Contents

ABS

Consolidating positions

Firms forced into consolidation as tough times take toll

Advisories and broker-dealers in the ABS space are having to adjust to the challenges of operating in a market with reduced liquidity and low trading volumes. The halcyon days of a couple of years back have passed, leaving a great many entities chasing fewer opportunities.

One response to these more challenging conditions has been consolidation, with - for example - StormHarbour Partners and Fusion Advisory Partners recently linking up to enhance their client offering and strengthen their position in the market (see SCI issue 205). Other firms, like brokerage Odeon Capital Group, have actively expanded their own business, while many others are leaving the space and returning to banks.

StormHarbour says that adding Fusion to its US operations group strengthens its core business lines - sales and trading, structuring and advisory and capital markets. Although this may improve what the firms currently offer, Odeon Capital md and head of research Mathew Van Alstyne believes consolidation for consolidation's sake achieves little - with the key being the addition of capabilities that a firm did not previously have.

Van Alstyne explains: "If you are in the same sector, you need to reach more customers, so instead of just doubling up your numbers you have to broaden your product offerings. The most important thing is adding value to your services."

Green Street Capital principal Dean Atkins agrees. He says: "Consolidation does not necessarily make sense if it is a true advisory firm merging with another advisory firm. If consolidation is adding something that one of the institutions does not have, then it makes sense, but in the pure advisory world that is probably rare. In most cases, I think you have brokerages linking up with advisory businesses and branching out in that way."

The reason firms need to branch out is simple: market opportunities have shrunk drastically, while too many firms have not yet responded. Atkins explains: "There were numerous small outfits which got going from 2008 onwards. At one point, there were upwards of 30 new brokerage outfits in London alone. There was a time and a place for that, but the market opportunity did not last as long as those entities thought it would."

He adds: "It is now very hard to be a pure broker on an independent basis. Bid-offers have normalised and trading volumes are nowhere near where they were. This tough environment has already led to some consolidation and there has also been a return of some of the key players in smaller brokerages back to the banks."

This trend is also what London headhunters are seeing. Lisa Wilson, Invictus Executive Search managing partner, says: "There are just way too many firms now in the ABS advisory space. A lot of senior people set up their own companies and had a fantastic couple of years, but now they are finding there just is not enough business. It is the same situation as with the brokers, which played an important role when the banks could not participate but got squeezed out when banks came back."

She continues: "There will be a lot of people who left banks to run advisory shops or brokerages who will now be going back into banks. But after these guys leave, what happens to the firms they set up? A lot of these will fall by the wayside unless they can consolidate in the way StormHarbour has done."

However, Van Alstyne disagrees with Atkins and Wilson in their assertion that there are too many firms chasing too little business. He says: "There is enough business to be chased. The number of firms is not the only issue, because what also matters is how many people there are at those firms."

He adds: "What we have found is that we have been able to hire and continue to expand because there is more opportunity in the marketplace than we were able to service with our existing employees. The reason we have been able to do that is some of the bigger firms cut down on staff to the point where we felt clients were being under serviced."

Odeon's approach has been to grow organically, rather than consider consolidation. Van Alstyne says that after starting out focused on structured products and RMBS, the firm moved into CMBS, student loans and auction rate securities, before more recently covering high yield distressed corporate and bank loans. He believes product diversification is the way to achieve stability and growth.

He says: "Consolidation is something the industry broadly is going to have to do at some point because there are lots of firms out there filling niches and it is really by combining niches that firms are able to become more powerful and improve the services they offer to clients."

Odeon's steady expansion may serve them well, but Atkins cautions that it is not a model all firms would be able to adopt. He says: "Aggressive expansion worked very well for Jefferies and in the ABS markets I see them as one of the success stories. Evolution has adopted a similar approach, but I do not see similar results in the ABS market."

Atkins adds: "For a small independent which maybe started in 2008 or 2009, expanding rapidly now is very unlikely to work - especially now that the market has normalised, bid-offers are not the crazily wide ones which were available for a short time and trade flow is just not there. In the European ABS markets I do not think that strategy would work."

He says the squeeze being applied may well drive further consolidation among advisories and brokers, especially among the sector's smaller players. However, he and Wilson each believe that alongside consolidation there will be something of an exodus from firms as senior people return to the banks many of them left only a few years ago.

Wilson says: "As recruitment people, we are seeing a lot of interest from people who moved into those companies and now want to get back into a bank. The advisories can still get good fees for the rest of this year, but beyond that does not look so good. The chance to leave and go to run a structuring team at a bank will tempt a lot of people."

The window of opportunity that many thought they could take advantage of two years ago has shut faster than almost anybody expected. With no let-up to the tough market conditions in sight, many firms have been left needing to expand or consolidate if they can and get out of the space if they cannot.

Van Alstyne says: "This continues to be a very testing time for brokers and advisories. As the market has rebounded rapidly and spreads have tightened, it behoves you to be more nimble and be more value-added. There is no catalyst on the horizon to suggest the market will become any easier to navigate; if anything, this market is set to become more challenging."

He concludes: "This is going to separate the wheat from the chaff. The guys with experience who are able to offer more value-added services will be able to shine a bit brighter the tougher the market gets."

JL

RMBS

Put-back potential boosts US RMBS

Highly priced assets, together with the current focus on the mortgage foreclosure scandal are driving forces in the US RMBS market this week.

"There has been a lot of noise in the market this week," one RMBS trader notes. This, he says, is due to the news headlines on mortgage servicer and originator representation and warranty breaches (SCI passim).

The coverage appears to have boosted activity in the sector, however. "The potential for put-backs - due to the lack of documentation when these deals were originally underwritten - has spurred quite a bit of supply, all of which traded very well," the trader confirms. He says that the supply did not quite reach the peaks that the market witnessed two weeks ago, but it came very close.

He continues: "With the foreclosure issue, it's starting to feel like the market is reaching its maximum capacity. I've seen subprime mortgages trade off from where they have been all week. The jury's not out yet, but it definitely feels like the market is softening up a little."

Another driving force in the market at present is the rising price of mortgage assets, according to the trader. "The prices are nearly close to the highs of the year - risk-adjusted yields are extremely low, particularly on higher quality assets."

Overall, the RMBS market has seen plenty of supply this week, with a noticeable volume of sellers - the majority of which lie in the hedge fund category. Meanwhile, the trader adds: "High quality assets are continuing to bid up, while the weaker assets have softened over the last day or two."

However, 'foreclosuregate' appears to be the main issue of the day. "The legal consequences for the market is really were all the eyes are on right now. At this point, the potential for action can have a serious impact on the market," the trader concludes.

LB

RMBS

RMS negative coupons cause a stir

Traders in the European RMBS market have been focused on the primary market over the past few days, with the emergence - via RMS 25 - of what is believed to be the first-ever negative coupons on retained tranches. At the same time, another leading issuer - Holmes Master Trust - continues marketing. Consequently, the secondary market has hit a lull.

Speculation is mounting over Kensington's £186m non-conforming RMS 25 deal. The transaction, which priced on Friday with negative coupons on its retained tranches (the publicly offered £128.2m 5.09-year triple-A notes came at 250bp over Libor), has caused market participants to question Investec's motives.

"The coupons on this deal don't reflect where Investec is in the current market," one ABS trader says. "The negative coupons will help with the excess spread available in the deal."

One structurer agrees that the negative coupons will likely help subsidise the transaction. But he says this feature also raises the question of whether the ratings on the notes are contingent on the rating of the holder, "given that on the tranches with spreads of -100bp the investor is paying income into the deal".

S&P's presale for RMS 25 notes that a number of tranches have features that aren't typical of a UK RMBS. For example, the mezzanine notes are expected to be deferrable-interest securities and there is a 'synthetic' step-up date for the class A1 noteholders.

Nevertheless, the trader adds: "RMS 25 was oversubscribed at launch, so it's not a surprise that it's trading up on the back of that. It's great news, as it's the first non-prime collateral that's been priced since 2007. However, it took a while to price and subscribe to, which reflects the deal's structure and its back-and-forth pricing. Generally, it's a good thing for investors."

Commenting further on the participatory dynamic of the primary market, the trader says: "Investors will not accept what is put in front of them anymore. They have a much more active role in bringing these deals to the market - it's really positive for the whole market."

Attention is now switching to the pipeline, however - in particular towards Santander's forthcoming Holmes issuance, which is expected to price in early November and is likely to comprise sterling, euro and dollar tranches (SCI passim). "We're expecting the Holmes deal to come in shortly, so the primary market is definitely the focus of the moment," the trader confirms.

He goes on to say that as a knock-on effect of this progressive boost of primary activity, the pace of the secondary market is beginning to slow down. "With primary deals, you have to review the documentation, look at the collateral pool - everything that's important around that deal. It's slowing secondary trading right down."

LB

CDS

CDS real-time reporting standards floated

Javelin Capital Markets has written an open letter on the ongoing US SEC and CFTC discussion about block trading and real-time swaps reporting. The electronic trading venue stresses the need to enforce Dodd-Frank's requirement for reporting interest rate swap and CDS transactions in real-time, as well as suggesting what should constitute a block trade.

Real-time reporting is crucial, argues Javelin ceo Jamie Cawley. He says: "You just have to look to September 2008 to understand the importance of real-time information for the market. It is a ridiculous notion to think we can operate IRS and CDS today with them being so liquid and not have any kind of real-time reporting of those trades."

Cawley says that knowing the value of the last trade is important to customers before they put their own trade on. Achieving this through real-time reporting will engender greater market confidence, with greater liquidity and lower systemic risk. He says this "provides for continuous markets, particularly in times of stress when the markets need that most".

Javelin argues that the one exception to real-time reporting should be block trades. This issue was addressed specifically by US Congress, allowing for a limited time delay in public reporting. Cawley explains that by giving a block trader time to offset, hedge or even trade out of their position, they are more likely to make bigger quotes in the future, benefiting liquidity.

How to define a block trade is where the issue becomes slightly more complicated. Javelin recommends a different method for IRS than for CDS, with IRS block trades being calculated according to risk per basis point.

Cawley says: "For IRS, we believe this should be done on a duration-weighted basis. If you take US$200,000 or US$250,000 of risk per basis point, it comes to US$1bn-US$1.2bn for two-year swaps but around US$135m-US$150m for 30-year swaps. The risk is constant across the yield curve, but the duration difference means for the same amount of duration - or DV01 - the notional goes up."

He continues: "The block trade is notionally bigger for two-year swaps than it is for 30-year swaps. That is somewhat consistent with the practice in the US Treasury world looking at futures."

Meanwhile, for CDS Cawley says the existence of multiple credit curves means that DV01 is not the correct approach. Instead, Javelin advocates using a 10x multiple to define a block trade. Javelin's open letter advocates using US$50m as the block trade for investment grade CDS (assuming the standard size trade to be US$5m).

The letter also suggested that US$50m is the standard size for investment grade index trades, but Cawley says that has recently been revised upwards. The market is understood to now consider US$100m to be the standard size trade for investment grade index trades, meaning a block trade should be US$1bn.

Cawley cautions that only block trades should have any delay and that, even then, such a delay should be measured in minutes, if not milliseconds. He concludes: "Only block trades should have any kind of time delay and even then there should never be an instance where information is not reported to the marketplace. The time a trade took place, the amount, the credit and the price should be reported, but not the names of the buyers or sellers. Some people are campaigning to have 30 days to report that information, which we think is ridiculous."

JL

Insurance-linked securities

First thunder cat bond marketing

Mariah Re, the first-ever catastrophe bond to solely cover severe thunderstorm risk, is being marketed by Aon Benfield on behalf of American Family Mutual Insurance. The US peril-focused single-tranche US$100m three-year deal has been given a preliminary single-B rating by S&P.

The transaction will cover losses in the covered area (a range of specified US states) resulting from severe thunderstorms. Losses will be calculated on an annual aggregate basis. Mariah Re's collateral will be invested in Treasury money market funds.

S&P notes: "Although this is not the first natural peril catastrophe bond that has included severe thunderstorm as a covered risk, it is the first bond wherein it is the sole covered risk... A covered event is any severe thunderstorm that has an event index value equal to or in excess of US$10m and has a date of loss within the risk period. The relationship between climatology and severe thunderstorm activity remains an open area of scientific research and there is no alternative event catalogue (e.g. near-term US hurricane catalogue) used for modelling."

Mariah Re will have two annual resets, effective on 1 January 2012 and 2013, and will be based on the calculation agent AIR Worldwide's insured industry database in effect at 15 September 2011 and 2012. Each annual reset will adjust the attachment point to maintain a probability of attachment of 2.56% and a probability of expected loss of 1.67%. The current probability of exhaustion is 1.04%.

The notes will cover 100% of losses between the attachment level of US$825m and the exhaustion level of US$925m.

MP

Investors

Capital efficient mezz fund marketing

Prytania Investment Advisors, in collaboration with Austrian firm Kuperstein, is prepping a fund designed to help financial institutions hold assets in a more capital efficient way under the new regulatory rules to come, such as Basel 3 and Solvency 2. The offering will target predominantly EMEA and, potentially, US corporate and consumer mezzanine assets at origination.

Dubbed the Primary Mezzanine Fund, the product aims to offer real risk transfer without diluting first-loss profitability for originators. "Many opportunities in this space are deal-specific, but we wanted to bring a broadly-diversified fund to investors. The idea has some similarities with the portfolio swap concept since, by transferring mezz risk into the fund, originators of the assets can avoid consolidation," explains Prytania cio Mark Hale.

The offering involves Prytania and Kuperstein partnering with financial institutions in order to direct originations according to tightly controlled parameters. Kuperstein has significant experience of structuring accounting-, tax- and capital-efficient vehicles, while Prytania offers extensive experience in structured finance asset management, investment advisory and related proprietary analytics.

Primary Mezzanine is targeting an initial size of €250m and net returns of 12%-13% after costs. Launch is expected in the spring, with initial marketing commencing now to build upon seed investor interest.

Financial institutions have in the recent past proved relatively unwilling to sell assets at low levels, but Prytania is confident that enough assets will be available for its fund. "There are many reasons why supply could be restricted, including that many banks are essentially funding for free and/or repo'ing credit and structured finance assets with central banks," Hale notes. "But the tightening regulatory net and increasingly restrictive financing opportunities should facilitate asset sales. Plus, prices have recovered to the extent that they're in the same ball park as those of July 2008, where many assets are marked, so it is often possible to sell them without taking a loss in P&L."

Oliver Fochler, partner at Prytania, adds: "Participating financial institutions would already have increased returns due to the regulatory capital relief, but if they invest in the fund as well, their risk-weighting would decrease even further depending on whether they are following the standardised or IRB approach. First-loss slices, which would attract RWA of up to 1250% could be converted into 100%-150% for standardised and 370% for IRB-based investments. This could be attractive on top of the mezz returns."

Hale suggests that there could be interesting opportunities for the fund concept in the structured finance space. "Certainly it would be efficient for some institutions to get some of their legacy ABS assets off their books in this way, but some investors may still be nervous about those assets. So we will begin with a clean fund and continue exploring other potential different incarnations that could cover structured finance assets. The expectation is to start small and broaden our focus out in terms of asset sectoral and geographical spread."

CS

CDS

Valuators prepare for regulatory measures ahead

A panel discussion hosted by Interactive Data last week examined the findings of a new A-Team Group survey, 'Valuations in European Buy-Side Institutions'. The survey focused on valuation issues across the OTC derivatives market and how valuations will be impacted by upcoming regulatory and accounting changes.

In terms of financial institutions' preparations for the regulatory changes ahead, BNY Mellon Asset Servicing securities data management md Matthew Cox expects the impact to be significant. "The function and remit of our data management group will increase. As an example, we're now being asked to place category levels on assets, meaning we have to work closely with vendors to source and validate additional data before it can be processed," he said.

Anthony Belcher, director of European fixed income at Interactive Data, added that - as a vendor - there is increasing client demand for an understanding of how valuations are derived to support regulation and accounting standards. "The wave of proposed regulations over the coming year is profound and auditors, regulators, risk managers and investors are all demanding more transparency in the procedures for valuing OTC instruments. Vendors such as us are responding to the need for transparency by introducing new assumptive data services."

Looking ahead to the next 12 months, the survey results found that - at 18% - the majority of respondents identified automation as their 'top goal' for valuations. Daniel Simpson, ceo of Cadis, explained that data management firms are now making automation a priority by creating specialised in-house valuation teams and investing in data management tools.

Huw Bishop, director of valuations & investment services at Blackrock, said: "Trying to establish fair value for an asset is the main aim across the board and establishing the quality of the price is important for reporting disclosures."

He further commented on the level of quality that investors can come to expect, with valuators aiming to provide longer-term value. "Increased transparency of methodology, number and type of contributing sources, and the quality of evaluating teams are all required from valuators as key medium and long-term expectations from users."

Valuation has been a topical debate since the start of the financial crisis and, with the new accounting standards and regulations coming online, all eyes are on this area of the market. Cox added: "We've seen valuation firms creating new models for new-to-market assets in order to meet client demand, but the coverage versus volume is always a challenge for the evaluators to balance."

He went on to discuss the evolving methods of valuation in the market and, in particular, among data warehouses. "I think the warehouses understand the importance of asset pricing now; the awareness has been raised. However, OTC valuations need to be priced differently, in that greater data sets are required to evaluate an OTC asset. Warehouses need to consider whether separate OTC systems should exist rather than including the functionality within the main model," Cox warned.

Moving on to valuation data budgets, the survey findings show that almost 40% of respondents - primarily the securities services firms - have budgets in place for over US$1m. Bishop said that he believes many firms already spend on vendor feeds and most have no specific new investment plans to spend more.

"The focus should be more on making sure that there is an appropriate balance between spending on vendors versus spending on in-house pricing activities," he noted.

Meanwhile, from a vendor perspective, Simpson added: "Clients are much more sophisticated when it comes to vendor performance and budget is always an issue. We deliver rapid ROI - a key determinant in securing funds, work with incumbent legacy systems and prove our ability to provide efficient and better quality data."

In concluding the discussion, the panel debated the issue of pricing liability and who should take responsibility for errors in valuations. The ultimate liability lies with the consumers, as they have a responsibility to validate the data, panellists suggested.

The survey participants included valuation managers and securities services companies across 67 institutions in Europe.

LB

CDS

Countering risk

Frank Iacono, partner at Riverside Risk Advisors, answers SCI's questions

Q: How and when did Riverside Risk Advisors become involved in the structured finance markets?
A: Although we formally announced our launch recently (see SCI issue 204), we have been quietly doing this business for about a year. There are several significant engagements we are currently working on and some we have already completed for clients.

My own background is in structured credit. I was on the Street for ten years, starting in 1998 at Chase, where I structured mostly corporate synthetic CDOs. From 2001-2006, I was at Lehman Brothers and at different times ran the synthetic CDO structuring and trading desks in New York.

For a time, I was also responsible for the single-name credit-linked notes group. I dealt almost exclusively in corporate credit.

From 2006-2008, I was ceo of a subsidiary of Morgan Stanley called Cournot Financial Products, which sold protection of highly-rated corporate synthetic tranches. The company was sold by Morgan Stanley in 2008 (see SCI issue 116). Since then I have been doing some consulting and litigation advisory work and more recently focusing on building Riverside's business.

Q: What are your key areas of focus today?
A: Collectively between the partners and employees we bring expertise in fixed income derivatives and structured products. We are working with corporate clients to help them choose the best hedge and structure the deal the right way, including the documentation, to provide transparency as to the economics of the transaction and ultimately help them get best pricing and execution from their bank counterparties.

A big part of the economics is the credit valuation adjustment (CVA), which in the context of our business is the add-on charge that a bank charges its clients for taking on credit exposure in an uncollateralised derivative obligation. We have our own proprietary CVA models, which we are continually enhancing.

Measuring and managing CVA risk is a natural outgrowth of my credit correlation trading background and CVA is important to us for several reasons. First, for many of the transactions in which we act in an advisory capacity, CVA is the least transparent component of pricing for the end user. Second, we believe CVA is likely to be one of the next major traded risks.

Right now the Street is figuring out how to value, measure and manage counterparty risk. Some dealers have very advanced thinking on this and some do not. It is very much in the process of being understood and there is a wide range of methodologies and practices.

At the same time, you have Basel rules kicking in, which will increase the regulatory capital charges associated with counterparty performance risk on derivatives contracts. This is an area where our understanding of the risk helps us bring our end-user clients transparency as to what they should be paying on their hedging contracts.

We're focused on ultimately being able to trade counterparty risk, either for our own account or on behalf of our clients. Given our backgrounds and what we see working with our clients, we think we can make some big strides in this area.

We also provide advice to a broad range of clients other than the corporates. As an example, we are working with a global bank that has a legacy structured credit business in wind-down and we are helping by providing expertise in respect to counterparty and market risk, while also providing transaction ideas to help it achieve the wind-down most cost effectively and expeditiously.

We also work with hedge funds that see opportunities in structured credit, but do not have the infrastructure and skill-sets in-house to evaluate these opportunities. Essentially, we lend our expertise to people that are not going to be a big enough player in the space to need permanent full-time professionals, but who want to make the most out of specific opportunities by leveraging off our deep transactional experience across a broad platform of derivative and structured products.

We are also working with counterparties facing LBSF in the Lehman Brothers bankruptcy. Individual counterparties are negotiating with representatives of the estate to determine the close-out amounts of derivatives and structured note positions.

Riverside adds value by providing a substantiation of the value and negotiating directly with the estate on a client's behalf. The skills that are needed are more than just the ability to model the transaction, but also the ability to size appropriate bid/offers and justify model input parameters, like correlation, which are not directly observable.

Q: Which market constituent is your main client base?
A: We have no main client base. We've worked with corporates, project finance sponsors, private equity firms, banks, hedge funds, more traditional asset managers and high net-worth individuals. Our clients are any end-user, dealer or investor in derivatives or structured products who has either a limited need - such as a corporate treasurer doing three interest rate swaps a year to hedge its financing or terminate a swap - or who has a temporary need - such as a bank winding down a legacy book - or even on an ongoing basis, where there is a limited need and outsourcing expertise is the best option.

Q: Do you focus on a broad range of asset classes or only one?
A: We are sticking closely to our expertise. My background is structured credit and to some extent rates and options. Chris Frost has a background in interest rate and FX derivatives, while Joyce Frost - who has worked with me both at Chase and at Morgan Stanley - has a background in a combination of credit, rates and currency swaps.

That is our core, but we are eyeing opportunities in municipals or commodities, which we see as potential expansion areas for our business in the coming months. For those, we would look to bring in someone senior who has lived and breathed the business for a long time.

Q: How else do you differentiate yourself from your competitors?
A: Every member of our team has significant transaction experience on the Street and some of us have both Street and buy-side experience. We bring to our client mandates hands-on transaction experience that you cannot get from a text book or a classroom.

We have been there and done it successfully and that means clients get a very high level of expertise without making a permanent hiring commitment. You are really getting the A-team that you would get on the Street, but working solely for the best interests of the client.

Q: What major developments do you expect from the market in the future?
A: Dodd-Frank is going to create a regulatory regime for swap dealers and major swap participants requiring exchange trading of many derivatives and collateral and margining rules for most. We think the corporate end-users we work with are likely to be exempt from these requirements, but there will likely be an impact on disclosure and cost as capital charges for counterparty risk will increase.

There will be a continued need for our expertise, which is where the CVA element is relevant again. There will be a need to know what the appropriate CVA is for financial reporting purposes as the disclosure rules get enhanced.

A key factor with Dodd-Frank is the creation of a requirement that certain counterparties have independent advisors on their derivative transactions. These counterparties - which include municipals, pension funds and agencies of the federal government - will need our services.

Even where there is not a hard-and-fast rule created by legislation, we think independent advisory is going to become a best-practice standard. Just as M&A transactions see both buyers and sellers having an investment bank providing advice, we think that convention will come to derivatives transactions.

JL

ABS

Fitch restructures EMEA SF group

Fitch has made a number of personnel changes to its EMEA structured finance group.

Karen Skinner has been promoted to md in Fitch's newly-created global research strategy group. Based in London, Skinner and the group will report to Peter Jordan, the firm's head of global business management.

Skinner was previously head of business & relationship management for structured finance and covered bonds for EMEA, having previously run the agency's corporate finance business development team in the region. The research strategy group will lead a global effort to optimise Fitch's research and ensure it continuously meets the needs of the market. The group's mandate includes analysing and recommending enhancements to the content, format and delivery of Fitch research that reflects the evolving ways in which content is consumed.

Philip Walsh, md, has replaced Skinner as head of business & relationship management for structured finance and covered bonds for EMEA. He was previously Fitch's head of CMBS for EMEA.

Additionally, Marjan van der Weijden has been promoted to lead the firm's EMEA structured finance group and will report to Ian Linnell, global head of structured finance. Euan Gatfield will replace Walsh as head of CMBS for EMEA, reporting to van der Weijden.

ABS

Bank adds sales director

Lloyds Bank has appointed Maureen Osborne as director in its capital market sales group. Covering the Nordic region, she will be responsible for credit sales, including ABS, reporting to the group's head of Germany and Scandinavia Hans Enssle.

Osborne joins the firm from Matrix and has over 20 years of credit sales experience.

CDO

ABS CDO management agreement reassigned

The collateral management agreement for the Avebury Finance CDO has been reassigned to KBC Bank from KBC Financial Products UK. The performance of the activities contemplated within this assignment agreement will not cause the current ratings of the notes to be reduced or withdrawn, according to Moody's.

CDS

Aussie expansion for analytics vendor

Numerix has opened a new regional sales office in Sydney, Australia, which will be managed by Jack Drewe, regional sales director of the Australian and New Zealand regions. Drewe will report directly to Erdem Ozgul, vp of the firm's Asia South sales operation.

"We are pleased to now be in a position to provide permanent local support for our Australian clients," says Numerix president and coo Steven O'Hanlon. "I am confident in our firm's continued ability to grow and package our products targeting such strategic areas as risk, insurance/variable annuities, commodity derivatives and to making sure that we continue to meet the overall pricing and risk management needs of our clients across the region."

CLOs

Permacap merger proposed

The boards of Greenwich Loan Income Fund (GLIF) and Asset Management Investment Company (AMIC) are in discussions with a view to GLIF acquiring the entire issued share capital of AMIC, by way of a scheme of arrangement. The scheme would be subject to the approval of both companies' shareholders, court approval and certain other conditions. The firms are aiming to complete the acquisition before end-January 2011.

Under the Scheme, GLIF would be the ongoing company and AMIC would become a wholly-owned subsidiary of GLIF. The board of GLIF believes that the acquisition would provide an opportunity to create a larger closed-ended investment company with a stable and predictable dividend yield and with long-term preservation of net asset value. T2 Advisers would be the manager of the enlarged GLIF group.

Based on the gross assets of both companies and assuming a full take-up of the cash offer, the enlarged GLIF group would have aggregate gross assets of approximately £200m.

RMBS

Distressed credit vet launches own firm

Former Siguler Guff portfolio manager Maria Boyazny has launched MB Global Partners, partnering with G2 Investment Group. The collaboration aims to capitalise on the credit dislocations and distressed opportunities created by the global financial crisis.

Boyazny previously managed US$4.5bn across Siguler Guff's distressed opportunities funds. "This is a decade of credit, as financial institutions and governments around the world are forced to refinance their LBO, real estate and sovereign debt. We will implement a number of innovative concepts to take our credit business to a new level," she says.

MB Global Partners aims to run an innovative multi-manager platform focused on an array of credit dislocation and distressed strategies, both by allocating capital to other managers and via direct investments. The platform will encompass all asset classes, including corporate debt, residential mortgage debt and commercial real estate.

RMBS

Ambac rehab plan faces attack

The RMBS Policyholders Group has commented on the Plan of Rehabilitation for the Segregated Account of Ambac Assurance Corporation, which recently filed by the Wisconsin Office of the Commissioner of Insurance (OCI) (SCI passim).

The plan continues a disturbing pattern, the group says, of OCI favouring Ambac and its shareholder to the detriment of policyholders. The plan requires policyholders to assign their rights of payment to Ambac under their underlying contracts which are insured by Ambac - even though policyholders are not paid in full. This plan, the group says, is a way to divert value from policyholders to Ambac's shareholders.

According to the group, a review of the plan confirms that the OCI has failed to fulfil its statutory obligation to protect the rights of all policyholders. Those in the segregated account - who hold insurance policies with priority over non-policyholder claims - are forced to bear the full brunt of Ambac's financial deterioration. These account holders will potentially recover only a fraction of what non-policyholders and other policyholders will receive on their claims, the group notes.

The segregated account policyholders are to receive 75% of any claim payments in the form of surplus notes of "questionable value" that may not pay any interest or principal before 2050. In contrast, general account creditors and policyholders would receive 100% of any claim payments in cash.

Despite forcing the segregated account policyholders to take a substantial discount on their policy claims, the group maintains that the plan provides no protections against Ambac distributing value to its equity holders - including the use of its US$7bn net operating losses. In addition, it would require policyholders in the segregated account to continue to pay premiums for policies that will not cover their claims.

Finally, the group says that OCI's disclosure of financial projections in support of the plan is lacking in substance or detail, with the regulator still refusing to share information with policyholders.

RMBS

Law firm expands mortgage foreclosure team

Nixon Peabody has expanded its mortgage finance and foreclosure team, offering additional resources to address clients' growing needs during the mortgage foreclosure crisis. The team advises clients on impending issues involving mortgage foreclosures and repurchase obligations as clients face bankruptcy and restructuring, litigation, government investigation and new regulatory enforcement, the firm says.

RMBS

Real estate vet recruited

RoundPoint Financial Group has named Steve Bashmakov as its new chief financial officer. Bashmakov will report directly to RoundPoint ceo Kevin Brungardt.

"RoundPoint Financial Group is a forward-looking company furnished with a dynamic team," comments Bashmakov. "Kevin's vision for growing a truly integrated mortgage banking and investment company in this real estate market is compelling."

Bashmakov brings to RoundPoint significant financial management, investor relations, risk management and strategic planning experience from a range of boutique and large financial services organisations. Prior to joining RoundPoint, he served as cfo and evp of Residential Credit Solutions.

RMBS

Expanding FI operation adds MBS heads

Braver Stern Securities has appointed John Keller and David Cuttino to lead its two new fixed income institutional sales offices in Boston, Massachusetts, and Richmond, Virginia.

Keller will head Braver Stern's Boston fixed income institutional sales operation. Prior to joining the firm, he was a portfolio manager of funds investing in ABS, MBS, CMBS and real estate for Cambridge Place Investment Management. Keller was also previously an ABS/MBS analyst and portfolio manager for Babson Capital.

Cuttino will lead Braver Stern's institutional mortgage-backed sales operation in Richmond. He joins from BB&T Debt Capital Markets, where he most recently traded agency and non-agency mortgage products. Prior to this, Cuttino managed an RMBS portfolio of agency derivative products and non-agency credit at West Side Advisors.

ABS

Fed's risk retention report welcomed

The US Federal Reserve Board has issued a report on the potential impact of credit risk retention requirements on securitisation markets, as required under the Dodd-Frank Act. The report highlights the significant differences in market practices and performance across securitisations backed by different types of assets, recommending that regulatory agencies take these differences into account when developing risk retention requirements.

Overall, the study documents considerable heterogeneity across asset classes in securitisation chains, deal structure and incentive alignment mechanisms in place before or after the financial crisis. Thus, it concludes that simple credit risk retention rules, applied uniformly across assets of all types, are unlikely to achieve the stated objective of the Act - namely, to improve the asset-backed securitisation process and protect investors from losses associated with poorly underwritten loans.

Consequently, the Board recommends that rulemakers consider crafting credit risk retention requirements that are tailored to each major class of securitised assets. "Such an approach could recognise differences in market practices and conventions, which in many instances exist for sound reasons related to the inherent nature of the type of asset being securitised," it explains. "Asset class-specific requirements could also more directly address differences in the fundamental incentive problems characteristic of securitisations of each asset type, some of which became evident only during the crisis."

The Board recommends that agencies responsible for implementing the credit risk retention requirements of the Act consider:

• the specific incentive alignment problems to be addressed by each credit risk retention requirement established under the jointly prescribed rules.
• the economics of asset classes and securitisation structure in designing credit risk retention requirements.
• the potential effect of credit risk retention requirements on the capacity of smaller market participants to comply and remain active in the securitisation market.
• the potential for other incentive alignment mechanisms to function as either an alternative or a complement to mandated credit risk retention.
• the interaction of credit risk retention with both accounting treatment and regulatory capital requirements.
• credit risk retention requirements in the context of all the rulemakings required under the Dodd-Frank Act, some of which might magnify the effect of, or influence, the optimal form of credit risk retention requirements.
• that investors may appropriately demand that originators and securitisers hold alternate forms of risk retention beyond that required by the credit risk retention regulations.
• that capital markets are, and should remain, dynamic and thus periodic adjustments to any credit risk retention requirement may be necessary to ensure that the requirements remain effective.

The CRE Finance Council welcomed the Fed report, applauding the fact that it highlights the need to tailor reforms and stresses that the uniform application of risk retention for all assets could curtail a market recovery.

ABS

Slow improvement for EMEA SF rating outlooks

The asset performance and rating outlooks for EMEA structured finance continue to improve, albeit slowly, according to Fitch. Five out of the six outlooks to change this quarter moved in a positive direction, the agency adds.

Fitch's ratings outlook for German consumer ABS changed from stable to stable/positive during the quarter, resulting from good asset performance and increased credit enhancement arising from sequential amortisation. The ratings outlook for SME CLOs was revised to stable from stable/negative, reflecting the benefit of transaction deleveraging.

Meanwhile, the asset performance outlooks for Belgian and French RMBS, as well as German non-conforming RMBS, all changed to stable/declining from declining, as house price trends suggest that the risk of a significant decline has reduced.

However, the agency notes that some asset classes continue to exhibit stresses from the recession. Others - notably Spanish RMBS - have benefitted from some originator support, while others, such as secondary CMBS, remain susceptible to further downturn.

Fitch says it expects monetary tightening in the eurozone and the UK to remain cautious, implying that the relatively benign interest rate environment is set to continue for the foreseeable future.

Of the 47 individual sub-sectors featured in Fitch's report, 13 have been assigned negative rating outlooks, with a further 12 assigned stable/negative. In most cases, negative rating outlooks remain focused on the more subordinated tranches - although in subsectors such as Dutch and South African RMBS criteria changes may affect ratings further up the capital structure, the agency concludes.

ABS

ASF cautions against 'overly broad' rules

In a letter to the US SEC, the American Securitization Forum (ASF) has expressed its full support for a portion of the Dodd-Frank Act that addresses conflicts of interest in securitisation. At the same time, the ASF cautions the SEC against imposing overly broad rules as it implements the Act because they could create serious unintended consequences.

"The ASF strongly supports the intent of this provision, which is to eliminate incentives for market participants to intentionally design asset-backed securities to fail," comments Tom Deutsch, ASF executive director. "However, the rules implemented by the SEC must be crafted to eliminate these incentives without unintentionally prohibiting appropriate hedging, market making and other legitimate transactions, and causing unnecessary adverse impacts on the markets for asset-backed securities."

In its letter, the ASF proposes language for a rule that it believes strikes the appropriate balance between achieving the specific goals Congress sought to achieve while also permitting the healthy functioning of the market. "We believe the Congressional Record makes clear that this provision is intended to prohibit market participants from intentionally designing asset-backed securities to fail," continues Deutsch, "and we agree with Senators Jeffrey Merkley and Carl Levin, who introduced the measure, that eliminating incentives leading to that result is necessary for a robust securitisation market."

ABS

Seasonal pressures drive auto ABS delinquencies

According to Fitch's latest indices for the sector, the prolonged stress of US consumer and seasonal pressures have pushed US auto loan ABS losses and delinquencies higher in the recent period.

"Weaker used vehicle values driven by seasonal factors contributed to the worsening auto ABS performance," says Fitch senior director Hylton Heard. "However, used vehicle values remain strong overall and declines were less than typically experienced during this time of the year."

Despite these pressures, auto ABS performance looks set to be stable through to the end of the year, the agency says. Prime auto loan ABS annualised net losses (ANL) rose three consecutive months to 0.90% through to September - correlating with historical patterns where used vehicle values typically fall in September.

Prime ANL levels are expected to range from 1% to 1.3% and hold well below 2009 levels, consistent with the continued strong performance of the 2009 and early 2010 collateral vintages. Prime ANL rose by 34% quarter-over-quarter through September, but were 46% improved over the same period in 2009.

The ANL rate of 0.9% in September was within the range of 0.85%-0.94% recorded during the same period in 2007. Prime auto loan ABS delinquencies of 60+ days increased to 0.64% in September, up 12.3% from August, but notably down over September 2009 by 23.8%.

Current delinquencies are relatively in line with the ten-year total average for the index of 0.57%, Fitch says, despite high unemployment figures, low consumer confidence and rising personal bankruptcies.

Meanwhile, subprime 60+ day delinquencies increased in September to 3.89%. Though the figure is 25.1% higher than in August, it is 21.7% lower than a year earlier. Subprime ANL rose in September to 6.75%, up 22.5% month-over-month, representing a decline of 30.3% from the 2009 number.

Due to the limited subprime auto ABS issuance in recent periods, monthly subprime index results are more subject to individual transaction volatility. However, Fitch says that its outlook for prime and subprime auto loan ABS ratings performance is currently stable/positive for the remainder of 2010.

ABS

Positive trends continue for timeshare deals

According to S&P's latest indices for the sector, overall trends were positive among US timeshare securitisations in 2Q10, continuing the encouraging performance noted in the prior quarter.

Key performance variables for the period, including delinquencies and defaults, either improved or remained unchanged, the agency says. Delinquencies declined to 3.85% - the lowest level since August 2008, while monthly defaults remained relatively flat at 72bp - close to their 12-month average of 71bp.

Meanwhile, ownership upgrades increased to 0.60% and prepayments decreased to 56bp from 78bp at the end of the first quarter, the highest they had been in the last 12 months, S&P notes.

The agency rated one new transaction in 2Q10, Silverleaf Finance VII's US$151.1m vacation timeshare loan backed notes series 2010-A. This transaction brought rated new issuance for the first half of 2010 to US$415.4m - well above the US$271m issued in the first half of 2009.

Although defaults in US timeshare securitisation collateral pools remain relatively high for this asset class, the rated transactions have performed as anticipated, S&P concludes.

ABS

BofA, Citi conduits on review

Fitch has placed the F1+ ratings on six ABCP conduits sponsored by Bank of America and Citi on rating watch negative (RWN). The move follows the placement of the banks' A+/F1+ issuer default ratings on RWN.

The ratings of the ABCP issued by the conduits are linked to the ratings of the banks, as sponsors and direct credit and liquidity support providers.

The BofA conduits affected by the RWN placement are Kitty Hawk Funding Corp, Ranger Funding and Yorktown Capital. The Citi conduits are CAFCO, CIESCO and Govco.

ABS

PPIP performance update released

The US Treasury reports that PPIP managers drew down an additional US$2.4bn over the last quarter, compared to US$5.7bn in Q2. Total draws under the programme now equal US$18.6bn, representing 65.5% of the US$29.4bn in total purchasing power available to PPIFs.

Of the US$19.4bn in market value invested, 82.4% resides in non-agency securities. Similar to last quarter, the prime and alt-A segments continue to make up the majority of non-agency investments, according to ABS analysts at Bank of America Merrill Lynch.

Overall, PPIP manager performance continues to be strong, with net IRRs for most managers above 34% since inception. The Treasury has, in turn, earned approximately 36% return on its equity investment since inception.

"PPIP has been successful in driving up the prices of distressed non-agency MBS," the BAML analysts note. "However, the housing market remains weakened, reflecting the low availability of credit, as well as concerns from both investors and lenders about another downturn in prices. Although homes are more affordable due to the low prices and interest rates, affordability does not matter if there is no financing available and/or there are expectations of a decline in asset prices."

ABS

US credit card charge-offs fall sharply

According to Moody's latest indices for the sector, charge-offs on US credit cards fell by over a percentage point in September, ending the month at 8.9%. The steep drop from 10.03% in August confirms that the small rise in charge-offs in August only reflected seasonal factors, the agency says.

Moody's says it expects charge-offs to move steadily lower into the first half of 2011. The index now stands at 260bp below its peak in August 2009, despite persistently high unemployment.

Improving delinquency trends are the key evidence that charge-offs will continue to decline, according to Moody's. During September, the delinquency rate fell by 5bp to 4.65%. The delinquency rate is now more than a full percentage point below its year-ago level.

"We are in part of the credit cycle where the historically strong correlation between the charge-off rate and the unemployment rate has weakened," says Moody analyst Jeffrey Hibbs. "Borrowers with relatively weak credit profiles have been charged off over the past couple of years, while issuers have tightened underwriting standards. The borrowers that remain tend to be stronger and more resilient to the ongoing weakness in the labour market."

The early-stage delinquency rate saw a small monthly increase - the first since March - at 1.23% in September, a small increase from the 1.20% in August. Overall, the average early-stage delinquency rate for the third quarter was lower than the second quarter - the first time this decade.

Also in September, the yield index moved lower to 22.08%, down from 22.84% in August. The sharp improvement in charge-offs boosted excess spread in September to 10.38%, an all-time high, Moody's concludes.

ABS

Euro SF downgrades decline dramatically

S&P reports that in 3Q10 the quarterly number of European structured finance downgrades fell to their lowest level since 2007, with downgrades falling by a third of the agency's total in 2Q10.

"Our latest report highlights an improvement in the credit performance of European structured finance," says S&P analyst Arnaud Checconi. "We took 509 rating actions in Q3, comprising 352 downgrades and 157 upgrades. This compares with 976 downgrades and 297 upgrades in Q2."

However, downgrades continued to outstrip upgrades in most asset classes, the agency says. Structured credit transactions, such as CDOs, accounted for 62% of all downgrades, given further credit deterioration among underlying corporate obligors.

Among European RMBS, there were eight upgrades and 41 downgrades across 16 transactions, resulting from some further deterioration in the UK nonconforming and Spanish markets. However, there were also 24 upgrades, mostly in seasoned transactions, S&P confirms.

For ABS, the agency lowered 17 ratings in seven transactions, primarily including German SME securitisations and Spanish consumer ABS - mainly due to poor collateral performance.

There were six upgrades across 16 CMBS transactions during the quarter. Despite recent improvement in some cities, a previous decline in CRE prices has undermined predicted future recovery values on defaulting loans underlying CMBS - leading to 41 downgrades.

Checconi adds: "In 3Q10, we placed 283 ratings on credit watch negative, primarily in the UK and Spanish RMBS sectors, implying that these sectors continue to be at risk of further downgrades in the months ahead."

CDO

CDO EOD notifications outlined

S&P says it has received notification from CDO trustees of events of default (EODs) on 437 global cashflow and hybrid transactions originated since 2001 that have experienced an EOD as a result of credit deterioration of recent-vintage ABS. The affected deals represent an aggregate issuance amount of US$407.7bn.

The transactions include: 265 mezzanine ABS CDOs, collateralised at origination primarily by single-A through to double-B rated tranches of RMBS; 122 high-grade ABS CDOs, collateralised primarily by triple-A through to single-A rated tranches of RMBS; 37 CDO-squareds, collateralised primarily by notes from other CDOs, as well as some RMBS tranches; and 13 CRE CDOs collateralised primarily by tranches of CMBS.

CDS

Japanese CDS clearing service prepped

Tokyo Stock Exchange Group (TSE) has selected Calypso Technology to build the platform for its new credit default swap clearing service to be provided by Japan Securities Clearing Corporation (JSCC). The service will clear CDS on the Markit iTraxx Japan index.

"Throughout the crisis, we saw increased demand from our clients for enhanced risk management capabilities and back office processing services, such as settlement and payments. Our vision is to provide a proficient, advanced market standard solution that would achieve the goal of reducing counterparty risk," says Kei Miyazato, head of TSE's IT business department.

TSE aims to use the Calypso system throughout the full lifecycle of OTC CDS clearing, including limits checking, trade matching, confirmation, messaging, margining, netting and settlement.

CDS

New CDS sovereign indices launched

S&P has launched a series of CDS Sovereign Indices that are designed to track the CDS market for sovereign entities. The index series comprises the S&P International Developed Nation Sovereign CDS Index and S&P Eurozone Developed Nation Sovereign CDS Index.

The former has been constructed to have approximately the same country constituents and weightings as the S&P/Citigroup International Treasury Bond Index. Similarly, the construction of the latter index provides approximately the same country constituents and weightings as the Eurozone Government Bond Index.

JR Rieger, vp of fixed income indices at S&P, says: "The launch of the S&P CDS Sovereign Indices not only meets this market demand, but allows users of the indices to directly make comparisons to the international bond market while offering a perspective on the cost of default protection based on those market weights."

The country constituents and weights for each index are set at the inception of each index series. On each rollover date, a new series will be launched with the current weights and constituents of the respective bond indices. Both have a 5.25-year maturity as measured from the effective date.

CDS

OTC clearing service launched

Calypso Technology has launched an OTC client clearing service for derivative clearing members (DCM). The firm will offer a solution for clearing members to clear and process OTC derivatives on behalf of their house and client accounts, across multiple clearing houses.

The service aims to provide support for all trade lifecycle events of a centrally cleared transaction, some of which include connectivity to clearing houses for trades and EOD market data and balances; reconciliation tool for validating data provided by each clearing house; and functions and methodology to call or replicate clearing house margins.

CDS

OTC derivatives best practices issued

ISDA has published two best practices documents, 'OTC Derivatives Settlements Best Practice' and 'OTC Derivatives Interest Compensation Claims Best Practice'. The documents are the results of the collaborative efforts of firms represented on the ISDA Settlements Implementation Group, which takes direction from ISDA's operations steering committee.

The OTC derivatives settlements document provides cross-asset class guidelines to the industry on common settlement risk management issues, covering both pre- and post-settlement issues. The OTC derivatives interest compensation claims document outlines guidelines for the submission and processing of interest compensation claims.

Julian Day, ISDA's head of trading infrastructure, says. "The publication of best practices to address cross-asset class settlement risk management provides an important framework for the industry going forward and is a vital step in the further development of robust infrastructure for the OTC derivative markets."

CDS

OTC derivatives concentration outlined

ISDA has released statistics regarding the concentration of OTC derivatives activity among major market participants, alongside its mid-year 2010 market survey results of privately negotiated derivatives. The results were published at its 2010 regional conference in Hong Kong.

The mid-year market survey suggests that the total notional amount outstanding of interest rate, credit and equity derivatives on 30 June 2010 was US$466.8trn. The five largest US-based dealers reported a notional amount outstanding of US$172.3trn - 37% of the total amount.

The market survey also reports that the notional amount reported by the 14 largest international derivatives dealers (the G14) was US$354.6trn at the end of June 2010 - after adjusting for double counting of inter-dealer transactions. This represents 82% of the total amount reported by all respondents, ISDA says. Broken out by product type, the G14 held US$354.6trn of interest rate derivatives (which is 82% of all interest rate derivatives reported), US$23.7trn of credit derivatives (90% of all credit derivatives) and US$5.5trn of equity derivatives (86% of all equity derivatives).

Meanwhile, the total notional amount outstanding of OTC derivatives increased by 1% from US$463.9trn at the end of December 2009, ISDA says. The survey results showed that credit derivatives decreased by 14% in the first six months of the year to US$26.3trn, from US$30.4trn - about 6% of the total amount.

According to the Bank for International Settlements, gross mark-to-market value of all derivatives was approximately 3.5% of the notional amount outstanding as of December 2009. In addition, net credit exposure is 0.6% of notional amount outstanding.

Applying these percentages to ISDA's market survey notional amount outstanding of US$466.8trn as of 30 June 2010, the gross credit exposure before netting is estimated as US$16.3trn. Credit exposure after netting - but before collateral - is estimated as US$2.7trn.

CLOs

HY CLO retranched

Carlyle High Yield Partners VII class A-2-A notes have been retranched and renamed Metropolis II series 2010-2. S&P has assigned a triple-A rating to the class A notes, sized at US$67.7m. The retranching also provides for US$16.97m unrated class B deferrable notes.

CLOs

CLO revolver assumed

Ownership of the class A-1LV revolver notes (current balance of US$68.2m) of MAC Capital, a multicurrency CLO, has been transferred from ABN AMRO Bank to RBS, reflecting RBS' acquisition of ABN. The transferred notes are in physical form, according to Moody's.

The agency has determined that performance of the activities contemplated within the transfer agreement will not cause the current ratings of the notes to be reduced or withdrawn. Moody's does not express an opinion as to whether the agreement could have non-credit-related effects, however.

CMBS

US CMBS loss severities climbing

S&P recently undertook a study of defaults and losses for North American CMBS that suggests defaults this year could eclipse the record 2,138 defaults experienced in 2009, if the current pace continues. During the first half of 2010, 1,200 loans defaulted, according to the rating agency.

More than half (3,338) of the defaults over the course of the study period - which spanned from 1993 through to June 2010 - occurred during the 18-month window between January 2009 and June 2010, while 597 and 249 loans defaulted in 2008 and 2007 respectively. In total, 6,533 loans defaulted over the study period, for a cumulative loan default rate of 9.41%.

Concurrently, the loss severity rate jumped to 41.57% for resolved loans that had incurred losses in 2009 from 18.49% in 2008. The loss severity rate continued to increase in the first half of 2010, to 43.58%, and is approaching a record high.

For the entire study period, the average loss severity rate for resolved loans that incurred losses is 34.99%.

Meanwhile, the average resolution time for loans with losses over the course of the study period is 20.5 months - albeit resolution times have been steadily declining since 2008. "In our view, due to weakening property fundamentals during this period, special servicers looking to maximise net recoveries on defaulted loans may have sought to dispose of assets more quickly before market conditions worsened," S&P explains.

CMBS

US CMBS loans defaulting at 'record pace'

Fitch reports that cumulative defaults for fixed rate US CMBS jumped by 112bp this quarter to 10.6%, through to the end of 3Q10.

"Loans continue to default at a record pace, with large loans driving the trend," says Fitch md Mary MacNeill. "Hotel and office properties were the largest contributors to defaults this past quarter."

Loan defaults for this year stand at US$21.66bn, Fitch says, and have already surpassed 2009 levels - US$17.75bn - by loan balance. The number of loan defaults through to 3Q10 is almost equal to 2009 figures.

Cumulative default rates rose by 286bp for hotel loans and 115bp for office loans, the agency says. The largest three defaults in 3Q10 were: the Innkeepers Portfolio (US$825m hotel, 2007 vintage); One Alliance Center (US$165m office, 2007 vintage); and Highwoods Portfolio (US$160m office, 2005 vintage).

CMBS

Euro CMBS payment defaults rising

S&P reports that European CMBS maturity payment defaults are continuing to increase this year and have, for the first time, outstripped term payment defaults.

Of the 34 payment defaults in 2009, only eight defaulted for the first time at maturity - with 26 defaulting during the loan term. By contrast, of the 33 payment defaults between January and September 2010, 18 were maturity defaults and 15 were term defaults.

S&P analyst Judith O'Driscoll says: "This data reinforces our view that, unless credit becomes more accessible to borrowers to enable them to refinance their maturity balloon payments, the rising tide of maturities in the years ahead is likely to be accompanied by a swell of delinquencies."

Meanwhile, delinquency and non-monetary breach rates remained fairly steady in recent months, with euro non-monetary breach rates by balance significantly exceeded sterling non-monetary breach rates. This, the agency says, could be attributed to differences in loan vintage and volume.

S&P says that the euro group loans are more sizable - 13 of the 29 exceed €150m by balance - and were predominantly originated in 2006 and 2007, at a time when market values were at their peak across Europe. Additionally, the sterling loan breaches, in the agency's view, are dominated by smaller loans, with only five of earlier vintages exceeding £100m by balance.

S&P analyst Robert Leach says: "Looking ahead, given that euro loan origination significantly outstripped sterling loan origination in 2006 and 2007, we anticipate that this pattern may continue for some time to come."

Monolines

Assured loses triple-A rating

S&P has lowered its counterparty credit and financial strength ratings on Assured Guaranty Corp (AGC) and Assured Guaranty Municipal Corp (AGM) to double-A plus from triple-A, outlook stable. At the same time, the agency affirmed its single-A plus counterparty credit rating on Assured Guaranty Ltd, with the outlook also remaining stable.

"The downgrades reflect our view that the current state of the financial guarantee market, with only one organisation issuing new policies, is symptomatic of investors' and issuers' diminished demand for bond insurance," says S&P analyst David Veno.

The longer this persists, the agency says, the more limited the potential for the re-emergence of a strong and vital bond insurance sector. This market dynamic, in turn, could hurt AGC's and AGM's business prospects. Conversely, as a result of less competition, the companies benefit from an increasing share of the insured business and will most likely be the first and largest beneficiary of any improved market for insured paper.

Veno adds: "On a combined basis, the companies have reported what we consider to be weak statutory operating results in recent years, as their negative statutory net income for the past two years and the first six months of 2010 demonstrates. It is our view that this could continue in the near term, given our projected non-stress loss expectation for the RMBS exposures, which could limit statutory surplus growth."

Although it recognises the companies' favourable GAAP results, the agency says that the statutory statements represent the solvency perspective - that is, the companies' ability to meet their obligations under their financial guarantee policies. "The outlook also reflects our view of the combined companies' strong capital position and our expectation that the level of capital will remain above the double-A minimum. If the companies report meaningful statutory losses, we could lower the ratings or revise the outlook to negative," Veno concludes.

Regulation

EC sets out crisis management framework

In response to the G20 agreement, the European Commission has set out its plans for an EU prevention and crisis management framework in the financial sector. The framework, the EC says, sets out a roadmap of measures with a view to delivering a more integrated system, in particular better suited to European banking groups.

Internal market and services commissioner, Michel Barnier, says: "First, we must try to avoid a financial crisis in the future. That is why our work to make the banking sector stronger and to create a real supervisory framework is so important. But banks will still face difficulties in the future. They might even fail and should be allowed to do so."

He adds: "We need to make sure that they can do so without bringing down the whole financial system, or risking that taxpayers are called on to pay the costs. No bank should be too big to fail or too interconnected to fail. That is why we need a clear framework which ensures authorities throughout Europe are well prepared to deal with banks in difficulty and handle possible bank failures in an orderly manner. That is the aim of [these] plans."

The framework outlines key preventative measures to be taken by banks. First, powers will be granted to take early action before they become severe, such as powers for supervisors to require the replacement of management, or to require an institution to implement a recovery plan.

Second, power will be granted for the takeover of a failing bank or firm by a sound institution, or to transfer all or part of its business to a temporary bridge bank. The overriding objective, the EC says, will be to ensure that banks can fail without jeopardising wider financial stability. The framework should provide a credible alternative to the expensive bank bail-outs of the last couple of years.

Third, the EC will place effective arrangements to ensure that the European authorities coordinate and cooperate as fully as possible in order to minimise any harmful effects of a cross-border bank failure. The commission proposes to build on existing supervisory colleges for the purposes of crisis preparation and management. It also proposes that the new European Supervisory Authorities and, in particular the European Banking Authority, should have coordination and support roles in crisis situations, without impinging on the fiscal responsibilities of Member States.

Fourth, the EC aims for national funds to be set up on the basis of contributions paid by banks, to fund the cost of future resolution measures and ensure that resolving a bank is a credible option. The existence of common financing mechanisms that avoid use of taxpayer funds should enhance cross-border cooperation and facilitate advance planning, it says.

The EC plans to examine the need for further harmonisation of bank insolvency regimes in a report by the end of 2012, alongside a review of the European Banking Authority in 2014.

RMBS

Housing finance symposium planned

The FDIC and the Federal Reserve System are to host a symposium on 25-26 October on mortgages and the future of housing finance. Federal Reserve Board Chairman Ben Bernanke will deliver opening remarks, while FDIC Chairman Sheila Bair will be the keynote luncheon speaker.

Bair comments: "The housing sector, one of the main engines of our economy, has seen positive signs, but there are many hurdles yet to overcome. It is very clear that as a country we need to aggressively examine the incentives of our system of mortgage finance to ensure that the problems that contributed to the financial crisis are addressed."

She adds: "It will be difficult to restore stability and normalcy to the housing finance system - and thus the broader economy - without reform. Over the [symposium] we will hear from experts across the housing spectrum to help identify solutions to these vital issues."

Experts from the public, private and academic sectors will participate in the symposium to discuss mortgage finance, foreclosures, loan modifications and securitisations.

RMBS

GSE performance projections released

The FHFA has released projections of the financial performance of Fannie Mae and Freddie Mac, including potential draws under the Preferred Stock Purchase Agreements (PSPAs) with the US Treasury. To date, the GSEs have drawn US$148bn from the Treasury under the terms of the PSPAs. Under the three scenarios used in the projections, cumulative draws range from US$221bn to US$363bn through to 2013.

The FHFA says it worked with the GSEs to develop consistent, forward-looking projections across three possible house price paths based roughly on the approach taken by the federal banking agencies last year in the Supervisory Capital Assessment Program. "These projections are intended to give policymakers and the public useful snapshots of potential outcomes for the taxpayer support of Fannie Mae and Freddie Mac," comments FHFA acting director Edward DeMarco. "These are not predictions; the results reflect the potential effects of a limited set of hypothetical changes in house prices, a key variable driving credit losses for the Enterprises."

The projected credit losses in each scenario primarily reflect possible further losses on the GSEs' pre-conservatorship mortgage business. As time passes, their dividend payments on Treasury preferred stock make up larger portions of the draws. Under the scenarios used in the projections, if dividend payments on preferred stock were excluded, cumulative Enterprise draws range from US$142bn to US$259bn.

"Much like the recently published Conservator's Report, FHFA is releasing these projections to enhance public understanding of Fannie Mae's and Freddie Mac's financial performance," DeMarco explains.

RMBS

Spanish foreclosures hit new record

Moody's reports that the rapid deterioration in Spain's economy and its illiquid housing market conditions have forced banks to initiate record numbers of foreclosures on Spanish mortgages since 2007. This, the agency says, will raise the severity of losses, squeezing liquidity and increasing cash commingling risk for RMBS transactions.

The volume of Spanish foreclosed mortgages that were taken to court grew by 126% in 2008 and by 59% in 2009 on a year-on-year basis. In Q110, a record 27,561 foreclosed mortgages were reported in Spain since the economic downturn started in 2007. Moody's says that the weak Spanish economy, poor housing market and high unemployment rate - the highest in the Eurozone, with a total of 4,326,500 unemployed in 2009 - have forced banks to initiate foreclosures of many mortgages.

Moody's vp, Alberto Barbachano, says: "Moody's believes that the very high reported number of foreclosed mortgages that have been taken to court in Spain since 2007 underestimates the actual number of properties that have been repossessed by Spanish financial entities."

He adds: "First, because more than one property may have been involved per individual foreclosure process - indeed, it is possible for a single foreclosure process with a real estate developer to have involved more than 20 residential properties. And second, because Spanish mortgage lenders have generally become more willing to accept voluntary agreements, accepting the property as payment in kind and then releasing the debtor from his/her debt."

According to the Bank of Spain, banks and saving banks currently hold €20.5bn worth of properties on their books.

SIVs

SIV ratings withdrawn

S&P has withdrawn its issuer credit rating on Beta Finance, as well as the ratings on the SIV's MTNs and CP. This follows the repayment of the MTNs and CP. The programme ratings were also withdrawn at the issuer's request.