Contents

ABS

Looking ahead for cat bonds

S&P has published extracts of a roundtable discussion on the catastrophe bond market it recently hosted. In a generally forward looking and positive discussion the participants concurred on a number of issues not least that despite the economic uncertainty surrounding the eurozone, unsettled US fiscal policy and volatile stock and bond markets there will be a robust pipeline of new issuance in 2012.

Among other things S&P highlighted the issues around Mariah Re's bonds (STORM passim). The agency asked: "Given the expected 100% loss to both classes of Mariah Re bonds, do you think there's a market for bonds covering severe thunderstorms?"

Brian Tobben, svp, insurance-linked securities, PartnerRe New Solutions, responded: "Yes. Other than a few structural concerns, we looked at Mariah and felt it was a reasonable transaction, although we didn't think it cleared at the right price. On a comparative basis, we've seen a number of tornado covers that traded in the insurance-linked securities market this year as well. With the appropriate structure and the right price, tornado risk can be placed."

Mariagiovanna (Patti) Guatteri, director, insurance-linked securities trading, Swiss Re Capital Markets, added: "I agree with Brian. I think there is a market. Pricing may be different moving forward, and changes in structure will be required because we learn more from losses. But I don't think investors are going to shy away from this risk."

Brent Poliquin, CCM manager, insurance-linked securities, AIR Worldwide, observed: "Irrespective of the Mariah transaction, 2011 has been an extremely active year for severe thunderstorm activity with companies like Allstate posting losses in excess of US$1bn. More and more companies are recognising the importance of including thunderstorms in their overall risk management strategy. Given this sort of risk awareness, it makes sense that it would translate to continued risk transfer into the capital markets."

S&P then asked: "How do you think the sovereign debt crisis and the complete loss to the Mariah Re bonds will affect trading in the secondary market in 2012?"

Brett Houghton, portfolio manager, Fermat Capital Management, said: "These are almost two separate questions. What we saw not only in the wake of Mariah, but also in the wake of the Japanese earthquake, was a robust trading in the secondary market, both at prices very near par for bonds exposed to Japanese earthquakes that were not expected to be affected, and also at distressed prices, all the way down to zero in the case of Mariah. Distressed trading is definitely up, and I think liquidity has improved over the last five years relative to what it was after Hurricane Katrina."

He continued: "With respect to the sovereign debt crisis, cat bond investors generally rely on less leverage than they did going into the 2008 crisis. In any market, there would likely be selling to raise cash in a crisis. But I think the cat bond market would likely experience less selling to raise cash in a repeat of a 2008-type scenario. [In addition,] the European crisis has been [ongoing for more than] two years, whereas the 2008 crisis had a more sudden onset. That means that investors in all markets have had more time to set up for this."

S&P then asked for views on pricing for 2012. Niraj Patel, senior trader and portfolio manager, Genworth Financial, replied: "The European crisis may put some pressure on European insurers and re-insurers from the capital perspective. Moreover, although we didn't have any headline-insured losses related to U.S. hurricanes or earthquakes, we did have a year with a great variety of catastrophes and insured losses. We also saw some capacity constraints related to peak perils. So there is a reasonable probability that spreads will widen somewhat in 2012."

The rating agency then moved on to expectations for new issue volume in 2012 and what factors that will affect it?

Guatteri said: "I think there is a robust pipeline going into 2012, so I'm optimistic. A specific trend we see is a high demand for aggregate coverage. That may also be an indication that the traditional market may not be enough to support this demand. An attractive pricing environment for sponsors, a healthy risk appetite of ILS investors, and whether sponsors value multiyear protection within the cycle would positively affect new issuance volume."

Houghton added: "Look for probably about US$6bn of issuance in 2012. We're still catching up from the structural demand baked into the market this year. The overall issuance target that would have been achieved this year was not due to some market delays after the Tohoku earthquake and the RMS model changes."
He continued: "A broader, long-term factor coming into play next year and later is the lead-up to the formal implementation of Solvency II. I'd be remiss not to also mention the accumulation of losses from a very wide variety of perils around the globe this year that have resulted in a more balanced relationship between capital in the insurance and re-insurance industries and the risks the industry is being asked to take. That balance is definitely in a healthier zone, which would lead us to expect increasing issuance volumes. And I think that the volatility and the fear of losses in some of the traditional capital markets asset classes are contributing to investor interest in ILS."

Patel added: "I agree with what Patty and Brett are saying in terms of the increased issuance in 2012. One of the trends we have seen is issuers re-tapping into their shelf and doing similar issuance, which is easier for investors to understand because they have already looked at the structure before. This, however, doesn't help from a diversification perspective. I would like to see a broader variety of issuers and different risks coming to market--for example, hurricane risk that isn't so heavily weighted toward Florida, or earthquake risks across the country for areas like the New Madrid seismic zone or the Pacific Northwest."

Tobben said: "We don't think there's any reason to believe there will be significant variation from recent years--somewhere around US$5bn is what we would project for 2012. There are a number of factors that could drive variations in issuance: how competitive pricing is in the ILS market relative to traditional reinsurance and the higher capital requirements due to implementation of the new RMS model and Solvency II. There could even be another medium-sized loss event that might drive a need for additional capital."

S&P then turned to smaller/private cat bond transactions. It asked whether there'll be an increase in 2012 in such transactions and, given the current cost structure, what is the minimum size of an issue that makes it economical to bring to market?

Houghton responded: "As the market grows, I think we will continue to see a broader variety of ways to access the market. Although we're enthusiastic supporters of public transactions, sometimes cost savings can be gained on the private side. If an issuer has a real need or purpose to do a private transaction, and benefits from it, we support those as well. I do think we'll see more private deals."

Guatteri added: "I hope there won't be a large number of private transactions as I really support more of a public 144A type of market and I'm not sure there is a big economic saving doing private transactions. However, there might be a trend for smaller issuances using shelf programs that sponsors can leverage after paying for the initial set-up costs. On the private transactions, I don't see the benefits for investors. For sponsors who consider the cost of issuing a 144A transaction prohibitive, it might make sense, but from an investor perspective, the liquidity would be significantly reduced in a private transaction."

Tobben said: "Private transactions seem to make sense for select sponsors in certain situations, but transaction costs are an issue. I don't think they're going to be a major part of the marketplace, but there will continue to be a few of those each year. I would be surprised to see a growing trend toward smaller transactions because bringing them to market is time-consuming and expensive. The transactions themselves are generally illiquid and there's also a potential for adverse selection in that the small risks that are priced attractively or structured attractively often get done quickly in the private market. I wouldn't expect to see a tremendous amount of growth in that segment."

He continued: "Assuming the ILS and reinsurance markets are priced similarly, my view is the minimum issue size is probably still around US$100m. A repeat issuer might be able to leverage prior experience and even market relationships to reduce that cost to some extent, but you need around US$100m. This minimum issuance size is probably keeping folks out of the market."

Guatteri added: "The magic number I hear is usually US$50-US$100m for minimum size. It also depends whether the sponsor is committed to coming back to the market to leverage the initial expenses for a future issuance. As the cost of setting up the program often keeps out smaller-sized deals, one possible solution could be to set up more flexible programs which are open to multiple sponsors, so the cost can be shared."

ABS

Life securitisation shows potential

S&P has published extracts of a roundtable discussion on longevity securitisations it recently hosted.

The rating agency observes: "With recent transactions in the UK, longevity securitisations are attracting more attention in the US. Differing market dynamics in the UK and US are also revealing the direction and focus their longevity securitisation markets will take: the UK market transactions generally focus on companies transferring their pension plan risk, known as 'de-risking'; transactions in the US lean more towards mortality catastrophe bonds."

It continues: "The [roundtable] panellists offered their perspectives on those markets, concluding that there's significant growth potential in both. Still, they cautioned that given the generally complex nature of these types of transactions - a considerable amount of data due to the thousands of individuals in every pool, for example--strategy to execution could take as long as a year. Moreover, investors remain concerned about counterparty risk and the illiquid nature of these transactions."

Another key issue is regulation. So, S&P asked: "What do you believe will be the impact of new and existing financial regulations on the longevity market?"

Jeffrey Stern, partner in the structured finance and derivatives group at the law firm Stroock & Stroock & Lavan, responded: "First of all, longevity and mortality swaps are not going to be cleared on exchanges until they become much more standardised than they are at present. We are many years away from that level of standardisation. Consequently, longevity and mortality swaps will remain OTC (over-the-counter) derivatives for the foreseeable future. That being said, Dodd-Frank will likely alter the risk capital requirements for bank counterparties and end users. This may in turn result in higher capital levels, thus making these deals more expensive to execute."

He continued: "It is also unclear whether a longevity cat bond will, in the end, be treated as an asset securitisation. I believe that the final resolution of that issue has not yet been determined. Even if such transactions were subject, for example, to the Dodd-Frank risk retention rules, it remains very unclear how such requirements would operate for this asset class. In all events, the law is still quite unsettled, and there is hope in the insurance-linked securities world that these cat bond structures will ultimately not be treated as asset-backed securities and will thereby avoid some of the risk retention and reporting obligations associated with ABS."

Gordon Fletcher, principal at Mercer Investment Consulting, added: My angle is advising pension funds. I don't think any new financial regulations are coming on the horizon that could impact those in the US We've heard a lot of talk about possible convergence between the US GAAP accounting regulations and the international accounting standards that are adopted in Europe and the UK That would be quite helpful if there was greater convergence because US GAAP doesn't generally support de-risking for pension plans and their sponsors. The sponsors are allowed to take a credit for expected equity returns in their accounts that are not allowed under international accounting standards. If they were to converge, that could promote de-risking at a much faster pace, but it certainly doesn't seem like that's going to happen any time soon."

S&P then turned to the future, asking panellists for their outlook for the market itself.

Fletcher replied: "My colleagues in the UK told me they have quite a pipeline of clients wanting to look at this with varying degrees of seriousness. Certainly there's a number of pension plans in the UK that are well along this process and, having seen two big deals go through recently, there is definite momentum. I think we're going to see more and more of the UK plans looking at these kinds of options, which is going to cause more and more action on the parts of reinsurers who are going to start to fill up their books. I think this could promote more interest in seeking other exits for the longevity risk other than the traditional reinsurer approach. The banks, of course, are going to be very keen to exploit opportunities here."

Stern added: "I share Gordon's view that the continued extension of people's life horizons and the growth of life expectancy will continue to put pressure on various market players to manage proactively their longevity and mortality risks. I do believe that will eventually result in more transactional activity in the field, particularly from pension fund in the US"

He continued: "I also believe that there is a heightened interest in the asset class. There are forces in the markets that are pushing market participants toward uncorrelated types of investments, and longevity and mortality risk transfer is an area that offers potential scale not often found in newer asset classes. I expect that we will see a significant growth over the next couple of years in this area as a result of these trends."

Structured Finance

SCI Start the Week - 9 January

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

Pipeline
The year began with three new deals entering the pipeline last week. The largest is a US$1.7bn stranded cost ABS (CenterPoint Energy Transition Bond Company IV), which was joined by a US$765m student loan ABS (SLM Student Loan Trust 2012-1) and a US$400m CLO (ALM V).

Pricings
The first RMBS of the year (€722m Popolare Bari SPV 2011) has priced. Three further deals also printed late last year - a C$120m ILS (Vecta 1), a €614m SME CDO (Madrid FTPYME II) and a US$775m credit card ABS (Chase Issuance Trust 2011-3).

Markets
The first trading week of 2012 was fairly quiet across most structured finance secondary markets. However, US CMBS was something of an exception as volumes jumped back to 2011 levels.
"Since the beginning of December, BWIC volumes have declined significantly, but in this holiday-shortened week there was nearly US$1bn in lists," report Deutsche Bank CRE debt analysts. Consequently, they say spreads were tighter across the board, with new issue mezz and legacy AJ spreads tightening the most.
Citi securitised product analysts concur, noting: "Weekly duper volume reached about US$700m, back to near its 2011 average of US$732m, after a slow December." Generic dupers and GG10s are now at 235bp and 250bp, respectively, 25bp-35bp tighter than at year-end. Generic AMs, currently at 625bp, are in by 75bp compared to year-end.
Non-agency RMBS-related price action was more muted, as prices remained close to flat over the past month, say US residential credit analysts at Barclays Capital. Despite that, they add: "The tone in non-agency cash is moderately bullish and there were marginal gains...in jumbo hybrids and alt-A fixed positions. Synthetic indices rose strongly in the first week of January, after remaining mostly flat during the second half of December. PrimeX rose 1.5-2 points on the week and ABX 06-07 PAAA/LCF rose 1-3 points."
Sentiment remained mostly unchanged in the opening week of 2012 in the US ABS market, according to analysts at JPMorgan. "Short-duration triple-A benchmark ABS that can serve as cash surrogates remain the hot commodities and continue to trade very well," they say. Spreads were mostly unchanged over the week, but triple-A two- and three-year fixed prime auto loan ABS spreads tightened by 2bp each.
Spreads were also unchanged in the US CLO market, report analysts at Bank of America Merrill Lynch. "Only modest flows into the New Year so far, as CLO investors continue to look for direction cues from broader markets."

Deal news
• Banco BPI has surprised the market by launching a fixed price tender offer for ten bonds, accounting for €2.17bn of outstanding nominal value, across three Portuguese RMBS transactions - Douro Mortgages 1, 2 and 3. The offers form part of the firm's efforts to manage its balance sheet and capital structure, and aim to provide liquidity to successful participants.
• Dock Street Capital Management has been retained as liquidation agent for Kleros Real Estate CDO IV. The collateral will be sold via two auctions on 18 January.
• Nomura Corporate Research and Asset Management has given notice of its resignation as investment manager on the Clydesdale Strategic CLO I and Clydesdale CLO 2005 transactions. The manager proposed to assign the investment management agreements for the deals to Ares Management.
• Faxtor ABS 2005-1 class A1 noteholders have been invited to tender their notes for purchase. The maximum proposed spend amount is €22m at a maximum purchase price of 80%.

Regulatory update
• The comment period on the proposed Volcker Rule has been extended by a month until 13 February 2012. The extension forms part of a coordinated interagency effort to allow interested parties more time to analyse the issues and prepare their comments.

Deals added to the SCI database last week:
Acier 2011-I
Atlantes Finance No. 4
BPM Securitisation 2
Chase Issuance Trust 2011-A3
FCT R&B BDDF PPI
GC FTPYME UNNIM 1
Geldilux TS 2011
Loma Re Series 2011-2
Madrid FTPYME II
Penates Funding 4
Siena Lease 2011-1
Vecta 1

Top stories to come in SCI:
TRACE and ABS liquidity
CDS documentation
US CMBS modification trends
Asian CLOs
Developments in real-time clearing
Recruitment trends

Structured Finance

DataWarehouse construction progresses

User functionality is the current focus of the team building the European DataWarehouse (ED), after Sapient Global Markets won the mandate to construct it at the end of October (SCI 1 November). Functionally, the ED will be a simple system, given that its purpose is to facilitate access to loan-level ABS data via screens and APIs.

"We're working with our usability experts to design the ED interface, which needs to be as simple as possible and cater for different types of user groups - those transacting in large volumes, as well as those doing a little on an occasional basis," confirms Darach Ó Braonáin, director at Sapient Global Markets. "We're spending time on getting the data representations of the ECB's ABS templates and taxonomy right. There are many subtle complexities in the European securitisation market, so we're nailing down how the system should work."

In parallel with its design, Sapient is also helping to establish the European Datawarehouse company that will operate the DataWarehouse. This involves building out the office and training the staff.

It is critical that the ED is owned and operated by the market for the market, according to Kevin Samborn, vp at Sapient Global Markets. Consequently, the firm began construction by engaging all stakeholders and ensuring that the process was as inclusive as possible.

Samborn suggests that Sapient's independence as an advisory and consulting firm has facilitated this process. "Construction of the ED needs to reflect perspectives from all market participants. While it is mandated by the ECB, it will be owned and overseen by a group of market participants that comprises both buy-side and issuer/originator participants."

The aim is to encourage widespread adoption, including by participants that don't have large IT teams or budgets. "The idea behind the project is to democratise access to data: information will be provided in an easy-to-understand way, so that any user can build their own analytics or use off-the-shelf applications. There is not at present a regulatory requirement for issuers to provide data, but we anticipate that most will participate. Ultimately, we expect the same infrastructure that has developed in the US to eventually take root in Europe," explains Ó Braonáin.

The ED ownership structure is expected to be based on a broad representation of user constituencies. "A key tenet of the ownership and management structure is that it is representative of the market," continues Ó Braonáin. "For example, a representative pricing committee will decide what to charge for access based on a cooperative model. Running costs will be fixed, so the more customers there are, the cheaper the price."

Sapient plans to host a series of briefings over the next six months to educate the market about the ED. "It's quite challenging: everyone will need to undertake at least some work to prepare for the introduction of the ED, so we're encouraging market participants to start thinking about this now," Samborn concludes.

CS

RMBS

Douro tender offers surprise

Banco BPI has surprised the market by launching a fixed price tender offer for ten bonds, accounting for €2.17bn of outstanding nominal value, across three Portuguese RMBS transactions - Douro Mortgages 1, 2 and 3. The offers form part of the firm's efforts to manage its balance sheet and capital structure, and aim to provide liquidity to successful participants.

The tender is for all rated notes in DOURM 1 and DOURM 2, and for the class A notes of DOURM 3. Senior notes are being tendered at 65, mezzanine at 40-52 and juniors at 35-37, for a maximum cost on full take-up of €1.395bn.

ABS analysts at Barclays Capital note that, given the current economic backdrop in the eurozone and that no Portuguese transaction has been called on its first optional redemption date, the launch of a tender offer is surprising. "There may be a variety of reasons for the offer by BPI, including a simple investment strategy to purchase bonds that it is most familiar - and hence more comfortable - with for a price it deems represents good value. The repurchase of these bonds also allows BPI to book accounting profits in its consolidated accounts, as well as improve its regulatory capital position," they comment.

Further, the BarCap analysts suggest that BPI may also repo any eligible bonds to the ECB. In the scenario that it owns the majority of each class of bond, it could even consider amending the transactions by way of an extraordinary resolution to call them early and potentially use the collateral to issue a new retained transaction to repo with the ECB.

In respect of the tender offer, the analysts point out that the class A and mezzanine levels look attractive compared with current indicative secondary market levels. They expect many investors to be interested in the offer because it provides a useful exit strategy from Portuguese exposure. In addition, they believe that many other issuers will be interested in the outcome and - if deemed successful - may also use a similar strategy to help improve their regulatory capital positions.

The tender offer will expire on 13 January, with results announced on 16 January. The settlement date is two days after.

The tender isn't being made into certain jurisdictions, including the US, Italy, Belgium, France, Portugal or Ireland.

CS

Structured Finance

Should triple-A be the only way for structured finance?

Andrew South, senior director and head of European structured finance research at S&P, argues that rating agencies can offer investors a valuable diversity of opinion

Investors in structured finance securities remain highly focused on triple-A ratings - and, consequently, so do issuers. But with banking system and sovereign risks recently increasing, triple-A ratings are becoming more difficult to achieve. In our view, market participants also tend to pay too little attention to what a triple-A rating for a given security actually means, based on the analysis behind it.

In particular, a security that one rating agency labels triple-A may not achieve the highest rating from another agency. This is because definitions and methodologies can vary significantly from one rating agency to the next.

This raises several questions: is the focus on triple-A ratings in the best interests of investors and issuers? Could a larger market develop for securities with a broader range of credit risk profiles? Should investors always view triple-A ratings from different rating agencies as comparable, or might they benefit from greater diversity of rating opinions?

There are no simple answers. However, in S&P's opinion, the ongoing financial crisis has shown that commonly held views and widespread use of similar methodologies can gradually heighten systemic risks in global markets. Therefore, we believe that wider acceptance of lower-rated securities and greater acknowledgement of different rating methodologies could be positive for the structured finance market.

The financial crisis triggered changes in credit analysis
The 2008-2009 recession and ongoing financial crisis have caused many market participants to reassess how they measure certain risks. Among rating agencies, this has led to a greater diversity in methodologies.

We at S&P have recalibrated some of our rating methodologies, aiming to enhance transparency and ensure comparability of our ratings across sectors. In some areas, we have tightened our ratings criteria. For example, we may look for more credit support and other risk-mitigating features before we consider rating securities triple-A.

Consequently, our assessment of the creditworthiness of some existing issuers and securities is now lower than it was before. In these cases, we have lowered our ratings.

In structured finance, this has led some transaction sponsors to request that we withdraw our ratings on their outstanding transactions, especially in cases where we no longer rated the senior securities triple-A. It may also be harder for transaction sponsors to receive triple-A ratings from us on new issuance.

Some transaction sponsors have cited this as a reason for not engaging us to provide ratings on their new transactions. We observe that investors have generally not stood in their way, remaining more focused on whether a security's outstanding ratings are triple-A and less focused on the methodologies behind the ratings and which agencies provide them. We believe, however, that both issuers and investors should welcome diverse credit opinions based on different methods of analysis.

Tighter rating criteria may not increase issuers' funding costs
If transaction sponsors perceive that one rating agency's criteria will lead it to assign lower ratings than another agency would, they may simply not engage the first agency to provide a rating opinion. This is known as 'ratings shopping', and we believe it is now happening in some areas of structured finance, effectively denying investors a potential diversity of opinion.

But is ratings shopping even in the issuer's interests? Not necessarily. One of an issuer's principal concerns is to minimise each new transaction's funding costs and it may perceive that engaging a rating agency with tighter criteria could increase such costs.

Minimising funding costs has historically been synonymous with maximising the portion of a transaction's capital structure that can be rated triple-A - that is, providing the minimum credit enhancement for the senior notes that would still allow them to have a triple-A rating. However, we believe that issuers may not always need to shop for the least stringent rating agency criteria in order to minimise costs - especially now that credit opinions and rating scales are becoming increasingly diverse.

In structured finance, engaging two rating agencies with different rating standards or methodologies may simply result in less of each issuance being rated triple-A by both agencies, with some other tranches bearing 'split ratings' of triple-A from one agency and double-A from another, for example. This may not necessarily raise a transaction sponsor's funding costs.

True, investors may demand higher spreads for tranches with split ratings. But they may also accept a lower spread on the senior-most tranche, which would have higher credit enhancement to support triple-A ratings from both rating agencies. The lower spread on the senior tranche may more than compensate the issuer for higher spreads on the other tranches, mitigating any effect on funding costs.

Other transaction costs can be an important consideration too. For example, in transactions that include hedging arrangements - such as interest rate or currency swaps - it may be relatively costly to obtain triple-A ratings.

This is because derivative agreements that mitigate counterparty risk sufficiently to support triple-A ratings on the notes tend to be expensive. An issuer that aims to structure, say, only double-A rated notes - even if the notes pay a higher coupon - might reduce its costs overall, while increasing the availability of lower-rated, higher-yielding structured finance securities and potentially appealing to new investors.

Investors may value different approaches to risk assessment
A more important consideration, in our view, is that both investors and regulators may not currently take into account important differences between rating agencies - and between their triple-A ratings - in ratings-linked investment guidelines and regulations. Any guidelines and regulations based on generic rating categories may rely heavily on metrics that are only loosely comparable among rating agencies, given that those agencies may not use common rating scales or standards. We believe that, by contrast, market participants should understand and value differences in ratings definitions for the unique perspectives that they provide.

In our experience, investors commonly assume that the rating scales of the major credit rating agencies are equivalent. This is perhaps not surprising, given that most agencies historically have used rating scales with about the same number of gradations (around 20) and, in some cases, even use the same letter designations.

The assumption that one agency's ratings are the same as another's has effectively become entrenched in certain regulations - for example, elements of the Basel 2 regulatory capital accord - and also in many buy-side participants' investment guidelines. However, we would warn against this view. Indeed, we have argued in favour of removing ratings references from legislation and regulatory guidelines precisely because this practice may lead to over-reliance on ratings and a false sense of equivalence among different agencies' ratings.

Consider, for example, the fundamentals of how different rating agencies assess creditworthiness. S&P's structured finance criteria generally consider - among other factors - an issuer's capacity to make full and timely payment of all its obligations on a particular security. This is not true of all credit rating agencies.

Another valid approach to assessing creditworthiness, in our view, may be to consider the size of the expected loss on the security. Differences such as this may hamper comparability between our ratings and those of other agencies.

Various definitions and methodologies among rating agencies may also lead to significantly different ratings behaviour over time. For example, we looked at a sample of French and German mortgage covered bond programmes that we rate triple-A and that Moody's rates Aaa. According to Moody's, the minimum overcollateralisation necessary to maintain the current Aaa rating is about 7% on average across these programs.

By contrast, S&P would lower its ratings below triple-A if overcollateralisation on average fell below 23%. For Fitch, we understand the equivalent figure is about 15%, according to data from Deutsche Bank.

Were it not for the focus on triple-A that ratings-based regulations and investment guidelines have introduced, we believe investors might value more highly the diversity in approaches and opinions among rating agencies. In our view, investors would benefit more from having access to varied opinions about a security's creditworthiness than from having fewer, less diverse opinions that all result in the same rating. Obviously, if each rating agency used the same methodology, a second rating on the same security would effectively add no further insight.

As long as triple-A ratings remain the de facto standard for many structured finance market participants, the scope for rating agencies to air divergent credit views will be limited. Today, a newly issued security is still more likely to have two triple-A ratings from agencies with similar approaches than it is to have triple-A and double-A split ratings from two agencies with different approaches, or with differing views of certain aspects of the risks to investors.

We can't know, of course, how perceptions and historical norms might shape investor and issuer demand for structured finance ratings in the future. But we believe that by sticking with conviction to their own rating definitions and methodologies, rating agencies can offer investors a valuable diversity of opinion.

Structured Finance

Broker-dealer legal pair recruited

Crowell & Moring has hired a pair of experienced broker-dealer attorneys. Eden Rohrer and Linda Lerner both join the New York office as members of the corporate group.

Rohrer joins from Haynes and Boone, where she was a partner. She has advised broker-dealers in proceedings with the US SEC, FINRA, state and foreign regulatory authorities. Her practice focuses on CDS and other securities, as well as market manipulation, insider trading, money laundering and a range of other issues.

Lerner joins from Debevoise & Plimpton and also spent more than ten years at Domestic Securities. Her practice focuses on compliance and regulatory issues under the SEC, FINRA and other organisations.

Structured Finance

Investor relations head hired

400 Capital Management has appointed Mark Lewand as director and head of investor relations. He joins the New York-based firm from Cambridge Place Investment Management (CPIM) in London.

Lewand spent 8 years at CPIM, where he was a senior executive responsible for business development. In his new role he is expected to be responsible for leading 400 Capital's efforts developing and managing client relationships globally.

Structured Finance

Credit advisor recruited

Kepler Capital Markets has hired Joachim Karoubi Nordon as an advisor in its credit alternative solutions group (ASG) in London. His most recent role was as head of credit market coverage at West Point Derivatives while he has also worked for Commerzbank and Société Générale.

Structured Finance

SF lawyer joins in expansion

SNR Denton has added a new partner to its banking and finance team in London, which it has earmarked for growth. Edward Hickman joins the firm from Linklaters, where he spent six years as a partner in the structured finance team.

Hickman specialises in loan portfolio sales, securitisation, regulatory capital, commercial real estate financing, debt capital markets and derivatives transactions. His appointment follows the promotion of Paul Holland, who was named as head of the banking and finance department at the end of last year.

Structured Finance

GSE vet joins law firm

Washington DC-based law firm Venable has hired Daniel Danello as of counsel. Danello has previously worked for Fannie Mae and joins from Ropes & Gray.

Danello specialises in derivatives, repos, regulatory and compliance matters. He spent 10 years as Fannie Mae's associate general counsel to the treasurer on governance and compliance matters and transactions in the equity, debt and derivatives markets.

He has also worked as senior assistant general counsel at Sallie Mae and helped launch its student loan ABS programme.

Structured Finance

Offshore firm heads to Luxembourg

Ogier intends to open a boutique law firm in Luxembourg and set up a fiduciary business in the country later this year, focusing on corporate and fund administration business. It would make Ogier the first offshore firm to have an onshore legal presence in Luxembourg.

The Luxembourg legal practice will be led by François Pfister. He is a senior partner at OPF Partners in Luxembourg and has extensive legal experience in the country. He will be joined by Daniel Richards, who is currently group partner in Ogier's Jersey office.

CDO

Credit, distressed investment pro hired

Black Diamond Capital Management has appointed Kenneth Rubin as senior md and hedge fund portfolio manager. He will have responsibility for Black Diamond's hedge fund platform along with managing principal Stephen Deckoff.

Rubin will be based in the Greenwich, Connecticut office. He has over twenty years of experience in credit and distressed investing, most recently as md and co-head of credit at Och-Ziff Capital Management Group. He has also worked at Cerberus Capital Management and CIBC World Markets.

CDS

TriOptima Japan head named

TriOptima has appointed Ken Nishimura as head of TriOptima Japan. He will manage the continuing expansion of the company's client relationships in the country as well as the day-to-day operations of the Tokyo office.

Nishimura was a director at Advantage Partners Group and has also held roles at GE Capital Japan, Nomura Securities and Nomura International, where he focused on structured products. He now reports to Asia-Pacific ceo Yutaka Imanishi.

CLOs

Investment manager adds business development md

Highland Capital Management has appointed a business development md in its New York office. Brian Rice joins from Investcorp International and reports to head of business development Clay Shumway.

Rice is primarily responsible for business development in the US and Europe, including developing relationships with institutional investors, consultants and wealth management platforms. Prior to serving as partner at Investcorp he held senior positions at Trust Company of the West and at Atlantic Investment.

CLOs

Global credit manager created

Resource America and CVC Capital Partners have entered into a definitive agreement which will create a new company - CVC Credit Partners (CCP). CCP will be a global credit management business with teams in the US and Europe and AUM of over US$7.5bn.

As part of the transaction, Resource America is selling its CLO manager, Apidos Capital Management, to CVC Capital for US$25m in cash and a 33% ownership interest in CCP. Resource America is retaining certain management fees, relating to previously managed portfolios, which may be collected in the future.

The remaining 67% of CCP will be owned by CVC Capital. CVC Capital is also contributing its existing credit manager, CVC Cordatus, to CCP.

CCP's strategy and operations will be managed by Resource America and CVC Capital. The current employees of Apidos and CVC Cordatus will join CCP. CCP's chairman will be Jonathan Cohen, Resource America president and ceo, while CCP's ceo will be Marc Boughton, managing partner at CVC Cordatus.

Gretchen Bergstresser, senior portfolio manager at Apidos, and Jonathan Bowers, senior portfolio manager at CVC Cordatus, will each be senior portfolio manager at CCP. Christopher Allen, currently senior md at Apidos, will be CCP's coo.

The transaction is subject to conditions but is expected to close during Resource America's second fiscal quarter ending 31 March 2012.

CMBS

New CMBS director recruited

Morningstar has appointed Gregory Murdock as director of CMBS investor services. He reports to Robert Dobilas, president of Morningstar's structured credit ratings business.

Murdock will work directly with CMBS investors to educate them on Morningstar's structured credit rating methodology. He will also represent the firm's structured ratings business with industry trade groups.

Murdock joins from Fannie Mae, where he was CMBS director. He has more than 20 years of experience in structured finance and fixed income, having also held posts at Freddie Mac and GEICO Corporation.

RMBS

Further RMBS investigations opened

Investors represented by Gibbs & Bruns have issued instructions to US Bank and HSBC, as trustees, to open investigations of ineligible mortgages in pools securing over US$19bn of RMBS issued by Wells Fargo affiliates.

Collectively, the law firm's clients hold over 25% of the voting rights in 48 trusts that issued the RMBS. Gibbs & Bruns has been active in this field, with instructions issued last month to five banks in regard to JPMorgan RMBS (SCI 16 December 2011).

ABS

Stable outlook for Canadian ABCP

Moody's outlook for Canadian ABCP programmes for 2012 is stable, with the credit quality of the underlying assets remaining strong and the rating outlook for the banks that supply their liquidity support continuing to be stable.

"The credit quality of the assets in the ABCP programmes remains strong, with few or no losses relative to credit enhancement," says Lisa Singman, Moody's vp-senior credit officer. "Credit trends of the existing assets will remain positive and will continue to be so in 2012."

The agency expects the Prime-1 ratings on Canadian ABCP conduits to remain stable this year. In addition, the amount of Canadian ABCP outstanding is expected to remain at current levels during 2012. As of June, Moody's rated C$24.27bn Canadian ABCP.

ABS

Monoline replacement agreed

Assured Guaranty (Europe) has replaced Ambac Assurance UK as financial guarantor and controlling creditor on Worcestershire Hospital SPC, a £97.2m UK Private Finance Initiative bond issue. The move is expected to enhance the creditworthiness of the bonds and was approved by 100% of the voting bondholders.

The guarantees - for timely payment of scheduled principal and interest throughout the life of the bond, which matures in 2030 - are being paid for by the bondholders through a reduction in the coupon on the bonds. Moody's has re-rated the bonds Aa3 based on the financial strength ratings of Assured Guaranty.

Dominic Nathan, md and head of infrastructure at Assured Guaranty (Europe), comments: "We are seeing a resurgent investor appetite for guaranteed infrastructure bonds - this is the first of a number of deals in our pipeline that we expect to close. Having survived the financial crisis with some of the highest ratings in the financial sector, Assured Guaranty is well placed to play a leading role in financing infrastructure projects in the UK and Europe at a time when the banks are retreating from long-term lending."

Structured Finance

Retained ratings warning issued

Fitch reports increasing volatility in the ratings of eurozone structured finance (SF) transactions that are fully retained by originators for use as collateral with the ECB. This reflects the originator's motivation - as the sole investor - to only preserve ratings that will continue to meet ECB eligibility requirements, the agency says.

"Choosing to restructure or amend retained transactions - rather than to respect the terms of the original transaction documentation that are designed to ensure rating stability - is becoming more frequent," it explains. "This is especially the case when the counterparties involved in the transaction are downgraded below the rating threshold to support triple-A ratings. In contrast, where transactions are held by a wide investor base, market discipline can be effective in maintaining the original terms."

The issue occurs mostly with respect to transactions where counterparties have been downgraded below eligible rating thresholds for triple-A ratings, especially in Spain, Italy and Greece. Rather than comply with the initial terms of the transaction documents, originators are often choosing to either restructure deals or implement alternative remedies to those that were originally mandated contractually, with the aim of keeping the original counterparties in the deal.

The result will frequently be a downgrade and rating instability, particularly at triple-A levels, Fitch notes. As banks' credit positions increasingly come under pressure, such originator-motivated restructurings and rating instability in retained transactions will likely rise.

Fitch says its ratings are assigned on the expectation that the initial contractual documentation will be respected by transaction counterparties. Consequently, when originators choose to amend or restructure retained deals, the agency will downgrade affected transaction ratings to a level where it believes documents will be respected in the future.

This level will depend upon the degree of importance of the relevant counterparty exposure, the counterparty's credit profile or specific mitigating factors - for example, levels of credit enhancement or the involvement of independent third parties in decision-making. Where a proposed restructuring or amendment undermines a transaction's integrity more fundamentally, such that respect for the provisions of transaction documentation cannot be assured, Fitch may withdraw ratings on the basis that a robust rating opinion cannot be maintained.

Further, an originator's behaviour with respect to restructuring retained deals will be an influencing factor in the agency's ratings of any subsequent new retained transactions for which the originator requests ratings.

Structured Finance

Euro SF recovery predicted next year

A sustainable recovery in European structured finance issuance is unlikely before 2013, due to a combination of factors, Fitch suggests. The agency forecasts public and retained European structured finance issuance for 2012 to be €300bn-€350bn, broadly in line with the €317bn seen in 2011 and €337bn in 2010.

The big unknown is what proportion of this will be placed with investors, rather than retained for possible ECB funding. The placed market has increased from 29% of total issuance in 2010 to 38% in 2011 and Fitch expects this to rise yet further in 2012 to approximately 45%. This compares to 71%, accounting for €423.5bn, in 2007.

Headline risk is likely to continue to affect investor appetite for European structured finance deals, although an increase in demand from US-based investors observed in 2011 is seen as encouraging. Regulatory uncertainty remains another brake on the recovery in issuance. The possibility that covered bond issuance could crowd out structured finance supply also remains, although more recently pricing differences between RMBS and covered bonds have narrowed somewhat.

In addition, concerns about an economic downturn and whether the eurozone sovereign debt crisis will be resolved could weigh on supply - and on whether that supply is placed with investors or used as collateral for repos with the ECB. And in two segments of the market, CMBS and structured credit, a lack of new funding for the underlying assets is creating refinancing risk for existing transactions and a lack of new securitisable assets.

Structured Finance

Intra-day commentary service launched

Fitch has launched 'Fitch Wire', a new service designed to provide insightful credit commentary on market events as they happen.

"Our rating and research opinions typically reflect a longer time horizon and Fitch Wire complements that analysis with more immediate commentary on issues that matter most to investors," says Fitch president Paul Taylor.

Jeremy Carter, previously md and head of structured credit for EMEA at the agency, heads the Fitch Wire team. He reports to John Olert, chief credit officer.

CDO

ABS CDO liquidation scheduled

Dock Street Capital Management has been retained as liquidation agent for Kleros Real Estate CDO IV. The collateral will be sold via two auctions on 18 January.

CDS

Sovereign credit risk report released

CMA has released its 4Q11 global sovereign credit risk report, in which it names the top-ten most and least risky sovereigns, as well as the best and worst performing sovereign CDS. The firm reports that nearly all global CDS prices widened during November's volatile period as the eurozone debt crisis continued, with the region widening by 9% overall, indicating the significance of Western Europe to the global economy and the importance of finding a permanent resolution to the situation.

Among the other key findings of the report, CDS for the USA dipped below 40bp mid-quarter but widened back out with the rest of the market in November, closing the year 3bp tighter on the quarter at below 50bp. Greece remains the most risky sovereign credit, a position it held throughout 2011, while Egypt became the eighth most risky sovereign credit as its spreads widened from 457bp to 621bp. Sweden, Slovenia and Slovakia were the worst performers for the quarter, as the markets assessed the impact of a potential deepening euro crisis and the impact on bank lending and growth prospects.

In contrast, Asian and Central/South American countries performed strongly in Q4. A rally in October was followed by widening in November after heightened concerns in the eurozone. However, a December rally saw the levels close at just above the October peaks.

CLOs

Rising concern over CLO supply

JPMorgan's latest global CDO client survey shows that lack of CLO primary supply has significantly increased as a concern from the July 2011 survey, but is tied with the two other top concerns - regulatory reform and CLO spread volatility. Loan downgrades and defaults is in fifth place, suggesting less concern with fundamental deterioration than had been expected. Concern over ratings volatility is near zero.

Respondents expect the US leveraged loan prepayment rate to be 20%-30%, which is in line with JPMorgan's base-case 25% forecast, and the European loan prepayment rates to be less than 10%. Structured credit analysts at the bank note that if prepayment rates turn out to be higher than expected, there may be price upside in CLO debt that will soon exit or has recently exited reinvestment periods, to the extent the market is currently undervaluing contraction upside.

The ratio of CLO investors planning to add risk is 50%, according to the survey - only slightly lower than 56% in July. The ratio looking to reduce exposure has nearly halved to 9%, which makes sense, given the drop in prices.

The 5:1 buy/sell intention ratio is high and bodes well for CLO technicals and spreads, the analysts say. The ratio looking to hold increased to 41%.

Respondents picked 150bp as the most appropriate level for primary US triple-A spreads. Finally, 15% was indicated as the most appropriate primary US CLO equity return.

Responses to the survey were obtained from 109 clients.

CLOs

RFC issued on CLO criteria

DBRS is requesting comments on proposed changes to the methodology it uses to rate and monitor CLOs and CDOs of large corporate credits. The updated methodology will cover US, European and Asian transactions.

The proposed revised methodology includes three components: a rating methodology for CLOs and CDOs of large corporate credits; cashflow assumptions for corporate credit securitisations; and a Canadian surveillance methodology for CDOs of large corporate credits. The update incorporates the new 'DBRS Correlation Metric', which is a measure of diversity calculated using a newly proposed model - the 'DBRS Diversity Model'.

The proposal also incorporates updates to the DBRS Idealised Default Probability Table, recovery rates and international recovery rate and timing categories. Additionally, for revolving portfolios, the proposed revised methodology replaces the DBRS CDO Toolbox with a new closed-form statistical model for analysing pool-wide default and loss characteristics - the 'DBRS Large Pool Model'.

Finally, the agency has also published a 'Unified Interest Rate Model for US & European Structured Credit'. This methodology provides a framework for generating interest rate stress scenarios for use in structured credit rating analysis for US and European transactions.

Comments are requested by 27 January. Following the review and evaluation of all submissions, DBRS will publish a final version of this methodology.

CMBS

K-Deal analytics tool prepped

Freddie Mac is preparing a free database tool for investors and analysts to monitor the performance and credit quality of its multifamily K-Deal MBS. The Multifamily Securities Investor Access tool is designed to increase transparency and save investors time by providing easy access to all post-securitisation data from investor reporting packages for the securities underlying the related series of K Certificates.

Investor access features include: information from all master servicers/trustees in the industry standard Commercial Real Estate Finance Council Investor Reporting Package format; preliminary term sheets, offering circular supplements and deal and property level data; downloadable standard reports; and data on more than 1,300 loans, supporting about US$22bn in securities.

CMBS

CMBS delinquency index drops as office sector rises

US CMBS delinquencies finished last year with a fifth straight month of declines, according to the latest US CMBS Loan Delinquency Index results from Fitch. However, office delinquencies are continuing on an upward trajectory.

CMBS late-pays declined in December to 8.37% from 8.41% a month earlier, Fitch says. However, office delinquencies climbed to 6.84%, exceeding their previous high of 6.64% set in July 2011.

Retail delinquencies are also up from November's levels, by 26bp. Conversely, delinquencies improved most notably for hotel and multifamily loans, with rates down from both year-end 2010 and their respective peaks.

Current and previous delinquency rates are: 14.42% for multifamily (from 15.71% in November and 15.63% at year-end 2010); 12.02% for hotel (from 12.66% and 13.99% respectively); 10.25% for industrial (from 10.34% and 6.24%); 6.89% for retail (from 6.63% and 7.20%); and 6.84% for office (from 6.56% and 5.69%).

The increase in office late-pays was led by the US$363m Bank of America Plaza loan, secured by a 55-story office tower in Atlanta, which became 60-days delinquent in December. The ten-year interest-only loan, scheduled to mature in 2016, has suffered due to Bank of America downsizing space, Fitch explains.

The rise in retail delinquencies, meanwhile, was led by the US$137m Legends at Village West loan (which became 60-days delinquent in December) and by Discover Mills - a US$135m five-year interest-only loan that failed to pay off at its December 2011 maturity.

While retail delinquencies have historically been the most stable among the major property types, Fitch suggests: "The rate in 2012 may experience increased volatility if new bankruptcies or store closings, such as the recent ones announced by Sears and Kmart, occur with greater than expected frequency."

CMBS

CMBS evolution considered

New issue US CMBS continues to evolve but with uncertainties that broader market volatility will only serve to exacerbate, according to Fitch.

CMBS 2.0 - or 3.0, as some market participants are now calling it - closed out 2011 with issuance at just over US$40bn, the rating agency notes. "Among the more notable attributes is the re-emergence of public deals with super-senior tranches and credit enhancement levels not seen in several years. The market seems to be treating the re-emergence of true public issuance as a good thing for CMBS because it broadens the investor base. However, a question that is popping up with more frequency is how new deals will be underwritten over time," it adds.

Fitch continues: "It's no secret that CMBS underwriting standards have seen a slow decline over the last two years, though they are still more conservative than pre-recession levels. How investors will react if they continue to slip remains to be seen. Fitch steadfastly maintains that it will increase credit enhancement levels if standards continue to decline this year."

Another aspect to consider is how deals from CMBS 1.0 have performed, Fitch says. Deals that came to market in 2006-2008 are only half way through their lifecycle, so a considerable potential impact from future defaults remains. The agency believes the ultimate default rate for these vintages will reach 30% - currently, they stand at just over half that figure.

In addition, regulation is still an open issue that needs to be determined with new CMBS; risk retention is likely to cause the most potential cause for concern. Fitch believes risk retention in some form is necessary for continued confidence in the market. However, investors and not just regulators need to be satisfied with what is ultimately decided on, the rating agency says.

CMBS

CMBS loan liquidations retreat

The volume of CMBS conduit loans liquidated in December retreated sharply, dropping by 51% from November's reading, according to Trepp. However, last month's reading was unusually high - it was the highest total since Trepp began tracking this number in January 2010. The December number represents more of a reversion to the mean, the firm says.

At US$1.04bn, liquidations were about 80% of the 12-month moving average of US$1.3bn per month. Since the beginning of 2010, special servicers have been liquidating at an average rate of about US$1.07bn per month.

The December liquidations came from 122 loans compared to the 218 loans that were liquidated in November. The 12-month moving average is 154 loans per month.

The average loan size for liquidated loans was US$8.5m in December. Over the last 12 months, the average size of a liquidated loan has also been US$8.5m.

Trepp says the losses from the December liquidations were almost US$518m - representing an average loss severity of 49.86%. This was down 147bp from November's 51.33% reading.

The December loss severity reading is well above the average loss severity of 43.7% over the last 24 months and also well in excess of the 12-month rolling average of 42.8%.

CMBS

December pay-offs fall sharply

The percentage of CMBS loans paying off at their maturity date fell sharply in December, posting the lowest reading since May 2011, according to the latest Trepp pay-off report.

In December, 37.5% of loans reaching their balloon date paid off. This was almost 10 points below November's 47.1% reading.

During 2010, the average monthly reading had been 34%. In 2011, that number increased to almost 44%. 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 explains.

But the firm doesn't expect a similar improvement over the next 12 months. Beginning this month the first of the 2007 five-year balloon loans come due, which will prove difficult to refinance. In addition, the absence of a buoyant CMBS market takes away one potential funding source for borrowers - a source that was viable for the first half of 2010.

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

The December number of 37.5% was well below the 12-month rolling average of 43.9%. By loan count, 51.2% of the loans paid off - up by about a point from November's reading of 50%. On the basis of loan count, the 12-month rolling average is now 50%.

CMBS

2007-vintage maturities hit CMBS delinquency rate

After a positive November delinquency report, the Trepp CMBS delinquency rate reversed course and moved higher in December. The firm believes that the move marks the beginning of a six- to twelve-month stretch where the rate could increase by 75bp in aggregate, driven by the first wave of 2007-vintage loans reaching their balloon dates over the next few months.

Overall in December, the delinquency rate for US commercial real estate loans in CMBS jumped by 7bp to 9.58%, according to Trepp. The rate increased in eight of the twelve months of 2011. The value of delinquent loans now stands at US$58.5bn.

The percentage of loans seriously delinquent is now 9.06%, up by 18bp for the month. If defeased loans were taken out of the equation, the overall delinquency rate would be up by 8bp to 10.03%.

By sector, the multifamily delinquency rate fell by 61bp in December but remains the worst performing property type at 15.57%. The lodging delinquency rate fell by 8bp to 12.2% and was the best performing property type year-over-year.

Despite falling 17bp, the industrial delinquency rate finished the month at 12.03% and was the worst performing sector for 2011. The office delinquency rate rose by 21bp to 8.97% and the retail delinquency rate increased 33bp to 7.85%.

Risk Management

OTC regulatory impact examined

GreySpark Partners has released a report examining the expected impact of OTC derivatives clearing from the buy-side, sell-side and third-party vendor perspectives. The report looks at the regulatory picture in Europe and the US, focusing on the MiFID review, European Markets Infrastructure Regulation (EMIR), Basel 3 and the Dodd-Frank Act.

The report identifies increased transparency, reduced systemic risk, changes to settlement processes and safeguards against firms 'too big to fail' as the key demands made by the impending OTC derivatives regulations. Operations, risk, credit, control and compliance departments will see the most significant impact as changes to functionality, additional systems integration and overall architectural adjustments are necessary to reach the standards set by the regulations.

Additionally, the research shows that reducing operational risk is the key hurdle to becoming compliant under the new regulations. Owing to delayed details from the regulators, market participants are focusing on internal process optimisation while they wait for further clarity.

The report indicates that liquidity risk, counterparty risk and systemic risk are expected to fall as a result of the regulations. On the other hand, costs and barriers to market entry are expected to increase.

Finally, client valuations are expected to improve in the central clearing framework, with disputes widely anticipated to fall as a result. Across the board, collateral optimisation and data standardisation remain a significant priority, according to GreySpark.

The report, published in conjunction with Best Execution, is the culmination of surveys and interviews with key industry participants over a period of three months.

Risk Management

LCR rules taking shape

The Group of Governors and Heads of Supervision (GHOS), the oversight body of the Basel Committee on Banking Supervision, met on 8 January to discuss Liquidity Coverage Ratio (LCR) proposals and its strategy for assessing implementation of the Basel regulatory framework more broadly.

With respect to the LCR, GHOS members reiterated the central principle that a bank is expected to have a stable funding structure and a stock of high-quality liquid assets that should be available to meet its liquidity needs in times of stress. Once the LCR has been implemented, its 100% threshold will be a minimum requirement in normal times. But during a period of stress, banks would be expected to use their pool of liquid assets, thereby temporarily falling below the minimum requirement.

The Basel Committee will clarify the LCR rules text to state explicitly that liquid assets accumulated in normal times are intended to be used in times of stress. It will also provide additional guidance on the circumstances that would justify the use of the pool and examine how central banks interact with banks during periods of stress, with a view to ensuring that the workings of the LCR do not conflict with central bank policies. The LCR is to be introduced as a minimum standard in 2015.

Meanwhile, the Committee will review the compliance of members' domestic regulations with the international minimum standards in order to identify differences that could raise prudential or level-playing-field concerns. It will also review the measurement of risk-weighted assets to ensure consistency in practice across banks and jurisdictions.

Against this background, each Basel Committee member country has committed to undergo a detailed peer review of its implementation of all components of the Basel regulatory framework. The Committee will then publish the results of the assessments, with the protocol governing their publication to be defined in due course. The initial peer reviews will assess implementation in the EU, Japan and the US, commencing in 1Q12.

RMBS

DSB noteholder meetings scheduled

A noteholder meeting is being convened on 24 January to discuss and approve two proposals related to the Monastery 2006-1, Monastery 2004-1, Chapel 2003-1 and Chapel 2007-1 transactions. The meeting follows one week after a scheduled meeting to discuss improving reporting and accountability of the security trustee for Chapel 2003-1.

The first proposal is to instruct the security trustee to abstain from challenging the bankruptcy trustees of DSB. This should allow the borrower to set-off compensation amounts due by DSB in relation to a breach by the bank of its duty of care against the amount outstanding under the borrower's loans.

The second proposal seeks to record any losses incurred by the issuer as a result of set-off of compensation as a debit to the principal deficiency ledger.

RMBS

Fed white paper supportive of RMBS

Fitch suggests that the recommendations in a recent Federal Reserve white paper on the US housing market are challenging, but some may benefit the private-label RMBS sector. The Fed's commentary recommends policies that limit the growth of the inventory of foreclosed homes and make mortgage credit easier to access.

The primary recommendation of the white paper is a government-facilitated REO-to-rental programme, either through direct rentals or third-party sales. While Fitch believes this idea has merit, as it could potentially reduce the number of distressed properties for sale, it would face some operational challenges.

A direct rental programme could be an undertaking of some magnitude and cost for an REO holder due to the staffing and property management demands associated with large-scale property rental schemes. While a third-party sales programme could minimise these direct costs, an investor's ability to secure financing and the lower bids for bulk REO present a different set of challenges. Finally, a programme subsidy may not be politically well-received if it were to lower the recoveries otherwise achieved through sales to owner-occupants.

Somewhat less challenging is the recommended expansion of the HARP programme to non-GSE and non-FHA mortgage loans. This would allow GSEs to refinance underwater borrowers who are current on their mortgages and meet certain underwriting criteria.

The potential default and loss exposure to the private-label RMBS would be significantly reduced by such a programme. But this may be the most politically unpalatable of the recommendations as it would increase the credit risk exposure and size of the GSEs' balance sheets.

A third recommendation calling for the increased use of foreclosure alternatives, such as short sales and deeds-in-lieu, is one that Fitch believes may be the easiest to implement as it has been put into practice by most servicers for some time now. Furthermore, the agency finds that these alternatives have lower loss severities relative to foreclosures as they reduce the need for legal procedures and lower the cost to protect, maintain and broker the property.

Overall Fitch believes these recommendations could be a net positive for private-label RMBS because they would primarily reduce distressed housing inventory and some could lessen the downward pressure on prices.

RMBS

Servicer loss mitigation assessment debuts

S&P's global surveillance analytics team has developed a method for assessing US mortgage servicers' default management processes. The aim is for investors to use the method to assess how effective servicers' strategies are in limiting losses.

The new method incorporates two key components: how quickly individual servicers have been able to liquidate non-performing loans; and the success of their loan modification programmes. This method is separate from that of S&P's servicer evaluations group, which encompasses a much broader set of factors for assessing and ranking servicers.

For the new method, S&P used loan-level information on non-agency US RMBS from CoreLogic's LoanPerformance database, assigning each loan to its respective servicer where possible. The study is limited to the 10 servicers for which the agency could identify the largest number of loans.

The results of S&P's study suggest that servicers' strategies can greatly affect losses resulting from non-performing loans. It also revealed significant performance variations among the servicers in the sample.

Servicers' average liquidation speeds can differ by several months, leading to variations in loss severity primarily due to differences in the number of payments borrowers miss. Loan modification programmes can also have a big impact on the overall losses from a loan pool: servicers' rates of successful modifications, as a percentage of all non-performing loans, ranged from 3% to 18% for the servicers in the sample. However, S&P determined that how well servicers implement modifications is more relevant for estimating effects on investor losses than the specific techniques used.

The agency plans to fine-tune this method in the future by refining how it weights the relative influence of speed-to-foreclosure and the success of loan modifications on losses.