Contents

Structured Finance

SCI Start the Week - 12 December

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

Pipeline
A variety of deals joined the pipeline last week. In ABS there are two new deals: a US$494.1m deal secured by drugstore leases (CVS Lease-Backed Pass-Through Series 2011 Trust) and a A$90m Australian auto loan transaction (Liberty Series 2011-1 Auto). Additionally, Freddie Mac SPC Series K-016 (a US$1bn CMBS) and Tramline Re series 2011-1 (a US$75m catastrophe bond) hit the market.

Pricings
There was also a variety of pricings, including three US ABS deals (US$811m CNH Equipment Trust 2011-C, US$119.4 CPS Auto Receivables Trust 2011-C and US$189m JGWPT XXIV). In European ABS, a €913m auto ABS (FTA Santander Consumer Spain 2011-1) and a €1.93bn consumer loan ABS (Scandinavian Consumer Loans 2011-2) printed.
RMBS issuance comprised A$1.25bn Apollo Series 2011-1 Trust and €2.1bn Royal Street 2011-3, while there was also a single US CMBS (US$774m CCFRE CMT 2011-C2). Finally, four CLOs priced: US$320m Dryden XXII CLO, US$354m Flatiron CLO 2011-1, US$419m Liberty Island Funding 2011-1 and US$200m Start CLO VII.

Markets
Increasing focus on year-end appeared to be the main consideration across all structured finance sectors last week, despite the continuing volatility seen elsewhere in global markets on the back of economic and regulatory news. Consensus expectations appear to be that muted secondary structured finance flows will continue until next year, barring an unforeseen extreme event.
Indeed, the ABS market is maintaining the status quo heading into year-end, with pronounced bifurcation between benchmark and off-the-run names/sectors, according to JPMorgan ABS analysts. Over last week, they say: "We continued to see good secondary trading in high quality and liquid ABS, but weak spreads and minimal flows in everything else."
However, they add: "The FFELP ABS sector finally showed a few decent bids for longer 4-7 year bonds, but interest remained limited to the clean names and structures." Elsewhere, the JPM analysts highlight that stranded asset ABS spreads tightened across the curve by 3-5bp on the week, while US dollar UK RMBS widened by 5bp.
In the US, over the past few weeks the tone in non-agency RMBS has been modestly better, according to MBS analysts at Bank of America Merrill Lynch. "Investors have begun to return to some sectors where prices have fallen and fundamental value once again can be found. This has been primarily driven by hedge fund investors, who have returned to the alt-A floating rate and the option ARM sectors after prices there have come down by 20% in the worst cases since July," they say.
In US CMBS last week, Citi securitised products analysts say: "Spreads tightened a bit across the stack, but flows were muted as the market turned its attention to the final new issues of the year."
GG10 duper spreads opened the week with a 305/295 market and finished nearly unchanged at 310/295 by week's end. Yet, legacy dupers were marked 20bp tighter on the week, early 2.0 senior spreads tightened by 10bp and super-senior classes from more recent deals tightened by 5bp.
Meanwhile, the Citi analysts say that credit spreads were modestly tighter, albeit on very light flows. Generic AMs were marked in 25bp to 725bp, while new vintage triple-B spreads were in by 15bp to 665bp.
At the same time, in European CMBS there was not much BWIC activity, with total lists for the week comprised of three names, with a combined total outstanding face value of less than €10m, according to Deutsche Bank CRE debt analysts.
In the CLO sector, BAML CLO analysts say: "The erratic trading usually associated with year-end balance sheet repositioning means spreads have not moved materially, despite visibility obviously being hampered by the large quality differential in the bonds on offer. We see some early signs of compression within the mezz segment, with decent evidence of original triple-Bs settling in within the mid-to-high 800 DM range, while the top of the capital structure remained slightly heavier."

Deal news
• Having announced a fixed-price tender for all outstanding NEMUS 2006-1 bonds (SCI 22 November), HSBC in the end accepted purchase of only the class D note equal to £10m at the purchase price of 84% of par.
• Sandelman Partners is set to assign the collateral management agreement for Sandelman CRE CDO I to Petra Capital Management. Consent to the assignment from both the majority of the controlling class and the majority of the preferred shares holder has been obtained, as required by the transaction documents.
• Deerfield Capital Management is proposing to transfer its rights and obligations under the investment management agreement of Gillespie CLO to BNP Paribas. The transfer requires the consent of the controlling class (the class A1 and A2 notes together) and the subordinated noteholders, each acting by ordinary resolution.
• Plemont Portfolio Managers has entered into a transfer deed with respect to Kintyre CLO I, pursuant to which it has agreed to transfer the role of portfolio manager to BNP Paribas by way of novation. The move is subject to the satisfaction of a number of conditions, including the consent of the controlling class (class A noteholders) by extraordinary resolution.
• Stone Tower Debt Advisors has been retained to act as liquidation agent for Gulf Stream-Atlantic CDO 2007-1. The collateral will be sold to the best qualified bidders in one public sale, held in New York at 10am EST on 13 December.

Regulatory update
• Overly prescriptive swap execution facility (SEF) rules - specifically the 15-second rule and the five RFQ requirement - will have a negative impact on liquidity, according to a new TABB Group survey. Nevertheless, nearly three-quarters of respondents believe that SEF formation will be good for the swap market.
• A new Celent report suggests that the leading Asian economies have been quite active in pursuing centralised clearing for OTC derivatives. While trading will take place on a regulated platform and then be cleared by a CCP in the US and Europe, there are no regulations to move trading to regulated platforms in Asia and trading is still expected to occur on a bilateral basis.
• The ECB has increased the collateral available for use in its operations by extending its criteria for securitisations. RMBS and SME ABS may now be eligible if their 'second best' ratings are at least single-A.
• In light of the continuing stresses in financial markets, the Bank of England has introduced a new contingency liquidity facility, dubbed the Extended Collateral Term Repo (ECTR) Facility. UK banks and building societies will be able obtain liquidity against a wide range of collateral, including securitisations, under the scheme.
• The US federal bank regulatory agencies are seeking comment on a notice of proposed rulemaking (NPR) that would amend an earlier NPR, regarding references to credit ratings, announced in December 2010. The initial NPR proposed modifications to the agencies' market risk capital rules for banking organisations with significant trading activities.

Deals added to the SCI database last week:
AMMC CLO IX
Berica 10 Residential MBS
Bilkreditt 2
Cars Alliance Auto Loans Germany series 2011-1
Foncaixa Consumo 1
Fosse Master Issuer 2011-2
FTA Santander Empresas 10
Goldfish Master Issuer series 2011-1
IDOL Trust 2011-2
Mill Creek CLO
Miramax Film Library Securitization Trust 2011-1
Quadrivio Finance 2011-1
SC Germany Auto 2011-2
Siena SME 2011-1
SLM Private Education Loan Trust 2011-C
Stichting Orange Lion 2011-6
Voba 3

Top stories to come in SCI:
2012 outlooks: Asian ABS and structured credit; European ABS; US ABS; CLOs; CMBS; and credit derivatives.

Structured Finance

Executive reshuffle as committee formed

S&P has announced a raft of organisational changes, effective immediately. The agency's new structure will include an executive committee responsible for the ratings business, strategy, regulatory and policy outreach, investment and talent.

"As we look forward to 2012, these organisational changes will better position us to drive growth in developed and emerging markets and to create new products and services," says Douglas Peterson, S&P president.

Peterson is joined on the committee by: Paul Coughlin, global analytics and operations executive md; James Daly, human resources vp; Catherine Mathis, marketing and communications svp; Adam Schuman, chief legal officer and executive md; Joseph Sniado, chief information officer and svp; and John Weisenseel, finance svp, all based in New York.

The committee also includes Yu-Tsung Chang, APAC ratings executive md in Tokyo, Christian Dinwoodie, market development executive md in London and Yann Le Pallec, EMEA ratings executive md in Paris. Searches are also underway for a chief economist and chief risk officer to join the executive committee.

Coughlin becomes global analytics and operations executive md in the change, having previously been corporate and government ratings executive md. He will coordinate global management of the analytical units and have direct responsibility for the ratings business, including corporate, financial services, government and structured finance in the Americas.

During a transitional period, Coughlin will also oversee the structured finance groups worldwide as previous global head of structured finance, David Jacob, is leaving S&P. Mark Adelson, most recently coo, has been named senior research fellow, charged with leading new research projects. Ian Thompson takes over as coo and has been appointed senior md.

Structured Finance

NZ law firm promotes partners

Russell McVeagh has promoted two new partners, effective 1 December. The new partners are Deemple Budhia, based in Auckland, and Nick Hegan, based in Wellington.

Budhia's practice covers all areas of finance law, including securitisation and structured finance, debt capital markets and derivatives. Before joining Russel McVeagh Budhia worked for Citibank's European commercial property and securitisation team and Allen & Overy's securitisation team.

Hegan's practice includes advising on regulatory issues and securities law. Before joining the firm he spent 13 years in financial markets in New Zealand, London and Chicago, including as md of derivatives trading at Bank One.

Structured Finance

MBIA, Morgan Stanley settle

Morgan Stanley has reached a comprehensive settlement with MBIA that terminates outstanding credit default swap protection purchased from MBIA on CMBS and resolves pending litigation between the two parties for consideration of a net cash payment to Morgan Stanley. Under the settlement, MBIA will also withdraw its RMBS-related suit against Morgan Stanley in return for Morgan Stanley withdrawing from suits challenging MBIA's restructuring.

The pre-tax loss on the settlement will approximate US$1.8bn in the current quarter. The bank notes that the settlement has the effect of significantly reducing risk-weighted assets and releasing the equivalent of approximately US$5bn of capital under the Basel Committee's proposed Basel 3 framework.

James Gorman, Morgan Stanley president and ceo, comments: "It's critical that we reposition for the new regulatory environment and do so quickly. A top priority for 2011 was to address this large outstanding legacy exposure and this settlement is consistent with our efforts to build capital and de-risk the balance sheet. Putting this behind us removes earnings volatility and meaningfully improves our pro forma Tier 1 Common ratio under Basel 3."

CDO

Further C-III CDOs assigned

C-III Asset Management is proposing to assign the collateral management agreements for Centerline 2007-SRR5, Centerline 2007-1 Resecuritization Trust and Arcap 2005-1 Resecuritization Trust to C-III Investment Management. This follows the internal transfer of five other CRE CDOs last month (SCI 30 November). Moody's has determined that the move will not cause the current ratings of the notes to be reduced or withdrawn.

CDO

Origination head named

Harald Berlinicke has joined SCDM as head of origination and client services. He is a senior director based in the firm's Berlin headquarters.

Berlinicke was previously a partner and senior portfolio manager at New Bond Street Asset Management as well as serving as an external consultant for Landesbank Berlin. Other roles have included vp at TD Securities and head of structured credit investments at Bankgesellschaft Berlin.

CDS

Credit hedge fund's European expansion

MKP Capital Management is to build a European credit team in its London office next year. Steve Jeraci, currently a partner at the firm, is moving to the London office as a first step in putting the team in place.

"Considering Europe's influence on markets globally, plus the risks and rewards being created by the transformation of the European financial system, MKP's investors will clearly benefit from an expansion of our European credit presence," says MKP ceo Patrick McMahon.

McMahon continues: "A credit team in London will naturally complement our existing macro and credit teams by providing on-the-ground intelligence and surveillance. It will also allow us to more efficiently source credit-related investment opportunities that arise geographically out of Europe."

Structured Finance

Macro issues cloud US outlook

Macro issues will continue to cloud an otherwise improving forecast for US structured finance performance next year, according to Fitch.

After a fast start to the year, macro concerns and regulatory developments slowed the pace of recovery. Fitch is expecting improvements to continue at a modest pace next year.

The outlook for the four US structured finance sectors is stable from a credit and ratings standpoint. Where the picture gets more chequered is how macro concerns will impact collateral performance.

The sector likely to resist external shocks remains ABS, even though collateral performance has dropped off significantly. Following almost two years of sustained performance improvements, the rating outlook remains stable to positive for most ABS sectors.

While liquidity is slowly returning to the US CMBS market, macro uncertainties may disrupt financing in 2012, albeit property market fundamentals are expected to continue slowly improving. Investment grade ratings will be mostly stable in 2012, while non-investment grade ratings will be susceptible to downgrades.

Unsurprisingly, RMBS remains the sector that will be most weighed down by external economic and political factors. The outlook for the sector is negative as mortgage loan defaults will remain high amid high unemployment and falling home prices.

Finally, CLOs will continue to be the lone bright spot next year. Collateral and ratings will remain stable for US CLOs as high yield defaults remain historically low and the benefits of recent delevering are further realised, Fitch concludes.

Structured Finance

Euro outlook divided

Moody's outlook for the collateral performance of ABS and RMBS transactions in 2012 is negative for Greece, Ireland, Italy, Portugal and Spain, but stable for prime assets in the UK, the Netherlands, France and Germany. Rising unemployment levels and austerity measures are expected to negatively affect collateral performance.

While government and regulatory pressure led to tighter loan underwriting criteria in many jurisdictions in 2011, the increased credit quality of the 2012 vintage will be offset by the up-tick in regional concentration as more small lenders raise funding via securitisation. Falling house prices in 2012 will lead to lower recovery values in RMBS and SME loans, while the deteriorating credit quality of servicers will increase counterparty and transaction risk, Moody's notes.

The performance of prime assets in the UK, the Netherlands, France and Germany has been broadly stable over the past year, however, and the rating agency doesn't expect conditions in these countries to lead to a material rise in defaults and losses. Nevertheless, while Moody's outlook for these markets remains within the stable band, it has deteriorated somewhat compared to the last time the rating agency updated the market on its views in July 2011.

Underwriting changes are anticipated to improve the credit quality of the underlying asset pools and, in the example of UK and Dutch RMBS transactions, will result in fewer interest-only loans. As such, the 2012 vintage of ABS and RMBS transactions will be less risky, as loans will be originated under tighter underwriting standards.

The 2012 vintage of loans will be more regionally concentrated than previous vintages, as a greater number of small lenders begin to utilise structured finance as a viable funding tool. Smaller lenders tend to have more regionally concentrated loan portfolios than their larger counterparts. As a result, the ABS and RMBS portfolios from smaller lenders will have more volatile performance due to regional concentration, according to Moody's.

In 2012, the agency expects the structured finance market to continue to be split, with issuance in certain markets - such as the UK, the Netherlands and Germany - continuing to be sold to real investors, while issuance in most other markets will be used solely as collateral for central bank operations.

Structured Finance

Feedback sought on creditworthiness NPR

The US federal bank regulatory agencies are seeking comment on a notice of proposed rulemaking (NPR) that would amend an earlier NPR announced in December 2010. The initial NPR proposed modifications to the agencies' market risk capital rules for banking organisations with significant trading activities.

The amended NPR includes alternative standards of creditworthiness to be used in place of credit ratings to determine the capital requirements for certain debt and securitisation positions covered by the market risk capital rules. The proposed creditworthiness standards include the use of country risk classifications published by the OECD for sovereign positions, company-specific financial information and stock market volatility for corporate debt positions, and a supervisory formula for securitisation positions.

The earlier NPR was based largely on the revisions to the market risk framework published by the Basel Committee on Banking Supervision since 2005. However, it did not include aspects of the Basel Committee revisions that rely on credit ratings.

Under the Dodd-Frank Act, all federal agencies must remove references to, and requirements of, reliance on credit ratings from their regulations and replace them with appropriate alternatives for evaluating creditworthiness. The agencies believe that the capital requirements resulting from the implementation of these alternative standards would be generally consistent with the standards in the Basel Committee's revisions.

The agencies expect to publish a final market risk capital rule after consideration of the comments on both NPRs. Comments on the latest NPR are requested by 3 February 2012.

Structured Finance

Extended repo facility announced

In light of the continuing stresses in financial markets, the Bank of England has introduced a new contingency liquidity facility, dubbed the Extended Collateral Term Repo (ECTR) Facility. UK banks and building societies will be able obtain liquidity against a wide range of collateral, including securitisations, under the scheme.

The facility is designed to provide 30-day sterling funding in an auction format, thereby mitigating risks to financial stability arising from a market-wide shortage of short-term liquidity. The BOE stresses that there is currently no shortage of short-term sterling liquidity in the market, but the new facility will provide additional flexibility should it be needed.

Operations under the facility will be announced at the discretion of the Bank to respond to actual or prospective market-wide stress. The operations would offer sterling for 30 days against collateral pre-positioned for use in the Discount Window Facility (DWF). All firms registered for access to the DWF would be eligible for ECTR operations.

Structured Finance

Post-crisis performance analysed

Fitch has published a report analysing how losses for global structured finance transactions are being driven by the underperformance of US RMBS and US ABS CDOs. Transaction performance varies significantly across asset classes and regions, it states, with the lowest loss rates visible in global ABS transactions and EMEA and APAC RMBS transactions.

Outstanding Fitch-rated SF bonds at the onset of the credit crisis in July 2007 had an original principal balance of US$5.2trn. To date, losses have been realised on 1.9% of this balance.

But the agency expects further losses to be incurred over the remaining lives of the transactions, leading to total losses of 8.1%. Total losses vary across the three regions: they stand at 10.6% for US SF, 2.6% for EMEA SF and 1.7% for APAC SF.

"Globally, ABS tranches are expected to suffer the lowest loss rate of 1% of their original balance," says Gioia Dominedo, senior director in Fitch's EMEA SF team. "These transactions include pools of short-dated consumer loans that benefit from a high level of diversity and relatively rapid pay-down."

Losses on RMBS transactions outside the US have also been limited, with total losses of 0.7% on EMEA RMBS and less than 0.1% on APAC RMBS. This contrasts with total losses of 12% for US RMBS.

US RMBS also accounts for over half of the total losses on tranches that were rated triple-A at the onset of the credit crisis, with another third resulting from US ABS CDOs.

CMBS losses, meanwhile, are higher and more consistent across regions. Total losses stand at 4% for both US and APAC CMBS, but are higher at 6.3% for EMEA CMBS. The higher EMEA CMBS loss rate is explained by the fact that two-thirds of the original balance relates to transactions from the peak of the property market in 2006-2007, compared to 44% for the more mature US CMBS market.

Structured Finance

ECB expands repo criteria

The ECB has increased the collateral available for use in its operations by extending its criteria for securitisations. RMBS and SME ABS may now be eligible if their 'second best' ratings are at least single-A. Previously, only issuance originally rated triple-A was eligible.

To be eligible for use in Eurosystem credit operations: collateral must also belong to the same asset class; the underlying assets cannot include loans that are non-performing at the time of issuance of the ABS or structured, syndicated or leveraged at any time; the counterparty submitting an ABS as collateral cannot act as an interest rate swap provider in relation to the ABS; and the ABS transaction documents must contain servicing continuity provisions.

The ECB will also conduct two longer-term refinancing operations with maturities of three years, at a fixed rate with full allotment, with the first to occur on 21 December.

Structured Finance

Sovereign review hits Euro deals

S&P has placed on credit watch negative its credit ratings on 270 tranches in 201 European structured finance transactions. The actions follow the credit watch negative placement of its ratings on 15 eurozone countries - Austria, Belgium, Estonia, Finland, France, Germany, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovak Republic, Slovenia and Spain.

Specifically, the agency has placed on credit watch negative: two tranches in two transactions with exposure to Belgium; 17 tranches in 10 transactions with exposure to France; seven tranches in four transactions with exposure to Germany; six tranches in three transactions with exposure to Ireland; 156 tranches in 131 transactions with exposure to Italy; 80 tranches in 49 transactions with exposure to Portugal; and two tranches in two transactions with exposure to Spain. The affected tranches either have what S&P considers a direct ratings link to the rating of the country or are exposed to a portfolio where most of the assets are located in one or more of these countries.

The conclusion of the eurozone sovereign rating credit watch placements may mean that S&P's ratings on Austria, Belgium, Finland, Germany, the Netherlands and Luxembourg could be lowered by up to one notch, with the other governments lowered by up to two notches. Under the agency's criteria, the highest rating it would assign to a structured finance transaction is six notches above the investment grade rating on the country in which the securitised assets are located. If the sovereign's rating is in the speculative grade category, the maximum uplift is five notches.

S&P will resolve the structured finance credit watch placements once it has resolved its review of the sovereign ratings.

CDS

Prescriptive SEF rules highlighted

Overly prescriptive swap execution facility (SEF) rules - specifically the 15-second rule and the five RFQ requirement - will have a negative impact on liquidity, according to a new TABB Group survey. Nevertheless, nearly three-quarters of respondents believe that SEF formation will be good for the swap market.

Over 43 firms have expressed an interest in creating a SEF, TABB notes. Asked who they believe will be successful ultimately as a SEF in each asset class, respondents named Bloomberg, CBOE, CME Clearport, Creditex, FXAll, ICE OTC Energy, ICAP, MarketAxess and Tradeweb.

Although the CFTC and SEC expect to begin implementing SEF trading mandates by 3Q12, over 80% questioned for the research do not expect implementation until 2013. Respondents also anticipate CDS and interest rate swap trade sizes to decline during the next five years by at least 25%.

The research is based on responses from over 200 buy- and sell-side market participants in the US and Europe.

CDS

Regulatory uncertainty hinders clearing prep

A new TABB Group study suggests that European swap dealers are being squeezed on all sides, with regulatory uncertainty hindering their ability to build out their swaps businesses. According to the report, many capital-constrained banks are balking at the expense of establishing OTC clearing services.

With Basel 3 set to make capital a rarer, more expensive commodity, 90% of the dealers interviewed see technology as a mission-critical investment, with top-tier banks each planning to allocate a minimum US$100m a year to their OTC derivatives reform technology budget. Top-tier dealers are building out their trading and clearing operations, revamping their prime brokerage, clearing and intermediation teams to operate as new, standalone units that can cross-sell swaps into the hedge fund space. Mid-tier firms expect to spend in the tens of millions.

Of the dealers interviewed, 70% say they're lobbying against reforms, while continuing to build out in anticipation of the worst. Dealers argue that the scope of reform in Europe is too broad and that Basel 3 is a "punitive marketplace killer".

The new study is based on one-to-one interviews with 24 European swaps dealers during early autumn 2011.

CDS

CDS RFQ service launched

Traccr has launched a multi-dealer request-for-quote credit derivatives electronic brokerage service, designed to enable buy-side clients to trade CLNs and CDS. The offering provides intuitive trading functionality via a simple graphic user interface and delivers streaming indicative CDS quotes, the ability to bilaterally negotiate terms, real-time execution and confirmation.

The platform facilitates trading of standard, customised and multi-name credit derivative instruments. More than a dozen institutional investors and broker-dealers have been beta testing the platform over the past few months.

CDS

Asian clearing model to differ

A new Celent report suggests that the leading Asian economies have been quite active in pursuing centralised clearing for OTC derivatives. Japan and Singapore have taken the lead in setting up clearinghouses, but the regional clearing model is expected to be slightly different from that in the US and Europe.

While trading will take place on a regulated platform and then be cleared by a CCP in the US and Europe, there are no regulations to move trading to regulated platforms in Asia and trading is still expected to occur on a bilateral basis. Once the trading has taken place between the two counterparties, the trade would be novated to the CCP and the CCP would become the counterparty to both the buyer and the seller.

Nevertheless, given that OTC volumes in a number of the Asian markets aren't significant, there some doubts over the sustainability and viability of central clearing in Asia. One or two clearinghouses would be ideal for such a scenario, Celent notes, but the existence of different CCPs in each national market means higher costs for firms that are trading in more than one market because they have to create a separate infrastructure in each market.

Another key finding of the report is that collateral and margin management will become more complex and expensive. At present, bilateral clearing allows counterparties to decide on the necessary collateral. The mutual understanding and experience of trading with their counterparties plays an important part in ensuring that the collateral requirements are not very high, according to Celent.

However, it is expected that the CCPs would be more conservative in their approach and set higher collateral and margin requirements. The cross-margining benefits that the larger participants currently derive from trading larger volumes might not carry into the new regime.

The report also points out the possibility that regional and global players that operate across a number of markets could choose to move their OTC business to markets with the least regulation and lowest collateral and margin requirement costs. "This would be undesirable for both the market that loses the business and the market that gains it," it says. "The market that loses business might not be able to sustain its CCP due to low volumes. The market that gains the business might have artificially high volumes and therefore would have more complex issues with regard to systemic risk in case of a default by a clearing member or even a CCP."

Additionally, multiple markets with CCPs mean that the jurisdictions will have to address extraterritoriality and interoperability issues that will arise.

CDS

Enhanced CDS statistics released

The BIS has published in its latest Quarterly Review a report detailing enhanced credit risk transfer statistics. Two improvements were made to the data in June: total credit risk transfers with each counterparty group have been decomposed according to characteristics of the underlying debt; and market values of credit risk transfers have been calculated with counterparties in different sectors after netting of any bilateral CDS positions with offsetting market values.

The aim of the enhancements is to provide more granular information on the types of risks transferred through credit default swaps by different groups of counterparties. The new data suggest that reporting dealers have used some hard-to-value credit derivatives to transfer credit risk to shadow banks, possibly exposing these counterparty groups to valuation risks, according to the BIS. The data also show that some financial counterparties have sold protection against defaults in the same sector on a net basis.

The BIS adds that the risk transfers were likely generated by basket CDS, synthetic CDOs or index tranches.

CDS

SEAT results in

The final price of Seat Pagine Gialle CDS was determined to be 10 during Friday's auction. 13 dealers submitted inside markets, physical settlement requests and limit orders to settle trades referencing the name.

CDS

PMI Group results in

Final results of the PMI Group CDS auction, held yesterday, were determined to be 16.5. 13 dealers submitted inside markets, physical settlement requests and limit orders to settle trades across the market referencing the name.

CMBS

Euro CMBS refi warning

Limited availability of refinancing for maturing loans will be the key threat to the credit quality of outstanding CMBS transactions in 2012, according to Moody's. A significant gap exists between refinancing needs and available financing in the overall European CRE market.

Financing is expected to only be available for low-leveraged loans secured by prime properties, as banks are in the process of shedding risky assets and deleveraging to meet regulatory capital requirements. However, most of the loans maturing in 2012 are secured by non-prime properties, which make up the majority of collateral securing European CMBS transactions. Moody's therefore expects an increase in defaults and/or restructurings in 2012.

The agency suggests that most of the loans maturing in 2012 which are secured by non-prime properties will not be repaid, but will be extended by servicers to avoid losses arising from property value declines. If underlying cashflows from the properties are insufficient to make loan payments, however, the servicer is likely to start the work-out process - which could take the form of forced property sales or loan foreclosures. While there have been few such enforcement actions to date, Moody's believes they will increase in 2012.

Further, the agency expects that there will be no significant new issuance in 2012 because, it argues, the investor base for this asset class is very small and CMBS offers no economically viable exit for originators.

CMBS

CMBS pay-offs bounce back

One month after posting the biggest drop in 18 months, the percentage of US CMBS loans paying off at their maturity date rebounded in November, according to the latest Trepp pay-off report.

In November, 47.1% of loans reaching their balloon date paid off. This was over five points above October's 41.8% reading.

During 2010, the average monthly reading had been 34%. In 2011, that number has increased to almost 41%. This reflected an improvement in the lending environment in the first half of the year that allowed some big 2005 and 2006 loans to refinance, Trepp says.

It continues: "At this point, we don't expect a similar improvement over the next 12 months. That's because, beginning next month, the first of the 2007 five-year balloon loans will come due. These will be even harder to refinance than the 2006 five-year balloons."

Given these two factors, while the number may be bumped higher or lower from month to month, Trepp doesn't anticipate the average getting higher than its current level.

The November number of 47.1% was slightly above the 12-month rolling average of 45.1%. By loan count (as opposed to balance), 50.0% of the loans paid off. This was up by almost six points from October's reading of 44.2%. On the basis of loan count, the 12-month rolling average is now 49.6%.

CMBS

Office CMBS delinquencies a concern

November marked the fourth straight month of declines in US CMBS delinquencies, though office properties remain an area of concern heading into 2012, according to Fitch's latest delinquency index results.

CMBS late-pays declined by 15bp in November to 8.41% from 8.56%. New delinquencies totalling US$1.8bn were offset by US$2.2bn of resolutions, Fitch says. More than half of all new delinquencies consisted of office loans.

Of the four most prevalent CMBS property types, loans backed by office properties saw the largest percentage gain in delinquencies since October, as well as over the past twelve months. Office late-pays were up by 4.3% (27bp) month-over-month and since November 2010 have increased 16.5% (93bp) from 5.63% to 6.56%. Office properties now contribute 210bp (US$8.4bn) to the index.

Fitch says that in contrast to the increase for office (and modest upticks for hotel and industrial), multifamily and retail delinquency rates declined from last month as follows: multifamily - 15.71% (from 15.99% in October); hotel - 12.66% (from 12.54%); industrial - 10.34% (from 10.28%); retail - 6.63% (from 6.83%); and office - 6.56% (from 6.29%).

RMBS

UK RMBS criteria updated

S&P has updated its methodology and assumptions for rating UK RMBS, following its September request for comment. The revised criteria apply to all new and existing ratings on UK RMBS.

The criteria aren't expected to have an impact on existing ratings on prime UK RMBS, although marginal rating actions could affect those prime RMBS whose credit performance in the recent downturn has been somewhat muted and some prime RMBS backed by asset pools that have not been recently managed. The impact on the non-prime sector of the UK RMBS market will be more pronounced, however.

Although ratings on most senior securities in non-prime UK RMBS should experience few changes, ratings on more than half of mezzanine securities and two-thirds of junior ones could be lowered, S&P says. The magnitude of any rating changes will depend on individual pool and structural features and greater variance will occur in specific transactions. However, the changes should generally be in the range of one rating category.

Some of these transactions have high seasoning, strong performance and lower original LTVs than that of the archetypical pool. The criteria aren't expected to impact the senior securities in these transactions and may positively affect some mezzanine and junior securities.

S&P intends to complete its review of all existing UK RMBS ratings over the next six months.

RMBS

MBS CCP announced

The DTCC's Fixed Income Clearing Corporation (FICC) mortgage-backed securities division has filed an application with the SEC to provide central counterparty (CCP) and pool netting services for trades in US agency MBS. The initiative is designed to reduce the risks and costs associated with trading in this market.

"We anticipate that our central counterparty services will reduce risk by greatly streamlining the settlement of mortgage-backed securities trades," says Murray Pozmanter, DTCC md and general manager, clearing services.

Once it has regulatory approval and implements the service, MBSD will guarantee settlement on all matched trades, a critical step for the MBS industry where the settlement of a trade often doesn't take place until months after the trade itself was made. The guarantee will ensure the completion of these long-settling trades if either of the trading parties defaults on its initial trade commitment or pool delivery obligations.

Although MBSD is currently able to net down more than 90% of the MBS trades it handles, in its role as a central counterparty it will introduce an additional netting process - pool netting - that will further streamline settlement on any remaining obligations.

To cover the risk of default by a member firm, MBSD will collect and hold collateral from its members in a clearing fund. With the introduction of a CCP, MBSD's current clearing fund risk management process will be modified to account for two additional components - potential intraday exposure and the results of daily back testing. To show its member firms the impact these new components will have on their daily clearing fund requirement, FICC is running a two-month 'parallel' reporting programme.

RMBS

UK RMBS impacted

S&P has placed on credit watch negative its credit ratings on 764 tranches in 119 UK RMBS, following an update to its criteria for rating such transactions (SCI 9 December). Affected deals are those where the agency believes there is at least a one-in-two chance that ratings will be lowered, following the application of its updated criteria.

The rating actions primarily relate to the UK non-prime RMBS sector. Specifically, S&P has placed on credit watch negative ratings on 592 tranches in 96 non-prime transactions. In addition, it has placed on credit watch negative its ratings on 172 tranches in 23 prime UK RMBS transactions.

The agency says it intends to complete its review of all existing UK RMBS ratings over the next six months.

RMBS

Aussie RMBS arrears falling

Australian prime RMBS arrears have fallen for the second consecutive quarter across all 30+ day indices, according to Fitch's 3Q11 Dinkum Index results. The index decreased by 17bp to 1.52% in September 2011 from 1.69% in June 2011.

"The stable mortgage performance in 3Q11 reflects that households have adjusted to the payment stresses of 4Q10 and 1Q11. Mortgage performance is expected to continue its improvements in 4Q11, further assisted by the recent interest rate decreases in November 2011, with the December 2011 decrease having more of an impact in 1Q12," says Courtney Miller, analyst in Fitch's structured finance team.

As expected, the decrease in arrears was predominantly in the 30-59 days and 60-89 days buckets, which were most affected over 1Q11-2Q11. As there have been no interest rate increases this year, Fitch expects this decrease to continue through 4Q11.

The Fitch Dinkum 90+ Days RMBS Index saw the smallest reduction of the three arrears buckets, decreasing to 0.63% in 3Q11 from 0.67% in 2Q11.

Conforming low-doc borrowers were at 5.3% at September 2011, down 8bp from 5.38% in June 2011. The 90+ days delinquency ratio reached its highest peak since inception at 2.87%, proving that low-doc borrowers remain under pressure in making mortgage payments.

Non-conforming low-doc borrowers' 30+ days delinquencies decreased by 198bp to 13.85%, returning to December 2007 levels. This decrease is believed to be primarily due to stable interest rates and the settlement of defaulted loans. Total low-doc 30+ days delinquencies decreased 18bp to 6.37%, down from record highs of 6.74% in 1Q11.

Fitch continues to believe that low-doc borrowers captured in the Dinkum Index are more likely to be affected by monetary policy decisions. These borrowers are expected to benefit from the recent rate cuts in 4Q11 and from the general health of the Australian economy.

RMBS

RMBS RFC issued

Moody's has published a request for comment regarding proposed changes to the assumptions and methodology used in its RMBS collateral analysis model, MILAN. The RFC details proposed changes to the approach used by the MILAN model for certain loan characteristics, as well as changes to some country settings.

Among the key proposed changes is the introduction of a transaction minimum credit enhancement level. The overall MILAN Aaa CE will be subject to a floor, which will be defined for each market. This market level floor will take into consideration general market uncertainties, such as system-wide event risk and asset correlation, which may lead to high losses in the pool in an extremely stressed scenario despite overall good quality of the assets.

Other proposed changes include: updates to seasoning adjustments; updates to various settings for Spanish RMBS, including the default frequency curve, origination channel and nationality adjustments and the introduction of an adjustment for temporary workers; and updates to various settings for Italian RMBS, including the default frequency curve, origination channel, nationality and adverse credit history adjustments and increased differentiation of default risks across Italian regions.

Finally, Moody's is proposing to update its approach to determining house-price stresses. The agency has published a separate RFC regarding the implementation of its House Price Stress Rate (HPSR) methodology.

The HPSR framework is splits into two factors: variable, which addresses the extent to which current house prices have departed from sustainable market fundamentals; and fixed, which addresses the extent to which structural economic features, such as housing oversupply, contribute to further declines in house prices. The variable and fixed factors are combined to produce the HPSR.

The ratings of approximately 25 EMEA RMBS transactions could be negatively affected by the proposed changes. Of the affected transactions, the vast majority would be in Spain (accounting for 23), with other markets being only very marginally affected. Moody's expects that the impact for these affected deals will be between one to three notches in most cases for the senior tranche.

The deadline for comments for both RFCs is 16 January 2012, with the methodologies expected to be published later in the month.

RMBS

Impact of REO dispositions uncertain

Fitch expects single-property REO and bulk REO sales to be a key activity in the US housing market over the next two years. However, uncertainties around FHFA's next steps make the disposition of those assets and their impact on the housing market hard to predict and variable by location.

Lenders Processing Service estimates that, nationally, over two million properties are currently in foreclosure. Corelogic estimates the percentage of total sales that are distressed loan properties has averaged 25%-35% in recent months. The investigation by several state governments into the processes that banks used to foreclose caused the market to freeze and build up a glut.

REO is expected to be important in the disposition of these assets over the next two years, with the majority occurring during the next 12-24 months. The lag is caused first by the foreclosure process, which takes on average approximately 12 months to complete. Subsequently, properties spend on average nearly eight months in REO before being sold.

The impact of these sales on the broader market is unclear, Fitch notes. FHFA, which owns approximately half of all residential distressed assets, requested suggestions in the autumn on how to dispose of them.

No decision has been made, but the director has publicly said that FHFA is considering solutions that are local, not national, in scope. It is possible, but unlikely, that a rapid disposition of FHFA homes at discounted prices could have a significant impact on the national market.

Fitch believes that FHFA will likely choose a programme that leads to measured sales or sales to investors that hold and rent out the properties for some term. This impact would be more modest in most regions. However, in some overbuilt areas, any disposition will likely be more notable.

RMBS

NHG RMBS on review

S&P has placed on credit watch negative its credit ratings on 38 tranches in 16 Dutch RMBS backed by Nationale Hypotheek Garantie (NHG)-guaranteed loans. The action follows the credit watch negative placement of the agency's long-term sovereign ratings on the Netherlands.

The NHG is issued by the Stichting Waarborgfonds Eigen Woningen (WEW). WEW's ability to meet its payments when it has a liquidity shortfall depends on the Dutch government's creditworthiness; therefore, all triple-A ratings on tranches in Dutch RMBS transactions where credit is given to the NHG guarantee are on review. S&P will give credit to the NHG guarantee up to the rating of the sovereign rating on the Netherlands.

The agency says there is at least a one-in-two chance that it will lower the sovereign rating on the Netherlands by a maximum of one notch.