Contents

CLOs

Euro CLO market softens

Softening in the European CLO market continues, with participants predicting another quiet week ahead. This is said to be a reaction to the previous period of fast-selling, as well as to macro issues that are finally impacting the sector.

"Overall the market has been quite soft, especially when compared to what we've seen in previous weeks," one CLO trader says. The pause in activity is a reaction to the fast pace of the previous month, he adds, which proved to be "too much too fast". Macroeconomic factors in Japan and the Middle East, as well as European sovereign issues are also catching up with market performance.

The risk aversion that is now alive in the CLO market has resulted in a softening of spreads across the capital structure, especially in mezzanine and junior paper, the trader continues. "With spreads softening, it's not clear whether this will reverse. But considering the rally we've recently seen and also the macro factors, I wouldn't be surprised if we see some significant correction in the market soon."

Bid-list activity has also suffered in the current climate, with lists performing poorly, if at all. "The bid-lists that were previously performing well and trading at tighter and tighter spreads have now taken a downward turn. The bids have gone down with some of the offers too, a result of dealers de-risking their books."

Although hopeful for an imminent turnaround in market behaviour, the trader accepts that the cautious environment will remain for the time being. "The offers are not reducing to the extent where people want to trade and naturally it has resulted in a lower trading volume overall," he concludes.

LB

CMBS

US CMBS on a tightening trend

A reduction in bid-list activity has driven spreads tighter in the US CMBS market this week. At the same time, differentiation among the better names is emerging.

"This week was relatively slow and it was the bid-lists that were hit the most. On average we'll see north of US$3bn lists in total and we've been far under that figure this week," one US CMBS trader says.

The reduced volume of bid-lists is believed to have prevented investors from buying from dealer inventories, which in turn caused aggressive buying behaviour among participants. "Inventories were heavy up until last week, but they're all much lighter now. When this happens, dealers are normally more aggressive in buying paper and it creates a cycle," the trader comments.

He adds: "The bid-up stuff has also been selling more aggressively and, in putting the bids out tighter, it makes people think that they're missing something. So they come in and it then feeds on itself."

Consequently, spreads have tightened considerably, with the more established issuers selling A4 pieces at between 15bp-20bp lower than average. "A reflection of this can be seen in a Citigroup deal from 2006, which was covered at 160bp a week ago and came in at 140bp this week," the trader explains.

With spreads tightening across the capital structure, differentiation among the better names is becoming more apparent. "The better names have recovered to where they were at the beginning of March, especially at the triple-A level. However, AM and AJ paper is still trading at anywhere between 50bp-100bp from the tights," the trader concludes.

LB

RMBS

Mixed performance for Euro MBS

European MBS performance has been mixed so far this week as investors react to wider credit pressures. Although RMBS pricing levels appear to be holding up, senior CMBS paper is exhibiting some weakness.

"It's been very quiet over the past week for MBS overall. I suspect that clients are reacting to weaknesses in the broader credit and equity markets," one MBS trader says. However, regardless of the slow pace of activity, RMBS pricing levels remain consistent, the trader confirms.

He continues: "We still haven't seen any negative price action and the sector is actually holding up strong, especially in the UK and Dutch prime markets, where there's more demand. However, although RMBS is performing relatively better than CMBS, there's still not that much trading going on."

Indeed, weak CMBS performance appears to be causing activity to dip to low levels in the sector. "Senior paper has suffered the most: some names could be down a point or two after this week," the trader adds.

As well as participants reacting to wider market weaknesses, the trader believes that a focus on primary activity and new issuance could be exacerbating the recent stand-off. "The primary space has seen much more activity, so I think people are focusing on this right now and neglecting secondary."

RBS' Arran Residential Mortgages Funding 2011-1 and Northern Rock's Gosforth Funding 2011-1 deals are both expected to price this week.

LB

ABS

Renewables deals prepped

Two European renewables securitisations - each in excess of approximately €750m - are expected to launch shortly, one of which will be preplaced. Each deal is anticipated to securitise renewable receivables generated from multiple jurisdictions, including the UK, Greece and Italy.

"The pools are pretty granular because the receivables arise from retail customers," explains transaction counsel Paul-Michael Rebus, group head and partner, securitisation and structured products at Eversheds. "It's a question of aggregating enough of these receivables to create economies of scale - something which needs to be thought about and prepared for well in advance of bringing a transaction to market."

To make it worthwhile securitising them, it is necessary to have a significant pool of receivables - thus limiting who the financial product is suitable too. As a result, a number of firms have been speaking to Eversheds' renewables team about aggregating revenue-generating renewables products.

Rebus confirms that one of the transactions is at the stage of appointing the lead/s. "We have a detailed term sheet and [are] getting the structure locked down. We are expecting to hit the button on the documentation at any time."

The characteristics that make the renewables securitisable are transferability, consistency and granularity. Rating agencies typically approach them as quasi-sovereign risk.

Indeed, political risk is the most significant jurisdiction-related risk because the feed-in tariffs are paid by the government. The tariffs are supposed to be guaranteed at a certain rate, for example, but several countries have subsequently changed this rate - some retrospectively.

"Some receivables that are set to back the transactions are in the process of being generated, so it is easy to tweak various terms and conditions to facilitate their securitisability to suit rating agency or accounting requirements. Some existing receivables have already been generated and are expected to have a different risk profile from a rating agency perspective. We're reviewing leases and licences every day to make sure they are securitisable," Rebus continues.

He adds that he often sees two distinct sectors in this market: those who have a finance background and those who have a renewables background. So it's a matter of educating each on the other side's business; for instance, clarifying the term 'bankable'. A bankable licence is often misconstrued as a securitisable licence.

The renewables securitisation sector has been given impetus over the last year by government recognition of capital markets as an exit for funding 'green' projects (see SCI issue 192). In addition, a pool of cash to provide guarantees/credit enhancement for infrastructure projects - including renewable installations - is set to become available under the European Commission's project bond initiative.

Developed jointly with the European Investment Bank, the objective of the initiative is to help promoters of infrastructure projects attract additional private sources of finance from institutional investors. As part of a consultation exercise, a stakeholders' conference on the initiative will be held on 11 April, with the deadline for comments being 2 May.

CS

CDS

West is best for CDS

The ten best performing sovereign credits of 1Q11 were from the western hemisphere, according to a new CDS report by Markit. Meanwhile, seven of the ten underperformers came from the Middle East and North Africa.

Of the ten top performers from the quarter, Markit's CDS analysts note that only Hungary and Chile could be classified as emerging economies, yet even Chile is a member of the OECD. All of the top five - Austria, Italy, Belgium, Spain and the Netherlands - have been members of the eurozone since its inception. France and Germany also made the top ten, as did the UK.

The strong performances of Italy, Belgium and Spain come in stark contrast to their fortunes last year. Despite political instability and high debt levels, Belgium has found favour with investors thanks to the relative size of its deficit and ease of raising funds. Italy and Spain have also benefited as the market has been encouraged by recent developments, not least the Spanish government's approach to reforms.

The MENA region accounts for the bulk of underperforming sovereigns. The revolutions in Egypt and Tunisia heavily impacted their own spreads and also drove spreads wider in the rest of the region. The analysts observe that Bahrain and Saudi Arabia widened more than most, noting the latter's importance as OPEC's biggest oil producer, which is being relied on to make up the shortfalls of elsewhere in the world.

Outside of MENA, Japan, Peru and Thailand also fell into the list of ten worst performers. Japan's spreads have been very volatile since the catastrophe last month, although the analysts expect the natural disasters that struck the country will not have a particularly strong effect on the nation's future growth.

The list of the ten sovereign credits with the tightest spreads includes three of 1Q11's ten strongest performers - the Netherlands, Germany and the UK. The Scandinavian nations of Norway, Sweden, Finland and Denmark make up the top four, with the USA, Hong Kong and Australia also making the cut.

Greece is the weakest sovereign credit, according to Markit. Fellow PIIGS Ireland and Portugal are also in the bottom five, along with Venezuela and Argentina. The Ukraine, Dubai, Lebanon, Egypt and Vietnam are the remaining credits in the bottom ten.

The analysts note that the CDS-bond basis is now negative for Greece, Ireland and Portugal, which are the weakest sovereigns in the eurozone. They add that the high margin requirements at clearing houses make it costly to hold bonds from these countries, which may be contributing to the negative basis.

JL

CMBS

Call for CMBS retention rule changes

Certain portions of the risk retention rules proposed by the federal agencies last week (see SCI 30 March) have generated heated debate among industry participants. While the proposals have positive aspects, there are also some concerning implications for CMBS issuance in particular.

MBS analysts at Bank of America Merrill Lynch note that the acknowledgement in the proposed rules of certain unique aspects of CMBS - such as knowledgeable B-piece buyers - is a good move, as is the menu of options available to satisfy the risk retention regulations. They also say that the exemption of risk retention for lower risk loans is positive.

Sponsors can use a vertical, horizontal or L-shaped slice for risk retention under the proposal. In CMBS there is an additional option for B-piece buyers.

The BAML analysts note a similar structure has long been used in the industry and that, with a few changes to comply with the new horizontal risk retention rules, this can continue. This option allows a third-party purchaser, rather than the sponsor, to retain the necessary first-loss exposure to the underlying assets on a pool of non-exempt loans.

However, the concept of a premium capture reserve account is expected to seriously hinder CMBS issuance, unless it is changed. The analysts suggest that this part of the proposal could completely eliminate IO classes: it would trap any excess spread amount as a gain on the sale of the underlying assets by the sponsor and prevent it from being monetised in the form of premium gross proceeds or IO bonds.

"This account would actually be subordinate to the other risk retention piece - whether held by the sponsor or the third-party B-piece buyer - and would be used to cover losses," they explain. "This proposal would likely change future deal structures and eliminate IO classes. If this structure remains in place in its current form, we believe it could significantly curtail new CMBS issuance."

Another concern is the 5% retention requirement being applied to re-REMIC structures. The analysts indicate that this could damage the expanding CMBS re-securitisation market. They also note that thresholds for the exemption from the 5% retention for qualified CRE loans are too restrictive to apply to the majority of CRE loans.

JL

CMBS

B-piece investment trends analysed

US CMBS B-piece investment volume has reached about US$470m so far this year - an increase on 2010's total of US$280m, but significantly short of the sector's peak in 2007 at an estimated US$6bn. Based on full-year CMBS issuance forecasts of US$35bn, 2011's B-piece volume could total about US$2bn, according to research analysts at S&P.

The attractiveness of pricing, whether firms continue to 'share' B-pieces - as Rialto and Elliott Management did in the recent GSMS 2011-GC3 deal (purchasing the unrated/single-B and double-B tranches respectively) - and the emergence of non-bank originator/securitisers and new funds may contribute to the number of players that participate in this niche segment going forward. Indeed, the S&P analysts suggest that B-piece buyers will likely play an integral part in the growth and sustainability of the 'CMBS 2.0' market.

"Besides the real estate workout expertise they typically offer, it appears that these firms' participation may fulfil the risk-retention requirements in proposed financial regulations pertaining to the sector," they note. "Given the market focus on this area, many market participants are questioning whether there will be enough B-piece purchasing capacity to grow the market above current issuance levels. From a credit and collateral quality perspective, however, this constraint to issuance may actually be positive for CMBS 2.0."

The number of active B-piece buyers in the US CMBS sector has shrunk from 12 (across 59 transactions) in 2007 to four (across 11) in 2010/2011, according to S&P. Centerline Holding Co - which was the most prolific buyer of B-pieces in 2007, participating in 18 deals - was acquired by Island Capital last year. Rialto Capital - one of the 'new' players in the segment - appears to be staffed by several former high-ranking employees of LNR Partners, which was one of the most frequent purchasers of B-pieces during the 2005-2007 period (participating in eight deals in 2007).

Elliott Management, meanwhile, represents somewhat of a shift in the market as hedge funds have not been typical B-piece buyers. GSMS 2010-C1, the first deal Elliott participated in, contained a structural nuance whereby many rights were assigned to the senior investors that traditionally went to the B-piece investor.

The size of the B-piece market is also relevant when considering whether fewer participants will stymie new issuance volume. The analysts estimate that the size of the B-piece market was US$6.1bn in 2007; this compares with US$0.3bn in 2010 and US$1.9bn so far this year. They base their estimates on the assumption that the B-piece market comprises the unrated through to double-B plus tranches of individual deals, then multiplying the percentage of the deal made up of those tranches by the amount of conduit issuance from that year.

Although issuance will have fallen by a factor of approximately six times between 2007 and year-end 2011, credit enhancement has nearly doubled, which pushes the current B-piece market to about one-third of its size at the market peak. "For the market to get back to US$100bn in annual issuance, which some market participants have quoted as a sustainable long-term level, B-piece buyers will need the capacity to purchase US$6bn in below-investment grade bonds - or roughly the same amount as our estimate for the size of the B-piece market in 2007," the analysts note.

The lack of a CRE CDO exit is another factor. At least for the near future, B-piece investors will likely have to hold all of their CMBS investments on their own balance sheets - limiting purchasing capacity even further.

CS

ABS

Fixed income co-heads named

Knight Capital Group has promoted mds Robert Lyons and Alan Lhota to co-head its global fixed income business. The pair will report to the firm's chairman and ceo Thomas Joyce.

Knight's institutional fixed income team provides buy-side firms with research, sales and trading across a broad range of fixed income securities, including ABS and MBS.

Before joining Knight, Lyons was most recently vice-chairman of investment banking at Merrill Lynch. He was previously global head of capital markets and head of the Americas capital markets at the bank.

Lhota was previously Knight's head of US high yield, distressed and bank loan sales. Prior to this, he led the high yield team at RBS Greenwich and worked within high yield sales at UBS.

ABS

Broker on hiring spree

CRT Capital Group has announced a raft of new hires in its securitised products and credit products groups. The move comes as the firm expands its client offerings by joining Tradeweb's platform as a liquidity provider for its mortgage pass-through securities marketplace.

Joining the firm as co-head of its pass-through trading desk is Tim Coyne, formerly with BNP Paribas, while Don Chaney - who comes from RBS - will trade non-agency and ABS. The pair joins Jim Stehli, who was recruited from UBS to run CRT's CDO/CLO desk (see SCI 16 February).

The build-out of CRT's credit product team, meanwhile, includes the addition of head of loan trading Marc Nuccitelli. He will act as principal, taking responsibility for settling loan trades. Sue Austin, who previously worked at Bank of America and Chapdelaine Credit Partners, will join the group as a loan closer.

Finally, three senior credit salespeople have joined the credit products team: Pat Downey, formerly at Bank of America; Sandy Volpert, formerly of Seaport Securities; and Ted Hines, who previously held similar positions at Chapdelaine Credit Partners and Merrill Lynch.

ABS

Promotion for SF partner

Mallesons Stephen Jaques has promoted Stuart Fuller to chief executive partner, effective from January 2012. Fuller is managing partner at the firm, specialising in structured finance. He is also the current chairman of the Australian Securitisation Forum.

ABS

Corporate credit md named

Gleacher & Company Securities has appointed Brian McGrath as md and distressed/credit trader in its corporate credit division. With over 23 years of credit market experience, McGrath was most recently a portfolio manager at Viathon Capital. Prior to this, he ran the high yield bond desk at DB Securities.

CDO

CRE CDO transfer proposed

Details have emerged about one of the CDOs whose collateral management agreement Winthrop Realty Trust is seeking to acquire (see SCI 1 April). An affiliate of the REIT, dubbed RE CDO Management, is proposing to replace Sorin Capital Management as asset manager for Sorin Real Estate CDO I. The transfer is subject to a number of contingencies, however.

Fitch has determined that the manager's capabilities are consistent with its criteria for credit asset managers. Winthrop's external advisors and its affiliates currently have over 260 employees and manage directly or through ventures approximately US$3.5bn of real estate assets. An affiliate of Winthrop currently manages one other CDO - the Concord Real Estate CDO 2006-1.

CDO

Wachovia fined over CDO misconduct

Wells Fargo Securities has agreed to settle charges regarding Wachovia Capital Markets' involvement in the misconduct of two CDO sales. The sales were tied to the performance of US RMBS as the housing market began to show signs of distress in late 2006 and early 2007.

The SEC found that Wachovia violated the securities laws by charging undisclosed excessive mark-ups in the sale of Grand Avenue II CDO equity to the Zuni Indian Tribe and an individual investor. Wachovia marked down US$5.5m of equity to 52.7 cents on the dollar after the deal had closed and was unable to find a buyer. After a period, the Zuni Indian Tribe and the individual investor paid 90 and 95 cents on the dollar - 70% higher than the price at which the equity had been marked for accounting purposes.

Additionally, Wachovia is said to have misrepresented the Longshore 3 CDO to investors, claiming it had acquired assets from affiliates 'on an arm's-length basis' and 'at fair market prices', when in fact 40 RMBS transactions were transferred from an affiliate at above-market prices. Wachovia had transferred these assets at 'stale' prices in order to avoid losses on its own books, the SEC alleges.

Wachovia Capital Markets, since renamed Wells Fargo Securities, has agreed to settle the SEC's charges by paying more than US$11m in disgorgement and penalties. A total of US$7.4m of this will be returned to investors through a fair fund.

CDO

Sale agreed for distressed debt funds

Institutional Financial Markets Inc (IFMI) has sold its investment advisory agreements relating to a series of closed-end distressed debt funds, known as the Strategos Deep Value Funds, and certain separately managed accounts. The advisory agreements are being bought by an entity owned by Frederick Horton and Alex Cigolle, which will be renamed Strategos Capital Management.

The pair, who previously served as IFMI's portfolio managers for the funds, will be joined by the Strategos portfolio management team in Philadelphia. IFMI will retain its ownership interests in the general partners of the funds and its rights to incentive fees, however.

The AUM of the investment advisory agreements is approximately US$400m. Pursuant to the terms of the purchase agreement, the buyer will pay a purchase price equal to 10% of all revenue, earned between the closing date and 31 December 2014. They will also assume all of the expenses of managing the Deep Value Funds and the separately managed accounts.

IFMI chairman and ceo Daniel Cohen says: "This is a win-win transaction, which allows the Strategos portfolio management team to manage its own company and asset management platform, and gives IFMI the opportunity to increase operating income while being able to participate in the long-term growth of the platform through our revenue-sharing arrangement."

CDS

ISDA DC members named

ISDA has announced the new members of its five regional Determinations Committees, which comprise the global decision-making structure around events in the CDS industry. There are five regional committees, each comprising 12 dealer firms (of which two are consultative) and six non-dealer members (of which one is consultative).

"The Determinations Committees continue to be an important component of the CDS market infrastructure and have been proven as an effective mechanism for resolving a range of questions that impact the CDS industry," says David Geen, ISDA general counsel.

The global voting dealers for all regions are Bank of America Merrill Lynch, Barclays, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Morgan Stanley and UBS. The global consultative dealer for all regions is RBS. Voting non-dealers for all regions include Citadel and D.E. Shaw (effective from 29 April), BlueMountain and PIMCO (effective from 30 July), and Elliott Management Corporation (effective from 30 November).

Americas voting dealers are Citi and Societe Generale, while BNP Paribas will be consultative dealer for the region. BNP Paribas and Societe Generale have been named as Europe voting dealers, while Citi is consultative dealer for the region. In the Asia Pacific region, BNP Paribas and Mizuho Securities become Japan voting dealers, with Nomura consultative dealer.

Citi and BNP Paribas will be Asia Ex-Japan voting dealers, and Nomura consultative dealer. Voting dealers for Australia/New Zealand are BNP Paribas and SG, while Westpac Banking Corporation is consultative dealer. Finally, GLG Partners has been named consultative non-dealer for all regions.

CDS

Hedge fund acquisition agreed

Medley Capital has acquired credit hedge fund manager Viathon Capital. Founded in 2005 by managing partners Brook Taube, Seth Taube and Andrew Fentress, Medley provides capital and advisory services to middle market corporate and asset-based borrowers in North America.

Viathon founder Robert Comizio will become a partner and senior portfolio manager for Medley's credit strategies group. He was previously senior portfolio manager at Marathon Asset Management in its special opportunity fund.

"As a capital solutions provider to the middle market, the addition of Rob and his team will further enhance our debt and credit-focused investment process and provides broader market perspectives and opportunities to both the borrower community and to our investors," says Brook Taube.

CLOs

AIB unloads its CLOs

GSO Capital Partners has acquired AIB Capital Markets' €1.7bn collateral management business. Under the agreement, it has entered into amended and restated investment management agreements for the Skellig Rock, Boyne Valley, Tara Hill and Clare Island CLOs.

CMBS

CREFC ceo appointed

The CRE Finance Council has appointed Stephen Renna as ceo, effective from 1 May. Under Renna's direction, the Council says it will continue its efforts to ensure that the market's recovery in commercial real estate gains speed and that the current rulemaking underway by federal regulators has the intended beneficial consequences of ensuring sound, secure CRE mortgages without limiting the availability of capital to the sector.

With over 22 years of CRE experience, Renna was most recently president of the National Association of Real Estate Investment Managers. Prior to this, he was svp and counsel for The Real Estate Roundtable.

CMBS

REIT spins off legacy assets

Capital Trust has restructured all of its outstanding recourse debt obligations.

The restructuring involved: the transfer of legacy assets to a newly formed subsidiary, CT Legacy REIT; the assumption of its legacy repurchase obligations by CT Legacy REIT; and the extinguishment of its senior credit facility (SCF) and junior subordinated notes (JSNs). The restructuring was financed by a new US$83m mezzanine loan provided by an affiliate of Five Mile Capital Partners and the issuance of equity interests in CT Legacy REIT to the former JSN and SCF holders, as well as to an affiliate of Five Mile.

Stephen Plavin, Capital Trust ceo, comments: "The restructuring appropriately recapitalises the legacy portfolio, with all stakeholders retaining an interest in its recovery. In addition to its ownership interest in and management of the legacy assets, Capital Trust maintains the full capabilities of its platform and is well positioned to continue its capital raising, investing and asset management activities."

Capital Trust transferred substantially all of its directly held interest earning assets to CT Legacy REIT, including its subordinate interests in CT CDO III. The REIT's subordinate interests in CT CDO I and II weren't included in the transfer, however.

CMBS

Bank welcomes back CMBS vet

Faisal Ashraf has rejoined Credit Suisse as head of large-loan structuring, pricing and execution. Working on the bank's CMBS desk in New York, he will report to head of real estate finance and securitisation Ben Aitkenhead.

CMBS

Replacement CRE head appointed

Jonathan Pollack is understood to be replacing John Nacos, who has left the bank, as Deutsche Bank's head of commercial real estate in the Americas. Pollack helped to found the bank's European CRE group in 2001, having joined from Nomura in 1999.

RMBS

RMBS vet moves on

RMBS specialist Jay Hohman has joined Cohen & Company Capital Markets as md. He was previously a director at StormHarbour Partners, which he joined in July 2010. Before that, he was an svp at Fundamental Capital Markets.

RMBS

Promotion for real estate pro

GE Capital has promoted Dmitri Stockton to president and ceo of its asset management arm (GE Asset Management). He succeeds Jay Ireland, who is assuming a newly-created position as president and ceo for GE Africa.

Stockton was most recently president and ceo of GE Capital's global banking unit, with responsibility for leading its consumer lending businesses and joint venture relationships in over 20 countries. He is also svp of the GE Company, a member of its corporate executive council and serves on the board of the GE foundation.

With past leadership roles throughout GE in sales, real estate, bond financing, mortgage insurance and risk management, Stockton brings a strong background in capital markets and financial services to his new role.

ABS

RFC issued on Canadian SF rules

The Canadian Securities Administrators (CSA) is seeking input on its proposals regarding the regulation of securitised products.

Under the proposed framework, reporting issuers would be required to provide investors with information on the features and risks of securitised products. While the new requirements will be consistent with international developments, non-reporting issuers that distribute securitised products in the exempt market will also be subject to certain initial and ongoing disclosure requirements.

"The proposed rules build on the CSA's efforts to provide increased transparency to investors while taking into account the particular features of the Canadian securitisation markets. We will work toward striking an appropriate balance between strong investor protection and an efficient, open marketplace," says CSA chair Bill Rice.

A key element of the proposed rules is the narrowing of the class of investors who can buy securitised products in the exempt market to a smaller, more sophisticated group. This feature is intended to help investors avoid products whose risk profiles and underlying components may be unsuitable for their investment objectives, the CSA says.

The comment period is open until 1 July 2011.

ABS

Portuguese ABS hit by sovereign downgrade

S&P has downgraded to double-A minus 68 tranches across 48 Portuguese ABS and RMBS, which previously were rated double-A, double-A plus or triple-A. Three tranches remain triple-A rated due to their European Investment Fund guarantee.

The downgrades are a result of S&P's revised assessment of Portuguese country risk in structured finance transactions backed by Portuguese assets, which in turn follows the agency's recent downgrade of Portugal to triple-B. It believes that the weak economic growth prospects, together with current structural rigidities in Portugal may adversely affect the performance of structured finance transactions backed by Portuguese assets.

Austerity measures to correct fiscal imbalances are also likely to further depress Portugal's medium-term economic growth prospects, while a challenging economic and financial environment could produce a negative effect - potentially triggering the need for capital support from the government. Therefore, the agency is limiting the maximum achievable rating for structured finance transactions backed by Portuguese assets to double-A minus.

Following its country risk analysis for the jurisdiction, 60 Portuguese ABS and RMBS ratings are no longer on credit watch negative for sovereign risk reasons, but remain on review for counterparty and/or credit reasons.

ABS

Private student loan charting tool launched

Moody's has released an interactive performance charting tool, which allows investors to compare deal performance on private student loan ABS. The tool also provides access to a full set of standardised performance metrics derived from the analysis of more than 50 Moody's-rated private student loan ABS transactions.

"The charting tool gives our structured finance research subscribers easy access to standardised performance information and allows investors to compare deal performance and access thousands of data points covering 18 individual metrics, using data that extends back to 2001," says Moody analyst Nicky Dang.

Further, the offering allows investors to chart performance indicators, such as cumulative defaults to date, monthly or quarterly defaults, parity levels, delinquencies, deferment and forbearance.

ABS

Regulations to delay SF recovery?

The influx of new and proposed global structured finance regulations is likely to delay the return of a 'normalised' market by at least 12 months, according to Fitch. Although regulations have a worthy aim in creating a robust framework, the number of international bodies involved means that substantial regulatory implementation and consistency is unlikely to be attained until at least 2012, the agency says.

"Uncertainty will continue until regulations are fully implemented and the volume of new regulatory initiatives slows. But some transactions are selectively getting done, despite the fact that the market is still learning to navigate numerous new laws at varied stages of implementation around the world," says Ian Linnell, Fitch head of global structured finance.

Additionally, with new issuance increasing in recent months, in spite of the added legal complexity, the chances for a more robust new issue market will also improve once the market has been able to fully incorporate the new regulations, the agency says.

The agency further highlights a number of areas of regulation that issuers, investors and particularly banks need to consider. These include regulatory capital requirements for SF investments for bank and insurer investors, as well as the treatment of investments for the purposes of new proposed liquidity and funding ratios.

Increased due diligence requirements will also influence the relative attractiveness of SF investments in the future. At the same time, new credit rating agency (CRA) law and regulation is expected to impact the market, as it supports the aim of reducing reliance upon CRAs - both in the regulatory framework and by market participants.

ABS

Spirit demerger reviewed

Moody's has commented on the demerger of the Spirit Group from parent Punch Taverns and the creation of a new listed parent company, Spirit plc. The agency currently rates all classes of notes issued by Spirit Issuer at Ba2.

Following Punch's strategic review (see SCI 23 March), Spirit's current strategy appears unsustainable and restructuring was deemed to be necessary. The two main activities of the Punch Group - the leased business and the managed business - present very different investment prospects to shareholders. The managed portfolio requires capital investment to sustain growth, whereas the leased portfolio needs repositioning through downsizing of more than 40% of the estate.

Finally, the limited synergies between the leased and managed operations and the group's existing structure are believed to be barriers in realising value in the respective portfolios.

The demerger is scheduled to complete by September 2011. Spirit is expected to own its existing securitisation vehicle in the current shape (including the managed and leased estates), half the cash at group level post-demerger costs and some extra leasehold pubs that are currently held outside the securitisations.

Additionally, about 100 to 150 of the leased pubs currently securitised in Spirit will be converted back to managed pubs. The remaining currently leased estates in Spirit - between 400 and 450 units - are deemed non-core and should be disposed in the medium term.

Beyond 5% in number of units and value, the disposal of the non-core leased pubs is subject to certain Opflex DSCR (1.65x) and LTV (60%) criteria. The proceeds of the disposals are expected to be used to fund capital expenditures or possibly up-streamed as dividend to shareholders, assuming debt coverage is sufficient to allow payments outside the securitisation.

At this stage, the demerger does not represent a significant incremental risk for the ratings of the notes issued by Spirit Issuer, Moody's says. However, the agency took action as a result of the impact of the demerger on the ratings of the Punch Taverns Finance and Punch Taverns Finance B notes.

Spirit Issuer is a whole-business securitisation of a portfolio of 658 managed pubs and 564 leased pubs, as of 4Q10. Since restructuring of the transaction in 2006 and to 4Q10, the trailing twelve months FCF from the leased and managed estates decreased from £1m to £113.6m - a drop of 39%.

Over the same period, the total number of pubs in the portfolio decreased by 9% and the amount of notes outstanding decreased by 27% - mostly as a result of purchasing on the open market and cancellations.

ABS

Further downgrades for Portuguese ABS

Fitch has downgraded 56 tranches - of which 51 are RMBS, one ABS and four structured credit (SC) - from 35 Portuguese structured finance transactions. All tranches remain on rating watch negative, with a further two tranches placed on review.

The rating actions follow the downgrade of Portugal's long-term foreign and local currency issuer default ratings to triple-B minus from single-A and its short-term IDR to F3 from F2 on review. Consequently, Fitch has placed a rating cap on Portuguese SF transactions at single-A plus - five notches above the sovereign rating. This reflects concerns about future overall macroeconomic events that could undermine the performance of the securitisations.

However, the more junior tranches of these transactions are vulnerable to further deterioration in asset performance, the agency says, and therefore also have a negative outlook.

CDO

ABS CDOs transferred

Wharton Asset Management has assigned its management responsibilities for the G Street Finance, G Square Finance 2006-1 and G Square Finance 2007-1 ABS CDOs to Vertical Capital. The successor asset manager and the trustees for the respective transactions plan to execute amended and restated management agreements on substantially the same terms as the old management agreements. The execution of the amended and restated management agreements will effectively transfer all Wharton's rights and obligations under the management agreements to Vertical.

Moody's believes that the execution of the new management agreements and the appointment of Vertical as the new manager will not have an adverse effect on the ratings of the securities. In assessing the credit impact of the new management agreements and the appointment of Vertical, the rating agency assessed the history of Vertical's management, the adequacy of its systems for managing the transaction and the low level of active management for these transactions which are no longer actively reinvesting. Consequently, its ratings on the deals are not being downgraded or withdrawn solely as a result of the execution of amended and restated management agreements.

Separately, Winthrop Realty Trust has disclosed that a venture in which it will hold a 50% interest entered into a contract to acquire the collateral management agreements with respect to three real estate CDOs that hold approximately US$1.8bn in loans and loan securities. The acquisition of the collateral management agreements is subject to the satisfaction of certain conditions precedent, however, including required third-party consents.

CDS

SEF preparations underway

JPMorgan has electronically executed and cleared CDS and IRS trades on Bloomberg's Fixed Income Electronic Trading platform (FIT). Credit index trades were executed and submitted to ICE Trust for clearing, while the IRS were executed and submitted to LCH.Clearnet SwapClear.

This is in line, Bloomberg says, with its preparations to meet the broadly defined requirements of the Dodd-Frank Act. The firm intends to register with the CFTC and the SEC as a SEF and a security-based SEF respectively.

The clients participating in the trades were BlueMountain Capital Management, Claren Road Asset Management, Diamond Notch Asset Management, Gracie Credit Opportunities Fund and PAMLI Capital Management.

CDS

OTC industry commitments outlined

ISDA has jointly submitted a letter with market participants and industry associations to global supervisors publicly detailing ways in which the industry will work to make the OTC derivatives markets safe and efficient. These commitments include increasing standardisation, expanding central clearing, enhancing bilateral risk management and increasing transparency.

In terms of OTC derivatives product and process standardisation, the industry says it intends to lay the groundwork for a range of risk reducing and efficiency benefits. This includes more automated processing, expanded central clearing and enhanced transparency. It also commits to process standardisation, working with CCPs, trade repositories and other infrastructure providers to standardise the design and implementation of electronic platforms for key businesses.

For expanding central clearing in a safe manner, a coordinated, phased-in approach will be employed to centrally clear more transactions in eligible products, ISDA says. Additionally, it aims to expand central clearing product offerings and work towards supporting a central clearing environment that can feasibly extend the risk reducing and efficiency benefits to a wider range of participants.

The letter also outlines the need for increasing the transparency in processes related to central clearing offerings. A robust data infrastructure serving the OTC derivatives markets, including trade repositories, will provide critical tools to support supervisors in carrying out their responsibilities and should also provide operational benefits to market participants.

Finally, the population of bilaterally managed OTC derivatives portfolios and robust bilateral risk management practices will be adopted and improved, including the implementation of standardised methods for reconciling portfolios and resolving disputed margin calls.

However, the letter identifies several factors that could impact these commitments, including the need for consistency between ISDA's aims and regulatory requirements in individual jurisdictions, as well as consistency between regulators.

CDS

OTC pricing tool launched

Numerix has launched LiquidAsset, a new solution for the pricing of commonly traded OTC derivative instruments. Built upon the firm's CrossAsset analytics, LiquidAsset is a function-based Excel service with an intuitive interface that allows trades to be priced quickly and accurately.

These types of trades pose new and different pricing challenges, as the bid-ask spread is orders of magnitude smaller than their exotic counterparts, according to Numerix. LiquidAsset users can take immediate advantage of built-in deal conventions that are pre-packaged for pricing and trading all the major currencies and their markets globally.

CDS

Long/short credit fund prepped

Schroders is prepping its fifth UCITS fund - Schroder GAIA CQS Credit. The fund - an unconstrained credit long/short product - will be managed by CQS and led by CQS cio Simon Finch. It aims to provide capital growth and attractive risk-adjusted returns through investing across investment grade and high yield markets in Europe and the US, the firm says.

CLOs

Credit opportunities fund prepped

KKR Asset Management is prepping a closed-end Global Credit Opportunities Fund. The fund will invest at least 80% of its assets in first- and second-lien secured and unsecured loans, as well as fixed income securities, including CDS, CLOs and Trups. These assets can be investment grade or sub-investment grade and the portfolio can be leveraged by up to 50%.

CLOs

Static CLO closed

KKR Financial Holdings has closed a US$400m static CLO dubbed KKR Financial CLO 2011-1. The transaction involved a privately negotiated financing agreement with an undisclosed third-party senior lender that accounts for the US$300m senior tranche, which priced at 135bp over three-month Libor. KKR retained a US$100m residual interest, consisting of US$20m mezzanine notes and US$80m subordinated notes.

The CLO matures on 2 April 2018 and pools senior secured US dollar-denominated leveraged loans. Principal receipts from the portfolio will be distributed to the senior lender and KKR pro rata, subject to the deal maintaining a 3:1 leverage ratio.

CMBS

CMBS maturity repayment index rises

Fitch reports that improving loan repayments - totalling €196m in March - have increased its CMBS Maturity Repayment Index to 40.3% from 38.4%. These repayments also reduced the outstanding matured loan balance by 3.6%, with 55 of the 126 loans that matured since 2007 having been fully repaid.

The two full repayments recorded in March included the £2m KD Investments loan (securitised in the DECO 8 - UK Conduit 2 deal), which matured in October 2010 and was secured by a property in the City of London that is fully let until 2020. The second is the €103m PFF Paris loan (Vulcan (European Loan Conduit No.28)), which matured in February 2011 and was placed in standstill when it failed to be redeemed at maturity.

In addition, material partial repayments were also recorded on Opera Finance (Uni-Invest) and Tahiti Finance. The €662m loan balance of the former fell by €49m due to asset disposals and cash sweeps. The latter swept £15m of cash to reduce the loan balance to £389m.

Only the £35m Agora Max loan (Indus (ECLIPSE 2007-1)) matured in March. As the loan was already in special servicing prior to reaching its maturity, its status remains unchanged and the loan remains in workout, the agency says.

CMBS

EMEA CMBS criteria updated

Fitch has released an updated version its EMEA CMBS rating criteria, which supersedes and replaces the agency's previous versions for all EMEA securitisations backed by commercial mortgage loans secured on investment property (including multifamily apartment blocks).

In the report, Fitch details the qualitative and quantitative factors it considers in its rating analysis. Specifically, the criteria report addresses how the agency assesses collateral value under various rating stresses, how both loan and transaction-level features can impact the distribution of funds from the commercial real estate portfolio to the bonds and how legal and operational risks may affect the underlying loan performance.

Fitch's new criteria also reflects market developments since the financial crisis, while outlining the principles according to which core rating assumptions are periodically determined in a counter-cyclical manner. As these broad changes already factor in its rating analysis, the criteria is not expected to result in rating changes to existing transactions, the agency confirms.

CMBS

Euro CRE crisis threatens

Navigant has warned of a looming commercial property funding crisis in the UK and Europe. The firm's research suggests that £500bn-£600bn loans made to commercial property borrowers by banks and other financial institutions will require refinancing within the next two years.

Further, Navigant says that the institutions previously positioned to make these loans either no longer exist or have increased lending standards subject to enhanced regulatory oversight such as Basel III. With many of the loans being securitised in the form of CMBS and temporarily rolled over as banks 'delay and pray', increased delinquency rates and ballooning loan maturities are expected to compel European banks to jettison commercial real estate holdings.

Navigant director John Lasala, says: "The days of kicking the can on commercial property loan refinancings are coming to a close. Spiking delinquencies, ballooning maturities and increased liquidity requirements of Basel III increase the institutional pressure to exit non-core commercial real estate assets."

Hedge funds face the same issue - the 2/20 compensation structure correlates directly with assets under management. The higher the mark of the property asset, or self-stated value, the higher the take-home pay - hence how 'mark-to-make believe' has become a mantra of disgruntled investors and competing fund managers, Navigant states.

While delinquencies increase, the number of 'watchlisted' transactions remains constant with bank headcount and monitoring capabilities. The percentage of delinquent loans being actively monitored and managed is increasingly low - less than 10% of 90-day delinquencies.

Meanwhile, the number of loans scheduled for maturity is set to double in the next few years - just as the strength of the collateral underlying those loans falls precipitously. This applies both relative to collateral used in earlier years and absolute in comparison with the broader market, compounding the commercial real estate problem exponentially.

"Interest rates are another issue entirely - the spectre of interest rates rising fast and far could nudge the commercial property sector over the cliff," Lasala concludes.

CMBS

US CMBS delinquencies hit highs

The US CMBS delinquency rate rose again in March, according to Trepp's latest Delinquency Report, with the percentage of loans 30+ days delinquent, in foreclosure or REO climbing by 3bp to 9.42% - the highest in history for US commercial real estate loans in CMBS. The month-over-month increase, however, is even smaller than February's increase and is one of the smallest increases since the beginning of the credit crisis over two years ago. The value of delinquent loans now exceeds US$61.5bn.

The lodging and office sectors boosted the overall delinquency rate in March by increasing 136bp and 3bp respectively. The multifamily sector improved by 40bp, yet remained the worst performing property type, while the retail and industrial sectors also improved by 9bp and 19bp respectively.

"For the second straight month, we've seen the delinquency rate increase in the low single digits. These are some of the best readings we've seen since the credit crisis began," comments Manus Clancy, md at Trepp.

He adds: "We believe that the overall delinquency rate will continue to rise over the next six months, but at a pace similar to what we've seen recently, not the 40bp jumps that we saw in 2009 and early 2010. You cannot discount entirely, however, the possibility that we see the rate decline slightly in one of these months."

RMBS

Maiden Lane assets to be publicly offered

The Federal Reserve has declined AIG's offer to purchase all of the RMBS assets in the Maiden Lane II vehicle (see SCI 14 March). The New York Fed together with the Board of Governors of the Fed System judged that the public interest in maximising returns and promoting financial stability should be approached with more consistency and in line with normal market practice.

In light of improved conditions in the secondary market for non-agency RMBS and a high level of interest by investors, the Fed believes that conditions are right for ML II to begin more extensive asset sales while avoiding market disruption. MLII's investment manager, BlackRock Solutions, will offer the securities for sale using the standard RMBS secondary market bid-list process.

The securities will be offered individually and in segments over time to give a larger set of investors opportunity to bid for the assets. The Fed believes that this will maximise sale proceeds while also reducing the likelihood that any one institution ends up with concentrated exposure to the assets.

BlackRock is expected to circulate the first bid-list sale early next week.