Contents

ABS

Falling grades?

FFELP student loan ABS at risk

The once unthinkable possibility of a US downgrade has quickly become a very real prospect, as the deadline for resolving the Federal debt ceiling and budget becomes imminent. A US downgrade would particularly affect FFELP student loan ABS, which would see its ratings move in lock-step.

Moody's has placed almost US$200bn of triple-A rated FFELP ABS on review for possible downgrade as a direct result of its review of the US rating. S&P is also monitoring the sovereign rating of the US and has warned that knock-on effects for other US government-related securities - such as FFELP ABS - should be anticipated.

Guido van der Ven, co-founder and principal at Education Investment Group, explains that two likely scenarios could result in a downgrade for the US sovereign rating. The first is that the deadline is reached without a resolution, in which case obligations do not get paid.

"The second scenario is they get to 4 August and raise the debt ceiling, but the rating agencies feel the government is still in an untenable situation for the future. The rating agencies have said there have to be meaningful cuts in the budget for them not to downgrade the US," he says.

Any US sovereign downgrade could have serious repercussions for student loan ABS. A round of forced selling would be anticipated, but further consequences - such as a loss of funding for the US Department of Education - could see loan guarantees disappear. Long-term reputational damage could also be a serious problem.

Structured finance consultant Dan Castro, former md and head of structured finance analytics and strategy at BTIG, notes that one of the main concerns in the short term is that pricing will be hit. He says: "The paper will not necessarily be weaker than it was before, but its rating could be downgraded. I think it is temporary and that if there is a downgrade they will find a way to resolve it. However, there will be a price drop and there are people that are sensitive to mark-to-market who could have a problem."

Forced selling could be a factor if the US Treasury and FFELP ABS get downgraded as some money managers will have ratings-based guidelines for what they are able to invest in. As ratings go below triple-A, they will no longer be able to hold the paper and will have no option but to sell. The FFELP sector already has wider spreads than other ABS sectors and forced selling into a sinking market will only exacerbate that.

Another issue would be with the Department of Education, which provides a 97% guarantee for FFELP loans, notes van der Ven. He explains: "I understand the government would de-fund several departments and that could include the Department of Education. So, funds to pay guarantee agencies on defaulted loans might not be available. There would be an issue in terms of timely principal and interest being paid on the loans that have gone through the default process."

However, the short-term prospects for FFELP paper may not be too bad. Despite any potential downgrade and loss of Federal guarantee, not all loans will need those guarantees and most borrowers should still continue making payments.

"Unlike with Treasury securities, with a student loan you have a borrower who is paying principal and interest. As long as they are paying, it does not matter whether the guarantee is there or not, because the payments are still coming in," says van der Ven.

He adds that most of the outstanding deals - even the more recent ones - are well seasoned. As most defaults occur in the first 18 months of repayment, it is worth noting that these outstanding deals have passed that peak in the default curve.

Castro notes that the scarcity value of FFELP paper could also work in its favour. He says: "It is like the non-agency mortgage market, where there have been very few deals in the last few years. That is running off now and helps explain why, even with fairly ugly collateral, prices are higher than they probably should be. The same thing could happen with student loans."

Longer-term changes could be more worrying for investors though. Even if a downgrade is reversed quite quickly, the situation is unlikely to return to normal. Even a temporary downgrade could taint the paper forever.

Castro says: "Knowing it may happen again could be a worry for some holders. There are people who only want top quality paper and anything less than that does not work for them. If they have to worry about this happening again in the future, then at some point, it is just not worth the effort."

An even bigger issue could be long-term liquidity. FFELP paper has always been highly liquid, notes Castro, and that could change after a downgrade. He adds: "Even if student loan ABS gets upgraded again, it is hard to imagine liquidity returning to what it was prior to any downgrade."

Despite the problems facing the sector, some investors may still prefer it to alternatives. Taking a particularly negative view on the US government's position, getting something from FFELP ABS may be better than getting nothing from US Treasuries.

"It is possible that - in the extreme case - as an investor, if you think the Treasury will never make good on their debt, you would be better off holding FFELP paper because you know some borrowers are going to make good on the loans. So, in that sense, you might prefer to hold FFELP ABS over US Treasury securities," says van der Ven.

Ultimately, although FFELP student loan ABS may be weakened by a downgrade for the US, it will still compare favourably to alternatives, in much the same way as van der Ven believes even a weakened US will still remain attractive to investors. He concludes: "If you look around the world for stable governments, large economies, free elections, free press and all the things that make you comfortable about investing, then these things still exist in the US. So, if the US is no longer triple-A and becomes say double-A, then isn't double-A the new triple-A? It is still the safest harbour out there."

JL

CMBS

US CMBS market 'treacherous'

The last week and a half has been "pretty treacherous" in the US CMBS market, reports one trader. The ongoing wrangling over the US debt ceiling and the threat of a US downgrade has helped create an environment of confusion, which has not been eased by S&P's latest actions.

Two single-borrower CMBS deals, both backed by Blackstone portfolios, priced on Friday: the US$425m City Center Trust 2011-CCHP, led by JPMorgan; and the US$1bn WFDB CMT 2011-BXR, led by Wells Fargo and Deutsche Bank. However, the real story last week was S&P's decision to update its conduit/fusion criteria, consigning the US$1.5bn Goldman Sachs/Citi GS Mortgage Securities Trust 2011-GC4 to the scrapheap in the process (SCI 28 July).

"Essentially, S&P said somewhat out of the blue that its model for new issue CMBS is wrong. It has launched a review and said that until it changes its methodology, it isn't willing to rate any deals going forward," explains the trader.

He continues: "The problem with that is the rating agency already published a presale on and had essentially promised to rate the Goldman/Citi deal. It pulled its ratings at the last second and that transaction did not get done."

GS Mortgage Securities Trust 2011-GC4 originally came to market with 14.5% subordination to the triple-As. Although the trader believes the deal was sound, he says the low credit enhancement meant the agency took a lot of flak from investors. Despite Goldman/Citi restructuring the transaction to include a super-senior tranche, it still priced wide.

"S&P's timing is unbelievable," says the trader. "After all the grief the arrangers have gone through with this deal, right when it seems everything is sorted S&P pulled the plug. We have been in the market for a long time and never seen anything like that."

A second deal was also affected - FREMF 2011-K14. Although Freddie Mac multifamily CMBS would normally not be impacted by such actions, one tranche of the deal was not wrapped by the GSE, so it too had to be pulled.

"That made for quite a choppy market. And then, on top of that, the head CMBS traders at Goldman and Citi both lost their jobs last week. The market is really trading on psychology rather than fundamentals at the minute and events like that really do not help," the trader explains.

The trader notes that flows are about 50% off from where they started the year, with most of the levered community sitting on a lot of cash at the moment. He concludes: "Anecdotally, we have heard that George Soros has returned money he was investing for others, but of his own money 75% is in cash. We have seen that across the community, with a number of players keeping a lot in cash, which really speaks to the indecision in the market right now."

JL

CLOs

Participations increasing in CLO refis

Refinancing older CLOs by transferring assets to new transactions appears to be gaining traction. Indeed, two recently closed deals and another in the pipeline have relied temporarily on participations rather than the more common outright assignment of the loans to transfer rights to collateral cashflows.

Although this approach to transferring assets may pose risks to the new CLOs, Moody's notes in its latest CLO Interest publication that these risks are manageable. The process involves the new CLO entering into a participation agreement with the old CLO, which then use commercially reasonable efforts to elevate all participations to assignments. Such an assignment is subject to the redemption of the existing notes in the old CLO.

Relying on participations rather than outright assignments exposes the new CLO to additional risks, including: counterparty risk, cashflow operational risk, compliance/new activities risk and ramp-up risk. Moody's consequently points out that, as a condition of the sale, the proceeds must be sufficient to ensure the complete redemption of the old CLO notes - which must take place within a few days after the close of the new CLO.

Equally, to mitigate cashflow operational risk, the participation agreement should provide that the old CLO will: continue to exist as an SPV, have enough funds, limit its activities mainly to elevating the participations and ensure that its service providers stay in place. To mitigate compliance risk, the old CLO can covenant in the participation agreement to limit its activities to elevating the participations into assignments. Finally, in respect of ramp-up risk, the exclusion of participations in excess of certain levels for the purpose of the new CLO's collateral quality tests, coverage tests and concentration limits provide strong incentives for the manager to convert each participation into an assignment before the effective date.

According to Moody's, participations accounted for around 80% of the collateral in the recent Carlyle Global Market Strategies CLO 2011-1 and Babson CLO 2011-I transactions (purchased from Carlyle Credit Partners Financing I and Babson CLO 2008-I respectively). Invesco's forthcoming US$500m Avalon IV Capital CLO is also set to purchase the majority of its collateral initially in the form of participations from Avalon Capital 3.

CS

CMBS

GGP spins off mall portfolio

General Growth Properties (GGP) plans to spin off 30 of its malls to shareholders through a special dividend. The 30 malls, 14 of which still serve as collateral for CMBS transactions, are to be transferred to a new REIT called Rouse Properties.

CMBS analysts at Barclays Capital note that most of the assets were classified as 'other' in prior GGP filings. Sikes Senter is included on the list, which may be surprising as had been labelled as 'Tier 2' property in prior filings. Most of the properties were part of the bankruptcy filing, except for Lakeland Square Mall.

The portfolio being transferred to Rouse Properties has tenant sales of US$279 per square-foot, occupancy cost of 13.2%, occupancy of 87.7% and combined core 2010 full-year NOI of US$164.5m, the BarCap analysts note. GGP says the portfolio could be valued between US$1.9bn and US$2.2bn, so the reported implied equity is between US$800m and US$1.1bn, at US$1.132bn in debt.

For the 14 properties that still have CMBS exposure, the analysts note that one - Three Rivers Mall - is part of a multi-property portfolio in CSFB 2005-C1, but that the rest of the portfolio was not included in the spin-off. They expect the underlying loan to be paid off because of the challenges involved with uncrossing and partial assumption of in-place financing.

The other loans are expected to be assumed by the new borrower created in the spin-off, so disruption to CMBS cashflow should be minimal. Boulevard Mall is the only loan in special servicing as of July, so the assumption is unlikely to require modified terms. After assumption, however, the analysts expect some of the loans to be paid off or liquidated.

Finally, the timing of the move is significant, given that recent developments in the CMBS market - such as spread tightening and rating uncertainty - have made securitising some assets more challenging. It is not clear whether any of the assets were considered as potential collateral for CMBS 2.0 deals, although the analysts note the average quality of the properties being spun off appears to be weaker than others that were securitised.

JL

CMBS

GS MST 2011-GC4 pulled due to CMBS review

Goldman Sachs and Citi have been forced to withdraw their GS Mortgage Securities Trust 2011-GC4 CMBS from the market, even though the deal priced last week (SCI 25 July 2011). The move follows S&P's release of an 'Advanced Notice of Proposed Criteria Change', saying: "S&P will not currently assign ratings to transactions that are based on the US conduit/fusion criteria, including the GS Mortgage Securities Trust 2011-GC4 transaction."

The two banks say in a joint statement that S&P informed them that it will not be able to deliver at this time final ratings for GS MST 2011-GC4 and that those ratings are a condition precedent to closing and settlement of the transaction scheduled for today, 28 July. "As a result, Goldman and Citi are withdrawing the GC4 transaction from the market."

They go on to say that S&P stated that its inability to deliver final ratings at this time is based solely on an internal S&P review of its application of conduit/fusion CMBS ratings criteria with regard to DSCR calculations. "S&P had previously informed Goldman and Citi that they were prepared to rate the GC4 transaction," the banks add.

S&P says its review has been prompted by the discovery of potentially conflicting methods of DSCR calculation in use. "We intend the review to harmonise the potentially conflicting methods without changing the overall calibration of the conduit/fusion CMBS criteria."

More specifically, the rating agency adds that it started using two methods to calculate DSCRs in early 2011. Before that time, DSCRs used in the criteria were based on the worse of actual debt service amounts and loan constants specified in the criteria article.

Starting around January 2011, S&P began using a simple average of the two methods in the analysis of new deals. Surveillance continued to use the earlier approach.

S&P says the review may result in multiple technical changes to the conduit/fusion CMBS criteria. "Because of the early stage of the review, the potential impact on outstanding ratings is uncertain. Until the review is completed, S&P will not assign new ratings to transactions that are based on the conduit/fusion criteria," it concludes.

MP

CMBS

Super-senior CMBS structure criticised

The introduction of the super-senior structure is credit negative for CMBS underwriting because it can diminish so much of the credit risk for senior investors that they no longer exert much-needed discipline on the underwriting process, according to an article in Moody's latest Weekly Credit Outlook. The development is also credit negative for the bond that supports the super-senior bond, the rating agency adds.

"The super-senior structure diminishes the extent to which investors' informed opinions about credit help preserve underwriting discipline and the viability of the CMBS market," Moody's notes. "Because credit slippage is already observable in the recovering CMBS market, continued investor participation is helpful to reduce the chance of repeating the significant degradation that took place prior to the financial crisis. We don't believe that regulations or issuer motivation ordinarily prove sufficient in maintaining credit discipline."

The agency goes on to say that the introduction of super-senior structures into CMBS is especially credit negative when subordination for the super-senior bond is meaningfully higher than what would have been necessary to achieve top ratings without it (for example, 30% when 18% is sufficient). "Overly enhanced super-senior bonds effectively take credit risk off the table, meaning that not only are super-senior bonds default resistant, but even downgrade resistant. Although some investors need to maintain liquidity and portfolio quality at the highest levels, taking credit risk off the table reduces their incentive to differentiate between deals in the market and to provide the market the discipline it needs."

The comments follow last week's pulling of GS MST 2011-GC4 (SCI 28 July), which the agency refers to as an "unnamed second-generation CMBS conduit transaction that featured a super-senior class structure". Moody's adds: "So far in this phase of the CMBS market, investors have not demanded a super-senior class if bond credit quality is consistent with their views. We expect WFRBS Commercial Mortgage Trust 2011-C4, a CMBS deal that we rated and that priced in the market in the same timeframe as the super-senior deal but that had significantly higher subordination, to close without restructuring."

According to the agency, another negative credit consequence of the super-senior structure is the creation of a new support bond, which is smaller and subordinated to the super-senior. "The original structure of the pulled deal before the introduction of the super-senior included one senior class roughly equal to 85.5% of the bonds offered. Carving out an 80% super-senior tranche left a 5.5% second priority tranche. Given that new CMBS deals are not highly diverse and have 25 or so loans, if the support bond were to take a loss, the loss would have the potential to be quite large on a percentage basis."

Consequently, Moody's concludes: "Thin tranches need more subordination to reduce the probability of default in recognition that their loss-given default is higher. This adjustment helps keep expected loss in balance and consistent across deals."

MP

RMBS

Mods dominate non-agency performance

Modified loans are increasingly driving overall performance in the non-agency US RMBS space and now account for 10%-15% of all non-agency loans from the 2005-2007 vintage, according to Barclays Capital securitisation analysts. This is particularly the case in weaker credit sectors, with over 25% of all subprime loans now modified.

Modification rates from delinquent loans peaked around a year ago and have declined since then, recently stabilising at 30%-40% lower than the highs. Over the same period, debt forgiveness mods have also risen, increasing from 5% to 15%. Payment reduction mods have stabilised at 25%-30%.

The BarCap analysts note that mark-to-market CLTVs between 140-180 have seen the highest modification rates. Other loan types with higher than average rates are conforming balance loans, owner occupied loans and loans where the borrower is not stretched on other revolving credit obligations.

Modifications in 2010 happened later in the delinquency cycle than in 2009, which may well be due to the compulsory HAMP trials and increased documentation collection. However, 2011 has seen that trend start to reverse and future modifications are expected to happen sooner than they did last year.

Improvement was consistently seen in redefault rates from mods made in 2008 through 2010, but that improvement has since stagnated. Recent mods are still expected to perform better than the early modifications though, with the analysts predicting life redefault rates in subprime for recent modifications of 50%-60%.

Redefaults have also been seen to correspond well with payment decreases and the movement of home prices. Delinquencies on revolving accounts and high utilisation rates on revolving accounts are accurate predictors for high redefaults. Generally, debt forgiveness mods perform better.

Finally, the analysts note that there are differences in modification rates and redefaults across servicers. They suggest that Ocwen, Litton, Saxon and Wells continue to modify a larger fraction of loans and their modification decisions affect redefault performance, such as lower redefaults for SPS mods. Countrywide mods perform the worst, they conclude.

JL

ABS

Aviation finance pro recruited

Christian Wulf has joined BNP Paribas' aviation finance group as director in charge of Latin America. He is based in New York and reports to Olivier Trauchessec, head of aviation finance, Americas.

Wulf joins from KfW's aviation finance group in Frankfurt, where he headed its North American activities. Prior to KfW, he was responsible for WestLB New York branch's transportation finance activities in the Americas.

Wulf replaces Bertrand Dehouck, who will now be in charge of BNP Paribas' relationships with aircraft leasing companies in the Americas. He also reports to Trauchessec.

ABS

Capita expands financial services remit

Capita is set to acquire AIB's international financial services business (AIBIFS) for a cash consideration of £29m, on a cash-free, debt-free basis. AIBIFS provides outsourced services - including corporate administration, treasury management, securitisation and middle/back office services - to financial institutions and corporate clients.

Paul Pindar, Capita ceo, comments: "The acquisition of AIBIFS is an excellent strategic fit for Capita. It fully complements our existing business in terms of services, client base and professional staff, while also providing Capita with the opportunity to further develop its client proposition within the financial services industry."

AIBIFS is headquartered in Dublin, where there are approximately 100 employees, with an additional 60 members of staff across other locations in Switzerland, Luxembourg and Hungary. On completion, the business will integrate into Capita's investor and banking services division, which employs approximately 2,000 people across Europe and India.

On a pro-forma basis, AIBIFS made an operating profit for the 12 months ended 31 December 2010 of £6.2m on turnover of £24m. The deal is subject to approval by the regulatory authorities in Ireland, Luxembourg and the Netherlands.

CDO

Aussie portfolio manager hired

Western Asset Management, a wholly owned subsidiary of Legg Mason, has appointed Damon Shinnick to its Australian fixed income team. He joins as a portfolio manager and senior credit analyst.

Shinnick joins a six-member team in Melbourne and will be responsible for formulating portfolio strategy and supplementing credit research in Australian and New Zealand markets. He will also be involved in developing new products in corporate and structured credit.

Shinnick was most recently based in the UK working for Pension Corporation, where he led the firm's credit research process and managed a portfolio of UK and European corporate and structured credit. He has previously held posts at Lehman Brothers Asset Management, Challenger Financial Services and HSBC Asset Management Australia.

Anthony Kirkham, head of investment management at Western Asset in Australia, says: "Damon brings with him a wealth of experience in Australian, UK and European markets, across portfolio management, credit research, asset allocation and risk management. With Western Asset in Australia reaching US$11bn under management, it has been an opportune time to expand the team and position the domestic business for continued growth."

CDO

KBC CDO unwind to proceed

KBC Group has received approval from the European Commission to amend its 2009 strategic plan and sell or unwind selected ABS and CDO assets. The bank confirms that sale/unwind will be subject to favourable market conditions going forward.

Due to the impact of changes in the regulatory environment, some measures presented in the initial plan had become less effective in achieving the bank's intended aim. It says its main objective is to execute the plan within the agreed timeframe and to repay the Belgian authorities in a timely manner.

CLOs

Lehman CLO supply anticipated

Lehman Brothers Holdings has entered into an agreement with WCAS Fraser Sullivan Investment Management, whereby Lehman's US$5.3bn loan portfolio will be transferred to the manager. Subject to court approval, the plan involves securitising around US$2.2bn of the portfolio via CLOs.

The first such transaction, slated for about US$500m, is expected to occur within six months of the agreement being authorised. A second deal could occur within a year.

About a dozen LAMCO employees currently overseeing the loan portfolio in New York and London are set to move to Fraser Sullivan under the plan. A hearing on the arrangement is scheduled for 17 August.

Separately, Lehman Brothers Holdings has also agreed to sell a portfolio of 10 office buildings in Rosslyn, Virginia, to a Goldman Sachs unit for US$1.26bn.

CMBS

UK debt advisory team expands

CB Richard Ellis (CBRE) has appointed Adam Wilton as senior director in its UK debt advisory division, based in London. He joins from Barclays Corporate, where he was a director for real estate structured finance.

CBRE says the hire is part of a drive to use specialist advisors in originating new loans or restructuring and refinancing old ones. Wilton has 12 years of experience covering real estate finance, securitisation and principal finance. As well as Barclays Corporate, he has worked for Nomura International and Bear Stearns International.

Natale Giostra, CBRE head of UK and EMEA debt advisory, comments: "The real estate debt market is now more complex and diversified than ever. Even borrowers with good quality assets must spend more time and effort arranging financing and are increasingly seeking advice from debt experts to broaden their network of lenders and to assist with loan structuring."

The appointment follows last month's arrival of Paul Hodge, associate director to the UK debt advisory team. Hodge previously worked at Lloyds Banking Group.

CMBS

FHA finance co-heads named

Walker & Dunlop has named Michelle Warner and Edward Williams as co-heads of its FHA finance division, responsible for all aspects of the firm's FHA finance programme. Warner joins from Deutsche Bank Berkshire Mortgage, while Williams has been promoted into his new role.

Warner was FHA chief underwriter/programme manager for Deutsche Bank Berkshire Mortgage, responsible for loan structuring, credit risk management, programme compliance and HUD relationships. Prior to Deutsche Bank, she was vp at Primary Capital Advisors, where she managed the underwriting, closing and servicing groups.

Williams joined Walker & Dunlop in February 2009 as vp of FHA finance and was subsequently promoted to deputy chief underwriter. Prior to joining the firm, he was an underwriter at Column Guaranteed/Credit Suisse and AGM Financial Services.

RMBS

UBS targeted in FHFA suit

The Federal Housing Finance Agency has filed a lawsuit in the federal district court for the Southern District of New York against UBS Americas and related defendants alleging violations of federal securities laws in the sale of private-label RMBS to Freddie Mac and Fannie Mae. The FHFA is seeking to recover losses and damages sustained by the GSEs as a result of their investments in UBS securities.

The lawsuit alleges that UBS Americas made numerous material misstatements and omissions about the mortgage loans underlying the private-label MBS, including the creditworthiness of the borrowers and the quality of the origination and underwriting practices used to evaluate and approve such loans. The defendants also failed to conduct adequate due diligence, according to the suit. It seeks to recoup the losses suffered by the GSEs related to their US$4.5bn investment in securities sold by UBS.

As conservator of Fannie Mae and Freddie Mac, the FHFA is charged with preserving and conserving their assets. "FHFA is taking this action consistent with our responsibilities as conservator of each Enterprise," says FHFA acting director Edward DeMarco. "From the issuance of 64 subpoenas last year to the filing of this lawsuit and further actions to come, we continue to seek redress for the losses suffered by the Enterprises."

The defendants named in the lawsuit are UBS Americas, UBS Real Estate Securities, UBS Securities, Mortgage Asset Securitization Transactions and former UBS executives David Martin, Per Dyrvick, Hugh Corcoran and Peter Slagowitz.

ABS

Euro auto ABS performance remains stable

Fitch says in a quarterly report that the overall performance of the European auto ABS sector remained stable in 2Q11.

A breakdown of the second quarter's performance shows that the Fitch 60-180 day Delinquency Index increased to 1% from 0.9% in 1Q11. The Fitch Net Loss Index remained stable at 0.5% and the Fitch Excess Spread Index increased by 0.3% to 3.1% in Q211. The increase in delinquencies in 2Q11 can mainly be attributed to German transactions, which recorded a slight increase in early stage delinquencies to 0.4% from 0.3% in the last quarter.

Consumer confidence improved slightly to -11.1% during the quarter from -12.8% in 1Q11. New passenger car registrations in the EU15 decreased by 2.3% in 1H11 over 1H10, which in absolute numbers amounted to 6.7m in 1H11 as opposed to 6.9m in 1H10.

New auto ABS issuance volumes in 2Q11 increased significantly in comparison to 2Q10 and the range of jurisdictions was wider. Three deals were issued in Germany, two in the Netherlands and one each in the UK, France and Spain for a total of €5.4bn. In 2Q10, only two transactions (both German) were launched, totalling €1bn.

ABS

Tranche thickness metric introduced

Fitch has introduced new tranche thickness metrics designed to convey the relative thickness of a tranche in new structured finance transactions. At the same time, the agency has withdrawn its loss severity (LS) ratings criteria, which will be replaced by the new metrics.

"LS ratings were originally introduced by Fitch in 2009 as an ancillary rating scale, largely to highlight the difference in structured finance securities relative to those from other sectors. This difference is particularly in terms of the recovery prospects of SF securities at different positions in the capital structure," says Ian Linnell, global head of SF ratings at Fitch. "However, feedback from ratings users has suggested that direct access to such metrics, rather than in the form of another rating scale, is the best means of conveying this information."

The motivation for a separate LS rating scale was to a large extent addressed by the subsequent introduction of the 'sf' modifier. However, Fitch recognises the ongoing interest by investors, regulators and other market participants in the information reflected in the components that underlie the LS rating scale. Therefore, at the time a new structured finance transaction is rated, the agency will provide the metrics for the rated tranches in the transaction.

The metrics are simple calculations that express a 'tranche thickness percentage' and the multiple of this percentage over Fitch's expected base-case loss - represented by a 'tranche thickness loss multiple'. The tranche thickness percentage, designated 'TT%', will be calculated as the ratio of the original class size to the original collateral balance of the structured finance transaction at the time of rating. The loss coverage multiple, designated 'TTLM' (tranche thickness loss multiple), will be calculated by dividing the TT% by Fitch's base-case loss expectation for the transaction collateral, for those groups that use a base-case approach.

This information will be provided in the transaction presale and/or new issue report alongside the long-term credit ratings. For asset sectors with no base-case loss expectation, only the TT% will be published. The TT% and TTLM calculations will be point in time and won't be updated as individual classes of notes amortise or base-case loss expectations change.

ABS

Spanish guaranteed deals on review

Moody's has placed on review for downgrade the Aa2 ratings of six Spanish SME CLOs and the ratings of four notes in an ABS transaction backed by payment rights related to Spanish electricity tariff deficits. At the same time, the agency placed on review for downgrade the junior notes of one of these six affected SME transactions - GC FTPYME SABADELL 6 - due to worse-than-expected performance.

The action follows Moody's placement of Spain's Aa2 rating on review for downgrade on 29 July, given that the government guarantees the payments on the affected ABS. The agency rates the guaranteed notes in the SME transactions at the higher of the intrinsic credit risk of the senior notes and the rating of Spain.

Five of the affected notes have an intrinsic credit risk of Aa3 and Moody's has therefore placed their rating on review for downgrade. The agency expects that a rating downgrade of these notes will be by no more than one notch.

Spain also guarantees interest and principal due under the notes issued by Fondo de Titulización del deficit del sistema electrico. Given the specific nature of this transaction, which presents various differences compared with other electricity tariff securitisations, the ratings of the notes are fully linked to the rating of Spain, Moody's says.

The agency will conclude the review of the affected ratings upon conclusion of Spain's rating review.

ABS

Further Greek rating actions taken

Moody's has taken rating actions on a limited number of Greek structured finance transactions that have high linkage to the Greek government or Greek banks. The actions follow the downgrade to Ca from Caa1 of the Greek government debt rating and the placement on review for downgrade of the ratings of Greek banks on 25 July.

The rating actions comprise: downgrading Titlos to Ca from Caa1; placing Ariadne Secured Notes on review for downgrade; and placing Axia III Finance, Katanalotika, Praxis II Finance and Epihiro on review for downgrade. Moody's anticipates that Greek banks will suffer substantial economic losses on their holdings of Greek government debt under the debt exchange proposal.

The highest achievable rating for Greek structured finance transactions remains Ba1.

ABS

Growth predicted for Argentinean ABS

Argentina's domestic securitisation activity should continue to grow during the second half of the year, dominated by infrastructure deals and consumer loan-backed transactions, according to Moody's. During the first six months of 2011, structured finance issuance totalled the equivalent of US$2.4bn - an increase of 20% over the same period of last year, excluding infrastructure transactions.

Delinquencies higher than 90 days in the Argentine financial system decreased moderately during 2010 and were at 1.92%, as of March 2011. Factors driving the decline in delinquency levels have been the reduction in market interest rates, a stronger labour market and greater economic activity. However, delinquencies may rise if further salary increases are insufficient to compensate for inflation.

The mix of securitised assets has remained stable, compared to the mix in 2010. Personal loans, consumer loans and large-infrastructure transactions represent 90% of the total amounts issued. Personal loans and consumer loans represent approximately 36% of the market, followed by credit cards and mortgage-backed securities.

ABS

Japan SF performance subject to stress

Moody's says in a new report that the performance of structured finance assets in Japan remains subject to the stress of a macroeconomic downturn. While Japan is likely to post a V-shaped recovery later this year, subsequent economic growth may subside to a lack-luster pace, according to the agency. Furthermore, the employment situation remains severe and the business environment for SMEs remains difficult.

Moody's latest update of performance outlooks for Japan's structured finance market entails no changes in any of the individual outlooks since its last report in April 2011 - negative for consumer finance loan ABS and CMBS, and stable for other asset classes.

In the consumer finance loan ABS sector, pool performance has not substantially deteriorated, despite the introduction of loan amount caps and Takefuji's bankruptcy in September 2010. However, performance is vulnerable to originators' lending policies, as well as the negative employment situation. Because many borrowers have insufficient income or cash to repay debt without resorting to additional borrowings, their inability to obtain new loans or additional funds makes it difficult for them to repay the principal on outstanding loans.

Recently, top-line earnings and bottom-line profits of consumer finance companies have faced an unfavourable environment. As a result, if these companies face difficulty in obtaining funding - which in turn restricts their capacity to lend - deterioration in pool performance will result.

In the CMBS sector, meanwhile, Moody's expects some high-leverage loans to default, while others will prove difficult to refinance because actual LTV exceeds the maximum LTV permitted by lenders. The depression in the office rental market and the deterioration in the business results of retail and hotel operators is also anticipated to reduce the cashflows and values of the underlying properties. As a result, recovery rates and recovery speeds for defaulting loans - particularly those backed by properties with single-tenant concentrations - are set to decline.

ABS

US-linked ABS confirmed

Moody's has confirmed the triple-A ratings of financial institutions directly linked to the US government, including Fannie Mae and Freddie Mac. It has also confirmed the triple-A ratings of securities guaranteed by, backed by collateral securities issued by or otherwise directly linked to the US government.

These actions follow the confirmation of the triple-A rating assigned to the US government. However, in conjunction with the revision of the US government outlook to negative, the rating outlook for these directly linked issuers has also been revised to negative.

The structured finance securities that have been confirmed include transactions defeased by US Treasury strips, transactions backed by FFELP government guaranteed student loans and US RMBS backed by government agency mortgages. These bonds do not carry outlooks.

CDO

Flip clause enforceability 'remains to be seen'

Fitch reports that the judgement of the UK Supreme Court last week regarding the so-called 'flip-clause' in a structured finance derivative (SCI 29 July) is positive for the noteholders and appears to be positive for SF generally. The agency confirms that the ruling will not have any rating impact and its criteria with respect to derivatives will remain unchanged.

The ruling potentially offers greater clarity as to the English law position regarding the enforceability of such mechanisms, not least because the UK Supreme Court is the highest legal authority in the UK and its rulings cannot be further appealed. However, the extent of such clarity will depend upon how lawyers interpret the case and the impact this will have on legal opinions on enforceability of such clauses, which remains uncertain at this point. The ruling also does nothing to resolve conflicts with US law, where decisions of the US Bankruptcy Court have found such clauses to be unenforceable.

It remains to be seen how the reasoning of the Court will be applied by lawyers in the UK when they analyse the enforceability of flip clauses in other SF transactions. The reasoning of the Supreme Court is not as straightforward as insolvency practitioners may have wished, according to Fitch.

Faced with a series of precedential decisions around the anti-deprivation principle that are not necessarily easily reconcilable, the Court appears to have opted for a "facts and circumstances" test. Specifically, the Court's decision seems to turn on a conclusion that the flip clause falls within "bona fide commercial transactions which do not have as their predominant purpose, or one of their main purposes, the deprivation of the property of one of the parties on bankruptcy". Moreover, the Court appeared minded to give effect to the agreed contractual terms, particularly because this was a "complex commercial transaction".

Fitch expects that as a result of this decision, English lawyers will provide reasoned opinions as to the enforceability of flip clauses under English law. The agency says it will analyse these opinions to determine whether the lawyers conclude, in the end, that the relevant flip clauses are enforceable and factor that into its credit analysis of the relevant transaction.

CDO

Lehman 'flip' appeal dismissed

The UK Supreme Court in its ruling in the matter of Belmont Park Investments v BNY Corporate Trustee Services has dismissed the appeal by Lehman Brothers Special Finance (LSF) relating to the validity of an alleged anti-deprivation provision known as a 'flip' provision. The basis of LSF's argument was that the agreement and outcome had breached the 'anti-deprivation principle' under which contractual terms purporting to determine the disposal of property on bankruptcy may be invalid or in breach of bankruptcy law.

In its unanimous dismissal of Lehman's appeal, the Supreme Court concluded that commercial sense and absence of intention to evade insolvency laws were highly relevant factors in determining the application of the anti-deprivation rule and that the rule does not apply to bona fide commercial transactions. The decision reaffirms the position that had already been established by the lower courts of the UK, but is in contrast to the US, where the Bankruptcy Court has previously confirmed that flip clauses do violate US bankruptcy law.

The result is helpful in removing doubts that arose in respect of applying flip clauses in priority of payments provisions under English law and is an endorsement of the approach adopted by English courts to give effect to the express terms of commercial contracts negotiated by sophisticated parties, according to a recent Orrick client alert. "The position between the UK and the US remains at odds, however, on this point and it will therefore remain a sensitive issue for US financial institutions executing swaps in structured transactions," it notes. "Agreeing the form of legal opinion acceptable to rating agencies in structured transactions where a non-US subsidiary of a US financial entity has in itself proved difficult in some circumstances."

CDS

Bank of Ireland auction results in

Inside markets, physical settlement requests and limit orders were yesterday (28 July) submitted by 13 dealers to The Governor and Company of the Bank of Ireland CDS auction. The auction consisted of seven buckets: senior/subordinated bucket 1 (for which the final price was determined to be 86.5); senior bucket 2 (76.625), 3 (72.875) and 6 (72.5); and subordinated bucket 2 (35.625), 3 (37.25) and 6 (34.25).

The Governor and Company of the Bank of Ireland deliverable obligations are denominated in Canadian dollars, Swiss francs, euro, sterling, Japanese Yen and US dollars.

The final results for the Irish Life and Permanent CDS auction are expected today.

CDS

Irish Life results released

Inside markets, physical settlement requests and limit orders were submitted to the Irish Life and Permanent CDS auction by 13 dealers on 29 July. The auction comprised six buckets: final prices for senior buckets 1, 2 and 3 were determined to be 83, 71 and 71 respectively; final prices for subordinated buckets 1, 2 and 3 were determined to be 38.25, 21.375 and 20 respectively. Deliverable obligations are denominated in euro, sterling and US dollars.

CLOs

Call for Dodd-Frank CLO exemption

The Loan Syndications and Trading Association (LSTA) has submitted to joint regulators a comment letter explaining why managers of open market CLOs are not subject to the risk retention provisions of the Dodd-Frank Act and thus should not be subject to the risk retention rules proposed by the joint regulators. The Association urges the joint regulators to retract their suggestion in the Notice of Proposed Rule Making (NPRM) on risk retention that managers of open market CLOs are covered by these rules.

The LSTA notes that open market CLOs are very different from the types of securitisations targeted by Dodd-Frank. It points out the assets underlying CLOs are liquid and transparent syndicated commercial loans to a broad base of US companies that are made only after careful credit analysis and due diligence. Moreover, open market CLOs performed very well through the financial crisis.

Consequently, the LSTA also urges the joint regulators - to the extent they do not agree with the LSTA's legal arguments - to nevertheless exempt open market CLOs from the risk retention provisions of the Dodd-Frank Act in order to avoid the serious negative consequences that would result from their imposition. "Rather than being originators of loans who sell assets into securitisation vehicles for the purpose of transferring risk from their balance sheets, managers of open market CLOs select loans in the open market for purchase by open market CLOs. Managers neither originate nor sell assets to open market CLOs," comments Bram Smith, executive director of the LSTA.

He adds: "In this way, they function more like managers of mutual funds. If the risk retention rules were applied to managers of open market CLOs, we would risk a shutdown of a business that provides much needed credit to US companies that create jobs and invest in growth."

The LSTA strongly supports the alignment of interests between issuers and investors underlying the risk retention provisions of Dodd-Frank, but notes that such alignment already exists between managers and investors in the context of open market CLOs. Managers of open market CLOs receive the bulk of their compensation only if the CLO performs as expected, the Association notes.

CLOs

Healthy US CLO issuance to continue

The pace of new US CLO issuance will likely remain healthy for the remainder of 2011, with little broader market interference, according to Fitch in its latest CLO Quarterly report.

New CLO issuance volume exceeded US$5.8bn in the first two quarters of 2011, with another US$1.3bn pricing in the first three weeks of July. Fitch maintains its projection of issuance between US$10bn-US$15bn by the end of the year.

"Macroeconomic uncertainty and regulatory concerns do not figure to dramatically affect US CLO issuance in the near term," says Fitch md Kevin Kendra. "Sovereign debt issues and slow economic growth may impede CLO issuance, though not to any great degree for the foreseeable future."

The new generation of CLOs are showing more conservative structural attributes, such as 90% or more senior secured loans, use of Libor floors, shorter reinvestment periods and shorter non-call periods (SCI 5 July). Structures tend to vary somewhat regarding parameters for exposure to covenant-lite loans, purchasing discount obligations and reinvestment parameters after the revolving period.

From a performance perspective, rating actions on Fitch-rated CLOs have largely consisted of affirmations on senior notes at triple-A and upgrades for mezzanine tranches further down the capital structure. Fitch expects more of the same for the rest of 2011.

CMBS

Japanese CMBS see more defaults and downgrades

A high proportion of maturing underlying loans of Japanese CMBS transactions continued to default in 2Q11, according to S&P. At the same time, the agency says downgrade numbers have increased significantly.

Twelve out of the 18 S&P-rated loans that matured in the quarter were not redeemed on their respective maturity dates. However, five other loans that had previously defaulted were completed in Q2.

Meanwhile, S&P says it took an increased number of rating actions during the quarter. "We lowered the ratings on 38 tranches of 14 transactions, representing a large increase in downgrades from the previous quarter, in which we downgraded only seven tranches of six transactions. Meanwhile, we did not raise the ratings on any transactions in the second quarter of 2011."

CMBS

US CMBS delinquencies spike in July

The delinquency rate for US CRE loans in CMBS shot up by 51bp to 9.88% in July, according to Trepp's latest delinquency report. This is the highest delinquency rate in the history of the CMBS market and comes after two consecutive drops in the rate for May and June.

However, Trepp says that much of the jump can be attributed to a technical change in the way some special servicers have been reporting data. Historically, the Trepp delinquency rate has treated a loan as delinquent when the servicer has said that it is pursuing a foreclosure strategy.

In the past, there had been a modest percentage of such loans that were current for which the special servicer was pursuing a foreclosure claim (in June, for example, this amounted to 20bp of the delinquency rate). In July, many more loans that were on a dual track for foreclosure or modification were assigned a 'foreclosure' workout code.

An additional 26bp worth of loans were assessed as a foreclosure strategy, even though the loan was current or within its grace period (this category jumped from 20bp to 46bp). "This manner of classifying loans has allowed us to capture disintegrating stories like Stuyvesant Town as 'delinquent', even though that loan was being kept current by the liquidation of various reserves," Trepp explains.

It continues: "The elimination of troubled loans - losses endured by CMBS loans - reduced the delinquency rate by about 21bp. The net of this, once the reclassification of loans is accounted for and loss resolutions are factored in, is that the core rate jumped about 46bp."

The percentage of loans seriously delinquent is now 9.14%. By that measure, the rate was up by 39bp.

CMBS

CMBS loan liquidations retreat in July

Over US$1.3bn in US CMBS conduit loans were resolved with losses in July, according to Trepp, representing a retreat from June's record level.

In total, Trepp says 175 loans were liquidated in July, compared to 197 loans and US$1.8bn in face amount in June. The losses on the July liquidations were about US$538m - representing an average loss severity of 40.2%. In June, the average loss severity was just under 46.4%.

The July loss severity average is slightly below the average loss severity of 41.8% over the last 19 months. "The special servicers have been liquidating at a rate of about US$1.01bn per month over that time - so the US$1.3bn in liquidations this month is well above the recent ongoing average," Trepp says.

CMBS

European loans in special servicing hit 100

The number of loans in special servicing in European CMBS transactions reached 100 for the first time last month and 15% of euro loans (by balance) is now in special servicing. These figures attest to the troubles that the sector continues to face, according to S&P's July CMBS bulletin.

"Although there were no delinquencies in June, this was to be expected as it is traditionally not a typical month for reporting," the rating agency says. "However, loan defaults and note defaults crept up in July and most of the loans scheduled to mature in July appear either to have been extended or defaulted."

S&P's rating actions in June and July were dominated by its counterparty criteria credit watch resolutions, which affected 120 transactions and moved ratings downwards by a two-notch average. The agency lowered ratings on 128 classes of notes previously rated triple-A, in contrast to the 25 classes it affirmed.

"In most cases, our ratings were constrained by liquidity facility arrangements that are not in line with our 2010 counterparty criteria," the agency explains.

CMBS

US fixed-rate CMBS defaults approaching 13%

Fitch's US CMBS cumulative default rate for fixed-rate CMBS increased to 12.9%, as of the end of 2Q11. This represents a 228bp increase compared to year-end 2010.

"Limited conduit issuance so far this year has not yet helped to stabilise the cumulative CMBS default rate," says Fitch md Mary MacNeill. To date, US$9.95bn in new fixed rate conduit CMBS has been rated by Fitch in 2011. "Highly leveraged loans from the 2005-2008 vintages are also still defaulting at an elevated rate," she adds.

In fact, each vintage from 2005-2008 saw over a 200bp jump in defaults from year-end 2010, with 2007 seeing the largest movement, up by 549bp. The four largest newly defaulted loans all were originated in 2007.

New defaults have declined during the year, however. Numbers for newly defaulted CMBS for 2Q11 came in at US$4bn, compared US$5.8bn in Q1.

The largest five new defaults, all of which occurred in Q1, are: the US$385m Empirian Multifamily Portfolio I (securitised in MLMT 2007-C1); US$335m Empirian Multifamily Portfolio II (ML CFC 2007-8); US$255m Schron Industrial Portfolio (GCCFC 2007-GG9); US$250m Bush Terminal (GCCFC 2007-GG11); and US$187m Windsor Capital Hotel Portfolio (GSMS 2006-GG6).

Fitch says all of the major property types had cumulative default rates increase by over 100bp. Office and retail led new defaults for 2011, with office contributing 31.5% and retail contributing 24.5% of the US$9.84bn in newly defaulted loans.

CMBS

Euro CMBS maturity defaults increasing

Fitch says in a new report that the performance of European CMBS loans deteriorated during 2Q11, primarily due to an increasing number of maturity defaults.

The proportion of loans categorised as being fully performing decreased to 67.2% from 71.2% during the second quarter. Fitch says this was primarily driven by a continued increase in the proportion of loans in maturity default, to 13.4% in 2Q11 from 10.4% in 1Q11. In line with this increase, the proportion of loans declared to be in default (15.4%) and in special servicing (16.3%) also continued to increase over the same period.

The size of the outstanding CMBS portfolio continues to shrink as an increasing number of loans reach their scheduled maturity dates, the rating agency adds. The number of outstanding CMBS loans (excluding granular transactions) fell to 603 in the second quarter from 631 in 1Q11. While five loans realised a loss during the period, the drop mainly resulted from the redemption of higher-than-average quality loans.

"As adverse selection persists, the performance measures of the remaining loans continue to deteriorate," says Gioia Dominedo, senior director in Fitch's European structured finance team. "During 2Q11, the weighed-average interest coverage ratio of the portfolio dropped to 1.7x from 1.8x. This follows a similar drop from 1.9x in the previous quarter."

Leverage on the portfolio remained broadly stable during the period, with an unchanged weighted-average Fitch LTV ratio of 97%. Nearly 60% of loans have Fitch A-note LTVs in excess of 100%, indicating continued pressure on loans maturing in the coming quarters.

Despite the deterioration in performance, the agency reports that ratings remained broadly stable during the past quarter. The majority of tranche ratings remained unchanged (90.9%), with a further 2.2% being upgraded and 2% paying in full, while downgrades accounted for 4.9%.

This stability is due to the fact that significant balloon risk is already incorporated in the current ratings, the agency explains. Where negative rating action was taken, this was typically driven by individual transactions underperforming compared to Fitch's expectations.

RMBS

Subprime contagion effect analysed

Kamakura Corporation has released a policy-oriented research paper that uses a microeconomic model of the prime and subprime markets to measure the macroeconomic impact of subprime mortgage defaults on home prices in general and prime mortgage defaults in particular. The report is authored by Kamakura md for research Robert Jarrow, as well as Marius Ascheberg (Goethe University), Holger Kraft (Goethe University) and Yildiray Yildirim (Syracuse University).

The paper measures the impact of various government policy responses in order to assess the most effective means of dealing with the subprime-related credit crisis. Its key conclusions are that: there is a contagion effect from subprime defaults to prime defaults due to the negative impact of subprime defaults on aggregate income; and monetary policy is the most effective tool for decreasing mortgage defaults and increasing aggregate home prices, in contrast to alternative government fiscal policies designed to loosen mortgage credit.

RMBS

Bank RMBS litigation to remain elevated

Losses related to private-label RMBS litigation and representation and warranty (R&W) claims are likely to increase or remain elevated at some of the largest banks, according to Fitch.

The settlement announced by Bank of America Corporation (BAC) may serve as a potential framework at least for some issuers and investors in private-label securities (PLS), in Fitch's view. Using the economics from the BAC settlement, the agency has revisited its estimates of the potential losses from R&W claims on PLS issued by the largest banks. It believes that the recent uptick in litigation and settlement activity could potentially increase the incentive for the largest banks to settle PLS R&W claims.

According to Fitch's estimates, the largest banks have US$28.5bn-US$33bn in potential lifetime losses from PLS R&W claims. Furthermore, the agency has been able to refine the principal balance figures for the largest banks by using recent public disclosures, which has resulted in greater principal balances, particularly for BAC.

However, increased losses related to PLS R&W are unlikely to have negative ratings implications for the largest banks, according to Fitch. While some institutions have a sizeable exposure, losses are likely to have more of an impact on earnings as opposed to capital.

RMBS

RFC issued on RMBS methodology

Kroll Bond Ratings Agency (KBRA) is seeking public comment on its RMBS rating methodology overview before 9 September. KBRA's rating of an RMBS transaction considers the strategy and operational strength of the originator and servicer, the quality and expected performance of the underlying collateral, and the security's credit enhancement and other terms.

The document outlines KBRA's methodology for non-agency RMBS, including originator and servicer assessments, loan file reviews and loan-level modelling. It is being released along with four other request-for-comment documents that describe in detail aspects of the rating methodology: the residential mortgage originator review process, the residential mortgage servicer review process, the residential mortgage loan review process, and the residential mortgage default and loss model.

KBRA says its rating approach for individual RMBS will be based on an integrated assessment of the originator and the servicer, the mortgage loan pool, and the security structure and transaction terms. "We focus on the market, competitive and regulatory environments in which the originator and servicer operate, in addition to their business model and strategy. Our review processes concentrate on the loan pool, as well as key mortgage origination and servicing operations that - if inadequate - could result in poor collateral performance."

The aim is to gain an informed view of the mortgage loan quality in an RMBS pool beyond what the mortgage and borrower data provided to KBRA may suggest. Combined with rigorous loan-level modelling and stress testing of both loan performance and the securitisation structure, this approach is expected to enable the rating agency to produce thorough and considered credit opinions on RMBS.

RMBS

Further clarity expected for Dutch mortgages

Fitch has published a special report on the expected impact of the updated code of conduct in the Dutch mortgage sector, noting that the update should bring more clarity to the market and with it an alignment and tightening of lending criteria among all residential mortgage lenders. The changes include the reduction in the maximum LTV to 104% plus transfer tax, a maximum of 50% of market value for interest-only loans and tighter rules surrounding comply or explain mortgage approvals.

The potentially negative impact on lending volumes following tighter underwriting criteria could be offset by provisions made by the Home Ownership Guarantee Fund (WEW) that temporarily increased the maximum NHG-eligible loan amount to €350,000 from €265,200 in 2009. In a further effort to boost market activity, this was followed by the temporary (one-year) reduction of the transfer tax to 2% from 6% in June.

"The changes to the Code of Conduct are not driven by deteriorating asset performance," says Ieva Snejkova, associate director in Fitch's RMBS team. "The key reason is to limit the indebtedness of new borrowers and reduce the bullet repayment risk linked to non-amortising mortgage loans."

Fitch expects the updated Code of Conduct to result in an increase of NHG-backed mortgage loans as mortgage lending criteria becomes more closely aligned to standard criteria. The new LTV and interest-only limitations under the amended code of conduct could also be seen as a discreet measure to limit the amount to be tax deductible for new borrowers.

"The Dutch government has decided to leave the tax deductibility scheme unchanged for now," adds Mark Wilder, associate director in Fitch's operational risk group. "However, the amended Code of Conduct should indirectly affect tax deductibility by implying lower loan amounts and lower interest payments to some borrowers."