Contents

ABS

Euro ABS gathers momentum

European ABS activity is beginning to pick up again after its year-end wind-down. Despite the spread widening seen last week, traders maintain a positive outlook for the sector during the first quarter.

"It was pretty quiet at the start of last week, although we saw more activity on Thursday and Friday," one ABS trader says. Nevertheless, the trader says that the ABS market feels reasonably strong.

He continues: "Contributing to this strong performance, we've seen some client activity mainly focused on buying paper. It's definitely looking stronger - especially on the higher yielding paper like Granite triple-Bs and single-As, which have all traded up."

CMBS is also performing well, despite a low proportion of investor interest so far, the trader says. "We've had some good bids on CMBS so far. We've sold some paper to clients and it does feel more positive because there are dealers looking to buy and expecting new lines to be issued this month. Every dealer is anticipating a rise in client buying and they're trying to get on the paper before that happens."

The trader also suggests that new issuance is expected to grow over the coming months, primarily due to the higher-than-average volume created towards year-end. "Banks are still looking for funding in the new issuance area. We also saw some covered bonds pricing in the last few days, so we expect ABS issuance to follow. The general expectation is that new issues will continue to fund themselves on ABS, but there are few specific details yet," he says.

However, although the market is currently feeling strong, the trader notes that the spread widening of the last few days could potentially weaken the marketplace. "I don't translate this into weakness yet. But if the widening continues, then the small rally that everyone is anticipating may not happen - everything will become weaker," he warns.

Overall, the trader says that while the ABS market feels positive in mezzanine paper and CMBS, as well as in UK and Dutch prime RMBS, the expected rally will fail to launch until banks begin to issue again. "Basically, levels will be kept where they are for the meantime," he concludes.

LB

CLOs

Bid-list anticipation dominates CLO market

CLO market participants are eagerly awaiting trading on a 43-item bid-list due today, which could significantly impact sentiment going forward. At the same time, European CLO activity lags behind the US, where pricing levels in mezzanine paper have traded up considerably.

"The CLO market has performed well over the last week," one CLO trader confirms. However, he notes a widening gap in US activity which is far exceeding European levels.

He continues: "Particularly between Christmas and the New Year period, the US market has been trading up big time. Double-Bs there have reached into 70s and 80s cash price, which is 10% yield - everyone is saying 'wow'."

Many European dealers began the New Year taking heed of US activity and increased their offers accordingly - some of which sold, the trader says. However, he adds that there is still a disconnection between demand and the depth of the European market.

Meanwhile, a 43-item bid-list - 17 items of which are European - is scheduled to trade this afternoon. "The reserves are very high," the trader says. But, as anticipation over the list builds, he finds it difficult to predict an outcome.

Either way, the trader says, the nature of today's sale will determine the current levels of the European CLO market. "Just as primary new issuance used to set the tone for secondary, lists like this provide a lot of information for us."

He adds: "It's all about how many line items trade: at the moment, people are saying that the offer side is definitely below the reserve level. Traders are therefore saying that they won't bid on those line items, as there's not much point. But it only takes a few customers to say here's the bid - above the reserve level - and, if a few names trade, then it will really set the tone for the period ahead."

However, the trader further explains that if no names trade, then investors will assume the market is not at a high enough level and will wait for offers to "cool down". Alternatively, he says that a successful outcome could change the CLO market dramatically.

"If things trade, then another 5-10 points will be put on the offer. Either way, at least this bid-list will provide a talking point and a benchmark for the market," he concludes.

LB

CDS

Euro sovereign-corporate CDS trades recommended

Concerns about peripheral Europe have increasingly affected the CDS spreads of core European sovereigns in the past two months, creating dislocations in the sovereign-corporate CDS relationship of core Europe. Indeed, credit strategists at Barclays Capital believe that a number of corporate CDS now trade too tight to their triple-A rated core sovereign CDS.

In particular, some German and Dutch names are trading inside their sovereigns, which the BarCap strategists indicate is not sustainable in the long term. "In the case of peripheral sovereigns, history shows that corporate CDS spreads can trade inside those of their domiciles for a protracted period of time," the note. "However, we view core European spreads differently. While we respect arguments about the diversification of large, multi-national non-financials, we do not believe they are sufficient justification for lower-quality corporates trading through the strongest of core European sovereigns."

The strategists consequently recommend two trade ideas to capitalise on this dislocation: buying protection on Bayer, versus selling protection on Germany; and buying protection on KPN, versus selling protection on the Netherlands. However, they point out that the key near-term risk for these trades is continued underperformance of core sovereign CDS spreads, triggered by a further transfer of strength from the core to the periphery - potentially including a significant upsizing of the European Financial Stability Facility.

They conclude: "Sovereign-induced volatility remains a key risk for credit spreads, in our view. To mitigate this risk, we believe European credit investors should be long core European non-financials and underweight the periphery."

CS

CLOs

CLO investor demand underscored

Over half (58%) of the respondents polled in JPMorgan's latest global CDO client survey say they plan to add CLO exposure this year. Indeed, buyers in the sector outnumber sellers by a ratio of about 5:1, up from about a 3:1 ratio one year ago.

120 clients participated in the survey, indicating that they were most concerned about regulatory risk - which JPMorgan structured credit analysts note is "hardly a surprise", given that European risk retention guidelines have recently been finalised. Concern over fundamentals came after this, reflecting participants' benign outlook for credit in 2011, followed by concern over sovereign risk (a new survey category).

Survey responses suggest that 125bp (or a 100bp-150bp range) is most appropriate for primary US triple-A CLO spreads. Appropriate primary European triple-A CLO spreads are seen about 50bp wider, according to JPMorgan.

Meanwhile, 4x-5x leverage and 12%-15% returns are viewed as most appropriate for primary CLO equity. However, some dispersion towards greater leverage and higher return was evident among responses, suggesting a diversity of risk tolerance and hurdles for future CLO equity investors.

Finally, structural resilience was deemed as the most important factor in maintaining the longer-term viability of the primary CLO market - unchanged from a year ago. Manager performance disclosure and confidence in rating agencies are low priorities, indicating that many respondents believe they can conduct their own due diligence effectively.

The European Banking Authority published final guidelines for Article 122a of the Capital Requirements Directive at the end of December. For CLOs, asset managers that are not 'credit institutions' can retain the 5% risk requirement through an 'originator SPV' (see SCI 17 November 2010) and possibly by other means. Retention by funds that are "controlled or managed by the investment manager" is restricted.

CS

CMBS

Tiering expected for German multifamily CMBS

Values for properties securing German multifamily loans in European CMBS are estimated to have decreased by 16% on average since origination. However, the risk of principal loss remains low for over half of the current securitised loan balance, according to a recent Barclays Capital study.

"While the outlook for the German rental market is positive for the next few years, performance tiering is likely to remain as a result of property location, quality of the mortgaged stock and, importantly, property management quality. We think that in addition to the already defaulted loan balance (6%), an additional 5% of the securitised balance has a high risk of defaulting before loan maturity," securitisation research analysts at the bank note.

The BarCap analysts studied all 57 outstanding German multifamily loans underlying 29 European CMBS transactions, with a current outstanding securitised loan balance of €15.9bn. They found that performance to date has been mixed: net operating income increased since origination for half of the loans and decreased for the remainder. Overall, equity sponsors of securitised German multifamily loans appear not to have increased net operating income substantially.

Loan maturities are concentrated in 2H13, with the aggregate funding gap at loan maturity estimated to be €1.5bn. Due to a scarcity of available capital, 74% of transactions are consequently expected to extend by more than two years and 12% by one to two years.

CMBS bonds mature on average 4.2 years after loan maturity. The usual tail period is three years for single-borrower transactions, thereby limiting potential loan extensions without a bond extension.

For 57% of the current securitised loan balance, the risk of principal losses is low after extension, according to the study. Such a risk is assessed as medium for 36% of the balance, while for 7% - which has a securitised LTV of above 100% - a principal loss is implied, unless loss mitigating measures are implemented or property values increase.

CS

ABS

Asia trust head appointed

Citi has appointed Adrian Nye as regional head of its agency and trust business in the Asia Pacific region. Nye's primary focus will be on broadening the bank's range of corporate trust services available to regional issuers and intermediaries active in the capital markets, M&A, project finance and securitisation sectors. He will report to Alan Smith, head of issuer services based in New York, and to David Russell, head of securities and funds services Asia Pacific, based in Hong Kong.

Nye began his career at The Industrial Bank of Japan in London and helped establish their corporate trust business. He subsequently held similar positions at Bankers Trust Company, focusing on both corporate trust and the depositary receipts business. Having moved to Hong Kong with Bankers Trust in 1998, he joined Citi in 2001.

ABS

Structured credit pros hired

StormHarbour has made three new senior appointments in to its client-facing business in Geneva.

Alberto Ferro-Villani joins StormHarbour (Suisse) as director of capital markets and origination. Alberto previously worked at Hepta Capital Partners as md of its mid-sized corporate-focused private equity fund. Prior to this, he worked at Credit Suisse on the corporate debt derivatives desk.

Hugues Dauphin joins the firm as director and Vincent Briffaud as associate, both in its client solutions team. Dauphin previously worked at Calyon in Geneva as executive director and head of its structured credit distribution, while Briffaud was an associate at BNP Paribas' structured credit solutions team.

The trio will report directly to Cyril Martinez, the firm's principal and general manager.

ABS

Italian SF counsel hired

Bird & Bird has hired Silvia Morlino as counsel in its banking and finance group, to develop its Italian structured finance practice. She joins from Allen & Overy, where she worked since the firm opened in Italy in 1998.

Morlino specialises in debt issues, share issues in IPOs, structured finance transactions, securitisation pursuant to Law 130 as well as English law and insurance structured products. She has recently been working on several public finance deals from the initial government securitisations (Inpdap).

ABS

Securitisation lawyer promoted

Bingham has elected 13 lawyers to its partnership, including one securitisation specialist. Robert Gross is a member of the firm's structured transactions group in the Washington, DC office and has represented investment banks, hedge funds, issuers, sellers, purchasers, investors, servicers and monoline insurers in connection with domestic and cross-border financial transactions. His transactional experience includes public and private offerings and resecuritisations of ABS; asset sales and purchases, including sales and purchases involving distressed assets; mergers and acquisitions of mortgage-related assets and businesses; future flow securitisations in emerging markets; publicly registered offerings of securities backed by UK and Australian mortgage loans; servicing transfers; derivatives; various financing transactions; and the creation and maintenance of various distressed asset fund structures and programmes.

CDO

CDO vet replaced

Paul Czekalowski, global head of FICC structuring at UBS, is understood to have left the bank. Paul Levy and Andrea Sambo have consequently stepped up as co-heads of EMEA FICC structuring, reporting to Matthew Zola, the firm's global head of securities structuring.

Levy joined the bank in September 2009 as European head of institutional structuring, having previously been a partner at Prytania Investment Advisers and before that head of exotic credit structuring (EMEA) at Merrill Lynch. Sambo was previously head of EMEA private-side structuring and oversaw the establishment of the firm's insurance and pensions industry group.

CDS

Risk manager adds senior adviser

Kamakura Corporation has appointed David Rowe as senior adviser to its management team in Honolulu. Rowe will advise the team on strategic directions for the firm's software and risk management information businesses. He will also be spending time with Kamakura's clients on best practice risk management strategies, the firm says.

Rowe is the founder and president of David Rowe Risk Advisory. Prior this, he was evp for risk management at SunGard, where he provided strategic input to its risk solutions.

CDS

Vice-chair returns to ISDA board

Gay Huey Evans has re-joined ISDA's board of directors as vice-chairman and non-executive chairman of Europe. Huey Evans, who is based in London, will act as an advisor to ISDA's board and management with respect to public policy issues in Europe. She will also work alongside the firm's executive management in refining the association's strategic plans in the new regulatory environment.

Huey Evans served as ISDA chairman from 1994 to 1998 while she was senior md in the capital markets division at Bankers Trust Company. Most recently, she served as vice-chairman of investment banking and investment management at Barclays Capital.

CDS

Wealth manager continues expansion

FalconView Capital Partners has expanded the scope of its business and management team, beginning by moving its head office to new quarters in Stamford, Connecticut. The firm's geographical reach will continue to expand through Latin America and Europe during 2011, it says.

FalconView co-founders Roy Ellis and Ivan Santillan recently acquired the interests held by minority shareholders and now own 100% of the holding company that, in turn, owns licensed and regulated broker-dealers in the US and in the Cayman Islands.

In addition, they have joined with ex-Brown Brothers Harriman banker Carlos Castellanos to found Landmark Wealth Management. The Swiss-based investment advisory firm will offer high net-worth individuals and institutions access to a platform of service providers, including Swiss private banks and independent asset managers.

CDS

Bank expands structured credit desk

Citigroup has appointed Sarah Draper as vp in its structured credit team based in London, moving over from Barclays Capital. Draper will report to Peter Keller, the bank's head of European credit structuring. Her appointment has been described as an"opportunistic expansion" of the team.

CLO Managers

ABS CDO manager transferred

Cairn Capital is set to replace Solent Capital as the collateral manager for ABS CDO Rhodium 1. Moody's has determined that the management change will not cause its current ratings on the affected notes to be reduced or withdrawn.

CLOs

Hudson CLO transfer confirmed

Pramerica Investment Management has confirmed that Aladdin Capital Management UK has assigned to the firm its rights and obligations under the collateral management agreement for Hudson CLO I (see SCI 23 December). In addition, two London-based Aladdin employees - Peter Allan and Richard Etheridge - will join Prudential's European leveraged finance team.

In London, Prudential Fixed Income currently serves as collateral manager or portfolio adviser for 13 CLOs with assets totalling more than €4.5bn. These transactions include four Dryden CLOs, two static CLOs, two replacement manager CLOs and five sub-advised CLOs.

"This is our eighth replacement manager or portfolio advisory contract in Europe in 2010 and we remain a willing partner to investors and managers seeking similar strategic solutions," says Jonathan Butler, md and head of Prudential's European leveraged finance business.

CMBS

CRE vet moves on

Ellington Management Group has appointed Leo Huang as a portfolio manager in its commercial real estate debt group. Huang will oversee the firm's CRE debt business, investing in CMBS, B-notes, mezzanine debt and various other CRE-related investments. He will report to Michael Vranos, Ellington's founder and chief executive.

Huang previously worked at Starwood Capital Group as head of real estate fixed income, while overseeing investment activity for the firm's VRE finance Trust company. Prior to this, he spent 10 years at Goldman Sachs as md and co-head of its CRE lending business.

CMBS

CMBS partner appointed

Sidley Austin has appointed Kevin Blauch as partner in its structured finance and securitisation practice. With a strong emphasis on handling CMBS deals for major investment banks, loan originators and investors, Blauch will focus on all aspects of the firm's structured finance activities.

Blauch has worked in the commercial mortgage loan workout area and has been involved in various real estate-related insolvency matters, involving CMBS in particular. He has also represented financial institutions or their management in dealing with troubled assets or related investigations.

CMBS

CRE md named

NAI Global has appointed Peter Ruggiero as md in its global capital markets team. He is tasked with expanding capital market activity across the firm's CRE platform, including providing clients with acquisition/disposition solutions, as well as debt and equity financing and asset management.

Ruggiero was most recently with Cassidy Turley and its predecessor Colliers International, where he created and managed its capital markets platform. Prior to this, he led Prudential Real Estate Investors' disposition strategy and managed its national sales platform.

Distressed assets

Opportunistic CRE fund minted

Declaration Management & Research has launched the DMR CRE Debt Fund I, which focuses on special situation recapitalisations of US commercial real estate of all types. Through opportunistic distressed debt acquisitions, discounted pay-offs and new senior and mezzanine financing, the fund targets an all-in yield in the low to mid-teens.

Declaration expects the fund to be the first in a series of CRE-related funds that it will launch over the coming years. The team is led by Michael Kelley, a 25-year industry veteran who built Merrill Lynch's global real estate principal investment businesses and managed CMBS before leaving in 2004. He is joined by Peter Jolicoeur, who worked with Kelley as the head of credit underwriting for Merrill Lynch's real estate principal investment team in North America, and Jin Lee, former principal at Royalton Capital and cio at Manchester Real Estate & Construction.

Manulife Financial Corporation and its US division, John Hancock Financial, will provide co-investment capital. Declaration is an operating company of Manulife Asset Management, Manulife's global investment management arm.

NPLs

Starwood snaps up non-performing portfolio

Starwood Capital Group has acquired a non-performing commercial loan portfolio with an outstanding principal balance of US$157m from a Midwest regional bank. The portfolio was purchased for 40 cents on the dollar and represents a price of around 32% of initial capitalisation.

There are 137 commercial loans in the portfolio, with concentrations in Florida, Indiana, Michigan, North Carolina and Ohio. Starwood says that through its Global Opportunity Fund VIII, which closed earlier this year, it has now purchased three loan portfolios in the last year with an aggregate outstanding principal balance of US$537m (see SCI issue 179).

"This acquisition is another example of Starwood Capital Group's ability to create value in today's competitive real estate market while building on the momentum we have achieved with Starwood Global Opportunity Fund VIII this year," says Chris Graham, Starwood Capital Group md.

RMBS

Promotion for SF attorney

Lowenstein Sandler has promoted attorney Jonathan Wishnia to become a member of the firm in its corporate department. Wishnia advises on mortgage and structured finance matters, including the trading and financing of whole loans and servicing rights. He also works in coordination with the capital markets litigation group, providing forensic analysis services in connection with MBS, ABS, CDOs, ABCP conduits, SIVs and derivatives.

RMBS

MBS trio recruited

Amherst Securities Group has recruited Peter Davidson, Chris Heaney and Chris O'Neill to help expand its MBS sales and client base.

Davidson assumes the role of md in Amherst's New York office, covering insurance companies, money managers and hedge funds. Previously, he was md in the mortgage-backed sales group at RBS and a director in mortgage-backed sales at Merrill Lynch.

Heaney has been named md in Amherst's mortgage sales division in Connecticut. He was previously md at Jeffries, specialising in structured product sales, including MBS, ABS, CMBS and CDOs.

Finally, O'Neill will serve as svp in the firm's mortgage sales division in New York. Previously, he was svp at Jefferies in its MBS and structured product sales group.

RMBS

Retail broker-dealer launched

Former co-heads of Morgan Stanley Smith Barney's capital markets division, Kevin Morano and Tom O' Brien, have launched SumRidge Partners - a fixed income broker-dealer catering to the wealth management industry.

SumRidge's core business is market marking in investment grade corporate and municipal bonds, US treasuries and agency securities, including CMOs. The firm - which will specialise in trades sized US$1m and under - aims to provide investment advisors, broker-dealers and all retail debt capital market participants with the tools to navigate the fixed income markets.

RMBS

Promotion for MBS vet

Fortress Investment Group has promoted Greg Finck as head of its newly created mortgage and asset-backed portfolio strategies team (MAPS). In his new role, Finck will move over to Fortress' asset management arm, Logan Circle Partners, and will report to Logan Circle ceo and cio Jude Driscoll. Based in New York, he will lead Logan Circle's structured product activities, focusing on the RMBS and ABS markets.

With over 18 years of experience within the mortgage and asset-backed markets, Finck was most recently an RMBS and ABS portfolio manager within Fortress Credit. Prior to this, he worked at Goldman Sachs as md, responsible for mortgage securitisation and secondary trading of RMBS.

RMBS

Charges determined for Schwab fund

The US SEC has charged Charles Schwab Investment Management (CSIM) and Charles Schwab & Co (CS&Co) with making misleading statements regarding the Schwab YieldPlus Fund. The SEC has also charged the firms with failing to establish, maintain and enforce policies and procedures to prevent the misuse of material and non-public information, while deviating from the YieldPlus Fund's concentration policy.

Further, the SEC has filed a complaint in federal court against CSIM's former cio for fixed income, Kimon Daifotis, and Randall Merk, evp at CS&Co, president of CSIM and a trustee of the YieldPlus and other Schwab funds. The SEC alleges that the pair committed fraud and other securities law violations in connection with the offer, sale and management of the YieldPlus Fund.

According to an administrative order, the firms failed to inform investors adequately about the risks of investing in the YieldPlus Fund, describing the fund as a cash alternative with only a slightly higher risk than a money market fund. Schwab's bond funds had a policy of not concentrating more than 25% of assets in any one industry, including private-issuer MBS. The funds violated this policy by investing approximately 50% of the assets of the YieldPlus Fund and more than 25% of the Total Bond Fund's assets in private-issuer MBS without obtaining shareholder approval.

According to the SEC's order and complaints, the YieldPlus Fund's NAV began to decline and many investors redeemed their holdings as the credit crisis unfolded in mid-2007. Unlike a money market fund, few of the fund's assets were scheduled to mature within the next several months.

As a result, the fund had to sell assets in a depressed market to raise cash. While the YieldPlus Fund's NAV declined, CSIM, CS&Co, Merk and Daifotis held conference calls, issued written materials and had other communications with investors that contained a number of material misstatements and omissions concerning the fund.

The SEC also found that CSIM and CS&Co did not have policies and procedures reasonably designed - given the nature of their businesses - to prevent the misuse of material, non-public information about the fund. Therefore, several Schwab-related funds and individuals were free to redeem their own investments in YieldPlus during the fund's decline.

The SEC seeks to have payments placed in a Fair Fund for distribution to harmed investors, and the related recoveries by other regulators, such as FINRA, may be contributed to the Fair Fund. CSIM and CS&Co - whose case continues - have consequently agreed to pay more than US$118m to settle the SEC's charges.

Technology

Software provider names sales svp

Calypso Technology has appointed Chris Zingo as svp in its sales department. Zingo will be responsible for the firm's overall sales strategy, while managing the regional sales managers in Europe, North America and Asia-Pacific. He will report directly to Calypso president Kishore Bopardikar.

Zingo joins the firm from SuperDerivatives, where he was svp of sales and support. Prior to this, he worked at Thomson Reuters as md of North American sales.

ABS

Partnership bolsters fixed income valuations

Advanced Fund Administration (AFA) has partnered with NewOak Solutions to provide periodic valuations and a suite of analytical reporting that will be incorporated into AFA's client service offering. In addition, NewOak and AFA will develop solutions supporting the investment process for managers of complex and illiquid strategies.

Through the partnership with AFA, NewOak will provide security level pricing, risk analytics and collateral data on complex and illiquid fixed income securities across RMBS, CMBS, ABS and individual loans. NewOak will also contribute to AFA's clients 'Stratus', NewOak's proprietary collateral management and loan tracking platform. The system is designed to track all important elements of loans, borrowers and the underlying collateral to help support the evaluation of loan portfolios across residential, commercial, consumer, student loans and life settlement sectors.

ABS

SEC proposes ABS issuer reporting rule

The US SEC is proposing a rule that would permit the suspension of reporting obligations for ABS issuers in certain circumstances - i.e. when there are no longer ABS of the class sold in a registered transaction held by non-affiliates of the depositor.

Section 942(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (SCI passim) eliminated the automatic suspension of the duty to file under Section 15(d) of the Securities Exchange Act of 1934 for ABS issuers and granted the Commission the authority to issue rules providing for the suspension or termination of such duty.

The SEC is also proposing to amend its rules relating to the Exchange Act reporting obligations of ABS issuers in light of these statutory changes.

ABS

Divergent European ABS recovery expected

The recent revival in new issuance for some European structured finance asset classes - notably UK and Dutch RMBS and German auto ABS - is expected to continue this year, according to S&P. However, the revival comes at a time when the market could be set to divide further along geographic lines, with more stable credit performance and greater issuance in core European countries than in peripheral countries.

"We understand that weaker lending institutions in peripheral European economies are currently effectively locked out of private funding, with securitisation no exception. To the extent that these woes reflect continued macroeconomic pressures, we would expect ongoing deterioration of securitised collateral performance in these countries," says S&P analyst Andrew South.

By contrast, collateral performance is stabilising for many asset classes in core European countries and, at the same time, secondary spreads on legacy securitisation issuance in these asset classes have now settled sufficiently, the agency notes. Regulatory uncertainty remains a risk, but is slowly diminishing, while the implementation of S&P's recent revisions to structured finance counterparty criteria may also affect upcoming ratings (SCI passim).

"Given the widespread use of counterparties in European structured finance, we estimate that approximately 40%-50% of outstanding transactions could be affected by our new counterparty criteria and have one or more tranche ratings placed on credit watch negative in January 2011," South adds.

Importantly, the proportion of affected transactions is likely to vary significantly by asset class. S&P expects the approximate percentage of outstanding transactions with affected tranches to be as follows: ABS 45%-55%, CMBS 65%-75%, RMBS 80%-90% and structured credit 10%-20%.

"Depending on transaction-specific circumstances, as well as sponsor and counterparty motivations to alter agreements, we expect affected transactions will either have de-risked by altering their documentation, or potentially have seen notes downgraded by late July 2011," South continues.

Nevertheless, the agency believes that the recovery in European RMBS will continue in 2011, albeit slowly. Mortgage lending volumes are also expected to continue to rise slowly, as financial systems and housing markets in many European countries emerge further from the downturn.

For CMBS, S&P believes that the greatest credit risk in 2011 stems from an increasing number of pending maturities on bullet and balloon loans, and borrowers' likely lack of refinancing options at that time. Any tangible recovery in primary issuance is unlikely to materialise until there is meaningful progress in tackling the overhang of under-capitalised real estate, it notes.

Meanwhile, the European ABS sector has become polarised during recent years, the agency says. However, where investor-placed issuance remains challenging, it believes that originators will likely continue structuring securitisations for use as central bank repo collateral.

Finally, S&P believes that a systemic rise in corporate creditworthiness and lower default rates will have a direct positive effect on CDO ratings.

ABS

Stable outlook for US ABS performance

The outlook for the performance of the majority of US ABS sectors is stable, albeit at weaker levels compared to their performance historically, according to Moody's 2011 surveillance outlook report. The stable outlook applies to securitisations of FFELP student loans, agriculture and construction equipment loans, timeshare loans and franchise loans.

Most of these sectors have some vulnerability to the weak economy, says Moody's vp Irina Faynzilberg. "Performance in these sectors will be weak as delinquencies and defaults stabilise at levels that are substantially higher than those in previous years."

Among government-backed FFELP student loans, some securitisations are exposed to the risk that their servicing will be interrupted as some servicers - with the demise of the FFELP loan in 2010 - will exit the business and the industry consolidates.

Moody's expects a weak recovery in the construction industry and a stable-to-improving condition in the agricultural sector to stabilise the performance of agricultural and construction loan ABS. The agency notes that agricultural equipment loans have been performing well, while weakness in the construction industry has led to poorer performance among construction equipment loans.

Meanwhile, fewer new franchise loans are expected to become delinquent in 2011, although consumers will remain financially restrained. Delinquencies and monthly charge-offs among timeshare loans will decline modestly in 2011, but remain at elevated levels, Moody's adds.

The ABS sectors with negative performance outlooks are private student loan, small business loan and tobacco settlement securitisations. Among private student loan transactions, the agency expects delinquencies and defaults to remain at high levels due to ongoing high rates of unemployment.

Additionally, losses on small business loans are expected to increase as high levels of delinquent loans are charged off. Some improvement in CRE values should increase recoveries on foreclosed properties, however.

Finally, tobacco settlement bonds face negative performance pressure due to the declines in the consumption in cigarettes, as well as non-participating manufacturer adjustments. Further, the legal challenges to the Master Settlement Agreement that created the payments have been receding.

CDO

New Abacus suit filed

ACA, the bond monoline insurer now operating in run-off mode, has filed a lawsuit against Goldman Sachs for fraud and unjust enrichment in connection with CDO ABACUS 2007-AC1 (see SCI Issue 208). ACA says it was misled by Goldman's activities alleging that the CDO was developed and sold by Goldman Sachs on behalf of its hedge fund client, Paulson & Co in 2007. Consequently, ACA is seeking US$30m in compensatory and US$90m in punitive damages.

According to the complaint filed in the Commercial Division of the Supreme Court of New York, Goldman Sachs's scheme was to fail ABACUS so that Paulson could reap huge profits by shorting the portfolio, and so that Goldman could reap substantial fees. Further, Goldman are alleged to have fraudulently induced ACA to take a long position in and provide guaranty insurance for ABACUS by ensuring that Paulson was to be a long investor in the CDO. Goldman are said to have known that Paulson intended to take a short position, reaping nearly US$1bn when the portfolio failed.

Goldman has since settled SEC civil charges connected to the case, agreeing to pay a $550m fine (SCI passim).

CDS

CDS compression continues apace

TriOptima says its triReduce portfolio compression service eliminated US$8.5trn in CDS notionals in a record 95 compression cycles during 2010. US$68.2trn in CDS notional outstanding has been terminated since the introduction of the service in 2003, reaching a peak in 2008 when triReduce credit cycles eliminated US$30.2trn in notional outstanding.

"The success of our compression efforts in previous years, as well as the increased industry efforts and prioritisation accorded to clearing contributed to lower compression levels for CDS index trades in 2010. However, we have seen a doubling in the termination of single name trades since 2008, due to the introduction of coupon standardisation in ISDA's Small Bang," says Raf Pritchard, ceo of TriOptima North America.

CDS

'Significant' improvement for troubled company index

The Kamakura index of troubled public companies indicates a significant continuing improvement in December, dropping 0.65% to 4.45%. On 17 December, the index reached its 20-year low of 4.36%, the firm says.

According to Kamakura, these results suggest that companies in the 'troubled category' are almost exclusively financial institutions or housing related firms, rather than a broad cross section of the economy.

CDS

Asian sovereign CDS tightens

Sovereign CDS spreads tightened most in Asia during a quiet holiday week of muted CDS movement, according to Fitch Solutions. Meanwhile CDS on European sovereigns are still pricing 23% wide of recent historical trading levels.

Another underperformer continues to be financial institutions, says the agency, with CDS spreads pricing over 6% wide of their established trading patterns. "European financials are still under notable pressure, pricing 15% wide of recent historical trading levels," comments Fitch md Jon Di Giambattista.

CDS

2010 sovereign CDS trends tracked

A new report by CMA on the risk profile of sovereign debt issuers has picked out several key credit trends over the last year.

Unsurprisingly, having widened 32% in Q410, Greece tops the list of most risky sovereigns with a five-year cumulative probability of default (CPD) of 58.8%. Venezuela moves off top spot down to second (51.4%), while Ireland (41.2%), Portugal (35.9%) and Argentina (35.4%) round off the top five.

At the other end of the scale, four of the five safest sovereigns were European. Norway leads the way with a five-year CPD of just 2.1%, while it was followed by fellow Scandinavians Finland and Sweden (each 3.0%). Switzerland and the USA each have a CPD of 3.6% to complete the five safest, while the Netherlands dropped out of the top ten completely after widening 62bp in the last quarter.

Q410 saw a big improvement for Argentinean CDS, which tightened 19.6%. Latvia (19.3%), Abu Dhabi (17.9%), Romania (17.3%) and the USA (14.4%) also had a very strong quarter. Of the 13 emerging European countries, ten tightened. The picture was not so rosy in Western Europe though, which had the five largest wideners - Belgium (70.4%), Spain (51.8%), Germany (51.7%), the Netherlands (37.4%) and France (35.2%).

In Asia, Vietnam was the final quarter's worst performer as it widened 23.5% and Moody's cut its rating to single-B, which is also how Fitch rates it. Indonesia had a good quarter and indeed a good year, tightening more than any other Asian sovereign over the course of 2010.

It was also a good year for the Middle East, with Abu Dhabi's cost of protection dropping from 150bp at the start of the year to 94bp, while Qatari CDS tightened 9bp to 88.5bp over 2010 and Saudi Arabia crept into the top ten least risky sovereigns by tightening 75bp.

Australia and New Zealand each widened around 10% in Q410 to end the year weaker, while in South America Brazil reached a two-year low of 91bp in October before finishing the year at 111bp.

CMA says it plans to soon introduce a liquidity score, determining pricing uncertainty by using changes in bid/ask spread, quote contributions and the number of contributors. It says Q410 saw Spain had 1705 daily quotes, while Portugal and Ireland each had 1597. Meanwhile Switzerland, Iraq and Iceland had the fewest daily quotes, with 0.1, 0.25 and 1 respectively.

CDS

Electronic CDS offering launched

UBS has launched a CDS electronic trading offering on Bloomberg for the major iTraxx and CDX global indices, including SovX WE, CEEMA SovX and Western sovereign single names. In addition to the North American, European and sovereign indices, the bank is also publishing live prices across all of the Western European single name sovereigns, in order to offer its clients electronic trading on the most liquid single name contracts, it says.

"UBS is making significant progress in the evolution of the CDS market by establishing an electronic offering for our clients to execute directly from their Bloomberg terminal," says Anatoly Nakum, head of flow IG credit trading for North America at UBS.

CMBS

Japanese CMBS defaults continue apace

Moody's-rated CMBS loans amounting to ¥670bn will mature in 2011, the agency says. Of these, the ten largest loans comprise more than 65% of the remaining balance and amount to ¥432.6bn.

Five large loans amounting to approximately ¥260bn will mature in March and April 2011, with their payment conditions expected to have a strong effect on overall performance in 2011. Of the 219 loans amounting to approximately ¥2.4trn as of the end of 2010, ¥416.5bn worth - or 17.1% of all CMBS loan balances - remained in default.

Loans amounting to ¥337.4bn defaulted in 2010, of which ¥187.3bn were recovered. The net increase in defaulted loans currently stands at ¥150.1bn.

CMBS

New high for US CMBS delinquencies

Trepp reports that the US CMBS delinquency rate rose again in December with the percentage of loans 30 or more days delinquent, in foreclosure or REO climbing 27bp to 9.20%. This is the highest in history for US CRE loans in CMBS, with the value of delinquent loans now exceeding US$61.5bn, according to the firm.

The decline in the delinquency rate in October 2010 appears to have been a blip, with the rate since increasing by 62bp, Trepp says. December's 27bp jump comes despite the fact that new issues continued to make their way into the calculation and servicers continued to resolve troubled loans. The new deals - which Trepp say should have low delinquencies for a while - will continue to put downward pressure on the delinquency rate as issuance continues to grow in 2011. Similarly, the resolution of troubled loans will also help to lower the rate.

"Many have speculated that between the emergence of new CMBS lending, the resolution of many troubled CMBS loans and an uptick in trophy property sales, that the commercial real estate crisis was nearing its final stages. The December delinquency rate underscored that there still may be some nasty surprises in store even as the market shows some signs of healing," says Trepp md Manus Clancy.

CMBS

CMBS delinquencies set to stabilise

The delinquency rate for US CMBS ended 2010 at 8.23%, having moderated in recent months, according to Fitch's latest Loan Delinquency Index results. US CMBS delinquencies are down from the high of 8.66% reached in September 2010. The agency projects late-pays to peak at or near 10% within the next year - a notable markdown down from its original forecast of 12% by 2012.

Several factors should work to keep the index near 10%, despite continued defaults of highly leveraged loans, according to Fitch md Mary MacNeill. "Property market fundamentals are stabilising and liquidity is returning to the market, allowing special servicers to resolve an increasing number of loans."

Current delinquency rates are: 15.63% for multifamily; 13.99% for hotel; 7.2% for retail; 6.24% for industrial; and 5.69% for office. An increase in new CMBS issuance for 2011 is also expected to help offset amortisation and repayments, thereby keeping the universe size relatively stable.

RMBS

Prime Dutch RMBS rated

Moody's has assigned provisional ratings to six classes of the Dutch RMBS, ARENA 2011-I, totalling €700m. The transaction, which references Dutch prime mortgage loans, is backed by residential properties located in the Netherlands and is originated by Amstelhuys. Rabobank is arranging the transaction.

The capital structure includes €147m triple-A rated class A1 notes as well as €497m triple-A class A2s. Beneath the triple-A tranches are €18.2m Aa1 rated class B notes, €16.1m Aa2 rated class C notes, €14m A2 rated class D notes and €7.7m Baa1 rated class E notes.

The expected portfolio loss of 0.65% of current balance of the portfolio at closing and the MILAN Aaa required Credit Enhancement of 8.2% served as input parameters for Moody's cash flow model. Moody's notes that the key drivers for the MILAN Aaa Credit Enhancement number, which is above the respective result of recently rated other prime Dutch RMBS transactions, are (i) the weighted average loan-to-foreclosure-value (LTFV) of 108.3%, which is higher than for other recently rated Dutch RMBS transactions, (ii) the relatively high proportion of interest-only loans (63.2%), (iii) the weighted average seasoning of 1.7 years, (iv) the above average borrower concentration (top 20 borrowers represent 2.1% of pool balance), (v) the limited possibility for the seller to substitute new loans into the subject structure and (vi) the availability of the NHG-guarantee for 27.8% of the loans in the pool.

Apart from the reserve fund, the transaction benefits from an excess margin of 50bp provided through the swap agreement -the swap counterparty is Rabobank International.

RMBS

Private label RMBS losses to increase

Losses on US private label RMBS are set to increase this year as the foreclosure backlog continues to drive down housing prices, says Moody's. The agency expects RMBS issuance to remain limited in 2011, but also says the rate at which loans in securitisations become delinquent should decline.

The exposed flaws in foreclosure practices could delay foreclosures by three to six months, while costs will increase as servicers take corrective actions. Moody's says RMBS trusts and investors will have a clearer picture of potential losses as the year progresses and it becomes clearer which servicers will suffer remedial foreclosure costs.

"The heightened scrutiny of foreclosure proceedings by borrowers and judges in general will lead to additional foreclosure costs and delays," says Amita Shrivastava, Moody's vp and senior analyst. "However, given already high loss expectations on RMBS pools and assuming servicers bear the costs of their malfeasance, these delays and higher costs will not have a material impact on our expected recoveries."

Recent guidance by the US Treasury encouraging servicers to make principal forgiveness a part of loan modifications should improve existing RMBS performance and lower delinquency rates. The agency believes that introducing principal forgiveness, which has been absent from previous modification programmes, should be of particular benefit for borrowers with negative equity.

Securitisation costs are likely to be higher than the cost of other funding sources because of new requirements for governance mechanisms and asset verification, while regulatory changes may also limit RMBS issuance. Originators may be particularly put off securitisation by the requirement to retain a 5% vertical slice.

Moody's also identifies the extension of the higher GSE loan limit as a factor which will damage private label RMBS issuance this year, saying it has already been partially responsible for shrinking the non-conforming jumbo market. "The high cost of securitisation and compliance with the increasing layers of regulation, along with the extension of the GSE loan limits, will continue to make accessing the private label RMBS market an uneconomical funding option for most mortgage lenders," says Todd Swanson, Moody's avp and analyst.

He continues: "The transactions that do come to market will likely have a very strong credit profile as a result of high quality assets, an increased alignment of interest between issuers and investors, increased disclosure of collateral and structural information and structural mechanisms to monitor and enforce breaches of representations and warranties."

Last year largely saw loan performance stabilise, with cumulative losses from December 2009 to November 2010 for 2005-2008 vintage deals growing from 11.8% of original balance to 14.9% for subprime pools, 5.7% to 9.5% for option ARMs, 5.2% to 7.9% for alt-A pools and 0.6% to 1.4% for jumbo pools.

RMBS

Fed set to streamline agency MBS portfolio

The New York Fed's open market trading desk will next week begin streamlining the administration of agency MBS held in the system open market account (SOMA) portfolio by consolidating some of the securities via Fannie Mae and Freddie Mac CUSIP aggregation. Through this process, aggregated CUSIPs are formed by consolidating existing agency MBS with similar characteristics into larger pass-through securities.

Such a process is commonly used by investors, but the Fed warns that the scale of coupon aggregation in this case will be large by market standards. It says the aggregation process will significantly reduce the number of individual agency MBS CUSIPs it holds, thereby reducing the administrative costs and operational challenges associated with managing the MBS portfolio.

The Fed currently holds more than 44,000 individual agency MBS CUSIPs in the SOMA. The aggregation process will reduce this number to less than 10,000. Because all of the payments on the underlying agency MBS flow through to the aggregated CUSIPs, the aggregation process will not otherwise affect the size or characteristics of the SOMA portfolio, the Fed notes.