Contents

CDS

Documentation issues

Voluntary debt exchanges scrutinised

Greek CDS contracts appear unlikely to be triggered under current proposals for a Greek debt restructuring. Indeed, a proposal from a consortium of French banks put forward earlier this week specifically underlines the necessity of preventing a credit event on Greek CDS. However, events in Athens over the past few months have put the spotlight on credit event definitions and could provide a catalyst for a revaluation of standard market documents.

"Even though CDS credit event definitions are well established, they can't cover every conceivable scenario," says Assia Damianova, special counsel at Cadwalader, Wickersham & Taft. "Crises come in different shapes and forms, sometimes revealing scope for improvement of standard market documents. The evolving situation in to Greece may turn out to be one of those instances."

The restructuring of Greek debt and its implications for CDS has been a hot topic in recent weeks, despite its relatively small volume of outstanding contracts (see SCI 21 June). Analysts have played down fears that regulators would be able to restructure Greece's debt while avoiding a credit event, noting that a 'voluntary' restructuring would not trigger the contracts.

A proposal brought forward by a consortium of French banks earlier this week - in broad terms - calls for a 'voluntary roll-over' of Greek debt into new 30-year bonds. But in instances such as this, the word 'voluntary' may not be as clear-cut as it seems.

Damianova asks whether an exchange done because of coercive economic reasons can be said to be truly 'voluntary'. "If one looks at the economic substance of the exchange, one may argue that if a refinancing restructuring with an adverse credit effect has been achieved, it should be irrelevant whether it was carried through an exchange," she says.

"Restructuring has proved to be the most problematic of the credit events with its difficulties of defining what is adverse for bondholders and of interpreting the circumstances that led to the adverse effect," she continues. "For example, if debt is restructured through an exchange, one will have to consider whether the definition of restructuring is wide enough to capture an exchange, if on the facts all holders have the power to accept or decline the exchange offer and if the offer has been accepted and become 'binding on all holders'. One would also have to consider the issues both under the public law of the jurisdiction of the sovereign and the proper law of the debt obligation that has been restructured."

Damianova observes that documentation pertaining to credit events for sovereign CDS probably hasn't been evaluated through real life scenarios since the debt restructuring of Uruguay in 2003. "If market events show that restructuring doesn't capture the risk that market participants expect to be captured, then the industry may have to reconsider its standard documents," she suggests. "For example, one can consider adding terms to safeguard against the manipulation of an exchange offer in a way that formally avoids a 'restructuringr credit event, whilst substantively impacting the credit quality of the sovereign debt."

AC

RMBS

MERS challenged

Change in business model mooted

The recent ruling in the Bank of New York vs Stephen Silverberg case is the latest to call into question the effectiveness of Mortgage Electronic Registration Systems (MERS). However, any changes to the MERS business model are expected to increase further the cost and time-to-market of new issue RMBS.

Taken with a number of other recent foreclosure-related suits, the Silverberg case reflects the growing concern about MERS felt by the courts in New York, according to Crowell & Moring partner William O'Connor. "In other words, MERS doesn't comply with centuries-old real estate policies upheld in the state. Longstanding public policy holds that landowners should know the identity of the holder of the mortgage or lien on their land," he explains.

O'Connor adds: "MERS was set up to mimic the securities registration system but to hold mortgage titles. But it is essentially viewed by the states and territories as a way for MBS issuers to defer/avoid paying taxes and assignment fees."

In the Silverberg case, a New York appellate court ruled on 7 June that CWALT 2007-14T2 did not have standing to foreclose because MERS lacked the power to assign the mortgage loan to the trust. The trust did not produce the original mortgage note, as is standard practice, and instead relied solely on the assignment from MERS of a 'consolidation agreement' to support its standing to foreclose.

O'Connor suggests that, as more foreclosure-related cases come down, more holes in MERS will be found and eventually it will have to change its business model to survive - which will increase the cost and time-to-market of new issues. "Issuers will have to begin complying with state laws and record mortgages properly rather than in the name of a MERS entity," he says. "Sweeping legislative changes may be needed in order for current MERS to be effective. This is highly unlikely to happen on a federal basis. A more likely scenario is the state-by-state passage of the Uniform Commercial Code, pertaining to how security interests are perfected in property interests other than real estate."

While O'Connor believes that there is potential for an alternative to MERS to develop, any such undertaking would have to comply with each state's statutory scheme, which would take time and be subject to intense scrutiny. Differences between judicial and non-judicial states would make a single system even more challenging.

A number of residential loan servicers are nonetheless spending time fixing assignment and recording problems. "The concept of separating mortgages from notes runs afoul of New York law, where the mortgage should follow the note," observes O'Connor. "The upshot of the [Silverberg] case is that liquidation timelines will extend further and the way that MBS is structured in the future will have to change. The market will likely see the impact of this within 6-8 months."

If properly interpreted, the ruling is not expected to impede the vast majority of foreclosures where the RMBS trust does possess the note - albeit it may further encourage borrowers to challenge foreclosures involving MERS. However, Moody's outlined in a recent Weekly Credit Outlook publication that it is credit negative for US RMBS because of the risk that some New York lower courts may incorrectly base anti-MERS decisions on the opinion's broad wording and issue framing. Such a misinterpretation could result in courts striking down any assignment from MERS to the trust, even where the trust is the holder or already the proper assignee of the note.

CS

CLOs

Regulation tops CLO investor concerns

The results of JPMorgan's latest global CDO client survey indicate that the number-one concern among the 107 respondents is regulation - unsurprising, given that Dodd-Frank risk retention proposals may soon be finalised. Eurozone sovereign risk was relegated to second place, even though the Greek crisis erupted as the survey was underway.

Nevertheless, the majority (56%) of CLO investor respondents plan to add exposure to CLO debt, equity or both in coming months. The ratio of buyers to sellers fell slightly from 4.8/1 in the first quarter to 3.5/1, but it appears that respondents are positioning to be overweight the sector.

Most respondents who expect to buy primary US triple-A CLO debt have a spread hurdle of 100bp over Libor, while a number of respondents who were in the 'maybe' category are targeting 120bp-130bp over. JPMorgan CDO analysts agree with the 100bp target for year end, but observe that there may be demand at slightly wider spreads. For European primary triple-As, investor spread hurdles appear fairly diverse but are mostly well inside secondary levels.

In terms of CLO primary debt investments, respondents view manager record and tranche subordination as the top two considerations. Post-reinvestment restrictions are third, while yield and non-call period come fourth and fifth.

"We are a little surprised yield is only in fourth place, but this could mean respondents are willing to sacrifice a bit of return but are relatively 'sticky' in choosing managers and with respect to credit subordination levels," the analysts note.

CS

CLOs

Post-crisis CLO structures assessed

Despite limited issuance to date, post-crisis CLOs appear to be more conservatively-structured than their pre-crisis counterparts. They also feature additional underwriting clauses designed to avoid some of the pitfalls that beset the asset class during and shortly after the financial crisis.

According to Moody's latest CLO Interest publication, typical subordination levels for triple-A rated CLO tranches have increased from around 25% pre-crisis to at least 30% post-crisis (deals originated in 2010-2011). New deals also tend to prohibit cancelling notes by junior noteholders, thereby avoiding tripping OC tests that would otherwise divert cashflows from equity.

The OC measure used in the EOD test now often excludes par haircuts associated with Caa rated and deeply discounted assets, reducing the likelihood of EOD. This exclusion of par haircuts is credit positive for investors in junior CLO tranches, says Moody's, because it makes an EOD less likely - thereby reducing market value risk to junior noteholders when senior noeteholders have the option to liquidate collateral.

"Additionally, definitions of deeply discounted instruments are more likely to be index-linked than in the past, given that in the mid-crisis environment virtually all corporate debt was priced at a substantial discount," comments Moody's research analyst Jerry Gluck. "In a market in which all instruments are effectively selling at a discount, the CLO manager may not be able to reinvest, resulting in a CLO with a much shorter than expected life."

New deals reduce risk by limiting a manager's ability to enter into risky investments. For example, current transactions generally exclude investment baskets for structured finance and synthetic instruments that were permitted in pre-crisis deals. Instead, new CLOs typically require that 90% to 95% of assets take the form of first-lien senior secured loans.

"Although such limitations may not always appeal to managers, they provide comfort to investors by limiting investments almost exclusively to first-lien loans - an asset that has performed reasonably well, even during the crisis," says Gluck.

Reinvestment periods in new transactions are usually two to three years, compared to five to seven years in older CLOs. The shorter reinvestment period - which tends to reduce the weighted average life of the CLO - lessens the likelihood that market innovations will lead to unanticipated risks over the life of the transaction, says Moody's.

New deals additionally address the realities of the post-crisis loan market, including now-common amend-to-extend arrangements and the use of Libor floors in commercial loan agreements. "The former is partly a response to poor liquidity during the credit crisis: amend-to-extend agreements were easier to arrange than new loans or other forms of financing," says Gluck.

He adds: "Such arrangements can increase the weighted average life of the collateral, raising the potential for defaults and, perhaps, the possibility that long-dated assets will have to be sold at prices less than par value when the transaction matures. Libor floors are reflective of the low interest rate environment during and after the crisis."

Although Libor floors can increase interest income for a CLO, it is important not to overstate the impact of the floors when calculating the weighted average spread of the collateral. Moody's says its modelling assumptions have evolved to address the risks associated with these features.

Meanwhile, CLO market participants - investors, collateral managers and underwriters - are largely the same entities that participated in the sector prior to the crisis. At senior levels, Japanese, European and US banks remain significant investors.

For senior and mezzanine tranches, US and European insurance firms continue to show interest. Hedge funds remain the most significant class of junior tranche investors.

There has been considerable consolidation among CLO collateral managers, however (SCI passim), with roughly 108 entities today compared to 134 entities in early 2007.

AC

ABS

Raymond James settles ARS charges

The US SEC has charged Raymond James & Associates and Raymond James Financial Services for making inaccurate statements when selling auction rate securities (ARS) to customers. Raymond James agreed to settle the SEC's charges and provide its customers the opportunity to sell back to the firm any ARS that they bought prior to the collapse of the ARS market in February 2008.

According to the SEC's administrative order, some registered representatives and financial advisers at Raymond James told customers that ARS were safe, liquid alternatives to money market funds and other cash-like investments. Among other things, representatives at the firm did not provide customers with adequate and complete disclosures regarding the complexity and risks of ARS, including their dependence on successful auctions for liquidity.

The SEC's order against Raymond James finds that the firm wilfully violated Section 17(a)(2) of the Securities Act of 1933. The Commission censured Raymond James, ordered it to cease and desist from future violations and reserved the right to seek a financial penalty against the firm.

Without admitting or denying the SEC's allegations, Raymond James consented to the SEC's order and agreed to: offer to purchase eligible ARS from its eligible current and former customers; use its best efforts to provide liquidity solutions to customers who acted as institutional money managers who are not otherwise eligible customers; reimburse excess interest costs to eligible ARS customers who took out loans from Raymond James after 13 February 2008; compensate eligible customers who sold their ARS below par by paying the difference between par and the sale price of the ARS, plus reasonable interest; at the customer's election, participate in a special arbitration process with those eligible customers who claim additional damages; and establish a toll-free telephone assistance line and a public internet page to respond to questions concerning the terms of the settlement.

ABS

Broker beefs up in ABS

Laeken International says it plans to establish a structured finance strategy and analytics team. The firm is eyeing James Woodrow to lead the team, with Marius Grant, Glenn Morris and Shannon Kelly completing it. The team will provide the fixed income sales and trading department with analysis and support, focusing especially on mortgage- and other asset-backed securities products.

CDO

Key man clause triggered

A meeting of Faxtor ABS 2005-1 class C noteholders is to be held at Ashurst's offices on 22 July to consider and, if thought fit, pass an extraordinary resolution regarding key person provisions.

Among other things, the collateral manager - IMC Asset Management - is requesting consent to replace two key persons (Frans Wesseling and Jeroen Bakker) with existing employees named Egbert Bronsema and Misja Perquin. The collateral management agreement provides that, in the event both key persons cease to be employed by the collateral manager, it shall hire a suitably qualified professional with experience comparable to that of each key person within 60 days following the occurrence of such an event - provided that such replacement is acceptable to the trustee and class C noteholders and in respect of whom a rating agency confirmation has been received.

Perquin joined IMC Asset Management in 2004 as an ABS analyst. He is currently the portfolio manager responsible for principal investment decisions in ABS, RMBS and CMBS for a US$1.5bn vehicle of US and European ABS securities. He also has responsibility for principal investment decisions in ABS for the IMC US Mortgage Fund.

Bronsema joined the firm in 2005 as a structured finance analyst. He is currently involved in portfolio management, risk analysis and new investment opportunities for its European structured finance portfolios out of Amsterdam.

Bakker, meanwhile, has founded a new asset management and advisory shop - Cervus Capital Partners - with two ex-IMC colleagues Felix Berger and Neil Tjin. He was previously md, European ABS, at the firm.

CDO

CRE CDO manager swaps

C-III Asset Management is set to transfer collateral management responsibilities for the Nomura CRE CDO 2007-2 and AMAC CDO Funding I transactions to C-III Investment Management. Both firms are subsidiaries of C-III Capital Partners, and the key employees and technology infrastructure are expected to remain in place.

C-III Capital Partners currently employs 270 professionals and manages approximately US$2bn of invested capital for four real estate debt and equity funds and CDOs. Fitch has determined that C-III Investment Management meets its minimum guidelines to manage the affected CDOs within the context of its stated review procedure for replacement managers.

CDO

Structured credit pro joins advisory

Steven Hilfer has joined Navigant Economics as a senior advisor in the New York office. The firm says that as inquiries and disputes involving complex financial instruments continue to evolve, Hilfer offers Navigant clients specialised expertise in the sell-side perspective of the securitisation business with a particular focus on MBS, CLO/CDOs and ABS.

Hilfer had a 20‐year career at Credit Suisse, where he was md and head of the US ABS CDO banking and structuring team. While at Credit Suisse, he spent seven years originating, structuring and executing CLOs and more than 10 years leading teams and structuring various MBS. Post-Credit Suisse, he led a business development team creating mortgage products related to consumer credit data for Experian Capital Markets and was a structured product trader at Auriga Securities.

CDS

Law firm gains Washington presence

Allen & Overy has established a new office in Washington, DC, with the addition of three new partners to bolster its US regulatory practice, to help clients meet the challenges of a radically altered regulatory landscape in the country. The firm plans to steadily grow the office in strategic areas, including derivatives.

The three new partners - Barbara Stettner, Chris Salter and Charles Borden - were previously with O'Melveny & Myers in Washington, DC. It is expected that several lawyers from Allen & Overy's New York office will relocate to augment the Washington office, in addition to David Slade, who will be the managing partner of the new office.

Stettner has extensive experience representing and advising broker-dealers, banks, investment banks, investment advisers and other US and foreign financial institutions on domestic and cross-border regulatory and compliance obligations under the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, the Bank Secrecy Act and federal and state pay-to-play and placement agent regulations. Salter also has extensive experience advising financial institution clients - specifically broker-dealers, investment advisers, private equity funds and hedge funds - on compliance with the federal securities laws and regulations and on compliance with the rules of self-regulatory organisations.

Borden focuses on matters involving the intersection of law and public policy and has extensive experience representing and advising financial institution clients - including broker-dealers, investment advisers, private equity funds and real estate investment firms - on compliance with federal, state and local political law regulations.

CLOs

CLO manager replaced

Bankia has replaced Caja Madrid as lead investment manager on Neptuno CLO I, II and III. EuroDekania Management remains the junior investment manager for Neptuno CLO III. Bankia has expressly agreed to assume all of the investment manager's duties and obligations under the investment management agreement and each other transaction document to which the investment manager is a party.

RMBS

Countrywide servicing settlement reached

22 institutional investors represented by Gibbs & Bruns have announced a settlement with Bank of America and Countrywide regarding repurchase and mortgage servicing claims on 530 Countrywide-issued RMBS, for which BNY Mellon serves as the trustee. The settlement, which is subject to court approval, involves Bank of America and/or Countrywide paying US$8.5bn to settle the claims owned by these trusts.

The settlement also includes: implementation of servicing changes and improvements that are expected to improve outcomes for borrowers and investors; the filing by BNY Mellon as trustee of a proceeding seeking court approval of the settlement; and an agreement by the institutional investors to intervene in that proceeding and use their best efforts to obtain approval of the settlement.

Under the settlement, Bank of America has agreed to move the servicing of high-risk loans for troubled borrowers to qualified sub-servicing firms at its own expense. The agreement also clarifies loss mitigation standards, improves servicing for borrowers and investors alike, and benchmarks Bank of America's servicing performance to industry norms. The bank has committed to pay agreed-upon fees to the trusts involved, if these servicing standards are not met on loans it continues to service.

RMBS

Op risk vet recruited

Allonhill has recruited Jim Sadler as md of business process management and analytics. He is charged with developing custom analytics to measure and report the firm's performance and help establish a new client-facing implementation team.

Sadler brings more than 20 years of operational risk management, process management and financial modeling experience to Allonhill. Most recently, he served as director of risk and analytics at Teletech Loan Services.

RMBS

RMBS sales manager added

Tejas Securities Group has appointed Samir Shah as md and co-sales manager of structured products. The addition reinforces the firm's sales and trading activity in mortgage-related structured products.

Shah will be product manager for higher-grade RMBS and joins John Randolph - who leads efforts in ABS, distressed RMBS and other structured products - and Tim Martin, who specialises in subordinate CMBS, as a senior leader of the growing structured products group at Tejas. He was previously head of the ABS/MBS group at MF Global and before that spent 12 years in fixed income sales at firms including Amherst Securities Group and Cantor Fitzgerald.

ABS

Tobacco settlement bond closed

Grant Thornton's public finance practice has been selected by the Tobacco Settlement Financing Corp of the State of New York (TSFC) to serve as the structuring and refunding verification agent on its US$959.1m bond offering that will be used to refinance existing debt. The firm says it was selected by the TSFC for its specialised expertise in serving as the structuring agent or refunding verification agent on 23 major tobacco securitisation and related bond offerings.

The latest offering of series A and B asset-backed bonds, backed by tobacco-settlement revenues, are rated double-A minus by Fitch and S&P. Proceeds from the offering, which Barclays Capital arranged, will be used towards refinancing US$1.04bn in TSFC's series 2003A-1C and 2003B-1C asset-backed revenue bonds.

Tobacco bond securitizations are based on the 1998 Tobacco Master Settlement Agreement (MSA) between 46 state governments and the tobacco companies. The MSA required cigarette manufacturers to make US$206bn of payments over a 25-year period to state governments in order to cover tobacco-related healthcare expenses.

ABS

US auto ABS remains strong

Credit fundamentals for US auto ABS remain strong in spite of recent economic headwinds, according to Fitch. But the agency warns that performance may soon begin to level off.

Auto ABS losses declined to near record levels in May, while delinquencies remained relatively stable. However, performance gains for the year may be approaching a peak, according to Fitch director Brian Vorderbrueggen.

"Recent signs of weakness in the US economy and the seasonally strong spring, which has come and gone, point to auto ABS performance levelling off in the coming months," he says.

Tighter underwriting in the 2009 and 2010 vintages coupled with a vibrant used car market has also contained losses on auto loan ABS this year. However, "Used car prices are not likely to stay on an upward trajectory, meaning auto ABS loss performance will eventually move off of record lows and normalise as we move into summer," adds Vorderbrueggen.

Fitch's prime 60+ day delinquency index was virtually unchanged at 0.46% in May versus April, and was 9.8% stronger than in May 2010. Delinquencies improved by almost 10% from the same period last year, although the rate of improvement has slowed modestly from the prior months.

Annualised net losses (ANLs) improved by 13% to 0.46% in May, posting four straight monthly declines, which were driven by strong seasonal factors and vehicle recovery rates. This loss level was the lowest ever on record since Fitch's Prime Auto Loan ABS index was compiled in 1998.

Despite this, the pace of the month-over-month decline slowed compared to the 20%-25% drops seen in the prior two months. On an annual basis, ANLs were 47% lower in May versus 2010, in line with prior months.

In the subprime sector, 60+ day delinquencies reversed course after three consecutive monthly declines. Delinquencies jumped by 25% to 2.16% in May, but were still well below 2010 levels by 29%, following strong April levels. Conversely, ANLs continued to decline, falling to 3.79% or 16% lower over April and down by 16% from May 2010.

ABS

SIVs hit in Landesbank review

Moody's has placed under review for downgrade the ratings of notes issued by the Carrera Capital and Harrier Finance Funding SIVs. The ratings of the latter are also under review with direction uncertain. The actions follow the agency's review of German Landesbanken ratings.

Carrera Capital is managed and sponsored by HSH Nordbank. There is a direct linkage between the ratings of Carrera Capital and HSH Nordbank due to the commitment by HSH to support the senior debt obligations of the SIV through the note purchase and liquidity facility agreement, as well as through a committed repo facility. The current liabilities outstanding are limited to the repo and liquidity facility.

Moody's notes that the rating review is the result of the A3 senior debt rating of HSH Nordbank, as well as its prime-1 short-term rating, both being placed on review for possible downgrade on the 1 July.

Harrier is managed by Brightwater Capital Management, a wholly owned subsidiary of WestLB AG. There is a direct linkage between the ratings of Harrier and WestLB due to support by WestLB to provide funding necessary to repay any maturity senior liabilities.

This funding support is provided by WestLB's commitment to purchase any senior debt issued by Harrier for the purpose of repaying any maturing third-party held senior debt. Termination of such support is only to be triggered when there is no further debt outstanding that is held by a third-party investor.

The rating review is the result of the A3 long-term rating of WestLB being placed under review with direction uncertain, as well as its prime-1 short-term rating placed on review for possible downgrade on the 1 July.

CDO

ABS CDO liquidations scheduled

Dock Street Capital Management (DSCM) has been retained to act as liquidation agent for the Silver Marlin CDO I and Tazlina Funding CDO II transactions. Noteholders have been invited to bid on the collateral, which will be sold at four sales. Two Silver Marlin portfolios will be sold on 12 July and two Tazlina portfolios will be sold on 14 July.

CDS

Swaps granted temporary relief

The US SEC has provided additional guidance to clarify which US securities laws will apply to security-based swaps starting on 16 July, the effective date of Title VII of the Dodd-Frank Act. Under the Dodd-Frank Act, security-based swaps are defined as 'securities' subject to existing federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934.

The Commission has approved an order granting temporary relief and interpretive guidance to make clear that a substantial number of the requirements of the Exchange Act applicable to securities will not apply to security-based swaps when the revised definition of 'security' goes into effect on 16 July. Nevertheless, federal securities laws prohibiting fraud and manipulation will continue to apply to security-based swaps after that date. To enhance legal certainty for market participants, the Commission also provided temporary relief from provisions of US securities laws that allow the voiding of contracts made in violation of those laws.

"As we move forward with the implementation of the Dodd-Frank Act, this temporary relief will help maintain the existing legal framework for security-based swaps under the Exchange Act until the Commission adopts new rules for these transactions," comments Robert Cook, director of the SEC's division of trading and markets.

In addition, the Commission approved an interim final rule providing exemptions from the Securities Act, Trust Indenture Act and other provisions of the federal securities laws to allow certain security-based swaps to continue to trade and be cleared as they have pre-Dodd-Frank. That interim relief will extend until the Commission adopts rules further defining 'security-based swap' and 'eligible contract participant'.

CDS

European Parliament backs OTC reforms

Proposals to strengthen the OTC derivatives market and reduce speculative practices linked to short selling have received the backing of the European Parliament, ahead of negotiations with Member States.

The short selling proposal requires traders to settle their uncovered short positions by the end of each trading day and restricts purchases of CDS contracts to owners of related government bonds or stakes whose performance is dependent on these bonds. MEPs also inserted a requirement that short sale transactions be reported less often. However, they enhanced the rules to ensure that fines are dissuasive.

A proposal on OTC derivatives, central counterparties (CCPs) and trade repositories, meanwhile, aims to bring greater safety, transparency and stability to the market. Information on OTC derivative contracts would have to be reported to trade repositories and be accessible to supervisory authorities under the proposal.

OTC derivative contracts would also need to be cleared through CCPs, with the aim of reducing counterparty credit risk. In addition, a key supervisory role is envisaged for the new European Securities and Markets Authority (ESMA).

CDS

Restructuring credit event called

ISDA's EMEA Determinations Committee has ruled that a restructuring credit event occurred with respect to Irish Life & Permanent on 1 July. It remains to be decided whether an auction will be held to settle credit derivatives trades in the name.

CDS

Q2 CDS performance reviewed

Greece remains the most risky sovereign debt, with the worst performance during 2Q11, according to CMA's latest sovereign credit risk report. Greek CDS spreads peaked on 27 June - one day before the austerity measures set by the EU and IMF were approved by the Greek parliament.

Spreads rallied following the decisive vote, but remain high with five-year probability of restructuring at 80% and the markets expecting it to take around two years for the austerity measures to drive down the cost of borrowing. Although the media remain firmly focused on the debt crisis in southern European countries, the CMA report finds that only three of the ten most risky sovereign debts are in that region.

Northern Europe continues to dominate the least risky sovereign debt rankings, taking the top six places. Germany jumps from ninth to fifth place, as the strength of the economy outweighs worries about exposure to Greece, Portugal and Ireland. Norway, Sweden and Finland remain ranked one to three respectively.

Interestingly, the five best performers in Q1 were all Western European countries. But Q2 also includes four from the Middle East, led by Bahrain, reflecting improved stability in the region by the end of the June.

CDS

Associations warn on extra-territoriality

Eight global and regional trade associations have called on regulators to intensify cooperation to prevent, alleviate or limit the harmful effect of overlap, inconsistency and ambiguity resulting from extra-territoriality in regulatory efforts to implement G20 commitments. Extra-territoriality is a fundamental concern in derivatives business, where it is common for counterparties based in different parts of the world to transact with each other.

The associations urge policymakers to consult with each other in formation of legislation and to resolve differences in the course of implementation of legislation. They further ask regulators to ensure that reform of the international financial regulatory system is based on consistency of approach and on mutual recognition.

Harmful effects of a failure to address this concern, cited by the associations, include: a more fragmented view of financial market activity making it difficult for regulators to prevent build-up and concentration of systemic risk; and legal uncertainty for internationally-active firms, giving rise to further risk. Examples of extra-territoriality concerns comprise: licensing, authorisation or registration rules; potential overlap and conflict in regulation of derivatives market participants in foreign jurisdictions; rules for CCPs; and trade repositories.

The eight associations signing the letter are: AIMA, European Banking Association, FOA, Global Financial Markets Association, Investment Management Association, ISDA, London Energy Brokers' Association and WMBA.

CDS

'End-to-end' CDS index trade executed

Goldman Sachs and BlackRock have completed a CDX investment grade index trade that was executed electronically and centrally cleared. The firms say this CDS trade is significant in that it demonstrates end-to-end integration across swap execution, affirmation and clearing.

The transaction was executed via the Tradeweb platform and centrally cleared through CME Group, with Goldman Sachs as the clearing agent. "This trade is another milestone toward helping our clients prepare for implementation of Dodd-Frank requirements," comments Jack McCabe, co-head of futures and derivative clearing services at Goldman Sachs.

CDS

Swap business conduct rules proposed

The US SEC is to propose rules that would impose certain business conduct standards upon security-based swap dealers and major security-based swap participants when those parties engage in security-based swap transactions. The move is the latest step in the implementation of Title VII of the Dodd-Frank Act.

"The rules we are proposing would level the playing field in the security-based swap market by bringing needed transparency to this market and by seeking to ensure that customers in these transactions are treated fairly," comments SEC chairman Mary Schapiro. "The standards we propose are intended to establish a framework that protects investors and also promotes efficiency, competition and capital formation."

The proposed rules would require security-based swap dealers and major security-based swap participants to communicate in a fair and balanced manner and make certain disclosures, including conflicts of interest and material incentives to potential counterparties. Additional requirements would be imposed for dealings with special entities, which include municipalities, pension plans, endowments and similar entities.

Public comments on the SEC's proposal should be received by 29 August.

CDS

AIB auction results in

The final prices for the Allied Irish Banks CDS senior and subordinated auctions, held yesterday, were determined to be 70.125 and 10.375 respectively. 14 dealers submitted inside markets, physical settlement requests and limit orders to the auction administered by Creditex and Markit to settle trades across the market. The Allied Irish Banks deliverable obligations are denominated in euros, Swiss francs, sterling and US dollars.

Separately, an auction to settle the credit derivative trades for Panrico S.L. Unipersonal LCDS is to be held on an as yet undetermined date.

CMBS

CMBS maturity repayment index rises

Fitch says in its latest European CMBS bulletin that full and partial prepayments caused its European CMBS Maturity Repayment Index to increase during June to 40.4% from 38.3%. These repayments also reduced the outstanding matured loan balance by 3.4% to €6.99bn.

Overall, 65 of the 154 loans that have matured since 2007 have been fully repaid. No loans matured in June.

Fitch highlights the sale of the Leadenhall Triangle, the collateral for the AMG loan securitised in Windermere VIII, which was completed on 16 June. The loan had failed to repay at its scheduled maturity in April 2010 and was subsequently transferred to special servicing.

"The full redemption has occurred despite the reported whole loan-to-value ratio of 123% at the last interest payment date (IPD). The loan accounted for 38% of the pool balance at the April 2011 IPD; proceeds will be allocated sequentially to the notes at the next IPD," Fitch says.

The agency also notes that a loss was realised on the Halton Lea loan (securitised in European Prime Real Estate No. 1) following the sale of its collateral, representing 13% of the A-note balance and 34% of the whole loan balance. "The loan had been in special servicing since July 2008 due to a projected interest coverage ratio breach; the special servicer subsequently appointed receivers in September 2009 that were involved in the management and, ultimately, sale of the asset," Fitch explains.

CMBS

European CMBS loan defaults to rise

Six more CMBS loans breached payment or other obligations in May, according to S&P's June European CMBS monthly bulletin. Servicers also reported that that they transferred eight more loans to special servicing in the same period and another five loans in June.

"Twenty-five loans are scheduled to mature in July and, based on recent performance, we anticipate that the tally of defaulted loans will rise," says S&P credit analyst Judith O'Driscoll.

RMBS

Distressed MBS fund launched

UCM Partners has launched the UCM MIDAS Fund, with US$10m in assets under management. The fund is designed to capitalise on relative value opportunities in the RMBS and other securitised debt markets, including CMBS and ABS. Its target return is currently 25%-35%.

The fund is managed by UCM Partners cio Jay Menozzi and portfolio managers Boris Peresechensky and Vesta Marks. The management team employs an investment process based on UCM Partners' proprietary analytical models developed to capitalise on undervalued cashflows of securities at the top of the capital structure within the RMBS market.

The resulting fund portfolio is intended to maximise total return while limiting downside risk and preserving investor capital. The fund also seeks to enhance returns through exploiting periods of market illiquidity and pricing anomalies to capture opportunities within distressed sectors and among mispriced securities.

RMBS

Some Countrywide RMBS to see ratings uplift

Fitch expects Bank of America's recently announced settlement of mortgage repurchase and servicing claims (SCI 29 June) to positively affect the ratings of approximately 10% of Fitch-rated US RMBS bonds in the affected legacy Countrywide trusts. In addition, payouts from the settlement in the short term and improved servicing practices over the longer term are likely to further improve recovery prospects for a larger portion of bonds. This could lead to more pronounced upgrades of the agency's recovery ratings (RRs) on those tranches.

"Virtually all credit ratings on Countrywide-issued Alt-A and subprime bonds are already at or near default levels, so BofA's settlement is unlikely to lead to significant upgrades," says Grant Bailey, head of Fitch's RMBS surveillance group. "On the other hand, current and future recovery prospects for these bonds certainly improve due to expected settlement payouts and mandated servicing improvements."

The announced settlement also likely establishes the framework for how other legacy RMBS issuers will ultimately settle portions of their representation and warranty related litigation. "If other RMBS issuers follow BofA's settlement framework, their bonds are also likely to see only modest credit rating upgrades, while bondholders should experience greater near- and long-term recovery levels," adds Fitch group md Kevin Duignan.

The settlement, which is pending court approval, includes changes to servicing practices and an US$8.5bn payment to Bank of New York Mellon, as trustee, for 530 legacy Countrywide RMBS trusts. According to Fitch's analysis, the settlement represents approximately 5% of the outstanding balance of the affected transactions. Payouts will be allocated according to each trust's expected share of total lifetime losses, as determined by a third party.

Fitch believes that the amounts ultimately allocated to the trusts will be insufficient to have an across-the-board positive impact on ratings, but for approximately 10% of the Fitch-rated bonds upgrades of a category or more are possible. While the worst performing of BofA's subprime, option ARM and Alt-A deals will see the largest payouts, the potential upgrades span the spectrum of both the prime and non-prime products.

RMBS

US RMBS criteria updated

Fitch has updated three criteria reports designed to better gauge credit risk on new issue US RMBS transactions. The agency confirms that originator reviews, loan-level due diligence results and the quality of representations and warranties to a transaction are key elements of its analytical process.

Each of these factors accounts for key risks that are not always apparent in the original collateral pool characteristics. As such, Fitch's evaluation of these risks may drive a positive or negative qualitative adjustment to a RMBS transaction's credit enhancement. Alternatively, the agency may determine that a rating cap is appropriate or may decline to rate the transaction.

As per its updated originator review report, Fitch will conduct detailed originator reviews on origination platforms of direct lenders or aggregators of mortgage collateral that participate in RMBS transactions that it is asked to rate. In conjunction with its origination review criteria, the agency expects that loan-level reviews will be performed by independent due diligence companies on all residential mortgage pools that Fitch is asked to rate. This allows the agency to consider whether loans have been originated in a manner consistent with the lender's underwriting guidelines and governing regulations and laws.

As per its amended representation and warranty criteria, Fitch outlines the loan-level reps and warranties and enforcement mechanisms it expects to be in included in RMBS transactions. These reps and warranties provide sufficient assurances about the integrity of the underlying mortgage pool and accountability.

More granular originator assessments, loan-level diligence and representations and warranties will improve the ability to assess credit risk in new RMBS transactions, the agency says. These amended criteria, in conjunction with its new US RMBS Prime Loss Model, will be important considerations in its analysis.