Contents

RMBS

Less dysfunctional

RMBS market infrastructure issues remain

Market participants agree that, in the near term at least, European ABS volumes will largely be driven by growth in the mortgage market. However, while the RMBS sector is undoubtedly more functional than it was a year ago, a number of issues remain.

Rob Ford, partner and portfolio manager at TwentyFour Asset Management, indicates that mismatches still remain between pricing, value, demand and investor depth. "The European RMBS market is certainly more functional than it was a year ago, but it isn't quite there yet," he comments. "For example, the major UK prime master trust issuers can't really bring junior notes to the primary markets yet because it just isn't economical. We're still suffering from a significant imbalance between the potential supply and the reality of demand."

One ABS investor concurs that the market is only really open for triple-A rated paper. He points out that issuers typically end up retaining 20% of a transaction, yet the economics don't make sense.

"The assets are generally money-good, but the cost of funding is high because issuers don't get capital relief," the investor explains.

RMBS is the obvious asset class to tap from an issuer's perspective, according to the investor, because the assets are unencumbered and many issuance programmes are already set up. However, he warns that investors will eventually become full up on Lloyds TSB and Santander paper, so will need other names to diversify across.

Estimates suggest that the European RMBS investor base is currently split between 40% banks, 40% asset managers and 20% insurance company or fast money accounts. "There are only between 20-30 active players in Europe and a handful are very large and dominate the market," the investor adds. "There has been increased demand from US accounts due to the spread differential between European and US yields, which are around 150bp over compared to 40bp over. But the market needs insurance companies and real money investors to return."

Shamez Alibhai, partner at Cheyne Capital Management, notes that prices have increased dramatically and quickly - which is surprising, given the thin investor base. He agrees that the market hasn't experienced a normal correction due to the small cartel of buyers dominating the market.

"Hedge fund ABS investors have consequently been shut out because the returns don't make sense at present. The market is a long way from recovering," Alibhai suggests.

Current European issuance largely consists of RMBS and auto ABS. "Everyone understands these assets and the premise of 'keeping it simple' when rebuilding a market is true. While I don't see why private CLOs can't be done, for example, building confidence in assets that are harder to understand is tough," Ford observes.

He expects growth to be driven by the mortgage sector, but says the question is whether this will diversify from the major high street banks. "The major UK and Dutch banks have all issued RMBS recently, while Kensington is the only independent house to have tapped the market. Until we see increased confidence in mortgage lending, we're unlikely to see any growth in warehouse lending, aiding confidence in the broader market."

Nevertheless, one aspect that could help from an investor's perspective is greater provision of information. "Ultimately, pre-crisis investors bought everything, so issuers weren't under pressure to change. But issuers that want to get deals done in the new environment will need to be forthcoming with information and documentation. We saw this with non-conforming issuers pre-2007," Ford concludes.

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ABS

Euro ABS holds on

The European primary ABS market is holding on for increased new issuance - which traders hope will roll in with the New Year. At the same time, the secondary market is eagerly awaiting news on a restructuring.

"We're currently watching and waiting on the Turbo Finance new issue," one ABS trader says. The UK auto ABS is currently being marketed by UBS and BNPP. "It's roadshowing to investors, but it's unclear when it's expected to price - it's all up in the air. It will be interesting to see what will happen, but it could stretch to next year."

With new issuance taking a back seat over the last month, the trader expresses his disappointment at the lack of new developments in the market. "We expected Barclays to come up a UK prime RMBS before the end of the year, which we thought would happen before resuming further notes in the master trust series - although this may still resurface this year. We're also hoping for a fixed rate senior tranche to be proposed ¬- it would be interesting for the sterling investor base."

Further, with the recent Lloyds Penarth Master Issuer Series 2010-2 deal being retained, the trader questions whether credit card issuance - as an asset class on the whole - is also shrinking. He notes that with conditions faring better in dollars, investors are no longer benefitting from sterling issuance.

He continues: "I'm not sure whether UK credit card master trusts will keep the asset class alive, as I don't believe that there's the liquidity for investors to stay. We would really like, and need to see, more new issuance on that front."

However, the trader is confident that the RMBS market will continue to flourish, with different types of investor bases being tapped - in particular in Yen, sterling, dollars and euros. "I'm confident that there is appetite for that type of paper," he adds.

His confidence doesn't extend to primary CMBS, however, in which he says there is much room for improvement. "Everyone is thinking about the refinancing that will have to happen. Until you see payment being taken through the system - especially by banks - I don't think there will be new issuance coming, unless of course it's credit-linked deals or Tesco bonds. For more traditional CMBS, I think we might have to wait a while."

In the secondary market, the trader says that the main focus is on the Punch A & B securitisations, which are currently distressed and being restructured. "We're watching this very carefully, but it could develop further in the New Year - again it's a wait-and-see situation."

He also points to an encouraging turn for secondary CMBS. "We were really pleased that the Trafford Centre securitisation assets were sold, as it generates support for UK retail. It's good to see premium assets being sold outside of London; it's reassuring for us."

LB

CLOs

US CLO market rushing 'through narrow gates'

A sudden rush of bid-list activity emerged in the US CLO market this week. However, despite the Plymouth Rock deal pricing with the tightest spreads of the year, investors are still holding out for 2011.

"There has been an influx of bid-lists and a sudden flurry of activity before year-end," one CLO trader confirms. Nine bid-lists are due to launch in the next three days, including the widely anticipated Orion SIV liquidation, scheduled for tomorrow (Wednesday).

The trader continues: "People are rushing through the narrow gates to try and launch their bid-lists. The prices continue to be vibrant and there seems to be reasonable demand, even though we're nearing year-end."

However, he adds that although supply is booming and demand is reasonable, investors remain poised and selective. "Sideline buyers are picking away at these lists and selectively throwing bids in. The stream bid is still robust and so these lists are being doubled up - there seems to be no stopping the 'freight train affect' barrelling down and picking up steam."

Elsewhere in the market, the US$297.8m class A tranche of the Plymouth Rock CLO priced at 150bp over Libor - the tightest spread of 2010 (see also separate News story). This, the trader says, reflects the urgent desire of investors to put money to work.

"This class A tranche is a sign of the times: steady, conservative money is coming back in; this coupon is a real eye-opener. It also confirms, of course, that the triple-A buyer base isn't an area where there are problems," he adds.

However, some end-of-year reticence was evident even for this opportunity. "I know triple-A buyers that own multiple billion dollars worth of CLO paper. They said that if a deal came and priced in December, they would probably wait until January anyway. They do have money - there's no shortage there, but they're prepared to wait a little longer," the trader concludes.

LB

ABS

Restructured ARS tipped for relative value

Restructured auction-rate and reset-rate securities could become a new source of supply in the student loan ABS sector next year, according to ABS analysts at Bank of America Merrill Lynch.

Trading of auction-rate securities (ARS) in the secondary market has historically been limited by low prices and the lack of investor depth. Consequently, a number of ARS have recently been restructured to become Libor-based student loan ABS. This process involves the sponsor purchasing its ARS, retiring the notes, transferring a pro-rata share of the underlying loans to a new trust and issuing a new ABS.

The resulting ABS tend to trade at a concession of around 30bp-35bp to benchmark student loan ABS. "We believe the sector can offer value, especially as the available supply of FFELP student loans continues to dwindle and the underlying loans tend to be more seasoned," the BAML analysts suggest. "Most of the concession is related to liquidity rather than credit, as the underlying loans have been originated under FFELP. The less liquid nature is the result of the relatively small programmes and servicing platforms of the state agencies and not-for-profit entities, with the exception of PHEAA."

An alternative way of gaining exposure to the student loan market is by purchasing failed ARS. The analysts indicate that FFELP ARS issued by discrete trusts tend to trade at a concession of around 20bp-30bp to comparable Libor-based notes, due to liquidity and structural complexities.

The student loan ARS market totalled about US$75bn outstanding before the auctions began to fail; an estimated US$65bn remains outstanding. The analysts note that although student loan ARS have seen a relatively high degree of ratings volatility, much of it has ended for the FFELP ABS sector, as the rating agencies appear to have fully revised their basis risk and failed auction and reset rate assumptions.

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CLOs

Morningside, Plymouth CLOs price

Two new US CLOs priced last week via Bank of America - GSO's US$400m Morningside Park CLO and PineBridge Investments' US$480.4m static Plymouth Rock CLO. This brings 2010's new issue CLO total to 11 deals for over US$4bn.

Morningside Park comprises US$265m triple-A rated notes (that priced at 160bp over Libor), US$22m double-As (230bp), US$38m single-As (330bp), US$17m triple-Bs (530bp), US$4m double-Bs (600bp) and US$54m unrated sub notes. Plymouth Rock comprises US$297.8m triple-A rated notes (that priced at 150bp over Libor, the tightest level seen this year), US$91.28m triple-Bs (300bp) and US$91.28m unrated sub notes.

New issue CLO triple-A levels are now firmly in the 150bp-175bp range. However, Wells Fargo CLO analysts note that spreads still vary greatly based on collateral mix, call protection and how much of the portfolio is ramped at closing.

"The 2010 CLOs consist of refinancings, financing trades, middle-market deals and broadly syndicated loan arbitrage CLOs," they observe. "While many of the 2010 CLOs represented special situations, some of the autumn CLOs are closer to the traditional new issue arbitrage deals that loan market players await. All of these deals are the product of significant investor input and typically were either small, club-type transactions or required the manager to bring equity investors."

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Insurance-linked securities

Successor X offers third series

Swiss Re's Successor X catastrophe bond programme is to offer its third series of notes. S&P has assigned preliminary ratings of single-B minus to the series 2011-1 class III-R3 and III-S3 notes, which reference will be exposed to major North Atlantic hurricane risk in selected states within the US and Puerto Rico, and major earthquake risk in California and Australia between December 2010 and December 2013.

EQECAT (EQE), as the event calculation agent, will calculate an index value following a qualifying event. The index value for the earthquake peril will be based on actual location and one-second spectral accelerations, provided by the US Geological Survey (USGS) to determine the sum of weighted shock and fire-following index values for both residential and commercial properties.

For the Australia earthquake peril, the index value will be based on earthquake magnitude, depth and location reported by Geoscience Australia (GA). The index value for US hurricane peril will be based on actual wind track data, provided by the US National Oceanic and Atmospheric Administration (NOAA).

The class III-R3 notes will cover hurricanes above an index value of 694.5 on a per-occurrence basis, up to an index value of 829.0. The notes will cover California earthquake above an index value of 660.5 on a per-occurrence basis, up to an index value of 838.7. The notes will also cover Australia earthquake above an index value of 653.5 on a per-occurrence basis, up to an index value of 1,182.

The class III-S3 notes will cover hurricanes above an index value of 580 on a per-occurrence basis, up to an index value of 694.5. The notes will cover California earthquake above an index value of 660.5 on a per-occurrence basis, up to an index value of 838.7. The notes will also cover Australia earthquake above an index value of 653.5 on a per-occurrence basis, up to an index value of 1,182.

Swiss Re can choose to reset the attachment and exhaustion points annually by sending EQE an updated data notice. The reset will become effective 15 days after the reset calculation date, which is 30 days after EQE receives this notice.

The transaction's collateral will be invested in S&P-rated triple-A notes issued by the International Bank for Reconstruction and Development. The Successor X 2011-1 notes pay interest quarterly in arrears at a rate equal to the return on the IBRD notes - expected to be six-month Libor minus 32bp - plus a class-specific interest spread.

MP

Insurance-linked securities

Swiss Re brings longevity ILS

Swiss Re Capital Markets is marketing a new longevity-related 'catastrophe bond'. The as yet unsized Kortis Capital's single tranche maturing in January 2017 has been assigned a preliminary double-B plus rating by S&P.

Swiss Re, as the cedant, and SPC Kortis Capital will enter into an ISDA-based counterparty contract under which Swiss Re will make payments in exchange for protection against a greater-than-expected change in the differential between the mortality improvement of older UK (England and Wales) males, aged 75-85 inclusive, and younger US males, aged 55-65 inclusive. The risk period is eight years from 1 January 2009 to 31 December 2016.

The protection will be based upon mortality results derived from pre-agreed mechanics. The trigger will be based on the difference between the UK index (annualised mortality improvement in the UK age group) and the US index (annualised mortality improvement in the US age group) over eight years of mortality improvements. The indices will be based on publicly available general population mortality data from the ONS for the UK index (England & Wales only) and the CDC for the US index.

Kortis Capital will issue 2010-1 class E floating-rate notes to investors for the notional amount of the applicable counterparty contract. The amount drawn from the programme will be invested in triple-A rated notes issued by the International Bank for Reconstruction and Development.

Coupons will be paid from the Swiss Re payments received and investment earnings on the collateral. If the longevity divergence index value of the measurement period (i.e., the entire risk period of eight years) exceeds the specified trigger level, collateral will be sold or put back to the IBRD at par to make payment to Swiss Re under the counterparty contract, and the principal of the notes will be reduced accordingly.

S&P observes: "Higher-than-expected mortality in the US age-group, relative to the UK age-group, could reduce future return of principal under the notes. For the notes to incur a loss, the Longevity Divergence Index Value would have to exceed 3.4% over the risk period. This means that the annualised improvement in mortality for the UK age-group would have to be at least 3.4% greater than the annualised mortality improvement for the US age-group over the risk period. The Longevity Divergence Index, as calculated by Risk Management Solutions (RMS), over equivalent eight-year risk periods over the past 70 years has shown a maximum value of about 3%."

The agency continues: "There is a risk that sustained excess mortality in the US age-group in the final years of the risk period, such as an epidemic or pandemic originating in the US, could increase the likelihood of the attachment point being reached."

MP

RMBS

Master trusts move to mitigate Eurosail impact

Moody's notes in its latest Credit Insight publication that a number of amendments have been made to UK RMBS master trusts to mitigate the potential rating impact of the Eurosail judgment (SCI passim). Most of the amendments are a variation on the theme of increasing the amount of limited recourse liabilities at the bottom of the capital structure.

"In our view, if the most junior ranking debt obligations of the issuer are subject to limited recourse, they can be disregarded as liabilities for the purpose of the balance sheet test - thereby reducing the likelihood of the issuer becoming insolvent," Moody's confirms.

As sole noteholder of the junior notes issued by the Fosse master trust, for example, Santander recently converted its claims against Fosse to limited recourse obligations. This reduced the risk of balance sheet insolvency to a level similar to the probability of default on the triple-A rated notes - though Moody's points out that since conversion to limited recourse requires noteholder consent, it may not be administratively workable for notes that are held by multiple third-party investors.

For the Langton and Silverstone master trusts, noteholders of the junior full recourse notes - Santander and Nationwide respectively - have covenanted to forgo all claims under their notes if, at any time, there should be insufficient assets to meet them. As a result, the issuers' liabilities towards the current junior noteholders have effectively become limited recourse obligations.

Meanwhile, both the Holmes and Gracechurch master trusts have increased enhancement levels by making new subordinated loan drawings (SCI passim). As the subordinated loans are junior limited recourse liabilities, they are disregarded for the purposes of the balance sheet test, Moody's observes.

Finally, the PECO option holder for the Arkle master trust has undertaken that it will exercise the PECO at the earliest opportunity and then surrender the called notes to the issuer for cancellation - thereby increasing the likelihood that the Arkle PECO will be effective at preventing balance sheet insolvency. However, the Arkle PECO will not become exercisable unless the trustee enforces its security interest. Therefore, in Moody's view, the Arkle issuers remain more susceptible to balance sheet insolvency than issuers whose notes are all subject to traditional limited recourse provisions.

The decision of the court in respect of Eurosail is the subject of an appeal to be heard in January 2011. Although the effect of PECOs on the balance sheet solvency test is not the direct subject of the appeal, it is possible that the Court of Appeal will revisit the topic.

In the meantime, Moody's says it will continue to review the rating impact of the Eurosail judgment on a case-by-case basis and assess any proposals presented by transaction arrangers to mitigate the risk of balance sheet insolvency.

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ABS

Structured finance partner recruited

SNR Denton has appointed Thomas Parachini as partner in its banking and finance department, based in London. Parachini joins from Ford Motor Credit Company, where he was managing attorney for treasury/capital markets and assistant company secretary. Prior to this, he was a member of the structured finance team at Thacher Proffitt & Wood in New York, where he represented issuers and underwriters in residential MBS transactions.

ABS

Investors push FGIC restructuring plan

Investors holding RMBS, ABS and municipal bonds guaranteed by FGIC have formed a policyholder group in the wake of the monoline's unsuccessful exchange offer, which expired on 22 October. The group intends to negotiate a restructuring plan with FGIC in the coming weeks and has formed a steering committee to lead negotiations.

The steering committee and FGIC expect to come up with a restructuring plan with the approval of all policyholders and other creditors in the coming weeks. FGIC will then submit the plan to the New York Superintendant of Insurance by the end of January. The goal of the plan is to start payments from FGIC to policyholders on their claims in cash and other considerations, rather than seeing the company liquidated.

"We are optimistic about our prospects for reaching a global resolution in short order," says James Walker from Fir Tree, a member of the steering committee. "FGIC has been receptive to our ideas and we are making good progress on our due diligence. We have also shared our plans with the NYSID. We believe it is in the interest of all parties - the company, policyholders and others - to avoid a liquidation scenario, which could result in a significant delay in the payment of claims by FGIC."

CDO

Mahogany litigation settled

Perpetual Trustee has reached an agreement with Lehman Brothers Special Financing (LBSF) to settle litigation on behalf of the more than 1,000 retail investors from Australia, New Zealand and Papua New Guinea for whom it acts as trustee in credit-linked notes issued by Mahogany Capital Limited.

Under the agreed settlement terms, which are subject to a number of conditions, Perpetual cannot disclose key financial details of the settlement for a period of approximately six months from the agreement date of 24 November 2010. But it says it will disclose financial details of the agreement and of the payment amounts to Mahogany investors once the conditions have been satisfied and the confidentiality period has expired. The firm expects Mahogany investors to receive one or more payments in late May or early June 2011.

"After thoroughly considering all options and with the relevant advice of third parties and the court, Perpetual believes the settlement agreement works in the collective best interests of Mahogany investors and will ultimately deliver concrete outcomes for them," the firm adds.

A US court hearing on the matter is scheduled for 15 December. A settlement will allow the Mahogany structure and the underlying institutional CDOs to be unwound.

Structured Credit Research & Advisory analysts note: "Perpetual has not sought formal feedback from Mahogany bondholders, but has acted unilaterally to agree a settlement with Lehman, citing Lehman's pre-condition of absolute confidentiality. The settlement will likely set a precedent for the institutional CDOs affected by Lehman's default."

CDO

Synthetic trading head named

Maxim Group has appointed Eymen Errais as md and head of structured credit sales and trading. Errais will be responsible for the development of the synthetic structured credit business, which includes trading index tranches and synthetic bespoke CDOs.

Prior to joining Maxim, Errais was a credit correlation trader at Merrill Lynch, Credit Suisse and Barclays Capital. He also founded CreditFlow Partners - a brokerage firm specialising in trading illiquid off-the-run synthetic structured products.

CDS

Hedge fund stake acquired

The Carlyle Group has agreed to purchase a 55% stake in Claren Road Asset Management - a long-short credit hedge fund with US$4.5bn in AUM - in exchange for cash, an ownership interest in Carlyle and performance-based contingent payments. Claren Road founders will reinvest substantially all of the initial cash proceeds from the transaction back into Claren Road funds.

Claren Road was established in 2005 by four former senior members of Citigroup's credit trading department - Brian Riano, John Eckerson, Sean Fahey and Albert Marino - who will continue to manage the day-to-day operations and, together with Carlyle, affect broader strategic decisions. Citigroup - which seeded Claren Road in 2006 - and the Goldman Sachs Petershill Fund, which bought a minority stake in Claren Road in 2008, will both monetise their economic interests in Claren Road as a part of this transaction.

Terms of the transaction - which is expected to close by year end - were not disclosed.

CDS

CDS pro moves into advisory

Simon Brooks, previously a credit derivatives trader for Rabobank in London, has joined Sydney-based Structured Credit Research & Advisory. His remit will be to expand the firm's fixed interest research and advisory service, as well as work on a number of expansion projects with the aim of growing the business.

Before Rabobank, Brooks was at Dresdner Kleinwort Wasserstein and Calyon, where he also assumed a project management role for numerous development initiatives.

CLOs

CypressTree sale closed

Primus Guaranty has completed the sale of CypressTree Investment Management (SCI passim) - its third-party asset management subsidiary - to Commercial Industrial Finance (CIFC). Berkshire Capital Securities acted as advisor to Primus on the sale of the CLO business.

Primus Guaranty's credit protection business - which consists of Primus Financial Products' US$11.8bn portfolio of credit default swaps - is not affected by the sale. Primus Financial Products will remain part of Primus Guaranty and will continue to be managed by Primus Financial portfolio managers.

Peter Gleysteen, CIFC's ceo, says: "Effective immediately, CypressTree's activities will be operationally integrated within CIFC's existing investment model, which we believe will benefit all investors in these funds."

CypressTree manages or subadvises approximately US$2.6bn of high yield and leveraged loan assets in seven CLOs and two other funds. The collateral management contracts for the CLOs were all included in the sale.

CLOs

CLO vet joins investment manager

Generation Investment Management has appointed Mike Ramsay as partner in its London office. Ramsay's role will include developing an investment platform and strategy to help clients with global credit investments.

Ramsay was previously at The Carlyle Group, most recently as global head of leveraged finance. In his time at the company, he established and ran the firm's European leveraged finance group, investing in corporate loans, high yield bonds, mezzanine and LCDS securities across public and private markets.

CMBS

CRE director named

Cole Real Estate Investments has appointed Travis Bowers as senior director of underwriting. Bowers will be responsible for underwriting functions related to analysing and acquiring prospective office and industrial acquisition pursuits.

With 13 years of experience in structuring, underwriting complex CRE loans, structured financings and sale-leasebacks, Bowers was most recently vp of equity investments for GE Real Estate.

CMBS

Advisory firm adds md

NewOak Capital has appointed Rachel Gould as both general counsel and md, based in New York. Her responsibilities include helping the expansion and marketing of the firm's solutions and advisory platform, which provides analytical and portfolio construction services to institutional investors and managers.

Prior to joining the firm, Gould was an attorney with Eckert Seamans in Boston, where she concentrated her practice on representation in all areas of financial and commercial real estate transactions. She also served as outside general counsel to a number of privately held businesses.

Real Estate

Capital markets evp named

Cole Real Estate Investments has appointed Jeffrey Holland as evp and head of capital markets. He will provide strategic direction and oversee all aspects of capital markets and distribution - including external and internal sales, marketing, broker-dealer relations, due diligence and securities operations.

Before joining Cole, Holland was the coo of BlackRock's US retail division, where he was responsible for corporate strategy, financial management and leading new business initiatives that cross distribution channels. Prior to this, he was with Raymond James & Associates, where he was the head of separately managed accounts and mutual fund wrap programmes.

Real Estate

Ranieri chairman appointed

Ranieri Partners has appointed Thomas O'Neill as head of two of its financial services companies. O'Neill will serve as chairman of the holding company of First Allied and of Ranieri Partners Financial Services Group. He will also join the investment committee of Ranieri Real Estate Partners.

O'Neill co-founded Sandler O'Neill + Partners in 1988, where he developed a firm known for advising bank and thrift clients throughout the country on strategic transactions and financings. Prior to this, he was md and co-manager at Bear Stearns' financial services group.

Regulation

Regulator beefs up supervision team

The UK FSA has appointed Simon Prior-Palmer and Robert Stansbury as senior advisors. Prior-Palmer will advise on the investment banking sector, while Stansbury will be advising on risk management issues.

Prior-Palmer has more than 30 years of experience in investment banking at Credit Suisse and JPMorgan, including leading Credit Suisse's UK investment banking team for ten years. Stansbury has been advising financial services firms on risk governance since 1993, with previous experience as a director at Hill Samuel responsible for derivatives, risk management, research and strategy.

FSA ceo Hector Sants comments: "I am delighted to announce the appointment of Simon and Robert as senior advisors to the FSA. They both have considerable experience to bring to bear on the regulatory changes and issues that we face in our work."

He adds: "Senior advisors are a core part of the FSA's delivery of intensive supervision. The team provides experience on regulatory, market and consumer matters."

ABS

Lessons learnt in Dutch bank collapse

The collapse of Dutch consumer lending bank DSB in October 2009 contains valuable lessons for the recovering international securitisation market, according to a new report by Bishopsfield Capital Partners. The report highlights that although many structural features of DSB securitisations held firm, issues related to the legal status of direct debits, borrower notification, commingling and set-off of risk caused unexpected consequences for noteholders.

"The DSB case serves to highlight that the concept of 'bankruptcy remoteness' requires further practical thought by securitisation market participants. Theoretical, complex and heavily structured solutions - however well intentioned - cannot be expected to cater for every situation," says Steve Curry, partner of Bishopsfield Capital Partners.

The report recommends that ring-fenced foundations should be used to receive collections and that reserve accounts, as well as liquidity facilities should be sized to take into account the time needed to implement practical solutions. Further, it notes that greater attention should be given to the set-off risk inherent in multi-tiered and multi-product banking relationships and that despositor protection schemes should be analysed in greater detail.

ABS

Counterparty risk criteria outlined

S&P has updated its methodology and assumptions for assessing counterparty and supporting obligations. The updated counterparty criteria apply to all new and existing structured finance securities on a global basis and to certain US public finance securities, the agency says.

The foundation of the updated criteria is the replacement of a counterparty when its creditworthiness deteriorates and falls below a minimum rating. It is this premise that allows a higher rating than the counterparty's because the exposure to the lower-rated counterparty is expected to be for a limited period, S&P states.

The new framework evaluates the structural features in counterparty obligations, outlining the conditions that S&P believes to be consistent with obtaining the maximum potential rating on a supported security. For derivative obligations, the new criteria will increase the triggers for collateral posting and counterparty replacement to reflect the shift to long-term ratings from short-term ratings. A counterparty with a minimum long-term rating of single-A can support triple-A rated securities.

Additionally, if the counterparty commits to post collateral once its rating falls below single-A, it may support the security until its rating falls below triple-B plus. The criteria has changed for collateralisation standards to include higher collateral amounts to be posted by the counterparty following its downgrade, the agency confirms.

The new criteria will mostly affect highly rated securities with derivatives, while for direct and other support obligations there will be limited impact on the ratings on supported securities. The rating impact resulting from the new criteria could vary from no rating change at all to a maximum downgrade of six notches. However, the agency estimates that approximately 29% of all outstanding structured finance transactions are likely to be affected by the new counterparty criteria.

The new criteria will apply from January 2011, where S&P plans to place all affected ratings on credit watch negative. Meanwhile, issuers have until 15 July 2011 - the date by which all credit watch placements should have been resolved - to take actions they consider appropriate to meet the criteria.

ABS

Servicer ongoing concern risk analysed

Fitch believes the elimination of the US FFELP can cause an ongoing concern risk for certain student loan issuers/servicers that have predominantly existed for the purpose of purchasing, originating and servicing FFELP loans. The agency says that these developments pose additional risks to transactions serviced by such entities and could have a negative impact on future rating performance, absent any mitigating factors.

In many cases, the issuer's new business model consists of becoming a servicer for the new Federal Direct Loan Program (DLP) resulting from HCERA. However, the sustainability of servicing DLP loans for not-for-profit servicers without scale efficiencies is uncertain, due to unknown revenue streams and loan count allocations at this time.

In addition, with the exception of the Title IV Additional Servicers (TIVAS) currently contracted to service DLP loans, no contract has been awarded to qualified not-for-profits with the responses to the Department of Education's (ED) Request For Proposal (RFP) not yet due.

Recent student loan servicer consolidation - such as ACS Education Services' acquisition of several platforms (Panhandle Plains' student loan servicing operations, Student Loan Corporation's student loan servicing operations and Chase Student Loan Servicing) or Brazos' acquisition of Graduate Leverage - has not materially affected trust performance to date. In these cases, portfolio conversions appear to have occurred with minimal impact to portfolio performance. However, this was achieved with a certain level of planning and lengthy timeframes for mapping and converting systems because of the nature of the sale of the platforms, the agency notes.

Fitch concludes that issuers currently changing their business model in light of HCERA to new and untested business models add a level of operational risk to a transaction in case the new business model fails. Fitch believes a properly contracted back-up service provider can mitigate these risks and protect student loan ABS from increased stress and potential rating actions.

ABS

'Significant improvement' for Canadian ABS

Following several years of limited term issuance, 2010 has brought significant improvement in the Canadian securitisation market, according to S&P. This momentum is occurring even as various government support programmes - which lowered funding costs and replenished liquidity - have wound down.

"Although issuance has varied among different sectors and asset classes, we believe that the Canadian securitisation market will likely maintain its positive momentum and continue to stabilise in the coming months," says S&P credit analyst Maria Rabiasz.

At approximately C$10.8bn in new issuance as of 31 October, the Canadian term ABS market is slowly approaching the C$13bn record term issuance of 2006. This total includes four transactions for approximately C$3.4bn issued in 2010 under the Canadian Secured Credit Facility (CSCF), which some market participants credit with helping to restart the Canadian securitisation market.

Three banks were able to tap the credit card market post-April 2010: Canadian Imperial Bank of Commerce through CARDS II Trust; Royal Bank of Canada through Golden Credit Card Trust; and National Bank of Canada through Canadian Credit Card Trust. In total, these three banks raised approximately C$3.7bn.

S&P expects additional bank and non-bank originators to tap the ABS term market as credit is extended and the focus shifts from loss mitigation strategies to account acquisition strategies. It is of the view that credit card receivables will continue to be securitised, given improving spreads and the generally solid performance of these assets despite the difficult economy.

In terms of nonbank-sponsored ABS issuance, meanwhile, the auto sector saw the most activity so far this year. Approximately C$6.9bn of auto loans, leases and dealer floor plan loans were securitised in this sector. Of this amount, C$3.4bn was funded through the CSCF programme.

With its Ford Auto Securitization Trust 2009-R1 transaction, Ford introduced the amortising ABS structure, which historically was not as well received by Canadian investors. But S&P suggests that Canadian investors have become more comfortable with this type of structure and Ford has replicated this structure five times.

Finally, total Canadian ABCP outstandings have fallen by more than three-quarters to approximately C$27bn (as at August) since their peak of C$115bn in July 2007. While the decline in this segment appears to have abated, S&P expects that proposed accounting and regulatory requirements for consolidation onto issuers' balance sheets and increased regulatory capital charges will keep total outstandings relatively stable in the near to medium term.

ABS

Grey-zone ABS methodology updated

Moody's has revised its rating methodologies for Japanese credit card receivables and consumer finance loan ABS. Additionally, the agency has explained its view on dilution risk for an underlying asset due to recalculations for Japanese ABS backed by loan receivables involving payments of grey-zone interest.

On 31 October Takefuji Corporation said it would recalculate the principal amount of its loan receivables based on the maximum IRRL interest rate (see SCI 12 November). Although this case is not typical, given its status as a leading consumer finance company in Japan, Moody's believes that the recalculation of assets will dilute their value when an originator goes bankrupt.

Further, an originator's credit quality and industry type are key factors in all of its risk assumptions, the agency says, given the potential dilution of an asset resulting from recalculation when an originator becomes bankrupt.

Ratings on ABS backed by grey-zone interest assets may be linked to an originator's credit quality. Therefore, the ratings may change when the originator's credit quality changes. However, if the deal includes positive factors, other than the originator's credit or industry, Moody's will take these factors into consideration and decide its rating.

Following this revision, the agency has placed under review for possible downgrade the Sunshine Trust Beneficial Interest class A2 tranche. The beneficial interest was issued in September 2008, backed by consumer loans receivables, including grey-zone interest asset.

ABS

UK credit card performance improves

Fitch reports that the performance of UK credit card trusts has improved in the third quarter of 2010 - driven by lower charge-off rates and a stabilisation of delinquency rates. However, yield rates and monthly payment rates trended lower in this period, the agency confirms.

Fitch's charge-off index fell significantly to 7.5% at end-3Q10 from 10.5% at end-2Q10. The decline was largely driven by the repurchase of debt management and delinquent receivables from the CARDS I and CARDS II trusts in June 2010. The 60-to-180 day delinquency index stabilised at 3.4%, which was observed throughout the three months ending in September 2010.

Meanwhile, the value of the yield index at end-September 2010 was 22% - representing a quarterly decrease of 0.7% points from the 2Q10 value. The monthly payment rate index ended the third quarter at 15.8% - a reduction of 0.8% points from the 2Q10 level, the agency says.

ABS

Agency responds to NAIC request

In response to a request from the National Association of Insurance Commissioners (NAIC)'s valuation of securities task force, Moody's has published extra information for certain securities. The majority of the securities fall under the agency's definition of a structured finance security, it says.

The additional items of information are: CUSIP number; security description; ratings as of date of list generation (and as of 31 December for final update); and date of last review or an indication the security has been reviewed during 2010. Moody's will update its list on 15 December and publish a final updated list in the first week of January, which should include all reviews from the last two weeks of 2010.

ABS

US credit card issuance set to improve

The performance of US credit cards is expected to improve in 2011, with charge-offs falling below 7%, according to Moody's. The agency also anticipates a rise in credit card ABS new issuance volumes, but expects levels to remain far below those of earlier in the decade.

Delinquencies have improved throughout 2010 combined with better roll rates, Moody's says, with lower delinquencies pointing to lower charge-off rates in the year ahead. "Higher charge-offs from the recent economic downturn effectively removed weaker credit-profile obligors from trust collateral pools, while new originations were targeted to obligors of higher credit quality. What remains in the wake of the credit crisis are accounts with comparatively stronger credit profiles," says Moody's vp Luisa De Gaetano.

While improving performance is a credit positive, regulatory uncertainty still hangs over the sector. Over the next 12 to 24 months the agency expects to lower its government support assumptions for some bank sponsors of credit card ABS because of provisions in the Dodd-Frank Act.

"A downgrade of the unsecured rating of a bank that sponsors a securitisation would be a credit negative for the related ABS programme," adds De Gaetano. "An issuer's willingness and ability to maintain card utility is a significant driver of collateral performance, should there be an early amortisation."

Further, Moody's notes that the ready availability of inexpensive alternative funding sources - specifically bank deposits - as well as regulatory uncertainty, will continue to contribute to the relative dearth of credit card ABS. Forecasts point towards issuance reaching US$15bn to US$25bn in 2011, as compared to about US$7bn projected for 2010. These amounts are dramatically lower than those for past issuance earlier in the decade, which ranged between US$50bn and US$90bn annually.

Moody's expects activity to pick up slowly in 2011 and beyond as portfolio receivables growth gives sponsors a reason to diversity funding sources away from solely bank deposits.

ABS

Mixed outlook for student loan ABS

Moody's outlook for private student loan securitisations is negative for 2011, as high unemployment shows no signs of abating and is striking recent college graduates particularly hard. However, the outlook for the vast majority of outstanding FFELP securitisations is stable, as their servicing and administration remain mostly strong - despite FFELP being discontinued after 30 June.

Among private student loan ABS, Moody's expects performance to be particularly weak among transactions issued in 2006-2010. These transactions typically contain loans to borrowers who have recently entered or will soon enter the repayment period of their loans when job prospects are poor.

"The weak labour market has hit recent college graduates disproportionately hard and therefore it will take a prolonged period of time for the economy to absorb the large population of recent college grads, who were unable to secure employment," says Tracy Rice, Moody's avp.

In 2010 issuance of private student loan ABS declined to US$7.6bn from US$10.3bn in 2009. The agency expects private student loan ABS issuance to drop further in 2011 as large issuers face competition from the US government in the form of student loan and grant programmes. Issuers also continue to keep originations scaled back because of tightened underwriting.

With regard to FFELP loans, the agency expects refinancing to lead to new FFELP securitisations at volumes similar to those in 2010. In 2010 total FFELP student loan ABS issuance increased by 25% to US$13.5bn from US$10.8bn in 2009.

"We expect servicing quality to remain strong for the vast majority of outstanding FFELP securitisations. The transfer of servicing that consolidation may require will only be a risk in situations where a transaction has neither a large, stable primary servicer nor a third party in place to facilitate an orderly transition," says Moody's vp Barbara Lambotte.

In addition, the agency does not anticipate ongoing industry consolidation to impact the trust administration of the large majority of FFELP securitisations. However, risks do exist for certain trusts that small, unstable entities administer with no third party in place to facilitate an orderly transfer.

ABS

US structured finance 'turning the corner'

With the economic recovery slowly underway, Fitch expects the US structured finance market to turn the corner towards stability next year. Additionally, from a new issuance perspective, the agency says that 2011 will bring an increased amount of transactions that continue to employ a 'back-to-basics' approach.

Kevin Duignan, Fitch group md, says: "New structured finance deals will see continued improvement in loan quality and will be issued by higher credit quality sponsors employing less complex structures."

The sector best-positioned for positive performance next year is US ABS, with delinquency and loss metrics better than they have been in years across several asset classes. "With ABS exhibiting impressive rating stability in the face of substantial recessionary headwinds, the outlook for the sector looks even better," Duignan adds.

However, the picture gets murkier when delving into mortgages, the agency says. The inventory of specially serviced US CMBS loans remains high, though the rate of transfers is slowing.

"Liquidity is returning to the market which should help improve rating stability for CMBS in 2011," continues Duignan.

Meanwhile, US property prices are rebounding in many markets. However, affidavit issues surrounding judicial foreclosure processes figure to increase an already-huge shadow inventory of distressed and unsold properties.

Fitch suggests that the worst appears to be finally over for US structured credit. The picture for CLOs appears brightest in 2011, says Duignan, given the declining default rates observed in the high yield sector.

However, SF CDOs with exposure to CMBS may see some marginal downgrades in 2011, due to pressure in the underlying CMBS sector. Bank Trups CDOs will continue to face - albeit slowing - deferrals and defaults, Fitch concludes.

ABS

Portuguese SF ratings on review

S&P has placed the triple-A, double-A plus and double-A credit ratings on 81 tranches in 52 Portuguese securitisations on credit watch negative. The move is due to the agency's updated assessment of the increased risks to Portugal's creditworthiness in light of the uncertainties around the implementation of the proposed EU treaty change.

Specifically, the agency has placed 55 tranches in 37 RMBS, 17 tranches in 13 ABS and nine series in two covered bond programmes on credit watch negative. The ratings on tranches rated double-A minus and below - both in the 52 and other Portuguese securitisations - are currently unaffected by S&P's Portugal sovereign credit watch placement.

The agency says it will assess to what extent the Portuguese economy's weak growth prospects, coupled with its current structural rigidities, may result in increased pressure on underlying assets backing Portuguese RMBS, ABS and covered bonds.

S&P intends to separately address any additional relevant risks for RMBS, ABS and covered bonds transactions caused by Portuguese banks acting as counterparties. Further, it will take the rating actions considered appropriate - should a bank in a transaction no longer fulfil eligible counterparty criteria - in the absence of structural mitigates.

ABS

Irish SF ratings on review

S&P has placed or kept on credit watch negative credit ratings on 36 tranches of 14 Irish securitisations. The move is due to the agency's updated assessment of the amounts the Irish government is set to borrow to fund further bank capital into its banking system.

Specifically, the agency has placed the triple-A ratings in five Irish RMBS transactions on credit watch negative, as well as the triple-A rating on a single tranche in one Irish CLO transaction. Additionally, the triple-A and double-A ratings on 23 tranches in eight Irish RMBS transactions were kept on credit watch negative. Tranches rated double-A and below - both in these 14 and other Irish securitisations - will not currently be affected by the downgrade of the sovereign.

S&P says that the credit watch placement of the Irish sovereign rating reflects its view of the possibility of another downgrade if the negotiations over the terms of the IMF-EU programme or over Ireland's 2011 budget fail to staunch wholesale funding outflows. Further, as a result of Ireland's downgrade, the agency is reviewing its opinion of Irish country risk and how it might affect Irish securitisation ratings.

The underlying assets of the CLO transaction are predominantly loans to corporate borrowers domiciled in the Republic of Ireland. S&P is assessing whether these assets will face greater pressure, given the increased country risk factor.

CDO

Noteholders drive CDO retranchings

Further details have emerged about the recent spate of CDO class A retranchings via the Metropolis II repack vehicle (SCI passim). In the case of each transaction involved - Carlyle High Yield Partners VII, Gresham Capital CLO 1, Eurocredit CDO V and Wood Street CLO III and IV - it appears that the noteholder, rather than the CDO manager itself, has chosen to restructure their investment.

CDO

Repack CDO rated

Eurocredit CDO V's double-A plus rated class A-1 notes have been retranched to form €83.3m double-A plus rated Metropolis II series 2010-9 class A notes and €20.9m unrated class B deferrable notes.

Metropolis II's series 2010-9 class A noteholders have limited voting rights to avoid a liquidation of the Eurocredit CDO V transaction if an enforcement event occurs. As a result, S&P's rating on the series 2010-9 class A notes is weak-linked to the rating on Eurocredit CDO V's class A-1 notes. In this case, as the rating on Eurocredit CDO V's class A-1 notes rises or falls, it is likely that the rating on Metropolis II's series 2010-9 class A notes will do so too.

CDO

ABS CDO manager transfer mooted

Princeton Advisory Group is set to replace Prudential Investment Management as the collateral manager for Prudential Structured Finance CBO I. S&P has issued a preliminary rating confirmation in connection with the related assignment and assumption agreement.

CDO

Updated surveillance prompts CFO downgrades

Moody's has downgraded its ratings on seven classes of notes issued by SVG Diamond Private Equity CFO and on seven classes of notes issued by SVG Diamond Private Equity II. At the same time, it has upgraded the ratings of three classes of notes and confirmed the ratings of three classes of notes issued by Tenzing CFO. The transactions reference portfolios of private equity investments essentially constituted of venture capital (VC) funds, buyout funds and mezzanine funds.

The rating actions are primarily a result of Moody's updated surveillance approach pertaining to CFOs referencing private equity interests and the evolution of the performance of the private equity transactions since the closing of the deals. In its updated surveillance approach, the agency relies on the IRR of each underlying fund as a primary performance indicator.

Moody's believes that the shape of the distribution that best fits the historical data is a student-t distribution with three degrees of freedom. The base case assumes the equivalent volatility for primary funds to be 52% for VC funds and 26% for buyout funds. The mean is assumed at 10% for both types of funds.

The timing of the cashflows is an additional required input in Moody's surveillance approach. Based on historical analysis, the agency chose a set of deterministic cashflows shapes for distributions and drawn-downs, which represent its 'J-curve assumptions'. Under these assumptions, draw-downs are expected to be mostly concentrated in the first three to four years following the initial commitment, while the cashflow distributions are spread over a ten-year period and mostly concentrated between year six and ten.

In its approach, Moody's used a Gaussian copula model for the dependency structure of the final IRRs of the funds. The correlation between VC funds and buyout funds is assumed at 40% in the base case. The intra-correlation is assumed at 50%.

CDS

Swap dealer definition proposed

The US SEC and the Commodity Futures Trading Commission (CFTC) have proposed joint rules under the Securities Exchange Act of 1934 that would further define a series of terms related to the security-based swaps market, including the definitions of 'security-based swap dealer' and 'major security-based swap participant'. The rules aim to implement provisions of the Dodd-Frank Act.

SEC Chairman Mary Schapiro says: "[The] proposals lay out objective criteria, but they are just a first step, as we seek public comment to help us appropriately address the market impacts and potential risks posed by these entities."

The definition of a security-based swap dealer, the SEC says, are persons who hold themselves out as a dealer in security-based swaps; make a market in security-based swaps; regularly enter into security-based swaps with counterparties as an ordinary course of business for their own account; or engage in activity causing themselves to be commonly known in the trade as a dealer or market maker in security-based swaps. The statute also specifies, however, that the term does not include a person who enters into security-based swaps for their own account "not as a part of a regular business".

The SEC is seeking public comment on the proposed rules for a period of 60 days following their publication in the Federal Register.

CDS

Sovereign CDS risk reduced

ReMATCH has reduced US$11.2bn in sovereign CDS trades in its second session since launching its new sovereign CDS service. It says this has greatly reduced risk for each of the major participating banks.

After the first session last month covered Spanish, Italian and German sovereign CDS, this second session included swaps on sovereign debt in Portugal, France and the UK. In each session, ReMATCH collects portfolio data from participating banks and uses proprietary technology to build mid-level curves and generate risk-reducing trades, enabling market participants to exit positions that they may otherwise have been unable to.

Steve Schiff, ReMATCH ceo, says: "The sovereign debt crisis and extreme market volatility in sovereign CDS markets have led to increased concerns among CDS traders and their management about outlier market risk exposures. Using innovative technology, ReMATCH reduces this build up of illiquid positions in a time efficient and cost effective manner."

ReMATCH, which is part of ICAP's post-trade risk division, is a post-trade bulk risk mitigation service that identifies and removes basis and calendar risks that accumulate as a result of market making and the management of legacy portfolios in the CDS market.

CDS

CDS auctions announced

Auctions will be held on 9 and 10 December to settle credit derivative trades for Anglo Irish Bank Corp and Ambac Financial Group respectively.

CDS

Developed, EM sovereign liquidity converges

Fitch Solutions reports that during 12 to 26 November the average CDS liquidity for developed and emerging market sovereigns converged for the first time since August 2010. This, the agency says, is driven mainly by intensified CDS market concerns on prospects for contagion across Eurozone countries.

Fitch Solutions md Jonathan Di Giambattista says: "In contrast to the decline in Irish CDS liquidity by Friday's market close, CDS liquidity for Germany, France and Spain moved up six, three and two global liquidity percentile rankings respectively in the past two weeks, suggesting the CDS market still harbours further contagion concerns - despite Sunday's announcement of an EU and IMF support package for Ireland."

He adds: "CDS spreads on European sovereigns also widened considerably in the week to 26 November, with Germany notably moving out 26% and other major sovereigns in the region seeing moves of over 10%."

From 12 November to 26 November, average CDS liquidity for developed market sovereigns moved from 8.7 to 8.58. This is in comparison to 8.6 to 8.61 for emerging market sovereigns over the same period. Overall, global CDS liquidity increased slightly, driven mainly by the Americas and Asia regions, whereas Europe remained broadly flat, Fitch concludes.

CLOs

Synthetic CLO completed

Standard Chartered Bank has completed its sixth synthetic CLO, the US$1.25bn START VI CLO. A single unrated equity tranche of US$87.5m was also distributed to mostly leveraged accounts based in the US, Europe and Asia.

Sean Wallace, the firm's group head of origination and client coverage in wholesale banking, says: "This is the first issuance off our START securitisation programme since the deepening of the financial crisis in 2008, so it is particularly pleasing to see such a strong market reception."

The transaction references a diversified pool of loans extended to more than 400 borrowers - with approximately 90% of the borrowers domiciled in Asia and the Middle East. The average credit quality of the initial pool is double-B equivalent.

The bank's previous issuance off its START platform was the US$1bn START V CLO in July 2008.

CLOs

Wood Street CLOs retranched

The class A-1 notes of Wood Street CLO III (rated double-A plus by S&P) and IV (triple-A) have been retranched to form the triple-A rated Metropolis II €138.6m series 2010-10 and €241.6m series 2010-11 transactions respectively. The notes are supported by unrated €46.26m and €60.47m class B deferrable tranches respectively.

CLOs

CLO manager replaced

Mizuho Alternative Investments is set to assign its collateral management duties for Mountain Capital CLO III, IV, V and VI to Carlyle Investment Management as replacement collateral manager. Moody's has been informed that all requisite consents and approvals have been received and conditions to closing have been satisfied.

The agency confirms that the current rating of any class of notes will not be withdrawn, reduced or suspended as a result of the transfer. It does not express an opinion as to whether the proposed assignment could have non-credit related effects.

CLOs

Moody's set to reduce CLO stress factors

Given the improved corporate credit outlook and reduced macroeconomic uncertainty, Moody's is reviewing the level of stress it applies to its default probability assumptions when rating CLOs. The agency now expects to reduce the stress factor - currently set at 30% - upon the conclusion of its review. Additionally, adjustments to certain parameters in the CLO model will be made.

Moody's expects the net impact of the update to reduce the credit enhancement levels needed for senior tranches of a typical CLO relative to those required under the 30% stress factor. The credit enhancement levels for mezzanine and junior CLO tranches are expected to be less affected by this review.

The agency aims to begin reviewing all of its outstanding CLO ratings, together with other performance characteristics as soon as the changes are finalised in the first quarter of 2011.

CLOs

ICM in the frame for CLO transfer

Resource Europe is proposing to assign all of its rights and responsibilities as collateral manager of Resource Europe CLO I to Intermediate Capital Managers. Consequently, it has requested that the holders of more than 50% of the aggregate of the principal amount outstanding of the notes consent to the proposed assignment by passing a written resolution by 13 December.

CMBS

Large divide in Japanese CMBS recoveries

The duration of collections and the recovery rates for defaulted CMBS loans vary greatly depending on whether the loans' initial LTVs were higher or lower than 80%, according to Moody's. The agency's latest report on the sector analyses 112 defaulted loans backing Japanese CMBS. Of these loans, 46 have completed special servicing and the other 66 are still in special servicing.

The initial LTV for 84 of the loans was lower than 80%, with special servicing completed on 27 of these within a 12-month period. The initial LTV was higher than 80% for 28 loans, with only five completing special servicing within 12 months.

Moody's reports that 66 loans, totalling Y365.1bn, have defaulted. This includes 46 loans that between them account for 73% of the loans with initial LTVs below 80%. The agency assumes any recovery will be stressed, but the overall impact should be limited.

The report also looks at loans maturing in November. It found that eight loans, totalling Y97.3bn, matured last month, while two (Y11.7bn) were paid down and six (Y85.6bn) defaulted. There were no loan extensions, but two (Y3.1bn) prepaid and one (Y3.3bn) was recovered. Defaulted loans amounted to Y365.1bn at the end of the month, up by 27% from October.

CMBS

EMEA CMBS restructurings, losses continue

Moody's reports that during 3Q10 EMEA CMBS transactions experienced further restructurings and principal losses as loan work-outs were completed.

"Principal losses were allocated to a fourth deal during Q3 and over the next two quarters losses are likely to be allocated in another five EMEA CMBS transactions," says Moody's analyst Viola Karoly.

The agency says that most of the restructurings this year have been designed to facilitate the refinancing of loans, illustrating that refinancing at loan maturity continues to be the major challenge for EMEA CMBS transactions. Year-to-date, only 41% of the loans with a maturity in 2010 have repaid or prepaid and 23% have been extended.

Moody's analyst Raphael Smadja notes: "Although commercial real estate markets have overall stabilised, value recovery over the next two to three years will not be sufficient to bring loan-to-values (LTVs) to financeable levels. As the lending market remains subdued and focused on prime properties, we believe that secondary properties - which form the bulk of CMBS collateral - will be very difficult to refinance."

He continues: "Overall, loan performance continues to deteriorate and six loans were liquidated by the end of 3Q10. Loan events of default, payment defaults (loans in arrears) and loans being transferred into special servicing continue to increase. The delinquency rate for large multi-borrower transactions was 7.6% at the end of 3Q10, compared with 6.7% during the previous quarter. The number of loans in special servicing increased as more loans were transferred to the special servicer and fewer loans were worked-out in Q3 than in Q2."

During 3Q10, Moody's upgraded a total of four tranches in three deals - due to reduced refinancing risk following loan and transaction restructuring in two of the three transactions. Upgrades also followed better-than-expected performance in the third transaction.

The agency also downgraded 18 tranches in seven transactions - mainly for loan-specific performance reasons. 17 classes of notes in seven transactions remained on review for possible downgrade and five classes in one transaction remained on review with direction uncertain at the end of 3Q10.

In the coming quarters, the agency concludes that it expects the number of downgrades to continue to outweigh the number of upgrades in EMEA CMBS.

CMBS

US CMBS delinquency rates rise again

Trepp's latest Delinquency Report indicates that, after falling in October for the first time in over a year, the US CMBS delinquency rate started rising again in November. The percentage of loans 30 or more days delinquent, in foreclosure or REO rose by 35bp during the month to 8.93%, putting the value of delinquent loans at US$60.3bn. This increase is the largest monthly increase since May 2010 and the overall rate is the second highest reading ever after this September's 9.05%.

"The November numbers certainly throw some cold water on the enthusiasm that has been building over the past six months that the peak for delinquencies was nearing," says Manus Clancy, md at Trepp. "This jump in delinquencies comes despite the fact that new issues are starting to make their way into the calculation and the special servicers are becoming more adept at processing the troubled loans. While we expect both of these factors will continue to put downward pressure on the rate, it would not surprise us if the rate continued to bounce around a bit as it continues to rise over the next several months."

CMBS

Proposal aims to end REC 5 stalemate

A proposal to REC 5 (Plantation Place) CMBS noteholders has been filed with the Irish Stock Exchange on behalf of the borrowers. The proposal seeks to find a solution to the ongoing deadlock following an LTV event of default on the underlying loan.

The proposal to noteholders aims to allow for either the early repayment of the existing debt in full by disposing of the property or substantial de-leveraging from a whole loan LTV of 95% to 70% via a prepayment on the sale of the equity interest in the One Plantation Place Unit Trust. The main elements of the proposal are: a temporary waiver of the LTV event of default for up to 22 months to 25 October 2012; an obligation on the borrowers and sponsors to conduct a sale and marketing process of the property or equity interest; and an obligation to sell the property if certain bid levels are received, with proceeds used to repay existing debt in full or significantly de-lever it.

An ongoing cash trap of all surplus cash after debt service and operating costs is also suggested, as is payment of the notes using the £16.5m currently in the GIC account and the introduction of a fee of 25bp if a sale occurs by 25 October 2011, increasing to 50bp thereafter, which will be payable to noteholders who vote for the proposal. Under the proposal, three outcomes are foreseen: either a property sale will be completed, resulting in the debt and costs being repaid in full, with noteholders getting their money back by loan maturity in July 2013; a unit sale will be completed and the whole loan LTV will be reduced from 95% to 70%, significantly lessening refinancing risk at loan maturity; or finally no sale will occur and at the end of the waiver period there would still be nine months until loan maturity.

The proposal has received the indicative support of all noteholders with whom it has been discussed, bar one who is still analysing it. This represents 50% of the class A notes, more than 75% of the class B notes, more than 70% of the class C notes and more than 75% of the class D and E notes.

Nassar Hussain, managing partner of Brookland Partners, which is working for the borrowers, comments: "The transaction has been in deadlock for some time. Whilst there have been attempts to resolve the status quo, they have typically been unsuccessful due to the conflicting interests and rights of the various parties involved, the decline in value of the property and the significant swap breakage costs."

He continues: "This proposal attempts to address these issues and represents a valuable and potentially unique opportunity to achieve a consensual, mutually beneficial solution that is relatively simple and should provide a positive outcome for all participants in the transaction."

Insurance-linked securities

Residential Re 2010-II closes

The second series of notes under United Services Automobile Association's Residential Re 2010 catastrophe bond programme has closed. The deal's rated Class1 tranche was confirmed at double-B by S&P (see SCI 12 November 2010).

The US$210m class1 notes priced at 625bp over US Treasury money market funds. The term of the new deal is two and a half years, the scheduled maturity date is 6 June 2013 and legal final maturity date is 6 December 2014.

The unrated class 2 and 3 notes were privately placed, sized at US$50m and US$40m respectively.

Like Residential Re 2010-I, Residential Re 2010-II 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.

Regulation

Basel Committee announces progress

The details of the Basel 3 text, including global regulatory standards on capital adequacy and liquidity, have been agreed at this week's meeting of the Basel Committee on Banking Supervision. The Committee intends to publish the rules text by the end of this month, when it will also publish a summary of the results of its quantitative impact study that was conducted this year.

The Committee has announced that the liquidity coverage ratio and net stable funding ratio will be subject to an observation period and will include a review clause to deal with any unintended consequences. Issues related to globally systemic banking institutions were also reviewed, with the Committee saying such banks should have loss-absorbing capacity beyond the Basel 3 standards.

A provisional methodology comprising both quantitative and qualitative indicators to help national authorities assess the systemic importance of financial institutions at the global level was also reviewed. A paper on these topics will be sent to the Financial Stability Board by year-end for review, while the Committee will complete a study by mid-2011 on how much loss absorbency systemically important banks should have.

During the meeting, the matter of cross-border banking resolution was also discussed and it was agreed that further evaluative work will be undertaken on how to improve the management and resolution of distressed institutions. Progress has also been made with regard to updating rules for capitalisation of bank exposures to central counterparties and a consultation paper on this topic will be issued by year-end, with the aim of finalising rules next year.

Finally, the Committee will issue a paper on 'Sound Practices for Operational Risk' and another on 'Operational Risk - Supervisory Guidelines for the Advanced Measurement Approaches' in the coming days.

Regulation

Law firm hires agency advisor

Cadwalader, Wickersham & Taft has hired Bradley Bondi as a partner in its Washington, DC office. He joins from the US SEC, where he was detailed to the Financial Crisis Inquiry Commission (FCIC) to lead a team of lawyers, investigators and accountants in examining the causes of the financial crisis.

Before that, Bondi served as counsel to SEC commissioners Troy Paredes and Paul Atkins, advising on enforcement actions, investigations, policies and the SEC's long-range strategic plan. He has previously worked for Kirkland & Ellis and Williams & Connolly.

"Bradley Bondi is joining Cadwalader at a critical juncture for our financial markets. Financial services firms face new challenges from Congress, federal and state regulators and competitors. The need for great counsel and insight has never been more crucial," says Cadwalader chairman Christopher White.

RMBS

Whinstone deals hit by poor performance

Moody's has downgraded six notes issued by Whinstone Capital Management and two issued by Whinstone 2 Capital Management, impacting approximately £389m of securities. Under the transactions, Northern Rock Asset Management (NRAM) receives credit protection on the issuer reserve funds of the transactions issued out of Granite Master Trust Funding and Funding 2 respectively.

The rating actions take into account worse than expected collateral performance within Granite (which has resulted in increased loss expectations for the mortgage portfolio), continued draws on the Granite Funding reserve fund and low excess spread observed in the trust as a whole.

The Granite master trust portfolio has been affected by adverse macroeconomic conditions, such as increase in unemployment and house price depreciation, as well as by the negative selection of loans remaining in the pool, according to Moody's. These factors are expected to impact future performance. Considering the current amount of realised losses and completing a roll-rate and severity analysis for the non-defaulted portion of the portfolio, the agency has increased its total loss expectations to 2.5% of the current portfolio balance.

The other factors that have led to the rating actions are: the continuing draws on the Funding reserve fund, which currently stands at £49.12m (1.42% of Funding notes outstanding), whereas the required amount is £57.67m (1.67% of Funding notes outstanding); and the increased WA note coupon of Funding and Funding 2 (0.19% and 0.24% respectively) that is expected to increase to 0.25% and 0.70% respectively in a year at current CPR levels.

RMBS

US manufactured housing remains stable

The manufactured housing sector has experienced a very slight increase in loss severities, net loss rates and 60-day delinquencies over the last year, according to Fitch. The agency currently rates 138 manufactured housing transactions, with an original balance of US$55bn and an outstanding balance of US$10bn.

"Stable manufactured housing performance has been driven by consistent servicing, loan seasoning and continued reductions in new unit supply," says Fitch director Susan Hosterman.

A recent rating review of the agency's manufactured housing portfolio yielded over 90% in rating affirmations. Additionally, it has upgraded another 2% of its top-rated tranches due to an improvement in the relationship between credit enhancement and expected pool loss.

"With the severity of liquidated existing units now stabilised, Fitch does not envision much change in manufactured housing performance over the next year," concludes Hosterman.

RMBS

Japanese counterparty criteria updated

S&P has published two Japan criteria articles following the publication on 2 December its 'Counterparty and supporting obligations methodology and assumptions' update (see SCI 3 December).

The first update, entitled 'Counterparty and supporting obligations methodology and assumptions', applies to all new and existing Japanese transactions, including ABCP programmes. The agency says it is discontinuing most Japan-specific counterparty criteria and replacing them with its global counterparty criteria.

While the previous criteria assumed no commingling risk for such transactions, the second update - entitled 'Updated criteria for deposit insurance for commingling risk in Japan RMBS deals' - explicitly reflects S&P's assessment of the creditworthiness of both Deposit Insurance Corps in Japan (DICJ) and the deposit-taking institution.

The agency further states that in certain types of Japanese RMBS transactions, it assumes that the commingling risk at an originator/servicer deposit-taking institution is mitigated by DICJ due to the Japan-specific deposit insurance system. Additionally, S&P notes that commingling risk is equivalent to the higher of the issuer credit rating on the DICJ and on the deposit-taking institution.

RMBS

BoE loan-level data requirements released

The Bank of England has outlined its new eligibility requirements for the use of RMBS at the Discount Window Facility.

Among them is the requirement to make loan-level data available to the public on at least a quarterly basis. This criterion will be met only if the mandatory fields in the BoE template are completed, although the Bank says it will accept incomplete records if satisfied with the explanation for the missing data.

To allow comparison, issuers will also have to report data using official definitions. Credit analysts at JPMorgan note that the Bank will use higher haircuts to push the market towards standardised definitions.

Investor reporting will also have to be substantially standardised, with defined minimum information requirements to be made freely available to investors, potential investors and 'certain market professionals working on their behalf'.

In addition, all transaction documentation will have to be made public. Furthermore, standardised transaction summaries should be made available to the public at the time of each new issuance, as well as cashflow models, which have to be transparent to the user and have downloadable outputs.

The requirement to publish all transaction documents will become compulsory from July 2011, while the other criteria will have to be met from December 2011, following a 12-month implementation period. There will be a further 12-month transition phase after this time, during which bonds not meeting the criteria will be accepted subject to an additional 5% haircut, to be increased by a further 5% each month during the year.

RMBS

Tool to reduce TBA fails

Tradeweb has launched an electronic solution - in collaboration with BlackRock, Credit Suisse and Goldman Sachs - that aims to reduce the number of failed TBA mortgage pool trades. The service enables institutional clients to pair-off mortgage pool transactions with dealers, thereby reducing the amount of pools that need to be cleared and enabling more efficient resolution of round-robin fails between dealers, the firm says.

"Failed trades are a systemic issue that impacts all market participants," says Colm Murtagh, md and head of rates trading at BlackRock. "Not only do they reduce the efficiency of the TBA market, but they introduce an additional layer of risk."

Previously, a customer with offsetting buys and sells could either 'assign' trades from one dealer to another, or take delivery of mortgage pools from one dealer against a 'buy' position and deliver against a 'sell' position. Many participants failed to receive expected pools; a chain of matched fails frequently becomes a closed loop, known as a 'round-robin'.

"Electronic assignments will be an important industry solution for reducing fails in the mortgage market because they provide a cost and time-efficient method of unravelling TBA round-robins, which are a key driver of systemic MBS fails," says Rob Huntington, co-head of global structured products at Credit Suisse.

RMBS

Irish RMBS placed on review

Moody's has placed the triple-A ratings of six Irish RMBS and one balance sheet CLO on review for possible downgrade. It has also placed all mezzanine and junior mezzanine ratings on five Irish RMBS tranches on review for downgrade.

Despite the recent EU/IMF agreement, the agency believes that the medium-term stress on Irish structured finance transactions will be greater than expected. Further, it anticipates further stress on borrowers from the austerity measures necessary to manage the increasing government debt burden resulting from the bail-out of the banking sector.

The agency confirms that its recent rating actions reflect its expectation that RMBS and SME corporate performance will deteriorate further and, consequently, that it no longer views triple-A ratings as achievable for Irish SF - except for those with short remaining maturities.

The majority of Irish bank ratings are on review for possible downgrade, raising concerns about operational risks in extreme scenarios. Arrears on existing Irish RMBS transactions continue to increase - the latest index shows 90-day plus delinquencies at 5.1% of RMBS prime pools. Additionally, Irish Central Bank data show that an additional 5% of loans are current only because of loan modifications.

The agency reports that defaulting Irish borrowers have typically been self-employed, located outside Dublin and had their mortgage originated during the peak of the market in 2006-2007. Going forward, it says that the key drivers of defaults are likely to be a combination of LTV ratios, affordability, employment status and location.

"Although LTV ratios have not yet emerged as a significant driver of default, the recession's severity and the sluggish housing market are restricting the options for all delinquent borrowers, irrespective of their LTV ratio," says Anthony Parry, Moody's avp. "Moody's therefore believes that default rates could still rise on higher LTV ratio loans, given the scale of negative equity in the Irish RMBS market."

RMBS

Citadel RMBS remarketed

F. van Lanschot Bankiers has successfully remarketed - via BNP Paribas, ING and Rabobank International - the Citadel 2010-I Dutch RMBS, which it had originally retained in July. The bank says that the offering was oversubscribed and placed with a wide group of institutional investors.

The transaction comprises €250m two-year class A1 notes and €500m five-year class A2s. The notes - which have triple-A ratings from S&P and Fitch - are said to have been offered at a discount to par.

RMBS

NCUA in the market again

The US National Credit Union Administration (NCUA) is in the market with its latest resecuritisation - the US$3.52bn NCUA Guaranteed Notes Trust 2010-R3. Proceeds from the issuance will be used to purchase a portfolio of 255 RMBS previously owned by five credit unions that have been placed into conservatorship by NCUA board.

The transaction comprises US$1.55bn senior I-A notes, US$1.6bn senior II-A notes and US$370m senior III-A notes. Each class of note is rated triple-A and is guaranteed by the NCUA.

The collateral will be split into three pools that each collateralises its respective series of senior notes, with no cross-collateralisation between the three series. Series I and series II will each be collateralised by floating-rate RMBS, while series III will be collateralised by fixed-rate RMBS.

RMBS

Master trusts 'resilient' to economic deterioration

Moody's has undertaken its annual assessment of the notes issued by UK prime and non-conforming RMBS master trusts. The analysis indicates that master trust notes, particularly triple-A rated notes, are very resilient to any deterioration in the economic environment and any resulting increases in the expected loss and MILAN Aaa CE assumptions.

Expected loss and MILAN Aaa CE assumptions were updated for the Aire Valley, Granite, Pendeford and Lothian trusts as a result of this review, but only Whinstone and Whinstone 2 transactions were impacted by rating actions. These downgrades result from the revised expected loss assumptions for Granite master trust, continued draws on the Granite Funding reserve fund and low excess spread observed in the trust as a whole. Given the relatively strong respective levels of credit enhancement, no rating actions have been taken on any other notes issued out of these trusts.

Moody's says expected loss assumptions for Pendeford and Lothian were increased primarily to align them with the expected losses it assumes for other similarly-performing trusts. The risks currently observed in the Granite and Aire Valley master trusts have resulted in increased expected losses of 2.5% from 1.75% for Granite and 3.5% from 1.75% for Aire Valley.

"Both Granite and Aire Valley continue to show negative performance, evidenced by increased pressure on their excess spread - from both high delinquencies and the slow repayment of the stepped-up notes - and the higher sensitivity of these trusts to a deterioration in economic conditions or an increase in interest rates," explains Olga Gekht, Moody's vp - senior analyst and co-author of the report.

Since Moody's July 2010 update, the asset performance outlook on UK prime RMBS has changed to stable from negative. In 2011 the agency expects performance to remain relatively stable or to experience an only marginal deterioration as a result of the slow economic recovery. Master trusts with a high proportion of non-conforming collateral - such as Aire Valley, Pendeford and Mound - or with prime collateral with risky characteristics, such as Granite, are expected to experience a more significant deterioration of performance as a result of limited refinancing opportunities available to the borrowers in these trusts.

A slower-than-expected economic recovery would adversely affect performance in all trusts. "However, we do not expect the economic scenario - which is moderately worse than the one described in our latest macroeconomic forecast for the UK - to result in the downgrade of any rated notes due to the high resilience of the ratings of these notes," adds Jonathan Livingstone, co-author of the report and a Moody's vp - senior analyst.

RMBS

Freddie Mac pool-level delinquencies disclosed

Freddie Mac is to begin providing pool-level delinquency disclosures on a monthly basis on its single-family mortgage participation certificate (PC) and giant PC securities. Implemented from January 2011, the agency aims to disclose the loan count and associated aggregate unpaid principal balances (UPB) for mortgage loans that fall into one of four delinquency groups (30-59 days delinquent, 60-89 days delinquent, 90-119 days delinquent and 120 days or more delinquent) for each PC and giant PC.

Additionally, the firm says that the disclosures will include information about certain seriously delinquent loans purchased from each PC and giant PC. This category of disclosure will represent the loan count and associated aggregate UPB of the loans purchased out of the PC or giant PC. The related principal payment will be passed through to security holders on the payment date in the current month in the case of fixed-rate PCs and giant PCs, and on the payment date in the following month in the case of adjustable-rate PCs and giant PCs.

"Freddie Mac is providing the market more timely and detailed information about delinquencies of loans backing our PC and giant securities. We understand that the new disclosures may aid market participants in modelling prepayment speeds. We will continue to consider disclosure enhancements that meet our investors' changing needs," says the agency's vp of mortgage funding Mark Hanson.