Contents

CMBS

All CMBS systems go

US CMBS is continuing to perform strongly. The primary market is enjoying a flurry of issuance, while spreads in the secondary market remain relatively tight.

"The market has been pretty active. There have been a couple of deals pricing this week and there was another one that priced last week. The new issue side of things is very active," reports one trader.

The trader notes that the US$925m WFRBS 2012-C6 deal from RBS and Wells Fargo was particularly well received. He says that pricing for the A1, A2, A3 and A4 tranches was 40bp, 85bp, 110bp and 105bp respectively.

"The class-Bs were rated double-A and priced at 225bp, which was tighter than guidance. There were also single-A notes that priced at 350bp and triple-B minus notes, which priced at 595bp. That is pretty good," he says.

Another deal to price recently was BAML-DB 2012-OSI. The US$325m securitisation is backed by 251 restaurant properties and generally printed just a little bit wide of guidance.

"Guidance for the A1 bonds was 125bp over swaps and they ended up pricing at 160bp over. The A2s were in line with guidance though and they came in at 200bp over swaps," says the trader.

The transaction also had a floating rate tranche that priced at 235bp over Libor. The class B notes priced at 350bp over swaps, with the class Cs and class Ds pricing at 450bp and 550bp over respectively.

The final new issuance is the US$125m CMBS backed by 7 World Trade Center. The mortgage loan is junior to tax-exempt Liberty bonds. The trader notes that the senior securitised tranche was rated triple-B minus and priced at 310bp over swaps, while the second tranche priced at 425bp over swaps, meaning both printed tighter than guidance.

Meanwhile, spreads in the secondary market remain relatively static. From around 300bp over swaps at the end of last year, GG10 A4s are now trading at around 220bp. The trader notes that new issue A4s are at about 105bp.

"It is certainly an active market. It is encouraging to see that, even despite the level of issuance, spreads have not widened," the trader says. "The only other news in the market is that UBS and Barclays have announced a new deal, but the details on that are yet to be revealed."

JL

RMBS

US RMBS volatility subsides

The volatility seen in US RMBS last week appears to have calmed down for the start of this one. However, supply in both agency and non-agency paper remains robust.

"Agency MBS widened at the end of the week as investors took profits and there was heavier supply from originators. There is significant risk to the basis if the market sells off further," notes Babson Capital in a recent client memo.

This week has started more gently than last week finished, however. "Our reference FNMA 5.5%/4.5% up-in-coupon swap closed essentially flat versus last Friday, finishing the session at US$2-US$24," note MBS analysts at Wells Fargo.

They continue: "Overall MBS activity was mild, with originations lighter and 15-years generally faring better versus 30-years. In the coupon stacks, the Fannie Mae 30-year 3.5%, 4.0%, 4.5% and 5.0% coupons ended about 1-2 ticks better when compared to their respective Treasury benchmarks."

Compared to their respective hedges, Ginnie Mae 30-year 3.5% coupons finished up two ticks, as did 4.0% coupons, while 4.5% and 5.0% coupons finished down a tick. Conventional Ginnie Mae 15-years were also generally down one or two ticks versus the curve.

Babson notes that any moves towards higher rates in agency MBS could prompt selling from the servicing sector, while investors may also pull back until there is more rate stability. Supply in non-agency RMBS, meanwhile, remains robust.

"The market has absorbed a high level of bid-list activity surprisingly well and prices have actually moved up, despite the heavy supply. The biggest buyers right now seem to be insurance companies and money managers, along with dealers that are constantly looking to replenish their balance sheets," the memo states.

Prices should continue to grind tighter for fixed coupons, medium-duration cashflows with limited credit convexity and strong structures with short-duration cashflows. The technical backdrop, decent fundamentals and some macro stability are providing fair weather for the market.

"Investors seem to be shrugging off the experience from April 2011 to December 2011, when prices followed a prolonged and painful down trend as Maiden Lane II supply hit the market and macro issues dominated headlines. This time around, the threat of any immediate supply seems to be off the table and European debt concerns have been resolved for the near term," Babson concludes.

JL

Structured Finance

Bottleneck breakers

As banks come under severe pressure and pull out of many areas of the securitisation market, the opportunity set for non-bank finance companies is growing. At the same time, sophisticated investors are seeking liability-driven investments with stable and attractive long-term cashflows, prompting some players to try to connect these sources of supply and demand.

NewOak Capital Management, for one, is building what it describes as an "open source platform" that aims to match these two forces up. "We're targeting niche areas where there is a bottleneck in finance," explains the firm's ceo Ron D'Vari. "This creates opportunities for sophisticated investors to participate in structuring tailor-made investments with flexible seniority level, maturity and yield."

The platform will act as a sourcing channel to identify assets that can be underwritten and structured appropriately, as well as managed in separate accounts or vehicles. The idea is to create club deals, with traditional senior/mezzanine/equity tranches where strategic investors take a more active role in structuring and specifying terms and conditions.

Senior tranches will typically have stronger covenants than regular ABS and skin-in-the game is naturally achieved via the aggregating party retaining the equity tranche. Because the investments are highly tailored, the yields will be juicier: coupons in the range of 300bp-1000bp over Libor for senior debt are expected, depending on where investors are in the capital structure.

The overwhelming majority of transactions will be private. Ultimately, parties like NewOak will aggregate them into a public entity, SPV or REIT or other such principal vehicle.

Target financial assets include trade receivables, supply chain finance, consumer finance, real estate, alternative energy, middle market, agriculture and equipment. "We're already seeing many enquiries from Asia, Latin America and Europe for alternative financing methods for both financial assets and hard assets," D'Vari confirms.

He cites power purchase agreements for distributed solar projects as one area, in particular, where strategic investors and non-bank finance companies can be connected via the platform. "Many companies are looking to hedge their energy consumption for 10 or 20 years out, for example. This plays into the trend towards liability-driven investing: investors like cash flowing assets and securitisation is ideal because it allows maturities and cashflows to be tailored to exact requirements."

D'Vari adds that volatility is here to stay and is becoming a significant issue for traditional investors. "By looking for ready-made investments, they're limiting the universe because there are fewer homogeneous assets available, all of which bear systemic risk. Renewables, for instance, are less prone to systemic risk - but they require partners and infrastructure to tap into."

CS

Structured Finance

SCI Start the Week - 26 March

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

Pipeline
The largest deal to enter the pipeline last week was FREMF 2012-K501, a US$1.1bn CMBS from Freddie Mac. It was joined by a US$377.5m equipment lease ABS (Great America Leasing Receivables Funding Series 2012-1) and a US$38.1m tobacco settlement ABS (Suffolk Tobacco Asset Securitization Corp series 2012). In addition, two auto lease deals - Bumper 5 Finance and FCT Eurotruck Lease II - began marketing.
The week also saw two CLOs join the pipeline (US$416m ICE Global Credit CLO and £825m Sandown Gold 2012-1), along with whispers of CLOs to come from Apollo Global Management, BlueMountain Capital Management, GoldenTree Asset Management and Marathon Asset Management.

Pricings
The rate of pricings cooled off a little last week. Three auto ABS deals (US$201.25m Credit Acceptance Auto Loan Trust 2012-1, US$230.07m Prestige Auto Receivables Trust 2012-1 and £384m Turbo Finance 2) printed, as well as a drug royalties deal (US$195m Drug Royalty 1 series 2012-1) and a student loan ABS (US$17.94m Rhode Island Student Loan Authority 2012 Senior Series A).

Markets
ABS investors were largely focused on secondary trading last week as new issuance took a breather from the very heavy volumes seen recently, according to ABS analysts at JPMorgan. Themes from the last few weeks were unchanged, they say, with demand remaining strong for higher spread ABS sectors such as subprime auto and UK RMBS.
This increased demand was reflected in tighter spread levels across most sectors. However, the JPM analysts add that demand for credit cards was slightly softer this week, with spreads widening out by 2bp to 4bp. "This is most likely due to the heavy supply seen in this space in the secondary market," they say.
As SCI noted on Tuesday, the BWIC onslaught also continues in the European ABS sector. However, while bid-lists are keeping participants busy for now, one trader reports that the market is crying out for some more variety.
Equally, as reported in SCI on Friday, US CMBS is continues to perform strongly. "It is certainly an active market. It is encouraging to see that, even despite the level of issuance, spreads have not widened," one trader says.
At the same time, Bank of America Merrill Lynch non-agency MBS analysts say that in US RMBS improved investor sentiment combined with the search for yield kept investors looking for bonds. "There were several lists with larger block sizes that traded well earlier in the week. Bonds on those lists traded 1-2 points higher. On the follow, other investors came into the market looking for the same execution but instead saw pricing flat," they report.

Deal news
• The final price of the Hellenic Republic bonds for the purpose of settling CDS transactions was determined to be 21.5%. A realised recovery rate of between 20%-25% had been expected, with the final figure more likely to be at the lower end of the range.
• Maguire Properties has filed its 10-K statement with the US SEC, shedding light on a number of CMBS properties sponsored by the company. Several loans are either in, or heading for, receivership - although not all properties are set for disposal.
• Ischus Capital Management has been appointed successor collateral manager for GSC ABS CDO 2006-4u. The new collateral management agreement essentially follows the key terms and provisions of the existing agreement.
• In an unusual move, a majority of the controlling class in Belle Haven ABS CDO 2006-1 has waived the deal's existing EODs, as well as rescinded and annulled its acceleration. As a result, the EODs are deemed to be cured, with the trustee and the noteholders restored to their former positions and rights under the indenture.
• Noteholders in the RMAC 03-NS1, 03-NS2, 03-NS3, 03-NS4, 04-NS1 and 04-NS2 RMBS have voted to ignore certain rating-related triggers in the deals, following the downgrade of Barclays - acting as liquidity facility provider - to A-1 from A-1+. Securitisation analysts at S&P view the move as a short-term positive for transaction cashflow but a negative for counterparty risk.
• Chamartín Meermann Immobilien, portfolio company no. 41 in the H.E.A.T. Mezzanine I-2006 SME CLO, has filed for insolvency. However, the insolvency event will not have an immediate effect on the transaction as the principal amount of the SOLA obligation (€4m) will only be recorded to the principal deficiency ledger in case of a principal deficiency event.
• The £175.66m Reference Loan no. 3 in the synthetic CMBS Estate UK-3 has been restructured. European asset-backed analysts at RBS note that successful CMBS loan restructurings have been less common in Europe than may be expected, so the result could prove to be a good template for other stressed loans.
• Dock Street Capital Management has been retained to act as liquidation agent for Ipswich Street CDO. The collateral will be sold to the best qualified bidders in two public sales on 27 March.
• The Bank of Scotland has announced tender offers at par for the class 5A notes from its MFPLC 4 and PENDE 2007-1 RMBS, which close on 2 April. The MFPLC 4 5A tranche is the last outstanding publicly placed note from the Mound Master Trust, due to be redeemed in November 2012.

Regulatory update
• The American Securitization Forum has submitted a letter to the Senate Committee on Banking, Housing and Urban Affairs and the House Committee on Financial Services, as well as the joint regulators requesting a correction to the statutory implementation date of the Volcker Rule. The rule is currently expected to become effective on 21 July 2012, pursuant to statutory requirements under Section 619 of the Dodd-Frank Act.
• The CFTC recently published final rules governing the standards by which swap dealers and major swap participants must conduct their dealings with counterparties under the Dodd-Frank Act. Firms will need to comply with the new rules by the later of 14 October 2012 or the date on which they are required to apply for registration.
• The DTCC has urged US Congress to pass new bipartisan legislation to prevent fragmentation of global swaps data and ensure the highest degree of transparency into OTC derivatives markets. Indemnification and a second issue - known as 'plenary access' - need to be addressed concurrently otherwise data fragmentation is likely to occur, the firm says.
• Stifel Financial has settled with five Wisconsin school districts in a lawsuit regarding mis-sold CDO investments (SCI 10 February 2010). The case concerns investments created by RBC and purchased by the districts, with Stifel acting as the districts' public finance investment banker.
• A panel of the Second Circuit Court of Appeals last week granted the SEC's motion to stay proceedings of its action against Citigroup, pending resolution of the parties' appeal seeking to set aside Judge Rakoff's rejection of the settlement agreement. The SEC had accused Citi of selling a US$1bn CDO called Class V Funding III, without disclosing that it was betting against US$500m of those assets.
• A consultation paper on covered bonds issued by the Monetary Authority of Singapore (SCI 12 March) includes proposals that would provide protection to investors in terms of quality covered assets, as well as through specifying minimum overcollateralisation levels and a requirement for ongoing monitoring of risk, according to Moody's.

Deals added to the SCI database last week:
BAA Funding
ALBA 2012-1
Avis Budget Rental Car Funding series 2012-1
Avis Budget Rental Car Funding series 2012-2
Babson CLO 2012-1
Carlyle Global Market Strategies 2012-1
Civitas
CNH Equipment Trust 2012-A
CPS Auto Receivables Trust 2012-A
FTA Santander Empresas 11
GE Equipment Transportation series 2012-1
JGWPT XXV series 2012-1
Madison Park Funding VIII
Mars 2600 series IV
Mercedes-Benz Auto Lease Trust 2012-A
NewStar Commercial Loan Funding 2012
Nissan Auto Lease Trust 2012-A
OZ Wing II Cayman
Santander Drive Auto Receivables Trust 2012-2
Sierra Timeshare 2012-1 Receivables Funding
Silverstone Master Issuer series 2012-1
Swiss Auto Lease ABS 2012-1

Deals added to the SCI CMBS Loan Events database last week:
BACM 07-1; BACM 2007-3; COMM 2007-FL14; CSMC 2007-C1; DECO 14; DECO 2006-C3X; DECO 2007-E5X; DECO 7-E2X; EMC VI; ESTAT UK-3; EURO 26X; EXCAL 2008-1; GECMC 07-C1; GSMS 2007-GG10; JPMC 2007-FL1; JPMCC 07-LDP10 ; JPMCC 07-LDP11; JPMCC 2004-CBX; JPMCC 2006-CB15; LBUBS 2007-C2; LBUBS 2007-C7; MSCI 2006-HQ10; OPERA GER1; TITN 2006-4FSX; WBCMT 2006-C27; WBCMT 2007-C34; WINDM IX; & WINDM XI.

Top stories to come in SCI:
Impact of RMBS litigation on valuations
Structured credit recruitment trends

CDS

Greek saga highlights CDS shortcomings

As the dust settles on Monday's Greek CDS auction (SCI 19 March), market participants seem happy to move on from a saga that has dominated headlines for so long. But the overall process has highlighted shortcomings in sovereign CDS - particularly with regards to PSI and CACs - and the risk remains that the next auction of this type might not go so smoothly.

Monday's auction was somewhat of an anticlimax, particularly following the months of market hype that led up to the announcement of a restructuring credit event and the settlement itself. The final price of the Hellenic Republic bonds for the purpose of settling CDS transactions was, as widely expected, determined at 21.5%. Since then, there has been little CDS market volatility, suggesting that from an investor point of view this was the right result.

However, according to Michael Hampden-Turner, structured credit strategist at Citi, things could have turned out very differently as there were a number of narrowly avoided pitfalls leading up to the auction. "At various stages we came close to avoiding a trigger altogether (had the 'volunteering' rate been higher still), a risk of orphaning (had the new bonds consisted of a single, principal-guaranteed structure) and most recently to the risk of a much higher recovery rate (and hence lower CDS payout) had the PSI been cut differently. Any of these could have dealt a severe blow to the credibility of the product," he says.

He notes that most of the uncertainty centred on the domestic-law bonds that did not have defined CACs in them already. In particular, it was the government's ability to change the terms of these bonds and thus potentially alter the auction results that caused the most risk.

This may perhaps give protection buyers pause for thought, should the market come closer to triggers in any other of the highly traded sovereigns. "A change in the rules that seeks to avoid this risk would be a good idea," Hampden-Turner says. "For example, an additional trigger event could be introduced for retroactive government intervention changing the terms of domestic-law bonds."

Spanish, Italian and Portuguese domestic sovereign bonds do not currently have embedded CACs - although Hampden-Turner says there is a fair chance that more CACs will be inserted retrospectively if a restructuring becomes more imminent. He adds: "With the market taking in its stride what is tantamount to the largest credit event in modern times, perhaps policymakers will be a little less inclined to bend over backwards trying to avoid similar CDS triggers in future."

AC

CMBS

Opera Uni proposal put forth

Further details have emerged on the plan put forward by Eurohypo and Uni-Invest Holdings - the special servicer and sponsor respectively - for Opera Finance (Uni-Invest), which defaulted last month (SCI passim). Noteholders will have the option of voting for a consensual restructuring of the transaction and, if that fails, class A noteholders will then vote on a credit bid.

All classes of bondholders are initially being asked to vote on the proposal for consensual restructuring, which will be overseen by Valad. It would involve an extension of the bonds to February 2016, a full cash sweep to class A, an increase in annual coupon to the class A notes of 3.77% and a PIK-able coupon of 8% for the other notes (SCI 26 March).

European asset-backed analysts at RBS do not expect the restructuring proposal to achieve the 75% approval required from each class of noteholders because, although it is positive for junior noteholders, it would make the returns and timing of cashflow to class A noteholders highly uncertain. Should this option fail to win approval, then the bid option will become operational.

Under this option, the Uni-Invest assets will be sold to private equity firms TPG and Patron. The class A noteholders would receive 40% of the outstanding note balance in cash and either new notes with a coupon of 300bp over Libor plus a PIK-able coupon of 100bp for the remaining balance or a further 35 cents on the dollar in cash.

The equity firms have also proposed an asset management plan to improve and sell down the portfolio as part of the bid option. There are other minor incentives, such as an incentive fee of 25bp of the principal balance and an option to acquire up to 10% of the joint venture.

The bid option would almost certainly be favourable for class A noteholders, according to the RBS analysts. "There is currently very little trading in the bonds, partly because many noteholders are restricted from trading because of the negotiations. But we would estimate that the class A bonds would trade in the low 70s in cash price, while the other classes would trade in the low single digits."

The analysts note that about 70% of the class A noteholders have already agreed to accept the bid from TPG and Patron if the consensual restructuring option falls through. It would therefore appear unlikely that the first option will receive the required 75% of support.

"If the consensual restructuring option fails, then under the bid option the value of the offer to the class A notes depends on the value of the new notes. Assuming that the properties are worth about €360m, the new notes will be backed by a loan with an LTV of about 60%," the analysts suggest.

They note that TPG and Patron have a business plan with several scenarios, each of which would see the new class As paid out by the end of 2016. Although the allocation of cash between the class A and equity-holder is not public, it is believed that cashflows will be allocated to the bondholders unless the sale price is "substantially above the allocated loan amounts".

"We consider it a strong positive that the private equity firms are prepared to invest about €143m of equity into the transaction, since it gives them a strong incentive. The sponsors will also pay some additional transaction costs," the analysts add.

It is not clear whether the new notes will be rated. They are expected to be of low investment grade quality and would probably trade at a spread of approximately 900bp in today's market.

"Keeping in mind that the face value of the notes will be only 60% of the current class A notes (the other 40% being paid out in cash), this equates to a value of between 89.2 and 94 on the current class A notes. Over the longer term, we would not be surprised if they recovered close to par in principal," the analysts continue.

Overall the proposal appears to be a win-win situation. TPG and Patron can effectively finance 60% of the purchase price at 300bp over Libor, which is better than they would get in the market, and the class A noteholders achieve an improvement on current trading levels. Although the junior noteholders will get next to nothing, the analysts believe this is "appropriate, given the situation".

"We see no credible alternative to the bid option for the class A noteholders. Although the theoretical value of the properties is about €360m, the last few months have already demonstrated that it is unlikely that this can be realised in enforcement without financing," they conclude.

JL

RMBS

Unusual RMBS-backed bond issued

A unit of Prudential Financial has issued an unconventional bond that is backed by a pool of legacy RMBS, but where the firm guarantees principal and interest payments. Fitting into neither RMBS nor covered bond categories, Prudential Covered Trust 2012-1 has been rated single-A by S&P and is said to have been issued earlier this week into the US market.

The pool of RMBS backing the US$1bn transaction has a notional balance of approximately three times the notional balance of the class A notes and is expected to generate enough revenue to make the scheduled principal and interest payments, as well as the guaranty fee, when due. However, the single-A rating of the notes relies solely on the rating of the guarantor, Prudential Financial. S&P notes in its presale report that it has not done an analysis of the RMBS pool to verify its cashflow potential.

The pool of RMBS - believed to be a legacy portfolio - was provided by another unit of the firm, the Prudential Insurance Company of America. At closing, it transferred the deposited underlying certificates to the issuer in exchange for notes and certificates.

The notes will pay a fixed rate of interest semi-annually. In addition, scheduled principal payments will be made on each interest payment date.

Deutsche Bank acted as sole structuring advisor on the transaction and was joined by Barclays Capital and Wells Fargo as bookrunner. According to reports, the 3.5-year bond priced at 250bp over Treasuries.

AC

RMBS

Home prices set to bottom earlier

Mortgage strategists at Bank of America Merrill Lynch estimate that - aside from seasonal swings - the bottom of the cycle in US home prices should be reached this quarter. They expect roughly flat home prices this year and next, with modest growth in 2014.

"Although we are still not expecting as the base case meaningful increases in home values until 2014, this development - if it plays out in the data in the coming months - should be a further tailwind for US bank credit," the BAML strategists note. "If nothing else, this increases the contrast with the Fed's scenario from the recent bank stress tests that had home prices declining another 25%. Reality now appears much more favourable than the stress scenario - the way it should be."

The main difference from prior forecasts is that prices reach the bottom earlier. However, along with the earlier bottom is a slower recovery and hence a flatter profile.

The strategists believe that prices should accelerate in the later years once the majority of the foreclosure inventory is absorbed, allowing prices to snap back to the trend in income. From 2012 through 2020, they're forecasting a cumulative price growth of 42%.

The two most important short-term variables for the BAML model are months' supply (the ratio of inventory to sales) and the share of distressed sales. Both of these variables are affected by the flow of foreclosures into the market, which has slowed due to policy intervention.

Months' supply has tumbled recently, reaching 6.4 months in February, down from 9.3 months last July. In addition, the share of distressed sales has been modestly lower than expected, averaging 27% in 4Q11. The strategists anticipate moderate increases in these parameters over the next two years, but - due to ongoing foreclosure prevention efforts - believe the levels will be lower than previously thought.

"We have learned that there is no silver bullet for policymakers to fix the housing market. The policy attempts have been aimed at preventing foreclosures, which has resulted in delaying the process. Our price forecast of a long and protracted bottom in home prices reflects this policy environment," they conclude.

CS

ABS

ILS specialists switch firms

Willkie Farr & Gallagher has hired a team of 12 insurance transactional and regulatory lawyers. The team joins from Dewey & LeBoeuf and will continue its ILS work from Willkie's New York, London and Washington DC offices.

The team is led by Alexander Dye, Michael Groll, Robert Rachofsky and John Schwolsky. It represents insurance companies, investment banks, sponsors and other institutions in capital markets and regulatory matters in the US, London, Europe, Asia and Bermuda.

The group also includes Scott Avitabile, Donald Henderson, Arthur Lynch, Vladimir Nicenko and Allison Tam, who will all be based in New York. Joseph Ferraro and Nicholas Bugler will be based in London and Christopher Petito will be working in the Washington DC office.

Structured Finance

Credit managers join SME scheme

The UK government is looking to invest up to £700m with a shortlist of seven fund managers. The managers in the running are: Alcentra, Ares Management, Cairn Capital, Haymarket Financial, M&G Investment Management, Palio Capital Partners and Pricoa Capital.

The money is part of the government's £1bn business finance partnership (BFP), to be used to help UK SMEs and mid-sized businesses with a turnover under £500m access non-bank finance. Investment will take place through a series of tranches, with the first expected to close in the summer.

HM Treasury will make investments of between £25m and £250m in any one fund, which can be pre-existing or yet to be established. At least 50% of commitments must come from sources other than the government and the fund must include lending directly to UK businesses within its investment mandate.

The choice of the seven shortlisted credit asset managers is still subject to further due diligence and the completion of private sector fundraising. Prospective managers are expected to be able to apply for the second investment tranche shortly.

CDS

Promotion, relocation for research analyst

Will Rhode has been promoted to director of fixed income at TABB Group and will be relocating from London to New York. He becomes responsible for leading the firm's fixed income practice examining trading, operational and technology issues impacting swaps, corporate bonds, sovereign debt and other credit derivatives in North America, Europe and Asia.

Rhode joined TABB two years ago (SCI 24 March 2010). He previously spent 14 years as a financial journalist specialising in risk management and derivatives, working in New York and Hong Kong.

CLOs

New role for ex-MS ceo

John Mack has joined Kohlberg Kravis Roberts & Co as senior advisor. He was most recently chairman and ceo at Morgan Stanley and previously held similar posts at Pequot Capital Management and Credit Suisse Group.

"John Mack is a great leader who we believe will add enormous value to KKR's investors, partners and our portfolio. He will help make us smarter investors and strengthen our firm," says Henry Kravis, KKR co-founder and co-ceo.

CMBS

New role for CRE vet

David Eyzenberg has joined Avison Young in New York as principal. He joins the CRE firm's capital markets team and will be responsible for providing representation to owners, developers and investors seeking to access institutional capital and assets.

Eyzenberg joins from NewOak Capital where he was md and head of the firm's real estate division. He was president of Prodigious Capital Group upon its founding in 2005 and has previously served as head of Madison Capital Group's New York office. He has also held posts at Wall Street Realty Capital and Greenstreet Partners.

CMBS

CRE association names chair-elect

Peter Denton has been appointed chair-elect of CRE Finance Council Europe. He will succeed current chairman Christian Janssen, Jefferies' head of CRE debt capital markets for Europe, to begin a two-year term as chairman in November 2013.

Denton is head of UK real estate at BNP Paribas. He has more than 17 years of experience in the real estate sector and has previously run Westlmmo's London office and held senior real estate banking roles at Barclays Capital, Eurohypo and Deutsche Bank.

CMBS

CMBS vet moves up a rung

Michael Mazzei has joined Ladder Capital as president. Greta Guggenheim, company co-founder and current president, will become cio.

Mazzei has over 25 years of experience in CRE and capital markets. He joins from Bank of America, where he was md and global head of the CMBS and bank loan syndications groups, while he has also worked as head of CMBS and CRE debt markets at Barclays Capital and as a founding head of the CMBS practice at Lehman Brothers.

Risk Management

Global sales head appointed

Antonio Neri has joined 4sight Financial Software as executive director. He will become global head of the sales, pre-sales, marketing and account management team at the company.

Neri was previously head of EMEA sales at Lombard Risk Management. He has also had spells at Almonde and Reech Capital and has several years' experience in collateral management and OTC derivatives valuation systems.

ABS

Card charge-offs hold steady

US credit card charge-offs held steady in February, as the charge-off rate index fell 1bp below its January level to 4.97%, according to Moody's Credit Card Indices. The agency expects the charge-off rate to start falling in the coming quarter and end 2012 at about 4%.

The delinquency rate index also declined, by 7bp to 2.86%, setting yet another all-time low. Early stage delinquencies declined to a new all-time low as well - 0.75% - and the upcoming tax refund season should lead to even lower early stage and overall delinquency rates.

"The charge-off rate typically increases in February because of seasonal patterns, so this month's reading is yet another indicator of the credit strength of collateral pools in credit card ABS," says Jeffrey Hibbs, a Moody's avp and analyst. "Weaker borrowers charged off at record levels during the recession and originators have added few new accounts to their securitisations, so the improvement in collateral will make for strong credit performance for the credit card trusts throughout the year."

The payment rate dropped by 115bp to 20.93%. Moody's notes that February historically has one of the weakest payment rates of the year, but the index remains close to historically high levels.

"Historically low delinquencies and high payment rates reflect the improved borrower mix in credit card trusts today. And we expect credit card performance to continue to improve in 2012," says Hibbs.

Rounding out the positive performance indicators for February, the yield index rebounded from its seasonal weakness in January by 58bp to 18.48%, which contributed to an increase in the excess spread index to 10.72%.

ABS

Private SLABS at risk

The New York Fed recently reported that as many as 27% of all US student loan borrowers are more than 30 days past due, with recent estimates suggesting that US$900bn-US$1trn of student loans are outstanding. Fitch believes that the recent increase in past-due and defaulted student loans presents a risk to investors in private student loan ABS, but not those in ABS trusts backed by FFELP loans.

The agency says that most student loan ABS transactions remain well protected due to the FFELP guarantee. In addition, recent securitisations have robust structures, with many featuring back-up servicing agreements.

Nevertheless, several macroeconomic factors are putting pressure on student loan borrowers, the main ones being unemployment and underemployment. US Bureau of Labor Statistics estimate the current unemployment rate for people 20 to 24 years old at nearly 14% and for those 25 to 34 years old at 8.7%.

Fitch anticipates elevated prepayments in FFELP transactions later this year attributable to the Special Direct Consolidation Loan programme (SCI 25 March 2011). The Department of Education is controlling access to this programme and extending the offer only to certain borrowers, so it is difficult to estimate how many borrowers will ultimately consolidate.

ABS

Mexican equipment ABS criteria finalised

S&P has published its methodology and assumptions for rating Mexican equipment lease ABS, effective immediately. At this time, no outstanding ratings are expected to be affected by the new criteria.

Equipment lease ABS in Mexico are similar to those in the US, S&P notes. Accordingly, when analysing such transactions, the agency will apply its US criteria with a few adjustments necessary for application in Mexico.

Like the US criteria, the criteria for rating Mexican equipment lease ABS include a review of the originator and its underwriting and servicing practices, collateral characteristics, static pool and portfolio performance, recoveries and residual cashflows, and transaction structure. The adjustments include the establishment of a base-case expected default rate for the pool associated with a specific local scale rating category. The base-case assumptions are applied in a local scale 'mxBB' scenario, compared with a global scale B stress scenario used for US transactions.

The criteria also consider country risk factors at each rating scenario level. The outlook and market conditions may vary from those of the US market due to economic cycles affecting the two countries.

ABS

Canadian card ABS criteria issued

S&P has published its methodology and assumptions for analysing credit risk associated with credit card ABS in Canada, effective immediately. At this time, no outstanding ratings are expected to be affected by the new criteria.

There are many similarities between the Canadian and US credit card markets and securitisation structures, S&P notes. Accordingly, the agency will apply the same criteria as those used for assessing US credit card ABS, with a few limited adjustments. Namely, Canadian-specific base- and stress-case performance assumptions take into account the overall better historical performance of the country's credit card receivables during periods of economic stress. Pool performance is compared to the Canadian Credit Card Quality Index (CCQI) and the analysis is further refined by comparing performance to specific Canadian credit card ABS issuers whose collateral pools comprise similar receivables.

The triple-A peak charge-off rate currently applied to Canadian credit card ABS ranges from about 21% to 30%, which is lower than the 33% established for the US benchmark pool because S&P believes that the current Canadian pools will likely perform better than the US CCQI benchmark under stressed economic conditions.

Structured Finance

Enhanced transparency for data portal

S&P Capital IQ has launched a fixed income transparency offering, delivered through a series of enhancements to its Valuation and Data portal. The service integrates fixed income terms and conditions data, valuation and pricing content and market commentary to provide enhanced transparency for over three million fixed income securities, including structured assets.

"By adding transparency and context to the valuation process, this new offering assists risk managers, pricing, accounting professionals and investment professionals to better distinguish between price and valuation risk, market and credit risk, while gaining further insight into the underlying drivers of the security or issuer risk," says Peter Jones, senior director at S&P Capital IQ.

Rui Carvalho, md at the firm, adds: "Combining multiple valuation and pricing approaches with market and reference data is an important step to gaining a better understanding of portfolio risk, front to back office, from a valuation perspective."

Incorporating trade and evaluated prices with the newly developed model valuation, the integrated valuation offering allows users to perform robust analysis on securities, S&P Capital IQ says. It provides enhanced terms and conditions data and allows for the comparison of multiple pricing approaches, with access to recent trade and valuation history. Also included are the underlying government bond and swap curves, security-specific risk sensitivities and CDS instruments.

Structured Finance

NY seminar draws near

Today is the last day for buy-side market participants to register for a complementary pass to SCI's Pricing, Trading & Risk Management Seminar, which is taking place on 29 March in New York. The event is being held at Bingham McCutchen's offices at 399 Park Avenue.

This conference will focus on risk management issues, trading and secondary markets, discussing strategies for opportunistic investors. The programme consists of a series of panel debates and a CLO analytics workshop.

Speakers include representatives from: Aladdin Capital Management; Christofferson, Robb & Co; Declaration; EIM; Federal Housing Finance Agency; Federal Reserve Bank of New York; Gapstow Capital Partners; Grenadier Capital; Gresham Risk Partners; JPMorgan Asset Management; LCP Capital; Levitt Capital Management; Nibco Consulting; and South Street Capital Management. The event is sponsored by Bingham, Moody's Analytics, RiskSpan and S&P Capital IQ.

Email SCI for a registration code or click here to register.

Structured Finance

Investor-placed issuance recovering

Much of the European ABS sector has seen investor-placed issuance recover significantly since the financial crisis, according to S&P. Overall, investor-placed European ABS issuance was just over €20bn last year - more than double 2010 volumes - albeit with collateral largely focused on German autos and UK credit cards.

Indeed, investor-placed issuance in auto and credit card ABS bounced back in 2011 to surpass pre-crisis volumes. Retained issuance also continued apace during the year, especially in the SME CLO sector, where it exceeded €65bn - with 85% of this amount backed by Spanish and Italian collateral.

For many major issuers, such as captive auto finance companies, the economics of securitisation are once again competitive relative to unsecured funding alternatives. The volatility experienced in many credit markets during 2011 was not generally mirrored in the mainstream structured finance sectors, a fact that S&P believes has partly restored the credibility of these asset classes among investors.

"German and French auto ABS, along with UK credit card transactions, are likely to dominate issuance again in 2012. By mid-March this year, investor-placed issuance in these sectors had reached about €3.8bn," comments S&P credit analyst Sabine Daehn.

She adds: "However, there are hurdles for the sector. With banks still in deleveraging mode, spurred by increased capital requirements, we think new loan origination volumes could remain flat or even trend down. And, with downside risks to the economic environment throughout Europe, we think performance prospects for European ABS will remain mixed."

Structured Finance

Call to extend Volcker implementation

The American Securitization Forum has submitted a letter to the Senate Committee on Banking, Housing and Urban Affairs and the House Committee on Financial Services, as well as the Fed, the FDIC, the OCC, the CFTC and the SEC requesting a correction to the statutory implementation date of the Volcker Rule. The rule is currently expected to become effective on 21 July 2012, pursuant to statutory requirements under Section 619 of the Dodd-Frank Act.

The letter expresses concerns regarding this effective date and the likelihood that final implementing rules will not be released by then. Following the submissions of 18,000 comment letters after the proposed Volcker rules were published (SCI 12 October 2011), US Treasury Secretary Timothy Geithner recently acknowledged that "there's absolutely some work to do on [Volcker]" and Fed chairman Ben Bernanke recently stated his belief in testimony that final implementing rules to the Volcker Statute will not be completed by 21 July.

The letter also notes that the extremely broad proposed definition of 'covered fund' and the absence of effective implementation of the securitisation exclusion in the proposed regulations has caused uncertainty in the industry as to whether certain securitisation vehicles will be considered covered funds in the final rules. In addition, there is uncertainty as to whether and the extent to which banking entities can enter into new covered transactions with covered funds after the expected effective date.

The association recommends that the Senate Banking Committee and the House Financial Services Committee move legislation that would amend the implementation date of the Volcker Statute to extend beyond 21 July to at least 12 months after the date of the issuance of final rules by the joint regulators.

CDO

ABS CDOs transferred

Ischus Capital Management has been appointed successor collateral manager for GSC ABS CDO 2006-4u. The new collateral management agreement essentially follows the key terms and provisions of the existing agreement.

Separately, ING Capital has assigned the collateral administrator agreement for Ajax Two to ING Global Investment Strategies.

Moody's notes that these actions won't cause the current ratings of the affected notes to be reduced or withdrawn.

See SCI's CDO Manager Transfer database for more recent moves in the space.

CDO

ABS CDO auction scheduled

Dock Street Capital Management has been retained to act as liquidation agent for Trinity CDO. Collateral will be auctioned off in three public sales on 3 and 4 April.

CDO

CRE CDO EOD waived

A majority of the controlling class of Gramercy Real Estate CDO 2007-1 has waived the EOD that occurred under the indenture and its consequences, as well as any EODs that may occur until the earlier of 27 August 2012 and the date written instructions to the contrary are provided to the trustee. Noteholders will continue to consider each such EOD and determine whether or not to waive it or whether to exercise any other rights or remedies that it may have. They have reserved the right to revoke or extend any waiver at any time.

CDS

ERC Ireland auction scheduled

The auction to settle the credit derivative trades referencing ERC Ireland Finance CDS is to be held on 29 March. The firm missed its FRN coupon payment scheduled for 15 February (SCI 20 March).

CDS

Clearing eligibility criteria outlined

The Bank of England has published a report clarifying which criteria it believes are important when determining the eligibility for central clearing of OTC derivatives products. Suitability for mandatory central clearing is likely to depend on product and process standardisation, but also on market liquidity, it suggests.

The report notes that liquidity is an important constraint and may require central counterparties (CCPs) to modify risk management models. Further, systemic risk reduction benefits associated with central clearing can only be achieved when CCPs have robust risk management processes.

"Novation to CCPs is unlikely to be practical where operational processes are not automated, while risk modelling and default management become particularly challenging when products are illiquid. Therefore, there may be a natural boundary for the central clearing obligation, with less liquid products or products for which operational process remain bespoke and less-automated unlikely to be suitable for a central clearing obligation," the report concludes.

CDS

Collateral optimisation offering launched

SunGard has added a cross-enterprise collateral management and optimisation solution to its collateral management suite. The offering, dubbed Apex Collateral, helps banks, is designed to support the shift towards central clearing of OTC derivatives.

Apex Collateral aims to centralise all elements of the collateral management process, from creating and maintaining a single, real-time inventory of collateral assets to trading collateral and managing operational requirements. Numerical algorithms automatically calculate the optimal assignment of assets to collateral requirements, helping customers minimise the overall cost and maximise the use of valuable collateral. Flexible workflow tools help standardise how collateral is managed across a broad range of products.

CDS

Congress urged to tackle swaps indemnification

The DTCC has urged the US Congress to pass new bipartisan legislation to prevent fragmentation of global swaps data and ensure the highest degree of transparency into OTC derivatives markets. Indemnification and a second issue - known as 'plenary access' - need to be addressed concurrently otherwise data fragmentation is likely to occur, the firm says.

In testimony before the House Capital Markets and Government Sponsored Enterprises Subcommittee, DTCC president and ceo Donald Donahue strongly endorsed the The Swap Data Information Sharing Act. The legislation would remove the indemnification provisions from the Dodd-Frank Act, which require US-based swap data repositories (SDR) to receive a written indemnification agreement from non-US regulators before sharing critical market data with them.

Donahue said: "Fragmentation would undermine the ability of regulators to obtain a comprehensive view of the global marketplace, which would impact their ability to see risk building up in the system and provide adequate market surveillance and oversight. While this legislation is a strong step in the right direction, it is one of two key technical corrections that is required to ensure regulators continue to have the highest degree of transparency into OTC derivatives markets."

The indemnification provision is a source of concern among many regulators, who have indicated that they would be unable or unwilling to provide such an agreement because the concept is inconsistent with traditions and legal structures outside the US. By removing the provision from Dodd-Frank, The Swap Data Information Sharing Act would align US law with international data sharing protocols developed through the cooperative efforts of more than 50 regulators worldwide.

Plenary access requires US-registered repositories to provide regulators in the US with "direct electronic access" to their data, including data on transactions outside their jurisdiction. While this provision was intended to ensure thorough examination of the SDR's operations, non-US regulators are concerned that the US agencies may interpret it more broadly to mean they have access to all swap data retained by the repository - even when the data has no identifiable nexus to US regulation.

CDS

Swaps business conduct rules released

The CFTC recently published final rules governing the standards by which swap dealers and major swap participants must conduct their dealings with counterparties under the Dodd-Frank Act. Most of the business conduct rules apply to both swap dealers and major swap participants, while others apply only to swap dealers. Firms will need to comply with the new rules by the later of 14 October 2012 or the date on which they are required to apply for registration.

Lawyers at Dewey & LeBoeuf note that the business conduct rules contain regulations relating to: prohibitions on fraud, manipulation and other abusive practices; disclosure; communications and fair dealing; confidentiality; diligence and recordkeeping; heightened duties for interactions with 'special entities'; restrictions on political contributions; and policies and procedures ensuring regulatory compliance. Many of the diligence and disclosure rules do not apply to swaps executed on a designated contract market or swap execution facility, where the counterparties to a transaction are typically anonymous to one another before execution of the transaction. Additionally, a number of obligations under the rules do not extend to counterparties that are swap dealers, major swap participants, security-based swap dealers or major security-based swap participants.

CDS

Risk appetite reflected in swaps activity

US commercial banks reported trading revenue of US$2.5bn in 4Q11, according to the OCC's latest quarterly report on bank trading and derivatives activities. These figures are 70% lower than Q3 revenues of US$8.5bn and 27% lower than in 4Q10.

"The seasonal decline in revenues we typically see in the fourth quarter of each year was made a bit worse by a noticeable reduction of risk appetite by both banks and their clients," comments Martin Pfinsgraff, deputy comptroller for credit and market risk. "Against a backdrop of concerns about sovereign debt and the health of European banks, demand for risk intermediation products fell. Market participants were very defensive."

Nevertheless, for the full year, insured commercial banks reported a record US$25.8bn in trading revenues - surpassing the previous record of US$22.6bn in 2009 by 14%.

Credit exposure from derivatives fell in the fourth quarter. Net current credit exposure (NCCE) decreased by US$74bn, or 15%, to US$430bn. Banks held collateral to cover 66% of their NCCE, 80% of which is cash.

"We saw a broad-based decline in derivatives portfolio exposures, as receivables from interest rate, FX, commodity, credit and equity contracts all declined," adds Pfinsgraff. "Although credit exposures declined during the quarter, NCCE remains very high due to the prolonged very low interest rate environment."

The notional amount of derivatives contracts declined for the second consecutive quarter, falling by US$17trn, or 7%, to US$231trn. The fourth quarter decline followed a 0.6% decline in the third quarter.

Pfinsgraff explains: "The decline in notionals reflects the counterparty credit concerns that were fairly widespread over the latter part of the year. While market uncertainties typically lead to increases in notionals, due to greater hedging activity, that dynamic changes when the concerns are credit related. De-risking across trading, lending, or investment activities can lead to reductions in transaction volumes, including hedging."

He notes that the decline in notionals also reflects continued trade compression efforts.

Derivatives contracts remain concentrated in a small number of institutions: the largest five banks hold 96% of the total notional amount of derivatives, while the largest 25 banks hold nearly 100%. Credit default swaps are the dominant product in the credit derivatives market, representing 97% of total credit derivatives.

CDS

Elpida Memory CDS settled

The final price for Elpida Memory CDS was determined to be 21 during this morning's auction. 13 dealers submitted initial markets, physical settlement requests and limit orders to the auction to settle trades across the market referencing the entity.

Separately, an LCDS auction is scheduled for 28 March to settle the credit derivative trades for Financiere Gaillon 7. Financière Gaillon 7 is included in the LevX index and is the subject of single-name loan CDS trades.

CDS

Greek CDS payments completed

The DTCC reports that payments on sovereign credit default swap contracts related to Greece have been successfully completed for single name and index (iTraxx SovX) transactions, following the restructuring event for the Hellenic Republic. US$2.89bn in net funds were transferred on 26 March from net sellers of protection to net buyers of protection on the entity.

CLOs

RFC issued on leveraged loan guidance

The US Fed, the FDIC and the OCC are seeking comment on proposed revisions to the interagency leveraged finance guidance issued in 2001. The move could be a modest positive for future CLO loan quality, according to securitisation analysts at S&P.

The update emphasises the importance of good underwriting and reserving for potential losses and seeks to address concerns about volumes, underwriting, covenant-lite loans and payments-in-kind. It focuses on five key areas: establishing a sound risk-management framework; underwriting standards; valuation standards; pipeline management; and reporting and analytics.

Feedback on the proposed guidance must be submitted to the agencies by 8 June.

CLOs

Insolvency event for mezz SME CLO

Chamartín Meermann Immobilien, portfolio company no. 41 in the H.E.A.T. Mezzanine I-2006 SME CLO, has filed for insolvency. However, the insolvency event will not have an immediate effect on the transaction as the principal amount of the SOLA obligation (€4m) will only be recorded to the principal deficiency ledger in case of a principal deficiency event. The deal's current outstanding balance is €242.3m.

CLOs

CLO reinvestment periods targeted

A number of corporate issuers appear to be carving out loans compatible with WAL constraints for CLOs nearing the end of reinvestment periods. The proposed US$3.7bn financing backing the Infor and Lawson merger includes a US$400m tranche with 4.5-year maturity tailored for CLOs, according to LCD. Gettyimages, First Data and Kinetic Concepts also recently issued loans targeting CLO participation.

CLOs

Successor manager clause amended

The investment management agreement for Clydesdale Strategic CLO I has been amended to allow under certain circumstances, following a resignation of the investment manager, the appointment of a successor investment manager designated by the resigning manager. The appointment is conditional upon, in addition to other requirements, neither a majority of the subordinated notes nor a majority of the rated notes (voting together as a single class) objecting within 30 days of such an appointment. The amendment also provides that an investment manager that is resigning in connection with the occurrence of a for cause termination event may not designate a successor.

The existing manager (Nomura Corporate Research and Asset Management), who intends to resign its obligations as investment manager on the transaction (SCI 4 January), proposed the amendment to Moody's for rating agency confirmation purposes. The agency has determined that the amendment will not cause the current ratings to be reduced or withdrawn.

CMBS

Maturing CRE volume jumps

Trepp has updated its US commercial mortgage maturities outlook with 4Q11 data. The firm now estimates that US$362bn of CRE debt will mature in 2012 - up from US$346bn in 2011.

For the five-year period 2012 to 2016, Trepp forecasts US$1.73trn of CRE maturities. Furthermore, its latest estimates of LTV ratios for the maturing mortgages indicate that nearly two-thirds of the maturities through 2016 are underwater or borderline-underwater.

Rising values will help improve the LTV picture, but Trepp foresees a special issue potentially looming for 2016 maturities. It estimates that as much as 56% of the 2016 maturities are underwater by 10% or more, reflecting the large volume of 10-year mortgages that were originated at the market peak in 2006.

CMBS

B-piece demand remains constrained

Absent potential regulatory hurdles, S&P securitisation analysts believe that conduit B-piece demand will be enough to support projected US CMBS issuance this year. However, they suggest that the small number of buyers could constrain growth.

Last year, eight players were active B-piece investors: Rialto (accounting for six deals), Blackrock (three), Torchlight (three), LNR (two), H/2 (two), Ellington (two), Northstar (one) and CBRE (one). Together, these firms purchased about US$1.5bn in B-pieces.

S&P estimates that three firms - Rialto, CBRE and Blackrock - have bought about US$250m in B-pieces year-to-date. In contrast, at the peak of the market in 2006-2007, about a dozen players bought over US$5bn worth of these assets.

CMBS

Coeur Defense ruling deemed credit negative

The recent Coeur Defense ruling from the Versailles Court of Appeal is credit negative for CMBS backed by French real estate loans, according to Moody's. The agency says it has factored the current ruling's effect into its latest review of the Windermere XII transaction. Currently, it rates the class A notes at Baa2.

The judgement passed by the Versailles Court of Appeal on 19 January confirmed the opening of French safeguard proceedings for both the French borrowing SPV that owns the Coeur Defense property in Paris and its Luxembourg-registered holding company (SCI 31 January).

CMBS

CRE lending principles issued

CRE Finance Council Europe's lender committee has released a guide entitled 'European Commercial Real Estate Lending Principles'. The committee's aim is to develop a high quality approach to European lending through best practice recommendations to market professionals.

The guide offers an initial layout of key principles to be considered when advancing secured investment loans. "The release of the real estate lending principles is a collaborative milestone for CREFC Europe and reflects the desire of the industry's constituents to create a more transparent, liquid and solid CRE finance market," comments Christian Janssen, md and head of CRE debt capital markets - Europe for Jefferies and chairman of CRE Finance Council. "We encourage market participants to utilise the principles and work with CREFC Europe on developing further initiatives to improve and strengthen the European CRE finance market."

Peter Denton, head of real estate finance UK with BNP Paribas and chairman of the lender committee, adds: "Europe is seeing a fragmentation of lender type - not just balance sheet using banks and capital market issuers, but the appearance of a more mature subordinated debt market - as well as growing interest from new entrants, such as the insurance, pension and money management companies. As such, we feel these are good reasons to focus on market standards in the sector."

CMBS

TITN 07-1 progress reviewed

A noteholder meeting was held on 23 March for the TITN 2007-1 (NHP) CMBS. The presentation included information on the recent actions taken by HC-One in connection with the 241 Southern Cross care homes transferred under the restructuring, as well as an overview of future plans for the homes.

On 1 November 2011 NHP injected £30m into the HC-One business to provide working capital and to fund an essential investment programme to improve the quality of care provided at, and the physical condition of, the care homes. Court Cavendish will manage HC-One and its homes at a rate of £1,100 per month per home under a management services agreement, terminable by 12 months notice by either party.

The initial rent for year one has been reset at £40m, which is 38% below the previous level. This will be reviewed in autumn 2012, once HC-One's three-year plan has been completed.

Meanwhile, the Libra loan remains in standstill until 13 April. As at 19 March, the mark-to-market on the forward swap is £187.3m out-of-the-money for the borrower.

Periodic payments due but unpaid at the borrower level in respect of the forward swap total approximately £22m. Current deferred class B to E interest is approximately £2.3m, while current accrued servicing advances are approximately £7.1m. The latest valuation of the Libra portfolio of properties is £618m as at 30 December 2011, reflecting the collective values of the individual properties, assuming purchase costs of 5.8%.

The special servicer will continue to consider all available options with a view to maximising recoveries on the Libra loan and will update noteholders once the bottom-up business plan has been finalised. An update on progress will also be released in 4Q12 after the business completes its first 12 months of trading. The group says it is on track to meet the initial budgets that were set for it on day one.

CMBS

Opera Uni restructuring proposal due

Valad Investment Management is to present a restructuring proposal for the OPERA UNI CMBS on 30 March. The proposal will see the implementation of enhanced asset management initiatives to maximise the recovery to bondholders through an accelerated disposal programme, with annual amortisation targets totalling €235m by August 2015, according to structured finance strategists at Chalkhill Partners.

The proposed restructuring will require a four-year extension to the final maturity of the notes to February 2016, with a coupon increase on the class A notes of 377bp as a running margin, as well as 5% deferred interest and 8% subordinated deferred interest on junior notes. The inclusion of a €10m cash reserve and the ability to draw on a working capital facility of up to €15m - which effectively replaces the liquidity facility - would provide more flexibility for the disposal process, the Chalkhill strategists note.

"If the restructuring is implemented, there is potential for recovery to class B to D notes. However, failure of junior notes to approve the proposal would result in class A noteholders voting to accept a credit bid from a joint venture of TPG and Patron Capital, which would see the class As repaid by 3Q12, with junior debt wiped out," they conclude.

CMBS

US CMBS loss severities hit highs

The weighted average loss severity for loans in US CMBS liquidated at a loss was 41% in the fourth quarter, up from 39.7% in the third, and the highest severity since the inception of Moody's quarterly US CMBS Loss Severities report. Excluding those with 'de minimis' losses (of less than 2%), the historical weighted average loss severity for all liquidated loans was 52.6%, up from 52.1% in the third quarter.

The total balance of loans liquidated in 2011 rose by 39% to US$14.6bn, while the number of loans liquidated rose by 12% - primarily because of a surge in liquidations in the 2006 and 2007 vintages to US$7.61bn from US$3.45bn in 2010. "The fourth quarter of 2011 marked the third consecutive quarterly increase in cumulative loss severity," says Keith Banhazl, a Moody's vp and senior credit officer. "But we think that, rather than indicating further deterioration in real estate fundamentals, the increases over the previous three quarters are due to changes in the vintage composition of the loans liquidated."

The increased share of liquidations from the troubled 2006-2008 vintage group, which has a loss severity rate of 51% versus 30% for earlier vintages, is pressuring the cumulative loss severity across all vintages. The 2006-2008 vintages have the highest loss severities: 50.8% for 2006; 51.6% for 2007; and 55.5% for 2008. The three vintages comprise 57.1% of CMBS collateral and 71.1% of delinquent loans.

Loss severities for loans liquidated after maturity default were significantly lower than for loans that defaulted during their term, Moody's notes. For liquidated loans from the 2004-2007 vintages, the weighted average loss severity for maturity defaults was 12.4%, compared to 52.9% for term defaults.

With regard to property types, loans backed by hotel properties had the highest weighted average loss severity at 46.2%; those backed by retail, the second-largest at 45.1%; while those backed by office properties had the lowest at 36.4%. Retail was the only major property type for which loss severity rose.

Loss severities declined year-over-year for all of the top ten metropolitan statistical areas by loss amount, other than New York's, which rose slightly to 22.5% from 21.3%. However, of the ten areas with the highest dollar losses, New York's 22.5% was the lowest severity, while Detroit's was the highest, at 58.1%.

CMBS

Opera Uni details clarified

Eurohypo, the special servicer on Opera Finance (Uni-Invest), has clarified certain issues that were raised by noteholders.

First, the class A committee represents 82% of the principal amount of the class A notes outstanding. Of the class A committee, 89% (or 72% of the class A notes outstanding) have confirmed that they will vote for the credit bid option if the consensual restructuring option fails. Further, 67% of the committee (55% of the class A notes outstanding) have agreed not to sell their holding until the meeting on 17 April and to vote for the credit bid option in case the consensual restructuring option fails to pass.

The quorum required for the meeting for the consensual restructuring option is 75% of the relevant class of noteholders and two-thirds of the class A notes outstanding in respect of the credit bid option. Additionally, the resolution will require the approval of at least 75% of the present quorum.

If the consensual restructuring option fails at the noteholders' meeting, the class A noteholders will convene later the same day to vote on the credit bid option.

Risk Management

Islamic hedging standard unveiled

The International Islamic Financial Market (IIFM) and ISDA have launched the ISDA/IIFM Mubadalatul Arbaah (profit rate swap) product standard to be used for Islamic hedging purposes. The Mubadalatul Arbaah (MA) standard follows on from the ISDA/IIFM Tahawwut (hedging) master agreement (SCI 3 March 2010) and provides the industry with a framework for Islamic risk mitigation.

The MA agreement is a mechanism structured to allow bilateral exchange of profit streams from fixed rate to floating rate or vice versa. The documentation provides product schedules based on two separate structures for transacting MA to mitigate cashflow risk. The MA standard documentation has been developed under the guidance and approval of the IIFM Shari'ah Advisory Panel, in coordination with the external legal counsel Clifford Chance and market participants globally.

"The MA standard has given to the industry access to a robust and well developed product documentation under the Tahawwut master agreement to manage cashflow risk for various Islamic capital market instruments, such as Sukuk, which has seen increasing number of fixed profit rate issuances in the last few years. And, as the Sukuk market grows, the need for hedging will also increase," comments Ijlal A Alvi, ceo of IIFM.

Islamic Financial Institutions have largely shown resilience in the current difficult financial environment and some are even going through an expansion phase. However, due to the inter-linkages with the global financial system, their balance sheets are exposed to fluctuation in foreign currency rates and also cashflow mismatches due to fixed and floating reference rates.

"IIFM recognises the importance of this critical segment at an early stage and undertook the challenge of developing global Islamic hedging standards in collaboration with ISDA. I am confident that such joint efforts will continue in the future for the benefit of the industry," comments Khalid Hamad, chairman of IIFM and executive director of banking supervision at Central Bank of Bahrain.

RMBS

Tri-state mortgage delinquency tool launched

The New York Fed has introduced a new interactive online tool providing mortgage delinquency and foreclosure information for each county in New York, New Jersey and Connecticut. The utility presents analysis of the housing market in the tri-state region from September 2007 through to December 2011, providing information about the percentage of loans in foreclosure as well as those that are 60 days and 90+ days delinquent.

Users can view the graphical analysis on a county-by-county basis and watch an animated timeline of how mortgage conditions changed during that period. Analysis for Long Island is also available by zip code.

"Mortgage delinquencies and foreclosures continue to hinder the strength of the recovery in our district," comments Kausar Hamdani, svp of regional and community outreach at the New York Fed. "We are confident this tool will provide relevant and timely analysis to help inform the public, policymakers and community leaders about these ongoing conditions."

The tool will be updated and supplemented as more information becomes available.

RMBS

Unexpected increase in Aussie RMBS delinquencies

Fitch reports that delinquencies in Australian prime RMBS unexpectedly increased to 1.57% in 4Q11 from 1.52% the previous quarter, despite a stable environment in terms of interest rates, economy and unemployment. The increase in the agency's Dinkum Index was mainly driven by a rise in the 30-59 day bucket, indicating that new borrowers are facing affordability constraints.

Moreover, the Dinkum Index understates the deterioration in Australian mortgage performance in this quarter as the inclusion of a large volume of recently issued transactions in the 4Q11 constituents has helped keep the overall index level low. The index would otherwise have jumped to 1.71%, not so far away from the 1.79% record high in March 2011. Fitch includes transactions in the Dinkum Index six months after they have been issued.

"It is too early to judge which factors contributed to the increase in arrears during 4Q11. To a measurable extent, declining house prices were the only key driver of mortgage performance to show a negative trend through 4Q11," comments James Zanesi, director in Fitch's structured finance team.

He adds: "Housing market stagnation might lead to arrears materialisation as the borrower who might otherwise have refinanced or repaid with sales proceeds falls into delinquency. Less seasoned and most leveraged loans are most affected by declining house prices."

Fitch continues to forecast deterioration in mortgage performance in 1Q12 when it expects seasonal Christmas spending, in combination with minor increases in bank standard variable rates, to outweigh the benefits of the two cash rates cuts in 4Q11.

More susceptible borrowers, such as self-employed households, still face challenges in meeting their mortgage obligations - as suggested by the Fitch Dinkum Low-Doc Index, which recorded an increase in 30+ days arrears to 6.62% in 4Q11 from 6.26% in 3Q11. The agency expects low-doc delinquency rates to remain high.

However, although delinquency rates are increasing and are above the historical Australian average, they remain low relative to other countries and well within the expectations used to derive Fitch's ratings for Australian RMBS transactions.

RMBS

Regional ERF differences persist

Fitch has published the 1Q12 economic risk factors (ERFs) applied in its prime residential mortgage loan loss model.

Default risk - though still elevated - continues to decline since peaking in mid-2007 and economic indicators are showing positive momentum, the agency notes. However, the ongoing housing correction and the high number of long-term unemployed continue to weigh on the recovery.

While regional differences continue to persist, Fitch also notes marked differences in economic conditions between the state and local MSAs. For instance, state ERF values within California vary by as much as 3x that of the MSA ERF, depending on zip code.

RMBS

Foreclosure timelines set to increase

Foreclosure timelines will continue to lengthen, according to Moody's latest RMBS Servicer Dashboard report. The average timeline as of 31 December 2011 stood at 654 days in judicial states and 297 days in non-judicial states.

"As these aged foreclosures work their way through the foreclosure process, we expect to see these timelines continue to increase," says William Fricke, a Moody's vp and senior credit officer. "The extended timelines will result in additional costs and increased loss severities to RMBS trusts."

On a positive performance note, the percentage of jumbo and Alt-A loans that remained current increased and early stage delinquencies declined from the third to the fourth quarter of 2011. "The increase in the percentage of current loans and decline in delinquencies, which we use to calculate our 'current-to-worse' roll rates, likely reflects the improvement in the unemployment rate and broader economy," notes Fricke.

Regarding the performance of individual servicers, Moody's observes that Ocwen's collections, loss mitigation and foreclosure timeline metrics deteriorated in the fourth quarter. "The Litton acquisition resulted in an increase in loans that rolled from current status to delinquency, as well as a decline in seriously delinquent loans that were cured or received cashflow," says Fricke. "For the period we are measuring, Ocwen had limited time to influence the performance of the Litton portfolio since the acquisition."