Contents

CMBS

Softening standards?

US CMBS underwriting trends scrutinised

The resurgence of the US CMBS market continues, with issuance so far this year already surpassing the total for all of 2010. However, as activity moves closer to pre-crisis levels, there are concerns that the high underwriting standards seen since the market's revival may also begin to more closely resemble pre-crisis precedents.

S&P recently noted the possibility of recent underwriting trends increasing CMBS risk (see SCI 11 March). MBS analysts at Bank of America Merrill Lynch also suggest that underwriting rigour has begun to be less conservative, although they add that some slippage is to be expected given the extremely clean nature of the first few deals when the market returned.

However, John Lonski, capital markets vp for Cornerstone Real Estate Advisers, is wary of reading too much into the deals that have happened so far. He says: "As 2011 has only seen a small sample size, it is quite hard to say just yet that we are really seeing signs of standards slipping. The return of the market is really in its infancy, especially when you consider what we have been through."

Although he believes it is too early to say that standards have definitely slipped, Lonski says an increase in competition in the market may see standards soften over time. He notes: "We have heard there are around 20-25 representatives from securitisation programmes out there looking for loans. As competition increases, you are going to have some sort of slipping; someone is going to blink first or do something first to get loans into their programme."

But countering this is improvements in deal-level diversification, subordination and credit enhancement. Should standards slip, these enhancements could go some way to redressing the balance.

"We have noticed the concentration of property types in deals starting to change a little for the better. If you look from the early 2010 transactions - the start of so-called CMBS 2.0 - loans backed by retail properties were comprising anywhere between 60%-70% of a transaction, so it was very concentrated," says Lonski.

He continues: "The last few deals in 2011 have been around the 40%-50% range, so there is an improvement towards a more heterogeneous pool. The market has reacted well to improved property type diversification - that is, less concentration of retail properties - in the most recent round of new issue transactions. However, the market is still uneasy when it comes to loans on hotel properties as their representation in the last few deals has started to increase."

Lonski expects that pools will be more balanced in the future as origination picks up during the year. He adds that credit enhancement has already improved and there has not been much disparity in credit enhancement between the CMBS 2.0 deals.

"The recent transactions have shown there is a large demand for this new issue type of CMBS. It seems that the pricing, leverage and subordination are all working together well and proving attractive for investors," he notes.

He continues: "The last few weeks or so have really been dominated by the events in the Middle East and North Africa. I think that has tempered expectations going forward, but it is a result of broader markets and not really specific to CMBS. I still expect deals to come out this year and be well received, pricing at or near initial price guidance and clearing at good levels."

With CMBS technicals currently very strong, Lonski says deals have largely been oversubscribed and he does not expect the broader markets to dampen that trend too heavily. Spreads remain attractive and demand is still good.

It may be too early to tell whether underwriting standards have fallen, but with many more deals in the pipeline 2011 should provide enough issuance to give a clearer picture. The market will be keenly observing just how far standards do slide, with recent history perhaps making investors more discerning than they previously were.

"It is definitely a worry that standards might slip and the fact they have not yet does not mean they will not in the future. Seeing how well some of these deals have been received, there is a lot of demand out there and a lot of people chasing these loans," says Lonski.

He concludes: "There is a slippery slope, but at the same time these originators are smart and they know they need to keep in mind an understanding of how the market is coming back and the types of loans investors will accept at this time. There is still only so much that investors are willing to see in transactions."

JL

CLOs

Prepayments sneaking up

Accelerating CLO prepays catch investors unawares

CLO prepayments are not always obvious for investors to monitor, but they seem to be happening faster than many in the market realised. Although not all bondholders will be equally advantaged by rising prepayments, the trend is only expected to increase over the next few years.

Justin Pauley, director at RBS, recently looked into the phenomenon. He says: "According to our analysis, the average annual prepayment rate for loans in CLOs during 2010 was 35.43%. That rate is 27% higher than LCD's annual repayment rate of 27.87% for their loan index."

Monitoring prepayments can be difficult for investors. Just as RMBS investors are struggling to track cashflows in remittance reports (see SCI 2 March), CLO investors are struggling to track prepayment activity.

Pauley says: "There is more that trustees could do to make prepayments clearer to investors. Managers know what the prepayments are and if they could share additional information it would be a real help to the market. If managers would include this information in a report, for example, it would make things a lot easier."

He continues: "Maybe in deals going forward we might see more clarity in the trustee reports. I have seen trustee reports show additional information - such as how loans are being haircut and how much they are being haircut by - which is very interesting additional information. Trustees certainly are making an effort to give more data."

However, Russ Morrison, head of high yield investments at Babson Capital, believes that plenty of information is already given. He says: "It is actually very easy to get a feel for what is going on with prepayments in CLOs which have ended their reinvestment period."

He continues: "In those cases, for somebody on the outside looking in, it is a pretty clean set of information. As the rating agencies have downgraded the liabilities, most of the market has restricted the prepayments to be reinvested, so there is not a lot of buying going on and you can largely see the activity in fairly static portfolios."

CLOs that are still in their reinvestment period provide a bit more of a problem, however. Morrison comments: "The market can always do a better job of being transparent with the information, but I think it is there and it is available. However, I can appreciate that for an actively reinvesting CLO there is sometimes a lot of movement going on."

Several factors pushed prepayment levels so high last year. The main reason that prepayments have picked up lately, says Pauley, is the upcoming maturity wall.

He explains: "The reason prepayments are picking up is mainly down to the maturity wall. As we get closer to the required maturity dates coming up in the next couple of years, the issuers are going to take advantage of credit markets and try to refinance."

However, Morrison does not see the maturity wall in the same way and argues it is easy to overstate its importance. He notes: "The market has done an incredible job of addressing the maturity wall. From where we were 18 months ago or even 12 months ago, the maturity wall has really been pushed out."

Morrison continues: "The concept of the high yield market is one that assumes that companies are going to have a certain amount of leverage in their balance sheets, so the expectation is that periodically there will be some form of refinancing. Performing companies have been able to address the maturity wall. They are doing everything that I would expect in a normal cycle, so I do not see the maturity wall as a critical issue."

Morrison says prepayments have been so high lately because of high Libor floors, high spreads and original issue discounts, which made the new issue market particularly attractive to investors. In these circumstances, borrowers are just looking for efficiency.

He explains: "Borrowers are simply looking to manage their capital structures efficiently. As the high yield market has continued to show an appetite - and therefore has seen tightening - borrowers have had opportunities to do that. Loans by nature allow prepayments and if a borrower can lower their cost of financing by 100bp-200bp long-term, even if that means paying some call protection, they will do that."

Older transactions that were issued in 2006 and 2007 had no loan market available to them before and no real opportunity for prepayments. Consequently, so long as performance is still strong, as they are getting closer to their maturities it is natural for prepayments to accelerate at the back end.

Pauley too says other factors have also been influential in pushing the prepayment rate higher than LCD index repayments. He cites the several big exposures to a small number of names in the LCD index which CLOs would not be able to have, as well as more restrictions for CLOs on the inclusion of names below single-B minus.

What prepayments there have been have not benefited all bondholders equally. Whether a deal is in or out of its reinvestment period is an important factor in whether senior or equity investors benefit.

Morrison explains: "The winners with CLO prepayments come in different shapes and forms; a lot of it depends on what vintage you are in. The investors that are benefiting right now are the senior investors in the older CLOs, which were done around 2003-2005."

A sizeable set of those CLOs have ended their reinvestment period and have considerable limitations on their ability to reinvest prepayments. In those deals, triple-A investors are finally getting their principal back and are rightly very happy about that.

As prepayments shorten the deal, ending the reinvestment period is not so good for equity investors. Inside the reinvestment period, though, the roles are reversed; reinvestment in assets with wider spreads is a bonus for equity investors, but extending the deal is negative for senior investors.

"Since many deals restrict reinvesting prepayments if the senior note is downgraded by one notch or mezzanine notes are downgraded by two or more notches, many CLOs are forced to use prepayments to amortise senior notes. This amortisation is obviously good for debt holders as they are going to get their money back faster and de-lever the transaction," explains Pauley.

Barclays Capital analysts highlight one deal - New York Life Investment Management Flatiron CDO 2006-1 - where the manager has asked the controlling class of senior investors to waive Moody's restricted trading condition. The deal has a reinvestment period end date of 2013 and the analysts, like Pauley, note that the restricted trading condition is a very limiting constraint for CLOs. Other deals may follow such a pre-emptive strategy within their reinvestment periods to increase flexibility.

The rest of the year is also expected to see prepayments speed up slightly on 2010. As a result of the maturity wall, Pauley believes they will continue to accelerate all the way up to 2014.

JL

CLOs

Caution prevails for Euro CLOs

The slow-down continues in European CLOs (see SCI 15 March) as investors remain cautious under volatile conditions. However, despite widening spreads and a dip in bid-list activity, the week looks set to close with stabilising levels.

"The week started off feeling like the bid-offer had gapped very wide, unsurprisingly with the weekend's news," one CLO trader says. Because of the volatility surrounding the market, he says that both investors and dealers have acted with caution this week - causing spreads to widen.

He continues: "The bid-offer has widened on the back of the market's reluctance to sell risk because of short-term news flow. However, it seems to me that it's on a gradual comeback. We're seeing people looking around for cheaper offers and beginning to realise that it's not quite achievable."

But, in seeking opportunity, certain market participants have attempted to manipulate offers, according to the trader. "There's a lot of chat going on right now in terms of people trying to play the market and squeeze cheaper offers out. It's not happening, however."

Bid lists have also been impacted by this week's volatile environment, the trader confirms. "Bid lists have generally been driven by profit taking of late and there are no 'forced' sellers in the market, so several lists have been pulled to give the market time to settle."

However, under the circumstances, those that did participate in this week's bid lists achieved positive results, the trader notes. "They may have got a bit less than the recent averages, but it wasn't anything drastic; it all performed well on the whole."

Overall, the trader says that although the market has not been busy in terms of trading volumes, pricing visibility is returning. He also adds that despite the softening in price spreads over the last two weeks, the market is beginning to stabilise quickly, albeit at lower levels.

"We've certainly come down off the highs. Right now, it's a question of increasing pricing visibility so the bid-offer normalises, while other news flow plays out around us," the trader concludes.

LB

CLOs

CLO market hits choppy waters

Volatility remains a feature of the US CLO market as the global economic downturn continues to impact secondary price levels and investor activity. These issues are also beginning to creep into the primary market, as the emergence of new issuance remains scarce.

"It's been choppy and rocky over the last week: the only part of the capital stack that's weathered the storm is equity," one CLO trader says. Double-B, triple-B and in particular single-A rated paper have all become several points weaker, the trader confirms. Mezzanine paper, meanwhile, has fallen back by 3-5 points - reaching seven points in the weaker deals.

Additionally, fear has crept in among bid-list sellers as the economic climate increases risk levels. "While some sellers took the inordinate step of pulling their bid-lists, the little activity that did take place provided very limited colour. I think the sellers were afraid of discovering a lower price point if they sold the bids," the trader notes.

Due to this week's bid-list hold-up, the pace of CLO activity struggles to return to form, in turn leaving participants to 'wait-it-out'. "Everyone's now waiting for a more normal state of play to return in the equity and Japanese markets before they start to get into the risk mode," the trader explains.

Indeed, new supply remains scarce, with pricing information only emerging for the Morningside Park CLO. The transaction was re-offered at 102, at a spread of 175bp over Libor.

"It would normally be trading at 160bp over, but the current circumstances are even affecting the new deals. As the investor only bought this a few months ago, I can only think he was testing the market," the trader says.

He concludes: "The primary market has been extraordinary light. There are still rumours of new deals in sight, but in view of the current situation in secondary, I think that we're looking at a weakness across the board. Everything is just holding its ground for now."

LB

CMBS

Volatility drives US CMBS

It has been an uncertain week for the US CMBS market as wider economic issues impact both pricing levels and investor confidence. However, this instability has driven activity to new highs.

"The last two days have been incredibly volatile for CMBS; more so than for any other asset class out there," one CMBS trader says. This market volatility is due to the wider global issues in Japan and the Middle East, the trader says, causing erratic and unpredictable pricing levels.

He continues: "Spreads have been trending all over the place. Yesterday the subordinate parts of the capital stack were 150bp wider - which is about five points lower than the day before. High yield was up by 1.5, while non-agency was off by about one point."

Despite the volatile conditions, the CMBS market saw a surge of activity yesterday, particularly from hedge funds. "We've seen a good amount of selling from leveraged money, yet dealers are acting a little cautious given the great run we've seen in a number of other asset classes over the last two to three months. All of a sudden we're dealing with all of the macro issues and CMBS has really taken the brunt, particularly from leveraged guys."

This sudden flourish of activity extends to bid-lists, with yesterday's volume totalling US$1.2bn - approximately four times the average amount. The trader confirms: "We've seen an incredible amount of flow on a day where things were generally not looking so great. I think this flurry was a delayed reaction to the nuclear issue. I think what really scared people was the question of what happens to CMBS?"

Meanwhile, the US$325m GS Mortgage Securities Corporation Trust 2011-ALF transaction priced late last week. "It actually went very well because even though it was an off-the-run asset class for the commercial real estate market, it was underwritten the right way," the trader notes. "It had stable cashflows through the worst of the worst. The leverage and the amount of debt in the trust were very low, so it all went pretty well."

LB

ABS

EBA stress test weighed

The European Banking Authority's 2011 stress test - which covers over 60% of total EU banking assets - is being run from this month until June, with the results of the exercise to be published on a bank-by-bank basis in mid-June. While the stresses for senior asset-backed trading positions appear adequate, those for junior bonds are arguably meagre, according to ABS analysts at RBS.

The stresses to be applied to trading book assets take into account market risk scenarios, namely price or spread shocks. In the case of securitisations held in trading books, such stresses will incorporate spread shocks of between 40% and 60%.

Compared to the mid-2010 stress-test exercise (SCI passim), spread shocks applied to ABS are in most cases exactly the same. The scenario inputs to be used for positions referencing US synthetic indices are different, however, with the stress equating to a flat 60% widening.

"Our observation at this stage is that the stresses to be applied to senior asset-backed trading positions look generally adequate, notwithstanding the disparity relative to the shock applied to senior financials," the RBS analysts note. "In the case of junior bonds, our take would be that the stresses to be applied look arguably meagre, considering that the price reference of end-December 2010 already builds in significant tightening in spreads (in the region of 30%-50%) over the preceding two months and, therefore, such stresses fail to capture 'mean-reversion' risks to mezzanine and subordinated ABS, in our view."

Securitisation exposures in banking books, meanwhile, are subject to credit-based stresses under the exercise. All securitisation exposures that are deemed to involve 'significant risk transfer' will be included, split across two groups - 'medium risk' and 'high risk'.

Medium risk assets include US ABS and CMBS, as well as EMEA ABS and RMBS. High risk assets include EMEA CMBS, US RMBS, all CDOs and re-securitisations. The analysts observe that US CMBS appears to be treated generously, at least compared to European equivalents.

The stresses are based on pre-defined rating migrations of the securitised exposures under baseline and adverse scenarios over the period until end-2012. The rating migrations to be used in the case of medium-risk (lesser severity of downgrades assumed) and high-risk (greater downgrade severity) assets are undisclosed, but the analysts note that the June 2010 exercise assumed a four-notch downgrade for all securitised assets.

For unrated positions, IRB banks are expected to use commensurate stress factors on the equivalent unsecuritised assets in order to calculate risk weight changes to the unrated securitised positions.

CS

RMBS

MBS wind-down to hit mortgage basis

The US Treasury will this month begin an orderly wind-down of its remaining portfolio of US$142bn in agency MBS. The move is expected to result in a slight negative to the mortgage basis.

The Treasury plans to sell up to US$10bn in agency MBS per month, in addition to an estimated run-off of about US$3bn per month. "We're continuing to wind down the emergency programmes that were put in place in 2008 and 2009 to help restore market stability, and the sale of these securities is consistent with that effort. We will exit this investment at a gradual and orderly pace to maximise the recovery of taxpayer dollars and help protect the process of repair of the housing finance market," says Mary Miller, assistant Treasury secretary for financial markets.

The market for agency MBS has notably improved since the time the Treasury purchased these securities in 2008 and 2009, it says, and based on current market prices a profit is anticipated for taxpayers. The sale of these securities will not alter the Treasury's previously stated debt management objectives, however.

MBS analysts at RBS are confident that this supply will be absorbed readily as many investors have been adding to the basis on widenings. But they warn of the possibility of the Fed following suit, to the extent that the wind-down is successful and spreads don't widen out. Any Fed selling can be expected to have a greater impact as it currently holds US$944bn in agency MBS.

In terms of potential opportunities for investors, the RBS analysts suggest that some movement in coupon swaps versus IOS is likely, given the bulk of the holdings is in 30-year 4.5s (33%) and 5s (32%) and to a lesser extent 5.5s (21%). GN/FN should outperform since holdings are all in conventional, while Gold/FN should underperform in 4.5s, be neutral in 5s and outperform in 5.5s.

In addition, specified pay-ups are expected to decline somewhat as the Treasury will be selling slightly seasoned pools. In particular, seasoned pay-ups should suffer in 4.5s and 5s, while 20-year specified paper will outperform seasoned 30-year as the Treasury doesn't own any.

The Treasury retained State Street Global Advisors in 2008 to acquire, manage and dispose of its agency MBS portfolio. While State Street will manage the wind-down of this investment, the Treasury will post the total agency MBS sales on its website at the end of each month.

CS & LB

Whole business securitisations

Punch strategic review welcomed

Punch Taverns published the results of its much-anticipated strategic review this morning (22 March). The proposal will reduce Punch's leased estate from around 5,200 pubs to 3,000 and see Spirit demerged from the business as a separate unit of managed pubs.

The smaller group of 3,000 pubs currently generates around 75% of the leased estate's EBITDA and has net income per pub of around £80,000. Meanwhile, Spirit could convert somewhere between 100 to 150 pubs from leased to managed on an ROI of 25%.

ABS analysts at Barclays Capital believe the announcement is supportive of all three of Punch's securitisations. Spirit will receive around half of the Plc cash after transaction costs of £30m, while Punch A and B will continue to be supported by the group as it begins discussions with bondholders.

The Barcap analysts note that the group's continued support of Punch A and B appears to signal a lack of appetite for confrontation with bondholders, who have recently been presenting Punch with a united front in anticipation of this review (see SCI 3 March). They add that focus is now likely to shift on securing concessions from bondholders in return for the group's ongoing support.

Gaining bondholder approval for non-core asset disposals is likely to be straightforward. Waiving covenants, on the other hand, is expected to be far harder for the group to achieve.

JL

CDS

Focus on flexibility

Gerrard Mahony, business development manager at Riskart, answers SCI's questions

Q: How and when did Riskart become involved in the CDS market?
A: Riskart is a highly focused Italian-based company concentrated on providing efficient OTC derivatives processing and administration to the middle and back offices of banks, fund management companies and corporates. We became involved with the CDS market several years ago as our clients began using CDS as an effective means of hedging their investment risks by means of this flexible and versatile instrument. For several clients, the move into CDS was triggered by their front office or portfolio managers and Riskart was called upon to provide an effective solution and consultancy to back office operations, so that the processing of these instruments could be stream-lined and inserted into the overall back office workflow.

Q: Which market constituent is your main client base?
A: Riskart basically works with any financial company or operation that trades or invests in OTC derivatives. More specifically, we work with banks, brokers, fund management companies and corporate clients. Clearly, in terms of back office administration of OTC derivatives, each of these categories may have different requirements (for example, fund companies require a daily net asset value calculation), but the flexibility of the Riskart software platform means that individual requirements in terms of specific functionality or workflow design may be easily catered for.

Q: Do you focus on a broad range of asset classes or only one?
A: Apart from CDS, our strong specialisation means that Riskart focuses on the broad universe of OTC derivatives and structured products, including but not limited to IRS, FX swaps, cross-currency swaps, equity swaps, index swaps, caps, collars, options and various structured products and the underlying financial instruments (bonds, equities, forex, deposits, indexes etc). In fact, we pride ourselves on the ability to process "any instrument that generates a cash flow".

Q: How do you differentiate yourself from your competitors?
A: I would sum up our key differentiators in three words: knowledge, adaptability and service. 'Knowledge' because we have been in this specific segment of OTC derivatives processing for the past 15 years and this accumulated knowledge and expertise is placed at the full disposal of our clients.

'Adaptability' because our software platform's key benefit is the ability to integrate variations on or completely new derivative structures without having to resort to re-programming the software, thus guaranteeing that the middle and back office can keep pace - easily and in a cost-efficient manner - with the evolution of the financial markets. Lastly, 'service' for us does not simply mean, for example, an efficient help desk service, but it is viewed as a commitment to a long-term client long-term relationship in which the service provided by Riskart focuses on constantly and proactively optimising client workflow and back office efficiency.

Q: What is the firm's key area of focus today?
A: Our focus at the moment is on building upon our first-in-class OTC derivatives processing platform to help clients resolve other key pain-points in the back office in adjacent areas such as reconciliation, efficient collateral management and netting in order to optimise liquidity management. Contrary to the general perception, the level of automation in the back office - above all in the OTC derivatives area - is far from complete and the application of Riskart's knowledge and experience to these areas is a natural extension of our current approach focused on increasing clients' operational efficiency.

Q: Which challenges/opportunities does the current environment bring to your business and how do you intend to manage them?
A: The main challenge in this area at the moment is the pending international reform of the OTC derivatives markets. This reform will have a radical impact on how clients manage OTC derivatives and will require them to undertake a complete review of current processes and software applications.

This reform, however, is not just another 'compliance cost' for clients, but can also represent interesting new business opportunities. We believe that Riskart has the ability and experience in this area to help clients fully understand the implications of the reform and plan adequate solutions. For example, one key element often overlooked is that the regulatory authorities are not planning a 'big bang' approach, but clients will need the ability to simultaneously manage for many years both 'standardised' OTC contracts together with bilateral OTC contracts.

On this and many other issues, Riskart is taking a proactive role in helping clients to prepare for the challenges posed by the reform, so that they can ensure full operational efficiency and as low an impact as possible on costs.

Q: What major development do you need/expect from the market in the future?
A: The planned regulatory reform means that for many aspects the markets are in a 'wait and see' mode. However, for a company like Riskart, it is not so much a question of expecting or waiting for a major development from the market, but it is about being constantly updated and ready to provide quick and innovative solutions so that issues in middle and back office operations do not hinder clients' ability to take rapid decisions based on business opportunities.

The OTC markets have always been a fulcrum for the creation of new financial products. At Riskart, we feel that the pending regulation of certain OTC financial instruments will not stop the market inventing new trading opportunities and investment vehicles. So, whether it be CDS, CFDs, new forms of exotic options or structured products, Riskart's value lies in the fact that the flexibility of its software platform permits it to stay apace with whatever new opportunities the markets decide to pursue.

ABS

Brokerage names ceo

Yorvik Partners has appointed Paolo Taddonio as ceo. Prior to joining the firm, he spent most of his 20-year career at Société Générale, where his last position was head of fixed income, currencies and commodities in New York. Previously, Taddonio held various positions in the fixed income, foreign exchange and treasury departments in London and Paris.

CDS

Credit derivatives vet recruited

Palmer Square Capital Management has appointed Angie Knighton Long as cio. Long will be responsible for all investment-related activities, with a particular focus on portfolio and risk management. She will also become a member of the firm's investment committee.

Prior to joining Palmer Square, Long worked for JPMorgan Chase, holding a variety of roles, including deputy head of credit trading for North America, head of high yield trading and head of credit derivatives trading. Most recently, she ran a proprietary trading book focused on long/short credit. In addition, she helped oversee risk management for the North American and European credit trading books.

CDS

CDS trader hired

Dimitris Melios is set to join Credit Suisse in May as a CDS trader. Based in London, he will report to the bank's head of investment grade and high yield trading in Europe, Arran Rowsell. Melios previously held a similar role at Citi.

CDS

Aussie fixed income offering prepped

BNP Paribas Investment Partners (BNPIP) has expanded its investment team as it prepares a new Australian fixed income offering for institutional and retail investors. The offering is expected to launch this quarter or next.

"We feel the timing is right to enter the market with capabilities aimed at what we believe fixed income should be - a properly defensive asset class for our superannuation funds where super members should consider investing their money," says Robert Harrison, BNPIP Australia chief executive.

On the institutional side, BNPIP will use its investment partnership with international fixed income portfolio manager Fischer Francis Trees & Watts. Heading the team will be BNPIP's head of Australian fixed income, Doyle Mallett. He is joined by portfolio manager Jasmin Argyrou, credit analyst Dominik Dumaine and fixed income business manager Dean Allan.

Argyrou was previously a fixed income fund manager at Schroders Investment Management, while Dumaine joins the team from BNPIP Paris, covering crossover and high yield securities. Allan was previously with BNP Paribas Securities Services, where he managed external investment managers.

CLOs

Investment manager adds partner

Tikehau Investment Management has appointed Fabrice Damien as partner. The move sees the firm further expanding into the primary credit and private debt markets.

Damien was most recently with Bank of America Merrill Lynch in France, where he was responsible for corporate and leveraged finance. Prior to this, he worked for RBS and Morgan Stanley in their high yield origination and leveraged finance groups in London.

CLOs

Successor CLO manager proposed

Octagon Credit Investors has given notice of its resignation as investment manager of the OCI Euro Fund I CLO. Ares Management has been proposed as the successor investment manager, conditional upon a number of criteria being satisfied.

The controlling class of noteholders and the class F subordinated noteholders can veto the appointment of Ares as successor investment manager on or prior to 16 April 2011.

Ares has informed the issuer that it is the investment manager to 22 CLOs across the US and Europe similar to OCI Euro Fund I, which it believes demonstrates its ability to professionally and competently perform the duties of investment manager on the deal.

CMBS

Investment manager names CRE head

NewOak Capital has appointed David Eyzenberg as md and head of its commercial real estate division. Based in New York, he will be responsible for directing the firm's principal activities in the CRE sector.

Before joining NewOak Capital, Eyzenberg was president of Prodigious Capital Group. Since its founding in 2005, he led the firm in consummating over US$350m in financing and advisory assignments, including in the CMBS sector. Prior to this, he headed Madison Capital Group's New York office, where he focused on raising equity and structured debt.

CMBS

CRE partnership to aid distressed banks

Westport Investment Group has established a strategic relationship with a multinational mergers and acquisitions firm to acquire discounted commercial properties and notes from American banks in distress. The relationship is designed to help small to mid-sized US banks in distress to increase revenue and, in some cases, to secure infusions of capital.

"It comes at a perfect time, when more and more banks are facing a financial crunch as a result of ever-increasing commercial loan defaults. Experts predict that these defaults are expected to continue through at least 2014 and in 2011 US foreclosures are expected to increase by another 20%," says Westport's cfo Chad Thanyachoto.

He continues: "In 2010, about 157 US [banks] were seized by the FDIC and many more banks face the same risk. Already in 2011, at least 25 banks have been taken over by the FDIC. To stay in business, troubled banks need to quickly sell off mortgage and property portfolios that are detrimentally affecting their books."

CMBS

Advisory firm beefs up in Asia

StormHarbour has appointed Aaron Tan as senior advisor in its Hong Kong office. Reporting to the firm's principal and Asia-Pacific ceo, Water Cheung, Tan will be involved in advising on and originating real estate transactions. He was previously md and head of Hong Kong coverage, investment banking and debt capital markets at Barclays Capital.

At the same time, Jean-Christophe Levens, Marc-Antoine Thiriez and Hugo Virag-Lappas - all former founding partners of Partners in Infrastructure - have joined StormHarbour's Singapore office as mds. The trio will be responsible for building out the firm's Asia-Pacific infrastructure finance business and will report to Vincent Moge, StormHarbour principal and head of the Singapore office and Asia-Pacific sales.

"Asia-Pacific is a burgeoning market where there is strong investor demand for infrastructure developments and a trend among governments in the region to increasingly look to privatise public utilities and core infrastructure assets," Moge says.

CMBS

Grubb and Ellis explores merger possibilities

Grubb & Ellis has engaged JMP Securities to explore strategic alternatives, including the potential sale or merger of the firm. In conjunction with the announcement, the Grubb & Ellis board also determined not to declare the quarterly dividend to holders of its 12% cumulative participating perpetual convertible preferred stock.

"A formal process to explore a transaction which affords the company the opportunity to drive additional scale across our platform is in the best interests of our corporate stakeholders, clients, broker-dealer partners and Grubb & Ellis professionals," says Thomas D'Arcy, Grubb & Ellis president and ceo.

CMBS

CRE capability boosted

Trepp has acquired Investcap Advisors, a privately held company that provides web-based applications for US CMBS loan and property surveillance. The acquisition provides Trepp with additional commercial real estate expertise and technology resources, while also expanding its range of CRE loan and property surveillance products.

As a result of the acquisition, Investcap founder Scott Barrie will be joining Trepp as md. Barrie holds over 25 years of experience in commercial loan origination, underwriting, secondary marketing and workouts.

RMBS

Op risk practice launched

Realpoint has launched an operational risk assessment practice to evaluate the performance of mortgage servicing firms. The new practice, which is part of the firm's credit ratings business, will be led by former head of servicer evaluations at S&P Michael Gutierrez.

Robert Dobilas, ceo of Realpoint, comments: "Mike Gutierrez and his team will use Realpoint's robust data set, technology and industry-leading analytics to develop an investor-focused solution that will establish a new standard for operational evaluations in the structured finance market."

Based in New York, the unit will be initially staffed by Gutierrez and three senior operational analysts - Michael Merriam, Richard Koch and Mary Chamberlain.

RMBS

Second Colonial Bank official charged

The US SEC has charged the former operations supervisor of Colonial Bank's mortgage warehouse lending division (MWLD) with participating in a US$1.5bn securities fraud scheme. The SEC alleges that Teresa Kelly enabled the sale of fictitious and impaired mortgage loans and securities from the MWLD's largest customer - Taylor, Bean & Whitaker Mortgage (TBW) - to Colonial Bank. She caused these securities to be falsely reported to the investing public as high-quality, liquid assets.

The SEC also previously charged former TBW chairman and majority owner Lee Farkas in June 2010, former treasurer Desiree Brown in February 2011 and charged the head of Colonial Bank's MWLD Catherine Kissick earlier this month (SCI passim).

According to the SEC's complaint filed in US District Court for the Eastern District of Virginia, Kelly along with Farkas, Kissick and Brown perpetrated the fraudulent scheme from March 2002 to August 2009, when Colonial Bank was seized by regulators and Colonial BancGroup and TBW each filed for bankruptcy. Because TBW generally did not have sufficient capital to internally fund the mortgage loans it originated, it relied on financing arrangements primarily through Colonial Bank's MWLD to fund such mortgage loans.

The SEC alleges that TBW began to experience liquidity problems and overdrew its then-limited warehouse line of credit with Colonial Bank by approximately US$15m each day. Kelly, Farkas, Kissick and Brown concealed the overdraws through a pattern of 'kiting', in which certain debits were not entered until after credits due for the following day were entered.

In order to conceal this initial fraudulent conduct, all four created and submitted fictitious loan information to Colonial Bank and created fictitious MBS assembled from the fraudulent loans, according to the SEC. These fictitious and impaired loans were misrepresented as high-quality assets on Colonial BancGroup's financial statements.

The SEC is continuing with its investigation, it says.

RMBS

MBIA policyholder group files appeal

The MBIA policyholder group yesterday filed their opening brief with the New York Court of Appeals in Albany, asking the court to allow their fraudulent conveyance action against MBIA to proceed. The group is seeking to reverse the monoline's US$5bn restructuring in February 2009 (SCI passim).

The plaintiffs have an automatic right of appeal, following a split 3-2 decision on 11 January to reverse the ruling of Justice James Yates of the New York State Supreme Court. He had previously denied MBIA's motion to dismiss the case as a "collateral attack" on the New York State Insurance Department's (NYID) improper approval of MBIA's fraudulent restructuring.

In their brief, the policyholders argue that the majority decision in the Appellate Division misapplied fundamental legal principles in violation of due process. Among other arguments, the brief states that as two justices "correctly held in dissent, the complaint sufficiently alleges that MBIA, through its fraudulent 'transformation', purposefully and in bad faith deprived plaintiffs of benefits of their insurance contracts (i) to be paid in the event of default, and (ii) credit enhancement".

This lawsuit is separate from the Article 78 action the policyholders are pursuing against the NYID and MBIA (see SCI 16 March).

No ratings impact from US Bank acquisition

Fitch says it will take no rating actions on any structured finance deals in connection with the sale of Bank of America Merrill Lynch's Global Securities Solutions securitisation trust administration business to US Bank. The agency notes the change in counterparty for the affected transactions, but won't be providing rating confirmation for them.

US Bank meets Fitch's current counterparty criteria for structured finance transactions. As such, the sale and transfer of duties to the bank will not impact the existing ratings of the affected structured finance transactions.

US Bank completed the acquisition of the US and European-based securitisation trust administration businesses of Bank of America on 30 December 2010. As well as establishing the bank in the US structured finance trust business, the transaction establishes a presence in Europe with offices in Ireland and London, thereby providing US Bank Corporate Trust Services with an opportunity to expand its distribution and product offerings abroad.

Under the terms of the agreement, US Bank acquired approximately 2,153 active securitisation and related transactions, more than 2.4 million residential mortgage files and 84,000 commercial files, and US$1.1trn in assets under administration. Additionally, the transaction provided US Bank with approximately US$8bn of related deposits at close.

After conversion, which is expected to be completed by the end 3Q11, the acquired US and European trust businesses will operate under the US Bank trade name.

ABS

Risk disclosure practices reviewed

The Financial Stability Board (FSB) has published a thematic peer review report of risk disclosure practices by financial institutions in respect of exposures to structured credit products. The report reviews both financial institutions' public disclosures of these risk exposures, as well as the actions undertaken by FSB member jurisdictions and private sector participants to enhance disclosure practices.

The review finds that FSB member jurisdictions have successfully prompted financial institutions to improve their disclosure of exposures to structured credit products. Most members have also taken steps to implement enhanced Pillar 3 disclosures regarding securitisation and related exposures published by the Basel Committee on Banking Supervision in July 2009.

However, the FSB says that improvements can be made on: the descriptions of the use and objectives of SPEs used for securitisation; the off-balance sheet exposures of SPEs; the exposures both before and after hedging; and the level of detail and granularity of the sensitivity analysis of securitisation exposures measured at fair value.

The level of external audit assurance provided on risk disclosures typically varies, depending on whether the disclosures are made in financial statements, Pillar 3 reports or management analyses in financial reports or websites. Practice varies on how that level of assurance is disclosed, the FSB says.

The review recommends that the International Auditing and Assurance Standards Board should review whether further guidance is needed in this area. It also recommends that banks improve their Pillar 3 disclosure practices, by better aligning their Pillar 3 disclosures with the publication date of financial reports.

Tiff Macklem, FSB's standing committee on standards implementation chairman, says: "The private and official sector should work together to develop principles for useful risk disclosures and to develop leading practice disclosures. The risk exposures of current interest to markets would include: concessional loan restructurings; exposures to sovereign debt and to other financial institutions; and liquidity and funding positions."

The FSB will organise a roundtable later this year to encourage improvements in risk disclosures, it says.

ABS

Select fund range expands

PIMCO has launched two funds on the Skandia Investment Solutions platform as part of a further distribution partnership for the PIMCO Select fund range. The partnership with Skandia is the second in a series of strategic alliances for PIMCO Select. It aims to offer UK investors direct access to PIMCO's investment expertise via savings, insurance and defined contribution schemes.

The two funds are: the Select Global Bond Fund, which is managed by Scott Mather, md and head of global portfolio management; and the Select UK Corporate Bond Fund, which is managed by Luke Spajic, evp and head of pan-European credit and ABS portfolio management. The first fund offers investors exposure to global fixed income, while the second offers investors the diversification benefit, yield premium and greater total return potential of corporate and credit versus government securities.

Both funds offer same-day pricing, delivered at 4pm GMT with a valuation point of 12pm GMT, and are available in institutional and retail share classes.

ABS

Interest rate risk criteria updated

Fitch has updated its criteria for stressing interest rate risk in existing and new structured finance transactions. The updated criteria have also been extended to transaction cashflows indexed to interest reference rates for Australian dollars (AUD), New Zealand dollars (NZD), Korean Won (KRW), Singapore dollars (SGD), Taiwanese dollars (TWD), Indian rupee (INR) and South African rand (ZAR). All previously published interest rate stress levels remain unchanged, the agency says.

Under the new criteria, Fitch has reviewed the additional interest rate bases and defined calibration parameters as inputs for its interest rate stress spreadsheet. The calibration process included an analysis of historical rate movements and a review of the economic outlook and monetary policy regimes of each country. It also includes an evaluation of the appropriateness of the resultant levels of stress produced by applying the interest rate criteria to the proposed calibration parameters.

The analysis and criteria are based upon short-term market interest rates, namely Libor or currency-specific equivalents. While all previously published stresses and newly introduced stresses for AUD, NZD, KRW and SGD reference international scale ratings, the stresses for TWD, INR and ZAR exclusively reference national scale ratings.

In addition, the special situation in India - where the traditional reference rate has been the prime lending rate - is now gradually being replaced by the recently introduced base rate. Since the base rate has only recently been introduced, the stresses have been built on suitable proxies such as government bond yields.

ABS

First post-crisis fall for Euro downgrades

The European structured finance downgrade rate fell for the first time last year since 2007, though it remained well above the long-term average, according to S&P. The gathering pace of Europe's economic recovery was broadly reflected in improved aggregate credit performance among SF transactions in 2010, the agency says.

"While some countries have powered out of recession...others have been left behind, creating a divide along roughly north-south lines. The pockets of continued economic weakness in some countries - and the related sovereign debt crisis - meant that credit trends within European structured finance varied widely across the region last year," says S&P analyst Andrew South.

He adds: "However, the overall improving economic backdrop in 2010 translated into 74.6% of European structured finance ratings remaining unchanged or raised during the year, compared with 70.2% in 2009. This represents the first decline in the downgrade rate for three years."

The rise in the upgrade rate to 5.6% from 1.2% was primarily related to improvements in the structured credit asset class, including CDOs. The average change in credit quality rose to -0.9 notches in 2010 from -1.5 notches in 2009.

Further, the average downgrade severity also improved marginally during 2010, with the average net downward move about four notches less severe than the average 5.1 notches in 2009. Of the 466 ratings the agency raised during the year, 368 were in structured credit, 52 in ABS, 38 in RMBS, seven in CMBS and one in a corporate securitisation transaction.

Of the 2,098 ratings lowered during the year, 1,487 were in structured credit, 236 in CMBS, 199 in RMBS, 108 in ABS and 34 in corporate securitisations. S&P lowered 156 ratings from 97 transactions to single-D during the year, giving an overall default rate of 1.9%, compared with 1.1% in 2009.

Despite evidence of some renewed investor interest, ongoing pressure in the SF market negatively affected the growth in the number of new ratings issued, the agency says.

ABS

Credit card charge-offs tick higher

Charge-offs on US credit cards ticked higher in February to 7.56%, up from 7.45% in January, according to Moody's. Although the charge-off rate is expected to resume its pace of steady declines, it will still break below the 7% mark during the 2Q11, the agency says.

"Familiar seasonal patterns and the roll-through of elevated delinquencies in September influenced the charge-off rate this month and resulted in the slight up-tick. However, the steady improvement in delinquency rate trends that has prevailed for the better part of the past year points to charge-off rates resuming their march lower in the coming months," says Jeffrey Hibbs, Moody's avp.

In February the delinquency rate index continued to fall to 4.02%, its lowest level since August 2007 and the sixteenth consecutive month of decline. However, the early stage delinquency rate did tick 1bp higher in the month, increasing to 1.02% - but remains close to its lowest level since the metric data started in 2000.

Also in February, the payment rate took a seasonal dip to 19.21%, a 121bp drop in line with the 22-year history of Moody's Credit Card Index. However, the agency says that fewer days in the month, contracting receivable balances after the holidays and anticipation of a tax refund traditionally reduce the payment rate.

The yield index climbed by 79bp to 21.31%, also attributed to a seasonal effect, the agency says. Further, while the increased yield pushed excess spread close to the all-time high set two months ago, yields are likely to decline over the course of 2011.

Finally, excess spread jumped 64bp to 10.75% during the month.

ABS

Outlook changes for US credit cards

Moody's outlook for the US credit card industry is now stable. This is due to the recovery of card issuers' asset quality and profitability in an improved economic environment, the agency says.

"Industry asset quality has rebounded in the past year. Delinquencies and charge-offs [have declined] among the 'big six' issuers in recent quarters and we expect this trend to continue in 2011," says Moody's vp Curt Beaudouin.

Asset quality has improved for two key reasons, Beaudouin says. Employment fundamentals are better, with lower initial jobless claims and a lower unemployment 'inflow rate'.

Additionally, card issuers have undertaken 'portfolio cleansing' - where bad loans are charged off and replaced with new loans with tighter lending standards. Although this tightening has now ended, lending criteria remains high, Moody's says.

Further, improved asset quality has driven down loan loss provisioning, leading to a return to profitability for all six major issuers. Revenue pressures still weigh on the industry, while balance profitability should continue to improve this year, the agency notes.

These pressures may have been the result of the effects of the CARD Act, passed in 2009 and whose main provisions were implemented in 2010. "Issuers are attempting to counteract these effects; for example, by looking for ways to increase fee income and stepping up the marketing of prepaid cards," Beaudouin says.

The overall improvement in fundamental credit conditions has arrested the downward movement in the big six card issuers' unsupported bank financial strength ratings. This, the agency concludes, has incorporated forecast charge-offs, profitability and capital - taking into account both expected and worse-than-expected economic scenarios.

ABS

Rise in rehab student loans expected

With the supply of rehabilitated US student loans likely to grow as borrowers that previously defaulted begin to re-perform on their loans, Fitch expects to see larger portions of rehab student loans in US FFELP ABS going forward. While rehab loans have always comprised a portion of the FFELP student loan ABS spectrum, their unique characteristics and performance history call for tailored assumptions when analysing student loan pools that contain rehab loans, the agency says.

Rehab loans are designated as such when previously defaulted loans regain FFELP status after a borrower has made at least nine on-time payments within a 10-month period. They generally default at higher rates and the defaults are more front-loaded than typical FFELP collateral.

"The timing and magnitude of defaults for rehab loans can adversely affect cashflows for student loan ABS. The embedded US government guarantee on the collateral, however, helps mitigate any credit concerns," says Fitch md Michael Dean.

ABS

New regulation bolsters Indian ABS liquidity

The Securities and Exchange Board of India (SEBI) has taken action to develop the country's securitisation market by issuing regulations for listing asset-backed transactions on the stock exchange. The move is expected to bolster secondary market liquidity for Indian ABS.

The new regulations from the SEBI provide a framework for issuance and listing securitised debt instruments by a special purpose distinct entity (SPDE). It has put in place a listing agreement for securitised debt, which it says provides for disclosure of pool level, tranche level and select loan level information.

The listing agreement will come into force immediately for all securitised debt instruments - as defined by the SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008 - that seek listing on the stock exchange. SPDEs which make frequent issues are able to file umbrella offer documents on the lines of a 'shelf prospectus.'

CDS

CDS trading platform expands

Creditex has expanded its electronic trading capabilities and products for CDS in the North American market. The Creditex RealTime electronic platform is now executing trades for the most liquid investment grade and high yield series of CDX indexes.

Creditex president Grant Biggar says: "In the liquid CDS products, trade execution and transparency are enhanced with electronic execution, along with improvements in efficiency and accuracy for post-trade processing. Trades are submitted via ICE Link for straight-through processing and are eligible for central clearing through ICE Trust. Notably, this is the workflow we anticipate will be at the core of the SEF rules once they are finalised."

He adds: "Alongside the Creditex RealTime market leading technology, our voice brokers in the US, Europe and Asia have a vital role ensuring liquidity is maintained in all market conditions and providing voice execution when the trade size or product liquidity require it. This hybrid model has been key to our success."

CDS

LatAm sovereign CDS index launched

Markit has launched its iTraxx SovX Latin America index to offer investors a transparent and standardised tool to monitor the sovereign CDS market in the region. The index is equally weighted and composed of the most liquid sovereign entities from the Latin American region based on data from the DTCC Trade Information Warehouse.

The index is currently calculated on a theoretical basis only and will become tradable if investor demand warrants it. The current constituents are: Argentine Republic, Bolivarian Republic of Venezuela, Federative Republic of Brazil, Republic of Chile, Republic of Colombia, Republic of Panama, Republic of Peru and the United Mexican States.

CLOs

RFC issued on CLO rating changes

Moody's is seeking comment from market participants regarding proposed changes to its modelling framework for cashflow CLOs. The changes have the aggregate effect of changing the credit enhancement levels for a rating category above the levels prior to the financial crisis, but slightly below levels during the crisis, the agency says.

Additionally, if these changes are implemented, the agency anticipates upgrades on outstanding CLOs to average about one notch for senior and mezzanine tranches, and between two and three notches for junior tranches. Moody's principally proposes removing a temporary 30% macroeconomic stress to its default probability assumptions, as well as changing its binomial expansion technique (BET) model ¬- used in the rating of cashflow CLOs.

In changing the BET model, the agency will first remove 30% of the default probability macro stress to reflect the improved outlook for global speculative-grade corporate entities. Second, it will increase the BET liability stress factors and recovery rate assumptions to better reflect empirical evidence obtained from corporate default and recovery data, while providing greater rating stability through future credit cycles

Third, it will modify several modelling assumptions associated with defaults of reinvestments, asset amortisations, interest collection from defaulted assets and the analysis of combination notes. Finally, certain stresses will be reduced for credit estimates aimed at addressing time lags in credit estimate updates during the recent crisis.

Moody's md Yvonne Fu says: "Perhaps the most significant changes, at least in terms of the likely impact on Moody's CLO ratings, concern the 30% default probability macro stress, BET model stresses and recovery rate assumptions. These proposed changes are the result of an extensive study and back testing of the CLO rating model using a large amount of historical corporate data available to us."

Moody's md Henry Charpentier says: "In light of the historical data observations and corporate fundamental approaches to assessing recovery rates for European corporate assets, Moody's has proposed not to tier recovery rates by legal jurisdictions. Furthermore, Moody's is considering [whether] to adopt a fixed rate recovery rate modelling approach for European deals, much like the approach currently used in the US."

Moody's is seeking comments on the changes by 8 April.

CMBS

Special servicing transfers begin to ease

The speed and volume of US CMBS loans transferring into special servicing has begun to subside in recent months, according to Fitch.

Approximately 200 loans have transferred for 2011, compared with 631 loans for 1Q10. "Following a monthly high of 255 loan transfers in January 2010, new specially serviced transfers steadily decreased each month, reaching a low of 74 in November," says Fitch md Mary MacNeill.

Since then, the number of monthly loan transfers has not exceeded 78. In 2010 there were 1,646 loans, totalling US$28.4bn that transferred into special servicing. This is down from 2009 when 2,162 loans, totalling US$37.5bn moved to special servicing, the agency says.

The rate of transfers for hotel loans has dropped off sharply to 8%. Many underperforming hotels had already transferred to special servicing before the hotel sector entered recovery mode. In contrast, office properties continue to lead new transfers at 41%. "High unemployment and lack of job growth will continue to force office loan borrowers to seek relief as leases roll or are renegotiated," adds MacNeill.

CMBS

CMBS resolutions drive commercial debt drop

The level of commercial/multifamily mortgage debt outstanding decreased by 0.5% in 4Q10 to US$2.4trn, according to the Mortgage Bankers Association (MBA). On a year-over-year basis, the amount of mortgage debt outstanding at the end of 2010 was US$67bn lower than at the end of 2009, a decline of 2.7%, the MBA reports.

The outstanding US$2.4trn in commercial/multifamily mortgage debt recorded by the Federal Reserve was US$12bn lower than the 3Q10 figure. However, multifamily mortgage debt outstanding rose to US$798bn, an increase of US$3bn or 0.3% from the third quarter.

"The change in the balance of commercial and multifamily mortgage debt outstanding was driven by a decline in the amount of CMBS loans outstanding. The US$50bn dollars of CMBS loans that paid-off, paid down or were resolved during the year represented 75% of the total decline. Strong originations by FHA, Fannie Mae and Freddie Mac led to an increase in the level of multifamily mortgages outstanding," says Jamie Woodwell, MBA's vp of commercial real estate research.

Commercial banks continue to hold the largest share of commercial/multifamily mortgages, US$802bn. CMBS, CDO and other ABS issues are the second largest holders, holding US$621bn. Agency and GSE portfolios and MBS hold US$325bn and life insurance companies hold US$299bn.

Looking solely at multifamily mortgages, agency, GSE portfolios and MBS hold the largest share of multifamily mortgages, with US$325bn. They are followed by banks and thrifts with US$215bn, CMBS and CDOs hold US$99bn; state and local governments hold US$74bn; life insurance companies hold US$47bn; and the federal government holds US$14bn.

In 4Q10, CMBS, CDO and other ABS issues saw the largest decrease in dollar terms in their holdings of commercial/multifamily mortgage debt - a decrease of US$15bn. Finance companies decreased by US$2bn, and the household sector decreased by US$799m.

In percentage terms, nonfinancial corporate business saw the largest decrease in their holdings of commercial/multifamily mortgages, a drop of 10%. The household sector saw a decrease of 5%.

The US$3bn increase in multifamily mortgage debt outstanding between 3Q10 and 4Q10 represents a 0.3% increase. In dollar terms, agency and GSE portfolios and MBS saw the largest increase of US$7bn. State and local government saw an increase of US$661m, and the federal government increased by US$34m. Meanwhile, CMBS, CDO, and other ABS issues saw the biggest decrease of US$4bn.

In percentage terms, agency and GSE portfolios and MBS recorded the biggest increase in their holdings of multifamily mortgages at 2%. Nonfinancial corporate business saw the biggest decrease at 10%.

RMBS

Japanese quake's impact on SF deals reviewed

Japan's recent earthquake may impact some of the underlying assets in rated structured finance securities, S&P says, with CMBS and RMBS most likely to be affected.

"Although we are in the process of identifying the affected transactions, we believe securitisation participants of rated structured finance securities, such as loan servicers, would require some time to fully assess the impact of the disaster on portfolio performance," the agency says.

The impact on individual transactions depends on the overall exposure of the portfolios of the rated securities. S&P believes that most transactions backed by geographically diversified asset pools would face limited deterioration in overall credit quality. However, given that the earthquake hit greater Tokyo metropolitan area, where many of the properties in structured finance transactions are located, S&P expects CMBS and apartment-loan RMBS that usually have less diversified asset pools may be directly affected.

If individual properties are significantly damaged, S&P will consider several key factors before deciding the impact of the collateral performance deterioration on the ratings. These considerations include the cost and time required to restore the properties, insurance coverage, and borrowers' willingness and financial capability to expend the costs. "Once we gain greater clarity on these factors, we will assess them against the cash reserves and liquidity support structure to determine the impact on each rating," says S&P.

The agency adds that the accident at the nuclear power plants at Fukushima and the lack of electric power supply caused by the earthquake may also indirectly hit the performance of structured finance transactions.

RMBS

Fitch releases new LatAm RMBS criteria

Fitch has released its new regional rating criteria related for Latin America RMBS. The regional piece allows for a standardised forward-looking approach to determine expected foreclosure frequency and recoveries across Latin American countries, the agency says.

The Mexican RMBS addendum incorporates an increased data analysis observation, including 2008-2010 - a period of significant downturn in the Mexican economy and housing market. Loan performance information under such stressful scenarios provides a robust level of empirical data to extrapolate loan performance expectations for rating specific stresses.

The key risk factors related to a Mexican RMBS transaction continue to be the borrower's willingness and ability to pay, the loan denomination, and the source of income. Fitch has used exploratory and regression statistical analysis techniques to review its assumptions on these key risk factors, as well as other relevant adjustments, it says.

The Mexican RMBS addendum further differentiates foreclosure frequency expectations between Peso and UDI-denominated loans. Other important updates include higher foreclosure frequency expectations for loans in the 1-30, 31-60, and 61-90 days in arrears buckets.

RMBS

Servicing settlement critiqued

SIFMA's evp of business policies and practices, Randy Snook, has released a statement in response to the State Attorneys General term sheet for mortgage servicing standards (see also 'Pardoning problems', SCI 10 March). The association says it supports sensible reforms to mortgage servicing that address the needs of borrowers and MBS investors.

"Any reform of mortgage servicing standards must be considered through the interest of the consumer and what would have the best outcome for the housing market and broader US economy as we continue to address foreclosure issues," says Snook.

SIFMA notes that any settlement regarding the creation of servicing standards for the nation's largest mortgage servicers will likely be viewed as new industry standards and therefore have a broad impact beyond those firms. It also expresses initial concern that such critically important and consequential mortgage servicing reforms are being contemplated in a closed process.

"This settlement, as proposed, would put at risk MBS investors who stand to absorb the losses from significantly extended foreclosure timelines due to the implementation challenges of the prescriptive terms of the settlement," Snook adds. "This would further harm their confidence in the private-label securitisation markets that are so vital to the nascent economic recovery. Extended foreclosure timelines would also adversely impact communities saddled with vacant housing, as well as the broader economy."

Further, SIMFA says that borrowers would likely see higher prices for mortgages under the proposed agreement. Given the broad impact of this reform, the association believes the process of developing broad servicing standards should be open to input from a range of stakeholders.

RMBS

South African RMBS reviewed

Fitch expects continued stable asset performance in 2011 across the South African ABS, CMBS and ABCP sectors, leading to their respective stable rating outlooks. However, the outlook for the RMBS sector is negative, partly due to several transactions being placed on rating watch negative (RWN) in late 2010, the agency says.

"The stabilisation of economic conditions is expected to continue, supporting the asset performance of structured finance transactions," says Fitch EMEA structured finance senior director, Emma-Jane Fulcher. "Nonetheless, elevated unemployment levels and the continuing slow de-leveraging of high consumer indebtedness could have a negative impact on the performance of the RMBS and ABS sectors."

However, the agency has changed its expectations for South African RMBS transactions and subsequently updated its respective rating criteria. The ratings of most RMBS transactions have been affected, leaving them on RWN pending further data analysis.

"While reported transaction performance has been in line with expectations for certain transactions, in Fitch's view this has been artificially supported by the use of voluntary asset buy-backs. Greater transparency, particularly in the investor reporting, on the use and impact of buy-backs would be welcome," says Andreas Wilgen, Fitch's EMEA ABS senior director.

RMBS

RMBS structural enhancements examined

The first US prime RMBS of the year - Sequoia Mortgage Trust (SEMT) 2011-1 (SCI passim) - contains numerous features that reduce credit risk exposure, according to Fitch. The structure of the deal addresses idiosyncratic small pool tail risk, the effect of collateral prepayments and representation and warranty violations.

These changes include the elimination of a prepayment step-down feature, the incorporation of a hard subordination floor and a strengthened representation and warranty process. "These structural changes are an improvement from the 2005-2007 vintage prime deals and serve to further reduce credit risk exposure for senior bond investors," says Fitch md Roelof Slump.

First, the transaction utilises a traditional senior subordinate, shifting interest structure for the distributions of principal and interest and allocation of losses. Unlike many prior transactions, SEMT 2011-1 does not allow for the timing of increased payments to subordinate classes to be accelerated if mortgage prepayments exceed expectations. The absence of this 'early step-down' feature will help retain subordinated credit protection for senior classes, according to Fitch.

Second, SEMT 2011-1 contains a subordination floor, which provides for a minimum amount of credit support throughout the life of the deal for the benefit of the senior tranche. Therefore the agency believes that the subordination floor will help mitigate tail-risk for the senior class as the number of loans in the mortgage pool decline and mortgage pool performance becomes increasingly volatile.

Unlike most prior prime transactions, subordination in SEMT 2011-1 cannot be reduced below 1.25% of the original mortgage pool balance - muting the impact of performance volatility arising from a few loans becoming delinquent towards the end of the deal.

Third, a review by the master servicer of any and all loans that become 120 or more days delinquent will be conducted to determine if there are any breaches of representations and warranties. If there is a breach which the seller cannot cure, the seller is obliged to repurchase the loan no later than 120 days following discovery of the breach.

Another notable feature in the SEMT 2011-1 transaction is the 20% clean-up call option, which is higher than the 10% threshold contained in most existing RMBS transactions. While Fitch did not assume in its analysis that the call-option will be exercised, the impact of a call would be to further reduce tail risk.

"These structural features enhance the protections afforded to the senior bonds as the transaction seasons," concludes Slump.