Contents

CMBS

October outlook

Wave of maturities gives clues to future CMBS performance

October was a busy month for European CMBS loan maturities, with 27 loans - totalling €2.71bn by balance - scheduled to repay. Only four repaid in full and on time, creating a number of considerations ahead of the glut of maturities expected next year.

Although by balance only 23% of the loans maturing last month were repaid, defaults were also around 23%. By balance, more than half of the loans scheduled to repay were extended.

"There is still the hesitancy from servicers to enforce and push loans onto special servicing, which is a good thing in a way," says Juan Salinas of Goldstar Research. "We have seen a lot of extensions on loans and the decision of whether or not to extend or to push into special servicing seems to have been purely driven on the strength of the borrower."

Despite the trend towards extensions, not all borrowers were granted them and some loans were forced into special servicing. "In some cases the servicer has just lost faith in the borrower or otherwise the borrower has disconnected," says Salinas.

He continues: "In those cases the loans have had to go into special servicing. We saw that happen with the Stade loan in Titan 2007-CT1, where there just was not a viable business plan."

Nassar Hussain, managing partner at Brookland Partners, notes that differences in jurisdiction also proved to be significant. Only one German loan out of 13 from the jurisdiction repaid in full at or before maturity, while both Dutch loans due to mature were extended.

"In the UK we have a creditor-friendly enforcement regime. Consequently, you are less likely to see an extension versus an enforcement at maturity, unless the borrower is willing to financially support the extension. With some of the stronger assets, we are seeing opportunities to refinance and find solutions," he says.

The insolvency regime in Germany is more favourable to borrowers, which makes enforcement unlikely unless the relationship with the borrower breaks down completely. The overwhelming tendency for German loans to extend last month should cause a re-evaluation in the market.

"In Germany you tend to see more extensions due to the increased costs, lower recoveries and loss of control in going through the insolvency regime. Pending new legislation is likely to improve this position," says Hussain.

He continues: "This enforcement and insolvency risk in these less creditor-friendly jurisdictions was never priced into transactions. This is unlikely to be the case for future transactions."

Another welcome change in the market has been an increased level of information being made available to investors. The destinies of a number of loans were known long before October, largely thanks to increased communication from servicers.

"It marks a real turnaround from two years ago, when the servicers were hesitant to engage with investors and were keeping information to themselves. Investors were then left with a very short time period to gather and utilise the information that was released, so it is really crucial that there has been a good level of communication this time," says Salinas.

He continues: "The level of communication has got a lot better - particularly from the newer servicers - which is fantastic for investors because it gives them more time to be able to absorb the information and come up with some sort of strategy. It is a change for the better and the market desperately needs that level of transparency."

Loan outcomes have historically been mixed among special servicers and that was again the case last month, although the varying servicer performance cannot always be used as an accurate predictor of a loan's fate. "There are some generalisations, but - as with all generalisations - they do not always apply," Hussain explains. "For instance, generally captive servicers are perceived to be more borrower-friendly than the independent servicers. But then you look at the statistics and Morgan Stanley, a captive servicer, actually has one of the highest enforcement rates."

October may give an indication of what future performance will be like for servicers as well as the market at large, however. The increased willingness of servicers to try to avoid special servicing and work with borrowers where possible is very welcome, says Salinas.

He notes: "The hard line they would sometimes take in the past seems to have disappeared, which is a lot healthier and more productive. If a hard line was to be taken across the board, that would be very damaging to the industry."

Salinas adds: "We have a tremendous amount of loans coming up to maturity and one person recently described the CMBS market to me as a NPL market. From what we are seeing, I think that might be a bit harsh; this willingness for a competent borrower, lender and servicer to work together should continue to work through and put together business plans that are executable in the current market."

But some business plans will simply not be executable. A lot of importance is attached to LTVs, with some analysts noting that loans with LTVs under 70% are repaying but loans with LTVs over 70% are not. However, Salinas believes that may be an over-simplification.

He says: "It depends how genuine that 70% is - which varies by loan and also by lender. We have seen a lot of positions reporting a 70% securitised LTV, but when subordinate notes and mezzanine debt are included the actual LTV increases to 90% or more, which is just unworkable for refinancing. In that case, the only option is to go for an orderly sale."

Salinas continues: "If the loan's real LTV is 70% and the loan stands on its own two feet, then refinancing will be viable. If it is a prime asset, then it should refinance and for what are now being called 'secondary assets' there are still people willing to selectively lend - although with higher lending costs."

The uncertainties surrounding the ability of loans to refinance mean the coming months are expected to be a testing time for the market. "Over the past 12 months there has been a trend of improvements in the number of loans defaulting at maturity, although the overall position has not been healthy. However, with the current uncertainty in the banking market, there is definitely potential for the situation to deteriorate again," says Hussain.

He continues: "The recent announcements from Eurohypo and Société Générale, coupled with other banks that have informally stopped lending due to the current uncertainty, [mean that to] refinance real estate debt in the short term is likely to be a difficult process."

Estimates indicate that as many as 60% of maturing European CMBS loans will fail to repay by the end of next year. Barclays Capital CMBS analysts predict as many as 30 maturity defaults in the first two quarters alone, with the majority coming from Germany.

"The situation is going to get worse because you have not had the peak of maturities yet. Also, there were certain loans restructured early on in the cycle that will need to be restructured again over the course of the next 12-24 months," says Hussain.

He continues: "It is going to continue to be a very busy time for servicers and the restructuring market to try and find intermediate solutions, while the banking and capital markets resolve the issues they face."

Salinas agrees that there could be tough times ahead, particularly with so many loans due to mature next year. While some are fearing the worst, he is not yet one of them. He concludes: "A lot of people are preparing for Armageddon, but I am not so sure; it is going to be nasty and it is going to be a hard year, but it is not going to be that bad."

JL

RMBS

Dollar demand

Favourable currency arbitrage boosts UK RMBS

The UK primary RMBS market has defied expectations and remained open for business throughout the European sovereign debt crisis. While issuance in the sector has been fuelled by its strong track record, demand from US investors is also working in its favour. Issuers are particularly keen to take advantage of this investor base, given the favourable currency arbitrage that has opened up within the past few weeks.

"In light of wider market stresses and the fear of something much worse around the corner, the health of the primary European - and especially UK ABS and RMBS market - has held up remarkably well," says Mark Hale, cio at Prytania Investment Advisors. "Against a backdrop of banks and corporates struggling to issue unsecured bonds or equity since July, the structured finance market has remained open for new issuance and secondary spreads have held up at relatively tight levels for senior vanilla ABS."

A number of UK RMBS have hit the market since the summer, including master trust issuances from Permanent (Lloyds), Gracechurch (Barclays), Arran (RBS) and Lanark (Clydesdale and Yorkshire Bank). All have marketed triple-A rated notes in sterling, euros and US dollars, with the dollar tranche generally making up the lion's share of the offering. Gracechurch Mortgage Financing 2011-1, for example, offered US$2.9bn versus only €400m and £220m in the other currencies.

Over the past few weeks currency arbitrage has become a key feature within UK RMBS, with some of the differences made even starker when the currency swaps are taken into account. "Clearly, the issuers have realised this and are trying to take advantage of this by issuing in dollars," says Krishna Prasad, head of mortgage-backed strategy for Europe at RBS. "On a nominal basis, sterling-denominated bonds are now trading considerably wider than US dollar- or euro-denominated bonds."

For example, triple-A-rated Granite bonds are bid at 328bp in sterling, but 256bp in US dollars and 259bp in euro. When swapped to US dollars, the euro- and sterling-denominated Granite bonds are at similar levels (330bp and 321bp respectively), both much cheaper than the dollar bond (256bp).

Other UK RMBS - such as Arkle, Holmes (Santander) and Fosse (also from Santander) deals - all tend to trade at similar levels. According to RBS, the sterling bonds are currently 20bp cheaper than the euro or dollar bonds.

Swapped to US dollars, however, it appears that the euro-denominated bonds are as much as 66bp cheaper than the dollar bonds. The sterling bonds are cheaper by about 26bp.

Prasad notes that US investors generally run dollar-denominated portfolios and prefer to buy bonds in dollars. "Such investors would be much better off buying euro-denominated paper and swapping them," he adds.

There are other reasons for issuers' decisions to tap the US investor base, however. Traditional US RMBS investors are at present constrained by a lack of private-label primary issuance, while UK RMBS offers a considerable spread pick-up over new issue US ABS.

On the other side of the equation, Hale suggests that investors may also perceive the UK to be a relatively stable jurisdiction, given the increasing worry over redenomination risk in continental Europe. "The UK economy will inevitably feel the pressure of wider problems in Europe, so the differentiation seen at present between some UK and continental European structured finance paper may be unjustified in the long-run if recent trends continue unabated," he adds.

Away from dollar issuance from traditional UK master trusts, non-bank lenders may also look to test US investor appetite in the near future. Buy-to-let issuer Paragon, which issued a sterling-only RMBS earlier this month (see SCI database), is considering a US dollar-denominated tranche in its next deal.

A long-term issuer in the UK securitisation market, Paragon sold £132m of triple-A rated notes to banks, fund managers and building societies. The equity piece was retained by the originator.

"We are long-term players in the securitisation market and it is our core funding source. We expect to access the RMBS market fairly regularly, notwithstanding that Paragon 16 is the first issue we have done since the crisis," says Peter Shorthouse, director of treasury and structured finance at the Paragon Group.

While Shorthouse considers that, in general, the UK RMBS market has held up pretty well, he notes that the sterling investor base is still relatively narrow - as evidenced by the need for US dollar investment in the larger deals. "We could do with broadening that base," he says.

"We did consider opening our deal up to the US market, but - given that we didn't have benchmark pricing for collateral in our home currency of sterling - it would be even more difficult to offer the deal in another currency. A US dollar tranche is something that we would consider for our next deal," he concludes.

AC

ABS

Happy holidays?

The European ABS market is very quiet and it is not just because of the Thanksgiving holiday in the US. Trading activity continues to lessen as the end of the year grows nearer, with one trader describing current levels as "extremely muted".

"Everybody has got to the point now where they feel they are close enough to year-end to sit back and wait to see what develops. I think the selling we are seeing is coming from people who need to do stuff before year-end," says the trader.

He reports that the "primary market has died off" over the last couple of weeks. Although there are a couple of deals being done and a couple more in the pipeline, the picture has changed dramatically since October.

"An interesting aspect of the market at the moment is that there has been a bit more dealer buying over the past couple of weeks, certainly compared to September and October," says the trader.

He continues: "A few weeks ago a flurry of bid lists came out. I do not know whether that was people positioning themselves or whether it was a case of pressure from the seller to step up."

As activity is so limited, spread levels have stayed almost completely static. "ABS spreads are not moving. Prime RMBS is trading at 150bp-160bp for UK paper and at about 150bp for Dutch paper at the top of the capital structure. There has been nothing for CMBS, so that is not moving. The periphery is selling off a little bit more and on-the-run asset classes are maybe flat to 5bp wider," the trader says.

All things being equal, the trader does not expect the situation to change before the year ends. In fact, the market could become even quieter. However, he also warns that there is too much volatility in the system at the moment to be certain about what the weeks ahead will bring.

"One of those big uncertainties is whether or not a legacy holder might come out and have to move a big chunk of bonds by the end of the year. It is such a thin market that something like that could just blow it completely out," he concludes.

JL

Structured Finance

SCI Start the Week - 28 November

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

Pipeline
A handful of transactions entered the pipeline last week. Of these deals, two were SME securitisations (€3.1bn Foncaixa Consumo 1 and €5.64bn Santander Empresas 10), one was a CLO (US$419m Liberty Island Funding 2011-1) and the remainder were RMBS (A$750m Apollo series 2011-1 Trust and Lanark Master Issuer series 2011). Meanwhile, Investec is believed to have postponed Gemgarto 2011-1.

Pricings
The bulk of last week's prints were in the ABS sector, but two CLOs also priced - the US$275m Mill Creek CLO and the US$450m AMMC CLO IX. The ABS new issues comprised: €995m Cars Alliance Auto Loans Germany 2011-1; €600m SC Germany Auto 2011-2; Nkr5.77bn Bilkreditt 2; US$721m SLM Private Education Loan Trust 2011-C; and €287.6m Iccrea SME Cart.

Markets
A shortened trading week in the US due to Thanksgiving, combined with volatility elsewhere led to a quiet week in nearly all the European and US secondary structured finance markets.
Across the European ABS/MBS markets, expectations are that it will remain quiet until year-end, according to one trader. But he warns that there is too much volatility in the system at the moment to be certain about what the weeks ahead will bring.
He says: "One of those big uncertainties is whether or not a legacy holder might come out and have to move a big chunk of bonds by the end of the year. It is such a thin market that something like that could just blow it completely out."
US CMBS bucked the static trend, however, and in the three full trading days of last week the market's widening trend continued. By Wednesday's close, according to Treppwire, the benchmark GSMS 2007-GG10 A4 bond stood at 340bp over swaps, having closed the previous week at 321bp over.

Deal news
• RBS is currently marketing a synthetic CDO-like structure referencing the bank's counterparty credit risk from a portfolio of OTC derivatives trades. The deal - dubbed Score 2011-1 - is its first public counterparty risk securitisation since 2008.
• October was a busy month for European CMBS loan maturities, with 27 loans - totalling €2.71bn by balance - scheduled to repay. Only four repaid in full and on time, creating a number of considerations ahead of the glut of maturities expected next year.
• 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.
• Kroll Bond Rating Agency is seeking public comment on its US auto loan ABS rating methodology. The agency says its approach focuses 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.
• Enterprise is considering strategies to mitigate a financial covenant breach in the Unique securitisation once the fixed rate debt starts to amortise in 2014. Analysts suggest the fact that a number of options are available to the pub operator should be supportive for investors, even if the deal isn't working quite as expected.
• The special servicer for the Keops loan, securitised in Juno (Eclipse 2007-2), has confirmed that 129 of the 130 properties that were sold via auction have completed. The remaining property - valued at Skr78m - will be re-auctioned.
• 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.
• RBS is seeking to modify the terms and conditions of Skye CLO 1, Solar Funding I and Lunar Funding I to allow it to purchase all of the notes outstanding before 31 January. The bank has announced a tender offer for the notes, with the amount to be paid for the notes determined via a modified Dutch auction procedure.
• 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.
• 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.

Deals added to the SCI database last week:
Bella Trust 2011-3
Cronos Containers Program I series 2011-1
Discover Card Master Trust 2011-A4
Freddie Mac SPC Series K-704
GE Equipment Small Ticket series 2011-2
IM BES Empresas 2011-1
Iowa Student Loan Liquidity Corp series 2011-1
Ivy Hill Middle Market Credit Fund III
JPMCC 2011-FL1
Nordstrom Credit Card Master Note Trust II series 2011-1
Penarth Master Issuer 2011-2
Record Lion RMBS 2011-1
Volkswagen Auto Lease Trust 2011-A

Top stories to come in SCI:
2012 outlooks
European ABS relative value
US CLO manager trading strategies
Profile of Four Point Alliance

CDO

CVA CDO marketing

RBS is currently marketing a synthetic CDO-like structure referencing the bank's counterparty credit risk from a portfolio of OTC derivatives trades. The deal - dubbed Score 2011-1 - is RBS' first public counterparty risk securitisation since 2008, when it issued Waverley 1 and 2.

The £2bn Score 2011-1 comprises four tranches: a £1.86bn senior tranche, a £60m mezzanine note, a £60m junior note and a £20m subordinated tranche. RBS is seeking to place the mezz and junior notes with investors, with price guidance at 1150bp over Libor and 1550bp over respectively, and will retain the other tranches.

The senior tranche is expected to be rated Aaa3/A1 by Moody's, according the marketing material. RBS explains that the transaction is part of its efforts to prepare for the new regulatory environment and higher capital charges. It also suggests that further similar deals are to come.

However, despite the paucity of such assets in a securitised format and the small size of the tranches on offer, Score 2011-1 may still face the distribution difficulties experienced by other CVA structures (see SCI 3 November 2010). The deal is understood to already have been shopped around a wide array of investors but is yet to be fully placed.

A fair number of firms are supposedly active in this space, so it would be surprising if all of them weren't interested in the transaction. However, their reluctance to participate could be explained by not wanting to be seen to be buying a public CDO or perhaps wanting to show that they can structure such a deal themselves.

MP

CMBS

Auction results reviewed

September's 'geo-series' CRE sale on auction.com covering Florida and Southeast US was the largest auction in CRE history and its impact on the CMBS market is still being felt. Consequently, US CMBS research analysts from Barclays Capital are continuing to monitor the results.

Of the more than US$2bn in notes and REO auctioned during the sale, about US$1.4bn was securitised in CMBS. Of that, close to US$850m has now been reported as liquidated as of the November remittance, while another US$600m is still outstanding in CMBS trusts, the BarCap analysts say.

They continue: "Some of the largest loans were sold at deep discounts: the US$45m Cross Creek Shopping Center (JPMCC 2005-LDP2) and the US$43m Northgate Mall (MLCFC 2006-4) were liquidated at 82% and 74% severities respectively. Overall, the CMBS conduit universe took nearly US$500m in losses during the past two remittance periods as a direct result of the auction, at a severity of 59%, higher than the average for conduit loan dispositions."

The analysts add that losses on REO properties were deeper, with nearly 70% reported severity, as opposed to note sales, which recorded losses of 55%. Among property types, multifamily assets remained relatively well bid, with an average severity of 51%.

This trend is similar to the results from earlier note auctions, such as the one in Las Vegas, where apartment buildings were the best performers. "This reflects our general view that the multifamily sector continues to outperform. On the other hand, bids on retail properties were significantly worse, with an average loss of 63%," the analysts note.

MP

ABS

Capturing market trends

Adam Prather, principal at Solve Advisors, answers SCI's questions

Q: How and when did Solve Advisors become involved in the structured finance market?
A: Solve Advisors was formed in July by myself and three colleagues - Eugene Grinberg, Matt McCann and Gerard Nealon. We were all formerly at Red Pine Advisors, which was acquired by Houlihan Lokey last year. At our previous employer, we developed many tools, including a pricing engine with custom-made assumptions and a network that could run multiple bonds over various scenarios, as well as parsing technology.

People always talk about fundamental analysis, but price is what really drives markets. The ability to really focus on structured product prices has historically been lacking in analytics offerings. Consequently, we recognised an opportunity to help investors capture market trends without much effort - because information is placed at users' fingertips, they have the advantage of speed as well as a user friendly interface.

The main idea for our business was formed when we saw competitors' products, which hadn't really adapted to make the lives of users easier. Nor had they advanced the technology in their offerings for a period of several years, combined with very expensive price points. Our goal is to facilitate efficiency and accuracy.

Q: What are your key areas of focus today?
A: We launched SolveQuotes, our market colour parsing tool, in October. But we also work with clients to develop custom software and analytical tools, as well as provide advisory services around complex and illiquid securities valuations and litigation support.

The market has, so far, been very receptive to SolveQuotes. The tool essentially scans email messages and attachments for market colour information - who's offering the bond, price, price talk, cover and original face - and then translates it into actionable data.

If there is market action related to a bond identified in a user's portfolio, for example, a light flashes to let them know whether it is on a bid-list or has traded. A user can also search by asset class, region, CUSIP and partial deal name using the parsing tool.

Many investors receive Bloomberg blast attachments from around 40 different sources a day, in various different formats. This is obviously a large amount of information to work through in a short timeframe and so the tool helps users to organise their day and spend more time on trading.

In addition, because they know where the market is, the buy-side has comfort that they won't get 'picked off' by dealers. Dealers and buy-side alike are able to focus on trading rather than the grunt work of shuffling through messages and trying to compare bonds.

SolveQuotes also features a BWIC monitor tool, which identifies BWICs unique to the user. It allows users to click onto upcoming BWICs or to see the previous history of bonds included in them. The history can be shown for as long as the user has had emails. Underlying the tool is a securities database, with CUSIP, asset class, rating and regional information displayed amongst other data.

In terms of the advisory side of the business, the aim is to solve problems and reduce redundant processes. We're able to do this because we have tools that are scalable and we can demonstrate transparency in our modelling/valuations processes, in particular for underserved parts of the market, such as reverse mortgages and aircraft leases.

Q: Which market constituent is your main client base?
A: We work with a diverse client base, spanning hedge funds, private equity, primary and regional brokers, insurance companies, law firms, trustees and administrators.

Q: How do you differentiate yourself from your competitors?
A: We have diverse expertise in developing sophisticated financial technology and analytics, as well as in trading, hedging and modelling structured products. This blend of backgrounds allows us to build software tools that are not only technologically advanced, but are also very intuitive.

We don't have any straight competitors. Some other technology providers can set parsing expressions to capture a small universe of structured products relatively safely, but we've built 125 expressions to capture a much larger share of the market.

Similarly, other providers have separate applications, whereas SolveQuote is based on a single framework. The system is a dashboard for everything the user does. In addition, a team of 'quants' doesn't need to be hired to operate our tools.

Q: What major developments do you need/expect from the market in the future?
A: Many issues still need to be resolved on a macro level. One such issue is the shadow inventory and glut of distressed assets weighing on the market. I don't limit this to structured products, but rather sovereign debt and other asset classes.

The Fed's decision to auction US$25bn of Maiden Lane II assets, for example, sounded nice at the time. But the sheer scale of supply became concerning, especially when the new issue market hasn't even come back. It could have found a more efficient way of disposing of the assets - for instance, by refraining from setting out a pre-planned auction schedule, which created expectations of volume.

Equally, I'm not sure whether the recent increase in GSE LTV limits is the best way to help homeowners. More borrowers will be able to refinance under the expanded guidelines, but it is still done on a one-by-one basis. A more dramatic move is necessary that is quick to implement.

US$50bn of TARP funds was reserved for principal forgiveness, yet only US$2bn has been used so far. The mortgage modification process is so time-consuming that it's difficult to determine how, or indeed whether, to use the remaining TARP money.

Ultimately, the government has spent significant amounts of money on quantitative easing. But, rather than buying US Treasuries, perhaps it would be better to spend it on infrastructure projects.

CS

ABS

New treasurer at Fifth Third

Fifth Third Bancorp has appointed svp Tayfun Tuzun as treasurer, effective from 2 December. Tuzun replaces Mahesh Sankaran, who is joining M&T Bank as director of finance.

Tuzun is currently Fifth Third's assistant treasurer and balance sheet manager, overseeing investment portfolio activities and balance sheet strategy. Before that he was structured finance manager at the bank. Prior to joining Fifth Third in 2007, Tuzun was director of research and risk management at FSI Group and treasury svp at Provident Financial Group.

ABS

Bank names new SF head

Crédit Agricole has promoted Jacques Prost to head of structured finance, replacing Jean-Francois Marchal. Prost is based in Paris and reports to Pierre Cambefort, deputy ceo.

Prost's previous role was head of real estate and lodging within Crédit Agricole's SF division. He has also served as head of SF for Crédit Agricole Indosuez in Italy, head of project finance in Milan for Banque Paribas and worked in the corporate department of Crédit Lyonnais in London.

ABS

Law firm names partners

Sullivan & Cromwell has elected new partners to the firm, including William Monahan and Amanda Davidoff. They will assume their new roles on 1 January 2012.

Monahan is currently an associate at the firm, based in New York. His practice focuses on representing clients and individuals at trial and on appeal, including complex securities class and derivative actions.

Davidoff is also currently an associate at Sullivan & Cromwell, based in Washington DC. She represents clients at both the trial and appellate level, with a focus on complex securities and antitrust class actions and derivative litigation.

CDO

Internal transfer for CRE CDOs

C-III Asset Management intends to transfer the CDO collateral asset management responsibilities for the ARCAP RESECURITIZATION 2003-1, ARCAP RESECURITIZATION 2004-1, ARCAP 2004-RR3, ARCAP 2005-RR5 and ARCAP 2006-RR7 CRE CDOs to C-III Investment Management. The key employees and technology infrastructure are expected to remain in place.

Both managers are subsidiaries of C-III Capital Partners, whose controlling parent company is Island Capital Group. C-III Capital Partners currently employs 345 professionals and manages approximately US$2bn of invested capital for four real estate debt and equity funds and CDOs.

Fitch has determined that C-III Investment Management meets its minimum guidelines to manage the affected transactions within the context of the agency's stated review procedure for replacement managers.

RMBS

NCUA targeting Wachovia next

The NCUA has filed suit in Federal District Court in Kansas against Wachovia and its subsidiaries. The suit alleges violations of federal and state securities laws and misrepresentations in the sale of RMBS securities to now-failed US Central Federal Credit Union and Western Corporate Federal Credit Union. This lawsuit follows several similar legal proceedings previously filed by NCUA against JPMorgan Securities, RBS Securities and Goldman Sachs.

NCUA's complaint alleges that there were numerous material misrepresentations made by the sellers, issuers and underwriters in the offering documents of securities sold to the failed corporate credit unions. These misrepresentations caused the corporate credit unions that bought the securities to believe the risk of loss associated with the investment was minimal, when in fact the risk was substantial.

ABS

Global securitisation volumes strong in October

At the end of October 2011, with just under US$225bn and €80bn of qualifying securitisation deals completed, the leaders maintained their places in the SCI league tables for bank arrangers in the structured credit and ABS markets. Most added to their accounts as the US and European markets saw above average issuance of US$24.6bn and €11.4bn respectively for the month.

Overall, JPMorgan maintains its commanding lead in both the US and UK/Europe tables. But the race for seniority elsewhere in the top ten on both sides of the Atlantic remains close with only two months to go.

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

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

The tables for the year to end of October 2011 can be found here.

ABS

Portuguese ratings cap revised

Fitch has downgraded 51 tranches (comprising 46 RMBS, four structured credit and one ABS) and affirmed 24 tranches (23 RMBS and one structured credit) of 36 Portuguese structured finance transactions. Of these deals, 31 are RMBS, four are structured credit and one is ABS. Additionally, the rating watch negative on 51 tranches has been removed, while six tranches of two RMBS transactions have been placed on RWN and a negative outlook has been assigned on 57 tranches.

The downgrades apply to tranches at Fitch's ratings cap for SF transactions from Portugal and follow the downgrade of the country's long-term foreign currency issuer default rating to double-B plus/negative from triple-B minus/RWN. Following the sovereign downgrade, the agency has revised its ratings cap on Portuguese SF transactions to single-A from single-A plus, thereby maintaining the five-notch differential between the sovereign IDR and the highest achievable SF ratings.

The ratings cap reflects Fitch's concerns that the weakening sovereign increases the likelihood of extreme macroeconomic events that could undermine the performance of the securitisations. The negative outlook assigned to all tranches rated single-A reflects the outlook for the sovereign rating.

ABS

Indian ABS stable, despite slower growth

Fitch attributes the stable performance of Indian ABS transactions despite moderating economic growth in the country to the robust performance of the underlying transactions.

The agency reports that there has been a substantial build-up of credit enhancement across all asset classes driven by the robust performance of the fully amortising underlying loans. This led to the upgrade of 18 tranches and affirmations of all others during the last 12 months. The upgrades are spread across asset classes and originators, with 13 being transactions backed by commercial vehicle loans, three construction equipment loans and two pools with tractor loans as the underlying asset.

Commercial vehicle (CV) loans exhibited a marginal up-tick in default rates, coupled with collection efficiency deterioration. The Fitch India commercial vehicle collection efficiency (FICCE) index suggests that gross collection efficiency is currently 14% lower than the long-term average.

"Although the performance of CV loan transactions has been stable until now, rising operating costs and largely stagnant freight rates can adversely affect the borrower's ability to service the loan," says Jatin Nanaware, director with Fitch's structured finance team.

Construction equipment loan performance has also been stable to date, despite the current economic slowdown and sector-specific stresses observed in the Indian mining industry. The performance has so far remained cushioned as most Fitch-rated pools have limited exposure to regions exposed to the mining crisis.

Finally, tractor loan pool performance continues to be strong, supported by many favourable factors - adequate rainfall, a greater focus on rural infrastructure and an increase in the minimum support price in line with increased key input costs. This has helped rural borrowers maintain profit margins, Fitch notes.

Structured Finance

Negative outlook for US-linked deals

Fitch says it expects to revise the rating outlook to negative for certain US structured finance ratings as a result of the change in the US sovereign's rating outlook to negative from stable. For deals that benefit from guarantees or insurance from the US government, the agency expects to revise its rating outlook on triple-A rated classes to negative from stable.

Outlook revisions are expected to affect: up to 1,500 classes of student loan ABS, mainly originated under FFELP; up to 100 RMBS classes guaranteed or insured by Fannie Mae, Freddie Mac and the Federal Housing Administration; up to 50 classes of structured credit notes that are credit-linked to the US government; and a small number of CMBS that include classes which may be significantly defeased (greater than 50%) with US Treasury strips. Fitch will review these transactions on a case-by-case basis, considering mitigants such as time-to-maturity to determine if an outlook revision is warranted.

Structured Finance

Euro default rate remains low

Despite weak macroeconomic conditions, inherent collateral stress and more recent concerns over sovereign creditworthiness, the default rate of European structured finance securities has remained low, according to S&P.

Only 0.9% of European structured finance securities outstanding in mid-2007 (by original balance) have defaulted so far. By contrast, S&P estimates that more than half have now redeemed in full. However, at 0.5% the 12-month rolling default rate still remained elevated at the end of 3Q11.

"Based on our calculations, only €22.6bn of notes - from an original outstanding of €2.59trn - have defaulted since mid-2007, resulting in a cumulative default rate of 0.87% on this basis," says S&P credit analyst Arnaud Checconi. "By definition, this cumulative measure of default can only increase over time and is up slightly from 0.84%, based on data through the second quarter of 2011. However, the European structured finance cumulative default rate remains low in absolute terms, for example, compared with the equivalent measure for US structured finance."

Checconi adds: "The transition and default rate trends diverge by asset class. For example, consumer-related securitisations have outperformed transactions backed by loans to corporates."

Upward or stable rating transitions have also generally correlated with position in the capital structure, S&P notes. The cumulative downgrade rate for speculative grade issuance between mid-2007 and the end of 3Q11 was nearly twice as high as for investment grade issuance, with the former recording a downgrade rate of 53.3%. More significantly, at 8.1%, the cumulative default rate for speculative grade issuance over the same period has been almost 10 times higher than the investment grade default rate of 0.83%.

Overall, the 12-month rolling downgrade rate has risen over the past four months, spiking in September. This was mostly due to the implementation of S&P's 2010 counterparty criteria, which led the agency to lower a number of ratings in European structured finance earlier this year.

Checconi concludes: "Renewed economic weakness in many European countries, as well as the ongoing sovereign debt crisis, could put more downward pressure on structured finance ratings in the coming months."

CDO

CDO tender offers proposed

RBS is seeking to modify the terms and conditions of Skye CLO 1, Solar Funding I and Lunar Funding I to allow it to purchase all of the notes outstanding before 31 January. The bank has announced a tender offer for the notes, with the amount to be paid for the notes determined via a modified Dutch auction procedure. A noteholder meeting will be held at the London offices of Allen & Overy on 16 December to consider and, if thought fit, pass the modification resolution.

CDS

Fitch adds to Greek credit event debate

Gross notional exposure to sovereign entities has climbed by nearly US$1.5trn since the end of 2008, with Europe accounting for approximately two-thirds of the total increase, according to Fitch.

While gross notional has grown significantly over the past few years for many names - including some of the most cited, like Greece, Portugal and Italy - actual net exposure appears quite low at under 2% of total debt. This provides additional context as to the true extent of positioning/hedging taking place, Fitch says.

Emerging markets' share of total sovereign CDS gross notional outstanding is also considerable. While declining, Latin America's share is a still-high 18%, while Asia's comes in at 13%.

The agency notes that the evolution of gross and net CDS amounts through time varies significantly. Countries with a more constructive outlook, such as Brazil, have seen significantly different patterns than Eurozone countries.

While all sovereign spreads have widened over the past several years, closer scrutiny reveals that European names on average are trading wider than virtually all others.

"This is all the more startling because, not long ago, Europe exhibited among the lowest CDS spread levels of all regions," Fitch explains. Conversely, CDS on Latin American sovereigns have on average widened the least of any region over the same period.

If a sovereign engages in a distressed debt exchange, it can impair creditors significantly. At the same time, a distressed debt exchange may not trigger a credit event, which may potentially leave a buyer of CDS protection vulnerable. This is due to current CDS language and the fact that such an exchange may be considered 'voluntary', even if deemed by bondholders necessary to avoid an outright default.

The possibility of another type of credit event being triggered along with the CDS spread widening seen to date does benefit the protection buyer. That being said, the disconnect in cashflows between a bond position and CDS contract adds a wrinkle that all investors need to be aware of, according to the agency.

It concludes: "It is important to note the distinction between a credit event and potential ratings default. While the latter relates to actions taken by Fitch or any other credit rating agency, only the ISDA Determination Committee can determine a credit event, which triggers credit default swap contracts."

CDS

SEAT credit event referred

ISDA's EMEA Credit Derivatives Determinations Committee (DC) has voted on the question of whether a failure to pay credit event had occurred in respect of SEAT Pagine Gialle. The relevant supermajority of DC members required for the question to be decided was not reached, however.

The DC rules provide that where the DC does not reach a supermajority on a question raised to it, the question is to be referred to a panel of three independent experts who will decide the question. The same process was used in the case of Cemex in November 2009 (see SCI 16 December 2009).

CDS

Dynegy CDS settled

The final price in yesterday's Dynegy Holdings CDS auction was determined to be 71.25. 13 dealers submitted inside markets, physical settlement requests and limit orders to the auction.

Of these dealers, RBS was assessed a US$1.9m adjustment amount after submitting an offer that was more than 39 percentage points below the average of the 12 other dealers. The bank offered 31.5 cents, compared to the initial market midpoint of 69.5 cents.

Separately, a bankruptcy credit event auction is to be held for PMI Group, following its bankruptcy on 23 November. ISDA's Americas Determinations Committee is also deliberating whether a bankruptcy credit event has occurred on AMR Corporation.

CMBS

Eurozone crisis knocks restructured permacap

Real Estate Credit Investments (RECI) - the permanent capital vehicle formerly known as Queens Walk Investments Limited - recorded a net loss of €10.8m in 2Q11 following mark-to-market losses on its investment portfolio. The loss has been attributed to lower bond prices and volatility surrounding the Eurozone debt crisis. However, the company believes market reactions to the Eurozone debt crisis have exaggerated price dislocations in the real estate securities markets and it is preparing itself to take advantage of this in the coming months though new purchases.

In August of this year RECI converted into a protected cell company (RECI PCC), retaining the real estate debt portfolio in the Core (RECI) and moving the legacy residual income assets into the Cell (ERII). It was the Core company that suffered the loss.

RECI, which is managed by Cheyne Capital Management, upped its focus on undervalued European RMBS and CMBS late last year following a €26.6m capital raising that was completed in September 2010 (SCI 16 June 2010). The firm says it retains full confidence in the fundamental investment case of the real estate debt market. It has, however, made fewer and more defensive asset purchases than in previous quarters and has reduced its exposure to a fall in UK commercial property prices in 2012 by entering into a hedge on the UK commercial property index.

The company has also changed the trading denomination from Euro to Sterling in early October and notes that the redenomination to Sterling aligns the company with broader investor demand.

"In a tough trading environment it is vital that RECI retains a focus on its long term strategy while maintaining a defensive bias on investment decisions," says Tom Chandos, chairman of RECI PCC. "With low loan-to-value ratios, backing of high quality assets and primary exposure to UK and Germany, RECI has full confidence in the fundamental strength of its real estate bond portfolio."

RECI's bond portfolio has a nominal value of £125.9m versus market value of £74.7m as of 15 November 2011. It has a cash balance of €18.3m as of 30 September, up from €4.6m as of 30 June. It says it will pay a dividend of 0.86p per share in respect of RECI Ordinary Shares.

CMBS

Keops properties complete

The special servicer for the Keops loan, securitised in Juno (Eclipse 2007-2), has confirmed that 129 of the 130 properties that were sold via auction have completed. The remaining property - valued at Skr78m - will be re-auctioned, while Catella tries to achieve a higher price by selling it to a private investor.

In total, 146 properties have been sold for Skr4.02bn, equating to 96% of valuation. The next stage of the process will be the distribution of sales proceeds by the Swedish Debt Enforcement Agency - expected to occur between 23 November and 2 December. Once distribution has occurred, the special servicer will advise on proceeds to be distributed to the notes.

Risk Management

OCC proposes ratings rule

The OCC has proposed a rule to remove references to credit ratings from its non-capital regulations and related guidance to assist national banks and federal savings associations in meeting Dodd-Frank due diligence requirements in assessing credit risk for portfolio investments.

In particular, the OCC proposes to amend the definition of "investment grade" in 12 CFR Part 1 to no longer reference credit ratings. In addition to following the standard under the proposed rule, national banks and federal savings associations would be expected to continue to maintain appropriate ongoing reviews of their investment portfolios to verify that they meet safety and soundness requirements appropriate for the institution's risk profile and for the size and complexity of the portfolios.

The proposed guidance clarifies steps that national banks should take to demonstrate they have properly verified their investments meet the newly established credit quality standards under 12 CFR Part 1 and steps national banks and federal savings associations should take to demonstrate they met due diligence requirements when purchasing investment securities and conducting ongoing reviews of their investment portfolios.

RMBS

Dutch RMBS unable to honour puts

GMAC RFC Nederland-originated RMBS E-MAC Program III and E-MAC Program II Compartment NL 2008-IV are unlikely to have sufficient funds to redeem the notes that are subject to redemption on put dates in January 2012, according to investor notices.

The issuer has been informed by the MPT Provider that it will not - and also does not have - the financial means to grant the servicing advance loan on or before the put date. Furthermore, the issuer has reason to doubt that it will succeed in finding any third party which would be willing to purchase mortgage receivables or to provide the servicing advance loan on or before the put date.