Contents

RMBS

Advantage transparency?

Data demands dividing UK lenders

Debate is intensifying about how the UK lending industry will meet the Bank of England's proposed requirements for data availability when the extension to the ABS discount window facility is implemented. The suggestion that data is made 'freely available' adds to the challenge, and the form issuer websites will take is taxing all securitising lenders at a time when they are preparing for a plethora of new regulatory demands.

While the availability of such data is welcomed by many, it has been seen as divisive and unnecessary by a number of issuers. Arguably, it has the potential to create price tiering between issuers that choose to or are able to disclose and those that don't or can't for technical reasons - thus creating information asymmetry within the market.

"In a world where capital is king and information is power, if an issuer launches a transaction backed up by transparent data, it could conceivably attract better pricing than issuers that don't and will have the added advantage of being able to sell the securities into the discount window facility," suggests one industry consultant. "The UK securitisation market is facing a triple-whammy in 2012, when Basel 3, the expiration of government guarantees -written at the height of the credit crisis -and market restructuring all kick in. If there is no active RMBS market in place by then, how will banks and non-balance sheet lenders raise the necessary capital to meet all their potential obligations?"

He continues: "What will this mean for the availability of lending product itself? The argument about transparency - and how it can be delivered - becomes all the more interesting against this backdrop."

Before 2012, BCBS157 - an element of Basel legislation - will require additional capital to be held for non-granular data based securitisations. Even at triple-A, the effect is in orders of magnitude: for example, a granular data holding securitiser will only need to hold 7bp at this level, while a 'traditional' or non-granular data securitiser will need 20bp (or 8 and 20 at double-A).

The BoE outlined in July its plan to require greater information transparency in relation to ABS as part of the eligibility criteria for instruments accepted in its operations (see SCI issue 194). The Bank envisages that disclosures of information relating to ABS deals be placed on a website maintained by the issuer/originator (or by another party on their behalf) and that it be made "freely and readily available" to interested third parties. Exactly what this means is not entirely clear and the Bank is expected to issue a market notice before the end of the year that sets out full details regarding implementation.

However, there appears to be a divergence among UK lenders in their attitude towards providing this data. "Most issuers really don't want to make information available on their websites because it's a burden, a responsibility and an overhead. Reluctantly, though, they have accepted this will need to happen," explains Mark Davies of Cedar Analytics.

He adds: "Indeed, the view among many of the old legacy lenders is that whilst they don't have the systems or the inclination to make the data available, the investor community won't know what to do with the data when they see it. Contrast this with the business models, capabilities and attitude of newer, non-balance sheet lenders - who were the backbone of the initial surge in securitised lending in the UK-and who can already support the requirements because they came to the market having to convince investors about their product, decisioning and systems."

However, there remain strong reasons to bring RMBS deals to market in the right way - which includes making more information available to investors. "Genuine cash investors are ready and waiting to back UK RMBS: they understand the credit well and the performance has been exemplary - no deal has ever failed and no investor has lost money on a UK RMBS issue. Housing demand outstrips supply in this country, which is always a good premise in any market," the consultant observes.

Against this backdrop, Cedar Analytics has built a portal that is designed to make issuer data accessible to investors, but which is different to other vendors' offerings in that it is a relational database and contains the same level of detail that is given to rating agencies. "We've developed intellectual property algorithms that make all the data consistent," confirms Davies. "The premise is that issuers will pay to put data in because they have to (as per the BoE's requirements) and investors will pay to use it because it offers the opportunity to price/trade deals differently and to ensure spread efficiency."

CS

RMBS

Retraining required

Expanded skill-sets to become a necessity for RMBS 2.0

Redwood Trust and PennyMac Mortgage Investment Trust each intend to complete RMBS deals early next year, while BlackRock is also preparing a fund that will buy jumbo mortgages with a view to securitisation. Whether these initiatives will revive US private label RMBS remains to be seen, but what is clear is that investors, originators and servicers will all need different skill-sets to those they had pre-crisis.

John Uhlein, managing partner and founder of Grenadier Capital, explains: "Investors will need more skill-sets in evaluating the new form of RMBS when it re-emerges. It is clear that this whole meltdown has demonstrated that the ultimate investors did not perform sufficient diligence on the underlying collateral, relying on reps and warranties, as well as the rating agencies. The use of third-party diligence firms really went by the wayside and clearly the analysis by the rating agencies was not particularly transparent."

He continues: "You had a situation with so much liquidity and demand that the power in the documentation went to the speciality finance companies like the mortgages servicers, who were able to sell the equity which led to a degradation of the underwriting standards."

Randy Robertson, md and co-head of the securitised asset investment team within BlackRock fundamental fixed income, agrees that greater knowledge has become a necessity. He says: "Investors will clearly need new skill-sets. Previously, investors took what turned out to be inappropriate comfort from transaction disclosure as well as originator-servicer practices, but at this point - after all the difficulties experienced in the marketplace - I believe a greater knowledge of the actual loan process is going to be vital for successful non-agency investors."

He adds: "Originators and servicers over the years were given a lot of free rein in terms of the creation of the assets - both at the loan stage and the creation of the securitisation - and were able to transact without sufficient protection mechanisms or quality control metrics. In the future they are not going to be able to do that and there will need to be many more requirements if investors are going to embrace a transaction."

Robertson says the BlackRock Mortgage Investors Fund, by learning from the mistakes of the past, is looking to set a standard for a new breed of RMBS. He explains: "The fund is trying to create what we think could be the prototypical non-agency security for the future. We have come at this from an investor's perspective and looked to address the issues that originators seem to be struggling with."

He says the fund itself might not be new, but the direction it is taking certainly is. Robertson adds: "In terms of the process itself, it will be different from the past. Every loan will be first underwritten by the originator, who will be vetted to make sure they qualify to buy mortgages from the fund - we would be looking for key management to have experienced both the highs and lows of the market and to have demonstrated a discipline to the market."

He continues: "Then a third party will underwrite again and then a quality control company will check the quality of the underwriters on a quarterly basis. The different underwriters are compared at a desk at BlackRock before ultimately being signed off for purchase." There would also be a clear delegation of duties between parties, so that the servicer will not be affiliated to either BlackRock or the originators.

Between BlackRock's innovative approach and the planned securitisations by Redwood and PennyMac, the future of the private label MBS market is beginning to look a little more hopeful. However, obstacles do still remain, not least the continued government participation in the market and the costs that will be associated with RMBS once all the newly required skill-sets are factored in.

Uhlein explains: "The expense which will be involved in RMBS is a worry. If you have Fannie and Freddie essentially dominating the market at subsidised levels, it will be hard. All that will be able to go the private route will be anything that does not meet their criteria, which today are the jumbo loans. It will be loans which would not meet the underwriting criteria and so therefore will have to be a lot more expensive."

He also notes that the uncertainty surrounding the implementation of regulations, such as the FDIC's safe harbour rule, makes it difficult to project what will happen in the market - pointing out that confusion over whether deals might be retroactively impacted only worsens the situation. While pending rules are causing doubt, he says some regulation is very necessary, even if it puts people off in the short term.

"Dodd-Frank is a huge issue right now for the implementation of disclosure. Reps and warranties are being rewritten so that the issuer has to retain skin in the game. Issuers wanting to do these deals hate that because it makes it expensive, but I can tell you first hand that when there is no skin in the game the underwriting standards slip," says Uhlein.

He adds: "You need to distinguish between the risk inherent with loans originated with specified underwriting standards and loans poorly or inadequately underwritten relative to those standards. Investors should bear the risk that loans do not perform as expected. The issuers need to bear the risk that the loans do not conform to the underwriting standards. Equity retention and stronger reps and warranties will address the latter."

The difficulties presented by regulation, uncertainty, expense, GSE dominance of the market and the continued struggles of the wider economy all conspire to make an imminent revival unlikely. But Redwood, PennyMac and BlackRock may be making headway in the face of all these obstacles. That said, Robertson warns that although green shoots can be seen, a revival "will be a slow, grinding process".

Uhlein agrees that talk of an imminent revival would be premature. He says: "Redwood had to file for a delay until next year for their transaction. Reading between the lines, I thought it was not very economical. The senior tranche was over-subscribed, but they admitted they were not getting a sufficient return on the equity piece."

He continues: "It is too early to say that this is a revival, but I am an optimist. It may well be a revival, but without question it will still take at least a year or two for the market to come back. Initiatives like those from Redwood, PennyMac and BlackRock will help pave the market because it shows someone is going out on a limb and taking some chances to get a deal done."

However, while senior tranches of these new deals may be oversubscribed due to additional disclosure and generous credit enhancement, the economics of holding the equity piece remain challenging. Uhlein concludes: "Based on pure economics today, you will not see a revival of that market. It will not stay like this forever, but it does mean that the future of the market is going to require recalibration of where the risks need to be borne and it is going to be more expensive."

JL

CLOs

Mezz appeal emerges in Euro CLOs

A spike in secondary mezzanine and equity flows is driving interest in the European CLO market this week. As prices continue to tighten, traders report a strengthening across the capital structure.

"The market has been fairly strong this week, with good flows," one CLO trader confirms.

There has been significant interest in mezzanine and equity tranches, the trader says, particularly from real money and hedge fund accounts. "We've also seen a lot of dealers back with their inventories, who are now looking to build up positions again - they're extremely keen to buy paper."

The secondary CLO sector is therefore benefitting from tighter spreads and stronger levels, the trader notes, with a broad range of paper trading. There has been noteworthy activity in tranches that have an expected cashflow of between two to three years, for example.

He adds: "The equity tranches of Leopard V and the Dryden CLOs have traded well and there has also been a good amount of activity in double-B paper, with the Duchess 7 and Harbourmaster 2 and 11 deals generating much interest." The trader says that, at present, double-B tranches are pricing within an expected range in the high 40s - with 20% yields.

On the supply side, however, the trader explains that the market has dipped slightly, with bid-lists failing to reach the volumes of September and October. He continues: "Sellers haven't been as active and we're still seeing people who bought into positions earlier staying put, as they have the advantage of a stronger market."

"That said," the trader concludes, "the market is performing well and levels are continuing to strengthen."

LB

RMBS

US RMBS proving resilient

US secondary RMBS has proved resilient to the recent foreclosure scandal and is exhibiting robust pricing levels. At the same time, a surge of investor interest in wrapped paper has created a buzz among traders.

"There was a lot of noise about the potential for RMBS foreclosure put-backs and it felt like the market was going to pull back a little, but it never happened," one RMBS trader notes. This, he says, is reflected in current pricing levels across the capital structure.

He continues: "Although we're certainly not at the highest of prices, net prices stand the same as last week - though spreads have become slightly softer. Volume-wise we're down slightly, but overall prices are at fairly robust levels across the board."

Senior tranches are performing well, the trader confirms, generating particular interest from cross-over buyers. "These investors are comparing RMBS with the corporate market and other markets out there. This high quality paper is still being bid incredibly well and it looks likely to stay that way," he adds.

Contributing to this week's robust RMBS performance is the increasing number of sellers, such as hedge funds, insurance firms and money managers. "Sellers who have a decent amount of money and profit in the trade are looking for a bit of extra yield."

Meanwhile, a surge of investor interest in wrapped paper has been welcomed by traders. "Investors are buying into wrapped ABS and RMBS paper in the lower dollar price sector as an arbitrage to what's happening with corporate sellers; that's been really interesting from our perspective," the trader observes.

However, the pay option segment has been exposed as the weaker part of the market over the last week. The trader explains that compared to other more active areas of the RMBS market, pay options have shown signs of slowing down since the foreclosure crisis.

"Aside from this," he concludes, "the secondary RMBS market has shown strong resilience."

LB

RMBS

Mixed message for Euro RMBS

It has been a mixed week for European secondary RMBS. Although mezzanine paper continues to perform well, Irish sovereign credit concerns are the main focus for the rest of the market.

"A lot of people are talking about the Ireland situation, which has had a real impact on activity over the past week," one trader says. Concern over Irish sovereign creditworthiness has had a knock-on impact on secondary RMBS, particularly Irish paper.

The trader continues: "Bid-lists and auctions are dropping in volume as a result. It's making people very nervous and therefore less likely to aggressively sell and more likely to sit back and wait."

The spike in interest in mezzanine paper continues, however, with levels rising again. "The mezzanine part of the capital structure is currently pricing at 50 points, which is 10 points higher than it stood at six weeks ago," the trader notes.

Elsewhere in the sector, Granite paper continues to perform well, with prices for triple-B tranches rising considerably. "They went from the high-40s in October to 55, where it has stood for a week. Granite has had a pretty good run so far; the paper has been rising continuously for six weeks," he adds.

Meanwhile, market participants are focused on the liquidation of the Euromax IV MBS CDO, which is set to be auctioned on 2 December by Henderson Global Investors (see SCI issue 206). The portfolio will be sub-divided into six buckets of appropriate asset classes to assist bidders, with the intention of maximising proceeds.

"We're looking towards Euromax as the next big liquidation," the trader concludes.

LB

CLOs

US CLO pipeline gains visibility

Price guidance has emerged for three of the four deals currently in the US CLO pipeline.

First in the queue is GSO/Blackstone Debt Funds Management's US$400m Morningside Park CLO via Bank of America. The deal comprises US$265m triple-A rated class A notes (talked at 160bp-170bp over Libor), US$22m double-A class Bs (275bp), US$38m single-A class Cs (375bp), US$17m triple-B class Ds (575bp-600bp) and US$4m double-B class Es (700bp). There is also an unrated US$54m equity tranche. Legal final is 12 January 2020.

The indicative portfolio pools 106 loans from 106 high yield obligors, of which 95.5% are senior secured and the remainder are second-lien unsecured. Expected weighted average purchase price for the loans is 97% of par, with 50% of the portfolio anticipated to be ramped by closing.

The second CLO in the queue is Apollo's ALM Loan Funding 2010-3 via JPMorgan. The transaction comprises US$262m triple-A class A1 notes (talked in the 175bp over area), US$20.5m double-A class A2s (300bp-325bp), US$25.75m single-A class Bs (400bp-425bp), US$14m triple-B class Cs (600bp) and US$10m double-B class Ds (725bp). There is also an unrated, as yet un-sized equity tranche.

The third is Guggenheim's deal, Guggenheim Term Financing, through Citi. Guidance for the US$300m triple-A rated class A notes is 160bp-170bp over. The transaction also consists of US$110m triple-B rated class Bs and an equity tranche that is expected to be sized at US$182.4m.

Finally, the fourth CLO in the pipeline is Oak Hill Advisors' OHA Intrepid Leveraged Loan Fund via Morgan Stanley. The capital structure for this transaction includes: US$272m triple-A rated class A notes; US$24m double-A class Bs; US$24m single-A class Cs; US$16m triple-B class Ds; US$16m double-B class Es; and US$53.5m equity. The latter two tranches will be retained.

CS

Insurance-linked securities

Thunder cat bond closes

Mariah Re, the first ever catastrophe bond to solely cover severe thunderstorm risk (SCI 27 October) closed yesterday, 15 November. The US peril-focused US$100m single-tranche three-year deal priced at 625bp over Treasury money market funds.

The transaction, which has been given a single-B rating by S&P, 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 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

ABS

Advisory affiliation established

LECG and NewOak Capital have established an affiliate relationship to provide a broader and deeper scope of services to the financial services industry. The two firms had previously undertaken work together over the past two years, resulting in new client engagements in consulting and litigation matters.

Chad Burhance, md and head of NewOak Capital's solutions division, says the affiliation will deliver enhanced service capabilities that should "expand greatly" the firms' joint positions in the market. "Both firms have significant relationships in the banking, insurance, asset management, specialty finance, private equity, workout and law firm markets, and we expect to be able to offer an integrated suite of solutions unlike any other firm in the market today," he adds.

ABS

BoA trust business sale agreed

US Bank has entered into an agreement to purchase the US- and European-based securitisation trust administration businesses of Bank of America. The transaction is expected to close in December 2010, subject to regulatory approval.

US Bank Corporate Trust Services will acquire approximately 2,153 active securitisation and related transactions, more than 2.4m residential mortgage files, 84,000 commercial files and US$1.1trn in assets under administration. Additionally, the acquisition is expected to provide over US$10bn of deposits.

"This transaction not only affirms US Bank as a leader in the corporate trust industry, it strengthens its strong positions in collateralised debt obligations and commercial and residential mortgage-backed securitisations," comments Terrance Dolan, vice chairman of wealth management and securities services at US Bancorp. "The transaction also establishes a US Bank Corporate Trust Services presence in Europe with offices in Ireland and London, England, while significantly enhancing the US Bank corporate trust presence in Chicago."

ABS

Organisational changes for McGraw-Hill

The McGraw-Hill Companies has made a number of organisational and management changes, which will see its financial services department realigned into two separate segments - S&P and McGraw-Hill Financial. Deven Sharma will be president of the former, while Lou Eccleston will serve as president of the latter - which will combine businesses such as S&P Indices and Valuations & Risk Strategies.

Jack Callahan will become evp and cfo of McGraw-Hill Companies, succeeding Robert Bahash. Bahash in turn will become the new president of McGraw-Hill Education. The president of McGraw-Hill Education, Peter Davis, has left the firm to pursue other career opportunities.

The firm says the organisational change will enable it to focus on creating enhanced credit risk benchmarks and research for the expanding global markets.

Eccleston joined S&P in 2008 to lead the newly formed fixed income risk management services unit. Bahash has been cfo of McGraw-Hill since 1988, where he has been responsible for managing information technology corporate-wide, including the direction of the corporation's digital strategy. Previously, he was svp of the firm's finance and manufacturing group.

Sharma joined S&P in 2006 as evp in investment services and global sales. He was named president in 2007.

Callahan most recently served as cfo at Dean Foods and in senior management roles at PepsiCo, General Electric Company and McKinsey & Company.

CDO

CDO fraud claims to proceed in part

The US District Court for the Southern District of New York has sustained, in substantial part, CDO-related fraud claims against Citigroup and its senior officers that were filed by Kirby McInerney. The Citigroup employees include former ceo Charles Prince, former cfo Gary Crittenden and former chairman Robert Rubin.

The plaintiffs allege that during early and mid-2007, Citigroup experienced, recognised and concealed a CDO crisis. Pursuant to the Court's ruling, securities fraud claims alleging violation of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 may proceed, on behalf of a proposed class of purchasers of Citigroup common stock during the period between February 2007 and April 2008. However, the Court dismissed claims on behalf of investors who purchased Citigroup shares prior to February 2007 and after April 2008, as well as claims that were unrelated to Citigroup's concealment of its CDO exposure.

The complaint details Citigroup's awareness of its significant CDO holdings and of the risk contained in such instruments. It also expands on how Citigroup's belated disclosures of its CDO exposures and losses in late 2007 and early 2008 were instrumental in the decline of its shares - from nearly US$50 per share to below US$1. Further, the complaint contrasts Citigroup's internal knowledge and actions with respect to its CDOs with its public statements concerning CDO holdings and exposure.

The Court summarised in its statement: "Simply put, plaintiffs identify a set of statements that gave the impression that Citigroup had minimal, if any, exposure to CDOs when, in fact, it had more than US$50bn in exposure."

CDO

SF CDO manager replaced

Ischus Capital Management has replaced GE Asset Management as collateral manager on Summer Street 2005-1, a cashflow mezzanine structured finance CDO. S&P has issued a rating confirmation in connection with the new collateral management agreement, which reflects its opinion that the change will not cause the current ratings on the transaction to be lowered or withdrawn.

CDS

Kamakura collaborates on Chinese CDS tool

Kamakura Corporation and Thomson Reuters have collaborated to launch a credit analytics tool that offers transparency and actionable data to the Chinese credit markets. The new service aims to provide CDS prices, compiled daily from 11 contributors, for major Chinese companies direct to financial market professionals via its financial desktops - including the fully-integrated trading desktop solution, Thomson Reuters Eikon.

CDS

Vendor acquisition announced

Misys is to acquire Sophis from its principal shareholder Advent International and various management shareholders, for an equity value of approximately €273m. A further €5m may be payable in cash on or shortly after closing, contingent upon performance in the year to December 2010.

Sophis had net debt of €162m at 30 September 2010, giving an enterprise value for the acquisition of €435m. Sophis's debt will be repaid upon completion of the acquisition.

The transaction requires approval from Misys shareholders, to whom a circular is expected to be sent in January 2011. The acquisition is expected to be completed by end-February 2011.

Sophis' buy-side solutions are expected to play Misys' sell-side strengths.

CDS

Vendor sees growth in New York

Brian Sentence, the founder director and ceo of Xenomorph, has moved to New York to spearhead growth of the firm's sales and support operations. He will join co-founder and consultancy director Mark Woodgate in leading the firm's marketing efforts.

Meanwhile, Matthew Skinner takes over as Xenomorph md for Europe, with Naj Alavi continuing as md for the Americas.

CDS

Credit trading head named

Credit Suisse has appointed Jonathan Fletcher as director and head of its investment grade corporate credit trading desk. Based in London, he will oversee the firm's activity in both cash and synthetic credits. He was previously a credit trader at Deutsche Bank.

CDS

Analytics vendor expands to China

Numerix has expanded its sales force again with a new office in Beijing, which will provide clients with Chinese OTC derivatives support. The office will be managed by Sindy Zhu, director of sales, who is responsible for the region. Zhu reports to Stephen Cheng, Numerix vp, sales, for Greater China.

CDS

Credit opportunities fund launched

Wiltshire Capital has launched a credit opportunities fund. The fund, which is sponsored by nabInvest, will invest in mispriced, stressed and distressed sub-investment grade European corporate debt.

The fund has been designed to operate through credit and market cycles and targets over 15% returns using minimal or no leverage, the firm says.

Wiltshire has formed a joint venture with PCE, which will provide institutional quality infrastructure, risk management, compliance and regulatory support, as well as fund-raising capability for the fund. Merrill Lynch has been appointed as the prime broker, while Grant Thornton will audit and Quintillion will administer the fund.

Wiltshire's founder and principal investment manager is John Sullivan, who was previously a co-founder of Cognis Capital.

CMBS

CRE firm adds svp

George Smith Partners has appointed Eric Hamermesh as svp and director of its business development team. He will work alongside the firm's md and principal David Rifkind to underwrite, place and close client business.

With over 30 years of CRE and securitisation experience, Hamermesh was most recently principal and founder of Platinum Capital Advisors. He has also worked at Goldman Sachs, Credit Suisse and Canyon Capital, underwriting and performing due diligence on distressed real estate portfolios.

Real Estate

CRE vet joins asset manager

Cole Real Estate Investments has appointed Eric Costa as director in its asset management and dispositions group. He will be responsible for increasing the firm's profitability and operating efficiency in its real estate portfolio. Prior to joining the firm, Costa was evp and principal with Aspen Properties, asset managing a portfolio of commercial properties totalling over 1.5m square feet.

RMBS

Cooperation on MBS data service

Equifax and BlackBox Logic are to merge their MBS data solutions to offer greater investor transparency. Equifax's data solution, ABS Credit Risk Insight Direct, will statistically match up-to-date borrower credit information to BlackBox Logic's database of MBS performance data. The collaboration is intended to help investors improve model accuracy, better predict loan default and prepayment, and enhance deal surveillance, the two firms say.

ABS

Minimal default rate for Euro ABS

S&P reports that the cumulative default rate for European securitisations since mid-2007 has been 0.86%. In many asset classes, securities' creditworthiness has remained resilient, in the agency's opinion, meaning downgrade rates have also been low. Significantly, the 12-month rolling downgrade rate fell slightly to about 13% from its peak last quarter.

A significant proportion of principal balances outstanding before the recession have also amortised, returning cash to investors. For example, S&P estimates that nearly 40% of note balances outstanding in mid-2007 across the ABS, CMBS and RMBS asset classes have since been repaid to noteholders, despite the underlying assets generally prepaying at a slower rate than prior to the recession.

ABS

Continued stabilisation for global SF ratings

Fitch reports that the ratio of affirmations to downgrades across its global structured finance ratings in 3Q10 followed a similar trend to 2Q, with affirmations exceeding downgrades by a ratio of more than two to one - although the number of upgrades increased. The trends reflect continuing signs of improved performance across various asset classes, the agency says.

In line with 2Q, US RMBS affirmations exceeded downgrades by a ratio of 2:1, but downgrades are still high, driven by continued poor performance in the prime sector. Conversely, the Alt-A and subprime sectors have shown improving performance in delinquencies since the start of the year. The volume of rating actions was much higher than the previous quarter, following sector reviews on Alt-A, prime and re-REMIC transactions.

US ABS transactions continue to trend positively, with limited concerns, according to Fitch. While the overall number of rating actions increased, the ratio of downgrades to affirmations was broadly in line with 3Q.

Most of the negative rating actions were related to the student loan sector. The FFELP sub-sector in particular saw significant rating actions following the application of revised basis risk criteria, although this was mainly limited to subordinated tranches. Conversely, many ABS sub-sectors are continuing to improve, with positive rating actions to 3Q10 increasing threefold on 2009.

US CMBS downgrades remain at elevated levels, however, reflecting the continued application of revised surveillance criteria to the floating-rate portfolio. Poor performance over the past year was the predominant reason for negative actions, although these were predominantly in the lower rated classes. Fitch expects downgrades to continue through 4Q10, primarily for the 2005 to 2008 vintages, as a result of continued deteriorating performance.

Meanwhile, affirmations outpaced downgrades for the first time in a year in US structured credit, following the severe negative ratings actions previously taken across the SF CDO and high yield sectors. However, CRE CDOs suffered higher downgrades due to continued poor asset performance. Negative rating actions were also seen across Trups CDOs, following the application of updated criteria in August 2010.

Away from the US, the number of rating actions in EMEA overall doubled from 2Q to 3Q and the ratio of upgrades to downgrades again showed significant improvement. However, EMEA downgrades continue to exceed upgrades, with most negative action focused on Spain and the UK, concentrated in CDOs, CMBS, some junior tranches of UK prime RMBS and some of the more recent Spanish RMBS transactions.

In EMEA RMBS, all of the UK master trust transactions were reviewed over the quarter. The majority of the tranches were affirmed, reflecting sound performance and credit enhancement build-up. But a limited number of junior tranches in two of the trusts were downgraded, due to a combination of structural issues and asset performance. A number of UK prime and buy-to-let transactions were also affirmed and the sector outlook for UK prime has recently been revised to stable from stable/negative, according to Fitch.

3Q saw the ratio of affirmations to downgrades in EMEA CMBS continuing the improving trend seen across the two previous quarters. This reflects the extent of previous negative rating actions taken and the fact that transactions are now performing broadly in line with expectations.

The percentage of tranches with a stable outlook is also increasing. The rating actions follow Fitch's change in sector outlook for UK prime CMBS earlier in the year to stable from stable/negative. However, performance continues to be mixed, with collateral in secondary markets remaining under pressure and refinance risk still posing a significant problem.

There was limited rating movement in EMEA ABS during the quarter, with affirmations dominating. This reflects shifts in some of the sector outlooks earlier in the year from negative towards stable, notably in German and UK auto transactions and corporate operating lease transactions. However, negative rating actions were taken on the lower tranches of two Spanish consumer and auto transactions, which continue to show high levels of losses and depleting reserves. In addition, a UK credit card transaction was placed on RWN because of concerns over the level of borrowers being placed on a debt management programme.

3Q was also a period of relative stability for the EMEA structured credit sector, with a significant improvement in the ratio of affirmations to downgrades, continuing the improving trend seen in the last quarter and reflecting improved sector outlooks assigned earlier in the year. Improved performance, together with increasing credit support drove affirmations across many Spanish SME transactions and Fitch recently revised its sector wide outlook for this asset class to stable from negative. German SME transactions are also showing signs of stability in portfolio quality.

Downgrades in APAC, meanwhile, were the highest since 4Q09, as further declines in Japanese commercial real estate values led to negative rating action. Elsewhere across the region and other asset classes, affirmations continued to be the dominant rating action.

Finally, the limited rating actions in Latin America demonstrated continued stability, in line with previous quarters. This trend is expected to continue across the portfolio for the rest of the year, Fitch concludes.

ABS

Japan ABS revisited on grey-zone issue

Moody's is analysing the risk for Japanese securitisations backed by loan receivables involving payments of grey-zone interest, following the start of Takefuji Corporation's corporate reorganisation procedures.

Takefuji is to redefine the principal amount of its loan receivables based on the maximum interest rate under Japan's Interest Rate Restriction Law. Accordingly, it will require that obligors pay down their loans based on the results.

Moody's is focusing on whether Takefuji's redefinition of its loan receivables may impact more broadly Japanese securitisations backed by grey-zone interest assets. This is based on the possibility that an originator will follow suit and redefine its loan receivables when it becomes bankrupt and that, if an originator redefines its receivables, then the securitised receivables may also be redefined and lead to their dilution.

The agency will consider how securitised receivables are treated upon the bankruptcy of an originator, whether there would be any differences in the handling of grey-zone interest assets because of the type of bankruptcy proceedings and whether there would be any differences in the handling of such assets because of the party which services the loan. Moody's says it may - in light of such considerations - change its rating assumptions.

ABS

Spanish originator support likely to diminish

Fitch believes that some originators are supporting Spanish structured finance transactions by refinancing and restructuring loans that are at risk or delinquent, partly in an effort to ensure rating stability. However, the agency says it expects such support to diminish in the near term, which could lead to higher losses in securitised portfolios.

"Originator support helps explain higher-than-expected loan prepayments and declining portfolio delinquencies within Spanish securitisations," comments Jeffery Cromartie, Fitch structured credit senior director. "This also creates a degree of rating stability - which could keep notes eligible for repo funding with the ECB."

The agency believes that recent prepayment rates are driven by originator support through loan restructurings of at-risk borrowers rather than re-financings by performing borrowers. This is because with most residential and SME borrowers already benefiting from a low interest rate environment, there is limited motivation for performing borrowers to refinance.

As most originators have tightened lending standards, credit may not be available or new loans may be charged with a higher borrowing cost, further reducing the incentive for performing borrowers to refinance. Current SME and RMBS transaction performance is benefiting from the removal of at-risk loans from the transaction pool, and it also results in modest deleveraging of the deals.

Control and flexibility are also key motivations driving originator support. "Instead of approaching the Gestoras for approval to modify securitised loans, originators may simply refinance the borrower under new terms and prepay the existing loan, which allows the originator greater flexibility," says Jose Pablo Zuniga, Fitch RMBS director.

Nevertheless, the agency believes that originator support for Spanish deals will diminish in the near term since the reputation risk associated with SF downgrades is lessened with investors now well aware of the economic prospects in Spain.

ABS

Securitisation leaders forge ahead

SCI has released its latest league tables for bank arrangers in the European and US structured credit and ABS markets. The figures show that RBS in Europe and Barclays Capital in the US have retained top spots for 2010 to the end of October. The leaders participated in an impressive €2.14bn and US$6.37bn worth of qualifying deals over the past month.

The tables are intended to provide a snapshot of who the major players are in the securitisation business on either side of the Atlantic as the markets start out on the long road to recovery. The aim is to identify the most active firms - whether as lead arranger or co-manager - rather than to calculate the size of the market, so there is a significant element of double-counting in the numbers shown.

The tables cover primary market transactions for ABS, CMBS, RMBS and CDOs/CLOs. Qualifying deals are full primary securitisations that were publicly marketed and sold to third-party investors; i.e. were not privately placed or issuer/arranger retained or re-issues or re-securitisations.

SCI publishes its league tables on a monthly basis. The numbers are based on the SCI deal database and are, where possible, corroborated with the firms involved.

Please click here for the year-to-date tables to end of October 2010.

CDO

Loan extensions reduce CRE CDO delinquencies

The increased incidence of loan extensions has helped precipitate a slight drop in US CRE CDO delinquencies, according to Fitch's latest indices for the sector.

"Many new loan extensions are short-term remedies designed to allow added time for further negotiation of pending loan modifications," says Fitch director Stacey McGovern.

CRE CDO delinquencies fell slightly to 12.8% last month from 12.9% in September. Total loan extensions in October were reported at 58 in the month, which is significantly higher than the 2010 monthly average of 37 extensions, the agency reports. Meanwhile, asset managers reported approximately US$98m in realised losses from the disposal of distressed assets in October.

"The risk still remains for realised losses to increase if real estate trends backpedal, though they have been in a relative holding pattern for the last few months," adds McGovern. Total realised losses across the CRE CDO universe total over US$1.7bn - approximately 7.6% of the collateral balance, the agency concludes.

CDS

Succession event pending

ISDA's Americas Determinations Committee is mulling whether a succession event occurred with respect to Coca Cola Enterprises Inc (CCE). Coca Cola Co completed on 2 October its acquisition of the North American operations of CCE, pursuant to the terms of a business separation and merger agreement.

CDS

Modest rise in OTC derivatives volumes

The BIS reports in the second part of the Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity that positions in the OTC derivatives market rose for the first time in three years to US$583trn, although at a slower pace than the previous period of 2004 to 2007. The modest overall increase is the result of a surge in positions until June 2008, followed by a decline in the wake of the financial crisis, the Bank says.

Growth in gross market values increased more than notional amounts outstanding, rising by 122% to US$25trn at the end of June 2010. This compares to a growth of 74% during the previous 2004-2007 period.

The modest overall growth in notional amounts outstanding hides significant variations across risk categories. The highest growth - of 25% - was recorded in the interest rate segment, bringing the share of this risk category in the market to a total of 82%.

Positions in foreign exchange derivatives went up by 9%. By contrast, amounts outstanding of the other OTC segments declined substantially, ranging from 30% and 40% to 60%.

Sharp movements in asset prices, related to a reassessment of risks during the financial crisis, drove up gross market values of foreign exchange, credit and interest rate derivatives. However, gross market values of equity and commodity contracts have declined.

Meanwhile, data from the BIS semiannual survey shows that positions of all types of OTC derivatives fell by 4% to US$583trn, following the 2% increase in the second half of 2009. The decline occurred against the backdrop of deteriorating market sentiment related to the European sovereign debt crisis, the Bank says. In contrast to this decline, gross market values for existing OTC contracts rose by 15% to US$25trn at end-June.

Finally, the notional amounts outstanding of CDS declined for the fifth consecutive semiannual period, largely due to terminations of existing contracts. Gross market values for single-name contracts dropped by 16%, while those for multi-name contracts rose by 10%.

The latest semiannual survey introduces additional information on the importance of central counterparties in the CDS market. At end-June 2010, about 11% of CDS positions were vis-à-vis a CCP.

The CDS counterparty breakdown for contracts with other financial institutions has also been expanded. CDS contracts with hedge funds and SPVs account for about 5% and 4% respectively of total notional amounts outstanding with other financial institutions.

CDS

Chinese CDS pricing service unveiled

Bloomberg has launched a new service that delivers daily reference prices for the Chinese Renminbi credit derivatives market. The service aims to reduce risk and increase transparency, while providing accurate pricing for risk assessments, the firm says.

The credit risk mitigation instrument fixing (CRMC) tool provides current market information on CNY credit risk mitigation instrument fixing, as well as individual bank's credit risk mitigation instrument data. CRMC functions as a reference price calculated from prices quoted on a particular tenor and credit rating from twelve of the largest dealers in China. Their prices are averaged after removing the highest and lowest quotes.

CDS

Electronic execution offered for CDS indices

Credit Suisse is to provide electronic trading of CDS indices for clients from any Bloomberg terminal. The service will launch with access to European indices initially, followed by US indices.

Historically, clients had been able to electronically view CDS price levels from a number of dealers, yet it was then necessary to place a phone call or exchange a series of messages in order to execute a trade. Now, Credit Suisse will publish live prices that clients can simply click to launch a trade request.

"Credit Suisse's leadership in establishing an electronic market for CDS is another example of our commitment to electronic trading across fixed income," says Tim O'Hara, head of fixed income for North America and head of global credit products. "We see this as both the logical next step for CDS and an opportunity to offer our clients an efficient and intelligent new way to trade with Credit Suisse."

CLOs

US CLO concentrations trend higher

The concentrations of corporate obligors in US cashflow CLOs rose slightly between the second and third quarters of 2010, according to S&P's latest CLO Exposure Report.

"The top 100 corporate names accounted for 37% of the total balance of cashflow CLO collateral in the third quarter, up marginally from 36% in the second quarter," says S&P analyst Ramki Muthukrishnan. "The concentration of the top 250 obligors also saw a small, but slightly more significant increase, rising to 57% of the total CLO collateral balance from 55% in the second quarter."

The corporate name with the highest dollar-weighted exposure among US CLOs continues to be Texas Competitive Electric Holdings, which has held the top spot since the first quarter of 2009, the agency says. The most widely held corporate obligor by reference count is HCA, which appears in 526 US CLOs.

Over 63% of the corporate names in the CLOs reviewed were rated in the single-B rating category. Among the top 10 obligors on a dollar-weighted basis, only one entity has an investment grade rating; the remaining were all speculative-grade. Meanwhile, the number of distressed obligors among the top 100 names continued to trend down in the third quarter, possibly because managers traded out of such names, S&P notes.

Business equipment and services continued to represent the largest sector concentration in the third quarter, with US$30.7bn in corporate names among US CLOs, while health care took the second spot at over US$26.6bn. The publishing sector remained a distant third, with approximately US$14.5bn in outstanding loans.

CLOs

Indian MFI CLO risks analysed

Fitch has issued a report highlighting risks in Indian microfinance securitisations, providing an insight into the key risk factors in these transactions. In the absence of suitable mitigants to such risks, these deals are unlikely to receive the highest long- or short-term ratings, the agency says.

Deep Mukherjee, Fitch director of structured finance, explains: "The intricate servicing arrangements, coupled with a lack of institutional back-up collection mechanisms, make the rating of microfinance securitisations inextricably linked to that of the originator/servicer."

The rapid growth of the microfinance institution (MFI) industry and its ability to affect the lives of a vast number of people have increasingly drawn the scrutiny of the Indian regulators, according to the rating agency. "While Fitch cannot anticipate regulatory change, the current uncertainly surrounding the regulatory environment would make it difficult to assign triple-A ratings to microfinance securitisations," adds Sandeep Singh, senior director of structured finance at Fitch.

Fitch says it expects the MFI market, particularly the securitisation market, to mature over the long term with the creation of systems and structures enabling the market to grow in a sustainable manner. Anticipated developments include the use of centralised credit bureaus to deal with cross-indebtedness, the growth of third-party servicing platforms and regulatory changes.

CMBS

Administration for Windermere CMBS loan

Hatfield Philips has moved the £172m remaining AMG portfolio loan into administration, following the failure to agree on an acceptable restructuring of the loan with the borrower. The loan - part of the Windermere VIII CMBS - matured in April 2010.

Since then, Hatfield says it had been striving to find a consensual way forward with the borrowers. Following a comprehensive due diligence process, it issued a proposal to the borrowers which allowed continued ownership in exchange for partial pay-down and a deleveraging of the lenders' positions.

Philip Byun, vp at the firm, says the goal is to maximise the recoveries for all lenders. In cooperation with its advisor and joint administrator, Hatfield will now be implementing its strategy, which will include driving substantial business plans for the five buildings and exploring the prevailing strong interest in these assets with third parties.

CMBS

Adverse selection for Euro CMBS

Fitch reports that despite low repayment rates on maturing loans, the lack of new issuance means that the number of loans securitised in European CMBS is shrinking. Excluding granular transactions, the agency says, the number of loans in the Fitch-rated CMBS universe fell to 701 from 740 during 3Q10.

Fitch European CMBS director Gioia Dominedo says: "As loans reach their maturity dates, it is natural that those with the lowest loan-to-value ratios are more likely to repay, increasing the weighted-average LTV on the remaining portfolio. Similarly, low LTV loans are also more likely to prepay, especially if they are secured by high-quality collateral, taking advantage of the limited debt financing that is currently available."

The WA Fitch LTV for European CMBS loans increased to 98% from 96% over the past quarter. This, the agency says, is due to a combination of redemptions of low LTV loans and further value falls for poor-quality collateral.

"Fitch expects this adverse selection to continue in coming quarters," says Dominedo. "The lower quality of the remaining collateral will put further pressure on performance, especially where redemption proceeds continue to be allocated on a modified or fully pro rata basis."

Performance measures for European CMBS loans continued to deteriorate during 3Q10, with the number of watch-listed, specially serviced and defaulted loans all increasing. Overall, the number of loans without reported performance problems decreased to 72.6% from 77.6% of the portfolio, Fitch notes.

Loan maturities remain the key challenge, as many borrowers are still unable to repay their outstanding loan balance when due. At end-3Q, 58.8% of loans that had passed their scheduled maturity dates were unredeemed. With the proportion increasing slightly to 60.4% by the end of October, the agency says it expects this trend to persist in coming quarters.

CMBS

Rise reported in US CMBS delinquency rates

The delinquency rate on loans included in US CMBS increased by 15bp in October to 8.39%, according to Moody's Delinquency Tracker (DQT). The increase was almost the same as the 14bp increase in September and the fifth consecutive month of modest growth in the rate.

In October, 282 loans totalling US$3.45bn became newly delinquent, while 211 previously delinquent loans totalling $2.82bn became current, worked out or disposed. The total number of delinquent loans increased in October to 4,042, with the total balance increasing by approximately US$627m to US$52.7bn.

"The increased pace of loans leaving delinquency has helped moderate the delinquency rate, but the potential for monthly spikes continues to exist due to the large number of troubled CMBS loans on the watch-list and in special servicing," says Moody's md Nick Levidy.

By property type, hospitality properties had the greatest increase in delinquency rate in October, gaining 45bp to 16.39% - the highest of the five core property types. At 35bp, multifamily experienced the next highest gain with 13.77%. Retail saw the greatest net overall increase in total delinquency balance, with $427m, increasing its rate by 27bp during the month to 6.87%.

Regionally, it was only the Midwest that decreased its rate, remaining at 8.63%. Meanwhile, the West saw the largest increase, gaining 29bp during the month to end at 9.36%. The East posted the second largest increase, rising by 20bp to 6.59% - the lowest rate among the four regions - while the South, the worst performing region, rose by 5bp increasing to 10.19%.

By State, Nevada continues to have the largest delinquency rate, with another rise of 97bp in October to 27.12%. Michigan, the second worst performing state, has a delinquency rate of 14.88%.

CMBS

US CMBS loss severities increase

The current historical weighted average loss severity for all loans backing US CMBS that are liquidated at a loss increased in the third quarter, to 38.4% from 35% the previous quarter, according to Moody's. Excluding loans with de minimus losses, the historical weighted average loss severity increased to 51%, up from 49% a quarter ago.

Loss severities in the third quarter were significantly higher than the historical average, as an additional 498 loans were liquidated for a loss at a weighted average loss severity of 52.6%, Moody's notes. For the remainder of 2010 and into 2011, the agency expects continued increases in the share of CMBS loans that are delinquent and/or in special servicing.

"Where we are in the real estate cycle can impact the probability that a loan will default and its loss severity," says Moody's vp Keith Banhazl. "After commercial real estate markets bottom out and valuations begin to slope upwards, loan defaults should taper off and for those defaulted loans smaller severities of loss can be anticipated."

The agency notes that current loss severities vary widely by the vintage of the loan and range from a low of 29.6% for 2000 to a high of 61% for 2006. Moody's anticipates that the cumulative loss severity rate will continue to rise as more loans from the troubled 2006-2008 vintages are liquidated at relatively higher loss severities.

"For loans from these vintages, lax underwriting standards, the absence of amortisation and other loan structural features, historically low capitalisation rates, reduced market liquidity and the general economic downturn will likely fuel higher loss severities," says Banhazl. "Severities will continue to be higher for these later vintages, but should average around 30% for earlier vintages."

Loans backed by healthcare properties have the highest weighted average loss severity at 61%, while loans backed by office properties have the lowest average loss severity at 35%. Meanwhile, the Dallas-Fort Worth-Arlington metropolitan statistical area maintained its status with the largest amount of liquidated loans by balance and loss amount, with a weighted average loss severity of 42% up from 41% last quarter.

CMBS

Resecuritisation rating approach updated

S&P is to incorporate its opinion of the interest payment at the applicable rating level, in addition to considering full principal payment in its ratings of resecuritisations.

For transactions for which the agency has received a request to rate but has not issued a rating, its rating analysis will assess whether the securityholders will receive interest and principal payments consistent with the applicable rating levels. For transactions that it has rated previously, S&P will review the performance of the underlying mortgage collateral, as well as the interest priority payment waterfall. It will then provide an update to the market, including any revisions to outstanding ratings as appropriate.

Insurance-linked securities

Second 2010 Res Re on the blocks

The second series of notes under United Services Automobile Association's Residential Re 2010 catastrophe bond programme have begun marketing. S&P has assigned its preliminary double-B rating to the class 1, series 2010-II notes.

The agency explains: "This preliminary rating is the same as the final rating we assigned to the company's class 1 series 2010-I notes because both have the same risk profile." The 2010-I class 1s were a three-year tranche with probabilities of attachment and expected loss of 1.09% and 0.76% respectively.

Residential Re 2010-I covers losses due to:

• Hurricanes in the District of Columbia and the following states: Alabama, Arkansas, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Mississippi, Missouri, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Vermont, Virginia and West Virginia.
• Earthquakes in all 50 states and the District of Columbia, though losses arising out of property damage caused by fire following will not be covered in Hawaii or Alaska.
• Severe thunderstorm and winter storm in the 48 contiguous states and the District of Columbia.
• Wildfire in California only.

Residential Re 2010-I priced on 25 May. The transaction was at one point targeting a total size of U$500m split over one unrated and three rated tranches, but came in at US$405m.

Regulation

AFME warns on Basel phased implementation

The Association for Financial Markets in Europe (AFME) says it welcomes the G20's decision to take forward the Basel Committee's recommendations, but warns that many unanswered questions remain.

In particular, a phased implementation for some aspects of Basel will be a significant challenge, both for the industry and regulators. AFME notes it is therefore crucial that the Committee address as quickly as possible the many outstanding questions that remain, on detail and aspects of timing, so that the financial services industry can begin to make preparations for the new regime.

"The phased implementation will help, but we would also like to see a schedule of periodic reviews to ensure that implementation is consistent across all jurisdictions and that that impact reviews are published. This will help to ensure that the new standards can be adjusted quickly to address any unintended consequences," it says.

The Association welcomes the G20's commitment to ensuring that the new financial regulatory framework is complemented with a more effective supervisory regime. It believes that enhanced supervision - under which supervisors have clear mandates, the independence to act and the appropriate tools and resources - is one of the cornerstones of a robust financial system.

Indeed, AFME believes that with such a regime in place to address the financial stability risks that are of concern to the G20, it should be unnecessary to designate certain firms as being globally or nationally 'systemically important' in order to impose on them further regulatory requirements, in addition to more intensive supervisory oversight. "However, given the G20's decision to do so, we call on the relevant bodies charged with bringing forward proposals in this area to guard against the potential unintended outcomes of this policy, in terms of the impact on the wider economy, and the barriers to entry it might create," it adds.

The Association points out that, as recognised by the Basel Committee, identifying systemically important financial institutions (SIFIS) is not an easy task and invites moral hazard issues. "We also note that the G20 has given national regulators the capacity to require supplementary prudential and other requirements on SIFIs and urge individual regulators to commit to taking a proportionate approach."

RMBS

REIT closes private RMBS

Walter Investment Management has privately placed US$135m RMBS notes issued by Mid-State Capital Trust 2010-1. The deal is backed by US residential mortgage loans, building and instalment sale contracts, promissory notes, related mortgages and other security agreements.

The US$56m class A notes priced at 350bp over Libor, while the US$78m class M notes came at 525bp over. Both notes are expected to mature in December 2045.

The purpose of the offering, the firm says, is to raise capital to fund its proposed growth objectives.

RMBS

Ambac regulator's actions challenged

The RMBS Policyholders Group has issued a statement saying that the bankruptcy filings of Ambac Financial Group (AFG) demonstrate clearly that the Wisconsin Office of the Commissioner of Insurance (OCI) failed in its statutory duty to protect policyholders of Ambac Assurance Corporation and "actively participated in an arrangement that will divert billions of dollars of tax attributes from the insurance company that it is charged with regulating".

According to the Policyholders Group, the bankruptcy filings reveal that OCI is endorsing a term sheet that allows AFG to retain its equity ownership in Ambac Assurance, while simultaneously proposing a plan of rehabilitation in Wisconsin that impairs claims of policyholders, running afoul of the absolute priority rule. Moreover, the term sheet that the OCI endorses proposes to give to AFG billions of dollars of Ambac's net operating losses (NOLs) and requires Ambac Assurance to compensate AFG for the use of any NOL, even though that asset rightfully belongs to it.

"The Group is dismayed to discover that not only has the OCI failed in its statutory obligation to protect policyholders, but arranged behind closed doors with AFG, its management and creditors to strip policyholders of valuable assets," it says. The Group adds that it will challenge the OCI's actions.

The Group's objections, which were filed on 8 November, and those filed by other Ambac policyholders are expected to be heard by the Wisconsin Circuit Court in a hearing scheduled to begin on 15 November 2010.

RMBS

Portuguese downgrades raise counterparty flag

Fitch says that the recent downgrades of several Portuguese banks will have an impact on two Portuguese RMBS, but is unlikely to affect 12 other RMBS and three Fitch-rated Portuguese SME CLOs. The affected banks are Banco BPI, Banco Espirito Santo, Millenium BCP and Banif.

At present, Banco BPI and Banco Espirito Santo perform several counterparty roles, including hedging counterparties, in Douro 3 and Lusitano 6 respectively. Following the rating actions taken on these banks, the entities no longer meet the definition of eligible counterparties as outlined in Fitch's counterparty criteria for structured finance transactions.

The senior ratings of these transactions are therefore likely to be capped at the hedging counterparties' ratings, unless the issuers take some form of remedial action. Potential remedial actions could include: posting collateral with an eligible counterparty, finding a replacement or an unconditional and irrevocable guarantee from an appropriately rated counterparty.

Currently, Banco BPI, Banco Espirito Santo, Millenium BCP and Banif act as collection account bank and servicer in 15 RMBS and three SME CLOs transactions. Under Portuguese securitisation law, proceeds collected from borrowers will not form part of the servicer's insolvency estate.

However, Fitch will assess the increased risk to the transactions of a liquidity stress and payment disruption. The agency does not expect there to be any rating implications, as this risk is typically mitigated by the transfer of collections into a transaction account held with an entity which holds at least an A/F1 rating on the next business day.

Fitch will nonetheless assess liquidity and hedging risks on a transaction-by-transaction basis. Depending on the action taken by issuers, it may take rating actions.

RMBS

Mortgage warehouse established

Annaly Capital Management has established Shannon Funding to provide warehouse financing to residential mortgage originators in the US. Shannon, which will operate out of offices in Bellevue, Washington, plans to begin operations in the first quarter of 2011.

Shannon will be led by Bruce Watterson, who has over 25 years of industry experience. He was the founder of Watterson-Prime, which provided due diligence and portfolio stratification for financial residential and commercial mortgage assets.

Michael Farrell, Annaly ceo, says: "Shannon plans to provide funding to smaller participants in order to help them generate well-underwritten mortgage product. As opportunities present themselves in the future, Shannon will expand its strategy and operations into additional markets."

RMBS

US subprime prices hold steady

Fitch reports that US subprime prices held steady for the fourth month in a row, with two underperforming vintages showing signs of a rebound. While the agency's US Subprime RMBS Total Market Price Index stood at 9.82 at the end of October, a closer look reveals that the recent 2006 and 2007 vintages have evened out, following significant price declines in August.

"Positive movement in the 2006 and 2007 vintages in recent months may be reflecting some market optimism," says Fitch senior director Alexander Reyngold. "There were also slight price increases for the 2005 vintage, though they were offset by a 4.6% drop on the 2004 vintage."

Loan level analysis reveals prepayment rates continuing to slow, with 12-month constant payment rates dropping across vintages. 30-day delinquencies rose slightly, Fitch says, while the more serious 60-day delinquency rate rose appreciably on the 2006 vintage and 90-day delinquency rates continuing to drop.

"Recent foreclosure-related activity may have inlays to delinquency and default rates over time, though it is still too early to tell," Reyngold concludes.

RMBS

US RMBS foreclosure risks examined

Moody's has released a report that examines four foreclosure-related risks that currently pose a threat to US RMBS.

First is the issue of missing and defective documents in foreclosures, which presents the most serious risk to RMBS, according to the agency. "We expect the issue of missing and defective documents to arise frequently in foreclosures," says Yehudah Forster, Moody's vp and analyst. "The impact should be medium because most, but not all, issues will be curable and will lead to delays rather than the servicers being unable to foreclose."

Second, the agency reports that 'robosigning' - the most publicised foreclosure controversy - presents a low to medium risk. Although most major RMBS servicers apparently 'robosigned' documents at various times, the practice ultimately should only have a limited impact on RMBS, says Moody's. Robosigning should only affect the loans currently in foreclosure and real estate owned by the RMBS trusts.

Third, challenges to MERS - the electronic platform designed to track secondary market mortgage loan transfers - have been assigned a low risk by the agency. This is due to the ability of MERS to assign a mortgage to the RMBS trust, which through the servicer may then foreclose.

Finally, the report examines the validity of RMBS trusts' REMIC tax-exempt status, which Moody's believes poses an extremely low risk. Most RMBS deals achieved favourable tax treatment by qualifying as Real Estate Mortgage Investment Conduits. The REMIC rules exempt a qualifying trust from the obligation to pay federal and state income taxes on the net income realised by the mortgages it owns.

RMBS

US RMBS reviewed on tail risk

Fitch has placed 1,810 tranches of US RMBS on rating watch negative in response to concerns that small pools in the sector are becoming an increased risk.

"Most existing RMBS transactions are not structured to protect against the potential for increased performance volatility as the pool size declines," says Fitch md Grant Bailey.

Fitch says it will raise credit enhancement rating thresholds and incorporate rating ceilings on outstanding RMBS, in particular transactions that are collateralised with a small number of remaining mortgages, to protect against tail-risk. For transactions without sufficient structural features to protect against tail-risk, the agency says it will generally cap its existing RMBS credit ratings at single-A for bonds collateralised with approximately 100 remaining loans or less. Additionally, it will generally withdraw ratings on bonds collateralised with approximately 50 remaining loans or less.

When analysing new transactions, Fitch says it will consider multiple factors in its assessment of the potential tail risk posed to bondholders. Fitch md Rui Pereira says: "Key determinants would include the diversity of the mortgage pool and the presence of any structural features, such as a credit support floor, that could help to mitigate such risk."

The credit support floor was seen in the recent Sequoia Mortgage Trust 2010-H1 transaction. Other possible structural mitigants may include a feature that converts class principal distribution from pro-rata to sequential once the pool balance declines below a pre-determined threshold.

RMBS

ASF underlines legality of mortgage transfers

The American Securitization Forum (ASF) has issued a White Paper to clarify the legal principles and processes underpinning the assignment and transfer of home mortgages and the creation of MBS.

"As our study highlights, the principles and processes involved in securitisation result in valid and enforceable transfer of ownership of mortgage notes and underlying mortgages," says Tom Deutsch, ASF executive director. "Further, the transfer and legal effectiveness of such ownership is not diminished by the fact that the right to foreclose may be subject to additional conditions and requirements of a particular mortgage."

Two documents lie at the heart of most residential mortgage transactions: the 'mortgage note', in which a borrower promises to repay the loan plus interest; and the 'mortgage', which is held as security. Most mortgage notes are considered negotiable and may be sold and transferred multiple times under provisions of the Uniform Commercial Code (UCC), the ASF says.

Under the UCC, the assignment and transfer of ownership of a mortgage note is most commonly effected by endorsing the note. Under this mechanism, the securitisation process provides a valid transfer of mortgage notes to trustees.

"The longstanding and consistently applied rule in the US is that 'the mortgage follows the note'," adds Deutsch. "When a mortgage note is transferred in connection with a securitisation, ownership of the mortgage automatically follows and is transferred to the mortgage note transferee."

In some transactions, the mortgage originator names mortgage electronic registration systems (MERS) as its nominee and record keeper. The use of MERS has been challenged, however, on the grounds that it does not have the authority to foreclose on a mortgage. Courts in a number of jurisdictions have found the assignment and transfer of mortgages to MERS does not adversely impact the ability to foreclose on a mortgage, the Association notes.