Contents

ABS

Green shoots

'Green' securitisation one factor in renewed recruitment activity

The tail-end of 2010 saw an encouraging increase in demand in the structured finance job market and the year ahead is expected to be an improvement on the last. Although restructuring concerns linger, hiring opportunities should arise - especially in CMBS and 'green' securitisation (see SCI issue 192).

The structured finance recruitment business is back. Since 4Q10 Mia Drennan, Square Mile Connections founder and md, has seen a significant increase in clients looking to make hires.

She comments: "We deal with a number of global blue chip banks, not just here in the UK but also in Asia and in the US. The last couple of months in particular, even up until Christmas Eve, have been extremely busy; I have never known a December like it."

Another London headhunter confirms that hiring activity is back, although he warns that demand is still a long way from pre-crisis levels. He says: "Everything is in a planning phase at the moment. In general DCM is down by 20%-30%. There have been pockets of hiring activity, with emerging markets and high yield both being busy, and there has also been some bank interest in ABS. But that has not become a big thing for all of them yet."

The headhunter adds: "We have got into more of a traditional recruitment cycle, albeit slightly delayed, so I am cautiously optimistic for the year ahead. It will not be huge, but there will definitely be some more hiring activity in this space."

Drennan is far more positive. Now that banks have achieved the necessary time and distance from the crisis to re-evaluate their strategies, many are looking to rebuild those teams that were disassembled over the last couple of years.

She explains: "We have already had an amazing kick-off to the year. It has been good to see we have had more demand for front-office roles, with trading requirements and senior sales roles. Banks are not just getting their internal affairs sorted, but instead they are going out and trying to build their business again."

One potential problem for the market could be the transactions that will require refinancing this year and the next, with appetite to refinance those transactions a cause for concern for Drennan. However, she notes that where restructuring does take place, there is a need for people with the necessary skills to do that, creating demand in the market.

Demand could also be created by a CMBS resurgence, which the second headhunter has heard very strong suggestions of for the second half of the year. Although he is still cautious about how strong a renaissance the market may see in that area, he believes ABS, corporate SME and covered bonds will continue to make strides.

He says: "There was not much of a pattern last year and it might be too early to call whether that will be the case again this year. In terms of what roles are in demand, it should be fairly broad-based. Due to deal flow and due to the way the market is, the call for specialism is not as great as it perhaps was. Somebody who can cover everything from corporate SME ABS right the way across through flow to covered bonds is going to be attractive."

"Emerging markets could be an angle this year, while people who can build relationships and get up off the ground quickly rather than spending a year or two developing their business are definitely going to be sought after," he adds.

Another angle this year is green securitisation, which Drennan believes could be a very innovative area for the sector. She says a US bank recently held a well attended seminar on the topic - a sign that the concept of securitisation being used by the UK government's proposed Green Investment Bank may be becoming a reality.

Drennan says: "Towards the end of the year, possibly into 2012, an area we are focusing on is the Green Investment Bank. The rumour in the capital markets is that securitisation and structured finance-style debt products will come out in some guise or another from the Green Investment Bank."

"Even a few years ago we started to see securitisation around forestry and wind farms. This is not new, but it is an area which could take off. Banks have been looking at this and, once it does take off, then they will of course be hiring for it. There are a lot of people floating around the market who could certainly put their skill sets to use," Drennan concludes.

JL

Monolines

One foot forward

MBIA litigation presses ahead

The banks involved in the fraudulent conveyance case against MBIA Insurance yesterday filed their Notice of Appeal of the First Department of the New York State Supreme Court Appellate Division's recent ruling (see SCI 19 January). In addition, they requested that the Court of Appeals grant an expedited briefing and argument schedule, thereby bringing some clarity around the timing of the litigation.

The plaintiffs are seeking an expedited hearing by the New York Court of Appeals on whether their common law action under the Debtor and Creditor Law can proceed. They believe the appeal should be expedited because: its prompt resolution is of "substantial public importance"; policyholders will be prejudiced as MBIA Insurance's financial condition deteriorates; and MBIA's ceo has publicly urged the expedited resolution of the litigation. Robert Giuffra, partner in Sullivan & Cromwell's litigation group and lead counsel for the 12 banks involved in the case, says he hopes the hearing can take place in the spring.

Meanwhile, the plaintiffs aim to get the Article 78 proceeding to trial by the summer. Sullivan & Cromwell will be submitting further papers at the end of February, in which several former New York insurance superintendents will testify - including James Corcoran, who was the superintendent from 1983-1990.

His affidavit states that the record clearly reflects that the New York Insurance Department (NYID) approved the MBIA transformation transactions, even though the transactions were "not fair and equitable" to the structured finance policyholders. It also notes that the NYID's stated public policy reason for approving the transformation - the reinvigoration of the municipal bond market - was "not within the statutory mission of the department" and did not justify the department's violation of its duty to protect and treat fairly the interests of all policyholders.

Further, according to the affidavit, the record reflects that - in rushing to achieve a public policy objective not specified in the New York Insurance Law - the department engaged in a "deficient, expedited review" of MBIA Insurance's financing condition, including of its ability to pay claims of all policyholders following the transformation.

The broadest implication for the structured finance industry from the Article 78 and fraudulent conveyance cases is that they raise questions about whether buying monoline protection makes sense, according to Giuffra. The banks bought policies with the expectation of credit enhancement and coverage, yet MBIA's 'transformation' essentially meant that US$5bn of claims-paying assets backing those policies were stolen.

"Insurance companies can sometimes be overwhelmed by claims, but the expectation is always that the insurance company will protect policyholders first; this hasn't happened with MBIA," Giuffra explains. "It is a fundamental principle of insurance regulation is that the regulator protects the interests of all policyholders. In the MBIA case, the New York Insurance Department favoured one set of policyholders - the holders of municipal guarantees - over another, which violates the basic principles of the New York Insurance Law."

MBIA'S transformation was illegal and the NYID never should have approved it, Giuffra alleges. Adding to the sense that the regulator has something to hide, he says that the plaintiffs have for months been trying to get hold of correspondence between the then superintendent Eric Dinallo and other senior department officials about the basis for its decision - to no avail.

At issue is a concern that the policyholders won't be paid out if they make a claim in the future. Although MBIA is currently paying claims, the plaintiffs fear that the monoline will run out of money before many of the insured instruments mature.

Giving some credence to this is a 29 December S&P analysis, which predicts that MBIA Insurance will face US$36bn in claims under the rating agency's stress scenario, while it has only US$6.3bn in claims-paying assets. Further, S&P says it expects MBIA Insurance's claims-paying resources to remain well below projected stress-test losses for the foreseeable future.

But the plaintiffs are going further and alleging that MBIA Insurance was essentially insolvent after the restructuring. As well as damages, they are seeking the restoration of MBIA as it was before the split and the claims-paying assets to be returned.

Wins by the plaintiffs could result in a number of further cases being brought by other counterparties against MBIA. Indeed, a federal class action against the monoline has already been stayed, pending a decision in the appeals court.

CS

CMBS

Fundamental change

US CMBS investor focus switches on performance concerns

Investor focus in the US CMBS market has switched from being technical to fundamental. As last year's rally fades, differences in performance are expected to become more pronounced, leading to increased tiering between bond prices.

The US CMBS market has been driven by strong technical factors - limited supply and lots of demand - for the last year, but underlying property and loan fundamentals appear to be becoming more relevant now. "We're beginning to see problems on larger loans impact cashflows higher up in the capital stack and investors are starting to differentiate between bonds based on performance. This wasn't the case last year when the market was hot," confirms Tom Zatko, md capital markets at Cornerstone Real Estate Advisers.

He adds: "If it is a problem loan, investors want to understand the potential outcomes of its resolution and get paid appropriately for the range of work-outs. Where an investor chooses to sit in the capital stack is also important."

For example, an AJ position could be hit with a downgrade because the bonds below it are impacted by a cashflow problem. AJ and AM tranches outperformed during last year's grab for yield, but now investors are paying closer attention to possible credit issues within them.

David Tobin, principal at Mission Capital Advisors, agrees that fundamentals were left behind last year as the CMBS market came off its 2009 lows. "It felt like you could buy any issuance and it would make a gain. This environment was driven by structural issues in terms of liquidity returning to the market, supported by low rates."

He points out that credit crunches are liquidity-driven and fundamentals-driven. "All of the liquidity-driven profits have been squeezed out of the market, so now it's all about fundamentals. It is important for investors to drill into analytics to figure out property-level performance and compare what they see with what's reported; for example, economic occupancy compared with physical occupancy."

The aim is to determine whether the individual anchor tenants are overpaying the rent. For leases written in 2007 and 2008, the rent could potentially reset downwards as leases come up for renewal. Alternatively, the leases could be below market and thus there could be an upside for certain properties.

The frequency of lease resets is another important consideration, according to Tobin. "Hotel leases are essentially a day long - a factor which contributed to the rapid decline in performance in the hospitality sector," he says. "Although hotels have rebounded dramatically, values in the sector remain volatile. In comparison, multifamily leases reset every year, while retail and office leases are typically 10 years long."

The focus on fundamentals is likely to drive increased tiering between CMBS bonds, although it won't be formulaic. "The credit approach is different for each tranche, with the risk priced on a custom basis," explains Zatko.

He continues: "Lots of information is available on legacy bonds, so it's possible to express a credit view specific to an individual loan. But because there isn't so much historical loan performance information for new issues, investors can look at whether they like the pool composition based on sector and geography, then drill down to the loan level and analyse the properties and borrowers. It's more of a fundamentals-driven analysis."

Tiering in prices will reflect the fact that underlying fundamentals are weak or weakening. Equally, if a sponsor is known to have poorly performing properties, certain issuers or vintages will be avoided.

However, some investors may overcompensate and this could, in turn, present opportunities. In the case where a sponsor has good and bad properties, it could be ranked lower due to poor performance, thereby creating mispricing for the good deals.

The less crowded area of the market is for bonds that are out of favour and consequently offer more yield. "If there is any compression, it will be on credit-sensitive and heavily distressed bonds," observes John Lonski, CMBS portfolio manager at Cornerstone Real Estate Advisers. "Paper that trades at a heavy discount hasn't really benefitted from the buoyancy in the market. Heavily distressed bonds are thinly traded at the moment and are typically small-sized, so the amount of work necessary to get comfortable with them rarely justifies the reward."

At the height of the market, hundreds of loans were securitised and so one shortcut was for investors to identify a shelf that reflected the characteristics they were looking for. As post-crisis issuers don't have a track record, the underlying pools have been relatively small to make it easier to do credit work.

In addition, new issue underwriting over the last year has generally been more conservative than before the crisis; for example, featuring lower LTV ratios and no use of pro forma underwriting. The underlying assets have also typically re-priced and the borrowers are solid, according to Zatko.

He says: "Certainly post-crisis CMBS new issues have been received well, albeit there have been a limited number of deals. The yields on new issues are less than those required for similar legacy CMBS, so investors appear to recognise their quality."

Four transactions are said to be in the pipeline for Q1, including deals from JPMorgan and Goldman Sachs. The trend whereby two or three sponsors band together to bring a CMBS is expected to continue this year, driven by originators trying to get deals to market sooner and on a more frequent basis rather than holding the loans on their books for a long time.

Tobin suggests that there is plenty of investor interest in new issue CMBS because they can protect their risk through fundamental analysis. "Residential mortgages are at the mercy of macroeconomic issues, whereas commercial mortgages are empirical and scientific - it is possible to anticipate how a security will perform," he observes. "Investors can reverse-underwrite a CMBS down to the property level and figure out whether they have principal risk. You can't do this kind of analysis on residential mortgages."

Tobin believes that the return of the conduit lenders represents the market rising to meet the challenge posed by CMBS maturity defaults. "Originators are helping themselves to fix the problem. Even if only 80% of a loan is refinanced through a CMBS, it should see the loan past its maturity date," he concludes.

CS

CDS

Bail-in backlash

EC proposal sparks debate on credit derivative definitions

A new European Commission 'bail-in' proposal threatens the very viability of CDS contracts. The proposal, which would see banks' senior debt forcibly written-down when they get into difficulty, may result in credit derivative definitions being adapted to include a regulatory write-down event.

The EC launched a consultation on the Technical Details of an EU Framework for Bank Recovery and Resolution on 6 January. Among the 'resolution tools', the consultation lists the possible write-down of bank senior debt. According to Assia Damianova, special counsel at Cadwalader, Wickersham & Taft, what the EC is saying to senior bondholders is that the price of holding bonds of a bank that is saved from collapse will be to bear some of the costs of such a bail-out.

There are two ways the EC believes such write-downs, which could be enforced from 2013, could work. One would be what is referred to as the 'comprehensive approach' and would see senior bonds written-down or even converted into equity by the relevant regulator, while the other is to compel banks to start issuing fixed volumes of debt that include write-down triggers for senior debt.

The crux of the issue for the CDS market is that having the potential for compulsory write-downs codified in a bond's documentation negates the current restructuring credit event. Damianova explains: "Importantly, in each case the consultation envisages that the potential 'write-down' power of the relevant authority must be disclosed in the terms and conditions of the bonds, which has obviously created a number of concerns in the credit derivative markets. The main concern is that write-downs that are contemplated by the terms of the debt instrument will not trigger a restructuring credit event."

This could lead to senior bondholders who hedge with CDS seeing their losses multiplied, as one London-based credit derivatives lawyer explains. He says: "Under this proposed scenario, people who have bought a bond and hedged their risk with a CDS will have their loss multiplied, because not only will their bonds be written down but they may not be able to get anything from their CDS. This would see them lose the premium they paid for protection and, further, there might be a regulatory angle too, because they will probably also be holding an imperfect risk transfer instrument - so for regulatory purposes they think they have transferred the risk, but actually they have not."

Restructuring has long been a complicated credit event to determine, with it often not being obvious when a restructuring process has commenced. Damianova notes that many of the changes to derivatives definitions and conventions in the last decade have been to address restructuring. However, as well as restructuring implications, the EC proposal could also impact whether bonds are still deliverable.

The idea that a bond could be forcibly converted into equity complicates matters. Damianova explains that it could be quite possible to enter into a CDS to hedge a particular bond, only to later find that bond cannot later be used to settle.

"If you end up with a bond instrument that says the bank has to repay principal but to the extent it has not been written down in a bank resolution process, then arguably that bond does not meet one of the deliverability criteria under the current CDS definitions," she observes. "This bond may be classed as a contingent obligation and if there is an ISDA auction, the bond cannot be valued and sold into the auction; if there is no ISDA auction, then the buyer of protection may not be permitted to physically deliver that bond in order to settle the CDS contract."

Many in the market are concerned by the consequences of the proposal. But Damianova suggests that with a step back to assess where the EC is coming from, it is possible to understand its logic.

She notes: "The Commission's aim is to shield the taxpayers from having to bail-out the big banks and it is quite minded to make other people who may benefit from the rescue, such as bondholders, bear some of the losses of a bank's bail-out."

Although there is still time for the proposals to be amended, the credit derivatives lawyer believes that the EC hasn't been very sympathetic towards the credit derivatives market and does not seem to have thought about the consequences for CDS. He predicts that hard lobbying for change will ensue.

Damianova, however, says that what the market has to do now is acknowledge the EC's position and motivation and adapt to it. As the restructuring process in Europe changes, so too must the credit derivatives market change and give thought to how transactions can be made to fit with the new regulatory framework.

"Of course, participants in the credit derivatives market (and other market participants) will respond to the consultation and many will have their strong views about it, but it may be that they will have to digest the possibility of there being a separate 'regulatory write-down' event," Damianova says.

She adds: "The derivatives industry will have to consider how the credit derivatives definitions can absorb and reflect the new set of restructuring circumstances, so that when people pay to get cover for restructuring events, they still achieve protection."

The credit derivatives lawyer sees a silver lining to this change. He says: "People have expressed concerns that in restructuring situations players who have bought CDS have no motivation whatsoever to be cooperative in the restructuring because they know they will get paid under the CDS."

He continues: "In the context of what we are discussing, that really changes the balance of power. Assuming definitions remain as they are, then you are no longer going to get paid under your CDS. Maybe this will lead to noteholders being more cooperative when the various options are laid out in front of them."

JL

ABS

Euro ABS has a good week-end

With the S&P counterparty criteria announcement out of the way on Tuesday, the rest of the week has been positive for the European ABS market. A strong UK RMBS sector has fed into other asset classes, boosting investor appetite across the board.

"The biggest event of the week has been the S&P ratings announcement; this is the key thing that people have been waiting on," one ABS trader says. However, he adds that despite its significance, in reality the announcement has not impacted the market in the way of spreads and pricing levels. "It was just an issue that people wanted out of the way."

Meanwhile, the prime RMBS market has performed well this week, due to a combination of tight spreads and limited bond supply. "Prime UK RMBS in particular has seen plenty of investor appetite, especially to pick up paper that's fairly priced, especially more transparent trading bonds like Granite," the trader notes.

The positive tone extended across most of the other ABS asset classes, notably CMBS, the trader adds. "Triple-B CMBS paper weakened a little at the end of last week, but that seems to have stabilised again, so it's all pretty positive."

The current wave of demand is due to a great extent to the willing participation of both dealers and investors. "What we're finding is that when we get senior or mezzanine bonds in that are priced at where they should be, investors are quickly coming back and lifting paper," the trader continues.

He also suggests that the current lack of new issuance has contributed to the success of the secondary market. Aside from Santander's Holmes 2011-1 and Amstelhuys' Arena 2011-I , primary deals have been scarce - consequently, causing investors to explore other options.

"The lack of primary supply means that we have seen an effect in the secondary space where investors have had time to have a look at what's around. In fact, it has been the only source of supply, whether it's dealer inventories or bid-lists. So, the investor appetite right now feels pretty good," the trader comments.

LB

ABS

Bright outlook for credit card ABS

It has been a good week for US credit card ABS, with two new deals pricing today. Further, the current outlook for both primary and secondary markets suggests a continuing improvement, with strong fundamentals underpinning spread levels.

"We've seen a continued improvement in credit card ABS, which has marked its effect on buying behaviour," one ABS analyst says. "Fortunately - or unfortunately for investors - we're still looking at strong fundamentals and strong technicals, which mean that the deals that have come to market have priced very well - generally being upsized or oversubscribed."

Indeed, two deals have priced today, 21 January. First, the senior US$600m tranche of GE Capital Credit Card Master Note Trust series 2011-1 - backed by retail credit card and private label store card assets - came at 65bp over Libor with a three-year WAL. The single-A subordinate class printed with a one-year WAL, but the pricing details were unconfirmed.

Second, the senior tranche of Santander Consumer Acquired Receivables Trust 2011-WO priced at 65bp over, with a 2.5-year WAL. The junior tranche came at 55bp over, with a two-year WAL.

The US ABS secondary market is also performing well, despite a softening in pricing levels, the analyst says. "It's interesting because when there's weakness in the broader market we tend to lag a little and tail off - that certainly seems to be the case this week." However, she concludes: "The market has closed out with a strong week overall and no big surprises."

LB

RMBS

Euro RMBS strikes back

The secondary European RMBS market has been reenergised by a busy and successful week or so of bid-list activity. However, S&P's counterparty criteria update (SCI passim) - and its potential impact on higher rated benchmark deals in particular - is causing some concern.

"The market is standing firm at the minute; there are a lot of buyers out there - or at least dealers who are happy to buy, thinking that there are buyers coming," one RMBS trader says.

This influx of buyers has driven the volume and outcome of bid-list activity over the past week or so, which has pushed prices up to significant levels. "We saw a large volume of bid-lists last week, with two or three launching a day - especially in UK non-conforming. They've had very good execution levels; levels that we haven't seen since 2008," the trader confirms.

He continues: "We had three in a row and every day the subsequent list was a point higher in pricing. Having said that, I've seen stuff on dealer offer sheets - as they bought it all - but I haven't seen much of it trade away from dealers yet."

The trader explains that while the bid-lists were extremely well received, activity has now stabilised somewhat, with one UK non-conforming list launching per day. "They are now selling at similar levels, perhaps dipping by a single point. Last week every single list was trading higher than the last, so it's levelled out now."

Meanwhile, S&P has begun implementing its updated counterparty risk criteria. With the new criteria set to affect top-tier ratings, Granite triple-A holders may have to review their options, the trader warns.

"This doesn't really affect us, as we're not ratings-sensitive, but some people will be very concerned - particularly those with Granite triple-A bonds as they're on rating watch negative. I'm guessing that there will be some solutions with Granite, but some bonds won't have an easy solution and will lose their triple-A ratings, so we could see some forced selling," the trader concludes.

LB

ABS

Euro CMBS targeted in criteria roll-out

European securitisation analysts at Barclays Capital estimate that approximately 1,400-1,500 tranches will ultimately be downgraded following the roll-out of S&P's updated counterparty criteria. Negative rating actions are expected to be more prevalent in European transactions because swaps are more common in European securitisations and the amended swap criteria will likely have the biggest impact.

In terms of the negative watch impact on specific sectors, CMBS is overrepresented to the benefit of prime RMBS and ABS, according to the BarCap analysts. "In relation to country, the low representation of the Netherlands stands out. Spain and Portugal, unsurprisingly, seem to be overrepresented."

Nearly all outstanding European CMBS tranches rated triple-A or double-A are affected, with notable exceptions being Immeo Finance 2 and Vesteda Residential Funding II.

In terms of UK RMBS, the Granite and Aire Valley programmes are on review, as well as many non-conforming RMBS issuers. Several HERMES and DSB-issued Dutch RMBS tranches are on credit watch, along with many Portuguese and Spanish RMBS, due to the counterparty vulnerability of the Spanish cajas.

Finally, the CARS Alliance, Asset Backed European Securitisation Transaction and Auto ABS Compartiment European auto ABS are now on credit watch.

The analysts suggest that a number of transactions will be restructured to avoid downgrades. "The likelihood for deal amendments is higher for securitisation programmes and originators that plan future issuance. If no future issuance is planned, issuers might decide that amendments to avoid a downgrade are not worth the effort," they note.

Many issuers - especially in the UK prime RMBS, Dutch RMBS and auto ABS sectors - are assumed to have already provided S&P with a written action plan to comply with the criteria. "Coincidently, these sectors are those for which primary issuance is expected this year. In European CMBS, the exceptions of highly rated notes not taken on review are a result of sufficiently high-rated swap counterparties, in our view," the analysts conclude.

CS

RMBS

Slower prepays expected for 09/10 Freddie pools

Freddie Mac has announced that it will no longer purchase Freddie Mac-owned streamlined refinance mortgages from 1 May 2011. MBS analysts at Bank of America Merrill Lynch suggest that elimination of this programme will result in slower prepayment speeds and a longer refinancing lag for 2009/2010 Freddie pools. It could also drive convergence between Fannie and Freddie 2009/2010 speeds.

This programme was the only GSE streamline refinance option available for borrowers after the HARP cut-off and has had a meaningful impact on Freddie speeds in the 2009 and 2010 vintages. The BAML analysts expect the announcement to impact Gold TBAs with 2009/2010 vintages as deliverable.

For example, the Gold 4.5 TBA could decrease by 3-4 CPR. Speeds for Gold 4.5 TBA came in at 28 CPR in Dec, while speeds for Fannie 4.5 TBA came in at 23 CPR.

"We don't believe that this announcement will have any impact on the Gold 5.5 TBA, which has a deliverable vintage of 2008. The reason is that those borrowers can still use the HARP programmes available through Fannie and Freddie," the analysts note. They recommend staying short GD/FN 5.5s.

CS

ABS

Rating agency role in Euro ABS discussed

The role of rating agencies in the European structured finance market has changed, according to panellists at a Fitch-hosted conference in London last Friday (21 January). The conference also focused on the outlook for the sector during the year ahead.

Will Davies, svp at PIMCO Europe and a panellist at the conference, commented on how recent counterparty criteria issues are likely to be addressed in 2011. "Although the criteria changes are important, investors do have more important issues to contend with at present. Additionally, investors are now conducting their own ratings analysis and, although important, ratings serve as a second or third opinion."

While counterparty criteria updates don't affect PIMCO, he congratulated the firms that have acted quickly to adapt to the changes. He added: "Many firms have experienced analysts to respond to such changes in the marketplace."

But Steve Gandy, head of securitisation at Santander, highlighted the impact on the market more broadly. "For Santander and other issuers, the concern is how investors are evaluating their transactions. Counterparty and regulation issues discourage less resourced investors from investing. That tends to put a damper on the market."

Looking at the role of the rating agencies in 2011, Ganesh Rajendra, head of asset- and mortgage-backed strategy at RBS, noted an interesting turn in rating changes from 2008. "From the middle of 2009, rating methodologies moved towards non-credit issues making changes in the way of criteria. This is where the rating agencies have shifted the goal posts."

He continued: "To obtain a triple-A rating is much more expensive now and therefore it will become a rarity going forward. Rating-sensitive investor bases have shrunk dramatically because of this, which makes the role of ratings complementary and not a driving force."

Gandy agreed that the cost to issuers' spreads on the underlying assets can outweigh the costs for the triple-A tag. "To achieve a triple-A rating is not imperative if our investors don't need it. The cost of a triple-A doesn't always add up - in which case, it's not worth it. What we need to do is drive down the cost of securitisation, so that it's in line with the asset prices."

Meanwhile, Rajendra said he expected CMBS to be the most affected asset class in 2011 - suffering from restructuring issues. However, overall he believes that credit trends will improve, whether the market suffers from a double-dip recession or not.

Indeed, Fitch expects GDP growth in the UK, Germany and France in 2011 to lead to improved performance of structured finance transactions in the EU's three largest economies. Corporate delinquencies and unemployment should stabilise and start to fall, while house prices are anticipated to either flatten or drop marginally. The agency's overall outlook for the sector in 2011 is stable.

However, Fitch expects that structured finance deals in weaker eurozone countries, including Spain, will have a tough 2011 - albeit probably less so than in 2010. "House prices will continue to fall in Spain throughout the year, while the impact of increased unemployment and falling GDP will be seen as state benefits and other temporary support expires," says Marjan van der Weijden, head of Fitch's European structured finance team. "These difficult conditions are reflected by more than 20% of Spanish tranches having a negative outlook."

The agency expects RMBS defaults and delinquencies to remain artificially low throughout Europe because of lender forbearance. Additionally, a large number of collateral and transaction outlooks are stable due to the expected slowing rate of house price declines. However, Spanish and Irish RMBS will continue to be the hardest hit, and consequently their collateral and transaction outlooks remain negative.

Although the agency has warned of the upcoming refinancing needs of both CMBS and CLOs for two years, it does expect to see the market working towards a solution this year. As the market moves closer to its peak refinancing years of 2013-2014, a large proportion of transaction outlooks are negative.

Meanwhile, the performance of consumer ABS is stabilising in line with unemployment, Fitch reports. But the impact of increasing unemployment in Spain during 2010 will be felt this year as people's savings and benefits run out.

Italian mixed leasing transactions will also come under pressure from a protracted economic recovery, but to a lesser extent. Continued deleveraging should increase rating stability in these transactions, Fitch concludes.

LB

CLOs

Underlying strength

Jeff Herlyn, Michael Rosenberg and David Wishnow, principals of Tetragon Financial Management, discuss their firm and their expectations for the CLO market

Q: How did Tetragon come about?
JH: The idea for Tetragon came about because we are all big believers in the senior secured bank loan space, which has proved itself by weathering many different financial cycles, but saw that it was very difficult for institutional investors to access it. Even more importantly, it was even more difficult for equity investors to get exposure to the asset class as most of the banks they could invest in that used to hold senior bank loans as their primary asset - the Manny Hannys, the Chemicals and the Chases of the world - had all morphed into investment or global banks.

So the original concept was to bring back the old form of commercial bank and reintroduce the asset class to the public equity investor. That was the case even when we began raising money privately in 2005 before ultimately taking the company public in 2007.

With that concept in mind, we asked ourselves: 'What is the best and most efficient way to invest in the senior bank loan asset class?' So far, we continue to answer that question by saying that it is by utilising cashflow CLO equity.

Q: How did you implement that?
JH: The idea is not just to replicate the old commercial bank model, but also to improve on it. By setting up our company and investing in the CLO markets, we weren't running the risk of mismatching liabilities and assets - cashflow CLOs match our funding and our asset class.

A traditional commercial bank model uses customer deposits, which are typically short term in nature, to fund longer-term loans. While we may have seven-year loans inside a CLO, we also may have 14-year locked-in non-recourse non mark-to-market financing - which is one of the major typical features of CLOs that we felt was an improvement upon the commercial bank environment.

We also generally don't have the same expenses that commercial banks have. For example, we don't have the bricks and mortar costs associated with a full bank network; we mainly outsource to what we believe are best-in-class third-party loan managers; and we also have an in-house CLO and loan management team called LCM , which we purchased in early 2010 from Calyon, that manages some of our CLOs for us. At the same time, we also seek to structure the company in a tax efficient manner.

In addition, we may offer more diversification than a typical single commercial bank did back in the day when it really was just one chief credit officer's view of the world and the rest of the lending officers essentially followed suit and added exposures to his views. Right now, we have exposure to 68 different CLOs among 32 different managers; each one has a slightly different style of management.

We have European deals; we have US deals. In the US, we have middle market and broadly syndicated deals, all with slightly different risk profiles and styles of investing.

In our view it all makes sense now, but when we were going public in 2007 we had to ask potential investors to, among other things, trust our experience and belief that the underlying market and the structures involved were robust. Since then, we have been through a very severe cycle and we think that the asset class has proven itself once more. Equally, both our method of investing in the senior bank loan space through structured deals with our input and the diversity that comes from that have in our view proven themselves as well.

Q: Why is the senior bank loan market so resilient?
JH: We believe it comes back to in a large degree the original premise that banks had in taking principal risk in this space by using customer deposits, which they thought of as very safe assets. All of their senior loan investments were underwritten to a very high level of probability of return of principal and that was because, among other things, they typically took security in the companies they were lending to, were senior in the companies' capital structure and also generally held 100% of their assets as collateral.

Consequently, the historical recovery rate on the asset class is in the high 70s close to 80%. Obviously things do go in cycles and that average was pulled down when the underwriting got a little exuberant back in 2007, but on average in our view the market has generally remained fairly disciplined - that can be seen from its relatively quick revival and its return characteristics. Going forward there may be even more scrutiny of deals as regulatory changes may require the banks to be even more disciplined in this asset class.

MR: We think that the relative resiliency of CLOs compared with other assets that were securitised within CDOs has in part to do with the leverage and the structure itself. When the old style commercial banks held loans on their balance sheets, they typically were leveraged 12 to 1 - tier 1 capital was traditionally 8% - and when you look at CLOs you see that not coincidentally they are typically leveraged at the same ratio.

So, there was a good amount of long-term empirical data that you could look at with respect to expected losses in helping to understand the risks you were taking in utilising the same amount of leverage. When you take other asset classes - subprime mortgages or ABS for example - that were put into CDOs, those were often levered upward of 50-plus times and banks holding those assets on their balance sheets were never levered 50 times. That meant from our perspective there was an unfortunate combination of mainly untested assets - subprime mortgages had never before been through a real downturn - and generally untested structures.

Q: Where do you see the opportunities and challenges in 2011 and beyond?
JH: Going forward, we see the senior secured bank loan asset class as a key part of the capital markets in the US and Europe, especially here in the US. Indeed, the market has improved and increased in size significantly since the downturn over the last 18 months. We continue to see it as a relatively resilient and more disciplined market compared to others and see it as potentially continuing to be lucrative for us going forward in creating what in some sense carry trades - where we own the assets inside of our CLOs for the interest income just like a bank, as opposed to looking to trade in and out of those assets in search of price appreciation.

DW: Also, there may be opportunities with LCM. In November 2010, we put together through LCM the US$300m LCM VIII CLO, which we believe was one of the first new issue fully distributed CLOs post-crisis. For 2011, we expect that market to continue to come back from where it was a few years ago and we would seek to do further new CLOs with LCM where we may own the majority of the equity.

We would also expect to continue to invest in third-party managed deals. We are believers in cashflow CLOs and we are believers in the senior bank loan market. With appropriate leverage applied to it, we think it's a potentially solid investment opportunity.

MR: As David says, we have already seen the opening up of the new issue CLO market in 2010 and we think that's going to continue through 2011 and going forward. In our view, it probably won't reach the volumes we saw in the heyday of 2006/7, but we would expect to see volumes more reminiscent of the early 2000s.

That's because in our view there's a need for these instruments. As we said earlier, senior secured loans are a proven part of a company's capital structure and there are going to be companies with funding needs and CLOs will be one of the market participants for those loans - along with banks, hedge funds, investment managers and retail funds.

So, we do think our core business model is strong and we'll continue to see opportunities going forward to invest in attractive new issue CLOs. What is likely to change compared to prior years is something we saw in 2010, which is low levered transactions.

Instead of 12 times, we may only see six, seven or eight times levered transactions. But, as we've seen, there is a market for such structures.

DW: As the market continues to expand in 2011, fewer managers will be able to do deals. In the past, many different loan managers - regardless of their experience and size - were able to get deals done, but now that has changed.

Track record is key; performance history is key; even size and scale and access to capital is key for CLO managers to grow. I think that puts us in a very good position, given the size and scale of what we've done to date. We're arguably the largest CLO equity investor in the market and we've got significant resources and capital to expand on that still further.

ABCP

Canadian ABCP fund launched

GMP Investment Management (GMPIM) has launched its Canadian ABCP Fund, which will invest in the securities from the Master Asset Vehicles that were created from the restructuring of the non-bank sponsored Canadian ABCP market in 2008 (SCI passim).

"The objective of the ABCP Fund is to capitalise on the attractive risk/return potential of this unique, diversified, deep-value investment opportunity," says Jason Marks, ceo, cio and managing partner of GMPIM.

The firm has successfully traded over C$2bn (face value) in Canadian restructured ABCP through its GMP Diversified Alpha Master Fund since April of 2008 - a fund that has garnered a 27.39% return since inception. "Asset-backed commercial paper is poorly understood in the market, which creates an opportunity for GMPIM, with its specific expertise and trading experience," adds Greg Foss, portfolio manager of the Canadian ABCP Fund.

ABS

Goldman restructures ABS group

Goldman Sachs has restructured its US ABS banking group, leaving Mike Millette as the sole head of structured finance. Kevin Gasvoda has taken on a different role in the bank's mortgage division.

Under the restructuring, certain underwriting and origination activities related to MBS and ABS - which were previously housed in the bank's securities division - are being moved to the financing group, in which Millette works.

ABS

Structured credit head named

Sumitomo Mitsui Banking Corporation has appointed Robert Carney as head of structured credit and securitisation. He is responsible for the bank's purchase of structured credit investments, negotiation and execution of credit hedging, new product development and the execution of asset-back funding.

Carney was previously an executive director with Wye Tree Asset Management. Prior to this, he worked at the monoline FSA for almost seven years, most recently as a director.

ABS

ABS duo promoted

Sidley Austin has elected 28 lawyers to its partnership, including two securitisation specialists in the Chicago office. T.J. Gordon and Jeffrey Weinstein have been named partners in the firm's structured finance and securitisation practice, with the former also a partner in the syndicated and leveraged finance practice.

Gordon's practice focuses on the representation of banks, insurance companies and other financial intermediaries in structured finance, asset securitisation and secured lending transactions, as well as work-outs and restructurings. Securitisations and other financings of student loans, federally-guaranteed and private, comprise a significant portion of his practice.

Weinstein represents commercial and investment banks and companies in connection with structured finance transactions, including offerings of ABS, CP conduit transactions and lending transactions. He has broad experience with traditional asset classes, such as residential mortgage loans, vehicle and equipment loans and leases, credit card receivables, dealer floorplan loans and trade receivables, as well as esoteric assets such as mortgage servicer advances, sports and stadium-related revenues and license and royalty revenues.

ABS

Partner swaps securitisation teams

Martin Fingerhut has joined Cassels Brock & Blackwell as partner in its financial services group. Fingerhut will play a key role in the firm's securitisation team. He was previously a partner in Blake, Cassels & Graydon's financial services group and chair of its structured finance group.

ABS

Law firm beefs up SF group

Watson, Farley and Williams has appointed Francesco Curreli as partner in its international project and structured finance group. He joins the firm from Hogan Lovells, where he advised domestic and international lenders, borrowers and equity investors on restructuring as well as acquisition, real estate, mezzanine, project and shipping finance. Prior to this, he was part of the finance group at Bonelli Erede Pappalardo.

Curreli is joined by senior associate Francesco Dialti, who also moves from Hogan Lovells. The pair will be based in Milan.

ABS

Special counsel appointed

Cadwalader, Wickersham and Taft has appointed Joseph Beach as special counsel in its capital markets department. Based in the firm's Charlotte office, he will focus on loan finance, asset-backed finance and securitisation.

Beach represents major investment banks, financial institutions, asset managers, commercial paper conduits and fund managers in secured financing ABS. He has experience in ABCP and specialises in broadly syndicated loan securitisations and middle market loan warehouse financing.

CDO

Broker adds trading team

Sterne Agee & Leach has appointed Barry Dennis as head of its structured products trading team. The firm has also hired Adam Robison, Bill Fedyna and Joseph Gambino, all of whom are based in New York.

Dennis was previously co-head of structured products at Chapdelaine's credit unit. Robison and Fedyna were also previously at Chapdelaine, while Gambino worked at Stifel Nicolaus & Co. Prior to this, all four worked together at Merrill Lynch, where they traded and sold CDOs, ILS, CMBS and RMBS.

CDS

Credit manager adds president to lead new venture

Golub Capital has appointed Daniel Posner as president and cio of its new credit strategies group, which is expected to launch a fund later this year. The credit strategies group - based in New York - will invest in long/short credit opportunities, focusing on opportunistic and distressed credit assets, with particular emphasis on event-driven investment opportunities in the US and Europe.

Posner joins Golub from DE Shaw, where he was md and global head of its distressed credit markets investing unit and portfolio acquisition unit. Prior to this, he was svp for Intermarket Corporation and also held positions at UBS, Deloitte and Goldman Sachs.

CMBS

CRE vets pair up again

Cassidy Turley has appointed Noble Carpenter and Bart Steinfeld to lead its capital markets expansion into key markets across the US. The pair will provide investors and users with capital markets services, including investment sales, debt placement, structured finance, recapitalisations, joint venture equity, development financing and note sales. Both will be based in New York.

Carpenter and Steinfeld join from Jones Lang LaSalle (JLL), where they served as international directors and senior members of the firm's real estate investment banking group. Here, they focused on note sales, debt restructuring and workouts. Most recently, Carpenter headed JLL's note sale practice, while Steinfeld led the firm's asset resolution services practice.

CMBS

CMBS counsel recruited

Winston & Strawn has appointed Christine Spletzer as of counsel in its real estate practice in New York. With over 20 years of experience, Spletzer has focused on CMBS, representing issuers, underwriters and loan sellers. She joins Winston from Duval & Stachenfeld, where she was partner and co-chair of its structured finance strategies practice group.

CMBS

CRE servicing team acquired

Crown Westfalen Credit Services (CWCS) has integrated a team of four commercial mortgage servicing specialists from JPMorgan's subsidiary Whiteshire Debt Solutions. The new team will continue to manage an array of JPMorgan servicing mandates in Frankfurt.

Elke Wagner, who joins as coo of CWCS, says: "We are excited to join the CWCS team and their partner and main investor Forum Partners. Our experience and know-how in servicing large commercial real estate assets complements CWCS' skills on the residential and small commercial side. We expect the combination to play a major role in the servicing business in Germany."

JPMorgan has named Crown as a preferred servicing partner for future SPL and NPL portfolio acquisitions in Germany.

Investors

Asset manager bags hedge fund pro

Credit Suisse Asset Management has appointed Stephen Stonberg as coo in its product management group. Stonberg will report to Ravi Singh, md and head of alternative investments, and Alastair Cairns, md and head of strategy, merger and acquisitions, and product development for the asset management unit.

Stonberg was previously partner and ceo of Brevan Howard US.

Investors

Director ousted on 'differences in views'

Alexander Jackson has been ousted as a director of the boards of Tetragon Financial Group and Tetragon Financial Group Master Fund. Jackson was given notice by all of the other directors to vacate office as a result of his conduct following the board's approval in July 2010 of the investment in GreenOak Real Estate, from which he dissented, in relation to differences in views with the other directors.

Jackson joined the boards of TFG and the Master Fund in December 2008. He remains a principal of Tetragon Financial Management, the investment manager to TFG and the Master Fund.

Monolines

Ambac rehab plan confirmed

The Wisconsin Office of the Commissioner of Insurance (OCI) has obtained confirmation of its Plan of Rehabilitation for the Segregated Account of Ambac Assurance Corporation in Dane County Circuit Court in Wisconsin. Absent further orders by this or other courts, the Segregated Account expects to promptly begin processing allowed claims under the terms of the Plan of Rehabilitation upon satisfaction of certain conditions in the plan.

Once the plan takes effect, holders of permitted policy claims will receive 25% of their permitted claims in cash and 75% in surplus notes bearing interest at the rate of 5.1% per year with a scheduled maturity on 7 June 2020. The decision to adopt a 25/75 split was guided by the need to preserve sufficient cash to pay all valid policy claims, including those may arise in the future. The cash/note ratio may be adjusted in conjunction with a yearly assessment of liabilities and claims-paying resources.

Substantially all claims-paying resources of AAC will be available to pay claims of policyholders whose policies have been allocated to the Segregated Account. As of October 2010, approximately 700 in-force policies covering a net par outstanding amount of approximately US$50bn were held in the Segregated Account.

Regulation

Advisor boosts regulatory team

The International Capital Market Association (ICMA) has appointed John Serocold as senior adviser in its regulatory policy and market practice team to lead its work on secondary market practice. He will be responsible for coordinating the response of member firms to current consultations on the review of the markets in Financial Instruments Directive (MiFID).

Serocold was most recently md at LIBA, where he led its work on securities trading, clearing and settlement issues, prime brokerage and investment bank insolvency. Prior to this, he worked for the UK authorities, both at the Bank of England and the FSA.

RMBS

PIMCO pair promoted

PIMCO has promoted 20 staff to evp level, including two involved in structured credit.

Yuri Garbuzov is a portfolio manager in PIMCO's Newport Beach office, focusing on structured credit products. He joined PIMCO in 1997 and has also managed credit portfolios, including bank loans, convertibles and structured bank paper, and developed quantitative analytics for the firm.

Dan Hyman is a portfolio manager focusing on MBS and derivatives, also in the Newport Beach office. Prior to joining PIMCO in 2008, he was a vp at Credit Suisse, where he traded agency pass-throughs.

ABCP

Aussie ABCP ratings cut

The programme documents for Deutsche Bank's Australian ABCP programmes - Cutlass Securitisation, Scimitar Securitisation, Spear Securitisation and Sword Securitisation - have been amended to lower the minimum short-term rating for supporting counterparties to A-1. The amendments follow the update to S&P's criteria for assessing counterparty risk and result in the ratings of the programmes being lowered to A-1 from A-1+.

At the same time, the rating agency removed the ratings from credit watch, where they were placed with negative implications on 18 January 2011 with the implementation of the new criteria.

ABCP

Stable outlook for global ABCP

Fitch's credit outlook for global ABCP in 2011 remains stable, consistent with the outlooks for the global financial institutions that act as liquidity and credit enhancement providers to ABCP programmes. ABCP rating actions - if taken - will most likely reflect the health of sponsors, support providers and other relevant counterparties.

The agency expects to see a continuation of trends in the global ABCP marketplace consistent with those witnessed since the outset of the credit crisis, including investor migration towards traditional multi-seller programmes sponsored by highly-rated financial institutions, and the continued improvement of the credit quality of underlying portfolios. The primary focus this year will be on evaluating the strength of the economy and the impact of the potential impact of recent banking and financial institution regulatory changes, it says.

ABS

Aussie stability anticipated

Fitch says the Australian structured finance market performed well through 2010 and expects that trend to continue this year. A new report anticipates that ABS and RMBS ratings will be stable in 2011, while CMBS ratings may face pressure due to refinancing risk.

As of end-2010, 84% of Fitch-rated Australian structured finance tranches had stable outlooks, up from 78% at end-2009. The agency believes that this will continue during 2011 as a result of stable Australian economic conditions, although the recent flooding in Queensland could have a negative impact on property values.

The agency does not expect any widespread deterioration in underlying asset performance, while interest rates continue to pose the biggest concern. Interest rates have risen seven times in the last two years, which may lead to higher delinquency levels if rises continue.

"With stable economic conditions and low unemployment, ratings are expected to generally remain stable during 2011. Further interest rate rises are the key risk to ratings stability," says Adam Daman, associate director in Fitch's Australian structured finance team.

ABS

Full-year securitisation league tables released

SCI has released its latest league tables for bank arrangers in the European and US structured credit and ABS markets. The figures show that in December JP Morgan in Europe and Barclays Capital in the US held on to their top spots. The leaders participated in over €28bn and US$77bn worth of qualifying deals throughout 2010.

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

The tables cover primary market transactions for asset-backed securities (ABS), commercial mortgage-backed securities (CMBS), residential mortgage-backed securities (RMBS) and collateralised debt/loan obligations (CDOs /CLOs). Qualifying deals are full primary securitisations that were publicly marketed and sold to third-party investors, i.e. were not privately placed or issuer/arranger retained or re-issues or re-securitisations.

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

The tables for the year to end of December 2010 can be found here.

ABS

Greek deals hit by sovereign downgrade

Fitch has downgraded 29 tranches - 26 RMBS, three ABS - of 17 Greek structured finance transactions (14 RMBS, three ABS). The agency has also affirmed 11 RMBS tranches, all of which have a negative outlook.

The rating actions follow the agency's downgrade of Greece's long-term foreign and local currency issuer default ratings (IDRs) to double-B plus from triple-B minus. As a result of the sovereign downgrade, the rating cap on Greek SF transactions has been reviewed from double-A minus to single-A.

To date, the majority of Greek transactions have performed well with low delinquencies and defaults. However, there are currently signs that delinquency levels are increasing, Fitch notes. The future performance of the assets supporting these transactions may be further adversely affected by the changes occurring to the macroeconomic environment.

The assets are typically highly-seasoned and the credit enhancement available for many of the tranches has increased significantly, compared with that originally available. However, the more junior tranches of these transactions are vulnerable to further deterioration in asset performance.

Some of these transactions have Greek banks as counterparties providing collection accounts. In the event of a default of a collection account provider, such transactions are expected to face a liquidity stress. However, in all cases, the agency expects the reserve funds to provide sufficient protection to prevent note shortfalls.

ABS

Sponsors adapt to new criteria

S&P reports that sponsors' action plans have helped mitigate the impact of its revised counterparty criteria. The agency confirms that the number of transactions affected by the changing criteria is lower than previously estimated as transaction sponsors have actively sought to allay the alterations' effects.

A transition date of 18 July has been set for the changes, but S&P will not place on credit watch any ratings where a written action plan outlines what the agency believes to be a viable timeline to achieve compliance with the new criteria. "In all, we received suitable action plans covering 225 transactions - or about 7% of transactions outstanding - in which we would otherwise likely have placed on credit watch a further 554 tranche ratings on aggregate," says S&P credit analyst Andrew South.

The agency says there is a pattern regarding which sectors and transactions it received action plans for. Most plans came for transactions in the ABS and RMBS sectors, where investor-placed new issuance restarted last year and transaction sponsors may be most motivated to take action to maintain ratings.

ABS

Concerns raised over 'expert' liability

The US SEC has voted to adopt two new sets of rules designed to revitalise the ABS market by encouraging better investor disclosure. However, SIFMA has already spoken out about a flaw it sees in the decision.

The first set of rules requires issuers to disclose the history of the requests they received and repurchases they made related to their outstanding ABS. The second set would require ABS issuers to conduct a review of the assets underlying those securities.

"At one time, the securitisation market provided trillions of dollars of liquidity to virtually every sector of the economy," says SEC chairman Mary Schapiro. "These rational measures are designed to help revitalise the important ABS market by encouraging better disclosure for investors."

The first set of approved rules were proposed in October 2010 (see SCI issue 204) and implement Section 943 of the Dodd-Frank Act, intended to help investors identify originators with clear underwriting deficiencies. Issuers will have to file with the SEC their last three years of repurchase history by 14 February 2012.

After that initial filing they will be required to update on a quarterly basis, including repurchase history for all outstanding ABS if there is a covenant to repurchase or replace a pool asset, and also file a history of all fulfilled and unfulfilled repurchase requests.

The second rule set relates to Section 945 of Dodd-Frank, requiring issuers of ABS registered under the Securities Act to review assets underlying the ABS. This applies to all registered ABS regardless of assets and can be carried out by the issuers themselves or third parties, so long as that third party is named in the registration statement as an expert under federal securities laws. Any registered offering commencing with an initial offer after 31 December 2011 must comply with the new rules.

Richard Dorfman, md and head of SIFMA's securitisation group, is concerned about the 'expert' label. He says: "SIFMA appreciates the efforts of the SEC to bring to a conclusion Section 945 rulemaking on due diligence. We remain concerned, however, with the expert liability issues which we raised in our comments to the SEC in November."

He continues: "Naming a third party conducting a due diligence review an 'expert' creates a liability associated with that designation, which could limit the availability of these types of services, effectively preventing and/or limiting access to the valuable due diligence provided by these types of firms. Also, we continue to believe it is unwise for the SEC to delineate minimum standards for diligence reviews, given the complexity of these activities and existing liability of issuers for prospective disclosure."

CDO

Mixed performance for Euro SF CDOs

Fitch has downgraded 40 tranches and affirmed 140 tranches from 33 European SF CDOs. In addition, the agency has revised the outlooks from negative to stable for 15 of the affirmed tranches.

European SF CDO performance has been in line with expectations since the agency's last review of the sector in 2009, while the majority of the tranches have been affirmed - generally at very low ratings. However, some transactions have shown further negative credit migration, which has not been offset by transaction deleveraging. The downgrades of these transactions reflect the decline of available credit enhancement caused by the negative credit migration of the assets.

Fitch has revised its outlook from negative to stable on several senior tranches that have demonstrated increasing credit enhancement and limited negative portfolio migration. The risk of future negative portfolio performance is expected to continue to be offset by increasing levels of credit support driven by deleveraging or portfolio manager trading.

However, the agency says that the majority of tranches in this distressed sector are at clear risk of default and are rated triple-C or below, with the default of any single-C rated tranche seen as unavoidable.

Since the last review, two transactions have hit an event of default (EOD), due to the undercollateralisation of the senior tranches. Liquidation proceeds of one, Euromax IV MBS (SCI passim), were insufficient to fully redeem any of the notes. As a result, all rated tranches have been downgraded to D and the ratings have been withdrawn.

An EOD has also been declared on Eurocastle CDO II, due to negative portfolio credit migration, and the transaction has consequently been downgraded. Nevertheless, Fitch observes that the EOD risk on the remaining SF CDOs is decreasing. The senior classes of Pallas CDO II were thinly collateralised at the last review in 2009, for example, but the collateralisation level has since improved.

Finally, the ratings of Eirles 2 Series 127, Tsar 11 - Eirles Two Series 136 and Tempo CDO 1 class D notes have been downgraded to D following credit events valuation that led to the write-down of the notes. Claris Limited Series 59 Napa Valley V ABS CDO has been cancelled and the notes have been downgraded to D and withdrawn.

CDO

'Encouraging trends' for Trups CDOs

Encouraging trends have emerged for the US bank Trups CDO sector, according to Fitch's latest default and deferral index results for the sector.

"New deferrals have declined for a fifth straight quarter and are down notably from third-quarter 2009 peaks," says Fitch director Johann Juan.

There were 166 new deferrals in 2010 - a significant improvement from the 274 new deferrals that occurred in 2009, the agency says. Another positive sign is the increase in the rate of new cures: 12 banks cured their interest payments in 2010, compared to just two in 2009.

However, the slow-down in deferrals has not yet translated to lower rates of defaults, which remained virtually at the same level as in 2009. During 2010, there were 67 new defaults compared to 70 defaults experienced in 2009.

As a percentage of original collateral balance, exposure to defaulted banks within Fitch-rated Trups CDOs increased by 0.11% to 14.68% in December, while exposure to deferring banks rose by 0.31% to 18.09%. As of the year-end, 153 bank issuers are defaulted - affecting approximately US$5.53bn held across 82 Trups CDOs. Meanwhile, 385 bank issuers are deferring payments on US$6.81bn of collateral across 85 Trups CDOs.

CDS

OTC collateral communication tool prepped

The DTCC, MarkitSERV and AcadiaSoft are working to deliver a joint solution for improving communication related to setting and maintaining the collateral required between counterparties to OTC derivative transactions.

Beginning in the first quarter of 2011, the MarkitSERV portal will provide clients with integrated access to the AcadiaSoft Messaging Platform - an online service that facilitates and manages communications required for collateral calls. The new service will enable buy- and sell-side counterparties to manage information electronically on exposures, commitments and adjustments to collateral, while creating an audit trail of all communication about margining.

To the extent messages about collateral are used to satisfy collateral and related reporting requirements under the Dodd-Frank Act, they can be processed through DTCC's Trade Information Warehouse facilities and regulatory reporting interface, the firms say.

Peter Axilrod, md of DTCC's derivatives services and product development, says: "This alliance leverages our organisations' expertise in providing market participants with the first component required for straight-through processing for collateral. DTCC remains committed to partnering with complementary service providers to bring to market a host of automated solutions that continue to increase transparency and successively take more risk out of bilateral collateral processing and the OTC derivatives market as a whole."

CDS

Buy-side faces OTC regulatory pressures

Buy-side institutions face significant gaps in being able to accommodate the regulatory requirements emerging in the US and Europe, according to a survey conducted by BNY Mellon. The analysis was conducted to show what the buy-side needs to do in the face of forthcoming industry regulatory changes, which are focused on the standardisation of OTC derivatives and a migration to central clearing.

The survey indicates that 40% of respondent institutions do not have an internal OTC derivatives pricing capability, yet robust independent pricing is necessary to validate collateral demands. Further, only 10% of participants use of best practise potential future exposure (PFE) calculations for counterparty credit risk measurement: the 90% majority continue to use current mark-to-market valuation, which has no forward-looking capability.

Over 75% of the respondents do not re-hypothecate securities collateral. Insurance and pensions fund institutions that are able to pool collateral actively re-use securities collateral.

Finally, just under 50% of survey participants have outsourced their collateral management. A further 25% have deployed vendor collateral management solutions internally, with the remainder reliant on bespoke applications.

Patrick Tadie, BNY Mellon's global business head for derivatives360, says: "While the standardisation of OTC derivatives and migration to central clearing is welcomed, our current and potential clients from buy-side institutions have expressed a number of concerns that arise from this - loss of flexibility, increased cost of financing positions, management of exposure and disruption over the transition period. We look forward to addressing these concerns with our clients and helping them overcome potential problems in the implementation of the new rules."

CDS

No succession event for Aioi

ISDA's Japan Determinations Committee has ruled that a succession event did not occur with respect to Aioi Insurance Co on 1 October 2010, when Aioi Insurance and Nissay Dowa Insurance merged to become Aioi Nissay Dowa Insurance.

CDS

CDS data sources compared

An independent study - published by the CNMV, Universidad Carlos III de Madrid and UCLA - has found that "different data sources do not reflect credit risk information equally efficiently" and that CMA Datavision "leads the credit risk price discovery process".

The study compares the six major sources of corporate CDS prices (CMA, Reuters EOD, Fenics, GFI, JPMorgan and Markit), using the most liquid single name five-year CDS of the constituents of the leading market indexes (iTraxx for European firms and CDX for US firms) from 2004 to 2010. It found systematic departures from the common trend across these data sources, with the price discovery analysis across the six data sources indicating that CMA Datavision contributes to the "formation of prices" to a greater extent than the other data sources, providing newer and more influential information.

CDS

ICE reaches US$15trn in cleared CDS

IntercontinentalExchange has announced that its CDS clearing houses have surpassed US$15trn in cumulative gross value and 400,000 transactions.

To date, ICE Trust has cleared US$8.4trn in North American CDS indices and US$636bn in single-name CDS, resulting in cumulative open interest of US$542bn. ICE Clear Europe has cleared €3.8trn in iTraxx indices and €695bn in single-name instruments, resulting in €470bn of open interest.

"In a little less than two years, ICE and its clearing members have made substantial progress toward increasing stability and transparency in the CDS market and in reducing systemic risk globally. This is a significant achievement and we'll look to build on it in 2011 with the expansion of our products and services," says Scott Hill, ICE svp and cfo.

ICE Trust expects to offer single name buy-side clearing this year, while ICE Clear Europe is set to offer buy-side clearing and to commence clearing of Western European sovereign CDS contracts.

CMBS

Stable performance expected for US CMBS

Moody's expects higher new issuance volume and greater ratings stability for outstanding CMBS to characterise the sector in 2011, as the US commercial property markets continue to rebound. However, the agency notes that the CRE market has become trifurcated, with prices for larger trophy assets rising, prices for distressed assets declining sharply and prices for smaller but healthy properties remaining essentially flat.

Moody's forecasts US$37bn of US CMBS issuance for 2011. "The combination of borrowers seeking low interest rates and investors seeking higher yield led to a three-fold increase in issuance in 2010 over 2009, with deal size and deal diversity also increasing. Based on what is already in the pipeline, we anticipate those trends to continue and accelerate in 2011," says Moody's md Nick Levidy.

Increasing or stabilising property values, higher transaction volumes and greater liquidity for CRE in 2011 will contribute to relative ratings stability for outstanding CMBS in 2011. "An increase in extensions of troubled, but performing loans will likely provide additional breathing room for owners to potentially grow their way out of their problems," says Moody's svp Michael Gerdes.

The agency estimates that delinquencies of CMBS conduit and fusion loans will rise to between 9.5% and 11% in 2011, with loans in special servicing at or around the 20% level and loss severities also rising for loans liquidated over the next year. "Our base expected loss estimates reflect this outlook as our rating actions capture a significant amount of losses that have yet to be realised," adds Gerdes.

Moody's also expects continued variations from the national trends for geographic markets and property types. "Many of the loans in areas where the pace of the recovery is lagging the rest of the country will not be able to extend, refinance or trade hands at the levels that loans in more robust markets will achieve," says Levidy.

"Hotel and multifamily sector fundamentals are expected to continue the recovery that began in late 2010, while office, retail and industrial market fundamentals will start to form a bottom in 2011 - with a strong rebound not expected until 2012," he concludes.

CMBS

Japanese CMBS loan defaults peak

As of end-December, the balance of defaulted underlying loans backing Fitch-rated Japanese CMBS exceeded ¥250bn, with the number of defaulted loans declining for the second consecutive quarter. Despite the increase in the defaulted loan balance, the agency believes that the upward trend in defaulted loans by number has peaked, taking into account loans expected to mature in 2011 and the expected progress of the defaulted loans.

"The total defaulted loan balance reached a new high in 4Q10 after the previous peak in 2Q10, as three loans maturing in 4Q10 - each with balances of more than ¥20bn - defaulted at their maturity dates. However, the number of defaulted loans decreased and was almost the same as at end-2009," says Naoki Saito, Fitch Japanese structured finance director.

As of end-December 2010, 38 loans (¥251.9bn) were in default within the Fitch-rated Japanese CMBS universe. The number of defaulted loans decreased by two compared to end-September 2010; however, the balance increased by ¥98.8bn. The default rate as of end-December increased to 31.5% by loan balance and 31.9% by loan number, from 17.7% and 29.4% respectively at end-September 2010.

In 4Q10, six loans totalling ¥122.2bn defaulted, while nine loans totalling ¥14.3bn were paid in full without defaulting. Additionally, the work-out activity was completed on eight defaulted loans, with an outstanding balance of ¥37.9bn as of their respective default dates. In total, 21workout processes were completed in 2H10 - three times that of 1H10.

A total of ¥225.2bn, relating to 40 loans, will mature in 2011 - including nine loans each with balances of more than ¥10bn. The status of these loans will affect the trend of the total defaulted loan balance. However, taking into account the maturing loan number in 2011, as well as the expected progress of workout, Fitch believes that the total number of defaulted loans will not exceed 51 - the highest number to date, recorded at the end of 2Q10.

CMBS

Noteholders reiterate support for REC proposal

A notice has been issued on behalf of a group of REC Plantation Place CMBS noteholders and junior lenders reiterating their support for the owner's recent proposal to sell Plantation Place on a consensual basis. The notice also states the group's intention to oppose any alternative proposal that may lead to an enforced sale of the underlying loan or property.

Nassar Hussain, managing partner of Brookland Partners, says: "This investor group collectively has sufficient holdings to block any alternative proposal which may seek to push through an enforced sale of the underlying loan or property and sends a strong public message to anyone contemplating such a strategy."

He adds: "The notice reinforces the strongly held views of the vast majority of creditors who believe the owners' proposal to be the best available solution to the current deadlock, as shown by the noteholder vote on 23 December in which over 82% of noteholder votes were in favour of the owners' proposal, but which ultimately was not approved due to a single class B noteholder, holding approximately 2% of the notes, voting against the proposal."

CMBS

US CMBS loan mods quickening

Although US special servicers are working out underperforming commercial mortgage loans at an increasingly faster rate, they remain mired in an uphill battle heading into 2011, Fitch says.

Loans transferring out of special servicing reached a record US$27.9bn during 3Q10 - more than in the last four years combined. Additionally, the rate of loans entering special servicing fell for the first time in over two years - US$90.1bn in 3Q10, compared to US$92bn in 2Q10.

"Loan modifications continue to dominate as a resolution method. Servicers will resolve loans with increased velocity as liquidity returns to the CMBS market," says Fitch md Stephanie Petosa.

However, the rate of new loans transferring into special servicing remains rapid, with 4Q10 activity spiking. Additionally, recent vintages are still accounting for the largest volume of transfers, the agency says, with 2005-2007 vintages representing over 85% of all specially serviced loans by balance.

Also impacting overall loan recovery rates is the extraordinary volume of modified loans returning to master servicing. "There is no guarantee that modifications will result in a full payoff at maturity or end of term. Recovery rates for loans with losses will also continue to see more instability," adds Petosa.

CMBS

70% of maturing CMBS loans to pass refi test

Fitch reports that approximately 2000 US commercial mortgage loans are due to mature over the next 12 months, representing an outstanding balance of US$22.5bn. The maturities are expected as follows: US$4.5bn in 1Q11 (with hotel properties accounting for 29% of the total); US$4.9bn in 2Q11 (39% retail properties); US$6.1bn in 3Q11 (39% retail properties); and US$6.8bn in 4Q11 (28% office properties).

More than half of the maturities - US$12bn - were originated between 2005 and 2007, when real estate values grew to their highest levels, the agency says. "Borrowers of maturing five-year interest-only loans will need to contribute additional equity to reduce debt levels. Five-year loans will face more difficulty in refinancing, especially office loans with significant upcoming lease rollover," says Fitch senior director Adam Fox.

Of the loans maturing in 2011, Fitch expects approximately US$16bn (70%) to pass its refinance test. This is because most of these loans have 10-year maturities and are not experiencing leverage issues.

"Loans that pass Fitch's refinance test will be in a better position to be refinanced as liquidity continues to return to the CMBS market," adds Fox.

CMBS

Japanese CRE sales hit new peak

Fitch reports that sales of collateral properties backing Japanese CMBS transactions have increased substantially both in number and value in the second half of 2010. This was mainly due to the progress of work-outs for defaulted loans, including bulk sales of the collateral properties to resolve the default status, the agency says.

"In 2010, office properties accounted for the largest proportion of property sales by value, while residential properties accounted for the largest number. Residential properties accounted for the largest proportion of property sales from defaulted loans throughout 2009 and 2010 both by value and number, while office and retail properties accounted for most of the unsold properties by value," says Naoki Saito, Fitch Japanese structured finance director.

An increase in office property sales and bulk sales led to strong 3Q10 total sales in value and number - the highest since 3Q09. The agency's analysis shows that most properties sold in 2010 were located in Tokyo and achieved lower cap rates - just over 6% for residential and office - than properties located elsewhere.

Work-out activities for defaulted loans were largely in line with expectations, Fitch says, with the majority of sales at or above its 'stressed-sale value' when transactions were last reviewed.

CMBS

US CMBS delinquencies moderating?

The delinquent unpaid balance for US CMBS increased in December by an additional US$1.21bn, up to US$62.32bn, according to Realpoint's latest monthly delinquency report. This follows the previous month's increase of US$1.93bn.

The total unpaid balance for CMBS pools available for review for the December remittance remained steady at US$752.25bn. Despite the one-month delinquency decline experienced 4Q10, both the delinquent unpaid balance and delinquency percentage over the trailing twelve months continues to trend upward, but at a moderated pace compared to earlier in the year. The resultant delinquency ratio for December of 8.29% (up from 8.13% a month prior) is just under two times the 5.2% reported one-year previously in December 2009, but over 29 times the Realpoint recorded low point of 0.283% from June 2007.

Both liquidation activity and average loss severity have been on the rise over the trailing 12 months, especially in the last few months of 2010. Another US$918.4m in loan workouts and liquidations were reported for December across 143 loans, at an average loss severity of 56.7%. Year-to-date in 2010, US$7.83bn in loan workouts and liquidations were reported across 1,181 loans, at an average loss severity of 50.9% - including US$4.45bn in the past six months alone.

Real Estate

US CRE prices continue rising

US commercial real estate prices as measured by Moody's/REAL National - All Property Price Index (CPPI) increased by 0.6% in November. This was the third consecutive monthly price increase, following three prior months of decreasing prices. Prices have now moved up 6.4% since August 2010, the agency reports.

Prices at the end of November were up by 2.8% over the prior year, down by 31.6% from November 2008 and were at 41.6% below the October 2007 peak. "We expect the choppiness of the CPPI to continue in the months ahead. A clear positive trend is unlikely to develop until markets become convinced that the recovery of the broader global economy has real staying power," says Moody's md Nick Levidy.

There were 121 repeat-sales transactions worth US$1.7bn in November, up from 110 sales totalling US$1.4bn in the prior month's index. In November, approximately 24% of the total repeat-sales transactions used to calculate the indices were considered distressed - down from the prior month and slightly below the yearly average of 26%.

"Due to the small number of overall repeat-sales transactions, only a few distressed sales can swing the total percentage of distressed sales above or below the annual average," Levidy adds.

RMBS

Canadian mortgage rules reviewed

S&P is reviewing the Canadian government's revised rules for Canadian mortgages and home equity lines of credit (HELOCs) to determine their potential impact on the transactions that the agency has rated. The Canadian government last week announced three major changes to rules for government-backed insured mortgages that are expected to go into effect over the next few months.

First, the maximum amortisation period will decrease to 30 years from 35 years for new government-backed insured mortgages with LTV ratios of more than 80%. Second, the maximum amount that Canadians can borrow to refinance their mortgages will decline to 85% from 90% of the property's value. Finally, the government will withdraw the insurance it provides for backing lines of credit secured by homes, such as HELOCs.

However, S&P says that this last point will not be applied retroactively to HELOC collateral that currently benefits from CMHC insurance, including future draws taken on or after 18 April 2011. The conditions to this include that the loan will presently be insured by CMHC, predetermined amortisation limits are met, the loan was underwritten in accordance with CMHC policies and the amount of future draws plus the outstanding balance do not exceed previously established ceilings.

In December 2010, the agency assigned a triple-A rating to the Platinum Canadian Mortgage Trust 2010-1 notes, which are backed by CMHC-insured first-lien HELOCs. Given its understanding of the position of CMHC outlined above, S&P does not expect the ratings to be impacted as a result of the rule change relating to HELOCs.

RMBS

Aussie RMBS could withstand housing downturn

Fitch has completed its Australian RMBS housing stress test report, concluding that overall the triple-A tranches of all the transactions tested were resilient to the stresses applied in the study, with only 0.14% of all triple-A tranches by balance experiencing a potential downgrade to the double-A category in the most severe stress scenario.

The analysis was completed in response to the significant market commentary surrounding the sustainability of continued rising residential property prices in Australia. The report does not comment on whether Australian property is overvalued, but looks instead at the consequences a precipitous fall in Australian residential property prices would have on the ratings of Australian RMBS.

The report examines four mortgage market downturn scenarios and the likely impact on outstanding Australian Fitch-rated prime RMBS. These scenarios capture defaults and house price declines as: mild, based on 2.5% base defaults and a 20% decline in house prices; moderate, based on 6% base defaults and a 30% decline in house prices; severe, based on 8% base defaults and a 40% decline in house prices; and a fourth scenario of severe stress coupled with a downgrade stress of Lenders Mortgage Insurance (LMI) providers to a triple-B rating.

Fitch tested the ratings of all conforming Australian RMBS transactions rated by the agency that remained outstanding as at 30 September 2010. The transactions tested were originated between 2003 and 2010. The analysis shows that triple-A rated tranches are well positioned to withstand all four stresses.

"While the low level of potential downgrades can be explained by conservative underwriting and the transaction structure, the most compelling reason for performance in the stress tests is the strong seasoning of the transactions, which benefit substantially from house price appreciation since origination," says Ben Newey, director with Fitch's Australian structured finance team.

Fitch notes that while junior tranches are resilient under the mild, moderate and severe stresses, most of the notes in this category are largely dependent on the rating of the LMI provider and therefore susceptible to a LMI provider downgrade.

RMBS

Months to clear shadow inventory increasing

The volume of distressed non-agency residential mortgage properties in the US continues to fall, but at a slowing pace. S&P currently estimates that the principal balance of these distressed homes amounts to about US$450bn, representing nearly one-third of the non-agency RMBS market outstanding.

The agency defines this 'shadow inventory' of distressed properties as outstanding properties whose borrowers are (or recently were) 90 days or more delinquent on their mortgage payments, properties currently or recently in foreclosure, or properties that are real estate owned (REO).

As at the end of 4Q10, S&P estimates it will take 49 months to clear the supply of distressed homes on the market in the US as a whole. This is an 11% increase over the previous quarter and a considerable 40% increase from 4Q09 for the average time to clear these properties.

Miami is the only top-20 metropolitan statistical area (MSA) for which the agency's estimate of the time to clear the inventory of distressed properties remained stable since 4Q09. Although the Los Angeles MSA has the largest current overhang balance, the shadow inventory in the New York MSA will take the longest to clear - at 130 months, as of 4Q10.

That is at least twice as long as it will take in any of the other top 20 MSAs and 2.7 times the average time to clear for the US as a whole. This is primarily due to very low liquidation rates in New York.

S&P's recent estimates of months to clear have increased primarily because of the deceleration of the distressed property liquidation rate rather than a rise in overall distressed property levels.

RMBS

Negative outlook for UK non-conforming

Moody's reports that UK non-conforming RMBS performance improved in 2010, as demonstrated by decreasing arrears levels and an even more pronounced drop in repossession rates. Nevertheless, given the uncertain long-term performance trends, the agency maintains a negative outlook for the sector.

The improved performance trend in the sector in 2010 coincided with: a stabilisation in unemployment levels; historically low interest rate levels; and borrower-friendly regulation initiatives, which prompted servicers to consider repossession as a measure of last resort. However, refinancing opportunities for non-conforming borrowers remain limited and redemption rates have continued to decline.

Limited remortgaging opportunities will keep redemptions below pre-crisis levels, unless a wider range of non-conforming products returns to the market. In this case, Moody's believes that non-conforming portfolios will remain outstanding for longer, thereby pushing up total losses on mortgage portfolios.

Since the beginning of the crisis, the agency has raised its expected portfolio loss assumptions on average to 5.2% and 6.4% of the original portfolio balance respectively for the 2006 and 2007 UK vintages. Consequently, non-conforming RMBS has experienced high rating migration relative to other sectors in EMEA. However, it remains significantly lower than for Alt-A and subprime RMBS in the US, Moody's notes.

Performance stabilisation contributed to a fall in rating migration in 2010 compared with 2009. However, rating migration levels for triple-A notes have remained largely flat in 2010 as a result of rating actions driven by operational risks. In addition, Moody's estimates that senior ratings in approximately 20 transactions in this sector will be impacted by its new operational risk methodology.

The agency currently maintains a negative outlook for UK non-conforming RMBS as uncertainty regarding the long-term performance trends remain. Legal uncertainties also remain, pending the legal proceedings relating to the application of the balance sheet test, as well as the effectiveness of post-enforcement call options in transactions with UK issuers and unlimited recourse notes.

RMBS

Impact of GSE reform explored

Moody's has released a report discussing a number of reform scenarios for Fannie Mae and Freddie Mac, as well as the potential impact of reform on the ratings of the GSEs' debt obligations.

"Our triple-A ratings on the GSEs' debt obligations are based on the credit strength of the US sovereign and we believe the government will continue to support Fannie Mae and Freddie Mac through the reform process. However, the GSEs' debt ratings could change if political support were to build for a recapitalisation plan requiring the companies to service their debt from their own resources, without government support," says Moody's svp Brian Harris.

Fannie Mae and Freddie Mac own or guarantee some US$5trn of mortgage loans or securities, or about half the US mortgage market. Major reforms are unlikely to be adopted until after 2012 and changes likely would be phased in over time, Moody's says. In the absence of a quick political solution, the bond market may act as a catalyst for reform by increasing the GSEs' borrowing costs before the government's currently unlimited support for the companies is replaced by a fixed sum in January 2013.

Of three broad alternatives for reform, Moody's believes a hybrid between privatisation and nationalisation may come closest to meeting the government's principal aims. "Legislators will need to consider how best to balance two main, but conflicting, objectives. While the government will be looking to ensure consistent access to affordable mortgage credit, it will also seek to limit its role in the housing finance market to reduce the risk of future taxpayer bailouts," Harris adds.

Whatever the final outcome of reform, Harris notes that the GSEs' current set-up will probably not change during Moody's ratings outlook horizon of the next 12 to 18 months. The outlook on the ratings of the agencies' senior debt obligations therefore remains stable.