European primary ABS issuance. Public placement of the deal with a number of different investors indicates that the market could finally be moving away from private, club-type closings towards a healthier regime.

Two tranches were on offer in the latest Fosse transaction - £675m three-year class A1 and €700m three-year class A2 notes, both pricing at 140bp over. The sterling tranche was almost 1.1x oversubscribed, while the euro tranche was almost 1.8x oversubscribed. Banks, asset managers, insurers, pension funds and supranationals from across the UK, Germany, Benelux and France participated.

Most recent European deals have, however, been privately placed as issuers shy away from the public price discovery process. "I do not know how much issuance can be absorbed by the market, but the real question is how widely it will be distributed. The amount that has gone beyond small groups of pre-arranged investors has been relatively small. In that respect the market needs to see a change, with wider distribution," one European securitisation strategist notes.

He believes that transactions are frequently being placed with the same investors. One large American bank in particular is thought to have been involved in a lot of recent issuances. "Hopefully we are moving away from everything going to private placement, but the next few months will be the real test for that," the strategist says.

Luke Spajic, head of European credit and ABS portfolio management at PIMCO, does not share his optimism, however. He believes the trend for private placement will continue.

Spajic says: "We will see more deals being privately placed. If issuers find the market un-obliging, then they may look to go to a pair of hands that want to bargain. Privately placed deals or privately negotiated deals will be more prominent."

Nevertheless, the Fosse placement has reaffirmed expectations for a busy autumn issuance period. The strategist confirms: "We will see a lot more issuance than there has been in the last few months. The next few months will see a pick-up in activity, primarily in UK and Dutch RMBS. They are the core areas, because they have the widest possible investor base."

Spajic agrees: "I see both covered bonds and the ABS asset class looking more interesting, even to credit investors who are not involved in that sort of spread. RMBS and ABS in general will look intriguing. Where extension risk is minimised and there is a good sense of LTV and you do not get huge arrears, then RMBS will be attractive."

Spajic does have concerns, however. He believes anxiety surrounding sovereigns has contributed to a great uncertainty in the market regarding global growth. Despite action by the EU, IMF and ECB to tackle the sovereign issue, he says "economic fundamentals definitely look weaker now than they did six months ago because the sugar rush stimulus has faded".

He adds: "I have very mixed feelings about the new issue market over the rest of the year. We need to be selective looking for deals across credit. The issuers who are stretched will underperform if the markets get rattled."

Pricing is expected to remain very sensitive, although it should tighten a little bit. Spajic believes a more significant tightening is unlikely any time soon "because investors will want to take chips off the table, so it will be difficult for momentum to build. My hunch is that we are in a reasonably tight range until there are changes at the macro level - or if policy changes significantly".

He adds: "Issuers do not want to print at very wide spreads, but yields are significantly lower than this time last year. Investors do not want very tight spreads and are wary of very low all-in yields. Obviously, there has to be a meeting of minds somewhere. I think investors will be far more discerning; if a corporate is going to go out there and borrow at exceptionally low yield, investors will want more detail on the use of proceeds."

The strategist predicts that, should issuances continue to be as successful as recent ones have been, then spreads will tighten as a result of increased market confidence. He says: "Spread tightening depends on avoiding any potholes along the way. At the moment, there are too many 'ifs' to accurately predict what will happen with spreads. But I do not expect a significant widening unless something dramatic happens externally."

Certainly, the European new issue pipeline is building, with STORM 2010-III, Stichting Eleven Cities 5 and VCL 12 in the queue. Spajic concludes: "There has been a lack of supply from Europe and there might be some pent-up demand. Credit markets have become very correlated, so investors will have to work much harder at discerning value across all the spread product categories."

JL

RMBS

Revitalising Russian RMBS

State support helps securitisation market get back on track

The Russian RMBS market is showing signs of life, spurred on by the government. Programmes launched by the Agency for Housing Mortgage Lending (AHML) and the state development bank VEB (Vnesheconombank) to help originating banks are providing a welcome boost to the country's securitisation market.

Loans originated by AHML were used for one recent R13.5bn securitisation (see SCI issue 194), the agency's first for years. Following its success, further transactions are anticipated to be on their way.

"The market is starting to come back in some ways, depending on whether you look at new issuance figures for mortgages or at general trends in the marketplace. The figures suggest the market is coming back because in 2009 new issuance was about a fifth of what it was in 2008, but the first half of this year has already matched the entirety of 2009," says Irina Penkina, senior structured finance analyst for Russia/CIS at S&P.

Nikita Gusakov, Citi's head of local debt capital markets for Russia, adds: "There is a lot of rouble liquidity. The domestic rouble market started rallying in the second half of 2009 until April this year when it stabilised. It has been pretty flat since then, with good demand for high grade bonds. The market was quiet for RMBS, but for good deals with market-suitable parameters, there should be no problem with demand."

Despite the promising signs for the RMBS market, Penkina believes that a limited recovery and increased yearly issuance may simply be the result of an easing economic environment. Although unemployment figures, per capita income and banks' willingness to lend have all improved, she warns it would be premature to expect markets to make a quick return to previous peak levels.

While progress may be slow, at least it is being made and the government is certainly playing a role in that. "Most activity still comes from the state banks," says Vladimir Dragunov, partner at Baker & McKenzie.

He adds: "The market is slowly coming back and there is a lot of interest. The government wants to provide more residential properties to people and they push the construction and real estate market. Obviously they realise that, for these things to happen, the banks need to provide the financing. They want mortgages to be at 11% in roubles, so they need to create efficient refinancing tools and a number of institutions are participating in the programme."

Penkina explains the importance of the government's programmes to the market: "Only the largest banks or banks which are part of the AHML programme are able to engage in the market. Those banks which do not comply with the AHML underwriting requirements are out of the scheme."

She adds: "It is not that hard to get on the AHML programme, but it is a matter on financial conditions. The AHML is there to develop the mortgage market and they push for the market to develop in terms of underlying standards and they push down the prices of underlying mortgages. Not many banks are willing to comply with this requirement."

Although not all banks are able to engage in the market at the moment, there are enough for mortgage securitisations to begin. Gusakov explains: "We are currently marketing a new RMBS deal for AHML. It is [the] first RMBS deal in the market after the crisis, so we will see how it goes. I think we may see one or two other deals coming from state banks before year end."

He continues: "There could be demand for top-tier names if they go for a properly structured deal, which is relatively short term. For the private names, it is maybe a little bit too early - they might follow next year, hopefully in the first half of the year."

Dragunov is also expecting only a couple more issuances this year, but with more following in 2011. He says: "I do not expect any public international deals, but there may be some domestic deals - maybe one or two by Christmas and more again next year. There are not many deals in very advanced stages, so I do not expect much more to happen this year."

He adds: "Also, the programme of the government was designed to stimulate banks to give new mortgages, which the government will refinance. This means the banks need to build up the portfolios with new mortgages, which will take time. For the programme to work, most of the deals will have to happen next year."

While the government agency programmes have played, and continue to play, a role in revitalising the market, the state is limited in what it can do. Ultimately, it may be foreign markets, rather than domestic factors, that decide the fate of Russian RMBS.

Gusakov explains: "Psychologically it will be important to see how the RMBS market develops elsewhere, in other countries which have more mature markets. People will be interested to see how it restarts after the crisis. It should reopen globally after the crisis, which would positively influence the local market."

JL

CLO Managers

Limited opportunity

CDO management contracts continue to trade well

Prices for CDO management contracts continue to trade well. The window of opportunity will only last as long as the new issue CDO market remains broken, however.

Matt Natcharian, head of structured credit investing for Babson Capital Management, confirms: "Prices for CDO management contracts are trading well because there is so much demand for them, with managers looking for a mix of both complementary and new areas of businesses to add to their platforms."

He says this is being driven by the fact that there's no active new issue market and so medium and large managers are looking for ways to grow, helping ensure they remain a significant player in the market. "It has been tougher for smaller managers to continue building their businesses, so they are taking advantage of this opportunity."

The most recent sale is believed to have traded at above 50% of the manager's expected revenues, with over 20 bidders involved. "Certainly CLO management contracts are valuable and many managers would be interested for the right transactions, but even for large shops - where there are economies of scale - some of the prices may not prove to be profitable for them. The conclusion I draw is that some managers are focused on maintaining their market scale," Natcharian adds.

But while selling activity remains strong for the moment, he warns that the window of opportunity is small - essentially until the new issue CLO market returns. Managers will have little incentive to buy or sell businesses once the market begins improving.

In an analysis of US CDO manager mergers and acquisitions occurring over the past two years, S&P has found that motivations for such activity appear to differ between 2009 and 2010. "It is our view that in 2009 a push for economies of scale resulting from an overall decline in management fees was the primary factor driving M&A activity. In 2010, with subordinate overcollateralisation ratios rising for many CLO transactions - and management fees picking up again, as a result - the motivations for M&A activity appear to be more diverse," the agency notes.

Some of the driving forces seem to have included investor actions to remove and replace a collateral manager (see also separate News Analysis), financial issues at certain parent companies of collateral managers and a desire by parent companies to move away from the CLO market, according to S&P. "In our opinion, these M&As still resulted in economies of scale, however, as many of the acquisitions involved no increase in personnel for the acquiring organisation."

So far this year, the agency counts nine separate collateral manager mergers or acquisitions, involving 33 separate CLO transactions and one CBO transaction. In all of 2009, there were 14 separate M&As involving 46 different CLO transactions.

S&P reported one CLO manager M&A for August: the replacement of A.C. Corp by Ivy Hill Asset Management on the Knightsbridge CLO 2007-1 and 2008-1 transactions. Further consolidation opportunities look set to emerge with the recent bankruptcy filing of GSC Group.

Capstone Advisory Group has been retained to auction off GSC's US$8.65bn structured finance platform. It is understood that the firm's CLO management obligations will be included in the sale.

According to S&P, the collateral management agreements for the CLO transactions contain provisions permitting some combination of noteholders and equity holders to agree to replace the collateral manager upon the bankruptcy of the existing collateral manager. It rates 12 CLO and 11 ABS CDO transactions managed by GSC Group and its affiliates.

CS

CLOs

CLO equity investor boost?

CDO analysts at Wells Fargo don't expect the US CLO primary market to return in scale until at least the second quarter of next year. New issuance for the remainder of 2010 is anticipated to continue featuring smaller, clubby-type deals.

"As with the 2010 new issue deals, we expect most new issue CLOs to be slightly unique situations, such as refinancings or reverse inquiries," the Wells Fargo analysts explain. "Several issues hinder new issuance, but asset-liability spread...and regulatory uncertainty are the primary causes."

However, they note that two possible catalysts might encourage new issue CLO equity investors to re-enter the market. "Obviously, CLO triple-A spreads could tighten to the low-100s range, while loan spreads hold steady or widen, or CLO equity investors could begin to examine primary CLO equity returns through a different lens. In a world where McDonald's can sell single-A, 10-year bonds priced 55bp over Treasuries, investors have been reducing yield targets and looking for new ways to gain returns."

Although a projected CLO equity base-case IRR of 9%-12% may not seem attractive compared to the mid-teen levels projected in 2006, leverage is much less now. "Put another way, the anticipated returns will stay higher at higher projected default rates than on a higher leverage deal. In addition, if high-yield bond and loan spreads move in, the CLO equity return - with its more attractive cashflow timing - should be competitive with other asset classes. As accounts examine new issue CLO equity, we believe more investors will find value," the analysts note.

Trading ranges for CLO tranches still vary based on the structural language, manager and collateral. But indicative dollar prices for double-A notes are 72-82, 62-72 for single-As, 50-65 for triple-Bs and 45-60 for double-Bs. This represents a monthly tightening of approximately 25bp on triple-A tranches, whereas junior note prices were generally flat on the month, the analysts say.

CS

Insurance-linked securities

Reinsurance pricing weighs on ILS recovery

The ILS market appears to be regaining its confidence following the effective closure it experienced between late 2008 and mid-2009, according to S&P. However, the rating agency believes that pricing levels for traditional reinsurance and ILS need to become more closely aligned and both the investor and issuer bases to expand greatly for long-term convergence to occur between the two markets.

S&P cites increased transparency and enhanced collateral structures (reducing exposure to counterparty risk) as improvements that have given the ILS market renewed confidence. Indeed, issuance has increased by almost US$1bn more in the first half of 2010 than in the same period in 2009.

But the agency believes that the majority of issuances for the year may have already occurred. The market may therefore struggle to meet S&P's expectation of around US$4bn of issuance in 2010, unless there is a major catastrophe event to encourage cedants to transfer risk and raise capital.

It notes that trends in both the reinsurance and ILS markets have served to shift pricing competitiveness for insurers in favour of the traditional reinsurance market. Generalist hedge funds and money managers have retrenched to more traditional investments, while catastrophe reinsurance is now priced to attract many of the cedants that might have considered issuing ILS. Indeed, the softening reinsurance market has outpaced the tightening of spreads in the ILS sector, challenging the economics of the capital market route.

"We believe that unless a major catastrophic event occurs, reinsurance pricing is likely to soften further," comments S&P credit analyst Dennis Sugrue. "Since the relative attractiveness to issuers of ILS as a medium to transfer insurance risk has traditionally been linked to reinsurance pricing, this is likely to dampen ILS issuance. We do not expect levels of issuance to return to those experienced in 2006 and 2007 over the next 12-24 months."

S&P also observes what it describes as an "interesting and contrasting" dynamic in the reinsurance and ILS markets. In reinsurance, reinsurers are tending to diversify by product line and geography, potentially reducing the price of traditional reinsurance. Conversely in ILS, concentration is increasing as the market attracts a higher proportion of specialist investors from within the insurance industry. This investor concentration could potentially push issuance costs up for insurers.

ILS investors in 2010 seem to be requiring an increased spread on the more-remote risks; i.e., those less likely to occur. S&P believes that this is because the market is becoming saturated with these transactions. Conversely, spreads for bonds with lower attachment points are narrower than those issued after Hurricane Katrina.

The agency concludes: "Over the medium term, in the absence of a major catastrophe event, we expect reinsurance pricing to decline faster than ILS pricing, thus increasing the gap between the two. The trends we have observed in the first half of 2010 do not lead us to predict any expansion in the concentrated investor base, nor do we anticipate that more issuers will overcome the barriers that deter new entrants from joining the ILS arena."

CS

Regulation

Compensation reform well under way

Significant progress has been made in improving compensation policies and practices, according to an international survey of wholesale banks. Findings show that most major banks are now implementing compensation schemes in line with standards published by the Financial Stability Board (FSB) in September last year.

The survey - undertaken by the Institute of International Finance (IIF) and Oliver Wyman - is based on responses from 37 firms, supplemented by interviews with wholesale banks. The IIF says it has spoken to institutions accounting for 70% of total global wholesales banking revenues for 2009.

Compensation reforms are taking place in governance, risk adjustment and deferred payouts, but the IIF says further work is needed on disclosure of bonus pools to take greater account of risk-adjusted profitability. Klaus-Peter Müller, chairman of the supervisory board at Commerzbank and IIF steering committee member, says boards are playing larger roles than they used to in determining compensation policies, with greater direct oversight of the allocation of bonus pools.

Rick Waugh, president and ceo of Scotiabank and another member of the IIF's steering committee, adds: "This report documents the important changes the financial services industry has made in its compensation practices since the onset of the crisis. However, more has to be done by those of us in the industry, and the IIF will continue to monitor performance in this area."

The report shows that risk management involvement in the compensation process has risen from less than half of firms in 2008 to almost all firms now. Waugh continues: "We are seeing greater emphasis to ensure that incentives are linked to performance and are aligned with shareholder interests. Importantly, we do not see this as restricting the level of compensation, but that banks adopt policies to ensure that incentives do not induce risk-taking in excess of the firm's risk appetite."

The survey finds that most banks remain short of the FSB implementation standards on disclosure, with less than half of participants publishing bonus pool size and allocation information. Substantial payout structure improvements have been made, however, including the use of payout instruments aligned with the long-term performance of the firm and increased recourse to non-cash instruments.

Unconditional payouts have been reduced by 50% and multi-year guarantees have been all but ended. Of the 15% of firms with some sort of golden parachute, the IIF says most have taken steps to eliminate them.

IIF md Charles Dallara says: "This is an encouraging report, but it shows that there are remaining challenges. For its part, the industry needs to continue its efforts to resolve outstanding technical and managerial compensation challenges in order to reduce excessive risk taking and so contribute to a more resilient financial system. It is important, however, that the regulators make maximum efforts to ensure that there is meaningful international consistency in the application of these standards."

IIF senior counselor George Abed concludes: "While progress to date has been remarkable, in many ways the full year 2010 will be even more instructive as firms in the industry draw lessons from experience and take into account the new legislation impacting compensation approved in the US and the EU among others. Compensation reform will also benefit from the fundamental improvements in such critical areas as risk management, governance, and disclosure that are being implemented by the industry within the framework of the new regulatory proposals currently being developed."

JL

ABS

Middle-market broker-dealer minted

Cortview Capital Securities has commenced business operations, having received a US$125m capital commitment backing from Warburg Pincus. The broker-dealer will focus on fixed income sales, trading, origination and securitisation, serving a national middle-markets client base.

The firm is headquartered in Richmond, Virginia, and has offices in New York, Charlotte and Boca Raton. Cortview's four founders include Theodore Luse, who will serve as president of its capital markets division. He has over 25 years of experience building and managing regional capital markets platforms, and was most recently head of debt capital markets for BB&T Capital Markets.

Luse says: "Cortview offers a unique and compelling combination of experienced regional sales and trading talent, substantial trading capital and a single-minded focus on the middle market, without the limitations of larger and more broadly focused banks and financial institutions."

Cortview's other founders are: Bradford Bodine - chairman - who brings more than 20 years of fixed income sales experience at a number of firms, including First Boston, Barclays and Wachovia; Michael Lacovara - president and ceo - formerly the ceo of Rodman & Renshaw; and Sean Byrne - coo - a fixed income trader with more than 20 years of experience at Bear Stearns and Solomon Brothers.

ABS

Regulation vet joins advisory team

Link Financial Group has appointed Marco Angheben as project director in its advisory team. The receivables management firm says Angheben will work on its ABS loan level data project to assist the European Central Bank in developing data handling infrastructure.

Angheben has 10 years' experience in regulation, with a focus on structured finance. He was previously director at the Association for Financial Markets in Europe in the European Securitisation Forum division, dealing with central banks, security regulators and policymakers.

Philippe Paillart, Link chairman, says: "We are seeing increasing demand for the services of our advisory division from clients in areas ranging from our core business in NPLs right across the wider consumer and commercial loan markets. Marco provides a huge boost to the expertise in our practice advising governments and regulatory agencies in the UK and the other major EU economies."

"Marco has a wealth of experience in dealing with market practice, legal and regulatory matters in structured finance," adds Paul Burdell, Link ceo. "Link will benefit from the additional complementary skills and knowledge he will bring on both operational and business development fronts, particularly in the German, Irish, Italian and Spanish markets where Link is currently operating."

ABS

Capital markets partner recruited

Elana Hahn has joined Morrison & Foerster's capital markets group as partner in its London office. Formerly with Mayer Brown International, she represents financial institutions, fund managers and US and UK corporations in pan-European and international financings.

Hahn has particular expertise in debt capital markets, fund and structured debt transactions across a wide range of industries and asset classes. Her practice includes funds and their financing, ILS, auto, credit card and trade receivables financing, whole business securitisations and mortgage- and other real estate-based debt capital markets deals.

ABS

Partners added to investment funds group

Dechert has appointed Achim Pütz as partner in its financial services and investment management group in Munich. Pütz was previously a partner at SJ Berwin and head of the firm's German financial markets Group. He is also the founder and chairman of the German Alternative Investment Association and has extensive experience advising clients on traditional and alternative investments.

Pütz's arrival is the latest in a series of partner additions and expansions for Dechert's European investment funds practice. Most recently, the firm announced the opening of its Dublin office, headed by leading Irish funds lawyer Declan O'Sullivan, formerly the chair of the alternative funds group at William Fry.

CDO

Investment manager names new SF head

AXA Investment Managers has appointed Laurent Gueunier as head of structured finance. He will report to Dominique Carrel-Billiard, the firm's ceo, and joins AXA's executive committee.

Gueunier replaces Pierre-Emmanuel Juillard, who - after 10 years with the firm - has joined Goldman Sachs as a partner in Asia, outside the asset management industry.

Gueunier joined AXA IM's management teams in 2002 to set up the structured corporate credit department. Prior to this, he spent three years within JPMorgan Chase's financial institutions derivatives marketing team, where he was in charge of structuring and developing derivatives in France and Belgium.

CDS

Bank strengthens Euro HY trading

Deutsche Bank has made two key hires to strengthen its high yield trading business in Europe. Andrew Jarman has joined the bank as senior high yield credit trader and Askin Aziz as senior high yield credit analyst. Both are based in London and will report to Antoine Cornut, the bank's European head of credit trading.

Jarman joins from Morgan Stanley, where he was responsible for market making in high yield bonds, CDS, leveraged loans and LCDS within its trading and corporate credit group. Aziz most recently served as senior credit analyst at James Caird Asset Management, providing analysis on the European high yield sector, cross-over leveraged loans and CDS.

CDS

IDB promotes Asia Pacific pair

BGC Partners has promoted Vanessa Ko to director and regional head of e-commerce for Asia Pacific and Norliza Kamardin to associate director of e-commerce for Asia.

Ko will spearhead the continued expansion of BGC's electronic coverage in the region with its electronic platform, BGC Trader. She joined BGC in 2005 as a product manager for credit and has been responsible for electronic brokerage in products including Japanese and Asian CDS indices.

Kamardin joined BGC in 2008 from Tullett Prebon as a product manager for e-commerce, covering FX options, CDS and US Treasuries. As associate director for e-commerce, she will be responsible for the marketing and day-to-day operations of the firm's electronic products for Singapore, Hong Kong, Japan and Australia. Kamardin will report to Ko.

CDS

CME adds md for OTC risk

CME Group has hired Alexandar (Sasha) Rozenberg as md, Over-the-Counter Risk for CME Clearing. He joins from SuperDerivatives, where he was product manager, credit derivatives and acting head of quantitative analytics.

Rozenberg will be responsible for advancing the company's OTC risk management policies and practices. He will be based in New York and will report to Tim Doar, md, risk management.

CMBS

Real estate firm adds acquisitions director

William Broms has joined Cole Real Estate as director of acquisitions. He will focus on sale-leaseback transactions, while helping Cole diversify its portfolio and secure investment grade and net-leased properties in key markets across the US.

Prior to joining Cole, Broms served as acquisitions director for Realty Income, one of the largest public REITs in the US. Here he was responsible for total operational and planning activities, including overseeing the acquisition of net-leased real estate portfolios.

Investors

Promotion for credit strategist

Loomis, Sayles & Company has promoted Chris Gootkind to director of credit research & credit strategy in its fixed income group. He also joins the investment grade sector team, where research ideas are introduced into client portfolios. He will report to Jae Park, cio in the firm's fixed income team.

Gootkind assumes leadership of Loomis Sayles' 37 person credit research group, which is responsible for covering investment grade, high yield, convertibles, bank loans and municipal bonds.

With over 29 years of fixed income investment experience, Gootkind was most recently associate partner and credit portfolio manager at Wellington, where he initially joined as director of credit research in 2006.

Investors

Analyst appointed to hedge funds team

Alkesh Chohan has joined Matrix Group as analyst in its fund of hedge funds group, led by the group's cio Stuart Ratcliff.

Chohan will strengthen the firm's five-strong fund of funds team and be responsible for conducting due diligence on prospective managers, as well as developing existing relationships with fund managers and prime brokers. He joins from TCP Asset Management, where he worked as an investment analyst for three years.

Investors

Asset manager acquisition integrated

F&C Asset Management has completed its acquisition of Thames River Capital and made two key appointments to its executive committee. In the enlarged group, Thames River will focus on distribution to IFAs and wealth managers, while F&C will concentrate on institutional distribution.

Charlie Porter, founder and chief executive of Thames River, joins the F&C executive committee with overall responsibility for the F&C group's retail and wholesale fund business. Jeremy Charles, coo of Thames River, also joins the F&C executive committee. While remaining coo of Thames River, he has been given a group-wide brief, reporting to Alain Grisay, F&C's chief executive, to implement changes to the group's financial business model.

Grisay says: "The acquisition of Thames River is an important component of our strategy of diversifying our revenues beyond our core insurance clients. In particular, Thames River brings a highly complementary set of investment capabilities, including expertise in absolute return, and a proven record of distribution among wealth managers where our presence has been limited."

RMBS

RMBS fund launched

Performance Trust Investment Advisors (PTIA) has launched its first mutual fund, the Performance Trust Total Return Bond Fund (PTIAX), a no-load fund that invests across the fixed income market.

Its objective is to purchase undervalued fixed income assets and achieve investment returns from both interest income and potential capital appreciation. The fund invests in government and agency paper, including both agency and non-agency RMBS, in which the investment focus is on first lien fixed-rate mortgages in the prime and Alt-A sectors.

Peter Cook, PTIA's cio, says: "While our new fund will invest in a variety of fixed income instruments, we believe there is tremendous opportunity to find undervalued fixed income assets in the prime and Alt-A mortgage securities sectors, which represent an estimated US$1trn market. The mortgage market is not homogeneous. We find opportunities based on detailed analysis of loans, borrower profiles and behaviours and how the securities themselves are structured."

RMBS

Countrywide reps and warranties investigation opens

Clients of Gibbs & Bruns have issued binding instructions to Bank of New York, as trustee, to open an investigation of ineligible mortgages in pools securing over US$26bn of Countrywide RMBS. The securities that are the subject of the instruction letter include a number of CWALT, CWHL and CWL issuances.

Under the pooling and servicing agreements (PSAs) terms, the holders of over 25% of the voting rights of the RMBS have the power to issue this binding instruction. The holders can also demand repurchase of mortgages that did not conform to the required representations and warranties at the time they were used as collateral for RMBS.

Gibbs & Bruns partner and lead counsel for the holders' group, Kathy Patrick, says: "We believe our clients' instruction, and the terms of the applicable PSAs, require the trustee to take action on each of these transactions. Our clients will pursue all contractual remedies available to them in these and the many other Countrywide RMBS deals where they have instructed us to take action to protect their rights and recover their losses."

RMBS

Suit filed over MBS fund violation

Hagens Berman Sobol Shapiro has filed a class-action lawsuit against Charles Schwab on behalf of investors who owned shares in the Schwab Total Bond Market Fund, as of 30 November 2006.

The suit accuses San Francisco-based Charles Schwab of causing the fund to deviate from its fundamental business objective to track the Lehman Brothers US Aggregate Bond Index. The suit - filed in the US District Court for the Northern District of California - accuses Charles Schwab of violations of the California Business & Professions Code.

Hagens Berman managing partner and plaintiffs' attorney, Steve Berman, says: "We intend to prove that Charles Schwab caused investors to suffer losses when it began investing in volatile, high-risk MBS without informing shareholders or seeking shareholder approval through a vote, which the company was obligated to do, according to the fund's prospectus."

The plaintiffs contend that the fund deviated from its stated investment objective by investing a material percentage of its portfolio in high-risk, non-agency CMOs, which were not part of the Lehman Brothers US Aggregate Bond Index. The attorneys also contend that the fund deviated by investing more than 25% of its total assets in non-agency MBS and CMOs, leading to tens of millions of dollars in shareholder losses.

During the period of 31 August 2007 through to 27 February 2009, the suit states the fund's shareholders suffered a negative total return of 4.8%, compared to a positive total return of 7.85% for the index. Plaintiffs have asked the court to award restitution to all class members and to order Schwab to return any management or other fees collected after the fund's alleged deviation, as well covering the class' legal costs.

Berman adds: "We filed this action under California state law, which clearly protects investor rights. We believe this will better represent the interests of our clients and other Schwab investors."

Technology

Risk management firm opens in China

Kamakura Corporation has opened new offices in Beijing and Shanghai to support its rapidly growing client base and distribution partners in China. The new offices will be headed by Kamakura md Li Li, who will work closely with distribution partner Fiserv and clients in Beijing, Shanghai, Xiamen and Hong Kong. The offices will also support Fiserv and clients in Malaysia and Thailand.

Li comments: "Kamakura's current clients include two of the four largest banks in China, and the new offices are dedicated to support them and our other clients in greater China. Kamakura's China staff provides real time support both for the Kamakura Risk Manager enterprise-wide risk management solution and Kamakura Risk Information Services public firm and sovereign default probability service."

Technology

Analytics vendor names federal service md

RiskSpan has appointed Allen Jones as md of its federal service - FHA and HAMP - consulting practice. He will be based in Washington, DC.

Jones most recently served as Bank of America's government lending executive, where he managed the transition and integration of Countrywide under the BOA umbrella. Prior to this, he worked for HUD as senior advisor to the federal housing commissioner, as well as special assistant to the deputy assistant secretary for single-family housing.

Trading

Trading trio move again

Knight Capital Group has recruited Todd Dahlstrom, Michael Cunningham and Eric Vander Mel, all from FBR Capital Markets' credit sales and trading team. All three joined FBR from Morgan Stanley last year. The trio will be based in Knight's Boston office.

ABS

Canadian credit card portfolio acquisition completed

CIBC has completed its acquisition of an approximately US$2bn credit card portfolio from Citigroup's Canadian MasterCard business. CIBC had more than US$14bn in outstanding credit card balances prior to the addition of the MasterCard portfolio, which is expected to be immediately accretive to its earnings.

Under terms of the transaction, prior to closing, non-performing accounts were removed from the acquired portfolio and from the securitised pool relating to the Broadway Credit Card Trust. CIBC will acquire all of the outstanding class B notes and C notes, as well as series enhancement notes issued by the Trust. It will also assume the respective servicing and associated responsibilities.

The class B notes are rated A2 by Moody's and single- A by DBRS. The class C notes are rated Baa1 by Moody's and triple-B by DBRS.

ABS

Confidential rating procedures revised

S&P has announced that, from 7 September, it will only assign confidential ratings for issuers' own internal use. In addition, issuers requesting confidential ratings must not distribute the ratings to any third party.

Ratings that issuers wish to disclose on a confidential basis to a limited number of third parties will be labelled 'private ratings', under S&P's new procedures. These third parties authorised by the issuer will be able to access a private rating and related reports on a dedicated password-protected website.

Confidential ratings and European private loan ratings issued prior to 7 September will not be affected by these changes.

This revised approach to non-public ratings addresses an evolution in the law and regulations in a number of jurisdictions where S&P is regulated as a credit rating agency, according to the agency. The aim is to align confidential ratings with the description of these ratings in a number of new regulations in the US and other jurisdictions.

ABS

Encouraging trends for US credit cards

According to Fitch's latest credit card index results, defaults on US credit cards touched a 15-month low, while late payments improved further. All of the major card issuers exhibited month-over-month improvements.

Fitch md Michael Deans says: "The trends are encouraging, but card defaults are still elevated historically and will remain so. Unemployment will continue to weigh on consumer credit quality throughout the rest of this year and well into 2011."

Senior credit card ABS ratings are expected to remain stable, given available credit enhancement, loss coverage multiples and structural protection afforded investors. The outlook for subordinate tranches, however, remains negative.

Late stage delinquencies trended lower for the seventh consecutive month while hitting a 19-month low, setting the stage for continued charge-off improvement in the coming months. Fitch's 60+ day delinquency index decreased by another 10bp to 3.76% during the July collection period, while early stage delinquencies also continued to decline, with 30+ day delinquencies decreasing for the fifth consecutive month by another 13bp to 5%.

ABS

Argentina securitisation activity to grow

Led by infrastructure deals and consumer loan-backed transactions, Argentina's domestic securitisation activity should continue to grow during the second half of 2010, according to Moody's.

During the first seven months of 2010, structured finance issuance totalled the equivalent of US$3.2m, representing a substantial increase of 94% year-over-year, the agency notes. Excluding five large infrastructure-related transactions sponsored by the Argentine government, the dollar equivalent amount issued as of July 2010 is 1.6% higher when compared to the same period in 2009.

The market digested the impact of changes that took place last year, particularly new regulations approved by the CNV to address market concerns about servicing and commingling risks, according to Federico Perez, Moody's associate analyst. In addition, ANSES (the Argentine Social Security Agency) has emerged as a large investor in the domestic market after the nationalisation of the private pension funds.

ABS

Sovereign, Euro ratings 'impossible' to de-link

According to Fitch, it is impossible to completely de-link the ratings of eurozone securitisation transactions from those of the relevant sovereign.

Marjan van der Weijden, md and head of EMEA ABS at Fitch, says: "Increased sovereign default risk can affect the performance of securitisations in various ways, as it bears negatively on the macroeconomic environment and raises the prospect of extreme events occurring in a country. As a result of this view, Fitch took negative action on its Greek SF portfolio following the sovereign downgrades that took place from late in 2009 and the structured finance team continues to monitor sovereign ratings closely."

The agency applies a cap of six notches to the uplift if the securitisation transaction rating can achieve above the relevant country's local currency issuer default rating. The potential rating uplift will be lower if the transaction is substantially exposed to a sector more related to sovereign credit risk, such as the banking sector. Following a sovereign downgrade, the agency states that adjustments will be made to SF rating assumptions for existing and new transactions featuring assets from that country.

"Heightened sovereign credit risk can create pressures on the broader economy of the country concerned, particularly if the government implements austerity measures to reduce fiscal deficits. Such measures may affect the performance of collateral in securitisations," says van der Weijden.

CDO

Minimal sovereign exposure for APAC CDOs

S&P has undertaken two studies on potential corporate and sovereign exposures in the reference portfolios of Asia Pacific synthetic CDOs (SCDOs) in response to the continued uncertainty in global debt markets. The studies found exposure to be minimal and not a cause for concern.

The agency says that in both studies it used a reference count of how often a company or country is referenced in an Asia Pacific SCDO transaction as a rough proxy for assessing the systemic overlap. However, it notes that this method does not take into account the aggregate notional exposure of a given obligor.

One study lists the 25 most referenced companies in Asia Pacific SCDOs and the other study lists all the countries which the Asia Pacific SCDOs are exposed to. The first study found that even the most widely referenced company across the 179 SCDOs reviewed does not amount to a significant level in the overall reference counts.

The second study found the exposure for SCDOs to sovereign credit risk is relatively small, comprising only 2% of all reference assets. S&P says sovereigns are unlikely to have much impact on ratings for SCDOs in the region.

CDO

RFC issued for market value securities

S&P has requested comments on changes it is proposing to its methodology and assumptions for rating market value securities. The agency's proposal focuses on the market value analysis it will apply to rate market value CDOs (MV CDOs), SIVs, certain extendible ABCP programmes and leveraged closed-end funds regulated in the US under the 1940 Investment Company Act.

The proposed changes focus exclusively on criteria assumptions for market value securities that rely on the liquidation of certain sovereign bonds, municipal bonds, corporate loans or securities and structured finance securities as the primary source of repayment. The agency says its criteria proposal does not apply directly to structures with multiple sources of repayment.

S&P's changes would radically alter its market value criteria and it says its aim is to enhance the comparability of its ratings on market value securities with ratings in other sectors. The proposed criteria would:

• Limit the types of market value securities eligible for triple-A rating to those investing in direct obligations of a limited number of sovereigns and leveraged closed-end funds regulated under the 1940 Act. Market value securities invested in other asset types would be capped at double-A.
• Anchor haircuts under its triple-B rating scenario for asset types addressed by the RFC to the estimated worst actual price declines of the last 30 years, while adjusting the rating scenario haircuts up for higher ratings. Haircuts would be raised for most assets covered in the changes.
• Create minimum liquidation horizons for the asset types in the RFC to tackle the risk that forced liquidation over short time periods can significantly impact bid-offer spread risk.
• Create a hierarchy of risk among asset types based on liquidity and tax advantages.

The agency says its criteria would apply to all securities that depend on the sale of securities as their primary source of repayment, but would not apply to novel or unusual securities that contain concentrated portfolios. For those latter assets, S&P may apply the above criteria as a starting point before modifying its analysis.

The changes would affect outstanding ratings on the securities issued by 220 leveraged closed-end funds regulated in the US and ratings assigned to 22 MV CDOs.

CDS

Index skew monetisation trade touted

Credit derivatives strategists at Barclays Capital recommend selling 1x2 payer spreads with a December expiry as an attractive way to monetise the steep skew in three-month iTraxx Main implied volatility. They put forward a trade that earns 11bp upfront and has positive P&L if iTraxx Main is below 167bp on 15 December.

Although implied volatility in iTraxx Main options has fallen significantly since its May peak, it remains well above the levels seen before the sovereign debt crisis, as concerns around the pace of the economic recovery linger. The volatility skew has steepened during that period and is now at the top of its two-month range. Consequently, it is possible to structure a 1x2 payer spread that earns positive upfront premium (€110,000) while offering a wide breakeven spread (167bp).

Main traded above this level only during the most violent period of the credit crisis after Lehman's collapse. However, the BarCap strategists note that the trade has negative delta at inception and so, in case of a widening before expiry, the trade could have negative mark-to-market while still being in the money.

The trade involves buying a €100m 15 December strike 135 payer on iTraxx Main and selling a €200m 15 December strike 150 payer on the index, ref 104.

CDS

No new series for LevX

The Markit iTraxx, CDX.NA.IG, CDX.EM and CDX.EM.DIV indices are scheduled to roll into their new series on 20 September. The CDX.NA.HY will be rolling into its new series on 27 September, while the MCDX and LCDX indices will roll into their new series on 4 October.

Provisional and final constituent lists for the indices will be posted in the run-up to the rolls.

The LevX Senior index will not roll into a new series, however. Series 6 will remain the on-the-run series until further notice.

Separately, the auction for Truvo second lien LCDS is to be held tomorrow, 9 September.

CDS

ICE buy-side single names to clear soon

ICE remains optimistic about launching a buy-side single name CDS clearing service in the coming months, according to a spokesperson at the firm. The launch was originally slated for early September.

"We are working with both the buy-side and regulators to do that. We think we'll still be able to make that happen," the spokesperson adds.

ICE clearinghouses report US$11.5trn in gross notional value of CDS clearing through to 27 August. This represents 286,645 transactions.

Open interest at ICE's CDS clearinghouses surpassed US$1trn in August, while buy-side CDS clearing at ICE Trust crossed US$2bn in gross notional value.

This past July marked the one-year anniversary of the launch of CDS clearing by ICE Clear Europe. ICE currently lists 243 CDS contracts for clearing.

CDS

Troubled company index deteriorates

The Kamakura index of troubled public companies deteriorated slightly in August, rising by 0.22% to 9.85%. The reversal was rare, in that the index has improved in 13 of the past 16 months, according to the firm.

David Boldon, Washington DC representative for Kamakura Corporation, says: "This month showed a larger group of public firms with deteriorating short-term default probabilities. Catalyst Paper of Canada led the way, with a 21.56% increase in one-month default risk during the month of August."

CLOs

CLO cross-investment mooted

Avoca Capital is seeking to purchase - though the Lombard Street CLO it took over from KBC Financial Products last December - notes issued by several CLOs it manages. In addition to other investments already contemplated in the transaction documents, the issuer is able to purchase notes from Avoca CLO II, III, IV, V, VII, VIII and IX, as well as Avoca Credit Opportunities and ACA Euro CLO 2007-1.

The purchase of these notes is subject to a number of constraints, however. No structured finance obligations for which Avoca is the collateral manager may be purchased, if following the purchase: the principal balance of the obligations managed by Avoca is greater than 2% of the maximum investment amount or Lombard Street owns more than 30% of the issued notional amount of that note. Additionally, no structured finance obligation that Avoca manages which has a current rating of B3 or worse may be purchased, unless rating agency condition is received from Moody's.

Moody's has determined that the amendment will not cause any ratings to be reduced or withdrawn. However, it does not express an opinion as to whether the move could have other, non credit-related effects.

CLOs

CLO credit estimate conversion updated

Moody's is to begin using an updated conversion of credit estimates when communicating rating factors to EMEA CLO managers.

Under its current practice, Moody's gives a credit estimate to EMEA CLO managers using a rating factor in the low end of the range that corresponds with the credit estimate. It now plans to implement the new practice using a rating factor in the midpoint of the range, which is roughly equivalent to a half-notch change. The agency will apply this change to each credit estimate as it becomes due for reassessment, which is at a minimum on an annual basis.

This technical transition may result in an increase in manager reported weighted average rating factor values. The change is not expected to have any rating impact on EMEA CLOs, however, as they currently reflect rating factors in the midpoint of the range that corresponds with each credit estimate.

CMBS

NAIC names CMBS modeller

The National Association of Insurance Commissioners (NAIC) has selected Blackrock Solutions to assist state regulators as they determine risk-based capital (RBC) requirements for the CMBS held by insurers. As the third-party financial modeller, Blackrock Solutions will assist in the assessment of more than 7,000 CMBS holdings by US insurance companies at the end of 2010, measured in terms of unique CUSIPs. The firm will coordinate with NAIC to develop expected losses for each CMBS CUSIP, allowing insurance companies to map their CMBS holdings to the appropriate RBC designation and accompanying solvency requirements.

The selection of Blackrock Solutions followed a review of 16 bids received by the NAIC in response to a request for proposals in July (see SCI issue 196). The review was conducted by NAIC staff and independent financial consulting firm Oliver Wyman, using a process similar to last year's efforts that resulted in the selection of PIMCO as the third-party vendor chosen to assist in the RBC modelling of RMBS.

NAIC employed the same selection criteria used for that process to select a financial modeller for CMBS: sound methodology; ability to process a significant amount of data; policies and procedures in place to address potential conflicts of interest; and a cost-effective price.

"The RMBS assessment process was a very important and successful step in our analysis of expected losses and related risk-based capital requirements for the insurance industry in 2009," comments Jane Cline, NAIC president and West Virginia Insurance Commissioner. "Expanding this examination to CMBS holdings further enhances our analysis for another 43% of the structured securities owned by the insurance industry. These assessments continue to distinguish and supplement the stringent capital requirements of NAIC and state insurance regulators, which are based upon the expected losses and RBC for a particular company."

Blackrock Solutions will coordinate with insurance regulators to develop a set of price ranges for NAIC designations one through six. These will apply to year-end 2010 statutory financial statements and will determine the RBC charges for each applicable security.

With respect to RMBS designations for year-end 2010, the NAIC will continue its highly successful relationship with PIMCO. It will next concentrate on the development of macro-economic assumptions with which Blackrock Solutions and PIMCO develop their models.

CMBS

Industrial CMBS loan secured

Holliday Fenoglio Fowler (HFF) has arranged a US$114m financing for six industrial distribution facilities, totalling 4.7m square feet, located in Georgia, Illinois, Ohio, Pennsylvania and Texas. The loan, arranged for Cardinal Industrial Real Estate, will be included in an upcoming CMBS securitisation and serviced by HFF.

Loan proceeds were used to acquire the portfolio from Dividend Capital Trust, which acquired the assets as part of the iStar portfolio sale. This was closed by HFF Securities and financed by HFF.

HFF senior md Lloyd Minten says: "The entire process from the initial call from the borrower to the closing took only 31 days, which emphasised the commitment by the borrower and lender, who worked diligently to complete this transaction under significant time constraints. The lender's planned securitisation of this loan underscores the improvements in the capital markets through the re-emergence of the CMBS market."

With the acquisition, Cardinal increased its portfolio of single tenant industrial assets located throughout the US to approximately 13.4m square feet.

CMBS

Positive takeover outcome for FLTST 2

A potential fire sale of the properties backing the Fleet Street Finance Two CMBS transaction has been averted, following the approval of the Berggruen takeover of Karstadt by a court in Essen. The necessary rental concessions were approved by both the creditors to Highstreet, Karstadt's largest landlord, as well as by mezzanine lenders - thus bringing to an end the insolvency proceedings that have dominated the department store's outlook since June 2009.

Berggruen was the chosen bidder from three in June and has spent the time since negotiating a restructuring of the existing rental terms. The securitisation is now subject to another restructuring, including an additional reduction in rent by around 20%, as well as revisions to the LTV test. The ICR post-restructuring is expected to fall to around 1.5x, given the rent reductions, before increasing to in excess of 2x once the new cap agreement commences in July 2011.

European asset-backed analysts at RBS note that the avoidance of the fire sale is positive for all noteholders, particularly the junior bonds, considering Cushman & Wakefield's suggested property portfolio valuation of around €650m (less than the class A notes) under a liquidation scenario versus €1.41bn as a going concern.

Moody's nonetheless placed its Baa2 rating on review for the class A notes of Fleet Street Finance Two, pending the decision with respect to either an extension of the existing liquidity facility or a new liquidity facility or implementation of a liquidity reserve account for the extended term of the transaction. The rating remains sensitive to the actual final outcome of the insolvency proceedings in relation to Karstadt, if different to the agency's expectation of a going concern and stabilisation of the tenant.

CMBS

August US CMBS delinquency rate accelerates

The delinquency rate for commercial real estate loans in US CMBS accelerated in August after two successive months in which increases in the delinquency rate had moderated, according to Trepp's latest National CMBS Delinquency Report. The delinquency rate last month was up by 21bp after an increase of only 12bp in July.

However, Trepp points out that this increase is well below the average jump of 35bp per month over the previous 11 months (after backing out the Stuyvesant Town impact in March). The 21bp jump last month puts the overall delinquency rate at 8.92%.

The increase for seriously impaired loans saw a similar jump up to 20bp, with the number of loan modifications remaining elevated. This will continue to put some downward pressure on the delinquency number as troubled loans get resolved and move from the delinquency category, according to Trepp. REO loans that are liquidated will have a similar impact.

The average loss severity in 2010 for liquidated loans has been 45%. However, if the losses are backed out for loans where shortfalls have been 2% or less, that percentage jumps to 60%.

CMBS

BMF drafting errors corrected

Amendments have been proposed to correct a drafting error in the documentation for the Business Mortgage Finance No. 1 to No. 7 transactions. All classes of notes issued by these deals, except the MERC notes, will be subject to the amendments.

Each class of MERC notes features a regular coupon that is paid as long as it is outstanding, as well as a step-up coupon that becomes additionally payable from the step-up date if the notes are not called before then. The transactions also feature a detachable class A coupon, paid pari-passu to regular class A coupon payments as long as the class A is outstanding.

In each BMF issuer's pre-enforcement and post-enforcement waterfall, the step-up coupon is paid to the extent that there is sufficient available excess cashflow, after paying senior ranking claims. In the pre-enforcement waterfall of each BMF transaction, the interest revenue received from the underlying portfolio - after hedging payments - is applied towards (inter alia) providing for: issuer expenses, payments of the regular coupon for all classes of MERC notes, reduction of the principal deficiency ledger balances of all classes of MERC notes and replenishing the cash reserve fund to its target level. Amounts remaining after that are classed as excess spread.

However, as drafted in all seven transactions, the step-up coupon of the most senior class of MERC notes outstanding at any time is not deferrable. Therefore, in situations where the step-up date has passed and where there is insufficient excess spread to pay the most senior class outstanding's step-up coupon in full, a note event of default would be triggered. Moody's understands that the issuers and the trustee consider that this is a drafting error and hence they intend to amend the documents of all the affected BMF transactions.

Out of the seven BMF transactions, only BMF 1 has passed its step-up date - in April 2009 - with the remaining step-up dates ranging from November 2011 (BMF2) to August 2014 (BMF6). To date, BMF1 has been able to meet its step-up coupons through excess spread.

As per the last reporting date for the BMF transactions, the reserve funds of BMF 3 through 7 were below their target levels, meaning that those transactions would not have sufficient excess spread to pay any step-up coupons were the step-up date to occur today. Moody's understands that the BMF transactions will be amended such that non-payment of the step-up amounts will no longer result in a note event of default.

CMBS

Euro CMBS repayments remain 'flat'

Fitch reports that its European CMBS Maturity Repayment Index remained roughly flat at 37% over the month of August, although three of the four loans that matured during the month were repaid in full.

The repaid loans are the Phone France loan (securitised in the Taurus CMBS (Pan-Europe) 2006-3 deal), the Nuremberg loan (Quirinus (European Loan Conduit No. 23)) and the CPFM loan (European Property Capital 3). All three loans were relatively small-ticket, ranging from €5.9m to €31m, and had low to moderate Fitch LTVs of between 58% and 78%.

In the case of the CPFM loan, the repayment follows a failure to repay at its original maturity date in January 2009 and full cash sweep amortisation during the extended loan term that reduced the loan balance by 40%. The larger-ticket €115.1m Randstad loan failed to repay, with the servicer - Capita Asset Services - agreeing a standstill period until 18 October. The loan has a Fitch LTV of 89%.

Of the €4.4bn total balance of matured loans in the index, only €8m was recorded in amortisation and cash sweeps.

CMBS

Attractive Japanese property market boosts CMBS

Moody's indicates that, given the recent growth in property transactions in Japan this year, the resolution of specially serviced loans has accelerated. This, the agency says, may lead to lower expected losses in CMBS loans.

Moody svp Tetsuji Takenouchi says: "Investors are gradually returning to Japan's commercial real estate property market. In just the last month or so, Moody's has rated two new CMBS deals, both designed to fund property acquisitions."

An overheated Chinese property market and Japan's solid legal system and infrastructure have made the idea of investing in Japan more attractive, the agency states. Asian money has revitalised Japan's property investment market and may provide exit opportunities for current CMBS loan borrowers.

Since July 2010, 28 loans amounting to Y216.5bn have been resolved, for which Y200.5bn was recovered for a recovery rate of 93%. The number of defaulting loan liquidations has also been rising.

Except for a few distressed sales, most of these loans were transferred at par - in the hopes of a recap - which has in part contributed to the 93% recovery rate. However, such a high recovery rate may not hold, the agency notes, given the numerous unresolved loans under special servicing.

Additionally, Moody's reports that the average remaining tail period for 67 defaulted Japanese CMBS loans is 3.8 years, indicating that the remaining tail period for 60% of the defaulted loans is more than three years. The agency concludes that distributed tail periods will avoid concentrated property dispositions, or bulk sales, in a short period, thereby absorbing the negative fluctuations of both the real estate and finance markets.

Documentation

Tightening underwriting standards continue

The US Office of the Comptroller of the Currency (OCC) reports that the trend of tightening underwriting standards has continued for the last three years. However, it is beginning to see some easing of standards in response to competition and a slight improvement in credit market liquidity.

Credit and market risk deputy comptroller Dave Wilson says: "Credit performance remains a concern, despite several years of tightening. We are beginning to see some recent signs that standards may be loosening. That's good for credit markets, as long as bankers remember to stick to sound underwriting principals and do not compromise standards because of competitive pressures or the assumption that loans will be sold to third parties."

Despite tightened underwriting standards, examiners note that risk in both the commercial and retail portfolios increased for the third consecutive year, with portfolio risk expected to increase over the coming year. This increase was largely due to the combined effects of loans, previously underwritten with more liberal standards and coupled with continued economic weakness.

This year's survey also indicated that the majority of banks are using the same underwriting standards, regardless of whether they intend to hold or distribute credits.

The survey included 51 of the largest national banks and covered the 12-month period ending 31 March 2010. The aggregate total of loans was US$4trn, which represented over 93% of all outstanding loans in the US banking system.

Regulation

Qualitative Level 3 disclosure recommended

ISDA's Accounting Policy Committee has submitted comment letters to the IASB and FASB on the respective exposure drafts 'Measurement of Uncertainty Analysis Disclosure for Fair Value Measurement' and 'Amendments for Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs'. The association notes that the comments and the solutions proposed by its members to the two exposure drafts are almost identical.

ISDA's key messages within the comment letters include the fact that it recognises the need for financial institutions to provide users of financial statements with an adequate understanding of the measurement of uncertainties inherent in instruments categorised as Level 3 in the fair value hierarchy. The association further believes that the existing disclosure requirements achieve the right balance between providing the users of financial statements with information about uncertainty on Level 3 instruments without requiring disclosing a high volume of complex data, which in many cases is not observable and could lead to more subjectivity.

It is concerned that the proposed 'quantitative' disclosure of the effect of correlation would be extremely difficult to implement and highly judgmental, leading to a lack of comparability between institutions. Therefore, ISDA members believe that a 'qualitative' disclosure approach would be better.

Finally, ISDA says it is concerned with the term "correlation" as it is used in the IASB exposure draft, since it is not appropriate for this type of data and recommends that it is changed for a more suitable one, such us 'interdependency' or 'interconnections' between unobservable variables in the measurement analysis of Level 3 inputs.

RMBS

MBX index prepped

Markit is set to launch a new series of structured finance indices, dubbed MBX, on 12 September. The move is being driven by demand for combined exposure to the cashflows of its recently launched IOS and PO indices.

The MBX series of indices will reference the same fixed rate agency pools as the existing IOS and PO indices, with new sub-indices of MBX either preceding or following the introduction of IOS/PO indices corresponding to the same underlying reference pools. The transaction structure will mirror the total return swap model of the IOS and PO indices, and will have both 'interest payment' and 'principal payment' components payable by the short position.

Markit expects the standardised, combined exposure of the MBX index to provide a more accurate pricing point for the entire pass-through structure and reduce the independent amounts required for the same type of exposure through an IOS/PO combination. The index will initially comprise six sub-indices, one for each of the corresponding IOS and PO coupons: MBX.FN30.400.09, MBX.FN30.450.09, MBX.FN30.500.09, MBX.FN30.550.08, MBX.FN30.600.08 and MBX.FN30.650.67.

RMBS

GSE housing goals established

The Federal Housing Finance Agency (FHFA) has sent a final rule to the Federal Register establishing new housing goals for Fannie Mae and Freddie Mac for 2010-2011. The final rule establishes three single-family, owner-occupied home purchase mortgage goals for low-income families, very low-income families and families living in geographical areas with lower-income populations, areas with high concentrations of minority residents and federally-declared disaster areas.

The home purchase and refinance goals are expressed as minimum goal-qualifying mortgage shares of home purchase or refinance mortgages acquired by the GSEs. The final rule sets a prospective or benchmark measure, as well as a retrospective market-based measure to assess each enterprise's performance relative to the actual goals-qualifying share of the primary mortgage market.

The final rule also prohibits housing goals credit for purchases of mortgages in private-label securities, including CMBS.

FHFA stresses that it doesn't intend for the enterprises to undertake economically adverse or high-risk activities in support of the goals, nor does it intend for their state of conservatorship to be a justification for withdrawing support from these market segments.

RMBS

More REO sales coming

Moody's Analytics' chief economist Mark Zandi said that more real estate-owned (REO) sales are on the rise, during a speech this week at a Federal Reserve US Housing Market and Neighborhoods forum. About 4.1 million first mortgage loans are in foreclosure or are clearly headed in that direction, he noted. Their data includes 49 millon first mortgage loans outstanding.

But the number of REO in loans of securitised pools, such as subprime and Alt-A loans, is declining. By late 2008, 400,000 of REO property were in securitised pools and this is now down to 200,000.

However, the REO from GSEs, such as Fannie Mae and Freddie Mac, is now rising. Thus, the total is now beginning to increase, Zandi commented.

"We will continue to see REO inventory continue to rise as we make our way through the remainder of this year into 2011," he said. "This implies further house price declines. We're not done."

The number of non-distressed home sales has fallen on the back of the tax credit, Zandi added. However, the share of home sales that are distressed is beginning to rise.

RMBS

'Surprises' reported in FNMA prepayments

MBS analysts at Bank of America Merrill Lynch point to a number of surprises in the latest fixed rate 30-year Fannie Mae prepayment report.

First, aggregate prepayments increased by 27% from 18.5% CPR to 23.6% CPR. "This jump is surprising, given that it implies a 35%-40% increase in refinancings, while recent month-over-month changes in the MBA refi index did not exceed 25% in the last two months," the BAML analysts note.

The second surprise is that prepayments in lower coupon, high credit, low LTV new production 4.5s were faster than expected. The analysts suggest that this speed increase can be explained by shorter refi lags for new collateral.

Third, seasoned collateral (2002-2004 originations) came in faster than expectations across the coupon stack. "We believe that longer refi lags for seasoned collateral explains the jump. 15-year speeds were also up 27% from 16.8% CPR to 21.4% CPR," the analysts add.

Meanwhile, aggregate Freddie Mac speeds were up 32% from 19.7% CPR to 26% CPR. "We believe that in addition to better loan characteristics, like higher FICO and lower LTV, servicer concentration differences between Fannie and Freddie account for the speed difference. In addition, faster speeds for 2009 and 2010 Freddie collateral can be explained by differences in streamline refinance programmes offered by Fannie and Freddie," the analysts continue. 15-year speeds were also up 32% from 16.8% CPR to 22.2% CPR.

The analysts expect aggregate 30-year speeds to increase in September by 10% due to the higher refi index, but tempered by the lower day count (one less business day) and turnover seasonal impact.

RMBS

Aussie RMBS delinquencies stable in Q2

The ability of Australian borrowers to pay down their mortgages - as measured by delinquency rates - stabilised in Q210, according to Moody's.

Prime mortgage delinquencies greater than 30 days held steady at 1.39%, compared to 1.34% in Q110. Non-conforming mortgage delinquencies greater than 30 days rose to 13.74% in June from 13.02% in March.

Arthur Karabatsos, Moody's analyst in Sydney, says: "Borrowers in outer south-western Sydney and Fairfield-Liverpool are experiencing greater payment difficulties in comparison to those in other regions. These two regions feature the highest proportion of mortgage delinquencies, with 2.5% to 3% of loans falling into arrears of 30+ days past due."

He adds: "If current official interest rates hold, however, we don't expect significant pressure on delinquency levels. If they were to increase beyond these 'neutral' levels - that is, neither stimulating nor constraining the economy - delinquencies may rise, although we don't expect to witness the 1.63% seen in January 2009. We expect rating performance of the RMBS sector to be stable."

SIVs

SIV amends restricted operations triggers

Nightingale Finance is proposing to amend and restate the operating manual between the investment manager and the administrator. The amendment will remove certain liquidity triggers and consequences of the SIV's current operating status, restricted operations, as well as that of restricted funding.

Among other things, the amendment removes restrictions on investment and payment to the capital noteholders while in restricted operations. The issuer is still prevented from issuing any further senior debt, other than rolling the current outstanding obligations, however.

Moody's has determined that the proposed changes will not cause the current ratings of the notes issued by the SIV to be adversely qualified, reduced, suspended or withdrawn.