Contents

CLOs

Limited downside?

Optimistic CLO equity outlook garners investor interest

CLO equity is proving its mettle, with prices remaining resilient in the face of broader market volatility. New investors are looking to participate in this area of the market as industry insiders predict a strong case for CLO equity performance over the next four-to-five years.

"US CLO equity can offer an attractive current yield with limited downside," says Miguel Ramos-Fuentenebro, md at GSO Capital Partners. "Any growth in the market should be positive for the asset class and rising inflation should not have a significant effect. There are many reasons why investors may look at these potentially attractive risk-rewards."

David Wishnow, principal at Tetragon Financial Management, suggests that because yields are low in US government bonds, certain investors are looking for yield in corporate credit. "Whether that's through loans or through structured credit, there are some new investors getting involved," he says. "Some of these new investors are large, traditional, long-only asset managers that would have historically played within the debt tranches. They are now moving down the capital structure and that should be a positive for the CLO space."

A number of other factors are coming together that should result in strong CLO equity performance going forward. The US Fed's decision to keep interest rates low until 2013, for example, means that loan spreads should remain at elevated levels for months to come.

"Higher spreads also make refinancing of outstanding loans less likely, hence prolonging the CLO arbitrage. Not great for triple-As, but perfect for equity," note structured credit strategists at Citi.

The likelihood of low global default rates and ongoing good recovery rates are also deemed positive factors for CLO equity performance. In addition, the investment exhibits low correlation with other fixed income assets.

Wishnow adds that a large percentage of the bank loans that are newly-issued have Libor floors, so if those loans are held in a CLO, that Libor floor may too be a positive for CLO equity returns. The Citi strategists estimate that Libor floors alone in US CLOs contribute approximately 6.25 points per annum to CLO equity returns.

Furthermore, although many older CLOs are coming to the end of their reinvestment period, some CLO managers are still able to reinvest unscheduled principal repayments post this period if, for example, the debt in those deals has not been downgraded by more than two notches. The recent CLO debt upgrades by S&P and Moody's indicates that this may be a possibility for some deals - another positive for CLO equity.

"High spread and the presence of Libor floors suggest that distributions of 30 points or so, seen over the last year, are here to stay for the near future," say the strategists. "At an average equity price tag of 2.5 multiple of annual cashflows, the IRR is an attractive high-teens/low 20s. Market volatility may not go away for awhile, but valuations and relative low duration make CLO equity attractive, in our view."

Despite many industry participants drawing comparisons between the current market climate and that of 2008 and 2009, Ramos-Fuentenebro points out that the key difference between then and now is the technicals. "In 2008 we had a market where many [CLO] holders were unwilling holders: they didn't really understand or want the bonds that they had; for example, the SIVs or those investors with mismatched funding. This resulted in many forced sellers," he explains.

He adds: "Today, we believe most of that has cleared. Managers that didn't sell in 2008 are unlikely to sell now. There may be a few hedge funds who decide it's been a nice ride and decide to sell, but so far we have not seen much activity."

Ramos-Fuentenebro notes, however, that it is difficult to know where the market is at the moment because there is limited trading. "Some open-ended funds that were launched as opportunity funds in the CLO market in 2008/9 may actually be seeing some redemptions now, which could increase trading in the market," he says.

In 2009 GSO's permanent capital vehicle, Carador, tweaked its investment strategy to invest in more senior CLO tranches rather than junior tranches. However, Ramos-Fuentenebro explains that at that time there were defaults in the underlying loans.

"We thought that defaults could significantly increase and so climbed up the capital structure to find opportunities," he says. "The difference now is that - although people are concerned - we believe corporate defaults are not likely to increase. And, at the same time, you can see higher cashflows on the equity. This makes it more difficult to justify investing further up the capital structure."

He concludes: "It's not so much where you sit in the capital structure, but also how quickly you get your cashflows and how much price volatility you can take."

AC

CLOs

US CLO equity holding up

Market volatility continued last week, with macro concerns - such as the contraction reported by the Philadelphia Fed and continuing Eurozone worries - weighing on participants' minds. While CLO pricing will remain volatile until clarity emerges on these issues, one US CLO trader says the current environment is largely leaving investors on the sidelines - albeit equity is still being traded.

CDO BWIC volumes are at the lowest level they have been this year, at around US$1.7bn month-to-date in August. "With most investors concerned about the deteriorating macro outlook, we saw fewer bids last week - most of them were 5-10 points back of the offer," the trader confirms.

He notes that bids are mostly for senior paper, with some also being seen for equity tranches. In particular, one US$54m equity list from Thursday traded well.

"Half a dozen bids on Thursday's equity list traded well above price talk," the trader says. "Even though the loan price sell-off is affecting NAV, technicals continue to improve, with fewer defaults and triple-C downgrades."

The trader notes that CLO triple-As are trading between 200bp and 300bp, with junior triple-As around the 350bp-450bp level. He adds that further down the capital structure triple-Bs trade between 750bp and 950bp, while double-Bs trade at around 1000bp-1300bp.

Structured credit analysts at JPMorgan believe that pricing volatility will last a while longer. "CLO pricing will remain volatile until clarity emerges on the macro outlook and Eurozone policies. However, we continue to observe limited selling of CLOs."

They point out that CLO equity pricing has held up well, despite the volatility, largely due to very high cashflow performance and scarcity of supply. Redemptions of 2008/2009 opportunity funds may serve to boost supply going forward, however.

There could also be a bump downwards in CLO equity prices if loan and market technicals weaken further, but it will be transaction-dependant and the analysts note that there has been stickiness so far. They add: "As one of the very few assets which still offer high cash-on-cash carry in a continued low interest rate environment, we think CLO equity pricing may continue to hold up reasonably well, with downside risks in the near term based on technicals in the loan market."

JPMorgan research indicates that as of end-July a broad group of 375 2005-2007 vintage US CLO equity positions exhibited average annualised cashflow returns of about 28%, versus 17.2% on average between 2005 and 2010. Subordinate OC cushions were averaging 4.2%, with sufficient cushion in most cases to withstand low-to-moderate credit losses caused by triple-C downgrades or defaults.

JL

CMBS

DBUBS braves seasonal slow-down

The latest US CMBS to price is evidence that despite the current market environment there is still investor demand for the structures and that the diminished deal pipeline is only a seasonal slow-down. At the same time, volatility has helped to reinforce which firms are committed to the sector and which are not.

The successful pricing of DBUBS 2011-LC3 last week was important, according to one structurer, because it demonstrated that significant liquidity remains in the US CMBS market. "S&P pulling its rating for the GS MST 2011-GC4 deal, coupled with volatility in the capital markets had sparked concern about the strength and health of the market," he explains. "But the DBUBS triple-As, especially the A4 tranche, were oversubscribed. Now there is a sense that while spreads may widen and pricing change, liquidity is still there."

The DBUBS triple-As were also notable for being publicly placed. The structurer anticipates that further public deals will emerge going forward.

"It's not that there is a lack of 144a demand, but there are plenty of accounts that would like to participate in the market that haven't been able to because the deals weren't public," he says. Among those expected to bring public deals is Cantor Commercial Real Estate, which has recently registered a public CMBS shelf.

But a Goldman Sachs transaction is slated as the next to hit the market, albeit at a smaller size than originally planned. It's not clear whether this is due to the recent spread volatility, which was expected to cause a slowdown in issuance. The size of the DBUBS deal is thought to have been reduced from US$2.2bn to US$1.4bn because some of the loans weren't closed in time, for example.

However, the structurer points out that August is always quiet. "It's hard to tell if the market is a little slower because it's August or because of what's happening in the broader credit markets. I think October and November will be very active though."

He predicts that CMBS pools will increasingly comprise multifamily collateral as the historical dominance of the sector by Fannie Mae and Freddie Mac wanes.

The structurer adds that the big banks and other issuers committed to the CRE market have continued to close financings throughout the recent volatility, suggesting that the dislocation served to separate the wheat from the chaff. "Those that are committed to the market and have the ability to hedge have remained active. A number of other players that perhaps entered the market opportunistically have disappeared."

It appears that the CMBS market hasn't been impacted too badly in the short term by S&P's downgrade of the US. The structurer concedes that although there has been a general flight to quality, the CRE market has maintained its vibrancy due to the attractive rate environment.

"As spreads widen in the capital markets, rates have come in - which is accretive for bondholders," he concludes. "Issuers are also underwriting to healthy metrics, which facilitates the closing of deals. The growth of the business has certainly been supported by historically attractive rates and there continues to be optimism about the market."

CLOs

Manager preps CLO equity fund

Against a backdrop of stagnated European CLO issuance and a looming loan refinancing crisis, European structured credit manager Prytania is preparing a new CLO equity fund designed to provide equity financing and warehousing facilities to would-be CLO managers. At the same time, it hopes to offer investors in the fund returns of around 20%-25% per annum over five years.

"The need for a fully-functioning CLO market is more significant than the regulators seem to realise, particularly given the problem of how to deal with the huge loan refinancing wall," says Mark Hale, cio of Prytania.

Over the next four years some €69bn of European CLOs by par amount will have ended their reinvestment periods, while over the same period up to €61bn of European leveraged loans held within CLO portfolios will need to be refinanced, according to S&P. The rating agency notes that the prospect of little-to-moderate new CLO creation and a general paucity of loan and capital market credit in Europe could leave many borrowers short in the coming years, possibly leading to a second spike in European leveraged loan defaults.

"There's an element of ongoing dysfunctionality in the European CLO market in particular," says Hale. "Even with sensible investors and a range of good managers, it is still very difficult to issue an arbitrage CLO in the region. The subject of risk retention in conjunction with CLOs is one particularly problematic area. There may be creative solutions brought to market in the medium term, but managers are generally not expecting to issue conventional CLOs for the time being."

Many existing CLOs are now coming to the end of their reinvestment periods, although some have made amendments in order to continue investing. Upgrades from S&P and Moody's are allowing managers to reinvest for longer than previously anticipated and unlevered funds are also helping to deal with the refinancing problem, but there is still a lack of refinancing capacity through 2013-2014.

"The gap in funding is substantial and the authorities appear to be more interested in fighting the imaginary problems of the last crisis rather than looking at the looming refinancing crisis," says Hale.

Prytania hopes that its new CLO equity fund will contribute modestly to resolving part of this problem. Hale explains that one of the reasons that some smaller managers Prytania is in dialogue with are unable to issue CLOs is because - unlike the larger managers - they are not in a position to provide material equity to the deal.

The ability to warehouse loans can also prove problematic for some managers, so the fund will also offer warehousing facilities where necessary. "It also gives us the opportunity to work with managers to design new deals with safer underwriting and better structures and gives us some control over the collateral referenced in the deal," he adds.

Prytania sees a strong case for CLO equity performance over the next five years, given the prediction of relatively low global default rates, relatively low real interest rates, ongoing good recovery rates and low correlation of the product with other fixed income assets. In addition, the Libor-floor provision now found in many newly-issued US leveraged loans is set to benefit CLO equity returns, should the loans be referenced in such a deal.

Away from the CLO equity fund, Prytania is also hoping to launch its Metreta Fund in the autumn. The fund will invest in very highly-rated structured finance securities and target professional investors.

"We believe the senior part of the structured finance curve is still artificially cheap for the risk involved and, if the current volatility continues to drive spreads wider, so much the better," says Hale.

AC

CMBS

GRAND restructuring proposal outlined

Deutsche Annington (DAIG), the borrower behind German multifamily CMBS GRAND, has outlined its restructuring proposal for the transaction via a solvent scheme of arrangement. The aim is to deliver noteholders a full recovery of principal over an extended term, it says.

Under the restructuring, DAIG intends to extend the maturity of the notes, to insert a definition of extraordinary resolution into the trust deed and to make other amendments to facilitate a full refinancing of the deal over time. At a meeting held on 16 August between DAIG's in-house legal counsel and the legal advisers to each of the issuer, the ad-hoc group and the trustee, the borrower confirmed that all noteholders would be treated fairly and equally during the process. As such, it is intended that noteholders form a single scheme class for the purposes of approving the scheme of arrangement.

The threshold for corporate schemes of arrangement is believed to be 75% of noteholders. Structured finance strategists at Chalkhill Partners note that this seems an effective way of circumventing a blocking tactic by one of the junior tranches in a standard class by class approval requirement.

However, they point out that the ramifications of the solvent scheme of arrangement are unclear at this stage. "Particularly, the wording around 'the equal treatment of each class of noteholders' raises some questions as to the preservation of waterfalls/seniority that constitute the cornerstone of structured finance transactions."

The emphasis on treating all classes of notes equally may nevertheless indicate that the refinancing could involve the issuance of a single new class of notes.

GRAND's existing maturity date is July 2013. Given the difficulty of refinancing bonds in the current environment, European securitisation analysts at RBS expect that an extension of three to five years will be necessary.

They point out that the pace of asset sales has been quite slow so far. For example, in the last two quarters only 939 and 740 units respectively sold out of a total of over 165,000 residential and almost 40,000 other units.

"We believe that the expectations for sales of the units were too high when the transaction was done and do not have any expectation that this will pick up significantly any time soon. This makes the refinancing critical for the future of the transaction," the RBS analysts add.

Whether the restructuring has a positive impact on the valuation of GRAND bonds depends on whether the sponsor injects cash into the deal, according to the analysts. "If it does not, then any reduction in LTV is due to an increase in valuation or natural amortisation, which we view as largely optical. Even so, a formal refinancing or extension will take away the uncertainty and should be considered a positive."

DAIG aims to finalise all commercial negotiations on the proposal by early October and have the scheme of arrangement implemented by 31 December.

CS

ABS

Risk head departs

David Murphy, head of risk and reporting at ISDA, has left the association. According to an ISDA representative, Peter Sime is interim head of risk and research while the association works on a plan to handle the functions.

Murphy joined ISDA in April last year. It is understood that he will now focus on his structured finance risk management and valuation consultancy, Rivast.

ABS

Lewtan names ceo

Lewtan has appointed Salil Donde as ceo. He joins from Marshall & Swift/Boeckh, where he served as ceo and as a member of the board of directors. Before that, Donde was the president of Fiserv's life and financial software and solutions business.

ABS

Structuring director appointed

GE Capital has hired James Simeons to its corporate structured finance team. He joins as corporate originations and structuring director and will be based in London, responsible for originating and structuring new business financing.

Simeons comes from Bank of Tokyo Mitsubishi UFJ, where he was responsible for trade receivables securitisation. He previously spent 14 years at JPMorgan, rising to the level of executive director. He joins a team responsible for providing structured asset-based lending solutions, such as receivables, inventory and plant & machinery financing.

ABS

Asia corporate trust services strengthened

BNP Paribas Securities Services is expanding its corporate trust service (CTS) in the Asia Pacific, enabling a full range of services from conventional debt to structured debt. The bank has appointed Ben Lumley-Smith as regional client development manager for debt markets based in Hong Kong. He has over two decades' of experience in the sector, working for Citi, JPMorgan and Hambros Bank.

ABS

Fixed income platform bolstered

As part of the expansion of its Americas platform, Natixis has made three senior appointments in its fixed income, commodities & treasury (FICT) Americas team.

Denis Prouteau joins the Americas platform in New York as head of FICT. He has 25 years of experience in trading, sales and debt capital markets, having held senior positions in New York, London and Paris. Most recently, he was co-head of sales for FICT in Paris.

Andrew Schaeffer joins CIB Americas as head of the newly-formed credit platform, comprised of debt instrument structuring, syndication, trading, research and distribution. He has more than 20 years of financial services experience, most recently as head of debt capital markets credit sales & trading at Crédit Agricole.

Finally, Grégory Fage has been named head of FX, interest rate derivatives and money market sales for FICT Americas, with the mandate to further expand Natixis' customer reach and product offering in these markets. He has 15 years of experience and worked his entire career before Natixis at Crédit Agricole, most recently as md, head of FX sales Americas in New York.

CDO

CRE CDO transferred

J.E. Robert Company has assigned the collateral administration agreement for JER CRE CDO 2006-2 to C-III Investment Management, following C-III Capital Partners' acquisition of substantially all of JER's assets and rights related to its businesses as CDO collateral administrator and special servicer in respect of commercial real estate loans. C-III Asset Management will be appointed advancing agent on the transaction.

Fitch notes that the ratings of the JER CRE CDO 2006-2 deal will not be affected by the amendment or the appointment.

See SCI's CDO Manager Transfer database for more recent assignments.

CDO

CRE CDO transfer in the works

Caplease Investment Management is set to assign its collateral manager duties for Caplease CDO 2005-1, a CRE CDO, to NRF Cap. NRF Cap will also become successor advancing agent, with the ordinary shares being transferred from EVA LLC to NRF Cap OS LLC. Moody's has determined that the proposal will not cause its ratings on the notes to be reduced or withdrawn.

See SCI's CDO Manager Transfer database for more recent assignments.

CDS

Swaps director recruited

The CFTC has appointed Gary Barnett to serve as its director of the Division of Swap Dealer and Intermediary Oversight. The new division is part of the agency's restructuring to fulfil its expanded responsibilities under the Dodd-Frank Act.

Barnett will play a key role in the CFTC's efforts to regulate the swaps market under the law. He currently heads the US derivatives and structured finance practice group at Linklaters in New York, where his specialty is the global swaps markets. He also has been actively involved in the development and implementation of clearing systems for the derivatives market.

CDS

London partner relocates

Ashurst partner Chris Whiteley has relocated to the firm's international finance team in Hong Kong. Whiteley has been a partner in Ashurst's London office since 2006 and is a derivatives specialist, with particular expertise in OTC derivatives. He has extensive experience of advising in relation to traditional hedging and trading activities and complex transactions, together with related credit support arrangements, clearing and other credit risk mitigants.

CDS

Collateral management head hired

Citi has appointed Sam Ahmed as head of collateral management sales for Asia Pacific in its global transaction services unit. He joins from Merrill Lynch in Singapore, where he managed regional collateral management and derivatives client services teams for its private banking division. Ahmed reports to Pierre Mengal, regional head of collateral services for Citi in Asia Pacific.

CDS

Risk management practice bolstered

Catena Technologies has appointed Aaron Hallmark as head of its trading and risk management solutions practice. The hire is aimed at strengthening the firm's ability to deliver services related to OTC derivative products and risk management platforms.

Hallmark previously spent more than nine years with Calypso Technology, initially managing the professional services team for the Americas, based in New York, and then moving to Singapore to serve as regional director of professional services for Asia. Prior to Calypso, he held positions at several US-based technology companies, including Infinity Financial Technology, Microsoft and the Stanford Research Institute.

CMBS

Real estate trio poached

McCarthy Tétrault has appointed James Papadimitriou, Valérie Mac-Seing and Sébastien Thomas as partners in its Montreal real property and planning group.

Papadimitriou has extensive experience advising clients in real estate acquisitions, developments, commercial lending transactions, real estate joint ventures, real estate financings, mortgage portfolio purchases, project financings and commercial leasing transactions. He will act as McCarthy Tétrault's real property and planning group lead for the Quebec region and joins from Blake, Cassidy & Graydon.

Mac-Seing has broad expertise in real estate acquisitions, dispositions and structured finance, representing lenders and borrowers in debt restructurings, interim and permanent financings, financings of corporations, and domestic and cross-border acquisition financings. She also advises real estate investment and pension funds, foreign investors, lenders and real estate promoters.

Thomas practises real estate and infrastructure law, with extensive experience in real estate acquisitions and dispositions, commercial leasing and development projects, with a focus on wind energy, infrastructure and industrial projects, municipal zoning and regulatory matters. Mac-Seing and Thomas were previously at Stikeman Elliott.

CMBS

Pru JV hires CMBS originator

Prudential Mortgage Capital Company has hired Curtis Brunton as a principal in the Western region, based in the firm's San Francisco office. He will originate CMBS loans on behalf of the company's recently announced joint venture with the affiliated funds of Perella Weinberg Partners' asset-based value strategy (SCI 11 July), which is focused on providing conduit loans to borrowers.

Brunton, who spent nine years as a principal with Prudential Mortgage Capital Company between1999 and 2008, rejoined the company from Redwood Trust where he was an md. He will report directly to Marcia Diaz, an md in the Los Angeles office.

RMBS

Broker-dealer expands CMO desk

Ally Securities has made two new appointments to its CMO team. Bruce Graham and Chris O'Bara have joined the broker-dealer from BNP Paribas and Nomura Securities respectively.

The pair report to Eric Londa, head of sales and trading for Ally Securities. Graham becomes md for agency CMO trading, while O'Bara becomes an associate in the same group. They follow the recent appointments of Brendan Kissane as director of MBS trading, Joe Ciprari and Joe McNamara each as md for sales in Los Angeles, and Michal Leavitt and Michael Petrucelli each as director for sales in Chicago.

RMBS

Gleacher to focus on MBS, credit

Gleacher & Company says it is implementing a new strategic plan, following a review of its business operations. Under the plan, the firm will continue to service clients through its high-performing fixed income business, while realigning and investing in its core investment banking practice.

The strategic plan is designed to maximise revenue and rationalise expenses by leveraging the expertise and execution capabilities of the firm's fixed income business, including capitalising on opportunities in the MBS and credit markets. It will see the business being reorganised around key industry verticals - including real estate, financial services, aerospace and defense, general industrial and financial sponsor coverage - while opportunistically adding new businesses that have synergies with the firm's core competencies and the needs of its clients. The build-out of the Gleacher's national mortgage origination platform will also continue through additional investment in ClearPoint Funding.

But the firm will exit the equities business. Following these actions, Gleacher will carry a headcount of approximately 400 employees, reducing annual operating expenses by approximately US$40m.

ABS

Seasonal spike for private student loan defaults

According to the latest results from Moody's Private Student Loan Indices, 5.4% of securitised private student loans defaulted in 2Q11, up from 5% in the first quarter. The agency attributes much of the rise to a seasonal spike in the default rate for the 2010 securitisation vintage.

At 5.4%, the default rate index is significantly lower than its record-high peak of 7.6% in 3Q09. Nevertheless, it remains about 2.5 times higher than the average run rate before the recession.

"Loan seasoning has been the primary driver of the improvement in defaults from after the peak rate," says Tracy Rice, a Moody's avp and analyst. "However, we think the bulk of this improvement in performance is behind us."

Record-high levels of unemployment for young college graduates will continue to weigh down on student loan performance, the agency predicts. Looking ahead, it expects the default rate index to stay close to its current level for the remainder of the year.

"A steady 90-plus delinquency rate from the first to second quarter should keep the default rate steady in the third quarter, but the seasonally-driven improvement in the 30-89 day delinquency rate should cause a slight improvement in defaults by year end," adds Rice.

During the second quarter, the 90-plus delinquency rate index was unchanged from the first quarter at 2.7%, ending a string of five consecutive quarterly declines that dates back to 4Q09.

ABS

Continued improvement for US auto ABS

The auto loans underpinning rated US ABS transactions continued to show signs of improvement in July, according to S&P's US Auto Loan ABS Tracker, a new monthly review of collateral performance and ratings activity in the sector.

"We created the Tracker to provide a monthly snapshot of the US auto loan ABS sector," says S&P credit analyst Mark Risi. "The report shows recent developments as well as vintage data from Standard & Poor's Auto Loan Static Index. It will also contain trends in the underlying collateral mix in our rated securitisations, a summary of ratings activity for the month and historical rating transition data."

The July report shows that aggregate net loss rates in June 2011 were approximately 47% lower than their December 2010 levels, although they were 5% higher than in May. The aggregate recovery rate climbed steadily to reach 66%, as of June - an all-time high - up 20% from 55% in December 2010. The percentage of loans delinquent for more than 60 days remained at about 1%, with minor variations month to month.

S&P initiated 69 upgrades, 131 affirmations and 14 positive credit watch placements in June and July, affecting 54 outstanding transactions from five issuers. There were no downgrades.

ABS

Card delinquency rates hit all-time low

US credit card delinquency rates declined to another all-time low in July, with just 3.09% of credit card balances 30 days or more past due, according Moody's Credit Card Indexes. Continuing improvement in delinquencies suggests that credit card charge-offs will resume falling in the coming months, after they ticked up by 5bp in July to 6.09%.

Moody's expects the charge-off rate index to eventually fall to below 4% by the end of 2012. The delinquency rate has posted steady declines over the last 21 months and is now less than half of what it was in October 2009, when it reached 6.23%.

Early-stage delinquencies also declined in July and set a new all-time low of 0.83%, led by a 7bp decline in the Citibank trust. Excluding the effect of the Citibank trust, the early-stage delinquency rate index would have increased modestly due to seasonal factors, says Moody's.

"We expect seasonal trends to persist in the coming months and result in flat to slightly higher early-stage delinquencies, even though the underlying credit of cardholders remains historically strong," says Moody's avp and analyst Jeffrey Hibbs.

Cardholder payment rates - which are a good proxy for cardholders' willingness and ability to pay down their credit card debt - declined in July to 21.28%, down from the all-time high set in June. "Nevertheless, the payment rate is still strong and reflects the shift towards higher-quality obligors who pay their balances in full each month, as weaker borrowers charged off at record levels during the recent recession," says Hibbs.

The yield index slipped again in July, to 19.97%, but this was due mainly to an ongoing decline in the discounting of principal receivables, by which issuers re-classify some of their principal collections as finance charge collections. Excess spread also declined due to the higher charge-offs and lower yields, but remained above 11% at 11.18%, near its all-time high. Moody's expects the excess spread index to remain strong.

ABS

Canadian consumer ABS maintains stability

Canada's consumer ABS market continues to maintain its historically stable performance amid the country's sound credit environment, according to S&P.

"While the amount of outstanding ABS declined during the recent economic downturn, overall performance has been improving," says S&P research analyst Erkan Erturk. "In addition, the new issuance market remains active and the country's unemployment rate continues to decline."

Canada's consumer-lending practices and securitisation structures have generally been conservative, which creates collateral with high credit quality and helps support stable ABS ratings, the agency notes. Indeed, Canadian ABS ratings have been stable across all rating categories since 1991 and S&P expects this to continue over the next 12 months as the unemployment rate continues to trend down.

Credit card charge-offs are relatively low and although receivables have decreased over the past year, the new ABS issuance market has been active. Meanwhile, Canadian auto loan collateral continues to outperform US auto loan ABS transactions. Specifically, Ford Canada's 2009 and early 2010 auto loan ABS transactions have been outperforming Ford's same-vintage US deals.

However, potential risk factors remain for Canadian consumer ABS transactions, including a potential global economic slowdown and any adverse change in the labour market or consumers' ability to absorb higher debt servicing costs when interest rates start to rise.

ABS

All change in US securitisation

At the end of July 2011, with a shade over US$160bn of qualifying deals completed, the leaders have once again all swapped around in what remains a closely fought race for top place in the SCI US league tables for bank arrangers in the structured credit and ABS markets. For the first time this year, JPMorgan holds top place in the US to match the position it has held in Europe since March. Europe, meanwhile, continues to lag significantly in volume terms, recording €62.75bn worth of qualifying deals year-to-date.

Last month's leaders in the US league table remain close, but have swapped positions in July. June's number one Barclays Capital is now second and Bank of America Merrill Lynch drops from third to fourth, having been overtaken by Citi. Deutsche Bank remains fifth, but sixth and seventh placed Wells Fargo and RBS were able to close the gap this month.

In Europe, JPMorgan continues to lead the table, having been involved in over €21.4bn worth of deals in the year to end-July. However, BNP Paribas has jumped one place to second and Lloyds TSB two places to fourth in a quiet month that saw €4.2bn worth of deals.

The league 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.

To see the tables for the year to end of July 2011 click here.

ABS

Auto RVs near all-time highs

Prices and residual values for US wholesale used vehicles are near all-time highs, which is leading to strong performance for auto lease ABS, according to Fitch in its inaugural Auto Lease RV Loss Index results. Residual value (RV) realisations on outstanding auto lease ABS have produced gains on a consistent basis since mid-2009.

At the same time, credit losses have improved drastically over the same period. Annualised net credit losses (ANL) for auto lease ABS in June dropped to virtually zero down from the peak of 0.70% auto lease ANL in June 2009. Credit loss performance trends for auto lease ABS have closely mirrored those of auto loan ABS, albeit at a much lower level.

Fitch senior director Brad Sohl expects more of the same in the near term. "Supply and demand for used vehicles is likely t support strong residual values for auto lease ABS in the near term," he says. "While the uncertain direction of the economy may lead to some weakening, credit losses are likely to remain low and generally within expectations."

The strong sector outlook will extend into auto ABS rating performance, Fitch concludes.

CDO

Consecutive declines for CRE CDO delinquencies

US CRE CDO delinquencies declined for the third straight month, according to Fitch's latest index results. July delinquencies fell to 11.8% from 12.6% in June. Asset managers reported 12 new delinquent assets last month, including nine newly impaired CMBS bonds.

While new delinquencies included one term default, two matured balloons and nine impaired securities, 14 formerly delinquent assets were removed from the index. However, some loans that were brought current or extended may resurface and cause CRE CDO delinquencies to rise if these work-outs prove to only postpone an inevitable default.

The removed assets include: four matured balloons, which were recently modified and/or extended; two defaults that were restructured and brought current; two defaulted assets that were paid off in full; one impaired CMBS with a prior interest shortfall that was brought current; one mezzanine interest foreclosed out resulting in 100% loss; and four assets sold or paid off at discounts to par ranging from 0.03% to 85%.

In July, CRE CDO asset managers reported approximately US$31m in realised losses. The highest loss was related to the discounted sale of a participation in a loan secured by a recently constructed hotel in Atlantic City, New Jersey, Fitch reports. The remaining portion of the loan remains in the CDO. The next largest loss was related to the sale of a whole loan on a New York City hotel.

In total, CRE CDO realised losses total approximately 10% of par (based on original fully ramped collateral). Modelled expected losses on Fitch's portfolio average 36.6%.

The continued accumulation of realised losses is not expected to negatively impact the more senior CRE CDO ratings, as prior rating actions have contemplated future losses. Ratings on the most junior classes remain subject to volatility as future realised losses may differ from current expectations on specific CDOs.

Office - the largest property type at 24% by balance - remains at the lowest delinquency rate among all property types. Conversely, loans from non-cashflowing property types such as land, condominium conversions and construction - which depend on either interest reserves and/or borrower coming out of pocket - have the highest delinquency rates.

Current delinquencies by asset type are: 35% (accounting for 5% of total collateral) for land; 27% (2%) for condo; 21% (1%) for construction; 15% (15%) for multifamily; 12% (16%) for hotel; 11% (21%) for rated debt; 10% (1%) for industrial; 9% (7%) for retail; 6% (24%) for office; and 11% (5%) other. The remaining 3% is uninvested principal cash.

In July, 31 of the 33 CRE CDOs rated by Fitch reported delinquencies ranging from 0.8% to 50.2%. Additionally, 16 rated CRE CDOs were failing at least one OC test, which is one more than the prior month.

A majority of the Fitch-rated CRE CDOs have received pay-downs to their most senior classes as the CDOs either exit their reinvestment periods or have periods of OC test failure. As of the July reporting period, 20 CDOs remained in their revolving periods. However, nine of those CDOs will soon become static as they reach their reinvestment period exit dates by year-end 2011.

CDS

Trade repository recommendations released

The Committee on Payment and Settlement Systems and IOSCO's Technical Committee have released for comment its recommendations on the OTC derivatives data that should be collected, stored and disseminated by trade repositories (TRs). The committees support the view that TRs, by collecting such data centrally, would provide the authorities and the public with better and timely information.

The recommendations address the Financial Stability Board (FSB)'s October 2010 report, 'Implementing OTC derivatives market reforms'. This called on the CPSS-IOSCO to consult with the authorities and the OTC Derivatives Regulators Forum in developing: minimum data reporting requirements and standardised formats; and the methodology and mechanism for data aggregation on a global basis.

The proposed requirements and data formats will apply to both market participants reporting to TRs and to TRs reporting to the public and to regulators. CPSS-IOSCO also find that certain information currently not supported by TRs would be helpful in assessing systemic risk and financial stability, and suggest options for bridging these gaps.

The recommendations also cover the mechanisms and tools that the authorities will need to aggregate OTC derivatives data. They advocate a system of standard legal entity identifiers (LEIs) as an essential tool for aggregation of such data and that TRs actively participate in the LEI's development and use the system once it becomes available. As the implementation of a universal LEI will require international cooperation, it is noted that further international consultation would be beneficial.

Finally, it is suggested that CPSS-IOSCO or the FSB make a public statement calling for timely industry-led development, in consultation with the authorities, of a standard classification system for OTC derivatives products.

Comments on the recommendations should be sent by 23 September. After the consultation period, CPSS-IOSCO will publish a final report by the end of 2011.

CDS

CDS liquidity peaks on sovereign concerns

Fitch Solutions reports that in the month to 19 August increased CDS market uncertainty on the prospects for sovereigns has pushed average global CDS liquidity to its highest level since the firm's liquidity scores time series began in March 2006.

"CDS referencing developed market sovereigns have seen the biggest liquidity surge, followed by emerging market sovereigns, with average CDS on both now trading at near similar levels of liquidity," comments Diana Allmendinger, director, Fitch Solutions in New York. "This near convergence between developed and emerging market sovereign CDS liquidity was last seen during the start of this year and appears to signal renewed CDS market uncertainty on the potential for Eurozone contagion, as well as slower global growth."

As of last Friday's market close, average CDS liquidity for emerging and developed market sovereigns was 8.12 and 8.26 respectively, compared to 8.21 and 8.45 one month previously. Average global CDS liquidity closed at 9.30 versus 9.34 for the same period.

CLOs

Green light for Lehman CLO plan

Lehman Brothers Holdings' asset management agreement with WCAS Fraser Sullivan (SCI 28 July) has been approved by Judge James Peck of the US Bankruptcy Court. The court ruled yesterday that the relief sought through the agreement is in the best interests of the debtors and their creditors.

Under the asset management agreement, the debtors: are entitled to receive collections of proceeds from loans that are non-CLO assets; can retain the decision-making authority for any actions for which Fraser Sullivan is required to seek approval; can receive the portion of the consideration paid by any CLO issuer that relates to its loans; continue to be obligated for any future funding obligations; and are obligated to pay their proportionate share of the fees payable to and expenses of Fraser Sullivan.

CMBS

EMEA special servicing activity outlined

Moody's reports in its latest EMEA CMBS specially serviced loans update that in July three new loans were transferred into special servicing and four were transferred out. This brings the total number of loans in special servicing to 103, accounting for about €14.6bn.

The agency expects the number of loans in special servicing to increase, driven primarily by non-payment at maturity. Based on the outstanding balance, it notes that only 0.7% of the loans are not from the 2005 to 2007 vintages. Further, 75% of the properties backing the loans are based in the UK and Germany, 48% of the loans are backed by office buildings or retail property and 63% of the loans are represented in four EMEA CMBS conduit programmes - Eclipse, Titan Europe, White Tower and Windermere.

Finally, 78% of the loans have been in special servicing for over a year, with 71% of the loans in special servicing being due to an LTV covenant breach or non-payment during the term or at maturity and 47% being delinquent. The weighted-average Moody's expected loss severity for loans in special servicing is stable, at 37%.

CMBS

Innkeepers agreement terminated

Chatham Lodging Trust and Cerberus Capital Management have terminated their commitment and obligation to acquire interests in 64 hotels owned by Innkeepers USA Trust, in accordance with the terms and conditions of their 16 May agreement (SCI 16 May). The two firms say they jointly determined to terminate the agreement due to the occurrence of a "condition, change or development that could reasonably be expected to have a material adverse effect on Innkeepers' business, assets, liabilities (actual or contingent), operations, condition (financial or otherwise) or prospects". Chatham's separate purchase of five Innkeepers hotels, which closed on 14 July, is not affected by this decision.

CMBS

Multifamily CMBS lags apartment recovery

Despite various metrics pointing to a recovery in the apartment sector, the credit performance of CMBS backed by multifamily collateral has yet to benefit, according to S&P.

The factors that have helped bolster the apartment sector include: the weak US housing market, an increase in demand from the 20-34 year-old core rental group, modest new apartment supply and the de-bundling of households. Further, S&P notes that the Apartment Tightness Index is at very strong levels according to the National Multi Housing Council and, as reported by CBRE, apartment rents rose almost 4% on an annualised basis through the second quarter.

"Despite the apartment index and rental trends, the CMBS multifamily delinquency rate is at a historically high level - not what would be expected in a recovering sector," says S&P credit analyst Larry Kay. "In June 2011, the CMBS multifamily delinquency rate was at 15.50%, well above the rate of 1.10% at the start of the recent recession."

According to S&P, considerations in three areas are causing the divergence and may keep the CMBS multifamily delinquency rate at high levels: property location, collateral grade and rental conversions. More specifically, the markets with the steepest home price declines also have some of the highest CMBS multifamily delinquency rates.

RMBS

Shadow inventory declining?

S&P's estimate of the months to clear the supply of distressed homes on the market in the US fell for the first time since mid-2009 during 2Q11. The volume of distressed US non-agency residential mortgages also decreased during this period.

At the end of 2Q11, S&P estimates that the balance of shadow inventory shrank to approximately US$405bn, from an estimated US$433bn at the end of the previous quarter. This latest number represents just under one-third of the outstanding non-agency RMBS market in the US.

"We estimate it will take 47 months to clear the national shadow inventory. This is five months shorter than our estimate at the end of 1Q11 but still six months longer than our estimate one year ago," says Diane Westerback, md of S&P global surveillance analytics. "In conjunction with stable liquidation rates, we believe these are positive signs that the amount of time it will take to clear this 'shadow inventory' should continue to decline over the next year."

S&P based its analysis on LoanPerformance loan-level non-agency RMBS securities data available through CoreLogic. While the analysis of the shadow inventory uses only non-agency data, the agency believes that the months-to-clear is similarly high for the market as a whole.

"Long liquidation timelines and the accumulation of so many distressed loans are due in large part to rising court delays in foreclosure proceedings, a problem that plagues agency and non-agency loans indiscriminately. As long as these delays continue to affect the housing market, the shadow inventory remains a market-wide threat," concludes Westerback.

RMBS

Silverstone restructuring proposed

Nationwide is proposing to restructure its Silverstone UK RMBS master trust, subject to noteholder approval. Moody's reports that the restructuring will not impact the current ratings assigned to any of the notes issued by the trust.

The restructuring plan involves: removing the yield reserve and increase the margins on the funding swaps; replacing part of the support provided by the reserve fund with Z notes; and including criteria that will enable Nationwide to make a one-off repurchase of surplus loans from the trusts and reduce the minimum trust size. Other amendments include changes to the terms of scheduled amortisation and bullet notes post step-up, rules relating to conditions precedent prior to a refinancing contribution being made and the granting of loans by the seller to fund the expenses incurred in respect of the proposal.

Following the restructure, the yield reserve of 9.8% - which was previously established to pay excess margin on certain class A notes - will be removed. The margins payable by the swap counterparty under the funding level swap will be increased in line with current market rates and to allow all of the interest payable on the notes to be paid directly from revenue receipts. As a result, the asset yield above Libor post-swap is expected to increase from 0.9% to 1.5%.

The reserve fund will be reduced from 4.9% to at least 3.3% of the notes currently outstanding. At least £1.2bn of new 2009-1 class Z notes will be issued such that the overall credit enhancement provided to the rated notes in the trust will increase from 13.8% to at least 17.2%. The reduction of the reserve fund and removal of the yield reserve reduces the dependence on cash reserves and increases the reliance on the underlying mortgage collateral and revenue receipts, according to Moody's.

Loans that are fixed for longer than five years (accounting for around £950m) will be included in the one-off repurchase of loans, along with a random selection of further loans to reduce the trust balance to around £28bn. The minimum trust size will be reduced further to £23bn in the period to October 2013, and to £13bn in the period between October 2013 and October 2014.

RMBS

Eurosail impact investigated

Following the recent Eurosail court judgments, Moody's believes that some structured finance issuers in the UK and mainland Europe could become balance-sheet insolvent under English law. However, it suggests that this is not a material credit risk for many investors because the probability of negative consequences subsequently arising is very low.

Most post-enforcement call options (PECOs) and some limited recourse provisions are ineffective in preventing issuers from becoming balance sheet insolvent. These features are only effective if it is inevitable that an issuer's liabilities will be discharged.

If an issuer becomes balance sheet insolvent, the main risk is that an event of default could be triggered, which could then theoretically lead to enforcement. However, even if the issuer becomes balance sheet insolvent, most investors are very unlikely to be negatively affected because enforcement is unlikely to occur unless senior noteholder interests are served.

Moody's has completed its preliminary review of a sample of transactions and is continuing to investigate the implications of the Eurosail judgments for other structured finance transactions.