Contents

ABS

Forward-looking Euro ABS trades spark interest

With a steady and positive flow of activity, it has been an active week across all parts of the European ABS market this week. Meanwhile, forward-looking participants are starting to prepare for the January 'boom'.

"It's been an active week for us. Student loan deals have been trading up slightly, with a couple of new issues that are attracting interest," one ABS trader says. "There were notes due to pay-out and re-market this week as well, but with spreads being too wide, the majority of the notes have been extended," he adds.

"Before it was difficult to get sellers for these student loan deals, as people were holding out for the re-marketing, expecting to refinance them. Now we're seeing some of the sellers giving up on that, yet on the back of this we're seeing more trading."

The trader goes on to say that generally across the market participants are starting to look forward to December and January in order to establish their position in the market. "October is normally pretty busy, then we have November which is notoriously slow, with December even more so. The real rally in the market is in January."

However, last year market participants anticipated this beginning-of-the-year flurry causing the rally to start in December - which could happen again this year, the trader suggests. "Although with sellers coming in and out without warning, it's hard to predict this year's outcome."

In general, the trader says that although ABS has not performed as well as other parts of the structured finance sector so far, it is now due to follow the success of other asset classes. "MBS has been rallying and the CLO market in particular is doing well, this I think will continue across the board, except in the most liquid sectors, were they still have a lot of new issues coming in," he notes. "The overall trend for ABS is a positive one, bidders are going higher and continuing to look down the capital structure to pick up cheaper deals."

Elsewhere in the European market, CMBS is also said to be trading much better this week, with senior tranches in particular attracting investor attention. "We received a couple of bid-lists - mostly junior bonds - which traded much higher than we could have expected," the trader confirms.

Although demand for new issues in UK and Dutch prime RMBS is causing pricing to weaken slightly, the RMBS sector is generally performing well, according to the trader. "Things are trading up, with UK non-conforming in particular trading very well and producing high volumes."

He concludes that investor dynamics are helping to strengthen the market. "There was a time when dealers were bidding up to senior tranches alone, but clients are stepping in now - the market is now very strong."

LB

CLOs

Two-way traffic for Euro CLOs

With new issuance creating investor opportunity across both primary and secondary markets, the European CLO sector has seen a healthy flow of activity over the past week.

"The market this week has been good; there is much buying interest from our accounts," one CLO trader confirms. "There has been a high volume of market participation, which we have not seen for some time."

This investor interest is an outward sign, it seems, that the secondary European CLO market is picking up. "It's definitely two-way traffic right now," the trader adds.

The performance and the flow of online CLOs have also proved positive, with default rates improving further, he continues. "The default rates that we were seeing previously haven't materialised - in fact defaults have fallen lower. This reflects an increase in, or improvement of, CLO OC cushions."

The trader notes that the improvement in default rates, combined with the investor opportunities that are now arising is another driver of European CLO performance. "CLOs are providing a compelling and attractive value: the returns are much higher, yet the risks - depending on the tranche - can be significantly lower."

He continues: "Investors are realising that fundamentally these investments are holding value." Based on the structure and the performance of the portfolios, the trader says, CLO issuance is currently holding more appeal than other asset classes. "Overall it's technical and fundamental issues that are driving demand."

He also hints towards the primary CLO market making a comeback soon. "There are new signs of the re-opening of the primary market, with talk of new deals coming in."

He concludes that overall there has been a healthy flow of activity across all of the CLO capital structure, with spreads continuing to tighten and investor support being offered. "Figures on the whole are looking much better."

LB

CLOs

Strong par dynamics support US CLOs

The demonstrated ability of CLOs to behave as advertised - in other words, shutting off proceeds to junior notes in a downturn and switching them back on only as and when par is restored - is a key takeaway of the financial crisis, according to CDO analysts at Bank of America Merrill Lynch. Par levels consequently remain a relatively sensible measure of the extent to which promised performance was delivered through a difficult cycle.

"The ability to sort out which manager made a positive impact - if any - on its CLO portfolio is made even more interesting by what we continue to believe will be a gradual, slow but steady rebirth of the new issue market," the BAML analysts observe. "As the primary market finds its new equilibrium at issuance levels far lower than at the 2006/2007 peak, track record will be a key component of the manager survival race - as prospective noteholders, both most-senior and equity, are likely to focus on those names deemed to have 'passed the test' of the credit crisis."

The analysts compiled junior OC test headroom data, sorted by asset manager, at the aggregated asset class level that indicates higher par cushions across the board - with barely a negative reading throughout the sample of deals. This appears consistent with the circa 90% pass rate at the overall US CLO sector level.

From a CLO outlook perspective, their overall takeaway from these data points are that: strong par dynamics continue to support their long-held bullish US CLO equity call; and robust par-build metrics and narrowing of credit dispersion as the underperformers catch up into the rally supports the down-in-risk stance in CLO mezz debt.

CMBS

Technical factors driving CMBX rally

A number of factors are behind the rally in the Markit CMBX indices in recent months. While some of these factors are due to fundamentals, the rally has been more technical in nature, according to MBS analysts at Bank of America Merrill Lynch.

From a fundamental perspective, market participants appear to be growing more positive on their outlook for commercial real estate, with prices seemingly having bottomed or, for some sectors, started to rise. Property fundamentals have also formed a bottom, accompanied by a gradual recovery in the financing markets.

However, the cash market has not experienced the same rally, with price appreciation dramatically lagging the synthetic market. Additionally, the rally and credit curve flattening has not extended as far down in cash as it has in CMBX.

"We think the rally has been more driven by technicals and exasperated by the market's illiquidity, especially for the down-in-credit tranches," the BAML analysts explain. "How much is driven by short covering/profit taking going into year-end and how much by a true change in view on the credit outlook is unclear, however."

In terms of buying into the rally, the analysts say they like the AM curve flattening trade (in cash and synthetic), buying the wider/later vintage AMs versus tighter/earlier vintages. "While there has been some pronounced flattening in the AM3s and 4s versus the AM1s, the AM2s have recently outperformed. We recommend buying AM4s versus AM2s and think there is a few points of upside as it retraces its recent widening."

RMBS

Tighter sovereign linkage likely for Irish RMBS

European asset-backed analysts at RBS note that Irish RMBS appear to be caught in a pincer movement between the deterioration of collateral performance and the sensitivity of banks to the sovereign rating, due to the extent of government support for the banking industry.

RMBS typically enjoy a six-notch rating differential with the sovereign. But Moody's latest watch placement of five Irish RMBS transactions will involve a review of loss assumptions and operational risks, as well as taking into account the probability of some extreme scenarios such as a possible rescheduling of government debt. As a result, the RBS analysts anticipate that slow-pay senior will have a tighter linkage to the rating of the sovereign, at least until the economy starts to stabilise.

They add that the two great uncertainties hanging over Irish RMBS are whether the notes will be called on or not too long after their step-up dates and whether repossessions start picking up significantly. The call dates for many outstanding Irish RMBS fall in March or June 2012, with the bonds offering a dramatic yield pick-up on the call being exercised.

"However, with the government becoming increasingly vocal about investors sharing the pain, calls may be harder to justify - but this would favour programmes from better placed sponsors such as FSTNT. The forbearance situation is another source of 'optionality', with the potential for substantial losses on repossessions," the analysts add.

€15.2bn (or around 96%) of outstanding senior Irish RMBS notes are now on watch negative by at least one agency.

CS

RMBS

Foreclosuregate unlikely to pose systemic risk

Estimates of mortgage servicers' and originators' potential liability for breaches of representations and warranties and loan documentation errors vary significantly. But there is agreement that 'foreclosuregate' is unlikely to become a significant systemic risk.

Indeed, many recent analyses of banks' liability for such claims appear to overestimate the likely extent of the problem, according to MBS analysts at RBS. They note that repurchase liabilities can be broken down into four categories: a possible financial settlement with the 50 state attorneys general (AGs); non-agency MBS repurchase obligations on loan file exceptions; non-agency MBS repurchase obligations on breaches of representations and warranties; and GSE loan put-backs.

In a new report, the RBS analysts focus on the size of a potential settlement with the AGs and the scale of potential non-agency MBS repurchase obligations for the four largest US banks - Bank of America, Citigroup, JPMorgan and Wells Fargo. In aggregate, they anticipate that in the next several months the banks will agree on a financial settlement with the AGs in a range of US$1.3bn-US$4.3bn.

Over the next year or so, the banks will satisfy objective loan file exception repurchase obligations of approximately US$25bn, while over the next several years they will satisfy a relatively small percentage of massively-sized claims for breaches of representations and warranties due to litigation or negotiated settlements with investors. Finally, the banks are also expected to repurchase approximately US$13bn of loans from the GSEs over the next several years.

An estimate of bank sector exposure to reps and warranty claims put forward by MBS analysts at Barclays Capital is far higher, however. They indicate that over the next five to seven years banks may end up paying US$85bn claims, emanating mostly from agencies, monolines and insurers.

"Excluding claims already paid and existing provisions, this would result in another US$75bn of losses," the BarCap analysts note. "However...the base number is more math less analysis and it is important to remember that a lot of factors that go into this math are highly subjective and, hence, result in low conviction rates around our estimate."

Nevertheless, they suggest that reps and warranty repurchase losses are unlikely to pose significant risks from a systemic standpoint. First, the repurchase process is very complex and, in most cases, it has either not begun or is in the early stages.

Second, the time lag in accessing loan files and getting a successful repurchase claim is long and can involve much individual loan-specific back and forth between the parties involved. The lag could worsen dramatically if claim volumes increase substantially.

Third, even if losses are high, they are likely to happen over the next several years, which should lessen the systemic effect. "We cannot ignore the possibility of faster negotiated settlements, but would not expect originators to embrace them unless they offer a much better deal than the other option of taking it slow. The real near-term risk from our standpoint is if significant negative headlines make their way into the markets," the BarCap analysts conclude.

CS

Secondary markets

October on track for record BWIC volumes

Structured credit analysts at Citi estimate that US$2.5bn US CLO BWICs hit the market in September - the highest monthly volume on record since they started tracking bid-lists in May 2009. This month's volumes look set to follow suit, with US$1bn of BWICs already offered (SCI passim).

Supply has mostly come from bank workout groups looking to reduce exposure into the rally and fast money seeking to take some money off the table. Roughly US$120m of bonds came from the Menton III CDO portfolio, which was previously insured by MBIA - suggesting that the insurer has begun tearing up contracts with its counterparties.

On the demand side, real money accounts - particularly insurance companies on both sides of the Atlantic - continued selectively buying triple-A and sometimes double-A CLO paper. But the rally in high yield has also prompted accounts that until recently avoided structured credit to look at relative value opportunities in CLOs, according to the Citi analysts.

"Together with existing buyers, these - mostly fast-money - accounts were primarily responsible for spread tightening in the mezz section of the CLO capital structure, with prices rallying 6-7 points over the course of the month for both single-As and triple-Bs," they note.

Prospects for the primary market are positive too, with at least six transactions in the pipeline. Should these deals close before year-end, the total number of CLOs priced in 2010 would reach 12 for a total volume of roughly US$5bn.

CS

Secondary markets

Price talk

Structured finance and derivatives valuation issues discussed

The 2010 SCI Guide to Pricing and Valuation. As with the highly popular 2009 Guide, the 2010 edition is downloadable in PDF form from the SCI website here; however, SCI subscribers will receive a printed copy as part of the October issue of the SCI magazine (current and former triallists can download a PDF of the magazine here). The in-depth fully illustrated and referenced 24-page guide contains articles from four leading participants in the pricing and valuation space for structured credit and ABS.

The first article, written by Mike Li of Dynamic Credit Partners Europe, looks at the valuation applications of loan-level data for European RMBS. Li explains that unlike in the US, where non-agency mortgage loan disclosure for investors has been fairly transparent, loan tapes have not commonly been provided by issuers in Europe due to privacy and competitive concerns, while overall strong loan performance (and bank support for their issuance programmes) mitigated investor need for this information. As a result, while US RMBS can be analysed at the loan-level due to the availability of such data, for all practical purposes, European RMBS can only be run at the pool level, he says.

As Li concludes: "Although loan-level data is still not available for the vast majority of European RMBS transactions, continuing investor and regulator demands for additional disclosure may hopefully address this in the near future... In the end, investors, regulators, rating agencies, originators and arrangers/underwriters can all agree that increased transparency leads to higher quality valuations, which in turn increases investor knowledge of and interest in European RMBS, leading it to become a more mainstream investable fixed income asset class."

The second article - by David Ellis, Sarah Cannon and Hugo Watson Brown of Navigant Capital Market Advisers - looks at the issues surrounding OTC derivatives close-outs. In particular, it discusses the valuation challenges as a consequence of early termination of contracts in the aftermath of the Lehman bankruptcy.

The authors suggest that the ability to reconstruct market data for the period surrounding the close-out date is crucial; this data represents the building blocks from which the valuation is built. "The scope of the data reconstruction depends on the nature of the asset being valued," they say. "The ability to marry the reconstructed market data with the right model and a reasonable set of assumptions will minimise the incidence and degree of valuation disputes."

The application of advanced Monte Carlo methods to valuations, meanwhile, is the topic addressed by Dan Rosen of R² Financial Technologies. He notes: "The role played by the mispricing of structured credit securities in the lead-up to the recent financial meltdown leaves little doubt that the development of better methods for pricing, hedging and risk management of these instruments is an important priority. The modelling of these products presents significant challenges for industry participants today, given the complexity of their structures and underlying risks (market, credit and liquidity)."

Rosen finds: "Full-scale scale Monte-Carlo approaches for valuing structured credit products have only been considered recently and seem computationally demanding, owing to the requirements of simulating the performance of underlying collateral and the cashflow waterfall. In particular, the weighted Monte Carlo methodology provides a practical solution, which effectively models the intertwined market and credit risks in these structures."

Last is an interview with David Pagliaro and Peter Jones of S&P Valuation & Risk Strategies, in which they discuss their firm, their clients' needs and the European structured finance market The interviewees observe that regulation is the current driving force in the market. Not all the proposed rules are yet finalised, but they believe the implications are clear.

"Investors will be expected to perform their own credit and cashflow analysis. In order to do this in compliance with the requirements of the new regulatory regime, investors will need access to loan level data on an ongoing basis; they will need to undertake their own stress testing using their own assumption sets and independent cashflow models; and they will need to have a thorough understanding of structural features, including waterfalls, deal triggers and the like."

CMBS

Advocating change

Ann Hambly, ceo, and Brock Andrus, managing partner at 1st Service Solutions, answer SCI's questions

Q: How and when did 1st Service Solutions become involved in the structured finance market?
AH: I've been in the servicing industry for 34 years and a large amount of that time was spent in CMBS servicing. I was previously ceo at Prudential Servicing until 2005 and before that at GE and Nomura.

The year before I founded 1st Service Solutions, which acts as a borrower advocate, it became apparent that there was a need for an entity to bridge the gap between what a servicer knows and what a borrower knows about CMBS loan approvals and modifications. Most borrowers have no real understanding of what happens when a loan is put into a CMBS pool and so there is a need for someone to explain the process.

BA: Traditionally, borrowers' relationships with lenders involve loan officers for the life of the loan. But, for CMBS, the relationship with the loan officer ends when the loan is sold to the CMBS trust, so when problems crop up there is no loan officer to answer any questions.

The aim of a borrower advocate is to fill that black hole. Because we are involved in so many transactions with special servicers, we can tell borrowers what to expect and help them understand the process better, in addition to providing on a real-time basis what type of structures are successfully being consummated.

AH: I don't think anyone knew what was needed back in 2005; I certainly didn't know whether anyone would pay for this kind of service. But once I tested the water it was instantly obvious that there is huge demand for a borrower advocate.

We've expanded significantly over the last few years, growing from a staff of one (me) in 2005 to three in 2006, and now we have 16 people working here. We have US$2.5bn of assets in the pipeline, across all types of real estate assets (though 90% is CMBS). We operate from Dallas, but our clients are based across the US.

Q: How do you differentiate yourself from your competitors?
AH: I would venture to guess that there are 100 firms that claim to offer the same service as us, but I'm 99% sure that we're the only firm with hands-on experience in CMBS servicing. As the work increasingly shifted to troubled loans, clearly many more firms entered the market, but our background is the differentiating factor.

BA: I believe we still have the largest market share though.

AH: We live in the world of special servicers on behalf of a borrower. We think of ourselves as facilitators.

It doesn't do any good to take the needs of the borrower to the servicer without understanding the needs of the servicer. Our role is essentially to interpret between two different languages: the special servicer speaks the language of bondholders, while the borrower speaks the language of property owners.

Q: What are your key areas of focus today?
AH: Our role hasn't fundamentally changed over the years. In 2005 we focused on helping borrowers manoeuvre through the CMBS servicer approval process - helping them modify leases and organise waivers, for example. Lately, 80% of our time has been spent dealing with non-performing properties.

Another area of focus is on loan assumptions, which have historically been problematic, but the process is even more complicated now. It takes forever to get approval and there is no one party directing the process.

Part of the reason for the lengthy process is because the CMBS market became highly competitive, with extremely tight servicer cost structures. Consequently, there is little time to handle all the additional requests and workloads have become even more strained with the emergence of troubled assets. In such a situation, we step in and essentially call the plays and keep everyone organised and working towards the same goal.

BA: At present, most of our work involves helping clients work out distressed assets - such as in cases where they own a retail centre and the anchor tenant has left, or where they own an apartment complex that is suffering from falling rent income - and is typically cashflow-related. We outline the issues that are plaguing the asset and plan appropriate strategies.

Traditional lenders can do certain things that CMBS lenders can't do. We educate borrowers in the sorts of strategies that can be executed.

Q: Which challenges/opportunities does the current environment bring to your business and how do you intend to manage them?
BA: There is a trend developing that is specific to borrowers. When negotiating with special servicers, most of our clients are faced with a situation where new money needs to be brought in to turn the distressed asset around. Many borrower capital bases have been wiped out, so part of our job is to be a capital provider/coordinator.

This can be especially true when considering a borrower's option to pursue a discounted loan payoff. In this case, both new debt and equity need be raised - and a good portion of our efforts are aligned with such needs of our clients.

It's a question of marrying up distressed money that wants to participate in the CRE space with the borrowers that need it. Many distressed funds have their own pipeline of assets, but earmarking deals remains a significant challenge and there is a lot of money that needs to be deployed. Each fund has different return expectations or quality thresholds.

AH: In the days of the RTC, plenty of distressed real estate assets came onto the market as banks liquidated REO product. But today there is not the volume of foreclosed/REO properties available, as has been expected, because of the sheer number of loans that still are in the process of being worked out or will begin the workout process. Investors are realising that they have to connect with the borrower directly and get in the middle of the process rather than waiting for REO assets to come onto the market.

I believe that we'll start seeing more REO trades in one or two years' time. And then who knows how long it will take to flush all of the distressed assets out of the system? It'll take at least four or five years.

BA: The CRE market currently benefits from low interest rates. But, as rates begin increasing, institutions that have loans outstanding may find that their appetite to retain distressed assets decreases - lessening the likelihood for the 'pretend and extend' strategy to be deployed by lenders.

Q: What major developments do you need/expect from the market in the future?
AH: Many market participants are speculating about whether the commercial real estate market has hit bottom. I think we're getting close to the bottom, but the bottom has a long flat part, so it'll be a while before we see a recovery. For instance, there is no way that all of the CRE debt that's coming due over the next five years will be able to be refinanced if values don't begin recovering and banks don't begin lending again.

BA: Financing ability is creeping back, but it's nowhere near the pace that it was at in 2006-2007.

CS

ABS

Trading vet moves on

Odeon Capital Group has appointed Derek Rose as svp to lead the trading desk of its new office in Chicago. In this role, he will be responsible for providing clients with a full service offering for trading in the high yield and distressed debt spaces.

Rose has 23 years of experience in the securitisation industry and joins from Southwest Securities, where he was svp in charge of ABS and CMBS trading. In this role, he developed the firm's sales platform across all securitised products and built a trading franchise for auction rate securities and other student loan-related products.

ABS

Promotion for fixed income md

Standish Mellon Asset Management Company has promoted David Leduc to cio of its active fixed income group. With 23 years of investment experience, he has been working at Standish since 1995, most recently as md of global fixed income. Previous to this role, he was senior portfolio manager, responsible for overseeing the firm's management of all non-US and global bond strategies

ABS

New partners to strengthen SF team

Clyde & Co has appointed Chris Sykes and Robert Franklin as partners in its structured finance team. The pair will work to strengthen the firm's services in the international projects, construction and real estate sectors.

Sykes joins the firm from Osborne Clarke, where his areas of experience included acquisition, asset and property finance and general corporate banking. In particular, he has advised banks on both investment and development, ranging from residential to commercial, industrial and retail property.

Franklin specialises in project finance and was previously at Denton Wilde Sapte. His experience lies within advising on the development and implementation of projects, including roads, rail, airports, healthcare, education, accommodation, water, defence and natural resources.

ABS

Prytania partner replaced

Prytania has recruited Oliver Fochler as a partner. Fochler was previously head of global business solutions at Moody's Analytics in London and has significant experience in credit and structured finance. He will be responsible for the firm's origination and client management, replacing Marc Jones, who is leaving to pursue an opportunity with RBS.

CDO

Asset manager acquired

RBC is to acquire BlueBay Asset Management for £963m. The offer price, equivalent to 485p per BlueBay share, represents a premium of 29.1% to the closing price of a BlueBay share (375.7p) on 15 October 2010 (the last business day prior to the announcement date) and 57.7% to the average closing price of a BlueBay share (307.6p) for the three months ended 15 October 2010.

In addition, BlueBay shareholders on the register at 5 November 2010 will be entitled to receive a proposed dividend of 7.5p per share in respect of the financial year ended 30 June 2010.

It is intended that the acquisition will be implemented by way of a Court-sanctioned scheme of arrangement under sections 895 to 899 of the Companies Act. The scheme is expected to become effective by the end of December 2010, subject to the satisfaction of regulatory conditions.

George Lewis, group head of RBC Wealth Management, comments: "This acquisition will further RBC's strategy to leverage our position as a top-10 global wealth manager and continue to expand our asset management solutions for the benefit of our clients around the world. BlueBay is an ideal fit with RBC's growing asset management business and we are confident that this transaction will benefit the clients, employees and shareholders of both firms."

CDO

Three partners provide Asian firepower

Bingham McCutchen has strengthened its Asian presence by expanding its Hong Kong office with three new arrivals. Laurence Isaacson and Mark Fucci transfer to Hong Kong from New York and Tokyo respectively, while Vincent Sum has been hired from a Hong Kong firm.

"The expansion of Bingham's premier structured finance and derivatives practice to Asia continues our strategy of building upon our market-leading practices to service our clients globally," says Reed Auerbach, leader of Bingham's structured transactions group. "Larry's move and Vincent's arrival to the Hong Kong office will be an immediate benefit to our clients doing business in Asia."

Isaacson moves over from Bingham's New York office. He was head of the structured finance practice at Fried, Frank, Harris, Shriver & Jacobsen before joining McKee Nelson in 2003. Isaacson is a partner in Bingham's structured transactions group, representing clients in a range of asset-based transactions, including collateralised debt, loan, swap and fund transactions, as well as structured products, credit-linked notes and complex credit derivative transactions.

Sum joins the structured transactions group from Hogan Lovells in Hong Kong, where he led the debt capital markets practice. He is experienced in structured transactions, derivatives, structured credit, retail and non-retail structured funds and debt capital markets. Sum is qualified to practice in Hong Kong, England and New York.

Fucci, a partner in Bingham's global financial restructuring group, moves over from Tokyo. He specialises in restructurings, insolvencies and complex financial transactions.

CDO

Advisory merger announced

StormHarbour Partners continues to build out its client-dedicated offering with the addition of the Fusion Advisory Partners team to its US operations group. Fusion, the founders of which include Gregory Freer and Joseph McCann, will be integral in supporting the origination of new client business and enhancing the scope of StormHarbour's core business lines - sales and trading, structuring and advisory, and capital markets.

The Fusion team have experience in credit, alternative, structured finance and private equity markets. They have also been at the forefront of several industry trends, particularly in regards to consolidation in the US CLO market and restructuring of CDS portfolios.

CDS

CCP advisory practice announced

Catalyst has launched a CCP practice to help financial institutions deal with post-trade challenges - in particular, the requirement that clearing for OTC derivatives needs to be in place by the end of 2012.

The use of CCPs helps financial institutions address the two key market changes that followed the financial crisis, the firm says. First, the regulatory environment has tightened up, with the G20 requiring all financial institutions to novate their OTC derivative portfolios to CCPs by late 2012. All firms therefore will have to become either a clearing member or client of a clearing member.

Second, banks and investors have become more risk-averse. Running all trading through one central clearing mechanism - which deals with the risk and potential loss if one party defaults - enables financial institutions to reassure investors that their money is protected and allows end-users to reduce their credit and market risk to banks.

Christian Lee, head of the firm's CCP practice, says: "Additionally, the opportunities for banks seeking to provide client clearing solutions are significant. However, the clock is already ticking; there will inevitably be massive demands from clients prior to 2012 and we can help banks in formulating and delivering this new strategic model."

CDS

EMEA sales head named

Numerix has appointed John Peck as head of EMEA sales. Based in London, he is responsible for derivatives pricing and valuations services across the region and will report to the group's EMEA md, Nick Haining.

With 25 years of experience in the global financial industry, Peck joins from Quantifi, where he was responsible for establishing and running the firm's operations in EMEA.

CDS

Industry heads join newly-formed SEF

Javelin Capital Markets, a swap execution facility (SEF) for credit derivatives and interest rate swaps, has appointed James Cawley as ceo and Chris Augustin as chief information officer.

Cawley is a founder of the Swaps and Derivatives Market Association and was most recently the founder and ceo of IDX Capital. Prior to this, he was the founder of Axiom.

Augustin was recently the global cio and head of technology at Merrill Lynch. Post merger with Bank of America, he was cio for global markets and research, where he was responsible for the firm's technology needs - including the execution of the merger and setting the firm's strategic direction.

Cawley says Javelin's mission is to bring cleared and transparent execution of interest rate swaps and credit default swaps to the institutional marketplace. The firm executed its first fully cleared interest rate swap trade via IDCG in July on a pilot basis (see SCI issue 196). It expects to register as a SEF, as recently defined under the Dodd-Frank Act, in due course.

CDS

Quantitative analyst added

Fitch Solutions has appointed Joao Garcia as md of its quantitative analytics group. He will be responsible for the quantitative financial research of the group, as well as the management and development of its credit-based products, spanning areas such as credit risk, interest rate risk and market risk. Based in London, Garcia will report to Fitch md Thomas Aubrey.

Garcia joins the firm from Dexia Group, where he spent eight years working in the risk management and treasury divisions, most recently as head of credit quant in treasury and financial markets.

CLOs

CLO transfer won't derail CypressTree sale

Primus Guaranty and Commercial Industrial Financial Corp (CIFC) confirm that the acquisition by CIFC of Primus' CypressTree Investment Management subsidiary and the CLOs and structured credit funds it manages is on track for completion by the end of October. The two firms released a statement indicating that consummation of the transaction will not be affected by the transfer of the management of Hewett's Island IV CLO to LCM Asset Management (see last issue), an action that was initiated by the CLO's equity investor (Tetragon) "well in advance of CIFC's interest in and agreement to acquire CypressTree".

The firms announced on 22 September that they had executed a binding letter of intent with regards to the proposed transaction (see SCI issue 202). Over the past several weeks they have worked to conduct the necessary due diligence and legal reviews. When that process is finalised, CIFC will become the owner of CypressTree and serve as the manager or sub-advisor of all CLOs and funds that CypressTree manages or sub-advises, they note.

Following the transaction, CypressTree's and CIFC's investment platforms will be operationally integrated within CIFC's existing investment model. CIFC and Primus are currently working together to ensure a smooth, seamless on-boarding of the management of the CLOs to CIFC's platform.

CMBS

CREFC ceo steps down

CRE Finance Council ceo Dottie Cunningham has resigned, with John D'Amico named as interim ceo. Separately, D'Amico will also become president of the organisation for a one-year term, starting in June 2011. The search for a new permanent chief has also been begun.

A search committee formed by past CRE Finance Council presidents has been set up to find a new executive director. It aims to have a candidate to present the board of governors by the end of 2010.

Cunningham led the CRE Finance Council for 12 years.

CMBS

Real estate vets join advisory firm

Chatham Financial has appointed Mike Havala and John Avioli as senior executives in its capital advisory group, Chatham Capital Advisors. The pair will launch its Chicago office.

Havala and Avioli were the co-founders of Blue Spire Capital, a Chicago-based consulting group. Previously, Havala spent 15 years as the cfo of First Industrial, while Avioli spent 12 years as the director of finance for Lerner Companies.

Founder of Chatham, Mike Bontrager, says: "The addition of Mike and John further expands the talents and experiences of our team in developing strategy, structuring and executing transactions involving secured debt, unsecured debt, subscription debt, corporate lines of credit, joint venture equity and publicly-traded common stock, preferred stock and bonds."

CMBS

Law firm targets real estate disputes

Duval & Stachenfeld has formed a new practice group, the structured real estate dispute resolution team, as an adjunct to its distressed real estate practice. The new team is co-chaired by real estate partner Bruce Stachenfeld and litigation chair Allan Taffet.

The law firm says it has seen a lot of investors and lenders "scrambling" to preserve their capital as real estate property values have deteriorated and investor losses have risen steadily. The firm represents both plaintiffs and defendants and says these disputes broadly come in four types: repurchase claims (often called put-back or take-back cases); "tranche warfare" cases; where holders of non-securitised debt refuse to be wiped out without a fight; investor suits based on fraud or securities law claims; and disputes centred on other contract breaches.

When dealing with these types of cases, the firm says its deep expertise in litigation, real estate and structured finance position it strongly to prosecute or defend these claims. The new structured real estate team will distil legal strategies for these kinds of disputes and is "specifically targeted to this burgeoning area of contract disputes/litigation".

Investors

SSgA promotes in fixed income

State Street Global Advisors (SSgA) has promoted Kevin Anderson to global cio for fixed income and currency. Based in London, he will work within the firm's fixed income and equity investment team.

Since joining SSgA in 2001, Anderson has been responsible for all fixed income beta solutions worldwide and was most recently head of fixed income for the group. Prior to joining SSgA, he was responsible for the development of quantitative strategies at Schroder Investment Management.

Ratings

Rating agency adds avp

DBRS has appointed Maria Lopez as avp in its structured credit group. Based in London, she will report to the firm's md of US and European structured credit, Jerry van Koolbergen.

Before joining the firm, Lopez worked for Ahorro y Titulizacion, a Spanish primary transaction manager.

RMBS

Lender acquired in mortgage banking move

Gleacher & Company intends to launch a residential mortgage banking initiative through its newly-formed subsidiary Descap Mortgage Funding, having acquired all of the shares of common stock of ClearPoint Funding from its founder and ceo Greg O'Connor in the process. ClearPoint is a residential, non-depository mortgage lender based in Marlborough, Massachusetts currently employing approximately 100 employees.

Head of the mortgage finance initiative at Gleacher & Co and president of the new subsidiary Mark Pappas will be responsible for overseeing the firm's interest in ClearPoint Funding. O'Connor will continue to lead the firm's overall operations effort.

Robert Fine, head of Gleacher & Co mortgages, ABS and rates group, says: "Strategically, the acquisition of a mortgage bank to originate mortgages is a logical extension of our existing secondary mortgage and asset-backed business. The acquisition of ClearPoint Funding will provide a platform from which to build and execute a national mortgage origination strategy."

RMBS

Countrywide executive pays record penalty

Former Countrywide Financial ceo Angelo Mozilo will pay a record US$22.5m penalty to settle SEC charges that he and two other former Countrywide executives misled investors as the subprime mortgage crisis emerged (see SCI issue 140). The settlement also permanently bars Mozilo from serving as an officer or director of a publicly traded company.

Mozilo's financial penalty is the largest ever paid by a public company's senior executive in an SEC settlement. Mozilo also agreed to US$45m in disgorgement of ill-gotten gains to settle the SEC's disclosure violation and insider trading charges against him. A total financial settlement of US$67.5m will be returned to harmed investors.

Former Countrywide coo David Sambol also agreed to a settlement of US$5m in disgorgement, a US$520,000 penalty and a three-year officer and director bar. Former cfo Eric Sieracki agreed to pay a US$130,000 penalty, as well as to a one-year bar from practicing.

In settling the SEC's charges, the former executives neither admit nor deny the allegations against them. The penalties and disgorgement paid by Sambol and Sieracki will also be returned to harmed investors.

"Mozilo's record penalty is the fitting outcome for a corporate executive who deliberately disregarded his duties to investors by concealing what he saw from inside the executive suite," says Robert Khuzami, director of the SEC's division of enforcement.

John McCoy, associate regional director of the SEC's division of enforcement, adds: "This settlement will provide affected shareholders significant financial relief and reinforces the message that corporate officers have a personal responsibility to provide investors with an accurate and complete picture of known risks and uncertainties facing a company."

In addition to the financial penalties, Mozilo and Sambol consented to the entry of a final judgment that provides for a permanent injunction against violations of the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The settlement was approved by John Walter, US district judge for the Central District of California.

RMBS

Countrywide RMBS investigation continues

The Countrywide investigation regarding ineligible mortgages continues (see SCI issue 198). The holders of over 25% of the voting rights in more than US$47bn of Countrywide-issued RMBS have sent a notice of non-performance to Countrywide Home Loan Servicing, as master servicer on the transactions, and to Bank of New York as trustee.

The notice, which is the first step in the process of declaring an event of default, has identified specific covenants in 115 pooling and servicing agreements, where the holders allege that Countrywide has failed to perform.

Kathy Patrick of Gibbs & Bruns, lead counsel for the holders, says the notice urges the trustee to enforce Countrywide's obligations to service loans prudently by maintaining accurate loan records. It also demands the repurchase of loans that were originated by Countrywide in violation of underwriting guidelines, compelling the sellers of ineligible or predatory mortgages to bear the costs of modifying them.

Patrick also notes that the group of holders that tendered the notice is larger and encompasses more Countrywide-issued RMBS deals than were included in the 20 August instruction letter. "Ours is a large, determined and cohesive group of bondholders. We have a clearly defined strategy. We plan to vigorously pursue this initiative to enforce holders' rights."

ABS

SEC ABS disclosure proposals released

The US SEC has issued a new proposal to improve disclosure to ABS investors. The proposed rules would require issuers to perform a review of the assets underlying the securities and publicly disclose information.

"This marks the third commission proposal to address the ABS issues that came to light during the financial crisis," says SEC chairman Mary Schapiro. "This proposal will require issuers to provide investors with better information about the loans backing the asset-backed securities."

There are three key aspects to disclosure enhancement under the proposals. First, issuers registered with the SEC would have to review the bundled assets underlying the ABS. Second, amendments to Regulation AB would compel an issuer to disclose the findings of such a review. Finally, the issuer or underwriter for ABS offerings would have to disclose any findings from a third-party review.

The latest proposal follows another from last week in which the SEC suggested regulations to require ABS issuers and credit rating agencies to provide investors with new disclosures about representations, warranties and enforcement mechanisms (see last issue). Public comments on the proposed rules - including whether there should be a minimum review standard in this latest proposal - are asked for by 15 November 2010.

ABS

EM ABS recommendations released

A report containing securitisation-related recommendations for regulators in emerging markets jurisdictions has been approved by IOSCO's Emerging Markets Committee (EMC). The report suggests that a stable macroeconomic environment, a robust legal and accounting framework, a neutral tax system, investor education and a robust framework for the securities regulator are all necessary for the development of a securitisation market.

The EMC also highlights that regulators in EM jurisdictions should collect a minimum set of information on securitisation markets to monitor development and identify potential sources of risk for financial stability or consumer protection. In addition, it states that regulators should strengthen disclosure requirements for securitised financial product (SFP) both in public and private offerings.

The report states that regulators should encourage trading of SFPs in public venues and impose transparency in OTC markets, as well as encourage the development of pricing agencies. Finally, the EMC recommends that regulators should strengthen business conduct obligations and align credit rating agencies regulation with the IOSCO code of conduct.

ABS

UK credit card ABS performance stabilising

Fitch reports that the performance of UK credit card trusts is showing signs of stabilisation, as delinquency rates remain unchanged from the previous month. Nevertheless, the agency says, the risk of increased charge-offs - as a result of the write-offs of delinquent and debt management accounts - still remains.

The August 2010 Fitch 60-to-180 day Delinquency Index remained unchanged from the July 2010 value of 3.4%. This stabilisation comes after six straight months of decline.

The Fitch Charge-off Index registered an increase of 0.3%, reaching 7.8% in August 2010. This increase follows a record charge-off decrease in July 2010, which was driven by the repurchase of receivables in delinquency and under debt management from the CARDS I and CARDS II trusts. The increase was mainly driven by the change in the charge-off rate of the Gracechurch and CARDS II trusts.

The Fitch Yield Index at end-August 2010 was 21.9%, representing a decrease of 0.4% from the July 2010 value. The CARDS I trust reported a significant monthly drop in yield; the cause of this decrease is being investigated, the agency confirms. Meanwhile, the Monthly Payment Rate Index fell by 0.1% to 15.9%.

Finally, the Fitch three-month average Excess Spread Index rose again in August 2010, surpassing the record peak set only last month. The index stands at 11.1% as at the end of August 2010, Fitch says.

CDO

CRE CDO delinquencies on the rise

Fitch reports that US CREL CDO delinquencies rose to 12.9% in September, with 19 new delinquent assets reported. 34 of 35 Fitch-rated CREL CDOs reported delinquencies ranging from 1% to 41.3%.

Meanwhile, CREL CDO asset managers reported over US$70m in realised losses from the disposal of distressed assets during the month. Total realised losses across the CREL CDO universe total over US$1.6bn - approximately 7% of the collateral balance.

"Loans secured by office and multifamily properties represented over 70% of all new delinquencies," says Fitch director Stacey McGovern. "Among the September delinquencies were eight term defaults, seven matured balloons and four credit-impaired securities."

CDO

Updated criteria for SF CDOs

Fitch has updated its global rating methodology for SF CDOs. The primary updates reflect recent default and recovery data for SF bonds, which include revised default correlation and recovery assumptions.

The agency says that the criteria changes will have a limited rating impact on transactions and that downgrades are unlikely to exceed any one rating category. For CDOs that have suffered a significant decline in performance since the last rating action, the impact may be greater in order to reflect credit deterioration in addition to the criteria changes.

The updated criteria will be applied in the course of ongoing rating reviews for SF CDO transactions, the agency says.

CDO

Trups CDO bank deferrals spike

Fitch says that bank deferral rates within US Trups CDOs increased notably last month, while overall defaults remained flat. Meanwhile, new bank deferrals increased by 1.6% to 18.8%, with default rates remaining steady at 14.2%.

"Last month's spike in deferrals was actually due to one bank beginning to defer payments on a substantial amount of issuance. Absent this outlier, deferrals actually decreased slightly during the quarter," says Fitch director Johann Juan.

Two new bank issuers defaulted, adversely affecting three CDOs and bringing the total number of defaulted bank issuers to 140 - representing US$5.4bn across 82 Trups CDOs. Additionally, 380 bank issuers have deferred on their interest payments, affecting US$7.1bn of collateral held by 84 Trups CDOs.

CDO

US synthetic CDO trading activity declines

US synthetic CDOs (SCDOs) saw a decline in trading activity in 3Q10, compared with the previous quarter, according to S&P. However, as in 2Q, companies in the financial intermediaries sector were traded most frequently among the corporate obligors in US SCDO reference portfolios.

The rating agency has also identified and ranked the top-10 most-widely added corporate names among US SCDO portfolios in the third quarter. The top three were Banco Santander, Iberdrola and Banco Espirito Santo. However, while most individual sectors represent less than 5% of the overall assets held by the SCDOs, the financial intermediaries (10%), telecommunications (8%) and utilities (6%) sectors had higher concentrations.

In addition, the top-10 corporate names that SCDO managers traded out of their portfolios during the same period were identified, with the top three being BMW, Hercules Offshore and Toyota Motor Credit.

S&P credit analyst Christopher Davis says: "Our review showed that even the most widely referenced corporate obligor across these 800 SCDOs does not represent a significant concentration risk, in our view. Bank of America, which tops our list, accounts for just 1.3% of the total reference counts in our study."

CDS

Sovereign CDS liquidity linked to bond yield

Fitch Solutions has conducted a study which suggests that the liquidity of a sovereign's CDS is highly correlated to its underlying bond yield. Additionally, the firm claims that any market intervention that might reduce CDS liquidity during periods of market stress would, in fact, exacerbate sovereign funding issues.

"Where sovereign CDS liquidity is high, bond yields tend to fall, thus reducing the cost of funding for sovereigns. Conversely, bond yields increase when liquidity in the CDS market falls off," says Fitch md Thomas Aubrey.

The study, using material from 1 January 2008 to 30 July 2010, analyses the difference between a country's bond yield and a comparable 'risk free' quote for three European sovereigns - Portugal, Spain and Greece - and three emerging market sovereigns - Brazil, Turkey and Mexico.

"In times of intense market stress, the correlation between CDS liquidity and bond yields increases significantly. These findings have important implications for all market participants and highlight the importance of how asset market liquidity has a direct influence on asset valuations," adds Aubrey.

CDS

OTC task force formed

IOSCO's Technical Committee has formed a 'task force' on OTC derivatives regulation. The aim is to coordinate securities and futures regulators' efforts in working together in the development of OTC derivatives supervisory and oversight structures.

Hans Hoogervorst, chairman of IOSCO's technical committee, says: "IOSCO has identified the need for enhanced international coordination between securities regulators in order to support the global reform efforts currently underway regarding OTC derivatives regulation. Many jurisdictions are currently adopting legislation that provides securities and futures regulators with an important role in the regulation of the OTC derivatives markets."

The purpose of the task force, the IOSCO says, is to develop consistent international standards related to OTC derivatives regulation in the areas of clearing, trading, trade data collection and reporting. The task force will also issue a report on exchange and electronic trading, evaluating the benefits and challenges of increasing exchange and electronic trading measures. This report will be produced by the end of January 2011.

It will also produce a report by July 2011, which sets out - both for market participants reporting to trade repositories and for trade repositories reporting to the public and to regulators for the purpose of macro- and micro-surveillance - minimum data reporting requirements and standardised formats, and the methodology and mechanism for the aggregation of data on a global basis. A third report on international standards will build on the earlier reports, setting out consistent international standards for OTC derivatives regulation in the areas of trading, data reporting, clearing and the oversight of swap dealers and other market participants.

In developing these standards, the task force will consider the G20's objectives as outlined in its Communiqué, the Working Group's report and the characteristics of the derivatives markets and legislative mandates of IOSCO members in this area. This report is scheduled for January 2012.

The Task Force will be led by the US SEC, the US CFTC, the UK FSA and the Securities and Exchange Board of India.

CDS

Further OTC advice published

CESR has published its second set of technical advice to the European Commission in the context of reviewing MiFID, which came into force in November 2007. The first set was published on 29 July and this completes CESR's technical advice on MiFID.

The new set of advice covers CESR's views on standardisation and organised platform trading of OTC derivatives, post-trade transparency standards and client categorisation. Also included are remaining CESR responses to the EC's request for additional information in relation to the MiFID review presented in March this year.

The advice contributes towards meeting the G20 objectives set out on 25 September 2009 by delivering a series of measures to encourage an efficient and sound EU derivatives market, CESR notes. Included are better tools for securities' regulators to monitor transactions and positions on those markets.

Carlos Tavares, chair of CESR and of the Portuguese Comissão do Mercado de Valores Mobiliários (CMVM), notes: "CESR's second set of advice on how to overhaul MiFID addresses important issues that have been at the core of discussions by regulators internationally and at the European level, since the wake of the financial crisis. Our advice represents the culmination of CESR's work to modernise the MiFID framework and has at its centre the objective of strengthening market resilience."

He adds: "It is also forward-looking in proposing a significant role for ESMA in fostering the standardisation and organised platform trading of OTC derivatives in line with wider global developments. This new role will be conducted in articulation with the national competent authorities, which must have improved tools at their disposal to monitor activities in the OTC markets."

CESR says it will shortly publish feedback statements relating to the consultation papers on standardisation and exchange trading of - and transaction reporting on - OTC derivatives, as well as extension of the scope of transaction reporting obligations and client categorisation. The EC is also expected to launch a public consultation on the MiFID review soon.

CDS

Stronger swaps regulations prepped

The US SEC has adopted an interim rule requiring certain swaps dealers and other parties to report any security-based swaps entered into prior to the passing of the Dodd-Frank Act on 21 July. It has also proposed rules intended to mitigate conflicts of interest for security-based swap clearing agencies and execution facilities, as well as national securities exchanges that post security-based swaps or make them available for trading.

The interim rule means parties have to report security-based swap information to the SEC or a registered security-based swap data repository. Parties will also have to preserve data relating to the terms of pre-enactment swaps in support of the reporting requirements.

"This interim final rule provides a means for the commission to gain a better understanding of the security-based swap markets, including their size and scope," says SEC chairman Mary Schapiro. "Until such time as final rules are adopted, this interim rule clarifies who needs to do security-based swaps reporting, what needs to be reported and when such reporting needs to occur."

On the proposals to tackle conflicts of interest, meanwhile, Schapiro notes that the OTC derivatives markets have a high concentration of activity through a limited number of dealers. She says: "By creating a structure that would promote more independent voices within clearing organisations and trading venues, this proposed rule is intended to make these entities less susceptible to promoting the interests of a few participants."

The proposed rules on conflicts of interest are known as Proposed Regulation MC and require clearing agencies, SEFs and exchanges to adopt ownership and voting limitations, as well as certain governance requirements.

The interim rule will become effective once it is published in the Federal Register. In the meantime, public comments are sought as the SEC looks to develop a permanent reporting procedure. Public comments for the additional proposed rules should be received no later than 30 days after being published in the Federal Register.

CDS

Succession event mulled

UBS has requested that ISDA's Japan Determinations Committee rule on whether a succession event occurred with respect to Sanyo Shinpan Finance Co. The firm on 1 October merged into Promise Co via a two-step merger, with Promise becoming the surviving entity.

CLOs

FLLO loan characterisation proves blurry

S&P reports that some US CLO collateral managers are investing in first-lien-last-out (FLLO) loans. However, the agency says that the way managers are characterising such loans - whether as senior secured loans or second-lien loans - could have an impact on CLO investor payments.

The credit risks associated with FLLO loans are generally equivalent to those of second-lien loans, S&P says. Once a default occurs, the FLLO loan typically becomes fully subordinated to the senior secured loan and receives no payments until the senior secured loan is paid in full.

Under its criteria, the agency assigns lower recovery rates to second-lien loans and other subordinated obligations than to senior secured loans. For FLLO loans that are not assigned recovery ratings, the characterisation by the collateral manager consequently takes on greater importance and may have a direct impact on payments to CLO investors.

For example, failure of an O/C test generally results in diversion of interest proceeds to pay down the most senior CLO notes on subsequent payment dates, while deferring payments to the subordinate classes. For this reason, S&P concludes that collateral managers' characterisation of FLLO loans and the resulting impact on O/C test results could have a direct impact on payments to investors.

CLOs

Improved performance for Euro SME CLOs

Fitch reports that European SME CLO performance has now stabilised or improved across all jurisdictions. However, further default volatility during 2011 is expected as austerity measures are introduced across the region.

Nevertheless, the agency predicts that the ratings will remain stable, as the benefits of the expected recoveries and deleveraging will provide sufficient credit protection for SME CLO transactions during 2011.

Spanish transactions show improving delinquency rates as 90+ day average delinquency rates have fallen to 2.1%, from their Q409 peak of 3%. Fitch says that the recent improvement in delinquency rates and elevated loan prepayments rate can in part be attributed to originating banks restructuring non-performing loans.

Meanwhile, although German transactions are seeing stabilisation, performance varies. While balance sheet transactions have been relatively stable, schuldschein transactions have experienced high levels of defaults and underperform on the balance sheet segment.

Finally, Dutch transaction performance has been above average compared with their European peers, the agency confirms. Outstanding portfolio balances have decreased significantly and the credit enhancement of rated tranches has increased substantially since closing. The slight negative portfolio credit migration over the last six months has been offset by strong recovery rates, Fitch concludes.

CMBS

Japanese CMBS loan defaults reaching peak

Fitch says that the number and balance of defaulted loans underlying Japanese CMBS has declined as of end-September. Despite its expectations that the previous upward trend in defaulted loans is reaching a peak, there is a possibility, the agency says, that the total defaulted loan balance may increase again in Q410.

"This is the first time that both the number and balance of defaulted loans have decreased on a quarterly basis, since Q209, when Fitch started publishing its end-of-quarter underlying loan default commentary," says Naoki Saito, Fitch's Japanese structured finance team director. "The declines are a result of a reduction in newly defaulted loans, together with progress in the workout activities of existing defaulted loans."

As of end-September, 41 loans (Y154bn) were in default within the Fitch-rated Japanese CMBS universe. The number and balance of defaulted loans had decreased by 10 and Y46.6bn respectively, compared to end-June 2010. The default rate, as of end-September 2010, declined to 17.8% by loan balance and 29.7% by loan number, from 20.7% and 32.9% respectively at end-June 2010.

In Q310, three loans totalling Y19.1bn defaulted, while four loans totalling Y24.7bn were paid in full without defaulting. Additionally, the workout activity on 13 defaulted loans totalling Y44.1bn was completed.

Q310 saw the number of workouts completed exceeding 10 for the first time within a quarter since Q109. Fitch says it expects workout activity for many remaining defaulted loans to be completed before end-Q410.

A total of Y183.8bn, relating to 12 loans, will mature before end-December 2010. In contrast, the agency notes that a maximum of Y90bn will mature on a quarterly basis during 2011 and that fewer loans will mature in 2012 year-on-year - suggesting that Q410 represents a peak in terms of maturing loan balance. Therefore, taking into account the maturing loan balance in 2011 as well as the expected progress of workouts, Fitch believes that the previous upward trend in defaulted loans is in fact reaching a peak.

CMBS

US CMBS delinquencies rise again

The delinquency rate on loans included in US CMBS increased by 14bp in September to 8.24%, according to Moody's Delinquency Tracker. It was the smallest monthly increase in the national delinquency rate since October 2008 and the fourth consecutive month of modest growth in the rate.

"This easing of the rate of growth in the delinquency rate does not necessarily portend a near-term improvement in the market," says Moody's md Nick Levidy. "The number and balance of loans becoming newly delinquent remain high, but in the past few months the number of loans that became current, worked out or disposed has increased."

In September, 311 loans totalling nearly US$3.8bn became newly delinquent, while 238 previously delinquent loans totalling approximately US$3.3bn became current, worked out or disposed. The total number of delinquent loans increased in September to 3,971, with the total balance increasing by approximately US$500m to US$52bn.

Hotels had the greatest increase in delinquency rate for the second month in row, gaining 47bp to 15.94%. At 31bp, industrial properties experienced the next highest gain, while remaining the best performing of the five property types, with a 6.32% rate.

Office properties had the third largest increase in the past month, with a gain of 29bp, bringing the delinquency rate to 6.40%. In the retail sector, the delinquency rate increased by a single basis point to 6.60%. Of the five core property types, only multifamily recorded a decline in September, dropping by 3bp to 13.42%.

By region, only the West saw a decline in its delinquency rate in September, the rate falling 11bp to 9.07%. The South posted the largest increase seeing a rise of 36bp to 10.14%. The Midwest had the second largest gain, with a 33bp rise to 8.63%, while the East continues to be the strongest performer with a rate of 6.39% after an 11bp increase in September.

By State, Nevada continued to have the largest delinquency rate by a very large margin. Its 26.22% rate is more than three times that of the nation and more than double the rate of 12.48% in December 2009. It continues to outpace Michigan, the state with the second highest delinquency rate, by over 11%.

CMBS

FLTST 1 senior noteholders fire warning shot

M&G is to convene an informal meeting of the class A noteholders in Fleet Street Finance One to discuss the pending maturity of the outstanding loan, which is scheduled for February 2011. European asset-backed analysts at RBS suggest that the action is a direct response to Cairn's appointment as financial advisor to the Queens Moat House borrower, which may be considering an attempt to extend the legal final of the underlying loan and potentially the issued notes.

The transaction is secured by three loans backed by carehomes (Four Seasons), hotels (Queens Moat House) and shopping centres (Swift). Two of the loans have since prepaid and half of the hotels in the QHM loan have been sold, with the deal now secured solely on a portfolio of 14 hotels.

The £101m QMH loan has an LTV of 44%, while the ICR is a reportedly healthy 7.64x. "Given the size and metrics, it hardly seems like a loan in need of extension, with even the generally conservative rating agencies considering the LTV will be less than 60%. We consider that a number of investors, including M&G, are increasingly frustrated at loan extensions being granted with little or no increase in margin, resulting in value destruction for senior noteholders with compensating benefit handed to junior debt and equity," the RBS analysts note.

CMBS

Majority of Extended Stay CMBS pays down

Extended Stay Inc last week emerged from Chapter 11 bankruptcy protection. The company was bought by a group of private equity investors for a total of US$3.925bn in July.

Most of the hotels the company owns had debt securitised in the WBCMT 2007-ESH CMBS. The October remittance report for the transaction indicates that classes A through to J were paid off in full and, in addition to principal, received payment for their prior interest shortfalls. However, the class M notes took a total loss.

The remittance shows two remaining classes outstanding - the K and L notes. MBS analysts at Bank of America Merrill Lynch suggest that this may be due to the trust not receiving all of the cashflow.

"In fact, there is a line on the reconciliation page labelled 'Pledged Certificate Cash Flow not yet received by the Trust' totalling just under US$274m," they note. "Class K's full balance remains outstanding and it received payment of prior interest shortfalls, but class L has been partially written down, according to the remittance report."

Distressed assets

RFC issued on troubled debt restructurings

The FASB has issued an exposure draft of a proposed Accounting Standards Update aimed to increase transparency in reporting on troubled debt restructurings.

The proposed update is intended to help creditors determine whether a modification of the terms of a receivable should be considered a troubled debt restructuring, both for the purposes of recording an impairment and for disclosure of troubled debt restructurings. There is currently no unified practice for identifying what constitutes a troubled debt restructuring, FASB notes.

"Investors, regulators and practitioners asked the board to clarify what types of loan modifications should be considered troubled debt restructurings for accounting and disclosure purposes," says FASB acting chairman Leslie Seidman. "We encourage our constituents to review and comment on the board's suggested guidance on how to create greater consistency and transparency in the reporting of these transactions."

If approved, the proposed clarifications would be effective for interim and annual periods ending after 15 June 2011. It would be applied retrospectively to restructurings occurring on or after the beginning of the earliest period presented. Comments are asked for by 13 December 2010.

Real Estate

US CRE prices fall again in August

The latest results from Moody's REAL Commercial Property Price Indices (CPPI) show that US CRE prices decreased by 3.3% in August - the third consecutive monthly decline of between 3% and 4%.

Prices are now the lowest they have been since the beginning of the market downturn, falling below the previous low recorded in October 2009. Nationwide, prices are 45.1% below their peak in October 2007 and have returned to 2002 levels - with the indices declining by 7.6% in the past year.

"The CRE market in the US has become trifurcated, with prices rising for performing trophy assets located in major markets, falling sharply for distressed assets and remaining essentially flat for smaller healthy properties," says Moody's md Nick Levidy.

Prior to 2009, only a few distressed sales and performing properties drove the CPPI. However, during the downturn the number of distressed properties has increased, causing an increased weighting of the CPPI towards troubled properties with large negative rates of return.

The dollar amount of the repeat sales was slightly higher in August, totalling US$1.85bn, compared to US$1.35bn in July. However, the number of repeat sales remains significantly below what it was during the peak.

CRE prices are currently 19% below the Consumer Price Index (CPI), since December 2000. Over time, however, the agency says it expects the CPPI to revert to a long-term trend line close to that of the CPI.

RMBS

Signs of stability for subprime RMBS

The latest results from Fitch's US subprime RMBS indices suggest that although prices remain at a crossroads overall, two of the sector's more maligned vintages are showing signs of stabilising. The total index stands at 9.85 through to the end of last month, which is similar to August, the firm reports.

While the index price has remained virtually flat over the last three months on aggregate, the report shows 2006 prices rising by 15% and prices for 2007 rising 10% higher. This comes after both vintages experienced significant price declines in August.

"Loan modification programmes are becoming more successful in stabilising serious delinquency rates, which is helping stabilise asset prices for both 2006 and 2007 vintages," says Fitch director Kwang Lim.

Fitch senior director Alexander Reyngold adds: "Prepayment rates will continue dropping through the winter, though there are concerns that these declines partially reflect a lower credit quality pool on aggregate."

RMBS

Claims of invalid loan transfers dismissed

Seven law firms have come out strongly against misinformation circulating within the financial markets that transfers of residential mortgage loans to securitisation trusts were not valid. Each of the firms reiterated their belief that the conventional process for loan transfers embodied in standard legal documentation for mortgage securitisations is adequate and appropriate to transfer ownership of mortgage loans to the securitisation trusts in accordance with applicable law.

Tom Deutsch, executive director of the American Securitization Forum, explains: "In the last few days, concerns have been raised as to whether the standard industry methods of transferring ownership of residential mortgage loans to securitisation trusts are sufficient and appropriate. These concerns are without merit and our membership is confident that these methods of transfer are sound and based on a well-established body of law governing a multi-trillion dollar secondary mortgage market."

The law firms involved are Bingham McCutchen, Cadwalader, Wickersham & Taft, Dewey & LeBoeuf, Hunton & Williams, Orrick, Herrington & Sutcliffe, Sidley Austin and SNR Denton US. The ASF plans to release a white paper over the course of the next two weeks that provides additional legal and market practice background on establishing ownership by securitisation trusts.

RMBS

Rating review hits 13 Spanish RMBS

Fitch has placed 45 tranches of 13 Spanish RMBS transactions on rating watch negative (RWN), due to the performance of their underlying assets. The agency says it is particularly concerned with the reserve fund depletions in combination with elevated arrears of high LTV loans.

Of the 13 transactions, seven have depleted their reserve funds and have seen a build-up of defaulted loans for which they have not yet provisioned. Transactions such as TDA 25, TDA 27, TDA 28 and Valencia Hipotecario 4 are no longer able to provision for future losses and are incurring a cost of carry on the value of defaulted loans that have not been written off. In coming months UCI 17, BBVA RMBS I and AyT Colaterales Global Hipotecario CCM 1 are expected to fully deplete their reserve funds.

The transaction structures include interest deferring mechanisms for junior and mezzanine notes. Once defaults reach preset levels, these features provide additional support to senior noteholders by diverting interest payments from more junior noteholders. Fitch consequently says it expects an increasing trend of interest deferral in the next several months.

Meanwhile, UCI 16 was able to make full interest payments on its class D notes, with the agency expecting both class C and D notes to defer interest from December 2010. Similarly, it expects the class C notes of Valencia Hipotecario 4 to defer on the interest payment date later this month. As loans in this transaction continue to default, Fitch believes that the deferral trigger on the class B notes is likely to be breached in early 2011.

Class A and B tranches of AyT Colaterales Global Hipotecario Sa Nostra 1, which carry investment grade ratings, were not placed on RWN as the current level of credit support is deemed sufficient by Fitch to maintain the current ratings. The agency intends to resolve the RWN action by the end of 2010.

RMBS

Debut NCUA resecuritisation marketing

Barclays Capital is understood to be leading the first of the US National Credit Union Administration (NCUA)'s resecuritisations under its plan to address impaired assets in the corporate credit union system (see SCI issue 202). The government-guaranteed transaction is expected to price within the next week, sized at US$3.85bn and backed by non-agency RMBS.

The NCUA's new programme, dubbed NCUA Guaranteed Notes, will securitise legacy assets - which are mostly impaired mortgage-backed securities - from five corporates that currently are either in conservatorship or have been converted to asset management estates. Each of these resecuritisations will be sold with an unconditional guarantee backed by the full faith and credit of the US.

"Since the NCUA Guaranteed Notes are backed by the federal government, similar to US Treasury securities, these investments carry a zero risk-weight and are permissible for credit unions," explains NCUA chairman Debbie Matz.

The move follows NCUA's repayment of a US$10bn loan from the US Treasury, using proceeds from selling performing assets of two formerly conserved corporate credit unions - US Central Federal Credit Union in Lenexa, Kansas, and Western Corporate Federal Credit Union of San Dimas, California. These sales included securities backed by residential and commercial mortgages, credit card receivables, student loans and auto loans.

The loan was made to NCUA's Central Liquidity Facility (CLF), which in 2009 transferred the US$10bn to the National Credit Union Share Insurance Fund (NCUSIF) in order to lend US$5bn each to US Central and WesCorp. Those loans stabilised the two corporates while they were in conservatorship.

RMBS

GSE foreclosure policy framework set

Fannie Mae and Freddie Mac are implementing a four-point policy framework to address foreclosure process deficiencies, including guidance for consistent remediation of any identified deficiencies. The framework envisions an orderly and expeditious resolution of foreclosure process issues that will provide greater certainty to homeowners, lenders, investors and communities alike, according to the FHFA.

FHFA acting director Edward DeMarco comments: "The country's housing finance system remains fragile and I intend to maintain our focus on addressing this issue in a manner that is fair to delinquent households, but also fair to servicers, mortgage investors, neighbourhoods and most of all is in the best interest of taxpayers and housing markets."

The move comes as the multi-state foreclosure task force, comprising 49 state Attorneys General and 50 state mortgage regulators, begins its inquires into whether individual mortgage servicers have improperly submitted affidavits or other documents in support of foreclosures in the associated states. The task force is seeking to determine whether "robosigning" constitutes a deceptive act and/or an unfair practice or otherwise violates state laws.

The task force's executive committee consists of the Attorneys General Offices of Arizona, California, Colorado, Connecticut, Florida, Illinois, Iowa, New York, North Carolina, Ohio, Texas and Washington, as well as the Maryland Office of the Commissioner of Financial Regulation, New York State Banking Department and the Pennsylvania Department of Banking.

Distressed assets

NAMA upside

Conor Houlihan, partner with Dillon Eustace, discusses investment opportunities in Irish distressed debt

Ireland's well-documented property-fuelled boom has come to a crashing halt, leaving billions of euros of distressed assets on the loan books of the major Irish banks. As a result, Ireland is becoming a focal point for buy-out and distressed investment activity, with individual assets now changing hands at discounts of 50% and upwards.

In an effort to repair the Irish banking system, late last year the Irish government established a specific asset management body - the National Asset Management Agency (NAMA) - to acquire approximately €81bn face value of eligible assets from five Irish banks - namely AIB, Bank of Ireland, Anglo Irish Bank, EBS Building Society and Irish Nationwide Building Society. The overall portfolio size has recently been reduced, to exclude loans of less than €20m, in order to expedite the transfer process. It is estimated that this exclusion of smaller-scale developers will reduce the face value of the overall portfolio by €6.6bn.

Investment opportunities are emerging in relation to not only NAMA-related assets, but also other assets remaining on the balance sheets of the NAMA participating banks, as well as the loan books of non-NAMA Irish banks. Of course, pricing is a key issue.

Although the NAMA valuation methodology is prescribed by law, the discount or hair-cuts applied to date on these assets may be instructive. The weighted average discount for the loans acquired in tranches one and two was over 50% and for certain institutions was over 70%. Obviously certain assets within these portfolios suffered even higher discounts.

The process of NAMA acquiring assets from the banks is ongoing. At the end of August this year, NAMA had completed the acquisition of 3,518 individual loans with a nominal value of €27.2bn.

It is anticipated that NAMA will directly manage the 150 or so largest borrowers. The management of the remaining debtors will be delegated by NAMA back to the banks, who themselves will act as primary servicers for NAMA.

So what exactly is NAMA supposed to do with these assets? In a nutshell, its primary goal is to protect and enhance the value of the asset, and to do so in the interests of the State and the Irish taxpayer. Since acquiring the assets, NAMA has been engaging with debtors to assess their viability based on business plans that borrowers are required to prepare in good faith.

NAMA has indicated that it expects to see realistic targets of achieving a significant reduction of debt over a three-year horizon in order for a borrower to be considered viable. To be considered viable by NAMA, debtors will generally need to be able to identify assets that can be realised or re-financed within three years to repay a substantial portion of the debt owed to NAMA. Where a borrower is not paying its loans and is not able to produce a sufficiently compelling case in its business plan, it seems likely that NAMA will foreclose on the secured property.

What does this mean for investors and where do the opportunities now lie? Clearly, market factors will influence the timing of asset sales. However, NAMA has indicated that it will not engage in the "speculative hoarding of assets".

In some cases, it may make sense for NAMA to make an additional investment in assets that it acquires; for example, if it was felt commercially viable to complete a particular property development.

In such cases, NAMA has indicated that it will be proactively seeking joint venture partners. Indeed, since the announcement of the establishment of NAMA there have been numerous approaches and expressions of interest to the Irish ministry of finance, to NAMA and to the Irish banks themselves from distressed debt investors and advisory firms looking to provide capital and/or expertise.

Given the sensitive Irish political and economic climate, NAMA is coming under intense pressure to start showing some value for the taxpayer - and in the process, help restore stability to the Irish banking system and the commercial property market. It therefore seems likely that NAMA's work over the coming months and years will - directly and indirectly - present a multitude of opportunities for investors.

The relative size of the NAMA portfolio, coupled with current market conditions, will no doubt make the task a difficult one. In such circumstances, a model whereby NAMA can reduce its current exposure while retaining a right to participate in any future upside will surely be strongly considered. We have seen some recent innovative refinancings by European banks that may serve as a useful precedent in this regard.

Of course, NAMA is not the only potential port of call for investors looking for openings in distressed assets. A recent review of the prudential capital requirements by the Irish Central Bank and Financial Regulator specified an amount of additional capital that needs to be raised by each of the banks.

Some, such as Bank of Ireland, have already completed an extensive capital raising exercise. Others, namely EBS, are reported to be in discussions with potential investors (including private equity funds) who have submitted proposals to acquire a stake in the building society.

In addition, work is ongoing on restructuring proposals for the two more distressed Irish financial institutions - Anglo Irish Bank and Irish Nationwide Building Society. It is expected that similar opportunities may also arise in relation to non-NAMA assets of the other NAMA banks and in relation to the non-NAMA banks operating in Ireland, some of whom are now signalling they want to exit the market.

The scope for banks to continue to "pretend and extend" may wane as the economic recovery becomes more protracted and there are greater incentives to resolve their impaired asset problems. Potential opportunities may take the form of joint ventures with the banks and debtors, individual loan and portfolio sales, securitisation or some other form.

There have already been some recent cases where the debtors and banks have successfully received additional capital commitments from outside investors in the form of new equity and an assumption of debt. There have also been cases where, rather than forcing a fire sale upon liquidation, banks have done debt for equity swaps. Such as in the case of Anglo Irish Bank, Ulster Bank and the iconic Dublin department store, Arnotts.

However, while some further debt for equity swaps can be expected, it seems that this can only be a solution in a limited number of cases. As such, it may increasingly become the case that the only real solution to resolving non-performing loan issues will be for the banks to realise their losses through sales of these assets. By also transferring the management of such assets to investors who specialise in this area, the banks may in addition usefully free up resources to focus on rebuilding their businesses.