Contents

ABS

Hesitant hiring

Recruitment lull expected to continue

After a quiet year so far for those in structured finance recruitment, the final quarter is not expected to buck the trend. Participants appear to be taking a more measured view of the recovery, with cautious expansion set to be the dominant trend going forward.

A lot was expected of 2011, but it has not quite lived up to those expectations. This might be because the market has not grown as much as some participants initially thought it would.

Lisa Wilson, managing partner at Invictus Executive Search, explains: "I think this year has been pretty average. Last year was a lot better than this year, but I think next year will be very similar to this one."

She continues: "Last year everybody was seeing the light at the end of the tunnel and became very active as they thought things would continue to grow, but I think this year they realised that the growth was not as strong as they had anticipated."

Another London-based headhunter agrees. He believes that banks have effectively finished hiring for the short- to medium-term and that conditions must improve further in order for organisations to be confident enough to seriously consider rebuilding teams.

He says: "The funds are hiring, but they are not hiring any main risk takers. A lot of them are just adding in junior vp-level talent and starting to grow their own. They are always open to new opportunities, but the message we got at the start of the year was that this would be a fairly boring year and it has proved to be so."

The headhunter adds that he has seen growth in one or two areas. "Overall though the banks are pretty much shut for business at the moment. Even the smaller shops are not really hiring."

After hiring activity trailed off in the middle of the year with the traditional summer slowdown, it has failed to pick back up again. August was particularly quiet and there has not been much pick-up in the weeks since. Wilson notes that although many recruiters were surprised by how little movement the month witnessed, they might have seen it coming.

She says: "Everyone is quite worried because August was a disaster. It is always a disaster, but our industry somehow always manages to forget that fact and everyone expects it to be great. It was not a disaster because of the Eurozone; it was also because everyone goes on holiday in August and it is the same every year."

With Eurozone fears still preying on market confidence, the headhunter suggests that banks will be too preoccupied with getting their houses in order and adjusting to changing market conditions to look at hiring new recruits soon. "The banks have got so many different potential issues on at the moment that it is very, very difficult for them to operate even just standard hiring."

He continues: "The slots are disappearing so fast because every time the environment shifts, the business plan shifts. The way a lot of banks are now set up, I think it will be a difficult environment for a while."

One area that has been tipped for activity is banks building up CVA desks, but the costs and technological know-how required to set those up could be prohibitive. Furthermore, if banks do look to build those desks up, they may be able to do so without brining in new staff.

"The CVA area is very technologically difficult, but people will be building it up. However, it is most likely that they will look to shift people internally, because if you have come from a quantitative structuring background then you can probably do CVA with your eyes closed," says Wilson.

The second headhunter agrees. "There is some activity in CVA. A lot of people jumped on it thinking it would be the next big thing in structured finance. Banks still have a long way to go to look at how they are managing and allocating risk, but - although there is some necessity - I do not think it is going to boom and take off."

Recruitment beyond CVA is not expected to be too busy, either. While credit opportunities do exist, the impression is that funds will continue to be cautious.

"High yield is still ticking over and I think that is an opportunity for another year or so, given where the market is. Generally, next year will be fairly flat unless there is a major change in the landscape - although I don't see how a major change can possibly happen," says the London headhunter.

He adds: "Talking to people, I get the sense that they do not quite believe this is how things will stay. They have a glint in their eye and I think they will end up being quite disappointed. I think we are now looking at the new normal and next year will be very similar to this one."

The headhunter says that planning for next year, like last year, is bitty and weak. "I think recruiters are waiting until January because I do not see the traditional November planning time coming in right now either."

Wilson is slightly more optimistic, however. Although she does not expect to see drastic changes any time soon, she notes that there are still areas for growth.

She concludes: "While I am not overly optimistic for next year, I am not overly depressed about it. There are still certain institutions out there who have not done badly and that were quite cautious about rehiring. They will see the market picking up in all the traditional asset classes - and maybe in a few new areas - and will continue to cherry pick good people."

JL

CDO

Reflective ratings?

Trups CDO outlook stabilises, ratings questioned

The number of 'problem banks' monitored by the FDIC dropped in the second quarter from 888 to 865 - the first decrease since the financial crisis began - which should mean fewer new defaults in Trups CDOs. Although the market is not declaring a recovery just yet, questions are being asked about the accuracy of current ratings in the sector.

Despite decreasing in the short term, the number of problem banks remains higher than it was a year previously, so it is not yet clear whether the latest decrease marks the start of a genuine recovery. Banks closed by the FDIC sometimes blur these figures, but there has been a decline in their number as well.

Bradley Golding, md at Christofferson Robb & Co, notes it is significant that the slide seems to have stopped. He says: "In spite of what is going on in Europe and in spite of the pricing, things are clearly getting somewhat better. That is based on the ability to move assets. My take is that asset prices seem to be stabilising and the freefall has stopped."

Certainly, the mood among regional banks has improved, says Golding. "From some of the banks I talk to, there is a little more interest and they seem to feel they have a little bit more ability to move distressed assets. The world is not going to be cured overnight, but the lack of degradation is clearly a good thing."

More positivity at the regional bank level is encouraging. But PF2 Securities Evaluations director Gene Phillips remains concerned by the recent performance of Trups CDOs, which he notes "has been very, very poor".

Phillips says: "We think it is a massive issue how bad the performance has been. We have tried to communicate this, but it is just not as big an issue for the rest of the market because it is a small market."

However, he is not convinced that performance has been as bad as the rating agencies have marked it to be. "We cannot see the future, but given the state of affairs we think the rating agencies have downgraded these bonds too far."

Phillips is concerned that the downgrades have continued recently because it suggests the agencies may not have been assigning ratings that accurately reflected their opinions. He adds that it is unclear what has to happen before the agencies will upgrade transactions.

Recently, however, Fitch did affirm 488 tranches from 86 Trups CDOs backed primarily by bank and insurance collateral, while also downgrading seven tranches and upgrading one. Furthermore, the agency revised its outlooks for 71 tranches from negative to stable.

The outlooks for most lower priority classes remain negative, as Fitch notes they are more vulnerable to future negative migration. However, the agency did assign stable outlooks to 15 second priority classes rated single-B or higher, which have significant cushions between their credit enhancement levels and projected loss levels corresponding to their ratings.

Kevin Kendra, Fitch md and head of US structured credit, explains that there are two main reasons that the rate of Trups CDO downgrades has slowed and rating actions have stabilised. He notes: "Defaults and deferrals have slowed for bank Trups CDOs in recent months while an increasing number of banks have begun curing previous deferrals."

Kendra adds: "Bank Trups CDOs are able to trap excess interest to bolster credit enhancement and pay down the most senior classes."

However, he is vague as to when deals may be upgraded. A stable outlook suggests that no change is expected for one or two years.

"Most senior notes have a stable rating outlook, which represents a change for the better compared to last year, when the large majority of bank Trups CDOs carried a negative outlook," Kendra comments.

He continues: "Significant portions of Trups CDO portfolios are still defaulted or distressed, so new deferrals, migration of deferral to default, bank M&A activity and banks curing previous deferrals still warrant close attention."

A lack of investor pressure to upgrade Trups CDOs could feed into rating agency reluctance to reverse the downgrades. Phillips also notes that the agencies may not want to be seen changing their minds so soon after downgrading.

If the recently-observed improvements do indeed mark the start of a recovery, then the rating agencies may be compelled to change their ratings again. As well as a decreasing number of problem banks, there have also been some bank deferrals that have cured.

Around 20 banks in Trups CDOs cured their interest deferral and resumed interest payment during 2010-2011, including 12 in the first half of 2011. This is due to improved performance and also on occasion stronger banks taking over troubled ones.

Further takeovers are likely as healthy banks look to expand. The acquisition of weaker banks would save them from FDIC receivership and keep dividend payments flowing to Trups investors.

The number of banks closed by the FDIC has been falling since 3Q09 and is expected to be lower this year than in either 2009 or 2010. Phillips believes the speed at which the FDIC pulls banks into receivership is crucial to the performance of these deals.

"If they are willing to go through the extra loop before pulling a bank into receivership, that will improve the CDOs' performance," he says. "Similar to their willingness to work through an issue or to pull the trigger, the availability of buyers is a key feature that will affect the performance going forward. It is an uncertainty."

Finally, there is one more uncertainty for Trups - the Collins amendment, which comes into effect in 2013. It will see Trups begin to lose their capital benefits, with major issuers likely to exercise regulatory calls closer to the implementation.

"The small banks are grandfathered on capital usage, but the big banks have to start looking at this 2013 deadline - which is approaching very quickly - and decide how that plays a part of their capital plan," warns Golding.

He concludes: "In this Collins amendment in Dodd-Frank, you start to have a phase-out of the capital benefit of Trups. That begins in 2013 and is one-third every year, so that by the end of 2015 you not only have to raise capital, you will also see capital slowly slide away if you have significant Trups [holdings]."

JL

RMBS

Prepay potential

Major HARP changes announced

The FHFA and GSEs Fannie Mae and Freddie Mac yesterday announced a long-anticipated series of changes to HARP (SCI passim), designed to encourage more eligible borrowers to refinance. Up to three million borrowers could take advantage of the changes, with prepayment speeds expected to rise dramatically as a result.

"Building on the industry's experience with HARP over the last two years, we have identified several changes that will make the programme accessible to more borrowers with mortgages owned or guaranteed by the [government sponsored] enterprises," says FHFA acting director Edward DeMarco. "Our goal in pursuing these changes is to create refinancing opportunities for these borrowers, while reducing risk for Fannie Mae and Freddie Mac and bringing a measure of stability to housing markets."

As with the current version of HARP, to qualify the existing loan must have been originated on or before 31 May 2009 and borrowers must be current with an LTV above 80%. But the changes eliminate certain risk-based fees for borrowers who refinance into shorter-term mortgages and lower the fees for other borrowers, while removing the current 125% LTV ceiling for fixed-rate mortgages backed by Fannie and Freddie. In addition, under the changes, certain lender reps and warranties are waved; the need for a property appraisal where there is a reliable automated valuation model (AVM) estimate provided by the GSEs is eliminated; and the end-date for HARP is extended until 31 December 2013 for loans originally sold to the GSEs on or before 31 May 2009.

MBS analysts at RBS believe the first and fourth enhancements are particularly important. They say: "In our opinion, the relaxation of certain reps and warrants was the most impactful change to come from [the] announcement. This should generate faster speeds in higher coupons (particularly in different-servicer refis)."

The analysts add: "The use of AVMs in lieu of appraisals is also significant, as it should expedite the process and further relieve lenders of appraisal rep and warrant risk. Anecdotally, we hear that most put-backs are due to misrepresentations in the appraisal (and also income)."

The FHFA expects that an additional 800,000 to one million loans will be refinanced through the revised programme, but analysts at Barclays Capital dispute these figures. They say there are 1.65 million loans originated before June 2009 that are between 80% and 125% LTV, with no mortgage insurance (MI), six months' clean payment history and WAC above 5%.

The analysts believe there are a further 240,000 loans above 125% LTV that meet the criteria, meaning a combined figure of around 1.9 million loans which will be directly eligible for refinancing. A further 1.2 million loans with MI could refinance, putting the overall eligibility figure somewhere between 1.9 million and 3.1 million.

Based on assumptions for prepayment speeds of borrowers with and without MI, the Barcap analysts suggest that 50 CPR for one year is reasonable under the new rules. Based on this estimate, 5s and 5.5s would prepay at 42-44 CPR for a year, while 6s would be 38 CPR or 39 CPR and 6.5s would be 34 CPR or 35 CPR. For most 2006-2008 coupons, these would represent a 10 CPR to 15 CPR increase compared to an unchanged HARP.

The analysts expect MHA and CQ/U6 paper to perform well, "given that they seem to be outside the purview of these changes". Vintages and coupons with lower FICO scores, higher updated LTVs and a lower percentage of MI are expected to prepay fastest, with 2005-2008 vintages the most affected.

There will probably be a lower effect on seasoned vintages, according to the Barcap analysts, as the LTV for most borrowers is lower. "For those and post-HARP vintages, there is some potential for moderation in prepayments for higher-quality borrowers as originators focus their attention on refinancing the existing higher rate loans from their books, given capacity constraints," they add.

The GSEs plan to issue guidance with operational details about the HARP changes to mortgage lenders and servicers by 15 November. Industry participation in HARP is not mandatory, so implementation schedules are expected to vary as individual lenders, mortgage insurers and other market participants modify their processes.

JL

CMBS

Floating into fixed?

Increased acceptance of fixed rate CMBS loans expected

The UK commercial real estate lending market is built on convention and at present the convention is for floating rate loans. But limited refinancing options and the emergence of a new breed of originators are driving increased acceptance of fixed rate loans in European CMBS.

New European CRE platforms are emerging with the mandate to originate fixed rate loans. Jefferies International, which recently hired Barclays Capital's Christian Janssen as head of CRE debt capital markets, and Cantor Fitzgerald are reported examples.

"While many banks currently lend only to big customers with whom they have significant relationships in the CRE space, smaller platforms could step in and service smaller players, who could well have more appetite for fixed rate," suggests Conor Downey, partner at Paul Hastings.

He notes that origination of longer-dated fixed rate CMBS loans is the 'Holy Grail' in Europe. Fixed rate loans have been put forward by many in the market over the last two to three years as an obvious solution to the refinancing problem. While a handful of legacy European CMBS - such as Canary Wharf and Trafford Centre Finance - comprise a combination of fixed and floating rate bonds to tap into cheap funding from pension funds and retain the ability to prepay some of the debt, fixed rate loans remain scarce in CMBS deals.

"Fixed rate loans are very attractive to life insurance companies and pension funds because they provide certainty of income and match the funds' payment streams to their customers," Downey explains. "In the US, at least 50% of CMBS loans are fixed rate. But European borrowers are used to floating rate loans and prefer them to be freely pre-payable, whereas fixed rate loans have redemption penalties."

In the US market, defeasance options are available to allow fixed rate borrowers to prepay, albeit at a significant cost. The structures for this are driven by US tax and, as such, are not relevant in the European market. Consequently, prepayment for fixed rate loans in Europe remains an expensive option and is seen very rarely in practice.

Some European floating rate loans, meanwhile, have begun to include prepayment penalties in the early years via yield maintenance provisions. For example, DECO 2011-CSPK features prepayment penalties that decrease over each of the first three years of the transaction's life. Investors are increasingly seeking similar provisions and this looks set to become a common feature in the market.

"Floating rate loan prepay penalties reflect the fact that lenders don't want to go to the cost and trouble of arranging a loan, carrying out due diligence etc only to be prepaid shortly after closing," notes Downey. "This is also relatively common in mezzanine loans, with new funds asking for similar terms. These investors are targeting approximately 10% returns and this is intended to ensure that they receive them."

At the moment while the market is disrupted, banks are reported to be unwilling to take the risk of executing any loans - fixed rate or otherwise - due to uncertainty of pricing. At the same time, too many lenders are still willing to 'extend and pretend', so borrowers aren't under pressure to consider fixed rate loans. However, large pension funds and life insurers are said to be building teams to lend directly on the loans opportunistically.

"The UK CRE lending market is built on convention and at present the convention is for floating rate loans. Eventually some borrowers will have no option but to consider refinancing into fixed rate loans. International borrowers, who are used to borrowing on a fixed rate in the US and elsewhere, may be the first to do this," says Downey.

Meanwhile, CRE loan sales are expected to increase in Europe as banks seek alternative ways of refinancing their portfolios (see also SCI 6 October). RBS is close to finalising Project Isobel, with Blackstone expected to take a 25% stake in the £1.4bn vehicle. And Lloyds Banking Group is currently looking for buyers for a £1bn portfolio named Project Royal.

Sources suggest that Project Royal is a better template for future CRE loan refinancings, however, because the sale includes control rights - meaning that the buyer can work the loans out.

CS

CDS

Growth market

New supply of Aussie CLNs gaining traction

Demand for simple Australian structured credit products is increasing - albeit from a low level - as investors search further afield for yield. At the same time, issuance of these products offers banks an opportunity to attract a new source of funding while other avenues, such as securitisation, remain relatively subdued.

Westpac is one such bank that is actively marketing credit-linked notes (CLNs). Its latest series references subordinated debt on three major Australian banks - the bank's fourth such issuance in 10 months.

Beginning in mid-2009, Westpac previously issued four series of asset-backed structured notes, in which the bank bought a diversified basket of bonds, swapped them into a fixed coupon, matched all the dates and offered investors a significant premium over term deposits. "These were popular, but credit spreads moved in pretty quickly and we also faced problems with liquidity and execution in the underlying bonds," says Gavin McLaren, head of structured product at Westpac.

In the bank's latest series of notes, therefore, the authorised investments have been Westpac term deposits, with fixed yields enhanced via the CDS market on a small basket of Australian names. Westpac has been targeting names referenced in the Australian iTraxx index, where there are around five to 10 entities that are liquid and high-yielding.

According to risk consultant Satyajit Das, until last year Australian banks were actively bidding up retail deposits. "Under those circumstances, there was very little incentive to switch into high-yielding investments," he says. "However, with the collapse in yields at the end of 2Q11, we've seen a lot of investors looking for higher returns and that has given banks the opportunity to issue credit-linked notes."

McLaren agrees that there has been significant investor interest for vanilla fixed income products in the wake of the financial crisis, particularly term deposits, and explains that the CLNs have the benefit of offering a better yield over those term deposits. "We are now on to our fourth series of CLNs and it's fair to say it's been a bit of a journey engaging our investors and getting them comfortable with fairly simple baskets of credit. The reason we did the physicals first is because investors were happier buying the physical bonds as the underlying asset rather than the derivative."

Westpac has offered both three- and five-year maturities on its latest issuances of CLNs. In August, a CLN on a five-year basket of financial names offered an 8% coupon. The bank is currently marketing a three-year note, which will offer a yield in the region of 6.5% due to the fact that credit spreads are widening over European sovereign concerns.

The investor base for the CLNs tends to be from within Australia itself, with a small amount of Asian interest. The end investors are typically self-managed superannuation funds, retirees or high net-worth individuals - all of whom satisfy the wholesale customer test. Average face value per investor is approximately A$500,000.

CLNs also give Australian banks the opportunity to tap new sources of funding. Das explains that banks' loan-to-deposit ratios have been very high over the past couple of years, so they need to raise wholesale funds to bridge that gap.

"They also need to fill the securitisation market gap," he says. "This has been done in a variety of ways. Initially banks issued government guaranteed bond issues. Then banks issued MTNs and bond issues, but ultimately banks are experimenting in order to find the best way of financing themselves in the current market."

However, McLaren suggests that CLNs will most likely be popular for some time to come. In particular, he points to the Australian self-managed superannuation funds that have somewhere between 28%-30% of their investments in cash-type investments.

"Since the GFC, investors have been looking for high-yielding structures that are balanced by low-risk," he says. "The size of investments in these products is growing transaction by transaction as our distribution channels and investors get comfortable with the concept of what CLNs are and how we have structured them. Investors are diversifying a lot more into this style of product - I think there's room for further growth in this market."

McLaren expects structures to remain simple and transparent, however, without leverage. "Investors are not interested in complex investments at the moment. Although we do baskets of names, investors will know the proportions up-front."

He concludes: "I believe there's scalability potential for this type of product into broader investor groups."

AC

CMBS

CMBS bid lists wear thin

BWICs have saturated the European secondary CMBS market and already weak dealer bids are getting weaker. Senior paper remains attractive and is drawing in former mezzanine investors, but otherwise activity is muted.

Hedge fund investors have become more interested in senior CMBS, where yields have increased. While senior CMBS remains resilient, client interest in the mezzanine space is far more limited and a degree of investor fatigue seems to have set in.

"There has not been very much change from the previous weeks. As with RMBS, buying interest is mainly in the higher quality paper and it is hard to get much traction beyond that," reports one trader.

He continues: "For senior CMBS, there is decent client interest and there are higher yields where prices have gone down. This has seen more hedge fund players move up into the senior end, whereas before they were primarily looking at mezzanine bonds."

There has been a fairly consistent stream of bid lists for mezzanine CMBS bonds, but the trader notes that sellers seem to be outnumbering buyers at the moment. Client participation in the BWICs has been limited. Further, the dealer bids that are being received are growing weaker.

"Participants are continuing to try to sell mezz CMBS on BWICs, but the bids have got worse and worse. Right now it looks like it is a better option to try to work with individual dealers that can go to specific clients instead of relying on these lists," says the trader.

He adds: "There have been a lot of these BWICs. Investors are perhaps just a bit tired of them now."

The trader does not expect a change in the level of demand or activity any time soon. Stability in the rest of the credit market might drive price increases and consequent yield decreases for senior bonds, but it will take time.

"It seems like the market is going to be like this for a while. People are looking for the higher quality and they prefer to stay in the top of the capital structure, so I think that will continue to be the case until we see some more rallying," the trader says.

He concludes: "If the prices of senior paper go up and hence yield goes down, then the buyers looking for yieldier assets would have to move down a bit. But I think that will take time; I do not think we will see much change in the short term."

JL

ABS

SCI Start the Week - 24 October

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

Pipeline
Four transactions remained in the pipeline at the end of last week: the US$1bn Freddie Mac SPC Series K-15 CMBS; the €1.5bn IM FTPYME Sabadell 9 SME CLO; and two RMBS - Permanent Master Issuer 2011-2 and the A$500m Series 2011-1 SWAN Trust.

Pricings
European RMBS dominated issuance last week, with the €296m Carismi Finance 2011, €724m Grecale RMBS 2011, €935m FCT Domos 2011-A and €1.1bn FCT Domos 2011-B all printing. Two credit card ABS also priced: US$300m Cabela's Credit Card Master Note Trust 2011-IV and £610m Arran Cards Funding 2011-A. An auto lease ABS (€861m FCT Ginkgo Sales Finance 2011-1) and two CLOs (€1.36bn Empresas Banesto 6 and US$407.1m Atrium VII) rounded out the new issues.

Markets
Activity in US ABS was fairly limited at the start of the week, with many market participants attending the ABS East conference. But trading picked up as investors returned to their desks during the latter half of the week, according to ABS analysts at Bank of America Merrill Lynch. "Participants at the conference seemed more interested in discussing market technicals, rather than fundamental issues," they note.
Trading focus remained on benchmark sectors, although news of Citigroup's decision not to sell its private label card business renewed interest in the notes issued by COMNI, the BAML analysts add. After the news, spreads on COMNI notes tightened by 40bp for longer dated floating- and fixed-rate classes.
Spreads on short-dated senior and subordinate cards and autos were mostly unchanged during the week. Spreads in the FFELP ABS market were flat to tighter by 2-5bp.
On the week, US CMBS spreads reflected a preference for safety as 2010-2011 triple-A paper tightened, while legacy paper remained flat, according to Wells Fargo structured products analysts. Specifically, ten-year 30% credit support paper from the 2011 vintage tightened by around 5bp to 160bp over swaps. Spreads on agency CMBS paper also improved, with ten-year Freddie Mac K-deal bonds coming in by 9bp to 74bp over swaps.
In European CMBS trading activity was again muted last week, though BWIC volume (€80m) was higher than the prior week, according to CRE debt analysts at Deutsche Bank. "Prices in general were flat, with a sizeable list on Tuesday covering at levels at or even slightly above price talk (though admittedly some of the weaker names did not trade), which we would expect should inject some confidence into the market. There were also stronger signs of stabilisation for mezzanine tranches than recent weeks," they say.
Meanwhile, the near-term outlook for the CLO markets was once again clouded by macro and policymakers' decisions, according to BAML CLO analysts. But, they add: "With the relative value backdrop improving fast and with fundamentals still relatively steady, we continue to find sufficient value on a medium-term basis in parts of the capital structure to suggest slow and gradual accumulation of yield in quality bonds, if and when they can be sourced."
CLO analysts from JPMorgan concur: "The gain in leveraged loan prices has led to improved relative value in CLOs. US loans price 4.5 points higher than CLOs' weighted-average price, up from barely 1.3 points in mid-August, and European loans now price 7.4 points higher than CLOs."

Deal news
• Innkeepers USA Trust has reached an updated agreement with Cerberus Series Four Holdings, Chatham Lodging Trust and other related parties, thereby settling the litigation initiated in August (SCI passim). Innkeepers says the agreement clears the way for the sale of 64 Innkeepers hotels to a Cerberus-Chatham joint venture for approximately US$1.02bn.
• The final payment on Epic (Industrious) was made on the 20 October IPD, resulting in a loss on all classes of notes. In particular, it represents the first time that a European formerly-rated triple-A securitised bond has suffered a principal loss.
• The Devonshire Square whole loan, securitised in ELoC 26 (Triton), has been extended to 23 April 2013. A business plan has been agreed that includes a covenant by the borrowers to market the property or otherwise refinance the loan by no later than 22 April 2013.
• Two ABS CDOs are due to be liquidated on 26 October: Dalton CDO and Kent Funding II. VCAP Securities and Stone Tower Debt Advisors respectively have been retained to act as liquidation agent for the sales.

Regulatory update
• The increase in reporting requirements and the use of trade repositories under the European Market Infrastructure Regulation (EMIR) is expected to boost transparency and allow regulators to keep tabs on systemic risk, according to a new Celent report. Given that a high proportion (68%) of interest rate swaps is already cleared via a CCP, the regulation is anticipated to have the greatest impact on the CDS and FX markets in Europe.
• The European Commission is proposing to revise the Markets in Financial Instruments Directive (MiFID). The new framework will increase the supervisory powers of regulators and provide clear operating rules for all trading activities, it says.
• MEPs have voted to ban naked CDS trading, with the sole exception of an option for a national authority to lift the ban temporarily in cases where its sovereign debt market is no longer functioning properly. Both the European Council and the full Parliament must now ratify the agreement.
• The Hong Kong Monetary Authority and Securities and Futures Commission have issued a joint consultation paper on the proposed regulatory regime for Hong Kong's OTC derivatives market. The bodies have been working together since G20 commitments were made in 2009.

Deals added to the SCI database last week:
Agorazo 2011-1
Ally Master Owner Trust series 2011-5
American Credit Acceptance Receivables Trust 2011-1
Arran Residential Mortgages Funding 2011-2
Autokinito
First Investors Auto Owner Trust 2011-2
Golden Bar 2011-2
Grecale RMBS 2011
Home Loan Invest 2011
Honda Auto Receivables Owner Trust 2011-3
Silverstone Master Issuer series 2011-1
SMART Trust 2011-3
SMHL Securitisation Fund series 2011-2
Spiti

Top stories to come in SCI:
Prospects for Trups CDOs
Australian/Asian CLN demand
US auto ABS issuance
RMBS servicing
Development of European loan-level data
CRE refinancing trends

ABS

Recapitalisation group formed

Tim O'Connor has joined Sandler O'Neill + Partners as md and head of its newly created recapitalisation and advisory services group. The group will provide advice related to recapitalisations and restructurings, primarily to the middle market.

O'Connor was most recently executive md at Gleacher & Company, where he founded its recapitalisation and restructuring group and served as co-head of its investment banking group. He is joined by a team of eight other investment banking professionals, based in New York, and reports to William Hickey and Brian Sterling, principals and co-heads of investment banking.

The recapitalisation and advisory services group complements Sandler O'Neill's structured finance group, providing an expanded suite of services to clients.

ABS

ILS head hired

Michael Popkin has been appointed co-head of insurance-linked securities (ILS) for Towers Watson Capital Markets (TWCM). Based in New York, he will report to Ed Hochberg, head of TWCM.

In his new role, Popkin will assist clients in a wide range of strategic risk management activities surrounding ILS and industry loss warranties. He will also aid in the development and implementation of risk transfer solutions in the capital markets, including sidecars, catastrophe bonds and life insurance-related securitisations.

For two years prior to joining TWCM, Popkin served in two roles - head of financial institution origination and head of structured credit solutions - at RWE Supply & Trading in London. He has also previously held the positions of co-head of European structured credit sales at Dresdner Kleinwort in London, and svp and senior portfolio manager for Zurich Financial Services in New York, where he managed a variety of structured product investment portfolios.

CDO

Citi settles CDO case

The SEC has charged Citigroup's principal US broker-dealer subsidiary with misleading investors about a US$1bn CDO tied to the US housing market in which Citigroup bet against investors as the housing market showed signs of distress. The CDO defaulted within months, leaving investors with losses while Citigroup made US$160m in fees and trading profits.

The SEC alleges that Citigroup Global Markets structured and marketed a CDO called Class V Funding III and exercised significant influence over the selection of US$500m of the assets included in the CDO portfolio. Citigroup then took a proprietary short position against those mortgage-related assets from which it would profit if the assets declined in value. The bank did not disclose to investors its role in the asset selection process or that it took a short position against the assets it helped select, according to the Commission.

Citigroup has agreed to settle the SEC's charges by paying a total of US$285m, which will be returned to investors.

The SEC also charged Brian Stoker, the Citigroup employee primarily responsible for structuring the CDO transaction. The agency brought separate settled charges against Credit Suisse's asset management unit, which served as the collateral manager for the CDO transaction, as well as the Credit Suisse portfolio manager primarily responsible for the transaction, Samir Bhatt.

The SEC alleges that Citigroup and Stoker each violated Sections 17(a)(2) and (3) of the Securities Act of 1933. While the SEC's litigation continues against Stoker, Citigroup has consented to settle the SEC's charges without admitting or denying the allegations. The settlement is subject to court approval.

Citigroup consented to the entry of a final judgment that enjoins it from violating these provisions. The settlement requires Citigroup to pay US$160m in disgorgement plus US$30m in prejudgment interest and a US$95m penalty for a total of US$285m that will be returned to investors through a Fair Fund distribution. The settlement also requires remedial action by Citigroup in its review and approval of offerings of certain mortgage-related securities.

The SEC instituted related administrative proceedings against CSAC, its successor in interest Credit Suisse Asset Management (CSAM) and Bhatt. The SEC found that as a result of the roles that they played in the asset selection process and the preparation of the pitch book and the offering circular for the Class V III transaction, CSAM and CSAC violated Section 206(2) of the Investment Advisers Act of 1940 (Advisers Act) and Section 17(a)(2) of the Securities Act and that Bhatt violated Section 17(a)(2) of the Securities Act and caused the violations of Section 206(2) of the Advisers Act by CSAC.

Without admitting or denying the SEC's findings, CSAM and CSAC consented to the issuance of an order directing each of them to cease and desist from committing or causing any violations, or future violations, of Section 206(2) of the Advisers Act and Section 17(a)(2) of the Securities Act and requiring them to pay disgorgement of US$1m in fees that it received from the Class V III transaction plus US$250,000 in prejudgment interest, and requiring them to pay a penalty of US$1.25m.

Without admitting or denying the SEC's findings, Bhatt consented to the issuance of an order directing him to cease and desist from committing or causing any violations or future violations of Section 206(2) of the Advisers Act and Section 17(a)(2) of the Securities Act and suspending him from association with any investment adviser for a period of six months.

CLOs

Gulf Stream key persons confirmed

Apollo Global Management has named the approved replacements to the key persons in the collateral management agreements for the 10 CLOs it acquired via its purchase of Gulf Stream Asset Management (SCI 8 July).

James Zelter, Anthony Civale, Joe Morroney and Stephen Riddell are the approved replacements on the Gulf Stream-Compass CLO 2002-I, 2003-I, 2004-1, 2005-1, 2005-II and 2007, as well as Gulf-Stream-Sextant 2006-1 and 2007-1, Gulf-Stream-Rashinban CLO 2006-I and Neptune Finance CCS. Moody's has confirmed that the move will not result in withdrawal, downgrade, reduction or other adverse action with respect to its ratings on the securities.

CMBS

Special servicer hires two

CWCapital Asset Management (CWCAM) has hired Eric Ellison and Toni Meyer Walker as mds. They will be responsible for diversifying services and building CWCAM's third-party business, as well as integrating the offerings of the CW platforms. Both Meyer Walker and Ellison will report to David Iannarone, president of CWCAM.

Ellison brings over 25 years of real estate industry expertise in the US and abroad, with a core concentration in distressed and performing real estate, CMBS, RMBS and other consumer loans. He previously worked at Morgan Stanley, where he founded and co-headed Morgan Stanley's Asia real estate lending and principal finance business.

Meyer Walker brings over 25 years of commercial real estate industry expertise in special assets and under-performing loans and real estate. Prior to joining CWCAM, she served as svp, special asset management at TriMont Real Estate Advisors, where she led a team of asset managers working primarily with European-based institutional clients who held investment positions throughout the US.

CMBS

Barcap accelerates CMBS expansion

Barclays Capital has announced several appointments to its CMBS finance business in the US. These appointments accelerate the recent expansion of the firm's CMBS origination capabilities, following the appointments of Larry Kravetz and Spencer Kagan (SCI 24 June), as well as the establishment of a CMBS loan origination programme with Fund Core Finance Group (SCI 19 September).

Jon Trauben joins Barcap as an md and head of subordinate debt origination. He was previously an md and head of capital markets, high yield real estate and loan syndications at Cantor Fitzgerald. Prior to that, he spent eight years at Credit Suisse as an md, head of high yield real estate and loan syndications, Americas.

Dan Vinson joins the firm as an md and head of CMBS structured finance. He was previously an md and US head of capital markets and transaction operations at Eurohypo, where he has been since 2006. Prior to that, he spent approximately ten years at GE Real Estate as an md of commercial real estate capital markets.

Michael Birajiclian joins as a director and head of loan closing. Most recently, he was a senior asset manager at Greystone Bank. Prior to that, he held similar roles in CMBS capital markets at Bank of America in the large loan and structured finance group and in the securitised finance groups at Nomura and Morgan Stanley.

All three new hires will report to Kravetz and be based in the firm's New York office.

CMBS

Euro CMBS research platform launched

Goldstar Research, a new subscription-based web platform that provides analysis of European CMBS transactions, has been launched. The company has developed a suite of products including quarterly deal reports with interim updates to be published on Goldstar's blog and a free CMBS portal through which participants can access market research and transaction data.

The service delivers tactical research on individual transactions within the CMBS universe, which focuses on analysis driven by Goldstar's own proprietary models at the bond, loan, property and tenant level. The reports contain stress scenarios for individual loans and bonds, as well as maps, photos of the properties and a snapshot summary of the CMBS structure.

In addition, Goldstar offers a forum for all market participants to share information about specific transactions and general developments within the CMBS market. Links to pertinent third-party research, as well as transaction documents - such as offering circulars, trustee reports, servicer reports and regulatory notices - are also available.

The company has the backing of industry veterans Scott Goedken of rating agency DBRS and RBS' Krishna Prasad, both of whom are non-executive directors.

ABS

Shrinking counterparty eligibility examined

Fitch says the number of banks with sufficiently high ratings to act as eligible counterparties in triple-A rated structured finance and covered bonds transactions has shrunk materially (see also SCI 28 September). This is putting pressure on how easily counterparties can be replaced and on the liquidity of derivative counterparties. It is also increasing concentration risk in an already vulnerable financial system, according to the agency.

Since October 2007 the number of eligible counterparties has fallen by approximately 60 to fewer than 250 globally. However, of these counterparties, only a minority are actively involved in providing - or have the capacity to take on - significant derivative exposures in third-party structured finance transactions.

Stuart Jennings, md and group credit officer for global structured finance, says: "The loss of a few large banks as eligible counterparties is even more significant than the fall in absolute numbers." The agency will assess the impact of the reduction in eligible counterparties when it reviews its structured finance counterparty criteria, which is due by March.

The most obvious examples of a loss of counterparties are Lehman Brothers and Bear Stearns. However, several major banks have also been downgraded below the A/F1 rating trigger - the minimum rating that can support a triple-A rating.

Most significantly, Morgan Stanley's single-A rating is on rating watch negative (RWN), which makes it ineligible without some form of risk mitigant, such as posting collateral. In Spain, Bankia - a merger between Caja Madrid and Bancaja - is rated below single-A, while in Italy two more large banks became ineligible earlier this month. Unione di Banche Italiane (Banca UBI) was downgraded and UniCredit was placed on RWN.

The US has seen a reduction of over 20 eligible counterparties from just over 70 in 2007, but the euro zone has seen the largest number of banks fall below the eligibility threshold. In Spain, the number of counterparties has fallen by more than half to just 10. Italy has just seven remaining above the threshold from 13 before the crisis.

In both Italy and Spain, only a limited number of the available counterparties are active participants in SF transactions, such that foreign banks are increasingly participating in these markets. Similarly, transactions from countries that have received bail-out funds from the EU and IMF are now fully reliant on foreign-owned banks as eligible counterparties.

One of the key assumptions of Fitch's counterparty criteria for continuation-type derivatives is that the ultimate mitigating action, such as finding a replacement counterparty, is capable of being effected within a reasonable timeframe upon the occurrence of a counterparty becoming ineligible. The agency's view has always been that replacement counterparties are, in principle, available for the majority of derivative contracts - albeit often at an increased cost and only after an extended timeframe. The number of eligible counterparties is still high enough for it to keep that assumption for standard derivative products in global reserve currencies in major countries.

But, as the number of counterparties shrinks, liquidity in more esoteric derivatives or those involving minor currencies or peripheral eurozone countries will reduce. This will especially be the case during a crisis. In cases where Fitch is not comfortable that a replacement can be found during a stress, then ratings above that of the counterparty may not be possible, the agency warns.

ABS

US securitisation issuance passes US$200bn

At the end of September 2011, with more than US$200bn of qualifying securitisation deals completed, the leaders maintained their places in the SCI US league tables for bank arrangers in the structured credit and ABS markets. All added to their account as the month saw US$29bn of issuance.

Europe, meanwhile, dragged itself out of the summer lull to see a shade under €4bn issued in the month. This brings the year's total to over €68bn for the region.

Overall, JPMorgan maintains its commanding lead in both the US and UK/Europe tables.

The league tables cover primary market transactions for asset-backed securities (ABS), commercial mortgage-backed securities (CMBS), residential mortgage-backed securities (RMBS) and collateralised debt/loan obligations (CDOs/CLOs). Qualifying deals are full primary securitisations that were publicly marketed and sold to third-party investors; i.e. were not privately placed or issuer/arranger retained or re-issues or re-securitisations.

SCI publishes its league tables on a monthly basis. The numbers are based on the SCI deal database and are, where possible, corroborated with the firms involved.

For the tables for the year to end of September 2011, please click here.

CDO

Trups defaults, deferrals continue to decline

The combined default and deferral rate for US bank Trups CDOs declined this past month, according to Fitch's latest index results. 14 banks resumed interest payments and repaid accrued interest on their Trups through the third quarter, compared to just two through the third quarter of last year (see also SCI 24 October).

"While the increase in cures is an encouraging sign, there are still 382 banks that are currently deferring," says Fitch director Johann Juan. "The resolution of current deferrals in cures or defaults will be largely driven by the overall US economy over the near term."

Bank defaults within Trups CDOs increased by 10bp to 16.6% through the end of September, while bank deferrals fell by 3bp to 15.9%. The combined default and deferral rate for banks within Trups CDOs decreased to 32.5% from 32.6%.

Year to date, there have been 64 deferrals and 33 defaults for bank Trups CDOs through the end of September, notably lower than the 140 deferrals and 56 defaults experienced through the end of September last year. At the end of September, 189 bank issuers - representing approximately US$6.2bn held across 83 Trups CDOs - were in default, while 382 deferring bank issuers were impacting interest payments on US$6bn of collateral held by 84 Trups CDOs.

CDS

Asian CDS liquidity hits high

Fitch Solutions reports that in the two weeks to 21 October a jump in CDS market uncertainty on the prospects for regional health care, utilities and technology companies helped drive average liquidity for Asian entities to the highest level since the firm's CDS liquidity scores time series began in March 2006.

"Whilst Asian CDS still lag the higher levels of liquidity seen in Europe and North America, CDS on Asian oil and gas companies are now trading with more liquidity than for any other industry in the region," says Diana Allmendinger, director at Fitch Solutions in New York. "Among corporate names, Hutchison Whampoa Limited and Telekom Malaysia Berhad are third and fifth in the overall top-five most liquid entities in the Asia Pacific region, whilst Nippon Telegraph & Telephone Corporation also moved 11 regional percentile rankings in the past two weeks."

As of last Friday's market close, average CDS liquidity for Asian entities was 10.15 versus 10.33 two weeks previously. Elsewhere, regional trends in Europe and North America remained broadly the same, with average global CDS liquidity closing at 8.74 versus 9.03 for the same period.

CDS

ICE preps sovereign CDS clearing

ICE Clear Credit is set to launch the clearing of Latin American sovereign credit default swaps on 31 October, making it the first central counterparty to clear sovereign CDS. The SEC has granted regulatory approval for the clearing of sovereign CDS of Argentina, Brazil, Mexico and Venezuela.

"Sovereign CDS are some of the most actively traded CDS products today. We are pleased to extend our clearing capabilities to sovereign CDS, which furthers our objective of meeting the needs of market participants and reducing systemic risk," comments ICE Clear Credit president Christopher Edmonds.

CMBS

Epic loss hits class As

The final payment on Epic (Industrious) was made on the 20 October IPD, resulting in a loss on all classes of notes. In particular, it represents the first time that a European formerly-rated triple-A securitised bond has suffered a principal loss.

The final calculation of the credit protection payment on EPICP INDU was determined to be £251.7m, resulting in full payment of interest on all notes and a final principal payment on the class As of £221m. The outstanding £88.54m of class As and all the other notes were written off, implying a principal loss to the class A notes of 28.4% and a 97.2% loss to the class B to F notes.

The reference obligation, a single loan on a UK industrial portfolio, experienced a credit event in September 2008 following shortfalls in debt servicing. The portfolio was sold in October 2009 for £263.3m, with the recovery amount being £224.8m after swap breakage costs.

Structured finance strategists at Chalkhill Partners suggest that the calculation of the net recovery amounts is unclear, given that the interest payments have totalled approximately £30m to the October 2011 IPD. "This gives us reason to believe that either the final recovery amounts under the loan workout have been re-stated or the protection buyer has forgiven most of the costs, following the delay in determining the credit protection payment. In any case, class A noteholders will be receiving an unexpected uplift in recoveries," they note.

CMBS

CMBS financial statements missing

Many of the specially serviced US CMBS loans that have returned to performing have not reported current financial data, according to Fitch. The agency argues that this lack of information leaves investors in the dark with respect to the property's performance.

"Fitch Ratings believes special servicers should make an effort to collect operating statements on specially serviced loans as per loan documents and include the statements in business plans," says Adam Fox, senior director at the agency. A review of loans returned to master servicing in July and August found no financial reporting since before the loan transferring to special servicing.

Fitch has asked special servicers to provide business plans for a sample of recently corrected loans where recent financials were not reported. The agency will investigate and report on this in the future.

The agency adds that while an operating statement for a distressed asset does not always provide a true representation of performance, investors and rating agencies should be provided these as a tool in their analysis. "An appraisal value obtained from special servicers does not provide a full explanation of value, nor how a decision was based. When financial information is not reported, Fitch Ratings applies more conservative modelling assumptions, generally resulting in increased default and loss assumptions," it says.

Fitch also found that approximately 60% of the loans in special servicing classified as current on debt service payments have not reported year-end 2010 financial data. "According to the CREFC Investor Reporting package, which dictates the reporting of property level performance data, the special servicer is responsible for the collection of operating statements for defaulted loans and the master servicer is responsible for performing loans. When a borrower does not provide operating statements, it is usually an indication that the property may be in distress. Statements collected by the special servicer are sent to the master servicer for analysis and reporting," the agency explains.

CMBS

US conduit credit quality slips in Q3

The credit quality of the loans in the US CMBS that Moody's rated in the third quarter showed some slippage, suggesting looser underwriting, the agency says in a new report. Specifically, leverage as measured by Moody's LTV ratio increased to 95.2% in 3Q11 from 93.9% in 2Q11.

"Although the credit metrics of 3Q11 conduit loans generally remain comparable to those of the 2004 conduits, one of the last normal years before the credit crisis, the signs of erosion in underwriting are worrisome," says Tad Philipp, Moody's director of commercial real estate research. "We saw aggressive underwriting in a small but growing share of recent loans."

During 3Q11, the share of interest-only loans increased and the share of loans with funded reserves in two major categories decreased. However, in many cases lower leverage partially mitigated the credit impact of these trends.

Moody's rated three conduit transactions during the quarter, bringing the number of transactions since CMBS started up again after the crisis to 15. The agency notes that a widening of bond spreads for CMBS has reduced the competitiveness of conduit loan origination against balance sheet programmes. Consequently, it expects conduit issuance to cool off over the next few quarters.

"CMBS remains an important, long-term component of the commercial real estate capital markets and will trend back toward US$50bn-US$75bn volume per year when the spread widening driven by eurozone debt issues reverses to the levels we experienced earlier this year," says Philipp. "For CMBS, the current turmoil means delay of game, not game over."

CMBS

Devonshire Square extended

The Devonshire Square whole loan securitised in ELoC 26 (Triton), which was due to mature today, has been extended to 23 April 2013. The borrowers and the facility agent have agreed a business plan that includes a covenant by the borrowers to market the property or otherwise refinance the loan by no later than 22 April 2013. The plan also introduces a number of milestones that will need to be met by the borrowers.

The new business plan for the loan was agreed after 12 months of negotiations. As part of the restructuring, the loan sponsor - The Rockpoint Group - has already made an equity payment of £3m to finalise and secure certain tenancy agreements in respect of the Devonshire Square property.

The borrower will also enter into an interest rate cap for a notional amount equal to the principal amount outstanding of the securitised loan and the most senior portion of the capex loan. The hedge is to cover exposure to Libor throughout the loan extension, during which time interest is payable by reference to a floating rate.

Finally, the intercreditor agreements and the credit agreement will be amended to provide that upon the disposal of the property, the net disposal proceeds will be applied towards repayment of the securitised loan and the senior portion of the capex loan. In addition, the principal amount of the securitised loan will, at all times, be repaid, whether or not due, in priority to amounts outstanding under the junior loan.

CMBS

Innkeepers settles

Innkeepers USA Trust and its affiliates have reached an updated agreement with Cerberus Series Four Holdings, Chatham Lodging Trust and other related parties, thereby settling the litigation initiated in August (SCI passim). Innkeepers says the agreement is supported by its constituents and clears the way for the sale of 64 Innkeepers hotels to a Cerberus-Chatham joint venture for approximately US$1.02bn.

The sale price falls short of the Cerberus-Chatham US$1.125bn winning auction bid for the assets. However, Innkeepers says: "The sales price yields an increase in value of approximately US$75m to creditors when compared to the baseline bid established for the May 2011 auction. Moreover, the settlement can be effectuated through consensual modifications to the existing 'plan of reorganisation' confirmed by the US Bankruptcy Court in June 2011, which will allow the company to exit from Chapter 11 as planned."

Innkeepers adds that with the exception of Midland Loan Services and Lehman ALI - both of which support the terms of the deal and have agreed to their treatment under the modified plan - all of Innkeepers' unsecured creditors and equity holders will continue to receive the same treatment they were promised under the confirmed plan in June. The revised agreement is subject to court approval.

The fixed-rate debt, serviced by Midland, will be modified to the new amount of approximately US$675m. Lehman, the holder of the floating-rate mortgages, will receive a cash payment of approximately US$224m on account of its claims.

Risk Management

CCP resolution regimes stressed

Paul Tucker, deputy governor financial stability at the Bank of England, yesterday outlined at a European Commission post-trading conference what he believes are the essential issues in contributing to the safety and soundness of CCPs.

Tucker pointed out that trading, clearing and settlement infrastructure has over time coalesced into vertically integrated groups. As a result, he emphasised the importance of CCP risk managers having clear and independent reporting lines to group boards in order to remove any incentive for exchanges to seek to influence their behaviour. Nor should CCPs look to outsource their risk management function.

Tucker also stressed the need for effective resolution regimes for CCPs, stating that they should preserve the CCP's essential services and minimise disruption and value destruction. As bondholders and other unsecured creditors should bear the losses of a failed bank, clearing members should probably bear the brunt of recapitalising CCPs as their contribution to keeping it going.

Finally, Tucker called for an extension of Timothy Geithner's demand for minimum initial margin requirements for uncleared OTC derivatives contracts: policies should apply across markets and beyond OTC contracts. These margin requirement minima should, he said, remain flexible to account for changes in the economic climate. It was suggested that those drafting European Market Infrastructure Regulation (EMIR) should contribute in this area by making explicit provision for such macroprudential tools.

Risk Management

MiFID 2 unveiled

The European Commission is proposing to revise the Markets in Financial Instruments Directive (MiFID), with the aim of making financial markets more efficient, resilient and transparent. The new framework will also increase the supervisory powers of regulators and provide clear operating rules for all trading activities.

MiFID already covered multilateral trading facilities and regulated markets, but the revision will bring a new type of trading venue into its regulatory framework -organised trading facilities (OTFs). It will also introduce new safeguards for algorithmic and high frequency trading activities, including the requirement for all algorithmic traders to become properly regulated, provide appropriate liquidity and rules to prevent them from adding to volatility by moving in and out of markets. Finally, the proposals will improve conditions for competition in essential post-trade services, such as clearing.

Under the new proposals, in coordination with the European Securities and Markets Authority (ESMA) and under defined circumstances, supervisors will be able to ban specific products, services or practices in case of threats to investor protection, financial stability or the orderly functioning of markets. It will also sets stricter requirements for portfolio management, investment advice and the offer of complex financial products. Additionally, rules on corporate governance and managers' responsibility will be introduced for all investment firms.

ISDA says it is concerned that the European Commission's stance on organised trading of OTC derivatives goes well beyond the spirit of the September 2009 G20 commitment that OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate. In particular, the Association notes that the restrictions on OTFs will limit the types of trades that can be transacted on single dealer platforms and adversely affect the ability of firms to effectively manage their risks.

The proposals have passed to the European Parliament and the Council for negotiation and adoption.

RMBS

Fastnet 5 restructured

Irish Life & Permanent (IL&P) has restructured Fastnet 5, an Irish RMBS.

Under the restructure, it increased the principal amount outstanding on the class A1 notes to €343m from €279m and reduced the principal amount outstanding on the class A2 and A3 notes to €343m from €510m and €527m respectively. This increased the credit enhancement for the class A notes to 31.2% from 11.6%. All classes of notes now pay a fixed rate of interest of 0.5% per year.

There is also no longer an interest rate swap, which results in interest rate risk between the fixed-rate liabilities and the predominately floating-rate assets. Additionally, the liquidity reserve fund and contingency reserve funds were removed from the transaction.

Furthermore, Danske Bank has been appointed as account bank for the transaction account and reserve account. IL&P will remain as trust account provider, receiving the collections from underlying borrowers. Finally, Homeloan Management has been appointed as back-up servicer.

S&P has consequently raised its credit ratings to double-A plus from double-B on the class A1, A2 and A3 notes.

RMBS

Australian Mortgage Delinquencies Increasing Despite Mining Boom

By Arthur Karabatsos, Moody's Vice President and Senior Analyst (Advertising Feature)

Despite the Australian mining boom, mortgage performance has shown a material deterioration since Moody's last regional delinquency report in October 2010. Between March 2010 and June 2011, as 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. Of Australia's 65 regions, those performing very poorly, that is, with more than 2.5% delinquencies, increased to 11 from two. Those performing poorly increased to 17 from five.

When each of Australia's 65 region's current ranking is compared to their March 2010 ranking what is revealed is that even if a region improved its ranking, it did not necessarily mean it had performed better, just that its performance had not deteriorated as much those others which moved down. Only three regions recorded improvements on last year, but their gains were only marginal.

Within each housing market, the level of equity a borrower has in their home is a key predictor of their ability to maintain mortgage repayments. Each market's heat map reveals mortgages performance deteriorates as they radiate away from city centers and home equity decreases. Home buyers in the more expensive housing have more home equity, due to larger down-payments than regions with cheaper housing, and where borrowers with less financial means borrow more against their home. Even though houses within the more expensive regions have experienced the greatest year-on-year declines in prices, they are performing relatively better.

For example, of Sydney's 15 regions, the Eastern Suburbs is the city's most expensive (House Price Ranking = 1) with a median house price at $1.3 million. It has suffered the largest year-on-year house price decline (10.5%), more than double the national average. However, it has the second lowest LTV (55.91%), resulting in it having the second lowest delinquencies (1.05%, Delinquency Ranking = 14).

This contrasts with Fairfield-Liverpool, the city's fourth least expensive region (House Price Ranking = 12) with a median house price at $440,000. It has shown year-on-year house price increases of 2.3%, the largest in Sydney. However it has the highest LTV (63.9%), resulting in it having the highest delinquencies (3.15%, Delinquency Ranking = 1).

Additionally, regional profile analysis reveals that, without exception, borrowers who fail to make one or more mortgage repayment have a higher LTV and loan balance than all other borrowers within the same region. For example, borrowers in the Fairfield-Liverpool region have a weighted average LTV of 64% and average loan balance of $179,000. But those who are 30 plus days delinquent have a weighted average LTV of 77% and average loan balance of $283,000.

The report analyses the level of delinquencies within regions and also where most of Australia's delinquencies are situated. For example, the Gold Coast is the third worst performing region with 3.11% delinquencies, but it also has the most delinquent loans outright with 6.93% of all delinquent loans in Australia located in there.

Our analysis was performed on over $117.6 billion worth of mortgages which are included in Moody's-rated residential mortgage backed securities (RMBS) portfolios. They represent about 10% of Australian's $1.1 trillion mortgage market and are considered a suitable proxy for market trends.

Australia - 30 Plus Days Regional Delinquencies
Despite Australia experiencing a mining and resources boom, many more borrowers are falling behind in their mortgage repayments. The resource-rich states of QLD and WA have experienced large declines in mortgage performance. This paradox is due to the fact that mining generates fewer direct jobs than other sectors of the economy, QLD's heavy reliance on a weak tourism industry, and strained household budgets due to increased food and utility costs.

Last year, all of QLD's regions were performing satisfactorily or better. This year four of the 11 worst performing regions - classified as performing very poorly - are in QLD.

Mining: Nationally, mining contributes only 1.8% to employment. Year-on-year employment growth in mining in QLD and WA has been 44.6% and 9% respectively, compared to 0.3% and 2.5% for non-mining employment growth. However, mining represents only 2.4% and 7.1% of all people employed in QLD and WA. The implication is that non-mining workers in QLD and WA are feeling the pinch because of lower employment and wages growth, while living expenses are increasing throughout the country.

Reliance on Weak Tourism Industry: Tourism directly employs 118,000 Queenslanders, or 5.3% of all persons employed in the state. Three of the four Queensland regions performing very poorly have a large tourism industry and hence a high dependence on tourism. They are the Far North, Sunshine Coast, and Gold Coast. The WA region of Lower Western WA also has a large tourism industry and a high dependence on tourism. It has home borrowers performing very poorly.

The Far North and Gold Coast have traditionally been heavily dependent on Japanese tourism. However, Japanese travelers into Australia have fallen sharply; in fact, their share of overseas visitors has dropped from 20% in the early 1990's to just 5%. Additionally, total international travelers arriving in the country have moved sideways since the 2000 Sydney Olympics. Weak domestic tourism is attributed to the weak global economy, compounded by a strong Australian dollar making holidaying in Australia more expensive for overseas tourists and overseas travel more attractive for Australians.

Increased Living Expenses: The squeeze on household budgets is more severe than the Consumer Price Index (CPI) would suggest. Year on year, the CPI has increased 3.6%. However, the cost of food and utilities - which account for about 20% of household budgets - has increased much more. Year on year, food has increased by about 6% with utilities increasing about 6% in Perth and 14% in Brisbane.

Sydney - 30 Plus Days Regional Delinquencies
Sydney is the worst performing mortgage market and surrounded by 5 regions performing very poorly. Fairfield-Liverpool (3.15% delinquencies) is the worst performing region nationally as it was in 2010. Interestingly, all regions performing very poorly (except the Hunter) experienced a slight year-on-year increase in house prices, while the others declined. In addition to higher LTV's, the regions performing very poorly have relatively higher levels of employment volatility, an additional factor contributing to their high delinquency levels.

Three official interest rates rises since March 2010 have affected Sydney borrowers the most as they are the most indebted in the country, mainly due to Sydney being the most expensive housing market with a medium home price at $562,000.

The key predictor for a borrower missing a mortgage repayment is their level of home equity. The relationship between delinquencies and house price rankings shows that the better performing regions are associated with higher home prices, despite much larger year-on-year house price declines. This is because home buyers in the more expensive regions have more home equity due to larger down-payments than regions with cheaper housing, and where borrowers with less financial means need to borrow more against their home. Additionally, borrowers in more expensive regions are on higher incomes and allocate relatively less of it on food and utilities.

For example, the Eastern Suburbs is Sydney's most expensive region and has suffered the largest year-on-year house price decline (10.5%). However, it has the second lowest LTV (55.91%), resulting in the second best mortgage performance with only 1.05% delinquencies. By contrast, Fairfield-Liverpool, the second least expensive region, has seen year-on-year house price increases of 2.3%, the largest in Sydney, but has relatively high LTV's (63.9%), resulting in it being the worst performing region with 3.15% delinquencies.

Melbourne - 30 Plus Days Regional Delinquencies
Australia's second biggest city, Melbourne, is performing relatively well. Melbourne's relatively lower cost of housing ($501,500 median house price) spares it from the affordability issues faced by Sydney. Overall, Melbourne's mortgage performance has deteriorated along with the rest of Australia. Despite this, delinquency levels mostly remain satisfactory or better.

Similar to Sydney, in Melbourne, the level of equity a borrower has in their home is a key predictor of their ability to maintain mortgage repayments. Regions with lower LTV's, such as the three most expensive regions of Southern Melbourne (56.1%), Inner Eastern Melbourne (56.2%) and Inner Melbourne (59.7%), have shown the lowest delinquency performance at 1.16%, 1.00% and 0.92% respectively. Despite this, these three regions have also displayed the largest year-on-year house price declines in the city with Inner Melbourne falling 14.9% (the highest regional decline), Southern Melbourne falling 10.6%, and Inner Eastern falling 10.9%. In contrast, the worst performing region, North West Melbourne has a higher LTV at 66.3% and has shown the worst delinquency performance (2.1%), but only a slight house price decline of 0.8%.

Brisbane - 30 Plus Days Regional Delinquencies
QLD has suffered the largest deterioration in mortgage performance since our last report. Before, all of Brisbane's 13 regions were performing satisfactorily or better. Now it is only four.

The Gold Coast is Brisbane's (and QLD's) worst performing region. Its delinquencies almost doubled to 3.11% from 1.57%. It also recorded Australia's largest percentage-point increase in delinquencies with a 1.54% increase. In addition to the Gold Coast, Wide-Bay-Burnett (3% delinquency), Far North (2.59%), and South East BSD Balance (2.33%) are the only regions nationwide to record a percentage point increase over 1%. The general deterioration in mortgage performance has resulted in QLD moving up our delinquency ranking table and occupying a greater proportion of Australia's worst performing regions.

The tourist regions of the Far North (whose largest city Cairns is the gateway to the World Heritage-listed attractions of the Great Barrier Reef and Daintree Rain Forest), Sunshine Coast and Gold Coast are classified as performing very poorly with delinquencies of 2.59%, 2.68%, and 3.11% respectively. These regions have both a large tourism industry and a high dependence on tourism. Tourism in these regions has deteriorated as a strong Australian dollar has made Australia a less attractive destination for international travelers and overseas travel more attractive for Australians. These regions have experienced large volatility in unemployment with 3% to 4% monthly swings. In addition, there is anecdotal evidence of increased underemployment as people work a lower amount of hours than they would like.

Construction is also a main industry in the Gold Coast, and which has suffered due to an oversupply of apartments and declining prices. This has contributed to its high unemployment rate. Unemployment increased from 5.5% in January this year to 8.1% in June. This compares to a national rate of 5.1%.

Gold Coast house prices have declined 7.2% year on year. Since their peak in March 2010, house prices have dropped 10%, while apartments have dropped 9.8% since January 2010. Apartment prices are likely to remain subdued. Colliers International says additional apartment sales by receivers will result in the market receiving approximately two years supply. The oversupply is illustrated by properties taking about 90 days to sell compared to the national average of about 55 days.

As in all other markets, a key predictor of a borrower's ability to maintain mortgage repayments is their level of home equity. More expensive regions display higher levels of equity or lower LTV. Regions with lower LTV's, such as Brisbane City's Inner Ring (58.9%) and Outer Ring (60.4%), display the lowest delinquencies. By contrast, the regions with the higher LTV's, such as Ipswich City (67.9%) and the Gold Coast (65.3%), are regions with the highest levels of delinquencies.

Perth - 30 Plus Days Regional Delinquencies
Despite Western Australia being biggest beneficiary of Australia's ongoing mining boom, all its regions moved into a worst performance category. This apparent paradox is partly explained by the fact that non-mining jobs still account for most of the state's employment and such sectors lag the mining sector in growth. Mortgages in the tourist region of Lower Western WA (encompassing the Margaret River wine district) are performing very poorly (2.78% delinquencies). This may be attributed to a strong Australian dollar that has made Australia a less attractive destination for international travelers and overseas travels more attractive for Australians.

Perth serves as a strong example of the fact that the level of equity a borrower has in their home is a key predictor of their ability to maintain mortgage repayments. Four of its regions have high LTV's of around 59%, and show an elevated level of delinquency in comparison to the well-performing Central Metropolitan region with an LTV of 52.7%.

Perth's most expensive region is the Central Metropolitan with a median house price of around $1 million. This has suffered the largest year-on-year house price decline of 12.5%, but has a relatively low LTV. In contrast, Lower Western WA, which has the lowest regional median house price of around $360,000, has also experienced house price declines, but to a more moderate degree with a 5.3% fall measured year on year.

Adelaide - 30 Plus Days Regional Delinquencies
Regions within Adelaide have outperformed Sydney, Melbourne, Brisbane and Perth. All its regions are performing satisfactory or better.

Despite the overall good performance of the Adelaide regions, the relationship between the level of equity a borrower has in their home and their ability to maintain mortgage repayments is also evident in this city. The regions performing well and very well have LTV's around 60% or below. The worst performing region, Northern Adelaide, is also the one with the highest LTV of 62.9%.

Regional Contribution to Total Australian Delinquencies
Two regions contribute more than 5% to Australia's total delinquencies, the Gold Coast and North Western Sydney. Not only is the Gold Cost Australia's third worst performing region with 2.37% delinquencies, but it also has the most delinquent loans outright. A total 6.93% of all delinquent loans in Australia are located in the Gold Coast. North Western Sydney is the fifth worst performing region with 2.97% delinquencies, but is also responsible for 5.45% of all delinquent loans in Australia.