Contents

Regulation

Retention risk

Article 122a leaves investors in quandary

The window for commenting on Article 122a of the Capital Requirements Directive (CRD) is closing quickly, but before the 1 October deadline lots of questions remain over the retention rules. The guidelines for new securitisations formally go into effect on 1 January 2011, while existing securitisations that have new exposures will have to comply by 1 January 2014.

If an EU investor - mainly a European bank - wants to invest in a securitisation, it has to be able to show it has met some due diligence requirements under the Directive. This means checking whether the originator or sponsor has retained a 5% net interest in the transaction. But since the new requirements are essentially the opposite of Dodd-Frank in the US, where the onus is on the originators, European banks that have US operations are in the throes of both initiatives.

"If you have any inkling at all that you want to be securitising in the New Year (and we are seeing signs that originators are starting to do so), you need to get all your ducks in a row before that," says Leonard Ng, partner at Sidley Austin. "To the extent your deal touches any kind of EU bank investor, you are effectively drawn into the whole regime."

The 122a guidelines (see SCI issue 193) were designed to give more clarity and transparency to a market that is still suffering under some dark clouds. But for some, it has also raised a lot more complications. With member states having different retention requirements, it does not make it easier to sell to a broad investor base.

Germany, for example, has a 10% risk retention requirement. Market participants expect other jurisdictions could also raise their retention risk since the 5% requirement is a minimum.

"122a was put together somewhat in a hurry," says one structured finance lawyer. "The guidance that industry participants are looking at now and looking to comment on is helpful in clarifying some questions, but there are still concerns in some areas about how the retention rules will be applied."

One uncertainty is how the retention requirements pertain to CLOs. This is particularly the case where the sponsor is putting together a package of loans to securitise a CLO and there is no originator as such who can be counted on to retain 5% of the exposure or 5% of the loans.

"It's just a package of loans created in an SPV. There are still discussions going on about how those transactions should comply," the lawyer says.

Indeed, if CDO managers end up having to own 5% of the proposal amount of their deals - both existing and new - on either a vertical or aggregate basis, only the largest managers or banks may be able to issue transactions going forward. Intermediate Capital Managers appears to be one such manager: the firm recently closed its ICG EOS Loan Fund I, the equity of which was placed with other ICG funds (SCI passim).

Another area that needs more clarity is how the rules relate to ABCP conduits. As the guidelines stand now, they make sense in the context of term securitisations as opposed to an ABCP conduit transaction.

"Retention can be done by an originator or sponsor, but it doesn't have to be both," notes the structured finance lawyer. "In many transactions going into ABCP conduits, normally the originator does retain a first loss piece. Normally, it's more than 5% of the transaction."

He adds: "It may not be written into the contract that it always has to be 5%. That might have to be changed in the contracts going forward."

For now, hedge funds and other managers are spared having to comply with Article 122a. But eventually they will also have to adhere to the rules under the Alternative Investment Fund Managers Directive, which should be agreed on in the coming weeks.

"Hedge funds will also have to show their regulators that they have carried out all the due diligence on securitisations. We don't know to what extent, but those managers will certainly require the 5% retention requirement of originators," says Ng.

Non-bank corporations that fund through the securitisation markets were not included in the few exemptions from the 5% retention requirement cited by the Amended CRD. Syndicated loans, purchased receivables and CDS that are not used as hedges for securitisations are among the exemptions.

Large financial institutions are indeed more aware of the coming adherence to Article 122a, but even for them it is taking time to filter down. "Business units of large financial institutions are starting to realise this is a big issue...but smaller institutional investors, such as the smaller regional banks, may not have the resources to develop the required systems and controls in order to demonstrate compliance," notes Ng.

One thing is certain: those originators that are attuned to the EU requirements will have a distinct advantage over other originators who are ignoring the initiative for now. Investors will either end up wanting the deals to be fully compliant or they will want a huge upside in pricing to compensate for potential regulatory risk, according to Ng.

"What it means is the EU investor is not going to invest in a US deal if the US deal is deficient in any way in terms of its originator risk retention or in its disclosure," he concludes.

KFH

CMBS

Euro CMBS refinancing pressure mounts

The necessary quorum of noteholders has voted in favour of the restructuring proposals for Titan 2006-4FS, staving off a loan event of default coinciding with the 3 September maturity. Indeed, only a handful of European CMBS loans maturing this month and next are expected to be repaid successfully.

The Titan restructuring further extends the loan by two years and the deal legal final by one year, in return for margin step-ups with a requirement for the borrower to delever by £100m by January 2012 (SCI passim). European asset-backed analysts at RBS note that the restructuring highlights how the balance of control in certain single-borrower, op-co based securitisations ends up being more equal between borrower and noteholder. They suggest that this is because the creditors' right to enforce threatens to be an uncertain process, making restructuring seem a more palatable alternative.

S&P recently warned that the ratings of the Titan bonds may be negatively affected by the restructuring, mainly given the compression of the tail period and the corresponding squeeze in any potential workout timing. But the RBS analysts believe that the bond's current indicative distressed-like prices undervalue the likely inherent going-concern value of the nursing home operator, which they see as being a more likely security backstop for the notes rather than the underlying assets.

Other European CMBS loans due to mature this month include the Hofplein loan in Plato No.1, the Castor & Pollux loan in White Tower 2007-1 and 'Loan 4' in NEMUS Funding No. 1. The Hofplein and Loan 4 loans are anticipated to repay on their maturity date, but the Castor & Pollux loan defaulted at the end of 2009 following an LTV/LTC covenant breach due to a revaluation. The borrower has requested a two-year extension of the loan, which is expected to be granted.

ABS analysts at Barclays Capital point out that, at €1.15bn, the CMBS refinancing exposure in October is larger and concentrated in the second half of the month. It is dominated by several large loans that have a current whole loan balance of more than 100m in their respective currency.

The BarCap analysts note that some loans and transaction to watch include the €54.5m Steigenberger loan (accounting for 15.6% of Titan Europe 2006-1), two Swiss loans amounting to 30% of Taurus CMBS (Pan-Europe) 2006-3 (the SFr92.6m Trafalgar and SFr19.8m Vich Brig loans) and two loans representing 22% of the Perseus (EloC 22) transaction (the £106m Columbus Court and £50.2m Major Belle loans). They believe that out of the loans maturing this month and next, only a minority will be repaid successfully.

"Above-average scheduled repayment prospects have, in our view, the two Swiss loans mentioned above and some of the small loans maturing in October 2010. We estimate that of the 24 loans with scheduled maturity next month, 16 (€1.02bn) will still be outstanding in November and beyond," the analysts conclude.

CS

CMBS

Resurgent CRE market aids Japanese CMBS

Investors are beginning to return to Japan's commercial real estate property market, according to Moody's in its latest Weekly Credit Outlook. The agency cites the purchase of four office properties by a Morgan Stanley SPV last week as an example. It says the resolution of specially serviced loans through property and loan sales of properties has increased throughout the year, leading to lower CMBS losses, particularly for junior classes.

The property acquisition market has been active as many Asian investors, such as Singaporean REITs Mapletree Logistics Trust and Parkway Life, bought properties from Japanese borrowers looking to pay down their CMBS loans. Moody's says the investors were attracted by Japan's legal system and infrastructure, as well as overheated conditions in the Chinese market.

Lenders are becoming more willing to lend against properties as they see this renewed activity. More buyers entering the property market means sales accelerate debt payments, which in turn provides funds to extend new loans, Moody's explains.

The agency has rated four Japanese CMBS deals so far this year, all of which were acquisition finance deals, amounting to Y70bn in debt. Despite also rating four deals last year, the agency says those were mostly refinance deals. The new deals are seen as a sign of recovery.

Another positive omen is that the number of defaulting loans under special servicing has declined - if only slightly - from 70 at the end of April to 68 at the end of August. Seven loans defaulted and entered special servicing over the last three months, during which time special servicers resolved nine loans. In the three months previously, 24 loans defaulted and entered special servicing while only six specially serviced loans were resolved.

The agency says servicers have recovered Y200.5bn of Y216.5bn, or 93%, on 28 loans since July. There were a few distressed sales, but generally the trustees transferred most of these loans to the subordinated loan lenders at par, resulting in 100% recoveries to the CMBS trusts.

The sub-loan lenders plan to take over, re-leverage and gradually liquidate the properties. Servicers have been selling underlying properties, but Moody's notes there has not been a fire sale.

Equally, payment performance remains strong, with steady cashflows of pool properties helping support CMBS performance.

JL

RMBS

GSE reform debate continues

The Mortgage Bankers Association (MBA) last week filed a comment letter with the Federal Housing Finance Agency (FHFA) regarding the Agency's proposal to establish a framework for conservatorship and receivership operations for Fannie Mae, Freddie Mac and the Federal Home Loan Banks. The move was swiftly followed by the Agency releasing data comparing the performance of loans acquired by the GSEs relative to loans financed with private-label MBS.

The MBA says it has three primary concerns regarding the FHFA's proposal, the first of which is that it appears overly theoretical in its approach. For example, it speaks in generalities about what the FHFA would do in resolving claims among competing claimants.

In the current situation with respect to the conservatorship of Fannie and Freddie, the claimants on their assets are known now. MBA suggests that the FHFA revise the proposal to include as much specificity as possible, such as identifying how the Agency will deal with each specific class if the firms are put into receivership.

Second, the proposal sheds no light on what would ultimately trigger placing the GSEs into receivership. Fannie and Freddie have already moved well beyond the point where any other financial institution would have been put into receivership, the MBA notes. The FHFA should thus state clearly the degree to which the continued operation of the firms under an FHFA conservatorship benefits existing shareholders and/or increases costs to taxpayers and whether accelerating the timetable for putting the firms into receivership would reduce taxpayer expense.

Finally, the FHFA should specify its goals in receivership. For example, the FDIC follows a receivership policy of least-cost resolution, in which the failed institution is sold whole or piecemeal. MBA believes the FHFA should articulate its own receivership policy, such as whether it will follow a least-cost model or a different strategy, whereby the direct return to the taxpayers might be lower but the overall benefit would come in using the assets of the GSEs to promote the development of a new, competitive secondary market structure.

The MBA stresses that its comments are not meant to promote any specific course of action for the FHFA; rather, they are meant to illustrate the types of issues its needs to address as openly and quickly as possible, so that market participants understand what could potentially change in the near future. "Past operating practices and norms do not provide an adequate guide for two reasons," the association explains. "First, this is a unique situation with little historical precedent. Second, nearly every action FHFA and the enterprises take would have a financial impact on counterparties and different creditors."

Meanwhile, the FHFA says the data release is aimed at informing the current discussion on the future of the country's housing finance system. As well as comparing the credit quality and performance of the loans the GSEs acquired relative to loans financed with private-label MBS, it documents the differences in single-family conventional mortgages acquired by the enterprises versus those financed through the issuance of private-label MBS during the recent mortgage lending and house price boom and the ensuing bust.

Credit score data shows that 84% of single-family mortgages acquired by the enterprises during 2001 to 2008 were made to borrowers with FICO credit scores above 660, while 5% were made to borrowers with FICO scores below 620. In contrast, 47% of mortgages financed with private-label MBS originated during this period were made to borrowers with FICO scores above 660, while 32% were made to borrowers with FICO scores lower than 620.

Further, 82% of enterprise-acquired loans had LTV ratios at origination of 80% or less, while two-thirds of mortgages financed with private-label MBS had LTV ratios at or below 80%, with that share increasing from 54% of 2001 originations to 81% of 2008 originations. The pattern of decreasing LTV ratios over time, most pronounced for loans financed with private-label MBS, is consistent with the greater use of second liens to avoid mortgage insurance on low down-payment mortgages.

Loan payment types show that 88% of enterprise-acquired mortgages were fixed-rate loans originated between 2001 and 2008 and ranged from 79% for 2004 originations to 96% for 2001 originations. Mortgages financed with private-label MBS were predominantly adjustable-rate loans. These loans comprised 70% of mortgages financed with private-label MBS originated between 2001 and 2008 and ranged from 53% of 2008 originations to 75% of 2004 originations.

The FHFA's data suggests that, in terms of overall performance, roughly 5% of enterprise-acquired, fixed-rate mortgages and 10% of enterprise-acquired ARMs were over 90 days delinquent at some point before the end of 2009. However, roughly 20% of fixed-rate mortgages and 30% of ARMs financed with private-label MBS were over 90-days delinquent at some point before year-end 2009.

CS & LB

CDS

Emerging opportunities

David Hinman, cio, and Raymond Zucaro, managing principal at SW Asset Management, answer SCI's questions

Q: How and when did your company become involved in structured finance?
DH: We were involved in structured credit at Drake, but now the firm has gone away, so these days we have our own firm and our mandate is pretty broad. We have a small and focused firm, which is essentially a long-short credit hedge fund.

We can do pretty much anything in this format. We could buy structured credit assets, we could short structured credit assets and we could do them synthetically. To date we have not done much in that space because we have found better value in straight bonds and single-name CDS.

We would like to get more involved, but it depends on what is going on in the market. Our focus is more on corporate bonds outside of the G7 - we think that is a David Hinman                                              big growth area.

Eventually the structured credit innovations that you have seen in the US and Western Europe will be taken up in the emerging market credit space. This will not be to the same extent as when the structured credit market was on steroids between 2003 and 2006, but there will be elements of structured finance being incorporated.

That has already started to happen. There have been a couple of bespoke CDOs done on a cash basis and we think there will be more in the future. We are interested in those mandates, perhaps structuring one and managing one. At the moment the space is fairly small and illiquid, but we want to entertain any and all options.

Q: In your view, what has been the most significant development in the credit markets in recent years?
DH: The synthesising and indexation of credit was huge. We run a long-short credit hedge fund and it really was not possible 10 or 15 years ago to run the kind of fund we do now.

To get short a decade ago primarily required waiting to borrow and short single-name cash bonds. There were not indices, there was not much synthetic credit, there were not many options or swaptions, but now those innovations allow for a much broader mandate.

To manage credit assets 10 years ago, the investor had to make the decision to be long cash bonds, long interest rate risk and long credit spread duration. But now you do not necessarily have to assume those risks.

That was then. The most significant development going on right now in the credit markets that people will be talking about in three years is emerging market corporate bonds. People talk about sovereigns, which gets all the press, but corporate bonds in emerging markets are growing very rapidly, are underrated relative to their developed market counterparts and are under-researched and under-followed.

In 2013 people will be talking about this rapid growth. The emerging market corporate market is very fragmented; there are not many indices, there are not many dedicated mandates. Yet emerging market corporate performance trounced emerging market equities over any meaningful time period.

Q: What are your key areas of focus today?
DH: We tend to be long on the emerging corporate world and short the developed world. We use warrants, convertibles, CDS, indices and cash bonds. We would certainly look at bespoke CDOs and trading tranches on Raymond Zucaro                                         indices.

In 2008 we hedged our emerging market corporate credit risk by shorting mezzanine indices in US high yield, which worked out quite well. The convergence of non-credit participants getting involved in the credit space in 2006/2007, with the correlation desks and all these techniques for modelling credit away from individual credit research, just set up for a fantastic short.

Emerging market corporates are simpler. The world is going back to simple.

Companies do not have complex capital structures, private equity is not involved much and bonds tend to be issued out of an operating company. Hold your hat and get ready for this, but the proceeds from emerging market corporates actually go to the companies themselves.

It reminds me of credit in the early 1990s or late 1980s. I think we will see more CDS and more CDOs going forward in the emerging credit space and we are certainly set up to capitalise on those.

Q: What major developments do you need/expect from the market in the future?
RZ: For the area we focus on, we think there will be more products on the structured products side, where we could do a long-short emerging markets fund. In the future we think there will be more of a selection of securities on the structured side. The best thing you see in a structured product today is sovereign CDS, but that does not quite capture the risk in our view.

DH: The market ebbs and flows. Sometimes it is a tidal wave, as we saw in 2008. Participants were getting yield in 2006/2007 by leverage - whether it was via a principal protected note or mezzanine, all the different terms were still leverage - and now the market seems comfortable getting yield by taking duration risk.

Rates are very low and investors are taking a lot of risk. Looking beyond leverage risk or US credit risk, there is a healthy income out there in the emerging market credit space. We can combine some of the elements of the past and do a longer-life vehicle with a greater duration, use some leverage through tranching technology in the form of a CDO and put our emerging market corporate credit research hats on and put something together.

We know of two emerging market corporate CDOs that have been done. There have been plenty of sovereign ones. We think this could be something we are doing in the next couple of years as the market prints emerging market corporate CDOs.

JL

ABS

Trio joins fixed income team

Insight Investment has strengthened its fixed income business with the appointment of three new hires - Jeremy Deacon, Azhar Hussain and Joseph Hazelwood.

Deacon joins as structured credit analyst, reporting to structured credit portfolio manager, Shaheer Guirguis. With almost ten years of ABS experience, he was most recently at CQS Management as ABS analyst to its specialist ABS hedge fund.

Hussain joins the firm as head of high yield and leveraged finance, reporting to Alex Veroude, head of credit. Prior to this, he spent nine years at Gulf International Bank, where he was head of corporate debt.

Finally, Hazelwood has been named fixed income dealer and was previously at F&C Asset Management, where he held a similar role.

ABS

ABS trio finds new home

Kramer Levin Naftalis & Frankel has expanded its banking and finance group with the appointment of three new partners - Gilbert Liu, Laurence Pettit and Richard Rudder. Prior to joining the firm, the three ABS specialist lawyers practiced at Baker & McKenzie.

Liu represents issuers, underwriters, borrowers, lenders and service providers on private and public securitisation transactions involving CRE assets, timeshare loans, auto loans and intellectual property. Prior to joining the firm, he was head of the New York office's banking, finance and major projects practice group and co-chair of the pro bono committee.

Pettit regularly advises issuers and financial advisors on structured finance transactions involving a wide range of jurisdictions and asset classes. He also represents clients in debt capital markets transactions, which in recent years have included tier two capital notes for bank issuers, extendible liquidity notes, commercial paper and medium-term notes.

Rudder represents major commercial and investment banks, issuers, investors, trustees and bond insurers in public and private financings involving esoteric assets. He has acted as deal counsel in the closing of transactions, including the first commercial mortgage loan conduit transactions and many of the first mergers and acquisitions transactions to employ securitisation as the principal financing technique.

ABS

Partner pairing moves to LA law firm

Winston & Strawn has expanded its M&A, securities, private equity and finance capabilities with the addition of James Levin and Warren Loui as partners. The pair will join the firm's Los Angeles office.

Loui was most recently at Mayer Brown, where he was partner in its banking and finance department. His representation of lenders and issuers includes acquisition financings of up to US$3.7bn and securitisations in transactions valued up to US$6bn.

Levin joins Winston from O'Melveny & Myers, where he was partner in and former co-chair of the firm's M&A/private equity practices. He has represented numerous Fortune 500 and private companies in their acquisitions and business dispositions.

ABS

Law firm promotes partner

Matthew Kellett has been appointed departmental managing partner of Berwin Leighton Paisner's finance department. He succeeds Simon Allan and, as part of this move, will also take on the role of practice group head of the firm's banking and capital markets group.

Kellett joined BLP in April 2010 to develop its structured finance capability. He was previously a partner in the banking group at Linklaters and more recently headed up the financial structuring group at RBS for five years. Kellett will continue to pursue his structured finance brief in combination with his new management roles.

His appointment follows developments in BLP's international strategy and the move of Allan into a broader role as part of the central management team.

ABS

EU CRA application confirmed

S&P confirms that it has filed its application for registration under the EU's new credit rating agencies regulation. Rating agencies that wished to be registered had to have adopted the necessary measures to comply with the regulation and submitted their application for registration by 7 September.

S&P says it has already had in place policies and procedures designed to protect the integrity and independence of the ratings process and effectively manage conflicts of interest. But, as a result of the new EU regulation and the global nature of ratings and the capital markets, it has been adopting additional policies and procedures and expect that they will apply globally where appropriate and subject to local law.

The EU regime incorporates standards and principles that have been recognised by IOSCO's Code of Conduct Fundamentals for Credit Rating Agencies (SCI passim). It additionally provides for increased transparency and disclosure by registered CRAs and oversight and inspections by local securities markets supervisors.

The principal provisions of the EU regulation include: analyst rotation; a minimum 12-hour pre-publication notice to issuers for factual review; the prohibition of CRA employees accepting gifts or favours; endorsement of ratings from non-EU offices; look-back reviews of analysts that leave; ratings business separation; rating performance data; securities disclosure; structured finance disclosure; and the addition of a structured finance identifier.

CDS

Firms collaborate to launch credit fund

GAM has launched its first market-neutral credit fund with credit manager DCI. GAM Star Diversified Market Neutral Credit aims to produce absolute returns with low correlation to fixed income markets.

The fund invests in a highly diversified long and short portfolio of mispriced, predominately investment grade credit. The strategy represents a unique offering in the growing UCITS III universe, according to GAM.

DCI will use quantitative systems to determine corporate default probabilities and to accurately value corporate credit instruments. It will then construct carefully risk-matched and diversified long and short portfolios to exploit the revealed mispricings.

DCI managing partner and cio, Stephen Kealhofer, comments: "There is different information in equity and credit prices. We capture and interpret an extremely broad set of information from both equity and credit markets, so that we can determine credit risks accurately and frequently. We use this information to identify and exploit mispricings in the market."

The team seeks to minimise the portfolios' sensitivity to aggregate credit market moves. This market-neutral style aims to minimise the impact on the portfolio if overall credit market spreads change. As a result, the fund seeks to produce returns that have a low correlation to overall fixed income and equity markets, as well as low volatility in general.

CDS

Broker expands EM fixed income group

BTIG has expanded its global fixed income group to include a London-based team focused on emerging markets. The team - which includes Russell Scott, Cornelia Colonius and Alpesh Lad - will be led locally by Darren Reiss, md and head of the emerging markets fixed income sales team in London. They will report to Alex May, the firm's global head of emerging markets.

Reiss joins from Knight Libertas, where he was director on the institutional fixed income sales desk. Prior to this, he was director of HSBC in the emerging markets sales team and started his career at Hambros Bank, trading investment grade credit.

Scott has been named md and head of CEEMEA trading. He was most recently executive director in the emerging market trading team at UBS. He also held roles at HSBC, trading emerging market fixed income and credit derivatives.

Lad brings 15 years of experience in emerging markets corporates, sovereigns and structured products. He was most recently executive director of emerging markets structuring and distribution at UBS.

Finally, Colonius brings nine years of experience in emerging markets on both the buy- and sell-side. Her last role was director of HSBC in the emerging markets sales team covering European pension and hedge funds.

Jon Bass, BTIG's head of global fixed income, comments: "As emerging markets bonds have continued to see steady inflows in recent months and are expected to perform well over the coming months, we wanted to ensure our European-based clients had access to a local sales and trading team with the experience needed to navigate these markets."

CDS

New role for structured products veteran

Mitch Braselton has joined Deutsche Bank as md in its institutional client group, debt department, in North America. Based in New York, he will report to Stefan Hoops, the firm's head of structured product sales for the region.

Braselton was previously at Garrison Investment Group, where he was md, focusing on business development for financial institutions. Prior to this, he spent four years at Morgan Stanley as co-head of structured credit sales in North America and six years with Bank of America as head of structured product distribution for Europe.

CLOs

DBRS re-opens London office

DBRS has re-opened its European office. Simon Ross, svp, is now working permanently from London for the rating agency's structured credit team. The team is led by md Jerry van Koolbergen in New York.

The move follows the publication of an additional RFC on DBRS' core European rating methodologies - that for SME CLOs (see also SCI issue 198). Market participants are encouraged to review and contact the agency with any comments before 30 September.

CLOs

Euro CLO trading head hired

Alan Packman has joined UBS as an executive director and head of European CLO trading. He was previously an md at Aladdin Capital Management, where he traded all ABS asset classes.

CLOs

Collateral management duties re-assigned

Princeton Advisory Group is set to assign its asset management duties for Rosedale CLO II to JMP Credit Advisors. All requisite consents and approvals will be received and conditions to closing will be satisfied under the assignment.

Moody's has determined that the assignment will not cause the current rating of any class of notes to be withdrawn, reduced or qualified.

CMBS

Advisory practice names CRE md

Michael Zanolli has joined Alvarez & Marsal Real Estate Advisory Services as md. Working across both the New York and Philadelphia offices, he will focus on real estate structured finance and investments, including CMBS, CRE CDOs, proprietary trading and workouts.

With more than 20 years of experience, Zanolli was the founder of Wallingford Capital Management, where he advised creditors and debtors on complex debt restructurings and workouts of CRE debt. Previously, he was head of real estate investing at an alternative investment manager.

CMBS

CRE executive director appointed

Chuck Lee has joined JPMorgan's commercial real estate securities and capital markets platform as executive director. Lee will spearhead the bank's advisory line of business with the FDIC, Freddie Mac and Fannie Mae, as well as other institutions. He will report to Jonathan Strain, debt capital markets director in the firm's CMBS division.

CMBS

CMBS vet moves on

Romano Paredes has joined UBS in its debt capital markets group. He will work in the real estate area and reports to Mark Graham, the bank's head of EMEA securitised products.

Paredes was the former head of European CMBS at Morgan Stanley.

CMBS

Real estate director recruited

Robert Baskeyfield has joined European Risk Capital as executive director in its real estate group. His primary focus will be on arranging commercial and residential property finance transactions, including structured debt and hybrid equity placements.

Baskeyfield was formerly responsible for origination in KBC's London real estate group. Prior to this, he spent nearly a decade in the German real estate sector at Deutsche Hyp in London.

Investors

New name and focus for QWIL

A Queen's Walk Investment Limited extraordinary general meeting convened today (15 September) has approved a change of focus and name for the company, as well as approving the distribution of shares.

Shareholders have agreed to amend the company's investment policy to allow investment in Western European real estate debt, including RMBS and CMBS. Queen's Walk announced this was its intention last month (see SCI issue 197) and it says it will try to take advantage of dislocation in the MBS markets.

It was also agreed to change the company's name to Real Estate Credit Investments Limited. This will come into effect as soon as the Guernsey Registry has granted the application for the name change.

The Queen's Walk board of directors has also announced the resolutions proposed at the EGM to offer new ordinary shares and bonus issue preference shares were passed. New ordinary shares were priced at €2 per share.

Application has been made for the 13,322,328 new ordinary shares to be admitted to trading on the London Stock Exchange. Dealings are expected to commence on 16 September. Application has also been made for up to 49,958,731 preference shares, with dealings expected to commence on 17 September.

Queen's Walk chairman, Tom Chandos, says: "We are very pleased with the take-up we have seen for this capital raising both from new and existing shareholders, which - together with the passing of the resolutions at today's EGM - demonstrates the strength of support for the company's revised investment strategy. The company will seek to utilise the proceeds of the fundraising to exploit opportunities in real estate credit investments using the expertise and knowledge of its investment manager, Cheyne Capital Management."

Investors

Promotions for fund management pair

Third Avenue Management has promoted Jason Wolf to co-manager of the Third Avenue Real Estate Value Fund and Thomas Lapointe to co-manager of the Third Avenue Focused Credit Fund.

Wolf will share responsibility for managing the US$1.6bn fund with veteran Third Avenue manager Michael Winer. Wolf joined the firm as senior research analyst in April 2004 and has served as co-manager of the Third Avenue Real Estate Opportunities Fund, Third Avenue Real Estate Value Fund (UCITS) and Manulife Global Real Estate Fund. Prior to joining the firm, he was an equity analyst at European Investors, responsible for the research and analysis of US REITs.

Lapointe will share responsibility for managing the US$900m mutual fund with Jeffrey Gary. Lapointe joined Third Avenue Management in June 2009, along with Gary, and the pair has worked in tandem since that time building out the credit team and launching the Third Avenue Focused Credit Fund. With more than 18 years of investment experience, he was previously co-head of high yield investments for Columbia Management.

Investors

Promotion for fixed income investment officer

Munder Capital Management has promoted co-cio, Edward Goard, to cio of its fixed income group. He will focus on overseeing the firm's fixed income strategy, portfolio management, research and trading.

With over 16 years of fixed income investment experience, Goard joined the firm in 2007. Prior to this, he was principal senior portfolio manager and head of interest rate and mortgage strategy at Barclays Global Investors.

Real Estate

Second CRE fund announced

LRG Capital Real Estate Partners has announced that its LRG Capital Real Estate Partners I Fund is now closed to new investors. The fund, which was targeted at high net-worth investors in the San Francisco Bay area, closed with all equity raised after the onset of the September 2008 financial crisis. The portfolio is comprised of eight quality office, mixed-use and multifamily properties.

LRG Capital will be moving forward with a second fund - the LRG Capital Real Estate Partners Fund II. The fund will focus on the San Francisco Bay area commercial market and will be directed at institutional investors.

"LRG Real Estate Partners II Fund will mirror the successful strategy employed for our prior fund," says Larry Goldfarb, LRG Capital's ceo. "We will continue to seek investments in which we add value though a direct operating platform and various other strategies."

Real Estate

Real estate advisory acquisition ahead

Macquarie Group has entered into an agreement to acquire 100% of the membership interests in Presidio Partners, a US-based real estate private capital raising and advisory firm. The transaction is expected to close in the fourth quarter.

Presidio's presence in the US and Europe, in combination with Macquarie's position in Asia Pacific, will create a global real estate private capital markets platform. The combined platform will have a 19-person private capital team that has raised a combined US$30bn for private real estate transactions from 390 institutions in Europe, North America, the Middle East and Asia Pacific since 2003.

The private capital team will be supported by Macquarie's broader real estate advisory, equities and debt capital markets business. The acquisition also follows the appointment of a six person CMBS team in the US.

Desi Co, partner of Presidio, says: "Macquarie will assist with proprietary and third-party overseas capital for potential US investment opportunities, providing its full resources to our industry. We will work together to provide our key institutional relationships with globally accessed club and direct investment opportunities."

Regulation

GSI fined over Abacus reporting obligations

The UK FSA has fined Goldman Sachs International (GSI) £17.5m for breaching FSA Principles. The fine relates to GSI's failure to ensure that it had in place adequate systems and controls to enable it to comply with its UK regulatory reporting obligations. This resulted in a failure to notify the FSA of matters relating to the US SEC investigation into the Abacus 2007-AC1 synthetic CDO (SCI passim).

The transaction was structured by GSI's US affiliate, Goldman Sachs & Co (GSC), and marketed (in part) by GSI from the UK to institutional investors. Fabrice Tourre was, while at GSC, part of the team that structured Abacus. Later, Tourre transferred to GSI in London and became an FSA approved person in November 2008.

As an FSA authorised firm, GSI has obligations to disclose relevant information to the authority. GSI's systems for compliance with those obligations were inadequate to ensure that other group members would bring to its attention relevant matters that might have an impact on GSI in the UK.

Specifically, in August 2008, the SEC began making enquiries of GSC regarding Abacus. Over the next year the Commission obtained documents and witness evidence about Abacus from GSC and from GSI London-based personnel. Despite the involvement of GSI in the marketing of Abacus and the involvement of UK approved people in the SEC investigation, no-one at GSC or GSI considered the potential regulatory implications of the SEC investigation for GSI.

In breach of FSA Principles 2 and 3, GSI did not have effective systems and controls in place to ensure that relevant information about the SEC investigation was shared between GSC and the people within GSI that needed to know about it. In particular, GSI did not have effective procedures in place to ensure that its compliance department was made aware of the SEC investigation so that it could consider whether any notifications needed to be made to the FSA in compliance with GSI's regulatory reporting obligations.

Following its investigation, the SEC issued Wells Notices to GSC and Tourre containing allegations of serious violations of US securities law relating to Abacus. In breach of FSA Principle 11, GSI did not tell the FSA that a Wells Notice had been issued to Tourre in September 2009, although several senior managers at GSI were aware of the fact. As a consequence of GSI's failure to notify, Tourre remained approved in the UK and able to perform a controlled function for several months without further enquiry or challenge from the FSA.

Margaret Cole, FSA md of enforcement and financial crime, comments: "We have repeatedly stressed the importance of firms self-reporting regulatory issues to the FSA in a timely way. GSI did not set out to hide anything, but its defective systems and controls meant that the level and quality of its communications with the FSA fell far below what we expect of an authorised firm. The fact that senior business people at GSI in London knew about Mr Tourre's Wells Notice, but did not consider the obvious regulatory implications for GSI, is very disappointing."

The FSA investigation found that GSI did not deliberately withhold any information from the FSA and cooperated fully, agreeing to settle at an early stage. In doing so, the bank qualified for a 30% discount. Without the discount, the fine would have been £25m.

RMBS

Bank poaches SF head

Noel Doromal has joined Deutsche Bank's residential mortgage securities origination and distribution group, reporting to George Mangiaracina. Doromal was previously vp and structured finance head at Citi.

RMBS

Ratings vet joins RE software firm

Real estate software vendor FNC has appointed Steve Grundleger as evp in its capital markets group.

Grundleger managed the RMBS bond rating business for Fitch before collaborating on a structured finance business development group for the same firm. Prior to this, he was key principal at Duff and Phelps, where he developed and managed the RMBS bond rating business.

ABS

Basel capital reforms unveiled

The Basel Committee on Banking Supervision on 12 September announced a substantial strengthening of existing capital requirements and fully endorsed the agreements it reached on 26 July (see SCI issue 195). These capital reforms, together with the introduction of a global liquidity standard, deliver on the core of the global financial reform agenda and will be presented to the Seoul G20 Leaders summit in November.

The Committee's package of reforms will increase the minimum common equity requirement from 2% to 4.5%, to be phased in by 1 January 2015. In addition, banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress, bringing the total common equity requirements to 7%. This reinforces the stronger definition of capital agreed by Governors and Heads of Supervision in July and the higher capital requirements for trading, derivative and securitisation activities to be introduced at the end of 2011.

Further, a countercyclical buffer within a range of 0%-2.5% of common equity or other fully loss absorbing capital will be implemented according to national circumstances. The purpose of the countercyclical buffer is to achieve the broader macroprudential goal of protecting the banking sector from periods of excess aggregate credit growth.

For any given country, this buffer will only be in effect when there is excess credit growth that is resulting in a system wide build up of risk. The countercyclical buffer, when in effect, would be introduced as an extension of the conservation buffer range.

These capital requirements are supplemented by a non-risk-based leverage ratio that will serve as a backstop to the risk-based measures. In July, Governors and Heads of Supervision agreed to test a minimum Tier 1 leverage ratio of 3% during the parallel run period. Based on the results of the parallel run period, any final adjustments would be carried out in the first half of 2017 with a view to migrating to a Pillar 1 treatment on 1 January 2018 based on appropriate review and calibration.

The Committee notes that systemically important banks should have loss absorbing capacity beyond these standards, however, and work continues on this issue in the Financial Stability Board and relevant Basel Committee work streams.

Preliminary results of the Committee's comprehensive quantitative impact study indicate that, as of the end of 2009, large banks will need, in the aggregate, a significant amount of additional capital to meet these new requirements. Smaller banks, which are particularly important for lending to the SME sector, for the most part already meet these higher standards.

Transitional arrangements for implementing the new standards have been agreed, with the aim of ensuring that the higher capital standards can be met through reasonable earnings retention and capital raising, while still supporting lending to the economy. The Committee says it will put in place rigorous reporting processes to monitor the ratios during the transition period and will continue to review the implications of these standards for financial markets, credit extension and economic growth, addressing unintended consequences as necessary.

SIFMA president and ceo Tim Ryan notes that the Basel Committee's proposals "will result in a more robust capital and liquidity regime for the global financial system". He adds that the proposals appear to move in the same direction as the requirements enacted into law by the Dodd-Frank Act, while providing a reasonable time frame for implementation.

"Yet we believe a number of issues must be resolved if these proposals are to support stability without constraining the supply of capital, which is essential to support economic growth and job creation," Ryan continues. "These new rules will have a large economic impact when fully implemented. So it is critical that they be implemented with consideration to providing stability and confidence to the financial system without limiting long term economic growth."

ABS

Relative value themes identified

Wells Fargo has updated its Relative Value Indicator (RVI) - a technical analysis model designed to give an alternative, unconventional view of relative value - to account for recent moves in ABS spreads. The tool was launched in June (see SCI issue 189).

ABS analysts at the bank find that, three months later, the model points to better relative value in three segments of the market: subordinated bonds of subprime auto ABS; three-year triple-A prime auto loan ABS compared to credit card ABS; and rate reduction bonds relative to credit card ABS.

"The better relative value compared to the credit card sector is based mainly on the tightening of credit card ABS relative to other sectors over the past three months," the Wells Fargo analysts note. "Consistent new issue volume would normally provide an anchor for spreads and valuations, as well as an outlet for investor demand. Without a more robust primary market, the direction of consumer ABS spreads is being determined by supply and demand in the secondary market."

ABS

Strong showing for TALF ABS

ABS analysts at JPMorgan have highlighted a large TALF ABS bid list amongst last week's otherwise light secondary trading sessions. They note that TALF loan balances stood at US$33bn on 8 September, versus US$73bn in aggregate loans requested (US$60bn in ABS and US$13bn in CMBS).

The analysts believe investors have repaid around 55% of TALF loans since the programme's inception a year and a half ago. Current TALF ABS loan outstandings are estimated to be US$25bn, with pay-down for the loans expected to be faster than those in CMBS.

TALF ABS bonds continue to provide positive carry at premium prices, according to the analysts, with ABS credit risk for investors and the Fed remaining negligible. Ratings are holding up strongly and loan repayments are predicted to accelerate with year-end profit taking.

As the primary market remains quiet, TALF liquidations are expected to be absorbed easily by the cash ABS investor base, while technicals are also anticipated to hold up well for the rest of the year.

ABS

Utility ABS proves economic option

Entergy Arkansas says its recent securitisation, the US$124.1m Entergy Arkansas Restoration Funding 2010-A, achieved the lowest interest rate (2.3%) for a utility ABS since the tool first came into use in 1997. The firm estimates that it will save customers US$32m in the recovery of costs associated with the devastating ice storm of January 2009 as a result of the transaction.

Securitisation became available in Arkansas - via the Arkansas Electric Utility Storm Recovery Securitization Act - after Entergy Arkansas proposed the option to state legislators in 2009. This was the first time an Arkansas utility company has used securitisation, although Entergy Arkansas' sister companies have used the tool in their states to pay for hurricane damage.

Investors in the bonds will be repaid with money collected through a new line item on customer bills beginning in October labelled 'Ice Storm Recovery Charge'. For a typical customer using 1,000 kWh of electricity in a month, the line item will be US$0.87.

Securitisation has proven to be a cost-effective alternative to the conventional method of cost recovery, which entails including the cost of repairs in base rates.

Morgan Stanley last month priced the triple-A rated (all three agencies), 5.45-year Entergy Arkansas deal at 55bp over swaps.

ABS

Senior NextStudent notes still outstanding

Moody's has downgraded to single-C 23 classes of senior notes from NextStudent Master Trust 1. The original underlying collateral consisted of government guaranteed student loans originated under FFELP.

Around US$98.8m of securities are affected by the downgrades, which were caused by the acceleration and liquidation of the student loan collateral following several events of default under the trust indenture. Proceeds from a collateral auction in July were used to repay 93.6% of the senior notes outstanding at that time (see SCI issue 194).

Approximately US$98.8m of senior notes and US$80.6m of subordinated notes remained outstanding after the 10 September payment date. Neither class of notes is accruing interest and the securitisation trust has small claims against NextStudent Inc, the original master servicer and trust administrator, as well as another transaction party. These amounts would not be enough to fully repay the senior notes, according to Moody's.

ABS

Student loan servicers chosen

The US Department of Education has released the second year's allocations of new loan volume to be granted to servicers for the period beginning on 1 July 2010. The number of loans given to each servicer is based on customer satisfaction and default aversion results.

The four servicers are FedLoan Servicing, Great Lakes Educational Loan Services, Nelnet and Sallie Mae. Bank of America Merrill Lynch ABS analysts expect Affiliated Computer Services (ACS), which is the department's original and current servicer for FDLP loans, to receive loans not given to the other four servicers.

Five metrics are used by the department when allocating new loan volume, three of which measure satisfaction among customer groups and two of which measure the success of default prevention efforts. The first year's ranking should have a minimal impact on the relative pricing of deals serviced by the four entities, according to the BAML analysts.

The College Board says 8.7 million Stafford loans were disbursed in the 2008-2009 academic year. There are 6 million new borrowers, of which 32% will be serviced by PHEAA, 30% by Great Lakes, 22% by Nelnet and 16% by Sallie Mae. The analysts suggest that these lower allocations should not alter how the servicers are viewed.

Equally, event risk related to the elimination of FFELP should be minimised by the contracts with the department. The analysts say ACS and the other four servicers have a good track record with FFELP loans. Fees will be dependent on the number of loans serviced and their status.

ABS

Singapore credit card ABS refinanced

The Singapore credit card ABS, Diners Club Card Securitisation, has been refinanced under the Orchid Funding ABCP programme. The programme limit for the transaction is S$223m.

The transaction - dubbed Card Centre Asset Purchase Company - comprises a working capital facility, class A1 and A2 certificates (all rated single-A minus by Fitch), as well as class B (triple-B) and C (double-B) certificates. There are also two unrated class D tranches.

The three single-A minus tranches account for 72.5% of the capital structure, the class B notes account for 5.9%, the class Cs 5%, the class D1s 10.6% and the class D2s 6%. The class A2 tranche has a fixed size of SG$105m, while all other classes have floating sizes.

The deal has an 18-month revolving period, followed by a pass-through period. The issuer has entered into an interest rate swap for S$105m with RBS and ANZ to hedge the interest rate risk of a portion of the certificates.

The structure allows receivables to be one to 120 days delinquent, as of the initial cut-off date, although any additional receivables are required to be current.

ABS

Tender offer for franchise ABS

DineEquity, parent company of Applebee's Neighborhood Grill & Bar and IHOP Restaurants, plans to offer senior unsecured notes to qualified institutional buyers and non-US investors. It will use the net proceeds from the offering, together with the proceeds from other secured debt financings to fund tender offers and consent solicitation for certain series of its subsidiaries' outstanding franchise ABS notes. It will also redeem, prepay or purchase any of the securitisation notes that are not tendered.

The offering will be made under Rule 144A and Regulation S.

ABS

Improving trends for future flow ABS

Fitch says that the survival of future flow structured transactions during stressful periods in emerging markets confirms its belief that they protect investors' interests by mitigating sovereign risk better than other types of structures.

Credit trends are improving for future flow securitisations in emerging markets, with rating levels generally rising over the last several years, according to Fitch. For the first time since the agency began rating these transactions, several future flow securitisations hold ratings in the single-A category, either having migrated to or launched at that rating.

Through to June 2010, Fitch has rated 182 such transactions since the first future flow deal closed in 1991. Overall coverage levels have remained fairly strong and should stabilise further as the economy recovers and commodity prices improve, the agency notes.

ABS

Stable performance trend for Greek ABS, RMBS

According to new indices published by Moody's, the Greek RMBS and ABS market recorded a stable performance trend over the past year, despite the severe deterioration of the greater economy and the sharp increase in country and banking sector risk.

In June 2010, RMBS transactions showed a 90-days plus delinquency trend of 0.9%, which compares with 1.1% in June 2009. The cumulative defaults trend has remained constantly between 0.4% and 0.5% since August 2008. The Moody's annualised total redemption rate (TRR) trend increased to 8.1% in June from 7.3% in June 2009.

As most Greek ABS transactions were issued during the course of the past two years, only limited historical performance data is available for this market. The 90-days plus delinquency trend for the ABS SME/leases market recorded 1.5% in June 2010.

The index has declined over the past year as new transactions with low delinquencies were added to the index. The cumulative defaults trend was 0.5% in June 2010, while the defaults in those transactions in the index range from 0% to 2.5%. Moody's annualised TRR trend has declined constantly over the past year, reaching 34.2% in June.

ABS consumer loan transactions, meanwhile, have shown stable performance over the past year. Moody's annualised TRR in the three Greek consumer ABS transactions ranged from 25% to 31% in June 2010.

The agency's outlook for the Greek RMBS and ABS markets is negative. As of June 2010, the total outstanding pool balance in the Greek RMBS market was €5.1bn, compared to €8.4bn one year previously, which constitutes a year-on-year decrease of 39.4%.

Conversely, the balance of the Greek consumer ABS increased from €5.029bn at the beginning of 2009 to €5.067bn in June 2010. In the same period, the balance of SME and leasing ABS increased to €17.3bn from €11.1bn.

CDS

Regulatory concerns weigh on CDS market

Fitch's latest global credit derivatives survey indicates that various regulatory initiatives are occupying the focus of the credit derivatives market. Indeed, several respondents expressed surprise at the extent to which the market meltdown or negative dynamics were attributed by market observers to the use of CDS.

Further, 96% of the respondents agree that central clearing is necessary, with most believing it will reduce systemic risk. However, there was less of a consensus among survey participants as to the desirability of having multiple clearing houses or the exchange trading of CDS.

The survey also highlights one of the most significant recent trends in the sector as being the acceleration in sovereign CDS trading. The vast majority (89%) of respondents expect this to continue, particularly given the market's perception of heightened risk due to stretched balance sheets.

Another notable finding, the agency says, is that the relative proportion of the market featuring indices has fallen for the first time since conducting the survey. Nonetheless, single-name CDS and the indices continue to dominate the CDS market, representing over 90% of the total on a combined basis.

Meanwhile, the top 10 counterparties comprised 78% of the total exposure in terms of the number of times cited. This is up from the 67% reported last year, reflecting the dominant role of banks and dealers as counterparties and the concentrated nature of the CDS market. Other results show that the banks surveyed saw a decline in both sold and bought positions and continued to have relatively balanced portfolios in the aggregate.

CDS

CDS price action analysed

Credit strategists at Goldman Sachs have analysed price action in global CDS markets over the past few months to identify which themes have driven moves in credit spreads. This involved looking at a cross-section of returns from 1000 corporate single-name CDS through a factor model based on rating quality, industry, region and other technical factors across sectors.

The analysis revealed four themes, the first being that German outperformance remains strong and will likely persist. German firms have strongly outperformed their US and European counterparts on the back of the recent strong macro data.

The second theme is that peripheral Europe is still lagging and will likely continue to as long as the divergence in the strength of the Eurozone recovery persists. Germany and to a lesser extent France, Belgium and the Netherlands are recovering at a relatively robust pace, while peripheral countries like Spain, Portugal and Greece are still lagging behind.

Third is that the double-B segment remains the sweet spot. US growth risk is well reflected in a strong decompression within high yield, as double-B and single-B credits have significantly outperformed triple-C rated names. "Our view across the rating spectrum remains positive on the crossover space relative to the broad market," the Goldman strategists note.

Finally, cyclicals are set to continue to underperform in the US, with the CDS market appearing to price in a cautious view on growth in the country. However, the strategists point out that market participants will likely begin looking for signs of a bottoming in US deceleration. While that doesn't seem to be the case yet, they believe that such stabilisation should reverse the underperformance of cyclical - although until there is some evidence of this, they remain positioned defensively.

CDS

Buy-side CDS clearing service in development

Eurex has confirmed that plans for its client asset protection (CAP) solution are still going ahead as it seeks to enhance its CDS clearing offering. CAP is intended to provide segregation and portability of customer assets and positions.

Eurex Clearing says it will continue market consultation for its buy-side service and CAP "once this solution has been adapted to the current regulatory developments still under discussion".

The new CAP functionality, including the pool ID concept, will be technically available with Eurex Release 13.0 and CCP Release 6.0, which are planned for 8 November. Eurex expects to begin offering the CAP service in the first half of 2011 and is testing it from this month.

Other asset classes and instrument types are also planned for Eurex's clearing service and an internal project to expand the OTC product base has begun, with OTC equity derivatives and interest rate swaps being considered. A new portfolio risk methodology is also being evaluated. Eurex says it intends to consult the market on these developments in Q410 and Q111.

CDS

Streamlined CDS novation platform launched

Ahead of the implementation of ISDA's 'Credit Consent Equals Confirmation' project (see SCI issue 198), IntercontinentalExchange - via its ICE Link platform - has launched Novation Consent = Confirmation (C=C), an industry-wide CDS novation initiative.

Several key features of the C=C initiative were first introduced on ICE Link, including making the transferee a full participant in the work flow, support for block novations and straight-through-processing (STP) of novation consents. ICE Link's STP eliminates rekeying of details and manual compares and reconciliations, allowing easy tracking and auditing by the novation counterparties. The benefits for market participants are accelerated legal certainty and substantially lower operational risk and cost, according to ICE.

Clive de Ruig, global head of ICE Link, says: "We believe that true efficiency and risk reduction in trade processing comes from an automated process to which all major market participants have programmatically connected their trade capture systems. Link thoroughly simplifies the operational processing of novations within the industry."

CDS

Sovereign stress test calculations clarified

CEBS has defended the European stress testing exercise, the results of which were published on 23 July (see SCI issue 195). In particular, it has clarified how gross sovereign exposures were calculated.

The gross exposures disclosed in the stress tests were on-balance sheet exposures net of impairments but gross of collateral and hedging, according to CEBS. In order to provide a meaningful picture of the economic risk borne in the trading book, banks were allowed to deduct offsetting short positions when reporting gross exposures.

CEBS says that the individual disclosures of sovereign exposures were an essential component of the exercise and a great enhancement in terms of transparency. Such transparency was intended to complement the design of the sovereign shocks applied in the adverse scenario of the stress test exercise, excluding the possibility of a sovereign default.

Further, CEBS notes that comparison with other sources should be treated with caution as a result of different reporting dates and reporting methodologies. For instance, data provided by the BIS is aggregated in a way that makes the comparison with data disclosed by banks during the stress test exercise impossible.

CDS

2006/2007 subprime CDS prices drop

Fitch Solutions reports that while US subprime CDS prices are still supported by positive momentum, uneven performance over the last month may signify an impasse for future performance. The latest Subprime RMBS Total Market Price Index shows that the overall price is levelling off at 9.86 through August. This follows almost 7% month-over-month increases on average from February through May, as well as a 3.9% rise in June.

However, on closer inspection, the agency reveals that the most recent vintages have experienced significant price declines. The 2006 vintage experienced a price drop for the first time this year, falling by almost 10% from last month's levels. This comes after increasing by 113% from the end of 2009 through to July 2010.

The 2007 vintage fell for the third straight month, plummeting by 16.8% in August.

According to Fitch director Kwang Lim, the price declines are a cautious response to initial concern of a lower credit quality pool. "Recent spikes in prepays and defaults, along with elevated delinquency levels and roll rates are lending weight to the increased caution," he says. "On a positive note, serious delinquency rates stabilised last month primarily as a result of HAMP and alternate modification programmes."

The recent-month's loan level analysis of the indices' constituents highlights a first-time increase in the 30-day delinquency levels in June. The analysis also reveals stabilisation of delinquency levels across subprime deals issued in 2005-2007, driven primarily by loan modification activity. Prepayments have also dropped across most vintages, though prepays are likely to drop further heading into the autumn and winter.

CDS

New constituents for iTraxx, SovX indices

The Markit iTraxx Europe indices will roll into their 14th series on 20 September. One constituent (J Sainsbury) has been replaced (by Kingfisher) in the iTraxx Europe Main index. Six constituents have been replaced in the iTraxx Europe Crossover index, while eight constituents have been replaced in the iTraxx Europe HiVol index.

The Markit iTraxx Asia ex-Japan and iTraxx Australia indices will also roll into their 14th series on 20 September. The iTraxx Japan will roll into its 14th series a day later, on 21 September.

The composition of the iTraxx ex-Japan and Australia indices remains unchanged. But three constituents have been replaced in the iTraxx Japan index. Central Japan Railway Co, Suzuki Motor Corp and Tokyo Gas Co have been replaced with Canon Inc, Mitsui Chemicals Inc and Shimizu Corp.

Meanwhile, the Markit iTraxx SovX family of indices will roll into their fourth series, also on 20 September.

The composition of the iTraxx SovX Asia Pacific, BRIC, G7 and Western Europe indices remain unchanged. The composition of the SovX CEEMEA index also remains unchanged, although the entity weights for the Ukraine and the Czech Republic have been respectively increased by 1% and decreased by 1% compared to the Series 3 index. All other entity weights remain unchanged.

Four constituents were replaced in the iTraxx SovX Global Liquid IG index, however. Hellenic Republic, Republic of Bulgaria, Republic of Chile and the UK were replaced with Federal Republic of Germany, Portuguese Republic, Republic of Kazakhstan and Republic of Panama.

CLOs

Charter Communications leads CLO manager buys

Charter Communications Holdings led the loan obligation purchases by CLO managers in Q210, according to a ranking of S&P's rated US CLO transactions. MSCI and NRG Energy followed in second and third place by loan obligation purchases.

"Charter discharged more than one-third of its pre-petition obligations through the bankruptcy process and emerged from Chapter 11 with debt to EBITDA of about 5.6x, which is considerably below its pre-bankruptcy levels (closer to 10x)," notes S&P. Charter Holdings emerged from bankruptcy on 30 November 2009.

Collateral managers' gross asset purchases rose to approximately US$22bn in Q2 from US$18bn in Q1, while gross sales declined slightly to about US$8.1bn from US$8.5bn. Sales by gross par amount were most prevalent in the health care industry during the quarter, while overall the business equipment and services sector have seen the most purchases.

CMBS

Innkeepers-related trades touted

A new Five Mile-Midland reorganisation plan is expected to be filed for Innkeepers if the exclusivity of the original - and since rejected - Lehman-Apollo plan is lifted. Based on the latest developments, MBS analysts at Barclays Capital believe that existing Innkeepers-related loans are likely to remain in their respective CMBS trusts.

However, the BarCap analysts warn that the loans are also likely to undergo substantial modification. As such, they recommend selling LBUBS 2007-C6 and LBUBS 2007-C7 IO and A2 fixed tranches, as these transactions are likely to experience substantial principal pay-downs if the new Five Mile-Midland reorganisation plan approved.

In addition, the analysts anticipate that - given the non-homogenous nature of collateral - even post-restructuring there is a high probability that the pool will continue to experience partial principal pay-downs following the release of individual properties. "We also recommend avoiding the lower-rated tranches off these deals, as we expect losses to climb through the double-B plus originally rated tranches, if not higher."

At the same time, they see value in the LBUBS A2FL, the generic A4, AM and AJ tranches, which are currently trading lower than similar tranches off comparable deals because of uncertainty about the resolution of Innkeepers' bankruptcy. "It also appears that interest shortfalls associated with the Innkeepers restructuring could be lower than originally thought," the analysts add. "This is because the Five Mile-Midland plan includes payment of restructuring fees to the special servicer from the cash received from Five Mile in exchange for 100% of the new company's equity; as such, the servicer is not expected to be reimbursed from the general interest collection."

The hearing to consider Midland's motion to terminate exclusivity is scheduled for 30 September, with the objections deadline on 23 September.

CMBS

CMBS loan assumption completed

1st Service Solutions has facilitated a US$6.7m CMBS loan assumption for two institutional-owned self-storage facilities. On behalf of the buyer - a regional self-storage provider - 1st Service Solutions worked with special servicers and the lenders' representatives to assume the two conduit loans for US$3m and US$3.7m respectively in acquisition of the properties.

The 1st Service Solutions team was led by portfolio manager Andy Dunlap. He comments: "In today's uncertain market conditions, loan assumptions are a practical way for commercial property buyers to finance purchases and we were happy to serve as the navigator for the buyer and seller through the process."

CMBS

US CMBS delinquencies continue rising

The delinquency rate on loans included in US CMBS increased by 21bp in August to 8.10%, according to Moody's Delinquency Tracker (DQT). The delinquency rate had increased by a slightly smaller 18bp in July 2010.

Moody's md Nick Levidy says: "Delinquency rate increases have moderated over the past three months, but the overall rate itself is expected to continue rising over the near term, with the potential for an occasional spike given the large reservoir of troubled loans in special servicing."

In August, 285 loans totalling nearly US$4.7bn became newly delinquent, while 328 previously delinquent loans totalling US$3.7bn became current, worked out or were otherwise disposed of. The total number of delinquent loans dropped slightly in August to 3,909, as the total balance of delinquent loans increased by approximately US$1bn to US$51.56bn.

Industrial properties had the second largest increase in delinquency rate in the past month, with a gain of 52bp. However, industrial properties remain the best performing of the five property types, with a rate at 6.01%. In the retail sector, for example, the delinquency rate increased by 8bp, bringing it to 6.59%.

Regionally, the West saw the greatest increase in August, with its delinquency rate rising by 14bp to 9.18%. The South has the highest delinquency rate of 9.78%, with a minimal 5bp increase during the month.

The Midwest was the sole region to experience a decrease as the rate declined by 29bp to 8.30%. Finally, the East continues to have the lowest rate after a minimal 10bp increase, with the delinquency rate currently at 6.28%.

Meanwhile, Fitch's latest US CMBS delinquency index shows that although the pace of defaults remain elevated, a record number of loan resolutions in August tempered the effect of US$3.1bn of new delinquencies. Recent defaults on five loans greater than US$100m contributed to a 23bp net increase in the US CMBS delinquency rate to 8.48%. US$2.1bn of loans were resolved or liquidated last month.

Fitch senior director Adam Fox says: "Though special servicers are working out loans at an increased rate, the volume of new delinquencies has not yet subsided. Highly levered loans originated at the market's peak continue to default as borrowers seek modifications or hand back the keys to underperforming assets."

In August, three Fitch-rated loans in excess of US$100m became newly delinquent due to performance issues, including the US$825.4m Innkeepers portfolio, US$140m Hyatt Regency Bethesda and US$129.5m Lynnewood Gardens.

CMBS

Ratings review hits US CMBS

Fitch has placed 32 subordinate class transactions on rating watch negative (RWN), based on a preliminary review of 78 2006-2008 vintage fixed-rated US CMBS. The preliminary review indicates that the majority of rating actions for current high investment grade classes will be less severe than previous actions and will mainly be limited to one to two rating categories - particularly for the AM classes.

Additionally, the ratings of super-senior triple-A rated classes of these transactions are not affected by this action, the agency notes. It expects that these tranches will likely be affirmed upon completion of its review.

Certain transactions were placed on RWN because of concerns regarding performing yet deteriorating large loans or specially serviced loans that experienced large value declines caused by new appraisals. On average, the transactions affected by the action have seen the percentage of loans in special servicing increase by approximately 144%. The recognition of additional losses, the agency states, will move the transactions closer to its expected potential loss and will result in downgrades to subordinate classes that currently have a negative outlook.

Rating actions are expected to be less severe relative to past actions, but will affect some classes that were not downgraded at the last review. In previous rating actions, the agency assumed a continuation of performance deterioration, however, the transactions being placed on RWN have experienced a greater degree of deterioration than previously expected.

LCDS

LCDS auction results released

The final results of the Truvo LCDS auction have been published. The final price was determined to be 41.125, with eight dealers submitting inside markets, physical settlement requests and limit orders. Due to a zero net open interest, there was no subsequent bidding period.

Separately, the auction for Boston Generating has been scheduled for 21 September.

Real Estate

FDIC structured transaction completed

The FDIC has closed on a sale of 40% equity interest in a limited liability company (LLC) created to hold approximately US$762m from 20 failed bank receiverships. The winning bidder of the multibank structured transaction is Mariner Real Estate Partners, with a price of 30.93% of the unpaid principal balance.

As an equity participant, the FDIC will retain a 60% stake in the LLC and share in the returns on the assets. The FDIC offered 1:1 leverage financing and will issue purchase money notes through the LLC in the original principal amount of US$109m.

The FDIC will convey to the LLC a portfolio of approximately 1,062 distressed residential and commercial acquisition and development loans, of which more than 80% are delinquent. Collectively, the loans have an unpaid principal balance of US$762m. As the LLC's managing equity owner, Mariner will manage, service and ultimately dispose of the LLC's assets.

Real Estate

Lodging properties prevalent in CRE sales

CWCapital is understood to have put up over US$300m in distressed CMBS loans for sale across two portfolios. The first - for around US$200m - is being held by Mission Capital, which has scheduled an auction with final bidding currently scheduled for 30 September and a closing in October. The second portfolio, for just under US$100m, is a package offered by CB Richard Ellis.

MBS analysts at Bank of America Merrill Lynch note that, as commercial real estate transaction volume has picked up (see also separate News Analysis), many recent sales have centred on lodging properties. They suggest that the reason for this may be that hotel transactions have increased more than those for other property types.

According to Real Capital Analytics, hotel sales are up by 136% in the first half of this year - the biggest gainer among the five property sectors the company tracks. This is, of course, in part due to the recovery of the sector.

Over the past few weeks, a number of hotel trades have taken place involving CMBS assets. For example, Pebblebrook is buying the Monaco Washington DC for US$74m, including the assumption of a US$35m loan that backs CWCI 2007-C2 (accounting for 1.5% of the deal).

LaSalle Hotel Properties also announced the purchase of two hotels based in Philadelphia. One of these is the Westin Philadelphia for US$145m, which secures a US$72m loan in CD 2006-CD2 (accounting for 2.5% of the deal).

RMBS

TMPG guidance issued for agency MBS

The Treasury Market Practices Group (TMPG) has issued guidance designed to maintain the integrity and efficiency of the Treasury, agency debt and agency MBS markets. The guidance centres on: promoting market-making and liquidity; maintaining a robust control environment; managing large positions with care; and promoting efficient market clearing.

The TMPG says it believes that the public and all market participants benefit from a marketplace that is transparent and efficient. "We believe that these characteristics help maintain vigorous competition and liquidity in the Treasury, agency debt and agency MBS markets. To that end, we recommend that all Treasury, agency debt and agency MBS market participants incorporate best practices in their operations in order to promote trading integrity and to support an efficient marketplace."

SIFMA, for one, welcomed the guidance. Its president and ceo Tim Ryan comments: "By encompassing the Treasury, agency debt and agency mortgage-backed securities markets, the TMPG's best practices for trading and settlement now promote well-functioning, liquid markets across the majority of fixed income securities. SIFMA shares this focus on ensuring disciplined, orderly markets that promote liquidity, and the best practices...complement SIFMA's existing market standards and practices in these markets."

RMBS

German RMBS restructured

The restructuring of E-MAC DE 2009-1, a German prime RMBS originated by GMAC-RFC Servicing, will not affect its credit ratings, says S&P. The restructuring includes introducing a call option, transferring servicing from Hudson Advisors Luxembourg to Hudson Advisors Europe, as well as changes to the 'instructing group' definition when no event of default occurs.

E-MAC DE 2009-1 has three classes of notes outstanding. S&P rates the class A1 notes triple-A and class A2 notes triple-B on a deferrable basis. The class B notes are not rated.

RMBS

Interest rates threaten Spanish RMBS

Fitch says that interest rate rises coupled with the current economic environment represent a significant threat to Spanish RMBS performance. Although the agency expects ECB rates to grow from 1% to 1.5% by 2012, with high unemployment expected to persist through to 2013, it anticipates a weak economic recovery for the country.

Fitch EMEA RMBS head, Gregg Kohansky, says: "Spanish mortgage borrowers continue to benefit from low interest rates that boost mortgage affordability. However, Fitch remains cautious on Spanish RMBS performance, given the prospect of modest interest rate rises over the next two years, before a recovery takes hold in Spain."

"Interest rate movements are a key variable in the Spanish mortgage sector delinquency performance," adds Carlos Masip, associate director in Fitch's Spanish structured finance team. "Given the challenging macro-economic landscape and high unemployment level in Spain, Fitch believes that it would not take a significant change in interest rates to put mortgage portfolio arrears back on an upward trend."

A review of historical mortgage arrears and mortgage interest rates over the past 20 years shows a high correlation between the two variables. The agency says that when rates increased from 2006 to 2008 as a result of ECB rate tightening, it observed a material increase in mortgage arrears - albeit from very low levels.

The current RMBS asset outlook for Spain is declining and is supported, in part, by concerns over the effect of interest rates on future borrower affordability. Despite recent arrears stabilisation, ratings outlooks for Spanish RMBS are also negative due to the deterioration across nearly all RMBS pools that contain loans originated from 2006 onwards.

Fitch concludes that the effect of interest rates on Spanish mortgage performance is magnified by three important factors. First, more than 90% of Spanish mortgages are variable interest rate products; second, Spanish banks were not considering stressed interest rates when measuring borrower payment capacity at origination; and finally, in the years before the housing market downturn, lenders also began bridging affordability gaps by marketing longer amortisation products.

RMBS

Fiscal tightening set to hit UK RMBS

According to S&P, upcoming fiscal tightening could lead to a second wave of deterioration in UK prime and non-conforming RMBS collateral performance. The agency says it remains cautious about the longevity of the bounce-back in UK house prices.

S&P analyst Neil Monro comments: "We expect house price movements to remain uncertain in the near-term and we note that a high percentage of non-conforming borrowers remain in severe arrears. Therefore, possible future increases in unemployment or interest rates may cause a further wave of repossessions."

The agency believes that the looming fiscal austerity package and the possibility of interest rates rising again could significantly test some borrowers' ability to make their mortgage payments. This is particularly true in the context of still-severely curtailed refinancing options, due to lender-initiated tightening of their criteria, as well as potential future changes to regulation.

According to S&P, UK housing remains overvalued on a fundamental basis. For example, the average house price-to-income affordability ratio for first-time buyers is still stretched at 4.3x, relative to the long-term average of 3.3x. Market signals for UK house prices are mixed and data from the Halifax and Nationwide indices has been at odds over whether prices were rising or falling in each of the last four months. Forward-looking survey data from the Royal Institution of Chartered Surveyors (RICS) in July suggested that the proportion of respondents expecting prices to fall in the next three months exceeded by 28 percentage points.

RMBS

Upgrades, affirmations for Lehman NC RMBS

Fitch has upgraded four and affirmed 39 tranches of seven UK non-conforming transactions that no longer have currency swaps in place due to the bankruptcy of Lehman Brothers. In addition, the senior tranches carrying ratings above triple-C have been removed from rating watch negative (RWN), where they were placed on 19 July.

The affected deals are: Eurosail - UK 2007-3 BL, Eurosail-UK 07-4, Eurosail-UK 07-5 NP, Eurosail Prime-UK 2007-A, EMF-UK 2008-1 and Mortgage Funding 2008-1 plc.

The rating action on these tranches follows the judgment delivered by the English High Court on 30 July in the case of BNY Corporate Trustee Services Limited v Eurosail UK 2007-3BL PLC. In his judgment, the Chancellor of the English High Court ruled that Eurosail UK 2007-3BL was not unable to pay its debts under the UK Insolvency Act 1986 (SCI passim). The Chancellor also ruled that the existence of a post-enforcement call option in the transaction had no effect on the solvency of the deal.

On 20 August the class A3 noteholders filed an appeal against the Chancellor's judgment that the issuer was not insolvent under the Act. Fitch notes that the outcome of the appeal could have an impact on the rating of the notes in all seven transactions.

The upgrades of A1 and A2 notes of EMF UK 2008-1 and B1a notes of Eurosail UK 07-4 reflect the movement of foreign exchange rates in favour of the issuers since December 2008. Fitch now expects the class A1 notes of the EMF UK 2008-1 transaction to pay in full in December 2010.

Similarly, the upgrade of the class ETc notes in the Eurosail UK 07-3 transaction is a result of the agency's expectation that those notes will pay in full on the upcoming payment dates due to a stabilisation of underlying collateral performance.

The ratings on the transactions remain exposed to further FX movements, which could eventually move in favour of the issuers. In the meantime, due to their structures, the EMF UK 2008-1 and the Mortgage Funding 2008-1 transactions are also more exposed to the risk of interest shortfalls on the class A notes, as a result of tightening in excess spread following deterioration in asset performance.

In October 2009, Danske Bank failed to renew the liquidity facility agreement on the Eurosail Prime UK 2007-A and the Eurosail UK 07-5 transactions. Danske Bank also stated that due to the issuers' inability to meet the 'no default' representation of the underlying liquidity facility agreement, these transactions were unable to make stand-by draw-downs.

A similar issue occurred recently in the Eurosail UK 07-6 and the Eurosail UK 07-4 transactions, leaving Eurosail 07-3 as the only transaction out of the seven with a liquidity facility in place. In Fitch's view, the absence of a liquidity facility does not affect the ratings of these transactions, as its purpose is to provide support for short-term liquidity shortfalls, which would typically occur in higher rating scenarios.

Most of the loans in the underlying pools have now reverted to variable rates and are benefiting from low interest rates. The agency believes that this is the main cause behind the stabilisation in arrears reported by most UK non-conforming issuers. It expects interest rate rises in 2011, at which stage the ability of borrowers to meet their monthly payments may be put under pressure.

Fitch also believes that these deals remain exposed to the effects of unemployment. Both factors are likely to lead to another wave of arrears and repossessions, which will impact the transaction's ability to generate excess spread.

RMBS

NZ earthquake impact to be determined

Fitch says that it is too early to quantify the extent to which the Christchurch earthquake could impact outstanding Fitch-rated New Zealand mortgage-backed transactions. The agency believes that: servicing activity will not be materially impacted; property damage may temporarily affect borrowers' ability to pay and possibly eventual recovery rates; and transactions might bear a certain degree of income shortfall, which should be fully covered by principal draws and other structural features within the transactions.

Up to 100,000 homes in the Christchurch, Selwyn and Waimakariri areas have been affected by the earthquake, which hit on 4 September. The agency says it will assess the impact in respect of servicing activity, arrears levels, recovery rates and eventual principal or interest shortfalls on the affected transactions.

Servicers who are based in Christchurch and contribute fully or partially to the transactions' servicing activity have been affected; however, arrangements have been made to complete critical tasks and reports in a timely manner. At this stage, the agency says it does not expect any significant impact on servicing activity.

It remains to be seen whether any transactions will bear a loss or income shortfall related to the earthquake. Property damage may affect borrowers' credit risk profiles and recovery rates and it is likely that demand for building activity will overcome the available supply, in turn affecting the timing of eventual repairs.

Additionally, in the case of insurance cover, property damage is expected to cause a temporary financial shock to borrowers due to cash outflows, such as: payments incurred before the claims are settled; additional expenses for repairing functional items in the home; and the cost of replacement being higher than the indemnity value. However, part of the shock will be offset by lenders' initiatives, such as payment holidays and additional further advances.

New Zealand's Earthquake Commission provides catastrophe cover for the first NZ$112,500 for damage to the home and NZ$22,500 for damage to personal belongings. Any additional losses are expected to be covered by private insurance, and only those households with insurance are expected to be covered by the Earthquake Commission.