Contents

CLOs

Mixed bag

Volatility offers pros and cons for CLOs

The recent sell-off in US leveraged loans has enabled existing CLOs to purchase assets at a discount. However, the current spread environment is proving somewhat challenging for managers seeking to bring new issues.

Charles Kobayashi, portfolio manager at BlueMountain Capital Management, confirms that the recent sell-off in leveraged loans is positive for existing CLOs because assets can be bought at a discount. "Fundamentals haven't changed: defaults remain low - they may creep up eventually, but the outlook remains promising in terms of default and secured recoveries."

However, he concedes that the current spread environment is a little more challenging for CLO managers seeking to bring new issues. BlueMountain priced its recent BlueMountain CLO 2011-1 at the end of July, but only a middle market CLO and a refinancing have printed since then (see SCI's CDO database).

The firm is waiting to see what the clearing price is for the next deal that comes to the market before considering whether to launch a new CLO. "We're in discussions with underwriters and investors, but it depends on the arbitrage," explains Kobayashi. "It comes down to the spread on the triple-As, given that they account for 60% of the capital structure. The coupon on our latest transaction was 120bp, but 130bp-140bp would still work, based on underlying loan spreads; 200bp doesn't make sense economically."

An estimated five to seven deals are in the pipeline, aiming to price after Labor Day. Kobayashi points out that liquidity tends to dry up around holidays, but what happens after Labor Day will be a good indication of where the market stands.

Meanwhile, the challenging new issue environment also appears to be facilitating CLO manager consolidation. "Fewer managers are able to come to the market and reinvestment periods are ending, meaning that the vehicles will start delevering and these managers will receive lower management fees," Kobayashi observes. "There are a number of likely candidates out there: many managers came in 2005-2007 with one or two deals - they are now in a position where they have to either grow AUM or sell. At the same time, many larger players are ready to take on collateral management contracts."

Consolidation among European managers, in particular, is likely to gather pace due to the lack of a new issue market. "If your business model is based on increasing assets under management, it's currently a very difficult environment. While prohibitively high prices were previously being asked of potential acquirers [SCI 26 April], sellers' expectations are now much-reduced," Kobayashi adds.

Structured credit strategists at Citi estimate that close to 40 CLOs have changed hands in five separate M&A transactions so far this year (see also SCI's CDO Manager Transfer database). They note that over the past three years the number of CLO managers has shrunk to 111, from 136 at the market's peak in late 2007. The top-10 managers now control almost 40% of the US CLO universe, with 60 managers holding four or fewer transactions.

The Citi strategists point to two further potential sources of consolidation among CLO managers. First is a merger by smaller, independent managers that better positions them to source loans and get preferred treatment by the Street. However, the problem with this type of transaction is the issue over who will run the firm post-merger.

"A more likely source of M&A is a transaction in which private equity shops look to expand their CLO management platforms to grow business and place loans from sponsored transactions," they add. "Apollo's acquisition of Gulf Stream [SCI 8 July] is exactly this type of transaction and we may see a handful of similar deals in the future. Sankaty and Katonah, both with the backing of private equity, may be in the hunt to expand their platforms."

Against the backdrop of the current market volatility, Kobayashi nonetheless suggests that as a long-term investment CLOs are defensive because they are managed through the cycle. "Distributions have remained strong and most structures came through the financial crisis intact - CLOs have been proven robust in a higher default environment. Term loan recoveries have typically been in the 70s context."

The US CLOs launched so far in 2011 have been fairly standardised, with two-year non-call and three- to four-year reinvestment periods at 10x-11x leverage. Nicole Pineda, partner at Walkers, confirms that most of the structures she is seeing are vanilla.

"Investors want fairly transparent, simple structures. Many participants still view CLOs as a more viable product than perhaps other ABS asset classes, with more connection to the real economy. But suspicion remains about overly-engineered transactions," she explains.

Philip Paschalides, partner at Walkers, adds that a lot of his work in the CLO space has focused on the refinancing of existing deals. "Whether this is a straightforward process depends on the number of noteholders involved and how easy it is to form a consensus. It was assumed that everyone had the same interests, but over the crisis, we learned how noteholder interests often diverge," he notes.

Nevertheless, a number of more complicated transactions have come to the market over the last year or so. Indeed, the first US CLO to reopen the market after the financial crisis - Fraser Sullivan's COA Tempus deal from May 2010 - used new technology in the form of merger provisions to aggregate a number of other Cayman vehicles that had not closed full-blown capital markets deals.

"The latest iteration of this technology, BlackRock's BMI CLO I, came in June and involved merging a Delaware corporation with a Cayman company. These are structures which are more complicated to organise, but bring economies of scale for the managers," observes Paschalides.

A couple of BDC structures have also closed over the last year or so, including the Golub BDC 2010-1 from July 2010. But statutory and regulatory requirements as to how they operate appear to have limited the take-up of the vehicles by CLO managers.

Looking ahead, Paschalides remarks that Cayman is often used as a jurisdiction for transitioning due to its creditor-friendly laws and a solid reputation for innovation. "During the financial crisis, large portfolios - with up to US$30bn of assets - were restructured through Cayman vehicles via sophisticated repackagings or by otherwise modifying maturities or gaining shelter from mark-to-market requirements. Given the current market volatility and the sudden spike in nervousness with respect to financial institutions, we could see more of this happening again," he concludes.

CS

ABS

ABS analyst added

Scottish Widows Investment Partnership has appointed Sarah Wall as senior ABS investment analyst. Based in the firm's London office, she reports to Daniel McKernan, head of European and UK credit. Wall has over 11 years' experience in the financial industry, most recently at M&G Investments, where she was director of ABS restructuring and before that director of ABS credit research.

ABS

ABS trader returns to BNPP

BNP Paribas has hired Bjoern Bauermeister as an ABS and MBS trader in London. He reports to Olivier Morand-Duval, European head of ABS trading.

Bauermeister joins from Cantor Fitzgerald, where he spent two years in non-US ABS and MBS trading after a previous stint at BNP Paribas. He has also worked for WestLB, trading ABS and ABS CDOs.

ABS

Structuring vet moves to SG

Tareck Safi has left his role at RBS, where he was head of secured asset solutions, and is set to join Société Générale in November. He will join the European loan syndicate on the sales and trading desk, tasked with developing coverage of institutional investors.

Safi will report to Richard Hill, EMEA head of loan sales and trading. He spent more than nine years at RBS and has previously held ABS-related posts at Mizuho and HSBC.

CDS

ISDA names deputy ceo

George Handjinicolaou has returned to ISDA as deputy ceo and head of ISDA Europe. He will be based in ISDA's European headquarters in London.

Handjinicolaou served as ISDA's deputy ceo and regional director for EMEA from July 2007 to June 2009. In May 2009, he was appointed to the role of vice-chairman of the Hellenic Capital Market Commission (HCMC). He most recently was ceo of TBANK.

CLOs

Patriot Capital duo find new home

JMP Group's alternative asset management arm Harvest Capital Strategies has formed Harvest Capital Credit, a specialty finance company providing structured credit to small businesses. Richard Buckanavage, who was formerly president and ceo of Patriot Capital Funding, serves as president of Harvest Capital Credit and is joined by Ryan Magee. The pair will be based in New York.

Although Harvest Capital Credit will originate transactions independently, it will leverage the infrastructure and capabilities of JMP Credit Advisors and should benefit from relationships and opportunities presented by Harvest Capital Strategies, which has committed an initial equity investment of US$10m and an additional line of credit of up to US$30m.

Before co-founding Patriot Capital Funding, Buckanavage held a variety of positions at GE Capital Corporation, most recently as md and head of debt capital markets. Magee was formerly a vp at Patriot Capital Funding and its successor Prospect Capital Corporation. He previously held a portfolio management role in GE Capital Corporation's global sponsor finance unit.

CLOs

Dalradian CLOs acquired

Rothschild Credit Management, a 100% owned subsidiary of NM Rothschild & Sons, has acquired Elgin Capital. Elgin Capital will remain as collateral manager on the Dalradian European CLO I, II, III and IV transactions, however, and continue to manage the portfolio in accordance with the master collateral management terms dated 8 August 2007.

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

ABS

Auto ABS performance set to slow

Marginally higher delinquencies and losses last month have done little to put the brakes on strong US auto loan ABS performance, according to Fitch's latest index results for the sector. The agency does expect auto ABS performance to slow in the third quarter, however, which is typically the weakest time of the year.

According to Fitch senior director Hylton Heard: "Dealers discount existing new vehicle models while awaiting new 2012 year models to enter showrooms, which tends to drive severity higher and results in higher loss levels. That being the case, auto loan ABS remains on firm footing and will likely remain so this year with little outside interference."

Prime 60+ days delinquencies rose to 0.50% in July, a 4% increase but in line with the level in March earlier this year. Delinquencies are 11% lower than this time last year, though the rate of improvement has levelled off in recent months.

Annualised net losses (ANL) were at 0.48% in July, within record lows recently recorded, despite the 17% jump over June's level. ANL were still well below 2010's rate by 40%. The record low for this index was 0.41% recorded in June this year.

Outside of seasonal patterns, auto ABS performance continues to be supported by high used vehicle values and thus high recovery rates, and stronger loan and borrower structures/characteristics in recent vintages securitised.

ABS

Auto ABS loss expectations lowered

Credit performance has remained strong across all types of US auto loan ABS since mid-2009, says Moody's in a new quarterly sector summary. The strong performance is driven by the improvement of consumer credit and the exceptionally strong used vehicle market.

"Delinquencies remain at historical lows and excess spread, the first level of credit protection against losses, has on average been sufficient to cover losses," says Sanjay Wahi, a Moody's avp and analyst.

Across all subsectors, transactions issued in 2009 and 2010 are performing significantly stronger than Moody's expectations at the time that they were rated. "As compared to those of prior years, the 2009 and 2010 transactions also benefit from stronger underlying credit, with borrowers having higher average FICO scores, and loan terms with short maturities," adds Wahi.

As of August 2011, Moody's has lowered its loss expectations on average by 20% to 50% from original expectations at the time the ratings were issued, leading to upgrades or reviews for upgrade of many securities. The agency has also lowered its loss expectations for auto loan transactions issued prior to 2009.

Moody's now expects these vintages to perform on average 1.5 to two times weaker than original expectations, down from earlier estimates in 2009 of 1.5 to three times. As a result, several securities from these transactions have also been upgraded.

Prime and subprime pools on average fall towards the low- and mid-end of the range of Moody's current loss expectations, while near-prime pools - which suffer from concentrations in some economically weaker US states - on average fall toward the high-end.

The 2011 vintage of auto loan securitisations are also performing strongly, says Moody's, and similarly to their 2010 counterparts - although they are marginally weaker in terms of borrower credit quality and lending terms. As these transactions season, the agency will update its loss expectations as needed.

ABS

Affirmations for some FFELP ABS

S&P has affirmed its ratings on 239 classes from 178 US FFELP student loan ABS deals and removed them from credit watch, where they were placed with negative implications on 15 July, following the placement of the US sovereign ratings on credit watch negative.

The rating affirmations include 26 classes of triple-A rated senior bonds from 22 transactions. The remaining affirmations affect senior bonds rated no higher than double-A plus and mezzanine and subordinate bonds rated no higher than double-A.

The ratings on 118 classes from 63 FFELP student loan transactions, rated below the rating of the US, remain on credit watch negative due to performance or counterparty-related issues. Ratings on 1,035 classes from 295 deals, rated triple-A and double-A plus, remain on credit watch negative due to US sovereign exposure and in some cases counterparty-related issues.

CDS

Further Irish Life credit event called

ISDA's EMEA Credit Derivatives Determinations Committee has resolved that a restructuring credit event occurred in respect of Irish Life & Permanent. One or more auctions may be held in respect of outstanding CDS transactions of varying maturity buckets. This is a subsequent and separate credit event to that which the EMEA Credit Derivatives Determinations Committee resolved on 5 July and which was settled following auctions held on 29 July (SCI 1 August).

CDS

iTraxx rules amended

Markit has amended the rules governing its Markit iTraxx Europe family of credit default swap indices. The new rules take effect immediately and will therefore apply to the indices' roll into Series 16 on 20 September.

Under the amendments, a Governance Committee has been established that includes the 12 Markit iTraxx Europe market makers with the largest index trading volumes in the past 12 months, according to DTCC TIW figures. Committee members will be reviewed once a year.

The Committee has voted to implement a number of changes in connection with the iTraxx Europe Crossover and Main indices. With respect to the former, entities that do not have actively traded CDS are now eligible for inclusion in the index. In addition to the usual eligibility criteria, these entities must have issued a minimum of €500m of new debt over the past 12 months and have at least one bond included in the Markit iBoxx EUR Liquid HY and/or Markit iBoxx USD Liquid HY indices.

Constituents eligible for inclusion in the iTraxx Main index will also now be selected directly from a liquidity list based on trading activity data from the TIW. Previously, constituents that were no longer eligible were removed from the previous series of the index and replaced by entities from the liquidity list. The sector-specific membership criteria, which require entities from a number of specific sectors to be included in the index, remain in place.

CLOs

German SME performance diverges

Of the three German SME securitisation sub-segments, SME CDOs and mezzanine CDOs performed worse than SME ABS during the financial crisis, according to Moody's. Mezzanine CDOs experienced greater refinancing risk concerns and adverse obligor selection, while the less granular portfolios backing SME CDOs and mezzanine CDOs mean they experienced higher cumulative default rates. While Moody's outlook for SME ABS and CDOs remains stable, its outlook for mezzanine CDOs is negative on the back of continued downward rating pressure.

Mezzanine CDO cumulative defaults outstripped by a factor of 10 those for SME ABS transactions, which have shown strong performance compared to initial expectations. SME CDOs performed below original expectations as their cumulative default rate is more than twice as high as that for SME ABS after 57 months following the closing date.

Further, during the peak of the crisis, the quarterly default rate for SME CDOs increased more steeply than for SME ABS. For mezzanine CDOs, such rates have been much worse at higher absolute level and experienced more volatility. In addition, recoveries were lower than expected in SME ABS and CDOs, but better than for mezzanine CDOs.

In part due to the differences in collateral performance, rating migration patterns were also different for the three sub-sectors. German SME ABS deals have experienced little rating migration, while ratings of SME CDOs and in particular mezzanine CDOs have migrated significantly.

CLOs

SME CLO review completed

Fitch reports that the reviews of SME CLO transactions since its criteria update in June (SCI 7 June) have mostly resulted in rating affirmations.

"79% of the reviewed SME CLO tranches have been affirmed, as transaction performance has mostly stabilised," says Laurent Chane-Kon, director in Fitch's European structured finance team. "Portfolio performance - rather than the criteria update - was the main driver of the actions, with upgrades representing 9% of the rating actions, offsetting downgrades, which total 8%. The magnitude of the rating actions was confined within one rating category, except for one tranche that was downgraded by two categories due to counterparty risk."

Most of the reviewed transactions were Spanish and German SME CLOs. The affirmation of most of the Spanish SME CLOs reflects the stabilisation of the delinquency and default level observed in the portfolios and the deleveraging of the transactions. German SME CLOs had mixed performance, but the moderate credit deterioration observed for half the CLOs was offset by portfolio amortisation and excess spread protection, resulting in most cases in rating affirmations.

CMBS

DQT up after two months of declines

The delinquency rate on loans in US CMBS conduit and fusion transactions rose by 22bp in July, remaining above 9% for the seventh consecutive month, according to Moody's Delinquency Tracker (DQT). Meanwhile, the rate of loans in special servicing, as measured by Moody's Specially Serviced Loan Tracker (SSLT), fell by 5bp to 12.3%.

This was the third consecutive decline in the SSLT and the 306bp spread over the DQT is the lowest it has been since August 2009. "Given the elevated specially serviced loan rate and continued economic uncertainty, CMBS delinquencies are likely to remain in the high single-digit range for the near term," says Tad Philipp, director - CRE research at Moody's.

There was no new CMBS conduit issuance in July to offset the loans that left the CMBS conduit/fusion universe, resulting in a US$5.1bn drop in CMBS outstanding, Moody's says. An increase in the delinquent loan balance of US$835m also contributed to the rise in delinquency rate.

The delinquency rate for hotels shrank in July, falling by 76bp to the current level of 15%. Thirty-five hotel loans were either worked out or disposed of, bringing the hotel delinquent balance to a one-year low.

The delinquency rates for office and retail both rose, however. Office delinquencies rose to US$14bn, up by US$1.8bn from the beginning of 2011. Industrial delinquencies declined by almost US$200m, while multifamily remained approximately the same.

Delinquencies in all but two vintages from the 2000-2008 period rose. The exceptions were 2003 - which was down by 6bp - and 2008, down by 1bp. The delinquency rate for 2001 rose markedly, by 795bp, ending July at 33.78%. The elevated delinquency level for 2001 was due primarily to a decline in the overall balance, with only 18% of the 2001 vintage balance still outstanding.

CMBS

Recovery analytic values published

S&P has released the updated values for its CMBS recovery analytic. The move follows the June update to the framework and macroeconomic assumptions that the rating agency uses in its regression models for forecasting property revenue and capitalisation rates (SCI 13 June).

S&P has published an Excel workbook, which contains three spreadsheets. One describes the various columns in the result spreadsheets, one provides deal-level results and one provides bond-level results for the agency's five macroeconomic scenarios.

"A number of market participants requested that we incorporate actual losses in the deal- and bond-level loss estimates. We estimate actual realised deal-level losses based on bond-level write-downs and added additional columns on the deal-level spreadsheet, which incorporates actual losses and our loss forecasts. We have also included the bond-level cumulative losses as of 31 July 2011," S&P says.

Transactions included in the spreadsheet are predominantly S&P-rated US conduit/fusion CMBS deals. However, there are also 17 transactions that S&P does not rate.

In compiling and testing the results, S&P concluded that it needed to adjust the way the model calculates loan amortisation. "We tested the impact of the change on the results we released in January and generally it reduced losses on average by approximately 18bp for the baseline scenario. There were some exceptions to this and losses increased more than 1% for five transactions. The results we released reflect this change."

CMBS

Innkeepers initiates litigation

Innkeepers USA Trust and its affiliates yesterday announced that they have filed a complaint with the US Bankruptcy Court for the Southern District of New York against Cerberus Series Four Holdings, Chatham Lodging Trust and other related defendants for breach of contract and other claims for reneging on their commitment to acquire 64 hotels from Innkeepers (SCI passim).

The "defendants purport to terminate their binding and irrevocable commitment based on an unidentified and unexplained 'material adverse effect'," according to Innkeepers' complaint, "but no such material adverse effect has occurred. Cerberus' and Chatham's failure to provide any evidence of a material adverse effect is not surprising because the debtors' (Innkeepers') business remains strong and on course." Moreover, the binding commitment letter contains no "market" material adverse event clause, according to the complaint.

Innkeepers is seeking an order requiring Cerberus and Chatham Lodging Trust to perform their obligations under the binding commitment letter or pay substantial damages in an amount determined at trial for the defendants' improper termination of their binding and irrevocable commitment to purchase 64 of Innkeepers' hotels. The damages could exceed their US$20m deposit, which is being held in escrow.

CMBS

More Aussie CMBS to emerge?

Since the yields of Australian RMBS have come off their post-crisis highs, Australian originators of small ticket commercial loans are discovering that more investors - seeking higher yields - are investing in SME CMBS, according to Moody's. However, while the agency doesn't expect further issuance in the SME space this year, it suggests that there may be some issuance in traditional CMBS.

The typical collateral for SME CMBS includes loans to SMEs such as sole traders, partnerships or small limited liability companies to purchase commercial properties, Moody's says. These loans are mostly valued at less than A$1m and include shop fronts or small light industrial units to operate their businesses. They may also include loans to 'mom and dad' - that is, investors seeking alternative property investments that offer higher returns than those of residential buy-to-let.

Because SME CMBS deals comprise hundreds of homogenous loans, the techniques used to analyse RMBS and other types of homogenous and granular portfolios can be used to analyse SME CMBS. This familiarity with existing techniques has encouraged some traditional triple-A rated RMBS investors to purchase the higher return notes offered by senior SME CMBS.

Two new Australian SME CMBS have launched this year, the issuers of which have an established track record as they had been involved with SME CMBS deals before the global financial crisis. "From an investor's point of view, this established track record and familiarity with an issuer's programme is important because without them, as with inaugural issuers, investors may price the deal at a premium and thus make it uneconomical. As there are no other repeat issuers as they have just completed deals, we do not expect to see any other SME CMBS deals within the next 12 months as inaugural issuers would not go ahead with their deals due to the cost of funding," Moody's notes.

Conversely, traditional CMBS deals comprise a small number of borrowers, each with few properties used as loan collateral. Because of the few properties involved, ranging from A$20m to over A$100m, these types of transactions require a different type of analysis to that of SME CMBS. Traditional CMBS have portfolios consisting of a few non-homogenous properties and thus require an in-depth analysis of the individual properties - meaning, among other things, a review of property valuations and an understanding the commercial real estate market and property dynamics.

Investors with this knowledge are typically REIT buyers. As Moody's expects comparatively rated CMBS bonds to price wider than REIT bonds, this may encourage an increase in traditional CMBS transactions over the next 12 months.

Consequently, the agency concludes: "As we head into the Southern Hemisphere spring, with little expected movement of RMBS spreads in the near term, Australian CMBS issuance could start to bloom as investors seeking higher yields re-examine the risks and rewards of this asset class."

CMBS

Fewer US CMBS loans coming due in 2012

2012 will see a sizeable drop in the number and volume of CMBS loans maturing from that seen this year, according to Fitch. In transactions rated by the agency, approximately 1,200 commercial mortgage loans totalling US$17.3bn are scheduled to mature in 2012 compared to 2,000 loans totalling US$22.5bn in 2011. Maturities are likely to remain modest in 2013 and 2014 at US$13.3bn and US$15.5bn respectively, before jumping to US$29bn in 2015.

Loans scheduled to mature in 2012 have an average balance of US$13.9m and were originated between 1996 and 2007, Fitch says. Loans secured by office properties represent the largest concentration of maturing loans next year at 38%.
Multifamily (22%) and retail (20%) properties follow. Fourth-quarter 2011 maturities remain modest, at only 204 loans representing US$4.4bn.

The majority of maturities next year are expected in the first half of 2012. Broken down by quarters, US$6.3bn (43% of which are office properties) is expected to mature in Q1, US$5.1bn (47% office properties) in Q2, US$3.4bn (31% retail properties) in Q3 and US$2.5bn (45% retail properties) in Q4.

Fitch continues to expect the majority of loans to pay off at maturity, despite the short-term volatility of the capital markets. "Most maturing loans, particularly those from earlier vintages, benefit from stable performance and years of scheduled amortisation, which make them more easily financeable in today's market," says Adam Fox, senior director at Fitch. "The most challenging loans to refinance are those that were originated in 2007, the peak of real estate values, meaning that borrowers will likely need to contribute additional equity to secure financing for five-year loans."

Approximately 83% of loans scheduled to mature during the first six months of 2011 have paid off. Of the loans that did not payoff, only 20% are classified as in foreclosure or real estate owned, while 42% are classified as current or performing matured.

Fitch says it has observed that smaller balance loans secured by traditional property types are the first to refinance, while those with near-term lease expirations or in tertiary markets are more difficult. Of the US$2.5bn of outstanding loans that failed to pay-off at maturity during the first six months of 2011, 35% are secured by retail and 25% are secured by office properties.

RMBS

JHF RMBS hit

Moody's has downgraded the ratings on 40 tranches in 36 Japanese RMBS transactions and confirmed five tranches in three other transactions. The rating actions follow the downgrade of Japanese government-related issuers and Japanese banks on 24 August. The downgrade of these entities in turn follows Moody's decision to downgrade the JGB rating to Aa3, with a stable outlook, from Aa2.

The ratings on 32 of the affected tranches were downgraded due to the declining credit quality of the Japan Housing Finance Agency (JHF), which insures the residential mortgage loans backing the transactions. In addition, JHF guarantees scheduled dividends and principal payments on all 32 tranches.

The primary uncertainty, according to Moody's, is any future change in the credit quality of JHF because the ratings of the beneficial interests reflect the rating of JHF. For instance, if the rating of JHF fell to A1 or A2 from Aa3, the ratings of the beneficial interests would fall to A1 and A2 respectively from Aa3. The ratings do not factor in the credit quality of the underlying residential mortgage loan pools.

RMBS

RMBS repurchase principles released

The American Securitization Forum (ASF) has released model RMBS repurchase principles for investigating, resolving and enforcing remedies with respect to RMBS representations and warranties. The principles were developed as part of ASF Project RESTART, with the aim of being included in future RMBS transactions.

The ASF believes that 'skin in the game' for originators and issuers of RMBS would be better implemented through appropriate representations and warranties that issuers provide with respect to securitised loans, coupled with an effective repurchase framework that is consistent with the model RMBS repurchase principles. According to the association, many investors believe that the repurchase process set forth in most existing securitisation contracts does not provide applicable parties with an adequate means to pursue a repurchase demand, nor does it effectively specify mechanisms to identify breaches or resolve a question as to whether a breach occurred.

"For these reasons, our membership began working towards the ASF model RMBS repurchase principles to delineate a consensus framework for enforcing remedies with respect to representations and warranties in RMBS transactions by, among other things, establishing the role of a new 'independent reviewer' that will have access to the files of applicable mortgage loans to determine if a breach has occurred and requiring a robust mechanism for the investigation and resolution of disputes regarding breaches of transaction representations and warranties," it notes.

The basic elements of the framework involve: compliance with representations and warranties following the occurrence of an agreed-upon 'review event'; recommendation by the independent third party to the securitisation trustee of whether or not to demand repurchase of, or substitution for, the pool asset by the representing party; and, if the representing party disputes the independent third-party's findings, submission of the dispute to a binding dispute resolution process.

RMBS

Countrywide interventions granted

The judge overseeing Bank of America's US$8.5bn Countrywide RMBS settlement last Friday granted permission for several parties to act as interveners in the case (SCI passim), including Walnut Place, TM1 Investors, six of the FHLBs, V Re-Remic and groups of life insurance companies and pension funds. However, the New York and Delaware Attorney Generals haven't been granted permission to intervene in the case as their petitions have been objected to by Bank of New York Mellon.

BNY Mellon's grounds for objecting to the AGs' intervention include its assertion that the Article 77 proceeding is not the proper forum for them to bring adversary actions involving claims for damages against the trustee and that any objection by the AGs would "deprive certificateholders of their right to an expedited resolution", according to ABS analysts at Barclays Capital. The AGs are to respond to these objections by 6 September.