Contents

CDO

BWIC blues?

CDO holders resist pressure to sell

Volatility in the wider market has resulted in price softening within secondary CLOs over the past couple of months. But, although investors are keen to capitalise on the opportunities presented, wider market concerns have yet to compel many holders of CDO paper to sell.

According to data from Bank of America Merrill Lynch, the average DM for triple-A CLOs has moved from 170bp in July to 190bp to date, double-As from 300bp to 425bp, single-As from 475bp to 650bp, triple-Bs from 675bp to 925bp and double-Bs from 900bp to 1175bp within the same timeframe. "There's certainly a softening of prices in the CLO sector, which is creating buying opportunities," says Neil Basu, managing partner at Pearldiver Capital.

He adds: "The investment strategy will need to be tuned to which part of the capital structure you are targeting. Activity will be driven by the investors that are behind opportunity funds in terms of return levels people are looking for."

However, secondary activity remains low in Europe. One London-based trader says a handful of bid lists circulate each week, if that, with only a small fraction of bonds from those lists trading.

"There's limited information on covers and feedback suggests that when someone does win a bond, the gap between the winning bid and the cover is very wide, so the covers are misleading," he adds. "Bid/offers are wide, clients are generally not selling and the market has a degree of bottom-fishing going on."

The most recent BWICs have been issued for a variety of reasons. To date, most have been issued for price discovery or small cash-raising exercises, with varying degrees of success. Meanwhile, one or two of the lists in recent weeks came from funds preparing for redemptions and raising cash in anticipation.

The trader also points out that of those BWICs that are distributed, an increased proportion are so-called 'quiet' BWICs and only go to a small sub-section of the dealing community, skewing further their relevance to the wider market. "These 'quiet' BWICs have appeared less than a handful of times, but in the context of thin market trading conditions they stand out like a sore thumb," he continues.

Basu estimates that BWIC volume in Europe has totaled on average €500m or less per month during the past year, while US CLO BWIC volume has averaged around US$2.5bn per month (August 2010-August 2011).

According to strategists at Babson Capital, the US CLO market is also in price-discovery mode and will look to this week's US$350m in bid-list supply for greater clarity. A sample of US lists scheduled to trade this week includes a couple of CDO liquidations (Newbury Street CLO and Kleros Preferred Funding IX), two single-A BWICs and another BWIC referencing CLO tranches rated from triple-A down to equity. Names referenced in the BWICs include HLCLO 2007, HLCYN 2007, BLACK 2006, APID 2005 and AVCLO 2007.

"There have been ups and downs, but currently we're not seeing any signs of distressed sellers," says Basu. "Obviously some prices have softened, which is good for opportunity funds, but we haven't seen signs of massive distress like we saw in 2009."

He adds that he would not be surprised if hedge funds that have dabbled in CLOs and ABS and which are facing redemptions lighten up on CLOs, but suggests that it would be quite natural given the current volatility in the market. "I would think this will increase supply on the secondary market, but volumes will also be driven by bad banks that are also under pressure, asset managers preparing themselves for redemptions and multi-strategy hedge funds that might put out some of their more illiquid positions via BWICs."

AC

CMBS

Cluster of deals on CMBS horizon

US CMBS is about to experience a burst of activity as attention turns to a flurry of new deals, which will hit the market in the next couple of weeks. A US$1.491bn deal from Morgan Stanley and Bank of America Merrill Lynch, expected to price soon, will be leading the way.

"The market has not been too busy lately, but it has not been totally quiet either; for the time of year, it has been quite average. Spreads have been widening for the last few weeks and are now bouncing around a bit as they try to stabilise," says one CMBS trader.

He notes that the benchmark GG10 bond's A4 tranche is generally around the 320bp mark at the moment, but has also recently been as wide as 340bp or 350bp. "The bonds are really bouncing around a little bit, but they are currently inside of some the recent wides," he says.

The market's main focus at the moment is the raft of upcoming new transactions. The trader explains: "There is one new deal in the market right now - MSC 2011-C3 - which is coming from Morgan Stanley and Bank of America. That deal is just under US$1.5bn and it is where most people are focused right now."

He continues: "There is a whole bunch of other deals coming after that in the next few weeks. There is US$5bn-US$6bn in the pipeline and that will all be coming to the market in the near future, so it will be interesting to see what kind of spreads they get."

Beyond those deals, however, the trader laments that there is not a lot to look forward to. He concludes: "Unfortunately, there is not a lot happening at the moment. That is pretty typical after spreads have widened so much. Participants are trying to figure out what to do and obviously those who think spreads are wide enough do not want to sell, so that slows activity down a little bit."

JL

ABS

SCI Start the Week - 12 September

A look at the major activity in structured finance over the past seven days

Pipeline
Bank of America and Morgan Stanley have begun marketing their US$1.49bn Morgan Stanley Capital I Trust 2011-C3. The deal is first of an expected US$8bn US CMBS new issue pipeline through October, across seven deals, according to Citi securitised products analysts. MSC 2011-C3 includes a 30% super-senior block and a naturally rated AJ class with 19.125% subordination.
S&P estimates that as many as 13 CLOs are also slated to hit the market in the coming months. Meanwhile, a FFELP student loan ABS originated by the Utah Board of Regents entered the pipeline last week and Kensington is reportedly prepping a £200m UK non-conforming RMBS.

Pricings
Four US auto ABS transactions printed last week: the US$1bn Huntington Auto Trust 2011-1, the US$1.26bn Ally Auto Trust 2011-4, the US$900m AmeriCredit Auto Receivables Trust 2011-4 and US$900m Santander Drive Auto 2011-3.

Secondary market
Last week's new issue US ABS pricings were consistent with the spread tiering observed in August, with senior and benchmark spreads holding roughly firm, and subordinate and off-the-run spreads wider than levels at the start of summer, according to JPMorgan analysts. However, they add that despite the spread concessions, the transactions were upsized to reflect strong demand from a broad investor base - front-end triple-A tranches in particular were most heavily oversubscribed.
There was decent investor interest in the secondary market as well. Auto ABS remained somewhat better bid in secondary than in new issue. Supply in secondary remains a limiting factor; in particular, plain vanilla FFELP ABS paper has been increasingly difficult to source.
Meanwhile, in the US CLO market post the pricing of Golub Capital's deal the week before last, YTD issuance volume stands at US$8.7bn. In CLO secondary, BWIC volume for September so far is up to about US$788m.

Deal news
• The English High Court ruled last week that a sequential pay trigger in Fleet Street Finance 3 hasn't been breached. The dispute about whether a trigger was breached resulted in repayment proceeds of the GSW and other loans being partially withheld. The Saxony loan is now deemed not to be in material senior default and withheld principal proceeds are expected to be paid on the October IPD, according to CMBS analysts at Barclays Capital.
• TIAA-CREF has reportedly acquired the 1616 N. Fort Myer Drive property from Beacon Capital Partners for US$145.5m, representing the sixth property sale from the modified Beacon-Seattle portfolio. CMBS analysts at Barclays Capital expect some interest shortfall reimbursements and principal pay-downs to consequently hit the six affected CMBS in the coming remittance periods.
• Credit watch resolutions linked to S&P's 2010 counterparty criteria dominated the agency's European structured finance rating actions in 2Q11. The agency took 937 rating actions in the quarter, comprising 812 downgrades and 125 upgrades, compared with 240 downgrades and 72 upgrades in the previous quarter.
• Codean has released its annual update on the maturity profile of leveraged loans underlying CLO deals. A comparison between this year's and last year's maturity profiles illustrates that refinancing efforts already made have resulted in a significant reduction in the value of loans due in 2012-2014 and a corresponding increase in the volume of collateral maturing in 2016, 2017 and later.
• In what has been described as an unprecedented move for the agency, Fitch has upgraded a tappable transaction, raising both the class A and B notes of Dignity Finance a single notch to A plus and triple-B plus respectively. The upgrades are mainly driven by the deal's strong performance to date, the agency says.
• Fitch is proposing to revise its mortgage loss criteria for South Africa. The agency has maintained South African RMBS notes on rating watch negative while it solicits feedback from market participants on the new criteria.

CDO

Junior noteholders fail to halt CDO bankruptcy

The US Bankruptcy Court for the District of New Jersey recently denied a junior noteholder's motion to dismiss an involuntary chapter 11 case commenced against ZING VII, a CDO-squared. According to a client memo from Willkie, Farr & Gallagher, the court's decision sets a new precedent for an offshore CDO issuer's senior noteholders to use a Chapter 11 proceeding to seek liquidation of the issuer's assets, despite specific provisions in the documentation that otherwise require supermajority consent of every tranche prior to any such liquidation.

ZING VII entered into EOD in 2009. A sole investor - Anchorage Capital Group - bought over 67% of the senior notes on the secondary market, with the aim of liquidating the deal and monetising the assets. Having proved difficult, Anchorage attempted to put the deal into Chapter 11.

However, earlier this year another ZING VII investor - Hildene Capital Management - decided to petition against the move (SCI 28 July). Hildene purchased junior notes shortly after the bankruptcy filing and petitioned for the dismissal of the Chapter 11 case, arguing that: ZING VII was not eligible to be a debtor under the Bankruptcy Code because it had no place of business or property in the US; the petitioning noteholders were not qualified petitioning creditors because their debt was non-recourse; and the interests of creditors would be better served if the bankruptcy court abstain from exercising jurisdiction and dismiss the case.

But the bankruptcy court denied the motion to dismiss, rejecting all of Hildene's arguments. The court found that ZING VII had both a place of business and property in the US: ZING VII maintained a registered office in Cayman, but conducted most of its business in the US through the New Jersey-based collateral manager and New York-based indenture trustee. The court found that the business conducted through these parties established a place of business in the US for purposes of ZING VII's eligibility to be a debtor under the Bankruptcy Code.

The court also found that ZING VII's property located in the US, which includes certificated collateral securities physically located in New York and cash collateral accounts with the New York indenture trustee, separately satisfied the eligibility requirement under section 109.

The bankruptcy court declined to consider whether the petitioning noteholders - a group of funds holding super-senior (class A-1) notes - was qualified to file an involuntary petition under the Bankruptcy Code. Since only an alleged debtor can contest an involuntary petition (which ZING VII did not do), the bankruptcy court found that Hildene had no right to challenge the petitioners' qualifications.

The bankruptcy court also rejected Hildene's assertion that the indenture was a subordination agreement that must be enforced pursuant to section 510(a) of the Bankruptcy Code, which gives effect to contractual subordination agreements. In doing so, the court noted that the non-petition clause in the indenture was for the benefit of the senior noteholders, not a limit on their right to file a petition.

Based on these findings, the court held that the petitioning noteholders had shown good faith in their desire to realise the greatest present value of the collateral securities for the benefit of the class A-1 creditors without negatively impacting junior creditors who have no prospect of recovery under the status quo. Hildene has filed a notice of appeal.

According to the client memo from Willkie, Farr & Gallagher, the case has significant implications for other CDOs and similar investment vehicles designed to limit their exposure to US bankruptcy proceedings. "Perhaps most significantly, in ruling that ZING VII was eligible to be a debtor in an involuntary Chapter 11 proceeding, the court relied on certain facts and circumstances that are common among many offshore CDOs and similar vehicles managed by US-based managers," explains the firm. "First, even though ZING VII indisputably did not have a domicile or residence in the US, the court emphasised that because 'the important functions of investing, collecting, disbursing, recordkeeping and communicating with noteholders [are] primarily done in the US', ZING VII had a place of business in the US for purposes of eligibility through the New York-based indenture trustee and the New Jersey-based collateral manager."

The court's reasoning suggests that any offshore CDO issuer or similar vehicle that has a collateral manager, administrator or indenture trustee performing customary services in the US could be eligible for Chapter 11. Furthermore, the law firm notes that the court's finding that the CDO issuer's property interests in the US were an independent basis for ZING VII's eligibility makes it clear that pledged collateral held in the US (whether in a bank account, in a vault or registered through the DTC) could render an offshore CDO or similar entity susceptible to a voluntary or involuntary Chapter 11 proceeding.

"Zais is also noteworthy in its finding that a senior CDO noteholder's efforts to avoid limitations in an indenture designed to protect junior tranches from being wiped out in a liquidation is not per se improper," says the memo. "The court equated such restrictions to burdensome executory contracts that can be rejected in bankruptcy, noting that '[a]ny knowledgeable attorney opining on the enforceability of a contract will disclaim the effects of bankruptcy law'. It remains to be seen whether other courts will apply the court's reasoning in the context of other indentures, which often include similar restrictions."

The firm suggests that senior noteholders of defaulted or otherwise insolvent issuers may look to Zais as a roadmap for an alternative strategy to realise accelerated returns through liquidation of CDO collateral. "Holders of junior notes or interests should consider how an involuntary bankruptcy could impact their positions and whether measures can be taken to avoid or reduce those risks," it concludes.

AC

CDS

Tackling the overhang

The risk of accelerated de-leveraging among peripheral European banks has emerged amid the current market volatility. Against this backdrop, an appropriate strategy appears to be one that shorts systemic risk and is long idiosyncratic risk.

The main problem is that over the past ten years European bank balance sheets have doubled in size, growing by three times as much as GDP, according to RBS senior credit strategist Alberto Gallo. "US banks have been able to externalise the assets on their balance sheets through securitisation with government agencies. In Europe bank balance sheets were a strong weapon in times of growth, but have become a burden in times of slow growth because every asset has a cost of carry," he notes.

Italian banks are particularly vulnerable because of the deterioration in capital ratios. In contrast, Spanish bank balance sheets have improved due to industry consolidation. Periphery names remain the riskiest in the current environment, however - albeit this is already partly priced in.

Gallo suggests that there is no quick fix to bank balance sheets. Given the debt overhang across all European small and medium-sized banks and without strong growth, banks have no choice but to de-lever or consolidate.

But he warns that the adjustment could be bumpy: the de-leveraging process may accelerate if the situation deteriorates in Greece. As the IASB recently noted, banks have not fully marked down their Greek exposure. Many banks aren't fully marking their legacy securitisation exposures to market either, so these may also have to be marked down further.

"The process is damaging if every bank does it at the same time. Alternatively, banks could earn their way out of these exposures, which is obviously difficult in a low-growth scenario," Gallo adds.

He continues: "Financing costs are increasing and could be the difference between making a business viable or not going forward. If the sustainability of small banks becomes unviable, there will likely be more consolidation among banks and subordinated bond/equity holders will suffer."

Nevertheless, Gallo indicates that the market is in a different situation from another Lehman Brothers-type scenario, where there was a sudden collapse in liquidity. "The basis has become positive (whereas it was negative after Lehman's collapse) and cash is outperforming, although pressure is building on the real money side to sell into the volatility," he explains. "It's more of a slow-motion crunch."

Gallo consequently recommends buying protection on the iTraxx Subordinated Financials index versus selling protection on the iTraxx Xover index with a ratio of 1.35x:1x. The rationale for the trade is that spreads are set to continue widening, but a directional play ahead of the upcoming Fed meeting is avoided.

The strategy shorts systemic risk on banks and goes long idiosyncratic risk on high yield corporates. In other words, it should benefit from: higher sovereign and peripheral exposure; lower geographical diversification; and better high yield technicals/improving fundamentals.

CS

RMBS

HARP changes to benefit borrowers

The White House has released a fact sheet indicating that barriers which exist for the current HARP programme will be removed to help more borrowers refinance their mortgages. The focus is expected to return to high LTV borrowers.

FHFA director Edward Demarco says the agency is reviewing HARP's mechanics to find possible improvements that would reduce barriers for borrowers who are already otherwise eligible to refinance using HARP. He says: "If there are frictions associated with the origination of HARP loans that can be eased while still achieving the programme's intent of assisting borrowers and reducing credit risk for the [government sponsored] enterprises, we will seek to do so."

Demarco adds that most creditworthy borrowers outside of the programme who have positive equity should be able to refinance through normal market mechanisms. This is an important distinction and RMBS analysts at Barclays Capital believe the FHFA will not look to increase the number of eligible borrowers, but is instead focusing on enhancing the operation of the programme for the current borrowers.

The BarCap analysts note that the FHFA has specifically mentioned it is considering removing barriers for 125-plus LTV borrowers to refinance, which is currently the HARP limit. The agency has reiterated its intention to provide high LTV borrowers who have a good payment history with the opportunity to refinance, which will lower credit risk to the GSEs and add stability to housing.

With that in mind, the analysts expect the FHFA to specifically target those good quality borrowers with high LTVs. They note: "While it could take incremental steps such as reducing LLPAs, the most important step, in our view, would be a limited easing/waiving of rep and warranty risk for this targeted set of borrowers. While we have made the case earlier that this is not straightforward, we think this statement raises the possibility of some initiative in this direction."

The analysts note that Demarco's statement argues for improving HARP, not expanding it. A renewed focus on refinancing high LTV borrowers with strong pay histories would mark a shift from the current situation, where they say the programme effectively became a refinancing vehicle for low LTV borrowers.

They suggest that this more limited scope should be positive for lower coupons and the middle of the stack, although higher coupons could come under further pressure.

JL

ABS

Walkers forms ILS group

Law firm Walkers is launching an insurance-linked securities (ILS) group, bringing together the expertise within the firm covering all alternative risk transfer instruments. The new group comprises dedicated, multi-jurisdictional lawyers advising clients on the legal and practical aspects of trading, financing and securitising risk involving Cayman Islands and Irish entities, including cash and synthetic catastrophe bonds, captive insurers, sidecars and life settlement transactions.

Walkers' ILS group includes Dublin-based partner Anthony Smyth, who specialises in tax, as well as a number of other specialist attorneys from Dublin and the Cayman Islands. Additionally, the firm has hired Derek Stenson, who joins its Cayman Islands office as an associate in the ILS group. He previously worked at William Fry in Dublin, advising on the establishment and ongoing regulation of catastrophe bonds and mortality bonds, as well as life settlement structures and other bespoke structured transactions.

ABS

Esoteric ABS pro added

KGS-Alpha Capital Markets has recruited Robert Piano to its new ABS team. He joins from Barclays Capital after nine years in its asset securitisation group, where he was most recently a director specialising in esoteric asset transactions. At KGS-Alpha, Piano will lead the origination of secured financings in the institutional debt markets, including bank, ABS and private placements for primarily non-traditional assets.

ABS

EAF gets new investment officer

Accounts receivables firm Equable Ascent Financial (EAF) has hired Trish Mattler as cio, responsible for business development, M&A and investor relations. She previously spent four years with Cerberus Capital Management, during which time she served as EAF's interim cfo and was a member of its board. Mattler has significant experience in finance, especially in the areas of M&A and structured finance.

ABS

FICC md recruited

Emmanuel Androulidakis has joined Macquarie Bank as md in fixed income, currencies and commodities. He was previously md, European asset-backed finance and trading at Cantor Fitzgerald. Before that, he was director and ABS/RMBS trader at RBS.

ABS

Advisory hires new London principal

Amir Hoveyda has joined StormHarbour in London as a managing principal. His responsibilities will include developing and implementing the growth strategies of the firm's European capital markets and advisory businesses, helping manage the firm's overall European operations, and supporting the leadership of the firm worldwide as a member of the firm's global governance group. Hoveyda was most recently md and head of high grade and high yield debt capital markets for EMEA, and a member of the global capital markets and EMEA corporate and investment banking executive management committees of Bank of America Merrill Lynch.

CDO

CRE CDO sold on

CapLease has confirmed the sale of CapLease CDO 2005-1 to NRF Cap, an affiliate of NorthStar Realty Finance Corp (SCI 19 August). The sale, which generated total cash proceeds excluding accrued interest of approximately US$30.2m, primarily included the transfer of the CRE CDO's assets and liabilities. It also included the prepayment of three cross-collateralised first mortgage loans by the borrower.

CapLease retained an aggregate of US$5.9m face amount of class A and class B notes in the CDO transaction, which will continue to receive principal and interest in accordance with the CDO waterfall. But the firm says it may sell these notes in the future.

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

CDS

CME Group gains clearing member

BNP Paribas Securities Corp has joined CME Group to clear CDS. The bank is also able to clear futures and OTC interest rate swaps.

As a CME clearing member for CDS, the firm says it will be better positioned to fulfill regulatory mandates that require credit derivatives between financial institutions to be cleared through a clearinghouse. The clearing solution will also enable BNP Paribas' global clients to become compliant with the mandatory client clearing requirements of the Dodd-Frank Act, it adds.

CLOs

BlueMountain beefs up in Europe

BlueMountain Capital Management has named David Rubenstein ceo of BlueMountain Europe. Rubenstein, who joined the firm in 2006, will also continue in his roles of both cfo and general counsel on a global basis. He succeeds Jeffrey Kushner, who is retiring from the asset management business and will move back to the US to pursue other opportunities.

Transferring with Rubenstein from New York to BlueMountain's London office is Noam Leslau, md. He is joining the UK offices' business development team, with a focus on Europe and the Middle East.

The firm has also hired two London-based senior credit analysts - Adam Feldheim and Jonathan Moore - who will report to Peter Greatrex, global head of research. These four executive additions expand BlueMountain's European team to 21 professionals.

The appointments, and the continued expansion of the firm's UK operations, illustrate the growing opportunities BlueMountain sees in Europe, as institutional investors demonstrate more interest in alternative credit strategies. European institutions account for nearly half of BlueMountain's investor base and total assets raised year-to-date.

RMBS

Policyholder group trial scheduled

In the latest development in the Article 78 proceeding brought by the structured finance policyholder group against MBIA and the New York State Insurance Department (SCI passim), Justice Barbara Kapnick of the New York State Supreme Court has entered an order providing for a trial date of 27 February - 23 March 2012, "barring any conflicts that may arise in the Court's or the parties' schedules". While the respondents may seek summary judgment, Justice Kapnick told the parties at the most recent status conference (on 15 August) that she expects to set a trial in order to hear from expert witnesses, given the complexities of the case and the mass of evidence.

ABS

Improvements seen in timeshare delinquencies

US timeshare delinquencies fell again this past quarter, according to Fitch's latest index results for the sector.

The decline in delinquencies reflects not only the seasonal improvement that timeshare loans typically see in the spring and summer, but also year-over-year improvement. Now within range of historical averages, Fitch expects delinquencies to continue to follow seasonal patterns, but that year-over-year improvements will subside.

"With timeshare ABS delinquency performance returning to pre-recessionary levels, improvements figure to level off," says Fitch senior director Brad Sohl. "Therefore, barring meaningful economic deterioration, timeshare performance is likely to remain stable."

Total delinquencies for 2Q11 were 3.21%; down from 3.38% in 1Q11 and 3.42% at the same time last year. Monthly defaults for June remained unchanged from March data at 0.79%. Improved default trends typically lag those of improved delinquencies in the spring.

The delevering of timeshare ABS structures and ample credit enhancement levels, combined with improved performance should continue to support rating stability, however.

ABS

Tobacco bond review completed

Moody's has concluded its review of tobacco settlement revenue bonds, following the 25 May publication of its updated cashflow modelling assumptions for the sector. The agency has downgraded 60 tranches in 13 securitisations, accounting for approximately US$3.5bn. It has also confirmed seven tranches in three securitisations (US$1.1bn) and upgraded 134 tranches in 27 securitisations (approximately US$3.5bn).

The primary reason for the downgrades was the continuing decline in Master Settlement Agreement (MSA) payments to the transactions, which depend on the volume of domestic cigarette shipments and have been declining following falling cigarette consumption. Moody's new modelling assumptions reflect its updated expectation of the mean cigarette consumption decline. It revised the estimate upward to 4% per year from on average around 3%.

The confirmed and upgraded tranches benefit from lower transaction leverage and the resultant high DSCRs, often significant cash reserves and relatively short-term maturities, which minimise the impact of the cigarette consumption declines over the long term.

However, a structural feature of tobacco settlement securitisations limits the credit quality of the bonds. Upon an event of default, the cash allocation in many transactions switches from sequential to pro-rata, which weakens cashflow to the bonds with short-term maturities.

ABS

Card delinquencies near six-year low

An unprecedented streak of declining US credit card delinquencies is rapidly dropping to a near six-year low, according to Fitch's latest Credit Card Index results. The results also show credit card charge-offs ticking up for the first time in four months and excess spread reaching new heights in the latest period.

"US consumer credit quality has improved rapidly since the beginning of the year and delinquency trends bode well for further gains," says Fitch md Michael Dean. "We're at a point now, however, where seasonal factors will likely temper the pace of further collateral improvements for credit card ABS."

Registering its 19th straight month of decline, 60+ day delinquencies shed another 31bp to settle at 2.15%. The ongoing rapid improvement has pushed the delinquency index 52% below peak levels of 4.5%, reached just 18 months ago. Early stage delinquent balances, associated with borrowers who have missed at least one payment, also declined by 32bp to 3.02%.

After posting the second largest monthly decline since the Bankruptcy Reform Act went into effect in late 2005, credit card defaults tacked on 8bp from July to 6.41%, ending a positive four-month streak. The increase was driven by two of the larger trusts - Citibank and Bank of America - posting higher losses. Current charge-off levels are 35% lower year-over-year and post-crisis are now closely tracking the historical average of 6%.

Meanwhile, excess spread on a three-month average basis shattered a new record as it broke past the 11% mark for the first time ever. Performance increased by 37bp to a new high of 11.1% and is now almost double the levels experienced at the end of 2009. One-month excess spread dipped from the previous month, but also remained above the 11% mark.

After setting a historical high last month, monthly payment rate performance decreased by 62bp to 21.14%. Despite the dip, current levels remain well above the index average of 16.3%.

Gross yield for the month also dropped slightly, slipping below the 20% mark at 19.99% for the first time in roughly 21 months. "The historically high monthly payment rates are indicative of strong credit quality borrowers in the underlying credit card pools," says Fitch director Herman Poon.

On the retail front, charge-offs improved for the third consecutive month, while breaking below the 9% mark for the first time in nearly three years. Charge-offs declined by 6bp from the previous month to 8.84% and are 25% lower year-over-year.

Similar to the prime index, 60+ day delinquencies hit their own six-month streak as cardholders continue to make more on-time payments. Late stage balances held steady and strengthened by another 3bp to 3.25%.

The three-month average excess spread also jumped 57bp to 11.96% in July, while recording the highest level in 4.5 years. Since the inception of the retail index, excess spread has averaged close to 8%.

Both gross yield and MPR dropped during the month. Yield declined slightly to 25.58%, while payment rate decreased to 14.28%.

ABS

Capital release fund minted

IFC is set to invest US$100m in a capital release fund, marking the first time it is joining private investors to help banks free up existing capital and use it to boost loans to SMEs in emerging markets. The fund - established and managed by New York- and London-based Christofferson, Robb & Company - is raising an additional US$300m from private investors, in conjunction with IFC's investment.

The fund's investments will provide risk protection for unexpected credit losses on portfolios of loans to SMEs in emerging markets. In exchange for the protection, banks will gain capital relief that will be used to extend more loans to SMEs in developing countries.

The investment reflects IFC's commitment to improving access to finance for SMEs in developing countries, it says. Inability to obtain financing is a main constraint to growth for these businesses.

Richard Robb, ceo of Christofferson, Robb & Company, comments: "IFC is playing a key role in attracting private investment to this fund. This will enable more financing for small- and medium-sized firms in emerging markets, where investors are under-exposed. We anticipate that the scope for such transactions will grow considerably."

ABS

Future ABCP growth questioned

Traditional ABCP programmes remain sound structures post-financial crisis, though the regulatory landscape raises questions as to the prospects for growth going forward, Fitch reports.

After reaching a high of nearly US$1.2trn in outstandings in the summer of 2007, the ABCP market nearly ground to a halt once the crisis began to take hold. While the non-traditional market value and extendible ABCP structures fell by the way side, traditional multi-seller ABCP proved resilient and performed well from a ratings perspective.

"With non-core banking relationships essentially a thing of the past, large sponsors will stick with the back-to-basics approach of using plain-vanilla, traditional ABCP for their cost-effective short-term financing," says Fitch director Kevin Corrigan.

That being said, while still very much a large market, annual ABCP issuance is unlikely to increase beyond current issuance levels (US$300bn-US$400bn) for the foreseeable future. "Recent accounting changes and other regulatory proposals are jeopardising the economics of ABCP conduits as viable short-term funding vehicles," adds Fitch md Michael Dean.

ABS

CRA board proposal slammed

SIFMA has submitted comments to the US SEC in response to a Dodd-Frank mandated study the Commission must undertake related to the assignment of credit ratings to structured financial products. The association says it strongly opposes the implementation of the 15E(w) system because it would represent an unprecedented intrusion of government control into a private financial market. Rather, it supports the alternative proposed by the SEC that Rule 17g-5 satisfy the requirements of Section 939F.

Section 939F of Dodd-Frank requires the Commission to study and develop rulemaking to establish a system related to the assignment of initial credit ratings on structured finance products by NRSROs that prevents the issuer from selecting the NRSRO that will determine initial credit ratings. If the SEC is unable to find a superior alternative, it is required to implement a regime that was found in the Senate's version of the Dodd-Frank Act (the '15E(w) system'), but which was replaced with Section 939F in the final bill.

Rule 17g-5 provides transparency into the data and information used by a rating agency, allows other rating agencies to access and use that data and information as desired, and allows market participants to discern whether or not conflicts of interest have influenced a rating. The 15E(w) system would create a Credit Rating Agency Board that would determine qualification standards for NRSROs deemed eligible to provide an initial rating, direct the flow of business to NRSROs by assigning them to transactions for which they would provide an initial rating, levy fees on NRSROs, review the performance of NRSROs and limit the compensation of NRSROs that perform an initial rating.

SIFMA suggests that the 15E(w) system presents its own set of conflicts of interest, such as incentives for rating agencies to lobby or attempt to curry favour of particular Board members in order to obtain increased business. Additionally, the quality of the expertise of the Board and its staff is in question, especially when the Commission's request for comments does not include staffing or employment of Board members. 15E(w) also presumes that any issuer would be able to obtain and an investor value a rating from any qualified NRSRO, which in reality is not always possible.

"We believe the 15E(w) system would impose unprecedented government control on private markets," says SIFMA evp Randy Snook. "If implemented, this regime would further entangle the government in credit ratings, running counter to the other parts of Dodd-Frank which compel regulators to disentangle government from credit ratings. This regime would also run the risk of significantly disrupting securitisation markets, which are essential to economic recovery, at great cost and limited benefit."

The provision of Dodd-Frank was meant to address perceived conflict of interests in the current issuer-pays model of credit ratings. However, SIFMA believes that conflicts of interest will be present in any model for credit ratings and will always need to be managed appropriately. It believes that the current rule 17g-5 addresses these issues today.

ABS

Resolution rules adopted

A final rule to be issued jointly by the FDIC and the US Fed to implement Section 165(d) of the Dodd-Frank Act has been approved. This provision requires bank holding companies with assets of US$50bn or more and companies designated as systemic by the Financial Stability Oversight Council to report periodically their plans for rapid and orderly resolution in the event of material financial distress or failure.

The final rule requires the company to describe its plan of how it could be resolved in a bankruptcy proceeding. The goal is to achieve a rapid and orderly resolution of an organisation in such a way as not to cause a systemic risk to the financial system.

The final rule also sets specific standards for the resolution plans, including requiring a strategic analysis of the plan's components, a description of the range of specific actions to be taken in the resolution and analyses of the company's organisation, material entities, interconnections and interdependencies, and management information systems.

Submission of resolution plans will be staggered based on the asset size of a company's US operations. Companies with US$250bn or more in non-bank assets must submit plans on or before 1 July 2012; companies with US$100bn or more in total non-bank assets must submit plans on or before 1 July 2013; and companies that predominately operate through one or more insured depository institutions must submit plans on or before 31 December 2013. Plans are required to be updated annually. A company that experiences a material event after a plan is submitted has 45 days to notify regulators of the event.

Separately, the FDIC has approved a complementary interim final rule under the Federal Deposit Insurance Act to require insured depository institutions with US$50bn or more in total assets to submit periodic contingency plans for resolution in the event of the depository institution failure. The interim rule has a 60-day comment period.

ABS

UK SME GSE touted

Adam Posen of the Bank of England suggested in a recent speech that the UK government establish an entity to help increase small business lending by purchasing and securitising SME loans from banks. Conceptually, the entity would be a government-sponsored institution similar to Fannie Mae and Freddie Mac in the US. Securitisations from the so-called British Enterprise Investment Entity could count as eligible repo collateral with the central bank, which would also provide start-up capital to the institution, according to analysts at S&P.

Posen also called for the creation of a public bank for lending to small businesses. Bank SME lending in June was 4.5% lower than a year earlier.

CDS

Swaps clearing platform launched

State Street has expanded its futures commission merchant activities to include the launch of a swaps clearing platform. The firm says its clearing capabilities are integrated with its existing servicing offering, forming a global end-to-end solution that reduces operational risk through automation of the many stages of derivatives processing. Clients have the option of either a complete solution for derivatives or a component-based approach tailored to their specific needs.

CDS

Liquidity-driven CDS indices minted

Fitch Solutions has launched a new family of global CDS indices, which include 15 regional sovereign indices, over 40 industry-level corporate indices and a further 70 sub-sector corporate indices. The indices are designed to provide portfolio and risk managers with a comprehensive insight into the direction of credit risk, portfolio correlations and wider CDS market trends.

The Corporate CDS Indices family are uniquely liquidity-driven and cover the top 75% of the most liquid names based on Fitch's existing global CDS liquidity scores service. "This new generation of indices will provide a powerful addition to Fitch Solutions' CDS pricing and valuation product suite, enabling users to conduct longer-term trend analysis of spread movements by region, country, industry sector or sub-sector," says Thomas Aubrey, md, Fitch Solutions in London. "The combination of Fitch's CDS liquidity scores, CDS-implied ratings and CDS indices will enable users to overlay liquidity trends on spread trends to help identify sector or regional outliers - enhancing the decision-making which underpins effective portfolio and risk management."

The CDS indices track daily spread changes and incorporate over five years of searchable historical data. In addition to indices across Europe, the Americas, Asia Pacific and Middle East & Africa, Fitch Solutions can provide bespoke country and instrument subordination level indices. This service can be used for correlation analysis, peer comparison and benchmark creation, including those for entities that aren't actively traded or where there is no CDS data.

CDS

OTC price verification service launched

Tullett Prebon's OTC Valuations platform has rolled out a new OTC derivative price verification service aimed at high volume portfolios of vanilla through to complex products.

Daily valuations are typically charged at US$0.20, which includes full price challenge support, automated portfolio submission and delivery of price files on a T+0 basis. This flexible service is made possible through automation of market data verification processes, portfolio trade loading, model calibration, report generation and valuation report delivery.

Miroslav Vanous, head of EMEA at OTC Valuations, comments: "Since opening the business in 2007, automation of error-prone, manually intensive processes has always been a key part of our architectural blueprint for system development. This latest release of our in-house valuation technology allows our analysts to spend most of their time on modelling the most complex structures, as we have 'systematised' the work that many firms continue to do in spreadsheets, including market data management and cleansing."

CDS

CDS quanto data introduced

CMA has launched a new product that takes into account the CDS quanto spread of key Euro-zone sovereigns.

Given European sovereign CDS are typically traded in US dollars and not the domestic currency, in order to accurately mark-to-market holders of sovereign and large corporate CDS need to understand the impact on domestic spreads from the implied change in the FX rate in the event of a default. Quanto spreads in Euro-zone sovereigns suggest that the EUR/USD FX rate is likely to reduce in value, introducing a devaluation risk. The CDS quanto spread therefore reflects how the market adjusts prices to factor in this risk.

CMA Datavision CDS Quanto data provides clients with access to full CDS currency curves that factor in market-implied FX devaluation factors based on quanto spreads observed in the market. Jav Bose, product owner for CMA Datavision, explains: "Full-term non-standard term structures can be created from a single five-year observed Quanto spread by determining the market-implied devaluation factor. The results produce curve differentials which are not constant across the term structure and essential for accurately pricing non-standard CDS currency exposure."

CDS

CDS indices rebranded

S&P's credit default swap indices are to be co-branded with ISDA and renamed the S&P/ISDA CDS Indices. The indices seek to reflect the CDS market for US corporate credits and increase transparency for market participants, the two entities say.

Alexander Matturri, executive md at S&P Indices, comments: "S&P/ISDA CDS Indices offer market participants additional, important transparency and insight into the credit default swap market. By working closely with ISDA and market participants, we expect to broaden the family of S&P/ISA CDS indices and attract even greater interest in these indices by both institutional investors and dealers alike."

The current family of indices to be co-branded by ISDA and S&P Indices includes the CDS Benchmarking Indices, the CDS Sector Indices and the CDS Sovereign Indices.

CDS

Swaps segregation supported

ISDA has written to the CFTC in response to its Notice of Proposed Rulemaking regarding the protection of cleared swaps customer contracts and collateral.

The association says it agrees with the Commission's selection of the complete legal segregation model as the most appropriate choice of holding model for cleared swaps collateral. Further, it regards this selection as an important first step in arranging appropriate customer protections against FCM failure, including porting.

ISDA recognises that there may be a tension between achieving porting and maximising portfolio-margining, however. The association urges the Commission to allow individual customer choice to balance use of these two mechanisms, always with due regard for DCO safety.

Finally, although ISDA says it understands why the CFTC might be interested in an optional approach to collateral holding models, the association suggests that this concept be put aside for now. "Optionality will produce complexity and expense that might be tolerable when the cleared swaps market is well-established, but that will be burdensome to a developing market," the letter notes.

CLOs

German SME CLOs perform strongly

German balance sheet SME CLOs have performed well during the economic crisis, according to Fitch. Certain transactions have even outperformed some German auto ABS transactions, underlining their robust performance.

Average total cumulative defaults across the 12 CLOs Fitch rates are approximately 2.5% of the initial transaction volumes since closing, with the average time since closing standing at four years.

Fitch has reviewed German balance sheet SME CLO performance throughout the year and upgraded the ratings of eight tranches and affirmed another 44 tranches. The agency says the upgrades were in tranches that have built up credit enhancement through deleveraging.

Fitch also revised the outlook for five transactions from negative to either stable or positive, reflecting expected increased credit enhancement as a result of deleveraging as well as acknowledging the stable economic environment. Three transactions still have a negative outlook.

Corporate insolvencies rose in 2008 and 2009, but still remained below the levels of 2002-2004. Fitch says the comparatively modest increase was due to the German economy being stronger and more flexible than it had previously been.

The agency says the stable corporate insolvencies contributed to the solid performance of the transactions. According to the German statistical office, the number of corporate insolvencies decreased from 32,687 in 2009 to 31,998 in 2010, and Fitch expects the trend to continue through 2011.

Fitch expects German SMEs to continue to operate in a stable economic environment, which will positively affect the future performance of balance sheet SME CLO transactions. Some additional defaults may occur, however, despite decreasing corporate insolvencies.

Fitch notes some transactions are reporting increasing numbers of borrowers in the lowest rating categories of the originating banks, although the agency believes losses will be offset by available credit protection. Negative rating actions are not expected in the near future.

CMBS

US CMBS delinquencies back off

US CMBS delinquencies backed off the previous month's record high as US$3bn of loans left the Fitch Loan Delinquency Index in August, lowering the rate by 36bp to 8.65% from 9.01%, according to the latest index results. However, the agency says month-to-month volatility will likely persist.

The potential for volatility was underscored by August's four largest loan resolutions, which accounted for 25bp of the 36bp drop - though none of the loans were liquidated, each was classified as newly delinquent just one month prior. They were: Two California Plaza (US$470m) that was previously classified in foreclosure, now current, but in technical default; Solana, Westlake, TX (US$220m partial A note pari passu portion) previously classified in foreclosure, now current following a modification; Savoy Park, New York (US$210m) previously classified in foreclosure, now 30 days delinquent; and Paramount Hotel, New York (US$106m) previously non-performing matured (extended without transfer to special servicing).

"Though delinquencies have held below 10% and special servicing volume has come down from 2010 peaks, tracking formerly delinquent or specially serviced loans will remain a challenge for investors," says Fitch md Mary MacNeill.

While liquidated loans have an immediate and measurable impact on their respective trusts, loans that employ a longer-term workout can be more difficult to monitor. Further complicating surveillance is a frequent lack of financials for troubled loans and volatile or inconsistent loan status reporting.

While a loan may be classified as current, financial performance of the underlying collateral is generally a better indicator of future probability of default. Across Fitch's portfolio realised losses have remained constrained, with a majority of principal erosion ultimately expected to occur later in the life of the deals.

New delinquencies in August totalled US$1.7bn and included three loans with a balance in excess of US$100m. They are: US$375m The Belnord (New York multifamily, 60 days delinquent); US$170.6m Jameson Inns Pool (non-performing matured); and US$135m Duke Cleveland East Suburban Portfolio (60 days delinquent).

Current delinquency rates for all property types have declined and are as follows: multifamily: 15.88% (from 15.92% in July); hotel: 14% (from 14.22%); industrial: 10.12% (from 10.45%); retail: 6.77% (from 7.01%); and office: 6.13% (from 6.64%).

CMBS

Pay-offs barely move in August

The percentage of loans paying off on their balloon date barely moved in August, according to the latest Trepp pay-off report.

In August, 39.5% of loans reaching their balloon date paid off. This was just a shade lower than July's 39.6% reading. The August number was just above the 12-month rolling average of 39.2%.

By loan count - as opposed to balance - only 43.1% of the loans paid off. This was down over six points from July's reading of 49.4%. On the basis of loan count, the 12-month rolling average is now 48.8%.

Prior to 2008, the pay-off percentages were typically well north of 70%. Since the beginning of 2009, however, there have only been two months where more than half of the balance of the loans reaching their balloon date actually paid off.

CMBS

Agency CMBS on the rise

Compared with pre-2009, when GSE issuance was relatively minimal and private investment bank transactions dominated the CMBS new issue market, agency deals now account for a more significant portion of the primary market.

"Between 1995 and 2007, GSEs contributed anywhere from just under 3% to just over 11% of the total new issue CMBS market," says S&P research analyst James Manzi. "That figure increased to more than 23% in 2008 and then ramped up to more than 76% in 2009."

Agency CMBS issuance is mostly backed by multifamily properties, S&P observes, though the make-up of deals can vary by issuer. "During the CMBS boom years, issuers placed many large multifamily loans in conduit/fusion deals. During the past few years, however, the agencies have increased their market shares at the expense of the conduit issuers. As such, legacy conduit/fusion CMBS collateral pools contained about 15% of multifamily loans by balance, whereas 'CMBS 2.0' conduit/fusion deals have contained about 4%," the rating agency says.

With respect to debt service coverage and loan-to-value ratios for 2010 and 2011 issuances, Manzi notes that underwriting practices can vary among the different issuing institutions. Despite the potential for varied calculations, he says the issuer-provided metrics do highlight some interesting trends.

"Freddie Mac pools appear to be more conservatively underwritten in 2011, on a weighted average basis, than in 2010. Comparatively, the metrics for the other issuers all went modestly in the opposite direction," he explains. "Additionally, DSC and LTV metrics for multifamily and manufactured housing loans in conduit/fusion 2.0 deals seem weaker than the entire collateral pools."

RMBS

Revised South African RMBS criteria proposed

Fitch is proposing to revise its mortgage loss criteria for South Africa. The agency has maintained South African RMBS notes on rating watch negative while it solicits feedback from market participants on the new criteria.

The criteria proposals may result in downgrades for the notes currently on RWN, potentially from the triple-A rating scenario, since the proposed default probabilities (DP) may represent an increase over those assumed for the initial rating analysis of some transactions. The rating impact of the proposed criteria would nonetheless vary from transaction to transaction, depending in particular on the amortisation of the notes since closing.

The main proposals for change consist of: a new DP matrix; a set of rating scenario stress multiples that vary according to the individual 'Bzaf' DP of the loan; the assignment of a 'AAAzaf' DP of 25% for a benchmark mortgage with certain identified features; revised cost and timing assumptions for the work-out of defaulted loans; and a reduction of the 'high prepayment stresses' currently assumed by the agency. Fitch also proposes to adopt an amended geographical classification based on the largest metropolitan areas of the country.

RMBS

Mixed performance for Mexican RMBS

Fitch reports that the performance of Mexican RMBS transactions has suffered since 2008. While some portfolios have seen stabilisation since then, others continue to show signs of deterioration.

180+ delinquencies have remained below 8% for most CEDEVIS transactions and below 3% for all TFOVIS transactions. In contrast, 180+ delinquencies for Sofoles/Sofomes-backed transactions have exceeded 20% and in some cases have reached 40%. Equivalently, delinquencies for bank sponsored RMBS have ranged between 8%-12%.

"Mexican RMBS has underperformed over the past four years; however, much of this relates specifically to UDI mortgages originated by Sofoles/Sofomes," says Cinthya Ortega, director at Fitch. "Transactions sponsored by banks, INFONAVIT and FOVISSSTE have continued to perform within expectations."

Fitch says substitution of primary servicers has impacted several Sofoles-backed transactions. Hipotecaria Credito y Casa S.A. de C.V. S.F.O.L. and Hipotecaria Su Casita, S.A. de C.V., S.F.O.M. loans were transferred to ING Hipotecaria S.A. de C.V. S.F.O.L. and Patrimonio S.A. de C.V. S.F.O.L.

The agency believes the transfer of these portfolios may improve performance in the long run. However, there is concern that performance will be impacted by short-term disruptions, which have stalled the recovery process for non-performing loans and the changes in economic incentives imbedded in each back-up servicing agreement.

Results indicate recovery levels are in line with Fitch's original expectations, while recovery levels will continue to decrease given the rising non-performing loans within the market and complications over servicer transfers.