Contents

RMBS

Mortgage servicing revisited

CRE special servicer-style model touted for RMBS

The FHFA's initiative to restructure the GSE mortgage servicing model (see SCI 19 January) has re-energised debate on servicer compensation. While there is agreement that the current system has many shortcomings, some believe that the proposed changes don't go far enough.

Ron D'Vari, ceo of NewOak Capital, says the issue at stake is how to incentivise servicers to do a good job. He points to the CRE special servicer model as an example.

"Special servicers are fighting for their own backs, whereas residential servicers are third parties and work on an optimal profitability model," he notes. "I haven't seen a model that fully aligns incentives for residential mortgage servicers in the same manner as CRE special servicers' incentives are aligned."

D'Vari continues: "From the inception, the special servicing function in the CMBS and CRE markets attracted more institutional interest because of its more concentrated nature and the foreclosed asset is more manageable than the residential. The CRE B-piece buyers had tended to have a loan-to-own approach."

Unlike the CRE asset class, single-family residential properties have been viewed as a non-institutional market in terms of both holding the underlying as a pure loan and holding it in a securitisation. However, D'Vari suggests that a similar model for owning residential properties in bulk could be created, with scalable platforms to attract institutional money.

MBS analysts at Barclays Capital indicate that four options for servicing compensation are being considered for performing loans under the FHFA initiative: no minimum servicing fee; a nominal minimum servicing fee; a one-eighth minimum servicing fee, with mortgage servicing rights capitalised; and the retention of a 1% principal and interest strip in the unguaranteed loans backing an MBS. They expect the second option to win out.

But D'Vari notes that principally-serviced mortgages - for example, where a portfolio of whole loans has been acquired - tend to perform better than loans serviced by a third party. "We need to work out how to bring this into the paradigm," he says. "Perhaps servicers should also be the residual holder. The regulatory push for issuers to retain 5% of a transaction could be an instance where they have natural servicing rights."

In addition, under REMIC rules, there are instances where loans are auctioned after a certain length of time. The more sophisticated players could buy non-performing loan pools and enjoy the servicing rights associated with them. This could be one way of building special servicer capabilities for residential mortgages, according to D'Vari.

There appears to be more consensus about non-performing loans under the FHFA initiative, with a fee-for-service approach likely to be adopted. The BarCap analysts point out that this model would ensure that such a business is profitable and thus facilitate the transfer to a special servicer.

Indeed, NPLs trapped in securitisation vehicles where there is a fixed economy appear to be receiving the least attention from servicers at present due to financial restrictions. While consolidation in the servicer industry - as exemplified by Morgan Stanley's acquisition of Saxon Capital and Citi purchasing Ameriquest - means that the market has an excess in master servicing capability, servicers naturally aim to grow their businesses with newly originated performing loans or higher margin business, such as hedge funds that have purchased non-performing whole loan portfolios.

According to the analysts, the cost of servicing a performing loan is approximately US$4 per month relative to US$80 for a non-performing loan. They point out that the perceived inability of servicers to pursue loss mitigation efforts more aggressively on behalf of borrowers has frustrated regulators. However, while larger servicers may have the infrastructure and economies of scale to do so, the costs of implementing loss mitigation programmes can be prohibitive for smaller servicers under current compensation.

In terms of improving the servicing function more broadly, D'Vari says that PSAs could serve to further maximise value by, for example, providing wider risk mitigation options or allowing principal to be modified. However, modification has historically been tricky, given the potential to trigger a tax event.

"An independent servicing oversight function would also be helpful," he concludes. "Bondholders don't have a practical mechanism to assert their rights in connection with servicers and mortgage insurers, so they need someone to act as a collateral oversight, surveillance and verification agent to ensure that servicers are acting in accordance with the PSA for the collective interest of all bondholders."

CS

CLOs

Supply shortage drives Euro CLOs

Prices are continuing to climb in the European CLO market as a shortage of underlying supply drives investor activity. Meanwhile, two significant loan restructurings were announced last week.

"Prices seem to be going up for the secondary market now, with unheard of levels. There are half a dozen deals with underlying assets that are trading above par too," one CLO manager confirms. In particular, triple-C assets have seen the biggest rise in price reaching the mid-90s - a development anticipated by traders for some time.

The manager continues: "Pricing has tipped over the edge now, which is all very good news but it makes it very tricky to reinvest. I think we're one of many CLO fund managers who are not meeting all of our CLO tests, therefore we're unable to reinvest in assets that are above par."

At the same time, in keeping with other sectors, CLO market activity continues to be driven by a supply shortage. The combination of limited underlying assets and an influx of repayments is causing investors to chase deals, the manager says.

Meanwhile, the manager confirms two notable loan restructurings in the past week. "First, the price for the Mevisa transaction has been lowered - the idea of a Spanish deal flexing downwards is quite unusual," he says.

Second, the tranching structure of Phillips Val, which was only launched in October, has been altered. "The headline margin is staying the same, which is 3.25, but they've taken away the Libor floor and re-tranched it to make more of the A-tranche - with a low interest margin - rather than the B tranche. Basically the underlying transaction has changed to make more of it, at a lower mark," the manager explains.

LB

RMBS

Testing times for Euro RMBS

While investor appetite remains firm for European secondary RMBS, the lack of diversification in the primary market is an issue. Uncertainty about market drivers, combined with regulatory concerns is testing participants' commitment to the market.

"Since the start of the year, we've seen good appetite in the mezzanine and senior space," one RMBS trader says. While demand for secondary paper remains strong, the primary market has been relatively quiet, with the majority of new issues remaining UK and Dutch.

Indeed, one of the latest RMBS to hit the market is the Dolphin Master Issuer series 2011-1. "From what I understand," the trader says, "the issuer had approval for a bigger size, but decided on printing €500m. It's trading OK in secondary, but I think they wanted to print €1bn but were unsure as to whether it would succeed."

Another new issue doing the rounds last week was the Arena 2011-1 deal, which according to the trader has also received a positive response. "It's been well received, especially if you compare it to secondary, where offers are thin and bids are substantially tighter."

However, the trader notes that difficulty remains in gauging the market and the source of bids. "With the depth of the market right now, it's difficult to grasp how good the bids really are; the investor space still feels limited. We saw this at the end of last summer, when three new Dutch deals came to the market. The appetite wasn't good enough to absorb everything and it looks like it's happening again."

He continues: "Especially as an end-investor, it's becoming harder to grasp what is driving the market as there's a lot going on in the underlying. Particularly for the peripheral countries, the Irish and Spanish transactions are developing a large distinction in geography and it's hard to generalise why people are buying and selling. We're seeing Irish and Spanish deals trade fairly differently from Dutch and UK transactions."

In addition, the trader observes that tiering among UK RMBS programmes is becoming more apparent. This is being driven by the perception that some sponsors may not support their master trusts in the future. "Generally, master trust CPRs are low, so extension risk is being priced in."

Meanwhile, the implementation of new regulation is another factor limiting market clarity. The trader notes that the rules - particularly the risk retention aspect of them - will test sentiment.

"We'll have to see what will happen and who will be the real money, the real cash investors, and who will remain in the market. We'll have to see how this works out for the future of structured finance," he concludes.

LB

RMBS

Shortage in liquidity providers emerging

Senior investors in UK non-conforming RMBS Alba 2007-1 are set to vote on a controversial proposal regarding the provision of a new liquidity facility. The proposal nonetheless underscores the dearth of liquidity facility providers in European ABS at present.

"Every liquidity facility provider is scrambling to find reasons to get out of agreements," confirms one London-based structurer. "No-one wants to provide liquidity facilities anymore because the capital costs are prohibitively high under Basel 3. In addition, many banks no longer meet the ratings requirement for providing the facilities." He cites Danske Bank, which is said to have notified all issuers that it will make claims for increased capital costs, as an example.

Reflecting the increased cost associated with liquidity facilities, the proposed margin and commitment fee for Alba 2007-1's new liquidity facility are 250bp and 125bp over Libor respectively, compared with 45bp and 16bp over for the expired facility. HSBC - which is proposing to provide the new facility - indicates that this pricing "reflects prevailing market pricing and its own internal cost of capital and funding", while also maintaining that it does not "overburden the deal expenses".

Class A2 and A3 noteholders of the transaction will meet on 23 February to consider and, if thought fit, pass an extraordinary resolution that would provide for the new liquidity facility. This follows HSBC's failure, as cash manager, to renew the existing liquidity facility or make a standby drawing in a timely manner.

The proposed new liquidity facility is a 364-day committed revolving liquidity facility in the amount of £10m. The expired liquidity facility, provided by Danske Bank, was a 364-day committed revolving liquidity facility in the amount of £55.8m. In a notice about the proposal, HSBC suggests that the amount of the expired facility was "too large for its purpose" and the amount of the new facility is "more appropriate".

But the firm says it will provide the new liquidity facility only if it is entered into: without any admission of liability of the cash manager in respect of any claims arising out of the current absence of a liquidity facility, in particular, any claims in connection with the failure to renew the expired liquidity facility agreement or make a standby drawing in a timely manner; and in full and final settlement of all claims against the cash manager arising out of the current absence of a liquidity facility.

In the event that the new liquidity facility agreement is not entered into, the notice points out that other courses of action open to the noteholders include: trying to reach a commercial resolution with the cash manager by means of further pre-action discussions, mediation or other form of alternative dispute resolution; and commencing proceedings against the cash manager. The trustee on the transaction (also HSBC) believes that there is a reasonable prospect of success that a commercial resolution can be reached. Similarly, it has been advised that it has a good claim against the cash manager for damages to cover all recoverable losses flowing from the failure to renew the expired liquidity facility or make a standby drawing in a timely manner.

The note warns that any costs incurred by the trustee in relation to the litigation will be met as costs, charges or expenses of the trustee, for which it is entitled to be paid under the trust deed in accordance with the priorities of payments. Such costs may be recoverable, should the trustee win the litigation; however, ultimately the Court has discretion as to what order it makes in terms of costs.

CS

ABS

Business development svp named

Jeremy Harrison has been appointed svp and senior business development officer in Bank of America business capital (BABC). Based in London, he will report to Joseph Powers, BABC business development manager for EMEA.

With over 20 years of marketing and credit experience, Harrison was most recently manager of US-based asset-based lending operations at Lloyds Banking Group. Prior to that, he worked at GE Capital and GMAC.

ABS

Global ABS head appointed

RBS has promoted Scott Eichel to global head of securitised products and US credit within its global banking and markets division. He will continue to report globally to Peter Nielsen, the bank's global head of markets, and regionally to Michael Lyublinsky, co-head of global banking and markets division in the Americas, and global co-head of fixed income, commodities and currencies.

Eichel will oversee the bank's ABS, MBS and CMBS products across trading, structuring and sales, while leading the US credit business within its markets franchise. He joined RBS in 2008 from Bear Stearns, where he was senior md and co-head of RMBS and ABS trading.

ABS

Pair departs auction platform

SecondMarket has seen a couple of high-profile departures this week. Head of the structured products group, Elton Wells, and CDO market specialist Sal Cincinelli have both left the firm. Wells is said to be considering his options, while Cincinelli is leaving the industry altogether.

ABS

CFO steps down on Wells notice

CoreLogic cfo Anthony Piszel has resigned from his duties following the receipt of a Wells notice from the US SEC for disclosure matters during his tenure as cfo with Freddie Mac. He will continue to serve in a non-executive capacity until 1 June 2011 to assist in a smooth transition of his responsibilities.

Piszel, who joined CoreLogic from Freddie Mac in January 2009, received a Wells notice indicating that the SEC is considering a civil enforcement action against him. He intends to make a Wells submission to persuade the SEC that no action should commence, CoreLogic says.

Until a replacement cfo is found, svp of finance and accounting Michael Rasic will serve as principal financial officer, reporting to CoreLogic president and ceo Anand Nallathambi. The firm has also engaged former Standard Pacific cfo Andrew Parnes as a consultant to assist Nallathambi and Rasic during the transition.

ABS

Eaton Vance exec recruited

Prytania has appointed Walter Shulits as a non-executive director. Shulits was previously director of institutional marketing at Eaton Vance Asset Management and still acts as a consultant to Eaton Vance. He will assist Prytania in further developing senior client relationships with institutional investors, as well as providing strategic advice to the firm.

CDO

Broker snags CDO pro

Jim Stehli has joined CRT Capital Group as principal in its securitised products division in New York. Stehli was most recently a managing partner at Sirona Advisors. Prior to this, he was md and head of the global CDO group at UBS.

CDO

Citadel on hiring spree

Citadel has appointed Geoff Coley as head of its fixed income group. He will be based in the firm's New York securities unit, overseeing approximately 120 people.

Most recently, Coley was ceo at Chapdelaine, from where Citadel plans to add another 30 employees from the broker-dealer's redundant credit unit. Most of Chapdelaine Credit Partners' traders, sales staff and analysts will join the firm, including head of desk analysts and founding partners Andrew Rochat, Jon Walker and Scott Shiffman.

CDS

Firms team up for sovereign CDS offering

GFI Market Data and Macrobond Financial have partnered to offer GFI sovereign CDS data via Macrobond's analytics platform.

Macrobond clients will be able to analyse and map historical ongoing trends and validate trading ideas through using GFI Market Data's sovereign CDS product on the Macrobond application. Users can also subscribe to the full suite of GFI Market Data's CDS products, including global corporate, index, tranche, spread and switch pricing in CDS. The data will include historical prices going back to 1997, the firms say.

Philip Winstone, global head of sales at GFI Market Data, says: "GFI Market Data provides a comprehensive, global view of actual executable and executed CDS prices that is sourced directly from GFI CreditMatch. This distribution and sales partnership is also an exciting extension of our strategy to increase the reach of our high-quality data services."

CLOs

CLO management expansion agreed

Resource Capital has entered into a definitive agreement to expand its investment in broadly syndicated bank loans. A subsidiary of the firm has agreed to purchase 100% of the ownership interests in Churchill Pacific Asset Management (CPAM) from Churchill Financial Holdings for US$22.5m.

Under the agreement, Resource Capital will be entitled to collect senior, subordinated and incentive fees related to five CLOs, totalling approximately US$1.9bn in assets managed by CPAM. CPAM will be assisted by Apidos Capital Management − a subsidiary of Resource America − in managing the five CLOs.

Jonathan Cohen, Resource president and ceo, says: "We are very pleased by the opportunity this represents for our shareholders. We should be able to achieve attractive risk-adjusted returns in an asset class where we have made a substantial profit over many years."

Barclays Capital acted as the exclusive financial advisor to Churchill Financial Holdings.

CMBS

CRE firm forms advisory

Grubb & Ellis Company has formed Daymark Realty Advisors, a wholly owned and separately managed subsidiary. The new group will be based in Santa Ana, with regional offices in Atlanta, Chicago, Dallas, Phoenix and Richmond, Virginia.

Daymark will be responsible for the management of Grubb & Ellis' entire tenant-in-common portfolio and will provide specialised management services to the owners of the portfolio. Additionally, it will provide strategic asset management, property management, structured finance, accounting and loan advisory services to its existing portfolio. The group will be led by president and ceo Steven Shipp, who previously served as evp of portfolio management for Grubb & Ellis Realty Investors.

Thomas D'Arcy, Grubb & Ellis president and ceo, says: "Daymark Realty Advisors is dedicated to meeting the unique and evolving needs of its tenant-in-common clients, while Grubb and Ellis Company continues to focus on its core real estate services and non-traded REIT businesses."

In connection with Daymark's launch, Grubb & Ellis and Daymark engaged FBR Capital Markets as financial advisor.

CMBS

CRE exec hired

Neil Bane has joined Johnson Capital as principal and head of its equity desk. Based in the firm's New York office, he is also a partner in the global hospitality investment banking group and loan sale advisory/workout team.

Bane was previously a director at Carlton Group, responsible for the origination and placement of over US$6bn in debt, equity and loan sale advisory/investment property transactions.

CMBS

Distressed CRE servicing team formed

Hilco Real Estate has formed Hilco Real Estate Managed Asset Resolutions (HREMAR). The new operating unit will provide specialised, turnkey loan servicing to lenders and other real estate investing entities on their most deeply-distressed loans and REO assets.

HREMAR will service distressed assets, from single parcels of raw land to the largest commercial and residential projects, including a broad array of esoteric assets. The unit will operate from offices in Chicago, Boston and Atlanta.

The HREMAR management group comprises Jerry Hudspeth - as ceo - along with Ronald Lubin, Edmund Terry and Michael Tsandilas. The group will manage all financial, legal and other compliance processes, as well as provide all necessary loan and property management services.

Each property will be directed through a workout or resolution process, which could include foreclosure, receivership or bankruptcy. Additionally, where a resolution requires a disposition process, HREMAR will provide traditional brokerage and auction services, the firm says.

Hudspeth was most recently president and ceo of Portfolio Financial Servicing Company, where he worked closely with rating agencies, monoline insurers and major lenders and trust groups.

Lubin joined Hilco Real Estate in 2008 as senior executive. He was previously md of Crystal Capital, where he led the real estate debt and equity investment business.

Terry also joined Hilco Real Estate in 2008 as senior executive. He was previously md at Crystal Capital and prior to this was with NewStar Financial, where he was responsible for CRE structured product origination and underwriting.

Tsandilas has 15 years of CRE loan origination and underwriting experience with Bank of America, TriSail Capital and Anglo Irish Bank.

CMBS

CRE md recruited

Berkadia Commercial Mortgage has appointed Hugh Hall as md in its capital markets group. Hall will focus on developing and managing loan programmes to offer the firm's clients greater access to the increasing level of available capital. Based in New York, he will report to Berkadia svp Joe Franzetti.

Hall was most recently a consultant to Loan Core Capital. Prior to this, he was a founder and coo of Gramercy Capital, establishing its national direct origination business and developed loan trading, capital markets and CMBS investment programmes.

Berkadia recently expanded its commercial real estate financing options with the addition of fixed-rate loans for inclusion in the new generation of CMBS and a short-term, floating-rate programme to provide bridge financing to multifamily borrowers seeking permanent long-term debt from Fannie Mae or Freddie Mac.

Regulation

FDIC staffs up

The FDIC has hired additional key leadership staff for the Office of Complex Financial Institutions. Jason Cave has been named deputy director for complex financial institutions monitoring, while Mary Patricia Azevedo becomes deputy director for international coordination.

Cave has been with the FDIC since 1993 and currently serves as deputy to the chairman. In that capacity, he has been responsible for coordinating various FDIC Board functions and spearheading several large bank initiatives.

Azevedo has worked in international affairs for over 30 years. She currently serves as associate general counsel and svp at The Western Union Company.

RMBS

Agency debt vet recruited

BMO Capital Markets has hired three senior fixed income professionals to continue the expansion of its global and US fixed income institutional sales and trading groups. One of them, John Valecce, joins as director of the firm's dealer sales desk, specialising in GSE debt.

Based in New York, Valecce reports to Bill Kirby, head of US core rate sales in the debt products group. He comes to BMO from CRT Capital, where he was svp, focusing on bonds and fixed income.

RMBS

Data firm boosts management team

Integrated Asset Services has appointed John Burnett as coo. Burnett brings more than 18 years of process management experience in REO, valuation, foreclosure, bankruptcy and loss mitigation. Prior to joining IAS, he held senior management roles at IBM-Lender Business Process Services, Wilshire Credit Corporation, Wells Fargo Bank and Washington Mutual Bank.

RMBS

IndyMac execs charged with fraud

The US SEC has charged three former senior executives at IndyMac Bancorp with securities fraud for misleading investors about the firm's deteriorating financial condition.

The SEC alleges that former ceo Michael Perry and former cfos Scott Keys and Blair Abernathy participated in the filing of false and misleading disclosures about the financial stability of IndyMac and its main subsidiary, IndyMac Bank FSB. The three executives regularly received internal reports about IndyMac's deteriorating capital and liquidity positions in 2007 and 2008, but failed to ensure adequate disclosure of that information to investors as IndyMac sold millions of dollars in new stock.

According to the SEC's complaints filed in US District Court for the Central District of California, Perry and Keys defrauded new and existing IndyMac shareholders by making false and misleading statements about its financial condition in its 2007 annual report. They also offered materials for the firm's sale of US$100m in new stock to investors.

The SEC further alleges that Perry knew that rating downgrades in April 2008 on bonds held by IndyMac Bank had exacerbated its capital and liquidity positions to the extent that it had no choice but to suspend future preferred dividend payments by no later than 2 May 2008. Perry also failed to disclose that IndyMac would not have been 'well-capitalised' at the end of its first quarter without departing from its traditional method for risk-weighting subprime assets and backdating an US$18m capital contribution.

According to the complaint, Abernathy replaced Keys as IndyMac's cfo in April 2008. He similarly made false and misleading statements in the offering documents used in selling new stock to investors, despite regularly receiving internal reports about IndyMac's deteriorating capital and liquidity positions.

In summer 2007, while serving as IndyMac's evp in charge of specialty lending, Abernathy allegedly made false and misleading statements about the quality of the loans in six of its offerings of RMBS, totalling US$2.5bn. He failed to ensure that the quality of the firm's loans was accurately disclosed and failed to disclose that information had come to the firm's attention about loans containing misrepresentations.

Abernathy agreed to settle the SEC's charges without admitting or denying the allegations and pay a US$100,000 penalty, US$25,000 in disgorgement and prejudgment interest of US$1,592.26. Abernathy also consented to the issuance of an administrative order suspending him from appearing or practicing before the SEC as an accountant.

The SEC's complaint against Perry and Keys seeks permanent injunctive relief, an officer and director bar, disgorgement of ill-gotten gains with prejudgment interest and a financial penalty.

ABS

Rating removal rule proposed

The US SEC has voted unanimously to propose amendments that would remove credit ratings as one of the conditions for companies seeking to use short-form registration when registering securities for public sale.

Section 939A of the Dodd-Frank Act requires federal agencies to review how existing regulations rely on credit ratings and remove such references from their rules as appropriate. This marks the first in a series of upcoming SEC proposals in accordance with Dodd-Frank to remove references to credit ratings contained within existing Commission rules and replace them with alternative criteria.

"Over-reliance on credit ratings has been one of the factors cited as contributing to the financial crisis. I look forward to hearing from companies that are currently eligible for short-form registration as to whether there are alternative criteria that would preserve their eligibility," says SEC chairman Mary Schapiro.

The proposed rule amendments would remove the NRSRO investment grade ratings condition included in SEC forms S-3 and F-3 for offerings of non-convertible securities. Instead of ratings, the new short-form test for shelf-offering eligibility would be tied to the amount of debt and other non-convertible securities issuers have sold in the past three years, the SEC says.

The proposal is open for public comment until 28 March 2011.

ABS

Market awaits second op risk hit

Moody's expects to publish its operational risk guidelines for global structured finance transactions by the end of February. The agency says the new guidelines could affect the senior ratings of up to 200 transactions worldwide, including approximately 80 RMBS, 30 ABS and 20 CMBS in Europe, as well as 47 student loan ABS in the US.

"The performance of a securitisation transaction depends not only on the creditworthiness of the underlying pool of obligors, but is also closely linked to the operational performance of various transaction parties such as the servicer, trustee and cash manager," says Moody's md Annick Poulain.

The operational risk guidelines will set out the agency's specific considerations when analysing servicing arrangements, including back-up servicers, replacement facilitators, master servicers and third-party servicers. The guidelines will also discuss the role that cash managers and calculation agents play in structured finance transactions and the importance of liquidity to cover payment shortfalls in the event a servicer disruption occurs.

The final published criteria will outline the operational risk characteristics that are commensurate with highly-rated structured finance securities. "Moody's expects the combination of negative rating pressure on servicers and cash managers, insufficient back-up servicer arrangements or the lack of dedicated liquidity to result in rating reviews on around 130 European securitisation transactions. However, if transaction sponsors rapidly implement structural improvements to mitigate identified operational risks, watchlisted ratings could be confirmed," adds Poulain.

ABS

Trade receivables platform prepped

BayernLB has launched a new securitisation programme, through which its Mittelstand and corporate clients can finance their receivables portfolios. The minimum volume for a transaction on the platform, dubbed Corelux, is €25m.

The firm says that demand for such financing solutions is particularly high among retail and industrial companies, as well as leasing companies. "For these firms, having liquidity available at all times is essential, as is access to a diversified pool of refinancing sources," it notes.

ABS

Aussie ABS performance to remain stable

Moody's reports that collateral performance in all asset classes of the Australian structured finance market is likely to remain stable over the next 12-18 months.

"Seasoning for older deals and over-enhancement - relative to Moody's-calculated Aaa numbers - for newer transactions will help support ratings stability. Specifically, we are referring to conforming and non-conforming RMBS, ABS and CMBS," says Rich Lorenzo, Moody's vp.

He continues: "But, at the same time, we note that any downgrade of Genworth Australia - which is now on review for possible downgrade - may affect RMBS notes also on review for possible downgrade. These notes are primarily junior notes."

Moody's says that the key reason for the stable performance outlook for all asset classes is the continued strong performance of the Australian economy. The agency forecasts a GDP growth of 3.4% for 2011.

"The impact of the Queensland floods on the structured market is also likely to be minimal. Although we are still ascertaining their effects, our preliminary analysis indicates the absence of any ratings impact both on senior notes due to subordination protection and, although more vulnerable, on junior notes due to excess spread," adds Lorenzo.

ABS

Stable outlook for non-Japan Asia SF

Fitch says that most outstanding ratings of non-Japan Asia structured finance transactions will be stable in 2011. The key performance indicators - such as delinquencies, payment rates and default rates - for ABS and RMBS, as well as debt service coverage ratios for CMBS are in line with the agency's expectations.

The four economies of Korea, Singapore, Taiwan and Thailand are expected to steadily expand with a GDP growth rate of at least 3.7% year-on-year and a low unemployment rate of below 5% in 2011.

"In 2010, Fitch affirmed the ratings on more than 90% of the outstanding Fitch-rated notes in non-Japan Asia with stable outlooks. With stable economic conditions and low unemployment rates, Fitch expects the underlying collateral to continue to perform well in 2011," says Fitch non-Japan Asia SF associate director April Chen.

Fitch currently monitors the performance of 12 public Korean RMBS, credit card and auto loan ABS transactions. Overall, delinquencies and losses of the underlying collateral pools are well managed and have fallen to levels seen before the 2008 financial crisis. This is a trend that is set to continue in 2011, considering originators' prudent underwriting policies and the sound collection track records of these outstanding transactions.

Further, the agency expects the Singapore property market to continue to recover. Retail and hotel sectors have demonstrated improving asset performances and are expected to attract more tourists and commercial activities in 2011, while occupancy rates and rental levels for the office sector have seen a gradual rebound since 2008. Fitch believes that the cashflow earned on Singapore properties will strengthen in 2011.

CDO

CRE CDO delinquencies on the rise

US CREL CDO delinquencies rose to 14% in January from 13.6% in December, according to Fitch. The increase is the net result of 10 new delinquent assets and 13 removed or now-current assets, the agency says.

Although the rise in delinquencies are not expected to impact Fitch's CREL CDO ratings, ratings on the most junior classes remain subject to volatility as future realised losses may differ from current expectations.

January's largest new delinquency is a restructured land loan that has interests contributing to two different CDOs. Lot sales at the property have not been at the pace anticipated when the loan was modified last year and the borrower has not been able to cover the debt service payments.

"Non-cash flowing property types continue to have the highest delinquency rates of all property types. Approximately one half of all construction loans and one-third of all land loans contributed to CREL CDOs are currently delinquent," says Fitch director Stacey McGovern.

In January, 33 of 34 Fitch-rated CREL CDOs reported delinquencies ranging from 1.3% to 46.8%. Currently, 15 CREL CDOs are failing at least one overcollateralisation test, the agency reports.

CDS

RFC issued on hedging convergence

FASB has issued a discussion paper to solicit input on how to improve, simplify and converge the financial reporting requirements for hedging activities.

In May 2010, the FASB proposed its revisions to improve and simplify standards for financial reporting of financial instruments - including hedge accounting guidance - in its proposed Accounting Standards Update. In December 2010, the IASB issued its exposure draft (ED) on hedge accounting, which seeks to align hedge accounting more closely with risk management, while addressing inconsistencies and weaknesses in the existing hedge accounting model.

Differences exist between IFRS and US GAAP relating to hedge accounting. The revisions proposed by the IASB in its ED would result in more differences compared with the FASB's current and proposed hedge accounting guidance. The FASB discussion paper therefore asks stakeholders whether the IASB's proposals are a better starting point for any changes to US GAAP as it relates to derivatives and hedging activities.

"The FASB is issuing this discussion paper to determine whether our constituents think the IASB's proposed changes would improve the accounting for hedging activities," says FASB chairman Leslie Seidman. "The information received during the comment period will be helpful to both the FASB and the IASB as we deliberate issues pertaining to hedge accounting."

In addition, FASB plans to participate in the IASB's discussion of comments received on its ED, as well as input received on the FASB proposed Update in the second quarter of 2011. FASB is seeking written comments on the documents by 25 April.

CDS

CDS electronic trading access offered

Barclays Capital has launched electronic trading of CDS on BARX via the Bloomberg Professional service. The firm will make markets on the major US and European credit indices, as well as on over 70 active single-name CDS across several sectors.

The new functionality allows clients to trade a broad selection of liquid credit instruments electronically, offering users access to execution pages for the financials, autos, TMT, consumer products, materials, utilities, oil and gas, and sovereigns sectors.

"Regulation is changing the credit landscape and the market continues to shift towards a model increasingly rooted in electronic trading. We embrace this change and believe it is essential to continue developing products and services that help accelerate this market evolution," says BarCap's head of European high grade trading, Mike Cattano.

CDS

Egypt driving EM sovereign CDS liquidity

Fitch Solutions says that recent events in Egypt have partly driven a rebound in average emerging market sovereign CDS liquidity, which since 1 February has begun to outpace movements in average developed market sovereign CDS liquidity.

"After trading at near identical levels for the past two months, emerging market sovereign CDS are again more liquid on average than their developed market peers," says Fitch md Jonathan Di Giambattista. In the month ending 4 February, CDS liquidity for Qatar, Egypt, Iraq, Lebanon and Bahrain jumped 21, 14, 12, nine and nine regional percentile rankings respectively.

Elsewhere, oil and gas continues to be the most liquid sector, predominantly driven by North American names. Globally, CDS on oil and gas companies are trading with the highest level of liquidity since March 2006.

However, despite the high level of market uncertainty indicated by increased liquidity, CDS spreads on oil and gas companies have outperformed the broader credit market so far this year, while globally CDS on oil and gas entities are pricing 4% tight of recent historical trading levels. "This suggests that current market uncertainty over the future direction of oil and gas sector CDS is not being mainly driven by credit quality concerns about the companies themselves, but instead wider market issues such as the sustainability of oil prices and the eventual outcome of political tension in North Africa and the Middle East," adds Di Giambattista.

CDS

First SEF-ready CDS completed

Tradeweb has completed the first fully-electronic US CDS trades to be considered swap execution facility-ready under the Dodd-Frank Act regulatory framework. The US dollar-denominated swap transactions were executed on the Tradeweb institutional multi-dealer-to-client platform between BlueMountain Capital Management and Deutsche Bank. The trades were then cleared by CME Clearing and ICE Trust, with Deutsche Bank acting as respective clearing members.

"Today's trade represents the first-ever transaction to fit within what many market participants expect to be the new model for central clearing and electronic execution of derivatives. We are supportive of this evolution and expect to see a healthy and competitive landscape among the various market offerings," says Scott Beardsley, principal and head of operations at BlueMountain.

CDS

DTCC launches regulatory portal

The DTCC has launched an automated portal to provide regulators worldwide with direct, online access to global CDS data registered in its Warehouse Trust Company global repository.

Currently 19 regulators around the world are live on the portal. This is the first such global regulatory service of its kind in the financial marketplace and was designed based on guidance provided by the OTC Derivatives Regulators Forum with respect to data access protocols, the DTCC says.

"In constructing this new portal, DTCC's goal is to provide access to OTC derivatives data to regulators in a timely, fair and seamless manner, without any preferential treatment across geographic jurisdictions worldwide," says Stewart Macbeth, DTCC md. "We have been committed since the inception of DTCC's central repository to providing data on global OTC derivatives transactions, so that regulators can view risk exposures from a central vantage point as a means to help protect markets against systemic risk."

CDS

Risk reduction service expands coverage

ReMATCH has expanded its service to include US financials. In its first four runs, the firm has reduced a total of US$8.4bn in CDS trades on US financial reference credits, including American Express, Capital One Financial and GE.

While most of the liquidity in the CDS market is focused around the five-year maturity, trading portfolios build up net open positions with maturities that shorten over time but are significantly more difficult to exit. ReMATCH says that it addresses the problem of minimal or no exit liquidity at these 'off the run' points in a trader's CDS portfolio, reducing the market risk created by the build-up of these illiquid positions.

Steve Schiff, ceo of ReMATCH, says: "ReMATCH's success in reducing sovereign and emerging market CDS risk built up in the banking system has encouraged dealers to look at reducing accumulated market risk exposure to their counterparties in the US financials market."

CDS

RFC issued on counterparty risk proposals

The European Commission has launched a public consultation on proposed measures to strengthen bank capital requirements for counterparty credit exposures arising from derivatives, repo and securities financing activities. In particular, it is inviting views regarding the capitalisation of exposures to central counterparties and the treatment of incurred credit valuation adjustments.

The measures are based on the work of the Basel Committee on Banking Supervision and will form part of the Commission's upcoming legislative proposal to implement Basel 3 reforms into EU law. They also complement its other regulatory initiatives in this area, including the regulation of OTC derivatives, central counterparties and trade repositories.

Responses are requested by 9 March 2011. The EC says the consultation's feedback and the ongoing quantitative impact study being conducted by the Basel Committee are essential for finalising its legislative proposal, due for summer 2011.

CMBS

US CMBS delinquencies increasing

The delinquency rate on loans included in US CMBS conduit/fusion transactions increased by 22bp in January to 9.01%, according to Moody's Delinquency Tracker (DQT). January marks the first time the delinquency rate has been above 9% and the seventh straight month the rate has increased by less than 25bp. The total number of delinquent loans fell during the month, the third time they have done so during the current downtown.

Moody's expects the delinquency rate to continue rising in 2011, but at a slower pace than it has over the past two years, reflecting early signs of a gradual turnaround in CRE markets. "The balance of loans leaving delinquency status in January was very high. More of the same is anticipated in the months ahead, underpinning our conviction that the delinquency rate will continue to moderate in 2011," says Moody's md Nick Levidy.

During January loans totalling US$4.4bn became newly delinquent, while previously delinquent loans totalling approximately US$3.6bn became current, worked out or disposed. In all, the total number of delinquent loans decreased in January to 4,052 from 4,104 and the total balance of delinquent loans increased to US$55.7bn from US$54.9bn.

By property type, multifamily properties saw the largest increase in delinquency balance, which rose by just over US$1bn, pushing the delinquency rate for multifamily properties up 121bp to 15.59%. The agency notes that three loan portfolios totalling US$915m made up the majority of the new delinquencies.

The industrial sector had the largest percentage increase of the five main property types, its delinquency rate rising 259bp during the month to 9.13%. As with multifamily, the climb was driven by a few loans, with two industrial loans totalling a combined US$623m accounting for most of the new delinquencies.

The delinquency rate for retail properties declined for the first time since February 2010. During January, it fell by 17bp to 7.27% as the balance of delinquent loans dropped by US$443m.

Office properties also dropped for the third time in the last four months. During January the sector fell 28bp to 6.43%, the lowest rate among the property types. Hotels continue to be the worst performing category, with the delinquency rate increasing by 38bp in January, to end the month at 16.75%.

RMBS

Senior Irish RMBS targeted

Moody's expects the top rated notes of Irish RMBS to suffer multi-notch downgrades due to rating actions on most of the Irish banks. Operational risk exposure is now the main consideration in determining the ultimate rating levels achievable in each transaction, it says.

In particular, Moody's review will focus on the counterparties performing key roles, such as servicer, cash management, account bank and swap counterparty and the strength of back-up arrangements. It will also look at the impact of further government austerity measures on borrowers' ability to perform their financial obligations.

Moody's expects greater rating migration - into the Baa range - in transactions where there are weak counterparties in any of these roles and insufficient structural mitigants to avoid payment disruption on the notes.

On 2 December 2010, the agency placed the ratings of all Irish RMBS transactions on review for possible downgrade. Due to further deterioration, Moody's downgraded a significant number of Irish banks to the Baa/Ba range. The agency expects to conclude its review of all Irish RMBS within the next two weeks.

RMBS

Report on housing reform released

The Obama Administration has delivered its report on housing reform to Congress. The report outlines the Administration's plan to wind down Fannie Mae and Freddie Mac and shrink the government's current footprint in housing finance on a responsible timeline.

The Administration recommends ending the capital advantages that the GSEs previously enjoyed by requiring them to price their guarantees as though they were held to the same capital standards as private banks or financial institutions. This is aimed at leveling the playing field for the private sector to take back market share. Although the pace of these increases will depend significantly on market conditions, the target is to bring Fannie Mae and Freddie Mac to a level even with the private market over the next several years.

To further reduce the GSEs' presence in the market, the Administration recommends that Congress allow the temporary increase in those firms' conforming loan limits to reset as scheduled on 1 October 2011 to the levels set in the Housing and Economic Recovery Act (HERA). It also supports gradually increasing required down payments so that any mortgage that Fannie Mae and Freddie Mac guarantee eventually has at least a 10% down payment. In additional, the plan calls for continuing to wind down their investment portfolio at an annual rate of no less than 10% per year.

As the GSEs' presence in the market shrinks, programme changes at FHA will be encouraged to ensure that the private sector - not FHA - picks up this new market share. The Administration recommends that Congress allow the present increase in FHA conforming loan limits to expire as scheduled on 1 October 2011, after which it will explore further reductions. A 25bp increase in the price of FHA's annual mortgage insurance premium will also be put in place.

Throughout the transition, the government remains committed to ensuring that Fannie Mae and Freddie Mac have sufficient capital to perform under any guarantees issued now or in the future and the ability to meet any of their debt obligations. This assurance is essential to continued economic stability, it says.

The plan also lays out reforms regarding stronger consumer protection, increased transparency for investors, improved underwriting standards and other critical measures designed to fix flaws in the system. Additionally, it will help provide targeted and transparent support to creditworthy but underserved families that want to own their own home, as well as affordable rental options.

The Administration supports several immediate and near-term reforms to correct problems in mortgage servicing and foreclosure processing to better serve both homeowners and investors. These include putting in place national standards for mortgage servicing; reforming servicing compensation to help ensure servicers have proper incentives to invest the time and effort necessary to work with borrowers to avoid default or foreclosure; requiring that mortgage documents disclose the presence of second liens and define the process for modifying a second lien in the event the first lien becomes delinquent; and considering options for allowing primary mortgage holders to restrict, in certain circumstances, additional debt secured by the same property.

Finally, the report puts forward three longer-term reform choices for structuring the government's future role in the housing market. Each of these options would produce a market where the private sector plays the dominant role in providing mortgage credit and bears the burden for losses, but each also has unique advantages and disadvantages. Deciding the best way forward will require an honest discussion with Congress and other stakeholders about the appropriate role of government over the longer term, the report notes.

RMBS

Mexican RMBS performance to remain flat

S&P expects the overall performance of the Mexican RMBS market to remain flat in 2011, as macroeconomic benefits begin to filter through. 2010 was the first year issuance decreased since the Mexican RMBS market's inception in 2003 - dropping 24% to US$2.37bn from US$3.13bn in 2009 - with only two credit institutions issuing nine RMBS transactions during the year.

S&P believes this decline was mainly due to banks' and non-bank financial institutions' (NBFIs) absence from the market as a result of higher spreads and consolidations, mergers and restructurings in the NBFI industry. In its opinion, the possible requirement for additional capital reserves for structured financings under Basel 3 could also further decrease RMBS issuance across markets over the next few years.

"While we believe the Mexican economy will continue its gradual recovery - based on our general expectations of approximately 4.5% GDP growth for 2011, higher employment levels and low interest rates - we expect a lag between that economic recovery and its positive impact on Mexican RMBS transactions, whose performance we expect will remain flat throughout 2011," says S&P credit analyst Marisol Gonzalez de Cosio.

During 2011, the agency anticipates delinquency and loan default levels to continue to increase, although at a slower pace than those seen over the past 18 months. There will also be the opportunity to assess the 12- and 24-month recidivism rates for the first round of loan modifications that many servicers implemented during 2009 and 2010.

RMBS

Housing reform proposals positive for RMBS

The Obama Administration's report to Congress aimed at reforming the US housing market (see SCI 11 February) contains key positions that affect both Fannie Mae and Freddie Mac, as well as the mortgage markets as a whole, according to Fitch.

Specifically related to Fannie and Freddie, the report states that: "The government is committed to ensuring that Fannie and Freddie have sufficient capital to perform under any guarantee issued now or in the future and the ability to meet any of their debt obligations. The Administration will not pursue policies or reforms in a way that would impair the ability of Fannie or Freddie to honour their obligations."

Fitch md Thomas Abruzzo says: "Such a definitive statement by the Administration confirms on-going support to Fannie and Freddie." The agency anticipates maintaining the long and short-term issuer default ratings (IDRs) of Fannie and Freddie at the AAA/F1+ rating, and the long-term senior debt ratings at triple-A. Fitch believes that these current ratings will remain in place indefinitely.

While the government's proposals have the potential to add stability to the housing sector, the plan is just the beginning of any restructuring in the US market, adds Abruzzo. Ultimate decisions regarding this plan will have to go through the legislative process and details regarding implementation remain to be seen.

In addition, it is likely that the ultimate housing reform plan can change and will likely take time before any change is realised. Further, many questions have arisen from this report and the consequences of such change will need to be reviewed more thoroughly.

Regarding the development of national servicing standards, refining servicing compensation practices and increasing disclosure regarding the existence of second liens, the proposals are long-term positives for RMBS investors. "Each of these proposals is a potential catalyst for an eventual increase in issuance of private label US RMBS," says Fitch md Kevin Duignan.

RMBS

Genworth review hits Aussie RMBS

Moody's has placed on review for possible downgrade 81 tranches from 78 Australian RMBS. The review was prompted by the placement on review for possible downgrade of Genworth Financial Mortgage Insurance.

The review affects Australian term RMBS rated by Moody's containing mortgage loans insured by Genworth. Most of the notes placed on review for possible downgrade are junior, the ratings of which are highly correlated with the rating of Genworth.

Only one senior and three mezzanine notes have been included in this review. The majority of the outstanding senior and mezzanine notes are well insulated from substantial rating migration of Genworth, Moody's notes.

For seasoned transactions, this is attributable to the build-up in subordination levels and improvement in the credit quality of the collateral since transaction close. In the case of more recent transactions, senior notes were structured to be independent of lender's mortgage insurance, a practice adopted by Australian RMBS issuers since the advent of the global financial crisis.