Contents

CMBS

Mind the funding gap

European CRE debt fund opportunities outlined

The European commercial real estate debt funding gap is estimated to be €94.5bn over the next three years, with the bulk (€45bn) coming due in 2013. While mezzanine funds moved early to fill the void left by the banks retreating from the sector, it is becoming apparent that the opportunity is much broader than this.

A number of challenges are preventing traditional lenders from re-entering the European CRE market, not least of which are increased pressure to downsize assets and the pending Basel 3 capital requirements. RBS and Lloyds TSB, for example, are reportedly looking to exit around £60bn of exposure to the sector by 2014.

Michael Keogh, senior investment and economic analyst at Henderson Global Investors, estimates that around £100bn-£150bn of UK CRE assets will likely come back onto the market over the next few years. This figure is based on the fact that the outstanding debt in the UK real estate sector is around £275bn. Property debt as a percentage of bank lending represents about 12% of this, so to get to the level of real estate lending that most banks are looking for - at 6%-8% - they will have to dispose of some assets.

"So far we've seen some tactical disposals, which have supported valuations, but we expect banks to sell more aggressively in the future - which will impact sentiment and limit price rises," Keogh explains. "New legislation will ensure that the capital that banks have to hold against risky assets will increase steadily until 2015 and this, together with tighter controls on new lending, will limit new capital in the market. Existing debt requirements can't be met by balance sheet lenders or CMBS, which creates an opportunity for funds to access the market."

The individual loan size appetite of banks that are active in the sector has also reduced considerably. Pre-crisis, £200m-plus CRE loans in the UK were not uncommon, while today CBRE puts the maximum UK loan size at around £50m.

This could facilitate small clubs of lenders coming together to facilitate term funding. "There are potential opportunities for new fund entrants to work alongside banks in these clubs, without having to replicate the infrastructure that banks have for servicing and so on. To participate meaningfully, however, the ability to take down £30m-£50m per deal is likely to be required," notes Colin Fleury, head of ABS investment at Henderson Global Investors.

A wide range of returns is available, especially for funds investing in legacy CMBS assets. New origination senior debt finance for high quality, well-tenanted properties in good locations and loans at around 60% LTVs can generate low-200bp over Libor because of the paucity of lenders. Fleury suggests that higher returns at equivalent or perhaps even lower LTVs may be available for financing good quality second tier real estate due to the focus of many lenders on the best prime assets.

In comparison, junior debt could yield anywhere between 8% and14% IRRs, depending on the risk profile of the loan. If a lender requires additional yield, back-ended returns could be built in via accrual of interest or equity participation when the property is sold.

Among the new lenders seeking to take advantage of the CRE funding gap are Allianz Re and AXA, which have launched senior debt funds with IRR targets of 5%-7%. Cairn Capital, Matrix Commercial, Pramerica, Longbow UK and Duet have all launched mezz funds with IRR expectations of 9%-15%. These funds are typically focused on originating new mezz loans rather than buying secondary assets.

New fund entrants are said to have a €20bn fund-raising target, but have only achieved €1bn-€2bn so far. Mezz debt funds, in particular, appear to be having difficulty buying into higher returns.

"In 2010 approximately only 10 mezz deals were issued, so they've had to pare back their expectations. We feel an IRR of 6%-10% is more achievable," comments Andrew Creighton, director of property at Henderson Global Investors.

Given the competition in the mezz space, opportunities may be greater - and easier to deliver - in senior debt. Creighton suggests that the timing of the opportunity is over the next two to three years, when restructurings, disposals and discounts will be at their most prevalent. For instance, banks are reportedly keen to get loans off their books at discounts of up to 25%.

But appetite remains conservative, with the prime sector crowded in terms of available financing and non-prime properties witnessing a sharp shortage of funding. Indeed, the yield gap between prime and non-prime CRE assets has never been so extreme, according to Keogh. "Perhaps prime is overpriced or good secondary is underpriced, but we believe the latter will provide the best returns."

In terms of accessing the stock, there are a range of suppliers. Henderson favours a multi-channel approach that taps a mix of natural fixed income players and property specialists, including debt placement agents and receivers.

Away from funds, meanwhile, insurance companies are also becoming increasingly active as CRE senior lenders. For instance, MetLife was recently involved in the refinancing of both Columbus Court in ELoC 22 and Midcity Place in Windermere VII. In addition, AXA REIM participated in the funding for Carlyle Group's acquisition of the Thames portfolio from White Tower 2006-3 (SCI 16 June 2010).

ABS analysts at RBS suggest that insurance appetite for CRE debt financing is being fuelled by the attractive long-dated yields on real estate lending, as well as potential favourable treatment for holding direct real estate whole loans rather than a securitised version of the same exposure under Solvency 2.

In addition, at least one joint venture is understood to be in the works that aims to take out problem assets from CMBS structures. Given that banks are reluctant to crystallise losses on loans with high LTVs, the idea is to potentially transfer distressed portfolios into a vehicle on their balance sheet with the support of an equity partner. Capex and opex would then be invested in the underlying assets, with the upside eventually split between the partners.

CS

ABS

Eerily quiet

Hiring on hold as recruitment pattern changes

It has been an unexpectedly slow start to the year for the structured finance job market. The typical surge of appointments normally seen in the first quarter has simply not materialised and recruiters are not convinced it will come any time soon, with a fundamental shift in recruitment taking place.

"This last quarter has been a weird one and I think the next one could be too. Nothing has moved on from the end of last year. It is like the world is in limbo," says Lisa Wilson, managing partner at Invictus Executive Search.

She continues: "We really have not seen the stampede that we would normally expect during the first quarter of the year. One reason for this is that a lot of the bonuses were put back to comply with all the financial accounting and regulatory changes."

Another London-based headhunter agrees that bonuses have thrown a spanner in the works for recruiters this year. He says: "It has been a slow start to the year across the board. I think initially part of it on the sell-side was banks waiting to see the reaction to their bonuses; it was a case of waiting to see what different people were doing."

He adds: "What we have seen in terms of general profits is that they have stayed reasonably flat. It was a good year in some areas - such as high yield - but cost base has risen dramatically, particularly in terms of base salaries, for example. Until that gap widens, I think most guys will be quiet when it comes to hiring."

Wilson notes that in a more typical cycle US banks would pay out bonuses around December and January. Other institutions would generally have paid out by the middle of February or beginning of March, with people switching jobs once they have been paid. That has not been the case this time around though, as bonuses have been put back.

"It has been a much slower take-off since Christmas than we would normally see, but I do not think that is particularly negative; I think that might be the shape of things to come. People are going to be remunerated in such a different way that recruitment will be able to happen throughout the year, rather than having to do it once they have been paid," says Wilson.

She believes this could cause quite an adjustment in the market, with recruitment theoretically spread out over the course of the whole financial year. Wilson certainly does not buy into the idea vocally expounded by some that nothing has changed and it is all business as usual.

She says: "There are a lot of people in the industry talking very loudly about how busy they have been, but I am sceptical. We are busier than 2008 and 2009, but the numbers and movement we are seeing and reading about do not tally up with what some people are claiming."

The London-based headhunter is equally wary of claims that recruiters are inundated. He says: "There are headhunters out there expecting it to be very busy, but I do not know what planet they are on, frankly. It is not what we are hearing from clients. I have a lot of clients on the in-house resourcing side, who just are not that busy right now."

He adds: "There has been a lot of talk of upgrading or replacing, but for that we need the wheel to start turning. Unlike last year, where UBS and others were hiring a lot and started that wheel going, I do not see at the moment where a big net hirer is coming from."

What activity there has been is patchy. The headhunter says he has not seen any one job role particularly in demand over others and nor has one sector been drastically busier than others.

"There has been some targeted activity, but I cannot say that RMBS has gone ballistic or there is one particular sector which is really taking off. The business environment has picked up, but at the moment there are no major plans to go out and start a wave of hiring," he says.

He continues: "The funds have started to move on the alternative side. We are starting to see a focus on the illiquid stuff. There is not a massive hiring spree, but we have started to see a little bit of pick-up. We are in conversations on that side, but it is a slow start to the year across the debt capital markets."

Although improvement is expected pretty much across the board - be it as part of a delayed cycle or as part of a new, year-round recruitment cycle - one area the headhunter warns will not be busy any time soon is CMBS. He concludes: "Structured credit remains a highly toxic environment. I think you can forget about CMBS because I just do not see that coming back, ever."

JL

ABS

Euro ABS on a tightening trend

European secondary ABS spreads are tightening off the back of swelling new issue supply. At the same time, Nordea Bank's tender offer for the Midgaard CMBS is generating interest.

"There hasn't been an enormous amount of secondary market activity in the last few days, mainly down to the primary market dominating investor attention," one ABS trader says. The volume of new issuance is, in turn, supporting tightening spreads.

The trader adds: "Participants are concentrating on the up-take of new issuance at the minute and the list of deals that are either being priced or have been priced, such as Gosforth Funding 2011-1 and Storm 2011-I. All the new issues seem to have attracted good investor attention, which in turn has reflected well on secondary trading due to tightening spreads."

Additionally, the trader explains that the slight pricing movement of Granite this week provides a good indication of performance in the secondary market. "We know that Granite is the most liquid name out there, so - if we take out the primary lead in terms of secondary market direction - Granite is always a good benchmark. It's traded as the market's liquid issue and has definitely traded better over the last week, if only by a small amount."

Indeed, the overall tone of the market is positive, according to the trader. "If you own something less liquid or less relevant, then moving up by 10-20 cents just for the sake of it is probably a waste of time. If you leave it where it is and someone then thinks it's cheap because it hasn't moved, then maybe you get a buyer and you move on to the next trade."

One deal generating interest at the moment is the Midgaard Finance CMBS, which became subject to a tender offer yesterday, 13 April. Issuer Nordea Bank is offering to buy-back the €155m A2 tranche at a premium to par - potentially at €1015 per €1000, if all early tender conditions are met.

The trader says: "The tender offer comes ahead of a coupon step-up - 0.58% to 1.45% per annum - so it makes good sense for Nordea to tender the deal. Unsurprisingly, we now see Midgaard trading at 98-99, but it was apparently lifted at 99 the day before the announcement."

Going forward, new issuance is expected to continue to dominate the European ABS market. In the meantime, this week's lower inflation numbers are likely to have strong consequences for UK rate rises, the trader believes.

"The lower inflation numbers will delay any rate rises in the UK - although we did see rates go up in Europe recently, which isn't surprising," he says. "I think a lot of people would have predicted that. Overall it's a good thing for absolute yields and floating rate paper, but the UK rate rises may get pushed back a bit as a result of weaker retail sales and lower inflation numbers - we'll be better informed as the weeks progress."

LB

CMBS

Cantor CMBS finding favour

The US CMBS market ended last week on a positive note, with spreads tightening and anticipation building over Cantor Fitzgerald's first CMBS - CFCRE 2011-C1 (SCI 14 April). Meanwhile, the Maiden Lane II auctions continue to attract aggressive bids in the RMBS sector.

"CMBS spreads are marginally tighter this week, particularly at the AM and AJ part of the capital stack. The top of the stack also remains very well bid, although it hasn't moved all that much," one US CMBS trader notes. In spite of the positive market tone, however, there has been little in the way of bid-list activity.

On the primary side, the talked-about deal of the week is Cantor Fitzgerald's US$634.3m CMBS - CFCRE 2011-C1. The transaction is set to be well received, due to a lack of competing deals and a high volume of investor interest, the trader says. "Whether it's money managers, pension funds, insurance companies or just the sheer appetite for risk assets right now, it definitely has a market."

At the time of writing on Friday, price talk on the deal had emerged. Guidance for the 4.7-year triple-A notes was 130bp-135bp, while the 2.6-year tranche was being talked at 70bp-75bp over swaps.

"It's Cantor's first deal ever and they don't have a ton of balance sheet, so it's clearly going to price at a concession to where other new issue deals are pricing. It all contributes to the deal doing well," the trader remarks.

Away from CMBS, the Maiden Lane II auctions continue to be well-received. However, the quarterly reports published in association with the lists are pushing investor competition to an all-time high, the trader says.

"A number of clients definitely care for this paper and I think that dealers are paying relatively aggressive prices because of the quarterly report basis. It's going to be like a league table, where participants can showcase their deals and show everyone how much they were able to buy. Dealers are now willing and able to take principal risk in that way," he concludes.

LB

RMBS

Failed calls impact Euro RMBS

The European RMBS market appears to be regaining some stability, underlined by a positive response to new issues. However, the failure to call certain Leek and E-MAC transactions has caused a stir among some investors.

"The general sentiment is that the RMBS market is pretty stable. The new issues that we've seen have all been received very well, so it all looks positive," one RMBS trader comments.

He adds: "Contributing to this is the lack of turmoil from the recent macro issues. There have been no fire sales or forced selling from any parties, so it's been business as usual."

However, two issuers failing to honour their calls caused a stir among investors this week and last. First, the Co-operative Bank failed to call the UK non-conforming Leek 17, 18 and 19 RMBS transactions. This was surprising, given the track record that Leek deals have in being called at their first optional redemption date - which was further reinforced by Leek 16's redemption only three months ago.

The Co-op has, however, put forward a number of proposals to compensate noteholders for its failure to call the transactions. "It's been quite interesting because the market had priced in the Co-op calls, so it came as quite a shock. But the package they're trying to put together is quite investor-friendly. They're trying to solve their accounting problem in an investor-friendly manner, so that's positive," the trader says.

The second issue not to be redeemed at its call date was E-MAC NL 2004-1. The trader suggests that this could be problematic for some investors.

He says: "It becomes quite technical with all the parties going through the documentation, so I'm not sure what the solution will be. It's not as straightforward as you might expect from a securitisation - I've heard many different views, but we'll see how that situation turns out."

LB

CMBS

Softening standards support CMBS refis

Concerns about the upcoming US CMBS maturity wave are being eased by a loosening of underwriting standards, according to CMBS analysts at Citi. Over half of the fixed rate loans scheduled to mature in 2011 are expected to be refinanced without any equity injection being required.

The Citi analysts suggest that intense competition between banks, insurance companies, government agencies and conduit lenders has seen underwriting standards soften and credit spreads shrink over the past six months. Many lenders have been driven into the subordinate debt space in the search for higher yields, which is further helping borrowers to refinance.

Since analysis carried out in November, the analysts indicate that the change in underwriting standards means their refinanceability threshold assumptions for required debt yield and DSCR are lower now than six months ago - by 200bp and 5bp respectively. Their LTV assumption is 5% higher and their coupon assumption is up by 25bp.

Around 55% of loans scheduled to mature in 2011 are expected to be refinanceable without any equity injection. Approximately 18% are classified as being on the cusp of refinanceability, with the remaining 27% thought to have a very low probability of being refinanced.

Since November, a further 10%-13% of loans maturing this year have come to be seen as refinanceable. However, the analysts note that there isn't much scope for underwriting standards to loosen any further, so it is unlikely that many more loans will move into this bracket without generating more cashflow and improving their valuations.

The loans thought to be likely refinanceable have strong credit metrics, with an average debt yield of 14.8%, DSCR of 1.89x and LTV of 55.3%. Those thought unlikely to be able to refinance have an average debt yield of 6.5%, DSCR of 1.03x and LTVs in excess of 100%.

The analysts also note the average loan size of loans likely to refinance is US$7.7m, while the average for the unlikely loans is US$18.1m. They attribute this to the fact that many of the distressed loans come from later vintages, with typically large loans and loose underwriting.

Loans maturing in 2012 have also benefited from increased competition, with 48% now seen as likely refinanceable - up from just 40% in November. Around 18% could also be refinanceable with an equity injection.

Although a refinanceability rate of less than half will not eliminate concerns about upcoming maturity, more borrowers are now able to refinance and the more hospitable lending environment means the amount of additional capital needed for refinancing is also being reduced. The analysts believe this could make equity injections more palatable to borrowers, although 34% of loans maturing in 2012 are left with a very low probability of being refinanced.

JL

Real Estate

Liquid access

Steven Grahame, fund manager, and Toby Hayes, assistant fund manager for Pacific's Liquid Property Fund, answer SCI's questions

Q: How and when did Pacific Real Estate Capital Partners become involved in the property derivatives market?
SG: Pacific's Liquid Property Fund received FSA approval on 26 January and is, together with the Euro ActivIncome Fund and segregated accounts, part of Pacific Real Estate Capital Partner business. I was previously cio, alternatives real estate at Hermes and developed the use of derivatives to gain efficient exposure to desirable diversity characteristics of property. I joined Pacific to drive the alternatives division and launch Pacific's Liquid Property Fund.

The fund focuses purely on property and targeting institutional investors. The offer is unique as it invests across the multi-asset classes of property, investing in indices such as direct property, listed equity, property debt and property derivatives. The aim is to deliver core property-like returns, but with daily pricing and liquidity.

Pacific Real Estate Capital was founded by chairman Sir John Beckwith and ceo Gerald Parkes, who previously ran Lehman Steven Grahame                                          Brothers' real estate private equity group in London. Both Sir John and Gerald have founded and built successful investment management businesses and are successful investors in the asset class. So providing a platform for new areas, such as the property alternative, was a natural extension of the business.

Q: What has been the most significant development in the market in recent years?
SG: Investors are increasingly looking for efficient exposure to diversifying asset classes. However, property has up to now been an illiquid and expensive asset class to access.

Pacific's Liquid Property Fund is a UCITS III vehicle, providing investors with the benefits of core direct-like property exposure (diversity), but without the costs and illiquidity. This is a significant leap forward and it seems we are the first manager to do this.

The UCITS regulatory standard has one of the highest regulatory requirements as only the most liquid assets can be considered. This provides investors seeking features of core property exposure with the comfort of liquidity.

Another development is the shift that has occurred in terms of market sentiment away from the hedge fund model, where there is little transparency and money is locked up. It is interesting to note that hedge fund strategies are moving into the UCITS III space.

Investors are also pressing much harder on fee structures and value for money. We only charge an annual management fee, which makes our fund very competitive.

Typical core property funds charge acquisitions costs (say a 5% entry charge) and significant management fees, plus an exit fee of 2%, which dilutes returns. It's also potentially frustrating for investors risking being illiquid at different stages of the property cycle.

In comparison, our total expense ratio is about 90bp, with no entry or exit costs as we don't buy direct property but gain diversified property exposure through the use of derivatives on indices. This keeps things simple.

Q: How has this affected your business?
SG: We have had to develop a new way of thinking to satisfy investor needs for a combination of direct property correlation, liquidity, openness and value of fees. Our response has been Pacific's Liquid Property Fund, a UCITS III OEIC offering daily liquidity and pricing. The fund provides investors with exposure to the underlying property markets, but with greater diversity than core direct property funds that typically invest in 30-40 buildings with constraints on geography.

Yes, we could use structured products. But we don't think this is ultimately what investors want as it also represents an additional layer of costs and counterparty risk.

We have daily independent pricing on the fund and have the capability to generate a shadow NAV to check the administrator. We have also developed a way of limiting our counterparty exposure, which benefits investors - there is integrity and innovation at every level of our approach.

We believe institutional investors will not only be interested in the fund, but also how the approach could be expanded to enhance direct property portfolios.

TH: The initial portfolio is derivatives-based via the IPD, Markit TRX and other property-based indices such as REITs indices. We hope to gain exposure to a wider range of strategies once we've reached critical mass.

Q: What are your key areas of focus today?
TH: The portfolio has three spokes: direct property markets (via IPD/NACREIF derivatives); property debt (Markit TRX); and property equity (REIT indices). We're expecting to maintain a UK home bias, but where and when appropriate invest internationally.

The asset allocation is flexible: we don't churn the portfolio, but have rebalanced it on a quarterly basis. We work hard to find value - in terms of the best risk-adjusted return - across different property asset classes and regions. For example, triple-A rated CMBS looks a bit expensive at the moment.

The focus of the fund is on 'developed core property' markets; in other words, the US, the UK and certain parts of Asia. Consequently, it benefits from international diversity.

Q: What is your strategy going forward?
SG: Our initial focus is on Pacific's Liquid Property Fund. However, we also see many direct property portfolios that could be more actively managed and market risks more effectively hedged. We are therefore looking forward to working more closely with institutional investors, who want to expand their property portfolios, manage market exposure or want to reduce their investment management costs.

Q: What major market development would you like to see in the future?
SG: We'd like to see more participants trading property derivatives. The basic issue is that the property and derivatives worlds don't mix easily: most players in the property world are surveyors and so derivatives are unfamiliar to them.

There is a disconnect between the two sectors and it will take time for property players to get comfortable with derivatives. They don't have the middle office skills that financial services participants do, for example. Still, there are some new entrants coming into the market.

The other issue is that the majority of property derivatives are based on the IPD index and are thus European-focused. Had they been developed in the US, they might have taken off more quickly.

Nevertheless, the advantages of being in the market are becoming more widely known in terms of helping to manage risk. The Property Derivatives Interest Group is doing a good job promoting the value of property derivatives and it is only a matter of time before the large property asset management companies to enter the market.

CS

ABS

Fixed income team recruited

Sandler O'Neill has recruited a team of five sales professionals to its Chicago-based fixed income group.

As md in the group, Scott Buchta is responsible for providing market insight and relative value trade ideas across the ABS, MBS and CMBS sectors. He will also assist clients in developing portfolio-level analytics, while focusing on extending the firm's existing balance sheet management franchise to include non-depository institutions.

David Connelly, who will also become md, is responsible for growing the firm's fixed income distribution in the Midwest, as well as further broadening relationships with non-bank financial companies. Also joining the team are Brian Vanselow, Kevin Smith and Michael Piper, all of whom will work alongside Connelly in this effort.

ABS

Bank adds debt solutions director

Deutsche Bank has appointed Michael Halsband as director in its capital markets and treasury solutions group. He will work with the bank's financial institutions clients and will be a senior member of the New York-based insurance solutions team. He will jointly report to Deutsche heads of debt & solutions coverage for financial institutions, Paul Puleo and Craig Wenzel.

Halsband was previously at Goldman Sachs, where he was a vp in its financing group, responsible for the origination, structuring, execution and marketing of catastrophe bonds, sidecars and insurance securitisations. Prior to this, he was svp at Alea Group.

ABS

Brazilian securitisation pact signed

BTG and Sumitomo Mitsui Banking Corporation have signed a memorandum of understanding, which provides the basis for mutual cooperation in the Brazilian corporate finance market. In particular, this cooperation will focus on structured products and securisations, as well as stimulating cross-border transactions that could be of interest to Japanese clients. The MOU also contemplates the distribution of Brazilian products to clients of SMBC group in Japan and other Asian countries.

ABS

Bank fined for ARS misconduct

FINRA has fined Jefferies & Company US$1.5m for failing to disclose additional compensations received and conflicts in connection with the sale of auction rate securities (ARS). The bank will repay US$425,000 in fees and commissions earned from the sale of ARS to the affected customers.

FINRA has also taken action against three brokers involved in the sale of these products, sanctioning Anthony Russo with a US$20,000 fine and five business-day suspension, Robert D'Addario with a US$25,000 fine and 10 business-day suspension and filing a complaint against Richard Morrison. This was due to their role in not disclosing the additional compensation and conflicts of interest.

Russo, D'Addario and Morrison comprised the firm's corporate cash management (CCM) group that provided investment advice and services, including purchasing and selling ARS, to 40 Jefferies institutional clients. The brokers used their discretion to purchase for these customers new-issue ARS that paid them and the firm additional compensation.

Further, in 32 other transactions, they purchased ARS for the customers from other CCM group customers, but failed to disclose the conflict created because they acted as agent for both the buying and selling customer. They also failed to disclose the existence of comparable or similar ARS with higher yields.

FINRA found that Jefferies committed several other violations in connection with its ARS business, including exercising discretion without written authority, failing to deliver official statements in connection with purchases of municipal new issue ARS and selling restricted (Rule 144a) ARS to a customer that was not qualified to buy them.

As part of the settlement, Jefferies also agreed to participate in a special FINRA-administered arbitration programme to resolve eligible investor claims for consequential damages. Jefferies, Russo and D'Addario neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

ABS

Asset management ceo named

Jefferson National has appointed Sal Naro as ceo of its asset management group - JNF Asset Management - and vice-chairman of its parent company, Jefferson National Financial. As well as being on Jefferson's board of directors, Naro will be a key strategist in expanding the firm's franchise, while driving the performance and growth of its asset management business. He was previously evp and global head of valuation and risk analytics services at Markit, and prior to this was co-founder and managing partner at Sailfish Capital.

Also joining Naro at Jefferson is Gregory MacKay, former md at PrinceRidge. Mackay was previously partner and portfolio manager at Sailfish Capital and head of structured credit trading at UBS.

CDS

Analytics alliance agreed

Sapient Global Markets has signed an alliance agreement with FINCAD. By combining the firms, customers will gain access to the technology and support required to ensure best practice integration and project delivery, the two firms say.

The alliance is designed to ensure that institutions benefit from streamlined integration with existing internal systems while addressing valuation and risk through consistent, firm-wide processes. "We are seeing an increased drive for systems that enable transparency, facilitate audit and tracking of valuation methodologies across asset classes, and easily integrate into existing core business and risk applications. We're committed to addressing this need for clients and to delivering the best solutions and experience possible," says Sapient vp Kevin Samborn.

CDS

EM fund manager acquired

Principal Global Investors has agreed to acquire a majority stake in Finisterre Capital and Finisterre Holdings, an emerging markets fund manager based in London. Principal says the deal will enhance its emerging market investment capabilities and further strengthen its multi-boutique model.

Finisterre has around US$1.63bn AUM primarily across three funds: the Global Opportunity Fund; the Sovereign Debt Fund; and the Credit Fund. The five partners will retain a significant minority stake in the business and will continue to direct the day-to-day operations. They also retain authority over fund investment decisions.

"The strategic partnership with Principal offers us the very attractive combination of continued autonomy and long-term stability for our clients," says Paul Crean, cio at Finisterre Capital. "It will enable us to expand our capabilities while preserving our business focus, organisational structure and unique investment culture."

CDS

EM investment director named

Michael Sandigursky has joined BlueCrest Capital Management as investment director, emerging markets credit. He will be focusing on loans, bonds, trade finance, commodities finance and bank balance sheet/regulatory capital relief transactions. Sandigursky was previously a quantitative credit strategist at Citi.

CDS

New ISDA director elected

ISDA has elected 12 directors, of whom 11 currently serve on its board. The new director is Yasuhiro Shibata, joint head of fixed income at Mizuho Securities.

Shibata is responsible for fixed income cash and derivative product trading in Japan. He has been a co-chair of the ISDA Japan Credit Derivatives Committee and has worked with the Japanese FSA and JSCC on a CCP for Japan's CDS market.

CDS

Global head of sales appointed

Christian Farber has joined Princeton Financial Systems as svp and head of global sales and marketing. He has more than 15 years of industry experience and joins from Albridge Solutions, where he was md of sales, relationship management and advisor sales.

Jim Russo, Princeton Financial president and ceo, says: "We are pleased to have Chris join the PFS team. We have been steadily growing our business and branding across the globe and Chris brings substantial knowledge and experience to accelerate this growth."

CLOs

Combined firm to proceed with new CLO

The merger of Deerfield Capital and CIFC (see SCI 22 December 2010) has closed. The firms will now operate as a combined company under the name CIFC Deerfield Corp.

The firm's ceo Peter Gleysteen says: "This merger is about growth and the unprecedented opportunities we see for asset management products, especially ones backed by senior secured corporate loans. In fact, one of the company's first decisions is to proceed with a new CLO and work is already underway as we look forward to growing the company."

CMBS

New Gleacher ceo named

The board of directors at Gleacher & Company has appointed Thomas Hughes as ceo, starting on 2 May. He has also been nominated for election to the board at the company's stockholders' meeting on 19 May.

Hughes was most recently chairman and ceo of LNR Property, the CRE special servicer. Prior to that, he was ceo of Global Deutsche Asset Management and a member of the Deutsche Bank Group executive committee. Before Deutsche Bank, Hughes held several positions at Merrill Lynch, rising to become head of MBS trading.

Hughes replaces Peter McNierney, who was made interim ceo in October 2010. Once Hughes assumes the role in May, McNierney intends to resign from the company to pursue other business opportunities.

CMBS

Real estate head hired

BlackRock has recruited Jack Chandler as global head of real estate. He will oversee the firm's global real estate capabilities, which extend across the capital market structure and include both equity and debt investment products totalling approximately US$13b in assets under management.

Chandler previously served as global cio and executive chairman, Asia for LaSalle Investment Management. He first joined LaSalle in 1986 and after 14 years with the company in the US relocated to Singapore in 2000 to launch LaSalle's Asia Pacific business.

In his new role, Chandler will report to Matthew Botein, head of BlackRock alternative investors. He succeeds Paul Audet, senior md, who assumed interim leadership for BlackRock's real estate business in 2008. Audet will transition to other executive responsibilities within BlackRock, where he previously held the roles of head of cash management and, before that, cfo.

RMBS

MBS vet moves on

Passport Capital has hired Jeffrey Kong as a portfolio manager. He will be responsible for managing the firm's mortgage-backed and related fixed income strategy.

Kong joins Passport from Structured Portfolio Management, where he was senior md and partner. He spent 10 years as portfolio manager for the firm's US$1bn flagship mortgage strategy and was responsible for asset selection, risk management and hedging.

Kong has nearly 25 years of experience in trading and evaluating mortgage securities. Before working at Structured Portfolio Management, he was a director and senior MBS trader at Donaldson, Lufkin & Jenrette. He has also served as a vp at Greenwich Capital Markets in MBS research and trading.

RMBS

Asset manager bags MBS vet

MountainView Capital Holdings has appointed Robert Wellerstein as md in its mortgage and fixed income sales and trading units. Wellerstein joins the firm from Banc of Manhattan Capital, where he was svp of whole loan and fixed income sales and trading. Prior to this, he worked at Countrywide Securities, where he was responsible for sales of all fixed income products, including agency servicing portfolios, residential whole loan pools, MBS and community reinvestment act loans.

ABS

SLABS reviewed on op risk

Moody's has placed the ratings of 209 tranches in 42 US student loan transactions from 13 issuers on review for possible downgrade, following the agency's initial assessment of the deals under its new operational risk criteria. The review includes ratings on 137 tranches from 19 government-guaranteed student loan FFELP transactions and 72 tranches from 23 private student loan transactions. The ratings placed on review are mostly Aaa ratings, but include also some Aa, A and Baa ratings.

The review placements are due to the insufficient back-up arrangements for the master servicer, administrator and primary servicing. As per its new operational guidelines, Moody's has placed on review all ratings from FFELP loans with non-investment grade rated master servicers, as well as administrators who are collecting on the underlying loans when no party is in place to facilitate a servicing transfer, or those with no back-up arrangement.

Finally, the ratings of private student loan transactions with lowly rated master servicers or with administrators that have no back-up arrangement in place have also been placed on review, the agency concludes.

ABS

Further Greek deals downgraded

Moody's has downgraded the senior ratings of one Greek CLO, eight Greek RMBS and 10 Greek ABS transactions to Baa1 or lower. The agency has also downgraded the mezzanine and junior ratings on one ABS, while maintaining on review for possible downgrade its ratings on three ABS.

This follows the downgrade of Greece's government bond rating to B1 and also considers the downgrade of several Greek banks to a rating of Ba3 or lower. The rating actions, Moody's says, reflect concerns about the exposure of Greek SF transactions to country risks, as well as operational risks in extreme scenarios. However, the agency recognises that transactions with high credit enhancement are more able to sustain significant asset performance deterioration resulting from country risks and operational risks.

ABS

Analytics platform enhanced

S&P's structured finance analytics platform ABSXchange has undergone a number of improvements that will allow clients to run projections against forecasted index rates and aggregate asset valuation metrics. It will also allow clients to utilise preset RMBS templates to simplify monitoring of portfolios, while overlaying scenarios created by assumptions from the latest RMBS Consensus Survey.

The survey collects cashflow assumptions from over thirty leading buy- and sell-side market participants across Europe twice a year (SCI 25 March). With the latest release of ABSXchange, all users will benefit from these assumption which cover the UK prime, UK non-confirming, UK buy-to-let, Dutch, Spanish and Italian sectors. It also includes benchmarks for prepayment, defaults, loss severity and months to liquidate.

Users will also be able to examine the formulae and underlying data that comprise the data benchmarks. The latest release of ABSXchange calculates up to 15 additional performance benchmarks and displays the underlying mapping.

A preset template for monitoring RMBS transactions has been made available to all existing users. The template consists of over 80 of the most commonly used performance metrics by European market participants. By adding it to an existing portfolio of bonds, the template can allow deal level, class level, collateral level and features metrics to automatically refresh and update on the screen.

ABS

Japan dominates Q1 APAC downgrades

A total of 20 Asia-Pacific structured finance tranches were downgraded in 1Q11 while just nine were upgraded, reports Fitch. The agency notes that 180 tranches were affirmed, indicating that the performance of most transactions remain in line with expectations.

"Downgrades among the APAC structured finance tranches were once again dominated by Japanese CMBS tranches, mainly driven by further downward revisions in property values as property cashflows deteriorated on account of falling rental or occupancy rates," says Helen Wong, director in Fitch's Asia-Pacific structured finance team. "On the other hand, upgrades during the quarter were mainly split between CDOs and Indian ABS."

Of the 20 downgrades, 19 were Japanese CMBS tranches from seven transactions. Two Japanese CMBS tranches were downgraded to single-D and a further ten to either triple-C or double-C. There are currently 20 Fitch-rated Japanese CMBS tranches on rating watch negative.

Upgrades were dominated by synthetic arbitrage global corporate CDOs arranged out of Asia-Pacific and Indian ABS tranches. Four SCDO tranches benefited from the stable weighted average rating of the underlying portfolio and increased seasoning. One tranche from an Australian non-conforming RMBS was also upgraded, reflecting an increase in overall subordination.

Fitch says it will continue to monitor developments in the wake of the New Zealand and Japan earthquakes. No significant damage to properties connected with Japanese CMBS has been reported so far, while information is still being collated for New Zealand.

ABS

OLA effectiveness examined

The FDIC has released a report examining how it could have structured an orderly resolution of Lehman Brothers Holdings Inc under the orderly liquidation authority (OLA) of the Dodd-Frank Act, had that law been in effect in advance of Lehman's failure. The report suggests that the powers provided to the FDIC under the Dodd-Frank Act to act decisively to preserve asset value and structure a transaction to sell Lehman's valuable operations to interested buyers could have promoted systemic stability, while recovering substantially more for creditors than the bankruptcy proceedings - and at no cost to taxpayers.

The report estimates that, given the substantial - though declining - equity and subordinated debt of Lehman in September 2008 and the power for the FDIC to implement a prompt structured sale while providing short-term liquidity to continue value-adding operations, general unsecured creditors could have recovered 97 cents on every US$1 of claims. This compares to the 21 cents on claims estimated in the most recent bankruptcy plan of reorganisation.

In addition, the lengthy bankruptcy proceeding has allocated resources elsewhere that could have otherwise been used to pay creditors. Through February 2011, more than US$1.2bn in fees have been charged by attorneys and other professionals principally for administration of the debtor's estate.

FDIC chair Sheila Bair comments: "This new report is an important step in ensuring that the public and market participants understand how the FDIC's new resolution authority for large systemic firms works. The powers to implement an FDIC liquidation of a systemic financial company during a future crisis give us the tools to end 'too big to fail' and eliminate future bailouts."

The FDIC report concludes that Title II of the Dodd-Frank Act could have been used to resolve Lehman by effectuating a rapid, orderly and transparent sale of the company's assets. This sale would have been completed through a competitive bidding process and likely would have incorporated either loss-sharing to encourage higher bids or a form of good firm-bad firm structure, in which some troubled assets would be left in the receivership for later disposition.

ABS

Tech trends show progress

A new report from Celent confirms recent trends in ABS technology. The firm expects to see a continuation of the move towards more integrated offerings from solutions providers, with an emphasis on providing investors with greater access to information and analysis facilities.

The report found that due diligence standards are becoming more comprehensive and sophisticated, while regulatory demands and investor focus on risk have made processes more formalised and detailed. Platforms have also grown to accommodate higher risk management requirements and provide more services based on clients' service-level agreements.

Celent also says the integration of risk and operations will be a key requirement of investment analysis, with single workflow solutions increasingly important for investors. Accessing the collateral performance data across asset classes, as well as generating all the required reporting are seen as key to winning back investor confidence. The firm says that consequently technology providers are working hard to enhance investor access to analysis facilities.

According to the report, the main focus areas for solution providers are: modelling the full deal structure, enhanced cashflow projections and integration of loan-level data. New regulations have led to disclosure of a lot of data, which has forced providers to offer focused and better data management, higher quality data analytics, better stress testing and improved risk management functionality.

Finally, as ABS data is expected to commoditise and decrease in costs, Celent expects to see opportunities for solution providers to bring cost-effective, SaaS-based offerings to the market so that firms can streamline pre-deal, deal execution and post-deal activities from the front- to back-office.

ABS

Life securitisation to be unwound

Scottish Re has entered into agreements to unwind its 2005 Orkney I XXX securitisation and to cede to Hannover Life Re, via a coinsurance reinsurance agreement, the underlying defined block of level premium term life insurance policies. The unwind transaction is expected to close in 2Q11.

On closing of the transaction, Scottish Re (US) will receive a recapture consideration that will be used in part to fund the ceding commission of US$565m due from Scottish Re (US) to Hannover Life Re. Any assets thereafter remaining in the accounts will be released to Orkney Holdings to be used to purchase all of the outstanding notes issued by Orkney I for an aggregate amount of US$590m, which represents a discount to the aggregate principal amount of US$850m of the notes outstanding. Once repurchased, the Orkney notes will be cancelled and Orkney Holdings will pay a dividend of any remaining assets to its parent, Scottish Re (US).

Approximately US$700m of the aggregate principal amount of the Orkney notes to be purchased are held by affiliates of Cerberus Capital Management, one of Scottish Re's controlling shareholders. Cerberus acquired the Orkney notes in the secondary market during 2009. None of Scottish Re, Orkney Holdings or any other of the company's subsidiaries was a party to Cerberus' purchase of the Orkney notes.

"The Orkney I unwind transaction is consistent with our run-off strategy of reducing our reinsurance obligations and simplifying the operations of the company. The transaction also strengthens the capital and surplus position of our primary US operating subsidiary, Scottish Re (US), and further positions it for removal of the Order of Supervision issued by the Delaware Department of Insurance in 2009," states Meredith Ratajczak, ceo of Scottish Re (US).

ABS

ABCP methodologies updated

S&P has updated its global methodologies for rating ABCP issued by multi-seller conduits. Following a request for comment in May 2008, new criteria for the classification and timing of new-seller transaction reviews has been introduced.

The update applies to the agency's analysis of ABCP issued by multi-seller conduits in which the ABCP investor is exposed to the credit risk of an underlying transaction funded by the conduit or where they are not exposed to such risk because it is covered through credit and liquidity support. The criteria will generally not apply to ABCP issued by multi-seller conduits in which all of the conduit's transactions are fully supported by a single support agreement that is independent of the execution of transaction-specific documents.

No outstanding ABCP ratings are expected to be affected by the criteria update. New-seller transactions will be impacted where they are funded by partially supported and transaction-level fully supported ABCP.

ABS

Sovereign ratings impact examined

Moody's has released a report on the impact of the ongoing Eurozone sovereign debt crisis on structured finance transactions. Looking at Greece, Ireland, Portugal and Spain, the agency examines how their macro economies and banking systems can weaken deal performance.

The report focuses on three factors: the highest rating achievable for securitisations; whether or not credit enhancement meets minimum levels; and the extent of operational risk attributable to the weakening of entities acting as transaction parties or successors to them.

The highest structured finance ratings currently achievable are Baa1 in Greece, Aa2 in Ireland, Aa2 in Portugal and Aaa in Spain. Moody's describes the highest rating achievable as the rating level beyond which the structural features or credit enhancement cannot fully mitigate the severity of the impact of severe events and the level of uncertainty around it.

Moody's says it reviews each transaction to determine whether credit enhancement is sufficient for each rating. Where a transaction has credit enhancement at or above the minimum threshold, the agency can project performance with enough confidence to apply that rating. Minimums are based on a determination of asset performance during a severe event, with projected losses and volatility of the asset types as well as the sovereign rating also factored in.

Finally, for operational risk the agency says the deterioration in the banking sector reduces the creditworthiness of financial institutions and so also impacts their ability to act as transaction parties or successors to transaction parties that can no longer perform.

CDO

CRE CDO delinquencies drop on loan repayments

Loan payoffs contributed to a decline in US CREL CDO delinquencies this past month, according to the latest index results from Fitch. CREL CDO delinquencies fell by 50bp to 14.1% in March from 14.6% in February.

Two defaulted mezzanine loans backed by interests in a Las Vegas hotel property were paid off in full as part of a larger restructuring. The interests were contributed to two affiliated CDOs. Additionally, a defaulted San Francisco hotel rake bond with interests contributing to two different CDOs was paid off in full.

Other assets removed from the index included: four loans disposed of at a loss; three previously repurchased assets; three CMBS assets no longer suffering from interest shortfalls; and two extended loan interests.

"Loans secured by office properties were the largest new contributor to CREL CDO delinquencies in March," says Fitch director Stacey McGovern. "Office properties have seen the most significant growth in the overall balance of delinquencies since the end of last year and will remain under pressure as leases roll to market amid prospects of slower economic growth."

In total, CREL CDO asset managers reported approximately US$73m in realised losses from the disposal of defaulted and credit-impaired assets in March. The highest single loss came from the discounted sale at 69% of par of a defaulted whole loan secured by an office property located in midtown Manhattan.

The original business plan for this property was to vacate tenants and ultimately redevelop the property. However, this plan stalled and the loan defaulted at maturity in March 2009.

The second largest loss involved the discounted payoff at 6.3% of par of a B-note secured by an industrial property located in Warren, MI. The asset manager agreed to the low amount, given the senior lender's ability to foreclose out the interest. Recoveries on disposed credit-impaired assets in March averaged slightly higher than last month at approximately 60% of par.

CDO

Trustees update on ABS CDO liquidations

The trustee for the Ridgeway Court Funding II ABS CDO has been directed to sell and liquidate the deal's collateral in a public sale. All secured parties to the transaction are eligible to bid on the portfolio.

Due to the liquidation, no distributions of any kind will be made on any subsequent regularly scheduled payment date. A final distribution will be made after the completion of liquidation on a date fixed by the trustee.

Separately, the trustee for the Forge ABS High Grade CDO I has liquidated the deal's portfolio (SCI 28 March). However, it notes that the proceeds of the sale of the collateral, together with any other funds available for payment on the distribution date will be insufficient to pay the class A-1 notes in full. No payments will be made on any other class of notes.

US$200,000 will be reserved for payment of expenses or to settle any other residual matters. Any residual funds will be distributed to the class A-1 notes in a later distribution.

CDS

Collateral agreements, electronic confirmation up

Among large dealers, 80% of all transactions are now executed with the support of a collateral agreement, according to results from an ISDA margin survey. A second survey on operations benchmarking also shows progress, with 100% of eligible CDS now confirmed electronically.

The process of reconciling collateralised portfolios shows steady signs in adoption. The results of the first survey show that 100% of large dealers and 73% of all respondents are proactively performing portfolio reconciliations.

"Market participants continue to expand their use of collateral to mitigate over-the-counter derivatives credit exposures," comments Conrad Voldstad, ISDA ceo. "This is particularly true in the credit derivatives markets, where 93% of all trades executed were subject to collateral arrangements in 2010."

The survey of 14 large dealers shows they delivered around US$41bn of collateral as margin to central counterparties. US$36bn of this was in their executing broker capacity and US$5bn was in their clearing member capacity. Active collateral agreements number nearly 150,000, of which 90% are ISDA agreements.

The second survey indicates that the move to electronic confirmation has been completed. From 99% of eligible CDS confirmed electronically last year (SCI 28 April 2010), the market has now become completely automated. The number of eligible interest rate derivatives confirmed electronically has also grown since last year, increasing from 77% to 83%.

ISDA also notes that the number of confirmations outstanding continues to decrease. From 1.1 days' worth of aged outstanding confirmations last year, credit derivatives now show an average across respondents of 0.5 days. Equity derivative confirmations and interest rate derivative confirmations also fell, from 7.3 days to 6.7 days and from 2.8 days to 2.1 days respectively.

"Throughout the years, ISDA and its members have led industry efforts to strengthen the operational infrastructure of over-the-counter derivatives," says Robert Pickel, ISDA's executive vice-chairman. "The results of the 2011 ISDA operations benchmarking survey show that the industry continues to focus on building a stronger and more resilient operational infrastructure for these products."

CDS

Swaps roundtable announced

The US CFTC and SEC intend to hold a two-day joint public roundtable on 2-3 May to discuss the schedule for implementing final rules for swaps and security-based swaps under the Dodd-Frank Act. The roundtable is intended to supplement the comments received to date and help inform the commissions as they proceed with rulemaking.

Among other issues, comments are invited on whether to phase implementation of the new requirements, compliance dates for new rules for existing trading platforms and on clearinghouses. The roundtable will also address the registration and compliance with rules for new platforms, such as swap and security-based SEFs and data repositories for swaps and security-based swaps.

The roundtable will be held from 9:30am to 4:00pm each day in the Conference Center at the CFTC's headquarters in Washington, DC. The discussion will be open to the public, with seating on a first-come, first-served basis. Members of the public also may listen by telephone.

CLOs

Sea change in CLO opinion

New issuance growth for 2011in the US CLO market is expected to be between US$5bn-US$20bn, according to Fitch. A survey of new and existing investors carried out by the agency last month found a consensus that as the market evolves, investors believe the CLO structure should evolve as well, with a particular change of opinion on post-closing amendments.

The new generation of CLOs contains several structural enhancements that are being well-received by most participants, the survey suggests. However, for future CLO issuance fundamentals remain key.

Fitch senior director Elizabeth Nugent notes: "Investors overwhelmingly agree that the credit quality of the underlying portfolio assets remains the pre-eminent driver of CLO performance."

The survey identifies increased interest among CLO investors to participate in post-closing amendments. Investors are in agreement that majority consent from each class of notes is appropriate for nearly all post-closing amendments, rather than just consent of the majority of the controlling class. Nugent says this represents a significant change in opinion, likely driven by the exit of monolines and SIVs from the sector.

CLOs

CSAM CLO prepped

Further details have emerged on Credit Suisse Asset Management's forthcoming US$410m Madison Park Funding VII CLO. The transaction is expected to close on 18 May via Bank of America Merrill Lynch.

Rated by S&P, the deal comprises US$255m triple-A rated class A notes (which are expected to price at 125bp over three-month Libor), US$37.5m double-A class Bs (185bp over), US$26m single-A class C1s (270bp), US$10m single-A class C2s (5.5%), US$22m triple-B class Ds (355bp), US$19.5m double-B class Es (440bp) and US$40m unrated subordinated notes. The class C1 to E tranches are all deferrable notes.

The CLO pools broadly syndicated senior secured loans, with 98 obligors.

CMBS

CMBS payoffs hit post-2008 high

The percentage of US CMBS loans paying off on their balloon date posted the highest reading since December 2008, according to Trepp's March Payoff Report.

"For only the second time since late 2008, the percentage cracked the 50% threshold - providing more evidence that the CMBS market continues to gain momentum," Trepp says.

Overall, 55.5% of the loans reaching their balloon date paid off in March. Over the last 12 months, the average percentage of loans by balance paying off each month has been 36.7%.

Trepp goes on to say: "In another twist from the recent trend, the percentage of loans paying off by balance (55.5%) was higher than the percentage paying off by loan count (52.2%). This is evidence that, in March, it was the larger loans that tended to payoff in a timely fashion. This continues the line of thinking that larger loans/trophy properties are having an easier time finding financing in the current environment."

Trepp adds that this shift is a departure from the statistics seen over the last two years. Only three times in the last 27 months has the percentage of loans paying off by balance been greater than the percentage paying off by count. In other words, over the last two years, the bias has been for the smaller loans to find a way to pay off - not the larger ones, it explains.

CMBS

CMBS loan performance, extensions assessed

Fitch has released two reports on the European CMBS sector. The first analyses 10 of the largest conduit programmes in the region and finds that the performance of European CMBS loans varies significantly by programme. The second suggests that extension requests for CMBS loans remain high, as borrowers struggle to repay their loans at maturity.

Fitch European CMBS director Gioia Dominedo says: "Of the ten largest programmes, the highest proportion of fully performing loans can be observed for the EMC and Opera programmes. The programme with the lowest proportion of performing loans is Talisman, followed by Windermere."

The reasons for loans being classified as non-current also vary across programmes, the agency says. For example, the highest proportion of term payment defaults has occurred in the Titan and Talisman programmes, accounting for 12.5% and 12.1% of the programme's loans respectively. Payment defaults in other programmes account for between 4% and 9% of loans, while ELoC and Opera transactions have not seen any payment defaults.

Differences in performance are also visible in average ICRs, DSCRs and LTV ratios. "When comparing the outstanding leverage of loans, the lowest average Fitch LTV is posted for the Epic programme, followed by the Opera and ELoC programmes. On the other end of the spectrum are the Titan, DECO and Eclipse programmes; all of which have average A-note Fitch LTVs over 100%," adds Dominedo.

While most banks were involved in CMBS issuance before the crisis, the volume of issuance varied significantly across institutions. At present, the conduit programme with the most outstanding loans is Deutsche Bank's DECO (accounting for 15.5% of CMBS loans), followed by Credit Suisse's Titan (12.6%) and Barclays Capital's Eclipse (10.6%).

Smaller contributors stem from Lehman Brother's Windermere (5.7%), ABN Amro's Talisman (5.2%), Morgan Stanley's ELoC (5.1%) and Merrill Lynch's Taurus (4.1%). No other programme accounts for more than 4% of outstanding loans, according to Fitch.

Meanwhile, the agency reports that 42 loans securitised in Fitch-rated CMBS transactions have been extended as of 1Q11 - with 35 of these still outstanding. While the number of loans extended every quarter is fairly stable, the proportion of total loans extended continues to grow. As of end-1Q11, 5.5% of outstanding loans had been extended.

"Loan extensions are clearly attractive to borrowers due to the value declines that have occurred, which in many cases have written off the original equity contributions and the lack of alternative funding. Even if borrowers are able to secure new funding, this is almost invariably on less attractive terms than their existing debt package. Consequently, it is unsurprising that the number of extension requests remains high," says Charlotte Eady, Fitch CMBS director.

While an extension is always favourable for borrowers, this is not always the case for lenders or noteholders. An extension may indeed have a positive effect, by allowing the borrower time to execute a value-enhancing business plan, manage an orderly portfolio liquidation and/or obtain new financing. However, an extension may also result in value deterioration, particularly where the collateral value is highly dependent on the in-place leases.

"When an extension is not a contractual right set out in the loan documents, Fitch expects servicers to exercise their discretion in order to determine whether an extension is indeed the best course of action for a loan. For example, the agency would expect servicers to turn down extension requests in cases where borrowers would be able to repay the debt without an extension," adds Eady.

Where servicers agree to grant an extension, Fitch expects servicers to be proactive in their negotiations with borrowers in order to improve loans' exit positions in return for granting an extension. It appears that servicers of European CMBS loans are not granting loan extensions where they have the discretion to refuse such requests, without some form of cash extraction from borrowers. This is evidenced by 83% of discretionary loan extensions featuring an additional equity injection and/or having had their terms amended to prevent cash from being released to the borrower.

By contrast, where loan agreements feature extensions, they typically do not require any borrower concessions. Consequently, it is unsurprising that 95% of all contractual extensions did not feature a cash injection, cash sweep or cash trap mechanism, the agency concludes.

CMBS

Euro CMBS loan repayment rate to fall

The proportion of European CMBS loans that are repaid in an orderly manner at maturity is likely to fall, compared to the loans that have already matured, according to Fitch. Just over half of the 152 loans that have reached their scheduled maturity dates since the onset of the credit crisis have either prepaid or repaid.

Whole loan balances, ICRs and LTVs have proven to be key determinants of the likelihood of redemption. The loans that have paid off had on average a balance of €47m, an ICR of 2.7x, a reported LTV of 65% and a Fitch LTV of 76%.

"Based on the characteristics of loans that have repaid to date, only 71 of the 547 additional loans that will reach their maturity dates by end-2021 are expected to repay either at or shortly after their scheduled maturity dates. The key factor limiting future loan repayments is leverage, with loans posting an average reported LTV of 79% and a considerably higher average Fitch LTV of 101%," says Gioia Dominedo, Fitch CMBS director.

A further 182 loans have credit characteristics consistent with loan extensions, while it seems most likely that many of the remaining 294 loans will go into standstill or a workout process - unless property and/or lending market conditions improve in the coming years. This does not necessarily imply that losses will be realised on all of these loans, Fitch notes.

However, an orderly sale or refinancing is considered less likely and, consequently, losses are more likely. The fact that only a relatively small proportion of outstanding CMBS loans are expected to repay in an orderly and timely manner reflects the key risk facing loans secured on commercial property, as well as their increased leverage following the recent credit crisis.

"The implication is that, under current market conditions, the majority of loans are sufficiently distressed that they are unlikely to be repaid through an 'orderly' exit at maturity. This typically relates to the loans' leverage positions, especially on a whole-loan basis," adds Dominedo.

While the markets for prime commercial property in certain jurisdictions have recovered, the secondary and tertiary properties that form the bulk of CMBS collateral have yet to benefit from this improvement. Consequently, any future movement in value for such collateral will be the key driver of the success of sales and refinancings at loan maturities, Fitch concludes.

CMBS

Some GSW funds to be allocated

A distribution will be made on the 26 April IPD to Fleet Street Finance Three class A1 noteholders of the amount of the GSW funds that are due and payable under either of the pro rata or the sequential application. The amount of this distribution is expected to be approximately €194.94m, with the balance of the GSW funds retained pending the ruling of the High Court of England and Wales (SCI 30 March).

CMBS

Cantor brings debut CMBS

Cantor Commercial Real Estate (CCRE) has come to the market with its first transaction - CFCRE 2011-C1. The US$634.3m CMBS is backed by 38 loans, secured by 67 properties in New York, Georgia, California and Florida. Cantor Fitzgerald has underwritten the deal.

Given that the originator is new to market, Fitch - which has rated the deal - reviewed a higher percentage of loans in the pool compared with recent transactions. The deal has a Fitch stressed LTV of 92.7%, which is also higher than levels for recent fixed-rate CMBS.

The agency notes that the pool has no hotel properties and less exposure to retail properties (at 27.2% of the collateral) than recent conduit transactions. Multifamily properties represent 22% of the pool.

A number of specialised assets are also included in the portfolio, to which Fitch applied higher cap rates, refinance constants or volatility scores. Five loans - the NGP portfolios I, II and III, as well as Heights at McArthur Park and Columns at Independence - have exposure to the US government. The Tribeca West loan has a high dependency on the entertainment industry and management's ability to procure post-production business, according to the agency.

The transaction comprises four triple-A rated class A tranches, as well as junior notes split over seven tranches.

CMBS

US CMBS delinquencies slip

The delinquency rate on loans included in US CMBS conduit/fusion transactions inched down by 2bp in March to 9.16%, according to Moody's Delinquency Tracker (DQT). More significantly, the total dollar balance of delinquent loans for the US declined in March, slipping to US$56.5bn from US$56.8bn during the month. This was the first monthly decline in the balance since October 2007, the agency says.

During March, loans totalling US$2.7bn became newly delinquent, while previously delinquent loans totalling approximately US$3bn became current, worked out or disposed of. In all, the total number of delinquent loans decreased to 4,097 in March from 4,112 in February.

The decline in the delinquency rate was largely due to the addition of new loans to the Tracker. The current loans add to the total and in turn lower the percentage that is delinquent through what is called the 'denominator effect'. The addition of new loans is expected to continue to suppress the delinquency rate as the year goes on.

Excluding more recently issued CMBS, specifically CMBS issued since 2009, the delinquency rate increased by four points in March to 9.39%. "The range in performance by MSA varies greatly. With local delinquency rates ranging from less than half to more than three times the national average," says Moody's analyst Tad Philipp.

The five best performing major metro areas are San Jose (2.9% delinquency rate), Boston (3%), Baltimore (3.3%), Washington DC (3.7%) and Denver (3.9%). The five worst performing major metro areas and the respective delinquency rates are Las Vegas (32.1%), Riverside (19.0%), Tampa (17.6%), Phoenix (16.4%) and Orlando (16.1%).

New York, the MSA with the largest outstanding CMBS loan balance (13%), had a delinquency rate of 8.85% - slightly below the national average. However, one loan - Peter Cooper Village and Stuyvesant Town - accounted for 42% of New York's overall delinquent balance.

By property type, the industrial delinquency rate fell by 34bp in March to 9.92%, after large increases in January and February. Hotel loans also saw their rate decrease in March by 12bp to 16.29%.

The delinquency rate for retail loans increased 2bp during March to 7.27%, while the rate for office properties increased 12bp to 6.89%. "Industrial, multi-family and hotel saw more resolutions than new delinquencies, while office and retail saw more delinquencies than resolutions," adds Philipp.

None of the four national regions had a change in their delinquency rate greater than 6bp. All saw small declines, except the West, where the delinquency rate increased to 9.54%.

RMBS

Servicer enforcement actions announced

The US Federal Reserve has begun formal enforcement actions requiring 10 banking organisations to address a pattern of misconduct and negligence related to deficient practices in residential mortgage loan servicing and foreclosure processing (see SCI 16 March). These deficiencies represent significant and pervasive compliance failures and unsafe and unsound practices, the Fed says.

The 10 banking organisations are Bank of America, Citigroup, Ally Financial, HSBC North America Holdings, JPMorgan Chase, MetLife, The PNC Financial Services, SunTrust Banks, US Bancorp and Wells Fargo. Collectively, these organisations represent 65% of the servicing industry, or nearly US$6.8trn in mortgage balances.

The Fed is taking actions to ensure that firms under its jurisdiction promptly initiate steps to establish mortgage loan servicing and foreclosure processes that treat customers fairly and which are fully compliant with all applicable law. In addition, the enforcement actions order the organisations that have servicing entities regulated by it - Ally Financial, SunTrust and HSBC - to promptly correct the many deficiencies in residential mortgage loan servicing and foreclosure processing.

The Federal Reserve plans to announce monetary penalties in addition to the corrective actions that the banks are expected to take in due course.

Formal enforcement actions have also been taken against Lender Processing Services (LPS) and MERSCORP (MERS). The action requires LPS to address deficient practices related primarily to the document execution services that LPS - through its subsidiaries DocX and LPS Default Solutions - provided to servicers in connection with foreclosures. MERS is required to address significant weaknesses in oversight, management supervision and corporate governance.

The LPS action is being taken jointly with the OCC, the FDIC and the Office of Thrift Supervision, while the MERS action is being taken jointly with those agencies and the FHFA.

RMBS

Assured RMBS claim settled

Assured Guaranty says it has reached a comprehensive settlement with Bank of America and its subsidiaries, including Countrywide Financial Corporation, regarding their liabilities with respect to 29 RMBS insured by the monoline. The agreement includes claims relating to reimbursement for breaches of representations and warranties and historical loan servicing issues.

The settlement agreement includes a payment of US$1.1bn to Assured Guaranty, as well as a loss-sharing reinsurance arrangement on 21 first-lien RMBS transactions. The settlement covers all Bank of America or Countrywide-sponsored securitisations, as well as certain other securitisations containing concentrations of Countrywide-originated loans that Assured Guaranty has insured on a primary basis. The settled transactions have a gross par outstanding of US$5.2bn as of 31 December, or 29% of Assured Guaranty's total sub-investment grade RMBS net par outstanding, and consist of eight second-lien deals and 21 first-lien deals.

"We are pleased to have reached a settlement with Bank of America that puts this legacy issue behind both of us," says Dominic Frederico, Assured president and ceo. "This settlement significantly strengthens our balance sheet, allowing us to more effectively assist municipal issuers. We hope that this settlement - negotiated outside of litigation - encourages other R&W providers, including JPMorgan Chase, Deutsche Bank and Flagstar Bank, to accelerate the R&W claims settlement process."

The cash settlement will be paid in full by 31 March 2012, with an initial payment of US$850m being paid on 14 April 2011. In addition, Bank of America and Countrywide have agreed to a reinsurance arrangement that will reimburse Assured Guaranty for 80% of all paid losses on the 21 first-lien RMBS transactions until aggregate collateral losses in those transactions exceed US$6.6bn.

Cumulative collateral losses on these transactions were approximately US$1.3bn with no paid losses by Assured Guaranty as of 31 December. As of that date, Assured Guaranty's gross economic loss on these RMBS transactions - which assumes cumulative projected collateral losses of US$4.6bn - was US$490m.

RMBS

GSEs among drivers of US outlook change

S&P has affirmed its triple-A long-term and A-1+ short-term sovereign credit ratings on the US, but has revised its outlook on the long-term rating to negative from stable. The negative outlook signals that there is at least a one-in-three chance that the agency could lower its long-term rating on the sovereign within two years.

The outlook reflects the increased risk that the political negotiations over when and how to address both the country's medium- and long-term fiscal challenges will persist until at least after national elections in 2012, according to S&P.

Among the fiscal risks S&P points to for the US is the potential for further extraordinary official assistance to large players in the financial or other sectors, along with outlays related to various federal credit programmes. For example, the agency estimates that it could cost the government as much as 3.5% of GDP to appropriately capitalise and re-launch Fannie Mae and Freddie Mac, in addition to the 1% of GDP already invested.