Contents

ABS

SCI Start the Week - 26 September

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

Pipeline
Three new transactions remained in the pipeline at the end of last week: a US$200.5m auto ABS, Credit Acceptance Auto Loan Trust series 2011-1; a US$50m whole business securitisation, NuCO2 Funding series 2011-1; and a ZAR1.19bn tap of South African RMBS Thekwini Fund 9.

Pricings
Auto ABS prints dominated new issue activity last week, with the US$350m Chesapeake Funding 2011-2, US$99.94m CPS Auto Receivables Trust 2011-B, US$970m Nissan Auto Lease Trust 2011-B, US$879m Toyota Auto Receivables Owner Trust 2011-B and US$625m Volkswagen Credit Auto Master Owner Trust 2011-1 all pricing in the US. Two European auto transactions priced as well: €844m VCL 14 and €600m SC Germany Auto 2011-1.
Other deals to hit the market included: US$1.72bn GS MST 2011-GC5; US$352m Apidos CLO VIII; US$397m State Board of Regents of the State of Utah series 2011-1; €1.1bn Gracechurch Card Funding 2011-4; €1.1bn B-Arena Compartment 2; and A$1.5bn-equivalent National RMBS Trust series 2011-2.

Markets
US ABS investors felt the effects of equity and rate volatility, as well as European economic and sovereign risks last week as secondary liquidity diminished and tiering grew even more pronounced, according to ABS analysts at JPMorgan. "Investors continue to prefer short, plain vanilla benchmark ABS for their safe-haven status, while demanding more spread concessions for everything else," they add. On the week, prime auto loan ABS spreads held up the best, while private student loan ABS spreads underperformed the most.
At the same time, the primary US ABS market saw US$3.3bn of supply in the week, US$2.5bn of which came from autos. Year-to-date supply currently stands at US$95.9bn, compared to US$82.9bn for the same period last year, the JPM analysts say.
Meanwhile, JPM CDO analysts say that year-to-date global CLO supply reached US$10.6bn last week and is now in their forecast US$10bn-US$15bn range for 2011. The CLO market's achievement has not come without cost, with pricing wider to levels not seen since the start of the year.
As with ABS, US CMBS secondary market trading continues to follow broader macro sentiment to a large extent. "Volatility is keeping some investors on the sidelines for now, two-way flows are becoming increasingly muted and most players are marginally better sellers. Real money players were fairly active this week, but fast money accounts are on the sidelines for the time being (except for some moderate activity in synthetics)," say Citi securitised product analysts.
However, they note that in contrast to August trading, there was no sense of panic in the CMBS market last week, despite a number of major developments on the macro front and another surge in broader market volatility. CMBS credit spreads only widened modestly, while dupers and DUS held up well. So, the Citi analysts say: "From this perspective, CMBS market sentiment is holding up somewhat better than other sectors."

Deal news
• The Oberpollinger property backing Fleet Street Finance 2 has been sold for €194m, with proceeds to be used to prepay the loan on the October IPD. As funds continue to be applied sequentially, the sale will benefit the class A notes. According to European securitisation analysts at RBS, it had been expected that - for meaningful sales to occur - the market would take time to get comfortable with the covenant of the restructured Karstadt operator.
• P&G SGR has announced the results of its tender offer for the Zoo ABS 4 CDO. It accepted a notional amount of €15.86m at a price of 70 for the A1B bonds.
• 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.
• 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.

Regulatory update
• 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.
• 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.

Deals added to the SCI database last week:
Ally Master Owner Trust 2011-4
BMW Vehicle Owner Trust 2011-A
CarMax Auto Owner Trust 2011-2
CNH Equipment Trust 2011-B
Discover Card Master Trust 2011-A3
Entergy Louisiana Investment Recovery Funding I
GE Capital Credit Card Master Note Trust 2011-3
Holmes Master Issuer 2011-3
JPMCC 2011-C5
Morgan Stanley Capital I Trust 2011-C3

Top stories to come in SCI:
CRE portfolio sales
Prospects for Trups CDOs
ABS recruitment trends
Collateral management as a new investment discipline
Alternative ways of addressing contingent capital needs

ABS

Swap opportunities

Rating agency counterparty criteria changes have created opportunities for highly rated banks to offer their services as external securitisation swap providers. At the same time, issuers are becoming increasingly proactive about identifying which banks can perform this role.

Traditionally, larger issuers have acted as interest rate and currency swap counterparties on their own securitisations. However, pressure on issuers to source external, non-correlated swap counterparties is increasing.

This is due to a number of factors, according to Anthony Whittaker, md and head of UK bank ALM and origination at Natixis. First, S&P's new counterparty criteria require a swap provider to have ratings of at least A/A-1 to avoid a rating event. This means that some issuers can't perform the role in-house.

Swap counterparties also need to have the balance sheet capacity to post collateral at short notice. Depending on the rating agency requirement, upon a downgrade a swap counterparty must post collateral into the securitisation vehicle of between 5%-13% for a floating/floating cross-currency swap.

Against this background, not only is the number of single-A rated counterparties narrowing, but some counterparties also have concentration issues because they've been involved in securitisation swaps for a number of years. Given that it is harder to find suitable counterparties and becoming more expensive to execute securitisation swaps, issuers are increasingly paying attention to which banks will be able to perform them.

CS

CDS

Optimising collateral

Proposed rulemaking changes concerning margin and capital requirements for non-cleared swaps and non-cleared security-based swaps under the Dodd-Frank Act could result in an estimated US$2trn increase in demand for collateral. The challenges associated with collateral management are consequently expected to be pronounced, while also creating opportunities for third parties to deliver cost-effective solutions.

Increased demand for collateral will ultimately drive up the cost of holding the same positions, according to NewOak Capital md Chad Burhance, potentially giving rise to a new investment discipline - collateral optimisation. "Collateral managers now need to consider multiple factors to successfully manage their portfolios, as well as to earn sufficient return on their collateral," he explains.

Burhance points to three areas that will likely see change as a result. First is that participants may have to begin accepting different types of collateral in addition to cash, which is now most typically used.

Second, the emphasis will be on optimising allocation. Certain securities will become more valuable, likely leading to relative value and arbitrage opportunities.

Finally, discipline around collateral substitution will emerge. "It's a global market, so it will be important to project where collateral will be needed or rehypothecated several days out," Burhance observes.

In terms of infrastructure and technology, business process and outsourcing opportunities exist for third-party providers as collateral managers attempt to catch up and minimise costs. "Reconciliation is an obvious process to outsource because it's fairly standardised," says Burhance. "Valuation substantiation could also be outsourced: movements in collateral values are based on mark-to-market, so third parties can provide support to challenge the margin call. This is more pronounced for illiquid assets."

Meanwhile, the move to risk-based margining adds further complexity to the process. Each counterparty uses their own model and assumptions, which means that opportunities also exist for third parties to provide risk measurement and aggregation services.

"Some approaches hold up better at different times," Burhance adds. "During normal times, it is possible to achieve good predictability on a less rigorous/intensive basis. But in volatile times a more rigorous and complex approach may be needed to properly estimate risk."

He says that timing will become all the more important under the new rules: the larger the horizon, the greater the potential discrepancy in collateral needs. "Collateral management is typically performed daily. But when the market moves to risk-based margining, firms may be receiving collateral calls multiple times in a day. Thus the ability to project the possible outcomes multiple days in the future will be required to manage the necessary cushion."

CS

RMBS

GSE g-fee hike anticipated

FHFA director Edward DeMarco's speech to the American Mortgage Conference this week has been described as arguably the "most comprehensive overview" in a long time of where Fannie Mae and Freddie Mac are headed. How a private company could do the work of the GSEs was the main theme running through the speech.

With respect to guarantee fees, DeMarco identified two key inefficiencies in the entrenched approach: even at their current levels, guarantee fees do not offset the average credit losses seen over the past several years; and the 'one size fits all' approach to setting guarantee fees is in contrast to the reality, where borrower characteristics, loan type and geographic considerations all contribute to expected credit losses.

"The future, according to DeMarco, likely involves higher g-fees," note ABS analysts at Bank of America Merrill Lynch. "Lest we think that DeMarco envisions a modest increase, he left little doubt that the increases could be large enough to require a staged implementation." Indeed, the speech introduced the possibility of adding new pricing adjustments based on geographic and mortgage product differences.

Overall, the speech is being viewed as a positive for the agency MBS market. The BAML analysts point out that while any step forward in the government's efforts to increase refinancing efficiency is potentially an ominous development for the mortgage market, a solution that includes substantially higher guarantee fees would offset a large part of the resultant refi activity.

"If this turns out to be the next step in the refi.gov process, we would expect MBS to outperform, led by higher coupons," they conclude.

CS

RMBS

'Operation twist' boosts agency MBS

The FOMC yesterday voted in favour of further easing monetary policy, including by buying an additional US$400bn of Treasuries with maturities between six years and 30 years by the end of June 2012. What surprised the market was the decision to re-invest the paydowns on the Fed's agency debt and MBS holdings into agency MBS.

Current Fed agency MBS and debt holdings stand at US$870bn and US$108bn respectively. Given that paydowns from the Fed's portfolio were only being reinvested into Treasuries, prepayments on its MBS holdings effectively increased net supply to the mortgage market.

But the FOMC's decision removes this overhang by keeping the size of the Fed MBS portfolio roughly constant, according to ABS analysts at Barclays Capital. "Removing the largest component of supply to the market makes the outlook for MBS supply markedly more positive," they note. "For example, during the past 12 months total conventional supply to the market was approximately US$330bn. Over the next 12 months, we estimate that total MBS supply to the market will be only US$60bn because of [these] changes."

Another important implication is that basis directionality should largely be removed. "Prior to this announcement, lower interest rates translated into greater supply to the market, which led widening pressure in a rally. Now, as the Fed MBS portfolio will remain roughly constant, there should be a significant reduction in mortgage basis directionality," the BarCap analysts explain.

With respect to the MBS market, the announcement has a down-in-coupon bias, the analysts add. Fed purchases will be focused mainly in the production coupons - 3.5s.

"Although this mostly addresses all the supply in lower coupons, the announcement does not address the supply overhang in higher coupons due to Treasury sales. Lower rates and flatter curve add to the down-in-coupon bias," they note.

Conversely, the announcement is expected to be negative for GN/FN swaps and 15s/30s.

CS

CDO

When Cayman directors fail to act

Richard Ruffer, svp at Walkers Management Services in the Cayman Islands, suggests two indenture provisions that could safeguard against future CDO involuntary bankruptcies

The recent US Bankruptcy Court decision in In re Zais Investment Grade Limited VII, No. 11-20243 (Bank. D. N.J. August 26, 2011) raises troubling concerns for investors in CDOs. The decision rejected a motion to dismiss an involuntary bankruptcy order entered against a Cayman Islands CDO.

As a result, the case opens the door for struggling Cayman CDOs to be pushed into involuntary bankruptcy in the US, despite having "bankruptcy-remote" structures. The case, however, also provides guidance on how CDO directors can help preserve the structural integrity of bankruptcy-remote transactions if they choose to act.

ZING structure and performance
Zais Investment Grade Limited VII CDO (ZING) closed in October 2005. ZING is a Cayman Islands exempted company with three Cayman-based independent directors. ZING's ordinary shares are held on trust for charitable purposes by a Cayman-based trust company.

ZING issued various classes of non-recourse, secured notes (with original ratings ranging from Aaa/AAA to A3/NR by Moody's and S&P) and a class of unsecured, unrated income notes that has rights similar to preferred equity. Zais Group acts as collateral manager for ZING with The Bank of New York Mellon Trust Company serving as indenture trustee.

As a CDO-squared, ZING's collateral portfolio consists primarily of securities issued by, or swaps referencing, other CDOs. By mid-2008, ZING's portfolio had deteriorated sufficiently to trigger ratings downgrades on all of its rated notes.

ZING suffered a covenant default on its notes in March 2009 and the senior note holders elected acceleration in June 2009. Under the transaction documents, the acceleration caused Zais to lose its ability to actively manage the collateral portfolio. Also at that point, the trustee became obligated to hold ZING's portfolio intact unless either the trustee could sell the portfolio and pay all notes in full or the holders of two-thirds of each class of notes consented to the sale - two highly unlikely events.

Bankruptcy petition, directors' failure to answer and motion to dismiss
On 1 April 2011, a related group of funds holding a large portion of the most senior class of notes filed an involuntary chapter 11 bankruptcy petition against ZING in the Bankruptcy Court for the District of New Jersey. The petitioners reasoned that the portfolio could not fully repay the most senior notes but that the portfolio, if actively managed, could yield more than if left to run off.

The reorganisation plan proposed by the petitioners called for the transfer of ZING's portfolio to an affiliate of the petitioners for management and orderly liquidation, with the proceeds distributed to the most senior class of notes. No other noteholders joined the petition.

The directors did not file an answer to the petition, so the Bankruptcy Court entered a default judgment against ZING on 26 April 2011. Afterwards, a junior noteholder filed a motion to dismiss the bankruptcy case. Another holder of the most senior class of notes and Zais joined in the motion.

Court's decision on motion to dismiss
The Court rejected the motion to dismiss after working through the movant's various arguments. The decision is noteworthy not only for the Court's analysis of the arguments, but also for what arguments the Court summarily rejected and why.

The Court rejected out of hand probably the strongest argument for dismissal: non-recourse. As non-recourse debt holders, the petitioners' claims are limited to the value of the collateral; thus, the petitioners can never be unsecured. In order to file a petition, the petitioners must be, at least partly, unsecured.

Non-recourse forms the backbone of bankruptcy remoteness and the Court's rejection of the argument at first appears shocking. The Court, however, rejected the argument not on its merits but on the basis that only the debtor can make the argument, and ZING missed its chance when the directors failed to contest the petition and allowed a default judgment.

The movant also argued that ZING does not qualify as a debtor under US bankruptcy laws because, as a Cayman company, it does not have a place of business or have property in the US. The Court disagreed. It concluded that a major and critical portion of ZING's operations are actually performed by Zais and the trustee, each from their offices in the US.

To meet the threshold, the Court noted that ZING only needs "a" place of business in the US, not its "principal" place of business. It found the activities of Zais and the trustee sufficient to constitute a place of business for ZING.

The Court went on to conclude that ZING's accounts and securities held by the trustee in New York City qualify as property in the US. Thus, the Court held ZING has both a place of business and property in the US, either of which qualifies ZING as a US debtor. Importantly, this analysis results in virtually every CDO with a US-based collateral manager or trustee qualifying as a US debtor, as could many Cayman hedge and private equity funds.

Finally, the movant argued that the Court should abstain from exercising bankruptcy jurisdiction for a number of reasons that are essentially fairness or equitable arguments. The reasons included that the petitioner was trying to gain an unfair advantage over other creditors, that bankruptcy is an end run around the indenture and that the petitioner's plan does not reorganise ZING. All of these arguments the Court systematically rejected.

Lessons learned
The case confirms that in order to ensure structured finance investors receive the deal they bargained for in the transaction documents, the entity must stay out of bankruptcy. The Court's willingness to entertain a reorganisation plan that overrides the indenture shows all deals are off once in bankruptcy. The case further shows that any CDO with a US collateral manager or trustee, or potentially just a US custodian, can end up in bankruptcy in the US.

The case also makes it clear that the directors of a CDO control the non-recourse argument, which had the best chance of keeping ZING out of bankruptcy if put forward by the directors. It is not clear why the directors failed to contest the petition. A letter from Zais to the ZING investors states that the directors had counsel and consciously chose not to oppose the petition.

Similarly, the Court stated in its opinion that ZING "has no stake and takes no position on the motion. It views this matter as an inter-creditor dispute to be resolved in an appropriate forum."

It is troubling to think the directors could believe that the company over which they have oversight would have no stake in whether or not it is declared bankrupt, particularly when the non-recourse nature of the debt means it should be solvent. Maybe instead the directors decided the deal was now a bad one for the senior noteholders and were willing to let the noteholders rewrite the deal in bankruptcy.

In any event, by deciding to do nothing, the directors guaranteed that a bankruptcy reorganisation plan would replace the deal the investors bargained for in the transaction documents. This will surely work to some investors' benefit and to others' detriment, but the fundamental premise of structured finance is that the structure is set at the start and followed through to the end, all in accordance with the transaction documents. Here, the directors proved themselves to be the weak link in ZING's bankruptcy remoteness chain.

Potential safeguards
ZING points out the importance of engaging the right independent directors - ones who will strive to have the CDO meet investors' expectations as set out in the transaction documents. In order further to reduce bankruptcy risk on future transactions, however, two provisions added to the note indenture could help.

First, the non-petition covenant in ZING did not apply to senior noteholders, only to junior noteholders. Having all noteholders bound by a non-petition covenant, particularly one phrased as a mutual covenant among the holders, may give noteholders a better footing from which to contest a petition.

Second, adding a covenant that the CDO will contest any involuntary bankruptcy petition - provided sums are available to pay for counsel - may provide an additional reason for directors to act. Failure to contest a bankruptcy typically constitutes an event of default in CDOs, but if an event of default has already occurred, the potential for a second event may not alone push the directors to act. A continuing covenant, in contrast, may compel the directors to act to support the integrity of the structure in all events.

ABS

Boutique bolsters FI sales

CastleOak Securities has added Gregory Hughes and Dana Brett-Levy to its fixed income division. The pair report to Patrick de Catalogne, senior md and head of fixed income sales & trading.

Hughes joins the firm as director, covering a diverse account base for credit, structured credit and all fixed income products. He previously developed credit trading and sales platforms at Ropemaker Capital and, before that, held senior roles in credit and structured credit sales at Commerzbank, HSBC and Deutsche Bank.

Brett-Levy joins CastleOak as director, covering fixed income institutional accounts both domestically and internationally. In her previous role as director at Coldwell Banker Commercial, she managed the distressed asset division, working with institutional clients in complex transactions involving real estate loans and assets. Prior to that, Brett-Levy held senior positions at Donaldson, Lufkin & Jenrette and Deutsche Bank.

ABS

ILS pro moves on

Noah Schiltknecht has joined Russell Investments in New Zealand as a consultant. He most recently worked as a senior investment analyst, modelling acquisitions and divestments for utility firm Vector.

Schiltknecht was previously involved in the structuring and valuation of insurance-linked products, credit and other derivatives at Swiss Re. He was also part of a project team that developed and introduced a new economic performance management and asset-liability management system for life and non-life reinsurance at the firm.

ABS

Executive committee bolstered

Sidley Austin has added six new members to its executive committee, including two with experience in structured finance and real estate.

Craig Griffith has been a partner in the firm's Chicago office since 1998. He represents banks, insurance companies and other financial institutions in domestic and international securitisation and structured finance transactions. These transactions have included a particular focus on the formation, administration and financing programmes involving the use of ABCP and MTN conduits in the US and Europe.

Effie Vasilopoulos joined Sidley Austin as a partner in Hong Kong in 2003. She is head of the firm's investment funds practice in Asia and focuses on the development of innovative investment fund structures and financial products, including real estate funds and REITs.

ABS

Advisory enhances Iberian coverage

StormHarbour has hired Paulo Gray as a principal and md. He will be chiefly responsible for driving client relationships and coverage in Portugal and the broader Iberian region, across fixed income sales and trading, structuring and advisory, and capital markets. Gray was most recently chief country officer and head of markets for Portugal at Citi in Lisbon, a role he held since 2003.

CDO

RBC charged over 'unsuitable investments'

The US SEC has charged RBC Capital Markets for misconduct in the sale of unsuitable investments to five Wisconsin school districts and its inadequate disclosures regarding the risks associated with those investments.

According to the SEC's order, RBC Capital marketed and sold to trusts created by the school districts US$200m of credit-linked notes that were tied to the performance of synthetic CDOs. The school districts contributed US$37.3m of district funds to the investments with the remainder of the investment coming from funds borrowed by the trusts.

The sales took place, despite significant concerns within RBC Capital about the suitability of the product for municipalities like the school districts. Additionally, RBC Capital's marketing materials failed to adequately explain the risks associated with the investments, the SEC alleges.

RBC Capital agreed to settle the charges by paying a total of US$30.4m that will be distributed in varying amounts to the school districts through a Fair Fund.

CDO

Wells Notice received over CDO ratings

The McGraw-Hill Companies has received a Wells Notice from the US SEC stating that the Commission is considering whether to institute a civil injunctive action against S&P, alleging violations of federal securities laws with respect to its ratings for the Delphinus CDO 2007-1. In connection with the contemplated action, the SEC may seek civil money penalties, disgorgement of fees and other appropriate equitable relief.

The Wells Notice is neither a formal allegation nor a finding of wrongdoing. It allows S&P the opportunity to provide its perspective and to address the issues raised by the Commission before any decision is made on whether to authorise the commencement of an enforcement proceeding. S&P has been cooperating with the Commission in this matter and intends to continue to do so.

CDO

CDO manager replacement proposed

A majority of the controlling class of investors in Belle Haven ABS CDO 2006-1 is proposing to replace NIBC Credit Management with Cairn Capital as collateral manager.

Under the collateral management agreement, the manager may be removed at any time, without cause, if the class AB overcollateralisation ratio is less than 100% for a period of more than 180 consecutive calendar days. Furthermore, at any time when an event of default has occurred and is continuing and the collateral manager has been removed or has resigned, a majority of the controlling class may appoint a successor manager

The transaction experienced an event of default on 14 April 2008, because the class AB overcollateralisation ratio had fallen below 95%, and was accelerated as of 23 September 2008. The removal of the collateral manager and the appointment of a replacement shall not be effective until the replacement manager has agreed in writing to assume all of the collateral manager's duties and obligations under the collateral management agreement.

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

CDS

Sales head appointed

CMA has appointed Steve Tucker as global head of sales, responsible for all sales, account management, channel partnerships and marketing at the firm. He is tasked with promoting and accelerating the global growth of the company through its key product lines - CMA Quotevision, CMA Datavision and CMA NAVigate.

Tucker most recently served as head of investment management and trade processing at Thomson Reuters. He has extensive experience in building and managing sales teams and businesses.

CDS

Finance practice beefs up

Jones Day has added two lawyers to its banking & finance practice in New York. Alice Yurke joins as partner and comes from Ashurst, where she was a partner in the finance practice. Jonathan Ching joins Jones Day as of counsel and was previously at a global investment firm, where he served as a vp and counsel.

Yurke focuses her practice on structured products, including credit-linked structures in both US and offshore markets. She has substantial experience advising financial institutions in structuring products for hedging, arbitrage, balance sheet management and liquidity purposes across a variety of sectors, and regularly advises clients on products involving principal protection.

Ching focuses his practice on structured products and their applications in trading and capital markets. He has managed numerous transactions involving product structuring, valuation and margin arrangements; insolvency issues; and trade unwinds; and has substantial background in negotiating documentation for transactions.

CLOs

Key man clause triggered

A key personnel event has been declared on the PULS CDO 2006-1 and PULS CDO 2007-1 SME CLOs. The clause was triggered by Manfred Gabriel ceasing to be a member of the board of the portfolio manager, Capital Securities Group, with effect from 23 September.

CLOs

Third CLO sold

Nomura Corporate Research and Asset Management has sold another CLO - Clydesdale CLO 2006 - to Ares Management. The transaction has been renamed Ares XXI CLO. Moody's has determined that the move will not result in the reduction or withdrawal of the deal's current ratings.

RMBS

MBS valuation partnership formed

Lewtan and Thetica Systems have formed a partnership to offer a pre-integrated bond valuation platform to MBS and ABS investors. Thetica Systems' ABS Analytics Trader Tools provide a suite of software that incorporates Lewtan's ABSNet, ABSNet Loan and ABSNet Loan HomeVal products with credit model assumptions to automate an efficient bond valuation platform with an easy-to-customise front-end solution.

The platform developed by Thetica Systems, integrating Lewtan's ABSNet and ABSNet Loan products, offers high-speed analytics capable of running thousands of bond scenarios simultaneously, including different pricing, economic and regional metrics. The tool allows for the most precise RMBS forecasting and valuation by integrating Lewtan's data with credit and default predictions of the user's choice, the two firms say.

RMBS

Mortgage insurer downsizes

Radian Group has realigned its operational structure to compete more effectively as a leading private mortgage insurer. The primary objective is to focus the firm's resources on sales and other core functions to grow profitable new business while aligning its support services to the reduced mortgage market volume expected in the near term. The realignment includes a workforce reduction of approximately 7% of Radian's corporate and mortgage insurance staff.

RMBS

Class action launched over RMBS sales

A class action has been commenced on behalf of purchasers of Bank of America common stock during the period between 25 February and 5 August 2011. The complaint charges BofA and certain individuals with violations of the Securities Exchange Act of 1934.

Robbins Geller Rudman & Dowd is representing the plaintiffs in seeking to recover the damages on behalf of stock purchasers. The complaint alleges that defendants misled investors by failing to disclose that BofA potentially owes more than US$10bn to AIG. Defendants are accused of making materially false statements and failing to disclose that Merrill Lynch and Countrywide Financial Corporation - both acquired by BofA - sold AIG over US$28bn in RMBS.

As a result of the RMBS sales, AIG suffered losses in excess of US$10bn and BofA was potentially subject to suit for those losses. Although defendants informed investors about the claims of other entities for their RMBS losses, investors were not informed about the AIG losses.

AIG subsequently filed suit against BofA in New York on 8 August 2011 to recover the losses it suffered as a result of RMBS sold by BofA, Countrywide and Merrill Lynch between 2005 and 2007.

RMBS

MBS trading team acquired

CRT Capital Group has acquired a team of sales and trading professionals from Citadel Securities' institutional MBS group. The team - which is led by Patrick Russell and Igor Vidrevich - will join CRT's securitised products business, focusing on RMBS, CMBS, ABS CDOs and mortgage-backed pass-through securities. Prior to joining Citadel, Russell and Vidrevich were part of Morgan Stanley's agency CMO trading desk, where Russell served as co-head.

ABS

Tractor loan ABS analysed

Fitch has analysed the key aspects that differentiate tractor loans from other asset classes and their resulting impact on Indian tractor loan ABS. The agency studied close to 80,000 loans amounting to R²1.9bn, originated between 2004 to 2010 by Mahindra & Mahindra Financial Services.

Performance of tractor loans improved significantly for the 2008-2009 vintage compared with the 2005-2007 vintage, with 180+ days past due delinquencies dropping to 3%-5% from 7%-9%, according to Fitch. The agency attributes this to improved cashflows for rural borrowers due to multiple uses of tractors, minimum support prices for agricultural crops that are more in line with key input costs and falling LTVs.

"Default for loans with LTVs below 50% was found to be 90% lower than loans with LTVs of more than 80%," says Jatin Nanaware, associate director with Fitch's Indian structured finance team. "The analysis also indicated that defaults in loans remain unaffected by payment frequency and that half-yearly loans perform the same way as monthly loans."

One of the key aspects of the study is the analysis of liquidity gaps in tractor loan ABS transactions. This is significant because while investor payouts in Indian ABS is monthly, close to 70% of loans in the securitisation pool backed by tractor loans are paid quarterly or half-yearly, leading to short-term cashflow mismatches. This risk is not present in other asset classes and to that extent Fitch incorporates stress analysis to account for liquidity issues while rating new tractor loan ABS transactions.

Overall, Fitch believes that the unique characteristics that set tractor loans apart from other asset classes in India are a largely rural customer profile, which has little formal credit track record, the payment frequency of loans and slower depreciation of the underlying asset.

ABS

Conflicts of interest examined

Fitch considers the alignment of interest between transaction parties and structured finance investors to be critical to a transaction's performance. In fact, the agency says it views this alignment as a significant part of the qualitative element of its rating criteria.

The US SEC's proposed rule (SCI 20 September) is intended to prohibit certain material conflicts of interest between those who package and sell ABS and those who invest in them. While the proposal should be welcomes as an initiative designed to increase investor confidence in structured finance, Fitch is concerned about the potential for confusion among market participants between true conflicts and certain normal hedging or risk management practices.

The agency's rating criteria already stipulates that some misalignments of interests or incentives in structured finance can be so material that either rating caps may apply or ratings are not achievable at any level. Examples of the misalignments that Fitch has seen in the past include revolving or managed transactions, in which the collateral may significantly change over time and originators or managers may have the incentive to sell or substitute low quality assets into the portfolio to maintain short-term funding to the company.

The SEC has stated that the proposal is not intended to prohibit traditional securitisation practices and has requested feedback to ensure this is the case. Market participants will likely use this comment period actively, given the potential for confusion about what behaviour the rules cover and how it will interact with other SEC rules and proposed rules.

As the SEC introduces new rules to reduce the risks posed by conflicts of interest, it is also working through other rules, including those for risk retention. Fitch supports aligning issuer and investor incentives by requiring issuers to retain some form of 'skin in the game', but risk retention rules alone do not eliminate the issuer's ability to act in their own interests.

Further, the agency remains concerned that US and EU conflict of interest rules - particularly those related to risk retention - are not aligned, which could create confusion. Additionally, artificial jurisdictional arbitrage opportunities may introduce unintended risk into the system.

ABS

Card delinquencies at all-time low

The credit card delinquency rate reached a new all-time low in August, with only 3.04% of balances 30-days or more past due. Credit card charge-offs also decreased by 7bp from July to 6.02%, according to Moody's Credit Card Index.

The delinquency rate has been declining for 22 months and is now less than half the 6.23% seen in October 2009. The charge-off rate index is also expected to continue decreasing and fall below 4% by the end of 2012.

Early-stage delinquencies did rise slightly last month, however. After setting an all-time low in July, they increased from 0.83% to 0.86%.

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

Cardholder payment rates also reached an all-time high in August, increasing to 21.91%. As a good proxy for cardholders' ability to pay down debt, this is an encouraging sign, Moody's says.

"Historically low delinquencies in general and high payment rates reflect the improved borrower mix in credit card trusts today, as weak borrowers charged off at record levels in the recent recession and originators have added few new accounts to the securitisations," says Hibbs.

The yield index rebounded above 20% in August. But Moody's says the expiration of principal discounting - where issuers re-characterise a portion of principal collections as finance-charge collections - will continue to erode this index for the remainder of the year.

The excess spread index remained above 11% and near its all-time high, as the uptick in yield combined with improvement in the charge-off rate contributed to the increase in excess spread.

ABS

WBS bonds reclassified

Markit announced in its annual index review that it has changed the classification of a series of whole business securitisation bonds from 'Collateralised/Securitised' to 'Corporate'. The change is due to these issuers operating in highly regulated environments where their debt behaves more like corporate debt than securitised debt. The change will take effect from 31 December and affects: BAA Funding; Gatwick Funding; Anglian Water; Dwr Cymru; Yorkshire Water; South East Water; Southern Water; Thames Water; Wales & West Utilities; Autolink Concessionaires; NATS; and THPA Finance.

ABS

Euro SF default rates remain low

European structured finance securities' default rate has remained low, according to a recent S&P transition report. Only 1.2% of European structured finance securities outstanding in mid-2007 have defaulted so far.

By contrast, the agency estimates that more than 44% have now redeemed in full. In addition, the 12-month rolling default rate fell to 0.5% at the end of 2Q11.

The rolling downgrade rate, however, increased to 12.9%, mainly due to rating methodology updates. The number of downgrades due to poor collateral performance has remained relatively modest, S&P states.

"Overall, downgrade rates have accelerated slightly over the past four months - partially due to the waning economic recovery in the core countries, but mostly due to the implementation of our 2010 counterparty criteria, which led to a relatively large number of downgrades," says S&P credit analyst Arnaud Checconi. "Renewed economic weakness in many European countries, as well as the ongoing sovereign debt crisis, could put more downward pressure on structured finance ratings in the coming months."

In addition, two events may cause the CMBS asset class to see further deterioration in its ratings: the potential unwinding of the economic recovery; and the loan maturity spike this past July and coming up in October 2011.

Overall, the 2006 and 2007 vintages have recorded the highest downgrade rates. But the report also finds that consumer-related securitisations have outperformed transactions backed by loans to corporate issuers, with 0.06% and 2.71% cumulative default rates since mid-2007 respectively. Further, higher rated tranches outperformed tranches that are lower in the capital structure, with almost 70% of triple-A issuances remaining stable for more than four years.

ABS

ILS fund minted

SCOR Alternative Investments has launched an insurance-linked securities fund dubbed Atropos. Domiciled in Luxembourg, the SICAV-SIF vehicle has an annual performance objective of 700bp over Libor.

"With this investment vehicle, SCOR Alternative Investments is offering the opportunity to access a diversified insurance risk portfolio in terms of perils, regions and instrument types, which is particularly difficult to obtain in this asset class," explains Olivier Nolland, head of sales and marketing at SCOR Alternative Investments.

ABS

RBI issues securitisation RFC

The Reserve Bank of India has released a draft of its Revised Guidelines on Securitisation Transactions for public comment. The revisions are mainly concerned with minimum holding period and minimum retention requirements for Indian banks. RBI is also considering laying down specific regulatory norms for transactions involving the transfer of loans through direct assignment between banks, as well as between banks and other entities.

ABS

US consumer ABS to see 'exceptional stability'

Traditional US consumer ABS ratings have demonstrated and will maintain exceptional stability, should the economy double-dip back into recession, according to Fitch.

Analysis by Fitch shows that roughly 99% of all investment grade US credit card ABS either stayed investment grade, were upgraded or paid in full between summer 2007 and the middle of this year. In addition, some 95% of all investment grade US auto ABS were either paid in full, upgraded or maintained their ratings. Further analysis shows that in the event of a double-dip scenario, credit cards and auto loans would maintain similar transition rates.

The underlying reason is that these traditional sectors have waded through multiple recessions since the 1980s. "Consumer ABS ratings have been battle-tested several times over the last 20 years," comments Fitch md Michael Dean.

Student loans, meanwhile, saw relatively higher ratings volatility, with approximately 75% staying investment grade or paying in full. It should be noted, however, that the more volatile student loan results were largely influenced by changes Fitch made to its FFELP methodology and worse-than-anticipated default performance in private student loan ABS.

The changes, as expected, primarily impacted lower-rated FFELP tranches and underperforming private student loan ABS. The good news is that with those actions now complete, future transition rates for both FFELP and private student loan ABS transition rates will likely improve, says Fitch.

"Consumer ABS has long benefited from healthy credit enhancement and a penchant for not straying from plain vanilla collateral," adds Dean. "Going forward, there appears to be no impetus for ABS originators to fix what isn't broken."

ABS

Student loan trusts on review

Fitch has placed 16 US student loan ABS trusts on rating watch negative. The impacted trusts contain more than 20% tax-exempt auction rate securities (ARS) and have a pool factor greater than 10%.

The trusts are being reviewed at this time due to the prominence of a unique multiplier function and its determination based on lowest rating assigned to the notes by any rating agency, the agency says. This feature, in conjunction with recent actions taken by other agencies as well as parity being sustained only voluntarily in some cases at levels substantially in excess of cash release levels, has led Fitch to re-evaluate the risk in these transactions. It notes that the analysis will focus upon structural issues and that there is not additional perceived credit risk associated with the collateral, which is comprised of FFELP student loans for most trusts.

Fitch will conduct a detailed review of each of the trusts placed on RWN over the next two to three months. Although these trusts are currently benefiting from the low interest rate environment, the review will consist of running various interest rate stresses against these transactions, coupled with the current and maximum multiplier function values to evaluate the long-term risk.

Rating actions as a result of the review are expected to include both affirmations and downgrades. Downgrades will vary, but some could be several categories in severity. Mitigating factors could include current parity level, minimum parity level for cash release, current pool factor, trust liability and collateral composition.

Since the failure of the ARS market in 2008, the maximum auction rate (MAR) has been in effect for these transactions. The MAR includes a multiplier or applicable percentage that increases depending on the rating. Typically, the applicable percentage is between 150%-175% of the linked index for ratings single-A or better and 200%-265% of the linked index for ratings less than single-A.

ABS

USCP dominance remains for EMEA conduits

After rising slightly in 1Q11, EMEA ABCP market issuance dropped in the second quarter by 5.6% to US$163.7bn. This was driven mainly by the US$7.9bn decrease in USCP issuance, which resulted in the lowest levels of USCP seen in 10 years, according to Moody's.

The ECP market also decreased by US$2.3bn. However, compared with 2Q10, the overall balance of outstanding EMEA ABCP - taking into account both USCP and ECP - rose by 5%.

Grampian Funding, Thames Asset Global Securitisation No.1 and the repo conduits were the main drivers of the decline in USCP issuance. Grampian accounted for approximately 41% of the overall USCP drop, while TAGS and repo conduits represented 19% and 17% respectively. The decline in ECP issuance was mainly due to a US$3.4bn contraction experienced by Churchill Loan Asset Securitisation Programme.

Despite the significant decrease in USCP, it remains the main funding source for EMEA conduits. USCP market share dropped below 60%, compared with 62.3% in 1Q11 and 69.2% in 2Q10. Meanwhile, ECP market share has been increasing steadily and, as of 30 June, it represented 36.6% of total EMEA ABCP issuance, compared with 26% in 2Q10.

CDO

ABS CDO liquidation due

Henderson Global Investors has been retained as liquidation agent for Avebury Finance CDO. The auction will be conducted in Dublin on 12 October.

CDO

Zoo tender completed

P&G SGR has announced the results of its tender offer for the Zoo ABS 4 CDO. It accepted a notional amount of €15.86m at a price of 70 for the A1B bonds.

CDS

NY CDS seminar draws near

SCI's second annual CDS seminar in New York is taking place on 6 October. The event is being held at Bingham McCutchen's offices at 399 Park Avenue.

The conference brings together market participants to discuss the impact of the Dodd-Frank Act and the future of CDS, exploring the implications for electronic trading and SEFs, centrally cleared versus bilateral trades, and risk management and documentation.

There will be a series of panel debates and workshops, with speakers including representatives from: Better Markets, Bingham, Capco, Citi, Claren Road, CME, Creditex, DTCC, Fortress Investment Group, ICE Clear Credit, ISDA, Javelin Capital Markets, JPMorgan, MarketAxess, MF Global, New York Federal Reserve, NYU, Stroock & Stroock & Lavan and Tradeweb.

Buy-side firms attend free, while sell-side firms and suppliers can still register with a 20% discount for a limited time. Email SCI for a registration code or click here to register.

CDS

Restructuring credit event declared

ISDA's Japan Determination Committee has ruled that a restructuring credit event occurred with respect to Victor Company of Japan, following the modification of an unsecured bond last month. Meanwhile, an auction to settle Irish Life & Permanent CDS trades - following its restructuring credit event (SCI 26 August) - will be held on 5 October. The auction will be split into two senior obligation buckets.

CDS

Ambac files amended reorg plan

Ambac Financial Group says it has reached an agreement with Ambac Assurance Corporation, the Segregated Account of Ambac Assurance Corporation, the Commissioner of Insurance of the State of Wisconsin, the Rehabilitator of the Segregated Account of Ambac Assurance Corporation and the Official Committee of Unsecured Creditors of Ambac Financial Group, with respect to all outstanding tax and expense-related issues between Ambac Financial and Ambac Assurance. On the basis of such agreement, Ambac Financial has filed an amended plan of reorganisation and an amended disclosure statement with the US Bankruptcy Court.

The dispute between Ambac Financial and the Internal Revenue Service relating to the tax treatment of CDS contracts currently remains unresolved, however. Successful resolution of this dispute is a condition precedent to consummation of the plan of reorganisation.

CDS

Need for global trade repositories reiterated

ISDA has filed a comment letter with the Committee on Payment and Settlements Systems (CPSS) and IOSCO in response to their consultative report on OTC derivatives data reporting and aggregation requirements. The association reiterated the need for a global view of trade repositories (TRs), data reporting and aggregation requirements.

ISDA has worked with its members and with regulators to establish TRs for credit, interest rate and equity derivatives and industry efforts are continuing to establish TRs for commodities derivatives and foreign exchange contracts. "An effective, global trade repository infrastructure is a shared aim of the regulatory community and OTC derivatives markets," says Conrad Voldstad, ISDA ceo. "We are concerned that this aim may be undermined by the pursuit of local regulatory mandates that may lead to a fragmented TR system."

The letter notes that ISDA believes that fragmentation of TRs will introduce operational complexity, undermine risk reduction and impose unnecessary costs. The association considers that the role of TRs in systemic oversight makes it essential that they are operationally robust and that there is no fragmentation of their function.

ISDA's comment letter to the CPSS and the IOSCO also reiterated the association's call for the development of a single counterparty exposure repository to provide an aggregated risk view for regulators of the net mark-to-market exposure for each counterparty portfolio, the corresponding collateral and the firms' calculation of net exposure after the application of collateral.

CDS

Commingled swap service launched

Bloomberg Fixed Income Trading has launched what is believed to be the first commingled trading platform for OTC swap trading, ALLQ Derivatives, which allows investors to review indicative prices and execute directly with dealers on the Bloomberg Professional Service. The new service is the foundation for Bloomberg's development of a SEF offering and will be adapted upon finalisation of the SEF rules by regulators.

The platform provides a full view of dealer liquidity available in the market, as well as multi-currency details on interest rate swaps and CDS. For CDS indices, customers can execute on prices in both the CDX and iTraxx index suites. Participating dealers in the CDS index markets are: Bank of America Merrill Lynch, Barclays Capital, BNP Paribas, Citi, Credit Suisse, Goldman Sachs, Nomura, RBS and UBS.

CLOs

GSC CLO plan prepped

A hearing on the trustee's motion for entry of an order in respect of GSC European CDO I-R and II is to be held on 5 October at the Bankruptcy Court. Among other things, the hearing will consider: approval of the form of ballot and the establishment of procedures for voting on the proposed Chapter 11 plan; and the establishment of notice and objection procedures in respect of the confirmation of the plan.

Under the proposed plan, all remaining liabilities and obligations of the debtors will be transferred to a liquidating trust, to be managed by a liquidating trustee. Each holder of an allowed general unsecured claim will receive its pro-rata share of remaining plan cash and its pro-rata share of trust units.

All executory contracts that haven't been assumed, assigned or rejected prior to the effective date will be deemed rejected. Proofs of claim must be filed in relation to rejected executory contracts within 30 days after the effective date, failing which further action against the debtors or the liquidating trustee will be barred, unless the Bankruptcy Court orders otherwise.

Finally, all of the debtors will be wound down and dissolved, except for GSC Group. However, European securitisation analysts at RBS expect this to have no significant effect on the GSC CDOs themselves, which generally continue to perform reasonably well.

RMBS

Positive Aussie mortgage performance likely

Fitch expects the decision by the Reserve Bank of Australia (RBA) to keep cash rates unchanged since November 2010 to continue to positively impact mortgage performance in 3Q11, after providing a degree of relief to borrowers in the previous quarter. The Fitch Dinkum 30+ Days RMBS Index, which tracks 30+ days delinquencies in the Australian prime RMBS sector, decreased to 1.69% in June 2011 from the record high of 1.79% in 1Q11.

"The stable mortgage rates over 2Q11 have allowed households to slightly adjust to the challenges which hampered mortgage performance during 1Q11, such as increasing interest rates, natural disasters and seasonal Christmas spending," says James Zanesi, associate director in Fitch's structured finance team. "Mortgage performance is also expected to continue its stabilisation through 3Q11 as the effect of Christmas spending continues to pass through, borrowers affected by natural disasters in 1Q11 continue to cure their delinquency status and households adjust their spending to the increases in mortgage rates over the last two years."

Fitch notes in particular that, in line with expectations, the decrease in arrears was mainly in the 30-59 days and 60-89 days buckets - which were also the buckets in which arrears increased the most during 1Q11. The Fitch Dinkum 30-59 Days RMBS Index and 60-89 Days RMBS Index decreased to 0.71% and 0.31% in 2Q11 respectively, down 8bp and 3bp from 1Q11.

However, the Fitch Dinkum 90+ Days RMBS Index increased marginally to 0.66% in 2Q11 from 0.65% in 1Q11. The increase in 90+ days arrears is still in line with expectations, as not all borrowers in arrears by one or two months in 1Q11 were expected to cure their delinquency status through 2Q11.

Certain borrowers remain under pressure when making mortgage payments, however. Although in 2Q11, Fitch's low-documentation Dinkum Index shows that 30+ days delinquency rates decreased to 6.55% from 6.74% in 1Q11, the current levels are still high.

Specifically, the 30+ days delinquency rate for prime and non-conforming low-documentation borrowers were respectively 5.38% and 15.83% in June 2011, down 7bp and 105bp from 1Q11. However, the 90+ days arrears for prime low-documentation borrowers are currently at 2.72% - a record high - suggesting that prime low-documentation borrowers are finding it difficult to cure their delinquency status.

RMBS

Assured ratings on review

S&P has placed its double-A plus long-term counterparty credit and financial strength ratings on Assured Guaranty Municipal Corp (AGM) and Assured Guaranty Corp (AGC), as well as the double-A long-term counterparty credit and financial strength ratings on Assured Guaranty Re on credit watch with negative implications. The move is due to significant concentration risk in Assured's consolidated insured portfolio, the agency says.

The existing legacy insured portfolio of exposures that Assured maintains contains many exposures that breach the largest-obligors test and are not consistent with the current ratings under S&P's updated criteria. The concentrations are in Assured's structured finance and public finance insured portfolios.

However, Assured is understood to be taking steps - such as creating capital or utilising additional forms of reinsurance - to mitigate these concentration risks. S&P believes it is likely that such actions will support ratings in the double-A category, but is placing the ratings on credit watch due to uncertainty regarding the ultimate outcome of management's actions to address the concentrations. It expects to resolve the credit watch by 30 November or potentially sooner as it reviews management's financial flexibility and capital-management plans, as well as the monoline's overall risk-management approach.

RMBS

Aussie mortgage performance deteriorates

Moody's reports that the ability of Australian homeowners to keep up with their mortgage payments has declined over the past year, despite the strength in the economy.

"Mortgage performance has shown a material deterioration since our last regional delinquency report in October 2010. Indeed, between March 2010 and June 2011, while the national delinquency rate - as calculated by Moody's - rose to 1.67% from 1.36%, regions performing poorly or very poorly increased fourfold to 28 from seven," says Arthur Karabatsos, a Moody's vp and senior analyst. "Of Australia's 65 regions, those performing very poorly - that is, with more than 2.5% delinquencies - increased to 11 from two and those performing poorly increased to 17 from five."

Moody's has published a report on residential mortgage performance over the last 12 months, which projects regional delinquencies onto 'heat maps' for ease of analysis. At the same time, the agency released a supplementary report that looks at delinquencies according to postcode, which highlights the 20 worst performing postcodes and lists the 300 worst.

"In our primary report on performance, we classified 11 regions as performing very poorly and six were from New South Wales (NSW), four from Queensland (QLD) and one from Western Australia (WA)," says Karabatsos. "NSW remains the worst performing state overall, with six of its regions performing very poorly."

At the same time, the biggest declines in mortgage performance have been experienced in QLD and WA, the two states which have been the biggest beneficiaries of Australia's ongoing mining boom, the report says.

"This apparent paradox is partly explained by the fact that non-mining jobs still account for most of the employment in both states and such sectors lag the mining sector in growth. For example, the strong Australian dollar has weakened the tourism industry, which accounts for more than 5% of employment in QLD," adds Karabatsos.

RMBS

Servicing compensation RFC released

The FHFA's Joint Initiative on Mortgage Servicing Compensation is seeking public comment on two alternative mortgage servicing compensation structures. The goals of the initiative are to improve service for borrowers, reduce financial risk to servicers and provide flexibility for guarantors to better manage non-performing loans, while promoting continued liquidity in the TBA mortgage securities market (SCI 19 January).

One proposal would establish a reserve account within the current servicing compensation structure. The other proposal would create a new Fee for Service compensation structure.