Contents

Structured Finance

Slow start

Traditional recruitment cycle yet to begin

Structured finance recruitment tailed off towards the end of last year and the early signs are that it will take a while to restart this year. Despite the generally muted outlook, pockets of hiring activity remain.

After the groundwork has been done before the Christmas holidays, January traditionally sees the completion of a number of job moves. However, recruitment activity in structured finance all but dried up towards the end of 2011 and that has continued into the start of this year.

"The market is quiet right now and that is a direct result of how quiet the previous quarter was. Nothing really happened last year from about August onwards. People just were not hiring in the run-up to Christmas and that has spilled over into the start of this year too," says Lisa Wilson, managing partner at Invictus Executive Search.

She adds: "January always starts slowly, but there is generally a good pipeline of moves that were started on in the year before. Nothing was started on towards the end of last year, so there is nothing to be wrapped up now. It means the recruitment cycle is going to take longer to start up this year."

That does not mean that there is no hiring going on, however. One London-based headhunter admits that "it is not that pretty out there right now", but notes that he is seeing opportunities, particularly with credit hedge funds.

He says: "The recruitment guys that are focusing on the funds side seem to be doing alright. There is a raft of money at the hedge funds waiting to be deployed."

He continues: "I do not want to talk the current market up, but one of the facts of the situation is that if everything clicks into place then the market could shoot up. One or two firms are looking to position for that by getting hires in place now."

Although the headhunter believes that bank hiring will not return for some time, he is seeing business come not only from the hedge funds, but also from rating agencies. Wilson has noticed a spate of hiring at the agencies too.

She says: "I have seen a lot of adverts for the rating agencies and they really seem to be beefing up. Fitch and DBRS, in particular, seem to be hiring a lot of people at the minute - mainly in the more traditional, vanilla assets classes, such as ABS and RMBS."

Risk management is another area where Wilson is still seeing companies actively hiring. She says: "Credit risk seems to be the most active bit of the market that is recruiting right now. It is not an area we have traditionally been heavily involved in, but at the moment it is certainly the most active."

The move to start building up CVA desks began last year (SCI 21 October 2011) and has continued into 2012, with Cris Kinrade the latest high-profile appointment when he joined Lloyds Bank (SCI 17 January).

Neither recruiter is expecting the structured finance market to take off in the next couple of weeks, so for the foreseeable future hiring may be limited to the rating agency, risk management and hedge fund sectors. The ongoing eurozone uncertainty is continuing to dampen expectations and activity.

The headhunter comments: "Activity is concentrated around the credit funds and we are starting to hear bits and bobs from the banks. I am not optimistic for this year: there is not going to be a lot of business unless things turn around. The situation in Europe is still hanging over the market and we still do not know what will happen with that."

He concludes: "It is difficult to tell at the moment when things will pick back up because we are still not into a proper recruitment cycle. At the back-end of last year, budgets and headcount should have been sorted out, but none of that happened. I do not think banks will be looking to get any headcount until March or April. The usual start-of-the-year rush will not begin for some time."

JL

CLOs

Bullish outlook

Positive market sentiment drives CLOs tighter

Buoyed by bullish sentiment in the broader capital markets, US CLOs have started 2012 on a positive footing. Primary issuance spreads are narrowing relative to late-2011 levels, while robust secondary market activity has been subject to increasing bid interest on double-Bs and triple-Bs.

"The CLO market has surprised us to the upside so far this year," says Josh Terry, md and head of Highland Capital's structured products team. "CLOs have rallied alongside the broader capital markets - secondary prices have tightened and new issuance price talk has also narrowed slightly compared to deals issued at the end of 2011."

Market participants appear optimistic on the near-term outlook for CLOs, both in primary and secondary. Structured credit strategists at Bank of America Merrill Lynch point out that CLOs have lagged the very steep moves in risky fixed income (loans and CMBS, for example) and, as such, valuation offers some support for a continuation of the positive behaviour of the product. They caution, however, that bouts of volatility should continue to affect global risk appetite throughout 2012 and that caution remains warranted.

Meanwhile, CLO analysts at JPMorgan confirm that the overall sentiment at last week's ASF conference was bullish, with most clients of the view that the technical backdrop favours incremental CLO spread tightening - subject to macro and regulatory risks. Low supply, high investor cash balances, pay-downs in older deals and relatively wide CLO spreads are cited as the factors contributing to demand for CLO paper.

"We also met new investors interested in building an investment strategy in both secondary and primary CLO markets," the analysts note.

Secondary spreads have performed well across the capital structure throughout January, with healthy BWIC volumes (US$250m-US$300m) reported each week. While equity continues to trade well (SCI passim), Terry highlights that the rally and risk appetite seen in the first few weeks of this year has resulted in increasing bid interest on double-Bs and triple-Bs. Double-B CLO tranches are estimated to have tightened by approximately 200bp since the start of the year.

"This is more of a correlation with the broader capital markets than a trend, however," says Terry. "The CLO market has performed as you would expect, given the rally in the broader capital markets."

On the primary side, two new CLOs - one from Golub Capital and another from Symphony Asset Management - printed in January, with transactions from managers including LCM, ING, Apollo and Ares expected to price in the coming weeks. The triple-A tranche of the Symphony CLO priced at 155bp, in comparison to spreads of around 165bp that were reached at the end of 2011 (see SCI's CDO database).

"Roughly speaking, new issue triple-As are around 10bp tighter and it looks as though we are heading tighter than that," says Terry.

He believes that volatility is the number-one hurdle to new CLO formation in 2012. "If there is a relativity low-volatility environment like we have right now, it opens the door to new issues. If volatility picks up, however, it makes it more difficult to time the price of your assets with the price of your liabilities. This is even more challenging as you get further down the capital structure."

Primary issuance in 2012 is expected to reach between US$15bn and US$20bn, with the source of issuance coming from traditional CLO managers, as well as CLOs backed by legacy portfolios - for example, the Lehman estate portfolios that will be managed by Fraser Sullivan (SCI 18 August 2011). Deal refinancing may also contribute to the tally.

Terry suggests that there will be issuance from all types of CLO managers this year. "There will probably be more deals out of the larger managers, but I imagine the smaller managers will be active as well," he says.

He adds: "As the year progresses, there may be a few instances of older deals being rolled into new ones. If the price of loans stays high, equity NAV levels will remain at fairly attractive levels, which might lead to some deals being called. This could lead to a supply of new issuance as old deals are rolled into new deals. This trend will likely be more prevalent in 2014, however."

CLO strategists at Citi warn that in the scenario where macro conditions worsen considerably and capital markets stagnate (as they did in 2008-2009 and nearly did so during August-September of last year), issuance will be significantly lower than estimated. "What could surprise to the upside is the greater involvement of regional US and Asian financial institutions, but that would require several months of market stability, in our view," they note.

The Citi strategists also highlight upcoming regulation, such as the Volcker rule, that may bring an end to the current trading trends. "European deleveraging, however, could increase the amount of trading as some banks will find it more attractive to sell assets rather than raise equity or finance assets in these difficult markets," they conclude.

AC

CMBS

US CMBS continues to impress

January has proved to be a productive month for US CMBS and last week was no exception to that trend. New issuance has been well received and spreads in both the primary and secondary market are tightening.

"The huge change in sentiment lately has been due to everybody switching to 'risk-on' mode. The way that has shown up in CMBS is people moving down the credit stack a little bit. Previously, interest used to be heavily focused on A4 super senior bonds, but over the last two weeks there has been a huge volume done on AM and AJ," says one trader.

The trader reports that spreads have tightened significantly. This is particularly true for AMs and AJs, but can be seen throughout the capital stack.

He says: "Overall generic A4 bonds are tighter by about 75bp since November. GG10s are tighter by about 90bp. In new issuance the super senior bonds are tighter by 30bp and single-As tighter by about 100bp. The AMs are tighter by 125bp and AJs vary a lot by bond, but are probably tighter by about 200bp."

The main catalyst for the tightening appears to be the recent FOMC announcement that rates will be kept low until 2014. The trader notes that an improving perception of events in Europe has also been a factor.

Last week saw a US$1.15bn new transaction from Goldman and Citi price. The trader comments: "GS MST 2012-GC6 was well received by investors and spreads were noticeably tighter than the last deal that priced in December. People liked it. Rialto out of Miami bought the B-piece."

The trader notes that the super senior triple-As priced at 120bp for the new deal, while those of the previous December issuance came at 130bp. Similarly, the new AS bond priced at 265bp as opposed to the previous 285bp, the double-A minus tranche came at 400bp (tightening from 450bp) and the triple-Bs at 790bp (tightening from 950bp).

The deal came a week after Freddie Mac priced FREMF K-705, which was also well received. With a couple of other deals in the pipeline - but US investor attitudes still closely tied to developments in Europe - the trader believes the next few weeks could be very significant.

He concludes: "Now a lot depends on what comes out of Europe. We went from a lot of negative sentiment at year-end to very positive sentiment quite quickly. It is all balancing out a bit now, so it will be interesting to see where we go from here."

JL

RMBS

Euro RMBS on the up

RMBS continues to lead the way for the European securitisation markets. Secondary trading in the sector is active, with the benchmark Granite programme in particular attracting interest.

"The market has exhibited a pretty positive tone over the last few days. We have seen Granite triple-Bs go from the very low 50s at the start of the year to above 60 now," says one trader.

He adds: "But it is not just Granite that is heading up: the rest of the market is now following that trend as well. For the rest of the market, that is not happening quite as quickly, but the direction is the same."

The main driver for the activity seems to be dealers that are replacing inventory. The trader comments: "I think they came into the year pretty light and now need to ramp up balance sheets in order to show paper out. That is pretty much what has been happening."

Consequently, the banks are acting as active buyers at the moment, says the trader. He is currently leveraging that appetite to sell Granite paper and invest elsewhere.

"We have been selling triple-B Granite bonds to buy paper that we think looks a bit more interesting. We are in the middle of a few of those transactions right now. There are other asset classes that are unchanged or slightly up on the year, such as certain CLOs or pieces of UK non-conforming RMBS, which we think are very exciting and offer some extra possibilities," he says.

In primary RMBS, Obvion is in the market with Storm 2012-I, a €744.3m prime Dutch RMBS. Santander, meanwhile, priced its latest deal - Holmes Master Trust 2012-1 - last week, upsized to US$4bn-equivalent with euro-, sterling- and US dollar-denominated tranches. Further primary issuance is expected to be more limited though.

JL

Structured Finance

SCI Start the Week - 30 January

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

Pipeline
A further three deals joined the pipeline last week. Two auto ABS deals (€460m FCT TitriSocram Compartment TitriSocram 2012-1 and €561.8m Red & Black Auto Germany 1) and one RMBS - Lloyds' Arkle 2012-1 - began marketing.

Pricings
A number of transactions printed last week. In ABS, two auto (¥25bn Driver Japan One and C$521m Canadian Capital Auto Receivables Asset Trust II 2012-1) and two credit card (C$1.06bn Master Credit Card Trust Series 2012-1 and US$675m GE Capital Credit Card Master Note Trust 2012-2) deals priced.
Additionally, four RMBS (€1.01bn B-Arena 2012-1, €1.44bn FCT BS CDN PPI, US$411.36m Sequoia Mortgage Trust 2012-1 and €1.22bn Storm 2012-I) and three CMBS deals (US$1.13bn FREMF K-705, US$1.15bn GS MST 2012-GC6 and £451m Tesco Property Finance 5) were issued. Finally, a large CLO (€1.403bn FCT BS CDN ENT) and a hurricane ILS transaction (US$40m Successor X 2012-1) printed.

Markets
The positive momentum seen in global structured finance secondary markets so far this year continued last week, despite the ASF conference taking many participants away from their desks.
JPMorgan ABS analysts say that "voracious" investor appetite remained for short benchmark ABS as cash surrogates and bids for the second-tier names and sectors also continued to improve. They add that spread changes on the week reflected this - credit card subordinates tightened by 5bp, three-year triple-B subprime autos tightened by 15bp and double-A FFELP bonds tightened by 5bp to 10bp. In addition, two-year triple-A fixed rate credit cards tightened by 2bp, but other spreads were unchanged.
CLO technicals also continue to be strong, with low supply and robust demand, according to JPMorgan CLO analysts. US super senior triple-As tightened 5bp last week to 180bp and pass-through triple-As moved by the same margin to 210bp, while the single-A to triple-B sector was 25bp tighter across the board.
In European CLOs, the JPM analysts add: "The basis to the US is also narrowing, with buying interest moving beyond the euro double-A and single-A area." Euro triple-A spreads moved 10bp tighter last week to 260bp, with double-As 75bp tighter, while single-As and triple-Bs both 100bp tighter. Euro double-B spreads remained unchanged last week at 2150bp versus 1025bp for US double-Bs.
Meanwhile, Citi securitised products analysts report that the US CMBS market saw another week of robust trading activity in an already very active month. They say: "Total volume for the week reached over US$1.2bn through Thursday, with a projected full-week total of more than US$1.5bn. So far this month, current face of over US$5bn has appeared on BWICs, despite the CREFC winter conference which curtailed trading activity early in the month and a couple of holiday-shortened weeks."
The CMBS credit sectors have been the prime beneficiaries of the recent risk-on sentiment, resulting in an increased flow of capital to the credit classes. Generic 2007 AMs have already tightened in by 150bp since year-end. Generic 2007 dupers are in just 25bp since year-end, 2.0 triple-As are in 15p, Fannie Mae MBS/DUS bonds are in 5bp and 2.0 super-seniors are flat.
Activity in the European CMBS market had a break-through week, according to Deutsche Bank CRE debt analysts. "Trading volume totalled roughly €100m, which is double the recent average. Investors of all types were more active this week than they have been in recent memory," they say.
The DB analysts note the most significant rally so far this month in Europe has occurred in the junior triple-A sector, although prices have not rallied broadly. For example, they say: "The TITN 2007-CT1X A2 is currently trading at around 68 which is largely unchanged since December. By contrast, the TMAN 7 class B was trading in the high-50s in December and is now in the mid-60s. The latter was driven up in part to the price increase in class A."
Continued buoyancy was also seen in the US RMBS secondary market. Residential credit analysts at Barclays Capital say: "Non-agency prices were higher even as most investors were headed to ASF. Jumbo and alt-A prices were up approximately 0.5-1.5 points week-on-week. Meanwhile, the ABX and PrimeX indices were also higher week-on-week, with prices up 1-2 points across most indices."

Deal news
• Assured Guaranty Municipal Corp (AGM) has entered into an agreement to reassume US$12.9bn of par it had previously ceded to Radian Asset Assurance. At the same time, Assured Guaranty Corp (AGC) has agreed to reinsure approximately US$1.8bn of Radian Asset public finance par.
• A meeting has been convened on 17 February for Eurosail Prime-UK 2007-A class A noteholders to consider, and if appropriate, pass an extraordinary resolution to terminate the hedging agreement with Lehman Brothers Holding Inc (LBHI) and agree to a stipulated and 'Agreed Claim Amount' of US$106m.
• Barclays Bank has commenced a tender offer to purchase for cash all outstanding class A2L, A3L, B1L and B2L notes, as well as four million preferred shares of ACA CLO 2005-1. The notes are being offered at between US$900-US$950 for each US$1,000 principal amount tendered or 63 cents (70 cents if tendered early) per preferred share.
• €29.4m Faxtor ABS 2005-1 class A1 notes have been bought back at a discounted purchase price. The repurchased notes were subsequently cancelled, thereby increasing the available credit enhancement to all rated notes.
• S&P has taken various rating actions on all classes of notes in the Granite UK RMBS master trust. The move follows the agency's counterparty analysis, as well as credit and cashflow analysis of the most recent transaction information that it has received.

Regulatory update
• OpenLink Financial has rolled out initiatives focused on accelerating compliance with Dodd-Frank regulatory milestones scheduled for 2012. Among these initiatives are: a Dodd-Frank regulatory compliance reporting package; CFTC position limits monitoring, in aggregate for both OTC and exchange-traded products; swap data repository (SDR) reporting; and OTC trade processing workflows, which have been extended for the lifecycle of cleared derivative products.
• The GFMA has posted a test file of provisional legal entity identifiers (LEIs), created by the DTCC and SWIFT. This information is being made available so that member firms and other financial market participants can begin to evaluate, understand and test the operational implications for their businesses of recently enacted and impending regulatory reporting requirements that include legal entity identification.

Deals added to the SCI database last week:
American Home Mortgage Servicing 2012-1
BAA Funding
CIFC Funding 2011-1
Ford Credit Auto Owner Trust 21012-A
Freddie Mac SPC series K-705
GE Capital Credit Card Master Note Trust series 2012-1
Holmes Master Issuer series 2012-1
Sequoia Mortgage Trust 2012-1
South Texas Higher Education Authority series 2012-1
Symphony CLO VIII
Tesco Property Finance 5
Vitality Re III
Volkswagen Auto Loan Enhanced Trust 2012-1

Top stories to come in SCI:
US CLOs
Special servicer fees
ABS portfolio management trends

CMBS

Euro CMBS NPL warning

Tiering within European CMBS is gradually forcing the best and the worst loans to leave the universe. Absent new primary issuance, this trend could result in European CMBS morphing into a non-performing loan asset class in which the securitised collateral is either in default or 'passed initial maturity' status.

European CRE investment and lending markets are characterised by significant tiering, according to Barclays Capital European CMBS strategists. Loans are currently only available for high-quality properties in good locations with superior lease profiles. Further, only well-regarded sponsors with proven track records and good banking relationships have a reasonable chance of securing loans.

"Against this backdrop, in 2011 the European CMBS market experienced an ongoing separation of the wheat from the chaff," the BarCap strategists explain. "While the best loans benefitting from strong sponsorship, high property quality, a relatively small loan size and a low leverage managed to repay on time or shortly after maturity, loans with a lesser quality were either extended or defaulted outright. At the same time, special servicers of European CMBS increasingly foreclose on defaulted loans if the property performance does not allow a loan extension or restructuring."

Taking developments during 2011 as a guide for the future, the strategists anticipate four trends to occur in relation to defaulted and specially serviced loans this year. First is for relatively small but highly levered maturing loans secured by one or a limited number of properties generating sufficient rental cashflow to continue to be extended, subject to increased amortisation.

Second, large highly levered loans that are secured by a property portfolio which is generating sufficient cashflow will continue to be extended, but subject to more covenants - including property asset management and disposal targets. Third, relatively small loans that are secured by one or a limited number of properties that do not generate sufficient cashflow to pay interest on the loan will be worked out relatively quickly, either by selling the properties or by accepting a DPO.

Finally, large highly levered loans secured by a property portfolio that are underperforming from a cashflow perspective are likely to be restructured, similar to the Mozart or Velvet loans. Business plans for such restructurings will also include property disposals over time.

"We expect that from 2015-2016 onwards, with a view to upcoming CMBS maturities, special servicers will start to press for a sale of the properties and (remaining) property portfolios that generate enough cashflow to pay loan interest - even if such sales would result in a realised loss. Absent substantial new issuance, at that point in time, European CMBS would be a non-performing loan asset class and redemption speeds would increase. Given the way losses are allocated to outstanding CMBS notes, we expect note principal write-downs to increase dramatically from 2015-2016 onwards only," the strategists observe.

An estimated 143 European CMBS loans with a securitised balance of €14bn will become due this year. The 2012 European CMBS refinancing exposure is dominated by UK (with 59 loans worth £5bn) and German (58, €5.5bn) loans. The maturity peaks are in January, April, July and September.

Over 2012, 60 European CMBS loans with a securitised balance of approximately €5.3bn are expected to enter special servicing - mostly due to non-payment at maturity. Approximately 40 loans are anticipated to leave special servicing, leaving the net number of loans in special servicing at 144 by year-end. In total, the strategists predict that cumulative realised losses will increase to around €1.7bn by end-2012, up from €700m at end-2011 - driven by a pick-up in Continental European loan workouts.

Further, they forecast that about €3bn of recovery/workout proceeds will be allocated to European CMBS notes this year, up from €2.4bn in 2011 - contributing to a principal repayment rate of 10%. DECO 2005-UK1, EMRF 2007-GIBR, URSUS 2, EPRE 1, REC 4, MARL 1, OPERA SCOT, EURO 24 and OPERA UNI are among the transactions expected to repay in full or be wound down in 2012.

CS

RMBS

HAMP changes to drive mod volumes

HAMP programme guidelines have been expanded, with the intention of helping a broader array of borrowers receive loan modifications. The changes are expected to be potentially significant for modification volumes.

Among the key changes announced on Friday is the extension of the HAMP programme by one year, with expiration now set for 31 December 2013. Borrowers below the 31% first-lien DTI threshold will also now be eligible to qualify for the programme. Additionally, HAMP will be expanded to include investor properties: those occupied by renters or which are intended to be rented.

Finally, principal reduction incentive payments to loan owners will be tripled in order to encourage the reduction of principal for underwater borrowers. Previously, investors or owners received anywhere from 6 to 21 cents per dollar of principal reduction made under the programme. US$22.7bn has been allocated to HAMP payments, of which US$2bn has been paid thus far and US$9bn-US$10bn is allocated for modifications already completed.

Principal reduction incentives will also be made for GSE-owned or insured loans to encourage the use of principal forgiveness by the GSEs and their servicers.

ABS analysts at Bank of America Merrill Lynch believe that the impact of expanding the DTI criteria, opening up HAMP to investors and increasing incentive payments have the potential to be "somewhat significant" for modification volumes. HAMP permanent modifications have reached 909,953 borrowers since the programme was launched in 2009; expanding its eligibility will affect perhaps another 1.3 million borrowers.

Assuming 50% of these borrowers qualify for HAMP and pass trials over the course of 24 months, that would result in 27,000 additional permanent HAMP mods per month (versus approximately 25,000 per month currently), the BAML analysts estimate. "With HAMP mods at about one-third of the mod universe, that indicates a 36% pick-up in mod rates, although crossover with the proprietary mod universe will dampen that figure."

CS

RMBS

Granite milestone hit as sentiment improves

The latest Granite UK RMBS investor report shows that the master trust passed a minor milestone in December, by finally completing the top-up of reserve funds to their increased levels following the breach of the arrears and step-up triggers. The completion of this process underscores the improvements in cashflow performance that have been seen over the past year.

Credit performance of the underlying mortgages has stabilised, according to European asset-backed analysts at RBS, with 90+ day delinquencies of 6.73% and repossessions at 0.63%. "Perhaps a more important indicator is not the stock of arrears but the net rate at which new accounts are falling into arrears, which has dropped back to pre-crisis levels following a sharp spike at the beginning of 2011, when a change in arrears capitalisation policy led to a jump in reported arrears," they add.

The RBS analysts point out, however, that the dramatic improvement in sentiment for Granite paper since the start of the year (SCI 26 January) began well before the investor report was released. GRANM class C notes have improved from a cash price of around 50 at the turn of the year to above 60, albeit they remain about five points shy of the previous peak.

"The rally in Granite junior bonds has taken the edge off potential future returns somewhat, although on a risk-adjusted basis we would argue that these bonds still represent good value with an estimated DM to maturity of circa 800bp on the basis of a 7.7-year WAL," the analysts note. "We still expect this master trust to be refinanced once it becomes economically beneficial to do so, which should knock about two to three years off this expected life and provide a boost to expected returns."

In the shorter term, Granite is expected to remain the liquid benchmark for European ABS and thus for it to be subject to wider market influences. "The longer-run dynamics look to be very positive in our opinion; however, investors should also consider alternatives such as non-conforming mezzanine bonds, which have not benefitted from the same degree of price appreciation, but are also benefitting from improving underlying collateral performance and low interest rates," the analysts conclude.

CS

ABS

Ex-Lloyds ceo joins advisory

Eric Daniels has joined StormHarbour as a principal and senior advisor. Daniels retired from Lloyds Banking Group last year after seven years as ceo.

Daniels will provide strategic advice and insight to StormHarbour's issuer and investor clients and to the firm's senior leadership team. He will be based in London.

Structured Finance

Boutique adds SF division

The Williams Capital Group has added a new division to address structured finance opportunities for corporate, federal, state and local government clients. The Eland Capital division is led by William Lighten.

Lighten has over 20 years of industry experience, including roles as global head of structured finance and global head of mortgage capital at Lehman Brothers. He is joined by Nadja Fidelia, Damian Harbutt, Vinay Karle, Prafulla Nabar, Gopalkrishna Rajagopal, Nelson Soares and Samir Tabet, who bring with them experience across ABS and RMBS.

Eland Capital will focus on a broad array of asset and mortgage finance opportunities, including securitisation and whole loan dispositions as well as asset valuation and advisory services. The team will also provide portfolio analysis and asset management services.

Structured Finance

Mid-market firm forms SF group

CoBiz Financial has formed CoBiz Structured Finance, which will provide asset-based loans to middle market businesses. Chris Randall - previously a co-founder, board member and coo of MFC Capital Funding in Chicago - will lead the group.

"The lower middle market for leveraged loans is currently underserved by the banking industry in our markets," comments Jonathan Lorenz, ceo of Colorado Business Bank and Arizona Business Bank. "Chris' knowledge and experience in leveraged lending will allow us to bring great depth to our loan products and continue to be responsive to the credit needs of businesses. The creation of CoBiz Structured Finance will allow us to serve growing businesses that are highly leveraged without incurring significant risk to the bank's credit quality."

Randall has more than 20 years of experience in the financial services industry. Before MFC Capital Funding, he served as vp and division manager for the structured finance group at Fifth Third Bank.

Structured Finance

FIG ceo steps down

Daniel Mudd has resigned from Fortress Investment Group. He took a leave of absence from his role as ceo last month (SCI 22 December 2011).

Mudd says: "I want to thank Fortress for the opportunity to help lead the company over the last few years. However, I do not want the uncertainty associated with a leave of absence, on my part, to become a distraction for either Fortress or its investors, and thus, I have decided to resign."

Randal Nardone, Fortress principal and co-founder, will continue to serve as interim ceo.

Structured Finance

Equipment leasing vet hired

David Biesemeyer has joined Holland & Knight as structured finance senior counsel in San Francisco. He specialises in equipment leasing, secured lending and factoring as well as facility and project finance.

Biesemeyer has more than 35 years of experience in equipment leasing and financing transactions. He has previously served as general counsel of ITEL Capital Corporation and ITEL Rail Corporation, Crocker Equipment Leasing and Great Western Leasing Corporation. He has also been senior counsel for Thayer, Ringoen & MacDonald and TXL Corporation.

Structured Finance

Bank boosts hybrid capital team

AJ Davidson has joined RBS as md and head of hybrid capital in London. He will have responsibility for EMEA and APAC and report to Lee Rochford, head of the bank's financial institutions structured finance team.

Davidson previously worked at Citibank as a director in the debt capital markets new products group. Before that he was at Bank of America Merrill Lynch and also served as a capital markets and corporate finance lawyer in private practice with Sidley & Austin and Linklaters.

Structured Finance

NY law firm adds two

Hogan Lovells has expanded its structured finance practice by adding two new partners in New York. Peter Humphreys and Evan Koster join from McDermott Will & Emery and Dewey & LeBoeuf, respectively.

Humphreys' practice is focused on securitisation, including financings of equipment and operating leases, credit card receivables, auto loans, energy receivables, healthcare receivables, intellectual property and trade receivables. He also has experience with structured capital transactions for insurance companies.

Koster has recently focused his practice in energy and equity derivatives and is increasingly involved in Dodd-Frank compliance counselling and derivatives advocacy. He has worked throughout Latin America for 20 years, with more than 10 years of high-level derivatives experience.

Structured Finance

Experienced SF lawyer recruited

Martin Bartlam is joining DLA Piper's structured finance team. He comes over from Orrick, Herrington & Sutcliffe where he was head of the firm's structured finance group and will begin work in February.

Bartlam specialises in financial structures and investments for banks, funds and corporations including transactions involving debt capital markets, securitisations, bank lending, derivatives and fund products. He has previously worked as head of finance at Jones Day, head of structured products at Crédit Lyonnais (now Crédit Agricole) and a member of the debt structuring team of Greenwich NatWest (now RBS).

Structured Finance

CRE firm hires in capital markets

Jeffrey Shell has joined CBRE as capital markets evp. He will be based in Grosse Pointe, Michigan, and focus on capital markets solutions for planned and existing single-tenant assets.

Shell is very experienced in structured finance, investment sales and other capital markets solutions. He specialises in sale-leasebacks and build-to-suit financing.

He joins from Grubb & Ellis, where he was evp and head of corporate finance. He will be joined by the team that worked with him there: Anne Rahm, vp; Amie Sweeney, vp; and Molly Copeland, senior financial analyst. Before Grubb & Ellis, Shell spent 16 years at Cushman & Wakefield.

Structured Finance

Real estate head named

Deborah Shire has joined AXA Real Estate Investment Managers (AXA REIM) as global head of business development. It is a new position carrying overall responsibility for corporate finance, investor relations, business development and marketing and communications, reporting directly to ceo Pierre Vaquier.

Shire was previously deputy head of structured finance at AXA Investment Managers, responsible for strategy, finance, marketing, operations and product development. In her new role she will lead innovation, supervise product initiatives and coordinate capital raising efforts for AXA REIM.

Structured Finance

Stroock partners move on

Anthony Schouten and Jeffrey Stern have joined Pillsbury's finance group as partners in New York. They were each formerly with Stroock & Stroock & Lavan.

Schouten's practice spans structured finance, corporate restructuring and commodities and derivatives experience. He is responsible for creating and negotiating derivative and structured credit products for investment banks and advises asset managers and others on their use.

Stern's practice covers structured finance and derivatives, developing and refining new forms of domestic and cross-border asset-based financings, credit derivative structures and other risk transfer transactions. He has done considerable work in Latin America, focusing on cross-border financings and derivatives transactions in Brazil and Mexico.

Mats Carlston, leader of the finance group, says Schouten and Stern will broaden the firm's service offerings, not least "in the slowly rebounding CLO market". Their addition is part of a continuing strategy of expansion for the firm.

Structured Finance

Hong Kong SF director appointed

Erwan Stervinou has joined GE Capital as structured finance director in Hong Kong. He will now report to Brett Taylor, executive director, and Shane Bennett, structured finance md.

Stervinou was a leveraged finance director at United Overseas Bank. He has also worked for Merrill Lynch in Singapore, Barclays Capital in London and Calyon in Seoul, Paris, Singapore and Hong Kong.

CDS

PM, credit fund relocate

Alex Vaskevitch has joined Serone Capital Management as partner. He brings his Zenith High Yield Bond Fund with him and will primarily be responsible for managing the firm's liquid investments and building up the high yield research and execution team.

The Zenith fund focuses on investment opportunities in the European high yield corporate bond market, allocating to both sub-investment grade and stressed debt instruments. It will continue to be managed by Vaskevitch and his expertise is expected to compliment Serone's existing product offering of structured credit and distressed and NPL portfolios.

Vaskevitch was most recently at BCM & Partners. He has also worked for LNG Capital and ABN Amro.

CMBS

Legal team poached

A group of five attorneys has left Burns White to join Dinsmore in a newly-opened Pennsylvania office. All five attorneys are experienced in CRE and CMBS.

Rich O'Halloran was previously chair of Burns White's business practices group and will serve as the office managing partner at Dinsmore. He is joined by Lindsey Hoelzle, Eric Levine, Alyson Ricker and Marshall Schreibstein.

As well as CRE and CMBS, the attorneys also bring experience in banking, regulatory and transactional matters. They all previously worked in Burns White's Philadelphia and Princeton offices.

Risk Management

Risk firms team up

Orchestrade Financial Systems and Numerix have announced a partnership to offer integrated access to pricing and risk analytics from Numerix within the Orchestrade trading and risk platform. It enables clients to manage risk and operations on a single platform.

Orchestrade clients can now leverage the full suite of Numerix models to price newly structured products and generate yield curves or volatility surfaces for every asset class. Orchestrade's positions, risk and processing engines can also be integrated with Numerix pricing and analytics in functions such as P&L attribution, scenario analysis or value-at-risk.

"Through this partnership Orchestrade clients will have a single, scalable platform that is not only faster to deploy but also less costly to license and maintain. It can grow with their business to handle increased volumes and new asset classes in response to ever changing market requirements," comments Richard Ferrari, Orchestrade business development vp.

RMBS

Illinois AG files lawsuit

A lawsuit has been filed against S&P by Illinois Attorney General Lisa Madigan. The agency is accused of acting dishonestly in assigning high ratings to risky RMBS investments in the run-up to the US housing market crash.

Madigan alleges that S&P compromised its independence by giving high ratings to risky investments as part of a deliberate strategy to increase revenue and market share. The lawsuit alleges that the increasing risks in pools were ignored in favour of appealing to investment banks and other clients.

Madigan says: "Publically, S&P took every opportunity to proclaim their analyses and ratings as independent, objective and free from its desire for revenue. Yet privately, S&P abandoned its principles and instead used every trick possible to give deals high ratings in order to retain clients and generate revenue. The MBS that helped our market soar - and ultimately crash - could not have been purchased by most investors without S&P's seal of approval."

The lawsuit cites internal emails and conversations among S&P employees which it says demonstrate that the company misrepresented its ratings. Included is an internal instant messenger conversation between employees saying an investment "could be structured by cows and we would rate it".

ABS

Vitality III closes

The third medical benefit claims ILS, Vitality Re III 2012-1 (SCI 13 January 2012), has closed. The two tranche deal finished as expected with US$105m of class A notes rated triple-B plus by S&P and US$45m of class B notes rated double-B plus.

The class A notes priced at 420bp over Treasury money market funds. The class Bs came in at 620bp over.

Vitality Re III covers claims payments of Health Re - and ultimately Aetna Life Insurance Co - relating to the covered insurance business to the extent the medical benefit ratio (MBR) exceeds 103% for the class A notes and 97% for the class B notes. The MBR will be calculated on an annual aggregate basis.

The initial annual ceded premium is US$750m. The initial MBR attachment points are US$772.5m for the class A notes and US$727.5m for the class B notes.

ABS

Ibis Re closes upsized

Assurant's Ibis Re II series 2012-1 (SCI 18 January 2012) US hurricane catastrophe bond has closed. The deal's class A notes were upsized to US$100m from an initial US$70m, while the class Bs came in as expected at US$30m.

The class A notes priced at 835bp over Treasury money market funds and the class Bs at 1350bp over. S&P rated the notes double-B minus and single-B minus respectively.

The class A notes will cover a pro-rata share of losses in excess of US$1.05bn up to US$1.855bn, on a per-occurrence basis. The class B notes will cover a pro-rata share of losses in excess of US$610m up to US$1.05bn also on a per-occurrence basis.

The trigger for calculating covered losses to Ibis Re II is based on the Verisk catastrophe index report, which shows insured personal-line losses on a county level multiplied by the predetermined county pay-out factors. AIR, as calculation agent, will perform this procedure. The initial and updated county pay-out factors are subject to annual reset at the ceding insurers' option subject to certain limitations. The attachment and exhaustion levels are subject to annual reset using updated industry exposure data and the applicable county pay-out factors to maintain the initial attachment probabilities and expected losses for each class.

The initial probability of attachment for the class A notes will be 2.33% and for the class B notes 4.95%. The modelled expected loss and probability of exhaustion for the class A notes will be 1.38% and 0.89%, respectively, and for the class B notes, 3.38% and 2.36%.

Ibis Re II will cover losses in the following areas: Alabama, Arkansas, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Mississippi, Missouri, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Vermont, Virginia, West Virginia, the District of Columbia, and Puerto Rico.

Structured Finance

Three-part Radian transaction agreed

Assured Guaranty Municipal Corp (AGM) has entered into an agreement to reassume US$12.9bn of par it had previously ceded to Radian Asset Assurance. At the same time, Assured Guaranty Corp (AGC) has agreed to reinsure approximately US$1.8bn of Radian Asset public finance par. Assured Guaranty is also set to acquire Municipal and Infrastructure Assurance Corporation (MIAC), which is licensed to provide financial guaranty insurance and reinsurance in 38 US jurisdictions.

The parties anticipate the re-assumption and reinsurance will be completed this week. Assured Guaranty will receive a payment of US$86m from Radian Asset for the re-assumption of the ceded risk, which consists 96% of public finance exposure and 4% of structured finance credits. Additionally, the firm projects it will receive an incremental US$1.9m present value from future installment premiums.

In connection with the reinsurance of public finance par, Assured Guaranty will receive a payment of US$22m.

The purchase - for US$91m in cash - of MIAC, meanwhile, is subject to regulatory approval and is expected to close in 1Q12. At closing, MIAC will have cash and cash equivalent assets of approximately US$75m. It has not issued any guarantees since its formation.

Structured Finance

DoubleLine credit fund listed

An IPO has been completed for the DoubleLine Opportunistic Credit Fund, followed by its listing on the New York Stock Exchange. Advised by DoubleLine Capital, the fund is organised as a non-diversified, closed-end management investment company.

The fund raised approximately US$326.5m in proceeds during the IPO. Wells Fargo was the lead manager of the underwriting, UBS the co-lead and Barclays Capital, BB&T Capital Markets, JJB Hilliard, WL Lyons, Janney Montgomery Scott, Ladenburg Thalmann & Co, Morgan Keegan & Company and Wedbush Securities were co-managers.

The fund's investment objective is to seek high total investment return by providing a high level of current income and the potential for capital appreciation. It may invest in debt securities and income-producing investments of any kind, including ABS, CMBS and RMBS. DoubleLine currently expects that the fund's dollar-weighted average effective duration will initially be between three and seven years.

Although leverage won't be employed initially, subject to DoubleLine's determination that the then-current market conditions are favourable, the fund intends - at a future date - to add leverage to its portfolio by using reverse repurchase agreements, dollar roll transactions or borrowings. The use of such leverage will not exceed a third of the fund's total assets, however.

DoubleLine founder, ceo and cio Jeffrey Gundlach is principally responsible for implementing the fund's overall strategy. Philip Barach, co-founder and president of DoubleLine, will assist in its implementation.

In addition, portfolio managers Joel Damiani and Joseph Galligan will assist in managing the fund's investments in MBS and other structured products. Portfolio managers Luz Padilla and Bonnie Baha will manage the fund's investments in emerging markets debt and global developed credit respectively.

CDO

Tender offer completed

€29.4m Faxtor ABS 2005-1 class A1 notes have been bought back at a discounted purchase price (SCI 3 January). The repurchased notes were subsequently cancelled, thereby increasing the available credit enhancement to all rated notes.

The repurchase was funded using cash available in the principal collection account. As of January 2012, approximately €22m is available in the principal collection account.

Following the end of the reinvestment period in February 2011, all proceeds in the principal collection account will be distributed to noteholders. Due to the funding of the repurchase of the class A1 notes, the amount of principal proceeds available for immediate distribution to the remaining noteholders will be substantially reduced. However, at the same time, noteholders will benefit from an increase in credit enhancement due to the relative increase of assets compared with liabilities in the structure.

Fitch notes that currently the class A3, A4, B and additional coverage tests are breaching their limits. But all coverage test ratios will improve as a result of the repurchase. Consequently, the amount of interest required to be diverted on future payment dates to the senior notes to cure the coverage tests may be reduced.

CDO

Trups CDO stabilisation trend continues

The stabilisation trend continues for US bank Trups CDOs as defaults and deferrals finished last year lower than at the end of 2010, according to Fitch's latest index results for the sector.

At 31.09% at end-December, the cumulative rate of defaults and deferrals for bank Trups CDOs fell 1.04% from last month. New cures (at US$449.8m in notional) exceeded new deferrals (at US$59m) in December. As a result, the net change was positive for 30 out of 36 CDOs affected by new deferrals and/or cures last month.

Trups CDOs experienced 40 new defaults and 73 new deferrals in 2011. This represents a significant improvement from the 70 defaults and 177 deferrals that occurred in 2010, Fitch notes.

At year-end 2011, 195 bank issuers were in default, representing approximately US$6.3bn held across 83 Trups CDOs. Additionally, 374 deferring bank issuers were affecting interest payments on US$5.4bn of collateral held by 84 Trups CDOs.

CDS

NRAM auction due

The auction to settle the credit derivative trades for Northern Rock (Asset Management) is to be held on 2 February. ISDA's EMEA Determinations Committee determined that a restructuring credit event occurred with respect to Northern Rock (Asset Management) on 15 December 2011.

CDS

Portfolio margining benefits offered

ICE Clear Credit has begun offering portfolio margining benefits for clearing participants' proprietary positions, allowing for more efficient collateralisation of opposite positions in index and correlated single name credit default swaps. ICE has received approval for clearing participant portfolio margining from the SEC and is self-certified with the CFTC.

"The ability to margin accounts on a consolidated portfolio basis is necessary to encourage increased clearing, reduce systemic risk during times of stress and provide capital efficiencies for market participants," says ICE Clear Credit president Christopher Edmonds.

Portfolio margining with respect to correlated CDS index and single name positions provides capital efficiencies while maintaining strong risk management protections, ICE explains. It says it has petitioned the CFTC and SEC to be able to provide the same margining benefits for client/customer CDS clearing.

"Consistent with the Dodd-Frank principles of equal and open access, we want to offer customers the same portfolio margining benefits that self-clearing participants now receive," continues Edmonds. "Customer portfolio margining reduces systemic risk and regulatory arbitrage opportunities, and improves the economics of CDS clearing for customers."

ICE Clear Credit legally segregates customer collateral from clearing participant proprietary collateral at all times. As a matter of law, customer collateral cannot be used for obligations related to a clearing participant's proprietary trading activities.

The pending petitions solely relate to the ability to hold customer collateral for SEC-regulated CDS single names and customer collateral for CFTC-regulated CDS indexes in the same account to facilitate portfolio margining of customer-related positions.

CDS

SEF regulatory alliance agreed

National Futures Association (NFA) and MarketAxess Holdings have entered into an agreement that paves the way for NFA to perform regulatory services for MarketAxess' planned swap execution facility. The agreement establishes a preliminary framework for the exchange of information and the development of technology standards that will enable the pair to develop, test and launch automated trade practice and surveillance systems, as well as develop procedures and processes necessary for MarketAxess to fulfill its SEF self-regulatory obligations.

Upon the issuance of the CFTC's final SEF rules, NFA and MarketAxess anticipate that they will enter into a formal regulatory services agreement. The CFTC has proposed to allow SEFs to contract with a registered futures association, such as NFA, or another registered entity for regulatory services.

CLOs

Warehouse conflicts of interest raised

Securities Litigation and Consulting Group has released a study on CLOs issued in July and August 2007. The report purportedly identifies conflicts of interest created when investment banks warehouse loans prior to the issuance of CLOs.

In particular, the study finds that banks could use warehousing as part of a trade allocation scheme and that warehousing appears to have resulted in some CLO trusts issuing securities without disclosing to investors that the securities had lost almost all their value because the trust was committed to paying substantially more than the market value of the warehoused loans. Two examples of such CLO offerings are cited - LCM VII and Bryn Mawr II - in which Bank of America appears to have transferred at least US$35m of losses to investors in July 2007 and which ultimately led to approximately US$150m in losses in these two CLOs only.

Tim Husson, SLCG principal and co-author of the report, explains that Bank of America bought or financed leveraged loans between November 2006 and June 2007 at slightly above par and then sold them to investors in the LCM VII and Bryn Mawr II trusts in late July and early August, despite the fact that the loans had lost 5% of their value in July 2007. These losses occurred before the two CLOs closed and were not disclosed to investors in the marketing materials or private placement memorandums, the firm notes. Later in August 2007, Bank of America - starting with Symphony IV - began disclosing losses that occurred during the warehousing period prior to the closing of the CLOs.

Such practises were widespread: SLCG notes that Citi issued a similar CLO, Bridgeport II, at the end of July 2007 without disclosing the losses that had already occurred in the loan portfolio. CDOs backed by warehoused CDO tranches, which had declined in value in early 2007, also appear to have been securitised with embedded and undisclosed losses.

CMBS

Windermere XII warning

Fitch says that the recent decision by the Versailles court of appeal to uphold the initial 'sauvegarde' protection granted to the borrower - a non-FCT SPV - and its parent behind the loan backing the Windermere XII CMBS is currently reflected in the transaction's ratings.

The latest ruling is the most recent in a series of court rulings that began in 2008 (SCI passim). Fitch understands that Eurotitrisation (ET), acting as Windermere XII's management company, will still have the right to appeal this court decision. This right, however, is reserved for a limited time period only and is subject to the provision of new legal arguments for the court to consider if it is to reverse its decision.

Fitch notes that the recent court decision did not rule on the allocation of property income that is pledged to a creditor under a Dailly transfer, nor on the safeguard plan, which remains suspended.

A court decision in October 2009 affirmed the issuer's right to the rental income, pursuant to the Dailly transfer. As a result, a cash agreement between the borrowers and ET is renewed on a quarterly basis, defining the amount that ET should provide to the borrowers to fund the costs associated with operating the property.

Fitch believes that the Dailly transfer somewhat undermines the safeguard status quo, although clearly to the benefit of noteholders of Windermere XII and other such creditors. The borrower had previously been granted protection from creditors while it formulated a plan to repay them.

Non-FCT SPVs are a common ownership structure for French investment properties and the court's ruling that such entities can be subject to safeguard proceedings creates uncertainty about the ability to enforce contractual loan provisions against other French borrowers, Fitch says. The agency warns that this may have negative ramifications for existing and future securitisations involving such borrowers.

CMBS

Japanese CMBS loan defaults rising

The balance of defaulted underlying loans backing Fitch-rated Japanese CMBS was ¥266.2bn at end-December 2011, accounting for more than half of the total underlying loan balance at that time. Although the defaulted loan balance decreased compared to end-3Q11, the default rates have continued to increase as total Japanese CMBS underlying loans have decreased even further.

"By end-1Q12, the defaulted loan balance may increase to more than ¥300bn as two large underlying loans are expected to default at their maturity dates in 1Q12," says Naoki Saito, director in Fitch's Japanese structured finance team. "However, more than half of underlying loans by number due to mature in the quarter may be paid in full without defaulting."

As of end-December 2011, 42 loans were in default within the Fitch-rated Japanese CMBS universe. The total defaulted loan balance decreased by ¥11.3bn compared to end-September 2011; meanwhile, the number of defaulted loans has been hovering at almost the same level since end-June 2011.

The default rate as of end-December 2011 increased to 50.8% by loan balance and 54.5% by loan number, from 47.4% and 48.9% respectively, at end-September 2011. The default rate may continue to remain high, with a fall in the total underlying loan balance and number, Fitch suggests.

It adds that in 1Q12, 13 loans (totalling ¥95.1bn) will mature, including two loans each with a balance of more than ¥15bn. Fitch expects these two loans to default at their maturity dates and the total defaulted loan balance may exceed the largest ever amount seen at end-2Q11 - ¥285.8bn.

In 4Q11, five loans (totalling ¥27.7bn) defaulted, while five loans (totalling ¥9.0bn) were paid in full without defaulting. Throughout 2011, 16 loans (totalling ¥65bn) were paid in full without defaulting and nine of them were caused by refinancing.

Fitch notes that workout activity was completed on seven defaulted loans in this quarter, with outstanding balances as at the date of default totalling ¥28.6bn. Four of them incurred a principal loss, including one loan, whose loss amount accounted for 96% of the initial loan amount as an extraordinary case caused by the Tohoku earthquake in March 2011.

CMBS

EMEA special servicing activity reviewed

Moody's has released its latest monthly update on specially serviced EMEA CMBS loans. As of year end, 114 loans were in special servicing across the large multi-borrower and single borrower transactions the agency monitors.

The Princes loan, securitised in Titan Europe 2007-3, was newly transferred to special servicing during December. The £9.3m loan (accounting for 1% of the pool) defaulted at its maturity date and will be specially serviced by Hudson.

Another loan, the Kiwi loan (€14m - 1% of pool balance) securitised in the Talisman 6 Finance, was worked-out and left special servicing. Full principal was recovered on the loan following a consensual property sale with the borrower.

Meanwhile, limited information has been disclosed on the work-out of the loan in Opera Finance (Uni-Invest) 2 since the suspension of the auction process for the sale of the company as a going concern. Moody's expects a note EOD to occur on the legal final maturity date as the principal on the loan will most likely not be recovered during the time left until 15 February.

Finally, the junior lender on the loan securitised in Alburn Real Estate Capital (£183.8m) announced that it wishes to appoint Hatfield Philips as the special servicer of the loan. Moody's understands the appointment is not yet finalised and that the loan servicer - NM Rothschild - has temporarily suspended taking any further action regarding the enforcement and disposal plan recommended to it by its advisers. The single loan is backed by a portfolio of 45 predominantly office properties in the UK and has been in default since May 2011.

The weighted average Moody's expected principal loss for EMEA loans in special servicing is 37%.

CMBS

Tesco CMBS prints amid ratings review

Tesco's latest sale-and-leaseback transaction - the £450m Tesco Property Finance 5 - has priced at 275bp over gilts via Goldman Sachs, HSBC, Lloyds and RBS. The previous four Tesco CMBS widened on the back of the news by approximately 20bp - from 240bp to 260bp.

The latest transaction represents a true-sale credit-tenant-linked securitisation of one commercial mortgage loan, secured by leases on 11 properties. The properties are leased to subsidiaries of Tesco, which guarantees their rental obligations.

S&P rated the deal single-A minus, in line with its rating on Tesco. But Moody's assigned it an A3 rating on review for possible downgrade, following the rating agency's decision to put Tesco's A3 rating on review on 20 January.

For the same reason, Moody's also placed on review for possible downgrade the ratings of the previous four Tesco issues, as well as the DECO 12 - UK 4 and Delamare Finance transactions. Approximately £3.5bn of debt is affected by the action.

CMBS

Specially serviced US CMBS on the rise

Specially serviced US CMBS loans have been on the rise since last quarter and are likely to continue increasing, according to Fitch.

Loans over US$20m moving to special servicing total 15 so far in 2012. A total of 210 loans over US$20m transferred to the special servicer in 2011, down from 312 in 2010, Fitch adds. The number of loans which transferred in 2011 by quarter were: 329 loans in Q1, 57 of which were over US$20m; 92 loans in Q2, 46 over US$20m; 299 loans in Q3, 42 over US$20m; and 340 loans in Q4, 65 over US$20m.

Office and retail loans led the new transfers in 2011, accounting for 349 and 379 loans respectively, according to Fitch. Although office had 95 of the 210 loans over US$20m, retail accounted for only 43 of the larger loans.

As leases roll and additional tenants consolidate space, Fitch expects office and retail to make up a larger percentage of newer transfers. Conversely, hotel loans had the least amount of new transfers at 104 loans. This represents a continued rebound for hotel loans after some of the worst years, while multifamily saw 235 loans transfer.

In 2011, slightly over 1,250 loans (approximately US$20bn) in Fitch-rated deals transferred to the special servicer. This represents a slight drop compared to 2010 when approximately 1,350 loans transferred totalling US$26bn. The average loan size also declined to US$16m in 2011, compared to US$19m in 2010.

Approximately 16% or 199 of the loans transferred in 2011 are now classified as past maturity. This rate is expected to rise in 2012 as five-year 2007 vintage loans reach their maturity date without a refinance commitment, Fitch concludes.

CMBS

Japanese CMBS see Q4 losses

Losses were incurred on seven of the ten Japanese CMBS loans for which collections were completed in 4Q11, according to S&P. Further, of the nine underlying loans of Japanese CMBS transactions rated by the agency that matured in the fourth quarter, three defaulted due to non-repayment in the same quarter and six were repaid.

Meanwhile, collections for 10 other loans that had defaulted prior to the fourth quarter were completed in the fourth quarter, with losses incurred on seven of these loans. At the same time, S&P lowered the ratings on 53 tranches of 14 transactions in Q4, while it raised the ratings on two tranches of a single transaction. The agency says it upgraded the two tranches primarily because credit enhancement levels improved as the redemption of the CMBS progressed.

41 tranches representing about 77% of the 53 tranches that S&P downgraded in the fourth quarter were rated in the double-B rating category or lower, indicating that most downgrades in the quarter were of CMBS tranches that had already had relatively low ratings. Moreover, 28 - or about half - of the 53 tranches that were downgraded were rated in the triple-C category or lower. S&P says it lowered the ratings on these 28 tranches because losses were incurred at the loan or CMBS level upon the sales of the underlying collateral properties.

As of the end of the fourth quarter, there were 51 defaulted loans for which the servicers had not yet completed collection activities. S&P says: "It is our view that, as the servicers proceed with collections activities relating to these loans, we will continue to lower the ratings on the relevant CMBS tranches if, among other factors, the servicers were to revise downward the minimum collateral property sales prices indicated in their business plans, or if the CMBS tranches incurred effective or actual principal losses as a result of the sales of the related collateral properties."

CMBS

Counterparty review hits Euro CMBS

S&P has placed on credit watch negative its ratings on 122 tranches in 65 European CMBS transactions. The move follows the rating actions the agency took on banks on 29 November 2011, following the application of its revised bank criteria. Many of the CMBS that S&P rates have exposure to one or more of the banks affected by these rating actions in counterparty roles.

S&P's 2010 counterparty criteria allow the agency to rate a transaction above the rating on its counterparties, if a replacement framework exists and other conditions are met. Applying these criteria, in the 65 transactions affected by the rating actions, the ratings on the affected tranches would likely be constrained by the rating on the applicable counterparty or one notch above that, in cases where transactions' replacement regimes comply with the agency's previous counterparty criteria.

Based on these considerations, S&P believes that there is at least a 50% likelihood of a rating change on the affected tranches. The agency aims to resolve any credit watch placements within three months.

CMBS

CMBS workouts driving maturity outcomes

Fitch reports that European CMBS loan workouts have become more prevalent as the majority of loans that were due to mature in January 2012 remain outstanding. The total number of loans being worked out due to maturity default increased threefold during the past month, to 55 loans from 40 loans, the agency notes.

Only three loans that were originally scheduled to mature in January have been granted extensions by servicers. In Fitch's view, as the CMBS portfolio deteriorates, the option for special servicers to extend loans is becoming more limited.

Nine loans repaid in full during the month, one of which was the £262m Milton & Shire Houses loan. It was originally scheduled to mature in April 2011, but was restructured and extended for 18 months. The property sale resulted in the repayment of the full debt amount.

Fitch's Maturity Repayment Index for January remains at 39%, largely due to the repayments offsetting any negative movement caused by the maturity defaults. Of the matured CMBS loan balance, only 28.4% of loans have been repaid at or shortly after maturity. The proportion of loans that have been extended has decreased to 36.4%, while loans that are being worked out or are in standstill have increased to 30.1%.

Further, different patterns are emerging between the maturity outcomes of German and UK loans. Far more German loans have been extended (60% by exit loan balance, with only 10% in workout) in comparison with the UK, where only 21% have been extended and 30% are in workout.

In both jurisdictions, around a quarter of loans are currently in workout. The higher proportion of loan extensions in Germany reflects the higher costs of enforcement: not only are foreclosure costs higher, but the stigma associated with workouts suggests that recoveries from forced sales are likely to be lower.

RMBS

Monitoring solution enhanced for TBA fails

SunGard has enhanced its Stream Fail Monitor solution to help financial services firms comply with the expansion of the Treasury Market Practice Group (TMPG) penalties to apply to mortgages and agency debt fails. Under the latest TMPG recommendations, firms will be penalised for any fails related to mortgage and agency debt transactions, effective from 1 February.

Stream Fail Monitor receives all fails from a customer's trading systems, helping the firm identify fail trends by security and monitor counterparty risk across multiple platforms, SunGard says. In addition, the solution applies the appropriate penalty interest rate to fails based on the TMPG's rules, as well as identifies receivables and payables and prepares interest claims.

RMBS

RMBS working group unveiled

New York Attorney General Eric Schneiderman, US Attorney General Eric Holder, HUD Secretary Shaun Donovan and SEC Director of Enforcement Robert Khuzami have unveiled the core mission of the new RMBS Working Group announced by President Obama in the State of the Union address. The collaboration intends to investigate those responsible for misconduct contributing to the financial crisis through the pooling and sale of RMBS. It builds upon ongoing state and federal investigations, while also launching new ones, including sending civil subpoenas to 11 financial companies.

The new working group says its goals are to: hold accountable any institutions that violated the law; compensate victims and help provide relief for homeowners struggling from the collapse of the housing market, caused in part by this wrongdoing; and help the country move on from this "destructive period" in its history.

The group will include 55 Department of Justice attorneys, analysts, agents and investigators. As it begins its work, 15 attorneys - civil and criminal - and 10 FBI agents and analysts will be initially assigned to the working group. An additional 30 attorneys, investigators and other staff from US Attorney's offices around the country will join the working group's efforts, in addition to existing state and federal investigations into similar misconduct under those authorities.

RMBS

Further rating action on DSB deals

S&P has lowered and removed from credit watch negative its credit ratings on all classes of Monastery 2006-I notes. At the same time, it has affirmed and removed from credit watch negative the ratings on all classes of Monastery 2004-I notes. The rating actions reflect what the agency considers to be the transactions' deteriorating credit performance, its analysis of set-off risk as a result of duty-of-care claims and its analysis of counterparty risk in the transactions.

S&P lowered and kept on credit watch negative all classes of notes in both transactions on 14 January, as a result of deteriorating credit performance and its assessment of potential set-off risk from duty-of-care claims. Since then, the agency says it has received further information surrounding the extent of duty-of-care claims from the security trustee, ATC Capital Markets. As a result of these factors, it has reviewed its ratings and taken further rating actions.

Each of the asset pools currently contains a large proportion of loans whose borrowers are alleging due-care failures with respect to the selling of accompanying insurance products and the overextension of credit. DSB Bank is understood to have about 15,000 duty-of-care claims filed against it. For Monastery 2004-I, 22.9% of the outstanding balance had a duty-of-care claim outstanding as of June 2011, compared with 26.9% for Monastery 2006-I.

Based on S&P's understanding of the framework agreement, the agency has assumed set-off risk amounts of 4.2% of the transaction for Monastery 2004-I and 3.4% for Monastery 2006-I. The issuer is expected to claim against the DSB Bank estate on the basis of a breach of the representations and warranties provided by DSB Bank at sale. However, given the uncertainty as to the timing of any recoveries, and as the issuer would be one of a number of unsecured claimants against DSB Bank's insolvency, the agency has not considered any potential recoveries in its analysis.

Monastery 2004-I currently has a pool factor of approximately 44% and Monastery 2006-I has a pool factor of approximately 63%. The collateral performance has shown signs of stabilising in recent quarters, resulting in S&P's removal of the ratings from credit watch negative.

RMBS

MBS fails charge becomes effective

The agency debt and agency MBS fails charge trading practice recommended by the Treasury Market Practices Group (TMPG) becomes effective today (SCI passim). Under the trading practice, a party who fails to deliver securities in a timely manner will incur a charge.

The NY Fed says it will adopt these practices in its own operations and strongly encourages all market participants to incorporate them into their trading operations. "The New York Fed supports the TMPG's efforts to reduce settlement fails in the agency debt and agency MBS markets, as it believes that prolonged, elevated settlement fails negatively impact market functioning and increase systemic risk," comments Brian Sack, evp and head of the New York Fed's Markets Group. "As was the case with the implementation of a TMPG-recommended fails charge in the Treasury market in May 2009, the implementation of agency debt and agency MBS fails charges should reduce the level of settlement fails and support the functioning of these vital markets."