Contents

RMBS

Investor fatigue?

Interest in previously popular bid-lists waning

Two Maiden Lane II (ML II) bid-lists were presented to the market last week and, after weeks of being well-received, the most recent auctions drew a tired response (SCI 13 May). As early fears about secondary market bifurcation subside, new concerns regarding the durability of investor appetite are being raised.

The New York Fed put out a total of US$2.54bn in current face bonds from the Maiden Lane portfolio last week, with the bulk of that (US$2.08bn) on the second list. MBS analysts at Bank of America Merrill Lynch report that 34% of the bonds on that second list did not trade, but the amount that buyers are willing to pay has also decreased.

Bret Ackerman, head of RMBS trading at Odeon Capital Group, believes that the scale of the ML II supply has begun to wear on the market. He says: "When Maiden Lane II first came to market, there was a concern that the additional supply would weigh heavily on bond valuations. While the first two lists traded through the offered side of the market, technicals have weighed more heavily on more recent lists and the market as a whole."

Ackerman continues: "The market has traded off 4-5 points since the beginning of ML II liquidations. While not the driver of the sell-off, the ML II supply has certainly been an exacerbating factor."

The BWIC process usually favours large dealers over customers, but the execution on the Maiden Lane BWICs has been more customer-bid driven than dealer-bid driven, notes Ackerman. He says customers are currently taking a buy-and-hold position as they look for long-term yield projection.

A softening in prices had been seen ever since the first list came out, even before last week's lists drew a muted response. Although the market in general has softened, another contributing factor could be less participation from Wall Street, where the first ML II list in particular was embraced as an opportunity for one-upmanship.

"There was an 'ego premium' placed on the first list, as larger banks were willing to trade at a loss in exchange for the press," explains Ackerman. "Basically, every dealer stepped up for the first lists because there was a risk of being removed from future lists. Of course, the Fed needs all participants to be involved to get best execution."

He continues: "Since then, there has been less press surrounding these and henceforth there is less upside to be had from one dealer buying a significant portion of the list and being deemed to 'control the market'."

The main concern at the time of the first Maiden Lane lists was about bifurcation in the market: while the Maiden Lane lists were very well-received, other lists were unable to attract the same bid levels. Ackerman does not think this was ever going to be a particularly worrying trend. Indeed, as Maiden Lane prices have come down since the ML II auctions started, the issue of bifurcation has also become less important.

"I do not think the Maiden Lane lists are creating a two-tier market. That seems to have been the case on the first list because of all the accompanying press, publicity and the pressures to be involved. But the most recent lists have come and gone with much less fervour," says Ackerman.

The BAML analysts note that another type of split is occurring though. Although 34% of bonds on the most recent list did not trade, that includes 51% of the subprime bonds which had been offered. This continues a recent trend of subprime prices becoming progressively weaker.

The Maiden Lane auctions are expected to continue up to the end of the year. With more than US$30bn of securities being delivered to the market in a series of bite-size chunks, it is possible that investors will eventually tire of being drip-fed and interest in Maiden Lane assets will dry up completely.

However, Ackerman does not believe the subdued reaction to last week's lists marks an end to the market's interest in ML II. He concludes: "There is a lot of money on the sidelines and US$250m dissipates from the market in paydowns and losses every month, so US$1bn-US$2bn is not more than the market can absorb every month."

JL

CLOs

Euro CLO market taking hold

The European CLO market is entering into a more stable and constructive period as spreads remain at consistent levels. In addition, positive sentiment is being generated by a CLO conference slated for tomorrow.

"The European CLO market is entering into a very constructive phase now and performance is looking positive," one CLO trader says. This is due to stabilising spread levels, which in turn are producing a healthier and clearer CLO market.

The trader continues: "Looking back over the last month, the trend has been fairly clear in terms of more real money investors purchasing paper. This creates a more stable market environment and has led to more normalised market activity, where spreads grind-in rather than leaping and gapping in - which is what we saw at the back end of last year. Sentiment is moving towards being far more positive."

Another factor that is said to be contributing to the positive outlook in the sector is a global CLO conference - the first to be held since the onset of the financial crisis - being held tomorrow in London. The trader believes that the meeting will bring about a dialogue, which will boost market activity.

"Things are positive anyway, but certainly knowing that there's a CLO gathering ahead is an additional boost to the market. We're expecting it to be a bullish event. Clients are buying paper ahead of the meeting, so we've seen a pick-up in purchasing activity from clients on the back of this already," he adds.

LB

CMBS

New issue boost for US CMBS

The announcement of two new deals this week, with two more expected next month, has boosted the US primary CMBS market. However, performance across the secondary market is suffering due to "shaky" spreads.

JPMorgan and RBS/Wells Fargo are due to begin marketing their respective US$1.5bn deals this week, with pricing expected to follow next week. JPMorgan's JPMCC 2011-C4 transaction is secured by 42 mortgages on 84 office and retail properties.

Aside from this, a Morgan Stanley CMBS is planned for shortly after Memorial Day (30 May) and a UBS deal is also expected in early June. "Despite the weakness in the market, we're expecting all of the transactions to trade pretty well. For investment grade assets, the investor base is most definitely active and there still seems to be a very good bid," one CMBS trader says.

However, secondary activity appears to be weakening this week, as evidenced by volatile spread levels. "Spreads are a bit shaky," the trader confirms. "It's something that we're seeing across a number of asset classes - particularly the non-investment grade tranches - there's definitely a weak tone at the minute. Things don't feel good at the mezzanine part of the capital stack either; it's all been sloshing around. It doesn't help that there isn't a large amount of trading."

Due to a number of factors, the trader is unsure as to whether current conditions are set to improve. One factor in particular that continues to weigh heavily on the market is the Maiden Lane bid-lists. The sheer breadth of bonds on dealer balance sheets is proving too much for the market to hold, the trader says.

"There's a lot happening overseas; there's the end of next quarter; the end of QE2; and the Maiden Lane portfolio. Short-term technicals are also suffering but I think that, as we look to the next 4-5 months, we will see improvements. However, in the short term, the next 6-12 weeks are going to be tough."

The trader concludes that despite the ongoing weakness in secondary activity, the performance of triple-A paper is proving strong. "The senior part of the capital structure is still performing well, with a good amount of investor demand."

LB

RMBS

RMS call surprises Euro RMBS market

The European RMBS secondary market has picked up considerably over the last week, with a surge of bid-lists containing predominantly UK non-conforming assets. In addition, market participants received welcome news today as RMS 16 gave notice that all of its outstanding notes will be redeemed.

"Today's RMS 16 redemption notice came completely out of the blue; it was definitely not anticipated by the market. But, as can be expected, participants are very happy that the transaction will be called on 13 June," one RMBS trader says.

However, negotiations around Co-operative Bank's proposals to compensate noteholders for its failure to call the Leek 17, 18 and 19 RMBS transactions are dragging on (see SCI 14 April). All of the UK non-conforming Leek deals were issued between May 2003 and April 2006.

Elsewhere in the market, bid-lists remain a key area of focus, particularly lists holding senior paper. One list launching this week comprised £25m of Newgate Funding 2007 paper, a UK non-conforming RMBS originated by Mortgages PLC.

"It's been received pretty well," the trader confirms. "It was mostly slow-paying triple-A paper, which traded between 80-210DM and had a 71% yield."

Another bid-list consisting of UK non-conforming paper was due to launch this afternoon. "We're waiting to get colour back on this, but it's expected to trade well," the trader concludes.

LB

RMBS

Maiden Lane lists weigh on US MBS

The latest Maiden Lane II auction has served as a wake-up call for the US MBS sector, with only 65% of the bonds selling. Fatigue is said to be the main cause, as the New York Fed's gradual release of bid-lists since 4 April have left market participants overwhelmed.

"The big news in the market is yesterday's Maiden Lane auction, which went very poorly. The market is only able to absorb so much and the supply keeps on coming," one MBS trader says. With yesterday's list involving US$2bn in bonds, concern is mounting that the auctions are absorbing all of the market's liquidity.

The trader continues: "In terms of colour, the subprime paper didn't trade. The vast majority of these portfolios comprises dirty Alt-A, pay option ARM and subprime collateral. The Alt-A paper more or less traded, but the subprime really suffered. It's all beginning to weigh on the market."

So far, there have been seven ML II auctions, with around 90% of the bonds on each list selling. Consequently, yesterday's poor reception indicates a "step back" in bidding, the trader adds. "The risk is that buyers will perceive the bid as not being as deep and eventually they will stop participating."

He suggests that yesterday's poor result could lead to the NY Fed becoming more receptive to AIG buying the balance of the portfolio. The insurer has reportedly bought around 50% of the paper offered in the auctions so far.

The trader continues: "Given how poor this auction went compared to the previous lists, we may see weaker prices from here on in. A strong bid from the beginning of the year encouraged the NY Fed to begin selling its portfolio, but at this point it's overwhelmed the market."

Elsewhere in the market, price levels remain unchanged for prime fixed and Alt-A hybrid paper, which are performing well and generating interest. However, bid-list volume in general has been lighter due to the focus on the Maiden Lane lists, the trader concludes.

LB

ABS

Tender offer aids CCCIT run-off

Citibank (South Dakota) has launched a tender offer to purchase up to US$4.84bn of senior notes from select CCCIT series. The move is seen as indicative of the impact of supply and demand fundamentals on credit card ABS spreads, which have been tightening steadily since late 2010.

Forming part of a broader asset/liability management strategy, the Citibank offer comprises an "any and all offer" and a "partial waterfall tender offer". All eligible notes that are validly tendered will be purchased for US$940 or US$971.25 (depending on the series) per US$1000 face under the first offer, while those tendered under the second offer will be purchased for an amount between US$972.5 and US$985 based on a priority assigned by Citibank. The series subject to the tender offer are predominantly floating rate notes issued prior to 2008.

The tender offer expires on 15 June, but noteholders will receive a US$30 early tender premium if notes are tendered prior to 1 June. Given current market pricing of the bonds subject to the tender offer, ABS analysts at Barclays Capital expect a high participation rate across both legs of the offer.

However, an overall cap (of US$4.84bn, representing 12.62% of the total CCIT ABS outstanding) and a per series cap (set at approximately 46% of the outstanding principal balance of each class subject to the tender) limit the total amount of validly tendered securities that will be purchased in the offer. If the full amount of notes subject to the 'any and all' offer is tendered, only US$540m of capacity under the overall tender cap will remain for the partial waterfall tender offer, the BarCap analysts note. Under such a circumstance, it is unlikely that notes lower down the priority waterfall would be accepted for tender.

About US$100bn of credit card paper is scheduled to mature by the end of 2012, according to ABS strategists at Wells Fargo, with the bulk of it coming due in the first half of next year. They expect credit card ABS spreads to gradually tighten further based on the lack of new supply and the demand from investors utilising the sector as a source of liquidity in the current low-yield environment.

"The credit card ABS market has been plagued by a lack of new issue bonds for the past two years," the Wells Fargo strategists add. "Securitisation has lost its funding cost advantage through accounting and regulatory changes, as well as the cheaper funding currently available from bank deposit rates. While most credit card issuers have been content to let ABS simply run off, Citibank has taken the extra step [of] offering to repurchase some of its outstanding credit card ABS."

CS

CDS

CVA: beyond compliance

Basel III has ushered in new rules for calculating credit value adjustment (CVA). But rather than being an expensive challenge, if tackled correctly, the new regulation can offer banks a lot more than just compliance, says Quartet FS co-founder Georges Bory

The debate surrounding the new capital charge for CVA continues apace, with regular murmurs of how the risk management community is getting to grips with the new regulation due in 2013. A survey by Fitch Solutions in April this year, for example, revealed that among 200 credit and counterparty risk practitioners, only 32% believed the new regulation will assist them in managing risk more effectively, while 25% thought that it would have the opposite effect and 43% remained unsure.

Designed to introduce better management and understanding of banks' exposure to credit risk, the CVA capital charge was part of new measures on counterparty credit risk within the Basel III regulations declared last December. While other parts of the package - particularly the increase in minimum capital requirements, new counter-cyclical buffer and liquidity ratios - may have the broadest implications, the counterparty credit risk rules could end up having the biggest impact on OTC derivatives dealers. Even though the new regulations have been welcomed by many, the modification is also set to make the CVA calculation far more complex and costly for institutions to deliver.

Changes afoot
Regulations such as this are always a catalyst for change. But, in addition to meeting the new requirements, risk managers need to look beyond pure regulatory compliance. They need to grasp the opportunities presented by the new CVA approach, beyond a simple measuring and reporting tick-box exercise.

As it currently stands, the CVA methodology will make the CVA calculation far more complex than previously outlined and all firms are now subject to the new standardised capital charge, rather than just those that have an approved VAR model. In practical terms, conducting the calculation requires financial institutions to project thousands of scenarios and then aggregate them in a non-linear fashion. This means that banks will have to design scenarios that cover the broad range of trade types, build calculation capacity to run the scenarios and then be in a position to undertake dynamic analysis of these wide ranging data sets.

However, while this new methodology to CVA calculation is undoubtedly more scientific and will empower risk managers with a more robust view of their exposure, it has also raised the issue of the increased cost of calculating the CVA. What's more, because CVA is not static, the challenge lies in being able to aggregate high volumes of data from multiple streams, to produce both the CVA calculation and the ability to drill down into the data in real-time.

In addition, banks have come to recognise that the CVA charge can be linked to the trades that generated it. As such, banks are looking to find ways to enhance their existing technology frameworks to manage the costs associated with CVA by paying greater attention to its use in the front office.

The role of CVA in the front office
Typically, risk managers calculate CVA on a particular week day using 'after the fact' values and, as such, the data and sensitivities are old. Therefore a weekly calculation of CVA does not provide up-to-date information, even if risk managers use some of the sensitivities to approximate daily values.

In response to this, some banks have set up CVA desks. With these desks in place, there is a now a need for a front office tool to calculate the CVA capital charge, its updates and also be able to hedge it.

For example, Citibank has set up CVA desks to consolidate credit risk management within the company. Here traders are in charge of reducing and managing the overall CVA of the bank. Traders are tasked with looking at where the CVA is and then trying to hedge it by buying the appropriate instruments.

Goldman Sachs was reportedly saved by its CVA desk when Lehman Brothers defaulted in 2008.

Long-term benefits
Approached in the right way, the changes to CVA can be an opportunity for financial institutions to go beyond regulatory compliance and develop a valuable operational tool for use by both the front office and risk managers. Since CVA is dynamic, moving with the markets, it allows banks to better predict the future - especially when combined with analytics as outlined above. So, while initial roll-out costs may seem an issue to some, longer term banks that adopt this approach stand to benefit from their clearer picture of risk.

In conclusion, it is likely that over the coming year there may even be further changes to the CVA charge, as some banks are reported to be pressing for a review. But whatever happens, a more proactive stance to managing CVA has become an important consideration for all firms in the aftermath of the credit crisis. If implemented properly, not only will new systems deliver on the regulatory side of the CVA scales but balance this with greater confidence and understanding of risk for the benefit of the business overall.

ABS

ABS head appointed

Janus Capital Group has appointed John Kerschner as head of securitised products within its fixed income investment team. The role is a newly created position and reports to Janus co-cio, fixed income, Gibson Smith.

Kerschner originally joined Janus in December 2010 as a mortgage analyst. In his new role as head of securitised product, he will be responsible for guiding Janus' process around the mortgage market and securitised products.

Prior to joining Janus, he was director of portfolio management at BBW Capital Advisors. Before that, Kerschner worked for Woodbourne Investment Management, where he was global head of credit investing.

ABS

Funds marketer added

Lexie Hope has joined Prytania Investment Advisors from Calimere Point Advisors to head up funds marketing. She has over 25 years' experience in the credit and structured credit markets, including senior roles at ING and Nomura.

ABS

Wilmington Trust acquired

M&T Bank Corporation has acquired Wilmington Trust Corporation in a deal that sees it add US$10.7bn in assets. Under the agreement, all Wilmington Trust bank customer accounts have become M&T Bank accounts, but the Wilmington Trust wealth advisory services and corporate client services businesses will still use the Wilmington Trust brand. Subject to the terms of the merger agreement, Wilmington Trust stockholders are receiving 0.051372 shares of M&T common stock in exchange for each share of Wilmington Trust common stock they owned.

ABS

Deloitte hires for regulatory change

Jeannie Lewis and Bryan Morris are joining Deloitte's Asset Management Services' governance, risk and regulatory practice. April Lemay, Deloitte & Touche principal, will lead the team.

Lewis has more than 20 years of regulatory experience. She joins as principal and will be based in Chicago, providing regulatory, compliance, risk management, litigation support and business advisory services to Deloitte's traditional advisory clients, investment companies, fund of funds, financial intermediaries, service providers and private funds.

She joins from Driehaus Capital Management, where she was assistant general counsel from 2007 until 2010. Prior to that, she held several posts with the US SEC, including associate regional director in the enforcement division.

Morris has more than 12 years of experience in the industry. He joins as a partner and will be based in Washington, DC. Morris takes on a leadership role within the asset management services practice for the Southeast region, providing both audit and regulatory compliance assistance to Deloitte's asset management clients in the region.

Morris joins from the US SEC, where from 2007 he was a professional accounting fellow in the office of the chief accountant, within the investment management division. Before that he was an assistant chief auditor in the public company accounting oversight board's office of the chief auditor. He is returning to Deloitte, where he started in 1999.

Lemay has more than 14 years of financial services experience. Based in Boston, she will lead asset management services efforts in external audit, internal audit, valuation and securitisation, risk and regulatory, financial accounting and reporting, security and privacy, internal controls, finance transformation, and operations and technology.

Lemay started with Deloitte in 1996 and became a principal in 2007. During her tenure at Deloitte she has specialised in operational efficiency, regulatory compliance and internal control consulting services.

ABS

Advisory continues Asian expansion

StormHarbour has made two senior appointments in Hong Kong. Hong Hoo Moon and Guohua Ren each join the firm as md and will report to Water Cheung, Asia-Pacific ceo and principal. The appointments further strengthen StormHarbour's operations in Asia-Pacific, after the firm announced four senior hires in the region only two months ago (SCI 23 March).

Moon was formerly head of the financial institutions group and head of investment banking at BNP Paribas Securities Korea in Seoul and will now be responsible for Korean capital markets origination. Ren was formerly head of capital markets within the China global markets group at Standard Chartered Bank in Hong Kong and will now be responsible for capital markets origination in Greater China.

CDO

New manager for CRE CDOs

RE CDO Management, an affiliate of Winthrop Realty Trust, is set to replace Sorin Capital Management as collateral manager on the Sorin Real Estate CDO I, III and IV transactions. The change will be implemented through an assignment and assumption of collateral management agreement for each transaction. RE CDO Management also proposes to enter into a letter agreement with each CDO prohibiting it and any of its affiliates from submitting any of the CDO's notes for cancellation without payment in full.

CDS

Bank sanctioned over Lehman CLNs

The Hong Kong Securities and Futures Commission (SFC) has reprimanded Core Pacific-Yamaichi International (CPYI) over of its internal systems and controls relating to sales of Minibonds, Octave Notes and Constellation Notes.

An SFC investigation raised a number of concerns with CPYI's internal systems and controls relating to the sale of Lehman Brothers-related structured products. Specifically, the agency cites: the adequacy of product due diligence on Lehman Brothers-related structured products before they were sold to clients; the adequacy of training and guidance given to its sales staff to enable them to understand the investment return characteristics, structure and risk profile of Lehman Brothers-related structured products; and the establishment and implementation of proper guidelines and monitoring procedures on the sale and marketing of Lehman Brothers-related structured products to clients.

CPYI does not admit any liability arising from these matters, but acknowledges the seriousness of these concerns. It has agreed to: offer to repurchase from all its eligible customers all outstanding Lehman Brothers-related structured products at a price equal to the principal amount invested by them, less any coupon payments received; and offer to pay compensation to all its eligible former customers in respect of their previous holdings in Lehman Brothers-related structured products in an amount equal to the principal amount invested by them, less any coupon payments, residual value and/or sale proceeds received.

The total amount that CPYI offers pursuant to the repurchase and compensation offers is approximately HK$9.6m.

CPYI has also agreed to immediately implement special enhanced complaints handling procedures, engage an independent reviewer to review its systems and processes, and to engage a qualified third party to review and enhance its complaints handling procedures. The SFC considers that this agreement resolves its concerns about CPYI's sales practices in respect of Lehman Brothers-related structured products and is in the best interests of investors.

CDS

Mahogany settlement disclosed

Perpetual Trustee Company has disclosed that investors from Australia, New Zealand and Papua New Guinea for whom it acts as trustee in CLNs issued by Mahogany Capital will receive up to 85 cents in the dollar of principal on the Mahogany Series I notes and 69 cents on the Mahogany Series II notes. This follows the settlement with Lehman Brothers Special Financing in November (see SCI 3 December 2010), which Perpetual was obliged not to disclose the results of for six months. Payment is expected to be made to investor later this month or early next month.

CDS

Asset manager beefs up

MKP Capital Management has expanded to Europe with the opening of a London office. The move aims to pursue investment opportunities globally and to service clients in Europe and the Middle East.

While the firm intends to also appoint London-based staff, emerging markets portfolio manager Karim Nsouli has relocated to London along with several other team members.

Additionally, MKP has appointed four executive hires in New York. Among these is Raffaele Ghigliazza, who will become the firm's director and risk manager, reporting to chief risk officer Henry Lee. Prior to joining the firm, Ghigliazza worked within the structured risk advisory group at JPMorgan, where he developed models for risk in various asset classes.

David Burke also joins the firm as director with responsibility for client development. He was previously md and head of strategic initiatives at hedge fund Arrowhawk Capital Partners.

Finally, Sean Perrota joins MKP as vp and associate portfolio manager, responsible for its financing activities. He was most recently at Goldman Sachs, specialising in providing long and short financing to fixed income hedge funds.

CLOs

Permacap adds director

Greenwich Loan Income Fund has appointed James Carthew to its board as a non-executive director. He was previously a fund manager, responsible for managing Advance UK Trust and Advance Focus Fund, a Guernsey domiciled investment company. He was also on the board of Progressive Asset Management, an asset management group that manages a number of UK and emerging market funds.

Separately, T2 Advisers has agreed to amend the fees it is paid to ensure that all parties' interests are aligned during the time taken to decide whether to deconsolidate the T2 CLO I (see SCI 27 April) and beyond. The intention of this amendment is to provide GLIF with the economic benefit of deconsolidation of the CLO in an assured timeframe, while providing the investment manager with clarity that will allow it to adapt to an environment of a substantially reduced fee income.

For the next three quarterly management fee payments, starting with the payment due at the end of June 2011, the management fee will be fixed at the payment for the previous quarter of £911, 272. Thereafter, from the management fee payable at the end of the first quarter of 2012, the management fee will be calculated on the company's gross assets - less the fair value of the liabilities within the CLO - to the extent that the CLO remains consolidated by the company.

As at 31 March 2011, the fair value of the liabilities within the CLO was US$212m. The new fee will be subject to a minimum fee of £155,000 per quarter.

CLOs

Policyholder group reply filed

The policyholder group on Friday filed its reply brief with the New York Court of Appeals in Albany in relation to its US$5bn fraudulent conveyance action against MBIA over its 2009 split (SCI passim). Oral argument in the appeal will be heard in Albany on 31 May and is expected to posit that: the Appellate Division Majority's "collateral attack" theory violates settled law; MBIA and the NYID Superintendent cannot evade due process through their "exclusive jurisdiction" and preemption theories; the Appellate Division Majority erroneously granted MBIA's motion to dismiss based on an affirmative defense contradicted by the allegations of the complaint; and the plaintiffs' common law claims are well-pled.

RMBS

MBS trading md named

KeyBanc Capital Markets has appointed Joseph McHale as md in its MBS sales and trading group. Based in New York, he will sell fixed income securities to institutional accounts. He previously held md positions at Auriga Securities, Brevan Howard and Nomura Securities.

ABS

Card delinquencies fall to two-year lows

US credit card ABS delinquencies and charge-offs have fallen to levels not seen in over two years, according to Fitch's latest credit card performance indices.

"Despite high jobless claims and unemployment, US consumers are whittling away their debt levels while credit quality measures continue to improve. Tighter underwriting and otherwise benign economic conditions will likely spur further improvements for credit card ABS performance metrics through the second half of 2011," says Fitch md Michael Dean.

The current level reached 2.93%, after declining 18bp from the prior month. As the economy struggled over the last three years, delinquencies were quick to rise and peaked at 4.54% in January 2010. Between 2004 and 2008, delinquencies hovered around 2.75%.

As expected from the improvement in delinquencies, charge-offs also continued to decrease. For the first time in 26 months, this metric crossed the 8% mark with a 7.88% reading. This is the lowest observation since February 2009, after which charge-offs increased steadily to highs in excess of 11% in early 2010, the agency notes.

With few changes to the prime rate and Libor curves, yield remained stable at 21.9%. Further, strong yields and improving loss metrics mean that excess spread generation has been robust. The one-month average excess spread reached another all-time record high of 11.56%.

Consumers are also paying back their card balances quickly, reflected in Fitch's monthly payment rate index approaching record highs of 21.72%. Payments rates are expected to remain high as more consumers transact and make on-time payments.

Fitch's retail credit card index exhibited similar trends, with gross yield remaining strong at 26.4% and monthly payment rates reaching 15.66%. The retail index also eclipsed meaningful hurdles with regard to credit quality, with 60+ day delinquencies falling below 4% for the first time since August 2008. The current level is 3.90%, which is still elevated compared to pre-recessionary levels of about 3.50% to 3.75%.

Finally, Fitch's retail charge-offs index remains above 10%, at 10.42%, but has shown steady improvement over the last six months since peaking at 13.41% in March 2010.

ABS

South African consumer ABS rated

Global Credit Ratings (GCR) has assigned indicative ratings to the ZAR1.7bn senior notes to be issued by Bayport Securitisation (BaySec). BaySec is a securitisation of personal loans advanced to lower income borrowers in South Africa by Bayport Financial Services. All of the notes have been rated single-A.

GCR reports that the senior notes will be listed on the Johannesburg Stock Exchange and the transaction will form part of a newly established ZAR4.4bn asset-backed note programme. All existing debentures will be replaced by notes to be issued at the expected closing date of 20 May. The notes will have the same pricing and repayment conditions as the existing debentures.

ABS

Further downgrades for Greek SF

S&P and Moody's have taken rating actions on a number of Greek transactions, following rating action on the Hellenic Republic.

S&P's action affects 29 tranches in 15 Greek ABS and RMBS deals. The actions are a result of the agency's revised assessment of Greek country risk and its impact on notes backed by Greek-rated assets, following its downgrade of the sovereign to single-B, credit watch negative, on 9 May.

S&P will no longer rate notes backed by Greek assets higher than triple-B negative, watch negative. Consequently, it has lowered its ratings on all Greek ABS and RMBS notes rated triple-B plus and triple-B, and placed on watch negative the sole tranche currently rated triple-B minus.

Meanwhile, Moody's has downgraded the senior note ratings of one Greek CLO, seven RMBS and three ABS transactions to Ba1 - all of which have been placed on review for further downgrade. The agency has also placed the mezzanine and junior notes of all ABS and RMBS transactions serviced by Greek banks on review for downgrade, as well as the Baa1 rating of ABS transactions serviced by Cypriot entities.

The rating actions follow Moody's decisions to place the B1 rating of Greece's government, as well as the rating of eight Greek banks on review for downgrade.

ABS

ABS collateral posting provisions bolstered

Moody's says that a recent amendment to the UK Financial Collateral Regulations is credit positive for structured finance transactions with swap agreements that incorporate collateral posting provisions.

The amendment alleviates the potential negative effects associated with re-characterisation by clarifying that swap collateral posted to an issuer benefits from the protection of the regulations. It also explicitly removes any priority rights that preferential creditors of a collateral provider may have in respect of posted collateral.

Swap counterparties generally agree to post collateral - upon downgrade below certain ratings - under the terms of a credit support annex (CSA). Posting collateral in this way enables the issuer to pay for a replacement swap in the event of counterparty default. For this arrangement to be effective, the collateral posted under a CSA must be fully available for use by the issuer immediately upon default of the swap counterparty, Moody's says.

The standard form ISDA English law CSA provides for an outright transfer of collateral rather than the creation of a security interest over collateral. However, if the parties insert provisions that give the swap counterparty additional rights over posted collateral, the CSA may be re-characterised as a security interest.

The re-characterisation of a CSA as a security interest has no negative impact for SF transactions, provided that it qualifies as a financial collateral arrangement for the purpose of the regulations. This is because the regulations dis-apply the registration requirement and certain other insolvency law provisions that would otherwise apply.

The amendment to the regulations also explicitly removes the priority right of certain preferential creditors, such as employees, in respect of financial collateral arrangements that are floating charges. The removal of preferential creditors' rights in relation to security financial collateral arrangements is credit positive for SF transactions, the agency concludes.

ABS

Valuation agreement inked

SIX Telekurs has become the first data vendor to access Xtrakter's mark-to-market valuation service, dubbed XM2M. SIX Telekurs clients will now have access to pricing data on over 45,000 domestic and international fixed income instruments, including ABS.

Yannic Weber, Xtrakter ceo, says: "Xtrakter is providing user-friendly pricing detail from XM2M. As a core part of the capital market infrastructure, we strongly advocate the possibility for clients to choose how they receive their data - directly, or indirectly using one of their existing service providers."

Ivo Bieri, SIX Telekurs head of product management and marketing, adds: "The collaboration brings a large volume of dealer-traded and quoted prices, sourced directly from a broad survey of market participants, into SIX Telekurs' data environment. We can now deliver a unique view of the European fixed income market in a format that precisely matches our clients' information landscape."

ABS

Securitisation league still wide open

Four months into the year with US$81bn of qualifying deals done and it's still an open race for top spot in the latest SCI US league tables for bank arrangers in the structured credit and ABS markets. Meanwhile, the tables for Europe reflect lower market volumes - totalling €45bn year-to-date - and show two firms out ahead of the rest, but a surge in activity in any asset class could change the situation dramatically.

For now, the US table is lead by Deutsche Bank, with JPMorgan and last year's winners Barclays Capital leading the pack close behind. Thus far, the firms have been involved in US$32.5bn, US$32.3bn and US$31.3bn worth of deals respectively.

In Europe, JPMorgan leads the table, having been involved in €15.7bn worth of deals. In second place with €13.1bn is RBS.

The tables cover primary market transactions for asset-backed securities (ABS), commercial mortgage-backed securities (CMBS), residential mortgage-backed securities (RMBS) and collateralised debt/loan obligations (CDOs/CLOs). Qualifying deals are full primary securitisations that were publicly marketed and sold to third-party investors; i.e. were not privately placed or issuer/arranger retained or re-issues or re-securitisations.

SCI publishes its league tables on a monthly basis. The numbers are based on the SCI deal database and are, where possible, corroborated with the firms involved.

The tables for the year to end of April 2011 can be found here.

ABS

Structured settlement errors corrected

Moody's has taken rating actions on 19 classes of securitised notes from 12 transactions backed by future payments owed under litigation settlement agreements. The actions were taken as a result of a correction of errors in the models used to rate the transactions, the agency says.

The structured settlement issuers affected are 321 Henderson Receivables I, II and VI, and J.G. Wentworth XXI and XXII. As a result of revisiting the transactions under the corrected models and assumptions, 14 tranches were upgraded, two downgraded and three were placed on review for possible downgrade, pending potential restructuring. The actions ranged from one to two notches, Moody's confirms.

In correcting the errors in the models, the agency has adopted the same asset correlation framework used in rating corporate structured products, with parameters adjusted to reflect the specific patterns of life insurance.

CDO

CRE CDO delinquencies climb again

CREL CDO realised losses and delinquencies increased notably this past month, according to Fitch's latest index results for the sector. Asset managers reported approximately US$164m in realised losses from the disposal of defaulted and credit-impaired assets in April - a significant rise from last month's total of US$73m.

"Many of the realised losses stemmed from foreclosure or deed-in-lieu of foreclosure actions that wiped out subordinate positions held by some CREL CDOs," says Fitch director Stacey McGovern.

The highest single loss occurred when the senior lender took a deed-in-lieu on land located near the Las Vegas strip. Two overleveraged B-notes - contributing to two related CDOs - were written down to zero by the asset managers.

The increase in realised losses comes as CREL CDO delinquencies rose to 14.8% in April from 14.1% in March. "CREL CDO delinquencies are likely to fluctuate between 13% and 16% for the remainder of the year as asset managers continue to resolve troubled assets," adds McGovern.

While 18 assets fell out of the index through resolution at a loss, payoff or extension, more assets became delinquent. New April delinquencies consisted of: eight repurchased assets; four matured balloon loans; 13 newly credit-impaired securities; and five term defaults.

CDO

ABS CDO liquidation due

Bank of New York Mellon, as collateral agent for Hereford Street ABS CDO I, has retained Fixed Income Discount Advisory Company (FIDAC) to act as its liquidation agent for the collateral. The assets will sold to the best qualified bidders, subject to a reserve level, in four public sales - two on 23 May and two on 24 May.

CDS

Subprime CDS rally continues

US subprime CDS prices are now in the middle of the longest sustained rally since the beginning of the subprime credit crisis, according to Fitch's latest index results. Prices rose for a sixth straight month, reaching 12.2 - a modest increase of 53bp.

"New signs of life in mortgage credit quality may be signalling the rally will have legs for some time to come. Fewer borrowers who are current on their mortgage are becoming delinquent each month," says Fitch director David Austerweil.

Approximately 2.15% of loans current in April became delinquent, down from 2.75% in March. At the worst point of the credit crisis, the monthly roll rate from current payment status to delinquency reached as high as 8.24%.

Among vintages, the 2004 vintage suffered a price decline of -1.02% this month, following its substantial price increase of 9.36% in March. Conversely, the price increase this month for the 2006 vintage was 2.55% after it was last month's laggard with a price increase of only 79bp.

While recent months have shown improvements in mortgage credit quality, this trend accelerated in April across a number of metrics. "The drops in delinquency rates this past month were the largest on a percentage basis since 2006," says Fitch director Alexander Reyngold. 30-day delinquencies fell 13.19% month-over-month and 60-day delinquencies fell 19.19% month-over-month.

The average month-over-month decline in the 60-day delinquency rate over the past year was -3.28%. "While encouraging, April's elevated rate of falling subprime delinquencies is not sustainable and will likely revert to the recent trend of more modest declines," adds Reyngold.

The percentage of 60-day delinquent loans that rolled to current was 17.57% - more than double the rate in January of 7.21%. Additionally, the percentage of 60-day delinquent loans that rolled to 90-days delinquent declined by -7.02% from the previous month, although they remained elevated at just over 39%.

The higher frequency of cured loans was not limited to the 60-day delinquency bucket. Last month, the percentage of borrowers from any stage of delinquency who became current was 7.49%, up from 6.06% in March and just 4.91% a year ago.

CDS

Fair value convergence completed

The IASB and the FASB have issued new guidance on fair value measurement and disclosure requirements for IFRS and US GAAP. The guidance, set out in IFRS 13 'Fair Value Measurement' and an update to Topic 820 in the FASB's Accounting Standards Codification, completes a major project of the boards' joint work to improve IFRS and US GAAP and to bring about their convergence.

The harmonisation of fair value measurement and disclosure requirements internationally also forms an important element of the boards' response to the global financial crisis. The requirements do not extend the use of fair value accounting, but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRS or US GAAP.

For IFRS, the update will improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRS. For US GAAP, the update reflects the FASB's consideration of the different characteristics of public and non-public entities and the needs of users of their financial statements. Non-public entities will be exempt from a number of the new disclosure requirements.

Leslie Seidman, FASB chairman, says: "This update represents another positive step toward the shared goal of globally converged accounting standards. Having a consistent meaning of the term 'fair value' will improve the consistency of financial information around the world. We are also responding to the request for enhanced disclosures about the assumptions used in fair value measurements."

CDS

Progress of OTC reforms reviewed

In response to the Financial Stability Board's (FSB) progress report on OTC derivatives market reforms, ISDA says that a far greater degree of convergence is essential to the global financial system's long-term health.

The association calls on the FSB to discourage particular jurisdictions from introducing rules in a way that leads to gaps in oversight or to regulatory overlap, and whereby particular markets and participants are subject to duplicative rules. Instead, ISDA says that areas of priority for achieving international consistency should include the scope of the clearing obligation, margin and collateral requirements, public transparency, capital requirements and the standards applied to CCPs.

In terms of meeting the G20 commitments in reforming derivatives markets, ISDA says that to ensure the transition to the new regime does not create instability or give rise to new risks, the implementation of new rules should establish a roadmap setting out a timescale.

Additionally, ISDA supports the principle that benefits of central clearing should be accessible to a broad range of market participants, although the access should not be prioritised over the need to ensure that CCPs are financially and operationally sound - given the significant amount of risk. The association also believes that certain end-users should be exempted from mandatory clearing, given the nature of their involvement in the market.

As for the role of multi- or single-dealer platforms that IOSCO is currently undertaking, ISDA believes that single-dealer platforms can provide enriched content and functionality to the end-user and should be eligible as an execution venue for derivatives. However, it does not believe that allowing single-dealer platforms as permitted execution venues for derivatives in locations outside the US will create regulatory arbitrage.

Considering the report's comments on reporting to trade repositories, ISDA also says that initial data requirements should be designed to enable regulators to monitor concentrations of risk, while proliferation of trade repositories should be avoided.

Finally, the association believes that regulators should seek to reconcile contractual obligations concerning confidentiality of client information with the requirement to report to trade repositories. If client confidentiality is undermined, it could have a serious adverse impact on the functioning of the market, it says.

CDS

Liquidity risk data offered

Kamakura Corporation has begun offering the Kamakura Risk Information Services Credit Crisis Liquidity Risk database (KRIS CCLR) to clients in 34 countries. The database contains the amount, origination date and maturity date of 15,801 borrowings by 1,305 institutions from the Federal Reserve during a key period in the recent credit crisis - 8 February 2008 to 16 March 2009. The database was compiled from more than 200 documents released by the Board of Governors of the Federal Reserve in April 2011 about "primary, secondary and other extensions of credit" by the Federal Reserve.

Kamakura says that the data provides essential insights on the liquidity risk and funding shortfall of the 1,305 firms in the database. "For decades, financial institutions have tried to measure liquidity risk using their own deposit balance and rate histories," says Kamakura Corporation founder and ceo Donald van Deventer. "Unfortunately, if the institutions have never faced their own liquidity crisis, the insights that can be gleaned are limited. The new KRIS CCLR data base is the first and only data base that describes exactly the daily funding shortfalls for 1,305 institutions during the credit crisis. The data is essential for accurately benchmarking risk simulations in Kamakura Risk Manager and other enterprise risk management systems."

CDS

CDS-implied PDs examined

In a new study, Fitch has analysed the ability of CDS spreads to identify in advance companies that eventually default by reviewing the CDS-implied probability of default (PD) of monolines, financial institutions and corporate entities that experienced a credit event between 2008 and 2010. Based on average CDS spreads during the two-year period prior to the occurrence of credit events in each sector, the report finds that the performance of spreads as default predictors varies across sectors.

For example, CDS spreads did not appear to provide a leading signal of default risk for financial institutions, according to the report. As of 12 months prior to the six credit events in the sector, the average one-year PD was 3.3%.

For corporates, the predictiveness of CDS spreads was mixed. On average, spreads implied less than 10% cumulative PD for the 18 entities that incurred a credit event - or that fewer than one in 10 companies were expected to default over the following two-year period. However, at 12 months prior to the credit events, the average one-year CDS-implied PD had risen substantially to roughly 23%.

Finally, monoline spreads ramped up well in advance of the three credit events in this sector. As of a 24-month look back, average spreads implied a 20% chance of default over the ensuing two-year period, rising to an implied PD of roughly 60% one year prior.

CDS

CDS notionals continue to contract

After contracting by 4% in the first half of 2010, total notional amounts outstanding of OTC derivatives rose by 3% in the second half reaching US$601trn by the end of December 2010, according to the BIS. Much of the increase resulted from the appreciation of major currencies against the US dollar, the currency in which the data are reported.

CDS notional amounts outstanding continued to contract, falling by 1% after the 7% decline in the first half. Gross market values of all OTC contracts fell by 14%, driven mainly by the 17% decline in the market value of interest rate contracts.

CDS market values shrank by 19%. Overall gross credit exposure dropped by 7% to US$3.3trn, compared with a 2% increase in the first half of 2010.

CLOs

CLO analytics tool launched

Thomson Reuters has launched LPC Collateral, a data and analysis-driven solution designed to improve analysis and transparency in the CLO market. The product links Thomson's loan end-of-day data to the underlying assets held in CLO portfolios to provide analysis to CLO traders and investors.

The new tool provides a detailed view of the underlying assets, enabling users to evaluate deal and portfolio-level exposures to specific segments, issuers or assets. Users can also monitor and benchmark historical performance of CLOs.

In addition, historical transaction data available in the product brings transparency to the secondary loan market by giving investors access to data on thousands of trades completed by hundreds of the largest loan holders, the firm says.

CLOs

Balance sheet CLO performance praised

Moody's has commented on the outstanding credit performance of bank balance sheet CLO transactions during the economic crisis between 2007 and 2010. Although investors continue to show interest in these transactions - which they view as offering stability, diversification and low credit risk - the supply from arranging banks is falling short of demand. This comes as a result of the divergence between investors' yield expectations and originators' cost metrics, the agency notes.

The strong performance of balance sheet CLOs is attributed to: the absence of market arbitrage; the granularity of portfolios; the quality of securitised assets; the level of protection embedded in these structures; and the strong alignment of interest between originating banks and investors.

As of 31 December 2010, Moody's rated US$137bn worth of debt securities issued out of 48 bank balance sheet transactions originated in EMEA. Between 2007 and 2010, the agency withdrew the ratings of US$175bn worth of debt securities issued out of 80 balance sheet CLOs following redemption in full of these liabilities. Over the same 2007-2010 period, this asset class recorded in aggregate only 0.42% in cumulative portfolio defaults - small in proportion to the aggregate original portfolio sizes.

Further, only 8% of balance sheet securities with an investment grade rating in January 2007 lost their investment grade status as of December 2010, compared with 42% for corporate synthetic CDOs and 41% for arbitrage CLOs.

CLOs

Symphony CLO takes shape

Further details have emerged about Symphony Asset Management's forthcoming CLO, Symphony CLO VII. Arranged by Morgan Stanley, the transaction comprises seven classes of notes, including one subordinated tranche and a US$334m class A tranche provisionally rated Aaa by Moody's.

The transaction is collateralised primarily by broadly syndicated first-lien senior secured corporate loans. At least 90% of the portfolio must be invested in senior secured loans or eligible investments and up to 10% of the portfolio may consist of senior secured bonds, senior secured notes, senior unsecured bonds, senior unsecured loans and second-lien loans. At closing, the portfolio is expected to be approximately 70% ramped up and fully ramped within six months thereafter.

CLOs

Pace of CLO principal payments changing

US cashflow CLO managers are increasingly looking to increase WAL tests in the transactions they manage or extend their CLOs' reinvestment periods, according to S&P. The agency says managers are typically seeking greater flexibility when choosing loans for reinvestment, but in the process may change the pace of principal repayment.

"The amendments we have reviewed to date have not had an impact on the legal final maturity of the affected transactions," says S&P credit analyst Robert Chiriani. "Increasing the weighted average life or extending the reinvestment period may change the pace of principal prepayments, but the CLO notes are still required to be repaid on or before the transaction's final maturity date."

Changes to WAL tests and defined reinvestment periods can alter the amortisation profile of an asset portfolio, extend the life of the collateral and reduce the potential for early note amortisation, notes S&P. The agency says its ratings address the timely payment of interest and principal when due in accordance with the terms of the transaction. In most CLOs, the repayment of principal on the notes is due no later than the transaction's legal final maturity date.

When S&P is asked to provide a rating confirmation for a proposed amendment, Chiriani notes that his team typically applies its criteria to evaluate whether the change would have a negative impact on current ratings. A rating committee may apply additional cashflow stresses when assessing CLO ratings in cases where a material proportion of the collateral pool have maturity dates beyond the legal final maturity date of the CLO notes, even when the portfolio is passing its WAL test.

"In our view, a variety of reinvestment periods and amortisation profiles work within the context of our criteria to support a particular rating level," says Chiriani.

CMBS

CRE reporting package updated

Commercial Real Estate Finance Council Europe (CREFC Europe) has released Version 2.0 of its European Investor Reporting Package (E-IRP). The aim of E-IRP 2.0 is to help improve transparency and liquidity throughout the European commercial real estate financial markets.

"CREFC Europe worked with the European Central Bank (ECB) and its advisor, Link Financial, in order to harmonise standards between the respective ECB's CMBS reporting template and E-IRP version 2.0," comments Matthew Webster, chairman of CREFC Europe's board of governors and md, global head of real estate finance at HSBC. "This harmonisation is a key achievement since it should encourage a uniformed approach to data collection within the European CMBS market and, hopefully, the wider commercial real estate finance sector."

Version 2.0 has been designed to provide core asset and loan data that can be utilised as the basis for reporting for many types of capital market transactions secured by European commercial real estate, including covered bonds, syndications, subordinate debt structures and CMBS. Among the new features of Version 2.0 are the introduction of minimum required fields, the introduction of standards for calculating key financial indicators - such as ICRs, DSCRs and LTVs - and financial calculations to be based on loan agreements and loan structure participation levels.

CMBS

CMBS delinquency rate inches up

The delinquency rate on loans included in US CMBS conduit/fusion transactions inched up by 6bp in April to 9.22%, according to Moody's Delinquency Tracker (DQT). At the same time, the total dollar balance of delinquent loans declined for the second straight month in April, slipping to US$56.4bn from US$56.5bn in March. However, CMBS conduit/fusion loans outstanding fell by over US$5bn in April, leading to the uptick in the delinquency rate, the agency says.

During April loans totalling US$2.9bn became newly delinquent, while previously delinquent loans totalling approximately US$3bn became current, worked out or disposed of. The total number of delinquent loans decreased to 4,047 in April from 4,097 in March.

Excluding more recently issued CMBS, specifically CMBS issued since 2009, the delinquency rate increased by 7bp in April to 9.46%. "We expect the delinquency rate to run high single digits to low double digits over the near term. The resolution process is in full swing and liquidations should roughly balance new defaults," says Tad Philipp, Moody's CRE research director.

Among the top 25 Metropolitan Statistical Areas (MSAs), the five best performing are Boston (with a 2.9% delinquency rate), Seattle (3.4%), Washington DC (3.7%), San Francisco (3.8%) and San Jose (3.9%). The five worst performing major metro areas and the respective delinquency rates are Las Vegas (with 29.4%), Riverside (19.8%), Tampa (17.9%), Phoenix (17.4%) and Orlando (15.5%).

New York - the MSA with the largest outstanding CMBS loan balance, at 13% of all loans - had a delinquency rate of 8.39%, slightly below the national average. Los Angeles, with the second largest outstanding balance of 6.8%, had a delinquency rate of 4.33%.

By property type, the multifamily delinquency rate decreased slightly in April to 15.35% from 15.66%, while the rate for the office sector was essentially flat at 6.89%. The industrial delinquency rate rose by 31bp in April to 10.23%, while retail increased 35bp to 7.62% and the hotel sector saw a 9bp increase during the month to end at 16.38%.

Three of the four national regions saw increases in their delinquency rates in April, although mild that at the most were 17bp. The West saw a 14bp drop in its delinquency rate to 9.4%.

RMBS

Government programme could harm RMBS

In its present form, the Decreto Sviluppo announced by the Italian government on 5 May could have a negative effect on Italian RMBS and obbligazioni bancarie garantite (OBG) ratings, says Fitch. The rating agency is concerned by the implications for cashflows from mortgage portfolios.

The government's decree will enable borrowers with an Italian mortgage loan to change their interest payments from floating- to fixed-rate. Borrowers would then also be able to extend the loan maturity by up to five years, as long as that does not push its total length to more than 25 years.

These options would only be available to borrowers who are not in arrears and who have an 'indicator of wealth' of below €30,000. This indicator of wealth is based on factors such as income and real estate assets. Eligible borrowers can apply for these changes until December 2012.

The reference fixed rate would be the minimum of the IRS with a 10-year term and the IRS with a term equal to the residual term of the loan plus the mortgage contractual spread.

A borrower switching from floating- to fixed-rate would face increased mortgage instalments because rates are higher for fixed-rate loans, but also exercising the option to extend the term of the loan would mitigate this and could reduce the instalments payable. Fitch expects borrowers to take advantage of this opportunity and also predicts that prepayment rates will fall, particularly for very recently originated loans and loans with a remaining term greater than ten years.

An increase in the proportion of fixed-rate mortgages in portfolios will negatively affect Italian RMBS because it could lead to issued securities being inadequately hedged, says Fitch. While the interest rate payable on the issued securities could increase, the interest receipts from the mortgage portfolio would be restricted by the larger fixed-rate component of the cashflow.

Furthermore, if borrowers can reduce their loan instalments, then the periodic cashflow generated by the mortgage portfolio will also be reduced - limiting the funds available to make payments on the issued securities. The agency says that if the increased risks of payment shortfalls are not mitigated or already factored into the rating analysis, negative rating action could result for RMBS transactions and OBG programmes.

RMBS

Downgrades expected on LMI review

Fitch has placed 54 publicly-rated Australian RMBS tranches on rating watch negative as a result of an exposure draft criteria report published on the credit given to lenders' mortgage insurance (LMI) within RMBS.

"While the LMI providers in Australia and New Zealand have shown a willingness to pay valid claims, recent years' surveillance data have indicated that not all claims are paid-in-full. Although the denial or rescission of claims has been rare, adjustments to claims are relatively common," says Natasha Vojvodic, head of Australian structured finance at Fitch.

She adds: "To date, no Australian transaction has suffered a charge-off due to unpaid claims. However, there are circumstances where losses could accrue to the bottom note. As a result, Fitch has placed all Australian RMBS notes with no credit enhancement below the bottom rated note on rating watch negative."

The exposure draft's consultation period will close on 17 June, after which the agency will consider feedback and publish final criteria. Should the exposure draft be implemented as proposed and assuming that the transactions have not been modified, the agency expects that the tranches placed on RWN will be downgraded multiple categories. The rating actions are limited to rated notes with no enhancement other than LMI and excess income.

Fitch will resolve the RWN on the affected tranches and complete its analysis on the remaining tranches in each Australian and New Zealand conforming RMBS transaction within six months of releasing the final criteria report.