Contents

CMBS

Unique CMBS auction approaches

One of the largest ever US CMBS note auctions is due - via the auction.com platform - in mid-May. Around US$700m of notes is to be offered in a sale that is expected to include several unique aspects.

The auction will consist of two parts: a note sale comprising 64 assets and a REO sale with nine assets. The assets are all located in Las Vegas and its vicinity, with 50 assets coming from LNR (represented by Archetype Advisors) and seven assets from C-III (represented by C-III Realty). Most assets were in different stages of delinquency, although some - such as the Green Valley Commerce Center - were reported as current or in a grace period.

A range of property types will be represented in the auction: 10 multifamily properties, 25 retail assets, 17 offices, 13 industrial properties and some land. Of the assets, 13 appear not to be securitised in CMBS deals, however.

The average loan size is quite low at US$11.5m, but some of the assets offered have an outstanding loan balance of more than US$20m. The Fountains at Flamingo and Sahara Pavilion North loans have US$50m and US$56m outstanding respectively, for example.

MBS analysts at Barclays Capital believe this signals that the note sale technique more usually used for smaller balance loans is now spreading to loans with larger balances. Given that the loss severity for note sale dispositions remains high, this raises the possibility of more substantial losses to the corresponding CMBS deals.

One interesting feature of the auction is that investors are able to bid on individual assets, which marks a shift from previous auctions. This raises the possibility that some assets might not be sold and will remain in CMBS trusts after the auction. It also means that loss severity could vary between assets, with bidding wars for better assets likely to occur.

Because most of the loans are securitised in CMBS deals, the BarCap analysts expect that once the auction is finalised loans with successfully sold notes will be reported as liquidated, maybe as early as June. The offering materials provide minimum bid information, so the actual sale price will establish a reference point for future auctions.

For a number of loans, the offering materials also provide greater detail on recent financials, occupancy data and appraisals than is available with the regular remittance package - which the analysts say allows for more accurate predictions of potential loss severities. They point out that the lowest bid for many assets is far below the most recent reported appraisals, so the actual severity on some assets is likely to be much lower than the minimum bid amount implies.

Finally, the disposition mechanism itself is also significant: the auction is expected to be conducted online between 17 and 19 May. Prospective bidders must register and make a deposit of at least US$5,000 to qualify and the buyer's premium is expected to be equal to 5% of the winning bid, which will also be payable by the winning bidder.

The bidding agent does not provide financing, so bidders are expected to be able to obtain financing independently. The analysts consider this to be a relatively new and simple bidding procedure, which should attract a broader base of investors. This would help to establish a fair value for individual assets and ultimately help the respective trusts to recover higher proceeds, they note.

The three transactions with the greatest exposure to the auction are: MLCFC 2006-4 at US$97.9m, GCCFC 2007-GG9 at US$62.5m and COMM 2006-C8 at US$47m.

JL

ABS

Bank adds client solutions head

RBS has appointed Brice Van Elswyk as head of client solutions for insurers in North America in its client structuring and solutions team. Based in Stamford, Van Elswyk will report to Miles Hunt and Joe Carney, co-heads of the bank's client structuring and solutions for the Americas. He joins the bank from Credit Suisse, where he led the US structuring group.

ABS

Barclays buys back Protium assets

Barclays has purchased the outstanding financial interests in Protium Finance, the fund through which it span off US$12.3bn problem structured credit assets (see SCI 23 September 2009). The firm says it is in the process of renegotiating the management arrangements of these assets and expects the acquisition to help facilitate an early exit from the underlying exposures.

Barclays entered into agreements to acquire the third-party investments in Protium for their carrying value of US$270m. From this month, the firm will be exposed to the majority of risks and rewards of Protium, which will be consolidated on its balance sheet.

Under the restructuring of the management arrangements, the general partner interest in Protium will be acquired by Barclays for a nominal consideration and the remaining interest held by C12 - Protium's investment manager - will be redeemed for a consideration of US$83m. Barclays will then become the sole owner of Protium, while C12 will continue to provide management services to Barclays in relation to the assets. As part of the transaction, US$750m of the proceeds from the Protium loan redemption will be invested in Helix, an existing fund managed by C12.

CDS

Senior CDS trader recruited

Peter Ragosa has joined Deutsche Bank's investment grade credit trading group in North America as a director and senior investment grade trader focused on credit default swaps. He will report to Masaya Okoshi, md and head of investment grade trading for the Americas.

Ragosa joins from Barclays Capital, where he was a director responsible for trading investment grade technology and retail CDS. Prior to this, he was a credit derivatives trader at Lehman Brothers.

CDS

Minority credit fund acquisition agreed

Asset Management Finance (AMF) has acquired a passive minority equity interest in Lucidus Capital Partners. AMF has so far invested over US$750m to acquire interests in 21 investment managers that collectively manage over US$80bn of assets.

Post AMF's investment, Lucidus will continue to operate in the same manner with the same staff and investment approach. As an asset manager of liquid credit strategies, Lucidus products have been managed since 1999 by current partners Darryl Green, co-ceo/co-cio, and Geoffrey Sherry, co-cio - who will retain majority ownership of the firm. The investment by AMF - an affiliate of Credit Suisse - will help facilitate the continued institutionalisation of the firm and assist in attracting and retaining key professionals, it says.

All of the after-tax proceeds received by the active partners of Lucidus will be invested in Lucidus' funds. Bruce Kovner and Peter D'Angelo, who have been committed supporters of Lucidus since inception, will continue to hold their minority equity interest in Lucidus via Caxton Associates.

CMBS

Borrower advocate adds md

Jeff Spelman has joined 1st Service Solutions as md, responsible for developing capital sources within its Equi-Debt Solutions platform. The newly launched platform offers equity and debt to borrowers of non-performing CRE loans.

Spelman was previously vp and senior portfolio manager at Hunt Realty Investments, where he was responsible for creating and implementing strategies for real estate operating companies and underlying assets. Prior to this, he was director of real estate operations at Sarofim Realty Advisors, where he provided clients with asset management, acquisitions, dispositions and capital markets services.

CMBS

Real estate md named

Jefferies has appointed Michael Old as md in its real estate investment banking group, based in London. With nearly 17 years of real estate investment banking experience, Old joins Jefferies from Bank of America Merrill Lynch, where he was md in its European real estate structured finance group. Previously, he was an executive director at NM Rothschild and Sons in its real estate investment banking group, focused on real estate structured finance.

RMBS

Aston/DoubleLine fund prepped

Aston Asset Management and DoubleLine Capital have partnered up to offer the Aston/DoubleLine Opportunistic Bond Fund. The open-ended mutual fund is expected to launch in early July and will combine Aston's distribution and administration capabilities with DoubleLine's portfolio management capabilities in fixed income.

Aston will act as the investment adviser to the fund, while DoubleLine will act as sub-adviser and will be responsible for its day-to-day management. The fund seeks to maximise current income and total return and will be led by portfolio manager Jeffrey Gundlach, DoubleLine's ceo and cio.

RMBS

Partnership strengthens MBS risk analytics

Clayton Holdings has partnered with MBSData to provide new loan-level data risk identification analytics and enhanced reporting solutions to investors in the fixed income mortgage sector. The new offering covers 98% of the active deal universe of private label MBS and provides a technologically advanced platform for investors to manage RMBS risk, the two firms say.

Under the partnership, clients will be able to combine MBSData's loan-level dataset information with Clayton's data query and reporting tool - InCyt - to access underlying loan-level details and to gauge collateral performance. This will also enable clients to identify trends among various data points and thereby identify potential performance issues and possible investment opportunities.

Tom DeLorenzo of MBSData says: "By combining our data with Clayton's reporting solution platform, we are able to marry top-tier datasets with industry-leading analytics. We think this tool is the right fit for any investor that wants an easy-to-use, self-service data mining and reporting platform at any granular level that supplies real-time insight about collateral performance trends and investment opportunities."

RMBS

RMBS vet moves on

Integrated Asset Services has appointed Paul Sveen as ceo. He will address the systemic challenges facing the residential mortgage industry, helping clients through leveraging the firm's valuation and default services. With 25 year of industry experience, Sveen previously held executive leadership roles in Lehman Brothers' structured finance and securitisation businesses and at Aurora Loan Services - Lehman's largest residential mortgage company.

RMBS

Distressed investment pro hired

400 Capital Management has appointed Todd Leih as a partner and senior member of its portfolio management team. He joins from Jane Street, where he was a senior portfolio manager for distressed fixed income structured finance strategies. Before this, Leih was at Bank of America, focusing on non‐agency mortgage credit and derivative strategies.

RMBS

Investor relations svp named

CMG Mortgage has appointed Todd Hempstead as svp in its investor relations department. Hempstead has extensive experience in product development, investor channel development and MBS asset acquisition strategies, both in the public and private sectors. Most recently, he served as svp for Fannie Mae.

ABS

Auto ANLs at five-year lows

Still-rising gas prices, as well as vehicle and parts supply shortages are having little impact so far on US auto ABS performance, according to Fitch. However, on-going macro events may adversely affect auto ABS performance down the road, the agency says.

"Consumer finances buoyed by tax refunds have driven annualised net losses down to levels not seen in over five years. Rising energy prices, weakness in the values of larger vehicle segments and overall industry-wide supply-chain disruptions caused by the recent natural disasters in Japan may pressure auto ABS over time," says Fitch director Paritosh Merchant.

In addition to the muted effect that higher US gas prices have had on auto ABS performance, vehicle supply shortages resulting from the March earthquake in Japan have not negatively impacted used vehicle values or recovery rates. In fact, vehicle inventories are currently very tight due to the disruption in vehicle supply and parts emanating out of Japan. This has supported used vehicle values and to an extent offset the negative effects of high gas prices in the US, Fitch says.

In the prime sector, auto loan ABS ANLs improved to 0.67% in March, 46% below March 2010 and 68% improved over 2009 levels. Overall, ANL declined on nearly 74% of all transactions that comprise Fitch's index. 60+ days delinquencies fell 10bp to 0.51% in March over February and were 15% better than a year earlier.

Subprime 60+ day delinquencies dropped to 2.63% in March, a 19% decrease over February and 23% down versus the same period last year. Exhibiting similar trends to prime losses, subprime ANLs fell to 5.10% - 14% below February and 27% improved from a year ago.

ABS

Ratings reference removal mooted

The US SEC is to propose amendments that would remove references to credit ratings in several rules under the Exchange Act. These proposals represent the next step in a series of actions taken under the Dodd-Frank Act to remove references to credit ratings within agency rules and, where appropriate, replace them with alternative criteria.

Under Dodd-Frank, federal agencies must review how their existing regulations rely on credit ratings as an assessment of creditworthiness. At the conclusion of this review, each agency is required to report to Congress on how the agency modified these references to replace them with alternative standards that the agency determined to be appropriate.

Public comments on the rule amendments should be received within 60 days after they are published in the Federal Register.

ABS

ABS data warehouse RFI planned

The Market Group, formed to oversee the tender process and select a constructor of the European ABS Data Warehouse (SCI 21 April), intends to issue a request for information (RFI) on or around 6 May 2011 to gather information regarding the commercial and technical strengths of potential constructors. The RFI will last for ten days from its issuance. Following a review of the responses received, the Market Group will invite a shortlist of the most suitable candidates to participate in a request for proposals process, which will be used to determine the eventual constructor.

CDO

Trups CDO deferrals resume climb

Deferrals experienced a greater increase this month, while two new bank closures also led to a slight increase in US bank Trups CDO defaults, according to Fitch's latest index results for the sector.

Bank defaults within Trups CDOs increased by 0.02% to 15.18% through the end of March. After a one-month respite, deferrals resumed their climb, rising 0.66% to 17.95%.

"March saw 21 new bank deferrals, bringing the number of deferrals to 32 for the first quarter of 2011," says Fitch director Johann Juan.

However, 1Q11 deferrals remain notably lower than the 52 observed during the same period last year. "With both defaults and deferrals for bank Trups CDOs stabilising over the last three to four quarters, this trend will likely continue through the remainder of 2011," adds Juan.

Through 31 March, 166 bank issuers have defaulted on their Trups, representing approximately US$5.72bn held across 82 Trups CDOs. Deferring banks are now up to 396, impacting interest payments on US$6.76bn of collateral held by 84 Trups CDOs.

CDO

ABS CDO liquidation scheduled

The trustee of the Ridgeway Court Funding II ABS CDO has retained Dock Street Capital Management to act as its liquidation agent. The underlying collateral is due to be liquidated in two public sales on 10 May to the highest qualified bidder or bidders, subject to a reserve level.

CDS

EC opens two CDS antitrust probes

The European Commission has opened two antitrust investigations into the CDS market, the first of which will examine whether 16 banks and Markit have colluded and/or may hold and abuse a dominant position in order to control the financial information on CDS. The second case will investigate whether the preferential tariffs granted by ICE Clear Europe to nine of these banks have the effect of locking them in the ICE system to the detriment of competitors.

The EC says it is opening these cases to improve market transparency and fairness in the CDS market. "Lack of transparency in markets can lead to abusive behaviour and facilitate violations of competition rules and the Commission should react accordingly. I hope our investigation will contribute to a better functioning of financial markets and, therefore, to a more sustainable recovery," says Joaquín Almunia, Commission vp in charge of competition policy.

Regarding the first investigation, the Commission points out that the 16 banks that act as dealers in the CDS market give most of the pricing data only to Markit. It suggests that this could be the consequence of collusion between them or an abuse of a possible collective dominance and may have the effect of foreclosing the access to the valuable raw data by other information service providers. If proven, such behaviour would be in violation of EU antitrust rules - Articles 101 and 102 of the Treaty on the Functioning of the European Union.

The 16 CDS dealers are JPMorgan, Bank of America Merrill Lynch, Barclays, BNP Paribas, Citigroup, Commerzbank, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, Morgan Stanley, RBS, UBS, Wells Fargo Bank, Crédit Agricole and Société Générale. The probe will also examine the behaviour of Markit: the Commission is concerned that certain clauses in Markit's licence and distribution agreements could be abusive and impede the development of competition in the market for the provision of CDS information. The firm is already under investigation by the US Department of Justice for alleged unfair access to CDS price information (see SCI 15 July 2009).

In the second case, the EC is investigating a number of agreements made between Bank of America, Barclays Bank, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Morgan Stanley and UBS and ICE Clear Europe. The Commission points out that these agreements were concluded at the time of the sale, by the dealers, of a company called The Clearing Corporation to ICE and contain a number of clauses (preferential fees and profit sharing arrangements) which might create an incentive for the banks to use only ICE as a clearing house.

The effects of these agreements could be that other clearing houses have difficulty successfully entering the market and that other CDS players have no real choice about where to clear their transactions, the EC suggests. If proven, the practice would violate Article 101.

The Commission will also investigate whether the fee structures used by ICE give an unfair advantage to the nine banks, by discriminating against other CDS dealers. This could potentially constitute an abuse of a dominant position by ICE in breach of Article 102.

CDS

Valuation issues 'not yet fully addressed'

Xenomorph has released a white paper outlining how trading and risk management decisions and valuation management is not yet formally and fully addressed within data management strategies.

Too often, says Xenomorph, valuations - and the analytics used to process input and calculate output data - fall between traditional data management providers and pricing model vendors. This leads to the over-use of tactical desktop spreadsheets where data 'escapes' the control of the data management system, leading to an increased operational risk.

"A deeper understanding of financial products reduces operational risk and promotes quality, consistency and auditability, ensuring regulatory compliance. Clients' requirements have evolved and portfolio managers, traders and risk managers recognise that it is no longer sufficient to treat valuation as an external, black-box process offered by pricing service providers," says Brian Sentance, Xenomorph ceo.

The paper also outlines that with regulators, auditors, clients and investors now demanding even more drill-down to the underlying details of an instrument's valuation, it is important to implement an integrated, consistent analytics and data management strategy.

CDS

CDS clearing connectivity offered

IntercontinentalExchange's ICE Link platform is set to offer connectivity to CME Clearing for CDS clearing starting this summer. ICE Link provides STP for the CDS market, with connectivity to 453 buy-side firms, 26 dealers, 11 prime brokerages and five interdealer brokers, as well as a number of post-trade services and data warehouses.

"As the leading trade affirmation service in the CDS market and a truly open platform, ICE Link is committed to providing the full range of straight-through-processing (STP) services, including connectivity to multiple clearing houses. We are pleased that the hundreds of buy-side clients, dealers and brokers who rely on ICE Link now have the ability to clear through multiple clearinghouses," says Clive de Ruig, ICE Link's global head.

CDS

Legal entity identifier requirements released

A coalition of financial-services trade associations have released requirements for establishing a legal entity identifier (LEI) system to aid regulators and the industry in monitoring systemic risk.

"The accurate and unambiguous identification of legal entities engaged in financial transactions is foundational and critically important towards the improved measurement and monitoring of systemic risk by regulators and supervisors," the groups note in the proposal.

They continue: "A global standardised Legal Entity Identifier will help enable organisations to more effectively measure and manage counterparty exposure, while providing substantial operational efficiencies and customer-service improvements to the industry."

Specifically, the associations propose that discussions should be held over the refinement and convergence of different approaches by those developing potential solutions for the LEI standard. The proposal also highlights the importance of immediate engagement with potential solution providers to help them understand the requirements as they prepare proposals for issuing and maintaining an LEI solution.

The Trade Associations aim to submit a final recommendation to regulators by July 2011, while public proposals are due by 30 May 2011.

CDS

Offsetting exposure draft analysed

ISDA has filed a comment letter with FASB and IASB in response to their exposure draft on the offsetting of financial assets and financial liabilities.

In the comment letter, ISDA acknowledges its support for convergence in the area of offsetting financial assets and liabilities and commends the boards for working jointly to develop a common set of principles. The letter notes, however, that the proposed principles within FASB's and IASB's exposure draft do not provide the most faithful representation of an entity's financial position, solvency and exposure to credit and liquidity risk, and will not improve the usefulness of financial statements.

"Reporting derivative assets and derivative liabilities on a gross basis pursuant to the proposal in the FASB/IASB exposure draft rather than on a net basis under current US GAAP would mislead users of financial statements by overstating the economic resources and obligations of the entity," says Conrad Voldstad, ISDA ceo. "There is a compelling argument that net presentation of all derivative transactions executed under legally enforceable master netting arrangements is more relevant and provides better information than presenting the individual transactions executed under those arrangements on a gross basis."

ISDA favours the current US GAAP offsetting principles, as they provide the best reflection of an entity's solvency and exposure to credit and liquidity risk. Further, it believes that upon termination or settlement of transactions - subject to a master netting arrangement - the individual derivative receivables do not represent resources where general creditors have rights and individual derivative payables do not represent claims that are equal to claims of general creditors. Instead, the net termination amount is the most relevant balance to present, ISDA says.

"As there is no consensus among financial statement users as to whether net or gross presentation is more useful, ISDA questions the boards' decision to favour a model that impairs the usefulness of the financial statements while raising significant cost-benefit concerns," adds Robert Pickel, ISDA executive vice chairman.

CMBS

CMBS 2.0 leverage likely to rise

The credit quality of CMBS issued post-recession has been strong, says Moody's. However, as the credit cycle continues, the leverage of the loans in transactions is expected to increase.

Moody's has rated eight CMBS 2.0 conduit deals since issuance resumed in 2010. "Current underwriting is vastly improved compared with CMBS issuance from 2007, contrary to some reports in the market. It is roughly consistent with that of 2004, one of the last 'normal' years before frothy underwriting kicked in," says Tad Philipp, Moody's director of commercial real estate research.

He adds: "In late CMBS 1.0, pro forma underwriting meant stretching for additional income from properties already operating at the zenith of their existence. In today's market, underwriting properties beaten up by the recession may involve trying to get closer to normalised income."

Post-recession deals are also 'chunky', Moody's notes, with five or more single loans making up more than 5% of a transaction. As the lumpiness adds an element of volatility to performance, loan leverage is also expected to increase as credit conditions loosen. Competitive lending markets are anticipated to drive up conduit LTVs to the mid-70s, from the 60s range they're in currently.

Favourable commercial real estate conditions should mitigate the credit risk this greater leverage might pose at this time. "As the cycle advances and the effects of additional leverage become more pronounced, however, it may become necessary to increase subordination," concludes Philipp.

CMBS

Euro CMBS maturity repayment falls

Fitch reports that the low repayment rate of loans maturing in April 2011 caused its European CMBS Maturity Repayment Index to fall to 38.1% from 40.3%. Coupled with the large volume of loans that matured, this increased the outstanding matured loan balance by 27.4% to €7.2bn. Of the 154 loans that have matured since 2007, 64 have been repaid in full, the agency says.

42 loans were originally scheduled to mature in April 2011. Of these, one loan has previously realised a loss (the Shrewsbury loan in Windermere XI), one loan is undergoing a workout (Epic (Industrious)), two loans have been repurchased by their originators and 12 prepaid more than six months ahead of their maturity dates. Of the remaining 26 loans, only six were repaid in time for their maturity dates. A further ten loans have been extended, one loan is in standstill and nine loans are in workout.

A total of €306.8m repayments were recorded during the month. The largest relates to the full redemption of the €69.3m Paris Prime Commercial Real Estate transaction at its maturity date.

This has resulted in a full principal distribution to the notes. However, interest shortfalls on the class D and E notes persisted at the last payment date.

Other repayments include the full redemptions of the Sfr51.9m Corviglia loan (Windermere X CMBS), the €35.9m SCI NOWA loan (Rivoli - Pan Europe 1), the £30.3m Aldermanbury House loan (Cornerstone Titan 2006-1), the £21.5m Cardiff Retail Park loan (Aquila (Eclipse 2005-1)), the £5.8m Trevelyan House loan (Cornerstone Titan 2005-1) and the €13m Castor & Pollux loan (White Tower Europe 2007-1).

Two losses were recorded during the month: the Redleaf loan (EQUINOX (ECLIPSE 2006-1)) realised a £4.1m loss following the completion of the sale of its collateral, while the Schiphol loan (MESDAG (Charlie)) generated a €1.9m loss following a discounted sale of the loan to its borrower.

CMBS

CMBS loan liquidations creep up

Almost US$1.25bn of US CMBS conduit loans experienced losses in April, according to Trepp's latest loss analysis report. This number is up by about 2% from the March total and is the third highest value since the firm began tracking it in January 2010. Only January 2011 and July 2010 saw higher totals.

In March, 66% of the loans that experienced losses had loss severities of under 2% of the loan balance - implying that many of the loans that had taken hits were likely refinancings in which special servicing fees had created small losses to the loan. In April, the opposite was true: 84% of the loans with losses in April had severities of more than 2%.

In total, 175 loans with a total balance of US$1.24bn were liquidated in April, compared to 105 loans and US$1.21bn in face amount in March. The losses on the April liquidations were about US$495m - representing an average loss severity of 39.9%. This value is slightly below the average loss severity of 41.3% over the last 16 months.

CMBS

CMBS next up for ECB loan-by-loan info

The European Central Bank (ECB) has announced that it intends to extend its loan-by-loan information requirements for ABS in the Eurosystem collateral framework to CMBS and small- and medium-size enterprise (SME) transactions within the next 18 months (see also SCI 21 April).

"Loan-level data for these asset classes will be provided in accordance with the templates available on the ECB's website at least on a quarterly basis on, or within one month of, the interest payment date of the instrument in question. The Eurosystem will continue to accept securities not meeting the new information requirements until the obligation to submit loan-level data comes into force," the ECB says.

CMBS

FDIC CMBS closes

FDIC has closed its CMBS backed by US$394.3m of performing commercial and multi-family mortgages from 13 failed banks. This pilot transaction, dubbed FDIC 2011-C1, marks the first time that the agency has sold commercial mortgage loans in a securitisation since the beginning of the financial crisis.

The transaction consists of three classes of securities. Senior certificates of US$315.4m represented 80% of the capital structure and will be guaranteed by the FDIC in its corporate capacity. These senior certificates sold at a fixed-rate coupon of 1.84% and are expected to have an average life of 2.6 years.

The approximately US$39.4m of class B mezzanine certificates sold at a fixed-rate coupon of 5%, with a WAL of 6.5 years. The subordinate class Cs also totalled US$39.4m and had a 5% fixed-rate coupon, but have a WAL of 7.1 years.

FDIC reports that the class A investors represented a wide variety of organisations, including banks, insurance companies and money managers, which paid par for the senior certificates. The class B and C certificates were purchased by Archetype Real Estate Debt Fund, an affiliate of LNR Partners.

FDIC says the transaction is consistent with its securitisation Safe Harbor Rule, except for certain limited differences necessitated by the origin of the collateral and the absence of information available from the failed banks. As outlined in the proposed rule, the deal incorporates transaction-governance procedures that align compensation of the master and special servicer with resolving problem loans and minimising losses to the trust.

"The transaction also provides for enhanced oversight of overall performance through an independent third-party trust advisor, BlackRock Financial Management, as well as extensive reporting and disclosure provisions," FDIC adds.

The transaction will provide just over US$353.2m in gross proceeds to the Deposit Insurance Fund. The lead underwriter and bookrunner was Wells Fargo Securities and co-underwriters were Barclays Capital and CastleOak Securities.

CMBS

Synthetic CMBS workouts examined

The conflicts of interest between lenders and noteholders in synthetic European CMBS structures may materially alter the loan workout process, according to Fitch. In particular, it may limit the flexibility available to servicers when working out distressed loans and may therefore result in increased losses, the agency says.

"Synthetic transactions present an inherent conflict of interest between the original lender and the CMBS noteholders that have provided it with credit protection. The interests of these two parties will naturally not be aligned as the lender continues to retain the loans on its balance sheet, but with credit protection against losses associated with it. Consequently, the lender will be focused on the maximisation of its interest revenue, while the noteholders will be most interested in minimising their losses," says Gioia Dominedo, Fitch's European CMBS director.

In the event of loan underperformance, noteholders will want to maximise recoveries; however, many strategies for doing so will require continued access to the lender's balance sheet - and therefore will not be available to them. As the lender has been paying for credit protection throughout the life of the transaction, it will have no incentive to extend or prolong the use of its balance sheet in order to slow the realisation of losses or to minimise the losses ultimately incurred by noteholders, Fitch says. More specifically, potential workout and restructuring options may be obstructed by the terms imposed by either the original lender or the CDS, or may directly trigger a credit event under the credit default swap.

The situation in synthetic transactions is in direct contrast to that of loans without credit protection on lenders' balance sheets - which affords the most flexibility for loan restructures or workouts. Cash securitisations provide additional flexibility for servicers to actively manage underperforming loans through extensions or broader restructurings.

However, when compared to balance sheet loans, they introduce the constraints of a legal final maturity date and competing noteholder interests. The limitations of synthetic structures have most recently been evidenced by the workouts of the Clichy and Neumarkt loans, both securitised in JUNO (Eclipse 2007-2).

Both loans had been transferred to special servicing in July 2009 following tenant departures and/or tenant defaults. In both cases, a new investor had been identified that would be able to inject additional equity into the loan structure. However, both potential investments became economically unviable for reasons related to the synthetic nature of the transaction and the collateral is therefore currently being marketed for sale.

For the Clichy loan, Barclays Bank - the original lender - demanded a significantly higher interest margin in return for agreeing to a restructuring. For the Neumarkt loan, the terms of the CDS required the loan's interest cost to continue to be calculated based on the initial swap rate during the extension period, even though the hedging had been terminated.

The strategies proposed on these two loans are similar to those that have been previously employed on underperforming loans in cash CMBS transactions. However, as loans in synthetic transactions remain on the lender's balance sheet, agreed restructurings are likely to be more akin to those occurring on pure balance sheet loans than to those seen in cash securitisations.

Loan margins - which are typically not a key consideration for servicers of loans in cash transactions - will therefore be key to the success of any restructure. This will result in servicers having significantly reduced flexibility with respect to loans securitised in synthetic CMBS transactions.

A further pitfall of synthetic structures relates to the timing of distributions, as a loss calculation cannot be made until all recovery amounts have been obtained. This can lead to time lags in cases where the majority of recoveries have been received but certain smaller amounts are still outstanding.

Fitch says it does not consider it appropriate to penalise performing loans securitised in synthetic transactions in its ratings analysis. However, if loans are underperforming, the workout assumptions may be adjusted to reflect the limited flexibility available to servicers and the increased likelihood of an accelerated enforcement or sales process.

Regulation

Swap definitions proposed

The US SEC has voted unanimously to propose rules further defining the terms 'swap', 'security-based swap' and 'security-based swap agreement'. The Commission also proposed rules regarding 'mixed swaps' and books and records for security-based swap agreements. The rules were proposed jointly with the CFTC and stem from the Dodd-Frank Act.

"The proposed definitions balance several policy and legal issues in a way I believe is practical, takes into account the specific nature of derivatives contracts and is consistent with existing securities regulations. The proposal seeks to provide guidance in rules and interpretations by using clear and objective criteria that should clarify whether a particular instrument is a swap regulated by the CFTC, a security-based swap regulated by the SEC or a mixed swap regulated by both agencies," says SEC chairman Mary Schapiro.

Public comments on the rule proposal should be received within 60 days after it is published in the Federal Register.

RMBS

Agency MBS fails charge proposed

The US Fed's Treasury Market Practices Group (TMPG) has proposed fails charge recommendations for the agency debt and agency MBS markets. The historically elevated levels of fails in these markets create inefficiencies, increase credit risk for market participants and heighten overall systemic risk. By replicating the incentives that exist in a higher rate environment to deliver securities in a timely manner, the proposed fails charges are expected to reduce fails, the TMPG says.

The introduction of these charges is designed to support the efficiency and liquidity of the agency debt and agency MBS markets, such that trading better reflects the underlying availability of securities for delivery and market participants are afforded greater certainty regarding settlement of their transactions. "We strongly believe that, like the fails charge recommended by the TMPG in the Treasury market, these recommendations will lead to more robust markets for agency debt and agency MBS and will serve to broadly reduce the risks associated with high levels of fails," says TMPG chair, Tom Wipf.

For the agency debt market, the proposed fails charge would accrue each calendar day a fail is outstanding and would include a US$500 minimum claim threshold, similar to the recommended Treasury market fails charge trading practice. Debentures issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks would be subject to this charge. The proposed fails would not be subject to a charge if delivery occurs on either of the two business days following contractual settlement date.

Charges for fails settled in a given calendar month would be aggregated between legal counterparties and a claim would be made if aggregate charges for the month exceed US$500. Agency MBS issued or guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae would be subject to this charge.

The TMPG is recommending the two-day resolution period to allow market participants to resolve operational fails, in recognition of the nature of clearing and settlement in the agency MBS market. A shorter resolution period may also be considered, or elimination of the resolution period altogether, if circumstances warrant.

The TMPG will be accepting comments on its proposals until 10 June.