Contents

RMBS

Partial eclipse

European covered bond issuance threatens to leave RMBS behind

The European covered bond market has seen almost €20bn in new issuance over recent weeks, eclipsing the far quieter RMBS market. The move has led some to question whether there will be sufficient demand for both products going forward.

Rob Ford, ABS portfolio manager at TwentyFour Asset Management, does not agree that RMBS is being left behind. He says: "When you look at the numbers without bearing in mind what the different swap costs are, it looks like covered bonds have gone off to the races and prime RMBS has been left behind, but a lot of that is hidden in the basis swap."

A recent three-year covered bond issued by RBS is a case in point. It was offered to the market at 95bp over mid-swaps and tightened to 93bp over. When the basis is borne in mind, this is not so different to an RMBS issuance, argues Ford.

He says: "That bond quite happily swapped to sterling Libor plus 140bp, which suddenly brings it right back in line with where you would expect to see prime RMBS. The reason for that is because the value of the basis swap is so enormous between euros and sterling."

Although UK banks may have been driven to the European covered bond market by the level of the basis swap to an extent, another factor is how quickly covered bond deals can be issued. The ease of issuance is one of the product's strongest pulls, especially as the summer holiday season ends and issuers get back to work.

Ford explains: "Theoretically you can put the deal on the tapes at 8 o'clock in the morning, close the books at 11 and launch a price at midday. It is that quick and that easy and it does not require an awful lot of work beforehand either. That is very powerful for banks."

He continues: "For an RMBS deal, the process is more complicated: there is a lot of ground work as you have to get the documentation together, put together a preliminary supplement and final terms sheet. That is fairly complex and, of course, you need to work with the rating agencies as you go along to ensure the correct ratings on the new notes as well as any existing bonds."

The comparative ease of issuance for covered bonds could go a long way to explaining why there has been a flurry of them over recent weeks while the RMBS market has been quiet. As banks have looked to complete issuances quickly at the end of the holiday season, the additional groundwork required for RMBS issuances has held them back.

Because they can be issued quickly, it is perhaps only natural that covered bond deals came to the market first. But now that the preparation work has been completed for some RMBS transactions, we are seeing those come to the market as well, with Santander's latest Holmes issuance at the vanguard.

"The prima facie differential between covered bonds and RMBS maybe looks like covered bonds have pushed on more than RMBS, but here we are hot on the heels of it, only a week or two later with a new Holmes issue," says Ford.

He adds: "It is no real surprise that it has taken a couple of weeks from seeing a covered bond in the market, launched and priced quickly to seeing an RMBS coming to the market now with all the leg work behind it."

The £2.4bn-equivalent Holmes Master Issuer 2011-3 - of which over 80% was US dollar-denominated - shows that prime RMBS is still valued by issuers. Despite the relative simplicity of issuing covered bonds, the drawback is that they are not as efficient as RMBS.

Ford says: "The high levels of overcollateralisation in a covered bond pool make an issuance that much more expensive. All of that collateral has to be funded from somewhere else. So, although putting together an ABS takes longer, it is more efficient."

It remains a case of covered bonds and RMBS suiting different issuers and different investor appetites. The recent strength of the covered bond market does not seem to have sounded the death knell for RMBS just yet.

Indeed, Ford stresses that both products are useful funding tools. "With a covered bond, you get it into the market quickly and get your funding done," he concludes. "But it definitely has some drawbacks in terms of asset encumbrance and overcollateralisation, whereas an RMBS deal gives you much greater benefits but is not quite so easy to issue. They each have their place and they can exist side-by-side."

JL

CMBS

Action plan

Real estate auction platform looks to expand

Online bidding platform Auction.com is credited for helping to resolve distressed real estate in the US by putting it directly into the hands of local entrepreneurs. The company is now looking to expand into the European market and potentially via non-core CRE asset dispositions.

Participants at a Hatfield Philips servicer forum last week described Auction.com as having had a "stunning impact" on the way that distressed commercial real estate is transacted. Historically, these assets were pooled together and sold to institutional investors, but Auction.com unbundles these pools and conducts individual auctions for each loan.

"It's a very transparent and unbiased process, which is good for both buyers and sellers," explains Ken Rivkin, evp and md at Auction.com. "Because it's an auction, everyone gets a last look at the assets and the auction ends only after all bidding is completed. We're changing the marketplace: a burgeoning cottage industry of buying notes and working them out means that real estate is being put back to work in the local community."

More than 80 institutional investors, all the special servicers and some big retailers, insurance companies and opportunity funds are signed up to Auction.com. Billions of dollars have been transacted via the platform since its launch in 1990. During an auction of Nevada commercial property assets in June, for example, the platform saw 130,000 unique asset hits, over 5,400 confidentiality agreements signed and over 1,100 bidder deposits for 70 properties alone.

With respect to CRE, Auction.com began by holding monthly multi-seller auctions and then introduced product-specific and geography-specific auctions. Indeed, alongside Nevada, well-received auctions have also been held this year for Texas and Arizona assets. The next such auction - slated to run between 19 September and 5 October - is for the Southeast region, involving 322 loan and REO assets once worth more than US$2bn.

While institutional investors still participate in the auctions, Rivkin says that local investors will pay more because they're getting what they want. Typically, they already own similar assets and are experts in the specific property type.

On the other hand, special servicers are increasingly using the platform to sell non-performing loans and notes - largely because Auction.com achieves high prices. They tend to sell smaller notes via the platform due to economies of scale.

Rivkin says that foreclosure processes in each state are also a consideration. "If the work-outs are time-intensive, special servicers are more likely to consider a sale via Auction.com. Ultimately, every asset is sold with a reserve, so it's possible to weigh up the NPV of foreclosure versus the price at an auction."

Auction.com is considering expanding into the UK and Europe in the first quarter of next year. But another potential revenue stream could arise through becoming involved with non-core CRE asset dispositions, such as the recent US$9.5bn Anglo Irish sale - either with the primary source or via buyers of large pools wanting to sell to a retail audience.

CS

ABS

SCI Start the Week - 19 September

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

Pipeline
Among the deals that entered the pipeline last week are: the C$535m Ford Auto Securitization Trust 2011-R3 auto ABS; the US$375.2m Sequoia Mortgage Trust 2011-2 private label RMBS; and the US$1bn JMPCC 2011-C5 CMBS. Additionally, Goldman and Citi are said to be in the market again with the US$1.7bn GS MST 2011-GC4, the CMBS they pulled last month.

Pricings
ABS issuance last week surged back to life after several weeks of minimal activity. Three of the new issues that printed were in the auto ABS sector: US$650m CarMax Auto Owner Trust 2011-2; US$1.25bn BMW Vehicle Owner Trust 2011-A; and US$500m Ally Master Owner Trust 2011-4. Two were credit card deals (US$800m Discover Card Master Trust 2011-A3 and US$858.2m GE Capital Credit Card Master Note Trust 2011-3), one was an equipment ABS (US$875.84m CNH Equipment Trust 2011-B) and another was a stranded asset transaction (US$207.16m Entergy Louisiana Investment Recovery Funding I). The US$1.5bn Morgan Stanley Capital I Trust 2011-C3 CMBS and £2.4bn-equivalent Holmes Master Issuer 2011-3 - of which over 80% was US dollar-denominated - were also well-received.

Secondary market
Primary issuance overshadowed the US ABS secondary market last week, with nine deals pricing - see above. The market was able to absorb this supply without too much trouble, according to ABS analysts at JPMorgan. However, they add that some of the deals issued later in the week did suffer from lower demand, as they were last to market.
The JPM analysts say that themes in the secondary ABS market were generally unchanged. Supply in secondary remains a limiting factor and technicals should help stabilise spreads from here, they suggest.
The US CMBS secondary market saw a significant pick-up in trading volume, however. There was about US$1bn in BWICs, compared with only US$0.5bn for the past several weeks, according to Barclays Capital US CMBS strategists. Most of the increase could be attributed to a pick-up in BWICs related to several CRE CDO liquidations.
CMBS spreads took direction from the strong demand displayed on the new issue MSC 2011-C3 deal, according to Citi securitised product analysts. The 30%-enhanced A4 class was many times oversubscribed and tightened twice during the marketing process. It ultimately priced at 185bp over swaps, 15bp tighter than the DBUBS 2011-LC3.
While cash market activity picked up, CMBX saw volumes drop again, according to Deutsche Bank CRE debt analysts. "With near-term resolution for the Greek crisis likely on the horizon and potential good news from Bernanke next week, prices bounced off of their lows," they report.
US CLO secondary activity continued to be fairly muted last week, with spreads wider especially in mezz. About US$700m in BWICs circulated, but a couple of lists at the beginning of the week did not trade well.
Meanwhile, the volatility of broader markets has been matched by decreasing activity within the European ABS space, especially in the primary market. While secondary market liquidity has also diminished, there hasn't been any significant spread widening in the most liquid ABS sectors, suggesting that most investors are simply waiting for the sovereign situation to play out.

Deal news
• The US Bankruptcy Court for the District of New Jersey has denied Hildene Capital Management's motion to dismiss the ZING VII involuntary Chapter 11 case (SCI 28 July). Hildene has filed a notice of appeal.
• S&P has issued an RFC on proposed changes to its criteria for rating UK RMBS. It details changes that align the agency's criteria for UK RMBS closely with those for global RMBS.
• CapLease has confirmed the sale of CapLease CDO 2005-1 to NRF Cap, an affiliate of NorthStar Realty Finance Corp (SCI 19 August).
• Solutus Advisors has replaced Hatfield Philips as special servicer for the Brunel loan, securitised in DECO 6 - UK2X.
• Two ABS CDOs are to be liquidated: Kent Funding II, while Rockville CDO I collateral will be auctioned in two sales taking place on 27 September.

Regulatory update
• The Independent Commission on Banking released its final report on 12 September, recommending the ring-fencing of retail activities. Regulators will prohibit ring-fenced retail banks from investing in certain types of securities, but will allow them to originate and retain portions of their own securitisations. The Commission estimated that banking system annual pre-tax costs could rise by £4bn-£7bn, with at least half of the increase from curtailing the implicit government guarantee on bank funding. The report suggests implementation by the beginning of 2019, aligned with Basel 3.
• 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.

Deals added to the SCI database last week:
Ally Auto Trust 2011-4
AmeriCredit Auto Receivables Trust 2011-4
Huntington Auto Trust 2011-1
Santander Drive Auto Receivables Trust 2011-3

Top stories to come in SCI:
Covered bonds versus European RMBS
CRE note auctions
Collateral management as a new investment discipline
Alternative ways of addressing contingent capital needs

ABS

Los Angeles partner recruited

Bingham McCutchen has appointed Dan Passage as a partner in its structured transactions group based in the Los Angeles office. He has over 20 years of experience and was previously head of O'Melveny & Myers' securitisation practice. Passage has structured programmes for the origination, financing and securitisation of novel asset classes, such as life settlements, premium finance loans, annuities, patent and trademark license royalties, and trade receivables.

ABS

Corporate trust beefs up

Wilmington Trust's corporate client services (CCS) business has announced the addition of five capital markets professionals to serve clients in Wilmington, Los Angeles and Dallas. The new staff members join Wilmington Trust from Wells Fargo and include John Deleray, Jeffrey Kassels, Gregory Hasty, Cam Lindsey and Mike Orendorf. The team specialises in providing traditional corporate trust and agency services for corporate escrows, corporate debt, municipal debt, life settlement, premium finance programmes and other capital markets transactions.

ABS

ABS analyst added

Chris D'Onofrio has joined DBRS' structured finance group as an svp, focusing on ABS as a lead analyst. He was previously a partner at Cold Street Partners, where he advised middle market specialty finance clients in the subprime auto sector. Prior to that, he spent nine years at Citi, most recently as a director in the global securitised products group where he originated and structured consumer ABS.

In his new role, D'Onofrio reports to Claire Mezzanotte, head of the US and European ABS, RMBS and covered bond group at DBRS.

ABS

Marathon names three new partners

Marathon Asset Management has named three new partners: Stuart Goldberg and Andrew Springer, who become senior portfolio managers and co-heads of the structured credit group; and Jake Hyde, senior portfolio manager in the corporate credit group. All three have become members of the firm's executive committee.

Springer has 24 years of experience in analysing, underwriting and purchasing mortgage assets and structured credit. Goldberg has 23 years of experience investing in fixed income in the global markets, while Hyde has 17 years of investment experience across the corporate, structured and mortgage asset classes.

Marathon's structured credit group focuses on principal investments in various securitised asset classes, including ABS, RMBS and CMBS.

ABS

Corporate trust head appointed

Dean Fletcher has been named regional head of BNY Mellon Corporate Trust, EMEA. He continues to report to James Maitland, head of client & business development for EMEA and Asia Pacific.

Fletcher had been serving as co-head of EMEA for Corporate Trust with Joe Duffy. Duffy remains ceo of The Bank of New York Mellon (Ireland) and will continue to focus on the growth of BNY Mellon's Irish businesses in his capacity as country executive for Ireland.

Fletcher joined BNY Mellon from Barclays Capital in 2008 as head of structured products, corporate trust, EMEA. He has significant experience in managing a portfolio of market-leading business lines that have provided a full range of trustee, agency and administration services across the debt capital markets.

ABS

Hong Kong corporate services team completed

Walkers Management Services has announced that its Hong Kong team is now complete with the appointment of Michele Wan as svp with Walkers Corporate Services. Wan moves over from Walkers law firm in Hong Kong, where she worked as an associate in the firm's corporate and finance group, specialising in asset finance, acquisition finance, structured finance and debt capital markets.

Walkers Corporate Services says it is now well placed to provide a complete range of local corporate services to clients in Hong Kong. These services include the formation of Hong Kong corporate entities, as well as the provision of local services for Cayman Islands and British Virgin Islands companies.

CDS

EM credit derivatives vet hired

Renaissance Capital has hired Soroosh Shambayati as md and global co-head of markets, based in Moscow. He will be responsible for fixed income, currency and commodities across the firm's key geographies of Russia, the CIS, Central and Eastern Europe, Asia and Africa.

Shambayati joins Renaissance from Nomura Securities, where he was chairman, global emerging markets. Prior to that, he worked as head of emerging markets, Europe, at Lehman Brothers and as global head of emerging markets credit derivatives at Citi.

In his new role, Shambayati will work alongside Nick Andrews, global co-head of markets.

CLOs

CLO pro recruited

Tom Majewski has joined RBS Securities' global banking & markets division in the Americas as an md in its asset-backed finance coverage and advisory team. Majewski will be responsible for originating structured transactions - including CLOs - and for providing distribution solutions to corporate and financial institution clients of the bank. He will be based in Stamford, Connecticut and report to Daniel McGarvey, head of asset-backed finance and financial institution banking, Americas.

Majewski has 15 years of experience in the ABS markets and has specialised in originating, executing and distributing CLOs and structured credit transactions for more than 10 years. He joins RBS from AMP Capital Investors, where he was head of the subordinate debt and infrastructure group in the Americas and a member of the firm's global investment committee and global divisional leadership group. Prior to AMP, Majewski was with Access Capital Advisors where he served as the lead portfolio manager for CLOs and direct corporate debt investments and was also a member of the firm's executive committee and global investment committee.

CMBS

Real estate partner returns

Pierre-Denis Leroux has returned to Blake, Cassels & Graydon's real estate group as a partner in the Montréal office. He was previously a partner at McCarthy Tétrault.

Leroux practises commercial law, focusing on acquisition and disposition of real estate, as well as structured and secured financing. He has documented some of the most complex transactions in Canada in these practice areas, the firm says.

CMBS

CMBS origination JV established

Barclays Capital and FundCore Finance Group have established a CMBS loan origination and securitisation programme. Barcap will provide funding to originate conduit loans, while FundCore will source loan opportunities.

The programme's loans will be jointly underwritten by Barclays Capital and FundCore and are anticipated to be periodically securitised. The two firms say they will look to originate and securitise five-, seven- and ten-year fixed-rate loans secured by traditional commercial property types in major markets throughout the US.

The new JV follows Barcap's announcement in June of its intention to expand its CMBS activities (SCI 24 June). At the same time, it hired Larry Kravetz and Spencer Kagan from G2Real Estate as head of CMBS finance and head of CMBS credit and underwriting respectively.

CMBS

Bishopsfield bolsters CRE advisory

Bishopsfield Capital Partners has recruited Arjan van Bussel as a new partner to further build its advisory, real estate and structured finance capabilities. He joins from RBS, where he was responsible for European CRE transactions in the structured finance team.

Previously, van Bussel worked in structured real estate capital at ABN AMRO, having also been a member of the bank's Benelux securitisation team. He began his career in 1998 in the residential mortgage-backed assets division of NIBC.

CMBS

LNR restructures

LNR Property has announced a new operating and an ongoing realignment of global resources. The firm says the move aims to meet the evolving demands of current businesses, opportunities unfolding in the current market environment and requirements arising from the Dodd-Frank regulatory environment.

The new operating structure comprises three business units that span across the global marketplace: LNR Asset Services, Archetype Investment Management and Archetype Capital Markets. At the same time, LNR has made a series of leadership appointments and promotions.

For LNR's special servicing business, LNR Asset Services, the firm has created a new office of the chairman, which will be led by vice chairmen David Levin and Thomas Nealon. The office is charged with oversight of all special servicing activities.

The following hires and promotions have also been made within the LNR Asset Services division: Isaac Pesin and Job Warshaw, who previously served as the US division's coo and head of loan work outs respectively, have been promoted to co-presidents of LNR's US Servicing division; and, as previously announced (SCI 25 July 2011 & 5 September 2011), Matthias Schlueter has been promoted to European coo and md of LNR Partners Europe and Derek Rich has joined as director of investment management for LNR's European division.

Within LNR's Archetype Investment Management division, meanwhile, the following hires and promotions have been made: Adam Behlman joins as md of capital markets and investment strategies, having most recently served as head of the real estate finance and CMBS division of UBS; Natan Bresler has been promoted to director of capital markets; and Luke Dann has been promoted to director and chief credit officer.

Two new entities, Archetype Financial Institutions Services and Archetype Mortgage Capital, comprise Archetype Capital Markets. Archetype Financial Institutions Services was created to acquire and manage portfolios of smaller balance commercial loans and real estate assets offered by small to medium-sized regional banks and financial institutions focused on reducing real estate exposure. Archetype Mortgage Capital is a conduit loan originator offering fixed rate loans secured by retail shopping centres, office buildings, multifamily apartment complexes, hotels, mixed-use and industrial properties located in North America.

Peter LaPointe joins as president and George Spillis joins as coo of LNR Archetype Financial Institutions Services Group, having most recently served as senior executives at Bayview Financial. Meanwhile, Larry Brown joins as president of Archetype Mortgage Capital. He comes to LNR with 23 years of experience in building loan origination platforms at Deutsche Bank, First Union and DLJ.

ABS

Sigma case rejected

SIFMA - represented by Cadwalader partner Martin Seidel and associate Nathan Bull - filed an amicus curiae brief in support of JPMorgan, which the association claims vindicates the rights of multiservice financial services firms. The move was in connection with a case involving the Sigma Finance SIV.

On 5 August, US District Judge Shira Scheindlin granted partial summary judgment to JPMorgan Chase Bank in a class action where plaintiffs asserted claims for breach of fiduciary duty against JPMorgan. They alleged that the firm's investment of fiduciary clients' cash collateral in MTNs issued by Sigma Finance and subsequent unrelated extension of repo financing to the vehicle, by the bank, breached its duty of loyalty owed to its fiduciary clients.

Judge Scheindlin rejected the plaintiffs' theory and held that the "extension of repo financing to a non-fiduciary client (Sigma) in a non-fiduciary capacity did not constitute a conflict of interest". Judge Scheindlin further held that "any other finding would supplant Congressional and regulatory determinations as to the appropriate trade-off between the facilitation of credit and capital formation...and the alignment of incentives such that financial services firms' bottom lines are driven exclusively by the success of their fiduciary clients' investments".

Seidel comments: "The court's decision preserves critical market liquidity and reaffirms almost a century of Congressional and regulatory guidance permitting integrated financial institutions to provide both investment management and corporate finance services."

ABS

Expanded disclosures described

Fitch has published a special report that describes the representations, warranties and enforcement mechanisms (RW&Es) the agency typically sees in structured finance transactions. The release of this report is part of the agency's plans to include expanded disclosure of RW&Es in global SF rating reports as a result of the SEC's adoption of Rule 17g-7 (SCI 10 August).

Beginning on 26 September, Fitch will include in all presale and new issue rating reports a description of the RW&Es available to investors and a comparison of them to 'similar securities'. The RW&Es the agency typically sees in most transactions include a description of the reps and warranties that address the collateral pool, parties to the transaction, security interests of the underlying assets and remedies available to noteholders.

The 'typical' RW&Es were derived by reviewing the documentation of recent transactions that Fitch views as representative for each asset class, thus defining what the agency regards as 'similar securities', which will be used as the basis for comparison in its transaction level reports. Typical asset-level RW&Es are listed on a country-by-country basis for each major asset class.

The definitions of 'typical' RW&Es are expected to remain somewhat fluid as industry standards in many areas of structured finance continue to evolve. Periodically, Fitch intends to update this report and, in particular, the various asset level appendices to reflect the developments in standards.

ABS

CIR RFC published

Moody's has published an RFC regarding its proposed methodology for counterparty instrument ratings (CIR). A CIR addresses the expected loss posed to a counterparty in relation to the payment obligations of an SPV under a financial instrument in a structured finance transaction. In the recent past, the agency has assigned ratings to a number of interest rate and cross-currency swap agreements, and ABCP and term liquidity facilities, particularly in the US and Australia.

The RFC provides details of Moody's proposed methodology. It explains that the agency's approach relies on an analysis of: the quality of the collateral underlying the structured finance transaction and the transaction structure; and the ranking of the SPV's payment obligations under the relevant financial instrument.

A notable feature is that, in some circumstances, the counterparty's financial strength may have a bearing on a CIR. For example, if the ranking of any swap termination payment that may become payable to the counterparty is dependent on whether or not the counterparty is in default at the relevant time, Moody's proposes to cap that swap's CIR at a level one to three notches above the rating of the counterparty.

Moody's anticipates that the proposed methodology will have a moderate impact on the currently outstanding CIRs, with only a handful of Australian swap ratings (characterised by potentially junior ranking termination payments and counterparty ratings in the single-A range) coming under downward pressure. These ratings are likely to migrate toward the rating of the counterparty. Conversely, a small number of US CIRs may see upward revision.

ABS

SEC to tackle conflicts of interest

The US SEC is set to propose a rule intended to prohibit certain material conflicts of interest between those who package and sell ABS and those who invest in them. The proposal, which the Commission says is not intended to prohibit traditional securitisation practices, implements Section 621 of the Dodd-Frank Act.

The proposed rule would prohibit for a designated time period securitisation participants from engaging in certain transactions that would involve or result in any material conflict of interest. Two criteria to determine whether the transaction involves a material conflict of interest are set out in the rule proposal.

"This proposed rule is designed to ensure that those who create and sell asset-backed securities cannot profit by betting against those same securities at the expense of those who buy them," comments SEC chairman Mary Schapiro. "At the same time, the proposed rule is not intended to interfere with traditional securitisation practices in which loans are originated, packaged into asset-backed securities and offered to investors in different structures."

The public comment period on the proposal will last for 90 days.

ABS

Ring-fencing expected to drive SF issuance

Fitch believes that an increase in covered bond and structured finance issuance volumes is likely to be one of the consequences of the removal of implicit state-support for large UK banks. The creation of ring-fenced and non ring-fenced banks in the UK will likely see ring-fenced banks using structured finance debt to partly fund their assets and using covered bonds and structured finance in non-ring-fenced banks to lower their borrowing costs.

"Securitisation will continue to play a role in asset financing for ring-fenced banks. But Fitch expects to see the most dramatic change in financing at non ring-fenced banks, with structured finance and covered bonds playing a much larger role," says Ian Linnell, group md and Fitch's global head of structured finance and covered bonds in London.

Investors in today's volatile markets frequently demand collateral, which means the increase in secured debt is not new for banks. However, the Independent Commission on Banking's proposed rules mean that even when the crisis passes, unsecured bank debt will find it hard to regain widespread support and will account for a lower proportion of a bank's funding than it did before the crisis.

Fitch believes that it is highly likely that a ring-fenced bank will issue structured finance debt in order to fund mortgages or loans that it elects to put in the ring-fenced bank. There will be a regulatory cap on the amount of wholesale debt a ring-fenced bank can issue. However, this cap is not stipulated in the ICB report and is unlikely to affect origination volumes because banks are free to originate mortgages and loans in either the ring-fenced or non ring-fenced bank.

For non ring-fenced banks, there are no proposed limits to wholesale funding and - absent potential state support - the use of secured funding could increase. "The introduction of depositor preference for ring-fenced banks will also play a big role in changing the funding mix. Effective subordination for senior unsecured creditors will push banks towards doing as much secured funding as they are allowed," says Gerry Rawcliffe, md in Fitch's financial institutions group.

CDO

ABS CDO on the block

Dock Street Capital Management has been retained to act as liquidation agent for Highridge ABS CDO I. The property will be sold to the best qualified bidder in two public sales scheduled for 28 September.

CDO

CRE CDO delinquencies flatten out

Delinquencies for US CRE CDOs flattened out this past month on limited loan activity, according to Fitch's latest index results for the sector.

With asset managers reporting only three new delinquent assets last month, August delinquencies fell slightly to 11.6% from 11.8% in July. Among the newly delinquent assets were one defaulted whole loan and two credit-impaired securities. The newly delinquent loan is secured by a vacant industrial building.

"The pace of new delinquencies has slowed over the last four months, which is an encouraging sign for CREL CDOs," says Fitch director Stacey McGovern. "However, delinquencies are expected to continue to fluctuate as economic conditions remain volatile."

While this ongoing decline in overall delinquencies suggests a positive trend for CRE CDOs, Fitch maintains its current loss expectations as losses continue to be realised and some of the modified and newly extended loans are expected to ultimately default again.

Thus, the agency says the change in the level of delinquencies is not expected to immediately impact its CRE CDO ratings. Ratings on the most junior classes remain subject to volatility as future realised losses may differ from current expectations.

Offsetting the three new delinquencies were four removed assets: two matured balloons, which were recently modified and/or extended; one impaired CMBS with a prior interest shortfall that was brought current; and one term default that was resolved via discounted payoff at a 40% loss.

In August, CRE CDO asset managers reported approximately US$39m in realised losses. The highest loss was related to the discounted payoff of a whole loan secured by an underperforming portfolio of 14 multifamily properties located in Texas.

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

CDO

ABS CDO sale due

The trustee of Kent Funding II has been direction to sell and liquidate all of the ABS CDO's assets. The holders of at least two-thirds of the aggregate outstanding amount of each class of notes voted to liquidate the transaction on 9 September. All secured parties are eligible to bid at the upcoming public sales.

CDO

Euro ABS CDOs affirmed

Fitch has downgraded three tranches and affirmed 53 tranches of 21 European ABS CDOs. Simultaneously, the agency has withdrawn the ratings of two tranches.

Fitch believes the affected transactions are highly distressed, as reflected by the highest rating of double-C. The performance of the deals has been in line with the agency's expectations since the last review between October 2010 and March 2011.

It has therefore affirmed the majority of the tranches, generally at the low ratings of double-C and below. Fitch views the default of any tranche rated single-C as unavoidable.

The ratings of Builder 2 - Eirles Two Series 143 notes and Cloverie - Ghibli 1 Series 2004-26 class A notes have been downgraded to D following credit events valuation that led to the write-down of the notes. Fitch has withdrawn the ratings of Cloverie - Ghibli 1 Series 2004- 26 class A and Series 2004-27 class B notes because all rated notes in the capital structure of the transaction have defaulted.

CDO

ABS CDO sales scheduled

Dock Street Capital Management has been retained as liquidation agent for Rockville CDO I. The collateral will be auctioned in two sales taking place on 27 September.

CDS

Vendor adds stochastic rating model

Pricing Partners has added a stochastic rating model to its Price-it derivatives pricing library that enables users to price ratings-linked products. Using rating transition matrices, the model bootstraps transition densities and can be plugged into the pricing platform.

CDS

Non-public default model released

Kamakura Corporation has updated its Kamakura Risk Information Services platform to include a non-public firm default model. The model is based on 2.866 million annual observations of non-public firms and 41,119 company failures in a multi-national non-public firm database. It displays default probabilities on an annualised, cumulative and forward basis for a 1-, 2- and 3-year term.

CDS

Collateral servicing platform enhanced

BNY Mellon has enhanced its derivatives collateral servicing platform for institutional clients with new margin management capabilities delivered through a secure web-based portal, DM Edge Connect. The firm says the enhancements provide clients with a fully automated system that facilitates the entire margin call and collateralisation process, improves reporting capabilities and reduces operational risk. To help introduce these enhancements, BNY Mellon has partnered with Algorithmics.

CDS

Housing concerns weigh on subprime CDS

The summer-long rally for US subprime credit default swaps (CDS) has come to a screeching halt, thanks to a sizeable drop-off last month, according to Fitch Solutions' latest index results.

Prices on US subprime CDS declined by 1.6% in August to 12.11, the lowest level since March of this year. Of note was performance for the 2007 vintage, which dropped a staggering 18.8%. However, prices are still up by 12.1% year-to-date due to the strong rally in 1Q11.

"Reduced expectations for US economic growth and its implications for US housing may be weighing on subprime prices," says Fitch director David Austerweil. "While newly delinquent loans have risen each of the last four months, delinquencies increased substantially for every vintage in August, possibly indicating renewed strain for homeowners."

The current-to-delinquent roll rate increased by 8.8% month-over-month to reach 8.1%. The backlog of foreclosed homes has been rising throughout the year as well: the percentage of homes in foreclosure in the 2006 vintage reached 21.2% in August, up by 3.8% month-over-month and 17.1% year-to-date.

"Subprime homes in foreclosure are at their highest levels since deal inception," says Fitch senior director Alexander Reyngold. "Making matters worse is that subprime loans are not becoming real estate owned and liquidated fast enough to reduce the balance."

While 12.8% of 90-day plus delinquent loans in the 2006 vintage entered foreclosure in August, only 2.1% of those foreclosed homes became real estate owned (REO). One positive this past month, however, was the substantial increase in balance modifications over the year.

The percentage of loans with balance modifications in the 2007 vintage reached 5% in August for a year-to-date increase of 79.6%. There are signs that balance modifications are also becoming more effective: the percentage of loans with balance modifications that subsequently became 60-days or more delinquent in the 2007 vintage has declined by 24.6% year-to-date.

CDS

CDS liquidity bounces back

Fitch Solutions reports that in the two weeks to 16 September global CDS liquidity bounced back from the temporary holiday-related lull seen in Europe and North America during early September.

"Continued market concerns on Eurozone sovereign prospects helped push average global CDS liquidity back towards the highs seen in late August," says Diana Allmendinger, director at Fitch Solutions in New York.

While CDS liquidity for developed and emerging market sovereigns continues to show a convergence trend, Fitch's CDS spread indices instead show divergence, with developed market spreads gapping out further over their emerging market peers as countries such as Belgium and Italy reached new highs last week. "Since July this year, spreads on European banks [have] begun to noticeably widen out on market concerns over their exposure to sovereign debt and, on 12 September, Fitch's European bank CDS index reached its widest recorded point - 153% wider than its North American bank CDS index," adds Allmendinger.

As of last Friday's market close, average CDS liquidity for emerging and developed market sovereigns was 8.15 and 8.30 respectively, compared to 8.19 and 8.31 two weeks previously. Average global CDS liquidity closed at 9.31 versus 9.33 for the same period.

CDS

iTraxx set to roll tighter

The Markit iTraxx Europe, Asia and SovX indices will roll into a new series tomorrow (20 September).

Structured credit strategists at UniCredit estimate that the new Series 16 Main index will start trading about 6bp tighter than the Series 15 Main index for contracts with standard maturities of 4.75 years and 5.25 years respectively. The major contribution to this roll spread comes from the name changes, while the credit curve effect is much smaller for all indices due to current comparatively flat credit curves.

The constituents of the Financials sub-indices have not changed, however, so the roll spread will only reflect the extended maturities of the new on-the-run CDS contracts. Given the current five-year to 10-year spread ratio, the Financials Senior roll spread should be zero, according to the UniCredit strategists, while the new five-year Financials Sub index will likely traded 1bp tighter than the outgoing series.

CDS

CDS analytics upgraded

CMA has released Quotevision 4.0, which the firm says is a significant improvement on the previous version through enhanced functionality, a new interface and a number of feature improvements. These include open architecture, a flexible GUI, integrated analytics and syndicated loan/LCDS data.

CLOs

CLO tender offer announced

Citi has commenced a cash tender offer to purchase outstanding Skytop CLO income notes. For each US$1,000 unpaid principal amount of income notes validly tendered, the bank will pay US$400. The offer is scheduled to expire on 14 October, unless extended or earlier terminated.

CMBS

TRX.II launch date announced

The long-awaited launch of indices referencing CMBS 2.0 (SCI 7 April) is now set. Markit has announced that the first trading date for its new family of indices based on CMBS issued since 2010 - the Markit TRX.II indices - will be 3 October 2011.

TRX.II will comprise a maximum of 25 triple-A rated securities from 25 different CMBS deals. Both private (144a) and public deals are eligible for inclusion. However, at launch, the index will primarily consist of 144a deals.

Each quarter the index will be rebalanced to include recent qualifying issuance by replacing the oldest deals in the index with newer deals. The index will have the same contract structure as the existing Markit TRX.NA.

The new index is intended to offer CMBS investors an efficient hedging and investment tool.

Separately, the Markit CDX North America Investment Grade and CDX Emerging Markets indices roll into their next series today (20 September). The Markit CDX NA HY index will roll on 27 September.

RMBS

RMBS monitoring tool enhanced

CoreLogic has enhanced its TrueLTV private label RMBS monitoring tool. The service will now provide insight into loss severities and risk exposure of paid-off and REO loans at both the property and portfolio levels.

Previously, TrueLTV included updated valuations on active liens in a security where outstanding mortgage liens were reflected on the property record. The enhanced service incorporates updated automated valuation model (AVM) information when there are no outstanding mortgage liens on the property or when the mortgage associated with the security is paid off.

The aim is to allow users to more accurately assess loss severities, develop trending information and better understand the correlation between first and hidden liens on properties associated with paid-off loans in securities. The enhancements are available for loan-level information with history dating back to November 1999.

RMBS

UK RMBS criteria changes proposed

S&P has issued an RFC on proposed changes to its criteria for rating UK RMBS. It details changes that align the agency's criteria for UK RMBS closely with those for global RMBS.

The proposal discusses two of the fundamental principles of structured finance ratings and criteria: the credit quality of the securitised assets; and the payment structure and cashflow mechanics. Credit enhancement levels for all rating categories will be increased as part of the changes.

The proposed criteria also adjust the computation of market-value decline and loss severity estimates. This means that in addition to a recessionary decline, the modelling approach would specifically incorporate an adjustment to estimate the degree of over- or undervaluation in the property market, as well as a forced-sale discount.

The proposed criteria should not have an impact on existing ratings on prime UK RMBS, although marginal rating actions could affect those prime UK RMBS whose credit performance in the recent downturn has been somewhat muted. The impact on outstanding ratings in the non-prime sector would be more pronounced, however.

For example, about 40% of outstanding triple-A ratings on non-prime UK RMBS would likely change, with the majority moving into the double-A category. Similarly, up to 40% of triple-B ratings could change and the majority of double-B ratings would move to a lower category.