Contents

RMBS

Agency angst

Questions remain, despite good start to the year

The New Year has seen agency MBS liquidity improve and spreads tighten, but 2011 is not expected to be entirely smooth sailing for the sector. Serious concerns persist about the US government's role in the market, with GSE reform continuing to be a contentious issue.

With the private label sector yet to pick up, agency MBS is dominating the marketplace. John Jay, senior analyst at Aite Group, does not see this situation changing any time soon.

He says: "The mortgage market now is entirely driven by GSE-backed paper, crowding out the private label-type mortgages. I think there might be investors for it, but the banks and mortgage bankers just do not want to originate them. So the place of last resort is going through Fannie and Freddie in order to issue mortgage paper."

Jay says housing construction remained robust into 2007 when there was still easy credit, but the financial crisis has meant there is now a large overhang of inventory stock that cannot be sold. Adding to this backlog is the presence of all the properties being foreclosed on.

A few years ago this stock could have been fuel to the private label fire, but 2011 will not be like that. Banks are demanding stringent assurances when lending, such as higher down-payments and pristine credit scores from all potential borrowers.

Ron D'Vari, ceo of NewOak Capital Markets, knows there will be difficulties in the market this year, but believes there will also be opportunities. He explains: "The CMO machine will start getting more exciting and there could be interesting arbitrage between the pass-throughs and a variety of derivative forms, such as IOs and POs."

He continues: "The sophisticated players that have more understanding and forecasting models of the default patterns and refinancability are going to be able to do some very pool-specific plays, while others may play on the sidelines or take a more macro bet on defaults-driven prepayments or refinancability driven by borrowers' income and housing prices."

The arbitrage is expected to feed back into collateral prices because it will increase demand for future CMOs, so the interaction between prepayment and defaults in pass-through valuations could be an important driver. The direction of interest rates could also be very important.

"Are we going to have a repeat of the summer of 1993?" D'Vari asks. "A reversal of interest rates would mean people could all of a sudden find they have mishedged their mortgages and need to do something else with them. That will create interesting markets in the volatility space and swaps. Rumours of large derivative losses by a few banks can further disrupt the market."

For example, during the panic of the summer of 2003 losses of half a point a day in a hedged pass-though position became common. Volatility could be disastrous for some of the more levered players.

Jay agrees that interest rates will be an important factor this year. He says that if rates come down, then investors may have to take another look at prepayment risk.

He also believes that the main risk this year is interest rate risk, not credit risk. He says some market drivers, such as refinancing, simply will not be there in 2011.

Jay explains: "Mortgage issuance is at least partly based on refinancings, but we are not going to see much refinancing because many folks who wanted to refinance have already done it. Also, the turnover of the actual real estate is not very high, so there will not be a large factor driving mortgage issuance because nobody is going to buy right now so there is no demand."

Indeed, unless a driver such as an increase in employment emerges, it is difficult to foresee a huge change in the dynamics of the agency mortgage market. Jay adds: "The mortgage market is going to track pretty closely to the health of the real estate market. In the US in particular it has had fits and starts, seeming to hit a floor and then going down again. There was a lot of spin out there coming from the home builders and trade associations supporting the real estate industry saying we had reached the floor."

D'Vari believes that so long as the market experiences these 'fits and starts' then agency issuance will continue to dominate. He says: "We do not expect home prices to rise at the national level. Even at the wider regional levels, the trend is going to be more sideways than anything else. With that in mind, supply will continue to be rather strong because home prices will remain in the range of the agency conforming criteria."

Further foreclosure and short sale-driven sales will provide additional supply, bringing the argument back to whether the Fed remains a player or not. What role the government plays in the MBS market is also dependent on the outcome of plans for GSE reform.

A government report on MBS agency reform is expected in the near future, with speculation rife as to what may be proposed. One suggestion is to do away with Fannie and Freddie altogether, but neither D'Vari nor Jay believes this is likely to occur.

Jay explains: "Many people may think this is a sexy knee-jerk thing to say (as Fannie and Freddie are directly supported by the government currently), but it is such a huge thing already that even if we were to say no more issuance of GSE-guaranteed mortgages then there is still a huge legacy of guaranteed loans already out there. As such, the probability of Fannie and Freddie going away is virtually nil."

D'Vari believes that without government backing, the agencies would not have survived, but that the non-agency market is not strong enough for the agency market to disappear. He says: "The non-agency market is not developing. The whole idea of pushing the agency mortgage market into a non-agency business is not going to work, at least not for the near future."

Another senior banker believes that, despite the short-term pain, liquidating Fannie and Freddie is the only way to save the MBS market. He points out that other advanced economies function without comparable GSEs and believes the US could too.

"It is important to let the marketplace clear itself without mutating the dynamics of it," he explains. "The government has been messing around with rates with QE2 and buying back securities because it feels like it needs to be doing something, but I think the mortgage market is such a huge part of the American economy that it just needs to clear and be given a chance to foreclose. If the government didn't dominate the market, then private label mortgages would come back online."

For all the idea's merits and drawbacks, D'Vari does not believe it is likely to come to pass any time soon. He concludes: "I think people will talk about this ambitious plan, but it will come to nothing immediately but set the tone on the margin. This discussion was on the table when I entered the mortgage market in the 1990s and is still here and will still be here when I retire - no time soon though."

JL

CLOs

'Too much, too soon' for Euro CLOs?

It has been another positive week for the European CLO market as spreads continue to tighten across the capital structure and prices remain firm. However, the high volume of fast-paced activity is generating some concern that the market is getting ahead of itself.

"It's been a good week: there's been an overall tightening and prices have been firm to supportive across the capital structure," one CLO trader confirms. However, this week has brought into question the effects of such a fast-moving market, he says. "People are voicing concerns that it's 'too much, too soon'."

He continues: "We're aware that the market is out of sync with the fundamentals, which is a concern - especially if you're a hedge fund that needs liquidity. If they're buying CLO bonds today, can they sell them in 3-6 months time? Will the liquidity that we see today continue? And even if it does, will the prices be at a similar level or better to where they are today?"

The trader explains that for now there is no clear answer, as many other issues continue to skew future predictions. "There are a whole lot of other considerations, such as sovereign and fundamental economic issues, which haven't really gone away. What we've seen is a technical rally that has been driving prices up and where people are trying to see opportunities they can offload on."

Despite this, the market continues to hold up and absorb the demand, the trader notes. "I hear that a lot of accounts are still looking for paper, so overall the market continues to maintain the bullish tone of the previous week."

Bid-lists have remained the main area of focus, with several lists and line-items being offered both today and yesterday. For example, a US bid-list yesterday saw a triple-A tranche reach the 96 point area. However, the European lists proved to be less successful.

"There have been European lists today, but most of the line-items didn't trade. There was one list yesterday too, comprising two triple-A and one triple-B tranches. But, again, this didn't trade either," the trader reports.

This, he believes, is a reflection of some of the more aggressive hedge fund bids pulling back amid uncertainty. "Sellers still hope that people will buy at a high price, which is probably why the lists didn't trade."

Going forward, the trader concludes that, in line with equity markets, the European CLO market could be heading for a volatile period in the short to medium term.

LB

CLOs

Some caution in Euro CLOs as supply continues

Despite a disappointing outcome for last week's much anticipated 43-line bid list (SCI 12 January) the European CLO market is still expecting a stream of supply this week. Next up is a 31-line list due to trade this afternoon, but there are signs that the call for some caution at the end of last week (SCI 14 January) is being heeded.

In the end, only 14 line items were offered from the 17 European lines in last week's 43-item bid-list. "Five out of the 14 actually traded. We know that only one of those bonds traded above the reserve level but the other four we're not sure about," says one CLO dealer.

The high reserves on the list appear to have been the cause of traders' reticence. The dealer says: "I spoke to a lot of other traders beforehand and they admitted that they were unlikely to place bids on the list - you're not going to put a bid in less than the reserve because you may look stupid. One or two dealers or brokers however possibly did place bids on levels below the reserve and it certainly happened with the bonds that traded."

He continues: "I'm pretty sure that the vast majority of traders - 90% - didn't bid on any of the line items as it was just too punchy. I think that the account offering the list felt that afterwards they had mistimed the market and misread it, but felt compelled to at least trade some of it, but they had the right intention."

The next large CLO bid-list is due to trade this afternoon - a €150m 31 line list of European mezzanine paper. The list is more straightforward than its predecessor with no reserve levels.

"Everyone is looking at this list right now and I think it will all trade," one CLO trader confirms. "There's so much demand for the paper on the list and very few sellers, so I expect there will be a good bid for it. This comes from people being more willing to pay up more this year in comparison to last year."

However, there is a more cautious tone to the market than in previous weeks. The dealer says: "Most dealers are not willing to show much or give anything away at the minute, they are pulling their sheets away from traders because the market is currently in a phase of gapping higher with each bid-list that comes in, but can still trade differently just after that. We'll know more about market sentiment after this list trades later today."

Nevertheless, the flow of supply is expected to continue. "We're anticipating more paper to be shown by the end of the week, especially from the banks. There were plenty of banks buying paper last year - lifting it from bid-lists - and they're going to have to sell it at some point, they can't hold it forever," the trader says.

LB

CMBS

US CMBS rallies as bid-lists boom

The US CMBS market saw a frenzy of bid-list activity last week, with traders reporting a dramatic increase in supply. At the same time, a fast-moving rally in the lower parts of the capital structure is boosting pricing levels even further.

"We've seen a continuation in the way of bid-lists and a huge rally in the belly of the curve," one CMBS trader says. He adds that despite the top of the capital structure withdrawing slightly, AJ and mezzanine cashflow bonds have seen significant client demand. "The AMs - which is in the 20-30 part of the capital structure - have been up anywhere from 4-5-6 points."

The trader says that the fast movement of the AJ bonds - up by 8-12 points last week - enticed a number of clients, who would have normally held back and waited for a gradual tightening in spreads. "They took a look and saw that securitisations that were previously at 60 were now trading at 72, so they thought it was time to take their chips off the table and rotate into other sectors."

Further, US bid-list volumes have seen a considerable rise over the last month. The supply has moved from between US$1.2bn-US$1.5bn per week late last year to around US$4bn, the trader says. "We're probably up US$3.5bn to US$3.6bn this week, so volumes have really shot up."

He continues: "Although it's starting to slow down now, the initial push, gapping spreads and dollar prices have really broadened in the amount of selling. It's a good bet that any time you have a significant move higher and then all of a sudden you see bid-lists two to three times bigger than normal, you're going to have a stagnation of prices."

Although bid-lists continue to be the driving force in the CMBS market, the turn of the year brings other factors in to play, the trader notes. "It's funny, as over the past two years everyone has been speculating over year-end or the beginning of the year in terms of asset allocation - whether it's CMBS, residential pass-through, ABS, corporate or equities - asking where is the best place to put our money? The overwhelming favourite became CMBS. We then had a number of hedge funds and other folks in mid-December, which were a little early to the party and jumped into the trade too soon in anticipation of a big rush."

Consequently, the trader suggests that bid-list activity is not the exclusive cause of the 'good rally' at the end of last year, which set up today's positive performance. "The supply and demand balance in value, versus the competing asset classes, is what really drove us to these tights," he remarks.

Current CMBS activity revolves around buying in the belly of the curve, the trader says, in both the cash and synthetic markets - particularly around the CMBX.NA.A.3 and AA.3 tranches. "We've had a number of hedge funds that have jumped into these credit compression trades. It's also happening in a number of asset classes, but it seems like it's definitely alive and present in the CMBS world," he concludes.

LB

ABS

Electricity tariff bonds marketing

Details have emerged on the first issuance from the much-anticipated Spanish electricity tariff ABS programme, Fondo de Titulización del deficit del sistema electrico FTA (see also SCI issue 195). Moody's has assigned provisional ratings to €2bn of initial Aa1 rated notes, with the programme limit sized at €22bn.

The programme securitises payment rights granted to Spanish utility companies to obtain compensation for the shortfalls in the settlement of their regulated activities in the electricity market. This tariff deficit is the difference between the costs incurred to supply the power and the regulated tariffs charged to the end-users.

The compensation will be considered as a fixed cost of the electricity system and a fixed amount will be added to the electricity bills of consumers in order to cover the deficit in the following 15 years. The Spanish electricity regulator (Spanish Comision Nacional de Energia) sets, administers and receives these amounts through the electricity system and passes them on to the utilities.

The issuer has acquired a portion of the tariff deficit generated between 2008 and 2010, which accounts for approximately €2bn as of the closing date. The issuer will acquire additional tariff deficits over the next five years and issue new series of notes, as well as issue notes to refinance existing series over the next 20 years.

The maximum limit for the programme may increase to €25bn in forthcoming years, subject to the approval of the General State Budget Law.

LB

CDS

MCDS poised for growth

The municipal CDS market is poised for growth, following on from an up-tick in trading volumes in 4Q10. Industry initiatives to introduce standardised contracts and potentially tranche trading are also set to bolster activity in the sector.

Two factors are driving growth in the MCDX index market, according to Mikhail Foux, director, credit and derivatives strategy group at Citi. First, investors are becoming concerned about the strength of the municipal bond market and so are using CDS to hedge their exposure. Second, with the Build America Bond programme terminating at the end of December, MCDS are now one of the few ways of playing the taxable market.

"Taxable muni investors could increase their exposure via CDS in either funded or unfunded forms, such as buying CLNs or selling protection," Foux explains. "Since MCDS frequently trade 40bp-60bp wider than bonds with the same maturity, selling protection can be more advantageous than buying bonds. Moreover, MCDS aren't sensitive to interest rate increases - a potentially 'hot' topic for fixed income investors."

Protection sellers could additionally be incentivised to enter the market with the introduction of MCDX tranche trading, which is said to be being considered for next year. Only two tranches - equity and senior - are understood to be envisaged at present. But, as the MCDX index trades at a higher spread than the CDX IG index, MCDX tranches will likely also trade at a premium.

An influx of protection sellers would, in turn, increase the liquidity and robustness of the MCDS market. "On the one hand, there are hedgers willing to buy CDS; on the other hand, there are real-money sellers of protection; and in the middle, you have a growing number of dealers ready for intermediate trading, which could result in shrinking bid-offer spreads," Foux adds.

Such an increase in liquidity would be supported by the planned implementation in 1H11 of standardised documentation for single name MCDS. At present, they trade with a running coupon, but will begin trading with a spread upfront similar to corporate CDS under the ISDA SNAC definitions. Trigger events will remain failure to pay and restructuring.

However, the MCDX implied recovery may decrease during negotiations over the standardised contract. It currently stands at 80%, which appears to be rather high.

Once MCDS contracts are standardised, single names and MCDX trades will be eligible for central clearing. But such eligibility could potentially widen an already large liquidity gap between the most active reference entities and the rest.

CS

CMBS

Sharp rise predicted for CMBX losses

A number of market participants released CMBX loss estimates in 4Q10, with the baseline estimates across the reports appearing to be remarkably consistent. S&P suggests in its latest Structured Finance Research Week publication that this reflects similar underlying assumptions about the future of the commercial property market.

S&P's baseline loss forecast for each of the five CMBX series is higher than the forecasts of the other market participants - Blackrock Solutions (on behalf of NAIC), Deutsche Bank, JPMorgan and Morgan Stanley. The projections are higher by 0.2% to 1.7%, but the agency believes these differences are relatively minor.

"On a relative basis, the forecasts are mostly consistent across the five CMBX series," S&P notes. "Four out of five forecasts expect CMBX 4 to have the highest losses and all forecasters predicted that the CMBX 1 will have the lowest losses, with four of the estimates falling between 6.3% and 6.8%. Of the five reporting firms, Blackrock Solutions was the only one to forecast that CMBX 5 will have lower losses than CMBX 3."

All forecasters predict that CMBX losses for all series will be higher than historical CMBS losses to date, however. S&P's estimate of 6.8% cumulative loss for CMBX 1 is about double the cumulative loss the 1996 CMBS cohort has experienced. The 1996 CMBS cohort has experienced the highest cumulative loss rate to date since the inception of the modern-day CMBS market in the 1990s.

The CMBX series reference CMBS collateral from the 2005-2008 origination cohorts. Losses to date for these cohorts currently range from about 50bp-80bp.

The CMBX forecasts indicate a sharp rise in realised losses for these cohorts in the next 2-5 years. To reach S&P's forecasted 15.6% cumulative loss for CMBX 4, loss rates will have to rise to an average of at least 3% per year in each of the next five years, the agency says.

If the CMBX realises the forecasted level of losses, the losses would exceed those of the worst cohorts of insurance company-originated collateral from the Snyderman-Esaki default studies for the period 1972-2002. The worst origination cohort in those studies was 1986, with an estimated cumulative loss of 8.1% of the original balance. S&P's estimated losses exceed 8.1% for four out of the five CMBX series and the 15.6% estimated loss for CMBX 4 is almost double the 1986 loss rate.

Most of the forecasters provided either the revenue or property value assumptions they used in their models for both baseline and stressed cases. Specifically, net operating income (NOI) growth/decline or peak-to-trough price decline was generally used to drive their loss estimates. Some even provided metropolitan statistical area (MSA)-level figures.

CS

Correlation

Junior mezz performance examined

Long mezz positions have performed well during growth periods, while short positions have proved to be an efficient market hedge through recessions. In an analysis of standardised tranche investment returns, credit derivative strategists at Morgan Stanley find that positive performance in 2006-2007 was driven by spread compression, time decay and relative pricing in favour of junior mezzanine.

"At the outset of the credit crisis, corporate credit super-senior tranches initially underperformed on rising correlation/systemic risks and mezzanine was a net beneficiary," they explain. "But, as the credit crisis developed into a broader financial crisis and ultimately a global recession, mezzanine tranches underperformed substantially, owing primarily to skew and spread dispersion. The healing market since then has been positive for junior mezzanine tranches, with both spread compression and risk allocation benefitting the middle of the capital structure."

The Morgan Stanley analysis suggests that time decay has generally been a positive factor, as defaults have been lower than those implied by single-name spreads. Equally, skew and dispersion appear to work together: when dispersion is rising, investors tend to avoid junior mezzanine risk, with these tranches driven lower both by market spreads and mezzanine risk aversion. The strategists also note that skew is directional and tends to fall when markets are selling off, thereby exhibiting the beta nature of junior mezzanine tranches.

By comparison, senior mezzanine tranches were considered to be 'orphaned' credit risk during much of the last credit cycle - at least until the credit crisis drove risk allocations up the capital structure and increased defaults served to differentiate them from senior tranches.

CS

Investors

Liquid credit fund prepped

Credit hedge fund manager Christofferson Robb & Co (CRC) is rolling out a new offering. The CRC Liquid Strategies Fund is set to launch next month, with US$100m from global family offices and pension funds.

CRC md Bradley Golding says the new fund builds on the strong track record of a short equity fund he previously ran from 2006-2010, pulling the firm's existing strategies together with small, primarily single-name equity overlay shorts to reduce volatility. Among other targets, the fund will look to exploit attractive opportunities in contingent convertibles and hybrids.

"This is a go-anywhere credit fund all through the capital structure of banks' financial instruments, from preferreds to trust preferreds, hybrids to sub-debt, as well as some of the less liquid core offerings, such as ABS, CDOs and synthetic bank CDOs. What we are trying to do is make a more liquid fund and something which appeals to a broader range of investor, while maintaining relatively low leverage," explains Golding.

He adds: "Around March and April 2009 we saw Trups were a very attractive prospect, trading at around 20 or 30 cents on the dollar. We saw a lot of products out there which were just square pegs people were trying to put into round holes; there was just no logical home for them, which makes them trade cheap. Where something does not already have a natural place, there are opportunities to invest at higher yields on a risk-adjusted basis."

The fund will differ from CRC's flagship credit fund in that it will focus on the US, as well as Europe. The fund will be managed day-to-day by Golding, who is joined on an investment committee by company co-founders Johan Christofferson and Richard Robb, managing partner and ceo respectively.

JL

Monolines

MBIA litigation uncertainty persists

The Appellate Division of the New York State Supreme Court on Tuesday reversed an earlier decision by a lower court and granted MBIA's motion to dismiss the plenary lawsuit brought by a group of banks challenging its restructuring (SCI passim), but ruled that a separate court action by the plaintiffs - called an Article 78 proceeding - could proceed. Uncertainty related to the timing and outcome of this and other litigation involving the monoline remains a material credit factor, according to Moody's in its latest Weekly Credit Outlook publication.

In its decision, the Appellate Division agreed with MBIA's position that the lawsuit was an improper collateral attack on the New York State Insurance Department's approval of MBIA's restructuring. The Court also dismissed all of the other causes of action stated in the banks' complaint.

"The banks have continuously sought to obstruct National's goal of providing much needed insurance capacity to the municipal market and to undermine the determinations made by the New York State Insurance Department. So we are gratified by the Appellate Division's decision and are now looking forward to a prompt resolution of the Article 78 proceeding, in which we fully expect to prevail," comments Jay Brown, MBIA ceo.

The trial hearings for the Article 78 proceeding were scheduled for this month, but have been postponed and are unlikely to begin before 2Q11, Moody's notes. Another potential delay may arise due to the judge that presides over the case and two other plenary actions against MBIA stepping down from his position in the Manhattan Supreme Court later this month.

"All these outstanding issues lead us to believe that there is significant uncertainty about the timing of any resolution of the lawsuits," the agency observes.

Barclays Capital, JPMorgan and RBC pulled out of the lawsuits at the end of December, following SMBC, CIBC and Rabobank's lead in 3Q10. MBIA, in turn, dropped its lawsuit against RBC four days later.

"These developments would be credit positive for the MBIA insurance companies if they indicate that MBIA and some of its counterparties are able to execute mutually acceptable out-of-court agreements to settle outstanding litigations. Such solutions would be an effective alternative to the time-consuming legal process," Moody's suggests.

Although none of the parties involved have disclosed their motives, there is speculation that the decision to withdraw was influenced by progress in settlement discussions related to the litigations initiated by MBIA against some MBS originators and CDO managers. Other factors that might influence the likelihood of settlements include more certainty about ultimate losses in some insured segments and improvement in MBIA Insurance's liquidity position, which increases the company's capacity to execute commutations that involve immediate cash outlays.

Nevertheless, the reduction in the number of litigants does not necessarily affect the process or outcome of the pending litigations, Moody's says. The list of remaining litigants includes some of MBIA's largest counterparties, such as Bank of America, Morgan Stanley and Citi.

As of 3Q10, MBIA had recorded US$2bn of put-back credit for its RMBS transactions - a material portion of which were originated by Countrywide/Bank of America. "The lack of resolution between MBIA and Bank of America is in sharp contrast with the agreement that Bank of America recently reached with Fannie Mae and Freddie Mac over put-back rights, which suggests that MBIA's already protracted legal battles may continue," Moody's concludes.

CS

RMBS

Resets to bring tiering opportunities

The non-agency MBS market faces US$246bn of payment resets over the next three years. Although this risk is expected to be manageable, differences in payment shocks could result in tiering opportunities, according to MBS analysts at Barclays Capital.

"We prefer MTA option ARMs to hybrid option ARMs because they face smaller payment shocks and have amortised down to a relatively lower mark-to-market LTV," they note. "We also favour deals with amortising IO loans from the prime jumbo market, as they face lower payment shocks than non-amortising IOs."

Borrowers who are already delinquent account for about US$100bn of the forthcoming payment resets and will not experience additional delinquencies due to payment shocks. Most of the resets on current loans will be recasts of option ARM loans, with payment shocks of about 30%-45%. The rest are alt-A resets that won't face a large initial payment shock, but will see subsequent pay shocks as rates rise along the forwards.

The BarCap analysts also anticipate substantial payment shocks in 2015-2018, as jumbo/alt-A 10/1s and 10-year IOs reset up. They forecast that payment shocks for this population along the forwards would be around 40%.

"Historically, a 40% increase in payments has been associated with a 50% increase in always current-to-delinquent rolls," the analysts add. "As such, 30%-40% payment jumps on negam and alt-A pools could worsen roll rates meaningfully. However, always-current loans that turn delinquent on payment shock will be the most suitable candidates for modifications and will likely be modified."

Overall, given the monthly rate of expected payment resets, the projected rate environment, payment shock levels and the potential for modifications, resets are expected to be a manageable risk. But the analysts warn that servicers with capacity constraints may be slow to respond to payment shocks.

"We would favour deals in which the servicer has a prior history of fast modifications and for which capacity constraints are likely to be small," they conclude.

CS

ABS

Rating agency beefs up in SF

Kroll Bond Ratings has made two appointments in its structured finance team. Kim Diamond assumes the role of senior md and co-head of the team, while Eric Thompson joins as md, focusing on CMBS.

The pair previously worked at S&P: Diamond as head of US MBS ratings and surveillance, and Thompson as head of CMBS surveillance. Thompson will report to Diamond, while Diamond reports to KBR president James Nadler.

Advisory

Debt advisory head hired

Gleacher Shacklock has appointed Daniel Morland as partner and head of its debt advisory group. Morland has over 15 years of experience in the debt markets, incorporating advising, arranging, underwriting, syndicating and restructuring debt in a variety of mandates and sectors. He joins Gleacher from DC Advisory Partners, where he was md.

CDO

GSC CDO sale halted

GSC has terminated its agreement to sell the collateral management contracts for the GSC EUROPEAN CDO II, CDO I-R and CDO V transactions to Black Diamond (see SCI 1 November) after an ad hoc group of minority lenders of GSC filed a motion for the appointment of a chapter 11 trustee in December. The Bankruptcy Court conducted an evidentiary hearing on the trustee motion, took the matter under advisement and subsequently approved the appointment of James Garrity as Chapter 11 trustee pursuant to Section 1104(d) of the Bankruptcy Code.

The Chapter 11 Trustee is currently reviewing the terms of the proposed sale of GSC's assets to Black Diamond. As a result, a sale hearing that was scheduled to occur on 21 December has been postponed to a date yet to be determined.

It remains unclear whether or not the assignment of the three transactions to Black Diamond will be completed pursuant to the terms set out in the November bidding procedures or otherwise.

CDS

Analytics acquisition agreed

Markit has acquired risk analytics provider QuIC Financial Technologies. The acquisition will enable Markit to meet the growing demand for risk analytics and enterprise risk management services by combining its strengths in data and valuations with QuIC's analytics expertise, the firm says.

QuIC will consequently become part of Markit's valuations and analytics services unit. The firm recently combined its valuations and analytics services - comprising the Totem, Portfolio Valuations, Valuations Manager, Evaluated Bonds and structured finance businesses - under the direction of evp Sal Naro.

CLOs

Boutique nabs CLO trader

Reggie Fernandez has joined KGS Alpha as a CLO trader. Fernandez most recently worked at Sirona Advisors in the same role. Prior to this, he held positions at Mashreq Bank, Deutsche Bank and UBS.

CMBS

CMBS svp appointed

DBRS has appointed Richard Carlson as svp in its CMBS group. Carlson will focus on operational risk reviews for CMBS ratings, including servicer evaluations and originator reviews globally. He will report to Mary Jane Potthoff and Erin Stafford, co-heads of the rating agency's US, Canadian and European CMBS group.

Prior to joining DBRS, Carlson spent 10 years performing operational risk reviews of commercial mortgage servicers and originators at Fitch. He started out his CRE career at GMAC Commercial Mortgage, where he spent eight years in its servicing group.

CMBS

CMBS conduit lender formed

Cohen & Company has formed a new venture with FundCore Finance Group to create a CRE conduit lender. The venture will offer borrowers extensive capital markets experience combined with superior loan origination, underwriting, execution and risk management capabilities, the firms say. The primary focus will be writing 5- to 10-year CRE fixed rate loans ranging in size from US$5m to US$75m. The loans will be targeted for securitisation and will include all major property types.

The company will originate transactions nationally through production offices located in Los Angeles, Chicago and New York, while trading and securitisation activities will be managed in New York.

Distressed assets

Distressed sales vet joins boutique

Andrew Arthur has joined FBR Capital Markets as md and head of distressed sales.

Michael Lloyd, senior md and head of credit, convertibles and options at FBR, comments: "Andy will lead a growing team of professionals as we continue to invest in debt origination, execution, idea generation and distribution in order to provide our clients with opportunities in the corporate credit market."

Arthur is a 25-year veteran of the distressed sales and trading industry, having held senior positions at RBS, Bear Stearns, Amroc Securities, Morgan Stanley and most recently Citadel Securities in New York.

Legislation and litigation

Ex-Fed vet bolsters advisory practice

Jim Embersit has joined Ernst & Young as executive director in its advisory practice.

Hank Prybylski, the firm's financial services advisory leader, says: "His extensive regulatory experience will be invaluable for our clients as they adjust to the myriad of recent changes, including Dodd-Frank and Basel 3."

Embersit has over 25 years of bank supervisory experience, including 20 years spent at the Federal Reserve. He was most recently deputy associate director for credit, market, liquidity and operational risk policy in the division of banking supervision.

Operations

AIG 'stabilised'

The New York Fed has announced the termination of its assistance to AIG and the full repayment of its loans to the firm, representing a substantial step toward achieving the Fed's dual goals of stabilising AIG and ensuring its repayment of government assistance. In addition, the Fed has been paid in full for its preferred interests in the AIA and ALICO SPVs.

"[This] reflects the significant progress AIG has made in reducing the scope, risk and complexity of its operations and stabilising its operating results," the Fed notes. "The accelerated repayment of the New York Fed frees up collateral that will enable the company to access private debt markets, an essential step toward facilitating the US Department of the Treasury's future sale of the common stock it owns."

The loans extended by the Fed to the Maiden Lane II and III facilities remain outstanding, however, and are being repaid from the assets in those facilities. The fair values of the portfolios well exceed the balances of the loans.

Regulation

Government affairs md named

SIFMA has appointed Bradley Edgell as md in its federal government affairs group. Based in Washington, Edgell will be responsible for federal government relations, reporting to Kenneth Bentsen, SIFMA's evp of public policy and advocacy.

Edgell joins the firm from The Options Clearing Corporation (OCC), where she served as director of government relations. Prior to this, she had extensive experience on Capitol Hill working for several members of Congress, particularly on financial services and capital markets matters.

ABS

US auto loan ABS criteria updated

S&P has updated its methodology and assumptions criteria for rating and monitoring US auto loan ABS. However, the rating agency does not expect the updates to affect any outstanding ratings.

The updated criteria include cashflow sensitivity analysis to test credit stability under conditions of moderate stress. It also uses a multi-pool cashflow analysis to address the liquidity risk associated with portfolios containing loans with wide-ranging annual percentage rates. Finally, the criteria introduces a floor to the triple-A stressed case level of cumulative net losses for a pool of auto loans, including cashflow assumptions for prepayments.

The agency says that auto loan stressed net loss assumptions are in line with the calibration of criteria in other areas of consumer ABS and RMBS after adjusting for differences in obligor, collateral and loan characteristics. The criteria is effective immediately for all US auto loan-backed ABS.

ABS

New Mexican ABS participants, assets expected

New participants appear poised to enter the Mexican securitisation market in 2011, according to S&P. The agency believes that the country's economy is stabilising, which could help the securitisation market's recovery.

"While new issuance levels will likely remain similar or slightly higher than they were in 2010 (US$8.7bn), the new year looks favourable," S&P notes. "We anticipate several new asset types entering the scene and fewer negative rating actions overall. However, the debt market remains somewhat unsteady and any financial uncertainties that crop up could cause investors to remain cautious and possibly decrease their purchase of and investment in new issuances. "

Although a large increase in the total issuance amount isn't expected this year, the agency anticipates a larger number of deals to be issued. "We expect Infonavit and Fovissste to continue issuing large amounts of RMBS during the year through regular securitisations and the HITO (Hipotecaria Total) platform, which is based on the Danish mortgage platform. We believe banks will return to the RMBS market only if it makes economical sense, with lower interest rates and premiums. However, due to global regulatory updates, it may become more expensive for banks to securitise their assets."

Consequently, banks, Infonavit and Fovissste could turn to covered bonds as an alternative to RMBS. Indeed, if Congress approves the modifications to Mexican law, the first Mexican covered bonds could debut during 2011.

Otherwise, states and municipalities will continue to tap the securitisation market through debt secured by future local tax revenues and tax participations. Further issuance of securities that are backed by auto loans, consumer loans, leases and trade receivables is also anticipated. In addition, securitisations of new assets, such as guaranteed consumer loans and microloans, may debut this year.

ABS

Increased compensation to reduce set-off risk

Moody's says that the new EU deposit compensation legislation will affect its assessment of set-off risk for certain European SF transactions.

The required deposit compensation limit for each EU member state has increased from €50,000 to €100,000 per depositor, in line with the latest amendments to the Deposit Guarantee Schemes Directive (DGSD). This increase is expected to reduce exposure to set-off risk for certain SF transactions originated by European deposit taking institutions. Moody's will update its approach to assessing set-off risk accordingly, it says.

Under the DGSD, member states with currencies other than the euro are required to convert the €100,000 limit into an equivalent protection amount in their national currency. The UK FSA implemented this requirement with an initial sterling limit of £85,000 and, pursuant to the DGSD, the sterling limit will be reset every five years in line with currency fluctuations.

Although the sterling limit has increased, the periodic reset to account for currency fluctuations introduces some volatility risk, Moody's warns. For example, if sterling appreciates against the euro between now and January 2016, the limit may be reset to an amount lower than £85,000.

ABS

FFELP ABS targeted for operational risk

Moody's reports that some US student loan ABS may be subject to downgrade if they do not meet the agency's proposed guidelines on operational risk. Certain characteristics of student loan ABS, particularly in FFELP-backed securities, mitigate operational risks compared to other ABS, the agency says.

"The roles and responsibilities of some key transaction parties - including master servicers, primary servicers and trustees - are different in student loan ABS compared with other asset classes," says Moody's avp Nicky Dang.

Based on the operational risk guidelines, the ratings of 47 student loan ABS trusts - issued by 15 issuers - constituting approximately 11.3% of total outstanding student loan ABS measured by dollar volume could be affected. "Most triple-A rated notes issued by FFELP trusts that do not meet the proposed guidelines could be downgraded to double-A, with a small group of notes possibly downgraded to single-A," adds Dang. "Triple-A rated notes issued by private and mixed student loan trusts with more than 10% private student loans may be downgraded to Baa, depending on the specific operational risk to which a trust is exposed."

ABS

Japanese ABS on recovering trend

Moody's reports that the performance of assets in Japan SF deals are recovering. The rating agency believes that in comparison to 2010, overall asset performance in 2011 will be fairly stable.

The Japanese economy is improving gradually and although the employment and income situation remains severe, it is expected to make a slow recovery. However, while the financing environment is not expected to drastically decline in 2011, the business environment for SMEs remains difficult, the agency says.

Meanwhile, CMBS will continue to suffer, Moody's says. But signs, such as a levelling-off in the rise in vacancy rates for office rentals and an improving financing environment for real estate transactions, indicate a recovery for the real estate sector.

"In light of our macroeconomic assumptions for Japan, as well as our view of the credit fundamentals for each asset class, our outlooks remain the same since our July report," says Mitsuteru Masuoka, a Moody's credit officer.

The agency's outlook for nine of the 11 asset classes (auto, instalment sales loan, credit card purchase, card cash advance and SME lease ABS; SME CDOs; balance sheet CDOs; conforming RMBS; and other RMBS) is stable. Consumer finance loan ABS and CMBS have a negative outlook - an indication of asset performance recovery.

ABS

Counterparty risk rating actions begin

S&P has begun implementing its new criteria for assessing counterparty and supporting obligations in structured finance transactions, placing or keeping on credit watch negative the ratings on 108 classes of notes in 73 Asia-Pacific deals and 13 classes in eight Japanese deals. The agency is expected to make separate announcements in connection with US and EMEA transactions imminently.

Of the Asia-Pacific notes affected, 17 are ABS classes in 15 transactions (accounting for 33% of S&P publicly rated ABS transactions); 11 are CMBS classes in seven transactions (accounting for 32% of S&P publicly rated CMBS transactions); 72 are RMBS classes in 43 transactions (accounting for 17% of S&P publicly rated RMBS transactions); and two are structured credit - including CDOs - classes in two transactions (accounting for 2% of S&P publicly rated structured credit transactions). In addition, ABCP issued from six ABCP programmes - accounting for 19% of S&P rated ABCP programmes - has been impacted.

The aggregate original issuance amount of Asia-Pacific (excluding Japan) securities with ratings affected by the credit watch actions is an equivalent of approximately US$39bn. This accounts for approximately 16% of the total number of Asia-Pacific transactions that issue securities rated by S&P. In general, the affected ratings are those in the investment grade rating category.

The aggregate original issuance amount of Japanese securities with ratings affected by the credit watch actions is approximately ¥153bn.

S&P says that, following the criteria update, some transaction documentation may no longer satisfy its criteria for counterparty risk. Generally, the updated criteria set a ratings floor at one rating level above the issuer credit rating (ICR) of the lowest-rated counterparty in the transaction. Without evidence of legally binding obligations - enforceable as between the parties - that reflect the agency's updated counterparty criteria, it is likely to lower the ratings on tranches rated above this floor.

Tranches that are rated the same or lower than one rating level above the ICR of the lowest-rated counterparty in the transaction have not been placed on credit watch negative. Additionally, S&P has not taken action on tranches for which it has received a written action plan that outlines a viable timeline and enables the transaction to comply with the criteria by its transition date of 18 July 2011.

To the extent that the agency receives updated information about the hedge counterparties in transactions, it may remove certain classes from credit watch negative based on the rating of the updated counterparty. It intends to resolve all credit watch placements by 18 July 2011.

ABS

Stable outlook for Asia ex-Japan SF

Moody's performance outlook for cross-border Korean transactions, including RMBS, auto loan ABS and credit card ABS, as well as Singaporean CMBS and Asia Pacific ex-Japan balance sheet CLOs is stable.

"The outlook on the Korean assets is driven by the country's economic recovery and the low unemployment rate. Receivables performance should remain stable," says Moody's vp Marie Lam.

However, caution remains, as households are highly leveraged. Additionally, obligors are vulnerable to payment shock if interest rates continue to rise or if the macroeconomic environment deteriorates, the agency notes.

"Nevertheless, the 2011 outlook on Korean assets is stable; we see no rating implications, given the amount of subordination and the size of the buffer between actual performance and the triggers that could set off early amortisation," adds Lam.

"For Singaporean CMBS, the robust economy provides stability to the office, retail and industrial real estate sectors - despite the abundant supply of space in all three sectors. The CMBS deals have stable cashflow and low appraiser's loan-to-value ratios. Thus, we see no rating implications to the outstanding CMBS transactions," confirms Moody's vp Jerome Cheng.

"For Asia Pacific ex-Japan CLOs, Moody's is also maintaining a stable outlook, driven by the stable regional outlook on key industry sectors, to which the reference portfolios are significantly exposed. With the key Asian economies recovering in 2010, portfolio defaults have been low. These economies should continue to grow in 2011," says Moody's vp Elaine Ng.

ABS

Risk retention study published

The US Financial Stability Oversight Council (FSOC) has released a study on the Dodd-Frank Act's risk retention requirements. The study notes that securitisation provides important economic benefits by improving the availability and affordability of credit to a diverse group of consumers, businesses and homeowners.

The FSOC suggests that the requirement to retain at least 5% of the credit risk of an asset sold to investors through the securitisation process, as put forward by Dodd-Frank, should allow market participants to price credit risk more accurately and allocate capital more efficiently. "By putting in place such safeguards, the Dodd-Frank Act can help ensure that securitisation is a stable and reliable source of credit for consumers, businesses and homeowners in the US," it says.

The study indicates that a risk retention framework should seek to: align incentives without changing the basic structure and objectives of securitisation transactions; provide for greater certainty and confidence among market participants; promote efficiency of capital allocation; preserve flexibility as markets and circumstances evolve; and allow a broad range of participants to continue to engage in lending activities, while doing so in a safe and sound manner.

In doing so, there are a number of design choices that regulators must address, according to the FSOC. The form of risk retention, allocation of risk retention to various participants in the securitisation chain, amount of risk retention, allowances for risk management and exemptions from risk retention are all important variables in the design of any such framework.

SIFMA says it supports risk retention measures that are calibrated to the risk profile and structural features of various asset classes. SIFMA president and ceo Tim Ryan, notes: "With any scenario, developing and implementing risk retention standards requires prudent analysis. SIFMA believes it is essential that regulators perform business or financial modelling that would clarify the effect weighting a given transaction with 5% retention would have on lending and financial markets. We are pleased that Treasury took steps toward this approach in this study that was mandated by the Dodd-Frank Act."

The Association urges regulators to ensure any proposed policies serve to align the interests of stakeholders, but do not have an unnecessarily negative impact on the availability of affordable credit to consumers and small businesses before those policies become practice.

ABS

Counterparty risk criteria rolled out

S&P yesterday rolled out its updated criteria for assessing counterparty and supporting obligations to North America and EMEA securitisations, following their Asia-Pacific and Japan implementation (see SCI 18 January). The rating agency has placed or kept on credit watch negative its credit ratings on 950 classes of notes in 482 North American and 1,981 tranches in 964 EMEA deals.

The aggregate original issuance amount of the North American securities with ratings affected by the rating actions is approximately US$116.9bn. In general, the affected ratings are in the investment grade rating category.

Of the EMEA transactions, 220 ABS classes in 134 transactions (accounting for 28% of S&P rated ABS transactions) have been affected; 297 CMBS classes in 123 transactions (accounting for 68% of S&P rated CMBS transactions); 987 RMBS classes in 414 transactions (accounting for 62% of S&P rated RMBS transactions); and 477 structured credit - including CDOs - classes in 293 transactions (accounting for 15% of S&P rated structured credit transactions).

The aggregate original issuance amount of EMEA securities affected by the credit watch actions is equivalent to approximately €755bn, accounting for approximately 30% of the total number of EMEA transactions that S&P rates. In general, the counterparty update will affect higher-rated securities, mostly those rated in the single-A rating category and above.

S&P intends to resolve all credit watch placements by 18 July.

CDO

CREL CDO delinquencies climb again

US CREL CDO delinquencies closed out last year at over 13%, according to Fitch. Delinquencies rose in December to 13.6% from 12.7% in November - primarily due to an increase in credit risk securities, including defaulted REIT debt and credit-impaired CMBS.

"The current rise in the delinquency rate is not expected to impact Fitch's ratings, as its analysis of each CREL CDO takes into account potential increases. While the current actual delinquency rate is 13.6%, the average modelled base-case default rate is 58.9%. Ratings on most junior classes, however, remain subject to volatility as losses are realised, which may differ from expectations," says Fitch director Stacey McGovern.

New December delinquencies consisted of one matured balloon, one term default and ten credit risk securities, Fitch confirms. Resolution activity in December was limited, with only one prior delinquency removed - an extended matured balloon loan.

Further, realised losses in December were less than US$10m, which is well below the 2010 monthly average of approximately US$60m, the agency notes. Total realised losses for the year comprised 3.5% of current collateral.

CDS

Swap verification rule proposed

The US SEC has voted to propose a rule governing the way in which certain security-based swap transactions are acknowledged and verified by parties who enter into them. The new rule - Rule 15Fi-1 - is being proposed under Title VII of the Dodd-Frank Act as another step in the SEC's effort to increase the transparency of the security-based swap market.

Under the proposed rule, security-based swap dealers and major participants - collectively known as SBS entities - would have to provide their counterparties with a trade acknowledgement detailing information specific to the transaction. This would occur within 15 minutes, 30 minutes or 24 hours of execution, depending on whether the transaction is executed or processed electronically.

The proposed rule would also ensure written policies and procedures were in place that are reasonably designed to obtain verification of the terms outlined in the trade acknowledgment. In addition, the rule would specify which SBS entity is responsible for providing the trade acknowledgment and permit it to satisfy the requirements by processing the transaction through the facilities of a registered clearing agency.

CLOs

CLOs given a range of performance outlooks

Moody's 2011 performance outlook for US CLOs is positive, while European balance sheet CLOs and Japanese SME CLOs remain stable. Additionally, the performance outlooks for European SME ABS and SME CLOs have stable to negative outlooks.

The agency notes that the global economic prospects generally brightened in 2010 following an unprecedented global contraction of 0.9% in 2009. With this uptick, the performance expectations for CLOs and SMEs also improved.

"Moody's believes that emergence from the recent global financial turmoil is not universal as some European economies continue to struggle. A combination of regulatory impediments and significant bank loans refinancing requirements will ensure that the re-emergence of CLOs and SMEs will also be far from smooth," says Moody's vp Beryl Marjolin.

According to Moody's forecast, declines in US speculative-grade default rates and the strong turnaround in the US loan market are both poised to continue into 2011 - having a positive effect on US CLOs. Further, US CLO portfolio performance metrics are expected to continue improving in 2011, albeit at a much slower rate than 2010. The performance outlooks for European CLOs and SMEs are less sanguine, but generally stable considering the backdrop of a slower economic recovery and growing concerns about sovereign and refinancing risk.

The agency believes that US CLO issuance will rebound in 2011, while European CLO and SME issuance is expected to remain flat. Further, the implementation of new regulatory requirements in 2010 is expected to introduce a degree of uncertainty to the recovery prospects for new CLO/SME issuance.

But Japanese SME CLOs are expected to perform soundly, despite the pace of recovery in the Japanese economy slowing due to weak domestic sales and waning overseas demand, as well as the appreciating yen.

CLOs

Balance sheet CLO mapping criteria explained

Moody's has released its mapping methodology for bank balance sheet CLOs. The new criteria describe the steps involved in establishing correspondence between the agency's rating scale and the internal ratings of a regulated bank.

Moody's emphasises that both quantitative and qualitative factors will form part of the rating committee decision. In particular, consideration will be given to the mapping statistical analysis, as well as to the operational review conducted by Moody's analysts to assess the bank credit processes and procedures.

In addition to a rating mapping, all information available to rating committees - including macroeconomic forecasts, input from other Moody's analytical groups, market factors and judgements regarding the nature and severity of credit risk inherent to a transaction - may influence the final rating decision with respect to a balance sheet CLO.

CMBS

Minimal impact from Silver Maple asset release

Moody's says that the release of Hougang Plaza from the security of Silver Maple Investment Corporation will not result in a reduction or withdrawal of the ratings assigned to the series 25 and 30 notes. The affected Singapore CMBS notes are the Aa1 rated US$255.5m series 025 and €175m series 030, which are due to mature in April 2014.

Silver Maple had eight shopping malls in its portfolio prior to the release of Hougang Plaza. As of the valuation date on 30 June 2010, Hougang Plaza comprised 1% of the portfolio's appraiser value and, as of 30 September 2010, it contributed to approximately 1% of the portfolio's retail income.

In terms of debt service coverage ratio, the impact of releasing Hougang Plaza is minimal, according to Moody's. For the month of September 2010, Silver Maple's reported DSCR was 6.73x. If Hougang Plaza were to be released from the September report, the DSCR would become 6.64x (pro-forma).

The appraiser's LTV was 22.8% before the release and 23% afterwards. After the release, US$500,000 of banker's guarantee will be placed in favour of Silver Maple.

CMBS

Rate of CMBS delinquency increases to slow

The delinquency rate on loans included in US CMBS conduit/fusion transactions increased by 16bp in December to 8.79%, according to Moody's Delinquency Tracker (DQT). For the year, the delinquency rate increased by 79% from 4.9% at the end of 2009 - albeit the rate of increase slowed considerably in the second half of 2010.

Moody's expects the delinquency rate to continue rising in 2011, but at a slower pace than over the past two years. The CRE markets are beginning to show signs of a turnaround, the agency says, with the DQT expected to finish 2011 in the 9.5% to 11% range.

"The rate of increase in newly delinquent loans is likely to continue moderating in the coming year as capital markets continue to heal and the flow of loans into special servicing slows," says Moody's md Nick Levidy.

Looking back on December, loans totalling US$3.7bn became newly delinquent, while previously delinquent loans totalling approximately US$2.6bn became current, worked out or disposed. In all, the total number of delinquent loans increased in December to 4,104 and the total balance of delinquent loans increased by approximately US$1.1bn to US$54.9bn.

By property type, hotels saw the most improvement in their delinquency rate in December, with a 5bp drop to 16.37%. This resulted from US$373m in hotel property loans becoming delinquent, while US$452m became current, worked out or disposed.

The delinquency rate for offices also improved in December, although only by a single basis point to 6.71%. Loans totalling US$808m became newly delinquent and loans totalling US$850m became current, worked out or disposed.

Retail saw US$1.15bn in loans becoming newly delinquent, while only US$474m in loans dropped out of delinquency - raising the retail loan delinquency rate 30bp to 7.44%. Multifamily saw a steeper 48bp rise to 14.38% during December, with a US$371 net rise in its total delinquent balance. Industrial properties continue to have the lowest delinquency rate at 6.54%, a 16bp increase from November.

All four US regions showed modest increases in delinquency rates in December, all rising within a narrow 10bp-17bp. The South has the highest rate at 11%, followed by the West at 9.86% and the Midwest at 8.74%. The East is the best performing region, with a delinquency rate of 6.7%.

For the year, the Midwest had the smallest increase in its delinquency rate, which rose by 312bp, while the West experienced the largest increase, with a 458bp rise.

By State, Nevada saw another steep rise in December, as its rate climbed 149bp to 28.99%. Alabama is the next worst performing state, but with a delinquency rate that is slightly more than 1000bp lower than Nevada. During December Mississippi became the 11th state to have a rate higher than 10% - rising by 40bp to 10.32%.

CMBS

Freddie positive on K-deal pipeline

Freddie Mac is in the market with its debut multifamily structured pass-through certificate (K Certificate) offering of 2011. The US$1bn K-010 transaction is backed by 76 recently originated multifamily mortgages guaranteed by the agency and is expected to price next week and settle on 10 February.

The offering is the first K-deal to be publicly rated by two rating agencies and represents the first of many such transactions that Freddie Mac expects to bring this year as its securitisation activity grows.

The K-010 Certificate offering is being marketed by JPMorgan and Wells Fargo as co-lead managers and joint bookrunners. Barclays Capital, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, Jefferies & Company and Merrill Lynch are co-managers.

RMBS

Servicing compensation initiative launched

The Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac are to work on a joint initiative with the Department of Housing and Urban Development (HUD). The initiative will consider alternatives for future mortgage servicing structures and servicing compensation for single-family mortgage loans.

The goals in this initiative are to improve service for borrowers, reduce financial risk to servicers and provide flexibility for guarantors to better manage non-performing loans. Alternatives for consideration may include a fee for service compensation structure for non-performing loans, as well as the possibility of reducing or eliminating the minimum mortgage servicing fee for performing loans or other structures.

Currently, a servicer's compensation is generally based on a minimum servicing fee that is part of the mortgage rate. This, however, decreases the flexibility necessary for optimal servicing of non-performing loans from both the borrowers' and guarantors' perspectives. The current servicing compensation structure also results in the creation of a mortgage servicing right asset, which can be difficult to manage.

"As the recent problems in managing mortgage delinquencies suggest, the current servicing compensation model was not designed for current market conditions. The goal of this joint initiative is to explore alternative models for single-family mortgage servicing compensation that better address the needs of borrowers, servicers, originators, investors and guarantors," says FHFA's acting director Edward DeMarco.

SIFMA md and head of securitisation, Richard Dorfman, adds: "SIFMA appreciates FHFA's focus on finding long-term solutions in the servicing industry, which will balance the funding and customer service needs of servicers while preserving the liquidity of the important 'to be announced' market. This is an especially important initiative, given the impact the housing market has on the broader economy."

Any implementation would be prospective and would not be expected to occur before the summer of 2012, the FHFA says.

RMBS

Resecuritisation credit concerns outlined

Moody's has outlined a number of credit concerns that have led to it increasingly declining to give the highest ratings to US RMBS resecuritisations. These include: the volatility of potential losses in the current environment, a lack of strong protections against bankruptcy risk, ambiguities in the legal documents and uncertainties resulting from foreclosure irregularities.

Resecuritisations bifurcate the risk embedded in low-rated RMBS bonds by creating two new bonds - directing cash first to the resecuritisation's senior bond and allocating losses to the resecuritisation junior bond. Moody's rated only 38 RMBS resecuritisations in 2009 and three in 2010 - representing less than 1% of the approximately 5,500 RMBS resecuritisations issued in that time.

"When properly structured, the resecuritisation senior bond could achieve a rating higher than the original underlying RMBS bond; however, the majority of resecuritisations we've seen to date have had significant credit concerns. We believe ratings on properly structured transactions can provide investors with a useful indication of the credit risk of their investments," says Moody md Linda Stesney.

Concerns over loss volatility have either disqualified many transactions from the agency's highest rating levels or rendered them uneconomical for issuers, it says. "Resecuritisations are more sensitive to certain payment scenarios than the underlying bonds. This sensitivity, together with the complexity of resecuritisations, results in a higher level of loss volatility," adds Stesney.

Further, Moody's believes that the added risk of bankruptcy in some RMBS securitisations is inconsistent with its highest ratings. "While the underlying bonds had strong protections against bankruptcy risk, some of the securitisations did not have the same type or degree of protection against the bankruptcy risk of their own sponsors," Stesney says.

The agency is unwilling to assign the highest ratings to resecuritisations due to foreclosure irregularities extending liquidation timelines, while adding to the costs. "Delays in foreclosure alter the amount and timing of payments to the underlying bonds, resulting in considerable uncertainty around the final pay down of the resecuritisations," concludes Stesney.

SIVs

SIV debt downgraded

Moody's has downgraded Nightingale Finance's Euro and US CP and MTN programmes, affecting US$488m of debt securities. The rating actions are due to the downgrade of AIG Financial Products Corp, which sponsors the SIV, on 12 January. The long-term rating of AIG FP was downgraded to Baa1 from A3 and the short-term rating to P-2 from P-1, on review for possible downgrade.

The direct linkage between the senior debt ratings of Nightingale and that of AIG FP is based on AIG FP's commitment to support the SIV's senior debt programmes through a senior note purchase commitment and a repo commitment. The former commitment enables AIG FP to purchase new senior debt issued by Nightingale, while the latter allows Nightingale to raise funds for the repayment of its senior debt through repo arrangements with AIG FP.

Whole business securitisations

Stable to negative outlook for UK WBS

Fitch's outlook for UK pub and healthcare whole business securitisations (WBS) is stable to negative for 2011.

Stefan Baatz, Fitch's director in global infrastructure, says: "The stable to negative outlook is driven by several factors. First, a sluggish recovery of the UK economy and a consequently weak labour market, coupled with rising commodity prices and the VAT hike will have a negative impact, particularly on the pub sector on which Fitch has a negative outlook."

He adds: "In addition, Fitch expects the large government spending cuts announced during the comprehensive spending review in October 2010 to put revenues and margins under pressure, in particular for healthcare transactions, for which Fitch has a stable to negative outlook. Job losses in the public sector could further curtail the already fragile level of consumer discretionary spending, compromising both pub performance and potentially self-pay healthcare revenues."

The well-performing and more specialised private healthcare operators (such as nursing home operator Barchester) and the well-managed food-led pubs (like Mitchells & Butlers) are expected to be more resilient over the course of the year. Conversely, the tenanted pub model (for example, Punch Taverns tenanted pubs) as well as the debt-laden elderly care homes - notably those that are more reliant on local authorities (such as Southern Cross) - will be in a disadvantaged position relative to their competitors. This will lead to greater differentiation in credit quality among WBS transactions, the agency says.

Given the diversity within the universe of Fitch-rated WBS transactions, rating actions over the past three years have varied between and within sectors. However, the key trend is that pub ratings have increasingly been downgraded due to deteriorating performance. Ratings for the healthcare sector, however, have been more resilient due to its fundamentally solid long-term prospects - albeit transaction-specific issues, mainly linked to refinancing pressure, resulted in some downward rating actions.