Contents

Emerging Markets

Switch of focus

Increasing EM allocations could reignite structured appetite

The sovereign debt crisis in Europe and ongoing budget issues in a number of US states have served to switch investor attention towards emerging markets. With yields trending lower, this could lay the foundation for the re-emergence of structured credit products in the segment.

"The sovereign debt crisis acted as a wake-up call, given that there is huge institutional investor allocation to European sovereigns and the US," confirms Søren Rump, ceo of Global Evolution. "A default of a European country or a US state doesn't look completely unlikely; therefore many investors have had to rethink their asset allocation strategies and allocate more towards safer markets like emerging markets and gold."

He adds: "The emerging markets segment has traditionally been seen as risky, opaque and illiquid, with investors tending to focus on their own domestic market. However, that's changing now: EM is more transparent and liquid than it was 10-15 years ago, but also fundamentally these countries are doing well - they are experiencing higher growth and lower debt-to-GDP than in developed countries. In addition, the sector has performed much better than other markets during the crisis."

The Institute of International Finance points to buoyant local credit market conditions helping to restore strong growth in domestic demand in emerging Asia, for example, especially China. It describes this growth as having been "the leading edge of the global recovery". Net private capital flows to emerging economies are expected to total US$709bn in 2010 and US$746bn in 2011.

Global Evolution focuses on EM sovereign debt rather than EM corporate debt. During the 2008 crises the corporate segment performed badly. It is less supported, with less liquidity than sovereigns, according to Rump.

"We focus on frontier markets, such as Mongolia, because significant yield pick-up and upside to the currency are available," he explains.

Mongolia, for instance, has a wealth of largely untapped natural resources - which points to a significant influx of investment. "The country has a small economy (US$4bn GDP), but natural resources estimated to be worth around US$1.5trn," Rump continues. "This represents opportunity from a portfolio context in terms of adding to yield and diversification. We'd rather add upside in this way than in corporates."

The firm doesn't subscribe to the 'decoupling' story, however. Rump suggests that the biggest risk to EM in the near term is the global market tanking once again, because markets are so interlinked.

"If risk willingness declines, there will likely be outflows from EM," he says. "The main danger that we're looking out for is problems in the developed world."

Rump explains: "There are no major EM-related issues: there will inevitably be some political and economic problems cropping up in some countries from time to time, but they have generally reduced over the last 10-15 years. Emerging market countries are much more aware about attracting capital these days: they communicate better and provide more macro data, as well as outline their political goals and views in a more honest and transparent way."

In terms of structured credit activity in the EM space, investors have typically shied away from leveraged vehicles since the onset of the financial crisis. However, given that yields are trending lower, Rump expects investors to eventually begin looking at more leveraged products in order to hit certain return targets.

Rump adds that existing emerging market CDOs, for example, have performed well throughout the crisis because the EM sovereign sector has performed well. However, he points out that sovereign CDS are trading too tight and local currency debt yields are too low for CDO economics to make sense at present. There is also a practical problem in terms of the rating agencies' tightened criteria, particularly with respect to market value deals.

CS

CDO

Dante appeal to clarify subordination provisions

The grant of appeal and language used by the judge in a recent Lehman CDO ruling are positive developments for the investors involved, according to Moody's in its latest Weekly Credit Outlook, as it indicates court willingness to end the dispute over validity of transaction documents containing subordination provisions. The US Bankruptcy Court of Southern District of New York on 21 September rendered an order that sets the stage for an appeal of an earlier ruling that was adverse to CDOs with swap exposure to Lehman Brothers Holdings Inc.

The court's order granted the motion of BNY Corporate Trustee Services, the trustee of the CDOs, to appeal an earlier controversial Bankruptcy Court decision handed down by Judge Peck in January 2010 (see SCI issue 170). While the order does not overturn Judge Peck's decision, it sets grounds for appeal and states that that there is a substantial difference of opinion over whether the correct legal standard was applied in reaching that decision. It also halts the proceedings Lehman initiated on 14 September to recover funds from noteholders of debt issued by 43 CDOs.

While UK courts upheld the provisions of the waterfall in the disputed Dante CDO, giving priority to the noteholders as provided in the documents governing the transaction, the US Bankruptcy Court in the prior decision found the same provisions unenforceable. In that earlier decision, the judge ruled that payment priorities that shift upon the filing for bankruptcy by one of the parties to the contract constitute ipso facto clauses and are therefore unenforceable in bankruptcy and not protected by safe harbour under the Bankruptcy Code.

Granting the motion to appeal, Judge McMahon commented on the ramifications of the earlier decision. He not only mentioned that numerous legal and other commentaries question the correctness of Judge Peck's ruling, but also said that Judge Peck's interpretation of the Bankruptcy Code has triggered significant uncertainty in the financial community. He also pointed to Lehman's efforts to forestall the review of Judge Peck's decision, as it was used by Lehman as leverage in settlement negotiations in similar transactions.

"This order will certainly not help Lehman negotiate with noteholders and trustees of 43 CDOs it seeks to get the early termination payment from," Moody's concludes. "The review of the Appellate Court will bring answers and resolve market uncertainty relating to multiple deals that incorporate flip provisions and credit default swaps with Bankruptcy Code eligible counterparties."

CS

CDS

Act to redefine financial services landscape

The Dodd-Frank Act could have as large an impact on the financial services industry as the 1933 Glass-Steagall Act, according to a new report by Celent. The implications for derivatives are particularly significant and could influence how swaps are entered into by structured transactions, for example.

Celent's report calls Dodd-Frank, which comes into full force over the next few years (SCI passim), "a vital piece of legislation". Key findings of the research concern the high costs associated with clearing, the need for firms to modify their business models and the effects of changes on the regulatory landscape.

Investment banks face a reduction in revenues of about US$10bn-US$15bn in 2011, the report says. The costs of required changes for banks, exchanges, clearinghouses and OTC derivative counterparties over the next three years are predicted to be high, impacting market participants' profitability. This will represent a "huge, but quite possibly necessary, price to pay for the financial industry".

Firms will have to transform their business models, the report says, to increase transparency and accountability, as well as improving risk management and compliance. These demands on banks, asset managers, exchanges and clearinghouses will have a financial, legal and tax impact for all firms, domestic or foreign, operating in the US.

Firms that previously used bilateral clearing in OTC derivatives will be affected by the new emphasis on exchange-based trading and OTC CCP clearing. Long-only entities and net buyers of credit derivatives and long-dated interest rate swaps will be hit by the high up-front margin required for clearing, while clearinghouses could also feel the pinch as increased competition against the likes of CME and ICE threatens their position.

The report also says that firms will "have to be much more proactive and alert with regard to monitoring all their operations", with IT infrastructure requiring upgrades to meet new reporting requirements in areas such as liquidity, risk exposure and stress testing. OTC derivatives and investments in hedge funds are cited as examples where better use of IT is needed to strengthen risk management practices.

In addition, the regulatory landscape is set to change, with the Financial Stability Oversight Council (FSOC) supervising every element of the financial sector. The SEC will have its budget doubled over the next five years as the Act goes about "fortifying the SEC's position as a leading regulator of the capital markets" and the report says the federal body has to "justify this faith" by becoming more proactive.

Derivatives trading will be further impacted by the Volcker rule, under which certain derivatives trading activities will have to be pushed out to a bank's non-banking affiliates, to distance taxpayers from the risks of derivatives trading.

Further, banks' investments in hedge funds and private equity funds will be regulated and limited to 3% of their tangible common equity in all such funds combined, or 3% of the fund's total ownership interest. Restrictions on proprietary trading and investments in hedge funds and private equity would particularly affect Goldman Sachs, JPMorgan and Citi, the report suggests.

A final regulatory change will be seen with the Bureau of Consumer Financial Protection (BCFP), which will operate as an independent agency within the Federal Reserve. The BCFP will regulate savings, credit and deposit companies and their products.

Many details of the Dodd-Frank Act remain open for further interpretation and rule-making by regulatory agencies. But S&P, for one, believes that the act has the potential to change how structured transactions enter into swaps, along with other current conventions of the derivatives market.

"We believe the mandatory central clearing and new capital and margin requirements, in particular, could have a significant effect on structured finance transactions that use derivatives - most commonly, interest rate, currency and credit default swaps - to mitigate certain risks," says S&P credit analyst Jaiho Cho.

In addition, some of the characteristics that are unique to SF swaps - such as the lack of a collateral posting mechanism - may require additional consideration and rule-making by the regulators to meet the act's overall goals, while promoting a reasonable set of market conventions.

"As further details about the new derivatives regulations come to light this year and beyond, we believe the increasing clarity about the regulatory framework could help mitigate some lingering uncertainties about the derivatives market convention," Cho adds. "We believe that if the regulators - and the rules they enact - take into account some of the unique characteristics of SF swaps, the market may adapt to the new framework without significant disruptions."

JL & LB

CLOs

CLO manager issuance expectations grow

In a recent survey of 127 US CLO managers undertaken by S&P, 63% of respondents said that they're contemplating future issuance of a new CLO. This compares with only 29.1% of managers in the agency's 2009 survey.

The survey comprised 70 questions covering a variety of topics, including portfolio management, economic strategies, organisational structure, staffing changes, technological capacities and revenue sufficiency.

Survey responses indicated that 48.8% of these managers are also considering issuing a credit opportunity market value fund, while 41.3% are considering launching a distressed loan fund. Additionally, 27.5% of these managers are considering some other type of issuance.

"We found that collateral managers were generally more optimistic about issuing new CLOs in 2010 than they were in 2009," S&P notes. "We also observed that expectations for new issuance of structured credit vehicles other than CLOs (synthetic corporate CDO, hybrid CDO and distressed loan funds) were generally lower than in 2009. In our view, the lowered expectations for non-CLO issuance are likely due to changes in market dynamics and investor demand."

Respondents were asked to characterise their primary reason for managing CLOs, with the responses of CLO issuance managers compared to the responses of all managers. CLO issuance managers selected fee-based reasons more frequently than all managers, while the larger group selected balance sheet management/financing source more often.

When the ownership of the manager was factored in, the data indicate that managers owned by large institutions are less interested in new issuance than those owned by management, individuals or private equity firms, according to S&P. "Not surprisingly, in our view, managers with less assets under management are more interested in new issuance than their larger counterparts. CLO issuance managers average US$19.3bn in assets under management, while all managers average US$32.4bn."

The agency concludes that, overall, the survey responses indicate that interest in issuing new CLOs is growing among existing CLO managers. "In our view, other factors - such as the availability and pricing of assets, regulatory changes, risk appetite and yields on competing investments - will likely influence whether managers will be able to follow through on those plans."

CS

CLOs

CLO equity offers 'incremental upside'

Valuations for some CLO equity tranches have in recent weeks been observed as high as CLO subordinate or mezzanine debt prices. Demand for CLO equity appears to be being driven by the search for high yields - with investors expecting improving collateral performance, the manager's reinvestment into higher yielding collateral and interest rate mismatches between assets and liabilities to make the return.

"Historically, a wide variety of institutions - such as insurance companies, asset managers and pension funds - invested in CLO equity, viewing this as a viable alternative to their private equity, fund-of-fund, real estate and other holdings," note structured credit analysts at JPMorgan. "As the crisis ebbs, just as it will take time for the CLO debt investor base to regain broad sponsorship and to the extent low yields and interest rates [continue] to squeeze investors towards carry, the CLO equity investor base should transition to a 'new' market (and not just the total return/fast money investors that we believe play a major role in current trading)."

Based on indicative valuations of a sample of US and European CLO equity tranches, the JPMorgan analysts indicate that the mean price for US CLO equity is around US$30-US40, with a distribution up to the US$60s-US$70s (closer to CLO subordinate and mezzanine debt). As expected, given the lag in underlying credit performance in Europe, European equity prices around a lower mean - at about €20-€25, but again there is a significant degree of tiering.

Indicative valuations have been somewhat sticky through the summer volatility; in large part likely due to the scarcity of supply and lack of forced selling and resulting lack of price transparency. The analysts' anecdotal observation is that the CLO equity investor base is largely buy-and-hold, and that any prior deleveraging earlier in the crisis due to fund or leverage unwinds is essentially over.

According to their March cash-on-cash return analysis, the proportion of performing equity rose from 51% in their October 2009 observation to 63%, while the average performing transaction's quarterly cashflow rose from 3.1% to 4.5% - suggesting an annualised return projection of the pre-crisis mid-teens. As of September, and updating transaction cashflows where possible, the analysts find as much as 79% of equity transactions are paying. Moreover, the average performing transactions' quarterly cashflow payment rose up to 5.2% in the latest quarter, implying an annualised return of circa 20%.

Many investors have a mid-teens or circa 15% hurdle for CLO equity, which is now implying a spread of around 1,400bp-1,500bp. Consequently, the analysts conclude, there is incremental upside in CLO equity in a low-yield, low-leveraged world.

CS

CMBS

'Careful' scrutiny of US CMBS loans advised

Modified loans are estimated to account for approximately 3% of the outstanding US CMBS universe, but their concentration continues to grow. Amid the further complications of defaults and liquidations, careful loan-by-loan analysis is consequently becoming increasingly important.

CMBS deal analysis will become more complicated as loans default, are modified or are liquidated by servicers, confirms Malay Bansal, head of portfolio management and advisory for commercial real estate & CMBS at NewOak Capital. "At some point, some deals with higher delinquencies may actually be better than deals with lower delinquencies, as deals with high delinquencies may be left with better collateral after weaker loans have defaulted than deals in which weaker loans are yet to default. Careful loan-by-loan analysis will be necessary," he says.

Further, MBS analysts at Barclays Capital suggest that it is important to treat clean performing and modified performing loans differently for valuation purposes. This is because modified loans could still default and their new cashflow stream derived from the modified terms is not certain, they explain.

Most modified loans are reported as 'cured'. In other words, they were returned to the master servicer three months after a modification agreement was executed and reported as performing.

"Our long-standing view has been that modified loans should not be included in the performing, or current, CMBS universe," the BarCap analysts note. "Although they might be performing, their terms were modified, often in a way detrimental to the trust. Therefore, in our view, these loans remain credit-impaired."

Further, the modification does not guarantee that the loan will continue to perform. In fact, a growing number of loans have re-defaulted following their modification, according to the analysts.

They have tracked about US$2.2bn worth of CMBS loans that were identified as re-defaulted - indicating that about 15% of all modified loans have re-defaulted. While many of these re-defaults are associated with smaller balance loans, there are some high-profile examples, such as the US$220m Solana (securitised in BACM0701) and the US$ 112.8m Chapel Hills Mall (LBUB06C1) loans.

While some re-defaults occur because the borrower is not able to perform as per the modified terms or new circumstances emerged, others could occur because the borrower wants to pay down the modified loan prior to the maturity date and is negotiating terms with the servicer. But the analysts suggest that another strategy may also be triggering re-defaults: the desire by the borrower to prolong the process.

"It is possible that in some modifications the borrowers did not intend to perform as per the modified terms to begin with. However, they still engaged in lengthy negotiations with the special servicer and executed the modification agreement because that effectively might help them buy time, hoping that the real estate cycle turns around quickly," they explain.

Re-defaults can also signal that the servicers are unable to identify a sustainable debt servicing level for a subject property.

CS

CMBS

CMBS 2.0 harking back to the old

Despite many people being under the impression that US 'CMBS 2.0' is a radical departure from what came before, much remains the same as it was in CMBS 1.0, according to MBS analysts at Barclays Capital.

The analysts note that an increasingly greater concentration of old CMBS properties is entering new CMBS conduit deals. As much as 49% of the underlying collateral by balance for JPMCC 2010-C2, for example, might be from old securitisations.

The analysts suggest that not all of the loans in the transaction were originated or securitised by JPMorgan, as there is a variety of originators and shelf names. Most of the loans were originally underwritten as five-year interest structures and securitised in 2004-2005 vintages. The majority have already been paid off, with many payoffs occurring three or four months prior to securitisation.

One loan, the US$143.1m Macquarie DDR Portfolio II securitised in LBUBS 2005-C2, is still outstanding. The analysts indicate that this could be caused by the partial release of underlying properties and possible lag between payoff timing. A substantial principal payment is expected once the loan is paid off, which could reduce the outstanding balance of the A2 tranche.

A departure from old CMBS can be seen in the structure, however. The BarCap analysts note many cases where the trust loan balance has declined from the level of prior securitisations, although there are exceptions. There are also cases where the appraisal in old securitisations was lower, despite those old securitisations being from the 2005 vintage.

But the analysts say that such a trend is not alarming and new securitisation is likely to drive payoffs, which will improve the CMBS 1.0 credit and trigger paydowns of selected short tranches. They conclude: "The structure of JPMCC 2010-C2 also signals that the strategy of sourcing new collateral by negotiating with borrowers with loans nearing their maturity dates might continue to prove successful in the increasingly competitive lending environment."

JL

CMBS

Euro CMBS loan extension differentiation expected

European CMBS loan-level delinquencies, defaults and transfers to special servicing were relatively low in number last month, according to S&P. The agency notes that these comparatively benign numbers are consistent with August falling between traditional quarterly reporting dates, rather than heralding a reversal of the performance trends so far this year.

In an overview of how loans maturing between January and August 2010 performed, S&P notes that only 10 of the 48 loans that had initial maturity dates in this period fulfilled their maturity payment obligations - representing 15% of the loan balance. In addition, servicers extended the loan terms of nine of the 48 loans, while the remaining 27 loans are either in default or in standstill.

"In our view, these factors reinforce what has become a familiar theme: refinance risk is a factor that will likely feature strongly in the European CMBS landscape for some years to come at a time when more than 50% of the loans, by balance, securing European CMBS transactions are scheduled to mature by the end of 2013," the agency says. "Against this backdrop, we believe that loan extensions are likely to remain a common feature for European CMBS transactions."

It remains to be seen if, by agreeing to extensions in lieu of accelerating loans, servicers are merely postponing the issue of enforcement and potentially compounding the risk of losses for transactions by reducing the tail period. Alternatively, agreeing to extensions may prove to be appropriate, particularly where extensions are accompanied by structural improvements such as loan paydowns or increased amortisation.

S&P expects servicers and special servicers to increasingly differentiate between loans that are better candidates for extensions and loans that are not. "We believe servicers' views of the quality and use of the properties are key and we also expect them to consider loans with excess cash - for partial paydowns or capital expenditures to improve the asset quality (for example) - as better candidates for loan extensions."

During August, servicers transferred two loans to special servicing, while another loan became delinquent.

CS

RMBS

Further servicing disclosures weigh on RMBS

Chase Home Finance and Bank of America last week suspended foreclosure proceedings in 23 states, as they investigate possible foreclosure processing irregularities echoing similar actions recently taken by GMAC Mortgage (SCI passim). The disclosures have heightened concerns about which other servicers may have similar problems and the impact of foreclosure delays on RMBS loss severities.

"Materially lengthened liquidation timelines and increased legal costs may lead to higher loss severities for affected RMBS transactions," says Rui Pereira, Fitch md and head of US RMBS.

Diane Pendley, head of US RMBS operational risk at the agency, adds: "Any servicer with a significant portion of their portfolio in judicial foreclosure states will be either directly or indirectly impacted by the attention focused on this problem."

Now that these issues have started to surface, what happens next? MBS analysts at RBS point to a number of uncertainties that may be clarified in coming weeks.

First, the geographic scale of the moratorium might expand to include non-judicial states. This follows attorneys general in California and Connecticut ordering GMAC to freeze all foreclosures within their states.

Second, it is likely that the investigations into internal procedures will expose more problems than have already come to light. Third, while new procedures can be implemented in a relatively short amount of time for new filings, it remains unclear how long it will take for servicers to check and correct the old filings. Depending on the volume and complexity of documents, the RBS analysts estimate that it could take months to fix the existing filings.

Fourth, will those who have already lost their homes take action and seek financial recourse from servicers? Although damages recovered on these loans by borrowers are unlikely to be clawed back from the trust, the recourse may cause servicers to change behaviour that might indirectly affect deal performance.

Fifth, going forward, even if new procedures are in place, counsel for homeowners or judges may routinely challenge the documents. Finally, servicers may stop advances more often than before, given the lengthened foreclosure timeline.

Fitch says it is currently contacting its rated servicers to determine if any newly implemented or planned changes are underway as a result of these disclosures. "If Fitch's review determines that a servicer's processes are not adequate and remedial actions are not sufficiently robust, Fitch will take rating actions on the respective servicer's ratings," comments Pendley.

Servicers who have filed deficient foreclosure affidavits would be expected to file amended affidavits or take other legal actions. However, for completed foreclosure actions within the judicial states - even with no inaccuracies in the affidavit - the level of required action will depend on the opinion of the courts.

Wells Fargo and Citi have so far confirmed that their processes have adequate controls in place.

CS & LB

ABCP

Basel 3 - securitisation opportunity?

Mark Davies of Cedar Analytics hopes that high quality ABCP finds its way back onto the market under BCBS157

In the hubbub surrounding the newly published 'Basel 3', regulated entities run the risk of losing sight of a couple of additional pieces of the requirement as published under BCBS157 - the snappily titled 'Enhancements to the Basel 2 Framework' - in July 2009. While the requirement to comply with Basel 3 en masse has an eight-year timescale attached to it, the need to comply with BCBS157 is set to 31 December 2010. To put that in context, that's exactly 100 days away from date of writing (22 September 2010).

The most significant part of BCBS157 for those involved in securitisation is the additional capital cost contained within the granular to non-granular piece. While the current 'in stasis' nature of the securitisation industry would suggest that this is not an issue; the devil is, as always, in the detail.

A table describing the effect is shown here and the impact on hypothetical portfolios is shown below:

Assuming a hypothetical triple-A tranche of £1m, the following capital cost considerations exist:

• Senior, Granular = £7,000 (£1,000,000 * .007)
• Non-Senior, Granular = £12,000 (£1,000,000 *.012)
• Non-Granular = £20,000 (£1,000,000 *.02).

What else could your organisation do with the extra £13,000 per £1m?

Under the method chosen by BCBS157 to define resecuritisation exposures, much of the market for ABCP is captured. For reference, the definition from the document is:

"The definition of a resecuritisation exposure captures collateralised debt obligations (CDOs) of asset-backed securities (ABS) including, for example, a CDO backed by residential mortgage-backed securities (RMBS). Moreover, it also captures a securitisation exposure where the pool contains many individual mortgage loans and a single RMBS. In other words, even if only one of the underlying exposures is a securitisation exposure, any tranched position (eg senior/subordinated ABS) exposed to that pool is considered a resecuritisation exposure. Furthermore, when an instrument's performance is linked to one or more resecuritisation exposures, generally that instrument is a resecuritisation exposure. Thus, a credit derivative providing credit protection for a CDO tranche is a resecuritisation exposure."

Cutting to the chase, any ABCP that contains even a single securitised loan within it is a resecuritisation exposure for purposes of BCBS157. One of the (many) reasons for using securitisation in the past has been to utilise lower risk weights under the IRB approach. BCBS157 continues to allow this, but only where granular data is produced.

Self-guarantee through ABCP conduits is no longer considered to be effective, as defined by the new p565(g)(i) - (iii). Operationally what does this mean?

In the context of either approach to credit risk - standardised or internal-ratings based - more information will be needed and will need to be able to be accessed by the whole of the market. For example, p565(ii) indicates that:

"As a general rule, a bank must, on an ongoing basis, have a comprehensive understanding of the risk characteristics of its individual securitisation exposures, whether on balance sheet or off balance sheet, as well as the risk characteristics of the pools underlying its securitisation exposures."

Furthermore, 565(iii) is more prescriptive still, suggesting that:

"Banks must be able to access performance information on the underlying pools on an on-going basis in a timely manner. Such information may include, as appropriate: exposure type; percentage of loans 30, 60 and 90 days past due; default rates; prepayment rates; loans in foreclosure; property type; occupancy; average credit score or other measures of creditworthiness; average loan-to-value ratio; and industry and geographic diversification. For resecuritisations, banks should have information not only on the underlying securitisations tranches, such as issuer name and credit quality, but also on the characteristics and performance of the pools underlying the securitisation tranches."

To further underline the importance of this, p565(iv) makes the following statement:

"A bank must have a thorough understanding of all structural features of a securitisation transaction that would materially impact the performance of the bank's exposures to the transaction, such as the contractual waterfall and waterfall-related triggers, credit enhancements, liquidity enhancements, market value triggers and deal-specific definitions of default."

In short, it appears that through BCBS157, Basel is finally getting to grips with the requirement for additional loan-level data for securitisations of all types. This is important as it requires there to be a repository for this data and - to reduce the cost of credit associated with securitisations - loan-level data to start being generated by the issuer community. This is one of the few ways in which we could expect movement in otherwise high quality ABCP of all types being returned to the market.

ABS

Securitisation sub-advisory mandate sealed

UCM Partners has launched its next generation core fixed income strategy, along with BlackRock, with approximately US$200m in AUM. In this direct sub-advisory relationship, UCM is responsible for managing the securitised debt portion of the strategy, while BlackRock will manage the government and credit portions of the strategy.

The securitised debt portion of the strategy - consisting of MBS, CMBS and ABS - is managed by UCM's cio Jay Menozzi and portfolio managers Boris Peresechensky and Vesta Marks.

ABS

Regional SF team expanded

Yorkshire Bank has expanded its corporate & structured finance team in Birmingham with the appointment of Maria Horsham as associate director. She will join the bank's acquisition finance team, managing relationships with key private equity backed clients, while supporting the bank's growth plans.

Horsham began her career 14 years ago at RBS and was most recently part of the firm's structured finance team, managing a portfolio of clients as well as a number of national lending programmes.

ABS

ABS research vet joins investment firm

Karen Weaver has joined Seer Capital Management as head of its market strategy and research group, serving as a member of the firm's investment committee.

With 22 years of experience in mortgage and asset-backed research, Weaver was most recently global head of securitised products research at Deutsche Bank. Prior to this role, she was the firm's head of fixed income and equity research for the Americas.

Weaver's addition to the Seer team brings together a number of former members of Deutsche Bank's securitised products group, including ex-head of global securitised products Richard d'Albert and ex-head of CLO/CDO structuring Michael Lamont. Other senior portfolio managers at the firm include Chris Schoen, former head of credit mortgage trading at Credit Suisse, and Tony Barkan, a hedge fund industry veteran.

ABS

Broker expands regional sales force

KGS-Alpha Capital Markets has opened three new regional sales offices in Fort Lauderdale, Florida, Reston, Virginia and Chicago, Illinois. Further, to accommodate its current and future growth, the firm is also establishing new headquarters in New York.

With a team of 40 professionals, Brian Bowes joined the firm recently to head non-agency mortgage trading (see SCI issue 197), while Lenny Blasucci will trade CMBS and ABS. Both new hires bring 20 years of expertise in mortgage trading and will report directly to the firm's ceo Levent Kahraman.

ABS

ABS structurer moves into recruitment

Raffaella Boscolo has joined Kinsey Allen International as a consultant responsible for its ABS and credit solutions business. She will report to the firm's md, Bruce Lock.

Previously working within the monoline bond insurance industry, Boscolo worked for both Financial Guaranty Insurance Company and Radian, where she was responsible for structuring CDOs. Prior to this, she worked in the ABS structuring team at SG.

ABS

Fixed income head named

Evolution Securities has promoted Gary Jenkins to head of its fixed income division. He will be responsible for formulating and delivering the firm's strategy for fixed income for 2011 and onwards.

Jenkins joined the firm in January 2009 and developed and promoted its fixed income research product. Prior to this, he was head of fundamental credit strategy at Deutsche Bank, producing research on the European credit markets.

ABS

Japanese credit rating application accepted

Moody's application for Japan Kabushiki Kaisha (MJKK) and Moody's SF Japan Kabushiki Kaisha (MSFJ) as credit rating business operators have been accepted under the Financial Instruments and Exchange Act of Japan on credit rating agencies.

MJKK will provide credit ratings for corporations, financial institutions and local and regional governments, as well as structured finance transactions intended for sale outside of Japan. MSFJ will also provide credit ratings for SF transactions intended for sale in Japan.

Japan's regulations aim to set out a framework for the registration, regulation and inspection of credit rating agencies operating in Japan.

CDS

Asset manager acquired in credit build-out

Moelis & Company has acquired Gracie Credit, a multi-strategy credit manager. On completion of the transaction in November this year, Gracie will operate as a separate business within Moelis & Co and continue to operate from its current location with no changes in its investment team.

Established in 2004 by managing partner Daniel Nir, Gracie has approximately US$2bn in assets under management and targets investment opportunities across the spectrum of credit products and markets. Nir and partners James Palmisciano, Manbir Singh, Michael Robertson and Alex Koundourakis lead a team of 30 employees, including 18 investment professionals.

In connection with the transaction, each of the Gracie partners has entered into a long-term employment agreement with economic incentives and other provisions designed to keep the investment team intact and focused on Gracie's investment mandate. Its investment management team will remain independent and operate autonomously from Moelis & Co, the firms say.

"We are committed to building a premier asset management business at Moelis & Co with the same client focus that we have demonstrated in our investment banking business," says Moelis & Co ceo Ken Moelis. "The acquisition of Gracie significantly enhances our platform for institutional clients seeking top-tier investment solutions and further expands our business activities."

CDS

AIG outlines government exit

AIG has entered into an agreement-in-principle with the US Treasury, the Federal Reserve Bank of New York and the AIG Credit Facility Trust designed to repay all its obligations to American taxpayers and position the firm as strong, independent and worthy of investor confidence. The plan involves three key components: repaying and terminating the FRBNY credit facility with AIG; facilitating the orderly exit of the US government's interests in two SPVs that hold AIA and ALICO; and retiring AIG's remaining TARP support and series C preferred shares.

Robert Benmosche, AIG president and ceo, comments: "We are very pleased that this agreement vastly simplifies current government support of AIG, sets forth a clear path for AIG to repay the FRBNY in full and sets in motion the steps for the US Treasury to exit its ownership of AIG over time."

AIG owes the FRBNY approximately US$20bn in senior secured debt under the FRBNY credit facility. Under the plan, AIG expects to repay this entire amount and terminate the FRBNY senior secured credit facility with resources from the parent, as well as with proceeds from a variety of asset dispositions underway - including the initial public offering of its Asian life insurance business, American International Assurance Company, and the pending sale of its foreign life insurance company American Life Insurance Company to MetLife.

Additionally, the FRBNY holds preferred interests in two AIG-related SPVs totalling approximately US$26bn. Under the plan, AIG will draw down up to US$22bn of undrawn Series F funds available to the company under TARP to purchase an equal amount of the FRBNY's preferred interests in the SPVs.

AIG will then immediately transfer these preferred interests to the US Treasury as part of its consideration for the Series F preferred shares. The firm will also apply proceeds from future asset monetisations, including the announced sales of the AIG Star Life Insurance and AIG Edison Life Insurance, to retire the remainder of the FRBNY's SPV preferred interests. When these transactions are completed, AIG expects that it will have repaid the FRBNY in full.

To retire the US Treasury's preferred interests in the SPVs, AIG will apply the proceeds of future asset monetisations, including its remaining equity stake in AIA and the equity securities of MetLife that AIG will own after the sale of ALICO to MetLife closes.

Finally, AIG has approximately US$49.1bn of TARP preferred shares outstanding. Under the plan, the US Treasury is expected to receive approximately 1.655 billion shares of AIG common stock in exchange for the US$49.1bn of TARP Series E and Series F preferred shares and the Series C preferred shares currently held by the AIG Credit Facility Trust.

In addition, AIG will issue up to 75 million warrants with a strike price of US$45.00 per share to existing common shareholders. Upon the exchange, the US Treasury will own 92.1% of the common stock of AIG.

The exchange will not be executed until the FRBNY credit facility is repaid in full. After the exchange is completed, it is expected that over time the US Treasury will sell its stake in AIG on the open market.

AIG expects to repay and terminate the FRBNY credit facility and complete the issuance of common stock to the US Treasury before the end of 1Q11.

CDS

Credit fund principal finds new home

State Street has appointed Sam Cole as evp and deputy head of its e-Exchange business, a division of State Street Global Markets. Based in New York, Cole will be responsible for product, technology and operational activities across the e-Exchange portfolio, as well as the coordination of all State Street Global Markets activities locally. He will report to Clifford Lewis, evp and head of State Street's e-Exchange business, and will also join the Global Markets executive management group.

Cole joined the firm from BlueMountain Solutions, where he served as president. He was also coo, co-head of trading and managing principal at the parent company BlueMountain.

CDS

Primus settles LBSF claims

Primus Financial Products has settled all outstanding claims with Lehman Brothers Special Financing Inc (LBSF), amounting to approximately US$1.1bn of CDS. Five reference entities in the portfolio, with a notional principal of US$66m, suffered credit events over the course of the last two years. Premiums unpaid by LBSF and owing to Primus totalled approximately US$16m at the time of settlement.

The mark-to-market value of the portfolio, together with the settlement prices of the CDS that had suffered credit events, totalled approximately US$54.4m in favour of LBSF. Primus paid LBSF US$17.5m to terminate all credit swaps and settle all outstanding claims.

CLOs

Debt capabilities enhanced with CLO manager buy

3i Group has acquired Mizuho Investment Management (MIM), a debt management firm specialising in CLOs and senior and subordinated corporate debt funds. The firm has a team of 28 employees and is expected to enhances 3i's capabilities in the debt markets, building upon the group's existing private equity and infrastructure businesses.

3i's existing debt management activities will be merged with MIM to form a distinct business line, 3i Debt Management, with a total of £4bn assets under management. Jeremy Ghose, ceo of MIM, will join 3i's leadership team as managing partner and ceo of the 3i Debt Management.

The acquisition consideration is £18.3m.

CMBS

CRE advisory md named

The Garibaldi Group has appointed Gary Sopko as md in its newly created capital markets advisory group, specialising in debt and equity solutions for CRE. As md of capital market services for the firm, Sopko is responsible for delivering the optimal capitalisation structure for the firm's clients' investment, development and financing needs by sourcing both debt and equity for CRE opportunities.

Prior to joining the firm, Sopko was a principal with the Llenrock Group, a real estate advisory and investment banking firm. Previously, he was md of capital markets and acquisitions of a regional CRE investment and development company.

Investors

New EM fund launched

Threadneedle has launched its Absolute Emerging Market Macro Fund, which has been rated single-A by S&P. The fund aims to achieve a positive absolute return of 7.5%-12.5% on an annualised basis on a long-term investment horizon - independent of any benchmark limitation, the firm says.

The lead manager on the fund will be Richard House, the firm's head of emerging market debt. Based in London, he will be supported by the firm's EM debt team, including EM strategy head Agnes Belaisch as deputy manager of the fund.

House says: "The fund allows us to exploit the many macro-based opportunities that exist across the EM universe without the constraints of any index. Within the fund, we have the flexibility to express our highest conviction macro views via sovereign credit, rates and FX, both on an absolute and relative basis."

Investors

CRE vets boost REIT

Starwood Capital Group has hired a team of executives to drive the growth of Starwood Property Trust. The four executives - Boyd Fellows, Stew Ward, Chris Tokarski and Warren de Haan - have joined the firm as senior executives of SPT Management, the external advisor and manager to Starwood Property Trust. All four will be based in the firm's San Francisco office.

Fellows joins the firm as president and md of SPT Management, reporting to Barry Sternlicht, chairman and ceo of Starwood Capital Group and SPT Management. Ward joins SPT Management as cfo, md and head of capital markets and risk management, while Tokarski is chief credit officer and md. De Haan is chief originations officer and md of SPT Management. Ward, Tokarski and De Haan will each report to Fellows.

The four executives have worked together for more than 15 years, having founded and built Countrywide Financial's CRE finance business. All four also founded and served as managing partners at Coastal Capital Partners, which acquired distressed CRE debt, advised owners of CRE on restructurings and financed health care properties.

Legislation and litigation

ABS CDO class action suit filed

A client of Berger & Montague has filed a class action suit in the US District Court for the Southern District of New York against Goldman Sachs (Dodona I, LLC v. Goldman, Sachs & Co), concerning two CDOs. The defendants are alleged to have sold two CDOs, while failing to disclose to investors both that the transactions were structured such that they were doomed to lose value and that Goldman would profit from its own short positions when the securities did lose value.

The two CDOs are the US$837m Hudson Mezzanine Funding 2006-1 (all tranches except class E and income notes) and the US$407.9m Hudson Mezzanine Funding 2006-2 (all tranches except class E and income notes). The value of the securities depended partly on the value of highly risky subprime-related and other RMBS.

Hudson 1 CDO reportedly suffered its first ratings downgrade by S&P in early September 2007, with US$280m of the securities downgraded by the end of 2007. By mid-2008, the triple-A rated transaction was downgraded to junk status. In addition, a certain principal of the Hudson 1 CDO was reportedly paid off in April and May 2009, with investors in several of the tranches losing millions of dollars.

Similarly, by the end of 2007, at least US$144m of the Hudson 2 CDO was downgraded, with further downgrades affecting US$286m securities on 20 August 2008.

Legislation and litigation

Defamation lawsuits dropped

Phoenix Partners founders Wesley Wang, Marcos Brodsky and Nicholas Stephan have dropped their defamation lawsuits against IDX Capital's principal, James Cawley. The trio previously worked for Cawley at Axiom Global Partners and claimed that he defamed them to Forbes magazine to gain an advantage in litigation between Axiom and their new business, Phoenix.

"As people know, the allegations made against me in the two lawsuits were cruel, unsubstantiated and without merit," Cawley comments. "The court recognised this by throwing out the core allegations over a year ago. I'm encouraged that Messrs Wang, Stephan and Brodsky have now decided drop the remainder of the lawsuits and move on."

Cawley and IDX Capital countersued Phoenix and Wang in February 2007.

Operations

Fund administration business restructured

Maples Fund Services has formally launched its restructured fund administration business, formerly operating as Maples Finance. The move is part of the global restructuring of the Maples Finance business, which now operates as MaplesFS, with various business divisions including Maples Fund Services.

Scott Somerville, who previously held a number of senior management positions within MaplesFS, becomes ceo of the group. Toni Pinkerton, who has been with the firm for six years, steps up as global head of fund services for Maples Fund Services. The Maples Fund Services executive team is rounded out by cio Tyler Kim, who is responsible for building out its technology and infrastructure.

Real Estate

CRE firm adds marketing pair

Andy Carey and Roy Elengical have joined The Richland Companies in its Houston office as tenant representatives. Both are responsible for marketing and leasing the firm's 30-property portfolio and third-party properties, as well as representing clients in identifying locations and negotiating commercial leases.

Carey joins the firm from Marcus & Millichap, where he was an associate for the national office and industrial properties group, providing advisory services to CRE owners. Previously, he has held positions at Ernst & Young, Credit Based Asset Servicing & Securitisation, Redwood Trust, S&P and JPMorgan.

Elengical was previously a senior leasing associate at Senterra Real Estate Group. Beginning his career at Shell Oil Trading Company, he has held positions at Hartman Income REIT and World Financial Group.

RMBS

State Street pair charged with misleading investors

The US SEC has charged a pair of former State Street Bank and Trust Company employees with misleading investors on subprime investments. John Flannery is the firm's former cio and James Hopkins was head of product engineering for North America.

The SEC's Division of Enforcement alleges that State Street's Limited Duration Bond Fund was marketed as an 'enhanced cash' investment strategy - an alternative to a money market fund. By 2007, however, the fund was almost entirely invested in subprime RMBS and derivatives. Despite this exposure to subprime securities, the fund continued to be described as a 'less risky' investment by the State Street pair.

According to the SEC, State Street provided certain investors with more complete information about the fund's subprime concentration and other problems with the fund. These better-notified investors included clients of State Street's internal advisory groups, which subsequently decided to recommend that their clients redeem from the fund, the SEC states.

At the direction of Flannery and the firm's investment committee, State Street sold the fund's most liquid holdings and used the cash to meet the redemption demands of their better informed investors. This left the fund and its remaining investors with largely illiquid holdings.

In the settlement, State Street agreed to pay more than US$300m to investors who lost money during the subprime market meltdown in 2007, additionally paying nearly US$350m to investors to settle private lawsuits.

RMBS

UKAR integration completed

Northern Rock Asset Management (NRAM) and Bradford & Bingley (B&B) are being integrated under a newly established holding company, UK Asset Resolution (UKAR). The integration has been planned for some time (see SCI issue 179).

NRAM says UKAR will maximise taxpayer value and exists to ensure the orderly management of the closed mortgage books of NRAM and B&B. The two companies will remain as separate legal entities with their own balance sheets and government support arrangements, with the Granite and Aire Valley master trusts kept separate.

Richard Banks, ceo of UKAR, has been appointed to NRAM's board as ceo, replacing Gary Hoffman. Three non-executive directors from B&B's board - Michael Buckley, Louise Patten and John Tattersall - also become non-executive directors of NRAM.

Hoffman steps down as NRAM's ceo, but remains ceo of Northern Rock plc. He says: "This integrated structure, with NRAM and Bradford & Bingley under common management and governance, creates the opportunity to deliver maximum value for the taxpayer and is therefore the right strategy."

Hoffman adds: "Following the successful rescue and restructure of the former Northern Rock business, NRAM returned to profitability in the first half of 2010 as income increased, impairment charges were reduced and arrears continued to stabilise. This trend has continued in the third quarter and I feel NRAM is being handed over in good shape for the future."

The integration is implemented within European Commission State Aid rules and follows approval by the UK FSA.

RMBS

WaMu court case continues

In the case of Boilermakers National Annuity Trust Fund versus WaMu Mortgage Pass Through Certificates, Series AR1, the US District Court for the Western District of Washington has issued an order denying in part the defendants' motions to dismiss the plaintiffs' Securities Act claims.

The court ruled that the plaintiffs have alleged actionable claims with respect to seven offerings totalling US$10.8bn in mortgage-backed certificates issued and underwritten by WaMu and its related entities. The certificates were supported by pools of residential mortgage loans.

"This decision is good news for investors," says Steven Toll, the plaintiffs' co-lead counsel and partner at Cohen Milstein Sellers & Toll. "While we are disappointed that the court dismissed a number of offerings from the case, we are gratified that the court has permitted the prosecution of this case to go forward."

The court granted the defendants' motion to dismiss claims pertaining to 25 certificates. However, it ruled that the alleged misstatements and omissions relating to the description of the purported loan underwriting guidelines gave rise to actionable claims and survived dismissal in each of the seven offerings.

The court also ruled that defendants failed to show that the purchase and sale agreements shielded defendants from liability, that economic loss was not sufficiently alleged or that the offering documents contained sufficient risk disclosures.

RMBS

Euro mortgage asset sale completed

Residential Capital has completed the sale of its European mortgage assets and operations to affiliates of Fortress Investment Group.

"The completion of these sales is another milestone toward our objective of reducing exposure in the legacy mortgage operation," says Ally Financial ceo Michael Carpenter. "In addition to these transactions, we continue to sell other legacy assets and remain focused on defining the best long-term strategy for our origination and servicing business."

The sales include a combination of approximately US$11bn of securitised loans, other loan assets and servicing rights, as well as the shares of the related operating entities in the UK, Germany and the Netherlands. With the completion of these transactions, Ally has effectively exited the European mortgage market.

RMBS

Partnership brings enhanced valuation platform

MDA DataQuick and MBSData have partnered to launch an enhanced RMBS valuation product. The product manages portfolio default risk by identifying and measuring previously unknown underlying loan performance risks, the firms say.

This offering utilises a combination of non-agency loan level information, current collateral and property values, as well as updated and combined loan-to-value and tax delinquency status. Additional liens, neighbourhood default rates and at-risk borrower behaviour can also be analysed through the product.

ABS

Final FDIC rule an 'improvement' on original

Moody's says that the final safe harbour adopted by the FDIC on 27 September is an improvement from the original rule, in terms of its credit impact on bank-sponsored securitisations (see also last issue). The final rule protects assets transferred to bank-sponsored securitisation vehicles from an FDIC receivership or conservatorship of the bank sponsor - effective for transactions closing after 31 December 2010.

"The rule as previously proposed would have created greater ratings linkage between the bank sponsor and the ABS," says Moody vp Sally Acevedo. "It contained conditions that would have been difficult, if not impossible, to satisfy and therefore it was unclear whether the safe harbour would be available when a bank fails."

As part of the final rule, the FDIC has consented to continue making payments or servicing the assets as required under the transaction documentation. Additionally, it grants expedited consent to allow secured parties to exercise contractual rights against the FDIC arising from its failure to pay or apply collections. This consent addresses the agency's concerns, Moody's says, about payment disruption during the FDIC's statutory stay period.

"Without the safe harbour, the FDIC's stay rights kick-in, putting at risk scheduled interest and principal payments on banks-sponsored ABS and delaying contractual remedies against the FDIC for payment defaults. Further, without the safe harbour, the FDIC's ability to reclaim asset transfers would expose investors to market value risk," adds Acevedo.

The final safe harbour rule also shields new issuances from master trusts that issued at least one obligation as of 27 September - as long as the related asset transfers qualify as GAAP sales under previous accounting rules. "This may be a boon for existing credit card ABS issuers. Nevertheless, the difficulty lies in proving compliance with accounting rules that no longer exist," Acevedo warns.

ABS analysts at JPMorgan nonetheless suggest that 4Q10 could bring an increase in activity from banks motivated to complete transactions before 1 January 2011, when the FDIC's new conditions for safe harbour kick in. The six-month no action period imposed by the SEC on rule 436(g)1 will expire at the end of the year as well - another regulatory change that may cause issuers to bring their ABS to market in 4Q10. The market is currently expecting the SEC to extend its no action period and possibly eliminate the need to include ratings in the prospectus as part of Reg AB 2 in order to keep the ABS market open.

Given the regulatory backdrop versus the typical seasonal fourth-quarter activity slowdown, the JPMorgan analysts indicate that the ABS pipeline will total the US$25bn-US$30bn range. Total supply for 2010, which stands at US$85bn, will likely still fall short of the US$140bn in 2009.

"Due to the possible supply pressure, anticipated trading activity slowdown and the low absolute yields, we expect that triple-A benchmark ABS spreads will likely remain range-bound," the analysts note.

ABS

ABCP 'flight to quality' to continue in 2011

Fitch predicts that investor demand in the ABCP market will continue to focus on simple structures with high quality assets in 2011.

Heather Collins, associate director in Fitch's ABCP ratings team, says: "Programme sponsors have taken steps to increase credit enhancement and asset quality over the past three years in recognition of investors' 'flight to quality'. This is set to continue into 2011, with activity centred on transparent, simple multi-seller programmes."

US investor demand for ABCP continues to dwarf demand in Europe and that trend is likely to continue throughout next year, the agency says. However, the contraction of the European investor base is now complete, according to Bank of America Merrill Lynch's Peter Eisenhardt, speaking at Fitch's ABCP conference.

"The European CP investors that are currently active have an appetite for ABCP; they're resourced for it and they like the risk diversification and yield that it offers," said Eisenhardt. "We're not seeing a flood of new investors entering the European market, but there's a good base and the market is building from here."

However, European issuers remain incentivised to issue into the US ABCP market. "There's a very favourable swap from US dollar to euro or sterling," added Eisenhardt. "Issuers want to maintain a presence in Europe, but there are very compelling economic arguments to issue USCP and do that swap."

Overall, the agency says it has a stable ratings outlook for global ABCP. However, it anticipates only modest issuance growth in the coming months, with overall outstandings remaining extremely depressed from the peak in July 2007.

The US ABCP market sits at US$399bn, down 11% this year and 66% below July 2007's figure. European ABCP outstandings are down by nearly 20% since the turn of the year, to US$34bn - 89% off the peak of the market.

ABS

SLABS ARS buyback launched

Nelnet has commenced a fixed price cash tender offer for the outstanding senior and subordinate auction rate student loan asset-backed notes of Nelnet Student Loan Trust 2003-2. The class A-5 notes are being tendered at a consideration of US$985 per US$1,000 principal amount, the class A-6s at US$960 and the class Bs at US$920.

In addition to the notes consideration, the company will pay all accrued and unpaid interest on the notes purchased pursuant to the offer up to the settlement date (anticipated for 19 October). The offer will expire on 14 October, unless extended or earlier terminated. Nelnet expects to use available cash to pay for the notes.

ABS

US credit cards improve against seasonal odds

Moody's believes that US credit card performance will improve, despite the August 58bp rise in charge-offs. Even with the August increase, the agency notes, the charge-off rate is below the 10% mark on a three-month rolling average basis - for the first time since May 2009.

"The relative improvement in card charge-offs is due to credit tightening, including lower credit limits and stricter underwriting standards," says Moody's analyst Jeffrey Hibbs. "Charge-offs are expected to decline even further, given the improvement in delinquency rates, which are often a harbinger of the future charge-off rate trend."

He adds: "The improvement in the delinquency rate is particularly notable since seasonal patterns have historically pointed to higher delinquency rates heading into the fall."

During August, the delinquency rate fell by 23bp to 4.70%, a two-year low and the tenth consecutive month of improvement. The early-stage delinquency rate was 1.20% in August, down 2bp from July but now 29bp below its March 2010 reading - moving lower for the tenth consecutive month.

The payment rate index fell slightly in August to 19.48% from 19.57% in July. While most issuers reported a continuation of the trend to strong payment rates, the decline was largely due to a sharp reduction reported by the Citi trust. Further, the agency believes that payment rate increases will ultimately fade and give way to a steady payment rate somewhere below its current level.

Additionally, with the yield index moving higher to 22.84% in August - up from 22.62% in July - the agency predicts the trust yield to lose steam as previous discount terms begin to expire.

ABS

NAIC ratings review completed

In response to a rule-change request from the National Association of Insurance Commissioners (NAIC), Fitch has formally reviewed 99% of its US structured finance ratings during the past 12 months.

According to these rule changes, US insurers may use SF ratings from acceptable rating organisations in certain risk-based capital calculations only if it can be confirmed that the rating has been reviewed within the past 12 months. This is of importance, Fitch says, as SF represents close to 20% of invested assets among US insurers, and capital charges can increase substantially if those assets do not carry current ratings.

"Investors and regulators have become increasingly focused on confirming that ratings are not only informative but current," says Doug Murray, Fitch head of global structured finance business relationship management. "Increased cost of capital can be caused by any number of factors, but stale structured finance ratings should not be one of them."

Kevin Duignan, Fitch head of US structured finance, adds: "Investors do not just want to know when a transaction is performing outside of original expectations, but also when it is performing within expectations. Therefore, Fitch's practice is to publish an affirmation at least annually when transactions are performing as expected."

This issue is also addressed in new EU guidelines, requiring all registered credit rating agencies to demonstrate that ratings have been reviewed within the previous 12 months. Fitch applied for registration under the EU Regulation on Credit Rating Agencies in August 2010 and is on schedule to meet this review requirement by August 2011.

ABS

Auto residual value criteria updated

Fitch has updated its EMEA auto residual value ABS criteria, which formalises its opinion on key risk drivers and provides a framework for transaction-specific base case and stress assumptions. In comparison to the previous criteria, the transaction-specific stress levels are typically higher. As assumptions in line with the updated criteria are already captured within the existing ratings, Fitch says it does not anticipate any rating actions to result directly from the criteria update, however.

The agency has reviewed a range of originator-specific and market-wide data from a number of European countries. It identifies key risk drivers of residual value losses as: macroeconomic deterioration; changing consumer preferences; the originator's residual value setting policy; and the condition and mileage of the relevant vehicles.

Under the criteria, Fitch analyses data to form an expectation on the performance of a particular transaction and then tests the ability of the transaction to withstand additional stresses. The base case sale proceeds assumption is set to take into account the agency's economic expectations and the originator's residual value setting policy. Within EMEA transactions, the latter is a risk as the purchase price of the receivables, paid to the originator, is typically based on the contractual residual value amount, set by the originator.

The potential impact of macroeconomic deterioration and changing consumer preferences is considered by applying rating haircuts to the base case sale proceeds assumption. Fitch believes that these factors could impact different transactions to varying extents.

Therefore, rating haircuts are derived on a transaction-specific basis, taking into account factors including: the distribution of loan contract maturities over time; the size and liquidity of the used car market for the given jurisdiction; and pool diversification with respect to manufacturer and vehicle model.

ABS

Stable performance for Indian ABS

The majority of Fitch-rated Indian ABS transactions have performed as expected, with the ratings outlook on the sector remaining stable, according to the agency.

Asset classes like construction equipment loans have exhibited a stable performance, Fitch confirms, resulting in the availability of substantial credit enhancement to cover for future defaults. However, the commercial vehicle loans of recent vintage transactions have exhibited a relatively faster roll-over into 90+ days past due bucket than of earlier vintages.

Jatin Nanaware, associate director in Fitch's structured finance team, says: "The overdue collection efficiency for transactions that closed over the last 12 months to May 2010 has shown a steeper drop of 10%-20% at a similar level of seasoning in comparison to the transactions that closed before May 2009."

He adds: "The drop in the overdue collection efficiency though has not translated into a worsening performance for the recent transactions, as most of these transactions have structural mitigation in the form of 'par' structure, resulting in the availability of excess interest spread. Also Fitch includes in its analysis at the time of initial rating specific adjustments to account for different timings of default and presence of overdue loans."

The largely stable performance of the transactions is also positively reflected in the ratings of the second loss credit facilities, with four deals upgraded to ratings higher than or equal to double-A from triple-B.

ABS

Pre-red SF cashflow tool launched

Intex Solutions has launched its INTEXreds web-based cashflow projection tool. The offering aims to support investor analysis and due diligence for structured finance securities during a deal's initial marketing phase - commonly referred to as the 'pre-red' period.

The service leverages RMBS, ABS, CMBS and CDO cashflow modelling language and structuring software, the firm says. It also provides investors with the ability to view collateral, run user-defined prepayment and default/severity cashflow stress scenarios, as well as viewing the deal waterfall script for pre-price cashflow deal models.

CDO

Higher recovery rates driving SF CDO liquidations

Moody's has examined data relating to the amount and timing of liquidation proceed distributions, as reported by trustees, for 164 structured finance CDOs from the 2003 to 2007 vintages. The sample - of which 85% were originated in 2006 and 2007 - consists of 69% mezzanine and 31% high grade SF CDOs.

The agency notes its key observations from the exercise in its latest Structured Credit Perspectives publication. Among these observations are that average recovery rates reached their trough at the end of 2008 and peaked in 4Q09; older vintage transactions generally have higher recovery rates; cash SF CDOs have higher recovery rates than hybrid transactions; HG SF CDOs have a higher recovery rate than mezz transactions; and average recovery rates for CLO-squareds exceed 50%.

All junior tranches experienced full loss of principal, irrespective of the type and vintage of the transaction. The average recovery rate for senior notes is 26.3%, according to the study.

The lowest average recovery rates occurred in 2H08, when the market witnessed a large wave of liquidations from 2006 and 2007 vintage transactions. Recovery rates increased slowly in 2009 and reached their peak in 4Q09. Higher recovery rates in the fourth quarter are driven by a greater percentage of liquidations from older vintage (pre-2005) CDOs.

16 SF CDOs liquidated during 2Q10, seven of which experienced an EOD in 2007 or 2008. That some 'seasoned' transactions which have not cured an EOD for at least one year recently have liquidated indicates that liquidation as a remedy is now viewed in a more positive light, Moody's notes.

"The recent rise in asset prices may have prompted growing numbers of controlling investors to liquidate SF CDOs," it explains. "Changes in investors or investment strategy (e.g., commutations of policies by insurance companies acting as financial guarantors) may also underpin the increase in liquidations."

2006 and 2007 vintage SF CDOs still dominate in number of liquidations. Pre-2005 SF CDO liquidations began increasing in late 2009 and peaked in the first half of 2010.

CDO

LCDO tender offer launched

Columbia Point, a wholly owned subsidiary of Elliott International, has commenced tender offers for several classes of junior notes issued by Pebble Creek LCDO 2006-1 (class C and D notes), Airlie CDO I (class B, C and Ds) and Pebble Creek 2007-1 (class C and Ds). The offer and withdrawal rights will expire on 27 October, unless extended.

The Pebble Creek 06-1 offer is subject to the condition that all of the notes, together with the Pebble Creek notes held by the offeror and its affiliates, represent at least 75% of the aggregate principal amount of the LCDO. At the commencement of the offer, Columbia and its affiliates held approximately 50% of the class C notes and 63% of the class Ds.

If the offer is consummated, the offeror is to pay a cash purchase price equal to 31% of the principal amount of the class C notes and 29% of the Class Ds. If the Airlie CDO I Offer is consummated, meanwhile, it will pay a cash purchase price equal to 33% of the principal amount of the class Bs, 31% of the class Cs and 29% of the class Ds.

The offer is subject to the condition that all of the Airlie CDO I notes validly tendered would, together with the Airlie CDO I notes held by the offeror and its affiliates, represent at least 65% of the aggregate principal amount of the notes. At the commencement of the Airlie CDO I offer, Columbia and its affiliates held approximately 71% of the class B notes, 37% of the class Cs and 6% of the class Ds.

Finally, if the Pebble Creek 07-1 offer is consummated, the offeror will pay a cash purchase price equal to 31% of the principal amount of the class C notes and 29% of the Class D notes. The offer is subject to satisfaction of the condition that all of the notes validly tendered would, together with the notes held by the offeror and its affiliates, represent at least 75% of the aggregate principal amount. At the commencement of the offer, Columbia and its affiliates held approximately 63% of the class C notes and 69% of the class Ds.

CDO

Synthetic CDO surveillance assumptions updated

S&P has clarified its methodology and assumptions for surveilling rated global synthetic CDO transactions.

S&P's methodology includes guidelines for upgrade and downgrade, as well as its recovery rate assumptions for unsettled credit events within a reference portfolio. It also includes guidelines for changing ratings when a tranche breaches an attachment or detachment point.

The analysis is based on the use of the agency's CDO Evaluator model, which uses continually updated ratings assigned to the underlying reference names in a synthetic CDO portfolio. S&P says it typically uses synthetic rated over-collateralisation (SROC) as the key measurement within these reviews to determine whether a rating action is necessary.

CDS

Auction for Takefuji Corp, but not Blockbuster

ISDA's Japan Determinations Committee resolved that a bankruptcy credit event occurred in respect to Takefuji Corporation on 28 September (see last issue). The Committee also voted to hold an auction for Takefuji and will publish the auction terms in due course.

Meanwhile, the Americas DC ruled that a bankruptcy credit event in connection with Blockbuster Inc occurred on 23 September, but that an auction for trades referencing the name won't be held.

CDS

CDS clearing service enhanced

LCH.Clearnet has enhanced the clearing functionality of its CDS offering in collaboration with its clearing members, the firm says. The enhancements include an enhanced risk management framework, integration of the DTCC's new automated credit events procedures and implementation of the CLS system connection, for product-related cashflow settlement.

Christophe Hémon, LCH.Clearnet chief executive, says: "We seek to build clearing models which fit with current market practices and which answer our members' needs, whilst at the same time responding to the regulatory push to reduce systemic risk by bringing more OTC products into clearing. We welcome recent policy developments and are well placed to operate within the proposed European rules for CCPs."

LCH.Clearnet's CDS clearing service was launched on 31 March 2010 and, as of 24 September 2010, the notional value of the 622 contracts cleared by the service amounted to €22bn, with an open interest of €1.6bn.

Meanwhile, the firm has begun a thorough review of the CFTC's proposed rules on governance and conflicts, as well as the rules proposed relating to systemically important derivatives clearing organisations (DCOs). The move follows the CFTC's release of the first series of proposed rules under the Dodd-Frank Act.

The clearinghouse says it has worked closely with the CFTC, Congress and others during the debate of the Dodd-Frank bill, with a particular focus on the requirements for DCOs in respect of governance arrangements and mitigation of potential conflicts of interest. "We look forward to working with the Commission during the comment period and final implementation of these proposed rules," it adds.

LCH.Clearnet has planned several initiatives in the US that it will be rolling out in 2010, including the introduction of a futures commission merchant (FCM) model to its SwapClear system. FCM access is expected to be available before the end of the year and will offer protections, including margin collateral being held in the US, portability of client collateral and positions, and arrangements governed under New York State law.

CLOs

Euro CLO performance stabilising

The pace of negative credit migration within European CLO portfolios is slowing, according to Fitch's latest European performance tracker for the sector.

Since Fitch's last such report in July, two defaults have occurred. However, the names were not heavily referenced in the transactions included in the CLO tracker universe.

Meanwhile, CLO portfolios saw their triple-C exposure decline to 7.4% from 11.6%. The average senior overcollateralisation (OC) test result increased to 132.1% from 131.6%, and the double-B OC test result increased marginally to 103.9% from 103.6%.

Betula Funding 1 has been removed from the tracker due to Fitch's rating withdrawal on the transaction in September.

CMBS

US$35bn US CMBS issuance forecast for 2011

Tightening credit spreads for US CMBS since the highs reached in 1Q09 should continue to spur new issuance in the near term, according to S&P. The agency notes that issuance for the fourth quarter could fall within the US$4bn-US$8bn range - the largest total since early 2008 - based on the current public pipeline of CMBS transactions.

Annualising S&P's fourth-quarter forecast would indicate US$24bn of issuance in 2011. However, the agency projects a higher figure - US$35bn - based on its regression estimates relating CMBS issuance to CMBS spreads and US Treasury yields, with adjustments for some positive qualitative factors. Its 2011 forecast assumes that spreads and 10-year US Treasury yields remain at today's levels.

"While US$35bn may seem high relative to the amount of issuance during the past two years, it would roughly equate to the levels we saw in 1996 and 1997," S&P says.

Several factors aside from spreads and interest rates are expected to affect US CMBS issuance in 2011. Several new lenders have entered the market and many existing lenders are planning to significantly boost their issuance volumes.

Furthermore, several of the new financial regulations are anticipated to be only a minor impediment to new CMBS issuance. "Finally, US$40bn of fixed-rate CMBS matures in 2011, in addition to as much as US$300bn of non-CMBS commercial mortgages. This rollover could provide opportunities for CMBS lenders to increase their loan origination volume," the agency concludes.

CMBS

Stuy Town auction postponed on mezz bid

The foreclosure auction of Stuyvesant Town-Peter Cooper Village has been postponed to 13 October due to negotiations over the mezzanine debt. CWCapital is seeking to acquire it from the Pershing/Winthrop joint venture, reportedly with the aim of reducing the amount of the transfer tax due.

If CWCapital wins the foreclosure auction with the credit bid, Rose Associates is expected to be appointed as the property manager. The acquisition of the mezzanine debt, if completed, would increase CWCapital's leverage against the borrower and potentially reduce the risk of subsequent legal actions from third parties, according to MBS analysts at Barclays Capital.

Moody's suggests in its latest Weekly Credit Outlook that a foreclosure auction is a strong credit positive for the various CMBS trusts holding portions of the mortgage on Stuyvesant Town as it means the uncertainties of relatively debtor-friendly bankruptcy courts will be avoided.

Scenarios other than CWCapital winning the auction with a credit bid include: selling the mortgage pre-auction to another party in a negotiated deal, with that party itself credit bidding at the auction; and, if CWCapital decides not to credit bid, the winning bidder could be an unknown party that offers the highest bid at the auction. Moody's notes that it is unlikely anyone will bid more than the full amount of the accrued debt, currently totalling US$3.7bn.

CMBS

US CMBS delinquencies breach 9% mark

US CMBS delinquencies topped 9% for the first time in history at end-September, reaching 9.05%, according to the latest Trepp CMBS Delinquency Report. However, the rate of increase slowed dramatically to just 13bp - the second lowest increase of 2010 and the smallest since July's 12bp increase. The average monthly increase for the past 12 months has been 33bp.

The increase for seriously impaired loans was slightly higher at 16bp, however.

Hotel and retail delinquencies continue to lead the way, with increases of 41bp and 37bp respectively. Hotel CMBS delinquencies now are at nearly 20%, the highest among major property types, with retail CMBS delinquencies topping 7% for the first time in history.

Multifamily and industrial delinquencies fell by 10bp and 8bp respectively, with industrial continuing to be the best performer among major property types.

CMBS

CMBS maturity repayment index rises

Fitch reports that its European CMBS Maturity Repayment Index increased to 38.5% from 36.8% during the month of September, due to two loans paying in full and partial repayments on six other loans.

Of the three loans that were scheduled to mature in September 2010, only the €31m Hofplein loan (from Plato No. 1) paid in full. However, the Vich & Brig loan (Taurus CMBS 2006-3) is also expected to make a full repayment shortly, the agency says. The final loan, Castor & Pollux (White Tower Europe 2007-1), has a maturity extension of one year.

Notable partial repayments were reported on Tahiti Finance and Taurus CMBS during the month. The former saw a £48.2m repayment associated with its restructuring, which also resulted in a loan extension to May 2012. The latter distributed SFr55.7m associated with the sale of the Volketswil asset securing the Epic loan.

The Snowhill loan (Indus ECLIPSE 2007-1) reported a full repayment after its April 2010 maturity date, although the outstanding £10.8m balance did not have a material impact on the index, the agency confirms.

Regulation

Auditor inspection reveals accounting weaknesses

The Public Company Accounting Oversight Board (PCAOB) has released a report summarising its observations of audits undertaken by financial institutions and other companies during the economic crisis.

"This report provides illustrative examples of the kinds of issues our inspection programme has uncovered during the past three years as a result of the impact of the economic crisis on the work of auditors," says PCAOB acting chairman Daniel Goelzer. "These inspection observations underscore the need for auditors to be diligent in assessing and responding to emerging areas of risk when economic and business conditions change."

The report found that auditors on occasion appeared not to have complied with the PCAOB's auditing standards in connection with areas significantly affected by the economic crisis, such as: fair value measurements; impairment of goodwill; indefinite-lived intangible assets and other long-lived assets; allowance for loan losses; off-balance sheet structures; revenue recognition; inventory; and income taxes. Firms have made efforts to respond to the increased risks stemming from the economic crisis; however, the deficiencies identified by inspectors in their reviews of issuer audits suggest that firms should continue to focus on making improvements to their quality control systems.

The Board says it will focus on whether firms' actions to address quality control deficiencies have, in fact, reduced or eliminated subsequent occurrences. George Diacont, PCAOB director of the division of registration and inspections, adds: "Inspectors will continue to adapt to emerging issues. Inspectors also will focus on whether firms are addressing the quality control deficiencies described in Board inspection reports."

These observations will serve to inform future PCAOB actions in connection with certain inspection, enforcement and standard-setting activities. The Board will consider whether additional guidance is needed related to existing standards.

Regulation

FASB exposure draft rebuffed

The Financial Reporting Executive Committee (FinREC) of the American Institute of Certified Public Accountants (AICPA) has submitted its comments on FASB's Exposure Draft of a Proposed Accounting Standards Update, 'Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities'. AICPA reiterates that it does not believe all loans should be carried at fair value, as stated in its December 2009 letter to FASB.

"The AICPA supports the objective of the proposal, but has many concerns about other specific aspects of the project and has made certain recommendations to FASB," the Institute notes. "Accounting for financial instruments is one of the areas that has been identified as a priority in the road to convergence with the IASB. The AICPA supports greater convergence with the IASB, but believes that changes are necessary in the proposed Exposure Draft to achieve that important goal."

AICPA says it supports a mixed attribute model for financial instruments over the "fair-value-for-almost-all-financial-instruments" approach proposed by the FASB. Through the utilisation of fair value and amortised cost, the mixed attribute model allows the measurement and reporting of financial instruments to reflect the way these instruments are actually managed, it adds.

FinREC agrees with the comments of dissenting FASB Board members, who stated that they "dissent from several aspects of the proposed guidance, primarily because it would introduce fair value accounting for some nonmarketable, plain-vanilla instruments that are held for collection (long-term investment), and most liabilities held for payment, which they believe would not reflect the likely realisation of those items in cash and, therefore, would not be the most relevant way to measure those items in the statement of financial position and comprehensive income".

In FinREC's view, the IASB's mixed attribute classification and measurement model for financial instruments - included in IFRS 9, 'Financial Instruments'; the Exposure Draft, 'Fair Value Option for Financial Liabilities'; and IAS 39, 'Financial Instruments: Recognition and Measurement' - is generally superior to that of FASB's proposed classification and measurement model. However, there are some aspects of the IASB's classification and measurement model that it does not support. In addition, it is opposed to the IASB's financial assets impairment model as proposed in the Exposure Draft, 'Financial Instruments: Amortised Cost and Impairment', and the FASB's proposed credit impairment model.

RMBS

RMS 25 due next week

Investec's UK non-conforming RMBS is expected to price next week. The £195.6m transaction - dubbed RMS 25 - will pool GMAC RFC, Mortgages PLC and Kensington collateral and will be led by Barclays Capital and Investec. Of the pool, 14.8% comprises buy-to-let mortgages, while interest-only mortgages account for 68.5%.

Both Fitch and S&P are expected to assign triple-A ratings to the £129.2m 5.4-year class A1 notes, which will be publicly offered. The remaining seven tranches - ranging from triple-A to single-B plus and an unrated equity piece - have a 7.9-year WAL and are rated by S&P only.

Meanwhile, a Holmes RMBS is expected to enter the pipeline in November, following Santander's streamlining of the Holmes master trusts.

RMBS

Holmes restructuring is 'rating positive'

Santander intends on 8 October to restructure its Holmes Master Trust RMBS programme (see also separate News Analysis). The proposal involves refinancing all amounts currently outstanding under the Second Master Issuer term advances (corresponding to the retained Second Master Issuer notes), as well as repurchasing around £36bn of trust collateral and adding a redemption reserve of £5.8bn from which the existing funding notes may be repaid.

The loans that are being repurchased have been selected at random and the characteristics of the pool remain similar following the loan repurchase, according to Moody's. The expected portfolio loss of 1% of original balance at closing remains unchanged, while the MILAN triple-A required credit enhancement of 9.6% represents a small increase over the previous figure of 9.4%.

Following the restructuring, outstanding notes in the trust will comprise: Holmes Financing Series 4 and Holmes Master Issuer 2006-1 Series 3, which are scheduled to repay next month; Holmes Master Issuer 2007-1 Series 3 and 4, which are scheduled to repay in January 2011 to October 2012; and Holmes Master Issuer 2007-2 Series 3 and 4, which are scheduled to repay in April 2011 to October 2011.

In Moody's opinion, the restructuring will not impact the current ratings assigned to any of the notes. However, it is expected to be rating positive, given: any potential implication resulting from the recent Eurosail PECO case (SCI passim) will be resolved, as there will be no notes in Funding 2 and the notes remaining in Funding 1 following the October IPD will now have the benefit both of the redemption reserve and a 7% reserve fund; cash collateralisation of the Funding 1 notes via the redemption reserve reduces the risk of back-ended losses as these notes will be less likely to extend past their scheduled repayment date; and the seller share is projected to increase from 33.8% pre the restructuring to 52.3% post the restructuring.

RMBS

ASF market reviews to aid transparency

1010data has partnered with CoreLogic and Equifax to produce the first report in its 'ASF Market Review' series. These reports will provide summary information on key segments of the MBS market, the firm says. The first report will focus on the non-agency MBS market, including segments such as subprime and Alt-A MBS.

Tom Deutsch, executive director at ASF, says: "ASF has long been a vocal advocate for increased transparency in the securitisation markets. In producing these reports with our partner, 1010data, we are providing critical technology and tools to bring together many data sources including Equifax and CoreLogic to disseminate valuable research to ASF members."

Greg Munves, vp of 1010data, comments: "Leveraging data from CoreLogic and Equifax provides buyers and sellers of non-agency MBS with strong insight into the current performance of these securities. The non-agency MBS report is meant to provide a high-level overview of the state of the market and serve as a starting point for investors to begin their own deeper analysis."

In the future, the ASF and 1010data will partner with additional data providers to bring members more reports on both agency and CMBS, the firms note.

SIVs

Nightingale SIV debt on review

Moody's has placed under review for possible downgrade Nightingale Finance's Euro CP, Euro MTN, US CP and US MTN programmes. The action affects US$489m of debt securities.

The rating review is the result of a rating review on the Prime-1 short-term rating of AIG Financial Products Corp, whose affiliate - AIG Capital Management - manages the Nightingale SIV. AIG FP is committed to support Nightingale's senior debt through a senior note purchase commitment and a repo commitment.

Technology

Post-trade interface tool enhanced

MarkitSERV has enhanced its application programming interface (API) to provide buy-side firms with a consistent user interface for real-time management of post-trade activities. These include clearing and allocation delivery across all major asset classes in the derivative markets.

The expanded API allocation delivery system will allow transmission of interest rate and credit derivative trade allocations to broker-dealers' front-office systems. Users, the firm says, will gain direct connectivity to central clearinghouses, as well as the ability to deliver allocation details electronically.

Technology

Analytics platform integrates performance data

Principia Partners has integrated Intex performance data into its Principia Structured Finance Platform (Principia SFP). Intex historical collateral performance data - including delinquency, loss and prepayment rates for over 23,000 Intex modelled RMBS, ABS, CMBS and CDO deals - can be accessed from the platform, the firm says.

For portfolio and risk managers, less data mining is involved to view any slice of a portfolio and generate queries regarding portfolio composition and overall performance, according to Principia. With this level of transparency and control, the firm adds, investors can readily carry out benchmarking tests across tranches to better ascertain relative value, maintain compliance with investment guidelines and flag underperforming assets.

The performance data adaptor follows earlier integration of the Intex Deal Model Library and associated cashflow waterfall models into the system.

Technology

Updated default probability model issued

Kamakura Corporation has released version 5.0 of its default probability models, including a new version of the firm's Jarrow-Chava reduced form default model and a new hybrid model that combines Merton default probabilities with the Jarrow-Chava approach. The version 5.0 default models are based on the observations of 1.76m public firms and 2,046 defaults.

Separately, Kamakura has also provided the Kamakura Risk Information Services Version 5.0 technical guide to clients and financial service regulators. The guide provides a complete description of model inputs and coefficients, as well as a full suite of Basel 2-compliant tests of model accuracy.

"During the credit crisis, it became starkly apparent to many market participants that legacy Merton default technology was inconsistent with the many failures of financial institutions around the world," says the firm's founder and ceo Donald van Deventer.

He adds: "In a crisis, cash is king, and the reduced form framework can take advantage of this insight that is ignored in the Merton framework. By extending the maturities of the KRIS default term structures to 10 years, we can now show early warning of the next 'business cycle in the making' to KRIS clients."

Whole business securitisations

Whole business add-on securitisation executed

NUCO2 Funding has executed a US$40m add-on securitisation to fund future acquisitions, pay securitisation expenses and for other general corporate purposes. The new 2010-1 deal will be issued out of the existing securitisation trust and will be pari-passu with the outstanding senior notes (series 2008-1 class A notes).

The notes are backed by cashflows generated by substantially all of NuCO2 Inc's business activities, which are primarily the leasing of bulk carbon dioxide systems and the distribution of carbon dioxide to quick service restaurants and other retailers of fountain beverages in the US.

Fitch has confirmed the US$75m NuCO2 Funding series 2008-1 class B1 notes at double-B, reflecting that the trust's performance is within initial rating expectations. Since issuance, NuCO has strengthened its industry position and improved trust interest coverage and leverage. The rating confirmation also reflects the trust's ability to withstand various stress scenarios that test customer location, attrition and growth rate assumptions.