Contents

ABS

Pole position

Auto deals set to continue US ABS domination

US auto loan securitisations in October totalled US$6bn and came on the back of strong September issuance of US$10bn. Considering the positive performance so far, analysts expect the ABS market to continue to be dominated by auto and other vehicle-related deals going forward.

Public issuance of auto ABS - including lease and dealer floorplan transactions - totalled US$60bn year-to-date, compared to US$58bn for all of 2010, according to SIFMA data. Wells Fargo consumer ABS analysts anticipate that full-year 2011 auto sales will be up by 9% on last year and so auto ABS issuance is likely to see a similar increase, perhaps approaching US$70bn for the year.

Structured finance consultant Dan Castro agrees that auto deals could dominate consumer ABS for the foreseeable future. While regulatory developments have impeded many asset classes, auto ABS has been largely unaffected.

Castro says: "The auto sector has not been affected by the new regulatory and accounting rules that have affected other sectors. Those other sectors have been really hurt by those changes, which is why you are seeing less credit card issuance, for example."

He adds: "In the credit card sector, the funding is not as attractive anymore. With credit card securitisation, there is also some tie to the bank, even though it is a securitisation. If the bank is having problems, the ABS trades off - which probably should not happen to such a degree, but it does."

By contrast, auto deals are more clearly removed from their originators, says Castro. The securitisations are thus less linked to the originating auto makers than credit card deals are linked to banks and so the fortunes of the auto makers have less of an impact on the deals.

Securitisation analysts at S&P also describe auto ABS as having "dominated the US securitisation markets this year" and predict the same to happen in the next few years. They note that another factor in favour of auto ABS is that auto issuers have traditionally held the first-loss positions, meaning the proposed risk retention rules will have less of an impact on the sector.

It is not just a case of other sectors struggling though: Castro notes that auto ABS has many strengths in its own right. "Auto loans have always been one of the most liquid sectors in the ABS market. The bonds are short in maturity and duration and they pay down quickly. Throughout this financial crisis it has also been, in my mind, the one sector where there have not been ratings downgrades."

Castro continues: "The sub pieces of those deals routinely get upgraded. The triple-As get downgraded only very rarely, mainly because the underlying loans are so short and they amortise quickly, so it is hard to lose a lot of money. On prime auto loans, the losses are around 50bp-60bp a year, which is not much."

He says subprime losses can be 5% or 6%, but even for subprime auto ABS there is so much credit enhancement that the risk of loss is actually pretty low. Being able to rely on the strong performance of auto ABS is consequently a significant lure for investors.

From an issuer's perspective, while banks rely on deposits for funding, finance companies cannot. As issuers are often finance companies and not banks, securitisation is a particularly attractive option in the auto sector.

Certainly Castro believes that activity in the sector could continue to increase. "I have noticed a definite pick-up in people looking at floorplan financing. Earlier this year, GM ran into some bumps, but then last month it looked like they might start issuing again. There have also been some auto lease deals, so it does seem like autos are very popular again."

He concludes: "The most important thing is that investors drive the market and, if they are not comfortable with something, then it does not sell. If investors are comfortable, as they are with auto paper, then issuers know they have a ready market to raise funding. That sector of the market just works and it works very well."

JL

CMBS

US CMBS bounces back

The US CMBS market has been significantly buoyed by the latest eurozone debt talks. Spreads have tightened markedly and investors are talking about a return to higher yielding assets.

"We have really seen a number of clients return to legacy assets. For a while, CMBS was lagging competing asset classes pretty dramatically. It kind of led the way down and then, when high yield and other asset classes started to recover, our market really lagged," says one CMBS trader.

He continues: "Today, that has really changed. GG10 A4s - which used to be the most liquid, top-of-the-capital-stack paper from 2007 - were trading right around 375bp a week ago and it has now come in to 275bp."

GG10 AMs were trading around 1200bp one week ago, but the trader says they have also tightened dramatically and are now trading at around 925bp. This striking improvement owes a lot to last night's meeting of European political leaders in Brussels.

"It is largely down to the greater clarity in Europe," explains the trader. "Also, for whatever reason, it finally feels like we are starting to get a return to risk and yield. Investors are not quite so risk-averse anymore."

He adds: "Back in February, hedge funds were typically 5% or 10% cash and more recently a lot of the ones we deal with have been around 80% or 90% cash. Now we are seeing a re-allotment of this capital into anything with any semblance of yield."

Whether this rally in the US market will last is largely dependent on European developments. If other asset classes continue to stabilise, then the trader is optimistic for the future. But he also warns that "if this turns out to be a head fake, then we could be vulnerable".

The trader concludes: "We are going to overshoot to the upside and overshoot to the downside. Clearly we have already overshot to the downside and, if it turns out that this good news from Europe is a fade on the macro front, then we are going to be vulnerable. At this moment though, we are really looking at the outperformance of US CMBS compared to competing asset classes and - just as we led the way wider - we are now leading the way tighter."

JL

RMBS

RMBS 'risk on' after euro boost

The European secondary RMBS market has experienced renewed activity and optimism in the wake of Wednesday's eurozone crisis talks. The sector has returned to 'risk on' mode; however, the new-found confidence is still fragile and dependent upon the success of the agreed debt package.

"As of yesterday morning, there has been a big rally. Most of it has probably been mainly driven by the Street, but liquid names like Granite are up by at least four or five points. Everything else is moving in the same direction, although it is less visible at the moment," reports one trader.

He continues: "All of it is driven by crossover being much, much tighter and the market being risk on again. The solution in Europe is very important."

The trader believes that the agreed European debt package is being embraced as a workable and permanent solution, whereas previous agreements were not seen as being so conclusive. He explains: "Although we have not seen the details of the European package, participants seem to be reassured that this time it is finally being sorted out. We are now a bit more confident that we have seen the floor of this market and we are ready to start taking risk again."

How the European debt package progresses will have a significant bearing on how well the RMBS rally holds up though. If the final deal comes in as it is expected to, then the rally is set to continue. Based on past experience, however, the trader is cautious.

"If the package comes out and it is exactly what has been rumoured, then I do not think we will move another leg higher because we have seen the rally based on the package. If it is wildly better than everyone expects, then of course we continue to go higher. But that is unlikely to be the case and I think the big move has happened," he says.

The trader concludes: "There is definitely more risk as we sit here that the package disappoints and we sell off than of it exceeding expectations and the market going another five points higher. The risk is definitely to the downside in equities and crossover, so that would obviously feed through into RMBS."

JL

ABS

SCI Start the Week - 31 October

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

Pipeline
A CMBS (US$1.09bn WFRBS 2011-C5), a catastrophe bond (US$50m Successor X series 2011-3), a prime RMBS (A$480m Torrens Series 2011-2) and an SME CLO (€1.3bn IM Banco Popular FTPYME) remained in the pipeline at the end of last week.

Pricings
Consumer ABS dominated last week's pricings, with the US$900m AmeriCredit Auto Receivables Trust 2011-5, the US$757.84m Ford Credit Auto Lease Trust 2011-B and the US$223.54m Navistar Financial Dealer Note Master Owner Trust II series 2011-1 all hitting the market. In addition, the US$825m Golden Credit Card Trust 2011-2 printed.
A couple of more esoteric deals were also issued: the US$199.8m SVO VOI Mortgage Corp 2011-A (time share) and US$250m CLI Funding 2011-2 (containers). And a couple of jumbo RMBS printed: the US$4.2bn-equivalent Permanent Master Issuer 2011-2 and the US$20.37bn-equivalent Oceanarium Master Issuer 2011-1. Finally, two SME CLOs priced: the €1.5bn IM FTPYME Sabadell 9 and the €9.29bn Impresa One 2011.

Markets
Most structured finance secondary markets, US ABS aside, were boosted to a greater or lesser extent last week by the eurozone deal announcement on Thursday.
The ABS market remained bifurcated, with cash surrogates firm or improving and down-in-credit bonds under supply pressure, according to ABS analysts at JPMorgan. In particular, they note that non-benchmark asset classes and subordinate bonds in the primary market continued to offer concessions due to the combination of soft demand and sizeable supply. "Our indicative ABS spreads stood mostly unchanged on the week," the JPM analysts add.
The US CMBS market saw a dramatic rally on the back of the announcement, according to Citi securitised products analysts. They report that GG10 dupers were trading at around 300bp over swaps late Friday, 85bp tighter than a week before, and generic legacy dupers at 265bp - 90bp tighter compared to the previous week.
"AMs are also up a few points (775bp over swaps compared to 950bp a week ago). CMBS 2.0 triple-As are now trading around 155bp over swaps, compared to 190bp last week," the Citi analysts say.
In European CMBS BWIC volumes remained muted at just under €20m current face for the week, with weaker names not trading, according to CRE debt analysts at Deutsche Bank. However, they add that volumes in OTC trading were significantly stronger compared to prior weeks, both in the run up to and after Thursday's sovereign debt agreement.
"The majority of activity was in mezzanine names, with arguably the biggest relative widening since May being the basis between A1 and A2. Currently, the basis in many transactions is 20 points, when in the past 10 points would be much more common," the Deutsche analysts note.
At the same time, MBS analysts at Bank of America Merrill Lynch say that non-agency MBS prices were up on the week. "Bids, offers and clearing levels indicate a 2-3 point uptick in bonds backed by dirtier alt-A collateral, for instance," they comment.
However, the BAML analysts add: "To be clear, the strong move in prices pales in comparison to the beating that the non-agency sector has taken over the summer and into the fall, especially in the more distressed sectors. There, we think a bond-by-bond analysis should yield fruitful investment opportunities for investors. Indeed, our sense from the investment community is that sentiment bears more resemblance to the end of 2008 and start of 2009 than at any time since: most investors agree that there is opportunity to achieve very good returns over a longer horizon, but relatively few have the penchant to commit capital given poor price action."
Meanwhile, the steady run-up in loan prices over the past three weeks continues to bring back the CLO undervaluation theme, note BAML CLO analysts. "With the cloud of uncertainty out of Europe lifted for now, we expect investors will refocus on the still robust performance story and on cheapened valuations, and this should support prices across the capital structure. We move back to an overweight on CLOs," they say.

Deal news
• 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.
• 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.
• 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.
• 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).
• Miramax Film NY is to refinance its outstanding indebtedness with a film rights and contracted receivables ABS dubbed Miramax Film-Library Securitization. The transaction is expected to close in 4Q11.

Regulatory update
• The FHFA and GSEs Fannie Mae and Freddie Mac 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.

Deals added to the SCI database last week:
Arran Cards Funding 2011-A
Atrium VII
Cabela's Credit Card Master Note Trust 2011-IV
Carismi Finance 2011
Empresas Banesto 6
FCT Domos 2011-A
FCT Domos 2011-B
FCT Ginkgo Sales Finance 201-1

Top stories to come in SCI:
US auto ABS issuance
US RMBS servicing
Development of European loan-level data
European CMBS refinancing trends

ABS

US Bank eyes European growth

US Bank has completed the conversion process following its purchase of Bank of America's corporate trust business in January (SCI 5 January). The firm has also recently opened offices in London and Dublin, staffed by former BofA employees, with the aim of growing its European business.

US Bank has purchased 18 corporate trust businesses over the last few years, but the BofA deal is the firm's first acquisition in Europe. Bryan Calder, president of US Bank Corporate Trust Services, says it took nine months to plan and execute the conversion of BofA's business onto the US Bank platform.

"To ensure that the two systems are fully reconciled and that all of the records are accurate, we had to deal with lots of moving parts, including the legal transfer of relationships and moving all of the securities and cash," he explains. "We reached out to our new clients to ensure that they knew what the plans were and we're confident that they are satisfied with the move."

Calder confirms that his firm is looking to gain more securitisation business in Europe, albeit with the caveat that the market isn't robust at present. Opportunities in covered bonds, fixed income more generally and escrow are also part of the plan.

"We want to be a proactive trustee and believe that we can really add value with our expertise in securitisation. We've come through the crisis and performed well, and are now even stronger with the addition of a new team," he notes.

Tom Cubitt, svp, has been appointed manager of US Bank's new London office. He was previously an svp at BofA.

ABS

SF partner moves on

Stephen Whelan has joined Blank Rome as a partner in the financial services group, based in New York. For more than 30 years, he has built a substantial practice in the areas of equipment leasing and structured finance, secured lending and asset securitisation.

Whelan joins Blank Rome from SNR Denton, where he was a member of the capital markets practice, concentrating in equipment leasing, asset securitisation, public finance, corporate trust and secured lending. He represents originators of financial assets, investment banks, credit enhancers, trustees and investors in the securitisation of leases, auto loans, maritime containers and other transportation assets, timeshare mortgage loans, health care receivables, franchise receivables, trade receivables, export receivables and various other financial assets.

Prior to SNR Denton, Whelan was with Thacher Proffitt & Wood, where he was a partner for 31 years and chairman of the corporate department.

CDO

ABS CDO transferred

NIBC Credit Management has been replaced by Cairn Capital as the collateral manager of Belle Haven ABS CDO 2006-1, following its removal without cause (SCI 27 September). Moody's has confirmed that the transfer will not result in the withdrawal, reduction or other adverse action with respect to the ratings on the notes. In assessing the credit impact of the agreement and the appointment of Cairn, the agency assessed the history of Cairn's collateral management of transactions comparable to the issuer, the adequacy of its systems for managing the transaction and the level of active management required for this transaction - which is no longer actively reinvesting collateral.

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

CDO

Replacement manager sought for GSC CDOs

Investors in the GSC European CDO I-R, II and GSC Leveraged Loan CLO deals have been advised that the issuers intend to appoint a replacement collateral manager by the end of 2011. GSC has indicated that it will release itself from its obligations under the collateral management agreement, should a replacement not have been appointed by this time. Subordinated noteholders are consequently urged to indicate their preferences for a replacement.

CDS

Primus buyback authorisation upped

The Board of Directors of Primus Guaranty has approved an increase of US$25m in its buyback authorisation to repurchase outstanding common shares and 7% Senior Notes due 2036 from time to time in the open market or in privately negotiated transactions at prices and upon terms approved by management. The authorisation does not obligate the company to acquire any specific number of common shares or Senior Notes in any period and may be modified, suspended or discontinued at any time without notice.

CDS

Citi taps CDS clearing pro

Suzanne Hubble has joined Citi to help drive its OTC derivative clearing platform in the European markets. She brings over 13 years of industry experience to this role, including positions in credit trading businesses and FX e-commerce. Most recently, she was at ICE Clear Europe, where she was the director of credit default swap development.

CLOs

Oak Hill management stake increases

An investor group composed of General Atlantic, Robert Bass and senior management has made an investment in Oak Hill Advisors, purchasing the minority stake held by iStar Financial. The transaction increases the management team's majority interest in Oak Hill Advisors and brings GA as a minority investor into the company. Bass co-founded Oak Hill Advisors' first investment fund and has maintained a strategic relationship with the firm since its formation.

CMBS

New CRE head confirmed

Jefferies has confirmed the appointment of Christian Janssen as md and head of commercial real estate debt capital markets Europe (SCI 25 October). He will be responsible for the origination and securitisation of European asset-backed debt financing, including CMBS, syndicated loans and loans secured on European commercial real estate. He reports to Steve Hulett and Craig Tipping, co-heads of Jefferies' European MBS/ABS group.

Janssen brings to Jefferies more than 15 years of experience and joins from Barclays Capital, where he spent seven years and was most recently an md in the CRE finance group. Previously, he spent seven years at Morgan Stanley in New York and London as an executive director in the securitised products group, and prior to that spent three years at Credit Suisse in New York in investment banking.

RMBS

RMBS servicing pro hired

Galton Capital Management has appointed Tim Lynch as head of servicing oversight, augmenting the firm's expertise in mortgage investing as it anticipates a new investment product offering. Lynch will oversee and manage all mortgage servicing activities related to this new product, including servicer evaluation, selection and monitoring.

Lynch joins the Galton investment team with 25 years of mortgage industry experience. He held various senior servicing management roles at two of the largest US servicers - Chase Manhattan Mortgage and Washington Mutual. Most recently, he worked for Chase Home Finance as a default risk portfolio manager and later as head of liquidation strategy in Chase's default strategy department.

Lynch rejoins several colleagues from Chase Manhattan Mortgage, including Matt Whalen, a portfolio manager and co-head of the Galton investment team. The mortgage credit trading team's experience spans origination, servicing, structuring, legal review, trading and hedging of both residential whole loans and RMBS.

The firm is planning a new investment product focusing primarily on acquiring pools of seasoned whole loans, as well as investing in legacy non-agency RMBS, single name RMBS CDS and mortgage credit indices. It will be the team's third longer-duration investment product offering.

ABS

'Significant' improvement seen in charge-offs

US credit card charge-offs improved significantly in September, according to Moody's Credit Card Index. Moody's charge-off rate fell to 5.27%, its lowest point since December 2007, with the six largest issuers each posting sizeable declines in their trust charge-off rates.

"September has routinely been a good month for the charge-off rate. Tax refunds in April mean that fewer obligors become delinquent, which has a ripple effect on the charge-off rate five months later," says Moody's avp and analyst Jeffrey Hibbs. "And we expect the charge-off rate to continue to decline this year and to fall below 4% by the end of 2012."

Meanwhile, the delinquency rate index held steady from August to September at an all-time low of 3.04%, even though the six largest trusts saw rises in both their early- and mid-stage delinquency rates. The rise is largely seasonal and Moody's expects slightly higher delinquencies to persist throughout the autumn months. The total delinquency rate remains at a record low, however, and collateral quality is exceptionally strong, according to the agency.

The cardholder payment rate also remained strong in September, although it slipped by 63bp to 21.29%. The third-quarter average payment rate was 21.49%, an all-time high.

"Payments in all of the bankcard trusts have been consistently strong, as improving credit quality has lowered delinquency rates. The shift in trust composition towards higher-quality obligors following the charge-offs of weaker borrowers means that the proportion of cardholders who pay their balances in full each month has increased," says Hibbs.

The yield index also continued to decline in September, due mostly to the ongoing expiration of principal discounting, whereby issuers re-characterise a portion of principal collections as finance charge collections. "Discounting added 1.8 percentage points to the overall yield index," adds Hibbs. "Most issuers are letting their discounting initiatives expire, as the improvement in collateral performance is mitigating the need to increase their trust yields by discounting."

Finally, the excess spread index remained above 11% in September, although it fell by 10bp, as the drop in trust yields more than counterbalanced the decline in charge-offs.

ABS

Rise in FFELP prepays expected

The US government has announced changes to its student loan programme that will likely result in an increase in prepayments in FFELP student loan ABS, according to Fitch. While negative from a credit perspective, the changes are not expected to have any material impact on existing ratings, the agency notes.

Student loan ABS transactions with borrowers that have loans under both the Direct Loan and FFELP schemes will be most affected because borrowers will be encouraged to consolidate their FFELP loans into the Direct Loan programme. Borrowers who consolidate their FFELP loan into the Direct Loan programme will receive an interest rate reduction of 50bp on some loans as an incentive. In addition, changes to the income-based repayment programme will be accelerated and expanded.

Borrowers will also be eligible to reduce their loan payments to 10% of their discretionary income, rather than 15%, starting in 2012 rather than 2014. Finally, students can receive principal forgiveness after a 20-year period instead of 25 years.

Fitch notes that student loan ABS transactions issued before 2006 are less vulnerable to this change due to the consolidation wave that occurred between 2003-2006. Transactions issued in 2009 and after often benefit from a more robust structure. However, FFELP transactions issued between 2006 and 2009 have a greater reliance on future excess spread, which could be negatively affected by a significant increase in prepayments.

In addition, since delinquent borrowers will not be eligible to consolidate their loans and higher quality borrowers will, FFELP SLABS pools may be left with higher concentrations of lower quality borrowers. This may further reduce the excess spread available to transactions.

The changes may also introduce incremental servicing risk for FFELP transactions that are serviced by entities that have not signed up for the Direct Loan servicing programme as their portfolio could shrink and the economies of scale reduce.

ABS

EFSF package unveiled

The banking package announced yesterday by EU policymakers will allow the EFSF to be leveraged up to five times via two options: collateralised insurance, which will operate only in the primary market; and some form of SPV, with leverage expected to come from the IMF/capital market investors in a tranche structure likely to see the EFSF bearing the first loss. RBS credit analysts believe that the latter option, under certain circumstances, would be a more effective tool to provide a credible backstop.

Other measures include nominal write-downs of 50% of Greek debt in private hands (any Greek debt owned by official lenders will not have the haircut applied) and a €130bn package to recapitalise European banks. Countries whose banks have the highest target equity shortfalls have been identified as Greece (at €30bn), Spain (€26bn), Italy (€15bn), France (€9bn) and Germany (€5bn). Banks with a capital shortfall are required to present a remedial plan before 25 December to the EBA and by mid-2012 to their national regulator.

The analysts note one positive surprise to come out of the package is that sovereigns will guarantee the senior debt of banks. "This will likely restore banks' access to primary markets. The guarantee, however, will come at a cost - which means that banks will still have to de-lever, albeit the pace will be more gradual."

But they also suggest that term debt being guaranteed by sovereigns rather than at a eurozone-wide level could increase the circularity of the mechanism. "Sovereigns at risk will find it difficult to support bank issuance, in our view, which next year equals around 25% of debt outstanding," they explain.

ABS

ABS parsing service minted

CMA has launched CMA ABSparsing, a new service that parses ABS auction and offering price runs received by front-office professionals. The platform parses and organises a firm's ABS pricing emails into a format that is easy to use and integrate into internal systems.

CMA ABSparsing processes data from auction price talk, colour and offering email runs. The data can be used for the analysis of pre- and post-ABS auction information, the creation of historical time series and supporting the mark-to-market process for ABS contracts.

The firm has also added a new asset class to its same-day pricing services - CMA Datavision ABS. The new product provides independent, market-observed pricing for up to 10,000 structured credit securities. The pricing data is composed of traded and sell-side offering prices sourced directly from up to 40 of the largest and most active market participants.

ABS

US auto ABS performance pressured

Seasonal pressures resulted in weaker delinquency and loss levels for US prime auto loan ABS last month, according to Fitch.

"Used vehicle values have softened following record highs during the first six months of this year," says Fitch senior director Hylton Heard. "Dealers have been ridding themselves of the 2011 models to make way for the new inventory, which tends to drive used vehicle values down."

Prime 60+ days delinquencies were at 0.56% in September, rising by 9.8% over August's figure - the fifth consecutive monthly increase. However, delinquencies are well within levels recorded in 2005-2006.

ANL rose by 19% in September month-on-month to 0.56%, but were below levels exhibited during the second quarter and noticeably improved over first-quarter loss rates.

In the subprime sector, 60+ delinquencies hit 3.18% in September, rising by 13.2% from August. On a year-over-year basis, September's delinquency rate was 18% below the same period in 2010. Subprime ANL rose by 21% to 6.44% in September, but were still improved over 2010 - although the year-on-year decline has slowed in recent months.

ABS

Film deal in the works

Miramax Film NY says it intends to refinance its outstanding indebtedness with a film rights and contracted receivables ABS dubbed Miramax Film-Library Securitization. It is anticipated that, subject to market and other conditions, the Miramax Film-Library Securitization will close in 4Q11. The notes to be issued under the new securitisation facility will be offered and sold to buyers in the US pursuant to Rule 144A and outside the US pursuant to Regulation S under the Securities Act of 1933.

ABS

Asia largely unscathed by crisis

Asia Pacific and Indian structured finance ratings have been largely unaffected by the global financial crisis, says Fitch. The agency notes that the strength of the regional economies has been a key factor in this performance, with transactions mainly performing in line with expectations.

"Most economies in APAC have performed well during the global credit crisis, which is often known as the 'North Atlantic crisis' within APAC. If regional economies saw declining growth, they have recovered quickly and this is reflected in the robust performance of most underlying asset classes, which is expected to continue," says Alison Ho, head of APAC SF performance analytics at Fitch.

Ho says most transactions have performed in line with initial expectations, with the exception of Japan. Weakness in the Japanese commercial property markets was worsened by the evaporation of liquidity in the country's financial markets. Despite a high number of defaults, however, losses have been low.

She says: "Even here, where nearly half of all maturing loans have defaulted and many tranches have been downgraded, losses on Japanese CMBS amount to just 0.1% of the amounts outstanding at the start of the crisis."

Japanese CMBS ratings have been severely downgraded, but the robust Australian economy has largely protected consumers there against the effects of the crisis. In Singapore and South Korea, strong economies and experience gained from past crises have resulted in stable ratings.

APAC structured credit did underperform, with defaults and downgrades of synthetic arbitrage investment grade corporate CDOs. Fitch attributes the downgrades to both poor performance of reference entities and the revision of the agency's corporate CDO criteria in 2008. However, Asian asset-backed CDOs have performed well, thanks to adequate surplus credit enhancement.

Indian structured finance transactions have also escaped the pressures of the global financial crisis. Strong asset performance in ABS and RMBS has seen all Fitch-rated tranches being upgraded or affirmed over the last four years, despite rising inflation and interest rates.

For ABS transactions, given that both the underlying loans and issued tranches pay a fixed rate of interest, Fitch notes there is little impact from rising interest rates. For RMBS, borrowers have the flexibility of either increasing monthly payments or extending loan terms in order to account for higher interest rates.

The agency notes that the forward-looking nature of Indian securitisation regulation meant that many changes implemented elsewhere in the aftermath of the crisis were already in place in India, such as non-reset of credit enhancement and amortisation of securitisation income through the life of transactions.

ABS

Tobacco-backed trusts on negative watch

S&P has placed its ratings on 86 classes from 23 tobacco settlement-backed securitisations on credit watch negative. The tranches are backed by payments from participating manufacturers (PMs) under the 1998 Tobacco Master Settlement Agreement (MSA).

Tobacco securitisations are independent of the issuing municipality and are backed solely by payments made by the PMs under the MSA. Under the agreement, the manufacturers are required to make payments to each state annually, in perpetuity.

The credit watch placements follow S&P's revised assumptions for cigarette volume declines, the percent of the MSA paid into a disputed payment account, payment withheld into the disputed payment account and the expected recovery amounts from the disputed payment account. The agency has revised the expected PM-disputed amounts from 10% to 15% because it believes Philip Morris USA could continue to dispute its portion by paying into the disputed account. Recovery assumptions have also been lowered from 80%-90% to just 50%-75% of the original disputed amounts in S&P's non-participating manufacturer adjustment liquidity stress.

The agency is also extending its 3.5% cigarette volume decline assumption another year. Base-case projections are for shipments to decline by 3.5% in 2011, 3.25%-3.75% in 2012 and 2.75%-3.25% annually beyond that. The criteria apply stresses that increase the volume decline assumption by 50bp for each rating category above single-B.

S&P maintains its assumptions about the duration of the disputes, base-case market shares and reinvestment income of the reserve account funds. It expects to resolve the credit watch placements within the next three months, following a more detailed review.

ABS

LatAm ABS fared well through crisis

Fitch reports that the global credit crisis has had minimal impact in Latin America when compared to the US and Europe.

Similar to the general economic impact in the region, the majority of the Latin American structured finance market was relatively unscathed. Rating stability was widespread across asset classes and throughout each country, except Mexico, the rating agency says.

Cross-border issuances, particularly future flow transactions, continued to perform exceptionally well amid the global turmoil. Locally rated transactions continued to remain stable, in some instances amid reorganisations and bankruptcies, testing securitisation laws.

While the majority of Mexican RMBS transactions related to banks and government-sponsored programmes performed well, inflation-indexed (UDI) transactions performed very poorly, according to Fitch.

Nevertheless, the agency expects portfolio performance and ratings movements to continue exhibiting stability. Over the last four years the sovereign ratings of several countries in the region have been upgraded. This, along with positive growth rates, should favourably impact the majority of Latin America structured finance ratings.

ABS

PPIF performance declines

Third-quarter PPIP data released by the US Treasury indicates weaker returns across all eight PPIFs. Net time-weighted cumulative returns since inception were down by 5%-14% across the funds, with Blackrock and RLJ Western Asset faring the best.

ABS analysts at Barclays Capital point out that the weak performance should not be surprising, given the sell-off in the non-agency markets in 3Q11 and the fact that the PPIP funds could not hedge their long positions. Performance since inception still remains strong for most of the funds, they add.

An additional US$855m of net capital was drawn during the quarter, with Oaktree and Wellington drawing an additional US$627m and US$228n respectively. The total market value of RMBS held by the PPIFs fell to US$15.9bn from US$16.9bn in the prior quarter, while the market value of CMBS holdings grew by US$300m to US$4.7bn.

Median prices on RMBS holdings fell by 3-4 points, while prices on CMBS holdings declined by 4-14 points.

ABS

ABCP programmes merged

Falcon Asset Securitization Co has merged with Chariot Funding pursuant to a certificate of merger dated 28 October, whereby Chariot is the surviving entity. Chariot is a multi-seller ABCP programme administered by JPMorgan. Chariot issues standard, callable, puttable and extendible ABCP notes, each currently rated A-1 by S&P.

Chariot will now fund all of the transactions that were previously funded through Falcon. Chariot, as the surviving entity, has assumed all of Falcon's rights, duties, and obligations.

S&P has consequently withdrawn its A-1 rating on Falcon's ABCP notes.

ABS

Sapient lands ED construction role

Sapient Global Markets has been mandated to construct the European Data Warehouse, the first European central ABS data repository owned and operated by the market for the market. The Warehouse is endorsed by the Eurosystem (SCI 21 April).

Once constructed, the Warehouse will process, verify and transmit data for the benefit of originators, investors, data providers and other interested parties. It is expected to launch by the end of summer next year.

The appointment of Sapient Global Markets follows a comprehensive selection process that started in April, with the Market Group's issuance of a Request for Information. More than 50 organisations from around the world expressed an interest in participating.

After a comprehensive review process, the top six firms and consortia who responded to the RFI were invited to participate in a more detailed Request for Proposals process at the end of May. Sapient Global Markets was selected as the best candidate, given its track record of creating database systems capable of managing and distributing large volumes of ABS data.

CDS

Data repository application filed

The DTCC has filed a registration application with the US CFTC to operate a swaps data repository (SDR), dubbed DTCC Data Repository (US), across multiple OTC derivatives asset classes.

"DTCC is committed to working with financial authorities and the industry to promote a transparent and sound OTC derivatives market," says Stewart Macbeth, president and ceo, DTCC Deriv/SERV. "By filing these applications, our goal is to facilitate swaps transaction record keeping and regulatory reporting by US market participants as required by CFTC regulations under the Dodd-Frank Wall Street Reform Act."

DTCC Data Repository (US) will provide trade repository and reporting services for OTC credit, interest rates, equities and foreign exchange derivatives.

CDS

New SEF on the cards

TeraExchange is preparing to launch central limit order books for OTC cleared derivatives. Featuring integrated cross-asset trading, analytics and voice broker assistance services, TeraExchange's core technology and platform will provide market participants with transparency, standardisation, connectivity and liquidity.

Strong risk controls, combined with centralised clearing further align with the objectives of the Dodd-Frank Act to boost transparency and reduce systemic risk. Additional features include: FCM pre-trade credit checks; clearing across multiple clearing houses (CME, ICE and LCH) based on contract; FIX API for direct access to exchange; and pre-trade transparency.

Registered as an Exempt Board of Trade (EBOT) for swaps and other OTC cleared derivatives, TeraExchange intends to apply to become a swap execution facility (SEF) once SEC and CFTC rules are finalised early next year. The platform was established by Spring Trading, which has offices in New Jersey and Washington, DC, a subsidiary in Germany and plans to expand to Europe, Asia and other locations shortly.

CDS

ISDA updates on Greek CDS

ISDA has released an update, following recent events related to the restructuring of Greek sovereign debt.

The Association confirms that the determination of whether the Eurozone deal with regard to Greece is a credit event under CDS documentation will be made by its EMEA Determinations Committee when the proposal is formally signed and if a market participant requests a ruling from the DC. It points out that it appears from preliminary news reports that the bond restructuring is voluntary and not binding on all bondholders. As such, it does not appear to be likely that the restructuring will trigger payments under existing CDS contracts.

In addition, it notes that the restructuring proposal is not yet at the stage at which the ISDA Determinations Committee would be likely to accept a request to determine whether a credit event has occurred.

CMBS

Strong CMBS resolution success rate

Despite tremendous volume of underperforming US CMBS brought on by the credit crisis, special servicers have maintained a strong success rate for resolving delinquent loans, according to Fitch. Special servicers have resolved over US$82bn in distressed CMBS since 2007, with an average recovery rate of 86%, the agency says.

Additionally, over three-quarters of the volume has come in 18 months (US$63.5bn resolved between January 2010 and June 2011). That said, "special servicers are still wading through a formidable backlog of underperforming loans that are in need of a workout", according to Fitch md Stephanie Petosa.

Modification is the most common resolution strategy for larger balance loans. Fitch reports that the average modified loan comes in at US$28.6m (compared to US$9.6m for liquidated loans). However, Petosa adds: "It is too early to determine what effect these modifications will have on final CMBS loan resolutions."

Note sales were the most employed liquidation strategy, followed by discounted payoff and paid in full.

CMBS

US CMBS defaults reach 12.4%

Cumulative US CMBS defaults finished the third quarter at 12.4%, according to Fitch. Defaults through Q3 were equal to approximately half of those for full-year 2010.

"Though large high profile loans are still defaulting, 2011 is on track to have fewer defaults than last year," says Fitch md Mary MacNeill. "Even with limited new issuance, the decline in defaults is signalling some level of commercial real estate stability in most markets this year."

Newly defaulted loans for 2011 thus far total US$11.4bn (795 loans) compared to US$22bn (1,477 loans) for all of 2010. 1Q11 saw US$4.9bn newly defaulted loans, Q2 saw US$2.7bn and Q3 US$3.8bn.

Fitch says the increase from last quarter was partially driven by several large specially serviced loans, formally being categorised as current, becoming categorised as in foreclosure. In the first and second quarters of 2011 combined, there were US$1.0bn in foreclosure compared to US$1.7bn in 3Q11 alone.

The largest three defaults added to the study in the third quarter are: Two California Plaza, US$470m (GCCFC 2007-GG10); The Belnord, US$375m (JPM 2006-LDP9); and Solana, US$360m (BACM 2007-1). Two of the aforementioned loans, Two California Plaza and Solana, entered the default universe after being categorised as being in foreclosure. However, both loans are now listed as current, as the special servicers continue to dual track a modification and foreclosure.

The 2005-2008 vintages continue to dominate defaults, as they contribute 88% of the year-to-date numbers so far. As of 3Q11, the 2007, 2008 and 2006 vintages have the highest cumulative default rates at 18.3%, 14.9% and 14.5% respectively.

CMBS

Maturity index decreases in October

Fitch's European CMBS Maturity Repayment Index deteriorated during October, decreasing to 37.2% from 41.7% in the previous month due to the very low proportion of loans maturing that was repaid.

40 loans were originally scheduled to mature in the past month, Fitch says, of which ten either prepaid more than six months ahead of their maturity dates or were repurchased by their originators. Only three of the 30 remaining loans were fully repaid: the £167m Metro loan securitised in Epic (Culzean); the £20m Grafton Estate Portfolio in Eclipse 2007-1 (Indus); and the Sfr33m Swiss Polo portfolio loan in Taurus (Pan-Europe 2007-1). Full and partial redemptions during the month, for both newly and previously matured loans, totalled €498m.

The combination of loan maturities and full/partial redemptions resulted in the outstanding matured balance increasing by 28.9% to €12.3bn. This is predominantly due to the six largest loans to mature during the month, which totalled over €2bn, failing to be repaid.

Fitch explains that the €560m sole loan in Opera Germany (No.2) had previously been extended by two years to October 2013 as part of a larger restructuring in 2010. It adds that the £286m Devonshire Square Estate loan in ELoC 26 (Triton) was also previously extended, for 18 months to April 2013.

"While the income performance of the collateral has been satisfactory to date, the Fitch LTV in excess of 100% suggests that a successful refinancing would have been unlikely," the rating agency notes.

Fitch observes that two of the largest loans to mature in October are already being worked out by their respective special servicers - the £213m Adelphi loan in Eclipse 2007-1 (Indus) and the £218m Keops portfolio loan in Eclipse 2007-2 (JUNO).

The collateral backing the Adelphi loan is considered to be prime quality. While such properties continue to be successfully refinanced, the long-dated swap on the loan increases the overall leverage and results in a whole-loan reported LTV in excess of 100%. The special servicer has entered into a standstill period with the borrower with the intention of appointing an advisor to better maximise recoveries for noteholders.

The Keops portfolio had been in workout since November 2009. All remaining properties were sold at public auction in October, with completions scheduled to take place in the beginning of November. Total sales amounted to Skr4.1bn, compared to an aggregate reported value of SKr4.2bn.

Fitch goes on to say that the largest principal distribution to occur in October resulted from the asset sale of the Oberpollinger property in Fleet Street Finance Two. "The partial prepayment resulted in a pay-down of €217m after the deduction of costs and senior expenses," it says.

The agency adds that the full repayment of the Metro loan in Epic (Culzean) also contributed to the principal distribution. "The borrower had previously sold three properties and significantly reduced the loan balance to £167m from £418m. The remaining two assets were located in London and it remains unclear whether they were sold or refinanced in order to repay the outstanding loan amount," the agency says.

CMBS

CMBS failure to repay warning

Based on LTVs alone, 60% of European CMBS maturing loans could fail to repay by the end of 2012, according to S&P's latest monthly CMBS bulletin.

The rating agency examined data on the 187 loans in European CMBS scheduled to mature between January 2010 and September 2011, to see what reported LTV ratios could herald for maturity performance. "Our study found that borrowers repaid most of the maturing loans with LTV ratios up to 70%, whereas they struggled to repay loans with LTV ratios greater than 70% - they repaid 51 in the first category and only repaid 29 in the second. In percentage terms, 70% of loans with LTVs of 70% or below repaid in full, whereas only 26% of loans by loan count with LTVs greater than 70% repaid in full," says S&P credit analyst Judith O'Driscoll.

S&P's LTV analysis also reveals that 22 of the loans scheduled to mature between now and December 2012 have prepaid. The majority of these (13 or 60%) have LTV ratios below 70% - supporting the agency's view that loans with LTV ratios of 70% or below stand a better chance of repaying. Notably, the remaining eight prepaid loans have LTV ratios of between 71% and 76%.

Furthermore, of the 183 loans that are scheduled to mature between 1 October 2011 and 31 December 2012 (representing €17bn by total loan balance), most of these (108) have reported LTV ratios of greater than 70% (35 of which are greater than 100%, representing €8.3bn). O'Driscoll concludes: "Based on LTV data alone, we believe that it's reasonable to conclude that borrowers may struggle to repay nearly two-thirds of the loans that are scheduled to mature between now and end-2012. By the same token, we consider repayment prospects are brighter for the remaining 75 loans that have LTV ratios of 70% or less."

Risk Management

Risk management data integrated

TradingScreen has integrated Fitch Solutions' risk management data to TradeFI, its platform for accessing the fixed income markets. As part of the integration, TradingScreen will combine its existing execution functionality with Fitch Solutions' risk management data and access to Fitch Ratings' fundamental credit ratings. The integration will give TradingScreen clients access to critical fixed income data on-the-fly to help shape trading decisions from a single screen, the two firms say.

Risk Management

CVA portal launched

Quantifi has launched a free online information source for professionals active in counterparty risk management and credit valuation adjustment (CVA). CounterpartyRiskManagement.org is a community site devoted to providing timely industry news, research and information on important issues surrounding counterparty risk. The firm says the portal has been designed to enable market participants to be better informed of the rapidly changing regulatory environment and market conditions.

RMBS

Projected GSE draws revised down

The FHFA has updated its projections of possible future Treasury draws by Fannie Mae and Freddie Mac to reflect the current outlook for house prices, interest rates and recent trends in borrower behaviour.

To date, the GSEs have drawn US$169bn from Treasury under the terms of the Senior Preferred Stock Purchase Agreements (PSPAs). Under the three scenarios used in the projections, cumulative Treasury draws at the end of 2014 range from US$220bn to US$311bn. In the initial projections released in October 2010, cumulative Treasury draws at the end of 2013 ranged from US$221bn to US$363bn.

The FHFA attributes the difference in the range of cumulative Treasury draws between the October 2010 projections and the October 2011 projections primarily to the fact that actual results for the first year of the projection were substantially better than projected.

Fannie Mae's cumulative draws are higher than Freddie Mac's in part because its mortgage book of business is approximately 50% larger than Freddie Mac's. In addition, Fannie Mae's serious delinquency rates are higher than Freddie Mac's.

RMBS

DSB claims weigh on Chapel deals

The latest estimates of potential duty of care claims against DSB suggest that the impact on the Chapel RMBS deals is likely to be dramatic, according to European asset-backed analysts at RBS. They note that most, if not all, of the subordinate notes in these transactions will potentially see at least a temporary suspension of interest payments and this could become permanent for the class D and E notes.

At the top end of the capital structures, CHAPE 2007 looks least secure - needing a 5% recovery from DSB (or an equivalent amount from excess spread) to ensure the senior notes can be repaid in full. At the lower end of the capital structure, CHAPE 2003-I is most concerning, given that it already has a PDL against the class D note. This means it would be at risk of taking a loss, even without any further duty of care claims, the RBS analysts note.

At a moderate recovery rate of 40%, the claims amounts from the DSB estate should be enough to ensure full payment on all classes of Monastery notes and cover most of the principal for class C notes in the Chapel transactions. The class D and E notes could incur a total loss of principal, however.

But the analysts warn that the size and timing of any recoveries from DSB are uncertain at this stage and in the intervening period the Chapel deals are likely to be running with very large PDLs that could, in the case of CHAPE 2007, temporarily appear to threaten the class A notes.

RMBS

Mortgages found to exceed Basel assumptions

Fitch says in a new report that the asset correlations assumed within the Basel 3 credit risk-weighting calculations generally exceed correlation values derived from US banks' credit loss experience during the financial crisis. Thus, the Basel correlations - which were calibrated several years prior to the crisis as a parameter within the Basel 2 internal-ratings based (IRB) approach - appear to account for credit loss volatility consistent with this significant stress period.

However, a notable exception is residential mortgages, whose empirically-derived correlations exceed the Basel assumptions. This finding suggests that the Basel correlation assumptions did not sufficiently capture the historically aberrant loss performance of this asset class during the crisis, according to Fitch.

The study also illustrates the degree to which asset correlations can vary over time, particularly during stress periods. The agency's 'rolling' analysis of quarter-by-quarter changes in implied correlations showed a tripling in correlations for US residential mortgages during a three-year span from 2008 through 2010.

According to Fitch, evaluating the appropriateness of the Basel 3 correlation assumptions and capital charges is not just a quantitative exercise. It also involves fundamental analysis of potential shifts in product attributes, sectoral trends, financial markets and the macroeconomic environment that could drive systematic changes in borrower performance.

RMBS

Greek subsidy delay threatens RMBS

Greek banks and RMBS transactions could lose interest payments because a Greek housing agency has delayed paying interest subsidies, says Fitch. Greek RMBS ratings already reflect severe stress, so the shortfall in subsidy receipts will not immediately affect ratings.

The Organismos Ergatikis Katikias (OEK) started delaying payments on interest subsidies in 2009. Issuer reports for some RMBS transactions still showed subsidy payments being received because the originating banks were making the payments on the OEK's behalf, but it is the OEK which is legally obliged to pay the subsidies.

Should the subsidy payments cease, the RMBS transactions will eat into their reserve accounts. Once those become depleted, some transactions will be able to use principal receipts to pay interest on senior notes, although this would greatly increase the likelihood of an interest shortfall which for many transactions would effectively constitute a default.

If the OEK defaults on the subsidy payments, the borrower is legally liable to pay the full interest amount of the loan. Fitch notes that most borrowers are not aware of this obligation and such a payment shock would likely lead to a spike in delinquencies, defaults and losses.

The affected banks are negotiating with the OEK to settle the subsidies and aim to reach agreement in the coming months. Subsidies provided to Greek mortgages by Consignments Deposits and Loans Fund (CDLF) and the Greek state are expected to continue to be received as scheduled.

Fitch reports that some banks which originated RMBS have decided to make the payments on the OEK's behalf to support their transactions in order to maintain the eligibility of the senior notes for repos. T Bank has stopped making payments on behalf of the OEK in the Byzantium Finance and Byzantium II Finance transactions, however.

As well as the Byzantium transactions, Fitch rates three other RMBS transactions that contain OEK subsidised loans - Estia Mortgage II, Stegasis Mortgage Finance and Themeleion IV Finance.