Contents

Asia

Positive momentum

APAC private placement, local currency deals to continue

Asia-Pacific (ex-Australia) structured finance is set to continue to be characterised by private placements and local currency transactions in 2011. However, the new offshore deliverable CNY market (CNH) could provide even greater opportunities in the region longer term.

Vincent Moge, head of APAC sales and head of StormHarbour's Singaporean office, notes that - while securitisation is essentially limited to countries like Australia (see separate outlook piece), Korea or Japan - there is a healthy private placement market all over the Asia Pacific region. Emerging market, high yield, special situation and distressed players, as well as bank prop desks participate.

Indeed, Moge suggests that bank prop desk spin-offs will increasingly become involved in the region in 2011. "Because of capital and regulatory constraints, prop desks will be spun off with the aim of seeding a fund under an asset management umbrella and raising external money. Banks will move away from the volatility of a prop desk to the stability of an annuity model," he explains.

Senior or mezz loans, share-financing deals and whole business transactions are of particular interest, according to Moge. "These are usually good-sized deals, at anywhere between US$25m-US$100m+, with a handful of investors involved per deal. Generating returns in the mid to high teens with a cash coupon or mix of cash and equity upside, together with attractive security packages, the appetite for such paper is clear in a low-yield environment."

He says that lack of supply isn't an issue. "The region is generally enjoying high growth rates, yet growth needs to be financed."

Standard Chartered, for one, has closed four Asian ABS over the last few months - including a Hyundai Capital auto ABS and a KAL airline ticket receivables deal. "My general impression is that before the North Korean incident investors were beginning to embrace Asian securitisation in search for yield, including appetite from Japanese and US accounts," says Warren Lee, head of structured financing solutions at the bank.

He continues: "In addition, there are diversification and relative value arguments in terms of zero losses and very low delinquencies. These accounts are also typically interested in European RMBS, but were finding that there isn't enough to go around."

Lee notes that it has taken time to educate investors, especially US accounts, on the nature of the assets and the qualities of the issuers. "Before the crisis, there was enough appetite among European and Asian investors, so we didn't have to deal with 144a rules. There was overwhelming US support for the first Korean covered bond for the Korea Housing Finance Corp in July, for example, so it seems likely that wider support for Asian ABS will lead on from there."

Appetite for local currency ABS, in particular, is expected to continue next year. For example, US$10bn-US$15bn worth of securitised deals were completed in the Asian region this year. Korea, especially, is likely to continue to see strong issuance off the back of an expanding consumer finance sector.

Lee points out that to access the local currency markets, however, it is necessary for banks to have a full-scale local currency fixed income platform - and not many banks have such capabilities. "It's too painful for large banks: they need people on the ground; i.e. research, trading, sales, derivatives....yet it's not necessarily a significant P&L impact at the start."

2010 also saw investor appetite re-emerge for Korean cross-border ABS, according to Jerome Cheng, vp - senior credit officer at Moody's. Spread tightening in the underlying receivables allowed credit card and auto ABS repeat issuers to tap the market. In addition, Korea Housing Finance Corp brought Korea's second covered bond.

"There is interest from originators to issue covered bonds in 2011 because it allows them to tap into an additional investor base," Cheng notes. "The enactment of a covered bond law in the country will help - though the timing around this is unclear."

There is also potential for cross-border Korean RMBS to reappear next year, albeit pricing remains an issue. "The spread required by investors is quite wide, yet the underlying loans don't yield very much. In comparison, credit card underlyings typically have more yield and the sponsors are usually finance companies, so their funding capital structures are different," explains Cheng.

He expects a slight growth in volumes for the country, driven by repeat - and potentially some first-time - issuers tapping the market and new Japanese investors entering the sector in search of higher-yielding Asian assets.

In contrast, the Singapore market was very quiet in 2009 and 2010 because banks are offering competitive pricing to corporates. "The focus of the market has traditionally been CMBS, but sponsors are now able to get cheaper funding through the bank market. REITs are also refinancing their CMBS via straight debt and rights issues on the equity market," Cheng observes.

Among the few Singaporean transactions that closed this year, the Ruby Assets CMBS was a landmark deal in that it had an equity option attached (see SCI 17 March). The others were largely isolated consumer finance deals, such as the Courts Singapore and Diners Singapore transactions.

Equally, securitisation activity in Hong Kong remains stagnant. For example, Hong Kong Mortgage Corporation (HKMC) used to be a prolific RMBS sponsor, but hasn't tapped the market for a number of years.

"HKMC can achieve better execution through the corporate debt market," explains Cheng. "Banks are well capitalised and the mortgage market is competitive. Mortgage companies may well consider RMBS again in the future, but generally the Hong Kong market is slow."

Meanwhile, many Japanese government-supported RMBS are expected to launch next year, as well as several frequent issuers tapping the ABS and RMBS markets. However, Moody's svp Yusuke Seki points out that the number of frequent issuers is declining because the outstanding balance of suitable assets is decreasing due to the revision of certain regulations, including the grey zone interest law.

"There may be a few grey zone interest transactions, but generally we expect volumes to remain flat next year for non-government supported deals," he confirms.

While most investors remain wary of CDOs, auto and credit card ABS are well-understood and so are the asset classes most likely to see activity in the country. But government-supported RMBS volumes far outweigh volumes in the other asset classes.

In terms of regulation, Seki doesn't anticipate any major negative impact on the market. "Japanese regulation in terms of rating agencies was implemented in October, which has given market participants time to get used to it."

Away from ABS, Oracle Capital cio Leon Hindle notes that structured credit activity in the Asian region appears to be picking up. He cites the public placement of a portion of Standard Chartered's START VI CLO (see separate CLO outlook piece) as an example of this.

"We've also seen some CLNs and other simpler products, such as basket-linked investments, being structured," Hindle says. "The tide is definitely turning. It will be interesting going forward for CLOs because appetite for US product is increasing."

However, Hindle points out that many uncertainties remain. "These uncertainties are a hangover from the financial crisis. For example, from a credit investor's perspective, low yield means that it is necessary to take relatively extended maturities - yet if the market changes course suddenly, an investor could be left high and dry. As a credit investor, 2009 was good and 2010 was reasonably good, but 2011 could be challenging."

QE2 appears to already be priced in, so the question for Asian structured credit is what next? "It's difficult to predict," Hindle observes. "We'll continue to see new issue and secondary activity, with any shake-out in the broader market pressuring valuations. The current situation is different from previous crises because everyone owns the same stuff."

Indeed, the asset overhang is a common theme in the region, with some unresolved situations from 2008 presenting potential opportunities going forward - especially in the liquid segments, where some structures have been priced too aggressively. "There has been huge demand for yield, but gains tend to reverse quite quickly," Hindle says.

But the recently established offshore CNH market could provide the greatest opportunities in the region going forward. "It may be possible to tap it with, say, an RMBS in the near future. Renminbi is expected to appreciate by 5%-7% over the next year, so investors entering this sector can benefit from a currency play as well as the coupon returns. However, government regulations must be first in place," Lee concludes.

CS

CDS

Liquidity lifeline

Clearing to renew confidence in face of threat to CDS liquidity

Gloomy predictions are being made for credit derivatives, with forecasts for future liquidity in the market divided. The demise of CSOs could have a catastrophic knock-on effect, but there is also hope that initiatives such as clearing may just do enough to salvage CDS liquidity and revive the market. (The full SCI Special Report on CDS can be downloaded at the bottom of the page.)

Maturing CSOs certainly pose a risk. Michael Hampden-Turner, structured credit strategist at Citi, calculates that about US$250bn of CDS is hedging CSOs maturing in 2011 alone, with similar amounts for each of the six years after.

He says: "Currently people are much more focused on regulation and that is a more immediate concern. People have not really looked at CSOs because not many have rolled off yet. However, while US$90bn of CSOs rolled off this year, next year it will step up to about US$250bn."

Others, such as Alexander Yavorsky, vp and senior analyst at Moody's, acknowledge the importance for the CDS market of hedging CSOs, but insist the market will not be as badly hit as Hampden-Turner fears.

Guy Dempsey, financial services partner at Katten Muchin Rosenman, says: "It is certainly the case that the existence of synthetic CDOs created a huge demand for certain credit derivatives and that demand has been diminishing since 2008. In the new normal, however, there is a view that there will be other needs found for credit derivatives."

But it is not just CSO maturities that have the market worried; there are liquidity fears over regulation too. One US-based market participant is particularly damning about the effect that regulatory speculation is having on the market at the moment.

He says: "Dodd-Frank and regulation in general is crushing liquidity in the CDS market right now. A lot of it is down to clearing, where there has been no real uptake at all."

Teething problems as the market gets to grips with clearing and exchange trading, as well as uncertainty caused by unfinished rules, a lack of competition between clearinghouses and the continued threat of systemic risk are also all conspiring to spook the market. Yet, despite these issues, there is a prevailing optimism that the changes due to come into force next year have the capacity to revitalise the CDS market.

Yavorsky and Hampden-Turner both believe that clearing next year will lead to increased liquidity for parts of the market, if not all of it, with exchange trading predicted to have a very positive long-term impact.

Jamie Cawley, ceo at Javelin Capital Markets, says: "In North America there are about 450-500 credits that trade in the CDS marketplace and, at last count, the US equity market had about 5,000 names traded, so there is plenty of room for CDS to trade either on exchange or through SEFs. There is plenty of liquidity today in the inter-dealer market and we expect there will be plenty of liquidity in the future."

JL

ABS

Growth prospects?

Economic, regulatory uncertainty dogs the outlook for US ABS

US ABS issuance volumes are expected to increase by about 10% in 2011 - largely as a function of growth in the underlying consumer sector. Although the market is likely to continue benefitting from positive fundamentals and technicals, regulation remains the wild card going into next year.

The US ABS market has gradually opened up as the months go by and this is likely to continue next year, according to Mathew Van Alstyne, md and head of research at Odeon Capital Group. A question mark remains over how FinReg is implemented, however, as well as its timing and whether there are any surprises.

"The regulatory environment is clearer, but so much of the decision-making has been left to different entities. Much of the minutiae will likely be more impactful: there are so many variables that it's difficult to know which will be the inflection point," Van Alstyne observes.

For example, he suggests that as more securitisations are required to be disclosed via TRACE, issuance prices could be impacted. "Increased transparency is likely to help liquidity, but there are many unknowns," he explains. "In particular, there is concern about the disclosure of prices on highly illiquid bonds, especially when different factoring schedules are involved. In any case, the rules aren't as helpful as they could be because banks are still protected by the relaxed mark-to-market accounting regime."

Elton Wells, head of SecondMarket's structured products group, agrees that regulation continues to be a wild card for the market. "We're in a better place than we were last year, where there was concern about over-regulation, but now there is concern about the details," he says.

Nonetheless, he believes that US ABS activity in 2011 will be similar to this year's, but perhaps with a few more new issues. "Volumes will likely remain flat to a 5%-10% increase. It's quite clear that, since the end of TALF, the market can sustain itself without government guarantees."

ABS analysts at JPMorgan have a similar forecast: they predict that gross US ABS supply in 2011 will reach US$115bn, an increase of roughly 10% on this year's volumes. They expect auto ABS to be the most active sector, accounting for US$65bn, with gains seen in the prime auto loan and lease segments.

Commercial receivables-backed ABS sectors - such as equipment, auto-fleet, trucks and floorplan - should also enjoy another solid year of issuance. Supply from esoteric sectors will likely stay flat to slightly higher year-on-year, given the stable and regular financing needs of the active issuers. In contrast, student loan ABS volumes are expected to fall to US$10bn, due to the termination of FFELP and weak demand for private student loans.

The credit card ABS sector is the wild card in JPMorgan's supply forecast for 2011. Based on the low 2010 gross issuance total of US$6bn (versus approximately US$90bn in run-off), they estimate that supply will reach US$10bn next year (versus approximately US$50bn in run-off).

However, Wells expects credit card ABS to make a come-back. "Volumes in this segment, as well as in autos, are a function of the economy," he says. "The overall forecast for the economy - barring any unforeseen events - is slow growth at around 5%-10%. I have a positive outlook for US ABS, but believe that the market won't return to normalcy until 2012."

He concurs that esoteric deals - such as structured settlement, aircraft and timeshare ABS - will continue to be a feature of the market. "As there are no non-agency RMBS transactions to speak of and agency deals only yielding so much, esoteric ABS are the only alternative. Investors in these deals are typically looking for tailored structures and so they're often completed privately."

Indeed, investor appetite also drives market growth. "A low interest rate environment makes certain asset classes less attractive because the absolute return is lower. Investors are therefore searching for more yield - hence the demand for off-the-run assets, such as life settlement and XXX securitisations. Negative net supply is also driving appetite for esoteric transactions because investors need to reinvest their cash as deals mature," Van Alstyne notes.

Consequently, subordinate and off-the-run ABS spreads should find it easier than benchmark ABS spreads to push through 2010 levels. The JPMorgan analysts suggest that single-A ABS spreads in benchmark asset classes could reach 45bp-50bp during 1H11, while triple-B ABS spreads could narrow to 75bp-80bp.

Higher up in the capital structure, three-year triple-A credit card and prime auto loan ABS levels are anticipated to retrace the tights seen this summer, given the potential increase in Treasury yields. "We expect triple-A benchmark ABS will return to swaps +15bp-20bp by the end of 2H11, but with the bulk of the tightening in the spring. Over the rest of 2011, we see swaps +10bp as an optimistic target, given the rate forecast and considering that investors will have reached another psychological barrier, returning back to single-digit ABS spreads," the analysts note.

The US market is characterised by a core investor base - the large insurance companies and some pension funds - as well as distressed debt funds and dealers. Van Alstyne observes: "There is a balance in the investor base between traditional and non-traditional accounts, with non-traditional accounts being more demanding of yield and more willing to take positions in esoteric assets. But it's not like it was at the height of the crisis: the investor base is overall more sophisticated."

Investing in European ABS, where double-digit returns can be found, is also an attractive option for some US accounts. "US investors are comfortable with European markets and understand them well," Wells confirms. "But there is some caution around sovereign issues and the lack of clarity regarding the ECB's eligibility criteria. Meanwhile, Asian investors are looking to invest in US corporate/esoteric ABS and CLO issuance and I expect this to continue next year."

Looking ahead, CLO issuance is a bright spot for next year (see also separate outlook article), according to Wells. "The credit quality and credit enhancement is better and the structures simpler in the latest generation of deals. This market has held up well and strong names should continue to perform well."

But the question mark for next year is around non-agency RMBS. "I don't think you can say that the market has returned until non-agency RMBS comes back. It should account for around 30%-40% of the market," Wells suggests.

Investor appetite exists for non-agency RMBS, but regulatory and foreclosure-related issues continue to dog the market. For example, the 'right' way to structure deals still remains unclear.

"It will be 6-12 months before these issues are hammered out," Wells says. "The market will determine the rest of it; for instance, investor due diligence has increased significantly. The market is more efficient these days and smarter about these issues."

Finally, in addition to further NCUA and FDIC issuances, investors should be able to gain exposure to secondary assets through increased distressed selling in 2011. The failure of many regional banks was expected to precipitate a sell-off in legacy assets this year that ultimately didn't materialise.

"We've seen a decent amount of selling, but not to the extent warranted by the overhang," Wells concludes. "However, banks are now at the stage where they've raised capital and want to sell distressed positions, so we should see some secondary supply in non-agency RMBS, CDOs and European CLOs come on to the market next year. Trups CDOs alone, for example, account for US$30bn-US$40bn of such assets."

CS 

CLOs

US CLO market ends 2010 with a bang

It has been an industrious and robust week in the US secondary CLO market, with last week's bid-lists producing high volumes of paper. Although this momentum is set to continue into 2011, the main threat to current prices is said to be lack of market supply.

"With the numerous bid-lists of last week, we saw a fairly decent volume of activity with firm prices," one CLO trader confirms. Indeed, the robust price levels achieved for equity lists caused surprise.

"I've never seen a CLO equity print that traded over par. There was another equity bid-list last week, where we saw prints in the low 80s as well," the trader adds.

He continues: "We even saw single-As in one case trade in the mid-90s, and other single-As approaching very close to 80 and high 70s. It was a fairly big week last week for us, with US$150m-US$200m of CLO paper trading as a result. Some lines even traded before the auction."

After last week's rush of activity, the CLO market is now showing signs of dying down towards year-end. Yesterday, 22 December, saw three bid-lists, while only one is scheduled for today.

Reflecting on the past year, the trader explains that the CLO market has drawn to a close with a robust price framework in place. This, he says, is due to decent price action, further sales and new issues.

"I think that January will bring a more robust CLO market than we've seen before. There's more money on the sidelines, which bodes well for secondary trading," he adds.

Pointing towards the new issues that are expected to kick-start the market again in the New Year, the trader indicates that many managers are currently working to launch new deals. "I think that the CLO market will continue in this mode next year because there will be a robust demand for paper. It's all positive; the new money that is set to come in is gathering clout in the market."

The trader adds that general market consensus suggests that the new allocations will spur activity further. With demand for credit investment and loan funds continuing to be more vibrant, he believes that the foundations for the market are reasonably good.

However, the lack of supply is one potential negative factor. "The waning supply is probably what is artificially keeping prices firmer. On a risk-reward basis, we've seen some improvement. But because there is less supply and less stock, prices tend to be a little more buoyant then they should be," the trader says.

However, he concludes: "The wall of money is definitely available and we know this going forward. US insurance companies are set to be big contributors, along with pension and retirement funds, which are currently allocating money to credit funds and managers."

The trader confirms that the volume of new US CLO issuance over the last year totals US$300bn.

LB

RMBS

Granite perks up Euro RMBS

It has been another quiet week in the European RMBS market, as most participants prepare for end-of-year. However, with senior and mezzanine Granite spreads rallying last week, prices have now settled at a relatively high level.

"It's been fairly quiet, with not a great deal of activity," one ABS trader comments. The lack of momentum in the market has seen spreads in Granite senior and mezzanine paper levelling off after their recent rally.

He continues: "The rally we saw in Granite triple-A and triple-B paper at the end of last week has now flattened, but at quite a bit higher than it was at the beginning of last week."

The trader explains that while the market benefitted from Granite's price rise last week, this week's lack of activity has resulted in a limited number of sellers. "At the time of the rally last week, there was still activity to drive from this and - although there is some activity pushing through - it's been a different case this week. With no sellers, we're left with people only looking to buy, so any offers are being lifted. Having said that, the offers are dwindling now too," he adds.

Elsewhere in the secondary market, the trader notes that although activity is dying down for year-end, there are still flashes of movement in the prime RMBS space. Particularly, he says, in the HMI 10 and Arkle Master Issuer Series 2010-2 deals.

"Prices in prime are reaching similar levels to the past few weeks, with deals trading at 140-150. But we're not looking at huge amounts of activity unfortunately," the trader notes.

Looking ahead, one RMBS portfolio manager confirms that there are no bid-lists planned before the New Year. Additionally, he says that he is unsure as to what will drive the next bout of RMBS activity.

"We're not exactly sure of where activity is due to pick up, as investors normally look for more off-the-run deals. I think there may be more interest in different deals in the New Year," he concludes.

LB

CDS

State-backed CCP still on the cards

Rumours abound in the CDS market that the European Parliament still harbours a desire to create a single European central counterparty. The CCP would be backed by the ECB, although details of exactly how it would work remain unconfirmed.

One CDS strategist believes a single European central counterparty is an exciting prospect. He says: "I have heard the rumour, but not seen any detail. In an academic sense, it is the best solution because it is theoretically the most efficient. It would be backed by the ECB, so there is no question of instability or creating more systemic risk."

Another senior executive has also heard that German and French officials want the EU to guarantee a European clearinghouse, but that there are fears in the UK that such a move would de-emphasise London as a financial centre. He says: "The world seems headed pell-mell towards multiple central counterparties in multiple jurisdictions - a result driven by a combination of national pride and competitive instincts."

He adds: "I think for any clearinghouse to be successful, whether they have explicit or implicit government guarantees, they need to be open and to serve a need in the marketplace. Because of that need, they must fall within regulatory oversight that ensures open access and transparency. I would like to think competition in the private sector could do this without government stepping in to control everything."

The strategist has similar concerns and believes that competition is favourable to a "socialist-style single CCP approach". He says the idea might be unworkable from a practical point of view, but could have the potential of creating European-guaranteed securitisation functioning somewhat like a European Fannie Mae or Freddie Mac.

JL

Insurance-linked securities

Lodestone II closes

The second catastrophe bond offering from the Lodestone Re programme has closed (see also SCI 1 December). The cedant, Chartis subsidiary National Union Fire Insurance Company of Pittsburgh, was able to obtain upsized cover of US$450m from an initial US$250m.

S&P has confirmed its preliminary double-B plus and double-B ratings to the transaction's series 2010-2 US$125m class A-1 and US$325m class A-2 notes. The three-year notes priced at 600bp over Treasury money market funds for the A-1s and 725bp over for the A-2s.

This is the second series issued in 2010 by Lodestone Re. Each series covers the same perils (US hurricanes and earthquakes), the only differences being the attachment and exhaustion points.

S&P says: "At issuance, the series 2010-2 class A-1 notes have the same risk profile (attachment and exhaustion points) as the series 2010-1 class A notes and have the same rating. One difference between the two notes is that the 2010-2 class A-1 notes will have a probability of attachment of 1.13% and an expected loss of 0.95%, versus 1.14% and 0.96% respectively for the series 2010-1 class A notes. The 1bp difference is a result of simulation error in the modelling process and we do not consider it to be significant."

As a result, at each annual reset, the series 2010-2 class A-1 notes may reset to a slightly lower attachment point than the 2010-1 class A notes because the series 2010-1 class A-1 notes have a lower probability of attachment.

The series 2010-2 class A-2 notes will cover an exposure layer not covered by the series 2010-1 issuance. These notes will have an attachment point of US$5.85bn and an exhaustion point of US$6.5 bn.

In comparison, the series 2010-1 class B notes covered losses in excess of the attachment point of US$5bn up to US$6bn. The probability of attachment for the series 2010-2 class A-2 notes is 1.44%, with an expected loss of 1.28% and a probability of exhaustion of 1.13%.

MP

ABS

Dynamic Credit US acquisition agreed

Duff & Phelps has acquired both Dynamic Credit Partners' US consulting business and June Consulting Group. The transactions accelerate growth initiatives in Duff & Phelps' corporate finance and legal management consulting practices, the firm says.

"Integrating these two like-minded firms into the Duff & Phelps culture and service platform expands our footprint in key markets. These strategic investments also fall in line with our commitment to deploying capital for growth," says Noah Gottdiener, Duff & Phelps ceo.

Founder of Dynamic Credit's US business, Jim Finkel will join Duff & Phelps' New York office as md and leader of its financial engineering practice. June Consulting Group's founder, Louann Barnett, will join as md in the firm's Houston office. The acquisitions bring over 22 client service professionals to Duff & Phelps.

ABS

Investment consulting arm adds directors

Timothy Ng and Mark Hong have joined Clearbrook Global Advisors' investment consulting arm, Clearbrook Investment Consulting. As md and head of research, Ng will oversee all aspects of the Clearbrook research process. As director, Hong will play an integral role in the research and allocation of alternative investments.

Hong is the former co-founder and principal of Structured Investment Group (SIG), while Ng was previously its president and cio. The pair have more than 40 years of combined investment experience, managing assets and risk at numerous firms, including Smith Barney, Prudential Asset Management and Merrill Lynch.

ABS

Structured finance pair promoted

Perella Weinberg Partners has elected six individuals to join its partnership from 1 January 2011, two of whom are structured finance professionals. Andrew Dym and Mark McGreenery work in the firm's asset management department in New York.

Dym has 23 years of experience in the structured finance industry. Prior to joining Perella Weinberg in 2008, he held positions of global head of structured finance and capital markets at CIFG Services and co-head of North American term asset-backed securities, asset-backed commercial paper conduits and principal investments at JPMorgan Securities.

McGreenery has more than 25 years of experience in the financial services industry. Prior to joining Perella Weinberg in 2008, he founded Amergin Portfolio Strategies. McGreenery was previously an md at D.B. Zwirn & Co, Fleet Capital Leasing and BTM Capital Corporation, where he was responsible for the development and implementation of new business strategies in the areas of structured finance and leasing.

CDO

CDO management services formalised

GE Asset Management (GEAM) is set to assign its asset management duties for the Navigator CDO 2003, 2004, 2005 and 2006 transactions to GE Capital Debt Advisors (GECDA). Moody's says it has been informed that all requisite consents and approvals for the assignment will be received and conditions to closing will be satisfied.

GECDA has provided management services for the deals on GEAM's behalf since October 2009. The transfer of management responsibilities is understood to be primarily a change of legal responsibility for the management, but will have no material change on the personnel or resources used to manage the portfolios.

Moody's has determined that the proposed assignment will not cause its current ratings on the affected notes to be withdrawn, reduced or qualified. It does not express an opinion as to whether the proposed assignment could have non-credit related effects.

CDS

Credit fund PM named

Third Avenue Management has promoted Thomas Lapointe to portfolio manager of the Third Avenue Focused Credit Fund, naming him a partner in the firm. The fund builds on the firm's distressed debt experience and invests throughout the capital structure, including high yield bonds, bank loans, capital infusions and debt-for-equity exchanges.

Lapointe will continue to be supported by a team of 29 investment professionals, eight of whom are focused on credit investing. He joined the firm in June 2009 and has since then built its credit team and launched the US$1bn Focused Credit Fund. Prior to this, he was co-head of high yield investments at Columbia Management.

CDS

Consultancy adds financial engineering pair

Duff & Phelps has appointed Simon Greaves as lead md and James Wood as md in its European financial engineering practice. The London-based pair will develop new products around complex instruments.

Before joining Duff & Phelps, Greaves was md at Fitch Solutions, where he was responsible for EMEA and APAC. Prior to this, he was a founding member and head of sales and marketing at Applications Networks - a financial software solutions start-up that was sold to Reuters.

Wood is an expert in designing and deploying quantitative models for valuation and risk management of complex financial instruments, including exotic credit derivatives. Prior to joining Duff & Phelps, he was at Fitch as md and head of the structured products valuation group.

CDS

CDS trader fined and banned

The UK FSA has banned and fined Nabeel Naqui - the former head of the credit products group (CPG) Europe and Asia Pacific at Toronto Dominion Bank - £750,000 for deliberately mismarking his trading positions and misleading fellow staff to conceal his losses over a period of two years.

Between July 2006 and June 2008, Naqui headed the CPG Europe and Asia Pacific desk at the bank. As well as being responsible for other traders, Naqui was responsible for trading credit default index and tranche products.

Over this period, the FSA states that Naqui persistently mismarked his trading book in order to overstate his performance. He also provided deliberately altered quotes to those conducting an independent valuation of Toronto Dominion's trading positions.

Naqui was made redundant at the end of June 2008 and during the transition of his trading book to a new trader, pricing issues were uncovered. Following enquiries by Toronto Dominion into the pricing issues, a downward valuation of C$96m was made to Naqui's book. Consequently, Toronto Dominion was fined £7m (reduced from £10m for early settlement) on 17 December 2009 for repeated systems and controls failings in relation to this case (SCI 23 December 2009).

Margaret Cole, the FSA's md of enforcement and financial crime, says: "Market professionals cannot resort to mismarking in any circumstances. Our tough action in this case should serve as a deterrent to others who might damage market confidence by acting in a similar manner."

CMBS

CMBS partner hired

Dechert has appointed Laura Swihart as partner in its finance and real estate practice based in New York. She will contribute to the firm's CMBS and structured finance coverage.

Swihart was most recently a partner at Winston & Strawn. Prior to this, she acted as securitisation counsel to Freddie Mac in connection with the Freddie Mac multifamily CMBS programme. In this role she advised Freddie Mac and other lenders and investors in connection with whole mortgage loans, participations, B-notes, mezzanine loans and other high-yield CRE financial assets.

CMBS

CRE workout firm launched

Peter Monroe and Joseph Gaynor have launched VRM - a value-added receivership and asset management company specialising in Florida commercial properties. Monroe will assume the position of ceo, while Gaynor becomes president of the firm.

Monroe was previously oversight board president of the RTC and coo of the Federal Housing Administration. He is a licensed Florida lawyer, commercial real estate broker and retail/office developer.

Gaynor is a Florida commercial real estate workout attorney and receiver, commercial developer and partner at Johnson, Pope, Bokor, Ruppel & Burns.

Monroe comments: "Special expertise is essential in dealing with complex Florida commercial workouts because of the challenges of Florida's judicial-only foreclosure process, Florida's extraordinary commercial real estate market decline and persisting high unemployment levels."

VRM has assembled a team of Florida real estate experts to service the needs of special servicers, lenders and, importantly, passive commercial investors. The firm's advisory board includes: Fred Hemmer, an office and retail developer; Mark Rosenfeld, former ceo of Jacobsons Department stores; Jim Shapiro, former head of Rutenberg Commercial Properties; Larry Comegys, a real estate consultant specialising in commercial workouts; Drew Smith, a developer of retail, office and industrial properties; Steve Duckworth, a multifamily developer; and Dennis Ruppel, a real estate and banking attorney.

CMBS

CRE firm adds debt and equity md

Grubb & Ellis has appointed Richard Jarocki as md in its debt & equity finance group. He will co-manage the group's efforts in the Northeast of the US, alongside former head of Citi's CMBS lending programme Steven Roberts.

Jarocki joins the firm from Rock Financial Consulting, where he advised on debt vehicles and processes. Prior to this, he spent eight years with Prudential Mortgage Capital, where he oversaw the large loan capital markets transaction team.

CMBS

CMBS joint strategy announced

Bank of America Merrill Lynch has entered into a formal agreement with AEGON USA Realty Advisors that will enable it to source new lending opportunities for its CMBS securitisation programme.

Mike Mazzei, global head of CMBS at BofA, says: "AEGON has a very successful and established commercial real estate lending platform. As the CMBS market continues to recover, this relationship will allow us to increase our securitisation capacity and strengthen our CMBS origination capabilities."

Investors

BlueBay acquisition completed

Royal Bank of Canada has completed the acquisition of BlueBay Asset Management (see also SCI 19 October). The acquisition brings over 200 employees and approximately US$40bn in AUM to RBC's global asset management business.

"By leveraging the combined strengths of RBC and BlueBay, this transaction will enable us to bring a greater range of asset management solutions to our clients around the world," says John Montalbano, ceo of RBC Global Asset Management.

Regulation

Former Comptroller set to return

The former US Comptroller of the Currency John Dugan is rejoining Covington & Burling as partner. Dugan will chair the firm's financial institutions group and advise clients on a range of legal matters affected by the increased regulatory requirements.

Most recently, Dugan directed the OCC's efforts to help shape critical parts of the sweeping Dodd-Frank financial reform legislation. "With over 25 years of experience in financial institution policy, regulatory, supervisory, litigation and legislative issues - both in private practice and in senior positions in the federal government - John brings extraordinary knowledge of financial institutions and the current legal and policy landscape," says Timothy Hester, chair of Covington's management committee.

Regulation

Former RTC exec to lead CFI

The FDIC has appointed Jim Wigand as director of the newly established Office of Complex Financial Institutions (CFI), which was created to better position the agency to carry out its responsibilities under the Dodd-Frank Act.

The CFI is responsible for the continuous review and oversight of bank holding companies with more than US$100bn in assets, as well as non-bank financial companies designated as systemically important by the new Financial Stability Oversight Council. CFI will also be responsible for carrying out the FDIC's joint responsibility with the Federal Reserve Board to require, review and approve resolution plans for large bank and non-bank institutions. Finally, the CFI will be charged with implementing the FDIC's new authority for the orderly liquidations of bank holding companies and non-bank financial companies that fail.

Wigand has served as the deputy director for franchise and asset marketing in the Division of Resolutions and Receiverships (DRR) since 1997. In this capacity, he oversaw the resolution of failing insured financial institutions and the sale of their assets. Prior to 1997, Wigand served in various executive positions at the FDIC and Resolution Trust Corporation (RTC).

Pamela Farwig will replace Wigand. She joined the FDIC Division of Supervision and Consumer Protection in 1998 as a bank examiner.

ABS

Absolute return fund launched

Loomis, Sayles & Company has launched the Loomis Sayles Absolute Strategies Fund - a global absolute return-oriented fixed income strategy. The fund, the firm says, aims to be an 'all weather' product for investors seeking consistent returns through all market environments.

The investment process will begin by identifying key global macro themes - including global inflation scenarios, yield curves, currency outlook and credit cycle. Next, the team will assess top-down risk/return opportunities to find the best cross-asset class ideas. In pursuing this objective, the firm says it will have the freedom to invest in opportunities including fixed income - government, sovereign and corporate instruments - currencies, securitised assets and derivatives.

"As we listen to market sentiment, it has become clear that investors are looking for a nimble process that can tactically respond to what we believe are the three biggest drivers in the market today - credit, curve and currencies. We have designed this fund to take full advantage of the best ideas generated by our vast research and analytical resources," says Matt Eagan, co-portfolio manager of the fund.

As well as Eagan, a co-manager of Loomis Sayles Multisector Bond funds, the new fund's portfolio management team consists of Kevin Kearns, senior derivatives strategist and absolute return portfolio manager, and Todd Vandam, senior credit strategist.

ABS

Securitisation arranger numbers released

SCI has released its latest league tables for bank arrangers in the European and US structured credit and ABS markets. The figures show JP Morgan has eased in to top spot in Europe, while in the US Barclays Capital has extended its lead for 2010 to the end of November. The leaders participated in an impressive €7.26bn and US$13.5bn 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 asset-backed securities (ABS), commercial mortgage-backed securities (CMBS), residential mortgage-backed securities (RMBS) and collateralised debt/loan obligations (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.

The year-to-date tables to end of November 2010 are available here.

ABS

ECB to introduce loan-by-loan requirements

The ECB is to establish loan-by-loan information requirements for ABS in the Eurosystem collateral framework. It intends to introduce the requirements within the next 18 months: first for RMBS and thereafter gradually for other ABS asset classes.

Loan-level data will be provided in accordance with a template, at least on a quarterly basis on, or within one month of, a deal's interest payment date. To allow the processing, verification and transmission of the data, the Eurosystem will encourage market participants to establish the necessary data-handling infrastructure. This is expected to facilitate the application of the loan-by-loan information requirements and contribute to further developing transparency in the ABS market, the ECB says.

When the necessary data-handling infrastructure has been established, the provision of loan-by-loan information will become an eligibility requirement for ABS. The Eurosystem will continue to accept securities not meeting the new information criteria until the obligation to submit loan-level data comes into force.

ABS

SF counterparty criteria reviewed

Fitch says it expects limited changes after its annual review of structured finance counterparty criteria. The minor changes to the criteria - such as content, marginal updates and supporting analysis - will be implemented to incorporate its latest advance rates and volatility cushion calculations.

Fitch further expects the focus of the review to be on making any improvements to the clarity and transparency of the criteria report. The fundamental criteria, however, is expected to remain unchanged and no rating actions are expected as a result of the review.

In summary, the key principles of Fitch's counterparty criteria include: counterparties with issuer default ratings (IDRs) of at least single-A can act as eligible counterparties to support SF transactions with securities rated in the double-A category or higher. Remedies upon loss of eligibility include guarantee or replacement with another eligible counterparty or collateralisation where minimum ratings are maintained, the agency says.

Counterparties with IDR ratings of triple-B can continue to act as counterparty where collateral is posted. Where collateralisation is a feasible remedy, Fitch says it expects remedial action to be effected within 14 days of losing eligibility. For those exposures that cannot be addressed by collateralisation, remedial action is expected within 30 days.

Despite the remedies outlined, certain counterparty exposures are deemed so excessive that they cannot be addressed by remedial action. These include structures in which the account bank holds the majority of enhancement supporting notes targeted for high investment-grade ratings. In such cases, ratings above those of the counterparty may not be possible, the agency concludes.

ABS

Disparity continues in EMEA performance outlooks

Moody's has raised its performance outlooks to stable from negative for ABS and RMBS in parts of the EMEA region, while outlooks for these securities in other countries remain negative. The disparity in outlooks is based on continued differences in the pace of economic recovery among individual countries, the agency reports.

Moody's notes that economic improvement in Germany, France, the Netherlands and the UK outpaced that in Spain, Italy, Ireland, Portugal and Greece in 2010. This provides a clearer indication of the direction of future ABS and RMBS performance, the agency notes.

"Moody's expects house prices in the UK and Netherlands to remain largely unchanged over the next two years," explains Moody's vp Alberto Barbachano. "Accordingly, the outlook for UK prime RMBS was raised to stable from negative, while the outlook for Dutch RMBS remains stable."

Moody's economist Nitesh Shah says: "The performance of assets underlying a number of securitisations improved markedly in 2010, despite negative GDP growth, rising unemployment, escalating fiscal deficits and tighter credit availability."

The agency says that it attributes this unexpected uptick to proactive management of arrears levels by servicers, in addition to the buyback of defaulted loans and loan modifications and EMEA-wide government initiatives to assist distressed borrowers. However, initiatives may merely be masking the extent of performance deterioration and troubled borrowers could still ultimately default.

"Moody's anticipates further rating actions on highly rated European securitised transactions in 2011, in light of continuing economic and financial challenges and evolving sovereign risk throughout Europe," says Virginie Marraud des Grottes, Moody's analyst.

Additionally, the agency says that its introduction in February 2011 of an updated methodology for measuring operational risk could potentially affect the ratings of around 70 EMEA transactions.

The agency expects European banks to make continued use of securitisation transactions and covered bonds to meet large financing requirements in 2011 and 2012.

ABS

Tobacco settlement bonds reviewed

Moody's has taken action on 35 securitisations of payments owed to the issuers pursuant to the Master Settlement Agreement (MSA) between domestic tobacco manufacturers and 46 states and certain territories party thereto.

The actions are being taken as a result of the adjudication of the Freedom Holdings case - the outcome of which reduces the uncertainty surrounding certain legal risks to the cashflows of the transactions. The specific actions address the agency's views on both the reduced legal uncertainty to the MSA cashflows, as well as the impact of continued declines and outlook for future declines in cigarette consumption.

Moody's says it is removing its review placement with direction uncertain and confirming the ratings on 12 classes in eight transactions. It is also placing 67 classes in 19 transactions under review for possible downgrade.

The 2010 MSA payment was approximately US$6.4bn - 16% lower than the 2009 payment. The reduction in the payments was a result of two main factors: the 9.3% decline in 2009 cigarette shipments and the approximately 8% non-participating manufacturer (NPM) adjustment. The NPM adjustments are subject to a dispute between the states and the participating manufacturers.

Further, the agency is placing 140 classes in 25 transactions under review for possible upgrade. Most of these classes are serial bonds, many of which will mature in the near future and will not be materially affected by the future MSA payment declines. In addition, many transaction structures include liquidity and debt service reserve accounts in the amounts sufficient to cover most, if not all, serial bond maturity payments, the agency concludes.

ABS

DSB case highlights back-up servicer role

More than a year after the bankruptcy of DSB Bank, its delinquency rates for ABS and RMBS transactions have declined significantly, despite an initial spike. However, Moody's notes the continued efficiency of DSB's servicing operations, as well as uncertainty regarding the size of losses from its 'due care claims'.

The agency says it has seen a substantial drop in 60+ day delinquencies for the DSB ABS and RMBS transactions, for which the bank acted as originator and servicer. This decrease is in spite of the steep rise in delinquencies following the collapse of DSB. However, current arrears remain on average more than double those of pre-bankruptcy levels.

Iris Thate, Moody's avp says: "Moody's believes the efficiency of DSB's servicing operations has remained good to date."

However, the agency notes that the transfer of servicing responsibilities to a third party is not yet complete. This issue highlights the difficulties in appointing a competent back-up servicer in some cases.

Doubt also remains about the size of losses from 'due care claims' on DSB-originated loans backing the ABS and RMBS transactions. "On 17 January 2011, noteholders will vote on a proposal put forward by DSB's bankruptcy trustee, under which DSB will enter into negotiations with borrowers to settle outstanding due care claims and debt restructuring requests," adds Shivani Kak, Moody's avp.

The agency in this case has assessed the necessity for clear documentation; the risks associated with representations and warranties provided by unrated originators; the weakness of the 'cold' back-up servicing arrangements; the importance of the role of the issuer and securitisation trustee; and the importance of aligning the interests of the bankruptcy administrator and issuers. Moody's ratings on the four notes remain on review for possible downgrade, mainly because of the effect of the 'due care claims' and continued uncertainties surrounding the servicer transfer.

CDO

CRE CDO delinquencies drop again

Continuing resolutions and extensions of non-performing loans resulted in a second-straight decline for US CREL CDO delinquencies, according to Fitch. Delinquencies fell to 12.2% in November from 12.8% in October.

"Though CREL CDO delinquencies have lingered between 12% and 13% over the last year, realised losses have continued to accumulate," says Fitch director Stacey McGovern.

Approximately US$890m of realised losses have taken place over the last 12 months. "Defaulted and credit risk assets continue to be resolved with realised losses to the CDOs and corresponding reduction in credit enhancement to all classes," McGovern adds.

Nevertheless, CREL CDO investment grade ratings are expected to remain relatively stable, while some volatility in the below investment grade rated tranches is likely.

New delinquencies in November included only one new term default, while seven delinquent assets were removed, Fitch says. These include: four extended matured balloons; two loan interests disposed of at a loss; and one loan payoff.

CDS

CME Clearing Europe wins FSA approval

CME Clearing Europe has been approved as a Recognised Clearing House (RCH) by the UK FSA. Barclays Bank and JPMorgan will act as the first settlement banks for CME Clearing Europe and will be a central part of its payment infrastructure. JPMorgan will also provide custody and liquidity services.

"Receiving RCH status from the FSA means we can now fully focus on the launch of CME Clearing Europe, early in 2011," comments Andrew Lamb, CME Clearing Europe ceo. "Through this new London-based subsidiary, we will provide locally-relevant clearing services to meet the needs of our European customers, a key CME Group market. Our London team will continue their work to ensure potential clearing members and customers are ready for our launch."

CME Clearing Europe's initial focus will be on introducing OTC commodity products, with clearing solutions for OTC financial products coming soon after launch. The intention is to offer multi-asset OTC clearing and to build on the parent company's European presence to further extend the geographical reach of CME clearing services.

Separately, CME Clearing Europe has applied to the CFTC to become a registered Derivatives Clearing Organisation (DCO).

CDS

No auction for Tea Co

ISDA's Americas Determinations Committee has ruled that a bankruptcy credit event occurred with respect to The Great Atlantic & Pacific Tea Company on 12 December. However, it has voted not to hold a CDS auction for trades referencing the name.

CDS

Further security-based swap rules proposed

The US SEC is to propose a new rule specifying the steps that end-users must follow when engaging in a security-based swap transaction that is not subject to mandatory clearing. It also voted to propose rules required under the Dodd-Frank Act that would set out the way in which clearing agencies provide information about security-based swaps that the clearing agencies plan to accept for clearing. This information is designed to aid the SEC in determining whether such security-based swaps are, in fact, required to be cleared.

The first rule specifies the steps that end-users must follow to notify the SEC of how they generally meet their financial obligations when engaging in a security-based swap transaction exempt from the mandatory clearing requirement. The SEC is seeking comment on whether to provide an additional exemption for certain financial institutions that would permit those institutions to use the exception to mandatory clearing that is available to end-users.

The second proposal would clarify how clearing agencies that are designated as 'systemically important' must submit advance notices for changes to their rules, procedures or operations that could materially affect the nature or level of risk presented at such clearing agencies.

"Promoting clearing wherever possible and appropriate is a key to building a regulatory framework for the derivatives market," says SEC chairman Mary Schapiro. "Through the clearing process itself, regulators will be more easily able to monitor transactions including prices and positions taken by traders, and thereby rein in the risks associated with these instruments."

CDS

CDPC counterparty rating downgraded

Moody's has downgraded the counterparty rating of NewLands Financial to Aa2, where it remains under review for possible downgrade. The agency has also withdrawn its ratings on all of the CDPC's outstanding debt.

NewLands redeemed all of its debt with a face value of US$385m on 20 December, leaving just over US$130m in capital to support its US$5.45bn notional CDS positions. Moody's has determined that the remaining capital is adequate to support a Aa2 counterparty rating. The rating continues to be on review for possible downgrade as the agency evaluates the possibility that additional capital may be paid out.

According to Moody's, following its launch on 28 March 2007, NewLands was only able to enter into a limited number of super-senior CDS contracts before the onset of the credit crisis effectively prevented it from writing more business.

CDS

CCP capitalisation consultation underway

The Basel Committee has issued a consultative paper on the capitalisation of bank exposures to central counterparties (CCPs) in particular, those related to the capitalisation of default fund exposures.

The Committee says it is giving affected parties and stakeholders an opportunity to comment on the proposed rules. Mark White, chair of the Basel Committee's risk management and modelling group and assistant superintendent of Canada's Office of the Superintendent of Financial Institutions, says: "The Committee's intent is to provide incentives for banks to increase the use of CCPs. This is balanced, however, by the need to ensure that the risk arising from banks' exposures to CCPs is adequately capitalised."

Further, the Committee has also announced that it will conduct an impact study, which will help in finalising and calibrating the CCP proposals. The impact study will be conducted in coordination with the Committee on Payment and Settlement Systems (CPSS) and IOSCO's Technical Committee.

These organisations will collect relevant data from the CCPs participating in the impact study. CPSS and IOSCO collectively set the standards for the supervision and oversight of financial market infrastructures - including CCPs - and are currently in the process of reviewing the standards.

The proposed rules for the capitalisation of bank exposures to CCPs will be finalised when the final CPSS-IOSCO standards are published during 2011. The Committee expects the rules to be implemented in its member jurisdictions by January 2013.

CMBS

US CMBS 2.0 index prepped

Barclays Capital will launch a US CMBS 2.0 index on 1 January 2011. The index aims to offer investors a clear measure for evolving CMBS markets by tracking the new category of recently issued securities commonly referred to as 'CMBS 2.0'.

The US CMBS 2.0 index will be a rules-based index constructed to measure the market of investment grade CMBS conduit and fusion deals issued since the beginning of 2010. To date, these securities have been issued as private placements and are therefore not eligible for the Barclays Capital US Aggregate index.

While many of the CMBS 2.0 deals are already eligible for the broader Barclays Capital US Investment-Grade CMBS Index, this new index also captures additional securities with a broader set of eligibility criteria. This includes a lower minimum deal size of US$250m, while sub-indices based on quality rating and average life will also be available.

BarCap's head of index, portfolio and risk solutions Waqas Samad says: "The US CMBS 2.0 Index is an important benchmark, offering clarity to a new class of securities in the evolving and resurgent US CMBS market. This product underscores the strength of our benchmark index platform, combining unparalleled coverage of the fixed income asset class with an ability to offer market transparency to both broad-based debt investors and dedicated investors in narrower yet growing markets."

These indices are intended to be used as a standalone benchmark for dedicated CMBS investors, issuers and market participants, which can also be blended with other BarCap fixed income indices to create an even broader benchmark. The new index can also be used as the basis for investable index products, such as total return swaps, structured notes and exchange-traded funds, the bank says.

CMBS

CMBS prepayment announced

MEPC is to prepay £102m of the £470m loan securitised in the Opera Finance (MEPC) CMBS. The prepayment will take place on 20 January 2011, in advance of the loan's maturity in July 2012, and is part of a wider financing strategy.

The CMBS, which was completed in November 2005 and arranged by Eurohypo, is secured against four of MEPC's business parks - Milton Park in Oxfordshire, Birchwood Park in Warrington, Chineham Park in Basingstoke and Hillington Park in Glasgow - currently valued at £619m.

As a consequence of this prepayment, Birchwood Park will be released from the securitisation. MEPC will use a combination of cash from recent disposals alongside a new £62m five-year facility from Eurohypo secured against Birchwood Park to repay the £102m of the £470m CMBS. The prepayment reduces the loan-to-value ratio of the securitised loan to 74%, with the interest cover remaining at 192%.

Rick de Blaby, MEPC's chief executive, says: "MEPC's early repayment of part of the CMBS notes underscores both the company's robust financial position and prudent debt management strategy. It was always our intention to proactively address the refinancing ahead of maturity, reduce the gearing and position ourselves for a new phase of activity and performance."

CMBS

Delinquent unpaid CMBS balance reverts

The delinquent unpaid US CMBS balance in November 2010 increased by US$1.94bn, up to US$61.11bn (a 3.3% increase), according to Realpoint's latest Monthly Delinquency Report. This followed the previous month's substantial decrease of US$3.02bn - the first reported decrease in over a year.

The delinquent unpaid balance for CMBS at such time had decreased uncharacteristically to US$59.18bn from US$62.19bn a month prior, mostly attributed to the resolution of the US$4.1bn Extended Stay Hotel loan from the WBC07ESH transaction (SCI passim). The expected but somewhat abnormal decline experienced in October followed 14 straight months of increase.

Outside of the 60-day delinquency category, the remaining delinquency categories each increased in November, fuelled by further delinquency degradation and credit deterioration. Despite ongoing loan liquidations, modifications and resolutions, the two most distressed categories of foreclosure and REO grew by US$893m as a whole (3.95%) from the previous month and remain up by US$14.71bn (168%) in the past year.

Distressed assets

FDIC closes three structured transactions

The FDIC yesterday closed three structured transactions. Two relate to commercial loans and one to residential loans.

A consortium of investors organised by Colony Capital participated in the acquisition of two separate structured transactions with the FDIC, comprised of two portfolios of loans - one concentrated in the Western part of the US and one concentrated in the Northern part of the US. For the North portfolio, Colony Capital and the Cogsville Group teamed with entities affiliated with WL Ross & Co and Invesco to acquire 557 loans with an aggregate unpaid principal balance of approximately US$204m.

For the West portfolio, Colony Capital and Cogsville worked with Mount Kellett to purchase 198 loans with an unpaid principal balance of US$137m. The purchase price was 27% and 60% of the unpaid principal balance of the loans for the North and West portfolios respectively.

On both transactions, Milestone Advisors served as advisor to the FDIC on the sale of the 40% managing member equity interest in a newly formed limited liability company created to hold the acquired loans, with the FDIC retaining the remaining 60% equity interest. In each case, the FDIC provided 1:1 leverage financing bearing a 0% interest rate.

The third structured transaction - dubbed 2010-2 Multibank Structured Transaction - involved a sale of a 40% equity interest in a newly-formed limited liability company created to hold assets with an unpaid principal balance of approximately US$279m from nine failed bank receiverships. The winning bidder on the pool was Cache Valley Bank, Logan, Utah, with a purchase price of approximately 22.22% of the unpaid principal balance.

As an equity participant, the FDIC will retain a 60% stake in the LLC and share in the returns on the assets. Again, the FDIC offered 1:1 leverage financing to the LLC, which will issue to the FDIC a purchase money note in the original principal amount of US$30.6m. The sale was conducted on a competitive basis with the FDIC receiving bids for either a 40% ownership interest or a 20% ownership interest in the LLC.

The FDIC as receiver for the failed banks will convey to the LLC a portfolio of approximately 761 distressed residential acquisition and development loans, of which more than 50% are delinquent. 81% of the collateral in the portfolio is located in Utah, Arizona, California and Nevada. As the LLC's managing equity owner, Cache Valley will manage, service and ultimately dispose of the LLC's assets.

Legislation and litigation

Judgment analysed in swaps case

ISDA has commented on Justice Briggs judgment handed down in the case of Lomas and others v JFB Firth Rixson and others. The case involved four out-of-the-money counterparties declining to terminate their ISDA Master Agreements with Lehman Brothers International Europe (LBIE), relying on section 2(a)(iii) of ISDA's Master Agreement to not make payments to LBIE. The Administrators consequently sought directions as to the interpretation of Section 2(a)(iii) and its compatibility with the anti-deprivation principle of English insolvency law.

The Court rejected the Administrators' argument that the condition of Section 2(a)(iii) should be interpreted as being subject to a limitation that it may only be relied upon for a 'reasonable time'. Additionally, the Court did not accept that a non-defaulting party had any obligation to designate an early termination date. Crucially, the Court found that Section 2(a)(iii) is 'suspensive' in effect - overturning the non-binding comments in the Marine Trade case that Section 2(a)(iii) is a once-and-for-all test.

The Court also held that there was no breach of the anti-deprivation principle under English insolvency law in the context of the swaps between the parties. The findings which state that payments under certain types of transactions suspended under Section 2(a)(iii) may be extinguished on the last date for payment is surprising, ISDA says, and at odds with the market's expectations.

Before the case had been brought, ISDA says that it had started the process of preparing a form of amendment to Section 2(a)(iii) in response to concerns raised by supervisors, including the UK Treasury. This process is set to continue, the Association says, regardless of the outcome of the case. It will consult with its members to agree a form of amendment to Section 2(a)(iii), which will be made available to market participants to amend their ISDA Master Agreements.

Real Estate

Second consecutive rise for CRE prices

US commercial real estate prices as measured by Moody's/REAL National - All Property Price Index (CPPI) increased by 1.3% in October, the second consecutive monthly increase for the index.

As of the end of October, prices were up 3.2% from one year ago, yet down by 34.4% from two years ago. Prices are currently 41.9% below the peak values reached in October 2007, the agency reports.

Moody's md Nick Levidy says: "We expect commercial real estate prices to remain choppy until transaction volumes pick up. Low volumes suggest that the bid-ask spread for commercial real estate is still very wide."

Despite October's price increase, the month still held the second highest percentage of distressed loans in the history of the index - totalling 30% of repeat-sale transactions. There were 110 repeat sales in October, with the dollar volume totalling US$1.4bn.

The agency also reports that the Eastern regional property type indices indicate large gains over the past year in office and retail. Apartments, however, showed smaller gains, with a decline in industrial property. Southern property showed annual gains in apartments and industrial, with office and retail experiencing negative returns.

The four property types in Southern California also showed mixed results, with industrial and office posting positive returns and apartments and retail recording negative returns. Florida apartments have posted a 33.5% increase in prices over the last four quarters - regaining a good portion of the value they lost last year when prices dropped by 46.1%, Moody's concludes.

Real Estate

AVMs under scrutiny

The recently-issued guidance from the Financial Institutions Examination Council (FFIEC) on real estate appraisals and evaluations will have a major impact on institutions relying on automated valuation models (AVMs), according to Integrated Asset Services (IAS).

New interagency appraisal and evaluation guidelines were issued earlier this month by the five federal bank regulatory agencies that make up the FFIEC - the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of Thrift Supervision. The new guidelines require any real estate-related financial transaction originated or purchased by an FFIEC agency to address the property's actual physical condition and characteristics. It also addresses the economic and market conditions that affect the estimate of the collateral's market value.

"To their credit, AVMs have always represented, and still represent, a quick, efficient and low-cost way to gather an abundance of sales information," says Ryan Tomazin, president of IAS. "The technology will continue to serve as an adequate assessment tool for a good number of applications, but for interagency transactions, the standard's been raised."

Tomazin suggests that, given the additional requirements imposed by the regulators, lending institutions will need to look at so-called 'hybrid' AVMs for certain applications. These next-generation models integrate a professional third-party inspection into the analytics to deliver a current view of subject and neighbourhood condition, condition-adjusted value and market price trends, the firm states.

"While the new FFIEC guidelines add another level of difficulty to mortgage lenders, raising the bar like this will surely be good for consumers and for the industry as a whole," adds Tomazin.

IAS has built out a full suite of end-to-end solutions designed around the industry's mortgage servicing challenges. The firm aims to offer a number of advanced collateral valuation applications, including AVMs, BPOs and appraisals, as well as complete REO management.

Regulation

Impact of new capital standards estimated

The Financial Stability Board (FSB) and Basel Committee on Banking Supervision (BCBS) have concluded their assessment of the macroeconomic impact of the transition to the new bank capital and liquidity standards. The report examines the impact of the transition to stronger capital requirements assuming a transition period of eight years, based on an estimate of the December 2009 level of common equity capital relative to risk-weighted assets in the global banking system.

The assessment concludes that the transition to stronger capital standards is likely to have a modest impact on aggregate output. The report estimates that if higher requirements are phased in over eight years, bringing the global common equity capital ratio to a level that would meet the agreed minimum and the capital conservation buffer, this would result in a maximum decline in the level of GDP relative to baseline forecasts of 0.22%, with a range of estimates around this point average.

This maximum GDP impact would occur after 35 quarters, according to the report. In terms of growth rates, annual growth would be 0.03 percentage points below its baseline level over this period.

That would then be followed by a recovery in GDP towards the baseline. A faster implementation period would lead to a slightly larger reduction from the baseline path, with the trough occurring earlier, resulting in a somewhat greater impact on annual growth rates.

Regulation

Basel 3 rules text released

The Basel Committee has issued the Basel 3 rules text, which presents the details of global regulatory standards on bank capital adequacy and liquidity agreed by the Governors and Heads of Supervision, and endorsed by the G20 leaders at their November Seoul summit. The Committee also published the results of its comprehensive quantitative impact study (QIS).

The Basel 3 framework sets out higher and better-quality capital, better risk coverage, the introduction of a leverage ratio as a backstop to the risk-based requirement, measures to promote the build-up of capital that can be drawn down in periods of stress and the introduction of two global liquidity standards. The standards will be phased in gradually, so that the banking sector can move to the higher capital and liquidity standards while supporting lending to the economy.

With respect to the leverage ratio, the Committee will use the transition period to assess whether its proposed design and calibration is appropriate over a full credit cycle and for different types of business models. Based on the results of a parallel run period, any adjustments would be carried out in the first half of 2017, with a view to migrating to a Pillar 1 treatment on 1 January 2018 based on appropriate review and calibration.

Both the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) will be subject to an observation period and will include a review clause to address any unintended consequences. Banks have until 2015 to meet the LCR standard and until 2018 to meet the NSFR standard. Banks that are below the 100% required minimum thresholds can meet these standards by, for example, lengthening the term of their funding or restructuring business models that are most vulnerable to liquidity risk in periods of stress.

The QIS exercise assessed the impact of capital adequacy standards announced in July 2009 and the Basel 3 capital and liquidity proposals published in December 2009. A total of 263 banks from 23 Committee member jurisdictions participated in the QIS exercise.

The Committee has also issued guidance for national authorities operating the countercyclical capital buffer, as a supplement to the requirements set out in the Basel 3 rules text. The primary aim of the countercyclical capital buffer regime is to achieve the broader macroprudential goal of protecting the banking sector from periods of excess aggregate credit growth that have often been associated with the build-up of system-wide risk. In addition to providing guidance for national authorities, this document should help banks understand and anticipate the buffer decisions in the jurisdictions to which they have credit exposures, the Committee says.

Meanwhile, the Basel Committee and the Financial Stability Board (FSB) will also issue in the coming days an updated report of the Macroeconomic Assessment Group, which analyses the economic impact of the Basel 3 reforms over the transition period. In addition, the Committee is conducting further work on systemic banks and contingent capital in close coordination with the FSB.

RMBS

Refinancing Register criteria updated

Fitch has updated its rating criteria for analysing the securitisation transactions that use the German Refinancing Register. In particular, the updated report contains the agency's view on and criteria aspects for transactions that use the register to accept loans instead of only mortgage liens.

The refinancing register is a file in which an originator can record the loans and mortgage liens that it sells to third parties without an immediate transfer of the loans and mortgage liens to the purchasing party. The Kreditwesengesetz - the German Banking Act or KWG - provides that by using the register all loans and mortgage liens that are sold by an originator are deemed originator-insolvency remote as soon as they are entered in the register. This removes the need to immediately assign the loans to the purchasing party or, in case of liens, for registration in the relevant land register.

The way the Refinancing Register is applied in a given structure will be factored into the agency's analysis of a transaction. It will also determine if Fitch can assume that the registered loans and mortgage liens are originator-insolvency remote.

RMBS

RMBS loss severities to increase

Fitch's latest RMBS performance metrics results indicate that loss severities on distressed US residential mortgage loans are likely to increase by an additional 5%-10% from current levels. This, the agency says, is due to higher loss mitigation, foreclosure expenses and weakening home values.

The anticipated increases for average loss severities for prime loans are expected to increase from 44% to 49%-54%. Alt-A loans, currently at 59%, are expected to increase to 64%-69%, while subprime loans, currently 75%, will increase by 80%-85%.

Prior to the recent negative trends, loss severities have remained stable for over a year, Fitch notes. Beginning in 2Q09, recovery values have been supported by an improvement in home prices brought on by low mortgage rates, homebuyer tax credits and government directed loan-modification programmes. From 2Q09 through 2Q10, home prices jumped by approximately 6% nationally and almost 12% in California, according to the Case-Shiller Index.

However, the positive momentum in home prices is not sustainable, according to Fitch md Grant Bailey. "With the tax credits expired and a high inventory of distressed properties remaining to be sold, the housing market faces significant challenges in 2011. The higher the glut of unsold properties on the market, the more adverse of an effect it will have on home prices."

Consequently, Fitch says it is projecting a further 5%-10% decline in home values nationally next year. Recoveries on distressed loans will also be negatively affected by increased servicing costs.

Due to loan modification efforts and servicer process issues, the average number of months between a troubled borrower's last payment and the property liquidation date has grown to 19 months - the highest level on record. The agency also predicts that the figure will increase by at least six months in 2011, even if the recent problems related to foreclosure affidavits are resolved quickly.

Several factors could help stem rising loss severities, according to Fitch md Diane Pendley. "Servicers are increasingly turning to less costly alternatives to foreclosure, such as short-sales. Servicers are also reducing the amount of payments they advance to the securitisation trust on behalf of delinquent borrowers."

This trend is particularly evident among subprime loans. In November, servicers only advanced on approximately 60% of delinquent subprime loan payments, down from approximately 90% of such payments at the beginning of 2009.

The combination of less-costly foreclosure alternatives and reduced servicer advancing is expected to mitigate, but not entirely offset, the negative pressure on recovery trends from weakening home prices and increased liquidation timelines. Therefore an increase in loss-severity for outstanding seasoned RMBS rating reviews is anticipated, Fitch concludes.

RMBS

RMBS re-REMICs on review following error

S&P has placed its ratings on 1,196 classes from 129 US RMBS re-REMIC transactions issued in 2002-2010 on credit watch with negative implications. The actions primarily reflect the agency's revised analysis of timely interest, including consideration of the impact of pro rata allocation of interest among senior and subordinate classes.

S&P says that previously it incorrectly analysed timely interest payments and did not incorporate an analysis of the effect of interest paid pro rata on the senior securities for those transactions that have this structural feature.

Approximately two-thirds of the classes affected by this credit watch action are from transactions issued in 2010, with one-quarter issued in 2009. Of the remaining classes issued before 2009, credit deterioration was the primary factor in many of the actions, the agency says.

The affected ratings do not include classes that have displayed sufficient credit enhancement to pay timely interest under the appropriate stress scenario to maintain the rating. Additionally, the action does not include any class currently rated below single-B or that are expected to pay off in a relatively short period of time, the agency states.

S&P plans to resolve the credit watch placements after completing further analytical cashflow testing and documentation reviews.

RMBS

Indian RMBS maintain stable performance

The performance of Indian RMBS transactions has remained stable throughout 2010, according to Fitch, with all 16 transactions that it rates maintaining their initial ratings with stable outlooks. The strong performance is a result of low average defaults of less than 1.5% of original principal outstanding across all vintages, the agency says.

The usage of credit enhancement has also been very low as a result of the low level of defaults and the availability of excess interest spread. Jatin Nanaware, Fitch associate director, says: "The Fitch Indian Residential Mortgage delinquency index has also shown a significant reduction over the last 12 months, with the index dropping 13% year-on-year, as of August 2010. Mortgage borrowers continue to exhibit positive credit behaviour, which is reflected in the high levels of prepayments, to the extent that on average over half of all amortisations have come from prepayments across all vintages."

RMBS

Hermes XVII restructured

Fitch has affirmed HERMES XVII Dutch RMBS, following a restructuring of the transaction. The changes made include an improvement to the credit risk of the portfolio due to the removal of arrears and some high loan-to-value loans, as well as additional mechanisms to support the unrated class E notes.

Following the restructuring, the substitution period will end immediately with the originator repurchasing €656.25m of assets from the collateral portfolio at par value. Principal will be allocated on a pro-rata basis to the notes. The end of the substitution period is expected to have a positive impact on the transaction by allowing credit enhancement growth due to the sequential amortisation of the pool.

The step-up dates for the class A, B, C and D notes have been moved back to January 2042, whereas the step-up date for class E notes was set to be January 2013. Meanwhile, the margin on the class A notes has also been changed to 0.5% from 1%, with the margin on the class E notes increasing to 9.5% from 2% - stepping up to 19%.

If the percentage of loans in arrears for more than three months reaches 0.35% of the current outstanding pool, the transaction will capture available net excess spread to build up a reserve fund to a target of 0.55% of the current balance. This reserve will provide support for the class E notes only and will be released to cover interest shortfalls on the class E notes. Once the step-up date for the class E notes is reached, any amount credited to the reserve fund will be used to pay down the outstanding class E principal balance.

Beyond the class E step-up date on January 2013, the agency confirms that any net excess spread available to the transactions will be allocated to redeem the outstanding principal balance on class E notes.

RMBS

RMBS data integrated

BlackBox Logic has partnered with Thetica Systems to improve its RMBS forecasting. Under the agreement, the Thetica platform will integrate BBx Data, thereby offering a high-speed analytics module capable of running multiple bonds simultaneously under various scenarios.

The tool allows for the most precise RMBS forecasting, the two firms say, utilising BBx's dataset and client or third-party credit and default predictions. Jack Broad, president of Thetica Systems, says: "This partnership offers analysts and investors more flexible and streamlined integration of bond valuation components including credit modelling, cash-flow waterfall libraries and in-depth loan-level data."

SIVs

BMO SIVs on review

Moody's has placed the Euro and US MTN programmes of the Links Finance and Parkland Finance SIVs on review for possible downgrade. The vehicles are sponsored by the Bank of Montreal (BMO) and there is a direct linkage between the ratings of the SIVs and of BMO due to the commitment of BMO to provide a liquidity facility for the repayment of the CP and MTNs as they fall due. The SIVs will also generate funds through an orderly unwind of its portfolio.

The reviews are the result of BMO's Aa2 long-term rating being placed under review for possible downgrade on 17 December 2010.

SIVs

SIV operating amendment mooted

Nightingale Finance is proposing to amend its operating manual between the investment manager and the administrator. The amendment will enable the issuer to enter into a reverse repo trade with its sponsor AIG Financial Products, without restriction to asset eligibility criteria, so long as committed financing from its sponsor is in place.

The maximum proposed size of the trade is up to US$300m and the issuer intends to utilise its current cash holding of US$250m for this purpose. Execution of the trade is expected to increase the issuer's credit risk exposure in its portfolio from current level of approximately US$1.4bn to up to US$1.7bn. However, due to the committed financing that guarantees repayments of the issuer's outstanding senior debt amount, the ratings assigned to the current outstanding notes are not affected.

Moody's has determined that the proposed changes and performance of the activities contemplated therein will not cause the current ratings of the affected notes to be adversely qualified, reduced, suspended or withdrawn. The agency does not express an opinion as to whether the amendment could have non-credit related effects.