Contents

CLOs

Still slow for Euro CLOs

The European secondary CLO market has been quiet, with a modest pick-up in BWICs not yet enough to generate much excitement. CLOs appear to have been over-sold and prices are expected to rise over time.

"We saw a small number of BWICs this week, including one fairly chunky first-pay clip of GSC paper that did not trade," says one trader. "The rest were all fairly scrappy and small - generally under €1m clips of paper at a time - and those have traded successfully."

Away from BWICs, the macro situation has continued to dominate and trading activity has been limited. The trader reports steady demand at the senior end of the capital structure, while the bottom end fell so far over the summer that the wide bid-offers there remain stable.

He notes: "I think the guys on the bid-side have realised that there is very little inventory available for sale at current market levels. The selling being done in the summer to try and race downwards has stopped and we have hit prices that are back to early 2010 levels."

The trader says that structures have improved in that time though. A combination of deleveraging, low defaults, triple-C improvements, amend-to-extends and some sizable prepayments has allowed managers the flexibility to reinvest at wider spreads.

"CLOs have clearly sold off to a silly degree when the actual structures have improved in that time. There have been plenty of positives for the deal structures and yet we have sold off too far in fundamental terms, purely on liquidity," he says.

The short-term future for the sector is hard to predict as pricing is being driven by macro events and not market fundamentals, but in the longer term the trader believes that prices will only go up as inventory decreases further. "We are at the mercy of which politicians or rating agencies are going to come out and say something to change the whole tone," he says.

The trader concludes: "It would take a very small amount of buying to cause prices to ratchet in and we have seen that at the senior end of the capital structure, where triple-As are 50bp tighter than they were two or three weeks ago due to a low but steady level of buying. I am not seeing any driver for anything other than potentially moving up in price as and when remaining inventory gets taken away."

JL

ABS

SCI Start the Week - 21 November

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

Pipeline
The pipeline comprised CLO and auto ABS transactions at the end of last week. The CLOs are: US$290m AMMC CLO IX; US$271.8m Dryden XXII Senior Loan Fund; and US$419m Liberty Island Funding 2011-1. The auto ABS deals are €995.3m Cars Alliance Auto Loans Germany 2011-1 and €573m SC Germany Auto 2011-2.

Pricings
A variety of asset classes were represented in last week's pricings. Among these were three credit card ABS deals: US$325m Nordstrom Credit Card Master Note Trust II series 2011-1; US$400m Discover Card Master Trust 2011-A4; and US$600m Penarth Master Issuer 2011-2. Two auto-related ABS - the US$1bn Volkswagen Auto Lease Trust 2011-A and the US$519.2m-equivalent Bella Trust 2011-3 - as well as an equipment (US$424.2m GE Equipment Small Ticket series 2011-2) and a container (US$200m Cronos Containers 2011) transactions also printed.
Additionally, two CLOs - the US$315m Ivy Hill Middle Market Credit Fund III and the €485m IM BES Empresas 2011-1 - priced. Issuance was rounded out by an RMBS (€2.69bn Record Lion RMBS 2011-1) and a CMBS (US$784m JPMCC 2011-FL1).

Markets
Last week, the ABS market was an island of activity in an otherwise quiet market with little flows in other US securitisation sectors, according to ABS analysts at JPMorgan. The new issue market continued to be busy (see above) and, in the secondary market, flows across most sectors picked up as the new issue calendar started winding down for year-end.
However, the JPM analysts add: "Broader themes are largely unchanged. Due to the low rate environment, investors continue to prefer fixed rates for the carry. Furthermore, the secondary market remains rich relative to new issue."
In US CMBS, Citi securitised products analysts report that as secondary volume picked up to near average levels, senior spreads modestly widened. GG10s widened by 15bp, while new triple-A classes increased by 5bp-10bp. Insurers and pension funds added marginal selling, while money managers and fast money accounts showed increased demand.
Meanwhile, secondary supply has picked up in a head start on year-end activity in European CMBS, according to Deutsche Bank CRE debt analysts, with last week seeing BWIC activity of just over €30m current face and around €20m already in the pipeline for this week. Of last weeks' lists, roughly half the names traded - with execution approximately in line with price talk.
The Deutsche analysts add: "Of recent BWIC activity, probably the execution of Opera METC A (backed by Europe's largest shopping and leisure complex in the northeast of England, with a high quality sponsor in Capital Shopping Centres) at a level just inside 350DM gives a good indication of where the market for high quality paper is at the moment."
Non-agency RMBS saw continued light volumes, with US$1.1bn in for the bid in non-agencies and US$970m in subprime (versus US$800m and US$1bn the previous week), according to MBS analysts at Bank of America Merrill Lynch. Yet, they add: "One brighter spot on the week was a relative increase in investor interest. Demand for super-senior option ARMs and bonds backed by alt-A hybrid collateral saw a pick-up. SSNR option ARMs are down 4-6 points from the end of July, but up about two points from the swoon in prices in October."
The BAML analysts continue: "Alt-A hybrids are down about six points since July as well. After seeing continued lack of interest from investors due to collateral concerns and their lack of carry, this week's revival of interest is encouraging."
Secondary CDO trading has also been on the light side, with month-to-date BWIC volume of US$1.3bn, according to CLO analysts at JPMorgan. They say the lack of supply seems to be holding CLO pricing in, with US double-As to double-Bs tightening by 10-50bp last week.
The JPM analysts go on to highlight US CLO equity, which appears to be shaking off sovereign concerns. "The trade du jour has been in long-dated equity, which has been attracting strong bids due to the longer reinvestment potential. For example, recent bid covers - for example, 2014 end of reinvestment period equity - imply cash prices as high as the US$100+ context," they note.

Deal news
• Freddie Mac is to begin securitising certain mortgage loans that were previously delinquent and that the company has purchased from its related mortgage participation certificate pools. These mortgage loans have been reinstated to current, performing status and have not been modified.
• The Malaysia Building Society has signed an RM1bn agreement with Cagamas to proceed with a recourse securitisation of personal financing receivables and conventional mortgage assets. The transaction was facilitated by Maybank, Affin Bank, RHB Bank and AmBank.
• S&P has published its global methodology and assumptions for rating financial future flow securitisations. The criteria provide a framework for assigning ratings to financial future flow transactions based on a multifaceted approach consisting of: the indicative issuer credit rating for the originating bank; a structural assessment; knock-out features; and a sovereign interference assessment.
• Northern Rock's Granite master trust has endured a difficult few years, but its performance has improved recently. While the programme's popularity with investors is well established, amortisation means that its benchmark status is finite.

Regulatory update
• Fannie Mae and Freddie Mac have released key implementation details for the revised HARP programme (SCI 26 October), in line with market expectations. Overall the changes represent a moderate easing in reps and warranties for FHLMC, with waivers on reps and warranties on old loans being the most prominent.
• The European Commission is proposing to toughen European legislation on credit rating agencies. The proposed draft Directive and draft regulation has four main goals: to ensure that financial institutions do not rely only on credit ratings for their investments; more transparent and more frequent sovereign debt ratings; more diversity and stricter independence of credit rating agencies to eliminate conflicts of interest; and make CRAs more accountable for the ratings they provide.
• The European Parliament has voted into law a regulation to curb short selling and trading in credit default swaps. The regulation requires traders to locate and have a "reasonable expectation" of being able to borrow the underlying from the located party.

Deals added to the SCI database last week:
5180 CLO 2011
Ally Auto Trust 2011-5
American Express Credit Account Master Trust 2011-2
CarMax Auto Owner Trust 2011-3
DT Auto Owner Trust 2011-3
Enterprise Fleet Financing 2011-3
FCC Auto ABS Compartiment 2011-2
Fraser Sullivan CLO VI
Gracechurch Mortgage Financing series 2011-1
Harley-Davidson Motorcycle Trust 2011-2
IM Banco Popular FTYPME III
Mercedes-Benz Auto Lease Trust 2011-B
New York City Tax Lien 2011-A
Nissan Auto Receivables Owner Trust 2011-B
Paragon Mortgages 16
PFS Financing Corp 2011-B
Porsche Innovative Lease Owner Trust 2011-1
Private Driver 2011-3
Race Point CLO V
Sierra Timeshare Receivables Funding 2011-3
SLM Student Loan Trust 2011-3
SMART Trust 2011-4US
Storm 2011-IV
TIB Diversified Payment Rights 2011
Torrens Trust 2011-2
WFRBS 2011-C5
World Financial Network Credit Card Master Note Trust series 2011-A
World Financial Network Credit Card Master Note Trust series 2011-B
World Omni Auto Receivables Trust 2011-B

Top stories to come in SCI:
European CMBS refinancing trends
European ABS relative value
US CLO manager trading strategies
Profile of Solve Advisors
Profile of CastleOak Securities

CMBS

CMBS conduit issuance estimated

A new report from Deutsche Bank CRE debt analysts examines the CMBS loans that are maturing next year and uses them to project what the conduit issuance market should look like in 2012. The analysts estimate that conduit production will be approximately US$35bn in 2012.

They indicate that the majority of loans securitised in next year's issuance will likely be refinanceable legacy loans. In addition, they anticipate that some non-refinanceable loans will become refinanceable as equity is injected to the capital structures. Some of the new loans will also refinance bank loans and legacy floating-rate CMBS loans.

Regarding the latter, the analysts cite the examples of the refinancings of Meadowood Mall (which was previously securitised in JPMCC 2005-FL1A) and 980 Madison (which was formerly in BSCMS 2007-BBA8). Both loans will likely appear in an Annex A in Q1, they suggest.

In all, the analysts note: "Even if we are correct and the issuance market grows another 40% next year, the overall size of the CMBS market will continue to shrink. Given the dearth of issuance in 2008, the size of the market started to decline and has been doing so ever since. 2012 will be no different. However, there is one important distinction: the relative decline should be less in 2012 than any other recent year."

Considering the growing maturity schedule over the next few years until 2017, the overall trend will likely remain negative, they add. "This dynamic should provide a floor for legacy LCF and AM bond prices because, as the shorter-duration bonds pay off, investors will look to put the proceeds back into the CMBS market but will have to contend with a smaller float," the Deutsche analysts conclude.

MP

ABS

Consumer focus

CastleOak Securities head of fixed income sales & trading Patrick de Catalogne and head of investment banking Michael Turner answer SCI's questions

Q: How, why and when did CastleOak Securities become involved in the structured credit and securitisation market?
PdC: CastleOak Securities has been in existence for six years now and the founding partners all came from another investment bank. CastleOak's background is in consumer-related ABS, such as credit cards and autos, as well as MBS and CMBS.

The idea has been to grow those platforms. My background was in MBS and ABS-related products, so it was a natural progression when I joined CastleOak to be further involved in that sector of the market.

CastleOak is active within secondary trading, as well as in the primary markets, where we are active in consumer ABS as well as mortgage-based securities, such as agency CMOs and CMBS.

On the secondary side, CastleOak acts strictly as an agent: we do not position or take risk on our platform. We offer liquidity to both buyers and sellers in the market.

Our primary market function is on the distribution side. Over the past four years we have been involved in approximately 79 primary ABS transactions that in aggregate are worth over US$52bn. We also took part in two CMBS transactions this year.

MT: From an investment banking client standpoint, many of the industry sectors and companies that we work with use a dual funding model, so that they can annually plan their financing along the secured and non-secured side. The secured side of the funding for many companies acts as a form of liquidity and back-up funding for when the unsecured markets aren't open. And in other cases, it's a core form of financing.

Q: What is CastleOak's key area of focus today?
PdC: We continue to focus on consumer ABS, particularly credit card transactions and auto ABS, along with MBS and CMBS. Within secondary market trading, we see quite a bit of demand on the shorter end of the market - deals with a one- to two-year weighted average life.

The average life-span on flows on the larger deals can be anywhere from money market out to three years, depending on their structures. But we tend to see demand on the shorter-life deals purely as a reflection of what our customers are looking for.

Q: What constitutes your main client base?
PdC: Our client base includes Tier 1 down to Tier 4 accounts and that's what we pride ourselves on. We serve the likes of the US$20bn-plus, top-tier asset managers all the way down to the money managers that may have less than US$1.5bn under management. We have a vast array of clients.

MT: In the investment banking area, we have some of the captive finance companies within the automobile sector, specialty finance companies, as well as banking and credit card companies.

Q: What have been the key themes of 2011 with respect to the structured finance market?
PdC: It has really been about issuance. This year - as with the previous couple of years - has been characterised by a diminishing amount of ABS issuance year-over-year. The market has had to adjust itself to that fact. Rating agency actions have also been constantly under scrutiny; i.e. will bonds that are rated triple-A today be rated triple-A tomorrow?

MT: The other theme that I'd add is a constant eye on regulations. Obviously accessibility and funding costs are the primary drivers for the issuance in the sector, but unfortunately a role by the central banks in the US and Europe has been important for keeping the securitisation markets going.

Back in 2009 when the US Federal Reserve had to implement the TALF programme to help stimulate the asset-backed market. CastleOak was one of only four non-primary dealers to act as a TALF agent to act as a liaison between the investors in the asset class and the Federal Reserve Bank.

Q: How does CastleOak differentiate itself from its competitors?
PdC: I think one of the things that we've done as a firm is to initiate ABS forums to get our investors together with issuers, so that they can get a broader picture from the issuer directly to see how their programmes are progressing.

Also, when you look at our firm in comparison to other regional firms that are out there, there are few - if any - other regionals that participate in the primary market like we do. There's also our function in the secondary market: we hear from a lot of our customers that our competency is better than other firms of our size.

Q: What is your strategy going forward?
PdC: Growing our structured credit business has been a focus for us from day one and we plan to continue our expansion, particularly given what is going on in the Street right now. We are looking for good sales people and traders. One of our main aims is to provide liquidity for our clients in these uncertain times.

MT: Over the course of 2012 we plan to continue our focus on the consumer sector within ABS. That is going to mean a continued calling effort on issuers, sponsors, the automobile industry. Their captive finance subsidiaries will also be a focus.

Credit cards will also be a focal point, as well as small ticket equipment companies. We will also be ready to be responsive to new areas of issuance within the asset-backed space. Examples might include the securitisation of solar panels and smart meters.

PdC: Internally, it is all about growth. It's about taking advantage of what is going on in the Street right now and finding quality people and bringing them onboard here, so we can really ramp up our distribution network.

Q: Which challenges/opportunities does the current environment bring to your structured credit business and how do you intend to manage them?
PdC: Issuance - or lack thereof - is a challenge. But the diminished number of investors is also a problem.

Looking back to 2005 and 2006, the greatest part of the investor base comprised ABCP issuers, CDO managers and many of the Yankee banks. They have virtually disappeared now and the amount of bonds that are going to securities lenders have gone too. It's all about broadening the investor base that is going to get involved in the asset-backed space.

MT: We need a boost in and a stabilisation of confidence in the asset class on the part of both issuers and investors to bring confidence back to the market. A lot of that will come from clarity on the rating agency issues, as well as continued development on a regulatory and policy-making front.

PdC: I believe that sustained issuance on a regular basis brings investors back into the mix. There's got to be clarity that there will be regular issuance from issuers to give investors the incentive to get involved in the sector. This will open up opportunities in the secondary market too.

The covered bond market is yet to come to fruition in the US. Yankee banks have been the primary issuers, so we will be looking closely at how that plays out and how it is accepted on a regulatory basis.

AC

CLOs

CLO management team acquired

The Carlyle Group has purchased Churchill Financial from Olympus Partners. A team of 13 investment professionals, led by Ken Kencel, has joined Carlyle's global market strategies business as part of the transaction.

Kencel becomes md at Carlyle and now reports to Mitch Petrick, md and head of Carlyle's global market strategies business. Kencel's Churchill team will continue to manage existing Churchill assets - including a US$1.25bn CLO - and will be able to leverage the Churchill platform in the future.

"The Churchill transaction enhances the capabilities of the global market strategies platform at an attractive time for middle-market lending," says Petrick. "Carlyle can now provide comprehensive financing solutions to the middle market."

Paul Rubin, partner at Olympus, adds: "Since Olympus acquired the business, Churchill has successfully capitalised on the attractive senior secured financing markets for middle-market companies. It has funded more than US$1bn in loans at attractive rates of return to companies that have successfully manoeuvred through the pitfalls of the recent economic crisis and demonstrate strong credit profiles."

Churchill's New York-based investment team has an average of more than 15 years' investment experience, focused exclusively on originating, underwriting, documenting and monitoring debt investments in middle-market companies.

CLOs

New asset management business formed

Aladdin Capital Holdings is selling part of its asset management business to Mitsubishi Corporation (MC). The businesses and assets being sold will form the core businesses of a new company, MC Asset Management Holdings (MCAMH).

The new company will be jointly owned by MC and Aminkhan Aladin, Aladdin founding chairman and ceo. MC will own 80%, with Aladin holding the remaining 20%.

Mitsubishi says it plans to expand MCAMH's business as a platform for its asset management business in several asset classes. MCAMH will acquire investment strategies from Aladdin Capital and will manage various strategies, including a new infrastructure debt platform.

Aladdin will continue as a structured fixed income asset manager, with US$9.6bn AUM. The company will retain its focus on CLOs, CDOs, other structured products and corporate synthetic portfolios and says the related portfolio management teams will not be broken up.

The proposed transaction remains subject to certain customary closing conditions. It comes just four months after the sale of Aladdin's brokerage team as part of an earlier strategic reorganisation (SCI 15 July).

RMBS

REO business acquired

Clayton Holdings has agreed to purchase Green River Capital. Green River, which provides REO, short sale and broker price opinion (BPO) services, will become a wholly owned subsidiary of Clayton, operating as a standalone business under its current brand and led by its current management team.

Christopher West, Green River founder and ceo, and Paul Bossidy, Clayton ceo, will become co-ceos of Green River. Joseph D'Urso will remain as president of the company.

"Green River is an excellent strategic fit for Clayton and our clients. It will expand our loss mitigation offerings at a time when short sales and REO dispositions are both expected to remain strong. Green River's BPO offerings will help our clients, along with our Quantum special servicing unit, to make better loss mitigation decisions and will complement Clayton's diligence and whole loan acquisition services," says Bossidy.

West comments: "During the past year, our REO and short sale assignments have grown by more than 87 percent. By joining with an industry leader such as Clayton, we expect to continue this growth and create a more scalable company while increasing the strength of the Green River brand."

The transaction is expected to close within 60 days.

ABS

ED share placement underway

European DataWarehouse (Management) Limited has appointed Perella Weinberg Partners to arrange a placement of its shares. This represents the next stage in the creation of an independently-owned ABS central data repository, pursuant to the ECB's call for a market-driven solution, the firm says.

The placement will target market participants, with the intention of ensuring that ED has a broad, diverse and representative shareholder base. The aim of the initiative is to make sure that ED is owned and operated "by the market for the market".

ED intends to carry out the placement before the company becomes operational in the summer of 2012, subject to appropriate market conditions. The proceeds raised will primarily be used to pay for the construction of the European DataWarehouse and provide ED with the necessary working capital for its initial years of trading and potentially for future growth.

ABS

Malaysian securitisation inked

The Malaysia Building Society (MBSB) has signed an RM1bn agreement with Cagamas to proceed with a recourse securitisation of personal financing receivables and conventional mortgage assets. The transaction was facilitated by Maybank, Affin Bank, RHB Bank and AmBank.

This is MBSB's second fund-raising exercise with Cagamas in the last three years. The last agreement was signed in 2009 for RM1bn.

The securitisation is designed to strengthen MBSB's funding programme, matching the tenure of its assets to liabilities. Moving forward, it says it will continue to focus on improving its asset quality, effectiveness and efficiency of operational processes, human capital development and strengthening of its risk management framework.

ABS

Italian ratings ceiling confirmed

Fitch reports that if the Italian government was downgraded below single-A minus, Italian structured finance transactions would not be able to achieve or maintain triple-A ratings. The agency reiterates that it applies a cap of at most six notches to the uplift that a securitisation rating in a eurozone country can achieve above the relevant country's local currency IDR.

Fitch's rating assumptions for Italian SF transactions reflect its current opinion regarding the probability and severity of an Italian recession. However, these assumptions may change with any reassessment of macroeconomic prospects.

The agency recently increased further the magnitude of the stresses it applies when assigning high SME CLO ratings compared with its base case. It also revised its Italian house price forecast to factor in a larger drop in values for all RMBS rating stresses.

Despite the worsening macroeconomic environment, the performance of Italian transactions has been better than the European average. The country did not experience the same house price bubble as in the UK, Ireland and Spain.

ABS

New SF recovery metric in use

Fitch has begun using a recovery estimate (RE) metric for distressed structured finance securities. The new metric is complementary to the agency's long-term ratings and replaces its recovery ratings (RR) for the sector.

RE is a forward-looking recovery estimate based on Fitch's expectations for principal repayments, which will be maintained and updated as the credit ratings of the associated securities are reviewed. Expected principal recoveries will not be discounted as they were with RRs, allowing greater flexibility for investors to use their own assumptions for default timing and discount rate.

"Fitch's new RE builds on its predecessor RR in terms of recovery detail and transparency," says Ian Linnell, global head of SF ratings at Fitch. "In particular, RRs had only six categories that corresponded to wider recovery ranges. The RE provides a more specific recovery rate estimate to the nearest 5% without having to interpret a rating scale."

ABS

Charge-offs hit post-crisis low

US credit card charge-offs fell by 6bp in October to 5.21%, which is the lowest level for charge-offs since 2007, according to the latest Moody's Credit Card Indices results. The agency expects charge-offs to continue to decline well into 2012, pushing the rate to below 4% by the end of that year.

"Following the sizable 75bp decline in the charge-off rate index in September, driven in part by seasonal trends, the continued improvement in October is notable," says Jeffrey Hibbs, a Moody's avp. "Earlier in the decade, sharp charge-off improvements in September were typically followed by increases in October, a pattern that has been broken now for the past three years as charge-offs continue their steady descent."

Other metrics of credit card performance also remained strong in October. During the month the delinquency rate held steady at an all-time low of 3.04%.

Early-stage delinquencies ticked a single point lower to 0.86%. For the past seven months, the early-stage delinquencies have moved within a narrow 4bp range.

"With the early-stage delinquency rate index hovering near its all-time low, the pace of further improvement is likely to be muted. However, looking ahead, the calendar is moving into a period that suggests seasonal declines in the early-stage delinquency rate in the coming months," says Hibbs.

In October, the payment rate slipped below the 21% level for the first time since April, to 20.91% - a full percentage point below the all-time high it reached in August. "Historically low delinquencies and high payment rates reflect the improved borrower mix in credit card trusts today as weak borrowers have charged off at record levels in the recent recession and originators have added few new accounts to the securitisations," continues Hibbs.

The yield index ticked higher in October, to 19.29%, but should continue to trend downward. This is mostly due to the ongoing expiration of principal discounting.

Finally, excess spread moved further above 11% in October to 11.30%, keeping near its historic highs.

ABS

Derivative obligations criteria revisited

S&P is requesting comments on its proposed expansion to its methodology and assumptions for assessing derivative obligations and specific amendments to other aspects of the criteria for counterparty and supporting party risk.

For derivative obligations, the proposed criteria consider different combinations of minimum counterparty ratings and collateral amounts so that the higher the minimum counterparty rating, the lower the collateral amount. The 'minimum counterparty rating' for counterparty replacement is the lowest counterparty rating that, in S&P's view, can support a given security rating.

"We believe the commitment to replace at a higher rating level balances the need for collateral as an incentive to replace and the requirement for external marks because the security rating is closer to the counterparty's issuer credit rating," says S&P criteria officer Irene Ho-Moore. In particular, the proposed criteria provide four replacement options (1 to 4, with 1 having the lowest minimum counterparty rating and highest collateral amount, and 4 having the highest minimum counterparty rating and no collateral).

Other proposed changes for derivative obligations relate to the volatility buffers for securities rated single-A plus or below and collateral that may be in a different currency than that of the rated security.

Furthermore, the proposed criteria would classify bank accounts that are direct support obligations under the current criteria as direct limited support, except for bank accounts and counterparties in funded synthetic structures. This proposed change would decrease the minimum counterparty rating for such accounts.

In addition, the rating on synthetic securities would be no higher than one notch above the counterparty's issuer credit rating. This proposed change would increase the minimum counterparty rating for such structures.

Market participants are encouraged to respond by 16 December. S&P will then review the comments and publish the updated criteria.

ABS

Lower growth projections weigh on WBS

S&P reports that the UK corporate securitisations it rates have generally performed in line with expectations, as reflected in their business risk profiles and the agency's stresses. However, the pub sector has felt the strain of the economic downturn more than other sectors, it says.

S&P notes that trading conditions for the pub sector remain difficult. Operating performance among tenanted pubs continues to lag that of managed pubs, which is improving overall, mainly due to their diverse offerings. Also, higher-quality estates with good locations have helped managed pubs generate healthier turnarounds.

Economists at the agency are more bearish in their projections for UK GDP growth, inflation and unemployment. Their forecasts are now 1%, 4.4% and 8% respectively for the current year.

"These indicators point to declines in consumer spending that may outpace our original expectations, which could put further stress on the performance of consumer-oriented industries," S&P notes. "At the same time, the government has started to implement some of the measures it announced last October in its Comprehensive Spending Review to reduce public sector spending, which industries such as health care and social housing may rely on."

ABS

SIV ratings downgraded

Moody's has downgraded the ratings of the US CP, Euro CP and MTNs issued by the Carrera Capital and Harrier Finance SIVs and from P-1 to P-2.

The SIVs are managed and sponsored by HSH Nordbank and Brightwater Capital Management, a wholly owned subsidiary of WestLB. There is a direct linkage between the SIV ratings and those of their sponsors, due to the commitment to support the senior debt obligations of the SIVs through the note purchase and liquidity facility agreement, as well as through a committed repo facility.

The rating actions are the result of a rating action on HSH Nordbank and WestLB, whose short-term ratings were downgraded to Prime-2 from Prime-1 under review for possible downgrade. HSH Nordbank's long-term rating was also downgraded to Baa2 from A3 under review for possible downgrade.

ABS

Unique strategy mooted

In an investor call yesterday, Enterprise discussed the methods it is considering to mitigate a financial covenant breach in the Unique securitisation once the fixed rate debt starts to amortise in 2014.

The firm stated it could change the beer supply and management service agreements, thereby injecting around £42m further EBITDA into the transaction. This would ensure that the DSCR remains above 1.25x, based on current performance, and therefore considerably in excess of the 1.1x covenant.

But, given the cash that would end up being trapped inside the transaction, this appears not to be the favoured option. The firm also noted that the deal could purchase further pubs from the group, thereby increasing the income generation.

However, it is also exploring the ability to continue to prepay the debt a year ahead of schedule, thereby continuing to switch the DSCR into an ICR covenant. The firm is currently attempting to clarify if this would incur any penalties under the documentation.

"The fact that they have a number of options available should be supportive for investors, even if the deal isn't working quite as expected, and we doubt many would be concerned about being prepaid," note European asset-backed analysts at RBS. "The effort going into finding a solution reaffirms our belief that there is considerable equity value in the estate and that a default come 2014 is unlikely."

ABS

Private SLABS defaults to remain elevated

According to Moody's Private Student Loan Indices, 4.8% of securitised private student loans defaulted in 3Q11, unchanged from the rate in the second quarter. Although stable, the default rate index will remain more than twice its average run rate before the recession through 2012, the agency says.

"High unemployment, rising debt and declining income means obligors will continue having difficulty repaying their student loans - keeping defaults high," says Tracy Rice, a Moody's avp and analyst. "We expect the index to increase slightly in 1Q12 because of an increase in the current 30-89 day delinquency rate, but for it to be range-bound in 2012."

During the third quarter, the 30-89 day delinquency rate increased to 3.7% from 3.4% in the second quarter. Moody's notes that seasonality is driving the increase, as December graduates complete their six-month grace periods before entering repayment.

In the third quarter, the 90-plus delinquency rate index posted its first quarter-over-quarter increase since 2009, up slightly to 2.7% from 2.5% in the second quarter.

The 3Q11 default rate of 4.8% is preliminary, the rating agency says, because not all securitisers have yet reported for the third quarter. The preliminary indices reflect 91% of the performance data for securitisations included in the indices to date.

ABS

IO RFC issued

Moody's is seeking comment on its proposed global rating framework for interest-only securities (IOs) applicable to US RMBS, US and European CMBS and US ABS.

The proposals reflect the results of extensive analysis into the meaning of the IO rating and how to better align IO ratings with the agency's traditional expected loss ratings framework. These changes have the aggregate effect of significantly lowering the outstanding ratings of many types of IOs, but leave the ratings of single-bond IOs and CMBS PAC IOs mostly unchanged.

"Any expected differences in cashflows to the IO holder that arise from defaults and losses can be mapped to a credit rating," says Deryk Meherik, a senior credit officer at Moody's.

Analysis simulating losses with various correlation, default and recovery rate assumptions - in combination with various prepayment rates - determined that the risk to the IO holder was essentially equivalent to the weighted average rating of the referenced bonds for the majority of the outstanding IOs. However, for an IO that references a pool or entire bond structure, the volatility of the rating results was high - making a rating cap of B2 an appropriate reflection of the level of risk to the IO holder. However, certain exceptions may apply.

Moody's is seeking comments on the proposal by 22 December.

ABS

Auto ABS RFC released

Kroll Bond Rating Agency (KBRA) is seeking public comment on its US auto loan ABS rating methodology.

KBRA's rating of an auto loan ABS transaction addresses: the quality and expected performance of the underlying collateral; the originator and servicer's business model and operational strength; and the transaction terms, including the capital structure, credit enhancement and legal structure. The agency says its approach emphasises a focus on prevailing industry and credit trends, the integration of originator and servicer evaluations with the transaction analysis, and timely post-issuance surveillance of pool performance, servicer operations and market conditions.

Comments should be submitted by 19 December.

CDO

ABS CDO liquidation scheduled

Cowen has been retained to act as liquidation agent for Diogenes CDO II. The collateral will be sold at six public sales on 6 December in New York.

CDS

Panrico auction results in

The final price for the Panrico LCDS auction was determined to be 8.125. Five dealers submitted inside markets, physical settlement requests and limit orders to the Panrico auction held this morning.

Due to a zero net open interest, there was no subsequent bidding period and so the inside market midpoint value is the final price. Panrico deliverable obligations are denominated in euro.

CDS

Panrico auction scheduled

The auction to settle the credit derivative trades for Panrico S.L. Unipersonal LCDS is to be held on 23 November.

CLOs

Euro CLO review completed

Moody's has completed its review of all European CLOs, which the rating agency initiated on 22 June in relation to its global CLO methodology update. The agency analysed 1067 tranches from 171 European CLO transactions originally totalling €46bn and upgraded 969 tranches originally totalling €40bn.

Of the 969 tranches that were upgraded, the average magnitude of upgrades was a little over three notches. The most junior tranches experienced larger upgrades of around four notches, while the senior tranches experienced smaller upgrades of about two notches on average.

During the sweep, Moody's upgraded 116 CLO tranches to Aaa, with an overall magnitude of two notches. As a result, 81% - representing 279 tranches originally totalling €38bn - of the European CLO tranches originally rated Aaa are back to their original ratings, versus 51% (175 tranches originally totalling €22bn) before the sweep in Europe.

Conversely, only a minority of 36% of non-Aaa tranches were restored to their initial rating levels. The rest remain on average 2.6 notches below their initial ratings.

The rating upgrades are due to Moody's revised CLO assumptions, as well as improved par coverage and credit quality.

The review process for US CLO transactions continues, with approximately 95% of the deals placed under review for upgrade already completed and the rest expected to be completed in a few weeks.

CMBS

EMEA special servicing to remain elevated

As the wave of October loan maturities passed, the number of European CMBS loans in special servicing has remained relatively stable, according to Moody's. However, the agency suggests that this is due to recent loan workouts and is only temporary.

Moody's latest monthly newsletter on EMEA CMBS reports that there were a total of 106 loans in special servicing as of end-October 2011. During the past month, loan workouts, with eight loans, outpaced new transfers by one loan. By balance, loans in special servicing represent 15% of all large multi-borrower and single-borrower transactions rated by Moody's.

All of the new transfers in October were due to non-payment at maturity. "When looking at all loans that have been transferred into special servicing to date (i.e. including loans that have been worked-out or repaid), out of 146 loans, 42% were transferred into special servicing due to non-payment at maturity. Covenant breach is the next largest contributing factor with 28%, while payment default during term contributed approximately 16% to the total," Moody's says.

Next to the increasing number of loans in special servicing, there has been a recent uptick in loan workouts as well, the agency adds. Since the beginning of the year, 22 loans have left special servicing, with seven of the workouts having been completed during October.

To date, of the 40 loans that have left special servicing, losses have been realised on 19 loans, affecting 14 different CMBS transactions. Fifteen loans have so far repaid with no losses to the securitisations. The balance has been restructured and were transferred back to primary servicing as corrected loans.

As loans stay in special servicing for longer periods, Moody's has observed an increase in property sales via enforcement. Large portfolio sales took place in October, including, for instance, the auctioning of the portfolio backing the Keops Loan (€218m) securitised in Juno (Eclipse 2007-2) and the German multifamily portfolio backing the DIVA loan (€240m) securitised in Titan Europe 2006-5.

Including the Keops and DIVA loans, Moody's tracked twelve loans as being in their final stages of workout. In some of these cases, recoveries have already been allocated to noteholders from property sales and the loans continue to be reported as in special servicing until final loss determinations are made.

With over 200 loans having to mature in the next two years, Moody's expects loan defaults to increase and non-payment at loan maturity to be the major obstacle facing existing EMEA CMBS transactions. Hence, levels of special servicing activity in the sector remain elevated.

CMBS

Rare tender offer announced

In a move rarely seen in the CMBS market, HSBC has commenced a tender offer for all outstanding NEMUS 2006-1 class A to E bonds at a fixed price for each. Noteholders are required to tender by 2 December.

Class A notes are being tendered at 96, class Bs at 94, class Cs at 90, class Ds at 84 and class Es at 65. European asset-backed analysts at RBS note that although the bonds aren't very liquid, these prices are probably slightly higher than where they may have traded before the tender.

CMBS

R2 partners with Trepp

R² Financial Technologies has announced a new partnership agreement with Trepp that enables users of the NxR² system to integrate data and analytics from Trepp into their portfolio and risk management analyses. Integration of the Trepp data and analytics will further improve the depth and detail of analyses performed on portfolios that contain CMBS, the firm says.

CMBS

Opco-propco conundrum considered

The majority of legacy opco-propco real estate structures are unlikely to secure refinancing in their current format from either banks or capital markets, according to Bishopsfield Capital Partners.

Whole business securitisations (WBS) and credit tenant leases (CTL) present alternative refinancing options, the firm says, particularly for opco-propcos with specialised and illiquid property assets. Vehicles containing high quality and more liquid real estate - high street retail and offices - should seek outright asset sales where possible, it adds.

The challenge facing opco-propcos is exacerbated by €50bn of CMBS transactions requiring refinancing between 2012-2014, reduced bank balance sheets, weak valuations and funding gaps within legacy vehicles, according to Arjan van Bussel, partner at Bishopsfield Capital Partners. "Funding gaps will require stakeholders in opco-propco structures to suffer pain. The question of how much will be a function of the market capacity under different market structures, such as outright property sale, WBS or CTL. The post-crisis bank market is not deep enough to refinance large loans and the syndication market has also been adversely affected by the credit crisis," he says.

The rationale for opco-propco remains valid, despite high-profile failures including this year's collapse of Southern Cross Healthcare, according to Bishopsfield. Financing terms, such as leases with rising rents that prove unsustainable in business downturns, are seen as responsible rather than the structure itself. Preserving the sound financial health of the opco is paramount and certain structural features, such as retention of an element of property sale proceeds in the opco or performance-based transfer of properties to the propco, could support this objective.

"In the absence of a vibrant CMBS and B-note investor base, we believe borrowers will have to look at alternative investor sources with different risk profiles. Replacement of legacy opco-propco structures with a new instrument is less a function of the underlying model than a consequence of factors affecting the European property financing market and global economy," says Amir Khan, associate partner at Bishopsfield.

CMBS

DQT down 7bp

The delinquency rate for loans in US CMBS declined 7bp in October, to 9.29%, according to Moody's latest Delinquency Tracker (DQT). Delinquencies have been above 9% for ten months now, the agency notes.

Moody's Specially Serviced Loan Tracker (SSLT) fell by 3bp to 12.10% and the gap between the SSLT and the DQT widened by 4bp to 281 from 277, one of the smallest spreads since June 2009. New delinquencies amounted to around US$2.5bn in October. Texas, Georgia and California accounted for nearly half, with the six of the ten largest new delinquencies backed by office or retail properties in Texas or Georgia.

Two new CMBS deals came to market in October, adding US$3.2bn to the CMBS conduit/fusion universe, Moody's notes. However, it adds that the addition was more than offset by the exit of US$6.3bn of seasoned loans - resulting in a US$3.1bn net decline in outstanding issuance, to US$591.6bn.

In the core asset classes, Moody's says multifamily and hotels had the highest delinquency rates of 15.6% and 13.9% respectively. None of the newly delinquent or specially serviced loans in October were large enough to join the top-10 lists for either category.

Risk Management

CCP access implications weighed

The Committee on the Global Financial System (CGFS) has released a report on the macro-financial implications of alternative CCP access arrangements. It was prepared by a study group chaired by Timothy Lane of the Bank of Canada.

The report notes that several jurisdictions are exploring the establishment of domestic central counterparties for the OTC markets and the possible benefits of establishing links between them. The conditions under which market participants obtain access to central clearing could have important implications for financial stability and efficiency, according to the CGFS.

One finding of the report suggests that expanding direct access to CCPs may reduce the concentration of risk in the largest global dealers. As direct access is broadened, it is essential that CCPs' risk management procedures be adapted appropriately to ensure their continued effectiveness, it warns.

The report also recognises that both large global and smaller regional or domestic CCPs will probably play a role in meeting G20 commitments. In both cases, developing and adopting international standards will be essential to avoid regulatory arbitrage and promote effective cross-border monitoring of infrastructure and participants.

Finally, it notes that CCPs and authorities should consider enhancements where needed to strengthen the safety and efficiency of indirect clearing that comply with international standards. Effective segregation, as well as portability of positions and collateral belonging to a direct clearer's clients, will be needed to realise the benefits of systemic risk reduction.

RMBS

Aussie RMBS resilience highlighted

Triple-A rated classes of prime Australian RMBS are mostly resilient to moderate hypothetical downgrades of lenders' mortgage insurers, but ratings on most double-A minus classes of notes are more vulnerable, according to S&P.

Australian prime RMBS have historically relied on lenders' mortgage insurance (LMI) as the main form of credit support. Deterioration in the financial strength of LMI providers or their willingness to pay claims, as indicated in the claims payout ratio, could therefore affect RMBS ratings.

"The continued strong credit quality of LMI providers has underpinned the ratings stability of Australian prime RMBS. In addition, loan portfolios backing Australian prime RMBS have been rapidly paid down, raising credit support within the transactions. This has provided a buffer for rated notes to withstand LMI downgrades," comments S&P credit analyst Vera Chaplin.

She adds: "We have also observed that Australian issuers are very aware of investors' concern on the potential rating dependency of RMBS notes on LMI providers. As a result, issuers have typically provided extra credit enhancement at transaction close for triple-A rated senior notes to weather downgrades of LMI providers."

S&P's study indicates that: about 73% of triple-A rated notes are likely to remain at the current rating level if no credit were given to LMI; about 95% would be in the single-A category or higher; all but four classes of notes would be in the triple-B category or higher. In addition, the sensitivity of rated notes to LMI providers reduces with the seasoning of RMBS.

RMBS

Freddie targets reinstated loans

Freddie Mac is to begin securitising certain mortgage loans that were previously delinquent and that the company has purchased from its related mortgage participation certificate (PC) pools. These mortgage loans have been reinstated to current, performing status and have not been modified.

Beginning this month, these reinstated loans - which the GSE holds in its mortgage-related investment portfolio - will be pooled into new Freddie Mac PCs with the new 'R' prefix. Reinstated loans must be current at least four consecutive months at the time of securitisation into such pools.

For the initial RMBS this month, Freddie Mac has elected to securitise reinstated loans that have been current for at least 12 consecutive months. These PCs may back new Freddie Mac REMIC and Giant securities in the future.

The GSE has purchased a significant number of delinquent mortgage loans from PC pools and held those loans in its mortgage-related investment portfolio. It continues to pursue resolutions of the delinquencies while these loans are held in the portfolio.

"By securitising mortgage loans that were delinquent but reinstated to performing status, Freddie Mac will provide additional needed liquidity to the market using our traditional mortgage security vehicles," comments Mark Hanson, Freddie Mac vp, securitisation and cash execution. "This new avenue for securitisation also will provide more flexibility for Freddie Mac to manage its mortgage-related investment portfolio."

RMBS

MBS funds merged

The Helios Strategic Mortgage Income Fund (HSM) has been merged into the Helios Total Return Fund (HTR), with the aim of providing enhanced investment flexibility for HSM shareholders. The funds' manager, Brookfield Investment Management, says that the investment guidelines for HTR - particularly its minimum ratings requirements for investments and ability to use a broader array of investment instruments - are more flexible than those of HSM.

Additionally, the merger should: lower the portfolio trading cost; potentially result in a modestly lower operating expense ratio for HSM shareholders; allow the combined fund to obtain better financing terms; and enhance market liquidity for the combined fund's common stock. The reorganisation is expected to be concluded in 1Q12, but is unlikely to materially impact the expense ratio of HTR or the dividend/share paid by HTR.

HSM is a diversified, closed-end fund that primarily invests in MBS that - in the opinion of the fund's advisor - offer an attractive combination of credit quality, yield and maturity. HTR is a diversified, closed-end fund that invests in and actively manages a portfolio consisting primarily of US Treasury, mortgage-backed, asset-backed and high-yield corporate securities.

RMBS

Aussie covered bond, RMBS issuers to diverge

Moody's says that higher-rated (Aa range) banks in Australia will likely prefer issuing covered bonds rather than RMBS, while most lower-rated banks (below Aa range) will continue issuing RMBS.

The agency explains that the discussion paper on Basel 3 liquidity reforms released on 16 November by the Australian Prudential Regulation Authority (APRA) gives impetus for banks to buy covered bonds over RMBS because they provide better liquidity management and will be cheaper to repo with the central bank. Higher-rated banks will favour issuing covered bonds over RMBS because they will help solve funding needs and be cheaper to fund in the capital markets.

The covered bond market is essentially a triple-A rated market. Although it is possible for single-A rated banks to issue triple-A rated covered bonds, it may be uneconomical for lower rated institutions because the amount of support needed to achieve a triple-A rated covered bond exceeds that for a triple-A rated RMBS.

Lower-rated banks, which have less diverse pools that usually exhibit higher arrears versus higher rated banks, will thus become a larger proportion of the market. Moody's suggests that this will result in collateral pools exhibiting more risk.

RMBS

Ambac extends reorg voting deadline

Ambac Financial has extended the voting deadline for its Second Amended Plan of Reorganisation until 4 January 2012. The monoline says this is in order to provide holders of claims against it with additional time to review the terms of any proposed settlement with the US Treasury - Internal Revenue Service. In addition, the Plan objection deadline has been extended to 30 December 2011 and the Bankruptcy Court hearing relating to the confirmation of the Plan has been rescheduled for 19 January 2012.

RMBS

BOI tender offers announced

The Bank of Ireland has announced tender offers for up to €1bn-equivalent, or 30% of the total outstanding amount, of Kildare Securities and Brunel Residential Mortgage Securitisation No.1. The move is aimed at providing liquidity to investors following the bank's decision not to call either deal on its step-up dates in March and April 2012.

The pricing for each note will be determined via a modified Dutch auction. The tender offer will close on 1 December, with results announced the next day.

RMBS

UK borrower scenario analysis completed

The credit performance of UK mortgage borrowers could deteriorate in a wide range of economic scenarios, according to a recent S&P scenario analysis report. Such scenarios include not only a renewed recession, but also a stronger recovery accompanied by rising interest rates.

UK mortgage arrears and repossession rates have declined modestly since mid-2009, but some market participants have questioned whether record low interest rates are keeping mortgage arrears artificially suppressed. "Rate rises seemed imminent in the first half of 2011, raising concerns that some borrowers might start struggling to make their mortgage payments," comments S&P credit analyst Mark Boyce. "More recently, however, mounting evidence of stagnation in the UK economy has turned the spotlight away from rising interest rates and onto the possibility of a double-dip recession, which would likely bring higher unemployment and renewed weakness in house prices."

The study looked at three scenarios: baseline, pessimistic and optimistic. "Under the baseline scenario of a slow economic recovery and eventual interest rate rises over the next two to three years, we believe the proportion of UK mortgage borrowers in severe arrears could rise by more than a fifth," says Boyce.

In the pessimistic scenario - which assumed a renewed economic downturn - arrears and repossession rates could almost double, surpassing their 2009 peak. "But even in an optimistic scenario - where the economic recovery picks up - we found that arrears and repossession rates could increase due to higher interest rates," he concludes.

RMBS

Servicer consent order compliance reviewed

The OCC has published a report on the actions by 12 US bank and federal savings association mortgage servicers to comply with consent orders issued in April to correct deficient and unsound foreclosure practices (SCI 14 April). While much of the work to correct identified weaknesses in policies, operating procedures, control functions and audit processes will be substantially complete in the first part of 2012, other longer-term initiatives will continue throughout the rest of 2012, the agency notes. The OCC has also released engagement letters that describe how the independent consultants, retained by the servicers, will conduct their file reviews and claims processes to identify borrowers who suffered financial injury as a result of deficiencies identified in the OCC's consent orders.

RMBS

Shadow inventory liquidation timeline declining

Regional default and liquidation rates varied widely in 3Q11, prompting a marginal improvement in the number of months that S&P estimates it will take to clear the supply of distressed homes on the US market to 45. While this number declined for the second straight quarter, it only marks a two-month improvement since 2Q11 and is still three months longer than the agency's estimate a year ago.

"The volume of these distressed US non-agency residential mortgages remained extremely high at US$384bn in the third quarter, but it has declined in each quarter since mid-2010," comments Diane Westerback, md of global surveillance analytics at S&P. "We believe this points to a continued drop in the amount of time it will take to clear this 'shadow inventory' over the next year, assuming national liquidation rates do not decline abruptly."

RMBS

Euro RMBS default rates to remain suppressed

While downgraded European countries have seen unemployment rates jump sharply over the last three years, a similar leap in RMBS pool default rates has failed to emerge, according to Moody's. The agency expects that existing public and private sector measures, the recourse nature of mortgages, the low interest rate environment and tighter underwriting practices will continue to suppress European RMBS default rates in 2012.

Moody's notes that the public and private sectors in Greece, Ireland, Italy, Portugal and Spain have come up with measures that have served to reduce reported defaults. However, while the agency anticipates that the majority of these measures will persist in 2012, it expects that the impact of austerity measures and persistently high unemployment levels will result in a significant rise in Greek default rates and a moderate rise in default rates among the other downgraded countries.

Cumulative defaults in Greek, Irish, Italian, Portuguese and Spanish RMBS pools in September 2008 were relatively low - not exceeding 100bp - and have not grown significantly since.