Contents

ABS

Structured comeback?

Government adoption could help alleviate Eurozone debt crisis

As nations struggle to tackle the Eurozone debt crisis, a fresh call has been made for European governments to consider structured finance solutions. An alternative option of a European version of TARP is also on the cards.

Leveraging state-owned assets could raise billions of euros. While there has been a reluctance to embrace this approach so far, changing conditions mean it could now be a more realistic possibility.

In the past, European governments have used structured finance transactions as off-balance sheet instruments to manage their deficits. However, rating agencies and Eurostat have not always been supportive of this.

Mike Nawas, founding partner of Bishopsfield Capital Partners, notes that Eurostat has tightened its rules in recent years. He says: "As a result, governments have to change their philosophy and move away from de-recognition of government debt as the main area of focus, towards seeing structured finance as a funding tool."

He continues: "De-recognition can still be on the table so long as there is the de-risking required to meet the hurdles placed by Eurostat. The main point, however, is that a change of attitude is needed. That is something European governments appear to have not yet got their heads around."

Another factor holding European governments back has been the added structured premium that makes structured finance more expensive than vanilla debt. Nawas believes that in the current spread environment the economic case for structured finance now makes far more sense.

"In the challenged Eurozone countries, the premiums they have to pay over the bund are so substantial that the additional margin you would have for a structured premium would be comparatively small," he says.

Nawas also points out that with structured finance, governments can target a very different investor base. In targeting those investors, there are numerous approaches governments could take, from securitising social security payments to workers' remittance flows. Perhaps the most obvious and appealing option is, however, to monetise real estate assets.

Amir Khan, Bishopsfield associate partner, says that some real estate solutions could be implemented very much in the short term, albeit with credit enhancements - for example, in the form of a temporary EFSF wrap - while there are others that would take a bit longer. "That is recognising which solutions can be attempted in a more off-the-shelf fashion, versus others where either there first needs to be more structuring work or more development of confidence around the asset class," he explains.

Exchangeable debt instruments are another option that could be implemented in a short period of time. Khan comments: "The tricky bit is for governments to consider which particular entity to designate for the exchange and whether that entity can present itself in a marketable way to potential investors."

Implementing exchangeable debt solutions could see the issuance of debt that could be convertible into equity of any state-owned entities - particularly those that will eventually be privatised. With a strong enough equity story for those entities, governments could well turn to them for debt raising.

Khan notes that, as recently as September 2010, the Portuguese government achieved a €885.65m issuance thanks to exchangeable debt, selling equity in the oil and gas company Galp Energia. He says: "So long as the equity story is strong enough and there is upside to be demonstrated, I do not see why that cannot be a potentially feasible solution."

The benefits of structured finance will vary by country, but could be particularly attractive for some of the smaller economies. While Nawas notes that it is impossible to put a figure to those benefits at this stage, he insists structured finance can play a large role.

"If you look at the debt raising needs on a day-to-day basis - especially when talking about countries such as Portugal, Ireland or Greece - then you would have the ability to target assets that could be structured into a government-linked structured bond. If you raise a couple of billion for a country that size, then it is a material contribution. That is where we think the added value will be seen first," says Nawas.

He adds: "It really depends on investor appetite. If you look at the magnitude of the European securitisation market pre-crisis, it was in the hundreds of billions of new issuance annually. With a post-crisis structured credit investment that is linked to a sovereign or the EFSF, either permanently or temporarily, it is not a huge challenge to the investor community to raise billions."

There have also been suggestions that the ECB and EFSF could adopt a programme similar to the US troubled asset relief programme. 'Euro-TARP' would involve a capital injection of up to €150bn in a bid to restore confidence.

Nawas is sceptical about the prospects for any potential Euro-TARP initiative, however, and says it is unlikely to apply to structured debt such as securitisations. This is not least because the European landscape is very different to the US.

While structured debt issuers in the US are mainly student loan companies, credit card companies or captive auto finance companies, Europe is dominated by banks and banking subsidiaries of insurance companies. Those institutions have received liquidity support from the ECB by way of repo, whereas in the US the government brought liquidity into the market by the TALF facility, created as part of TARP.

"So our conclusion is that Europe has tackled the liquidity shortage in a different way, taking away the need for a TALF-style programme," says Nawas. Although issuers will have to be weaned off relying on the repo market for their funding, he does not believe TARP will be the solution.

Nawas adds: "Maybe it is different when it comes to sovereign debt, but when it comes to structured credit I do not think TARP is the answer. With the exception of highly structured CDOs and part of the CMBS market, structured credit has been performing well in Europe."

With structured credit performing well, Nawas and Khan argue that - as long as the benefits and limitations of off-balance sheet financing are understood by all parties - structured finance still has a part to play. Although it will not be the sole solution to the Eurozone's woes, it could be a central one.

Nawas observes: "We deal a lot with financial institutions as clients. For them, it is the most normal thing that when you are constrained in your ability to raise unsecured debt, you move to secured debt. With financial institutions, that is happening and it is odd to see governments are not making that same transition."

He concludes: "The post-crisis reality, with all the sovereign concerns going on, means structured finance will be a gradual process and will not be a silver bullet. With that said, from an investor appetite perspective, there is no reason why the figure raised by structured finance cannot easily be in the billions."

JL

CMBS

Sustained shortfalls?

Concerns remain over Beacon Seattle loan mod

Nearly a year has passed since modifications to the US$2.7bn Beacon Seattle & DC Portfolio loan were set in motion. However, with concerns over equity shortfalls at maturity and the inability of some servicers to protect senior bondholders' rights, the jury is still out as to whether the restructuring has been - or will be - classified a success.

Originated in June 2007, the Beacon Seattle loan is one of the largest pari-passu loans in the US CMBS universe and is referenced in six separate deals (MSCI 2007-IQ14, MSCI 2007-HQ12, BACM 2007-2, BSCMS 2007-PWR16, WBCMT 2007-C31 and WBCMT 2007-C32). Having been transferred to the special servicer in July 2010 in anticipation of default, the borrower - Beacon Capital Partners - requested modifications to help fund leasing costs, capital improvements and debt service shortfalls.

Under terms of the modifications announced in late 2010, the maturity was extended by five years to May 2017; the current payment rate was lowered by 2.8% to 3%; the servicer was given the option to sell or refinance properties; some excess sale proceeds were designated to support other properties in the pool; and additional collateral was pledged.

"I think it's a little too early to say definitively if the restructuring has been a success or not," says Harris Trifon, research analyst at Deutsche Bank. "But what has happened in terms of the properties being released calls into question the longer-term viability of the modification agreement. We think there might be a bit of an equity gap when we get to the maturity date in 2017 and there's not going to be enough value in the remaining portfolio to pay back the debt."

He adds: "A lot of that depends on how the servicer has split excess proceeds from the property sales with the borrower."

The Beacon Seattle modification is fairly typical of the kind of loan restructuring agreements that have been struck over the past six to nine months: there has been an uptick in the number of deals that are being modified that include features aside from simple extensions (CRE Finance passim). However, the Beacon Seattle loan is much larger than most and the collateral more complex; for example, the pledge of ownership interests on one property and covenants to deposit cashflows from three properties, which - at the time of securitisation - was already encumbered with US$339m of existing debt.

Six of the original twenty assets (comprising 25 properties) have now been sold or 'released' from the pool. These include the 1616 N. Fort Myer Drive, Liberty Place, Market Square, 1300 North 17th Street, Key Center and Reston Town Center properties (CRE Finance passim).

"From our perspective, the big take-away is the split between the borrower and the trust. It says a lot about the inability of some servicers to protect senior bondholders' rights," says Trifon.

He explains that of the five or so properties that have been sold over the past few months, it appears that the vast majority of the excess proceeds have gone back to the borrower, not to the trust - which has led to this condition. "If that split remains, then I think ultimately the modification will not be looked on as successful as there will be some moderate losses associated with what is left when we get to 2017," he adds. "That being said, it is still early days and there's nothing to say that they won't switch that split between the borrower and the trust in the future. It doesn't appear likely, but we haven't seen anything in the documentation that says they could not do that."

CMBS research from Deutsche Bank estimates that the modifications have resulted in each trust incurring interest shortfalls equivalent to 2.797% of the interest payments on its outstanding exposure to the portfolio. Of that amount, 2% is being accrued and the rest is a permanent loss. Because there are multiple servicers and trustees handling the various notes associated with the loan, there have also been numerous inconsistencies in reporting shortfalls and losses.

"However, in our estimation, each time a property is released, the funds are used to pay back the deferred interest accumulated to the trust since the last time it was repaid," Deutsche Bank analysts write. "At the same time, the trust would take a small loss to account for fees, expenses and the permanent interest reduction (the Group B A notes do not take a loss as they have a junior B note)."

It is expected that further properties will be released from the portfolio in the coming months - particularly the better performing ones - and, in May of next year, the payment rate will increase to a minimum of 3.75%, reducing interest shortfalls to the trust. However, the analysts point out that the contract rate will decrease as well, increasing permanent losses to bonds.

"Until then, the Beacon Seattle & DC Portfolio will continue to generate a large amount of shortfalls to each deal that it's in," they add.

Secondary market prices for CMBS bonds referencing the Beacon Seattle loan have duly suffered because of the complexity and lack of clarity surrounding the loan modifications. For example, the AM class from the MSC 2007-IQ14 deal - which has the biggest allocation to the loan - has recently been trading/quoted at 1150bp over swaps or nearly twice the spread of "better" quality 2007 vintage AMs.

While the deal clearly has credit issues apart from this loan, they aren't considered to be significantly worse than many other 2007 vintage deals. "I think the pick-up in price of the associated bonds will be a gradual process," concludes Trifon. "A lot of it has to do with the lack of clarity surrounding the whole situation. But I would expect in the medium term that the difference would compress."

AC

ABS

Answers provided

EBA clarifies Article 122a risk retention issues

The European Banking Authority (EBA) has published a set of answers to questions received about Article 122a of the EU's capital requirements directive. In "a huge step forward for the market", the answers build on the CEBS guidelines from December 2010 and clear up many previous uncertainties.

Doug Long, evp business strategy at Principia, explains that the previous guidance left many questions unanswered. "The CEBS issued fairly broad guidelines in December last year. They made it clear that to invest in structured finance, you need to make sure the issuer has met its retention requirements. It listed a good set of operational credit analysis criteria investors must examine to understand the risks they are taking on."

He continues: "That was the framework that the local supervisors have been working from, but ambiguity remained. As they have tried to implement the requirements locally, a lot of questions have arisen. This latest guidance provides more clarification and is firm in reiterating certain elements of the initial guidance to head off potential loop-holes."

Elana Hahn, partner at Morrison & Foerster, is enthusiastic about the answers provided by the EBA. For managed CLOs and ABCP conduits in particular, many issues have now become clearer.

She says: "There is a large section on managed CLOs, which deals specifically with various permutations on fund structures. This is a real breakthrough for the market because people have been discussing potential structures but without knowing exactly what would or would not work. We have run up against a lot of issues and now we have got some answers on them."

The EBA's latest guidelines allow for third-party equity investors to provide the retention requirement for CLOs, albeit with provisos such as being involved in the structuring of the transaction and having no link to the CLO manager. The qualifying retention CLO holder should also be involved in any 'material' changes to the deal over its life. However, manager trading will not have to be vetted day-to-day, so long as eligibility criteria and other tests are complied with.

In addition, funds managed by third parties can play the role of retention interest via the use of originator SPVs, with the retention and holding requirements not extending to the fund's stakeholders.

Another clarification is that CLO managers will no longer be able to capture and monetise gains in equity by selling loans at a profit and reinvesting the money. Instead, the retention must also be increased commensurately, so that retention requirements are linked to asset values and not values of liabilities.

Hahn believes the increased clarity could help to unlock deal flow. However, she adds: "My only caveat is that there are a few areas where it seems the EBA has provided answers but not bright-line answers. For example, on the question of investor due diligence on the ABCP conduits, their answer is still quite vague."

Hahn continues: "On the one hand, that is positive because it does at least show that the EBA is recognising that there is not necessarily a one-size-fits-all approach and the rule has to be applied on a case-by-case basis. The flip-side of that is that a lot of market participants are really looking for some bright-line tests. It is the uncertainties that are having a bit of a chilling effect on issuance volume."

Increased deal flow would help iron out some of those remaining uncertainties, as it would give regulators a chance to get to grips with some of the practicalities of implementing Article 122a. In that sense, the clarifications could be part of a virtuous circle.

It is also important, however, for investors to develop their own understanding without being too closely spoon fed by regulators. Long notes that the onus at the moment is on not providing a fully prescriptive approach, as individual transactions or exposures will have different characteristics and requirements.

He says: "Investors will need to really analyse their portfolios to quickly understand the granularity of any given deal or new investment. I think the rules have struck an important balance between spelling out what must be done and giving the market enough flexibility to make sound investment decisions that can satisfy the regulation."

Although some uncertainties remain, the EBA has moved the debate on considerably. "There have been a number of comment periods and rewrites of the CEBS guidelines from 2010 and the regulators have clearly worked through many of these issues to come up with quite firm implementation guidelines; the FSA's BIPRU, for example," Long concludes. "These were never intended to be prescriptive per se and there will always be areas open to interpretation. The key is that there is a solid reference point when issuing or investing in structured finance deals and this can help develop a more sustainable market infrastructure."

JL

CMBS

Reaction needed for US CMBS

The US CMBS market spent last week waiting on news from Europe, but the launch of a new market index and the arrival of a floating rate deal this week should generate interest. Whether this interest translates into increased activity remains to be seen, however.

Today (3 October) marks the launch of the Markit TRX.II indices (SCI 20 September), comprising triple-A rated securities from 25 CMBS deals. One US CMBS trader believes the new indices could help generate activity in the market.

He says: "It will be interesting to see what happens with the TRX.II index. I would imagine that market participants will be quite interested in it."

Additionally, Deutsche Bank and Morgan Stanley are marketing a new floating rate CMBS - the US$619m COMM 2011 FL-1. This too could spark interest, says the trader.

He adds that the transaction is expected to price some time this week. "It is backed by seven loans secured on 52 properties, divided between 80% hotels and 20% office. That is something to keep an eye out for."

These two highlights are badly needed, as last week was very quiet for US CMBS. Although spreads were quite strong at the start of the week, they widened by the end.

The trader comments: "The market has not been terribly active lately. Spreads are just slightly wider than they have been lately. To a large extent, the market now is very technical-driven, following the news out of Europe."

He continues: "Given all the uncertainty, investors are in risk-off mode, so the focus has been in the senior part of the capital stack. Even though most participants believe that AM and AJ tranches are cheap, they are shying away from taking too much risk."

The trader reports that generic A4 bonds ended the week at around the 325bp mark and GG10 A4s ended at about 360bp. He adds that new issue 10-year public bonds are at around 175bp and the 2010-2011 vintage 10-year private bonds are "probably somewhere around 215bp".

Looking forward, the trader feels that a large event is needed in order for this week to be different to the last. But he isn't sure whether TRX.II or COMM 2011 FL-1 will be significant enough.

"Last week was quarter-end but still there was not a lot of selling. I think people are in a little bit of a wait-and-see mode. That could well be the mood this week too, unless spreads widen and allow people to come in. So long as people are worried about the risk of something happening in Europe, they are going to remain cautious," he says.

The trader concludes: "The Street probably does not have too many bonds, so it doesn't look like there is anybody who will be forced to sell. Spreads will probably bounce around a little bit until the mood changes in one direction or another, or someone is forced to sell."

JL

ABS

SCI Start the Week - 3 October

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

Pipeline
Another US CMBS - the $619m COMM 2011-FL1 - entered the pipeline last week, together with a New Zealand auto lease ABS, the NZ$250.5m FP Ignition Trust 2011-1. Additionally, HSBC and Lloyds TSB are prepping UK credit card ABS (the latter via the Penarth Master Issuer vehicle), while Nationwide is rumoured to be working on a UK RMBS via its Silverstone programme.

Pricings
Last week saw two auto ABS transactions print: $200.5m Credit Acceptance Auto Loan Trust 2011-1 and $1bn Hyundai Auto Receivables Trust 2011-C. Also in the US, the $603.1m Panhandle-Plains Higher Education Authority 2011-2 and $504.99m GE Equipment Midticket 2011-1 deals priced. Meanwhile, in Europe Clydesdale Bank's £829m RMBS Lannraig Master Issuer series 2011-1 and the €1.72bn Mesena 2011-1 balance sheet CLO closed.

Markets
While mixed economic data and bearish headlines coming out of Europe brought increased volatility to the rates market, the ABS market held in fairly well last week, according to ABS analysts at JPMorgan. With the exception of non-prime auto ABS spreads, which tightened by 5bp, ABS spreads across the rest of the asset classes remained unchanged.
"Liquidity remained solid in benchmark asset classes, while off-the-run and riskier ABS continued to require concessions... Of note, UK RMBS shrugged off the poor economic data coming out of Europe and continued to be in demand in secondary, trading slightly better than levels seen in primary a couple of weeks ago," the JPM analysts add.
In the US CMBS market spread movement was similarly limited. Legacy dupers continued a slight drift wider, with demand almost exclusively coming from banks, while in the AM and best AJ sectors there was improved interest from money managers -albeit with negligible effect on spreads - according to CMBS strategists at Barclays Capital. However, they add: "Somewhat encouraging news in an otherwise challenging market is that quarter-end selling seems to be very limited or virtually non-existent this time, as the Street is still running its inventory at a low level and accounts have not been massively adding CMBS paper at the sector level lately."
In the synthetic CMBS market CMBX volumes were again low last week with most activity seemingly related to short covering, according to CRE debt analysts at Deutsche Bank. "We expect volumes will remain light and price action volatile," they add.
Nevertheless there are high hopes for a new entrant to the sector - TRX.II, which launches today. As Citi securitised product analysts observe, if successful the new indices should help alleviate CMBS warehousing risk by providing a better new-issuance hedging tool compared to existing alternatives.
Finally, the secondary CDO market was deluged with bid-lists during the latter half of the week. Seven BWICs consisting of 67 different items hit the market on Wednesday, comprising European and US CLO assets, as well as ABS CDO and Trups CDO collateral. Two CLO lists - comprising 10 items - did the rounds on Thursday.

Deal news
• Southern Cross, the borrower behind TITN 2007-1, announced that it has transferred 250 homes to new operators. Business purchase agreements have been entered for approximately 70% of the group's care homes, with further transfers to follow this month and next.
• CBRE has replaced Capita as special servicer on the Lloyds Chambers loan securitised in TITN 2006-CT1X.
• 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.
• Henderson Global Investors has been retained as liquidation agent for Avebury Finance CDO. The auction will be conducted in Dublin on 12 October.
• Nomura Corporate Research and Asset Management has sold another CLO - Clydesdale CLO 2006 - to Ares Management. The transaction has been renamed Ares XXI CLO.
• 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.
• 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 and have a pool factor greater than 10%.

Regulatory update
• The Basel Committee has agreed on a range of measures to finalise key elements of its policy agenda and to put in place a strong implementation assessment framework. Among the measures is a proposal to introduce capital requirements for banks' exposures to central counterparties.
• The FHFA's Joint Initiative on Mortgage Servicing Compensation is seeking public comment on two alternative mortgage servicing compensation structures. One proposal would establish a reserve account within the current servicing compensation structure; the other would create a new Fee for Service compensation structure.
• 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.
• 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.

Deals added to the SCI database last week:
B-Arena Compartment 2
Chesapeake Funding 2011-2
CPS Auto Receivables Trust 2011-B
Gracechurch Card Funding 2011-4
GS Mortgage Securities Trust 2011-GC5
Mesena CLO 2011-1
National RMBS Trust 2011-1
Nissan Auto Lease Trust 2011-B
SC Germany Auto 2011-1
Sequoia Mortgage Trust 2011-2
State Board of Regents of the State of Utah series 2011-1
Toyota Auto Receivables Owner Trust 2011-B
VCL 14
Volkswagen Credit Auto Master Owner Trust 2011-1

Top stories to come in SCI:
CRE portfolio sales
Prospects for Trups CDOs
ABS recruitment trends
Spotlight on Beacon Seattle CMBS modification
Ramifications of Article 122a guidelines
Impact of Solvency II
CVA special report

ABS

Political risk practice enhanced

Lockton has expanded its global trade credit and political risk practice with the addition of Nadine Moore as svp. She will be responsible for business development, client advocacy, and structured finance and credit solutions for corporate clients in several industries - including financial services and private equity.

Moore joins Lockton after 11 years with Aon, most recently serving as md and practice leader for the broker's trade credit and political risk operation. She previously served as a client advisor and producer for executive liability and property-casualty insurance programmes.

CDS

Ex-BlueBay vets form fund

Northill Capital has formed Goldbridge Capital Partners, a new European credit asset management company. The firm will be led by Gina Germano and Dipankar Shewaram, with the financial backing of Northill Capital, enabling it to deploy up to US$100m of equity and seed capital.

The team at Goldbridge believes that the current credit market crisis combined with the need for European banks to de-lever will lead to a significant number of new high yield and distressed investing possibilities as businesses restructure. Goldbridge will seek to profit from the opportunity presented by the refinancing glut. The under-representation of institutional investors in the European sub-investment grade credit market compared to the US, combined with ongoing regulatory and economic shifts is creating an unprecedented opportunity, the firm says.

Germano has almost 20 years of European high yield and distressed investing experience, having worked at BlueBay Asset Management, Lazard and Morgan Stanley. Shewaram has over 14 years experience and was previously at BlueBay Asset Management and Western Asset Management, where he managed or advised over US$22bn.

Additional members of the team include Samantha Wessels, David Levenson, Thomas Naess and Nick Thomson, who bring European restructuring experience from BlueBay Asset Management, Houlihan Lokey, Jeffries, Barclays, Goldman Sachs, Deutsche Bank and Rothschild. Goldbridge has also put an experienced institutional distribution team in place led by Fahim Imam-Sadeque and Damian Nixon, both formerly with BlueBay Asset Management.

The firm expects to launch long-only and long/short funds, focusing in sub-investment grade and investment grade assets.

CDS

Credit trading vet hired

Gleacher & Company Securities has recruited Jerry Lee as md, responsible for leading and expanding the firm's crossover credit trading business. Prior to joining Gleacher & Company, he held md positions at Citadel Securities from 2009 to 2010, Bank of America from 2005 to 2009 and JPMorgan from 1993 to 2005. Lee established JPMorgan's crossover trading desk in 2001.

CDS

Credit mandate announced

GLG Ore Hill has announced that it has raised US$200m for a large institutional client's credit mandate, bringing its funds under management to US$1.7bn as of 1 September. Since the completion of Man's acquisition of the remaining 50% of Ore Hill in March (SCI 30 March), the firm's operations have been integrated into and are now managed as part of the GLG credit platform. This platform comprises 13 credit products, in both hedge fund strategies and long-only strategies, with AUM of approximately US$7.4bn.

CLOs

CLO transfer consent requested

Nomura Corporate Research and Asset Management has filed fifth amended and restated notices of proposed assignment of the investment management agreement for Clydesdale Strategic CLO I and Clydesdale CLO 2005. It has also requested consent from subordinated notes and rated notes, as well as a waiver from the rated notes. The manager is seeking to transfer its rights, duties and obligations under the transactions' management agreements to Ares Management.

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

CLOs

Opportunity fund prepped

3i Debt Management has recruited Rob Reynolds as the head of its new credit opportunity fund (COF), reporting to Andrew Golding, 3iDM md. Reynolds was previously md and cio of Resource Europe.

The COF - seeded by 3i Group with €50m - will form the foundation of a new fund initiative by 3iDM, targeting flexible investment in credit primarily in Europe. The fund will be open to other investors at a later date.

The COF will build on 3iDM's highly successful debut debt fund launched in October 2007 and exited in March 2011. The 2007 fund invested primarily in senior and junior secured loans and delivered an IRR of 13.6%, as well as a cash to cash profit of 1.4x.

RMBS

Auction platform hires for resi expansion

Auction.com has named Elizabeth O'Brien as md and svp. She will be based in the company's New York office and will lead its growing residential capital markets business.

"Beth's expertise enables us to build on the success of our residential foreclosures and commercial notes platforms and expand into residential notes," says Auction.com ceo Jeff Frieden. "Her track record in distressed mortgage finance makes her a driving force behind our ongoing growth as the world's preeminent real estate auctioneer."

O'Brien has 17 years of principal and client experience in the mortgage and real estate markets, serving most recently with Citi as a director in mortgage finance within its fixed income division. In this capacity, she managed various resecuritisations and liquidating trust transactions in excess of US$10bn and helped manage the legacy asset portfolio.

Prior to this, O'Brien was with Goldman Sachs' New York and Hong Kong offices in the real estate principal investment area, serving as chief administrative officer of the Whitehall Street Real Estate Funds. She was also responsible for structuring investments in residential loans, hospitality and financial services companies.

RMBS

RMBS class action settled

Dynex Capital has entered into a memorandum of understanding reflecting an agreement in principle to settle all claims asserted against all defendants of a class action lawsuit now pending in the US District Court for the Southern District of New York. The lawsuit was filed by the Teamsters Local 445 Freight Division Pension Fund in February 2005 and alleged violations of the federal securities laws on behalf of a class of purchasers of MERIT Series 12-1 and MERIT Series 13 securitisation bonds between February 2000 and May 2004.

The memorandum of understanding sets forth terms of a proposed settlement whereby the company would pay US$7.5m into an escrow account following the negotiation and execution of a definitive settlement agreement and preliminary approval by the Court. Dynex continues to deny that it violated any federal securities laws and says it has agreed in principle to this settlement solely to eliminate the expense, burden and uncertainty of the litigation.

Separately, the company announced that it expects to exercise its option to refinance this month approximately US$74.2m in collateralised financings with repurchase agreement financing in order to take advantage of the lower interest rate environment and reduce its overall borrowing costs. Approximately US$23.7m of the collateralised financings is a CMBS issued by the company in 1998. The bond has recently been upgraded to double-A from single-A plus.

Overall the refinancing is expected to save Dynex approximately US$2m annually in interest costs and approximately US$600,000 annually in amortisation expense. The company will take a one-time non-cash charge of US$2m on the redemption of the CMBS related to remaining unamortised discount recorded on the bond as of 30 September.

RMBS

Agency trading head hired

Richard Baxter has joined Gleacher & Company Securities as md and head of agency trading, based in the firm's New York headquarters. He has nearly two decades of experience managing sales and trading operations across a broad range of products.

Baxter was previously md and head of taxable fixed income trading at Cabrera Capital Markets. Before that, he was vp of futures trading at Fidelity Investments and an assistant portfolio manager responsible for basis trading, liquid products and derivative hedging at MBS hedge fund Providence Investment Management.

Also joining Gleacher & Company as mds are Gabe Borenstein, Christopher Owens, Daniel Baffoe and Jason Walsh. Borenstein and Owens will be based in New York, while Baffoe and Walsh will be based in Chicago.

ABS

Op risk criteria has limited impact

Moody's introduction of operational risk criteria into its structured finance methodology has had a limited impact on the ratings of European ABS, CMBS and RMBS transactions, the agency reports. It placed on review for downgrade 42 ABS tranches, 47 CMBS tranches and 131 RMBS tranches from 133 transactions on 2 March, following the publication of its criteria (SCI 2 March).

The agency has since downgraded 59% of the tranches and confirmed the ratings of 27%. Moody's is maintaining its review on the ratings on 8% of the tranches, pending the restructuring of their transactions. The remaining tranches have been fully repaid.

ABS and RMBS downgrades were limited to the senior notes of transactions and generally involved two to three rating notches. Most of the downgrades were prompted by inadequate back-up servicer arrangements in transactions where the servicer was either weaker in credit quality (rated Baa or below) or unrated.

Moody's notes that the main shortcomings in back-up servicing arrangements have been: a lack of a detailed action plan; a low credit quality back-up servicer; or the lack of a trigger in transaction documents that would require the back-up servicer to take over servicing even in cases where a back-up servicer is in place. In ABS and RMBS, amendments to documentation that added back-up servicing arrangements or strengthened them led to most of the confirmations.

These amendments put in place standard back-up servicing arrangements that were generally one of two types. Either they appointed a back-up servicer and had detailed action plans or they had back-up servicing triggers in conjunction with a back-up servicer facilitator. In some cases, provisions were added to allow the cash manager to make payments on the notes based on estimates in cases where there was no servicing report for one or two reporting periods.

The downgrades for CMBS transactions were prompted by inadequate structural mitigants to prevent a payment disruption in transactions where the servicer is not rated by Moody's. On CMBS tranches, the agency confirmed its ratings if the current ratings were already at or below the rating cap commensurate with the level of operational risk.

ABS

CLEF buy-back completed

Groupe Eurotunnel has bought back €110m of Channel Link Enterprises Finance (CLEF) notes at an average discount of 11%. The repurchased bonds have the same characteristics as the group's tranche C debt and are divided 60% in sterling and 40% in euros.

Eurotunnel has been able to take advantage of the liquidity requirements of its creditors to divest some of its recurring interest payments and thereby generate a profit corresponding to the amount of the discount. Jacques Gounon, Groupe Eurotunnel chairman and ceo, comments: "At a time when debt weighs heavily on economies around the world, Groupe Eurotunnel has been able to use its own cash reserves to reduce its debt servicing requirements."

Last week, Fitch raised the rating for CLEF to triple-B with a stable outlook.

ABS

First annual NRSRO report issued

The US SEC has issued a report on its observations and concerns following an examination of ten credit rating agencies registered as NRSROs. Although improvements were noted, concerns about each of the NRSROs remain.

The SEC notes apparent failures in some instances to follow rating methodologies and procedures, to make timely and accurate disclosures, to establish effective internal control structures for the rating process and to adequately manage conflicts of interest. The report notes that progress in addressing some of these concerns has since been made.

"This report demonstrates the SEC's enhanced oversight of credit rating agencies," says Carlo di Florio, director of the SEC's office of compliance inspections and examinations (OCIE). "We have recruited experts and strengthened the overall monitoring and examination process to better protect investors, ensure market integrity and facilitate capital formation."

The examination of the agencies was prompted by the Dodd-Frank Act, which has imposed new reporting, disclosure and examination requirements to enhance regulation and oversight of NRSROs. The agencies will now be reported on annually.

Norm Champ, the deputy director of OCIE, concludes: "We expect the credit rating agencies to address the concerns we have raised in a timely and effective way, and we will be monitoring their progress as part of our ongoing annual examinations."

ABS

Low duration bond fund launched

DoubleLine Funds Trust has launched the DoubleLine Low Duration Bond Fund with two 'no load' share classes: I shares and N shares. The fund invests mainly in debt securities and aims to have a portfolio with an effective duration of three years or less.

Eligible investments for the fund include ABS, MBS and CLOs. It will be managed by DoubleLine Capital president and co-founder Philip Barach, along with head of emerging markets fixed income Luz Padilla and head of global developed credit Bonnie Baha.

ABS

RFC issued on op risk criteria

S&P has requested comments on its proposal to refine and adapt its methodology for assessing operational risk in structured finance transactions. The updated criteria introduces an operational "risk screen", which highlights the key operational risk factors that are examined in each structured finance transaction.

The risk screen examines potential operational risks under four categories: transaction party profiles; conflicts of interest, moral hazard and fraud; transparency and disclosure; and structural integrity of the transaction. It lists 11 sub-factors under these four operational risk categories.

Each affirmative response to an operational risk sub-factor incurs a penalty score. A negative response or affirmative but remedied response incurs a zero score penalty. The cumulative penalty score from these responses is then translated into a cap on the rating for the structured finance transaction: the higher the total score, the lower the maximum rating S&P assigns to the security.

Although potential remedial actions are identified for various operational risk sub-factors, these criteria do not seek to specify the quantum or full requirement of such actions to mitigate the operational risk issues. This reflects the idiosyncratic nature of operational risk concerns identified transaction-by-transaction.

CDO

Trups CDO defaults stabilising

A slight uptick in defaults did little to deter stabilising overall trends for US bank Trups CDOs, according to Fitch's latest index results for the sector. Bank Trups CDO defaults rose by 0.28% to 16.5% from 16.2% last month due to the same percentage of August deferrals transitioning to default.

"The increase in bank Trups CDO defaults was driven by previously deferring banks," says Fitch director Johann Juan.

Despite the increase, combined bank Trups CDO default and deferral rates remained stable at 32.62%.

There have been 56 new deferrals through the end of August, compared to 109 new deferrals through August 2010. New defaults are also trending lower, with 30 new defaults through the end of August compared to 54 through August of last year.

"At its current pace, the rate of new bank Trups CDO defaults will remain notably lower than 2010," adds Juan.

At the end of August, 186 bank issuers were in default, representing approximately US$6.2bn held across 83 Trups CDOs. Additionally, 387 deferring bank issuers were impacting interest payments on US$6.1bn of collateral held by 84 Trups CDOs.

CDS

CDS survey results released

Sovereign credit default swaps use, market volatility and regulatory issues topped the list of the most surprising events in the credit derivatives market, according to Fitch's annual credit derivatives survey.

Survey respondents cited unexpectedly high volumes and spread volatility among various sovereign names, particularly those of Western Europe, and the relative outperformance of the emerging markets. They also overwhelmingly named central clearing, regulation in general and market liquidity as the top challenges for the CDS market.

A majority of respondents either 'supported' or 'strongly supported' central clearing of trades, the use of netting and increased transparency. The majority of participants also had either a negative or undecided view on multiple clearing houses, the exchange trading of CDS, changing collateral requirements for end-users and the capital requirements for clearing members.

By a small majority, respondents now forecast the overall size of the CDS market to drop. In a sharp turnaround from last year's survey, more participants now expect single name corporate CDS usage to decline (63% compared to 32% in 2009).

Fitch's eighth annual survey consisted of responses received over a three-month span from 26 banks in 12 countries.

CDS

Key Basel agenda finalised

The Basel Committee has agreed on a range of measures to finalise key elements of its policy agenda and to put in place a strong implementation assessment framework.

After a careful review of public comments received on the July 2011 consultative document, the Committee agreed to finalise the assessment methodology for global systemically important banks (G-SIBs). It agreed to retain the proposed calibration for the additional loss absorbency requirement, which will range from 1% to 2.5% Common Equity Tier 1 (CET1) depending on a bank's systemic importance, with an empty bucket of 3.5% CET1 as a means to discourage banks from becoming even more systemically important.

The Committee is proposing some changes to certain indicators to improve the methodology for identifying G-SIBs, which will be subject to additional testing by March 2012 using updated bank data. It is conducting this work in close cooperation with the Financial Stability Board.

The Committee will issue the revised G-SIB rules text and a summary and evaluation of the public comments before the November 2011 meeting of the G20 Leaders. It will continue to improve the quality and transparency of the data underlying the assessment methodology in time for implementation by 1January 2016.

In addition, the Committee discussed comments on its proposal to introduce capital requirements for banks' exposures to central counterparties (CCPs), believing that appropriate capitalisation is an additional measure to address systemic interconnectedness. It agreed to a number of adjustments to the treatment of banks' exposures to a CCP default fund and will issue these changes for final consultation in the coming weeks. The objective is to promote greater use of CCPs while ensuring that banks are appropriately capitalised against the exposures they face, it says.

The Committee also reviewed its work to finalise the liquidity standards over the observation period. While the observation period for the Liquidity Coverage Ratio (LCR) extends until mid-2013, the Committee agreed to accelerate its review to arrive at any adjustments in key areas well in advance of the mid-2013 deadline.

This accelerated process should provide greater market certainty about the final technical details and calibration of the LCR, according to the Committee. The remainder of the observation period could still be used to ensure that these and any other outstanding issues relating to the LCR are fully addressed. Work to evaluate the Net Stable Funding Ratio over the observation period continues.

Finally, the Committee has put in place a rigorous framework to monitor and review its members' implementation of the Basel regulatory capital framework. This comprehensive and robust framework will be coordinated by the Committee's Standards Implementation Group and will rely on peer reviews. It entails a review of members' domestic adoption and implementation timelines for the Basel regulatory capital framework, which includes Basel 2, 2.5 (trading book exposures) and 3.

Moreover, the Committee agreed to review the measurement of risk-weighted assets in both the banking book and the trading book, to ensure that the outcomes of the new rules are consistent in practice across banks and jurisdictions.

CDS

CDS review finds broad participation

Economic and contractual features are highly standardised across CDS trades, according to a new report by the Federal Reserve Bank of New York. Although recent trade volumes were low, there was evidence of broad participation in the market.

The report examined three months of global CDS transactions, investigating the market composition, trading dynamics and level of standardisation. It aims to enhance understanding of trading activity in the CDS market and inform the design of public reporting regimes.

A high proportion of trades in the dataset conformed to common contract terms, with activity concentrated in the 5 year tenor and standard notional sizes, bringing enhanced comparability between trades. Most trades were inter-dealer transactions, although there was broad participation and activity did not seem to be concentrated among a small number of dealers.

Over the three-month period, 50-100 unique market participants traded on a daily basis in single-name CDS and an average of 135 traded daily in the index markets. The report also notes that more than half of all transactions were between G14 dealers.

Trade volumes for single-name products were very low, with trading activity on specific contracts typically clustered in time, which is most likely due to event-driven trading. Most single-name reference entities traded less than once a day, whereas the most active were traded over 20 times per day. Sovereigns tended to trade more consistently than other single-names.

Trading in the index CDS market was seen to be far more active, particularly in on-the-run index contracts. The most active indices traded 100 times a day, with the CDX North American Investment Grade and Europe iTraxx consistently trading at a significantly higher frequency than other indices.

Clearing-eligible instruments traded more actively than non-eligible contracts, measured both on an intraday basis and as overall activity. However, transactions in both clearing-eligible and non-eligible contracts were similar in notional size.

There is also little evidence of dealers regularly hedging large trades with offsetting transactions in the same reference entity and within the same or next trading day, suggesting dealers typically trade out of positions over a number of days or even weeks.

The report concludes that large trade reporting thresholds based on notional size would allow a streamlined approach because corporate single-name, sovereign single-name and index CDS have substantial homogeneity in the distribution of notional sizes traded. However, a threshold set in terms of traded volume over a period of time would require more granular thresholds.

Finally, the report also calls for coordinated and comprehensive collection of trade data and consistent standards for price reporting, in order to make prices interpretable and meaningful.

CDS

ISDA warns EU tax 'harmful'

The European Commission's proposal for a financial transaction tax (FTT) throughout the 27 member states of the EU would be a negative development for derivatives, says ISDA. The association says an FTT would be "harmful to the financial sector and corporates alike".

ISDA warns that an FTT will increase the costs of using derivatives to hedge interest rate, currency, credit and counterparty risks, placing strain corporations and entities of all sizes. The new tax also risks reducing the capital base of financial institutions at the same time as regulators are demanding higher capital buffers and ISDA says passing those costs on to customers could limit access to financial markets and restrict liquidity.

CLOs

SME programme proposed

The UK government unveiled at its party conference preliminary details of an initiative aimed at bolstering lending to SMEs. This stimulus is intended to focus directly on corporate sector funding, in contrast to the Bank of England's earlier quantitative easing, which involved government bond purchases. Since most SMEs do not issue bonds, an alternative may be pooling banks' SME loans into securitisations, which a government entity or the Bank of England could buy or guarantee.

Fitch says that the introduction of a UK government SME guarantee scheme would align the UK with its European peers in terms of support and would likely lead to increased UK SME CLO issuance.

The UK currently has a government guarantee scheme where 75% of an eligible SME loan is guaranteed by the government. This scheme is at the individual loan level and relatively small compared with other European countries. In addition, SME CLOs in the UK are eligible for wraps from the European Investment Fund (EIF).

CMBS

Marginal change in Euro CMBS repayments

Fitch says its European CMBS Maturity Repayment Index changed only marginally during September, increasing to 41.7% from 41.1% in the previous month, due to full and partial redemptions totalling €140.9m. This slight change is explained by the fact that only two loans reached their maturity dates during the month. Combined with the redemptions, this resulted in the outstanding matured balance decreasing by 0.9% to €9.53bn.

Two of the four loans scheduled to mature in September were fully redeemed well ahead of their respective maturity dates - one through a prepayment (Grosvenor Chaussee d'Antin, securitised in FCC NACREA) and the other through a repurchase by the originator (Loan 4589, Morrigan CMBS 1). Both of the other loans that reached their maturity dates - Henderson 2 (Weiterstadt), securitised in EuroProp (EMC-VI), and Brisk (Victoria Funding (EMC-III)) - failed to meet their payment obligations. The former is in a one-month standstill period, while the latter has been transferred to special servicing for workout.

The largest principal distribution during the month resulted from the sale of the collateral for the St Katherine Dock loan (Taurus CMBS UK 2006-2), which matured in July 2010. The sales price of £156.3m agreed with the Max Property Group was significantly above the most recent value of £115.8m and resulted in a full redemption of the outstanding £84.9m securitised loan balance.

The only other full redemption to occur during the month was of the €15.5m Senior & Junior Monaco loan (JUNO (Eclipse 2007-2)), which repaid a few weeks after its scheduled maturity date of 10 August, following a sale of the collateral.

While both redemptions have had a positive effect on the Index, their impact is exaggerated due to the small number of loans that matured during the month. Fitch expects this trend to be reversed in October, when 31 loans are scheduled to reach either a first or an extended maturity date.

"This is consistent with the deterioration in the Index observed earlier in the year following the months of January, April and July, when a large number of loans also matured. Fitch's expectation also reflects the low average quality of the collateral securing the loans maturing during October and the continued constrained availability of new debt for such assets," the agency concludes.

CMBS

US CMBS delinquencies stabilise

After two very sharp moves over the last two months - a huge jump in July and a big dip in August - CMBS delinquencies stabilised in September, according to Trepp's latest delinquency report. For at least one month, the reading reverted to its pattern from earlier in the year when modest bumps in the rate were the norm.

In September, the delinquency rate for US CRE loans in CMBS inched up by 4bp to 9.56%. The CMBS market has now seen its delinquency rate fall in three of the last five months.

Trepp says: "There is no denying that the tone in the CMBS market has been acutely negative for the past three months. The market has taken a series of body blows over that time period: spreads have risen sharply, lenders have pulled in the reins on new loans, the US economy has weakened and many have speculated that the pricing of trophy properties in the US has come too far too fast."

However, Trepp adds that while many of the headlines were sharply pessimistic in tone, not all of the data was negative. "First, a number of trophy property sales were announced in September, indicating that this part of the market was not ready to retreat just yet and that lenders were still willing to do deals for the right assets. Second, CMBS spreads settled down considerably in the latter part of the month."

The percentage of loans seriously delinquent was not quite as promising, however. That rate is now 8.95%, up by 16bp for the month.

CMBS

Concerns raised over servicer changes

Recent changes in ownership, management and strategic direction among US CMBS special servicers are prompting new investor concerns, according to Fitch Ratings.

Given the decline in commercial mortgage performance since the beginning of the credit crisis, there has been much more focus on the role of special servicers, Fitch says. Recent events in particular have turned the spotlight on the largest CMBS special servicers, LNR Partners, CW Capital and CIII Asset Management, all which have undergone ownership changes in the past few years. Additional servicer changes have included staffing, strategies and expanding their business lines. Naturally, these numerous changes, coupled with the influx of loans into special servicing leave investors concerned.

"Investors are becoming increasingly skittish over potential conflicts between existing CMBS borrowers and the ownership interest in the special servicers," says Fitch md Stephanie Petosa. "Additional issues attracting market attention are Fair Market Valuations and special servicers' expansion into related fee-generating businesses."

Some of the largest special servicers have either acquired or are leveraging in-house expertise to provide services that were previously contracted for including brokerage services. Fitch expects CMBS servicers to protect the interests of all bondholders regardless of its own interests and not be motivated by their ownership interests or advancing affiliated entities.

CMBS

European CMBS recovery still not in sight

More weakness in the credit markets means that a recovery for European CMBS is not yet in sight, according to two new reports from S&P.

According to 'European CMBS: The Next 100 Days', which looks back on the sector in the first half of this year, new issuance appears unlikely to revive anytime soon. The report predicts that, despite steady progress in tackling the overhang of under-capitalised real estate and loan refinancing, renewed weakness in macroeconomic and confidence indicators suggest CRE lending is likely to remain depressed for some time.

S&P credit analyst Arnaud Checconi comments: "When the Chiswick Park transaction closed in June, it seemed the sector may have been heading for a turning point. However, sovereign-related concerns and more weakness in credit markets have caused issuers to hold back and shelve transactions."

He adds: "Upcoming maturities for bullet and balloon commercial mortgage loans - coupled with limited refinancing options - are reducing CMBS creditworthiness. Although special servicers are moving to work out these cases, standstills and loan maturity extensions remain common."

Meanwhile, S&P's latest European CMBS monthly bulletin highlights that legacy transactions are continuing to deal with the surge of loan maturities that began last year and the consequent competition for refinancing. "To put this into perspective, only four out of the 10 loans that were scheduled to mature in August have repaid. By the end of the same month, one in six European CMBS loans was in special servicing and one in eight in default. Based on current performance, this number looks set to rise in October, which will now have the highest maturing loan volume in 2011," the agency says.

While September has been a quiet month for maturities, S&P believes that the highest loan maturity concentration this year will now occur in October. Following more loan extensions, 32 are now scheduled to mature in October.

S&P credit analyst Judith O'Driscoll comments: "Given that 11 of these are already showing signs of pressure through term payment defaults or loan-to-value ratio covenant breaches, we anticipate October's performance to reinforce the maturity delinquency trend we have begun to see in 2011."

The agency has launched a monthly 12-month rolling loan maturity default index, which tracks maturing loan performance. It shows that the maturity default rate is now 11.93% and, in the past 12 months borrowers managed to repay only about €4bn of the €11bn of loans that were scheduled to mature; servicers declared €1.3bn of loans in default; servicers extended the terms of loans totalling €4.5bn and loans totalling €1.2bn are now in standstill or their fates are unknown.

CMBS

DQT edges down

The delinquency rate on loans included in US CMBS conduit/fusion transactions fell by 23bp in August to 9.01%, according to Moody's Delinquency Tracker (DQT). The rate of loans in special servicing, as measured by Moody's Specially Serviced Loan Tracker, also declined in August - by 7bp to 12.23%.

August was the eighth consecutive month that delinquencies in the US have been above 9%, according to Moody's. The resolutions of delinquent loans continued to exceed new delinquencies in August: there were US$4.1bn in resolutions versus US$2.6bn in new delinquencies. The difference lowered the total amount of delinquent loans in the US to US$54.0bn from US$55.6 bn.

Two new deals totalling US$3.1bn were added to the CMBS conduit/fusion universe in August, but approximately US$4.7bn of CMBS exited. The total outstanding issuance of US conduit/fusion CMBS now stands at US$599.5bn - the first time that the CMBS universe has been less than US$600bn since February 2007, according to Moody's.

By property type, the hotel sector saw the greatest improvement in its delinquency rate in August, as it fell by 44bp during the month to 14.56%. Industrial saw the biggest increase in its delinquency rate, as it rose by 43bp in August to 11.2%.

The multifamily sector continues to have the highest delinquency rate, at 15.21% in August, up 8bp from July, while the office and retail sectors continue to have the lowest rates at around 7%. During August, the office delinquency rate fell by 23bp to 7.36%, while the retail delinquency rate fell by 29bp to 7.08%.

By region, the South and West both saw improvements in their delinquency rates in August. The rate for the South declined by 67bp to 10.37%, while in the West it fell by 54bp to 8.28%.

The Midwest delinquency rate increased by 32bp to 9.67%. The delinquency rate in the East was nearly unchanged versus the prior month, declining by 1bp to 7.50%.

Risk Management

Pricing service unveiled

RiskSpan has released a proprietary independent daily pricing service for structured products and mortgage assets. The firm's data modelling and scenario capability harnesses the power of cloud computing to deliver an accurate market value with real-time pricing and can process thousands of securities in virtually minutes, it says.

Joe Sturtevant, co-founder and pricing executive at RiskSpan, comments: "We are now pricing bonds in the manner in which a trader would and providing context that streamlines the audit process."

Risk Management

Bank credit model minted

Fitch Solutions has launched its new Bank Credit Model to provide daily financial implied ratings and implied CDS spreads for 9,500 global banks. The model is expected to help risk managers improve their credit and counterparty risk surveillance, as well as help meet regulatory and compliance requirements.

"As current market sentiment towards the banking sector demonstrates, credit and counterparty exposure to financial institutions remains a key theme for risk managers," comments Thomas Aubrey, Fitch Solutions md. "Fitch Solutions' Bank Credit Model provides risk managers with a suite of valuable new inputs into their bank credit and counterparty risk decision-making process by combining financial and market-based indicators with industry coverage that goes well beyond the publicly rated universe."

The product combines financial implied ratings - a fundamentally-derived measure of a bank's one-year forward standalone financial profile - with daily implied CDS spreads. The implied CDS spreads are calibrated from Fitch Solutions' CDS market information, bank's financial ratios, distance to default information implied from equity market valuations and macroeconomic factors.