News Analysis
CLOs
Branching out
CLO managers diversify to survive
European CLO managers are broadening their capabilities in order to compete in an ever-shrinking market. Avoca Capital recently hired a credit team from Liontrust as part of its bid for diversification (see SCI 13 April), while upcoming risk retention rules may drive smaller players out of the market.
"To have 65-70 managers sharing a credit market that totals €100bn is quite fragmented. In a business that rewards economies of scale, as asset management does, that is proving to be unsustainable," says Clayton Perry, coo at Avoca Capital.
He continues: "The current situation is that many of those managers are pulling out of the market, having finally convinced themselves they will not be able to continue to grow their business now that the CLO market has gone into hiatus. Without an active CLO market, it has been very difficult for a lot of managers to grow in Europe."
Alastair Sewell, Fitch associate director, explains that the market will only become more competitive so long as there is a lack of new issuance. He says that in such an environment asset managers must either consolidate or diversify.
Sewell says: "The existing pool of CLOs out there to be managed is running down. Inevitably, in the absence of new issuance, there will be less business around for managers to engage in. That leaves two options to CLO managers: either consolidation, which is a finite business; or diversification, which is far more open-ended."
There has not been much CLO manager consolidation in Europe because the asking prices have typically been too high, according to one CLO manager. "Sellers often seem to expect a consideration that amounts to the prefunding of around 80% of future management fees, for example. This is typically only paid where the buyers have been public companies looking to send a message to shareholders that they are successful in increasing AUM, but I can't imagine it is a very profitable way of increasing AUM," he says.
Manuel Arrive, Fitch senior director, believes the low level of consolidation can be partly explained by the fact that managers can also increase their AUM by other means. He says: "You consolidate when you want to increase your AUM, but leveraged loan managers now have other avenues than acquiring CLOs to achieve this goal. CLO managers now are primarily leveraged loan managers, which can be done through different types of vehicles. There is a growing appetite for loans in the context of increased inflation expectations and regulatory changes."
Indeed, given the many challenges that the European CLO market faces and the limited prospects for new issuance in the near future, leveraged loan managers are repositioning themselves in order to survive. High yield bonds also appear to be a natural fit, with the inflow into this sector rising significantly over the last year.
"The same companies that used to issue in the bank loan market are now issuing in the high yield bond market - where there is plenty of liquidity and investors," explains Oliver Burgel, md at Babson Capital Europe. "A new asset class is emerging: senior secured bonds have a similar risk/return profile as bank loans, but they can be sold through UCITS funds."
He adds: "From a regulatory perspective, bank loans are often still seen as 'alternatives' and institutional investors typically reserve a 5%/10% bucket for alternatives - which deploy for sectors like private equity and hedge funds. Senior secured and unsecured high yield bonds are the closest UCITS-compatible substitute to bank loans and both asset classes have seen strong inflows."
Unlevered bank loan funds in Europe are limited by the UCITS restrictions on transferability. As it is impossible to guarantee instant liquidity on the underlying, the marketing of such funds to retail investors under UCITS III is prohibited.
Perry, meanwhile, explains the importance of adding the Liontrust team for Avoca's expansion. He says: "It is a part of a strategy to diversify. Leveraged loans are still the core of our business, but we believe that the general European credit manager is a relatively rare breed at the moment and that is a space we would like to take part in."
He continues: "It is our strategy to expand into other areas of credit that are adjacent to what we already do. The Liontrust hedge fund team gives us the ability to get into the public securities market and also to play long-short, so that is a very important step for us along the road to becoming a European credit manager as opposed to a European leveraged loan manager."
"Avoca is a great example of diversification. They were originally a CLO manager, but they began to diversify a couple of years ago. That included consolidation, but they also started launching segregated loan mandates. What they have done with Liontrust is an extension of the diversification activities they have already engaged in," says Sewell.
He continues: "The funds acquired from Liontrust are credit hedge funds, so this is diversifying beyond leveraged loans. This is a form of secondary diversification, in that the first diversification for CLO managers was by structure (such as into separately managed accounts). This is a secondary phase into related, but non-core asset classes, which is leveraging the corporate credit experience and expertise Avoca has in the leveraged space into a wider credit space."
Further CLO manager diversification is expected, but that does not mean that consolidation is over. One driver of consolidation could be risk retention requirements because - unless they can rely on a balance sheet to co-invest in deals - it is questionable whether marginal players will have the resources to bring CLOs in the new regulatory environment.
Arrive notes: "Risk retention rules may make business too capital-intensive for small asset managers. Asset managers should not have to retain equity on deals because they are not supposed to put their own balance sheet at risk. Asset management is an agency business, not a proprietary one. It can be argued that it is against the nature of asset management to require asset managers to invest equity in any of their deals."
A potential way of getting around CRD Article 122a is to market to investors who will not be affected by these rules, such as non-European credit institutions or pension funds. But Burgel suggests that tight debt execution would be questionable in these scenarios due to having to market to a more limited investor base.
An investor could also buy some of a CLO's equity and receive co-investment rights in return. "CLO equity is typically syndicated between 15 investors. Theoretically, a pension fund could take down 100% of the equity, but we haven't seen that happen yet. In any case, it's debatable whether a manager would accept the presence of someone telling them how to run the CLO, albeit in reality the co-investor probably might not interfere that much," Burgel notes.
More importantly, it is questionable whether a structure that is designed to circumvent these requirements will get an investor over the line, as it is the investor rather than the manager who pays the price if a regulator invalidates the arrangement. Ultimately, managers will probably have to retain 5% if they want to attract European investors.
Perry, for one, does not believe risk retention will be the issue that closes the book on the European CLO market. He says: "I believe skin-in-the-game rules will not be the deal killer for European CLOs; I think the economics of European CLOs are the much bigger issue. When the economics work, solutions will be found for the other issues."
JL & CS
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Market Reports
CMBS
CMBS new issuance gathering pace
The focus of US CMBS market participants over the last week has largely been on upcoming primary deals. Wells Fargo, JPMorgan and UBS are all in the market with securitisations due to launch over the next few weeks.
"The US CMBS market has been relatively slow over the past week and especially light in volume. Yesterday was particularly quiet, with hardly any activity at all," one CMBS trader says.
Spreads moved sideways, becoming gradually tighter over the past week, the trader adds. An indication of this is GG10's A4 tranche, which dropped from the previous week's levels of 190 to 180.
Meanwhile, spread levels on Cantor Fitzgerald's CFCRE 2011-C1 CMBS (SCI 18 April) - which priced last week - have already tightened on secondary activity, albeit only slightly. "With it only pricing last week, it's too early to tell how the deal will go," the trader comments. The timing of the transaction is nevertheless said to have been somewhat poor, given S&P's rating action on the US sovereign.
Elsewhere in the market, the trader indicates that Wells Fargo is working on a US$395m FDIC deal, while UBS is prepping a small balance CMBS dubbed Velocity Commercial Capital Loan Trust 2011-1. Both transactions are expected to launch over the next few weeks.
Further ahead in terms of the pipeline, Morgan Stanley is expected to bring a US$1.5bn CMBS with Bank of America. In addition, the Blackstone Group is said to be looking at securitising a US$800m five-year floating-rate loan from JPMorgan. The loan is intended to refinance debt on a portfolio of hotels.
LB
News
ABS
Euro ABS data warehouse underway
The ECB is expected to unveil plans for an ABS data warehouse tomorrow, 22 April. The move follows the central bank's December announcement that it intends to establish loan-by-loan information requirements for ABS in the Eurosystem within 18 months (SCI 17 December 2010).
The ABS data warehouse will hold loan-by-loan data on historical, current and future ABS issues. According to Paul Burdell, ceo at Link Financial, the warehouse will be owned by the market for the market. A constructor will be selected this summer to build it, with operations targeted to begin in the summer of 2012.
A Market Group, made up of senior representatives each from the ABS buy- and sell-side, will oversee the tender process and the fee structure for the users of loan-level information. This fee will cover the cost of ensuring that the data submitted from originators is in compliance with the fields and definitions included in the specific ECB reporting templates.
"We've tried to keep the structure of the warehouse very simple and complementary to other value-added analytics solutions," explains Burdell, who is the senior advisor of the ECB in this initiative. "The warehouse will be 'dumb', thus enabling users to process ABS loan-level data in compliance with the current regulatory requirements, such as Article 122a under the Capital Requirements Directive. The idea is to provide investors with a standardised template that makes it easier to understand and monitor the risks on their books across asset classes and jurisdictions."
Originators will have to start transmitting loan-level data to the warehouse under the Eurosystem collateral framework eligibility criteria from mid-2012 as part of the ECB repo operations. The hope is that issuers and originators in Europe will use the ECB templates, as well as the ABS data warehouse going forward to attract more investors to the sector.
"The market used to be characterised by what I call the 'not applicable' syndrome, in that issuers didn't think they needed to disclose detailed information. But this mentality has changed since the crisis so much that the market is now much more investor-friendly. There may also be a pricing impact in terms of deals that have full disclosure, given that the cashflows will allow a more precise pricing for transactions providing loan-level data rather than those that don't," notes Burdell.
Market participants are expected to eventually be able to buy shares in the warehouse in exchange for voting rights and access to the ABS data at discounted rates. The constructor of the warehouse will likely receive a preferential ownership stake in it.
A Technical Working Group was formed 18 months ago to create the loan-level data reporting template as part of the ECB ABS Loan-Level Data Initiative. Its members include investors, originators, rating agencies, central banks, industry associations and a law firm.
The first template to be rolled out under the initiative was for RMBS on 16 December 2010; the templates for CMBS and SME transactions will be published shortly. Other ABS asset classes will follow in due course.
CS
News
CDS
Idiosyncratic risk trades touted
Idiosyncratic risk is emerging once again in iTraxx portfolios, driving a divergence in performance between the average and the tails in the European credit universe. The move coincides with the roll of the index and the transition of tranches from the legacy iTraxx S9 index.
Credit derivatives strategists at Morgan Stanley believe the increased idiosyncratic risk, better visibility of tail risks in Europe and a cleaner iTraxx S15 portfolio create opportunities for a number of different tranche trade ideas. For example, they suggest that tail credit DSG International could be the catalyst that finally sparks a correlation move lower.
"Clearly, we - and the broader market - will be focused on the trajectory that DSG CDS takes, as it is the most important driver of tranches in the near term. DSG is a prolific name in the indices, with about US$1bn net notional of CDS outstanding in single name form," they note.
With the exclusion of DSG and Banco Espirito Santo - as well as several autos and industrial names - from iTraxx S15, the widest name in the index now trades at around 260bp and the five widest credits at around 220bp on average.
Given that investors have a better handle on sovereign risks than a year ago, the Morgan Stanley strategists also put forward selling protection on 3%-100% risk as a secular trade to monetise the risk premiums in investment grade credit, as well as express a short correlation view. They also recommend going long S15 0%-3% versus short S9 0%-3% as an inexpensive way to own DSG jump protection.
"This is a trade that works with all three maturities available," they explain. "At the short-end, there is not enough price differentiation between the two equity tranches, whereas at the long-end there is very little correlation premium in S15 over S9."
Unlike the CDX IG15 roll in the US that involved collapsing the six tranches into four (SCI 29 September 2010), the iTraxx roll will retain the original tranches. This is said to be because the existing structure is better for expressing relative value views.
CS
Job Swaps
ABS
Securitised products co-head named
Barclays Capital has named Diane Rinnovatore as co-head of securitised products origination (SPO) in its Americas global finance and risk solutions business. She joins Cory Wishengrad, who has been SPO co-head for the past year.
Rinnovatore has almost 20 years of experience in consumer and mortgage securitisation. She has covered banks in Barclays' debt capital markets group for the past three years and previously worked for Lehman Brothers, where she was co-head of securitised products banking.
Job Swaps
ABS
IFMI buys into PrinceRidge
Institutional Financial Markets (IFMI) has announced a US$45m investment in PrinceRidge Holdings. The investment from IFMI is a combination of cash and equity interests in a capital markets subsidiary in exchange for a majority equity interest in PrinceRidge.
Daniel Cohen, chairman and ceo of IFMI, says: "We are very excited to be a part of the new PrinceRidge. With PrinceRidge's leadership and combined businesses, we will increase our capital base and effectively double our team of capital markets professionals."
He adds: "In addition, we will expand our financial resources and enhance our ability to attract and retain top talent. PrinceRidge has an experienced team with a proven track record of success and we look forward to working with them to create value for IFMI's shareholders."
JVB Financial Group, which IFMI recently acquired, is not included in the transaction. Cohen does, however, say he believes there will be "significant synergies" between JVB and the new PrinceRidge combined business.
IFMI says most of its capital markets employees and certain support staff, totalling 61 professionals, will continue their association under the new structure. The move helps PrinceRidge launch in London, as IFMI anticipates that most of the professionals in its European capital markets operation will join their US colleagues as part of the new set-up once PrinceRidge obtains its UK FSA license.
John Costas and Michael Hutchins will continue in their current roles as PrinceRidge chairman and ceo respectively. Cohen will become vice chairman, cio and md of structured products for the company.
The PrinceRidge board of directors will include Cohen, Walter Beach and Lance Ullom from IFMI's current board, as well as Costas and Hutchins. IFMI also says Chris Ricciardi will remain as president of IFMI through a transition period, but will no longer be ceo of its capital markets division.
Subject to FINRA approval, the transaction is expected to be completed within 60 days.
Job Swaps
ABS
Aviation research md recruited
Deutsche Bank has appointed Douglas Runte as md and head of aviation debt research within its markets division. Runte will cover the transportation sector, focusing on airline, aircraft lessor and other aircraft-related debt across the investment grade, high yield and ABS markets. Based in New York, he will report to Steve Abrahams, the md and head of securitisation and MBS research at the bank.
With over 20 years of experience in fixed income research, Runte was most recently md and senior aviation analyst at Piper Jaffray. He previously worked at Morgan Stanley, where he was the senior analyst for both debt and equity for North American airlines and aircraft-backed securities.
Job Swaps
ABS
NewOak duo find new home
Brevet Capital Management has recruited a pair of ex-NewOak Capital employees to enhance its New York capital markets and structured finance advisory business. Brock Wolf and Jamie Wing have been appointed as md and director respectively, having previously held the same titles at NewOak. Before that, Wolf was a vp, structured finance at Garrison Investment Group, while Wing worked at BTMU Capital.
Job Swaps
CDS
Advisory hires pension plan strategist
Riverside Risk Advisors has recruited Steven Plake to broaden its relationship with corporate and public pension plans.
"We are reaching out to pension funds, their consultants and investment managers in a derivatives advisory capacity. Steve will lead Riverside's pension effort, helping plans in evaluating transactions and assisting in the construction and execution of derivatives strategies, complying with fiduciary duties and working through Dodd-Frank transition issues," says Riverside partner Joyce Frost.
Prior to joining Riverside, Plake was at NISA Investment Advisors, where he assisted in the development, implementation and execution of hedging strategies for pension plans. He was also a member of the firm's risk management and counterparty credit review committees.
Job Swaps
CLOs
CLO manager replacement confirmed
The replacement of Octagon Credit Investors (UK) by Ares Management as investment manager on the OCI Euro Fund I has been confirmed (SCI 17 March). Moody's has determined that the move will not cause the current ratings of the notes to be reduced or withdrawn. The agency does not express an opinion as to whether the amendment could have other, non credit-related effects.
Job Swaps
CLOs
Permacap undertakes strategic review
Greenwich Loan Income Fund (GLIF) is undertaking two significant steps that it says are consistent with its strategy to take advantage of market opportunities and optimise returns from its investments in the loan market.
First, Berkshire Capital has been engaged to undertake a review of the company's exposure to the CLO market, which is currently through GLIF's holding of 100% of the equity interest of T2 CLO I. The purpose of the review is to establish whether GLIF could enhance its return, while not materially affecting its risk profile, through the reduction in its holding in the CLO to the point that the CLO is no longer consolidated. The review will also consider replacement investment opportunities of comparable risk and reward in line with the company's investment objective.
Were the CLO no longer consolidated, the effect would be to substantially reduce management fees paid by GLIF, as the gross assets of the company would be significantly reduced. In addition, the net asset value of the company would reduce, as it would no longer reflect the marking to market of liabilities below par. The net asset value would then be more comparable to other listed loan-focused investment companies.
Second, with effect from 28 April, Geoff Miller will move from his current role as non-executive chairman to that of a full time executive director of the company. Patrick Firth will move from his current role of a non-executive director to that of non-executive chairman, while Fred Forni will remain in the role of non-executive director.
When Miller took up his role of non-executive chairman in 2009, it was intended that he would oversee GLIF's transition towards a more mainstream vehicle. However, as the company has moved from a very focused investment in the T2 CLO to a more diverse exposure to loan markets and particularly since the acquisition of Asset Management Investment Company, Miller has spent the majority of his time managing the capital structure of GLIF, its relationship with the market, liaising with the investment managers and looking at future opportunities for the business. Miller's appointment as executive director will therefore enable him to devote the necessary amount of time to continue to grow the company and enhance shareholder value. He will focus on the three key areas of investor relations, capital management and corporate strategy.
Job Swaps
RMBS
Amicus curiae briefs filed in MBIA case
Three amicus curiae briefs were filed yesterday with the New York State Court of Appeals in Albany in the latest twist in the bank policyholder group's US$5bn fraudulent conveyance action against MBIA over its 2009 restructuring (SCI passim). The submissions point out that dismissing the policyholder action under the New York Debtor and Creditor Law would violate due process and set a dangerous precedent, given that the New York State Insurance Department approved the MBIA restructuring without giving policyholders any notice or opportunity to be heard.
Three leading not-for-profit civil rights and legal services groups filed a joint amicus curiae brief, while two legal academics and the investment firms Aurelius Capital Management and Fir Tree Partners filed separate briefs supporting the policyholders' appeal of the First Department, Appellate Division's order dismissing their action against MBIA. Aurelius Capital and Fir Tree are pursuing a fraudulent conveyance action of their own against MBIA in federal court.
The NYCLU, MFY Legal Services and the Urban Justice Center note in their submission that, at its core, the case is about due process and the right of every individual and corporation to have its day in court. The academics say in their brief, meanwhile, that if the ruling is allowed to stand "thousands upon thousands of informal determinations made by state agencies suddenly would have binding effect in judicial proceedings".
The policyholder group filed its appeal brief on 16 March and oral argument in the case is scheduled for 31 May.
Job Swaps
RMBS
Military housing md named
Jefferies has appointed Paul Kopsky as md in its military housing mortgage business within the fixed income division. He will be responsible for expanding the firm's military housing operations and its financing suite of products.
With over 25 years of experience, Kopsky joins Jefferies from American Stock Transfer and Trust Company, where he was evp and cfo. Previously, he was evp and principal accounting officer and controller for Capmark Financial Group, and prior to this was svp at Reinsurance Group of America (RGA).
Job Swaps
RMBS
CMO trading head recruited
Rohit Kumar has joined UBS as md and head of the CMO trading desk. He joins from Barclays Capital, where he was a director at the CMO desk.
Job Swaps
RMBS
Bank bags trading vet
RBC Capital Markets has appointed Peter Hirsch as md and head of US dollar rates and mortgage trading. Based in New York, he is responsible for covering governments, agencies, agency mortgages and derivatives.
Hirsch has more than 25 years of industry experience and joins RBC from Standard Chartered Bank, where he was head of G-10 and emerging markets rates trading in the Americas. He has also held roles at Archeus Capital Management as cio, Citigroup as global co-head of interest rate trading, credit derivatives trading and sales, and at Salomon Brothers as head of US interest rate trading.
News Round-up
ABS
Credit card charge-off improvements resume
After a brief pause in February, charge-offs on US credit cards resumed their improved performance in March - falling to 7.35% from 7.56% the month before - according to Moody's Credit Card Index. The charge-off rate is expected to continue to decline throughout the spring, the agency says.
"Our expectation that the charge-off rate index will break below 7% in the second quarter at this point appears inevitable. However, as the effect of lower quality accounts being purged from trust balances fades away, further improvement will depend on employment trends and the quality of new underwriting," says Moody's avp Jeffrey Hibbs.
Moody's expectation of the charge-off rate index falling below 7% is largely based on the decline in credit card delinquencies that has taken place over the last several quarters. In March, the delinquency rate fell for the seventeenth month in a row, declining by 23bp to 3.79%.
The early-stage delinquency rate - a key indicator of future charge-off rates - fell below 1% for the first time since the beginning of 2000, when Moody's began tracking the metric. The rate dropped by 4bp in March to 0.98%, while the payment rate rebounded from February's seasonal low. However, the magnitude of the 256bp increase was beyond the agency's expectations, pushing the payment rate index to an all-time monthly high of 21.77%.
The yield index in March moved higher by 39bp to 21.70%, as it also followed its typical spring seasonal pattern of higher collections of finance charges. Finally, increased yield and lower charge-offs pushed the excess spread index to another all-time high in March at 11.51%, Moody's reports.
News Round-up
CDS
Five more CEBO contracts added
The Chicago Board Options Exchange (CBOE) is continuing its roll-out of credit event binary options (CEBO) with the addition tomorrow of five new options classes based on financial firms - Bank of America, JPMorgan Chase, Citigroup, Goldman Sachs and Morgan Stanley.
CBOE re-launched its newly-designed CEBOs at the beginning of March, with 10 initial single-name listings (see SCI 23 February). Since then, there has been demand from market participants for a mechanism to protect against potential downside risk in the event of default by broker-dealers.
A CEBO contract has just two possible outcomes: a payout of a fixed amount if a credit event occurs or nothing if it does not. Contract specifications for CEBOs were revised this year, with one change simplifying the terms of a payout for CEBO contracts - allowing CBOE to list contracts that specify bankruptcy as the only trigger for a payout.
Additionally, the size of the CEBO contract payout if a credit event occurs has been revised. If a bankruptcy occurs prior to expiration of the specific contract, the amount of the payout will be US$1000 per contract.
Initial series expirations for the five new contracts will be in December 2011, December 2012 and December 2013.
News Round-up
CDS
Counterparty risk challenges examined
Quantifi has published a whitepaper that explores the key challenges for banks in the implementation of counterparty risk management, focusing on data and technology issues in the context of current trends and best practices. Many banks face the challenge of consolidating their central counterparty risk groups or CVA desks across asset classes and business lines, the firm says.
Among the challenges outlined in the paper is gathering transaction and market data from different trading systems along with legal agreements and other reference data, which can cause significant and underestimated data management issues. It also covers the difficulty in calculating CVA and exposure metrics on an entire portfolio and incorporating all relevant risk factors. Finally, the paper looks at the expectations of traders and salespeople for near real-time performance of marginal CVA pricing of new transactions, while integrating internal counterparty risk management with regulatory processes.
"The OTC markets are going through significant changes due to new regulations and the impending Basel 3 capital accord. Many of these changes are being driven by counterparty risk concerns, either mandating or creating incentives for central clearing and imposing significantly higher capital charges for bilateral trading. In this new environment, banks are transitioning their business models and shifting decision-making authority from the front office to central risk management groups, including CVA desks," says Quantifi director of credit products David Kelly.
News Round-up
CLOs
Attractiveness of CLOs versus CEFs weighed
CLOs and leveraged loan closed-end funds (CEFs) offer structural trade-offs for senior and junior investors, as well as leveraged loan managers, according to Fitch. While both structures are intended to offer leveraged exposure to a diversified pool of leveraged loans, they vary in terms of their regulatory and operating frameworks, investment flexibility, leverage levels and structural triggers.
Regardless of their differences, however, the recent improved performance of the leveraged loan market has spurred new issuance activity in both types of investment vehicles, the agency says. The senior classes of both CLOs and loan CEFs weathered the recent financial stress well from a ratings perspective, with limited downgrades of senior CLO tranches and no downgrades for CEF debt or preferred stock.
The relative performance of different classes of CLOs and loan CEFs is expected to vary depending on the nature, timing and magnitude of any given stress scenario. In the wake of the financial crisis, issuance activity for both investment vehicles has increased, though CLO issuance is still at a fraction of pre-crisis levels.
Interestingly, Fitch says, several of the new leveraged loan CEFs were launched by investment advisors that traditionally have managed CLOs or private equity funds but are now entering the CEF market to diversify funding sources and management fee income streams (see also SCI 26 April). For loan managers, the trade-off between CLOs and loan CEFs will depend on the attractiveness of the permanency of capital associated with loan CEFs against a lower leverage/return profile and the potential ramifications of forced asset sales, the agency concludes.
News Round-up
CMBS
Third consecutive decline for CPPI
US CRE prices as measured by Moody's/REAL National - All Property Price Index (CPPI) fell by 3.3% in February - the third consecutive monthly decline. Down by 4.9% from 12 months ago, the index is only 0.8% above its post-peak low set in August 2010.
"There has been a clear distinction between the level of volatility when the top was forming in 2007 and the ongoing bottoming process," says Tad Philipp, Moody's director of CRE research. "As the top was forming, there was ample repeat-sales transaction volume and few distressed sales. In contrast, the bottoming process has seen large monthly price swings in part caused by fewer repeat-sales, a high percentage of which are considered distressed."
By both count and balance, the number of repeat-sales transactions in February was lower than in January. In February, there were 107 repeat-sales transactions totalling US$1.1bn, down from 116 repeat-sales totalling US$1.45bn the month before.
The number of repeat-sales transactions considered distressed remains at elevated levels. Approximately 29% of all repeat-sales transactions in February were distressed, says Moody's. Nineteen of the last 20 months have seen distressed transactions account for more than 20% of repeat-sales transaction activity.
The long-term performance of non-distressed assets in six major cities peaked higher, by 3%, and earlier, by two months, than the CPPI. However, post-peak the six-city series had a shorter bottom of one year versus 20 months and counting for the CPPI.
According to Philipp, "the six-city series appears to support the belief that while assets in top markets command the highest prices, their implied insurance premium for greater value preservation appears to have been money well spent".
News Round-up
CMBS
Specially serviced CMBS loss severity rises
Moody's latest update on its portfolio of EMEA CMBS loans in special servicing indicates that one new loan transferred into special servicing and one loan transferred out during March. The total number of loans in special servicing remains at 88, accounting for approximately €13.8bn balance outstanding.
Only 0.7% of the loans in Moody's portfolio are not from the 2005 to 2007 vintages. Other characteristics of the portfolio include: 89% of the properties underlying the loans are located in the UK, Germany and France; 50% of the loans are backed by office or retail property types; 78% of the loans have been in special servicing for over a year; and 50% of the loans are delinquent. Two-thirds of the loans were originated under four EMEA CMBS conduit programmes - Eclipse, Titan Europe, White Tower and Windermere.
The majority of the loans are in special servicing due to LTV covenant breaches or non-payment during term or at maturity, according to Moody's. The weighted average loss severity for loans in special servicing increased to 36% from 35% a month ago.
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