Contents

RMBS

Pardoning problems

Principal forgiveness proposal raises concern

The US government may force banks to pay a US$20bn settlement for mortgage servicing breakdowns, with the funds generated being used for principal forgiveness. Several issues still need to be ironed out - not least who would qualify for forgiveness - but the proposal has begun to gather momentum.

Dan Castro, md at BTIG, believes there are several flaws in the current form of the government's proposal. He says: "It seems to be a difficult prospect. It almost seems like they are floating a trial balloon out there to see what the reaction is from the parties which could potentially be involved. They want to see whether this is actually possible and how much resistance there is and whether that resistance is palatable. There are a lot of moving parts at play."

He adds: "It is very difficult as there are certainly some political motivations here. The government has got to get the regulators on board, which they have influence over but not control of. There are multiple regulators involved and several banks too. On top of that, you also have to consider the investors."

Castro notes that the government has said it will be banks, and not investors, who take the financial hit. However, he points out that such a suggestion goes against the government's stated aim of keeping the banks healthy - just at the time that those institutions have started rebuilding.

"It has to be the banks who take this hit and not the investors," says Castro. "You will never get investors to sign on, especially the people who bought MBS where the documents lay out that the servicer must act in the best interests of the trust. Servicers could go for principal forgiveness if it will ultimately save the mortgage and avert expensive foreclosure, but they could also look at alternatives like a short sale."

Whether the final sum imposed will be US$20bn or whether that figure might change is not yet clear. Castro says there will be a lot of debate over the figure and suggests the government has essentially chosen US$20bn as a starting point for a discussion on the issue.

He adds: "It seems like they are throwing out a number they think will be palatable and just waiting for the reaction. The housing advocates will say the figure is not nearly high enough and should double or triple, but the banks will push back and say they have already done a lot to help and say the figure should be drastically scaled down."

Castro continues: "It is a matter of perspective and depends on which side of the fence you are sitting on; is money coming into your pocket or is it going out of your pocket? Essentially this is a redistribution of wealth. I would not be too surprised if that number changed."

Meanwhile, ABS analysts at Bank of America Merrill Lynch warn that if the figure does stay at US$20bn, it will not achieve a lot and may even be counter-productive. They note negative equity stands at around US$744bn and suggest that imposing the US$20bn levy on banks could lead to credit tightening, which may well lead to total home equity dropping by another US$250bn.

Another issue of concern is who might qualify for principal forgiveness. A finite amount of money raised from the banks means there will only be a finite amount available for reduction - whether US$20bn or not - and so only a finite number of people who can qualify. Castro indicates that this brings serious moral hazards and could give completely the wrong incentives to borrowers, who think they have to be delinquent to join the queue for principal forgiveness.

He adds: "At this point, who would qualify for principal reduction is very vague. The Administration can say what it wants, but all the different parties will try to have their say and ultimately it must come from the regulators. I am not sure whether they will be able to get the bank regulators to agree to what the SEC has to say, let alone all of the States Attorneys General."

If the number does end up being US$20bn, it remains unclear whether each bank will have to take an equal hit or whether it will be apportioned by number of mortgages. The different types of mortgages - whether subprime, Alt-A or pay option ARMs - present a further difficulty.

Castro notes that, as the government considers making banks pay this US$20bn, the risk of overlooking the unique nature of individual deals is a serious one. He does not believe a blanket solution is easy to come up with and says it is important to act on a case-by-case basis, although the cost and time requirements involved with that are prohibitive.

Ultimately, he is sceptical about the workability of the whole proposal. Castro concludes: "So far, the government has gone down this route piecemeal and suddenly they want to do it in one fell swoop, getting everybody involved. Given they struggled to do it piecemeal, I do not know how they are going to be more successful doing it all at once."

JL

RMBS

Opening arguments

Volume of RMBS litigation set to increase

RMBS litigation is expected to gather steam this year: more new cases are set to be filed, while further decisions on preliminary motions are due. At the same time, courts will start adjudicating discovery disputes and motions for summary judgment.

Individual plaintiffs filed several new cases at the end of last year and the beginning of this one. Law firm Grais & Ellsworth says many of these recently filed cases allege claims that have not been alleged before, such as common law fraud. The firm believes that further plaintiffs might bring suit on those claims this year.

"Last year was the first year where there was a lot of activity in this area, but these cases take a long time. We filed quite a few cases last year, but it may take a few years for those cases to get all the way through and for investors to start seeing money back," says Owen Cyrulnik, partner at Grais & Ellsworth.

He continues: "In general, 2011 should be similar to 2010, but perhaps it will be a more mature year. Cases will be starting to get beyond motions to dismiss and begin to get documents and discovery and move forward a little bit."

After discovery, the next stage for those cases to get past will be motions for summary judgement, which by and large will not be decided on until next year. However, the case of Public Employees' Retirement System of Mississippi v Merrill Lynch - being heard by the Southern District of New York - has set a deadline to complete discovery in September this year and complete argument on motions for summary judgement the month after. Although those deadlines are subject to change, it demonstrates that some courts are eager to make more rapid progress.

Grais & Ellsworth has been fighting investors' corner in matters such as foreclosuregate for some time (see SCI 28 October 2010). Cyrulnik is confident that the firm's cases will pass motions to dismiss largely unscathed.

He says: "So far, defendants have made motions to dismiss in just about every RMBS case that has been filed and the courts have found some ways to narrow those cases a little bit. However, for the most part - with maybe one or two exceptions - even after motions to dismiss, cases have stayed alive. Cases may be narrowed and some specific issues may not go forward, but generally these cases should be proceeding."

A pick-up in put-back proceedings is predicted and Cyrulnik says his firm has already seen activity here. "This year we may see more put-back litigation, which we have not seen much of at all yet, as investors are looking to sue sellers of collateral for breaches of reps and warranties," he comments.

Cyrulnik continues: "We filed our first one on behalf of a client [two weeks ago] and that really was the first of its kind. There may well be more activity in that space as investors get more frustrated and more willing to sue for that kind of rep and warranty breach."

Bank of America settled repurchase claims with the GSEs at the start of the year (see SCI 4 January) and a settlement with investors is expected in the near future. How generous that settlement is should have a direct impact on how much future litigation the market sees.

"Bank of America said last year that they would like to settle," explains Cyrulnik. "They are expected to announce some sort of settlement with a big group of investors in the next 30 days or so, but there are concerns that that settlement may only be pennies on the dollar, which the bank hopes everybody will buy into. In that case, investors may reject that settlement and look to go out on their own."

Meanwhile, Christopher Garcia, the head of the Securities and Commodities Fraud Task Force in the US Attorney's Office in Manhattan, has said fraud probes into CDS and CDOs will be stepped up. It is currently an enforcement priority and the department has recently been beefing up as a result.

JL

CLOs

Euro CLO market hesitates

The European CLO market is showing signs of hesitancy as the previous week's rally in mezzanine paper comes to a stop. At the same time, equity pieces are in high demand as investors continue their hunt for yield.

"The triple-A and senior pieces have been holding up, along with equity," one CLO trader says. "However, mezzanine paper has seen harsh price drops, leaving investors feeling uncertain."

With last week's rally in mezzanine paper coming to a sudden halt and prices continuing to drop, the market has become somewhat hesitant. Similarly, bid-lists have become a cause for worry, the trader says. "We've seen pieces of bid-lists that haven't traded, which I believe is due to recent bids coming in way off the mark - it's contributing to the market's anxiety right now."

However, equity paper remains firm as investors continue to chase high yields, the trader says. "Equity is something that offers high yield, cash-on-cash returns and big payments; that's the appeal at the moment."

The trader believes that over the coming month mezzanine paper will flourish once again. But expectations surrounding senior paper are somewhat different, with activity expected to remain stagnant for some time to come.

"Senior paper is a different story, because prices are rising and deals are performing well. The idea is that if you don't sell, you won't get hit. People are holding back for that reason, as well as believing that by holding on to what they've got they'll make their money back. It's what's causing the lack of supply."

Meanwhile, the primary market is also suffering from a lack of confidence as the future of new issuance remains uncertain. The trader predicts problems in both the US and Europe as critical questions arise over the 'skin in the game' concept.

"People are wondering, who will be able to do this? It's looking like it will only be the big money banks. On the other hand, I don't think that it's fair to penalise CLOs. Leveraged loans are performing really well and they're beneficial for the market. We need the buyers of loans to drive the economy," the trader concludes.

LB

RMBS

Euro MBS holds on

Activity in the European MBS market has slowed this week, as participants hold on for rumoured new issuance.

"It's all mainly positive, although the market has been a bit slower in the last week compared to the busy bid-list period before that," one MBS trader says. This week's quiet spell is attributed to a lack of investor drive, along with rumours of an imminent batch of new issuance.

The trader continues: "There's still client interest, but because we're expecting new issuance in soon, clients aren't falling over themselves to chase deals or bid higher - although they are still buying. Rumours indicate that several UK deals are due to launch in March; if it's true, then the issuers need to start early. I'm expecting to see something by next week."

Meanwhile, UK prime RMBS is currently performing well, with a high volume of investor interest. "UK prime is always up at good levels and it's definitely holding up, and in fact tightening in," the trader notes.

The same cannot be said, however, of UK non-conforming RMBS, which is showing much less activity. The trader says: "Mezzanine paper is probably at the same levels as the last few weeks, but perhaps it's been a little softer this week. I think that a lot of dealers who bought from the bid-lists are still holding inventory and therefore it's softer on the back of that."

Despite poor performance in mezzanine, senior UK non-conforming paper is achieving strong levels, the trader adds. "We might start to see less activity than before, but it's still holding up at good levels; there's no softening here."

Elsewhere, the CMBS sector has been the main focus of the week, with a lack of paper prompting client demand. "We've seen an interest from clients who are involved in seniors, second and third tiers, and who are looking for the 60s/70s cash price points. However, those pricings are not there right now," the trader confirms.

He adds: "Paper is trading at good levels at the mezzanine and lower part of the capital structure, but we're seeing less client interest here, so it's all mainly dealer-driven."

Following a quiet few weeks, activity in the European MBS market is expected to resume with the arrival of the anticipated batch of new issuance. "Things will pick up once it's in and, aside from this, our business has been more active recently because we've chosen to be and it's worked well for us," the trader concludes.

LB

RMBS

Mezz appeal for Euro RMBS

The quiet patch for European RMBS continues, particularly in the primary market. However, mezzanine paper is running with demand in the secondary market, as investor appetite remains firm.

"It's all been relatively quiet in the primary market, aside from the Claris RMBS 2011 deal, which priced this week," one RMBS trader says. The 2.99-year A2 tranche of the Italian RMBS, originated by Veneto Banca and arranged by JPMorgan and Natixis, priced at 165bp over Euribor.

Despite the quiet period, the demand for mezzanine paper remains strong, the trader says. "There's definitely an audience and an interest in buying RMBS - particularly for mezzanine and extra yield. The action is all at the lower end of the capital structure, whereas senior paper is struggling to find an audience right now."

Elsewhere in the secondary market, the Hermes XVII Dutch RMBS - which was restructured last December (see SCI 17 December) - is still attracting strong interest. The trader continues: "Hermes has been doing very well and is trading up significantly. This is a reflection of the really positive performance of Dutch RMBS on the whole."

In addition, the UK RMBS market has performed well over the last week. "I feel like it's all positive and the right signs are there for both the Dutch and UK markets going forward. Despite the hassle from the rating agencies with downgrades, it's all remained pretty firm," the trader concludes.

LB

CMBS

More CMBS safeguard proceedings likely

The latest twist in the ongoing Coeur Défense case could have negative consequences for European CMBS. Moody's says in its latest Weekly Credit Outlook publication that securitisation structures using French SPVs are particularly affected, with the worst consequences expected for CMBS backed by French real estate.

French courts have been considering the case of Windermere XII - a Lehman-originated CMBS backed by the Coeur Défense office building in Paris - since 2008 (SCI passim). Moody's says a French Supreme Court decision last week (8 March) has implicitly confirmed the availability of insolvency-law protection to SPVs.

The decision by the Supreme Court states that the only valid test for a Procedure de Sauvegarde - a reorganisation proceeding where all the borrower's debts and assets are frozen - is when "the company is facing difficulties which it is unable to overcome". This will make it easier for French corporate SPVs to file for sauvegarde protection, but Moody's notes this will not apply to French fonds commun de titrisation (FCTs).

In the Windermere case, the borrower is a non-FCT SPV, called HOLD. The latest ruling overturns a Court of Appeal judgement from last year, which stated that sauvegarde protection had been misapplied. Although the case is now open to be reconsidered yet again, Moody's has identified three key risks as a result of last week's decision.

First, CMBS bondholders will have their enforcement rights limited. As with Coeur Défense, real estate borrowing SPVs could use sauvegarde protection to stop creditors from enforcing security on the real estate in case of a potential default. This would force creditors to negotiate a restructuring plan, increasing both the time and cost needed to recover their funds.

Second, bondholders could lose control over the loan workout process. Should the borrowing SPV and their creditors fail to agree on a restructuring plan, then the court could impose sauvegarde protection, which would reduce creditors' influence over the process.

Finally, bondholders face an increased risk of interest shortfalls. The agency notes that until a sauvegarde plan is adopted, no debt-service payment can be made to creditors. However, it notes that this risk is mitigated in CMBS structures by the availability of liquidity facilities, which mean an issuer can still make interest payments on the notes.

JL

RMBS

New twist for MBIA policyholder case

Citing newly disclosed evidence, four former Superintendents of the New York State Insurance Department (NYID) submitted sworn testimony on Friday that the NYID impermissibly allowed MBIA Inc to strip US$5bn from its main insurance subsidiary in a way that enriched MBIA Inc's senior executives and shareholders at the expense of policyholders. The move is the latest twist in the ABN AMRO Bank NV et al vs Eric Dinallo et al case before the New York State Supreme Court (see SCI 21 January).

Former Superintendents James Corcoran (who held the role between 1983-1990), Edward Muhl (1995-1997), Gregory Serio (2001-2004) and Richard Stewart (1967-1970) said that the NYID violated its core mission to protect policyholders when it allowed MBIA Inc to create a "healthy" insurer and a "sick" insurer in February 2009. The transaction created a new, ring-fenced municipal bond insurer - National Public Finance Guarantee Corp - whose profits are alleged to have flowed directly to the holding company and drained crucial claims-paying assets from MBIA Insurance, where it left behind claims for structured finance policyholders.

The four experts reviewed documents from the NYID and MBIA, many of them now public for the first time. They concluded that the department's approval process was rushed, deficient and perfunctory and improperly relied on outdated, misleading and inaccurate financial information provided by MBIA. All four said the approval process, as demonstrated by the documentary evidence, violated standard NYID procedure as well as national guidelines. They testified that, as Superintendent, they could not have approved the MBIA transaction.

The four experts submitted their affidavits to the New York State Supreme Court on behalf of 11 structured finance policyholders, which are suing MBIA for fraudulent conveyance and are separately seeking to have the NYID's approvals of the restructuring reversed in an Article 78 legal action. "These transactions benefitted MBIA Inc and its shareholders and management at the expense of MBIA Insurance's remaining policyholders. I am not aware of any provision in the New York Insurance Law authorising such an extraordinarily harmful transaction to policyholders," Muhl said in a sworn affidavit.

Serio cited an email sent by MBIA's cfo Edward Chaplin to MBIA treasurer Fred Pastore in November 2008, in which Chaplin describes MBIA Insurance as the "leavebehindco". Serio said the Department improperly permitted MBIA to employ a structure that ensured that all of the profits from MBIA's new municipal business "flowed to MBIA Inc, the parent company, not to MBIA Insurance".

Corcoran further testified: "Then-Superintendent Eric Dinallo approved the transformation transactions, even though those transactions on their face were not fair and equitable to MBIA Insurance's structured finance policyholders, were improper attempts to circumvent the express requirements of the New York Insurance Law and impermissibly enriched MBIA Inc and its shareholders and executives."

The plaintiffs represented in the policyholder group include: RBS, BNP Paribas, Credit Agricole, HSBC, KBC Investments, Bank of America Merrill Lynch, Morgan Stanley, Natixis, Société Générale, UBS and Wachovia Bank. Sullivan & Cromwell is lead counsel for the policyholder group.

CS

RMBS

HARP extension 'slight negative' for IOS

The Federal Housing Finance Agency is to extend the Home Affordable Refinance Program (HARP) to 30 June 2012. MBS analysts at Barclays Capital believe that the move should have a minor impact on TBA valuations but could be a slight negative for some IOS contracts.

HARP was set to expire on 30 June of this year. In addition to the extension, Freddie Mac will exempt HARP loans from their recently announced price adjustments and Fannie Mae will conform their eligibility date to May 2009.

Freddie announced in November that it would increase loan-level pricing adjustments, ranging from 0bp to 50bp depending on the FICO/LTV combination, starting in March 2011. By exempting new HARP loans from these fees, the FHFA has effectively made the proposed fee change a non-event for HARP borrowers and thus this change should not have an impact on prepayment speeds, according to the BarCap analysts.

In contrast, they suggest that the change announced by Fannie Mae could materially increase speeds for loans originated in this time period. Originally, Fannie Mae loans could only qualify for HARP refinancing if they had been originated prior to March 2009.

Prepayment-sensitive IOS contracts, in particular, could be slightly more exposed by the decision to change the Fannie Mae cut-off date from March 2009 to May 2009. To analyse the potential impact of this change, the analysts adjusted their prepayment model and re-ran the 2009 IOS coupon stack.

The results indicate that IOS 4.5% 2009 could drop by about 19.5 ticks, based on an even-OAS framework. The 4% and 5% IOS coupons could also be affected, but likely to a lesser extent, the analysts conclude.

Fannie Mae and Freddie Mac last year purchased or guaranteed more than 6.8 million refinanced mortgages. Of this total, 621,803 were HARP refinances with LTVs between 80%-125%. This is up from 190,180 in 2009, when HARP began.

CS

CDS

Banning naked CDS shorts: a bridge too far

Anu Munshi, partner at B&B Structured Finance, outlines the case against banning naked sovereign CDS shorts

First a proposal in the US in 2009 to ban CDS trading unless investors owned the underlying bonds or loans, which was fortunately defeated by the US Senate in 2010. And now the European Parliament has voted to push for a ban on naked short selling of CDS linked to sovereign debt.

We've read the widespread criticism of naked short selling via CDS and how it can push corporates and sovereigns into default or a web of spiraling cost of debt. Widening CDS spreads can cause cashflow problems for issuers by increasing their cost of financing, but bad fiscal management causes their CDS spreads to widen in the first place. There is also no publicly available evidence of naked CDS shorts being the key factor in issuer defaults or distress.

Banning naked CDS shorts isn't a good move for a variety of reasons. The CDS price of an issuer tells you about the market perception of its creditworthiness. Because CDS prices trade constantly, CDS are more volatile than ratings but increasingly more important, especially given regulators' desire for market participants to reduce their reliance on rating agencies.

Having a liquid and robust two-way CDS market is essential to having pricing in credit markets that are tradable and therefore reliable. Barring naked CDS shorts will constrain a fully functioning two-way credit market and reduce the reliability of an important market barometer.

Many market participants, particularly banks, go short CDS on issuers to whom they have derivative counterparty exposure rather than to whom they have given outright loans. This is particularly true of exposure to sovereigns, with whom banks transact large swaps on the back of government bond issues.

Derivative counterparty exposures are constantly changing and harder to hedge perfectly with CDS, making for logistical challenges in hedge reporting. As counterparty risk management is a priority for governments, regulators and banks alike, it is important to think through the consequences of banning CDS shorts that serve as hedges but may be harder to verify.

Finally, if naked CDS shorts on European sovereigns are banned, speculators will find other ways to express their views - by shorting European bank CDS or shorting the euro, for instance. Where do the bans end?

Most market participants support increasing disclosure requirements to achieve greater transparency and the push to centrally clear CDS to reduce counterparty risk. But banning a particular type of transaction altogether is a bridge too far.

ABS

Market vets head new debt platform

Berenson & Company has appointed Christopher Johnson and Jack Lucid as vice chairman and md respectively. The pair will lead the firm's new debt capital markets platform.

With more than 26 years of investment banking experience, Johnson was most recently head of the restructuring advisory group for the Americas at Deutsche Bank Securities. Prior to joining Berenson, Lucid was ceo and founding partner of Akarui Capital Partners, which was established to invest in the US non-investment grade fixed income market.

Additionally, the firm has appointed Lisbeth Barron as md and head of its media, entertainment and leisure advisory practice. Barron previously advised clients on the acquisition of strategic businesses, the sale of non-core assets and raising debt and equity capital.

ABS

ABS sales md named

Aladdin Capital has appointed James Showers as md covering ABS and MBS sales. Based in Stamford, he will report to the firm's structured product sales chief, Rich Barry. Showers previously held a similar role at Hexagon Securities.

ABS

Bank adds fixed income head

SG CIB has appointed Mark Landis to head its fixed income and currencies sales for the Americas. Landis will be responsible for managing the firm's client relationships in interest rate, credit, foreign exchange and securitised products. Based in New York, he will report to Vincent Bonamy, the bank's head of fixed income and currencies for the Americas, and to David Knott, global head of fixed income and currencies sales.

Landis joins SG CIB from Panda Global Advisors, where he was a founding partner and global head of business development. Prior to this, he was global head of marketing and investor relations at Touradji Capital Management, a commodity-focused hedge fund.

ABS

Ratings advisor appointed

Rabobank International has appointed Serge Haller as a ratings advisor in the capital markets solutions (CMS) team within its global financial markets division. Based in London, he will report to Ronan Donohue, the bank's head of CMS.

Haller will be responsible for offering ratings advice and services to all Rabo wholesale clients, including first time ratings, ratings defence, internal ratings work and advice on the impact of a range of corporate events. He was previously at Standard Bank and ABN AMRO, where he held the same position.

ABS

Social media investment platform launched

SecondMarket has launched a new online platform that harnesses social media tools. The platform enables participants to add biographical and investing information, including investment objectives, strategies and holdings, while creating a network of trusted investors.

Additionally, the new platform provides enhanced corporate information regarding thousands of private companies which was not previously accessible. Participants can add companies to their 'watch lists', enabling the SecondMarket community to crowd-source private companies. Both accredited and non-accredited investors may create profiles and watch lists, although only accredited investors can purchase shares, the firm says.

CDS

FIA broadens its focus

In light of the ongoing structural changes prescribed by the Dodd-Frank Act and global regulatory reform, the Futures Industry Association is to implement a set of incremental changes to its current activities to more effectively serve the financial services industry. The association will expand its focus to include the swap clearing activities of its members and strengthen its global presence to help promote best practices and standardisation in core international markets.

New clearing requirements for certain swaps are based on the model used for futures. Given the FIA's expertise in this area, it says it is well-positioned to expand its core mission to include the clearing of these products. Furthermore, it is actively working with OTC clearing leaders from member firms in the cleared swaps area to help shape rules and standards for these products across the globe.

"We seek strengthened collaboration with other industry associations and look forward to building upon our strong working relationships and rich history of sharing expertise to ensure that the needs of the industry are fully met," the FIA says. It has expanded its board, management team and staff to assimilate additional expertise in the clearing of swaps.

CDS

Buy-side marketing head named

TradingScreen has appointed Charles Garcia as head of global marketing for traditional asset managers. Based in New York, he will lead the firm's expansion into the global asset management community.

With more than 25 years of experience in the financial services and sales industry, Garcia was most recently head of North American sales at Sophis. Previously, he was director of business development at BlackRock Solutions and spearheaded TradeWeb's order management system product and sales strategy.

CDS

EM fund adds partner

BTG Pactual has appointed Ben Rick as partner in its global emerging market and macro fund. Rick, who will add European credit trading capabilities to the fund, will be based in London and report to managing partner Antoine Estier.

Rick previously ran Bank of America Merrill Lynch's proprietary credit trading group until the desk closed in December 2010. Prior to this, he held roles at UBS and Lehman Brothers.

CDS

Hedge fund beefs up in sales

PVE Capital has appointed Stevan Simic as risk manager and Ronald Neumunz as head of sales and investor relations.

Prior to joining PVE Capital, Simic worked in a similar capacity at Concordia Advisors. Prior to this, he was at Deutsche Bank in the risk controlling group, where he focused on market risk for the global credit derivatives desk.

Neumunz also worked in a similar capacity in his prior role at Alpstar Capital. His experience includes sales and management positions at London Diversified Fund Management and JPMorgan.

CDS

Technology incubation fund launched

ICAP has launched Euclid Opportunities, a new approach to financial technology incubation. Euclid will offer a seed funding and acceleration programme to early-stage companies that provide technology in the areas of post-trade risk management and data.

Mark Beeston, ceo of ICAP portfolio risk services, comments: "The rate of regulatory reform in global financial markets is driving unprecedented demand for new approaches, methods and practices. Identifying solutions to the challenges of tomorrow is one way that ICAP can remain at the forefront of innovation in the post-trade space. Euclid will enable ICAP to support and guide the providers of ideas and innovation to our industry, which in turn ensures we will continue to offer our customers the world's best post-trade solutions."

CDS

Asia Pacific distribution pact signed

Riskart has appointed Dragons' Desk, a financial technology firm, as its distributor in the Asia Pacific region. With offices in Hong Kong and Japan, Dragons' Desk helps diverse financial institutions implement superior technology solutions and best-of-breed investment practices.

"The Asia financial market is becoming increasingly sophisticated with a growing use of derivative contracts," explains Franco Marinotti, riskart's ceo. "Hong Kong, in particular, is a thriving financial centre and an important gateway to the Chinese market, where derivatives are becoming more popular and better regulated - but these derivative contracts need to be managed properly, which is our speciality. We have been searching for a while to find a company to work with in the Asia Pacific region that shares our passion for providing the best solutions for customers."

RMBS

New cio recruited

Paul Isherwood has joined The Chotin Group as cio. He is responsible for overseeing the analysis, trading and management of the firm's investment portfolios.

Isherwood has more than 15 years of experience creating, managing and investing in structured finance products, primarily backed by residential mortgage assets. Prior to joining Chotin, he was ceo and fund manager of Winston Capital, a Denver-based hedge fund that invests in RMBS and complex, undervalued assets.

ABS

TARP repayments gathering pace

The US Treasury says that, with the receipt this week of a US$6.9bn repayment from AIG, taxpayers have now recovered 70% of total Troubled Asset Relief Program (TARP) disbursements.

"We're optimistic that as we continue to wind down TARP, our temporary investments in private companies will ultimately result in little or no cost to taxpayers taken as a whole," comments Tim Massad, acting assistant secretary for financial stability. "While cost isn't the primary measure of TARP's success, the fact that we've already recovered more than two-thirds of the money disbursed for the programme is an important milestone for taxpayers."

The US$6.9bn repayment from AIG brings total TARP repayments and income to US$287bn. The Treasury currently expects that TARP investment programmes - including financial support for banks, AIG and the domestic auto industry, as well as targeted initiatives to restart the credit markets - will result in little or no cost to taxpayers.

The Administration estimates that the lifetime cost of the overall TARP programme will be approximately US$48bn, but when also including AIG common stock held for the benefit of Treasury outside of TARP that projected cost drops to US$28bn. The lifetime cost of TARP is likely to be limited to funds disbursed for Treasury's foreclosure prevention programmes, which were not expected to be recovered.

AIG used US$6.6bn of the US$9.6bn of proceeds it received from the 2 March sale of its equity stake in MetLife to make its latest repayment. Additionally, US$300m previously held in anticipation of expenses related to the sale of ALICO to MetLife was paid to the Treasury.

These funds will be used to reduce an equal portion of Treasury's remaining preferred equity interests in AIG, which now stand at US$11.3bn. The remaining US$3bn of proceeds from the sale of the MetLife equity units were placed in an indemnity escrow to secure obligations that may be owed to MetLife, as previously agreed to under the terms of the ALICO sale. Based on current market prices, the Treasury estimates that taxpayers will ultimately recover every dollar that the US government invested in AIG.

In addition to the repayment from AIG, taxpayers also received this week a US$2.7bn TARP repayment from the sale of the Treasury's Trups in Ally Financial. First Horizon National Corporation and 1st Source Corporation also repurchased warrant positions that the Treasury received in consideration for investments made under the TARP Capital Purchase Program, delivering a total of US$83.5m in proceeds for taxpayers.

ABS

New bond fund minted

Loomis, Sayles & Company has launched the Loomis Sayles Absolute Strategies Bond Fund to address investor demand for absolute return-oriented fixed income strategies in the UK and Europe. The fund allows for tactical investments in a variety of fixed income securities, including securitised assets and long/short derivative positions, aimed at preserving income while also offering a disciplined risk management process that seeks to mitigate downside risk.

The fund is jointly managed by Matthew Eagan, fixed income portfolio manager; Kevin Kearns, fixed income portfolio manager and senior derivatives strategist; and Todd Vandam, fixed income portfolio manager and credit strategist. The team will establish key global macro themes by assessing interest rates, the credit cycle and currency outlooks. It will then make tactical allocation decisions, adjusting the fund's credit, currency and sector exposures to avoid sources of systematic market risks.

The fund is a sub-fund of Natixis International Funds I, an open-ended Luxembourg-domiciled UCITS III vehicle, and is available in euro and sterling. The strategy is also available as a segregated mandate.

ABS

Greek ratings review underway

Following a recent series of downgrades, Moody's does not expect Greek structured finance transactions to retain or achieve an A3 rating or higher. The agency downgraded Greece's government bond ratings to B1 and several Greek banks to Ba3 or lower this month.

Regardless of the structural features or the amount of credit enhancement in place, SF transactions are not immune to the risk of certain high severity events, Moody's states. These events include a severe macroeconomic decline and deterioration in a sovereign or local banks' creditworthiness. While severe macroeconomic decline disrupts asset performance, the deterioration of the banking system leads to operational risk from the potential disruption of the performance of key transaction parties, such as banks that act as servicers.

While the agency's central scenario does not include a sovereign default or distressed exchange, the consequences of either event - including possible changes in the terms or enforcement of certain debt contracts - could overwhelm the benefits of credit enhancement and structural mitigants. The potential emergence of these events implies high and rapid transition risk.

Nonetheless, in analysing each SF transaction, Moody's will continue to recognise that transactions with high credit enhancement can sustain significant asset performance deterioration. Additionally, operational risk mitigants can reduce the linkage between the SF ratings and the credit quality of key transaction parties.

All Greek consumer and SME/lease ABS, RMBS and CLO transactions have ratings on review for possible downgrade. During its review, the agency will take into account the features of each transaction, including the level of credit enhancement, the current rating of the main counterparties and the structural mitigants for operational and other counterparty risks.

Moody's expects to downgrade all senior ratings to Baa1 or below and plans to conclude its review within the next two months, it says.

ABS

Canadian ABS momentum to continue

Moody's reports a stable outlook for all sectors of ABS issued in Canada and a positive outlook for the auto sector. The agency detects no stress in the RMBS and credit card backed sectors, despite record high levels of debt among Canadian consumers.

"Performance in the two sectors has been stable. Residential mortgage arrears remain low, supported by a stable housing market and low financing costs, and credit card charge-offs continue to improve from peak levels reached in late 2009," says Michael Buzanis, Moody's vp and senior credit officer.

The agency also notes signs of weakening prices in the housing market, but continues to believe that the performance of securitisations backed by residential mortgages will meet expectations. Credit card collateral performance should also show stability in 2011 as unemployment in Canada continues to decline and bankruptcies have stabilised. Finally, auto-backed ABS performance will continue to benefit from strong underwriting, with a particular focus on customers with prime credit quality.

ABS

Due diligence concerns revealed

Following on from its 2010 structured finance survey, Principia Partners approached participants at the recent American Securitisation Forum (ASF) conference to conduct a second survey. Based on the responses of 150 attendees, the exercise identified the most important aspects of investor due diligence, as well as how well investors believed their organisations were equipped to analyse ABS and MBS investments.

The results indicate a noticeable improvement in investor and market sentiment since Principia's 2010 study, according to the firm. Where the previous study saw 59% of investors say that they planned to increase investment activity within a year, the latest results revealed a 20% increase in this number. As much as 50% said that they would be ramping up their activity in the next six months.

In the 2011 study Principia questioned how investors prioritise the key aspects of due diligence which were identified in the 2010 report. Being able to model the full deal structure when analysing any given deal was ranked as the most important issue that investors needed to overcome. In the 2010 survey over 50% of investors stated that they were not effective at modelling the full deal structure in their analysis of new or existing securities.

The market agreed that the projection of cashflows through the waterfall and stress testing using forecasting assumptions was the next most important issue facing investors today. Again, the earlier study highlighted that this was an aspect of due diligence that continues to be a major operational challenge for investors.

Loan level and collateral performance data integration ranked next. Juxtaposed with positive signs of increasing investor confidence, however, overcoming negative internal perceptions of structured finance was a continued concern.

While best practices in ABS and MBS investment were clearly identified in the report, performing this work across the entire portfolio remains the biggest challenge for many investors. In both Principia studies, operational inefficiencies can be seen to be driving various deficiencies in investment analysis, risk oversight and reporting. Overall investors said that consolidating data into a single analytical framework that can normalise and manipulate portfolio deals remains a major challenge.

ABS

Mixed results for credit card ABS

Although collateral performance was somewhat mixed this month, US consumer credit quality maintained course after extending year-long plus improvements, according to Fitch's latest Credit Card ABS Index results. Credit card defaults and delinquencies fell again, while yield, monthly payment rate (MPR) and excess spread dipped during the January collection period.

"Charge-offs are now at a two-year low, while delinquencies have decreased for 15 straight months," says Fitch md Michael Dean.

Ratings on both prime and retail credit card trusts are expected to remain stable, given available credit enhancement, loss coverage multiples and structural protections afforded to investors.

Fitch's Prime Credit Card Charge-off Index showed a further decline in February and registered the fifth consecutive month-over-month improvement, decreasing by another 32bp to 8.05% during the month. Defaults are at the lowest levels since February 2009 and are down 29% year over year. This decline also represents a 30% drop from its peak during September 2009.

For the second straight month, the largest trusts that make up most of the index - including Bank of America, Capital One, Chase, Citibank and Discover - all reported monthly improvements in default rates.

According to Fitch's 60+ day delinquency index, late stage delinquencies remained relatively stable and recorded a marginal 3bp improvement to 3.20%. Marking a 13 consecutive monthly decline, this delinquency level for February is also 29% lower year over year. Similarly, early stage delinquencies improved, with 30+ day delinquencies decreasing by another 10bp to 4.10%.

However, gross yield retracted after a two consecutive month gain, decreasing by 1.48% to 20.5% in February. This is the first time in 12 months that yield has decreased below the 20% mark - although it still remains 10% above the historical average of 18.68%.

"With certain regulatory and legislative changes now in place, Fitch expect yields to decline up to 10% in the coming months," says Fitch director Herman Poon.

Despite the continued improvement in defaults, the decline of yield during the month impacted and drove the level of excess spread lower. Monthly excess spread decreased 94bp to 9.88%, while the three-month average remained relatively flat, with a marginal drop of only 2bp to 10.24%. This average still represents the second highest level historically and is 41% higher when compared to the same period last year.

Meanwhile, monthly payment rate slowed in February, falling 44bp to 20.37%. However, current MPR performance is 26% higher than the historical average of 16.2%.

Highlighted by positive across-the-board trends, retail credit card ABS gained momentum during the month of February. Along with improving early stage and stable late stage delinquencies, all collateral performance metrics posted month-over-month improvements.

The 30+ day delinquency index registered a decrease of another 12bp to 6.02%, while late stage delinquencies experienced a small uptick of 2bp but remained relatively stable at a two-year low of 4.20%.

Charge-offs continue to fall, registering another 44bp decline for the month. Retail charge-offs are 15% lower year-over-year and have reached levels not seen since the beginning of 2009.

Gross yield continues its ups and downs this month, faring better after a slip in January, with a yield increase of 29bp to 24.26%. Three-month average excess spread rose, adding 56bp to a level of 8.92% and posting a year-over-year 18% improvement. MPR maintained stability and improved marginally, recording a three consecutive month increase to 14.69%, Fitch reports.

ABS

Flip clause uncertainty drives counterparty update

The recent out-of-court settlement of the Dante CDO case (SCI passim) leaves continuing conflicts of law and uncertainty with respect to certain cashflow structured finance transactions that include interest rate and currency derivatives and so-called 'flip clauses', according to Fitch. Further unrelated case law opens a different conflict of law with respect to continued performance under a swap with a defaulted counterparty and timing of exercising termination rights. The agency has amended its counterparty criteria as a result of these uncertainties.

The new criteria expects eligible counterparties to have a minimum Fitch long-term issuer default rating of single-A and a minimum short-term issuer default rating (IDR) of F1 to support note ratings of double-A or higher. If collateral is posted, this eligibility is extended to counterparties rated BBB+/F2. Upon downgrade below this level, counterparties would lose their eligible status, the agency says.

The new criteria changes are not expected to have any rating impact on existing SF transactions - although if an affected counterparty is not replaced or guaranteed upon downgrade below BBB+/F2, transactions involving that counterparty as a swap counterparty would be at risk of a downgrade. Upon further downgrade below investment grade - BBB/F3 - Fitch expects a replacement or guarantor to be found within 30 calendar days.

For counterparties that the agency assumes could be impacted by the 'flip clause' issue, Fitch will expect a replacement or guarantee to be effected within 30 calendar days following the decline in their creditworthiness below the BBB+/F2 level.

Other changes to the criteria include an increased transparency of commingling risk upon the insolvency of a servicer/collection bank, or its account bank, while counterparties on rating watch negative will be rated one-notch lower than the entity's IDR.

ABS

Latest securitisation league tables released

SCI has released its latest league tables for bank arrangers in the European and US structured credit and ABS markets, covering the first two months of 2011.

In the quieter of the two markets, three firms are tightly bunched together at the top of the European table, having been involved in over €5bn of issuance so far - Deutsche Bank, BNP Paribas and Santander. In the US, Barclays Capital has retained the top spot that it held in 2010 and has some clear water between itself, with nearly US$15.4bn worth of deals, and second and third placed Deutsche Bank and Bank of America Merrill Lynch with US$12.6bn and US$12bn respectively.

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 February 2011 can be found here.

ABS

ABCP op risk guidelines planned

Moody's plans to propose operational risk guidelines for ABCP programmes, which will be made public through either a request for comment or press release by the end of April 2011. The agency will then invite ABCP participants to review and comment on its suggested approach to operational risk.

The proposed guidelines focus on operational risk arising from a transaction party unable to adequately perform its role as a result of bankruptcy proceedings or other impairments due to its financial condition. They will also identify transaction parties other than support providers whose performance affects the timely repayment of CP.

The proposal will include a set of principles to assess the adequacy of such parties in relation to a Prime-1 rating assigned to an ABCP programme. Sources of cash used to repay CP include: newly issued CP; cash received from assets; liquidity facilities; letters of credit; and other forms of programme credit support.

For ABCP programmes that rely on liquidity facilities, drawing on the liquidity facility is the last line of defence, according to Moody's. Repayment can be assured if a reliable party can draw liquidity and the funds go directly into the CP payment account.

If cash drawn from the liquidity facility flows through the programme waterfall, repayment will depend on the cash manager responsible. If liquidity availability depends on a good asset test, the surveillance and reporting functions will also be important to the repayment of maturing CP, Moody's says.

The new guidelines will also provide a framework to analyse the programme administration and cash management arrangements for Prime-1 ABCP. Moody's believes the creditworthiness of a service provider is a key element when assessing the operational risk.

Some arrangements may explicitly or implicitly provide levels of support and incentives that can be expected to minimise disruption and ensure operational continuity. Other situations, such as unrated third-party service providers with no links to a rated parent, may have mitigants to operational risk that will be considered by the agency on a case-by-case basis.

Overall, Moody's believes that almost all ABCP programmes will be in line with the proposed standards for administrators, cash managers or any other equivalent roles. Only a few ABCP programmes in the US, Europe and Asia may be affected based on their current structures, the agency concludes.

CDO

CRE CDO delinquencies climb further

The monthly climb in delinquencies continues for US CREL CDOs, with delinquencies rising to 14.6% in February from 14% in January, according to Fitch's latest index results. Construction and land loans continue to encompass the most late-pays by property type, though their collateral composition in current transactions is far smaller than other larger property types.

"Though office loans make up the largest percentage of CREL CDO collateral, they have the lowest delinquency rate among all property types. Over time, however, Fitch projects office delinquencies in CREL CDOs to increase," says Fitch director Stacey McGovern.

Current delinquencies by asset type are: construction, with 53% (representing 2% of total collateral); land, with 39% (7%); condo, with 26% (2%); multifamily, with 22% (14%); industrial, with 14% (2%); hotel, with 12% (16%); rated debt, with 12% (17%); retail, with 11% (6%); office, with 9% (24%); and other, with 9% (5%). The remaining 5% is un-invested principal cash, Fitch says.

CDO

ABS CDO liquidation announced

Class A noteholder consent has been given in respect of the sale and liquidation of the Forge ABS High Grade CDO I collateral. The transaction experienced an event of default in January 2008.

The trustee on the deal, Bank of New York Mellon, anticipates that the sale and liquidation of the collateral will be undertaken via one or more public sales. All noteholders are eligible to bid at any of these sales.

Due to the direction to sell and liquidate the collateral, no distributions will be made on the upcoming 5 April distribution date or on any subsequent regularly scheduled distribution date. A final distribution will be made after the collateral has been liquidated on the date fixed by the trustee.

CDS

Succession event mulled

ISDA's EMEA Determinations Committee is mulling whether a succession event occurred with respect to Cadbury Holdings Limited. This follows noteholder consent for Kraft Foods Inc to assume the obligations of the £300m 5.375% notes due December 2014 and the £350m 7.25% notes due July 2018, each issued by Cadbury Schweppes Finance and guaranteed by Cadbury Holdings Limited.

CDS

Sovereign restructuring credit event mulled

ISDA's EMEA Determinations Committee is mulling whether a restructuring credit event has occurred with respect to the Republic of Ireland. The move follows the country's first drawdown (of €5.8bn) on 18 January of the IMF loan and the IMF's claim to preferential creditor status with regards to the loan.

CDS

Succession event pending

ISDA's Americas Determinations Committee is set to discuss whether a succession event occurred with respect to Maytag Corporation on 25 March. This follows the assumption by Whirlpool Corporation of all of Maytag's indenture obligations on 30 December.

Separately, the EMEA DC has determined that a restructuring credit event has not occurred with respect to the Republic of Ireland (see SCI 14 March) on the basis that no information is available to confirm it.

CDS

CDS trading platform minted

Phoenix Partners Group has launched Firebird, its US CDS electronic trading platform. The platform was launched with 14 CDS dealers signed up and presently supports the trading of high yield, investment grade and loan CDS (LCDX) index products.

Firebird supports both hybrid-click trading, which allows traders to interact with their Phoenix brokers while simultaneously and independently executing trades, as well as pure-click electronic trading. The platform is positioned to allow Phoenix to register as a SEF under the Dodd-Frank Act when the CFTC finalises its rules governing the trading of OTC swaps.

CDS

Plateau for subprime CDS prices?

Although US subprime CDS prices rose for a fourth straight month, the rate of increase has slowed, indicating a near-term plateau, according to Fitch Solutions. The index increased by just 90bp to reach a level of 11.46 through the end of February, following average monthly increases of 5% over the previous three months.

Not surprisingly, riskier recent vintages weighed down the index, according to Fitch director David Austerweil. "2006 and 2007 vintages saw respective price declines of 11.3% and 2.5%. While the latest results do not reflect recent improvements in delinquency rates and CDRs for these riskier vintages, continued rising severities may drag down total CDS prices."

Prices for the 2005 vintage increased by 3.3%, however, providing a counterpoint to declines in other vintages. According to Fitch director Alexander Reyngold, the most dramatic change this month was the large decline in CPRs across all vintages.

He explains: "One-month CPRs fell by 25.3% on average and 41.4% for the 2006 vintage alone. Though the recent spike in mortgage rates was likely responsible, future CPR declines may pause next month if mortgage rates stay below 5%."

Although mortgage rates were mostly unchanged on a month-over-month basis, in early February the rate on 30-year fixed rate mortgages shot through the 5% level, resulting in fewer prepayments before decreasing into month end.

Last month's loan level data demonstrated significant improvements in both delinquency rates and CDRs. 30-day delinquencies dropped by 3.5% at the index level, with above average declines seen in both the 2006 (4.8%) and 2007 (6.3%) vintages. While 60-day delinquencies saw a more modest decline of -0.2% across all vintages, the decline for the 2006 vintage was -2.2%, Fitch reports.

One noteworthy change, the agency says, was the large decline in one-month CDRs of 10.8% at the index level. While every vintage saw an improvement, the 2005 and 2007 vintages saw the largest decreases in one-month CDRs of 14.6% and 10.7% respectively.

The only blemish in last month's loan performance data was the increase in loss severities. However, the increase was not unique to February as loss severities have increased at an average rate of 2% per month over the past year as the timelines for loans to reach liquidation continues to grow. February's 1.8% increase stayed close to that trend, Fitch concludes.

CDS

SEF-like CDS trades completed

MarketAxess Holdings has completed multiple CDS trades between JPMorgan and six investor clients over its execution trading platform. In a preview of how SEFs are expected to function once the rules and registration are complete, the trades were undertaken with JPMorgan acting as counterparty and clearer.

While some trades were cleared, others were intermediated or remained bilateral - reflecting the likely transition to clearing over the coming months, MarketAxess says. The six clients involved were BlueCrest Capital Management, BlueMountain Capital Management, Diamond Notch Asset Management, DCI, Pine River Capital Management and a large US bank.

The trades were completed both in the US and Europe to support trading in both regions. As the market responds to regulatory reform and more participants engage, MarketAxess will offer clients connectivity to a variety of available clearing firms, clearinghouses and affirmation hubs, it says.

"For the first time, our global OTC clearing clients and JPMorgan's trading desks were able to transact in a fashion broadly consistent with the key principles of the global regulatory reform. Our trade execution shows that we and our clients are prepared for the new regime, whatever form it ultimately takes," says Dale Braithwait, global head of credit derivatives clearing for JPMorgan.

CDS

New clearing, settlement standards proposed

IOSCO's Technical Committee and the Committee on Payment and Settlement Systems (CPSS) have issued for public consultation a series of new international standards for payment, clearing and settlement systems. The new principles are intended to further strengthen the global financial markets infrastructure.

The 24 proposals set out in a new report are designed to apply to all systemically important payment systems, central securities depositories, securities systems, central counterparties and trade repositories. When finalised, the proposals will replace certain existing standards with a single set of principles, which the CPSS and IOSCO say will provide greater consistency in oversight and regulation.

"Robust and efficient FMIs [financial market infrastructures] help to ensure that markets continue to function effectively, even in times of crisis. They are an essential prerequisite for financial stability," says William Dudley, CPSS chairman and Federal Reserve Bank of New York president and ceo.

The new principles introduce more demanding requirements than the existing criteria. These include higher standards for:

• the financial resources and risk management procedures an FMI uses to cope with the default of participants;
• the mitigation of operational risk; and
• the links and other interdependencies between FMIs through which operational and financial risks can spread.

The committees say there are also new principles covering issues that are not presently fully addressed by the existing standards. These include new principles on segregation and portability, tiered participation and general business risk.

Comments are due by 29 July and a final report will be published in early 2012. The current goal is for relevant authorities to include the principles in their legal and regulatory framework by the end of 2012.

CLOs

US CLO upgrades continue apace

US cashflow CLO performance continues to exhibit the strong credit performance of the second half of last year, according to S&P. The notable credit strength in the transactions' underlying asset portfolios has contributed to a steady flow of upgrades and positive credit watch placements in the early part of 2011, the agency says.

"Through February, we had upgraded 131 tranches above their original ratings and had upgraded 191 tranches to their original rating levels. The average upgrade within the investment grade realm was 2.74 notches, while the average upgrade in the speculative grade space was 4.12 notches," says S&P analyst Robert Chiriani.

In addition to the 551 total CLO upgrades in the first two months of the year, S&P placed an additional 266 CLO notes from 80 transactions on credit watch positive as of 1 March, indicating a strong potential for additional CLO upgrades.

Chiriani says the recent upgrades are primarily attributable to improved credit quality of the assets in the underlying collateral pools, reduced levels of defaulted assets and, in some cases, reduced outstanding liability balances. Additionally, many CLOs have experienced significant reductions in the amount of triple-C rated assets in their portfolios through a combination of trading activity and upgrades of the underlying obligors.

CMBS

CMBS risk indicators outlined

The current credit risk level for this year's new issue CMBS is at a low level, although recent underwriting and macroeconomic trends may shift risk higher as the year progresses, according to S&P.

"To help us gain a sense of what the prospects might be for 2011 CMBS originations, we analysed correlations between a set of macroeconomic and underwriting variables with 10-year cumulative losses for CMBS origination cohorts from 1998 to 2008. From this data, we constructed a CMBS 'leading indicators', or CLI, index that summarises credit risk factors for CMBS," says Howard Esaki, S&P's global head of structured finance research.

The CLI index showed that the credit risk for CMBS ranged from a low of 74 in 2010 to 133 in 2007. The current CLI index value is 80, which is relatively low by historical standards and indicates low potential losses for loans originated in 2011.

"If the index proves accurate, we would see the highest cumulative losses for the 2007 origination cohort and the lowest for the 2010 cohort. We currently project losses of more than 14% for 2007 originations," Esaki adds.

To construct its CLI index, S&P examined the correlation of over 25 macroeconomic and CMBS variables with projected CMBS vintage losses from 1998-2008. Based on the strength of that correlation within the group of variables, the agency chose 12 to be its 'leading indicators'.

CMBS

Property derivatives platform launched

LaSalle Investment Management has partnered with BGC Partners to establish a property derivatives capability for clients. The offering will allow LaSalle's clients to access a range of property derivative products, while fund managers can actively manage portfolio sector weightings, asset allocation and hedge market downside risks.

The announcement comes as interest in property derivatives continues to grow, despite a fall in volumes in the market in 4Q10 driven by increased activity in the physical property market and uncertainty around regulatory change, the firms say.

LaSalle's UK md Alan Tripp notes: "We do not believe that property derivatives will replace investment in direct real estate, but rather that they will equip fund managers with another risk and portfolio management tool. There appears to be appetite for this sort of diversified strategy."

CMBS

Stable outlook for Canadian CMBS

In Moody's new 'Canadian structured finance and covered bonds: 2011 outlook and 2010 review', the rating agency says it expects Canadian CMBS performance to remain stable as it sees signs of life in the new issuance market.

"We expect the delinquency rate for properties underlying our rated CMBS transactions not to rise significantly throughout 2011. For the US$12.2bn in outstanding CMBS balances across 44 transactions, the delinquent balance was 0.26% at year-end 2010. This compares very favourably to the US CMBS delinquency rate of 8.79% and a US sector outlook that remains negative," the report says.

The non-investment grade tranches of Canadian CMBS remain vulnerable to rating actions, however. Moody's says: "The small tranche sizes in the below-investment grade classes leave those securities subject to potential downgrades, even when only a few properties in any given transaction suffer a significant decline in cashflow. Because of this strong correlation with weaknesses in a single property, negative Canadian CMBS rating actions in 2010 were primarily in these sub-investment grade tranches."

The CMBS sector has seen no regular issuance since credit markets froze up in 2007, yet 2011 may begin to see a thaw. The thaw, however, will be a slow one, Moody's says. "Although spreads on commercial real estate mortgages tightened throughout 2010, and indicative CMBS spreads narrowed as well, CMBS lenders are still searching for firmer indications of interest and lower indicative spreads for the non-investment grade tranches."

The report continues: "A welcome sign of relief was the early February 2011 closing of the C$206m privately placed CMBS originated by Institutional Mortgage Capital Canada Inc as Series 2011-1. The transaction was less diversified than traditional Canadian CMBS and all 16 mortgages were held on properties controlled by two of Canada's largest and best capitalised REITs - RioCan and Calloway. There was also recourse to the sponsors for 100% of the loans."

Moody's goes on to say that although CMBS issuance will very likely be slow to gain momentum for the better part of this year, liquidity in the CRE market at large has returned to near pre-crisis conditions and funding spreads continue to improve. "Balance sheet lending by banks, finance companies and life insurance companies, among others, has picked up pace - an important fact, given the growing volume of maturing CMBS loans that were originated in 2000 through 2005. Consequently, refinance concerns are less today than they were in 2009 and early 2010," the agency concludes.

CMBS

US CMBS delinquencies rise again

The delinquency rate on loans included in US CMBS conduit/fusion transactions increased by 17bp in February to 9.18%, according to Moody's Delinquency Tracker (DQT). The performance continued a trend of moderate increases that began in June 2010, yet as the year goes on, the agency expects the addition of new loans to suppress the tracker's delinquency rate.

"As the specially serviced loan rate is 3.3% above the delinquent loan rate, this signals that further increases in the delinquency rate are to be expected," says Tad Philipp, Moody's director of commercial real estate research.

During February, loans totalling US$4.1bn became newly delinquent, while previously delinquent loans totalling approximately US$3bn became current, worked out or disposed of. In all, the total number of delinquent loans increased to 4,112 in February from 4,052 in January and the total balance of delinquent loans increased to US$56.8bn from US$55.7bn.

Looking at the five property types, the delinquency rate for hotels fell for just the third time in two years in February. During the month, the sector's delinquency rate fell by 34bp to 16.41%. In February only 20 hotel loans totalling US$333m were newly delinquent, while over US$500m in hotel loans became current, were worked out or disposed.

Increasing by 33bp during February to 15.92%, the delinquency rate of the multifamily sector is almost as high as that of the hotel sector. During February 68 multifamily loans totalling US$665m became newly delinquent, while 61 loans totalling US$447m became current.

The industrial sector saw the greatest gain in its delinquency rate in February, which increased 113bp to end the month at 10.26%. A total of US$399m of industrial loans became delinquent during the month, while US$74m in these loans became current, were worked out or disposed.

Retail was the only property type other than hotels to record a decline in its delinquency rate in February, as the rate dropped 2bp to 7.25%. Office loans remain the best performing of the five property types, although the office loan delinquency rate grew 34bp during February to 6.77%. During the month there were US$1.37bn of newly delinquent office loans, which led to a US$652m net increase in the total balance of delinquent office notes.

By region, the East saw the biggest increase in its delinquency rate in February, as the rate rose 44bp during the month to 7.16%. Three of the four biggest newly delinquent loans were in the East. The increase in the delinquency rate in the Midwest closely matched that of the US as a whole.

During the month, the Midwest delinquency rate rose 17bp to 9.21%. The South saw a marginal 4bp increase in its delinquency rate in February, with the rate ending the month at 11.01%.

The West saw a 26bp drop in its delinquency rate, to 9.48% - the second decline in two months. Declines specifically in the office and hotel delinquency rates largely led to the improvement.

By state, Montana saw a dramatic 482bp climb in its delinquency rate to 7.87%. Moody's notes that the large increase resulted solely from one newly delinquent loan.

Finally, Nevada continues to have a nearly 30% delinquency rate, close to twice as high as any other state.

CMBS

Communication tower CMBS prepped

Richland Towers is in the market with the US$188m Richland Towers Communication Tower Revenue Notes series 2011-1, a CMBS secured by multiple assets and ownership interests in tall tower communication sites. The sites will be used to transmit broadcast signals for television, FM radio, land mobile radio, wireless communication equipment and other related purposes.

The US$143m class A notes have a provisional Fitch rating of single-A, while the US$45m class B notes have a Fitch rating of double-B. The transaction is secured primarily by mortgages on the interests of the asset entities in tall tower communication sites representing not less than 91.9% of the net cashflow. The notes are structured as interest-only, with scheduled amortisation until each series' respective anticipated repayment date.

Proceeds from the notes will be used to refinance the indebtedness outstanding under existing financing and for general corporate purposes. On the closing date, a portion of the proceeds - US$5m - will be deposited into a site acquisition account. Richland expect to use the funds to acquire additional tall tower communication site assets during the 12-month acquisition period, commencing after the closing date.

Deutsche Bank Securities will act as the arranger on the transaction, while Midland Loan Services has been mandated as servicer.

CMBS

CMBS payoffs holding steady

The percentage of US CMBS loans paying off on their balloon date held steady last month, according to Trepp's latest Payoff Report. Overall, 38.4% of the loans reaching their balloon date paid off in February. In January, the level was almost identical at 38.7%.

Over the last 12 months, the average percentage of loans by balance paying off each month has been 35.8% - implying that the February number is slightly above the 12-month moving average.

Trepp notes that this statistic was developed for the purposes of honing extension scenario assumptions. The analysis only includes loans that have reached their balloon date without having prepaid or defeased.

RMBS

RMBS repurchase offer made

The US Federal Reserve has received a formal offer from AIG to purchase the assets in Maiden Lane II, which mainly comprise RMBS. The Fed says it has been aware of AIG's interest in these assets for some time. Any decision on a possible disposition of the assets will be made in a way that maximises the proceeds to the taxpayer and that is consistent with the goal of fostering financial stability, it adds.

RMBS

Irish RMBS ratings cap enforced

Moody's has downgraded the ratings of 50 tranches in 17 prime Irish RMBS transactions, while maintaining the ratings on 16 tranches on review for possible downgrade. These actions are due to the weak and rapidly deteriorating performance of the collateral, the weakened macro-economic environment and the increased operational risks linked to the weaker credit quality of Irish banks acting as key transaction parties.

The difference in the magnitude of rating actions on the senior notes of the various Irish RMBS is due to the significant difference in the amount of credit enhancement available within each transaction to withstand Moody's updated loss assumptions. The downgrades effect 17 of the senior notes from Aaa to the A range, nine senior notes to the Aa range, six senior notes to the Baa range and one to Ba2. The downgrade of the senior notes in Wolfhound 2008-1 to Ba2 from Aaa, for example, reflects the low credit enhancement at 9.3% of note balance compared to a revised loss assumption of 8% of current pool balance.

Among the mezzanine and junior notes, Moody's has downgraded 16 tranches to below investment grade. The agency believes that due to Ireland's increasingly uncertain economic situation and pending rating actions on the banking sector, Aaa ratings are not currently achievable for most securitisations in the sector. However, Aa1 is currently achievable for transactions that can sustain high stressed scenarios, due to a combination of high level credit enhancement and low exposure to operational risks.