Contents

CMBS

New CMBS deals price wide

Last week was an eventful one for US CMBS: although secondary trading was subdued, two new deals priced. Both transactions printed wider than had been expected, showing that the market has moved a long way from earlier in the year when triple-A spreads were pricing close to 100bp.

"The two deals that priced last week each priced quite wide," confirms one trader. "The first one priced on Thursday. It was a US$1.5bn deal from Wells Fargo and RBS and it came at about 20bp-25bp wider than price guidance when they started marketing the deal."

The transaction - WFRBS CMT 2011-C4 - eventually priced at 170bp over swaps, which is wider than any CMBS 2.0 deal that has come to market. The trader notes that the triple-B minus bonds priced at 575bp over swaps, which was a whole 125bp wider than the price guidance.

"On Friday came the second deal; this time from Goldman and Citi. It was also sized at US$1.5bn, but there were a lot of issues with it that had to be worked through. The credit enhancement was initially very low - for example, the triple-As only had credit enhancement of 14.5% and the triple-Bs only had 3.75% credit enhancement," notes the trader.

Most recent CMBS have had 17%-plus credit enhancement for triple-As and at least 5% for triple-Bs, so levels in the Goldman/Citi deal seemed conspicuously low. By contrast, the Wells/RBS deal had 16.9% credit enhancement for its triple-As.

"Investors were very concerned about the low credit enhancement. In fact, Goldman and Citi had to restructure the deal to split the triple-A tranche into senior triple-As and junior triple-As. In the end, the senior triple-As had 20% credit enhancement and the juniors 14.5%," says the trader.

The senior triple-A notes of this second transaction - GS Mortgage Securities Trust 2011-GC4 - priced at 175bp over swaps and the junior triple-A notes came at 230bp over. Meanwhile, the trader notes that the triple-Bs priced "more like a double-B tranche" at 700bp.

The trader adds that two other CMBS are currently marketing, both of which finance Blackstone portfolios. One is arranged by JPMorgan (City Center Trust 2011-CCHP) and the other is arranged by Wells Fargo and Deutsche Bank (WFDB CMT 2011-BXR).

"The US$425m JPMorgan deal is backed by a city centre hotel portfolio and is notable for being floating rate. Price guidance for the triple-A tranche is 225bp over Libor," he says.

The other transaction is sized at US$1bn, but does not have price guidance yet.

JL

RMBS

Lights in the dark for Euro RMBS

Nervousness in the European RMBS market has caused spread widening, as participants wait to see how issues in the Eurozone work out and whether they may lead to new problems for the banking sector. However, despite those concerns, UK and Dutch RMBS continue to give encouragement.

"We have not been too busy this week," explains one European trader. "General sentiment has turned a bit nervous, but that is noticeable in all markets, so RMBS is not an exception. Spreads have moved somewhat wider, but there is a definite difference between the southern regions on one hand and UK and Dutch RMBS on the other."

While bids on UK and Dutch RMBS have retracted slightly, the trader stresses that the situation isn't resulting in emergency selling. "There is no panic. It is still hard to get your hands on good bonds, especially if you are looking for seasoned Dutch RMBS, because there is not much offer out there," the trader says.

He continues: "The bids are somewhat lower, but if you are looking for bonds, you still have to pay up, so there is hardly any activity there. If you are looking to sell bonds, there are bids; it is not like after Lehman's collapse, where the market became totally empty."

The trader contrasts the current situation to previous times of stress in the market and says that what is being seen now is nowhere near as bad. If the situation does deteriorate, then he is confident that central banks will step in to provide liquidity to support the market.

He says: "I do not think we are going to see institutions coming into liquidity stress like we have done before, for example. This is different to a few years ago; the market is nervous, but it is not blowing out by 40bp."

Finally, while the southern regions have struggled, upcoming new issuance from the UK is encouraging. The trader says: "Some primary Italian transactions have been retracted, but on the other hand we also see Arkle prime UK RMBS being launched, so that is a lot more positive for the market."

He adds: "Southern Europe is the same as it has been for a couple of months. Investors were already cautious and only people really looking for yield were tempted to go there. At the moment, it is difficult to do something in Spanish or Greek RMBS and the only activity you really see there is people trying to get rid of positions."

JL

ABS

Business development head hired

Luis Acosta has joined Ally Commercial Finance as senior md, reporting to George Triebenbacher, president of structured finance. Acosta has more than 25 years of debt-investing experience, principally engaged in middle market sponsor finance. He has held various business development, transaction execution and leadership roles, working extensively with private equity firms and intermediaries.

Previously, Acosta was head of business development for the capital solutions group at PineBridge Investments. He also served as co-head of sponsor finance at Silver Point Capital.

ABS

Asset-based lender expands

Capital Business Credit has recruited Peter Provenzale as senior business development officer and svp, focusing on middle market borrowers. He is tasked with expanding the firm's asset-based lending division, working directly with president and ceo Marc Adelson and executive chairman Andrew Tananbaum.

Provenzale spent nearly 25 years at CIT in various capacities, including credit and marketing manager positions in both the asset-based and factoring divisions. He later served as the northeast marketing manager for Fleet Capital before moving to Wachovia/Congress, where he served as a business development officer, with a focus on turnaround companies and exit financing.

ABS

SunTrust fined over ARS violations

FINRA has fined SunTrust Robinson Humphrey and SunTrust Investment Services, for violations related to the sale of auction rate securities (ARS). SunTrust RH - which underwrote the ARS - was fined US$4.6m for failing to adequately disclose the increased risk that auctions could fail, sharing material non-public information, using sales material that did not adequately disclose the risks associated with ARS and having inadequate supervisory procedures and training concerning the sales and marketing of ARS. SunTrust IS was fined US$400,000 for having deficient ARS sales material, procedures and training.

FINRA found that beginning in late summer 2007, SunTrust RH became aware of stresses in the ARS market that raised the risk that auctions might fail. At the same time, SunTrust RH was told by its parent SunTrust Bank to reduce its use of the bank's capital and began to examine whether it had the financial capability in the event of a major market disruption to support all ARS in which it acted as the sole or lead broker-dealer. As these stresses increased, the firm failed to adequately disclose the increased risk to its sales representatives while encouraging them to sell SunTrust RH-led ARS issues in order to reduce the firm's inventory.

As a result, certain SunTrust RH sales representatives continued to sell these ARS as safe and liquid. In February 2008, SunTrust RH stopped supporting ARS auctions, knowing that those auctions would fail and the ARS would become illiquid.

Additionally, FINRA found that on 13 February 2008, SunTrust RH shared material non-public information regarding the potential refinancing of certain ARS issues with SunTrust Bank, which was contemplating investing in ARS. This information was material because SunTrust Bank was assured that if the auction market froze, it would likely be able to dispose of the illiquid ARS on the date the ARS was refinanced.

In addition, both SunTrust RH and SunTrust IS used advertising and marketing materials that were not fair and balanced, and did not provide a sound basis for evaluating all the facts about purchasing ARS. Both firms also failed to maintain adequate supervisory procedures and training concerning their sales and marketing of ARS.

This action concludes the agreements in principle with FINRA that were previously announced in September 2008 and withdrawn in May 2009. SunTrust RH and SunTrust IS voluntarily repurchased approximately US$381m and US$262m of ARS respectively from their customers after FINRA began its investigation. In addition, as part of the settlements, the firms will participate in a special FINRA-administered arbitration programme for eligible investors to resolve claims for consequential damages.

In concluding these settlements, the firms neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

CDO

Global head named in structured credit push

Natixis CIB Americas has promoted Kevin Alexander to head of global structured credit and conduits. He is already familiar with the structured credit and conduits group (SCCG) as he was previously SCCG head of CDO syndicate trading and hybrid structured products, focusing on marketing and trading structured finance products.

Alexander is an md at the bank and has spent 12 of his 14 years in the industry at Natixis. He was most recently head of US structured credit for its Gestion Active des Portefeuilles Cantonnés (GAPC) unit, where he led portfolio management and strategy for all US dollar-denominated structured finance products.

Yann Gindre, ceo of Natixis CIB Americas, comments: "Natixis is committed to the development of its structured credit business and has a large and well established team in this area. Kevin, with his background in SCCG and strong track record, is an ideal appointment to head the group."

CDO

ABS CDO reassigned

Fixed Income Discount Advisory Company (FIDAC) is set to assign its collateral management responsibilities for HARP High Grade CDO I to Cutwater Investor Services Corp. The new management agreement contains substantially the same terms as the existing management agreement, according to Moody's.

The agency notes that the execution of an amended and restated collateral management agreement will not result in the withdrawal, reduction or other adverse action with respect to its ratings on the transaction. In assessing the credit impact of the appointment of Cutwater, it assessed the history of Cutwater's collateral management of transactions comparable to the issuer, the adequacy of its systems for managing the transaction and the level of active management required for this transaction, which is no longer actively reinvesting collateral debt securities.

CDS

Market data pro hired

BGC Partners has recruited Mark Benfield as executive md and director of BGC Market Data. Benfield, who will be based in the company's Asia-Pacific region, will have global responsibility for BGC Market Data and report to Shaun Lynn, president of BGC Partners.

Benfield was previously regional md for ICAP Information Services in the Asia-Pacific region. He takes over from Bernie Weinstein, who will continue to oversee Kleos, BGC's technology infrastructure and system operations hosting service, and will also be responsible for the company's intellectual property business.

CDS

Partnership programme enhanced

Sapient Global Markets has joined the Murex partnership programme to provide professional services to clients of both organisations. Sapient says it will draw on its experience developing and delivering business and technology services for companies operating in the financial markets. Its expertise implementing complex risk applications, combined with Murex's platform, will enhance joint clients' cross-asset class risk management capabilities.

CLOs

GSC transfer confirmed

An investor notice for the GSC European CDO I-R, II and V transactions confirms that the sale of GSC Group assets to Black Diamond Capital Management is to take place by 25 July, unless the parties agree to defer it to a later date. Completion of the sale will constitute an assignment of the rights of the collateral manager to Black Diamond, including the rights of the collateral manager under the collateral management agreement and the related transaction documents. The move follows a sale hearing, which took place on 6 and 7 July at the Bankruptcy Court for the Southern District of New York (SCI 13 July).

CLOs

Fund sub-advisory agreement ended

Invesco Advisers has announced that it is to assume sole responsibility for managing the Invesco Van Kampen Dynamic Credit Opportunities Fund and will terminate its sub-advisory agreement with Avenue Europe International Management on 19 September. However, there will be no change in the management fee that the fund pays to Invesco.

In its role as sub-adviser to the fund, Avenue has been responsible primarily for managing the portion of the fund's portfolio allocated to European assets (accounting for US$380m of assets within a US$1.2bn portfolio). Avenue issued its own statement on the move, noting that its portion of the portfolio has outperformed the portion of the portfolio managed by Invesco and its predecessor from inception to date. Furthermore, Avenue says that the portion of the portfolio it manages has outperformed both the relevant high yield and leveraged loan indices from inception to date.

The firm adds that it is disappointed that Invesco has terminated the sub-advisory agreement and that, as fundamental bottoms-up credit investors, it believes it is uniquely positioned to take advantage of complicated credit investment situations on behalf of the fund's shareholders. Invesco, for its part, says it has extensive experience in European credit markets, including dedicated investment professionals in London who will support the fund's portfolio management team.

CLOs

Key-man vote adjourned

The meeting of Faxtor ABS 2005-1 class C noteholders on 22 July to vote on key-man provisions (SCI 5 July) was adjourned through lack of a quorum. An adjourned meeting will now be held at the offices of Ashurst on 5 August.

IMC Asset Management, the transaction manager, is seeking to designate two new key persons - Egbert Bronsema and Misja Perquin - to replace Frans Wesseling and Jeroen Bakker. The quorum required at the adjourned meeting is two or more class C noteholders representing any proportion of the aggregate principal amount of the class C notes outstanding.

CLOs

Consent received for GSC assignment

All consents required for GSC Partners Gemini Fund, GSC Partners CDO Fund II and GSC Partners CDO Fund IV to enter into assignment agreements have been either received or deemed. Collateral management responsibilities for the transactions will now be transferred from GSCP to GSC Acquisition Holdings, an affiliate of Black Diamond Capital Management.

Black Diamond has agreed to become a party to, to be bound by and to comply with the provisions of the management agreements from and after the assignment effectiveness date. Each management agreement will be left unchanged by the assignment, except for certain limited changes in the manager's representations.

Moody's has determined that the assignment will not result in the reduction or withdrawal of its current ratings on the notes.

CMBS

Loan servicer coo replaced

LNR Partners Europe has appointed Matthias Schlueter as its new coo and md. Schlueter, who has 10 years of experience in the commercial real estate and CMBS special servicing industry, will take over the role from outgoing coo Mark Miller. Miller, in turn, has accepted a senior position in the firm's US special servicing business.

Schlueter will be responsible for overseeing the firm's pan-European operations and helping to grow its loan and asset services platform across Europe. He spent the last six years in various senior roles at LNR Partners' US special servicing platform. Prior to this, he worked as a lawyer in various roles in the German commercial real estate market.

CMBS

Imperial Capital hires in structured finance

Todd Fasanella has joined Imperial Capital as an md located in its New York office. He will focus on investment banking for the financial services and real estate, lodging and leisure sectors and will also expand Imperial's capabilities by pursuing structured and project financing transactions for the firm's investment banking and institutional sales & trading clients.

Fasanella has over 15 years of commercial real estate, investment banking and asset finance experience during the years he worked at The Prudential Realty Group, Credit Suisse and Barclays Capital, where he most recently lead investment banking coverage for the vacation timeshare, lodging and real estate industries. His transactions have included structuring and executing asset backed securities, investment grade debt, high yield and equity offerings, leveraged loans, private placements and development loans as well as advising on mergers & acquisitions, joint ventures and restructurings.

CMBS

Real estate practice bolstered

Jodi Schwimmer has joined Dechert's finance and real estate practice as counsel in New York. She was most recently an associate at Cadwalader, Wickersham & Taft.

Schwimmer focuses her practice on CMBS, real estate finance and structured finance, representing clients in non-performing real estate debt obligations, structured products, the purchase and sale of commercial and multifamily mortgage loans, mezzanine debt, subordinate debt and structured real estate debt instruments. She also focuses on federal securities laws issues relevant to these types of securitisations.

RMBS

Asset manager adds in research

Deer Park Road Corp has hired Hao Li as research analyst to strengthen its portfolio management team as the firm's assets continue to grow. Li will focus on risk management and analytics, supporting portfolio managers Michael Craig-Scheckman and Scott Burg.

Prior to joining Deer Park, Li was at JPMorgan, where he worked on a US$1bn non-agency MBS portfolio and a US$3bn consumer ABS portfolio. Before that, he was at Millennium Partners, responsible for researching and trading non-agency RMBS securities, as well as financial modelling and property valuation.

The addition of Li closely follows the hire of Amy Charity, who joined Deer Park as investor relations manager in early June. She previously spent over nine years at Capital One in client service, marketing and regulatory/compliance positions.

RMBS

TARP cio joins REIT

David Miller has joined Pine River Capital Management as an md, responsible for business development and strategic initiatives for Two Harbors Investment Corp. Miller most recently served as cio for the Office of Financial Stability at the US Department of Treasury, where he was responsible for managing the investment portfolio for the US$700bn TARP.

Prior to joining the US Department of Treasury in 2008, Miller managed equity investments for HBK Capital Management, a multi-strategy hedge fund. From 1998 through 2007, he held various positions at Goldman Sachs, including vp, special situations group.

RMBS

Freddie Mac vet turns advisor

The Collingwood Group has retained Manoj Singh as a special advisor, to help its clients navigate the business opportunities that exist in Washington as a result of the housing crisis. Most recently, he was svp of pricing and securitisation (single family) and, before that, svp, head of market risk management for Freddie Mac. Prior to joining Freddie Mac, Singh held executive-level positions with Bear Stearns, Lehman Brothers and Wasserstein Perella Capital Management.

RMBS

MBS consultancy absorbed

Berliner Consulting & Research has been absorbed into Manhattan Advisory Services, a subsidiary of Manhattan Capital Markets. The firm will continue to focus on the mortgage and MBS markets, including on originator hedging and support, security valuation and investment selection and management.

It was formed in September 2008 by William Berliner, who previously ran Countrywide's trade strategies group. He began his career in the government operations department at Bear Stearns, subsequently moving to Nikko Securities, Prebon Yamane and the New York State Banking Department.

ABS

EM existing asset criteria updated

Fitch has updated its criteria for existing asset securitisation in emerging markets in relation to sovereign constraints. The analytical approach is unchanged, but certain clarifications and refinements have been introduced.

The agency notes that securitisation transactions originated in emerging market economies are affected by the macroeconomic, political and legal environment of that country. The volatility of the local economy can have a significant effect on the collateral performance, it adds. Fitch addresses the country risk through the sovereign rating and the country ceiling, which will provide an implicit cap to the maximum note rating achievable for a securitisation from an emerging market country.

ABS

Securitisation race heats up

At the halfway point of 2011, with close to US$140bn of qualifying deals counted, the race is heating up for top place in the SCI US league tables for bank arrangers in the structured credit and ABS markets. Demonstrating how quickly the situation can change, May's sixth-placed firm has jumped to third this month. Europe, on the other hand, remains less volatile with JPMorgan maintaining its substantial lead - albeit on the back of lower market volumes, totalling €58.5bn year-to-date.

Last month's top-two in the US league table are unchanged, but after a very busy June completing 10 deals Bank of America Merrill Lynch has leapt from sixth to third place. BAML's June statistics clearly show that an end-of-year top-three spot is open to anyone in the top 10 and beyond.

In Europe, JPMorgan continues to lead the table, having been involved in over €20bn worth of deals. In second place with an unchanged on the month €14.3bn is RBS. However, third placed BNP Paribas has moved considerably closer with a total of €13.89bn deals.

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

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

The tables for the year to end of June 2011 are published here.

ABS

Q2 issuance tops Y1trn in Japan

S&P reports that it has assigned ratings to Japanese securitisation transactions worth ¥1.1trn in the second quarter of 2011, representing a 134% increase on the same quarter of 2010. In contrast, the number of securitisation transactions rated by S&P in the same quarter declined by 44% year-on-year to 10. The total issuance amount of rated securitisations exceeded ¥1trn for the first time since 3Q08.

The surge in the total amount of rated issuance in 2Q11 can be primarily attributed to large issuances of regular monthly RMBS notes by Japan Housing Financing Agency, as well as refinancing of ABS transactions backed by consumer loans. JHF's Series 48 monthly notes issued in May had the largest-ever issuance amount among RMBS notes issued by the agency of over ¥500bn.

There were no new rated issuances in the CMBS and CDO segments during the second quarter, however.

ABS

Unusual wind bond marketing

Natixis is marketing a new euro-denominated two-tranche catastrophe bond - Pylon II Capital. The €65m class A notes and the €85m class Bs have been given preliminary ratings by S&P of single-B plus and single-B minus respectively.

Pylon II covers European windstorms in France, excluding Corsica and overseas territories, over five full wind seasons. The deal provides cover against losses suffered between the day after closing and 30 April 2016 to Natixis and to the ultimate sponsor of the transaction Électricité Réseau Distribution France (ERDF).

The class A note has a "drop-down" feature: if class B suffers a partial or total loss of principal, the class A notes' attachment and exhaustion points will be lowered to ensure that there is no gap in the cover.

ABS

Counterparty criteria impact tallied

S&P has estimated the final rating effect of the introduction of its counterparty criteria, following the transition date of 18 July. The impact was greatest on EMEA structured finance transactions.

"In all, we lowered about 13% of outstanding EMEA structured finance ratings - in about 16% of transactions - related to the 2010 counterparty criteria, by an average of 2.9 notches. Most of the downgrades occurred on tranches that we had previously rated in the triple-A or double-A rating categories, and CMBS and RMBS were the asset classes most widely affected [SCI 19 July]," says S&P credit analyst Andrew South.

He adds: "In fact, there was significant variation in the rating effect between different asset classes. For example, structured credit and asset-backed securities remained relatively unaffected, with only 3% and 5% of outstanding ratings lowered respectively. But in each of CMBS and RMBS, we lowered about 25% of ratings."

S&P notes that rating withdrawals were in some cases at the request of transaction sponsors, often where it was likely that application of the updated criteria would lead to a downgrade. In these cases, we generally re-analysed the transactions according to our criteria prior to withdrawing our ratings, lowering the ratings if appropriate, before then withdrawing them shortly afterwards.

Additionally, as of 18 July, the agency had only downgraded 10% of the tranches where sponsors had put forward an action plan. This suggests that sponsors had acted upon most of the actions plans submitted, therefore mitigating the prospective rating effect.

The effect of the criteria on ratings in the Asia Pacific and the US has been limited by comparison to EMEA. "In Asia Pacific, sponsors generally demonstrated widespread support for affected transactions by implementing changes to counterparty agreements in order to mitigate any potential ratings effect," South notes. "US transactions generally involve fewer interest rate and FX swaps than in Europe. In addition, the use of servicer advances in US transactions, compared with wider use of liquidity facilities in Europe, led to a lower rating impact."

ABS

RFC issued on updated Reg AB

The US SEC is re-proposing for public comment some rules regarding ABS shelf registration under Regulation AB, with the aim of achieving greater issuer accountability. The Commission initially proposed the rules in April 2010 (SCI passim), but the Dodd-Frank Act addressed some of the same concerns and it has since re-evaluated its original proposals.

"It is very important that we move forward with our new registration and reporting rules for the asset-backed securities market, but we also want to make sure we get it right," says SEC chairman Mary Schapiro. "This re-proposal will help us solicit the input and constructive comments we need to finalise this critically important project to protect investors in asset-backed securities."

The conditions required for shelf eligibility that the SEC is now proposing are: certification of the accuracy of the disclosure; reps and warranties that include dispute resolution procedures; and investor communication provisions. The Commission is also requesting comment to assist it in considering whether its April 2010 loan-level data proposal appropriately implements Section 942(b) of the Dodd-Frank Act and whether additional information or alternative approaches may be required.

Separately, the SEC is set to adopt new rules in light of the Dodd-Frank Act to remove credit ratings as eligibility criteria for shelf registrations. The new rules replace credit ratings with four new tests, one of which must be satisfied for an issuer to use Form S-3 or Form F-3 in its registration process. In order to ease the transition for companies, the rules include a temporary, three-year grandfather provision.

ABS

European SF outlook outlined

Moody's says it holds a stable outlook on the performance of collateral underlying certain types of ABS and RMBS originated in France, Germany, the UK (prime only) and the Netherlands. However, it has a negative outlook on the performance of collateral underlying some types of ABS and RMBS originated in Italy, Spain, Greece, Ireland and Portugal.

Specifically, Moody's has a stable outlook on collateral underlying French RMBS, German auto ABS, German SME CLOs, German RMBS, Dutch RMBS, UK credit card ABS and prime UK RMBS. This outlook broadly reflects the stronger economic performance in these countries, with continued GDP growth and either falling or stabilising unemployment rates.

In all of these markets, delinquencies have remained or become flat over the past six months. Moody's outlook for UK credit card ABS has improved to stable from previously negative on the back of improving personal insolvency trends.

However, the agency's outlook for collateral in Italian consumer loan ABS and RMBS is negative. Although collateral performance has been relatively stable in these markets over the past year, a weaker-than-average economic environment may disrupt this trend. Moreover, Moody's outlook for Italian leasing ABS is negative and deteriorating, because leasing obligors (primarily SMEs) are more leveraged than their household counterparts and therefore more vulnerable to economic shocks.

The agency's outlook for collateral in UK non-conforming RMBS remains negative and has deteriorated since December 2010. Non-conforming borrowers, who predominantly pay interest-only mortgages, are unlikely to be as resilient to mild increases in interest rates as their prime counterparts, Moody's notes.

The rating agency's outlook for collateral in Spanish ABS and RMBS also continues to be negative and also has deteriorated since December 2010. The outlook is informed by Moody's forecasts for a more sluggish recovery in Spain's economy than six months ago because of the overhang in the real estate market, the continued high employment rate and the rising interest rate environment.

Moody's outlook for collateral in Greek, Irish and Portuguese ABS and RMBS remains negative and has deteriorated since December 2010. The funding difficulties experienced by the governments of these countries will continue to dampen economic growth and lead to unemployment rate increases. Higher taxes will also exert negative pressure on household disposable income and SMEs' retained incomes.

CDO

Trups CDO defaults stabilising

Cumulative defaults and deferrals for US bank Trups CDOs are continuing to stabilise, according to the latest index results from Fitch.

Bank defaults within Trups CDOs increased by 1bp to 15.66% through the end of June, while bank deferrals decreased by 9bp to 17.52%. The combined default and deferral rate for banks within Trups CDOs decreased to 33.18% from 33.27%.

"Bank Trups CDO defaults and deferrals have shown signs of stabilisation for some time now, though it is important to note that they remain above pre-peak levels," says Fitch director Johann Juan.

Year to date, there have been 53 deferrals and 21 defaults for bank Trups CDOs through the end of June, notably lower than the 100 deferrals and 36 defaults experienced through the end of June last year. Fitch also notes that 16 banks resumed their interest payments through the end of June, compared to six banks that resumed their interest payments though the same period last year.

At the end of June, 177 bank issuers were in default, affecting approximately US$5.9bn held across 83 Trups CDOs. Additionally, 398 deferring bank issuers were impacting interest payments on US$6.6bn of collateral held by 84 Trups CDOs.

CDO

Second CDO tender for Citi

Citi has announced its second CDO tender offer this month, following the launch of one for Bryant Park CDO (SCI 12 July). The bank is now offering to buy back six senior tranches and the income notes of Dryden VI, for US$910-US$980 and US$580 per US$1000 principal amount respectively.

The offer is scheduled to expire on 19 August, unless extended or earlier terminated. Tenders of senior notes will only be accepted in minimum denominations of US$500,000 and integral multiples of US$1,000 in excess thereof. Tenders of income notes will only be accepted in the aggregate principal amount of at least US$3.8m.

Citi currently owns US$23.5m aggregate principal amount of income notes.

CDO

Secondary CRE CDO methodology released

Moody's has published a secondary methodology for rating CRE CDOs. The rating agency says the methodology does not introduce any changes to its approach and as a result will not have any impact on its existing ratings in the sector. The methodology primarily addresses Moody's approach to CRE CDOs that include direct commercial real estate debt interests, such as whole loans, B-notes, mezzanine debt and second mortgages.

CDS

ISDA warns on CDS execution

Marking the first anniversary of the Dodd-Frank Act, ISDA has commented on the safety of the OTC derivatives markets in light of the legislation and the efforts the industry has undertaken over the past few years in conjunction with global regulators. The Association cites increasing volumes of centrally cleared transactions, the reduction of notional outstanding via compression cycles and the establishment of trade repositories as evidence that the markets are safer and more efficient.

However, ISDA says it believes that regulations that dramatically change the method of executing business should be done carefully and over time. It points to proposed rules regarding electronic execution and extraterritoriality as being of most concern to end-users and dealers alike. The Association notes that it is not convinced the costs imposed by the rules and the likely resulting reduction in liquidity are justified at this time, especially since imposition of these requirements will likely drive business to other jurisdictions.

CDS

CVA functionality introduced

Pricing Partners has introduced CVA, DVA and bilateral CVA functionality for all payoff-based trades to its Price-it library. The solution leverages Pricing Partners' generic American Monte Carlo (AMC) engine to compute CVA/DVA/Bilateral CVA for virtually any derivatives, with accurate valuation of the potential future exposure and the corresponding probabilities of a default of a counterparty.

CDS

Insurance CDS index launched

Moody's recently launched its Global Insurance CDS Index (MDYGIX), which aims to provide a window into how investors are viewing the global insurance sector. The agency says that the index will serve as an independent observation of credit trends, supplementing its regular monitoring of insurers and reinsurers.

Overall, the ratings gap - or difference between CDS-implied ratings and Moody's ratings - is currently between two and three notches, implying that the CDS market has a more negative view of the insurance sector than Moody's ratings indicate. "The existence of a ratings gap will not in itself lead to rating actions," says Moody's svp Scott Robinson. "Rather, the index provides an alternative view to our typically more stable ratings and, like other market indicators, may 'red flag' companies for potential follow-up analysis."

Currently, the ratings gap is widest for European insurers. Since 2007, the US life and US multi-line sectors have exhibited the most volatile ratings gaps, according to Moody's.

The MDYGIX is non-fixed and equal-weighted, and is currently composed of 32 companies across the life, property and casualty, and global reinsurance sectors. For inclusion, a company must be classified as an insurer or reinsurer and have relatively high quality data in the CDS market.

CDS

JSCC pricing agreement signed

Markit is to produce daily settlement prices for Japan Securities Clearing Corporation (JSCC), required for mark-to-market pricing, margining and clearing of the Markit iTraxx Japan index. The pricing will be produced on credit indices cleared on JSCC.

Kevin Gould, president of Markit, comments: "The introduction of a central counterparty in the Asian Pacific CDS market is a major milestone. Markit continues to lead global initiatives centered on the clearing of credit default swap trades and is very pleased to be able to bring its European and US experience to the Japan Securities Clearing Corporation to help them in their efforts."

CDS

Risk assessment tops technology challenges

FINCAD has released the results of its second annual survey, in which 28% of sell-side and 30% of buy-side respondents reported that accurate risk assessment was their biggest challenge. Respondents in both of these segments consequently reported adjusting their risk management strategy, to include greater analysis and awareness of model risk and carrying out stress testing and scenario analysis. The most important type of risk analysis was Monte Carlo VaR for both sell-side (31%) and buy-side (40%) survey participants.

Another challenging area for both the sell-side and the buy-side, according to the survey, is independent pricing and valuation. 28% of buy-side respondents said this was their biggest challenge; one in five sell-side respondents reported that independent pricing and regulatory compliance are also big challenges that they face. Both sell-side (63%) and buy-side (58%) respondents felt that regulatory changes would have a moderate or major impact on their business.

The majority of sell-side respondents (69%) reported using third-party analytics exclusively or in conjunction with their in-house systems. When looking for a third-party analytics platform, transparency of the models and ease-of-use topped the list for the sell-side, followed closely by adaptability to market conditions. For the buy-side, transparency and ease-of-use were the most important features in an OTC valuation solution.

CDS

Tradeweb founder launches pricing platform

Jim Toffey, the founder of Tradeweb, has launched Benchmark Solutions. The firm says it is the first and only provider of fully independent, streaming, real-time, market-driven prices for fixed income and derivatives markets.

Backed by Warburg Pincus, Benchmark Solutions is focused on addressing fundamental shortcomings in price transparency and independence in the OTC fixed income and derivatives markets. "After the 2008 credit crisis, there was a clear need for greater transparency in the OTC markets," comments Toffey, Benchmark Solutions founder and ceo. "We brought together key industry experts in finance and technology to develop a system that synthesises millions of market observations daily and creates market-driven prices, which are updated and available to our clients every 10 seconds."

Targeted at front office professionals, Benchmark's flagship offering - the BMarkSM Real-Time solution - provides continuous real-time pricing data for fixed income and derivatives products. It will begin by covering corporate bonds and credit default swaps, with ongoing expansion slated across other OTC asset classes.

Using its patent-pending Market Calibrated FrameworkSM technology, the BMark Real-Time solution analyses over 12 million market inputs to price 550 CDS curves across six distinct tenors, as well as 7,000 corresponding US corporate bonds. This proprietary technology generates 118 million market-derived prices each trading day. Designed to integrate with and enhance clients' daily workflows, the real-time data is deliverable via the web or data feed and includes a comprehensive real-time overview of credit market activity.

CDS

Irish Life auction scheduled

An auction to settle the credit derivative trades for Irish Life & Permanent CDS is to be held on 29 July. ISDA's EMEA Credit Derivatives Determinations Committee resolved on 5 July that a restructuring credit event occurred in respect of the entity and resolved that one or more auctions may be held (SCI 6 July). Auctions are set to be held for senior and subordinated buckets.

CDS

Bank of Ireland auction scheduled

The auction to settle the credit derivative trades for The Governor and Company of the Bank of Ireland CDS is to be held on 28 July. ISDA's EMEA Credit Derivatives Determinations Committee resolved that a restructuring credit event occurred on 11 July in respect of the entity and that one or more related auctions would be held. The auction is set to comprise senior and subordinated buckets.

CDS

Greek credit event appears unlikely

ISDA has issued an update on whether last week's Eurozone rescue package for Greece is a credit event under CDS documentation. The Association says that any determination will be made by its EMEA Determinations Committee when the proposal is formally signed and after a market participant requests a ruling from the DC.

However, ISDA clarified two issues, based on what it knows at this point. In connection with the official sector portion of the rescue package (more aid money; expansion of EFSF), it notes that there does not appear to be anything relevant to CDS. The private sector portion (a proposal for a voluntary exchange of debt, with four options) also should not trigger CDS, according to the Association, since this is expressly voluntary.

CMBS

City Center Trust 2011-CCHP ratings queried

Fitch has published another unsolicited assessment of a CMBS deal in marketing. As with its unsolicited assessment on DECO 2011-CSPK (SCI 3 June), the agency finds its expected ratings on City Center Trust 2011-CCHP (CCHP) to be out of step with those actually assigned to the deal.

Fitch says that investment grade ratings assigned to the most junior class of the CCHP transaction would likely warrant no more than its double-B rating. The conclusion is based on Fitch's current analysis of hotel properties.

The agency says it was initially asked to provide preliminary feedback, but was ultimately not asked to rate the transaction. Fitch acknowledges that it did not have the benefit of direct access to the properties, their ownership or the management at the time of its preliminary analysis.

Based on typical Fitch cap rate assumptions for hotel properties, the agency would need to apply a pro-forma analysis of cashflow of approximately US$70m annually in order to pass an investment grade rating stress. This is not consistent with its rating approach. Alternatively, based on in-place cashflow, Fitch would need to value the assets with a cap rate of less than 9.5%, which falls well below the historical mean for hotel cap rates.

Fitch believes that the expectation of future growth should be a risk borne by property owners and not investment grade bondholders. Therefore its property valuations are limited to a multiple of in-place cashflow.

The agency goes on to explain: "The CCHP transaction is a portfolio of 13 full-service hotels located across 10 states, the District of Columbia and Canada. CCHP is one of the first floating-rate CMBS transactions in several years. The structure of a floating-rate transaction allows the sponsor the ability to prepay without penalty if cashflow growth is realised and refinance into longer-term financing at higher proceeds more reflective of property cashflow at that future point."

Fitch's typical cap rate of between 10.50% and 12% for hotels depends on a variety of characteristics, including property condition, location, flag, historical performance and diversity. The range is based on the historical mean of hotel cap rates observed by Fitch and exceeds the cap rate ranges of other property types based on the operating nature and historical performance volatility of the lodging sector.

Consequently, Fitch says: "Given the positive attributes of the CCHP portfolio, a cap rate at the lower and more beneficial end of Fitch's range would be assumed. However, this still results in the proceeds falling into the double-B rating category based on current in place cashflow. Importantly, property performance would need to improve and cashflow to increase from in-place levels in order to pass Fitch's investment grade stress. While Fitch recognises the strong quality of the collateral and sponsor, the current financing should not include investment grade debt that relies on an assumption of growth."

CMBS

Fitch sanguine on CMBS 2.0

A new report from Fitch suggests that the agency is currently comfortable with new CMBS deal structures, despite what it describes as "mounting concern that US CMBS underwriting standards are on the decline". At the same time, the agency underlines that it will take action, should standards decline too quickly.

Fitch says it believes that there is quite a way to go before standards approach levels seen in 2007, viewed by many as the most volatile vintage for CMBS. "Some market participants fear that we will shortly see loans comparable to the worst of the loans made between 2006 and 2008," it notes.

While the agency agrees that underwriting standards have declined in recent months, it observes that the deterioration thus far has been from very high standards. "It was only a matter of time before CMBS underwriting standards began to decline from such an unusually high level," adds Huxley Somerville, group md and head of US CMBS for Fitch.

Fitch says it expected this deterioration and increased credit enhancement levels to account for this growth in risk. In fact, the agency released a commentary in June of last year saying that the quality of CMBS deals would weaken over time because the first deals of CMBS 2.0 contained unusually low leverage.

Greater confidence in the industry and greater competition among originators would result in increased leverage. Fitch went on to say that if its predictions were right, greater credit enhancement would be a consequence.

In fact, the rating agency says the past two years show that the relationship between credit enhancement and underwriting standards has been directly inverse in nature. In short, Fitch has raised credit enhancement levels as metrics declined. Consequently, Somerville concludes: "If CMBS credit metrics begin to drop more precipitously, Fitch will raise credit enhancement levels accordingly."

RMBS

Irish RMBS rating ceiling lowered

Moody's has downgraded the ratings of 30 tranches of 14 Irish RMBS transactions, affecting €27.7bn of securities. The rating action reflects the decline in the credit quality of the Irish government's sovereign debt (Moody's downgraded it to Ba1 from Baa3) and the failure by relevant counterparties to either comply with trigger breaches or implement in a timely fashion proposed structural changes to mitigate the risk of disruption in the performance of major transaction parties. It also reflects the increased likelihood of severe events, with the agency expecting that Irish RMBS will no longer retain or achieve a rating higher than A1 - is six notches above the government's rating.

Moody's revision to A1 of the maximum achievable rating for Irish RMBS from its prior level of Aa2 reflects the continued weakness in the Irish economy and the challenges the government is facing in implementing its fiscal consolidation plan. In particular, there is a growing possibility that Ireland will need further official financing before being able to access the market. The maximum rating achievable for Irish structured finance transactions reflects the rating level beyond which structural features or credit enhancement cannot fully mitigate the impact of highly severe events and the level of uncertainty around them in the context of the extreme weakening of sovereign financial strength.

Moody's has therefore downgraded to A1 20 tranches in nine transactions that it had rated above this maximum achievable rating. These tranches include senior notes in six Celtic transactions (Celtic 11, 12, 13, 14, 15 and 16) and senior notes in three Phoenix transactions (Phoenix 2, 3 and 4).

RMBS

Colston RMBS restructured

Bristol & West has restructured its £3bn Colston No. 1 RMBS. Under the restructuring, amendments have been made to the swap counterparty, the GIC provider and the transaction documentation (including the addition of a back-up servicer). Additionally, the liquidity reserve has been removed from the transaction.

Credit enhancement for the class A notes now totals 14.55%, which is provided by overcollateralisation (12.45%) and a non-amortising reserve account of 2.1%.

Fitch notes that the transaction's performance has been stable, with low levels of three-month plus arrears balance - at 2.4% of the outstanding collateral balance - and principal loss rates at 0.18%. The agency has confirmed its triple-A ratings on the class A notes.

RMBS

Need for QM safe harbour stressed

The American Securitization Forum and SIFMA have filed comment letters with the Federal Reserve regarding the definition of a qualified mortgage found in Title XIV of the Dodd-Frank Act.

Title XIV of Dodd-Frank prohibits creditors from making mortgage loans without regard to the consumer's repayment ability. Among the ways to comply with this provision is the origination of a 'qualified mortgage'.

SIFMA believes that the origination of qualified mortgages will be the primary means by which lenders comply with Dodd-Frank and therefore an appropriate definition of this concept is essential. The definition must preserve the ability of secondary markets to provide funding for mortgage loans.

SIFMA also notes that the definition of qualified mortgage will also need to work seamlessly with its related construct, that of a qualified residential mortgage. To ensure that is the case, the Association proposes that any mortgage satisfying the definition of qualified residential mortgage should also automatically satisfy the definition of qualified mortgage.

Among SIFMA's other recommendations are: the adoption of a true legal safe harbour for mortgages that meet the definition of a qualified mortgage; the inclusion of standards for compliance that are easily verifiable with certainty upon the closing of the mortgage loan and at the time of securitisation; the definition of points and fees, as well as a cure mechanism for lenders and secondary market purchasers who discover that the points and fees limit in the QM safe harbor was exceeded; and the coordination of rulemaking for QM and QRM. In addition, the Association calls for a second round of public comment on the proposed rules.

ASF executive director Tom Deutsch says it is "critical" that a qualified mortgage definition is enacted that is based on objective criteria, which are determinable when the loan is made and result in safe harbour protection. "An after-the-fact finding of non-compliance would result in substantial liability for investors and other assignees down the capital markets chain," he explains. "Reasonable access to credit will depend upon the outcome of the qualified mortgage determination, as liability concerns may prevent lenders from originating mortgage loans that fall outside the standard, since investors would shy away from their purchase in the capital markets."

CDS

Challenges in implementing a counterparty risk management process

David Kelly, director of credit products at Quantifi, explores the key challenges for banks in the implementation of counterparty risk management, focusing on data, technology and operational issues in the context of current trends and best practices

Most banks are in the process of setting up counterparty risk management processes or improving existing ones. Unlike market risk, which can be effectively managed by individual trading desks or traders, counterparty risk is increasingly being priced and managed by a central credit value adjustments (CVA) desk or risk control group since the exposure tends to span multiple asset classes and business lines. Moreover, aggregated counterparty exposure may be significantly impacted by collateral and cross-product netting agreements.

Gathering transaction and market data from potentially many trading systems, along with legal agreements and other reference data, involves significant and often underestimated data management issues. The ability to calculate CVA and exposure metrics on the entire portfolio, incorporating all relevant risk factors, adds substantial analytical and technological challenges.

Furthermore, traders and salespeople expect near real-time performance of incremental CVA pricing of new transactions. Internal counterparty risk management must also be integrated with regulatory processes.

In short, the data, technological and operational challenges involved in implementing a counterparty risk management process can be overwhelming.

CVA and capital
CVA is the amount banks charge their counterparties to compensate for the expected loss from default. Since both counterparties can default, the net charge should theoretically be the bilateral CVA, which includes a debt value adjustment (DVA) or gain from the bank's own default. While clearing and collateral are the principal means for managing counterparty risk in the inter-bank market, uncollateralised exposure is more prevalent in the corporate derivatives market and banks compete aggressively on CVA pricing.

CVA pricing is inherently complex for two reasons. First, the incremental (or marginal) CVA for each trade should reflect the application of collateral and netting agreements across all transactions with that counterparty. Second, CVA pricing models not only need to incorporate all of the risk factors of the underlying instrument, but also the counterparty's 'option' to default and the correlation between the default probability and the exposure (i.e. right- or wrong-way risk).

Given the complexity, two problems arise. Some banks are not able to compete for lucrative corporate derivatives transactions because they do not take full advantage of collateral and netting agreements with their counterparties in calculating CVA. Or, they win transactions because their models under-price some of the risks and subject the bank to losses. The complexity is compounded by the need for derivatives salespeople to make an executable price in near real-time.

While CVA covers the expected loss from counterparty defaults, economic or regulatory capital provides a buffer against unexpected losses. Subject to approval, the Internal Model Method (IMM) specified in the Basel Accord allows banks to use their own models to calculate regulatory capital. The total regulatory capital charge for counterparty risk is the sum of the counterparty default risk charge and CVA risk capital charge.

The counterparty default risk charge is calculated using current market data, either implied or calibrated from historical data. Three years of historical data are required, including a period of stress to counterparty credit spreads.

The CVA risk capital charge was introduced in Basel 3, as CVA losses were greater than unexpected losses in many cases during the recent crisis. The charge is the sum of the non-stressed and stressed CVA VaR, based on changes in credit spreads over a three-year period. Eligible credit hedges can be included to reduce the total capital charge and cleared transactions may be omitted.

Data and technology
Gathering all the data necessary to calculate CVA and capital reserves translates into a very challenging technology agenda. Most banks have multiple systems for reference data, market data and transactions, which may be different for each business unit. These systems may be further sub-divided into front-office analytical tools and back-office booking systems, each with its own repository of market and reference data.

There may also be several internal and external sources for market data. The counterparty risk system must integrate with potentially many of these systems in order to extract the data needed to produce a comprehensive set of counterparty risk metrics.

For a large bank, the counterparty risk system may price something on the order of one million transactions over one thousand scenarios and one hundred time steps, or one hundred billion valuations. If the bank actively hedges CVA, the number of valuations is roughly multiplied that by the number of sensitivities required.

The counterparty risk system's infrastructure must also support back-testing, stress testing and historical VaR (see chart). In addition to fine-tuning the analytics, acceptable levels of performance and scalability can be achieved by distributing computations across servers and processor cores using grid technology.

With the huge amount of data involved and analytical complexity, the ability to view the various counterparty risk metrics across a variety of dimensions is absolutely essential. At the very least, the system should show current and projected exposures, CVA and regulatory capital by counterparty, industry and region.

The ability to inspect reference, market and transaction data inputs is vital in verifying calculated results and tracking down errors. The system must also provide reports for back-testing, stress testing and VaR outputs with similar aggregation and drill-down capabilities.

Trends
Post-crisis, the ability for senior management to get a comprehensive view of the bank's counterparty risks is a critical priority. Consolidated risk reporting has been elusive due to front office-driven business models.

As influential revenue producers, trading desks have maintained a tight grip on data ownership, model development and front-office technology. This has resulted in a proliferation of systems, making the job of aggregating risks across business lines excessively complicated. Continuous development of new types of derivative payoffs and structured products has exacerbated the problem.

However, the failures and near failures of several global banks have changed the traditional mentality. Banks are now taking a 'top-down' approach to risk management.

Decision-making authority is transitioning from the front-office to central market and credit risk management groups. This authority includes tighter controls on data and technology.

A key component of the top-down approach to risk management is the central CVA desk or counterparty risk group. This group is responsible for marginal CVA pricing of new trades originated by the individual business units and then managing the resultant credit risk.

In practice, the CVA desk sells credit protection to the originating trading desk, insuring them against losses in the event of a counterparty default. There are several advantages to this approach.

Housing counterparty risk in one place allows senior management to get a consolidated picture of the exposures and proactively address risk concentrations and other issues. As banks continue to ramp up active management of CVA, having a specialised group allows careful management of complex risks arising from liquidity, correlation and analytical limitations.

The reasons for not creating a central CVA desk or counterparty risk group tend to be practical issues particular to the institution. Decentralised infrastructures may make the data and technology challenges too great to ensure provision of meaningful consolidated counterparty risk metrics on a timely basis. Some banks have aligned counterparty risk management by business line in order to more effectively manage the data and analytical issues at the expense of certain benefits, like netting.

For centralised CVA desks, there is also the challenge of internal pricing and P&L policies. Most banks position CVA desks as utility functions that simply attempt to recover hedging costs in CVA pricing.

Recent regulatory activity has also had a profound impact on counterparty risk management, mostly due to central clearing requirements and higher capital ratios. Mandating central clearing for an expanding scope of derivative products effectively moves counterparty risk out of complex CVA and economic capital models and into more deterministic and transparent margining formulas.

The heavily collateralised inter-dealer market is also undergoing significant changes due to the widening of Libor basis spreads during the crisis. A new standard for pricing collateralised trades is emerging, based on OIS discounting. Institutions are now looking more closely at optimising collateral funding through cheapest-to-deliver collateral, re-couponing existing trades to release collateral and moving positions to central counterparties in order to access valuation discrepancies or more favourable collateral terms.

It is expected that most corporate derivatives transactions will remain exempt from clearing mandates since banks provide valuable hedging services in the form of derivative lines. The cost of extending these lines is increasing due to significantly higher regulatory capital requirements. Therefore, competitive CVA pricing and economic capital optimisation will remain priorities for corporate counterparty risk management alongside collateral and clearing processes.