Contents

CDS

Restructuring revisited

Greek CDS fears allayed

Fears that European regulators will attempt to restructure Greek debt without triggering CDS contracts appear to be overblown. While there has been speculation in the market that politicians were considering such a move, credit strategists stress that it would be forbidden by CDS documentation and would have far-reaching negative consequences for the banking system if allowed.

"In the case that regulators tried to implement a restructuring without triggering CDS, it would mean that the CDS market would lose its value as a hedge, which would trigger a default of 90% of the banks in Europe tomorrow morning," says Jochen Felsenheimer, co-head of credit at Assenagon. "If CDS is no longer a hedge from the viewpoint of the regulator, there would be a huge requirement for banks to increase risk capital."

He adds: "There is no way there will be a restructuring that does not trigger a credit event."

European regulators appear to have been doing everything in their power to avoid a CDS credit event over the past few weeks. Although the exact reason has not been verified, it is assumed by many in the industry that regulators want to avoid having a sovereign credit event in the Eurozone from a reputation standpoint.

"Greek CDS have gathered a lot of political attention as there is a dislike for the product, but policymakers quite frankly have a lot bigger problems to worry about at the moment as, comparatively, the volumes of CDS outstanding are not that great," says UniCredit senior strategist Tim Brunne.

Felsenheimer notes that he has not seen a restructuring event that has been discussed over the past few weeks that would not trigger a CDS credit event, except if it was 'no-money' term restructuring, such as removing the listing of Greek government bonds. "But who cares? That would definitely not improve the situation for Greece," he says.

The latest news coming out of Athens, however, suggests that restructuring plans will be on a voluntary basis. Brunne confirms this will not trigger a CDS and says there is, therefore, little to worry about on that front from a protection seller point of view.

"We are more worried about the likelihood of some sort of unintended credit event if politicians are not really progressing on negotiations or some undesirable political events are happening in Greece," Brunne says. "This is not the most likely outcome, but the risk is there."

Meanwhile, Greek five-year CDS spreads have reached a new record of 2000bp - some 100bp wider than at the end of last week. However, there is little trading going on and these elevated levels reflect bank unwillingness to take exposure at present.

The spill-over effect on other sovereigns such as Spain, Portugal and Ireland - as indicated by CDS levels - is also becoming less pronounced. "The market is increasingly showing that the Greek problem is an isolated case: this was not the case a few weeks ago," says Felsenheimer.

"People just need to wait a little longer for their [Greek] credit event," adds Brunne. "It is something that cannot be avoided in the long run. The economic fundamentals strongly suggest that Greece will need to get rid of some of the debt somehow."

AC

ABS

Trading up

Optimism seen in Euro secondary ABS, though challenges remain

Liquidity issues continue to dog the European secondary ABS market. While Markit's new iBoxx ABS indices may help (SCI 8 June), a broader range of investors also needs to get involved in the sector.

"There is a real bifurcation in the market between the top and bottom of the spectrum, but in the middle it is non-investment grade which is struggling to find a home at the minute. For the time being, I really struggle to see any sustainable flow there," says Craig Tipping, md and mortgage group co-head at Jefferies International.

Tipping adds: "Dealers are there to facilitate client flow, but putting to work €1bn creates dislocation in the wider market. One factor is that when the market goes like it is now, dealers frequently put their liquidity ahead of client needs and this magnifies the volatility in our market."

Rehan Latif, executive director at Morgan Stanley, notes however that investors are coming back to the market and even in times of stress there are trades to be done. "The US market has corrected much more significantly than Europe. From a trading volume perspective, we have traded US$1bn even on days when there has been stress, which shows the depth of the market as more participants come back," he says.

Latif adds: "We are beginning to see a lot more high yield guys getting involved and that has really been healthy for the market. I think we will start to see a drive to get more investors to come in."

Prospects do seem to be improving. Stuart Calnan, a Barclays Capital credit trader, notes: "If people are looking to do portfolio trades, then certain banks are willing and able to provide the balance sheet."

How helpful the new Markit iBoxx European ABS indices will be in terms of facilitating liquidity remains to be seen. Latif is confident that they could make a positive contribution.

He says: "A non-conforming index could be very useful as a hedging tool. A five-year benchmark index could make sense for our market; it feels like the right evolutionary step."

Calnan agrees that indices can be a useful tool, particularly when it comes to hedging. He notes: "The tools we have used for hedging, such as single name bank CDS and indices, have actually worked well."

Encouraging signs are emerging for the rest of the year and traders are optimistic about the months ahead. "There have been two or three portfolio trades within Europe. I think the next couple of quarters we might see a lot more selling from bad banks," says Latif.

He continues: "There are very interesting credit opportunities out there to take advantage of at the moment. Non-conforming mezz would be one, while SMEs are also a very compelling opportunity. Given the German story, I think that remains a very strong trade too."

Tipping also believes that Germany provides a compelling case in the short term and also suggests non-conforming as an investment with a longer outlook. He says: "In the short term I would look at the short duration Irish trade."

He continues: "I also think Germany will recover. Non-conforming is certainly a good investment, but the horizon there is three to four years, so it is more of a longer-term play. Meanwhile, ABS CDOs are also going to see continued interest, so I think there will be deals in that space too."

Calnan sees opportunities in high-coupon RMBS as well. He says: "In the near term I would look to invest in high-coupon RMBS and also in non-conforming. There are a number of deals that may switch to pro-rata, so the mezz is worth a closer look."

However, amendments to S&P's criteria for assessing counterparty and supporting obligations remain a headache for many investors. For example, the Hermes IX, X, XI, XII and XIII transactions have all had notes put on credit watch negative, with downgrades possible. Under such circumstances, there has been a lot of debate about whether the S&P rating should be removed.

Conor O'Toole, European securitisation research director at Deutsche Bank, does not believe that dropping the S&P rating would be the end of the world. He believes thay it is not needed for the transactions, which remain rated by S&P's peers.

Gordon Kerr, European ABS strategist at Citigroup Global Markets, appreciates why S&P has acted as it has. But he says: "Although they are trying to isolate deals from banks, they are introducing an element of systemic risk."

Kerr concludes: "It is difficult. What S&P is doing is well-intentioned, but they are creating a situation where it is very hard to find a replacement swap counterparty if a counterparty gets downgraded. Making it harder to replace a swap counterparty reduces the liquidity of that swap, so if something happens to the bank, you are more exposed to replacement risk."

JL

CMBS

Fund's CMBS strategy pays off

Real Estate Credit Investments (RECI) - the permacap vehicle formerly known as Queens Walk Investments Limited - reports that its foray into real estate debt investment has proved successful, evidenced in part by seven consecutive quarters of profits and a rise of 21% in Net Asset Value (NAV) from 16 September 2010 to 31 March 2011.

However, while the company continues to see opportunities in the bond markets, it believes that now is the right time to increase investment in the loan market.

For much of the past year RECI's strategy has been to focus on making investments in undervalued real estate securities. The split of new investments has been two thirds in CMBS and one third in RMBS. Most investments have been in Northern Europe, including the UK.

"Rising values in real estate bonds have boosted returns for our Real Estate Debt fund, but also means that fewer bonds returning sizable yields are available," the company says in its annual financial report. "However, yields in the loan market remain attractive and this should remain the case in the medium term. Demand by borrowers to refinance is rising, while appetite to lend in the mezzanine loan market is constrained. For example, some institutional investors are constrained from investing in loans because of high capital requirements demanded by new regulation."

RECI, which is managed by Cheyne Capital Management, started its real estate debt investment strategy in autumn 2008. Small investments in 2009 and early 2010 ensured that QWIL participated in the investment opportunity. But it was the €26.6m capital raising completed on 16 September 2010 that put the company in a position to substantially increase investment in undervalued real estate debt.

The company says it will continue to actively manage the residual income positions whilst seeking opportunities to sell assets at attractive prices. It intends to reduce the exposure to the residual income positions in order to provide investors with a clear opportunity to take advantage of the dislocation in the European real estate debt markets.

RMBS

Servicer purchase threatens RMBS cashflows

The change in servicing and advancing practices that will follow Ocwen Financial Corporation's purchase of Litton Loan Servicing may have a negative impact, according to Moody's. The agency has voiced concerns that payments will be diverted from senior bondholders in related RMBS.

Ocwen agreed to purchase Litton - including Litton's Texas-based loan servicing operations and US$41.2bn servicing portfolio, which includes all Litton-serviced RMBS - from Goldman Sachs earlier this month. Moody's says this will change Litton's current practices and possibly disrupt monthly cash distributions to RMBS transactions.

"We expect Ocwen's purchase of Litton to result in cash flow disruptions that will threaten fast cash flow bonds in the affected transactions. Delayed payments to these bonds would allow losses to deplete their subordination before the bonds are paid off, exposing them to higher losses when they must share principal pro-rata with other senior bonds," says the agency. Before subordination depletion, fast cash flow bonds generally receive all principal payments.

If Ocwen pursues both more loan modifications and tighter advances on delinquent loans than Litton has done then the purchase could disrupt RMBS cash flows. Ocwen may decide advances made in the past by Litton are non-recoverable and look to reimburse itself with funds from the top of the transaction waterfall, delaying bondholder payments.

Moreover, Moody's warns an increase in modifications will not only delay the collection of liquidation proceeds, it could also further increase the reimbursement of advances. The agency notes Ocwen has pursued modifications more rapidly than Litton over recent years and predicts a decrease in liquidations to follow the acquisition.

Potential delays in payments to some trusts may be increased by interest rate swap obligations which could be terminated if advance reimbursements prevent transactions from making monthly payments. Should a swap termination occur, the trust would typically pay the swap counterparty the value of remaining payments from the top of the waterfall, further delaying payments to bondholders.

When Ocwen purchased Barclay's HomEq in September 2010, Moody's notes many delinquent loans were quickly modified and a lot of outstanding advances were deemed non-recoverable, allowing Ocwen to reimburse itself before distributing transaction collections to trusts. There were also cases of defaulted interest rate swap obligations requiring swap termination payment that diverted all collections from the trusts for six months.

More positively, Moody's notes that below fast cash flow senior bonds, the transfer may see lower losses for other bonds. Ocwen's tendency to modify loans has produced lower delinquency levels than Litton has seen, with similar re-default rates. Successful modifications therefore could rehabilitate a greater number of borrowers and lower overall pool losses.

ABS

Capital markets attorney hired

Womble Carlyle has announced the appointment of Don Keough to its Baltimore office. He will work closely with attorney Merrick Benn in Womble Carlyle's equipment finance practice. The team helps companies lease equipment such as manufacturing lines, aircraft, barges and tankers, railroad rolling stock, software, energy and technologies.

Keough joins from SunTrust Equipment Finance & Leasing Corporation, where he was vp and associate general counsel and focused on municipal and commercial structured finance, energy and equipment leasing transactions .  Prior to SunTrust, he spent two years in private practice at Semmes Bowen & Semmes in Baltimore.

ABS

Asset finance team added

Clydesdale and Yorkshire Bank has expanded its corporate and structured finance services with the launch of a new corporate asset finance team.

Ian Barr, who is head of Clydesdale's existing asset finance function, will lead the new team. He is joined by four new arrivals - Iain Corbett, Gordon Young, Neil Roberts and Peter Burton - all of whom have moved from Fortis Lease UK.

The new service will provide funding for a wide range of assets, including most types of vehicles, general plant and machinery, manufacturing equipment, aircraft and marine vessels. Key sectors will be vehicle rental and contract hire, transport and logistics, manufacturing and industrial, energy and renewables, agriculture and local authorities

Typical transactions will be in the £1m to £25m range. Each transaction will be structured to match the asset lifecycle and the client's repayment capability.

Barr started his career with Clydesdale Bank in 1981 and has been involved in asset finance since 1992, when he joined EFT Finance. He rejoined Clydesdale in 1999 in an asset finance role and was appointed as head of the bank's asset finance operation five years ago.

Corbett and Young each have around 30 years' experience in banking and for much of that time have worked in senior roles in asset finance. Corbett was head of sales at Fortis Lease, while Young was head of fleet. Both take on the role of directors in the new team.

Roberts and Burton, who join as associate directors, have each spent over ten years in banking and finance and have particular experience in wholesale vehicle funding. At Fortis, Roberts was responsible for developing pan-European relationships with vehicle vendors, while Burton was a senior credit analyst, having previously worked in a similar role at Ford Credit.

ABS

ABS syndicate beefs up

Kenneth Rosenberg has joined Barclays Capital's securitisation syndicate team, reporting to Brian Wiele, head of Americas securitisation syndicate. Rosenberg most recently worked at Credit Suisse as a director in its ABS/structured products syndicate.

CDO

JPMorgan settles Magnetar case

JPMorgan is to pay US$153.6m to settle SEC charges that it misled investors in the Squared CDO 2007-1 transaction just as the housing market was starting to plummet. Under the settlement, harmed investors will receive all of their money back. In settling the SEC's fraud charges against the firm, JPMorgan also agreed to improve the way it reviews and approves mortgage securities transactions.

The SEC alleges that JPMorgan structured and marketed the synthetic CDO without informing investors that Magnetar Capital helped select the assets in the portfolio and had a short position in more than half of those assets. As a result, the hedge fund was poised to benefit if the CDO assets defaulted. The SEC separately charged Edward Steffelin, who headed the team at an investment advisory firm (GSCP) that the deal's marketing materials misleadingly represented had selected the CDO's portfolio.

"JPMorgan marketed highly-complex CDO investments to investors with promises that the mortgage assets underlying the CDO would be selected by an independent manager looking out for investor interests," says Robert Khuzami, director of the SEC's division of enforcement. "What JPMorgan failed to tell investors was that a prominent hedge fund that would financially profit from the failure of CDO portfolio assets heavily influenced the CDO portfolio selection."

According to the SEC's complaint against JPMorgan filed in US District Court for the Southern District of New York, the CDO was structured primarily with CDS referencing other CDO securities whose value was tied to the US residential housing market. Marketing materials stated that the Squared CDO's investment portfolio was selected by GSCP - the investment advisory arm of GSC Capital Corp - which had experience analysing CDO credit risk. Omitted from the marketing materials and unknown to investors was the fact that Magnetar Capital played a significant role in selecting CDOs for the portfolio and stood to benefit if the CDOs defaulted.

The SEC alleges that by the time the deal closed in May 2007, Magnetar held a US$600m short position that dwarfed its US$8.9m long position. It also alleges that in March and April 2007, JPMorgan knew it faced growing financial losses from the Squared deal as the housing market was showing signs of distress.

The firm then launched a frantic global sales effort in March and April 2007 that went beyond its traditional customer base for mortgage securities. According to the SEC's complaint, the firm sold approximately US$150m of mezzanine notes of the Squared CDO's liabilities to more than a dozen institutional investors, who lost nearly their entire investment.

Without admitting or denying the allegations, JPMorgan consented to a final judgment that provides for a permanent injunction from violating Section 17(a)(2) and (3) of the Securities Act of 1933, and payment of US$18.6m in disgorgement, US$2m in prejudgment interest and a US$133m penalty. Of the US$153.6m total, US$125.87m will be returned to the mezzanine investors through a Fair Fund distribution and US$27.73m will be paid to the US Treasury.

JPMorgan's consent notes that it voluntarily paid US$56.76m to certain investors in a transaction known as Tahoma CDO I. The settlement is subject to court approval.

In a separate complaint filed against Steffelin, the SEC alleges that he allowed Magnetar to select and short portfolio assets. The complaint alleges that Steffelin drafted and approved marketing materials promoting GSC's selection of the portfolio without disclosing Magnetar's role in the selection process. In addition, unknown to investors, he was seeking employment with Magnetar while working on the transaction.

The SEC's complaint charges Steffelin with violations of Sections 17(a)(2) and (3) of the Securities Act and Section 206(2) of the Investment Advisers Act of 1940. The SEC seeks injunctive relief, disgorgement of profits, prejudgment interest and penalties against Steffelin.

Separately, GSC's bankruptcy trustee has consented to the entry of an administrative order requiring the firm to cease and desist from committing or causing violations or future violations of Sections 17(a)(2) and (3) of the Securities Act and Section 204 and 206(2) of the Advisers Act and Rule 204-2 thereunder.

CDO

GSC interim hearing scheduled

An interim hearing with respect to the GSC European CDO II, V and I-R transactions will be held on 29 June before the Bankruptcy Court for the Southern District of New York.

The hearing will, among other things, consider the Chapter 11 trustee's motion for an order authorising the sale of assets and assignment of executory contracts pursuant to certain asset purchase agreements. It will also consider the non-controlling lender group's motion for entry of an order that would approve a form of ballot and establish solicitation/voting procedures, as well as notice and objection procedures.

If it is determined that consideration of the sale motion will go forwards, a hearing of the sale motion will be held on 6 July. Objections to the sale motion must be filed and received no later than 1 July.

The sale motion would include, amongst the contracts to be assumed and assigned to Black Diamond Capital Management, the collateral management agreement.

CDS

Demand for CDS lawyers exceeds supply

The CDS industry is suffering from a lack of lawyers, according to a UK- and US-based recruitment consultancy. Ogetay Akman, head of the legal recruitment practice at Twenty Professional Services, suggests that the lack of talent means the financial services sector needs urgently to look at transferable skills sets.

"The global financial crisis meant that whole teams were culled and this had the knock on effect of legal firms no longer seconding lawyers to support the credit derivatives teams," says Akman. "The result has been a two year black hole where no new talent has been brought on for pipelining purposes."

Akman notes that now credit lines have, to some extent, been unblocked there is a rush to start building out legal teams again - particularly since the raft of new regulation around the systemic risk of complex products such as credit derivatives.

"Banks urgently need a focus on the assessment, management and implementation of the regulatory agenda as it relates to global markets. The problem is that the right experience is very thin on the ground," he says. "Financial institutions are looking to build out big teams and want relevant experience from either an investment bank or a private practice firm."

Akman says that demand is massively exceeding supply, given that many of those who were made redundant during the credit crunch have branched out into other product areas or have chosen the interim route dealing with different product lines. "Those that are still around with the right exposure are often just too senior for the available roles," he adds.

The answer, suggests Akman, is to look at the transferable skills offered by ISDA specialists. "The supply and demand situation isn't going to get any better and so it's time to think outside the box a little," he says. "ISDA specialists often see their role initially as a stepping stone but then get pigeon holed and are discouraged from branching out. However, they will have had exposure to credit derivatives instruments including a detailed understanding of the associated documentation and will be experienced master agreement negotiators. If the banks are going to build out their teams within the time frames needed - as an option this is really a no brainer."

RMBS

MIAC acquisition completed

Radian Asset Assurance has completed the acquisition of Municipal and Infrastructure Assurance Corporation (MIAC), following approval from the New York State Insurance Department. The purchase price of US$82m is US$7m above the value of MIAC's statutory capital base.

Radian signed an agreement of purchase on 1 February 2011 for MIAC, a New York-domiciled financial guaranty insurance company. MIAC has not written any business, but has obtained licenses to do so in 36 states and the District of Columbia.

Radian says that the acquisition is consistent with its goal of reducing its non-core risk in order to eliminate uncertainty, while maximising the ultimate capital available to its mortgage insurance business. "Since we stopped writing new business in Radian Asset in 2008, we have successfully reduced Radian's financial guaranty exposure by more than 30%," states Bob Quint, the firm's cfo. "This acquisition provides Radian with the flexibility to pursue strategic alternatives in the public finance market, including possibly partnering with third-party investors to write new public finance insurance and/or reinsuring all or a portion of Radian Asset's existing public finance business."

RMBS

NCUA files first misrepresentation suits

The National Credit Union Administration has filed suits against JPMorgan and RBS, alleging violations of federal and state securities laws and misrepresentations in the sale of RMBS. Additional law suits may follow in order to recover losses from the purchase of securities that caused the failures of five large wholesale credit unions.

As liquidating agent for the failed corporate credit unions, NCUA says it has a statutory duty to seek recoveries from responsible parties in order to minimise the cost of any failure to its insurance funds and the credit union industry. The first two actions involve damages in excess of US$800m, but the agency is seeking billions of dollars in total damages through additional actions.

"NCUA has a responsibility to do everything in our power to seek maximum recoveries from those involved in the issuing, underwriting and sale of the faulty securities that resulted in the failures of five of the largest wholesale credit unions," says NCUA chairman Debbie Matz.

She adds: "NCUA's legal actions are based on ongoing investigations of individuals and entities responsible for selling these securities to the failed institutions. By these actions we intend to hold responsible parties accountable. Those who caused the problems in the wholesale credit unions should pay for the losses now being paid by retail credit unions."

NCUA's suits claim the sellers, issuers and underwriters of the questionable securities made numerous material misrepresentations in the offering documents. These misrepresentations caused the corporate credit unions that bought the notes to believe the risk of loss associated with the investment was minimal, when in fact the risk was substantial.

NCUA officials are also discussing the losses with a number of other sellers, issuers and underwriters. If NCUA is unable to reach reasonable settlements on behalf of the liquidated credit unions with these additional parties, the agency will likely bring additional lawsuits.

The five credit unions placed into NCUA conservatorship and now liquidated are: US Central, Western Corporate, Southwest Corporate, Members United Corporate and Constitution Corporate. NCUA filed the first two suits in the Federal District Court for the District of Kansas, the former headquarters of US Central.

ABS

Largest structured settlement ABS completed

JG Wentworth has completed a US$265m securitisation of payment rights under structured settlement and fixed-annuity purchase contracts. The US$226m class A notes have been rated triple-A by Moody's and DBRS, while the US$21m class B notes have been rated Baa2 and single-A (low). A residual class of US$18m has been retained.

Stefano Sola, JG Wentworth cio, comments: "This first securitisation in 2011 was the largest-to-date in the structured settlement industry. JG Wentworth is committed to creating a liquid market for structured settlement and annuity backed notes through the continued access to the capital markets with benchmark deals. Our established securitisation programme and continued access to the capital markets underlines our commitment to this growing and diversified investor pool by delivering a consistent flow of product."

Sola adds that consistent demand from insurance companies and money managers only underlines the strength of the asset class. He says: "We structured this transaction with a 25% pre-funding account. The driver behind this decision was the underlying investor appetite and demand for long term access to strong, consistent and predictable cash flows."

ABS

New Aussie ABS product launched

Certegy Ezi-Pay, a division of Flexigroup, has announced a new AU$133m securitisation of Australian consumer receivables. The transaction, Flexi ABS Trust 2011-1, is the first Australian ABS backed by consumer receivables originated at the point-of-sale on 'no interest' terms.

"This is FlexiGroup's second securitisation following an inaugural issue in August 2010", says Ilya Serov, Moody's lead analyst for the transaction. "It is quite an innovative structure, backed by 'no interest ever' retail loans, an asset class not previously seen in the Australian ABS markets. Although new asset types always present analytical challenges, the high levels of credit enhancement, coupled with the short weighted average life portfolio, support the Aaa (sf) ratings assigned to Flexi ABS Trust 2011-1", he adds.

Rather than relying on interest payable by the underlying obligors, the product is instead reliant on a retailer fee component to meet financing costs and for profit margin generation.

Unsecured consumer loans exhibit a higher risk profile than other receivables securitised in the Australian ABS market (typically, auto loans). Consequently, Moody's base case assumptions are a default rate of 3.00% with no recovery, materially higher than that for auto loans. The credit enhancement provided to the senior notes is 33.25%, supporting the triple-A ratings.

ABS

Positive performance for Peruvian SF

Peruvian structured finance transactions are performing strongly, despite uncertainty caused by recent political developments, says S&P. The agency expects the credit quality of the Peruvian structured portfolio to remain positive in the short- to medium-term, even if stress or volatility increases.

S&P notes Peru has experienced significant growth over the past few years and many originators have expanded their outstanding diversified payment rights (DPR) transactions. DPR transactions are backed by international wire transfers that most commonly arise from export-related financing, foreign direct investment, portfolio investment, and worker remittances, the agency notes.

"While debt service coverage (DSCR) levels  have declined as the DPR programs have issued new debt, they remain significant for all four active DPR programs in Peru - ranging between 60x and just over 100x. Incoming DPR flows have been significant as well," says credit analyst Eric Gretch. "In 2010, the average Peruvian DPR inflows exceeded the largest periodic debt service for the life of the programs by 85x."

DPR transactions are the most common type of securitisation issued in Peru. S&P also rates other asset types, such as RMBS. Peruvian RMBS has performed in line with expectations over the past few years. Gretch notes there have been temporary spikes in prepayments, but those have been correlated with drops in the country's interest rates.

ABS

Tight at the top of the securitisation table

At the end of May 2011, with US$105.3bn of qualifying deals counted, there's still little to separate the leaders in the latest SCI US league tables for bank arrangers in the structured credit and ABS markets. In Europe, it's a very different story, with one firm beginning to build a substantial lead - albeit on the back of lower market volumes, totalling €47.7bn year-to-date.

Last month's top three in the US league table are unchanged, but are now in a different order. Barclays Capital is now ahead, with US$41.9bn worth of deals; in current second place is Deutsche Bank, with U$41.3bn; and JPMorgan is placed third, with US$40.8bn. Only a shade behind is the bank in this and last month's fourth place - Citi, with US$39.2bn worth of deals to its name

In Europe, JPMorgan continues to lead the table, having been involved in €19.3bn worth of deals. In second place with €14.3bn is RBS.

The tables cover primary market transactions for ABS, CMBS, RMBS and 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 May 2011 are published here.

ABS

SFA proposal scrutinised

Fitch has commented on the recent proposal by the UK FSA to limit the use of the Supervisory Formula Approach (SFA) by tightening the conditions under which significant risk is transferred.

According to the new proposal, the FSA expects firms to seek an external rating for retained equity pieces, if they want to claim capital relief. The move is due to the FSA's recent observation of the increased use of the SFA on unrated equity pieces, resulting in substantial reductions in capital requirements.

The authority is concerned that the resulting capital relief is not commensurate with the amount of risk actually transferred, according to Fitch. In future, originators of securitised portfolios would consequently have to acquire a public rating for retained securitisation exposures instead of solely relying on the use of the SFA.

"The FSA's proposal is not a surprise. Back in October 2009, Fitch reported extensively on the strengths and weaknesses of the supervisory formula. It was clear at the time that the formula will not fit every purpose and in some instances produces counterintuitive results," says Ian Linnell, group md at Fitch.

The agency notes that the SFA is technically complex and requires extensive mathematical analysis to understand the drivers and dynamics of the resulting capital charges. It is built around an idealised portfolio of assets and does not capture the heterogeneity of types of assets included in securitisations and important elements of transaction structures.

Further, the securitisation capital charges generated by the SFA are highly sensitive to marginal changes in underlying risk inputs and assumptions. In practice, they appear to provide less differentiated capital charges than the ratings-based approach, since the calculated charges rapidly converge either to the floor charge of 0.56% or the maximum charge of 100%. In transactions where the number of tranches is limited and the equity tranche is relatively thick, it is possible for the SFA to generate capital charges that are significantly lower than the ratings-based approach.

"Capital charges for tranche exposures where the credit enhancement is slightly above the unsecuritised capital charges are highly sensitive to small changes in credit enhancement. The FSA is concerned that this phenomenon may lead to systemic undercapitalisation of banks," says Atanasios Mitropoulos, senior director at Fitch.

In addition, Fitch highlights that while recent attempts to harmonise the definition of significant risk transfer (SRT) across the various jurisdictions of Europe is welcome, the reality is that there are wide differences between regulators in their definitions and interpretations of what constitutes SRT. While the FSA may adopt a conservative approach in permitting the use of the SFA, it is unclear how other national regulators will interpret the rules, thereby questioning central banks' stated aim to provide a worldwide level playing field for banks.

CDO

'Minimal' Trups deferrals in May

Default and deferral activity in U.S Bank Trups CDOs was minimal during the month of May, according to the latest default and deferral index results from Fitch.

Bank defaults within Trups CDOs increased by 3bp to 15.65% through to the end of May. Similarly, bank deferrals fell by the same amount to 17.61%.

"While last month's activity may reinforce the belief that stabilisation is around the corner, it is still too early to tell if the trend of short-term volatility for bank Trups CDOs has run its course," says Fitch director Johann Juan.

40 deferrals and 20 defaults for bank Trups CDOs occurred through to the end of May, notably lower than the 74 deferrals and 33 defaults experienced through to the end of May last year.

At the end of May, 177 bank issuers were in default, affecting approximately US$5.89bn held across 83 Trups CDOs. Additionally, 390 deferring bank issuers were impacting interest payments on US$6.63bn of collateral held by 84 Trups CDOs.

CDO

Flag raised over CDO involuntary petition

Hildene Capital has filed a motion to dismiss an involuntary bankruptcy petition filed against the ZING VII CDO and is asking other noteholders to join it in this action. The firm suggests that the bankruptcy petition represents an attempt to force new terms on the deal's indenture, which could set a precedent that would disrupt the structured finance market.

Three funds managed by Anchorage Capital Group filed the involuntary bankruptcy petition on 1 April in the US District Court for the District of New Jersey. Since most structured finance transactions contain features to prevent a bankruptcy filing as a protection for noteholders and CDOs are supposed to be bankruptcy-remote entities, Hildene says it is "troubled" by the plan filed by Anchorage.

The proposed reorganisation would transfer all of the assets of the CDO to a new vehicle managed by Anchorage and foreclose any recovery by junior notes. Moreover, it would pay to the new Anchorage entity all amounts received on the assets, including any receipts in excess of the original principal amount of the senior notes held by Anchorage.

"We also believe that if the involuntary petition proceeds unchallenged, it could introduce significant legal uncertainty to the market for CDOs and other structured finance entities," Hildene notes.

The firm's motion consequently indicates that not only is ZING VII ineligible to be a debtor under the US Bankruptcy Code and that Anchorage was unauthorised to file, the involuntary petition was also filed in order for Anchorage to circumvent ZING VII's indenture's provision requiring supermajority noteholder consent to liquidate the collateral. Hildene says it views the Anchorage filing as a "step on a slippery slope that could create chaos, particularly with regard to expectations as to the bankruptcy-remote status of entities established to hold securitised assets".

A recent RBS research note suggests that almost 80% of CLOs in a selected sample are similar to ZING VII because they do not have language prohibiting the most senior noteholders from filing an involuntary bankruptcy petition. In other words, the transaction may become a model by which distressed debt buyers could launch a wave of involuntary bankruptcy petitions against CDOs, seeking to wipe out billions of noteholder value with premature liquidations.

Hildene also believes that the ability of any noteholders to file an involuntary bankruptcy case in the US - if it exists - is an important issue that would have been disclosed in an offering circular as a risk factor to be considered for ZING VII junior note buyers. "We further believe that the absence of such an important risk factor in the ZING VII offering documents (which we have been unable to find in any other CDO disclosure documents) says much about the expectations and intent of market participants. On the contrary, the offering circular does not distinguish between prohibiting any class of noteholders from filing a bankruptcy petition."

Another reason for concern with the ZING VII filing, according to Hildene, is the inaction of ZAIS, the CDO's collateral manager. While noteholders might expect that the manager would contest the involuntary petition as it would eliminate the substantial management fees being earned, no such action has been taken by ZAIS. Its failure to file any meaningful appearance in the action raises troubling questions about its role as collateral manager for the benefit of all noteholders, the firm says.

Hildene funds own all US$27m of the class A2 notes issued by ZING VII.

CDS

AIB failure to pay determined

ISDA's EMEA Credit Derivatives Determinations Committee has resolved that a failure to pay credit event occurred in respect of Allied Irish Banks. The Committee also voted to hold senior and subordinated auctions for Allied Irish Banks in respect of the failure to pay credit event.

This announcement follows the 13 June determination that a restructuring credit event occurred in respect of Allied Irish Banks and that an auction may be held. The restructuring auction resolution had been made by the Committee on the understanding that if a failure to pay credit event occurred prior to the date of the auction for the restructuring credit event, the auction may be held on the basis of the failure to pay credit event, rather than the restructuring credit event. As such, the Committee also voted that there will not be an auction held on the basis of the restructuring credit event.

CDS

Sovereign correlation model offered

Moody's Analytics has released RiskFrontier 3.0, the latest version of its credit portfolio management and economic capital calculation solution. This release features a new sovereign risk correlation model that enables financial institutions to better quantify and manage the sovereign risk exposure in their portfolios, the firm says.

The new sovereign correlation module quantifies the correlation between sovereigns, as well as the correlation between sovereigns and other asset classes. The sovereign risk model captures sovereign risk for 89 sovereigns and territories, which accounts for 99.5% of sovereign debt issuance.

"The new model incorporates factors that explain regional sovereign credit deterioration, commonly observed with contagion events," comments Amnon Levy, md of portfolio research at Moody's Analytics.

In addition, RiskFrontier 3.0 includes a new model for capturing the risks associated with defaulted assets, allowing users to quantify recovery values that take into account portfolio correlation. For users measuring portfolio performance against a benchmark, the ability to perform 'what-if' analysis has also been introduced to assess the impact of a portfolio strategy under the current economic environment, as well as against economically stressed scenarios.

CDS

Trade-date CDS clearing platform launched

Intercontinental Exchange (ICE) has launched the Affirmed=Cleared (A=C) interdealer workflow on its ICE Link platform. ICE Link's launch of A=C enables same-day clearing of CDS trades, in line with the Dodd-Frank Wall Street Reform Act in the US and the European Market Infrastructure Regulation (EMIR) initiative in Europe.

The introduction of A=C enables a trade to be cleared within minutes of execution. Trades are immediately submitted for clearing following affirmation on the ICE Link platform and, once cleared, all parties are notified in real time on ICE Link. Prior to the introduction of A=C, interdealer CDS transactions were sourced from the DTCC Trade Information Warehouse (TIW) and cleared on a weekly basis.

"The successful launch of the A=C interdealer workflow combined with our best in class connectivity across the CDS market, which includes multiple clearing houses and swap execution facilities (SEFs), delivers significant operational benefits to our partners," said Clive de Ruig, global head, ICE Link. "Our strategic goal is to provide clients a choice of where they want to execute and clear, and this brings ICE Link closer to how the world will work when SEFs come into place in a post-Dodd-Frank and post-EMIR regulatory landscape."

Since launch on 11 April, more than US$6bn in gross notional value has cleared at ICE Trust and ICE Clear Europe through the ICE Link A=C workflow.

Clearing

OTC clearing execution agreement published

FIA and ISDA today announced the publication of the FIA-ISDA Cleared Derivatives Execution Agreement as a template that can be used by participants in the cleared swaps markets in negotiating execution-related agreements with counterparties to OTC derivatives that are intended to be cleared.

The agreement was developed with the assistance of a committee comprised of representatives from both buy-side and sell-side firms with expertise in both futures and OTC derivatives. More than 60 organisations provided input during the development of the document.

The FIA and ISDA believe that this agreement will support the adoption of central clearing in the global derivatives markets by providing a model for the legal documentation supporting derivatives clearing. The FIA and ISDA emphasize that the use of the agreement is voluntary: The agreement is being published as a template for participants to use as they see fit and may not be necessary or appropriate under all circumstances.

This agreement lays out the procedures by which a trade is submitted for clearing, including the obligations for each party to affirm the trade within prescribed time limits. The agreement clarifies that once a trade is accepted for clearing, each party's agreement with its clearing firm will govern and neither party to this agreement has any further obligation to the other. Second, it establishes the rights and obligations of the parties in the event that a trade is not accepted for clearing. Third, the agreement includes optional annexes for those parties that want a clearing firm to be party to the agreement. The agreement is clearinghouse-neutral.

The agreement attempts to provide some initial structure for documentation governing the execution of cleared swaps pending full implementation of the reforms mandated by the Dodd-Frank Act in the US and similar reforms in other parts of the world. The FIA and ISDA recognize that many provisions in the agreement will be superseded by new regulatory requirements as well as the specific rules of individual swap execution venues and clearing organisations. Until cleared swap market rules and regulations have been adopted and implemented, the agreement sets out certain terms and conditions that market participants who enter into execution agreements may consider. This is the first version of the document; FIA and ISDA expect that the agreement will be updated and enhanced over time as the market for cleared swaps continues to evolve.

CMBS

DQT slips in May

The delinquency rate on loans included in US conduit/fusion CMBS slipped by 4bp points in May to 9.18%, according to Moody's latest Delinquency Tracker (DQT). The total dollar balance of delinquent loans for the US remained steady at approximately US$56bn.

"We expect a high single-digit or low double-digit delinquency rate to persist over the near term," says Tad Philipp, director, CRE research at Moody's.

The fact that the volume of specially serviced loans remained about 3.5% greater than the volume of delinquent loans in May underlines this persistence in the delinquency rate, says Moody's. Its Specially Serviced Loan Tracker fell by 10bp in May, to 12.62%.

During May loans totalling US$3.4bn became newly delinquent, while previously delinquent loans totalling approximately US$4.1bn became current, worked out or disposed of. In all, the total number of delinquent loans decreased to 4,017 in May from 4,047 in April.

CMBS

German loans prominent in special servicing

101 loans remained in special servicing across EMEA CMBS large multi-borrower and single borrower transactions monitored by Moody's, as of end of May 2011. While eight new loans entered special servicing during the month, no loans were removed following a full work-out.

All of the newly transferred loans are pan-European, with six of them backed by collateral in Germany. Germany now contributes 27% to the total balance of loans in special servicing and 44% to the total number of loans.

The size of the new loan transfers ranged from €15m to €149m, with a variety of property types forming the collateral, such as office, mixed-use and multi-family. Reasons for the new transfers included non-payment during term and at maturity, as well as LTV covenant breaches.

A pan-European large-multi borrower transaction - Silenus (ELoC 25) - saw its first special servicing activity in May, when three loans (representing 23% of total portfolio balance) in the portfolio were transferred into special servicing.

Several loans were subject to property sales during the month, with the number of loans for which the underlying properties have been sold reaching 14 - representing approximately 10% of all loans currently in special servicing by balance.

CMBS

Delinquencies forecasted

S&P has tested the theory that servicer watchlist data for CMBS can be an indicator of future delinquencies and found it to be reasonably accurate.

The rating agency explains: "A servicer can place a loan on its watchlist for a number of reasons, but most watchlist placements are indicative of an emerging credit problem. To test the hypothesis, we used Trepp data from July 2007 through May 2011 to regress CMBS delinquencies on lagged watchlist percentages."

S&P tested six different lag times: no lag, three months, six months, nine months, 12 months and 15 months. It found the best fit to be a lag of 12 months. For example, the watchlist data point at July 2010 is used to project the level of delinquencies in July 2011.

The agencies calculations imply that 81% of watchlisted loans make their way to delinquent status in a year. Applying this to recent data, S&P's regression model projects that the 30-day CMBS delinquency rate will fall 4bp to 9.51% in June, rise to a near-term peak of about 10.4% three months from now, and then level off between 10.0% and 10.3% in fourth-quarter 2011 and first-half 2012.

Finally, S&P says: "We 'back-tested' the regression by only using the data through year-end 2010 (in other words, we removed the actual data from the first five months of 2011) to determine if the predictions for January 2011-May 2011 were close to the actual data points Trepp provided. With the exception of January [where the difference was 43bp] the regression model's forecast was relatively close to the actual delinquency data and came within 4bp in March."

Ratings

Greek performance still sliding

Greek ABS and RMBS market performance continued to deteriorate in April, according to Moody's latest index data. ABS SME transactions saw cumulative defaults rise from 1.73% to 2.98% in a year. Consumer loans rose even higher, from 3.86% to 7.45%.

RMBS 90-day plus delinquencies rose from 0.7% to 1.97% between April 2010 and April 2011. Cumulative defaults more than doubled in that time, from 0.4% to 0.84%. The agency notes rising arrears and defaults suffered by Estia Mortgages in the last few months go a long way to explaining this poor performance.

On 13 May, Moody's downgraded to Ba1 all Greek transactions serviced by Greek entities, reflecting the agency's ongoing concerns about the exposure to increasing country and operational risk. On 10 June it downgraded five ABS and eight RMBS transactions, following its Greek government debt rating downgrade earlier that same month.

Moody's outlook for Greek RMBS and ABS collateral remains negative. GDP is predicted to shrink 3.3% in 2011 as the nation's economy remains in recession. Unemployment is expected to rise to 13.2% this year and taxes are also expected to increase as the government seeks to reduce budget deficits, which will lower household borrowers' disposable income.

The index has included 11 RMBS transactions (nine outstanding), 13 ABS transactions (12 outstanding) and two credit card transactions (one outstanding) since Moody's launched it in 2004. The outstanding pool balance for the Greek RMBS transactions stood at €3.81bn as of April. The balance was €14.58bn for ABS. Year over year, rated transaction balances have reduced 49.7% for RMBS, 40.3% for ABS SME and 15.1% for consumer loan ABS.

Regulation

Rule establishes risk-based capital floor

The Federal Reserve Board, FDIC and Office of the Comptroller of the Currency have adopted a rule establishing a floor for the risk-based capital requirements applicable to large, international banking organisations. This is consistent with Section 171 of Dodd-Frank.

According to the requirements, a banking organisation must meet the higher of the minimum requirements for general risk-based capital rules and the advanced approaches risk-based capital rules. The rule also allows some flexibility to establish capital requirements for certain low-risk exposures which are generally not held by insured depository institutions but may be held by depository institution holding companies or non-bank financial companies.

Regulation

SEC provides swaps guidance

The US SEC has provided guidance on which Dodd-Frank Title VII requirements - establishing a framework for regulating OTC derivatives - will apply to security-based swap (SBS) transactions from the effective date of 16 July. It has also granted temporary relief to market participants from compliance with certain of these requirements, as had been expected (SCI 13 June).

Substantially all of Title VII's requirements applicable to SBS will not go into effect on 16 July. Temporary relief from compliance with most of the new Exchange Act requirements which would otherwise apply on 16 July has also been granted by the SEC.

"This is the first step in a series of actions the SEC intends to take in coming days to address effective date issues," says Robert Cook, director of the SEC's trading and markets division. He continues: "Temporarily and to the extent appropriate, our goal is to preserve the pre-Dodd-Frank Act legal framework until we complete the rulemaking tasks and develop a workable implementation plan."

Title VII authorises the SEC to regulate SBS and allows the CFTC to regulate other swaps. After proposing all of the key rules under Title VII, the SEC intends to consider seeking public comment on a detailed implementation plan that will permit a rollout of the new SBS requirements in an efficient manner while minimising unnecessary disruption and costs to the markets.

Although the guidance and temporary relief are now in effect, the commission is seeking input from the public on today's actions. Public comments should be received by 6 July 2011. The antifraud and anti-manipulation prohibitions of the federal securities laws will continue to apply to security-based swaps after July 16.

RMBS

Foreign appetite for agency MBS drops

The latest US Treasury International Capital (TIC) flows data indicates that overseas holdings of agency MBS dropped by US$3.5bn in April. Net purchases (excluding paydowns) were US$6.7bn and paydowns were US$10.2bn.

"The broad theme remains the same," say MBS analysts at Bank of America Merrill Lynch. "Overseas purchases of agency MBS are not keeping up with paydowns in their agency MBS portfolios."

They add: "Year-to-date, overseas holdings of agency MBS have declined by US$21bn. At this point, the expectation that overseas investors will reinvest all of their paydowns in agency MBS seems like a stretch."

Demand for agency debt and MBS from Asian countries such as Malaysia, South Korea and Taiwan did, however, pick up in April. The analysts note that demand was also seen from the Cayman Islands, whereas Japan's appetite was weak.

The UK's appetite for agency debt has also dropped. While March saw hedge funds opportunistically buying the securities following a spread widening attributed to the Japanese earthquake, the trend reversed once spreads tightened.

During the course of the last year, overseas demand for long term US assets has declined significantly. The drop in purchases is partially attributed to the Fed absorbing most of the net supply in the Treasury market through purchases under the QE2 programme.

RMBS

Second Walter deal prints

Walter Investment Management has closed its second privately placed RMBS of the year (SCI 1 June) - the US$102m WIMC 2011-1. The notes are backed by US residential mortgage loans, building and installment sale contracts, promissory notes, related mortgages and other security agreements.

The purpose of the offering is to raise capital to fund the firm's previously announced acquisition of Green Tree Credit Solutions. Mark O'Brien, Walter Investment's chairman and ceo, says: "As we near our anticipated early third-quarter completion of the acquisition of Green Tree, the securitisation of the unencumbered assets brings us one step closer to completing the few outstanding items required to conclude the transaction. We are quite pleased to have been able to monetise these assets at a fair price without having to sell them, which allows us to retain the valuable residual interest in the assets."