Contents

Structured Finance

SCI Start the Week - 6 February

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

Pipeline
Principal Residential Investment Mortgages 1, a €178.6m RMBS, entered the pipeline last week. It was joined by Rhode Island Student Loan Authority 2012A, a US$17.94m student loan ABS. Credit Suisse Asset Management's latest CLO, Madison Park, also began marketing.

Pricings
Several deals priced last week, including two large RMBS transactions. Lowland Mortgage Backed 1, a €3.8bn RMBS, was joined by the US$3.65bn-equivalent Arkle Master Issuer series 2012-1.
The week also saw US$1bn non-prime auto ABS AmeriCredit Auto Receivables Trust 2012-1, US$1bn credit card ABS Discover Card Master Trust 2012-A1, US$547m student loan ABS SLM Student Loan Trust 2012-A and US$400m insurance premiums ABS PFS Financing Corp 2012-A all print. Finally, three CLOs were issued: the US$400m Ares XXIII, US$437m ALM V and US$410m LCM X.

Markets
Last week was another positive one for global secondary structured finance markets amid a broader equity and credit market rally.
In the ABS markets, JPMorgan analysts say they have seen higher volumes and greater investor demand across a broad spectrum of ABS credits. At the plain vanilla end, two-year credit card ABS floaters traded extremely well and "in terms of riskier ABS, investors appear increasingly willing to go for spread pick-up and less worried about liquidity".
Two- to three-year triple-A fixed credit cards and one- to seven-year triple-A credit card floaters tightened by 2bp on the week. Triple-A through single-A subprime auto spreads tightened by 5bp to 40bp, while double-B spreads widened by 75bp.
Triple-A equipment ABS spreads tightened by 4bp to 5bp, with single-A and triple-B spreads tightening by 10bp and 50bp respectively. Stranded asset spreads tightened by 2bp to 3bp across the capital structure. Finally, private student loan ABS also tightened by 25bp to 250bp.
Last week remained very active in the US CMBS secondary market and was characterised by a good two-way flow, according to US CMBS research analysts at Barclays Capital. "Based on the TRACE data, about US$8.2bn in the CMBS space traded, about a 5% pick-up from the prior week," they note.
The Barcap analysts report that generic 2005 dupers are trading in the S+110/115 area, unchanged to about 5bp tighter week-on-week. Generic 2006 dupers are in the S+140 territory, mostly unchanged from the prior week, though some CUSIPs were 5bp tighter.
2007 dupers outperformed, being 10bp-15bp tighter week-on-week. Generic AM and AJ tranches were largely unchanged on the week.
Meanwhile in European CMBS, CRE debt analysts at Deutsche Bank say: "Following the breakthrough in volume last week, activity in the market increased again by 20%. The flows are being driven by the fast money community as money managers are generally watching from the sidelines. Most of the buys are coming on mezzanine tranches from transactions where the senior bond has already rallied."
For example, TMAN 7 class As are up to the low-80s from the mid- to high-70s and the price on class Bs has rallied to the mid-60s from the high-50s.
CLOs too have had a very strong start to the year and last week was no exception. "CLO spreads are tighter across the structure and globally," JPMorgan analysts report.
For example, they note that US triple-As moved in 10bp last week to stand at 200bp and triple-Bs moved in by 25bp to 750bp. In Europe, triple-A CLOs were unchanged on the week, but still 20bp in on the year at 260bp, while European triple-Bs moved 50bp tighter last week to 1400bp.
Activity also remained generally positive in the US RMBS market, according to residential credit analysts at Barclays Capital. They say: "Non-agency prices were higher, with the negam sector leading the way, being up 1.5 points week-on-week. Jumbo and alt-A prices were up 0.25-0.75 points week-on-week. On the other hand, the ABX and PrimeX indices were weaker, with ABX flat to slight higher, while prime fell about 0.5 points."

Deal news
• The latest documents released as part of PJ Alliance's bankruptcy filing reveal a new reorganisation plan, which is expected to be reflected in a modification of the US$475m Alliance SAFD-PJ portfolio loan securitised in CSMC 2007-C2. Although concessions to the sponsors under the proposal appear high, the modification should result in a better-than-expected outcome for CMBS investors.
• 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 is said to underscore the improvements in cashflow performance that have been seen over the past year.
• Sainsbury's has disclosed that it may not redeem the Eddystone Finance CMBS on its April 2013 step-up date. How principal will be allocated to the notes post non-call remains unclear, however.
• An auction is being held to liquidate the Duke Funding High Grade I CDO, almost a year after a previous auction failed to attract enough bids. The latest auction is scheduled for 21 February, but its completion is subject to an auction call redemption amount.
• Lloyds has announced an unexpected tender offer for the Candide 2005 class A, Candide 2006 A2 and Candide 2006 A3 notes. The tender offer is at par for the three triple-A rated RMBS bonds.
• Enterprise Inns has sold 15 pubs, located across the west and south east of England, for £23m to Fullers based on a multiple-to-net income of 13.5x. Although Enterprise didn't disclose which part of its capital structure these pubs are being sold from, the company says it will use the proceeds to repay bank debt, or buy back Unique notes or debentures.
• 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.
• 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.

Regulatory update
• 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.
• President Obama has provided more detail on his plan to help spur mortgage refinancing, following his State of the Union address (SCI 25 January). Most elements of the initiative are likely to either require Congressional approval or the FHFA to revisit the work that went into developing HARP 2. The President's plan would introduce a HARP-like refinancing option for non-agency borrowers.
• The agency debt and agency MBS fails charge trading practice recommended by the Treasury Market Practices Group (TMPG) became effective on 1 February. Under the trading practice, a party who fails to deliver securities in a timely manner will incur a charge.
• 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.

Deals added to the SCI database last week:
B-Arena 3
FCT BS CDN ENT 2012
FCT BS CDN PPI
GE Capital Credit Card Master Note Trust series 2012-2
GS Mortgage Securities Trust 2012-GC6
Ibis Re II 2012-1
Storm 2012-I
Valsabbina 1

Top stories to come in SCI:
Special servicer fees
ABS portfolio management trends
Ratings impact of sovereign linkage

CDS

Sustained CDS index rally expected

CDS indices experienced a strong rally during the first month of the year, with credit investors adding risk on both sides of the Atlantic. Indeed, the CDS-cash basis turned significantly more negative in January, as CDS outperformed the cash market.

One driver of this outperformance was investors reducing their shorts, according to credit derivatives strategists at Bank of America Merrill Lynch. Credit accounts in Europe, in particular, had built up a strong underweight in financials at the end of 2011 but re-entered the sector this month. Consequently, the basis hit -17bp in Europe and -46bp/-72bp in US high grade/high yield respectively.

As the European high grade on-the-run CDS index ended January around 30bp tighter, front-end equity protection was better offered. The BAML strategists point to significant interest from accounts in owning short-dated equity risk via S9 five-year 0%-3% tranches, resulting in an approximately 2.2-point steepening on the front-end S9 equity curves. S9 junior risk was also better bid in the US high grade tranches, with all tenors closing January 3-4 points tighter.

Buying of 15%-30% tranche protection increased, meanwhile, due to accounts seeking a more 'systemic' risk hedge as it became cheaper to own.

At the same time, the index-to-intrinsics skew exhibited volatility during January in Europe and the US. The strategists note that three different patterns played out across the iTraxx Main, CDX IG and CDX HY indices.

In European high grade, the index remained tighter than its intrinsics, with skew closing the month flat at -6bp. In US high grade, the skew turned less negative over the course of the month, with the index underperforming single names by 4bp. Finally, in the US high yield space, the index outperformed its constituents by 0.6 points.

The strategists anticipate that credit will continue tighter, ahead of another ECB three-year LTRO, providing more liquidity to the European financial system.

CS

CLOs

CLO 'risk-off' trade evident in TRACE data

The latest Wells Fargo Structured Products Monthly examines TRACE trade data for the structured credit sector from mid-August 2011 onwards. US CLO analysts at the bank find that, thus far, the data largely matches conventional wisdom espoused by CLO market participants that bid/ask spreads widen and trading slows during times of volatility.

Indeed, increased market volatility in September coincided with lower CLO volumes, according to the TRACE data. As expected, December volumes were also much lighter than in October or November, as book keeping took precedence.

In terms of where trading occurs in the capital structure, the data suggests that investment grade tranches see the most volume. However, the Wells Fargo analysts note that as senior CLO tranches are much larger than lower-rated tranches, it should not be concluded that more trades occur at the top of the capital structure.

The TRACE data is broken down by IG tranches and non-IG tranches, with the lowest current ratings of Moody's, S&P and Fitch used to categorise the tranche. Unrated tranches are classified as non-IG.

Interestingly, the month with the highest percentage of trades in the non-IG space occurred in the month with the most volatility - September. "While it is dangerous to make conclusions based on such a small data set, this observation follows our view that mezzanine tranches should be viewed as higher-beta assets that tend to largely track stock indices or general investor sentiment. It also may be a reflection of the fact that senior note investors are less likely to sell during periods of volatility, preferring to wait out the short-term swings to avoid selling at temporarily depressed prices," the analysts observe.

The TRACE data also illustrates trading patterns. In the IG space, investor buying was greater than investor selling in seven of the 10 weekly periods from mid-August to mid-October, according to the analysts.

However, customer buying lagged customer selling in five of the next six weeks, with one notable large-scale customer sale in late-November. Customer buying then returned amid the low volume in December. Overall, of the 24 weeks surveyed in the data, customer buying was greater than customer selling in 13 periods - with two weeks when customer buying and selling were equal.

The non-IG volume data shows a slightly different picture. Overall, customer selling exceeded customer buying in 13 of the 24 periods surveyed. Notably, customer selling surpassed customer buying during five of the seven weekly periods from mid-August to late September.

Cumulative customer selling was greater than buying in both IG and non-IG tranches between mid-August 2011 and January 2012, likely driven by the 'risk-off' trade. Without the large sale in November, however, the IG volume data would show net purchases by investors for the period.

CS

CLOs

Recession threat highlights Euro CLO concentration

The threat of a new recession in Europe has highlighted that the performance of a few issuers could have negative repercussions for the entire European CLO universe, according to Moody's in its latest CLO Interest publication. Having studied the broad characteristics of the 50 most referenced issuers in the European CLO leveraged loan universe, the rating agency suggests that these 50 issuers are likely to drive the performance of the universe as a whole.

"European CLO leveraged loan portfolios exhibit a high degree of overlap among issuers, with the 50 most referenced issuers accounting for about 4% of the unique names in the European CLO universe, but almost half the universe exposure amount," says Hemal Shah, analyst at Moody's. "In light of the looming risk of recession in Europe, the performance of these issuers could have negative repercussions for the entire European CLO universe, even though the credit quality of the top 50 issuers is better than that of the universe of underlying CLO holdings."

The rating agency calculates that total collateral exposure to the European CLO leveraged loan universe is around €68bn, with the top 50 issuers accounting for €30bn, or nearly half. This universe comprises more than a thousand unique issuers.

The most referenced issuer, Tyrol Acquisition 1 SAS/TDF, appears in 90% of the European leveraged loan CLOs rated by Moody's: 51 CLO managers have invested in it. It currently has a corporate family rating (CFR) of B2, with a stable outlook. According to Moody's calculations, European CLOs hold around €1.4bn, or 32%, of Tyrol's debt.

Half of the top 50 issuers appear in at least 100 CLO portfolios, accounting for two-thirds of the top 50's collateral exposure. Five of these issuers each have more than €1bn exposure to CLOs.

In comparing the credit quality distribution of the top 50 issuers versus the European CLO leveraged loan universe, Moody's finds that credit assessments comparable to that of a B2 rating or higher is attributable to 70% of the issuers in the top 50 but to only 58% of those in the CLO leveraged loan universe. Only three names in the top 50 have credit quality comparable to Caa1 and below; these have an aggregate collateral exposure to the European leveraged loan CLOs of €1.8bn and are in cyclical industries, such as telecoms and media (advertising, printing & publishing).

Moody's also notes that in terms of country distribution of the top 50 issuers, the pattern is very similar to that of the European CLO leveraged loan universe, with the exception of a slight over-representation for Germany. "Interestingly, the top 50 issuers' exposure to the European peripheral countries - at 12.6% - is slightly higher than that of the CLO leveraged loan universe, at 11.4%," says Shah.

The credit quality of only 4.5% of the peripheral countries' top 50 issuers is comparable to a rating of B3 or lower, which is better than that of the other European countries. ERC Ireland is the only issuer with a rating of Caa or lower. Moreover, since CLO portfolios are usually diversified and the businesses of the underlying issuers themselves are also often diversified, the exposure to peripheral countries does not constitute significant risk to European CLOs.

The sector distribution of the top 50 is also similar to that of the European CLO leveraged loan universe. The exception is media (broadcasting & subscription), to which the top 50 has an exposure of 21%, compared to 10.3% for the CLO leveraged loan universe.

Incidentally, media (broadcasting & subscription) includes cable, the only industry with a positive outlook. Also, business services - the largest sector in the European CLO leveraged loan universe - comes in only seventh among the top 50, which is positive news because the sector has the highest one-year default rate forecast in Europe, at just under 5%.

"The concentration of the top 50 issuers in the European CLO leveraged loan universe exposes the CLOs to the risk that the poor performance of a few issuers will affect many CLOs," reiterates Shah. "The current trend for corporate rating actions is strongly negative. An increase in the number of issuers in CLO portfolios whose credit quality is comparable to a rating of Caa1 or below because of rating downgrades to the top 50 will have negative credit implications, including weakening WARF and OC ratios, for many CLOs."

As an example, in December 2010, the downgrade to Moody's rating on ERC Ireland Finance Limited to Caa1 from B3 expanded the average Caa bucket in the European CLO leveraged loan universe to 9.6%, from 8.7% in November. And, in May 2011, Yell Group Plc's downgrade to Caa1 from B3 expanded the average Caa bucket to 9.8% from 8.8%.

AC

CMBS

More large liquidations predicted

An increase in dispositions of larger CMBS loans in the coming months would not be a surprise, according to Citi securitised products analysts. They argue that there are three drivers behind such an expectation.

First, while special servicers may continue to aggressively liquidate the small loans in their pipeline, they may also now turn their attention to potentially liquidate larger ones. Second, the analysts say: "We may see liquidations of loans where modification negotiations with the borrower were unsuccessful (for example, where servicers are executing a 'dual track' approach). Servicers may also liquidate modified loans that remain troubled in spite of the modification."

Third, they suggest that servicers may be forced to liquidate properties the borrower itself is not interested in keeping. Various sponsors are rationalising their portfolios, they note, by injecting equity or bringing in partners for properties they want to keep and turning over the keys on the others.

"The current limited clarity over such larger liquidations is concerning. It makes it difficult to project loss severities," the Citi analysts observe.

They also find that extremely severe losses are becoming more common. Cases of 'negative recoveries', where loss severity exceeds 100%, were relatively rare in the past.

But this is no longer the case: in 2011, 22 loans sustained loss severities of over 100%, just over 2010's level of 20. This compares to an annual average of only five negative recovery cases from 2007-2009.

Various costs and expenses accounted for about 30% of overall losses in 2011, according to the analysts. Low sales price compared to the disposed balance is only one component of the overall loss, accounting for almost 70% on average. But other loss components, such as closing costs and various liquidation expenses, are important loss drivers as well.

Expense ratios - the ratio of liquidation expenses to net proceeds - continue to vary significantly across liquidations. In 2011, ratios varied from less than 5% to more than 100%. The expense ratios vary modestly by property type and across special servicers.

Amounts due to the servicers and trustee are the largest liquidation expense, accounting for 62% of all expenses, the analysts note. Such payments also take first priority in the net proceeds allocation.

MP

CMBS

Alliance SAFD-PJ plan surprises to the upside

The latest documents released as part of PJ Alliance's bankruptcy filing reveal a new reorganisation plan, which is expected to be reflected in a modification of the US$475m Alliance SAFD-PJ portfolio loan securitised in CSMC 2007-C2. Although concessions to the sponsors under the proposal appear high, if the hypothetical liquidation analysis truly reflects market conditions, the modification should result in a better-than-expected outcome for CMBS investors.

According to the disclosed liquidation analysis, a hypothetical Chapter 7 bankruptcy forced sale would only recover between US$193m-US$237m for the senior lender secured claims after all applicable fees and other related costs. Consequently, the new Chapter 11 plan proposed by the current equity owners essentially aims to increase the valuation by trading the loan's current interest payments for additional capital necessary to improve the properties' performance, Deutsche Bank US CRE debt analysts suggest.

The main terms of the proposed modification include a split into a US$423m A-note and two hope notes - a US$50m B-note and a US$30m C-note (comprising US$2m of loan principal and US$28m in capitalised payments). US$22.5m of new equity investment will also be made, to pay for expenses and a stabilisation fund of at least US$6m. A further US$5m of working capital may be provided before the effective date at the sponsors' option.

In addition, the loan's maturity date has been extended by three years to 31 December 2019. It also has a new interest-only rate schedule for the A-note, with Riverstone Residential Group becoming the new property manager and taking up to 3% of effective gross income from operations fees.

If the properties generate enough cashflow, the new equity is expected to be repaid in full in six years, along with a 16% return.

The Deutsche Bank analysts point out that the market's expectation for losses associated with the Alliance SAFD-PJ loan were more severe than the two proposed hope note balances would suggest. The proposed modification is also seen to be positive in terms of the clarity it provides in the timing of amortisation and ultimate repayment of principal.

The negative aspects of the proposed modification, the analysts note, are the waterfall and the bias towards the sponsors. "While we recognise the need to incentivise sponsors (old or new) to participate in a workout process, the proposed waterfall strikes us as extreme. There are not many investments in the CRE debt space which have the potential to generate high-teens IRRs and all of them in our view are much riskier propositions relative to the modification agreement proposed here. We can only assume that there were no other investors willing to assume and restructure the loan under more CMBS bondholder-friendly terms and the liquidation process would be too costly, time-consuming and result in far less proceeds."

CMBS strategists at Barclays Capital anticipate that the modification will benefit short-pay and IO tranches, but result in losses and shortfalls for the bottom of the capital structure. "Even though the loan is now effectively open for prepayment with minimum penalties, the suggested financing at a low rate appears attractive, and we think most of the properties are likely to remain in the pool if the modification is approved," they observe.

Ballots cast to accept or reject the plan must be received by the claims agent by 21 February, with the hearing to consider its confirmation scheduled for 27 February.

CS

CMBS

Eddystone non-call waterfall questioned

Sainsbury's has disclosed that it may not redeem the Eddystone Finance CMBS on its April 2013 step-up date. How principal will be allocated to the notes post non-call remains unclear, however.

European CMBS strategists at Barclays Capital believe that while the intended cashflow allocation rules for the deal are clear, the offering circular (OC) is ambiguous. "To make a final judgment on this issue, one would have to consult the loan agreement, which is not publicly available. For investors to be able to estimate cashflows on and after the April 2013 step-up date, we think that transaction parties should either publish the loan agreement or clarify how principal redemption would be allocated to ESTON 2006-1 after a potential non-redemption in April 2013," they observe.

Sainsbury's current intention not to redeem the deal on the coupon step-up date is thought to be economically-driven. If the transaction isn't repaid in April 2013, the loan and CMBS margins step up by approximately 35bp and any excess rental cashflow will be used to repay principal until the loan's final maturity in April 2018.

However, despite being in cash-sweep mode from April 2013 onwards, the waterfall is complicated by the time-tranching between the class A1 and A2 notes. Pre-coupon step-up date, the loan is subject to scheduled amortisation allocated pro rata to classes A1A and A1B.

Post-coupon step-up, the amount of principal to be allocated to the CMBS classes is not shown in the OC. But the BarCap strategists believe that post step-up date the intention is for loan principal redemption to continue to be allocated pro rata to classes A1A and A1B.

"Taking into account the likely intention of cash sweep loan repayments being allocated to classes A1A and A1B first, it becomes clear that a non-call is especially negative for classes A2 and below, whose WAL as of January 2012 would increase from 1.3 to 5.7 years (class A2) and from 1.3 to 6.3 years (classes B and C). The WAL of classes A1A and A1B increases 'only' from 1.2 to 2.4 years," they note.

While Sainsbury's aim may be to keep investors updated about its intentions in a timely manner, ESTON 2006-1 secondary market pricing reacted negatively on the disclosure. Since mid-January 2012, the class A1A and A1B notes have declined by around 2-3 points and the class A2s by 7-8 points, thereby pricing in the potential extension.

CS

Structured Finance

Credit vet founds new firm

Sal Naro has formed New York-based Coherence Capital Partners, an asset management company specialising in the fixed income markets. He becomes ceo of the firm, which will invest in companies that show strong performance in their balance sheets while taking short positions in companies that miss earnings expectations and suffer continued weakness in their primary business metrics.

Naro was previously ceo of JNF Asset Management and vice chairman of Jefferson National Financial, which he joined in April 2011. Before that, he was an evp at Markit and Sailfish Capital's co-founder and managing partner.

Structured Finance

Ex-Mallesons lawyers move on

Johnson Winter & Slattery has poached a pair of structured finance lawyers. Craig Wappett and Deborah Overstead join the firm in Brisbane as partner and special counsel respectively.

Formerly with Mallesons, Wappett is a financial services and major projects specialist, with experience ranging across governance, structured finance, financial product regulation and commercial transactions. Overstead joins Johnson Winter & Slattery from Piper Alderman and has experience in major projects, structured finance and insolvency. Prior to her most recent role, she was a senior associate with Mallesons.

Structured Finance

Law firm expands Perth practice

Allens Arthur Robinson is expanding its Perth finance practice by transferring Ben Farnsworth from Sydney and recruiting Simon Chan from Allen & Overy. Tim Lester, who leads the team, says the appointments are a reaction to the office's rapidly increasing workload.

Farnsworth is a senior associate who has been with the firm since 2010. He began his career as an associate at Allens in 2001, before working as a solicitor at Norton Rose Group and Milbank, Tweed, Hadley & McCloy prior to returning to the firm. He has structured finance experience both in Australia and overseas.

Chan is joining from Allen & Overy in London. He will join the team in March and become a senior associate. His previous role was at Minter Ellison in Perth. He specialises in cross-border structured finance and syndicated lending for a range of financiers and borrowers.

Structured Finance

Coherence Capital unveiled

Further details have emerged about Coherence Capital Partners, the asset management firm formed by ex-Sailfish Capital co-managing partner Sal Naro (SCI 3 February). The creation of Coherence Capital is the result of a management buyout of Jefferson National's core insurance unit.

Coherence Capital will manage traditional and non-traditional fixed income assets for a broad audience of investors. In addition, as a third-party advisor, the firm will continue to conservatively manage a portion of Jefferson National's general account portfolio of US$100m, as well as provide risk monitoring and advisory services for a portion of their reinsurance contracts.

The management team at Coherence Capital consists of several former Jefferson National Asset Management executives previously recruited by Naro in his role as ceo, including Vincent Mistretta (former head of portfolio management at Jefferson National Asset Management), Greg MacKay (its former coo) and Robert Del Grande (its former cfo). David McClean, former chief compliance officer of Sailfish Capital, will join the firm to oversee regulatory matters.

Structured Finance

Bank makes senior appointments

Credit Agricole Corporate and Investment Bank has promoted Frederic Truchot and Stephane Publie to head of fixed income markets and head of coverage for Americas, respectively. They each also join the management committee.

Truchot has been with Credit Agricole for more than 20 years and was most recently head of capital markets in Japan. He succeeds and will report to Jean-Francois Deroche and will also report globally to Thomas Gadenne. Truchot's previous roles within the company include head of derivatives sales and structuring for Asia ex-Japan and roles in DCM origination and derivatives marketing.

Publie is also a veteran of the firm and was most recently senior banker, a position he held for seven years. He has held positions in France and the US and is experienced in structured credit, securitisation and investment banking. He too reports to Deroche.

Structured Finance

Consultancy opens office in Asia

GreySpark Partners has opened a new office in Hong Kong to support its APAC clients. The new office will provide on-site and local delivery for client projects that have so far been managed from the UK.

The team will be led by Andrew McLauchlan, partner and md, who will be responsible for overall strategy and operations. He was previously based in London.

"You cannot ignore that the centre of gravity of global financial institutions is shifting East," says Frederic Ponzo, GreySpark managing partner. "Out of all the global financial centres to expand to, Hong Kong is the obvious choice."

The consultancy says it next intends to open an office in New York, which it expects to do next year.

CDS

French derivatives association formed

A new association of French valuation providers has been formed. The association professionnelle des valorisateurs d'instruments financiers (APVIF) has been set up as a response to the impact of the financial crisis and a lack of transparency in derivatives instruments.

The founding members are DeriveXperts, Finance Innovation, Lexifi, Momentum Consulting, Pilcer & Associés, Pricing Partners, Société Générale Securities Services and Zéliade Systems. They aim to restore market confidence through a better understanding of derivatives, the importance of independent valuation and regulatory bodies.

CLOs

GSC Group hearing due

The US Bankruptcy Court for the Southern District of New York has approved Black Diamond Capital Management's motion for entry of an order in respect of its fourth amended joint Chapter 11 plan for GSC Group. Consequently, Black Diamond is soliciting votes from GSC European CDO I-R, CDO II and CDO V noteholders to accept or reject the plan. A hearing to confirm the plan is scheduled for 14 February, with signed and completed ballots to be received by Epiq Bankruptcy Solutions by 6 February.

CMBS

Real estate vet joins advisory

Robin Priest has joined Alvarez & Marsal Real Estate Advisory Services in London as a senior adviser. He brings more than 30 years of experience in real estate and structured finance to the firm. His primary focus will be working with European real estate clients in connection with challenging and complex assets, portfolios or businesses.

Prior to joining A&M, Priest spent four years with Deloitte, where he was lead partner for real estate corporate finance in London. Before joining Deloitte in 2005, he set up a new property outsourcing business in the UK - Mapeley - in conjunction with Soros Real Estate Partners and Fortress Investment Group. The first 20 years of his professional career were spent as a structured finance banker in London, Sydney and Los Angeles.

Risk Management

Risk management tool use extended

Bureau van Dijk (BvD) has incorporated Fitch Solutions' Bank Credit Model into its Bankscope database. The dataset is now available to all Bankscope subscribers.

BvD's Bankscope product combines widely-sourced data with software for searching and analysing banks across the globe. Fitch's Bank Credit Model launched last year (SCI 3 October 2011). It provides daily financial implied ratings and implied CDS spreads and is designed to help risk managers improve credit and counterparty risk surveillance.

RMBS

NY AG files MERS suit

New York Attorney General Eric Schneiderman has filed a lawsuit against Bank of America, JPMorgan Chase and Wells Fargo, charging that the use of a registry system known as Mortgage Electronic Registration System (MERS) resulted in deceptive and fraudulent foreclosure filings. It follows a similar lawsuit filed recently by Massachusetts AG Martha Coakley (SCI 2 December).

MERS and its parent MERSCORP, BAC Home Loans Servicing, Chase Home Finance, EMC Mortgage Corporation and Wells Fargo Home Mortgage are also named in the lawsuit. Employees and agents of the banks are alleged to have repeatedly submitted court documents containing false and misleading information which made it appear that the foreclosing party had the authority to bring a case when it may not have.

The Attorney General's lawsuit charges that:
• MERS has filed over 13,000 foreclosure actions against New York homeowners listing itself as the plaintiff, while in many instances lacking the legal authority to foreclose and not owning or holding the promissory note, despite saying otherwise in court submissions.
• MERS certifying officers, including employees and agents of JPMorgan Chase, Bank of America, and Wells Fargo, repeatedly executed and submitted in court legal documents purporting to assign the mortgage and/or note to the foreclosing party. These documents contain numerous defects, including affirmative misrepresentations of fact, which render them false, deceptive, and/or invalid. These assignments were often automatically generated and 'robosigned'.
• MERS' indiscriminate use of non-employee certifying officers to execute vital legal documents has confused, misled and deceived homeowners and the courts and made it difficult to ascertain whether a party actually has the right to foreclose.
• MERS certifying officers have regularly executed and submitted in court mortgage assignments and other legal documents on behalf of MERS without disclosing that they are not MERS employees, but instead are employed by other entities, such as the mortgage servicer filing the case or its counsel.
• MERS and its members have deceived and misled borrowers about the importance and ramifications of MERS' role with respect to their loan by providing inadequate disclosures.
• The MERS System contains inaccuracies which make it difficult to verify the chain of title for a loan or the current note-holder and create confusion among stakeholders who rely on the information. In addition, as a result of these inaccuracies, MERS has filed mortgage satisfactions against the wrong property.

The lawsuit is seeking a declaration that the alleged practices are illegal as well as injunctive relief, damages for homeowners and civil penalties. It also seeks a court order requiring defendants to cure any title defects and clear and improper liens resulting from fraudulent practices.

ABS

Stable outlook for utility tariff bonds

Fitch is maintaining a stable rating outlook for US utility tariff bonds in 2012, despite potential declines in consumption due to continued recessionary impacts. The agency says that to date Fitch-rated tariff bonds are performing within expectations. This is largely due to structural features inherent in utility tariff ABS transactions, like the true-up mechanism and sub-account withdrawals, which have been able to ward off recessionary effects thus far.

The frequency of true-ups and sub-account withdrawals is expected to remain stable, with performance highly correlated to the health of the US economy. The business climate for US investor-owned electric utilities and utility parent companies will likely remain favourable this year, with company credit profiles and ratings to remain stable.

However, the longer the US economy remains weak, the greater the likelihood of a number of scenarios serving as negative rating drivers for the sector. Such scenarios include: material shifts in demand; a rise in delinquencies and charge-offs; bankruptcy of the industrial customer base and/or the servicing utilities; and elevated regulatory risk associated with rate increases and rising service disconnections.

ABS

Enterprise sale boosts Unique bonds

Enterprise Inns has sold 15 pubs, located across the west and south east of England, for £23m to Fullers based on a multiple-to-net income of 13.5x. Given that the pubs appear to have been bought for their trading potential rather than as a real estate play, the move is expected to help improve pub valuations outside of London.

Although Enterprise didn't disclose which part of its capital structure these pubs are being sold from, the company says it will use the proceeds to repay bank debt, or buy back Unique notes or debentures.

Securitisation analysts at Barclays Capital anticipate that the news will be positive for Unique paper, given that one of the reasons for the underperformance of Enterprise bonds relative to Punch has been a lack of a corporate buyer. "Since the start of the year, the Entinn 5.659 27s have improved by three points and, as our most preferred exposure to the tenanted pub sector, we still see value in these bonds with a yield of 11.5%, leverage of 6x debt-to-EBITDA to price or 4x EBITDA to price," they note.

ABS

FFELP SLABS ratings lowered

S&P has lowered its ratings on 87 classes of bonds from 29 FFELP student loan ABS transactions issued between 2003 and 2007 by Sallie Mae. At the same time, the agency affirmed its ratings on 50 senior classes of bonds from the same transactions. It also removed its ratings on all the classes from credit watch, where they were placed with negative implications on 15 July 2011.

The rating actions reflect the application of S&P's revised criteria for the treatment of the US government in its role as an insurer or guarantor and government agency loan-level support in structured finance transactions. The affirmed ratings reflect the following: the relatively short expected life of the classes; or the credit enhancement available in the transaction and/or our assessment of the likely continuation of a sequential-pay structure within the class A notes following a non-monetary EOD.

ABS

Embarcadero Re closes

The second catastrophe bond from the California Earthquake Authority's (CEA) Embarcadero Re programme (SCI 20 January 2012) has closed.

The single-tranche US$150m transaction priced at 725bp over Treasury money market funds. S&P has rated the deal double-B minus.

Embarcadero Re series 2012-I is based on CEA's ultimate net losses. CEA policies do not cover certain perils usually included in earthquake cat bonds, such as fire following an earthquake. The CEA policies only provide coverage for losses directly resulting from the shake damage of the earthquake. The earthquake epicentre does not have to be within California to be a covered event and commercial properties are not covered.

The class A notes cover losses from first and subsequent earthquakes in California on an aggregate basis over three annual loss occurrence periods (LOP). The attachment and exhaustion points for the first LOP are US$2.91bn and US$3.21bn, respectively.

ABS

Kibou doubles up

The Japanese earthquake catastrophe bond Kibou has closed at twice the originally envisaged size. The deal issued on behalf of risk counterparty Hannover Re and reinsurer Zenkyoren - Japan's National Mutual Insurance Federation of Agricultural Cooperatives - finished up at U$300m having begun marketing at US$150m (SCI 16 January 2012).

Kibou's single tranche series 2012-1 class A notes priced at 575bp over Treasury money market funds. The deal has been rated double-B plus by S&P.

Kibou will be exposed to earthquakes in Japan between February 2012 and February 2015. It will cover losses in excess of an event index value of 1,050 and below a value of 1,150. In addition, the notes will have a dropdown feature. If the event index value from the first event is equal to or greater than 270, the notes will provide coverage for any subsequent events from the dropdown effective date onward in excess of an event index value of 490 and below a value of 590.

Structured Finance

SF driving tri-party repo appetite

Risk appetite in the US tri-party repo market is returning, reflected in a rise in riskier forms of repo collateral and a decrease in haircuts, according to Fitch. The agency says that structured finance has been the primary driver of the increasing presence of riskier forms of repo collateral.

Fitch based its findings on repo transaction data sourced from a sample of the 10 largest US prime money market funds (MMFs), representing approximately US$90bn in repo transactions as of end-August 2011. Structured finance represents 20% of all repo collateral in this sample, with approximately half of this collateral in the form of Alt-A and subprime RMBS and CDOs. The median ratio of this collateral's value to the principal amount is 43%, a proxy for the discounted pricing of these securities.

Fitch's study also indicates that repo haircuts, after peaking during the crisis and its aftermath, have recently receded - a possible sign of thawing credit conditions. For example, median haircuts on repos backed by structured finance collateral declined from 8% to 5%, as of end-August. Median haircuts for both equity and corporate debt collateral have also declined from recent highs.

Structured Finance

Negative outlook for sovereign-linked SF

Fitch has revised its outlook on 253 tranches of Spanish and Italian structured finance transactions to negative. In addition, 12 tranches of five Irish RMBS transactions have been affirmed, removed from rating watch negative (RWN) and assigned a negative outlook. The agency has also downgraded 15 tranches of credit-linked or state guaranteed SF transactions in Spain and Italy.

The rating actions follow the downgrade of the long-term issuer default ratings (IDR) of Spain to single-A and Italy to single-A minus, as well as the affirmation of and removal of RWN from Ireland's triple-B IDR. The outlook for the sovereign ratings for all three countries is negative. All triple-A rated tranches of Italian and Spanish SF, as well as all double-A rated tranches of Irish SF consequently have a negative outlook.

Fitch says it recognises the likelihood that the downgrades of the sovereign IDRs will put pressure on the ratings of financial institutions in Spain and Italy. This is of concern for SF transactions in these countries as various counterparty roles are fulfilled by their domestic banks.

Structured Finance

FOF seeks distressed opportunities

Legg Mason Global Asset Management has launched Permal Hedge Strategies Fund, a fixed income-focused multi-manager, multi-strategy fund of hedge funds. The fund invests in a broad range of fixed income strategies, employing flexible asset allocation and moving capital between credit and non-credit strategies.

Investments will include developed as well as emerging market fixed income and long/short fixed income. There are also smaller allocations to event-driven strategies, such as distressed debt, together with global macro strategies intended to mitigate market volatility.

"We expect to see corporate restructurings, both inside and outside of bankruptcy, and distressed credit opportunities," comments Javier Dyer, portfolio manager of Permal Hedge Strategies Fund and Permal Group deputy cio. "Currently there are late-stage bankruptcy situations that are offering attractive IRRs for what are effectively liquidation situations. Elsewhere, with many loan and bond re-financings still due for renewal in 2013 and 2014, we again expect multiple long, short and distressed opportunities, with capital markets asserting greater discipline in differentiating between the good and bad credits. Outside of corporate credit, we like non-agency RMBS, with many securities offering significantly higher cash yields than corporate bonds."

CDO

Dante CDO resolution progressing?

Lehman Brothers Australia (LBA) has filed for Chapter 15 bankruptcy protection in the US Bankruptcy Court for the Southern District of New York, in what is said to be an attempt to resolve jurisdictional differences in respect of its liquidation. Chapter 15 of the US bankruptcy code relates to cross-border bankruptcy issues and allows a representative of a corporate bankruptcy outside the US to obtain access to the US court system.

A recent Structured Credit Research & Advisory (SCRA) client memo suggests that the action is motivated by PPB Advisory, LBA's administrator, trying to improve its position in two inter-related legal cases. In the first case, PPB is proactively trying to retrieve monies on CDOs where Lehman is the swap counterparty and where there are conflicting UK and US court rulings regarding payment priority (SCI passim).

In the second case, the LBA estate is being sued in a class action led by Piper Alderman. An outstanding issue in this case is agreement on the quantification of any losses, with a main point of contention and uncertainty being the value of the Lehman CDOs.

The SCRA memo indicates that PPB is seeking to resolve the Lehman CDO priority dispute partly to remove uncertainty over valuations and help progress resolution of Piper's claims against the LBA estate. "If PPB is successful in its attempts to maximise returns from the Lehman CDOs, it provides a double benefit of increasing the value of the LBA estate that holds some of these assets and also reducing the claims against the estate from Piper clients, who in turn also hold these assets."

SCRA notes that the best result for holders of Lehman CDOs is therefore that the courts accept Piper's arguments for a low expected recovery on these investments, which increases their claims, but that the actual eventual recovery is high so the LBA estate can actually pay the claims.

CDO

CDO auction re-attempted

An auction is being held to liquidate the Duke Funding High Grade I CDO, almost a year after a previous auction failed to attract enough bids (SCI 23 February 2011). The latest auction is scheduled for 21 February, but its completion is subject to an auction call redemption amount. If the bids delivered are less than this amount, no collateral will trade. The auction will be held across five sub-pools of collateral: agency RMBS, subordinated Alt-A RMBS, CMBS, senior subprime RMBS and subordinated subprime RMBS.

CDS

Kodak auction scheduled

The auction to settle the credit derivative trades for Eastman Kodak Company CDS is to be held on 22 February. A bankruptcy credit event was determined on the name last month (SCI 20 January).

CDS

NRAM CDS settle above par

The Northern Rock (Asset Management) CDS auction yesterday resulted in the first-ever credit event settlement where the final price rose above par. Dealers bid up the lender's shorter dated bonds, in bucket 1, from an initial market midpoint of 99.25 to 104.25. The final price for bonds in bucket 2 was determined to be 99.13.

13 dealers submitted initial markets, physical settlement requests and limit orders to the auction. The Northern Rock (Asset Management) deliverable obligations are denominated in euros, sterling and US dollars.

CDS

Global CDS liquidity spikes

Fitch Solutions reports that - as of last Friday's market close - average global CDS liquidity was at its highest level since March 2009, when its liquidity scores began.

"Whilst all regions have seen a notable up-tick in liquidity so far this month, CDS on European names are driving the increase - especially for developed market sovereigns, where market uncertainty on progress with Greek debt restructuring talks and Portugal's rising borrowing costs are weighing on sentiment," comments Diana Allmendinger, director, Fitch Solutions, New York.

At the corporate level, all global sectors saw an increase in liquidity, with consumer services and the oil and gas sectors now the joint most liquid and technology the least liquid. However, in contrast to the rise in liquidity that signals an increase in CDS market uncertainty, global corporate spreads have actually tightened off the back of recent encouraging economic data releases.

"European corporates have led this tightening, coming in 20%, and have been closely followed by North American and then Asian names, which firmed 16% and 11% respectively," adds Allmendinger.

CDS

Sovereign CDS 'still useful'

Fitch's latest quarterly European fixed income investor survey, representing the views of managers of an estimated US$7.1trn of fixed income assets, shows that the majority of investors still regard sovereign CDS as useful. This is despite the uncertainty surrounding whether the treatment of Greek debt write-downs by ISDA would constitute a credit event that triggered CDS contracts.

"More than two-thirds of investors said they plan to continue using sovereign CDS for hedging and investment purposes at current levels," comments Monica Insoll, md in Fitch's credit market research group. "This is despite the fact that in ISDA's opinion, voluntary exchanges of Greek debt are unlikely to trigger payments under existing CDS contracts."

Although 28% of survey respondents said they plan to reduce their utilisation of sovereign CDS in response to the lack of a credit event trigger by the ISDA Determinations Committee, only 10% signalled the decrease would be significant, while the remaining 18% indicated a more limited reduction. A small minority of 4% said they expect to increase their sovereign CDS use.

"Although liquidity in Greece CDS has long since dried up with the market pricing the six-month contract of Greece at over 20,000bp, implying an imminent default, today's survey results point to the continued use of sovereign CDS by investors more generally. This is reflected in CDS liquidity trends too, where developed market sovereigns are currently at their most liquid level since Fitch Solutions began tracking liquidity in March 2009," adds Thomas Aubrey, md of Fitch Solutions.

CLOs

Updated CLO methodology released

DBRS has released its updated global methodology to rate and monitor CLOs and CDOs backed by non-granular portfolios of large corporate credits. The new methodology does not have any substantive changes from the proposed methodologies published last month, with a request for comments (SCI 11 January).

The updated methodology generally utilises a proprietary model based on Monte Carlo simulation for analysing pool-wide default and loss characteristics for static portfolios. It is supported by three new public models: DBRS Diversity Model v.1.1, DBRS Large Pool Model v.1.1 and DBRS CDO Toolbox v.3.1.

The updates are expected to impact ratings that were rated or monitored under the superseded methodologies. In general, DBRS expects the ratings impact of the updated methodology to be positive for existing ratings. It will publish separate press releases with the results of the applicable rating actions.

CLOs

Trio of CLO prints point to tighter spreads

Goldman Sachs priced the US$430m Ares XXIII CLO for Ares Management on Friday, the third CLO to print last week. This brings year-to-date US CLO issuance to almost US$2bn, double the level at this time in 2011, with full-year issuance forecast to hit US$20bn.

Notably, the Ares CLO comprises a fixed rate tranche, which is expected to appeal to US insurance companies. The triple-A tranche priced at 150bp over Libor, in line with the other two prints from the week.

The triple-As of LCM Asset Management's US$410m LCM X priced slightly tighter at 148bp over (via Bank of America Merrill Lynch), but those from Apollo Loan Management's US$436.65m ALM V came at 150bp (via Citi). Following these prints, CDO analysts at JPMorgan believe that US CLO primary triple-A spreads could continue to tighten to 125bp over Libor during the year.

CMBS

DB UK CMBS announced

Deutsche Bank's latest UK CMBS - the £210m DECO 2012-MHILL - has hit the market. The transaction securitises a single commercial real estate loan, which the bank made to refinance entities managed by Queensland Investment Corporation's (QIC) 50% ownership in the Merry Hill shopping centre and adjacent retail and office parks. Westfield Group entities hold the remaining 50% ownership.

Merry Hill is a predominantly retail complex, located in Brierly Hill close to Birmingham. The site hosts one of the UK's preeminent shopping centres, with a footfall of more than 24 million visitors per year.

QIC acquired its 50% interest in Merry Hill in 2006. Deutsche Bank part-financed this acquisition with a £260m loan, which was subsequently securitised in DECO 12 - UK 4 and fully repaid in July 2011.

For the latest refinancing, Deutsche Bank has attempted to replicate the security package put in place for the original acquisition financing and securitisation in 2007. In contrast to most loans backing European CMBS, the borrower does not have any direct interest in the Merry Hill properties and the loan is not secured by any direct mortgage over the properties. Rather, initially the borrower has charged its interest in the partnership with the Westfield Group to Deutsche Bank as lender, in addition to a fixed- and floating-rate charge over all the borrower's assets.

The preliminary capital structure comprises £145m triple-A rated class A notes, £30m double-A class Bs and £35m single-A class Cs.

CMBS

Kamakura moves into CRE risk

Kamakura Corporation is set to launch a suite of commercial real estate default probability models based in part on data furnished by Trepp's Data Feed. In addition to the Kamakura CRE Default Models, Kamakura Risk Manager Version 8.0 - to be released later this month - will have full automated access to the Trepp CMBS Engine.

The Kamakura CRE default probability models contain separate default probability models for three separate data environments. The first sub-model is focused on transactions where the bulk of data available is concerned with the attributes of the loan itself.

The second sub-model is derived from a database that contains not only the attributes of the commercial real estate loan itself, but also the attributes of the building being financed. The third sub-model is based on the same data as the second, with the addition of information on the major tenants in the building.

CMBS

Multifamily rebounding

Fitch reports that multifamily, along with hotels, has shown the best performance rebound in the US over the past 24 months of all commercial real estate property types. As the economy has stabilised, the two sectors have been able to mark-to-market more quickly due to shorter term rentals than other property types that have stickier rental streams as a result of longer-term leases.

However, these two property types are also the worst performing in Fitch's loan delinquency index. One reason for this is that they marked-to-market earlier on the downside too and once a loan becomes 60+ days delinquent, its ability to extricate itself becomes difficult as the borrower has less cashflow available to ensure the property remains competitive with its peers.

Removing rent-stabilised New York multifamily loans and small balance loans from the sample reduces the index from 14.4% to 9.3% at end-2011, however. In 2006 and 2007, issuers underwrote fixed-rate multifamily loans with stabilisation plans, whereby rent stabilised units were converted to market. These loans - Stuyvesant Town/Peter Cooper Village (sized at US$2.8bn), The Belnord (US$375m), Riverton (US$225m) and Savoy Park (US$210m) - did not see their stabilisation plans pan out.

In addition, several issuers originated small balance commercial loans, many of which were not underwritten with typical conduit guidelines - instead using residential origination criteria. They have grossly underperformed compared to the CMBS conduit product.

Discounting these two sectors, multifamily moves from the worst performing of the five property types to the middle of the range, with office (at 6.8%) and retail (6.9%) being the best performers and hotel (12%) and industrial (10.25%) being the worst. Both office and retail have the advantage of stickier rental streams through the downturn, although Fitch expects the office delinquency rate to increase in 2012 as office rents signed at the height of the market five years ago roll to market.

CMBS

Delinquency rate stays rangebound

Last month the Trepp delinquency rate for US CRE loans in CMBS continued to hover within a narrow band. Overall, the rate in January fell by 6bp points to 9.52%.

For the last three months the delinquency rate has oscillated only slightly higher and lower and in the process the rate hasn't gone above 9.6% or below 9.5%, Trepp says. Similarly, over the last 12 months the rate has remained within a range of just over 50bp - the highest level was 9.88% in July 2011 and the lowest 9.37% in June 2011.

Trepp comments: "We noted late last year that improvements in the delinquency rate would be hard to come by - especially in the first six months of 2012. We were concerned that the first wave of 2007-originated loans that would reach their balloon dates in early January would not be able to refinance. We posited that this would push the delinquency rate higher."

It continues: "We were half right. The class of 2007 loans that ballooned in January did not fail to disappoint. Only 27% of these loans managed to pay off. In fact, if one removes a big Manhattan office loan that was refinanced with the help of a borrower that funded the cash shortfall, the total payoff percentage would have only been 15%."

However, that alone was not enough to push the delinquency rate higher. This upward pressure was offset in part by about US$1.6bn in loans that were resolved with losses - the third highest total over the last two years. Over US$5bn in loans became delinquent in January, but this number was counterbalanced by the over US$3bn in loans that cured this past month.

CMBS

CMBS loan liquidations spike again

The volume of CMBS conduit loans liquidated in January spiked sharply, jumping 51% from December's reading, according to Trepp. In fact, the January reading was the third highest total since the firm began tracking this number in January 2010.

At US$1.58bn, liquidations were about 21% above the 12 month moving average of US$1.3bn per month. Since the beginning of 2010, the special servicers have been liquidating at an average rate of about US$1.09bn per month, Trepp says.

In January liquidations came from 168 loans versus 122 loans in December. The 12 month moving average is 152 loans per month. The average loan size for liquidated loans was US$9.4m in January, while over the last 12 months the average size has been US$8.6m.

The losses from the 168 January liquidations were about US$623m - representing an average loss severity of 39.54%. This was down by over 10 points from December's 49.86% reading.

January represented the first time the loss severity number was under 40% since last April. The January loss severity reading is well below the average loss severity of 43.5% over the last 25 months, and also well in excess of the 12 month rolling average of 42.9%.

CMBS

Shift to workouts expected to continue

Fitch expects the shift towards putting loans backing European CMBS into workout, rather than granting extensions, to continue. This is because special servicers' options will become more limited as the volume of CMBS loans - many backed by non-prime collateral - coming due increases in 2012.

Depending on the outcome of the workout process, this could increase the risk of losses in the underlying loan portfolios, Fitch adds. A move from extensions to workouts is shown by the fact that the percentage - by exit balance - of maturing European CMBS loans that have been extended dropped to 37% at the end of January, from 42.1% at the end of December. The percentage of loans in workout rose to 21% from 19%.

"As shown in our latest European CMBS Loan Maturity Bulletin, only three loans - out of a total of 37 that were originally scheduled to mature in January - were granted extensions. As we have previously said, over time, smaller loans backed by higher-quality collateral have been repaid, meaning the overall credit quality of the remaining loan portfolio deteriorates," Fitch says.

It continues: "The majority of the CMBS portfolio is secured by non-prime assets and, given the limited amount of debt available to finance such assets, refinancing and timely repayment will prove challenging for many of the CMBS borrowers. Servicers will be less willing to grant an extension on a loan secured by a weaker property."

At the beginning of the year, the weighted average Fitch LTV of loans maturing in 2012 was 98%. For 2012 as a whole, the volume of Fitch-rated CMBS loans scheduled to mature is almost three times more than the €3.8bn that came due in 2011, the agency says.

RMBS

Euro RMBS on review

S&P has placed on credit watch negative its credit ratings on 122 tranches in 43 European RMBS transactions. The move follows the 29 November rating actions the agency took on banks, as a result of applying its new bank ratings criteria. It also takes into account the impact of S&P's counterparty criteria.

For the ratings on the RMBS tranches that have been placed on credit watch negative, the documented counterparty remedy periods have expired and there has been no remedy - and no definitive plan to remedy the breach has been presented to S&P - of the documented trigger. In addition, some of the tranches affected by the rating actions are already on credit watch negative for other reasons.

The agency aims to resolve these credit watch placements within three months and once it has reviewed the transactions in conjunction with any action plans (or absence of plans) for resolving the trigger breach that. Generally, for any plan, S&P says it will analyse the feasibility, timeliness and effectiveness in mitigating the downgrade of the counterparty.

RMBS

Ex-Credit Suisse bankers charged with fraud

The US SEC has charged four former Credit Suisse investment bankers for engaging in a complex scheme to fraudulently overstate the prices of US$3bn in subprime bonds during the height of the subprime credit crisis.

The SEC alleges that Credit Suisse's former global head of structured credit trading Kareem Serageldin and former head of hedge trading David Higgs, along with two mortgage bond traders deliberately ignored specific market information showing a sharp decline in the price of subprime bonds under the control of their group. They instead priced them in a way that allowed Credit Suisse to achieve fictional profits. Serageldin and Higgs periodically directed the traders to change the bond prices in order to hit daily and monthly profit targets, cover up losses in other trading books and send a message to senior management about their group's profitability, according to the regulator.

According to the SEC's complaint filed in the US District Court for the Southern District of New York, as the subprime credit crisis accelerated in late 2007 and 2008, Serageldin frequently communicated to Higgs the specific P&L outcome he wanted. Higgs in turn directed the traders to mark the book in a manner that would achieve the desired P&L.

However, under the relevant accounting principles and Credit Suisse policy, the group was required to record the prices of these bonds to accurately reflect their fair value. Proper pricing would have reflected that Credit Suisse was incurring significant losses as the subprime market collapsed.

The SEC alleges that the scheme reached its peak at the end of 2007, when the group recorded falsely overstated year-end prices for the subprime bonds. Just days later in a recorded call, Serageldin and Higgs acknowledged that the year-end prices were too high and expressed a concern that risk personnel at Credit Suisse would "spot" their mispricing.

Despite acknowledging that the subprime bonds were mispriced, Serageldin approved his group's year-end results without making any effort to correct the prices. When the mispricing was eventually detected in February 2008, Credit Suisse disclosed US$2.65bn in additional subprime-related losses related to the investment bankers' misconduct.

The SEC's complaint alleges that Serageldin, Higgs and the traders Faisal Siddiqui and Salmaan Siddiqui violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13b2-1 thereunder, and aided and abetted pursuant to Section 20(e) of the Exchange Act violations of Sections 10(b) and 13(a) and 13(b)(2) of the Exchange Act and Rules 10b-5 12b-20 and 13a-16 thereunder.

The SEC's decision not to charge Credit Suisse was influenced by several factors, including the isolated nature of the wrongdoing and the bank's immediate self-reporting to the SEC and other law enforcement agencies as well as prompt public disclosure of corrected financial results. Credit Suisse voluntarily terminated the four investment bankers and implemented enhanced internal controls to prevent a recurrence of the misconduct.

Credit Suisse also cooperated vigorously with the SEC's investigation of this matter, providing SEC enforcement officials with timely access to evidence and witnesses. The SEC's investigation also was assisted by cooperation provided by Higgs, Faisal Siddiqui and Salmaan Siddiqui.

RMBS

Refi plan fleshed out

President Obama has provided more detail on his plan to help spur mortgage refinancing, following last week's State of the Union address (SCI 25 January). Most elements of the initiative are likely to either require Congressional approval or the FHFA to revisit the work that went into developing HARP 2.

The President's plan would introduce a HARP-like refinancing option for non-agency borrowers. In order to qualify, conditions would have to be met that are similar to the requirements for HARP: the borrower would have to show a clean delinquency history, suitable credit, conforming loan size and eligible property.

The new loans would carry an FHA guarantee, but are expected to remain distinct from existing GNMAs. The new, marked-down loans would have a significantly different credit profile from a typical GNMA borrower: credit scores would likely be low, while LTVs would be high. In cases where principal had been forgiven, or where the borrower had been delinquent or facing hardship, the differences would be even more severe, ABS analysts at Bank of America Merrill Lynch suggest.

Additionally, the FHFA is progressing with its plans to move the agencies' inventory of REO into the rental market. Investors are invited to begin the pre-qualification process, a necessary step for participating in the upcoming REO auctions.

The BAML analysts view this step as crucial to the overall housing market recovery, given that high levels of distressed sales are a major contributing factor to the continuing weakness in housing prices.

RMBS

Surprise Dutch RMBS tender announced

Lloyds has announced an unexpected tender offer for the Candide 2005 class A, Candide 2006 A2 and Candide 2006 A3 notes. The tender offer is at par for the three triple-A rated RMBS bonds.

The bank says the offer is a liquidity management exercise. But the first optional redemption dates for the two transactions are in April and in November respectively.

Any securities not successfully tendered will remain outstanding. Lloyds says it intends to fund the issuers such that they may call and redeem the securities at their first optional redemption dates. However, it also notes that "no assurance can be given" that it will do this.

European asset-backed analysts at RBS argue that there was a probability of non-call priced into the Candide bonds. They suggest that with an Arkle RMBS currently in the pipeline, investors may have requested some certainty from Lloyds that call risk is not a concern. A tender offer at par provides such an indication.

The analysts believe it is highly unlikely that Lloyds won't call the transactions at their respective call dates. "Not calling would be a highly risky strategy, marginalising mezzanine and subordinate noteholders that were restricted in participating in this tender offer, and hence prove to be a sizeable reputational risk - particularly for a frequent issuer."

The tender offer deadline is 16 February, with the results announced the following day. Settlement will be on 20 February.

RMBS

Robust trading flows seen in non-agency RMBS

The did-not-trade ratio for US non-agency RMBS bid-lists last week was one of the lowest seen in a long time. About US$2bn was out for the bid, with 75% of the bonds trading either to end accounts or dealer balance sheets.

Babson Capital notes in a recent client memo that non-agency RMBS market sentiment remains markedly positive, demonstrated by robust trading flows last week. "There has been a significant increase in supply, with no negative impact on prices. Pricing continues to improve, especially in the cash market, which had been lagging synthetics for the past month."

Most of the selling appears to be coming from holders of legacy paper seeking to de-risk as pricing has improved. "Dealers are also making tight, 1-2 point markets, which are encouraging and a positive sign for liquidity in the market. Supply is expected to remain high, given current clearing levels and lower overall market volatility," the Babson memo states.

RMBS

Italian mortgage performance analysed

In a new special report, Moody's demonstrates that Italian mortgage loans most likely to default are those: made to foreign residents; that have been performing for less than 12 months before securitisation; that are originate-to-distribute by 'non-conforming' banks; that pay a floating rate; and with maturities of more than 20 years.

According to the report, loan performance differs significantly according to borrower nationality. Foreign borrowers are five times more likely to default than their Italian counterparts for high LTV loans, making this the single largest driver of Italian mortgage loan defaults.

Moody's notes that loans that have been performing for less than 12 months before securitisation have a default rate four times higher than more seasoned loans. Mortgages originated by non-conforming banks that are then securitised as the lending bank's main funding tool are next most likely to default, with a multiple of 3.8 times.

Floating-rate mortgages are twice as likely to default than fixed-rate mortgages and loans with maturities longer than 20 years are 1.9 times more likely to default than those with shorter maturities.

The report identifies a number of other characteristics that have a limited impact on the default probability of Italian mortgage loans. Loans backed by property located in the south of Italy (for loans with LTVs below 70%) are 1.8 times more risky than those backed by property in other regions of Italy, while broker-originated loans are 1.8 times more risky than branch-originated loans.

In contrast to most European markets, LTV is not the most important driver of Italian defaults, especially when the LTV is below 60%. Even when Moody's looked at mortgage loans excluding adverse characteristics in the 70%-80% LTV bucket, they were only 1.7 times more likely to default than in the 50%-60% bucket.