News Analysis
CLOs
Volatility persists
CLO rating refinements reviewed
CLO ratings volatility persists, with a raft of Moody's upgrades expected in coming weeks following changes to its modelling framework. The move represents the final rating agency CLO criteria amendment to be prompted by the financial crisis and its aftermath, but some discontent nonetheless remains over the rating landscape for the asset class.
For example, one CLO manager suggests that an overhaul of the rating agency criteria changes implemented over the last three years would be helpful in terms of helping kick-start new issuance in Europe. He says that S&P's updated CLO approach, in particular, is so stringent that there is little insight into what it takes as a manager of an existing structure to maintain a triple-A rating.
In comparison, Moody's appears to have taken a more enlightened approach, the CLO manager notes. "Moody's left most of its methodology intact post-crisis, but recognised that in uncertain times losses would likely be higher than observed previously. Consequently, it stressed ratings by a factor of 30% - although losses didn't materialise to this extent, so the agency is in the process of redressing this. The recovery on senior loans has been surprisingly strong during the crisis."
Moody's issued a request for comment in March regarding proposed changes to its modelling framework for cashflow CLOs (see SCI 23 March). The agency's principal proposals include removing the temporary 30% macroeconomic stress to its default probability assumptions and changing its binomial expansion technique model.
The extended comment period on the proposals ended two weeks ago. Jian Hu, md for structured credit at Moody's, confirms that the agency has received many comments from major market participants and is currently in the process of reviewing them.
"The comments are generally centred around the binomial stresses and recovery rates, as well as technical issues regarding the modelling of reinvestments and interest proceeds," he says. "The proposals have had a mixed reception, depending on which one is in question. We're evaluating these comments and undertaking more analysis, but don't expect to publish the results for another few weeks."
Hu adds that Moody's aim is to determine a methodology that is robust and that can withstand different economic shocks and credit cycles, while also taking into account the current and projected corporate credit conditions. "Amend-and-extend activity has helped relieve near-term pressure and moved it further down the line. But outstanding CLOs still have at least three to five years to run, so the updates to our methodology have to withstand these refi challenges."
Nevertheless, potentially significant upgrades could occur as a result of the amendments to Moody's modelling framework. The initial press release on the RFC noted that if the changes are implemented, upgrades on outstanding CLOs will average one notch for senior and mezzanine tranches, and between two and three notches for junior tranches.
This comes on the back of S&P raising its ratings on 697 US CLO tranches in 1Q11 and on 243 tranches in 4Q10. The agency recalibrated its CLO stresses back in September 2009 (see SCI issue 153) to target triple-A default rates that it believes are commensurate with conditions of extreme macroeconomic stress, such as the Great Depression. The recalibration resulted in an average downgrade of triple-A ratings to double-A.
"We've been transparent about what quantitative and qualitative requirements are necessary to achieve a triple-A rating," says Lapo Guadagnuolo, md at S&P. "Similarly, while the required subordination for a triple-A rating has increased, it can be calculated simply. Looking at our criteria, it is clear how a triple-A rating can be achieved: providing a portfolio has certain characteristics, it will qualify."
Default rates have been slightly better than expected over the last 18 months, which has prompted S&P to upgrade in certain cases. But Guadagnuolo says that this shouldn't be considered as a 'test' of the assumptions S&P made with its criteria changes.
"We have to take transactions as we view them in the long run. We consulted with the market about the recalibration process and so are aware of differing views among participants," he adds.
Most CLO tranches that had failed their OC tests for two or three years are now back in compliance, demonstrating that these structural elements are performing as they were devised to. "The fact that we are now upgrading some CLOs doesn't mean we shouldn't have downgraded any deals in 2009: ratings reflect both existing situations and expectations of defaults in the future," continues Guadagnuolo.
He confirms that S&P always looks at whether its criteria are valid, and it has no plans to change the CLO criteria again unless there are major events like changes in corporate behaviour that would impact the agency's view. "If we were looking to make any changes, we'd be public about it. We do not expect to make important criteria amendments often, but obviously it depends on our view of what the market is facing going forward."
Overall, Moody's and S&P appear to have taken more drastic CLO downgrade actions over the last few years than Fitch. Certainly, rating migration matrices suggest that the performance of Fitch's ratings have been less volatile at the senior level than those of the other two agencies.
Fitch refined its corporate CDO criteria in April 2008 (see SCI issue 86) by recalibrating its correlation model, which had a muted impact on leveraged loan CLOs with few downgrades. However, the following year saw a 20% default rate for leveraged loans, which resulted in some downgrades at the mezzanine/junior level and of a few single-A rated deals.
Since then, there has been some positive credit migration in Europe and a stabilisation of triple-C buckets. Only a quarter of Fitch-rated deals were in breach, but coverage tests have recovered and most deals are now distributing again and their ratings have been affirmed, according to Fitch director Laurent Chane-Kon.
However, Chane-Kon points out that his firm remains concerned about the wave of leveraged loan refinancings expected in 2013 and 2014, so wouldn't feel comfortable upgrading transactions until there's more clarity around this issue. Nonetheless, all things being equal, he doesn't believe that Fitch will make any further changes to its CDO criteria.
The CLO manager notes that Moody's and S&P now place a higher emphasis on portfolio diversity - essentially assessing European structures in the same manner as US deals. But, whereas it is possible to buy 150 names in the US loan secondary market, it is impossible to do so in Europe because there are fewer issues and less liquidity. It also means that European CLOs need sterling exposure to achieve the diversity.
This, in turn, has become challenging due to Moody's and S&P's new counterparty criteria. "It is possible to address this issue with a dual-currency revolver. However, unless loan spreads increase, it will always be difficult for the equity returns of European CLOs to compete with those of US CLOs," the CLO manager remarks.
Hu notes that Moody's CLO criteria changes aim to achieve global harmonisation between the US and Europe. He says that while diversity scores are often lower for European deals, this is a statistical feature and no reason to believe that in general the methodology is different for each region.
Guadagnuolo also emphasises that S&P stresses all CLOs according to the same criteria - whether they're European or US. He concedes that there are fewer assets in Europe, so creating a diversified portfolio is more challenging, but notes that the country diversification is better in Europe.
With respect to S&P's new counterparty risk criteria, Guadagnuolo suggests that the market could see some changes to the typical structure as a result of these requirements. Such changes could include a decrease in the number assets in a portfolio in a currency that is different to the one of the liabilities, as well as the inclusion of more tailor-made natural hedges - such as a revolver - to decrease the exposure to FX or interest rate risk.
Regardless of the differences in CLO methodologies, rating agencies are a fact of life, according to Avoca Capital coo Clayton Perry. "They all have their quirks, but fundamentally they are there to protect the rated investors and you just have to live with them," he explains. "I am very wary of people spitting out the dummy and saying rating agencies are killing everything. The agencies are doing their job and we will live with what they say."
Perry adds: "CLOs are very attractive vehicles - for investors and managers - and they have distinguished themselves in the last five years as being a really robust technology that works. For example, despite all the turmoil, it is almost inconceivable that triple-A or double-A investors will lose any principal."
Ultimately, the main reason that new issue cashflow CLOs haven't returned in Europe is that the arbitrage still doesn't make sense. "New CLO equity would theoretically pay 6%-7% in the current environment, which is not much higher than bank loans, so why increase your risk by investing in it?" asks the CLO manager. "A combination of tightening in the CLO secondary market and a widening of loan primary spreads is necessary for the arb to work."
CS & JL
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Market Reports
ABS
Euro ABS market bounces back
The European ABS market has bounced back to life this week as bid-list volumes increase and the new issuance pipeline grows.
The European ABS primary market has been particularly busy this week, benefitting from the announcement of Santander's Fosse 2001-1 RMBS. Although details of the capital structure are yet to be disclosed, one ABS trader is expecting the tranches to have three- to five-year WALs, with a large core investor claiming the biggest portion.
Another new issue that is generating interest is the £150m BAA fixed rate benchmark bond. The transaction, which matures in 2041, priced at 155bp over Gilts. "It was received well - being 40% oversubscribed - and it's performing OK. Spreads have tightened in since launch, but only slightly," the trader says.
The primary market is due to become busier in the months ahead, with the trader anticipating a flurry of new issuance in the run-up to the Global ABS conference held next month. Indeed, the trader explains that participants are eagerly awaiting a sterling credit card transaction to be announced.
He says: "It needs to happen, otherwise I think that some of those master trusts would be jeopardised in their existence. They repay very quickly, so they need to re-issue at some stage."
He adds: "It's been more interesting for a lot of those master trusts to issue in dollars, but I think that it's also very important for those issuers that they keep a sterling investor base. It needs to happen soon, otherwise people will start to ask questions about that asset class."
The trader also predicts that more auto loan deals will be announced - due to the rising popularity of the asset class since the start of the year, particularly from the sterling investor base. Additionally, further RMBS transactions are expected.
"They offer good collateral and simple structures - and we know now that they will be well received by the market. The earlier Holmes and Arkle deals set a precedent," the trader explains.
However, the trader believes that due to concerns about refinancing risks and structural disputes over legacy transactions, participants are wary in terms of future involvement in new CMBS transactions.
Meanwhile, in the secondary market, bid-lists launched today and are expected tomorrow. "A lot of Granite paper is being offered in the lists, which so far are all doing pretty well. They act as a good indication of what is expected to follow in coming weeks too," the trader concludes.
LB
Market Reports
CLOs
Investor comeback for US CLOs
The US CLO market ended last week with a bang as bid-list levels soared. At the same time, the sector appears to be seeing much broader investor participation.
"There's been a drastic improvement in the volume of bid-lists over the past week. We're seeing several lists per day, which are all trading well," one CLO trader confirms. The lists - which have attracted hedge funds, banks liquidating their legacy books and European names - have mainly consisted of equity paper, as opposed to the more commonly placed debt pieces.
The trader adds: "Equity lists are getting a very good reception; it feels like a good time to buy because spreads continue to be firm. It's actually been surprising that people have come back so fast."
Along with equity, debt tranches are also in demand, with mezzanine paper garnering the most interest. The rise in bid-list volume and positive investor reception is believed to be due to S&P's recently announced CLO rating upgrades. "The traditional investor base has returned to the market as a result, together with new investors that had previously been dormant," the trader says.
Positive sentiment in the US market has also had a knock-on effect on Europe, with average European CLO prices rising and triple-C rated paper seeing the most improvement. The trader explains: "Europe was lagging for some time, but it seems to have clocked back on, which is a huge plus. European CLOs have also reported an increase in senior OC cushions. We're seeing good metrics, which has given the market firmness all around."
However, the trader notes that the one missing factor in Europe's improving performance is the lack of new CLO issuance. "It's a shame, as everything else is really on the way to all-round improvement."
In terms of defaults, there have been no spikes and spreads are in fact edging in, the trader continues. "The period where macro issues could have impacted market participants appears to have ended, causing many to revisit the CLO product and I think that it's receiving a much broader participation."
LB
Market Reports
CLOs
Legacy inventories driving CLO BWICs
CLO bid-list activity remains strong, with several lists launching over the past week. Additionally, banks are said to be finally offloading their legacy inventories, as spreads gradually tighten in.
"The market has been relatively quiet in recent weeks, although we're beginning to see activity pick up - especially as spreads are tightening in slightly," one CLO trader says.
Though sluggish activity persists without "any heavy buying or selling", bid-lists continue to roll in. Three lists launched last week, for example, with Lightpoint Pan-European, Cadogan Square and Mercator being the largest CLO names seen in volume. Additionally, bid-lists from German sellers have launched this week, the trader confirms.
In the US CLO market, meanwhile, triple-A prices have dropped significantly, with new issues now printing at around 125bp over compared to the 150bp levels of last month. The drop is not expected to impact spread levels for European transactions, however.
Triple-A paper continues to attract much investor attention, the trader says. "Whether it's new investors entering or a new belief in the triple-A market, it seems to be centre-stage right now." In particular, Japanese banks are said to be re-entering the CLO market, with a particular focus on triple-A paper.
Meanwhile, banks are set to release inventories containing distressed assets as part of a clean-up of their balance sheets. The assets are expected to hit the market via bid-lists, the trader explains.
"I think that the banks have been holding on to this stuff for too long. The general feel of the market is that CLO investors are beginning to rebalance their legacy portfolios," he concludes.
LB
Market Reports
CMBS
Bid-list boosts Euro CMBS
The European CMBS market received a boost last week from a £220.5m bid-list. The list - which comprised senior sterling-denominated paper, backed predominantly by retail properties - traded at surprising levels.
"We saw a fairly large CMBS bid-list last week, trading high quality paper at surprisingly good levels. In terms of discount margins, prices ranged between the high-100s and the low-200s on most bonds," one CMBS trader says.
Parts of the list sold at tighter levels than previously seen in the market, reflecting the continued rally in the sector. Participation came mainly from dealers, the trader adds.
The list consisted of six tranches: DECO 2007-C4X class A1s; ECLIP 2005-1 class As; EPIC AYTN class As; EURO 22X class A2s; OPERA CSC3 class As; and VWALL class 1As.
However, aside from the bid-list, activity has been somewhat muted. The trader explains: "It's been fairly quiet - although there's still a good amount of paper available, especially at the senior end, with levels reaching the 60-70s cash price range. Junior lower quality paper is also readily available, but there's not a huge amount of interest here because it feels stronger at the senior end."
He continues: "Some interest has been generated over various deals, such as a CMBS funding for a UK shopping centre, but not enough to pick the pace of the market up." The trader concludes that, with the summer being a notoriously quiet time for the structured finance market, activity needs to pick up soon.
LB
Job Swaps
ABS
Business development director named
AlphaMetrix has appointed Mikus Kins as executive director of business development. Based in Chicago, Kins will be involved in the firm's hedge fund platform and administration offering, reporting to AlphaMetrix chief strategic officer Geoff Marcus.
Most recently, Kins was head of US business development at Bank of America Merrill Lynch, focusing on large corporate and multinational clients. Previously, he worked in the bank's global securities solutions division as EMEA head of products and sales, where he oversaw business development for CDO/CMBS/RMBS trust and administration.
Job Swaps
ABS
UniCredit reorganises CIB
UniCredit has reorganised its corporate and investment banking (CIB) division. Olivier Khayat will assume the role of deputy head of CIB and co-head of the financing & advisory product line (F&A). He was previously head of FICC at SG.
Khayat will work on a project to regroup the bank's equity and debt capital market activities within F&A to achieve an integrated financing and equity offering for clients. Based in Milan, he will also develop and manage an integrated approach to the overall credit value chain, focusing on cross-selling.
Vittorio Ogliengo will join Khayat as co-head of F&A, while also heading investment banking in Italy.
The reorganisation also sees TJ Lim replacing Mike Hammond as UniCredit's head of markets product line. Hammond will assume other responsibilities at the bank.
Job Swaps
ABS
ABS origination trio hired
Barclays Capital has made three new appointments in its securitised products origination group. Emile Ernandez, who was previously at Deutsche Bank, will become vp of the bank's esoteric team. Matt Brand - from Credit Suisse - will join the esoteric team as an associate, while Ravi Suresh - previously at UBS - will join the structuring team as an associate.
The trio will report to securitised products origination group co-heads Diane Rinnovatore and Cory Wishengrad.
Job Swaps
ABS
Walkers reorganises
Walkers has reorganised its global group ahead of the forthcoming retirement of global chairman Wayne Panton. Global managing partner, Grant Stein, will assume this role.
Diarmad Murray will become global managing partner. He was previously managing partner of the firm's Cayman Islands office and global head of its commercial litigation and dispute resolution group.
Jonathan Tonge, managing partner of the firm's practice groups, will become regions managing partner. Relocating to Jersey, he will also assume the role of the office's managing partner.
Finally, the reorganisation will see the firm's current managing partner of regions Ian Ashman become managing partner of practices, with responsibility for driving Walkers' revenue. Ashman will be based in Dublin.
Job Swaps
CDO
CRE CDO transferred
Blackrock Financial Management is assigning its collateral management duties for Kimberlite CDO I to Cutwater Investor Services Corp. Moody's has determined that the proposed assignment will not cause the current ratings of any class of notes to be reduced or withdrawn. The agency does not express an opinion as to whether the assignment could have other non-credit-related effects.
Job Swaps
CDS
MS adds credit salesman
Morgan Stanley has appointed ex-Barclays Capital salesman Stephane Babin to sell rates and credit in both cash and derivatives. Based in Paris, he will join the bank in July, reporting to Jean Laurent Girard, head of fixed income distribution for France, Belgium and Luxembourg.
Job Swaps
CDS
Credit hedge fund gains seed investment
The Palmer Square Emerging Manager Fund - in partnership with Atlantic Asset Management and Montage Investments - has provided US$25m of capital for a seed investment with Millstreet Capital Management, a long/short credit hedge fund manager. In addition to securing strategic investment capital, the relationship provides Millstreet with access to the distribution channels of Atlantic and Montage, the firms say.
"This agreement allows us to focus exclusively on generating attractive risk-adjusted returns on behalf of our clients. By combining our investing experience with Palmer Square, Montage and Atlantic's institutional marketing resources, Millstreet is in a unique position to grow the business in the years ahead," says Millstreet co-founder Brian Connolly.
Job Swaps
CDS
Broker adds fixed income trio
Cantor Fitzgerald continues its expansion into the fixed income, high yield and leveraged finance market with the additions of Matthew Zolin, Lori Samuels and Erin Andrews.
Zolin, who has been named md of high yield trading, and Samuels - who will become md of credit product - will report to Adam Vengrow, head of credit sales and trading at the firm. Andrews, who joins as a senior loan trader, will report into Michael Nitka, head of Cantor's bank debt group.
The trio joins the firm from Chapdelaine Credit Partners. Zolin was previously md of institutional high yield and distressed credit sales at Chapdelaine, where he was responsible for servicing institutional clients for primarily distressed, high yield and bank loans. Prior to that, he was director and portfolio manager for SG Asset Management, where he launched an event-driven credit and equity fund.
Samuels - who was also md at Chapdelaine - focused on investment grade, high yield and distressed bonds and loan sales globally. Prior to that, she worked in credit sales at Miller Tabak Roberts Securities, where she specialised in distribution of investment grade, high yield and emerging markets bonds.
Andrews was evp at Chapdelaine, where she was responsible for building out the loan business. She also specialised in distressed loan trading at Bank of America Securities and held various analyst positions there, prior to joining the trading desk.
Job Swaps
CDS
Global markets ceo appointed
BNY Mellon has promoted Arthur Certosimo to ceo of its global markets group. He will lead the bank's FX, capital markets and derivatives trading businesses worldwide, reporting to BNY Mellon president Gerald Hassell. Certosimo - who was previously the bank's ceo of alternative, broker-dealer and treasury services - replaces Richard Mahoney, who is retiring at the end of the month.
Brian Ruane will replace Certosimo as ceo of alternative and broker-dealer services, reporting to Karen Peetz, vice ceo and ceo of financial markets and treasury services. Ruane was previously head of alternative investment services at the bank.
Job Swaps
CLOs
GSC Chapter 11 hearing due
A hearing is to be held before the bankruptcy court on 25 May to consider the joint Chapter 11 plan for GSC Group and its affiliated debtors. Investor notices for the GSC European CDO I-R, II and V CLOs note that the proposed plan may be inconsistent with the provisions of the collateral management agreement, however.
Specifically, the plan proposes that all management contracts shall be assumed by the debtors and performed by the reorganised debtors, who shall be sub-advised by Sankaty Advisors pursuant to a sub-advisory agreement. Noteholders that don't consent to the plan can either reject such a management contract or assume the management contract in accordance with the provisions of the plan.
If they choose the latter, they are free to: perform under the management contract without the assistance of Sankaty or any other sub-advisor; appoint a different sub-advisor; assign the management contract to another entity; or employ Sankaty to serve as a sub-advisor to the reorganised debtors only to the extent a final order is entered authorising the same. If noteholders fail to object to the plan before two business days prior to the hearing, it will be deemed that they have given consent to the plan.
Job Swaps
CMBS
CMBS research vet recruited
Bank of America Merrill Lynch has appointed Alan Todd as head of US CMBS research. In this role, Todd will be responsible for generating high-level relative value and trade-specific research recommendations to external and internal clients in both cash and synthetics. He will also focus on providing macro-level overviews and in-depth analysis of the US CMBS and commercial real estate markets.
Todd will join the bank in August, reporting to Chris Flanagan, head of US mortgages and structured finance research. He will be based in New York.
Todd joins from JPMorgan, where he was head of US CMBS research since 2005. Previously, he spent five years at Bear Stearns, also in CMBS research.
Job Swaps
CMBS
CS hire signals CMBS return
Credit Suisse has hired Roger Lehman as md and head of CMBS research, responsible for research and analysis that "will support the bank's re-entry into CMBS origination, as well as its secondary trading desk". He will report to Dale Westhoff, global head of securitised products research, and will join Credit Suisse on 1 August.
Lehman joins Credit Suisse from Bank of America Merrill Lynch, where he was most recently co-head of structured finance research. Lehman had been with Merrill Lynch since 1991 in a variety of mortgage trading and research positions.
Job Swaps
CMBS
CMBS md named
1st Service Solutions has appointed Mitchell Brumwell as md and member of its management team. He will act as a representative for the firm by attending and speaking at conferences, seminars and panels held by independent organisations, associations, professional and industry trade groups and think tanks. Based in Chicago, Brumwell will report to the firm's co-ceos Ann Hambly and Mike Meisenbach.
Brumwell was previously an asset manager in JE Robert Company's special servicing division, where he managed a portfolio of performing and non-performing CRE loans on behalf of CMBS investors. Prior to this, he was an associate director at Fitch, where he focused on CMBS performance analytics, credit analysis, research and surveillance.
Job Swaps
CMBS
Simmons partner returns
Simmons & Simmons has expanded its financial markets practice in Paris with the appointment of partner Colin Millar. Millar - who joins from SJ Berwin Paris - specialises in leveraged finance, funds finance, restructuring and real estate finance. Before SJ Berwin, he was a partner at Simmons & Simmons Paris for nine years.
Job Swaps
RMBS
Broker hires MBS trio
MF Global has appointed Evan Malik and Phil Hermann as co-heads of its MBS and ABS sales team. Most recently, the pair held senior positions at Braver Stern, where they were founding partners of the firm's mortgage business.
Additionally, Richard Onkey has joined the MBS sales team, based in New York. He previously served as head of the ABS syndicate desk at UBS and Morgan Stanley.
Job Swaps
RMBS
Option One buy-back request issued
A number of large investors in RMBS that contain loans originated by Option One Mortgage Corporation - now Sand Canyon Corporation - are requesting the firm to repurchase loans that were improperly originated or documented and sold to securitisation trusts.
The investors have retained Talcott Franklin to organise and pursue this request. They presently hold over 25% of the voting rights in at least 64 trusts containing Option One loans. The firm intends to send instructions to the trust administrators on a trust-by-trust basis, as the requisite percentages of voting rights are assembled for each trust.
"As with many of these transactions, the damages may exceed the available funds for recovery, so we are encouraging investors to submit their holdings quickly so we can instruct the trust administrators as to their deals," says the firm's principal Talcott Franklin.
Job Swaps
RMBS
Head HEQ trader named
Southwest Securities has promoted Pho Phimvongsa to vp and head HEQ trader in its taxable fixed income division. He will continue reporting to svp and head of the firm's ABS/CMBS trading team, Patrick McCarthy.
Job Swaps
RMBS
RMBS trading head named
Odeon Capital Group has recruited Bret Ackerman as a director and svp in its sales and trading group. He will head the firm's RMBS trading desk, which utilises its trademark independent research to provide clients with a full service offering for trading in high-yield securities, in New York.
A 10-year veteran of the industry, Ackerman joins Odeon from StormHarbour Securities, where he was head of RMBS trading. He joined the firm as a director in structured products and sales, having previously been svp in structured product sales at MF Global and head of non-agency securitisation at Barclays Capital.
News Round-up
ABS
PPIP investment declining
The rate of PPIP investment continues to decline, with managers only drawing down an additional US$600m last quarter, compared to US$2.1bn in 4Q10 and US$3.3bn in 3Q10. Total draws now total US$20.9bn, representing 71.2% of the US$29.4bn in total purchasing power, according to ABS analysts at Bank of America Merrill Lynch.
Notable among the managers, Marathon Asset Management deployed an additional US$233m over the quarter, investing US$1.7bn - or 90% - of its US$1.9bn in potential purchasing power compared to roughly 78% last quarter.
Of the US$22bn so far invested by PPIP managers, 80% is invested in non-agency collateral. Alt-A assets continue to make up the largest portion of this collateral at 47%, up marginally from 46% in Q4. The share of subprime and option ARM investments also grew marginally as managers reduced their holdings of prime RMBS to 34% from 37% of total non-agency investments.
The BAML analysts note that, like last quarter, PPIP manager performance since inception remains strong. However, net IRRs continued to decline quarter-on-quarter.
News Round-up
ABS
Charge-offs to reach 20-year low
Moody's predicts that US credit card charge-offs will fall below 4% by the end of 2012 - a 20-year low that is roughly 50% below their current level. In 1Q11, Moody's credit card index charge-off rate stood at 7.45%, with the charge-off rate peaking at 11.12% in 1Q10.
An improving mix of borrowers has sent the charge-off rate downward, the agency says, after weaker borrowers were charged off at a record pace during the recession. "Credit card securitisations have already written off as uncollectible the accounts of most of the weakest borrowers and these borrowers are unlikely to get access to unsecured credit any time soon. Consequently, cardholders who remain are generally of higher credit quality, resulting in demonstrably better performance statistics in the months and years to come," says Moody's vp Luisa De Gaetano.
Moody's expects credit card originations to increase in the second half of 2011, leading to some risk of adding back weaker borrowers into the securitisation pools. The additions are not expected to push up charge-offs for at least a year, however.
First, originations will initially target only higher quality borrowers; it will then take at least six months before new lending can lead to charge-offs and begin to affect the charge-off rate. Finally, receivable pools will be sufficiently large so that substantial amounts of origination must take place before their credit quality is significantly changed.
The expected 50% decline in the charge-off rate by the end of 2012 will take place when the agency expects the unemployment rate to persist above 8% - a break in the usual linkage in performance that characterises the two rates, it says.
"As originations increase over time, however, unemployment will once again be a better predictor of card charge-offs as the makeup of the pools becomes more similar to that of the general population. The silver lining is that by the time credit card charge-offs start tracking unemployment again, unemployment will have recovered from current levels and will be closer to a long-run 5%-6% rate," adds De Gaetano.
News Round-up
ABS
NRSRO RFC issued
The SEC has issued a request for public comment on the feasibility of a system in which a public or private utility, or a self-regulatory organisation would assign a nationally recognised statistical rating organisation (NRSRO) to determine credit ratings for structured finance products. Section 939F of the Dodd-Frank Act directs the agency to examine the credit rating process for SF products and the conflicts associated with the 'issuer-pay' and the 'subscriber-pay' models.
The study must address the range of metrics that could be used to determine the accuracy of credit ratings, as well as alternative means for compensating NRSROs to create incentives for ratings.
The SEC will submit the findings of the study to Congress, along with any recommendations for regulatory or statutory changes by 21 July 2012. The public comment period will remain open for 120 days following publication of the request in the Federal Register.
News Round-up
ABS
ABS e-trading offered
MarketAxess has launched an electronic trading offering for consumer-based ABS on its e-trading platform. 14 market-making dealers provide liquidity to the platform and 100 institutional investor customers are signed up to trade. Product coverage includes credit cards, equipment leases, floor plans, student loans, timeshares and autos.
Electronic trading of ABS will take place using the firm's request-for-quote (RFQ) trading system. Post-trade reporting is streamlined with MarketAxess' straight-through-processing (STP) capabilities.
MarketAxess president Kelley Millet says: "We have brought increased liquidity and transparency to the corporate bond markets through e-trading and are pleased to leverage our platform for consumer ABS."
News Round-up
CDO
Involuntary bankruptcy for ABS CDO
The US Bankruptcy Court District of New Jersey issued an order of relief, representing the commencement of the involuntary bankruptcy of Zais Investment Grade Limited VII. The filing is believed to be the first instance in which a CDO has entered bankruptcy involuntarily. A single creditor initiated the bankruptcy: the current holders of the senior notes, Anchorage Capital Group.
News Round-up
CDS
Derivatives developments welcomed
SIFMA has welcomed two US derivatives-related legislative developments that occurred yesterday. The first proposal concerns the passage of H.R. 1573 by the House Agriculture Committee, while the second relates to the passage of H.R. 1610 by the Subcommittee on Capital Markets and Government Sponsored Enterprises of the House Financial Services Committee.
H.R. 1573 will extend the effective implementation date for the derivatives-related section of the Dodd-Frank Act. SIFMA notes that the current 21 July 2011 deadline for derivatives rulemaking does not provide adequate time for regulators to consider the critical issues related to this new regulatory system for OTC derivatives markets.
Ken Bentsen, evp of public policy and advocacy at the association, says: "This legislation would provide additional time for regulators to draft rules, conduct additional cost-benefit analysis and consider the cumulative impacts of these rules on the market and how they would affect businesses and consumers. We applaud the Agriculture Committee for recognising the need for regulators and the industry to get these new rules right and for passing this legislation."
Meanwhile, H.R. 1610 - the Business Risk Mitigation and Price Stabilization Act - will exempt end-users from having to post margin for derivatives contracts. "We firmly believe that US corporations, manufacturers, agricultural producers and pension funds and municipalities should not be required to post margin for derivatives they use to hedge legitimate business risks," Bentsen adds. "We applaud the Subcommittee for recognising the fact that requiring end-users to post margin will make the cost of hedging business risk more expensive and could result in higher prices for consumers who purchase products from these companies."
The association urges the full Financial Services Committee, in turn, to act on this legislation.
News Round-up
CLOs
Debt restructuring fund closes
Black Diamond Capital Management has closed its US$800m BDCM Opportunity Fund III. The fund will work to strategically deploy capital, with the goal of gaining control of highly attractive companies primarily through the purchase and subsequent restructuring of debt securities. In doing so, Black Diamond says it seeks to acquire middle-market companies that possess strategic assets and are market leaders in their respective industry sectors.
News Round-up
CLOs
BlackRock CLO firms up
Further details have emerged on BlackRock Financial Management's forthcoming US$400m BMI CLO I. Arranged by Citi, the transaction is expected to comprise six tranches, including one tranche of subordinated notes and a US$259m class A-1 tranche rated Aaa by Moody's.
BMI CLO I is collateralised primarily by broadly syndicated first-lien senior secured corporate loans. At least 90% of the portfolio will be invested in senior secured loans or eligible investments and up to 10% of the portfolio may consist of senior secured bonds, non-senior secured loans and senior unsecured bonds. At closing, the portfolio is expected to be approximately 50% ramped up and be fully ramped within three months after closing.
News Round-up
CLOs
CLO pricing service launched
Thomson Reuters has launched a CLO evaluated pricing service delivered via its distribution platform - DataScope Select. This new pricing capability will provide end-of-day valuations for global cash CLOs, including both broadly syndicated and middle market deals.
The offering utilises Thomson Reuters LPC loan pricing platform to calculate and assess the weighted average price of a CLO's portfolio of assets, while incorporating Moody's Analytics CDONet Library.
It unpacks the assets underlying an individual CLO - such as prepays, defaults and recoveries - in a more granular approach to credit assumptions, the firm says. Particular emphasis will be placed on the breakout and analysis of triple-C rated loans, defaulted loans, second liens and covenant-lite loans and bonds.
News Round-up
CMBS
Japanese CMBS defaults increase
The balance of defaulted underlying loans backing Japanese CMBS has declined slightly, according to Fitch. But the default rate of underlying loans continued to increase for a second consecutive quarter, both by number and balance.
"The default rate reached a new high on a quarterly basis, with a fall in the total underlying loan balance and number. Fitch believes that default rates are likely to stay relatively high, even if there is a decrease in the balance and number of defaulted loans," says Naoki Saito, Fitch's Japanese structured finance director.
As of end-March 2011, 40 Fitch-rated Japanese CMBS loans totalling ¥240.5bn were in default. The number of defaulted loans increased by two, compared with end-December 2010; however, the balance decreased by ¥11.3bn. The default rate as of end-March 2011 increased to 31.8% by loan balance and 36% by loan number, from 31.5% and 31.9% respectively at end-December 2010.
In 1Q11, six loans totalling ¥21.7bn defaulted, while four loans totalling ¥4.1bn were paid in full without defaulting. Two loans due to mature during the quarter were both extended for three months.
12 loans totalling ¥70.1bn are due to mature in 2Q11, although Fitch expects many underlying loans with 2Q11 maturities to default, regardless of the possibility of ultimate recovery in terms of the loan principal. However, the agency believes that the total number of defaulted loans will not exceed 50.
Finally, with a limited number of properties significantly damaged by the recent earthquakes in Japan, the agency confirms that approximately 20 properties have been sold as scheduled, while some sales transactions were cancelled or postponed.
News Round-up
CMBS
CMBS defeasance activity doubles
Defeasance activity among loans backing US CMBS increased sharply in 2010, reaching more than twice the total from 2009. Moody's reports that the defeasance of CMBS loans in 2010 was US$2.8bn, compared to US$1.3bn the year before, reflecting the increased liquidity for commercial real estate assets.
"Defeasance remains an important factor in CMBS credit because it dramatically reduces the risk of potential loss of principal and interest associated with real estate assets by substituting Aaa rated US government securities for the real estate collateral," notes Sandra Ruffin, Moody's vp and senior credit officer. "However, the amount of defeasance, and hence the benefit to CMBS credit, varies significantly by deal and vintage."
The agency says that for older, seasoned loan pools backing CMBS, defeasance continues to be a positive credit factor. However, there are low levels of defeasance activity and high levels of interest shortfalls for more recent vintage deals.
CMBS issued before 2005 is proportionately over-represented in defeasance, while vintages from 2005 until 2008 are under-represented. Loans originated prior to 2005 also benefit from principal amortisation, which Moody's notes is another positive credit factor.
At 39%, multifamily represents the largest share of defeased loans by aggregate loan balance. The multifamily sector benefits both from improved fundamentals and additional financing options as a result of GSE activities.
Last year the ten largest defeased loans totalled US$1.2bn and accounted for 42% of total defeasance volume for the year. The two largest defeased loans were originally secured by office buildings in New York City and Washington, DC, where property values recovered with gains of 33% and 21% respectively within the last year.
News Round-up
CMBS
Japanese CMBS large loan defaults rise
Default rates for large Japanese CMBS loans have increased, as of end-April 2011, according to Moody's.
Large loans amounting to more than ¥10bn have defaulted since the latter half of last year, accounting for 59% of the total outstanding balance of defaulted loans as of end-April. The level is a significant increase from 17% since end-March 2010, the agency says.
Compared to small- to mid-sized loans, refinancing lenders, or potential buyers of large loans are limited to large corporations. The need for restructuring is therefore higher, raising the hurdles for exit strategies through property dispositions or refinancing.
However, recapitalisation transactions are rarely seen in CMBS deals, Moody's notes. This is due to the difficulties on agreeing new structure conditions or on injecting additional capital by mezzanine investors, given increasing leverage in light of the fall in the value of the underlying properties.
In April 2011 five Japanese CMBS loans amounting to ¥147.6bn matured; none were paid down; five loans amounting to ¥147.6bn defaulted; and none were extended. No loans were prepaid, while four loans amounting to ¥17.6bn were recovered. Defaulted loans amounted to ¥568bn at end-April 2011 - up by 25% from the previous month, Moody's reports.
News Round-up
CMBS
CMBS loan payoffs dip
The percentage of US CMBS loans paying off on their balloon date fell in April from the impressive levels seen in March. However, the percentage of loans paying off in April was well above the 12-month rolling average of 38.9%, according to Trepp's latest payoff report.
In March, the percentage cracked the 50% threshold for only the second time in 27 months. In April, 47.5% of the loans reaching their balloon date paid off - eight points below the March reading.
By loan count, 53.8% of the loans paid off - up slightly from March's 52.2% reading. On the basis of loan count, the 12-month rolling average has been 46.6%.
Prior to 2008, the payoff percentages were typically well above 70%. Since the beginning of 2009, however, there have only been two months where more than half of the balance of the loans reaching their balloon date actually paid off.
News Round-up
CMBS
Loan resolutions aid CMBS delinquencies
Loan resolutions have once again helped cancel out rising monthly US CMBS delinquencies, with the overall rate holding steady for the second straight month and delinquencies rising by 1bp to 8.75%, according Fitch.
"While the nascent real estate recovery and elevated loan resolutions are grounds for cautious optimism, it is still too early to say that CMBS delinquencies have reached a peak. There are still several overleveraged performing loans that may potentially slip into payment default, meaning that CMBS delinquency volatility may persist," says Fitch md Mary MacNeill.
With three of the largest five performing specially serviced loans transferring last month, there is considerable uncertainty as to whether these loans would default in the near term. "Borrowers have been paying debt service on several performing large loans in special servicing during workout negotiations, but they may cease to do so if they are unable to reach a viable near-term modification. Conversely, any modifications or liquidations that remove large loans from the [Fitch] index could push CMBS delinquencies downward," adds MacNeill.
Current delinquency rates by property type are: 16.81% for multifamily (from 17.42%); 13.83% for hotel (from 14.12%); 9.6% for industrial (from 9.38%); 6.94% for retail (from 6.89%); and 5.65% for office (from 5.95%).
News Round-up
CMBS
US CMBS delinquencies re-accelerate
After three consecutive months in which the US CMBS delinquency rate showed signs of levelling off, the rate re-accelerated in April, according to Trepp's latest delinquency report. The percentage of loans 30+ days delinquent, in foreclosure or REO climbed by 23bp in April to 9.65%. The value of delinquent loans now exceeds US$62.8bn.
The report notes: "In February and March, the CMBS delinquency rate posted its smallest rates of increase since mid-2009. Those statistics, along with the view that CMBS lending was beginning to pick up steam, led many to believe that the worst was behind the CMBS market."
Trepp continues: "In April, however, the delinquency rate for US CRE loans in CMBS increased significantly. That puts the rate at, once again, the highest reading in the history of the CMBS market. The 23bp uptick is the biggest since December's 27bp jump and indicates that the improvement in the legacy CMBS market may continue to be bumpy in the near term."
The percentage of loans seriously delinquent (60+ days delinquent, in foreclosure, REO or non-performing balloons) is now 8.9%. By that measure, the rate was up only 1bp from March 2011.
There were five loans with balances of over US$100m. Those loans totalled US$1.07bn in new delinquencies.
These five loans represented about 15bp of increase in the monthly delinquency list. Included in this list were the US$475m Alliance SAFD loan and the US$223.4m MSKP Retail Portfolio loan.
News Round-up
RMBS
NYID email disclosure ordered
The New York State appeals court yesterday ruled that the New York State Insurance Department (NYID) must comply with a discovery order issued by Justice James Yates in November 2010 to turn over emails between then-Superintendent Eric Dinallo and four other senior NYID officials. The move is the latest development in the Article 78 action brought by the bank policyholder group against MBIA and the NYID over MBIA's alleged US$5bn fraudulent conveyance in February 2009 (SCI passim).
The order includes any emails sent among this group in January and February 2009 that might show the NYID's decision to allow MBIA to split its MBIA Insurance subsidiary in two was steered "away from a pure statutory obligation to assess the matter fairly for all policyholders". Although the NYID had argued that Justice Yates' order would result in the production of "zero" documents, it still sought to appeal the decision. The Appellate Division, First Department denied the motion.
Robert Giuffra, lead counsel for the policyholders and a partner at Sullivan & Cromwell, comments: "We're pleased that the Appellate Division has denied the Insurance Department's efforts to prevent discovery of emails among senior Department personnel reflecting bias, prejudgment of specific facts or that the Superintendent's approval was preordained or steered to an approval."
News Round-up
RMBS
FDIC outlines servicing lessons learnt
The FDIC has released a special foreclosure edition of its 'Supervisory insights' publication, which highlights lessons learned from an interagency horizontal review of the 14 largest residential mortgage servicers. The review resulted in consent orders with all of these entities (SCI passim).
The report also provides a forum for discussing how bank regulation and policy are put into practice in the field, as well as for sharing best practices and communicating about the emerging issues that bank supervisors face. "The best practices outlined in this publication provide important suggestions for avoiding pitfalls in servicing mortgage loans. We encourage all residential mortgage servicers to read the article and consider the best practices as they review their own servicing operations," says FDIC chairman Sheila Bair.
News Round-up
RMBS
Servicer advance receivables deal critiqued
The advance rates and reserve fund amounts in the most recent American Home Mortgage servicer advance receivables transaction, AHM SART 2011-1, are inconsistent with Fitch's criteria for achieving a triple-A rating. Rather, the deal's credit enhancement is more in line with mid-investment grade ratings, the agency says.
Fitch updated its servicer advance receivables criteria in December 2010 to better account for the extended property liquidation timelines seen across the mortgage industry. While asked to provide feedback on AHM SART 2011-1, the agency was ultimately not asked to rate the transaction due to its more conservative credit view.
Based on its review of preliminary information on the deal, Fitch deemed the advance rates on the receivables too high to achieve a triple-A rating under its criteria. Further, triple-A notes are expected to have sufficient liquidity to meet a minimum of 13 months of debt service and fees, the agency says. The AHM SART 2011-1 transaction provides for a reserve fund of only nine months of collections, which does not satisfy Fitch's threshold to achieve a triple-A rating.
News Round-up
RMBS
Speedy recovery for UK buy-to-let
UK buy-to-let borrower performance has bounced back after a severe deterioration during the downturn, according to S&P. Interest rate rises remain a risk, however.
"The drop-off in performance - and subsequent recovery - was more pronounced than for owner-occupier borrowers, which we believe is due to the specific characteristics of buy-to-let borrowers; in particular, the disproportionate effect that changes in interest rates will have. In the near term, the buoyant UK rental market should continue to support buy-to-let borrowers, but interest rate rises are a risk on the horizon," says S&P analyst Mark Boyce.
While pre-crisis arrears in the UK buy-to-let sector were consistently lower than for loans to owner-occupiers, performance deteriorated sharply during the recession. However, since the second half of 2009, buy-to-let credit performance has improved almost as quickly, the agency confirms.
"We believe this difference in performance behaviour was due to a greater contraction in credit availability for buy-to-let borrowers at the height of the crisis, as well as their greater sensitivity to changes in interest rates," Boyce adds.
The supply and demand dynamics for rental accommodation appear to support buy-to-let borrower performance in the medium term in the UK. These dynamics may keep upward pressure on rents and shorten average vacancy periods.
"Despite these positives, however, we believe that changes in interest rates will more closely affect the credit performance of buy-to-let borrowers than that of owner-occupiers. Our analysis suggests that a rise in interest rates could cause the average debt service coverage ratio to fall by about 40% by the end of 2012. Furthermore, even relatively mild house price declines over the next two years could place more than 30% of buy-to-let borrowers in negative equity, reducing their financial flexibility and thus risking a rise in arrears," Boyce concludes.
News Round-up
RMBS
Complex Lehman RMBS restructuring completed
Berwin Leighton Paisner (BLP) has acted for the issuers of 34 Lehman-originated RMBS in a restructuring exercise totalling £18.5bn. Undertaken in three stages, the restructuring took 16 months to complete and was necessitated by the voluntary winding-down of one of the Lehman originators and the complex structure of the collection accounts for each RMBS.
The first stage of the restructuring involved the transfer of the legal title to residential mortgages and related collection accounts held in the name of Southern Pacific Personal Loans to the issuers of each relevant RMBS. The second stage centred on the modification of the transaction documents for each transaction to address the concerns of Barclays Bank, in its capacity as a collection account bank regarding the provision of direct debit services to an SPV. The final stage focused on the release of HSBC Bank from its role as a collection account bank for 12 RMBS and the transfer of the related customer payment arrangements to Barclays.
The restructuring involved 11 Eurosail, six Southern Pacific Securities, five Preferred Residential Securities, five Southern Pacific Financing, three Marble Arch Securities, two Mortgage Platform Asset Sale, one Mortgage Funding and one EMF RMBS. The BLP team was led by structured finance partner Tamara Box and senior associate Alex Campbell, assisted by associates Grace Hui, Carl Shaffer and Charles Jenkins.
Box comments: "While RMBS transactions generally contemplate the demise of the originator, this process - which we believe is the first in which the actual transfer of mortgages and collection accounts to the issuer has been necessary - has highlighted the deficiencies in the market standard documentation."
News Round-up
RMBS
New agency indices prepped
Markit is expected to launch new MBX, IOS and POS indices on 12 May. The indices will reference Ginnie Mae II collateral issued primarily in 2010 for the 4%, 4.5% and 5% coupons.
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