Contents

Documentation

Robust regime

European documentation issues examined

European securitisation documentation has performed largely as it should have throughout the financial crisis. However, a number of hot-button issues still need to be resolved by the industry.

One area where documentation has been tested in ways that were never envisaged is engagement with rating agencies and trustees in terms of rating agency confirmations (RACs). It has become apparent that a range of engagement levels are necessary, depending on how material the change in the documentation is.

"In the past, rating agencies have been asked to confirm every small change, but this goes too far," observes Kevin Ingram, partner at Clifford Chance. "More thought needs to be given as to when and how rating agencies should be engaged, as well as how to get comfortable without a RAC when a change is self-evidently not material. Some situations require formal confirmation, such as for the issuance of a new security off an existing platform; others - such as minor technical amendments - could be done without a RAC or indeed formal consideration by the trustee."

If documentation states that a RAC is required, it is often assumed that rating agencies are obliged to provide one. "While we may choose to do so, there may be circumstances where we won't," notes Stuart Jennings, credit officer for the European structured finance group at Fitch. "For example, we may not be comfortable giving a RAC when there is a fundamental criteria review or where we're presented with a restructuring that involves a proposed change in servicer and the impact on the deal is unclear at that time."

He adds: "We may need to see an inexperienced servicer in action before assessing the rating impact. But we may provide one where we're comfortable and the issue is material to our rating opinion."

Jennings notes that it's best for documents to be flexible; otherwise there may be circumstances where a deal is in paralysis. "Ultimately, trustees need the power to go to noteholders or to make non-material changes without a RAC; for example, if there is a manifest error in the documentation. Having said that, we always prefer to be notified about changes to assess their materiality."

This issue has been most evident in the CMBS market. Traditional documentation has a set of provisions that were intended to deal with one-off situations where a single direction to the trustee was required.

But it is now being used in some CMBS transactions as a basis for obtaining ongoing operational guidance for dealing with the relevant commercial property. Ingram suggests that the introduction of provisions explicitly contemplating the appointment of a noteholder representative could be a good alternative in this case.

"Ideally, the industry should reach a point where only certain issues need to be voted on by a formal meeting of all noteholders," he says. "Noteholder representatives are a natural progression to address asset management issues. More detailed ongoing asset management is already contemplated in the infrastructure/utility bond sector with hard-wired arrangements for property substitutions or covenant replacements."

Jennings agrees that noteholder representatives are a possible solution. He also suggests that trustees should have sufficient contingency funds to engage advice on making any necessary amendments.

Overall, however, documentation has been interpreted in an appropriate commercial way and without the established principals of law being overridden, according to Ingram. "Structures have generally worked as they should: for example, there haven't been any challenges around true sale. Underlying legal analysis has proved to be robust in the main."

And, on the whole, litigation cases - in the UK at least - haven't resulted in the courts upholding the view that investors are protected come what may. "The courts have largely put forth a considered opinion: that securitisation is clearly a product aimed at sophisticated investors and that sophisticated investors should know what they're getting into," Ingram adds.

However, a couple of decisions have given the industry pause to think. Ingram cites the Eurosail and Dante cases (SCI passim) as examples. Certainly it was not obvious that anti-deprivation in the Dante case would be analysed in such depth by the UK courts, given that the case touched on a US-specific provision regarding anti-depravation in bankruptcy.

"The court could have ruled that the general over-arching principal of US bankruptcy law doesn't apply in the UK, but instead it seemed to accept that a similar general principle could exist under english law. This could potentially allow an anti-deprivation argument to be run in respect of particular clauses in documentation for the transaction being considered, albeit the courts may not uphold the argument in many cases. Given that, I wouldn't be surprised if a senior appellate court tried to clarify the issue at some point in the future," Ingram explains.

He suggests that going forward participants will spend more time on 'what ifs' and interpretations of waterfalls to address both the flip clause and other documentation issues. But he points out that this trend for increased documentation clarity is going with the grain of the market anyway: investors want simpler, clearer transaction structures and fewer switches of payment priorities. Equally, sponsors are more concerned about getting good execution than creating structures to extract every last efficiency.

Meanwhile, uncertainty over how the powers granted under European special resolution regimes will be exercised has created some concern in the securitisation market. It has also prompted speculation about whether safeharbour legislation will be introduced for securitisations in the region.

But Jennings notes that some comfort can be found in Northern Rock's rescue in 2007, when Granite remained intact, despite the government's emergency powers. "In addition, significant amounts of repoed ABS collateral is still held by the ECB, so governments are unlikely to exercise powers in a way that could disrupt such collateral. However, over time, pressure for harmonisation between jurisdictions could lead to some form of US-style safeharbour being introduced," he continues.

Ingram reckons that providing a deal is structured as a true sale, it should be immune from bail-ins. "I'm not a big fan of safeharbours because they represent significant margin cliffs: if a set of documentation is in line with the spirit of a safeharbour but fails on a technicality, it is out," he adds. "It would be better to have a broader set of principles applied more flexibly, allowing the market to deal with new circumstances as they arise."

Ingram concludes: "Europe has less of a tradition of safeharbours. They're effective in the US due to the ongoing dialogue between the SEC and industry in terms of no-action letters. There's nothing like this in Europe and ESME is unlikely to get to that level."

CS

CMBS

Landmark sale

First full European CMBS enforcement completed

The £288.2m sale of Aviva Tower closed last week, ending the series of property sales for the portfolio securing the £1.15bn White Tower 2006-3 CMBS. It is a landmark moment for the market, representing the first fully completed enforcement for a European CMBS transaction.

Conor Downey, partner at Paul Hastings, comments: "This is the first European CMBS to be fully worked out in an enforcement scenario. There have been individual loans worked out before, but this is the first full transaction to go through the process. We are quietly proud of it. We turned around a bad situation for bondholders and got them a better deal than they would have achieved from a fire-sale back in July 2009."

After a lot of criticism aimed at the structure of CMBS, this also shows that such transactions can work. "White Tower did exactly what it said on the tin. It was set up in a way so that an expert party was given power to turn things around and they did that. There were bumpy moments along the way, with flaws in some of the documents and insolvency petitions by HMRC, but the structure survived all of that," says Downey.

Next on the White Tower agenda is how much cash to hold back. Concerns about possible future nuisance litigation claims or residual liabilities within the structure mean some transaction parties would like to see some money put aside as a contingency for those potential events. That money would then be released to bondholders in a year or so if it has not been needed.

Negotiations on how much cash to hold back are ongoing. "We are currently negotiating with the trustees to try to get that amount reduced to the smallest amount possible," says Downey.

The class A and most of the class B noteholders have already been repaid in full from property sales made last year. The remaining class B and all of the class C and D noteholders should be repaid in full and there should even be a substantial recovery for the class Es, says Downey. He adds: "Given the class Es were trading six or nine months ago at almost nothing, I think the class E bondholders have actually done fairly well."

Downey continues: "When we were appointed in July 2009, the valuations suggested only the class As would be repaid in full. Even the class Bs were not expected to get full recovery. We are quite proud of this; we think it is a good illustration of what happens when there is a proper special servicer in place who has the power to take decisions."

He believes the performance of CB Richard Ellis Loan Servicing - appointed as special servicer in August 2009 - was particularly important, maximising recoveries by disposing of the properties at the right time and in the right way. He points to Epic Industrious as a comparison, where - due to the deal having a synthetic structure - the servicer had no power to manage the disposal of the properties and even class A bondholders are only expecting around a 50% recovery.

How the properties for the White Tower and Epic Industrious securitisations were disposed of could not have been more different. While Epic Industrious was criticised for presenting the entire portfolio to the market in a single lot, White Tower saw a piecemeal disposition.

A key element of the White Tower sales is that Aviva Tower and Alban Gate, the London headquarters of JPMorgan, did not come to the market in the same lot. Presented with both at the same time, investors would have been inclined to choose one over the other, but not both.

"Aviva Tower is probably the best property in the transaction; it is very stable and has got long leases in place. It was seen as possibly competing with Alban Gate, where the lease was running out and value was being impacted. It was important to sell Alban Gate quickly before the value fell further," explains Downey.

Putting the less attractive property on the market first meant that investors could be attracted to it without Aviva Tower competing for their attention, while the stronger asset could be held back without jeopardising the price it could achieve. "That paid off and I have to say, hats off to CBRE. Knowing the London property market is their strength and they chose the perfect time to sell," says Downey.

The long-term implications of the White Tower enforcement for European CMBS are significant. Unlike in the US, it is a market where single large loan CMBS are very common. In the short term, sponsors may be able to prolong deals for a couple of years, but this will not work in the longer term.

"In the longer term there will be problems. Inevitably, particularly with the secondary property portfolios - of which there are quite a number - the chances of value coming back up in those assets are very small," notes Downey. This is when the market might see more transactions following the blueprint White Tower has now laid out.

Downey concludes: "It will not always necessarily be property issues. There are many deals out there where borrowers just do not have the wherewithal to manage their transactions. In particular, as the value starts to go down and rental income starts to go down, you see things starting to go horribly wrong."

JL

ABS

New issue boost for Euro ABS

The primary European ABS market has seen a busy start to the week, with new issuance continuing to dominate investor focus. The Brass No. 1 RMBS is the latest transaction to price.

"Quite a few new issues have hit the market over the last week. That has been the main hub of action and it's all very good for the market overall," one ABS trader confirms.

One noteworthy deal that was marketing last week is Capital Finance Australia's Bella Trust No. 2 Series 2011-1, an auto ABS that features a sterling tranche. Another is Deutsche Bank's DECO 2011-E5 transaction, which is expected to be sized at £302m.

The deal is secured by the Chiswick Park office complex (see SCI 19 May). "This has been in the market for a while now and there were site visits organised yesterday, so we should hear more on this soon," the trader reveals.

Further, a new UK credit card deal from Lloyds TSB under the Penarth programme is circulating. The transaction includes both sterling- and dollar-denominated tranches sized at US$150m and £100m respectively.

"Price talk on the dollar tranche is fairly tight at 70bp over one-month Libor. This indicates that there is pretty solid demand for the paper, given the size of the tranche," the trader says.

Meanwhile, Yorkshire Building Society's Brass No. 1 RMBS priced on Friday. The £750m triple-A class A tranche came at 145bp over three-month Libor, with a 3.6-year WAL. The subordinate class was retained.

LB

CMBS

Negative tone prevails in US CMBS

A negative tone prevails in the US CMBS sector, following the release of disappointing economic data. As a result, the market remains tense ahead of tomorrow's non-farm payroll results.

"There has been a negative tone around the market this week prompted by poor housing numbers and economic data. They really set the mood for the week," one CMBS trader says.

The Case-Shiller index results were particularly disappointing, with data being "much worse than expected", he adds. The results also confirm the fear of a double-dip in US house prices.

Adding to the negative sentiment are fears of poor non-farm payroll results tomorrow. The trader says: "While all of the numbers are weak, the technicals are also performing badly due to the Maiden Lane lists not selling."

This is being reflected in the performance of the Markit ABX index. "They've been hit very hard and are down 10%-15% in the last week alone," the trader confirms.

On a positive note, however, the CMBS remittance data from 25 May showed stable levels. "The fundamentals look good and we're not seeing any deterioration, although the short-term supply technicals are not great," the trader explains.

In addition, several bid-lists launching yesterday provided a much needed boost to the market. The trader confirms: "We did see quite a few bid-lists selling yesterday, a lot of which were from hedge funds. We believe that one seller is the same seller that sold many bonds after the Japanese earthquake. But liquidity in the market right now is poor: we also had a fair amount of DNTs occurring yesterday."

The trader is unsure as to whether some of the sellers have hidden agendas. "We're unsure with some of the lists we're seeing if the intent is to sell or whether people are just putting these things out because they want to market their portfolios," he concludes.

LB

RMBS

Negative knock-on effect for Euro RMBS

Negative sentiment in the US appears to have had a knock-on effect on the European secondary RMBS market. However, participants believe that activity will bounce back ahead of the summer.

"The European market has definitely been weaker this week and it has shown in the bids for UK prime RMBS, which had been holding up pretty well in previous weeks," one ABS trader says. This has had a knock-on effect on Dutch prime paper, which has also suffered from weaker bids.

The trader continues: "Dutch prime paper seems to be pulling back; there aren't huge volumes at the moment and it seems to be trading down a lot. There are still not that many bonds on offer, which could be interpreted positively. But, as it stands, the sentiment is negative."

Last week, for example, saw a high volume of bid-lists - with the majority of the paper offered being non-conforming RMBS - but overall weakness in the market meant that bids pulled back somewhat. "Many of the sellers were hedge funds and the sector has traded down by a couple of basis points on the back of that. The Street looks fairly heavy on paper and in turn there are fewer bids from other dealers," the trader says.

Another factor contributing to the negative sentiment is today's disappointing US non-farm payroll results. "This will create worse sentiment in the US, which may indirectly affect the European market," the trader adds.

However, he believes that there is still time before the summer for market activity to pick up. "This year has been pretty strong and the timing of this weaker period is surprising as it's normally the busiest time of the year. I believe that sentiment will pick up again, although - because there is a lot of paper on the Street up for grabs - perhaps participants have become somewhat complacent," he concludes.

LB

RMBS

Sell-off weakens Euro MBS

The European MBS market is exhibiting signs of weakness this week as dealers look to off-load stock. At the same time, controversy surrounds Deutsche Bank's new DECO CMBS with Fitch debating its triple-A status.

"Sentiment feels weak at the moment. Many dealers are very heavy, which in turn is driving a sell-off in the market - especially as we're coming into the end of the first half of year," one RMBS trader says. Illustrating this weakness, Granite triple-B spreads dropped by 4bp over the last week.

The trader continues: "Dealers have had a good first five months and now they're trying to protect that by opportunistic selling. I've seen a lot of improvement on bonds from dealers and it looks like they're willing to try and find liquidity at much lower levels than they would have previously sold at."

Although activity has softened as a result of these dealer-driven sales, the trader believes that bouts of volatility are healthy for RMBS performance overall. "We are reaching more interesting levels and I expect that participants will start to become involved again at some point. Maybe not at these levels, but if we move another 5-10bp we'll start to see some activity."

Elsewhere in the market, the ALBA 2011-1 non-conforming RMBS appears to be performing well in the secondary market - although this is a surprise to some players. "We didn't participate in this deal," the trader says. "I'm surprised that Credit Suisse managed to place it. However, the fact that it's trading is a good sign."

On the primary side, Deutsche Bank's DECO 2011-CSPK CMBS has caused a stir this week. "Fitch was not asked to rate the deal. But the agency published an unsolicited assessment anyway, indicating that it wouldn't have given the deal a triple-A rating," the trader explains.

"It's unclear whether this will cause problems with placing the transaction. Only time will tell," he concludes.

LB

CMBS

GGP refinances five malls

As part of its drive to achieve US$5bn of refinancing this year (SCI 7 March), General Growth Properties (GGP) has confirmed the refinancing of five shopping malls, representing US$743m of new mortgages. Barclays Capital CMBS analysts believe this includes two properties - Park City Center and RiverTown - that are currently securitised in CMBS deals.

The five new fixed-rate mortgages have a weighted average term of 9.2 years and generated cash proceeds of US$180m more than the in-place financing. The weighted average interest rate of the mortgages is down from 6.29% to 5.4%.

GGP says it used US$139m of the excess proceeds to pay down mortgage loans on four assets with a weighted average interest rate of 7.31% and weighted average term of 3.1 years. Sandeep Mathrani, GGP ceo, comments: "We continue to execute on our goal of lengthening maturities, reducing our carrying cost and improving our capital structure."

A list of the five properties was not published by GGP, but the BarCap analysts are confident one of them is Oxmoor, which was previously securitised in GCCFC 2003-C1. By looking at all possible combinations of the remaining GGP properties and filtering for the set that most closely matches the reported coupon, balance and average life, the analysts identified Park City Center and RiverTown (securitised in WBCMT 2003-C8/C9 and COMM 2001-J2 respectively) and the unsecuritised Bellis Fair and Fox River as the likely remaining properties.

The BarCap analysts say that Oxmoor, Park City Center, RiverTown, Bellis Fair and Fox River are the five properties that yield aggregate parameters closest to those predicted for the refinanced properties. The balance for these properties is US$561m (where US$563m was expected), the coupon is 6.291% (where 6.29% was expected) and average life is 4.288 years (where 4.2 years) was expected.

JL

ABS

SF partner recruited

Macfarlanes has appointed former Clifford Chance lawyer Rachel Kelly as partner. She will play a key role in the firm's ongoing strategic development in structured finance and debt capital markets.

ABS

Law firm adds investment funds pair

David Goldstein and Gerald Rokoff, both formerly with White & Case, have joined DLA Piper as partners in New York. Goldstein joins the firm's global finance group and will lead its investment funds practice. Rokoff joins the tax group.

At White & Case, Goldstein served as co-head of the investment funds practice and advised on the formation and regulation of large domestic and international privately pooled investment vehicles, as well as first-time funds of high quality emerging managers. In addition, he counsels fund sponsors in structuring their governance and compensation arrangements.

Rokoff, formerly the chair of White & Case's global tax planning committee, has more than 30 years of experience advising asset managers on global and US tax-related issues. His practice involves advising fund sponsors, investment advisors and investors in identifying and implementing tax-efficient investment structures.

ABS

Fund outlines expansion plans

Oracle Capital, the Hong Kong-based structured credit opportunities hedge fund, is to embark on a US investor roadshow. The firm is seeking to raise US$200m in AUM.

Launched a year ago, the firm is approaching US$50m in AUM and in the first five months of the year generated a 22.36% net return (62.27% on an annualised basis). Leon Hindle, cio of Oracle Capital, says the performance reflects the continuing opportunities in structured credit, where - despite secondary trading volumes being at all-time highs - significant dislocations continue to exist due to the diversity and complexity of the asset class.

"Our investment approach focuses on the identification of assets that are both cheap from a fundamental perspective, but are also likely to benefit from market events or some other catalyst which will allow the fund to crystallise value," he explains.

To date, over 70% of the performance of the fund has been realised through trading gains. Oracle does not use leverage and works closely with local market participants to provide exit and restructuring solutions to the Asian institutional and sub-institutional holder base. The fund's investor base currently includes Asian and US institutional money, together with family office and high net-worth individuals.

Hindle says the opportunity set remains "outstanding". Well over US$100bn of such paper made its way into Asia and much of it remains unresolved.

CMBS

Freddie Mac announces organisational changes

Freddie Mac has announced new leadership for each of its three lines of business.

Anthony Renzi has been named evp of a new single-family and operations & technology division designed to oversee and enhance Freddie Mac's single-family mortgage business lines and technology division. David Brickman has been named as the new svp in charge of the multifamily division. Freddie Mac also named Carol Wambeke as its new chief compliance officer and Devajyoti Ghose as svp of Freddie Mac's investments & capital markets division and the company's treasurer.

The new single-family and operations & technology division consolidates the previously separate single-family credit guarantee, single-family portfolio management, and operations & technology divisions. In his new position, Renzi oversees Freddie Mac's single-family line of business, including the administration, relationship and performance management of Freddie Mac seller/servicers; performance of Freddie Mac's guarantee book of business; and all sourcing, securitisation, servicing/REO and business operations. He will continue reporting to Freddie Mac ceo Charles Haldeman and will remain a member of the Freddie Mac management committee.

In addition, Paul Mullings has been named svp of single-family sourcing and securitisation. Mullings' organisation represents the seller-side of the company's external face to customers.

Meanwhile, Brickman will assume the role of head of the multifamily division after Mike May - the current head of multifamily - leaves the company on 15 July. Brickman will be responsible for customer relations, product development, marketing, sales, loan purchase, asset management, capital markets and securitisation for the company's multifamily business, which includes the flow mortgage, structured and affordable mortgage, CMBS and low-income housing tax credit portfolios. He will report directly to Freddie Mac ceo Haldeman and will be a member of the company's management committee.

Most recently, Brickman served as vp of multifamily CMBS capital markets, responsible for all CMBS investment and multifamily capital market activities, including capital deployment, pricing, portfolio management, securitisation, research, model development and CMBS trading.

Freddie Mac's new chief compliance officer Wambeke was also promoted to svp and will report directly to ceo Haldeman as a member of the company's management committee. In this position she will be responsible for cross-divisional integration and management of corporate compliance and regulatory examination services.

Since joining Freddie Mac as a senior economist in 1997, Wambeke has held a number of executive positions most recently as the company's vp, compliance - regulatory affairs. Wambeke succeeds Jerry Weiss, who became the company's evp and chief administrative officer earlier this year.

In his new position, Ghose will be responsible for managing all of Freddie Mac's mortgage investment activities for the mortgage-related investments portfolio liquidity and cash management, as well as the company's short- and long-term debt issuance and hedging activities. He reports directly to chief financial officer Ross Kari and is a member of the company's management committee.

Previously, Ghose served in various senior positions at Freddie Mac, in which he was responsible for managing the company's debt portfolio and the non-mortgage investments portfolio; maintaining the company's liquidity position; evaluating the risks and returns of Freddie Mac's guarantee fee business; developing hedging strategies for Freddie Mac's investment portfolio; and developing valuation models for various fixed income securities including mortgage-related products, debentures and interest rate derivatives.

CMBS

Head portfolio manager hired

Cole Real Estate Investments has recruited Donald MacKinnon as svp and head of high yield portfolio management. In this newly created position, MacKinnon will be responsible for overseeing the firm's existing portfolio of high yield commercial mortgage debt investments, new originations and high yield debt portfolio strategy, including investment in CMBS. Based in New York, he will report to Mitchell Sabshon, evp and coo at Cole.

MacKinnon has 25 years of experience in commercial real estate. Previously, he was the head of structured credit trading and asset finance for Nomura Securities International.

RMBS

Performance analytics pro moves on

Opera Solutions has appointed Jonathan Di Giambattista as vp of product management for its global markets analytics group. Di Giambattista will spearhead the strategy and development of capital markets products, while also piloting market strategies, beginning with the firm's portfolio valuation and risk platform Mobiuss/RMBS.

Di Giambattista was previously md and global head of risk and performance analytics for Fitch Solutions, where he oversaw data, analytics and pricing and valuation product lines. Prior to this, he was svp of Algorithmics, helming single obligor credit risk product development.

RMBS

Bank fined for CMO deficiencies

FINRA has fined Northern Trust Securities US$6m for deficiencies in supervising sales of CMOs and using inadequate systems to monitor certain high-volume securities trades.

FINRA found that from October 2006 to October 2009, Northern Trust failed to monitor customer accounts for potentially unsuitable levels of concentration in CMOs. This was mainly because it used an exception reporting system that failed to capture or analyse substantial portions of the firm's business, including all CMO transactions, certain trades of 10,000 equity shares or more and certain trades of 250 or more of fixed income bonds.

Further, from January 2007 to June 2008, 43.5% of the firm's business was excluded from review. The absence of systems to monitor equity trades of over 10,000 shares or fixed income trades of over 250 bonds also resulted in a failure to review these trades for suitability, concentration, excessive trading, excessive mark-ups or commissions, or for trading in restricted stocks.

Brad Bennett, FINRA evp and chief of enforcement, says: "Northern Trust's deficient systems and procedures allowed more than 40% of its transactions to proceed without review, which in turn left vulnerable investors exposed to the risk of losing all or a substantial portion of their principal through potential over-concentration in CMOs."

In concluding this settlement, Northern Trust neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

ABS

Hong Kong CRA regime up-and-running

The new regulatory regime governing credit rating agencies (CRAs) is now operating in Hong Kong. The new regime is designed to ensure that CRAs in Hong Kong are regulated in a manner that is consistent with the enhanced standards that have been adopted in other jurisdictions

Under the new regime, CRAs and their rating analysts are required to be licensed for Type 10 regulated activity and are subject to supervision by the Securities and Futures Commission (SFC). In addition, Type 10 licensees are required to comply with the provisions of the Code of Conduct for Persons Providing Credit Rating Services and with other legal and regulatory requirements applicable to all SFC licensees.

In response to the SFC's request for license applications, it has issued Type 10 licenses to five CRAs and 156 of their rating analysts providing credit rating services in Hong Kong.

ABS

Lebanese trade receivables deal closed

Bemo Securitisation has closed a trade receivables securitisation for Cherfane Tawil & Co - the distributor in Lebanon of Samsung electronics. The transaction is backed by a diversified portfolio of trade receivables granted by Cherfane Tawil & Co to its clients, mainly dealers and sub-dealers. It is the first term trade receivables securitisation established under Lebanese Law.

The transaction is part of a multiple issuance programme of up to US$24m. The first issue SS - FUND transaction, which funds a US$9m portfolio, has been established pursuant to the Central Bank of Lebanon and Banking Control Commission approvals. It consists of the issuance of a 4.5-year class A and class B notes offered to the public and underwritten by Banque BEMO, Creditbank and Federal Bank of Lebanon.

ABS

Risk retention comment period extended

Six federal agencies are to submit a Federal Register notice to extend the comment period on the proposed rules to implement the credit risk retention requirements of the Dodd-Frank Act. The comment period - originally due to end on 10 June 2011- is extended to 1 August 2011 to allow interested persons more time to analyse the issues and prepare their comments.

The American Securitization Forum says it appreciates the additional time regulators are giving market participants for submitting comments regarding risk retention proposals, but calls instead for an entirely new round of proposed rules. The ASF says the proposals as written would severely hamper the flow of credit to American consumers and businesses and need to be materially redone.

ASF executive director Tom Deutsch says: "We appreciate the extra time regulators are giving the market to respond to their current proposals, but - given the hard work and leadership of our member institutions over the course of the last two months - the ASF is prepared to submit its comments under the previous deadline and expects to do so later this week."

He continues: "It is far more important, however, for regulators to appropriately implement the risk retention portion of the Dodd-Frank Act and we strongly urge them to reconsider their proposals and then offer a new set of proposed rules which better align the incentives and needs of borrowers, lenders and investors."

The ASF intends to submit a roughly 150-page comment letter, as well as following up with supplemental comments on key issues over the next couple of months. The comments will include extensive discussions on the entire range of securitised credit affected by the proposals.

"The extra comment period will help market participants coordinate their overall comments on the proposed QRM rules with the proposed QM rules mandated by Dodd-Frank, but it's critical that we recognise these rules have important implications for all types of securitisations, including auto loans, equipment loans, credit cards, student loans and middle market business funding through ABCP and CLOs," adds Deutsch.

ABS

ABS cash bond index launched

Markit has launched its iBoxx European ABS index, a cash bond index designed to track the performance of the European floating-rate ABS market. The index provides investors with a benchmark to assess returns available on European ABS assets denominated in euro, sterling and US dollars, while also measuring the relative performance of their portfolios, the firm says.

Rob Ford, ABS portfolio manager at TwentyFour Asset Management, says: "This index is good news for overall transparency in the European ABS market. It's a great addition to Markit's index offering and I'm sure it will be widely used by the market."

CDO

ABS CDO liquidation due

The holders of at least two-thirds of the aggregate outstanding amount of each class of Silver Marlin CDO I, an ABS CDO managed by Sailfish Structured Investment Management, have directed the trustee to sell and liquidate all of the deal's collateral. All secured parties to the transaction are eligible to bid at public sales of these assets.

Due to the liquidation, no further distributions will be made on any regularly scheduled distribution date. However, a final distribution will be made after the liquidation is completed.

CDS

CDS data services added

CMA has launched two intraday CDS data services to deliver independent credit pricing data to front and middle office professionals on a near-live basis. The CMA Intraday CDS data services are available directly from CMA and key channel partners.

The new service for the middle office, CMA Datavision Intraday CDS, represents an expansion of the firm's existing end-of-day service to help meet the demand for more timely and flexible risk management practices. Clients will receive full credit curves on the hour from 8am until 10pm, spanning the London open through to the New York trading close. In addition, the data contains unique liquidity metrics, such as quote frequency and average bid-offer spreads to verify prices, create flash profit and loss and value books on-demand.

Meanwhile, the new front office service - CMA Quotevision Creditpulse - serves as an entry point for traders and investment managers wanting to follow the global OTC credit market. A close to real-time tick-by-tick feed from the institutional CDS market provides a clear, structured view of indicative quotes observed in the market, the firm says.

CDS

Basel 3 CVA review completed

The Basel Committee on Banking Supervision has completed its review of and finalised the Basel 3 capital treatment for counterparty credit risk in bilateral trades. The review resulted in a minor modification of the credit valuation adjustment (CVA).

Under Basel 2, the risk of counterparty default and credit migration risk were addressed but mark-to-market losses due to CVA were not. During the financial crisis, however, roughly two-thirds of losses attributed to counterparty credit risk were due to CVA losses and only about one-third were due to actual defaults.

The Basel 3 framework, published in December 2010, sets out capital rules for CVA risk that include standardised and advanced methods. At the time it issued Basel 3, the Committee noted that the level and reasonableness of the standardised CVA risk capital charge was subject to a final impact assessment targeted for completion in the first quarter of 2011.

The impact study has been completed, showing that the standardised method as originally set out in the December 2010 rules text could be unduly punitive for low-rated counterparties with long maturity transactions. To narrow the gap between the capital required for triple-C rated counterparties under the standardised and the advanced methods, the Basel Committee agreed to reduce the weight applied to triple-C rated counterparties from 18% to 10%.

All other aspects of the regulatory capital treatment for counterparty credit risk and CVA risk remain unchanged from the December 2010 Basel 3 rules text. Overall, the Committee estimates that, with the addition of the CVA risk capital charge, the capital requirements for counterparty credit risk under Basel 3 will double the level required under Basel 2.

The Committee is completing its review of capitalisation of bank exposures to CCPs and expects to finalise the December 2010 proposals before year-end.

CDS

Variation margin requirements revisited

A report in the BIS Quarterly Review for June 2011 suggests that major derivatives dealers have sufficient unencumbered assets to meet CCP initial margin requirements for eligible CDS and interest rate swaps outstanding, but that a few may need to increase their cash holdings to meet variation margin calls in a timely way. The report also finds that the potential costs of individual or multiple dealer defaults for CCPs and their non-defaulting clearing members are likely to be small relative to their equity, providing CCPs factor into initial margin requirements the extent of tail risk and time variation in risk of different types of derivatives.

Indeed, the report indicates that the potential costs of two simultaneous dealer defaults should be affordable to CCPs and their non-defaulting members. However, CCPs may need immediate access to plentiful funding to ensure that they can make variation margin payments in the event that they inherit obligations as a result of the default of a clearing member. The precise volume of non-margin resources that CCPs should collect in anticipation of such costs depends on the prospects for multiple dealer defaults.

Finally, the report finds that the expansion of central clearing within or across segments of the derivatives markets could economise both on margin and non-margin resources.

CLOs

Euro CLO credit quality improves

The portfolio credit quality of the average European leveraged loan CLO is improving, according to Fitch. With no new recorded defaults in any transactions year-to-date, the average triple-C exposure of CLO portfolios decreased to 7.8% from 11.6% in July 2010.

Further, 21 of the 28 Fitch-rated CLOs are passing all of their coverage tests, compared to 15 in July 2010. "While CLO structures have worked relatively well and have captured excess spread to mitigate portfolio losses, some older-vintage CLOs' structural weaknesses have been exposed. These include increasing long-dated buckets, inefficient overcollateralisation tests and limited deleveraging after the reinvestment period," says Fitch associate director Carol Pang.

Additionally, senior CLO tranches have demonstrated a degree of rating stability, the agency says. "Since the crisis, the rating evolution of European cashflow CLOs was driven by Fitch's criteria change that resulted in reduced cushion against a downgrade and subsequently by the performance of the underlying loans," says Fitch director Laurent Chane-Kon.

He adds: "Fitch recognises that most cashflow CLOs have robust structures that have been working as anticipated. However, the lower-rated tranches remain vulnerable to further defaults and lower than expected recoveries as refinancing remains challenging in the current environment."

CLOs

SME CLO criteria updated

Fitch has updated its rating criteria for CLOs backed by SMEs loans. The agency has reduced several of its SME base-case default rates due to the macroeconomic environment for SME borrowers improving since it published its criteria in 2009.

However, Fitch continues to assume base-case delinquencies that are still above long-term averages, given the uncertainty regarding the strength and timing of macroeconomic improvements. Correlation assumptions have also been increased to ensure triple-A rating default rates remain broadly the same. The increase in correlation and decrease in base-case default rates is in line with the agency's forward-looking rating approach and, as a result, it does not expect any rating actions as a result of the new criteria.

CMBS

US special servicing loan rate drops

The rate of US CMBS loans entering special servicing is continuing to decline, according to Fitch Ratings in its latest US CMBS newsletter.

After reaching a peak of US$91.2bn in second quarter-2010, specially serviced CMBS loans have been declining for the last three quarters. Fitch expects this trend to continue.

"Improving market conditions are slowing the velocity of loans transferring into special servicing," comments Stephanie Petosa, md at Fitch. "Servicers are also modifying loans and moving them back into master servicing with increased success."

In fact, the vast majority (71%; US$57.6bn) of loans moved out of special servicing since 2009 have been modified and returned to master servicing. Fitch says it will continue to track the progress of these modifications over time and whether they re-enter special servicing.

CMBS

DECO 2011-CSPK warning issued

Fitch has published an unsolicited assessment of DECO 2011-CSPK. The rating agency says that although the deal's structure incorporates some CMBS 2.0 improvements, it finds that the transaction has a number of shortcomings.

Fitch says that the debt raised in DECO 2011-CSPK, Europe's first benchmark CMBS transaction since the crisis, would not achieve its triple-A rating. While the transaction features structural elements that address certain shortcomings in existing European CMBS transactions, the credit enhancement in place is not sufficient to support the agency's highest rating level.

While initially asked to provide feedback on DECO 2011-CSPK, Fitch was ultimately not asked to rate the transaction due to its more conservative credit view. Based on a review of preliminary information, the agency considers the securitised debt to be mid-to-high investment grade. However, the senior bond leverage is in excess of what can support the highest Fitch rating.

Chiswick Park is a high quality, modern, well-let suburban London business park that Fitch considers to be above-average on a number of counts, including: construction quality; specification; lease income strength; and occupancy rates. However, the agency notes that as it is located outside an established office submarket, the site runs the risk of losing appeal to the type of international media and other boutique tenants that currently occupy it.

As such, Fitch cannot rule this risk out in its severe stress scenarios. This risk contributed to the severity of its rental value decline and void assumptions.

"Property quality alone cannot offset the risk of significant cyclicality in the value of London offices," says Euan Gatfield, md in Fitch's EMEA CMBS team. "Trophy properties have recently been subject to a surge in investor interest, so the risk of cap rates pushing out in a future downturn has grown."

The agency notes that the structure of DECO 2011-CSPK addresses a number of the shortcomings of the last generation of European CMBS transactions. For example, the swapped notional is lower than the loan balance, thereby reducing the risk of breakage costs.

Following loan maturity, the bonds are capped, while the class X will cease to receive interest - both of which preserve more cashflow as principal. There are also a number of technical adjustments to servicing and control valuation mechanics that might allow for greater servicer discretion. Fitch views each of these enhancements positively.

CMBS

Euro CMBS surveillance methodology released

DBRS has published a methodology for its surveillance of European CMBS, which describes the analysis taken to arrive at any rating actions arising from the surveillance.

"A variety of events can affect the collateral of a CMBS pool and the cashflow necessary to ensure timely and ultimate payment of CMBS bonds," says Erin Stafford, md at DBRS. "During the life of a transaction, loans go delinquent, take losses, defease or prepay; tenants vacate; markets improve or soften; property values increase or decrease, to name only a few things that can change."

When initially establishing a rating, DBRS assumes that changes in the performance of the underlying loans can and do occur; therefore, it assigns ratings designed to withstand a certain level of volatility within the underlying commercial mortgage loans. Surveillance is critical to measuring and communicating to the investment community whether or not a change has the potential of affecting the ratings assigned to the bonds.

"This methodology will give investors greater transparency into the DBRS CMBS European rating philosophy," says Scott Goedken, European CMBS at the agency. DBRS expects its ratings to hold throughout a cycle; however, it is committed to performing surveillance and releasing performance update reports at a level that increases the transparency of its ratings.

CMBS

US CMBS delinquency rate drops

The US CMBS delinquency rate fell slightly in May with the percentage of loans 30+ days delinquent in foreclosure or REO declining by 5bp to 9.6%, according to Trepp's latest delinquency report.

Although small, the decline is the biggest rate drop for US CRE loans in CMBS in approximately two years - excluding October 2010 when the Extended Stay Hotels loan was resolved. The value of delinquent loans currently stands at US$61.5bn, the firm says.

"Last month, the delinquency rate posted its biggest rate of increase since late 2010 - a 23bp jump. The increase took many CMBS pros by surprise as it came after three consecutive months of improving results. While there may be additional bumps along the way, we think the May numbers accurately reflect a leveling-off in the market," says Manus Clancy, Trepp md.

The industrial delinquency rate spiked by 120bp in May, boosting the rate to nearly 12%. Six months ago, the rate was under 7%.

The office delinquency rate was up by 3bp during the month, yet remains the best performing major property type at 7.23%. Delinquencies in all other major property types declined for the month.

CMBS

Singapore CMBS prepped

CapitaLand is in the market with its second Silver Oak CMBS, ahead of the completion tomorrow of its tender offer for the outstanding notes of its first transaction. The deal is secured by Raffles City, a prime integrated property development in Singapore, which is owned by CapitaLand subsidiary RCS Trust.

The Reg S US dollar-denominated class A notes, due in 2018, have provisional Moody's/Fitch ratings of Aaa/AAA and are expected to total the equivalent of approximately S$800m. At closing, the proceeds will be lent to HSBC Institutional Trust Services, the trustee-manager of RCS Trust. RCS Trust will then use the loan proceeds to refinance its existing borrowings.

Raffles City comprises three parts: office (the Raffles City Tower); retail (the Raffles City Shopping Centre); and hotels/convention centre (Swissotel The Stamford, Fairmont Singapore and Raffles City Convention Centre). Office, retail, hotels/convention centre contributed 18.1%, 44.5% and 37.4% respectively to the trust's total gross rental income, as of December 2010.

Among the transaction's key strengths, Moody's notes that the underlying is a quality property in a good location. Raffles City is a landmark integrated development and conveniently located at the fringe downtown district, with direct access to one of the largest MRT interchanges in Singapore.

The rating agency also took into consideration the property management expertise of RCS Trust's owners, CapitaCommercial Trust and CapitaMall Trust, and the liquidity facility provided by DBS Bank, HSBC and Standard Chartered Bank. The facility covers 10 months of scheduled fees, expenses and swap payments.

In addition, Moody's believes that the major concerns of the transaction would be sufficiently addressed by the overall LTV, the stressed DSCR, the security package for the benefits of the noteholders and other structural features.

CapitaLand is tendering US$427m class A1, €30m class A2 and US$86.5m class B notes from its 2006 Silver Oak transaction in advance of the scheduled maturity date of 13 September 2011. Under the tender offer, notes validly tendered before 2 June will be purchased at 100.25% of their principal amount, together with any accrued and unpaid interest. Notes validly tendered after this but before the expiration deadline of 8 June will be purchased at 99%.

CMBS

CMBS loan losses examined

Almost US$1.4bn in US CMBS conduit loans were resolved with losses in May, according to Trepp's latest loss analysis report. That number is up by approximately 11% from the April total - the second highest value since the firm began tracking the figures in January 2010.

148 loans with a total balance of US$1.38bn were liquidated during the month - compared to 175 loans and US$1.24bn in face amount in April. Losses on the May liquidations were approximately US$594m - representing an average loss severity of 43.2%. In April, the average loss severity was just under 40%.

The May value is slightly above the average loss severity of 41.5% over the last 17 months. Special servicers have been liquidating at a rate of about US$949m per month over that time, Trepp says.

Removing the loans with losses of less than 2% from the sample, however, produces different results. In many cases, the firm suspects that small loss loans are actually refinancings that have taken place where the losses reflect small, unpaid special servicer fees or other costs.

On this basis - after taking out the 'small-loss' loans - the average loss severity jumps up to 48.2% for May. This is up approximately 1.1 points from April's reading and is below the average monthly loss severity of 55.1% over the last 17 months, Trepp concludes.

RMBS

EMEA RMBS loss criteria updated

Fitch has published a master criteria report detailing its rating methodology for assessing credit risk in RMBS transactions in EMEA. The criteria summarises the agency's existing analytical framework for both assigning a rating for the first time and monitoring existing ratings.

The agency has also updated its EMEA residential mortgage loss criteria. The fundamental residential mortgage loss and cashflow modelling methodologies have not materially changed and the updated criteria will have no rating impact on existing transactions, Fitch says.

Additionally, the agency is in the process of updating the separate country-specific criteria addenda containing specific residential mortgage loss and cashflow-related assumptions for Belgium, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, Spain, South Africa and the UK.

RMBS

RFC issued on Aussie RMBS criteria

Fitch has published an exposure draft on its Australian RMBS rating criteria with proposed key changes. While the sector has performed well during a period of global stress, the agency believes it was appropriate to undertake a detailed review of its current Australian RMBS criteria, given the substantial increase in household leverage and property price gains that have occurred in the country over the past decade.

"The past decade has seen a significant change in the mortgage market, household leverage and a considerable increase in property prices. Those factors, combined with the increased borrower sensitivity to interest rate rises, may result in mortgage performance in any future downturn being significantly worse than the last recession," says David Carroll, Fitch Australian structured finance director.

"While taking these aspects into account in making the proposed changes to the criteria, Fitch has also remained aware of the structure and regulation of the Australian mortgage market," says Natasha Vojvodic, Fitch head of Australian and New Zealand structured finance.

The proposed criteria changes include: increased base default probability for both conforming and non-conforming loans; increased debt-to-income adjustments; reduced seasoning credits; one market value decline assumption for all states of Australia; increased probability of default for first home buyers; and the introduction of downward house price indexing if house prices show sustained downward price movements.

Fitch expects the criteria to have a limited impact on existing, seasoned Australian RMBS transaction ratings due to the structural build-up of credit enhancement over time. The transactions most likely to be affected will be those issued more recently, those which feature a pro-rata payment structure with low subordination, or those with ongoing revolving periods.

The comment period is open for one month, ending on 8 July.

RMBS

New mortgage servicer rules imposed

Fannie Mae has issued new standards for mortgage servicers under the Federal Housing Finance Agency's servicing alignment initiative. The new standards address the management of delinquent loans, default prevention and foreclosure timeframes. It also aims to reinforce new incentives and compensatory fees, requiring servicers to take a more consistent approach for homeowner communications, loan modifications and other workouts and, when necessary, foreclosures.

"These new standards give homeowners facing difficulty making their mortgage payments a clear, consistent process. We want homeowners to be able to understand their options when facing foreclosure and we want servicers to reach homeowners early in the process, communicate frequently and clearly, and help homeowners avoid foreclosure," says Jeff Hayward, svp of Fannie Mae's national servicing organisation.

RMBS

Treasury MBS portfolio buyers revealed

The US Treasury has updated the market on the continued orderly wind down of its agency-guaranteed MBS portfolio. During the period from March to May, the Treasury sold US$23.68bn in face value of its holdings across 118 trades.

As a result, taxpayers have received a cumulative total of US$133.8bn in proceeds from this investment through sales by Treasury, as well as principal and interest payments (accounting for US$109.2bn). The Treasury has now recovered 59% of its original US$225bn investment in MBS, which it made during 2008 and 2009 through authority provided to it by Congress under the Housing and Economic Recovery Act of 2008.

The Treasury has also published a report on broker-dealer market share for the MBS sales, with the aims of maximising taxpayer returns and providing additional transparency. The score card shows JPMorgan as the top buyer, having purchased 17.8% (across 34 trades) of the MBS sales so far. Credit Suisse is ranked second, having bought 11.8% across 26 trades.