Contents

Real Estate

Commercial ventures

Property derivatives gain momentum as real estate hedges

Funds that invest in property derivatives remain a rarity. But the recent launch of two new vehicles in the space has moved the market a step closer to becoming a mainstream means of managing real estate risk.

Indeed, there are parallels between the property derivatives and CMBS index swap markets, according to inProp Capital partner Paul Ogden. "Property derivatives are index-level exposures to real estate. In US CMBS, index swaps were used to hedge pipeline risk. What we're seeing in the UK is significant amounts of bank real estate risk that has sensitivity to property values and a growing property derivatives market would enable correlated market risk within loan books to be appropriately hedged."

He adds: "This is essentially risk that the banks don't have control over, so - if this was hedged out - they could focus on idiosyncratic risk, which reflects the quality of the loans on their books. This correlated market risk could be repackaged through funds to make it investable. Furthermore, if such hedges attracted the right capital treatment, it should free up balance sheets for more loans to be made."

Certainly the recent launch of two new funds with remits to use property derivatives to manage assets and returns demonstrates that there is appetite for synthetic exposure to real estate. One of the vehicles - Pacific Real Estate Capital Partners' Liquid Property Fund - is awaiting FSA approval, but is expected to invest in property derivatives alongside other property assets, including CMBS.

The other, the inProp Capital UK Commercial Property Fund, launched in September and is an un-geared market tracking fund. The fund has three cornerstone investors - Scottish Widows, Prudential and Skandia Property Fund - and is targeting a size of at least several hundred millions of pounds.

Its strategy involves holding short-dated gilts and gaining exposure to property returns via property derivatives based upon the IPD index, which are negotiated as OTC total return swaps prior to being executed as Eurex property futures. This combination provides for access to OTC liquidity while allowing trades to be centrally cleared, Ogden notes.

He adds that property derivatives don't behave as simply as most people imagine they do: they need to be actively managed in order to tease out beta. "Appraised property values lag market sentiment and if you don't understand how property derivatives price, you can't use them to create beta," Ogden explains. "Investors have always struggled to access real estate beta, as it is a very hard asset class in which to achieve diversification. The fund overcomes these difficulties by using derivatives that deliver index level total returns."

Any approach to commercial property that is based on physical assets also ends up facing illiquidity risk: it's difficult to meet redemptions and it takes months to negotiate deals. However, Ogden says that the IPD index derivatives provide exposure to a broad swath of property while derivatives are priced daily, so the inProp fund can offer monthly liquidity.

"Investor demand for liquidity means that real estate fund managers have to hold more cash, which reduced the yield. We're mopping up the liquidity requirements and providing exposure to yield on property. Investors have traditionally had to choose either," he notes.

One older entrant to the property derivatives sector - Reech AiM Partners' Iceberg fund - has reportedly traded over £1bn of property derivative contracts, outperforming the IPD All Property Total Return Index by over 73% since its inception in 2007. European asset-backed analysts at RBS welcome the growing depth of the buy-side with mandates in property derivatives. "In our view, such 'mainstreaming' of property derivatives as a means to manage (and not only hedge) real estate risk is long overdue," they note.

UK commercial property swap contracts at the short end of the curve have rallied over recent months. For example, one- and two-year contracts have risen by over 300bp since mid-August, standing at 12.6% and 7.77% respectively on 22 October.

The RBS analysts suggest that the rally has been fuelled by better buying, particularly from pension funds. They indicate that two primary drivers of this are the continued attractiveness of derivative pricing compared to other forms of property, such as unlisted funds, and the fact that the derivative market allows any under-utilised dedicated real estate money to be put to work immediately.

In contrast, UK residential property swap contracts have experienced a significant correction since June, reflecting longer-term expectations of a weak physical market.

CS

CDS

Value judgement

Regulatory uncertainty, distribution issues limiting CVA market

An increasing number of banks are establishing credit value adjustment (CVA) desks, leading to suggestions that CVA could become the next major traded risk. However, regulatory uncertainty and the lack of an appropriate distribution vehicle are limiting the growth of the market for now.

Joyce Frost, partner at Riverside Risk Advisors, notes that the background to CVA potentially emerging as a major traded risk is the presence of end-user counterparty default risk on every dealer's book - yet there is limited secondary distribution of that risk. "A couple of methods of standardising this risk exist, but nothing that is liquid or broadly traded," she explains.

Frost adds: "Regulatory capital requirements are driving the need to distribute all types of credit risk. However, for a viable CVA market to develop, a broader base of credit investors need to become involved and this is a question of finding the right distribution vehicle."

According to Shankar Mukherjee, co-founder of the Novarum Group, the cleanest method of managing CVA risk is to assign the contract to another bank, with back-to-back market hedges in the case of un-margined counterparties. "However, there are two issues with the assignment method," he observes. "First, the consent of the counterparty is necessary to assign the contract; second, banks are often reluctant to disclose their positions to their competitors."

Consequently, Mukherjee says, the assignment market hasn't really taken off. "There have been some instances where a major swap dealer has laid its risk off with a second tier bank because it was less sensitive to market information, as the mark-to-market of the trade was so large it was using up a significant amount of credit and capital resources. Swap assignments and tear-ups are, however, quite common in the inter-dealer market."

As a result, the market is looking for a synthetic equivalent to trading counterparty risk, which would allow the exposure to be hedged without assigning the underlying. Mukherjee notes that contingent CDS (CCDS) would provide an effective hedge for CVA risk.

CCDS generally only reference a single transaction, whereas most users would want to hedge an entire portfolio of transactions executed with a single customer. But Mukherjee points out that a CCDS doesn't need to replicate a portfolio exactly - it could work as an abstraction of it.

However, while there are natural buyers of CCDS, it isn't clear who the sellers would be. The natural sellers would have been monolines and CDPCs, while Novarum is working to establish an alternative protection seller specifically in this space (SCI passim). Mukherjee suspects that as banks continue to face capital and credit constraints, eventually other market participants will be attracted to this space and deploy incremental capital to support this risk, allowing banks to recycle their credit and capital efficiently.

Equally, the regulatory treatment of counterparty risk hedges remains unclear at present. There is confusion around what constitutes an effective hedge because regulators have not specified what constitutes an effective "credit risk mitigant" for counterparty credit risk, other than netting and margin.

As a result, most banks - particularly in Europe - have adopted a conservative interpretation of the rules, arguing that the CDS hedge must mirror the underlying risk in the event of default and/or the underlying risk must be a deliverable obligation for the hedge to be effective. This implies that the hedges have to be non-standard CDS and thus less liquid.

The upshot is that CVA desks are increasingly being established to strip out the credit risk and market risk from counterparty exposures and hedge them separately, with the aim of mitigating P&L volatility. Such activity is so far being done internally, according to Mukherjee. Reasons to execute hedge trades externally would include mitigating retained cross-gamma and for the regulatory capital benefit, where it is available.

He explains: "Basel 3 has introduced a new capital charge related to the volatility of CVA and regulators are encouraging market participants to hedge with vanilla or index CDS, but with certain conditions. The regulators have set up the incentive very clearly, so more institutions will inevitably set up CVA desks. If CCDS were explicitly approved for mitigating regulatory capital, then banks would have more of an incentive to use these instruments."

But some banks have yet to begin managing counterparty risk independent of the bank loan credit risk book. "Many are dealing with counterparty credit risk in a manner similar to the traditional treatment of loan exposures; in other words, by reserving against buy-and-hold credit risk and hoping that the reserves are adequate," says Frank Iacono, partner at Riverside Risk Advisors.

Frost confirms that many banks still use traditional peak exposure models to measure counterparty credit risk and obtain counterparty swap credit lines. Iacono adds: "But the crisis has shown that traditional peak exposure models can get it horribly wrong - they don't measure wrong-way risk, or for that matter right-way risk, because the correlation factor is either ignored or underestimated."

He suggests that today's range of CVA risk management practices is analogous to where the market was in the late 1990s when credit derivatives first appeared, in that there is the potential for product innovation to drive a paradigm shift in the pricing and management of risk.

The issue is that CVA is a two-factor risk: the nature of the risk involves both the performance of the value of the underlying derivatives contract and the credit performance of the counterparty. "There is no broad trading of a contract that captures both of these risks fully," Iacono continues. "True CVA trading might involve, for example, a CDS where the payout is based on the value of an interest rate swap."

Further, he indicates that running CVA desks as profit centres would be like any other exotic business. "Models produce valuations and risk metrics and - as long as you understand the model's limitations and you reserve for the lack of liquidity, model uncertainty and other key risks - the opportunity is in how much your customers are willing to pay for the product above its manufacturing costs."

Meanwhile, in terms of creating an appropriate distribution vehicle for managing CVA risk, Mukherjee points to CDO-type structures that securitise the counterparty risk. Earlier iterations of this concept are the Amstel and Alpine transactions, for example, issued by ABN AMRO and UBS respectively. These deals tranched a pool of risk and sold the equity portion, thereby reducing the risk weighting of the exposure.

"The Amstel and Alpine deals securitised mainly corporate exposures and weren't replicated for financials because, under the provisions of Basel 1, financials carried a lower (20%) risk weight. But Basel II and III are more risk-sensitive, so it would make more sense to include a wider set of names in such pools going forward," Mukherjee concludes.

CS

ABS

Euro ABS regains strength

With a strong start to the week, the European secondary ABS market has seen a high volume of activity - particularly in the MBS sector. This sector is currently proving to be a strong performer, as investor interest in senior tranches is building strength back into the capital structure.

As reported in September (see SCI issue 205), the demand for new issue Dutch and UK RMBS paper had caused the prime sector to weaken. However, one ABS trader says that the market has returned from this dip and has regained strength. "It's crept up and the market is generally feeling more positive for it," he notes.

The trader goes on to say that the UK and Dutch MBS market has continued to perform very well, with the CMBS area in particular holding the most appeal due to strong performance across senior tranches. "CMBS has traded up considerably over the last few days, with new sellers coming into the market. Strong levels are certainly still holding up."

Meanwhile, in the primary MBS market, a new Dutch prime RMBS deal was announced yesterday (27 October), according to the trader. "This deal has been very well received by clients," he says.

However, the trader concludes that the busy week is drawing to a close with the circulation of a new bid-list today. The list - a CDO liquidation - contains both CDOs and ABS positions, which the trader expects will become the focus of the ABS market over the next few days.

LB

CDO

Euro CDO market holds investor attention

It has been a strong and steady week for the European CDO secondary market, with investor demand in the lower end of the capital structure and the Stanton CDO 1 liquidation both boosting activity.

"The past week has been good; we've seen a steady flow of activity," one CDO trader says. Contributing to this, he notes, is the current high investor demand for junior paper. "The big news in the market is the rally of double-Bs; a lot of guys are asking about offers in this area now."

The trader explains that the appeal in this part of the capital structure is, first, that it's currently benefiting from consistent pricing - ranging between the 40s and 50s level - and, second, that there is potential for tighter spreads and consequently guaranteed returns. "Investors think double-Bs are 'money-good' right now and, if they can get mid-teens returns, then they're asking us to ship it in."

Elsewhere in the capital structure, a number of benchmark deals have traded well, according to the trader. "The junior triple-As of the Harbourmaster CLOs 5 and 7 traded in the high 70s - it's a decent box."

He adds that senior Hyde Park CDO paper traded in the mid-200s mark. "We've had some great results this week," the trader observes.

Another factor contributing to this week's positive sentiment is the liquidation of Stanton CDO I, which saw tranches of CDOs, CMBS and RMBS in both euros and US dollars coming onto the market. The list, which traded last week, proved successful, with all of the CDO collateral selling.

"It did really well and it had a great market reception - the CDO assets all traded with high covers; it's been a great week," the trader confirms.

The latest CDO liquidation to be announced is the Euromax IV MBS deal, which is set to be auctioned on 2 December by Henderson Global Investors.

LB

CLOs

US CLOs continue to 'run with demand'

The US CLO market is a hive of activity this week as bid-list volumes and potential arbitrage opportunities continue to boost market interest. However, documentation neglect within new transactions could pose greater PIK risks.

Bid-lists have continued to boost the US CLO secondary market this week, one CLO trader confirms. "The CLO market is continuing to run with demand. Bid-lists as well as lower supply in the primary area are driving activity - it's been on fire this week. Between 50%-60% of the lists have traded - there's no fatigue in this area of the market."

As a result, the trader explains, CLOs have rallied across the capital structure from equity up through mezzanine to triple-As. "However, the triple-As are soft - this part of the capital structure isn't rallying too much," he adds.

The trader continues: "Single- and double-As, and double- and triple-Bs have all rallied up. Activity in this area is robust and it continues to attract sideline cash. That cash is being deployed by conservative money - insurance, money managers and total return folks."

Looking at the primary market, there is a belief, the trader says, that arbitrage will continue to develop in the CLO capital structure. "There is virtually no paper out there, but we still believe that CLOs are cheap from an arbitrage perspective. This is due to loan prices hovering over the lower 90s mark - with the better names hitting the high 90s."

The new transactions this arbitrage could generate could, however, pose a danger to investors if the documentation is not correctly processed and understood. The trader warns: "There are PIK risks in these deals if focus isn't on the documentation and language. It's important that new investors are aware that documentation is essential."

Elsewhere in the primary market, aside from the deals already noted in the SCI pipeline (click here for more), two other emerging CLO deals are gathering interest. The first - marketed by Deutsche Bank - is a European deal, rumoured to be approximately €300m. "This is a soft static deal," the trader says. "It's levered with very high subordination." The second is at an even earlier stage and is being brought by Citi, he confirms.

Overall, the trader concludes: "The new deals that are coming tend to have lower leverage, with much better terms and conditions than previously."

LB

CMBS

Business as usual for US CMBS

It has primarily been business as usual in the US CMBS market this week, with deals pricing as expected and spreads remaining tight. However, one investor segment appears to be changing its approach to the sector.

According to one CMBS trader, a shift is taking place in how issuers are currently marketing their deals to mainstream investors such as US life insurance firms. He explains that such firms are beginning to increase their risk tolerances - investing more money into specific mortgage investments in order to compete in today's market.

"I'm not surprised this is happening," the trader says. "Pricing has become more and more competitive, so if you can't make your pricing 'special', the only way issuers can compete is by changing the risk profile of their deals."

Elsewhere in the secondary market, tighter spreads and pricing consistency are contributing to a steady performance. "It's the money-flows and the technicals that are currently driving activity, as well as a drive for yield," the trader adds.

Looking ahead, he suggests that US CMBS is expected to continue to perform consistently across the capital structure.

Meanwhile, a report published on Friday by structured finance analysts at JPMorgan provides a general overview of activity in the US ABS market last week. The report suggests that buyers are focusing on primary issuance and neglecting the secondary market due to a continuation of weakened spreads.

However, the JPMorgan analysts note that despite October's sluggish performance, buyers are expected to return to the market in the near future. "At some point, cash will need to be put to work again. We believe investors should start to take advantage of the weakening in ABS."

LB

CLOs

US CLO reinvestment prospects examined

Structured credit analysts at JPMorgan have forecast US CLO reinvestment prospects for 2011 to 2014, based on a framework that incorporates prepayments, collateral sales, CLO issuance and structural deleveraging. Their analysis suggests that current outstanding US CLOs have reinvestment potential of up to US$86bn, US$68bn, US$47bn and US$23bn for 2011, 2012, 2013 and 2014 respectively - the equivalent of a cumulative US$224bn before 2015.

The analysis indicates that although reinvestment declines as current CLOs enter amortisation periods, this could be partially compensated for by new issuance. Assuming 'reasonable' CLO new issuance, actual reinvestment may rise by a third, to over US$300bn over the next four years, the JPMorgan analysts suggest.

While the future of the CLO market encompasses regulation, demand for risk, and market and economic conditions, the model focuses on the sources and uses of CLO cash and should help investors gauge the potential for CLOs to influence refinancing risk in the future, according to the analysts. "To conclude, while there is capacity for CLO reinvestment down the road, this significantly declines over time, with CLO issuance being a major variable," they note.

CS

CMBS

Alburn tender 'generous' for junior bonds

The borrower in the Alburn REC 6 CMBS has announced a tender offer for the outstanding bonds via a single price bid. Against current credit-based 'fair values', the tender looks relatively generous for the junior bonds that otherwise risk full impairment, according to European asset-backed analysts at RBS.

They suggest that on an immediate liquidation basis the class Cs and below would be completely wiped out. But, if swap breakage costs - estimated at £23.7m - are accounted for, enforcement will hypothetically result in a full impairment of the class B bonds as well, with the class As also potentially exposed to a marginal loss.

The weighted average tender price of 62% compares to a capital structure current recovery value of 72% (ignoring swap breakage costs), but - given that the tender is spread across the capital structure - the value to junior bonds appear compelling. While senior bondholders could - theoretically at least - extract better value by holding out and ultimately enforcing, they are likely to take into consideration the outlook for secondary/tertiary property values, as well as the management and refinancing challenges particular to this portfolio.

"We suspect the perception that the borrower is exploiting debt discounts to recapitalise at near-bottom of the market prices is likely to be unpalatable for some senior creditors also," the RBS analysts note.

CS

Insurance-linked securities

Latest Vita issued

Swiss Re has printed the latest iterations of its Vita mortality catastrophe bonds (see SCI 13 October 2010). The two tranches issued by Vita Capital IV finally sized at a total of US$175m and were privately placed.

The US$100m series III class E notes priced at 375bp over the interest on the deal's collateral and the US$75m series IV class E notes priced at 370bp over. Both tranches are due 15 January 2015 have been given a double-B plus rating by S&P.

Risk Management Solutions (RMS) conducted the risk analysis for the two series of notes, which provide Swiss Re with coverage against all excess mortality risks - including infectious disease, terrorism, and earthquake - in the US, Japan, Canada, and Germany. The series III noteholders will be at risk from an increase in age and gender-weighted mortality rates that exceeds a specified percentage of a predefined index (the mortality index value; MIV) in the US and Japan. The series IV noteholders will be at risk from an increase in age and gender-weighted mortality rates that exceeds a specified percentage of the MIV in Canada and Germany.

Swiss Re Capital Markets acted as sole manager and bookrunner on the notes issuance. Collateral for the new Series of Vita IV notes consists of securities issued by the International Bank for Reconstruction and Development.

MP

Insurance-linked securities

Calypso closes up

AXA's European windstorm catastrophe bond Calypso Capital has closed at nearly double the originally anticipated size (see SCI 13 October 2010). The deal's double-B rating has been confirmed by S&P.

The three-year Calypso capital had begun marketing at €150m but closed at €275m. Its single tranche of notes priced at 350bp over three-month Euribor.

The series 2010-1, class A notes are the first to be issued under the €1.5bn Calypso Capital principal-at-risk variable-rate note programme sponsored by AXA Global P&C. This transaction covers European windstorms that pass through Belgium, Denmark, France (excluding overseas territories), Germany, Ireland, Luxemburg, The Netherlands, Switzerland, and the UK.

The deal will cover events above an industry loss value, weighted by CRESTA zone and line of business, of €1.9bn on an occurrence basis, up to a limit of €2.5bn, subject to an optional annual reset. Calypso Capital will provide cover to AXA against losses suffered between 1 January 2011 and 1 January 2014. The risk modelling will be based on EQECAT's Europe windstorm model, as released in WORLDCATenterprise Version 3.13.

The deal's collateral will be put into a tri-party repo structure with BNP Paribas, London branch, as the counterparty and Euroclear Bank as the tri-party agent.

MP

RMBS

Progress for Lehman 'busted-swap' deals?

The Lehman bankruptcy process appears to be positioning to consider compensation amounts in respect of the hedging agreements with Lehman companies in their 'busted-swap' securitisations. The trustee for ESAIL 2007-6NC, for example, has proposed that noteholders give it authority to negotiate on their behalf with the Lehman estate over the size of the claim.

The market is currently pricing notes with zero recovery value attributed to any claim against Lehman for swaps and other hedging contracts, according to European asset-backed analysts at RBS. The Lehman entities in the case of ESAIL 07-6NC have indicated that they are willing to agree a revised claim amount of US$145m, a 25% reduction on the original amount - provided this is agreed by 30 November 2010, is a full and final amount not subject to set-off of any amounts owed by the issuer. The claim would then form part of the general unsecured claims against Lehman Brothers Special Financing and Lehman Brothers Holding Inc.

The issuer appears to have recommended accepting the revised claim amount, which should - based on a conservative recovery rate assumption of 30% - see all senior noteholders made whole.

The key remaining question is timing of any recoveries, the RBS analysts note. "The process will require the administrators to make an assessment and agree claims with all the potential counterparties and it is only at that point that payments can start to be made to claimants. This is clearly a large and complex task and, without any guidance, we would assume a timeframe for first receipts of around two years. There would then likely follow a series of payments over a number of years as assets are realised and proceeds released."

Nevertheless, the increased profile that the outstanding claims will receive due to these discussions should allow investors to start factoring in some recovery to their valuations, with potentially significantly positive effects for some of the class B or C notes.

CS

RMBS

ABX valuations revisited

ABS analysts at Bank of America Merrill Lynch have profiled ABX valuations in light of the ongoing foreclosure issues and likely liquidation delays. They note that the ABX index has displayed marked price weakness recently, with - for instance - 06-2 AAA declining almost four points from an average close of 61.3 to 57.6 on 13-14 October.

"The move in the ABX was interesting because it coincided with sharp weakness in bank stocks and rising noise around bank loan put-backs and bank foreclosure issues," the BAML analysts explain. "Interestingly, the big moves in the ABX were not complemented with a similar move in the cash markets, although weakness...was shared across the two markets."

They suggest that the timing of the drop in the ABX was odd, for two reasons. First, the issue of foreclosure delays - which should negatively affect the top of the capital structure to a slight degree - was not new. Second is the issue of put-back risk, which came to the forefront concurrent with the drop in the ABX.

"This is an odd move, since put-backs should be an overall positive for the ABX capital structure. We understand arguments that banks may wish to hedge their put-back loans with the ABX, but as investors we prefer a stance of taking advantage of axed sellers. In our view, the foreclosure issues and extending timelines stand as the primary risk to the downside in ABX prices," the analysts add.

They recommend a putting on long in the 06-2 PenAAA index, in addition to a long 06-2 AAA versus both 07-1 AAA and 07-2 AAA.

CS

ABS

Partner hired in Dubai

Jones Day has appointed Eric Milne as partner in its Dubai Office. In this role he will focus on international banking and project and asset finance, while advising corporate/investment banks and corporate borrowers.

Milne joins the firm from Simmons & Simmons in Dubai, where he was partner in the banking and finance practice. His industry experience includes infrastructure financings, securitisations, derivatives transactions and debt restructurings.

ABS

Asset finance head named

Natixis has promoted Pierre Debray to global head of its asset and international trade finance group. Supervising the project, shipping, aviation and structured export finance activities, he will report into the bank's corporate and investment debt finance division.

Debray joined Natixis in 2010 as deputy head of corporate and institutional business relations. Before joining the firm, he was most recently head of the Latin American platform at Credit Agricole in New York. Prior to this, he was head of credit risks in the firm's Paris office.

ABS

Risk advisor recruited

Moelis & Company has appointed Landon Parsons as senior advisor in its risk advisory group. He will be based in New York, serving clients globally as they manage their financial assets and key position and portfolio risks.

Parsons has nearly 25 years of structured credit experience as an analyst, investor and advisor, and has worked as a consultant to Moelis & Company since January 2010. Previously, he was a member of the mortgage special situations group at Goldman Sachs.

ABS

SF legal team poached

Katten Muchin Rosenman has hired a team of structured finance lawyers from Dewey & LeBoeuf, including four structured finance partners in New York and a financial products tax partner in Washington. The attorneys are Chris DiAngelo, Anna-Liza Harris, Howard Schickler, Joseph Topolski and John Keiserman.

The team will focus on public and private securitisation of consumer and commercial assets, and handles all types of financing for bank and non-bank finance companies.

DiAngelo represents issuers, lenders, underwriters and bond insurers on a variety of programmes and projects, including equity and acquisitions, and asset-backed, municipal and straight corporate debt. Before joining Katten, he was global co-head of Dewey & LeBoeuf's structured finance group.

Harris focuses her tax practice in the areas of structured finance and securitisation, including debt capital markets transactions, residential and multi-family MBS, ABS and the structuring of complex derivative and hybrid equity securities. Schickler represents a multitude of participants in the structured finance market, including issuers, underwriters, credit enhancers, lenders and borrowers in both domestic and international matters.

Topolski represents issuers, underwriters, placement agents and investors in ABS and other SF transactions. He has worked on transactions with an emphasis on retail auto loans, retail auto leases and dealer floorplan finance receivables. Finally, Keiserman regularly represents issuers and underwriters in ABS and MBS with an emphasis on auto loan, auto lease and dealer floorplan receivable securitisations and warehouses.

Katten says these latest additions complement the arrival last week of commercial finance partner Angela Batterson from King & Spalding and financial services partner Guy Dempsey from Latham & Watkins. Both will be based in the firm's New York office.

CDO

Hudson CDO class action filed

Klayman & Toskes has filed a class action lawsuit against Goldman Sachs on behalf of investors who purchased Hudson CDO securities. According to the suit, the defendants failed to disclose to investors that the CDOs were structured to lose value and that Goldman would profit enormously from proprietary short positions when the CDOs did lose value.

The securities affected include Hudson Mezzanine Funding 2006-1 and Hudson Mezzanine Funding 2006-2. Goldman's broker-dealer subsidiary, Goldman Sachs & Co, underwrote, offered and sold the Hudson CDO securities to investors.

CDS

Bank adds CVA trading head

Paul Bowmar has joined BNP Paribas as head of its fixed income CVA trading and credit/rates/fx hybrid trading for the Americas. He will be based in New York.

Bowmar was previously an md in the CVA group at RBS.

CDS

Primus ceo moves on

Primus Guaranty has promoted cfo Richard Claiden to the position of ceo, succeeding Thomas Jasper. Claiden will also serve on Primus Guaranty's board of directors.

Before joining the firm in 2003, Claiden was md and head of operational risk at the investment banking division of JPMorgan Chase. Prior to this, he held executive positions at the Canadian Imperial Bank of Commerce.

Primus corporate treasurer Christopher Gerosa will assume Claiden's responsibilities as cfo. Prior to joining the firm in 2007, he previously worked in the product controller areas of Deutsche Bank and Goldman Sachs.

Jasper joined Primus in 1999 and was one of the founders of the firm. He intends to continue to be active in the financial services and credit markets through his involvement in several investment ventures, board positions and related activities.

This management transition is part of Primus' current strategy to focus on the amortisation of its credit protection business, reduce expenses and return capital to shareholders, the firm says.

CLOs

GSC auction completed

Black Diamond Capital Management and its affiliate Black Diamond Commercial Finance (BDCF) have entered into a definitive agreement to acquire the investment management business and related assets of GSC Group. Subject to other required approvals, Black Diamond says it expects that the sale will be approved by the US Bankruptcy Court for the Southern District of New York at a hearing scheduled for 6 December 2010.

Upon completion of the sale, Black Diamond intends to assume active control of GSC's CLO, distressed/private equity and mezzanine funds - which combined have approximately US$8bn of AUM. The firm says it intends to retain GSC chairman Alfred Eckert as strategic advisor and Peter Frank, currently GSC president, as senior md. It also expects additional GSC employees to join the firm following the sale.

Black Diamond won a three-day competitive auction process for the GSC assets, held in accordance with Section 363 of the US Bankruptcy Code.

CMBS

CMBS vet launches advisory

Dan Smith has formed Four Point Alliance, partnering with Hart Advisors Group. The CRE advisory firm will specialise in expert witness testimony in CMBS lawsuits, loan servicing and asset management.

Smith previously originated transactions for RBC Capital Markets, including sourcing, underwriting and closing commercial and multifamily loans for inclusion in CMBS pools. He says: "Volume in the CMBS industry has dropped from an annual level of US$230bn to approximately US$4.5bn year to date. Losses are at very high levels and servicers are overwhelmed. Today's real estate investors want to identify everything they own and get control of their assets."

Distressed assets

Promotions for distressed funds pair

Siguler Guff has promoted James Gereghty to head its four distressed opportunities funds. Gereghty, who was previously responsible for the direct investment portfolio of the funds, will continue to report to the firm's founding partner and cio George Siguler.

Meanwhile, Marianna Fassinotti has also been promoted from the firm's distressed team. Working with Gereghty, she will oversee the funds' relationships with their underlying general partners.

Gereghty joined Siguler Guff in 2009, having previously headed the distressed debt analytics group at UBS. Prior to that, he was a senior member of the distressed debt research teams at Morgan Stanley and Bear Stearns. Fassinotti also previously worked at UBS in its distressed debt group.

Monolines

Ambac outlines its options

Ambac Financial Group says it has decided not to make the regularly scheduled interest payment due today, 1 November, on its 7.5% Debentures due 1 May 2023. If the interest is not paid within 30 days, an event of default will occur under the indenture for the notes, which would permit the holders to accelerate their maturity.

Ambac also confirms that it has been unable to raise additional capital as an alternative to seeking bankruptcy protection. As such, it is currently pursuing - with an ad-hoc committee of senior debt holders - a restructuring of its outstanding debt through a prepackaged bankruptcy proceeding (SCI passim). If the company is unable to reach agreement on a prepackaged bankruptcy in the near term, it intends to file for bankruptcy under Chapter 11 before the end of the year.

According to Ambac, a significant consideration for any restructuring or reorganisation is the impact on its estimated US$7bn net operating loss (NOLs) tax carry forward. The company says it considers the NOLs to be a valuable asset, but its ability to use them could be substantially limited if an ownership change occurred.

Earlier this year, Ambac entered into a tax benefit preservation plan to reduce the risk of an ownership change resulting from the trading of the company's stock. Nevertheless, if it files for bankruptcy protection, stock issued to the company's debt holders in connection with a reorganisation could trigger an ownership change if a significant portion of the debt being exchanged had been held by such debt holders for less than 18 months prior to the filing for bankruptcy.

Prior to the occurrence of an event of default under the indenture for the 2023 notes, Ambac intends to: pay interest on the notes; or to solicit acceptances for a prepackaged plan of reorganisation and, if such solicitation is successful, then to file for bankruptcy with a related prepackaged plan; or to file for bankruptcy under Chapter 11. Several factors may influence which of the above courses of action the company may take, including the status of negotiations with the ad hoc committee of senior debt holders and actions required to preserve the NOLs.

Real Estate

RE vet joins asset management team

Cole Real Estate Investments has appointed David Collins as vp in its asset management group. With over 30 years of industry experience in all areas of retail real estate management, Collins was most recently svp for Carlyle Development Group. He was previously also vp for Jones Lang LaSalle and evp for the Staubach Company.

RMBS

Lawsuit filed over MBS fund deviation

Klayman & Toskes (K&T) has filed a class action lawsuit against Charles Schwab on behalf of investors who purchased Schwab's Total Bond Market Fund. According to the suit, Charles Schwab caused the fund to deviate from its fundamental investment objective to track the Lehman Brothers US Aggregate Bond Index - specifically by investing a 25% of its portfolio in high risk non-agency CMOs.

The suit claims that the non-agency CMOs were not a part of the index and were substantially more risky than US agency securities. The fund's investment objectives, K&T says, prohibited any concentration of investments greater than 25% in any sector - other than if necessary to track the index.

ABS

EM-focused CRA debuts SA equipment ABS

Global Credit Ratings (GCR) has rated its first South African public equipment lease securitisation - Fintech Receivables 2 (Proprietary) Limited. The transaction was arranged by Nedbank Capital and originated by Fintech Underwriting (Pty) Ltd.

The deal comprises ZAR582m triple-A rated class A notes, ZAR78m double-A class Bs, ZAR59m single-A class Cs and ZAR54m triple-B rated class Ds. A subordinated loan of ZAR75.4m has also been issued. The proceeds of the notes and the subordinated loan will be used to fund FR²'s portfolio of equipment leases.

FR² represents the second refinancing of the securitisation programme, which was established in August 2008. The first refinancing took place in August 2009.

GCR is a full service rating agency with a focus on emerging markets, in particular Africa.

ABS

Further shrinkage expected in SF outstandings

S&P estimates that the total amount of US structured finance securities outstanding has shrunk by over US$1trn since the peak of the market in 2007, as assets mature, prepay or default. However, analysts at the rating agency believe that there is room for further shrinkage in the market.

"The ratio of outstanding SF volume to GDP remains well above where it was in the early 2000s, which leaves plenty of room for further declines," they explain. "We expect maturing and defaulting volume to continue to outweigh new issuance through 2011 and most likely 2012. The pay-down of private securitisations should result in a large amount of proceeds available for reinvestment, which should help to keep new issues well bid."

The S&P analysts estimate that the balance of total outstanding SF securities would still have to drop significantly to return to a more sustainable ratio to GDP in the 21%-22% range, which is near its 2000-2004 average. To reach the 2004 ratio (26.6%), total outstanding SF volume would have to drop by about US$400bn from where it is now. And to reach the 2000-2004 average (21.2%), it would have to fall by more than US$1trn.

At end-2007, outstanding US SF volume - at approximately US$5.45trn - was greater than the amount of outstanding US Treasury debt (US$5.08trn) and only about 10% lower than total US corporate debt (US$5.95trn). The largest contributor to the decline in volume since then has been non-agency RMBS, according to S&P, accounting for about US$800bn of the roughly US$1.1trn in lost volume over the past 2.5 years. Conversely, the agency RMBS market has grown to its current level of approximately US$5.3trn from US$4.4trn at end-2007.

ABS

German 10% risk retention approved

Germany's lower house of parliament last week formally approved the adoption of a 10% risk retention threshold for securitisations. However, following successful lobbying, the final rule incorporates a later implementation date and has some scope for a watering-down of the law, according to European asset-backed analysts at RBS.

The rule becomes effective at the beginning of 2015 rather than two years earlier, with any ultimate implementation subject to a review and an impact study by mid-2013. This will reflect on whether any other EU country has increased their own ABS risk retention thresholds and, if not, what the effect would be of unilateral German action in this respect.

"In our view, this suggests potentially that the German risk retention rule stands some chance of being moderated back to the 5% level that looks to be becoming a global norm," the RBS analysts note.

The country will adopt the EU's 5% retention requirement at the beginning of 2011, enforced via the bank ABS buyer base and applicable to any ABS, irrespective of asset or originator domicile. This interest can be held via first loss, vertical slice or seller share.

ABS

ABS analytical, operational challenges highlighted

A recent due diligence survey undertaken by Principia Partners confirms that investor and issuer confidence in securitisation is growing, with 60% of respondents stating they would increase their activity in the sector within the next 12 months. However, while trading activity is set to increase, analytical, risk oversight and operational challenges remain a major concern for financial institutions and asset managers, the firm says.

The most important objective identified by investors in the survey was timely access and effective integration of collateral pool performance data for investment and risk analysis. This was followed by the effective modelling of deal waterfall structures and cashflows for all the assets managed within a given portfolio.

Although recognised as a critical activity, 54% of all the investors surveyed stated that they were ineffective at accessing and monitoring performance data for the securities they held. This includes an inability to monitor pool performance measures that must be tracked for capital relief under the Basel 2 securitisation framework enhancements, such as delinquency, default, recovery and prepayment rates.

Meanwhile, 75% of investors ranked the consolidated risk surveillance of portfolio, deal, tranche and collateral pool performance in their top-two risk management concerns. 72% of investors said they were ineffective at establishing and monitoring hard and soft triggers, while 35% felt they effectively managed their global structured finance exposures in a single integrated environment.

"Even with greater issuer disclosure, understanding new deals will be an intensive task without the right tools and operations in place. Worse, it can lead to misinformed investment decisions, capital penalties or being priced out of the market altogether," says Douglas Long, Principia's evp of business strategy.

Over 500 senior securitisation market participants from 200 organisations took part in the study between June and September 2010.

CDO

New share placement for permacap

Carador Income Fund (CIF) has raised approximately US$10.25m through a placing of new shares. The fundraising has been undertaken in order to enable the company to take advantage of what it believes are attractively priced assets in the market, with 91% of the net proceeds raised already invested. Of the proceeds, CIF intends to use 30% to purchase CDO equity tranches, 60% mezzanine tranches and 10% senior tranches.

CDO

Derivatives pricing software enhanced

SciComp has enhanced its derivatives pricing software, SciFinance, to help quantitative developers shorten Monte Carlo derivatives pricing model development time. The software includes new models with faster execution speeds for specific asset classes; for example, single-tranche CDOs and commodity futures.

"The mathematical problems of pricing derivatives are tailor-made for GPU computing, and Monte Carlo simulations enjoy some of the fastest speed-ups on GPUs: from 50 to over 300 times faster compared to serial code," says SciComp evp Curt Randall.

Included in the SciFinance enhancements is a Stein stochastic recovery model for STCDO pricing, which yields results that are about 1,000 times faster than the previously used Krekel grid method, according to SciComp.

CDPCs

CDPC's ratings corrected

S&P has corrected its issuer credit ratings on the Athilon CDPC to double-B from double-B minus and on Athilon's senior subordinate note issues to single-B plus from triple-C plus. The move follows the agency's detection of the inclusion of an ABS CDO in the calculation of the corporate backed tranche's capital exposure in the capital report Athilon sent on 9 July.

S&P has subsequently affirmed its double-B issuer credit rating on Athilon, as well as lowering its issue credit ratings on the CDPC's senior subordinated note issues to single-B from single-B plus, its subordinated note issues to triple-C minus from triple-C and its junior subordinated note issues to double-C from triple-C minus following Athilon's commutation of a CDS on two tranches of one ABS CDO transaction. The CDPC consequently has no exposure to ABS or ABS CDOs in its CDS portfolio.

Athilon included in the capital report its exposure to the ABS CDO in their corporate tranches portfolio when they had calculated the corporate tranches' capital requirement. This resulted in the capital report showing a greater capital requirement than the amount reflecting Athilon's exposure to corporate-backed tranches only. The loss projection on Athilon's CDS on the ABS CDO transaction was captured twice: both in Athilon's corporate tranche loss projection and in S&P's life-time loss projection for the ABS CDO transaction.

The rating actions reflect the impact S&P believes the commutation had on Athilon's available capital and the total projected losses based on the 27 September capital report it received from the CDPC.

CDS

Collateral management tool introduced

Riskart has introduced a collateral management module to its software that integrates its back office OTC derivatives processing application.

The new module aims to automate the process of calculating cross-asset net exposure per counterparty on the basis of the relative CSA agreements, while introducing automation in the reconciliation and management of collateral calls. The function is also intended to reduce counterparty risk, allowing clients to focus on effective liquidity management, the firm says.

The riskart derivatives management suite is specifically designed for back office administration, accounting and compliance of products including CDS.

CDS

Canadian RFC issued on OTC regulation

The Canadian Securities Administrators (CSA) is seeking input on its proposals regarding the regulation of OTC derivatives. The proposals were released in CSA Consultation Paper 91-401, 'Over-the-Counter Derivatives Regulation in Canada', and form part of Canada's response to the G20's commitments to develop more robust oversight of the financial markets.

"As an active participant in the global financial markets, it is fundamental for Canada to respect its G20 commitments," comments Jean St-Gelais, chair of the CSA and president and ceo of the Autorité des marchés financiers (Quebec). "The comments received from this consultation will help the CSA to develop appropriate legislative and regulatory proposals for Canada's OTC derivatives markets."

The consultation paper summarises recommendations that are intended to strengthen the regulation of Canada's financial markets and manage specific risks related to OTC derivatives. The CSA says it aims to implement Canada's G20 commitments in a manner appropriate for the Canadian markets and harmonise regulatory oversight to the extent possible with international jurisdictions.

The issues raised in the consultation paper include:

• mandatory reporting of all derivatives trades by Canadian counterparties to a trade repository;
• provincial regulators obtaining regulatory authority to mandate electronic trading of OTC derivative products in the near term;
• the mandatory central clearing of OTC derivatives that are determined to be appropriate for clearing and capable of being cleared;
• the use of a risk-based approach by imposing capital and collateral requirements to reflect appropriately the risks that an entity assumes; and
• exemptions from the regulatory proposals outlined in this paper for defined categories of end-users.

CDS

Takefuji CDS settled

The final price for the Takefuji Corporation CDS auction was determined to be 14.75, with 15 dealers submitting inside markets, physical settlement requests and limit orders.

CDS

Austrian succession event mulled

ISDA's EMEA Determinations Committee is mulling whether a succession event occurred with respect to Raiffeisen Zentralbank Österreich Aktiengesellschaft. The move follows the demerger on 9 October of the main part of RZB's assets and liabilities to Cembra Beteiligungs, a wholly-owned indirect subsidiary of RZB, was registered in the Austrian commercial register.

On 10 October the merger of Cembra into its majority-owned subsidiary Raiffeisen International Bank-Holding (RI) was registered in the Austrian commercial register. On the same day RI, being the absorbing entity of the merger, changed its name to Raiffeisen Bank International.

CDS

CRA, OTC derivatives guidelines outlined

The Financial Stability Board (FSB) last week released two reports - 'Implementing OTC Derivatives Market Reforms' and 'Principles for Reducing Reliance on Credit Rating Agency (CRA) Ratings'.

The first report sets out common approaches to implementing reforms in OTC derivatives markets, setting out 21 recommendations that address implementation of the G20 commitments. In particular, it focuses on standardisation, central clearing, organised platform trading and reporting to trade repositories.

A key message of the report is the need to improve the availability of data on the OTC derivatives market as an input to policymaking to promote financial stability, as well as for monitoring whether targets to bring all standardised derivatives onto central clearing platforms are being met.

This report is only the first step toward consistent implementation of the G20 commitments, the FSB says, and highlights the amount of work that remains going forward. Authorities will need to coordinate closely to minimise the potential for regulatory arbitrage.

Meanwhile, the goal of the principles outlined in the second report is to "reduce mechanistic reliance" on ratings and to incentivise improvements in independent credit risk assessment and due diligence capacity. The FSB says that banks, market participants and institutional investors should be expected to make their own credit assessments and not rely solely or mechanistically on CRA ratings. Further, the design of regulations and other official sector actions should support this.

The principles aim to catalyse a significant change in existing practices. They cover the application of the broad objectives in five areas: prudential supervision of banks; policies of investment managers and institutional investors; central bank operations; private sector margin requirements; and disclosure requirements for issuers of securities.

The FSB has asked standard setters and regulators to consider the next steps that could be taken to translate the principles into more specific policy actions to reduce reliance on CRA ratings in laws and regulations.

CLOs

CLO amendments to improve recoveries

Noteholders have consented to a suite of amendments to the documentation in three Heat Mezzanine SME CLOs. Moody's expects the amendments to improve the recoveries on the underlying subordinated loans.

Included in the amendments are proposals to: extend the legal maturities by a further four years; remove the need for trustee consent to restructure the subordinated loan agreements or commence litigation against an obligor in the pool; create a cash reserve account to be placed senior to the notes in the waterfall, in order to pay litigation costs related to proceedings taken against any obligors in the pool; add supplementary rights for the issuer to appoint an additional recovery manager in order to be represented in creditors' meetings of relevant obligors; and allow the issuer to appoint a work-out manager at any time after the scheduled maturity to assist in restructuring negotiations of any defaulted obligors. The latter amendment was only approved in relation to H.E.A.T. I-2005.

Moody's notes that the amendments to the deal documentation are credit positive. In particular, it says that the extension of the legal maturity will allow sufficient time for the issuer to complete workout procedures on defaulted names and/or resolve any legal proceedings undertaken against obligors.

Further, there is no ratings impact on the tranches, including those for which Moody's considers to be distressed exchanges (H.E.A.T Mezzanine I-2005 B1 and B2 notes; H.E.A.T Mezzanine B and combo notes; and H.E.A.T Mezzanine - Compartment 3 A, B and C notes).

CMBS

First losses seen on Euro CMBS matured loans

Fitch says in its latest bulletin that European CMBS loan repayments fell in October, with two loans reporting their first losses.

Fitch's Maturity Repayment Indices reduced from 38.5% to 36.6% during the month, as less than 4% of maturing loan balance was successfully repaid. Overall, the outstanding matured loan balance has increased by 9% to €4.84bn. Of the 96 loans that have matured since 2007, 38 have been fully repaid, the agency says.

October saw the first losses on two loans that have passed their maturity dates. The collateral for the £7.7m Market Way loan (in Bellatrix Eclipse 2005-2) was sold on 18 October for £6.3m. After costs, the agency says this will result in a loss of approximately £2.5m.

The collateral for the £20.7m Grays Shopping Centre loan (in European Prime Real Estate No. 1) was also sold, resulting in a loss of approximately £500,000.

Meanwhile, Fitch has introduced a new Rolling Maturity Repayment Index, which measures - on a rolling 12-month basis - the proportion of loans successfully repaid either at or around their maturity dates. The Rolling Index stands at 21.1% by number of loans and 6.9% by exit loan balance. In contrast to the Cumulative Index, its rolling nature means that it could return to 100% in subsequent months in spite of the losses that were realised over the past month.

CMBS

Debut Euro CMBS resecuritisation rated

S&P has rated what are believed to be the first public resecuritisations of a European CMBS bond. The Asset Repackaging Vehicle series 2010-4 and 2010-5 transactions are backed by portions of GEMINI (ECLIPSE 2006-3)'s double-B plus rated class A notes, sold by Lazuli Ltd (in the case of the series 2010-4 resecuritisation) and HSBC Bank (2010-5).

The £69.41m series 2010-4 and £14.81m series 2010-5 deals have the same capital structure, comprising nine classes of notes with ratings ranging from double-A to double-B plus and an unrated class C. The scheduled maturity dates for both series are in July 2016.

S&P says it has previously publicly rated 20 issuances from the Asset Repackaging Vehicle, each backed by US structured finance securities.

CMBS

CMBS borrowers taking 'opportunistic measures'

While most US CMBS loans transferring to special servicing are driven by borrowers looking to prevent future defaults, select recent transfers are showing different results entirely, according to Fitch.

Most CMBS loans now in special servicing are there due to an 'imminent default'. This is an opaque, catch-all classification that provides little colour on what circumstances precipitated the transfer, the agency says.

"While some borrowers are taking proactive measures to avert defaults on soon-to-mature loans, others are simply looking to capitalise on current market conditions," says Fitch senior director Adam Fox. "Some of these more opportunistic measures are designed to extend a loan term, bring down leverage or save on out of pocket expenditures."

21 loans with balances greater than US$20m transferred to special servicing during October, Fitch says. The loans - the majority of which correspond to 2005-2007 vintages - range in balance from US$21.5m to US$187.2m (TIAA Rexcorp Plaza loan, Uniondale, NY).

Meanwhile, the agency says it expects loan defaults to continue escalating through 2011. Over 3,000 loans with an outstanding balance of approximately US$59.4bn in Fitch's portfolio were classified as specially serviced through to the end of last month.

CMBS

Extended Stay resolution dampens delinquencies

Trepp has issued its October 2010 Delinquency Report, which indicates that the US CMBS delinquency rate fell in October, marking the first month-to-month drop in over a year. The percentage of loans 30 or more days delinquent, in foreclosure or REO fell by 47bp during the month to 8.58%, putting the value of delinquent loans at US$58.3bn. This compares to a delinquency rate of 4.8% in October 2009.

"We have been saying for months that loan refinancings, note sales and liquidations would be putting downward pressure on the delinquency rate, and this is precisely what happened in October," says Manus Clancy, md at Trepp. "The biggest single driver in October was the final resolution of the huge Extended Stay Hotels loan, which accounted for 59bp in the delinquency reduction. We anticipate that once the Stuyvesant Town loan is resolved, there will be another 40bp worth of delinquencies removed in one fell swoop."

Regulation

Financial liability accounting clarified

The IASB has issued requirements on the accounting for financial liabilities, which will be added to IFRS 9 Financial Instruments and completes the classification and measurement phase of the board's project to replace IAS 39 Financial Instruments: Recognition and Measurement. The new requirements are aimed at addressing the problem of volatility in profit or loss arising from an issuer choosing to measure its own debt at fair value.

In response to feedback received during its consultation process, the IASB decided to maintain the existing amortised cost measurement for most liabilities. With the new requirements, an entity choosing to measure a liability at fair value will present the portion of the change in its fair value due to changes in the entity's own credit risk in the other comprehensive income (OCI) section of the income statement, rather than within P&L.

David Tweedie, IASB chairman, comments: "The new additions to IFRS 9 address the counter-intuitive way a company in severe financial trouble can book a large profit based on its theoretical ability to buy back its own debt at a reduced cost."

The second and third phases of IFRS 9 are concerned with accounting for the impairment of financial assets and hedge accounting. The IASB is aiming to complete those phases by 30 June 2011 and thus replace IAS 39 in its entirety.

RMBS

Wells admits to affidavit irregularities

Wells Fargo has submitted supplemental affidavits for approximately 55,000 foreclosures that are pending before courts in 23 judicial foreclosure states. The firm says the move continues its ongoing efforts to monitor and assess its foreclosure affidavit procedures by providing an additional level of caution and assurance.

Wells identified instances where a final step in its processes relating to the execution of the foreclosure affidavits did not strictly adhere to the required procedures. It says these issues do not relate in any way to the quality of the customer and loan data; nor does the firm believe that any of these instances led to foreclosures that should not have otherwise occurred.

The process of submitting supplemental affidavits will begin immediately, with the aim of completing this process by mid-November 2010. If Wells is unable to complete an individual court filing by the designated court review date, it says it will request a court extension to assure the file contains a supplemental affidavit before the judge rules on the case. Additionally, the firm has reaffirmed that it does not plan to institute a moratorium on foreclosure sales.

"We understand the concern over foreclosure procedures on the part of homeowners in these difficult economic times and want to do everything we can to assure that the procedures we have in place provide Wells Fargo borrowers and others with confidence that foreclosure proceedings we initiate are done appropriately," says Mike Heid, co-president of Wells Fargo Home Mortgage.

From January 2009 through to 30 September 2010, the firm says it has completed 556,868 mortgage loan modifications - including US$3.5bn of principal forgiveness - and has refinanced approximately 1.9m mortgage loans.

RMBS

Debut NCUA deal closes, second prepped

National Credit Union Administration (NCUA) is prepping its second resecuritisation - the US$2.82bn NGN 2010-R². Its first such offering - NGN 2010-R1 - settled yesterday, 28 October.

The US$3.28bn Senior Series I-A notes, which are backed primarily by senior floating-rate RMBS, printed at 45bp over one-month Libor, subject to a maximum note interest rate cap equal to 7% per annum. The US$566.5m Senior Series II-A notes, which are backed primarily by fixed-rate pass-through securities, pay a fixed-rate coupon of 1.84% per annum. The timely payment of principal and interest due on the notes are guaranteed by the NCUA, with that guaranty being backed by the full faith and credit of the US.

The transaction was oversubscribed, with over 35 investors participating, including credit unions, banks, broker-dealers, insurance companies, money management funds, pension funds and government agencies. Consistent with the level of their subscriptions, credit unions received almost 10% of the total allocation for both series of notes.

Barclays Capital served as the sole structuring agent and financial advisor to the NCUA on the sale.

RMBS

Mandatory redemption for Dutch RMBS

Moody's has withdrawn its rating on all notes issued by E-MAC NL 2003-II, due to the RMBS becoming subject to mandatory redemption. This was triggered by the failure to obtain rating confirmations from all rating agencies by 20 October 2010 - the put option date - as per the transaction documentation.

The agency changed the direction of its ongoing rating review of the notes to uncertain from possible downgrade on 15 September 2010. Moody's had indicated that it could downgrade the ratings of the notes if an event of default occurred following the failure by GMAC RFC Nederland.

E-MAC NL 2002-II was the last of the E-MAC transactions subject to provisions that exposed investors to specific risks upon enforcement. Under the post-enforcement priority of payments, the non-capped, market rate-based step-up interests would cease to be subordinated.

The agency believes that none of the other outstanding EMAC transactions are exposed to a change in the priority of the step-up margin in a post-enforcement waterfall. However, all of the E-MAC transactions are exposed to a senior swap termination payment in an enforcement scenario. However, Moody's says that the decision to serve an enforcement notice should be governed by the interests of the majority of senior noteholders.

The ratings of the senior class of notes do not consider a scenario whereby the decision of the controlling party would result in a loss to this class, the agency concludes.

RMBS

Foreclosure defects to prolong US housing correction

Fitch expects the in-flux state of US mortgage foreclosures to increase an already high 'shadow' inventory and lengthen foreclosure delays, both of which may prolong the US housing correction. Liquidation timelines of non-performing loans are already at historical highs and, based on recent resolution trends, it would take over three years to clear the existing distressed mortgage inventory in the non-agency RMBS sector, the agency says.

Fitch senior director Grant Bailey notes: "The foreclosure and liquidation extensions will slow the resolution of defaulted loans and delay home prices from finding a floor. Also, extending foreclosure times will weigh on US RMBS loss severities due to rising carrying costs."

Rising losses also leaves US RMBS more susceptible to negative rating actions, though downgrades and negative outlook revisions will likely be contained to bonds that already have a negative rating outlook, according to Fitch. The agency says it is reassessing its assumptions for the timing of loan liquidations and loss severities, with new criteria due out in the near future.

RMBS

Gracechurch master trust restructured

Barclays Bank has restructured its RMBS master trust, Gracechurch Mortgage Financing. Moody's believes that the restructuring will not impact the current ratings assigned to any of the notes and that it is ratings positive.

Under the restructuring, Barclays has made a refinancing contribution to repay all amounts currently outstanding on the Gracechurch Mortgage Financing Series 2009-1 notes, which it had previously retained. The originator will also repurchase around £11.5bn of trust collateral and add a new subordinated loan of £548m, which will only be repaid after all other notes have been redeemed. The loans that are being repurchased have been selected at random and the characteristics of the pool remain similar following the loan repurchase, Moody's confirms.

Following the restructuring, the outstanding notes in the trust will consist of Gracechurch Mortgage Financing Series 2006-1 - which is scheduled to repay before August 2013 - and Gracechurch Mortgage Financing Series 2007-1, which is scheduled to repay before August 2012.

RMBS

Irish RMBS restructurings affirmed

Bank of Ireland has restructured its Colston 2-4 RMBS deals, originated under the Bristol & West and Bank of Ireland Home Mortgages brands, following its formation of a new UK bank - Bank of Ireland UK (BoIUK). Under the restructuring, certain assets were repurchased from all three transactions' pools and transferred to BoIUK.

To reduce the size of the asset pools, some of the outstanding rated notes were also either partly or fully redeemed, reducing the balance of rated notes in all three transactions. Although the class A credit enhancement levels have declined in Colston 3 and Colston 4, the reserve funds have been increased in all three deals.

As a result, there is no material impact on the transactions' ratings, according to Fitch. The agency has affirmed its ratings on all three deals.