Contents

CMBS

Tough call

Opera Uni proposals weighed

Whether Opera Finance (Uni-Invest) noteholders vote for a consensual restructuring or the credit bid option on 17 April is said to be too close to call. Such a dual-track strategy is designed to ensure that there will be an outcome, but there is a real chance noteholders will fail to agree on either proposal - in which case the transaction will likely enter into an accelerated disposal programme.

Opera Uni B, C and D noteholders are expected to vote in favour of a consensual restructuring because they will see a return, as opposed to receiving nothing under the credit bid. But A noteholders have an interesting choice to make: whether to risk everything on the credit bid being accepted and a forced liquidation arising if unsuccessful, or vote yes to both options.

Noteholders will vote on the consensual restructuring option in reverse order and will have to achieve a 75% consensus for each class for it to pass. If it doesn't pass, A noteholders only will then vote on whether to accept the credit bid option.

The decision about whether to vote for the consensual restructuring or the credit bid comes down to perceptions of risk and reward, says one Opera Uni noteholder. Class A noteholders can expect a 400bp over Euribor margin plus 5% in PIK interest for a 2.5-year WAL versus 300bp plus 1% in PIK interest for a 1.5-year WAL under the respective proposals.

Although the additional 40% cash (less certain closing costs) upfront offered under the latter proposal represents significant de-risking, it is neutralised to a certain extent by the significant cash leakage to equity before full amortisation occurs for the class A noteholders. Because of this cash outflow, the same proceeds from asset sales need to be made under both proposals.

Indeed, many Opera Uni participants appear to be being blinded by the numbers at a superficial level, according to one source close to the transaction. "Because the credit bid option puts €140m cash on the table from day one, people are assuming it is better than a consensual restructuring. But they fail to realise that they'll effectively hand over control to the equity investors under the credit bid option and that these equity investors are aligned first to delivering high equity IRR performance to their investors in their funds rather than paying the class A noteholder debt back. The longer they take to pay back debt, the better their equity returns - the two are diametrically opposed."

In addition, two terms in the TPG/Patron documents seem to have been widely overlooked. First is that proceeds of any asset sales will in effect be equally split between the equity and debt, hence €108m-€160m of cash will leak to the equity before the A noteholder principal is fully repaid. It also implies that €300m needs to be made in asset sales before this happens.

The second term is that if the loan hasn't amortised below €180m after four years, TPG/Patron have the right to extend the debt by two years to July 2018. Consequently, noteholders could face extension risk, as well as execution risk in respect of the court approval process.

In comparison, Valad's consensual restructuring plan begins with zero cash on day one, but will see all A noteholder principal paid back by February 2016 and allow A noteholders to retain control throughout. The plan is aligned with the interests of all noteholders because it involves: a full cash sweep to debt; 50% of the management fees being paid only after full repayment of A note principal and €4m-€6m of B, C and D deferred interest; and fees being linked to growth in NOI of the portfolio.

The source adds: "It's going to be difficult to sell the assets in an oversupplied market, but Valad believes its strategy - based on phased disposals - will deliver over time. Most of the assets are older than 20 years and have been capex-starved, but the Valad strategy should also see more capex being invested than under the credit bid."

Certainly the noteholder cites control - which A noteholders would retain under a consensual restructuring - as an important issue. "The Valad management team has experience on the ground," he concurs. "Opco costs will be cheaper because they already have a team in place, whereas TPG/Patron will have to hire substantial additional personnel to the existing Uni-Invest team. Furthermore, Valad's business plan is less aggressive in terms of value realisation because they're not trying to make equity-type returns."

He continues: "Having said that, TPG and Patron have done lots of work on the transaction. They have a robust business plan and appear to be committed to the deal."

In an investor presentation released last Friday (30 March), TPG and Patron pointed to the partial upfront repayment of the class A bonds, a €160m equity injection and the existence of an asset-specific business plan based on full due diligence as reasons why noteholders should choose their plan over the alternative. They further cited their 18-month involvement with the deal, during which time they have added value to most properties by increasing occupancy via a combination of lower rents, capex investments and redevelopment.

Opportunistic sales of long-lease assets would provide additional deleveraging, the partnership noted. The business plan also recognises the limited value of a fifth of the portfolio and proposes a sale of these to free up management time to focus on value generation.

The noteholder says that the dual-track strategy is the right solution for supporters of a consensual restructuring because it isn't deliverable without the credit bid. "As the restructuring contemplates re-pricing the notes and pushing out the maturity, the credit bid - under which they'll receive nothing - provides impetus for the class B, C and D noteholders to vote in favour of a restructuring. But ultimately it comes down to what the class A noteholders want - some would prefer a reduction in risk-weighted assets or an upfront return, which they'd achieve with the credit bid."

He suggests that such a dual-track strategy could become a template for workouts of other defaulted CMBS, providing it is successful. "Different noteholder incentives make CMBS workouts extremely difficult, but the dual-track strategy forces everyone to agree on a course of action by a certain date. It's a case of mutually assured destruction: everyone has to act reasonably, allowing a majority to emerge - otherwise it is all about relative economics."

Ultimately, the voting may be tipped by investors who own both the class A and some mezzanine notes, according to European asset-backed analysts at RBS. In this case, noteholders will have to assess expected recovery based on how much they own of each class.

CS

RMBS

Warring over reps

Countrywide settlement could open floodgates

The US$8.5bn Countrywide settlement is the only sizeable potential RMBS representation and warranty recovery achieved so far. The key to the success of other such settlements is whether trustees follow BNY Mellon's lead and be more proactive.

The Countrywide settlement has been back and forth through the courts and is still subject to judicial approval (SCI 28 February). The process of pursuing cases can be lengthy and complicated, which helps explain why further large recoveries are yet to be seen.

Jonathan Wishnia, member of Lowenstein Sandler in New York, explains that there are a couple of factors holding cases back. "The lack of numerous global settlements is comprised of a combination of things. Until recently investors have not been willing or able to work together to push larger global settlements," he says.

He continues: "In addition, trustees - who really hold the keys to the kingdom because they have access rights to files and the rights under law to bring these cases - have been unwilling to do so in larger-scale matters. That combination has made global settlements substantially more difficult."

One of the stumbling blocks has been the threshold of 25% of investors required to direct a trustee to demand repurchases. Because companies are frequently guarded about revealing their holdings, it can be hard for investors to know who to reach out to and club together with.

Conversations for smaller settlements are ongoing and Wishnia says Lowenstein Sandler has several clients that are currently in discussions. "Some discussions have resulted in lawsuits being filed, while some are negotiating behind the scenes. Each situation has its own set of unique circumstances," he notes.

What makes Countrywide special is that BNY Mellon has been proactive. Like any trustee, it is risk-averse and has moved to mitigate the risk posed to it.

"BNY must have recognised that as a trustee it could have exposure. Essentially, if there are not substantial repurchases, investors should be expected to bring suits against trustees, claiming that it should be those trustees who have to pay up," notes Wishnia.

While BNY Mellon is the first trustee to behave in such a way, it may now have set a precedent for others to follow. "The group of 22 investors behind the BNY-Countrywide settlement has reportedly targeted Chase, Wells and possibly others. There is certainly potential for more global settlements to follow on from Countrywide," says Wishnia.

The scale of rep and warranty-related payouts could be quite large. Securitised products analysts at Barclays Capital believe the overall non-agency market could see around US$44bn in payouts, only US$10bn of which is currently accounted for by Countrywide and Bank of America's settlement with Assured Guaranty (SCI 18 April 2011).

"We estimate that the total payout to non-agency investors from rep and warranty-related recoveries will be US$26bn-US$52bn, using the US$8.5bn Countrywide settlement deal as a template. This corresponds to an average of 3-6 points of recoveries on non-agency securities. However, because of the chunky nature of the recoveries, some deals may receive substantially higher recoveries as a percentage of current balance," they add.

The US$8.5bn Countrywide settlement could well set a precedent for future cases. US$8.5bn is around 2% of the US$424bn of original face on the Countrywide trusts and in these cases it is also worth taking into account the size of the originator. Larger institutions such as Bank of America should be able to handle the expected level of payouts, but if investors sue for too much they could bankrupt sponsors and end up receiving nothing.

"Industry advisors before the settlement was announced had suggested to us that 2% was the right percentage for responsible parties to pay generically for settlements. Not right in the sense of correct, but right in that it would be enough for both sides to accept settlement," says Wishnia.

However, he notes that it is not yet certain that the final settlement figure for Countrywide will not be slightly higher. He suggests there is scope for the settlement to be increased to between US$10bn and US$12bn.

"It is a combination of how the New York state judiciary treats the claims and whether they give deference to the trustee's decision. One hopes that the objectors will be given the opportunity to attempt to get a valid estimate of damages by doing such things as reviewing loan files. I imagine the objectors would find it difficult to accept a settlement figure that has to rely in large part on the counterparty that is making the payment," he says.

The Barcap analysts suggest there could be US$34bn of further payouts coming and say deals with historically weak collateral performance should benefit most from settlements. Although Wishnia accepts the figure is possible, he notes that it is important to focus less on damages and more on where there are actionable representations.

He says: "Different counterparties undertook more actionable reps than others. Before you can even consider a proper damages assessment, you have to understand the contractual rights. What are the reps and warranties by a given selling counterparty and what was the underwriting process for that product that stands behind those reps and warranties?"

He continues: "No income, no asset loans, for example, are often more ripe for attack than documented loans of any sort, regardless of quality of paper. Those were more prone to misrepresentations and fraud. Pizza delivery guys claiming US$200,000 in income and other cases like that are where you are going to find breaches."

The Barcap analysts reckon investors who are positioning for the upside from rep and warranty-related payouts should focus on deals sponsored by the largest banks. The largest exposures to rep and warranty payouts lie with Bank of America and JPMorgan.

After Countrywide and the settlement it negotiated with Assured Guaranty last year, Bank of America should still have US$5bn left to pay. JPMorgan, on the other hand, has not negotiated any big settlements and could yet be forced to pay out as much as US$12bn. Deutsche Bank, Credit Suisse and Ally could all also be set for payouts in the billions.

"We continue to believe that rep and warranty-related payouts are most likely to occur among the largest sponsors. The primary reason for this is that these institutions likely have the financial resources to make a large settlement payment," note the analysts.

They add: "It may also be easier to find other investors in the deal to reach the 25% threshold needed to direct the trustee to demand repurchases from the sponsor. As such, investors looking for potential upside from rep and warranty recoveries should focus on securitisations sponsored by larger financial institutions."

Looking ahead, Wishnia believes the biggest issue that the industry is going to have to face is whether trustees will follow BNY Mellon's lead and be more proactive or whether they will continue to sit back. It is not yet clear whether statutes of limitation run six years from transactions closing or from when a breach was claimed, for example, and the answer to that question will have important ramifications.

"There is a line of thinking that the big banks and exposed counterparties are checking the box as every day goes by saying: 'OK, no more claims relating to this day because statutes have run'. If that is correct, then what we will find in 2014-2015 are master settlements for the claims that have been brought before the statutes ran. Everyone who made claims would get a slice of the settlement cash," he says.

Wishnia continues: "However, if statutes have not run since closing but instead started with a breach claim in, say, 2012, then that exposure has a much longer tail because it no longer has a definite length. That issue is going to have to be litigated at some point in time or everyone is going to settle because they do not want to have it litigated. That is the key to how long this all goes on for."

JL

CLOs

BWIC boredom as CLO market stutters

Excitement generated by the take-off of significant European CLO BWIC activity last month has turned to frustration and indifference. Bid-lists continue to flood the market, with notably large examples both today and yesterday, but trading is patchy.

"There has been a ton of BWICs, but it is hard to see where the market is. There is just no direction and, if anything, it seems like the market is moving sideways," reports one trader.

He says that while sometimes bonds are trading pretty well, other times they are not trading at all and sometimes they seem to be trading only very cheaply. Although the trader is not sure why the market seems to be lacking direction, he suggests that its lack of depth is not helping.

"A lot of our clients are getting very, very tired of BWICs. We have guys who used to bid on BWICs but do not even bother now. It really has got to that point now where they have just had enough," he says.

The trader notes there was one particularly large equity BWIC a couple of weeks ago that did not trade and which seems to have proved a turning point for the market. "I think that list frustrated the market a lot. A lot of people said after that they would never bid for equity on a BWIC again," he says.

The trader continues: "There was no problem with the bids, because those came in fine. It just did not trade. You have a lot of clients doing a lot of work in preparation, then with no colour it does not trade. That did not go down well."

While BWICs fail to trade, the relative cheapness of the European CLO market is irrelevant, argues the trader. "The amount of work hedge funds would have to do to build up positions, only for nothing to happen and for your hit rate to be terrible, means it is just not a viable market for them to target," he says.

A more positive development for the market is that investors do at least seem more willing now to venture below the top of the capital structure. Single-As still seem to be the most sought after paper.

"We have had a few guys bottom fishing and there is more interest in the lower-rated tranches, but it is still fairly limited. Single-As remain active and of course anything above that is attractive too," says the trader.

He continues: "Triple-Bs and double-Bs are starting to see a bit more interest. That is encouraging. However, the majority of enquiries are still right up the top of the capital structure and it is still only something like one enquiry in 25 for the stuff further down."

JL

Structured Finance

SCI Start the Week - 2 April

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

Pipeline
A variety of deals entered the pipeline last week, including the first NPL CMBS in over 10 years - the US$132m Rialto Capital Series 2012-LT1. The transaction was joined by the A$465m IDOL Trust Series 2012-1 RMBS and the US$367.5m Doral CLO II. Silvermine Capital Management is also marketing a US$400m CLO.

Pricings
The largest transaction to price last week was a US$2.347bn SME CLO (Sandown Gold 2012-1), which was joined by a second US$413m CLO (Galaxy XII CLO). A US$1.2bn CMBS (FREMF 2012-K501), a US$365.4m RMBS (Sequoia Mortgage Trust 2012-2), Investec's postponed RMBS Gemgarto 2012-1, a €422m stranded asset ABS (Rayo Finance Ireland Series 5) and a US$150m ILS (Combine Re) also printed.

Markets
Secondary trading in US ABS was active last week, although ABS analysts at JPMorgan note that the market appears to be trading sideways. The high level of supply for short-dated card and auto deals seen earlier in the year has lessened interest for those assets, but demand for FFELP student loan ABS is increasing.
The volatility in US RMBS has eased off, as SCI reported on Tuesday. Strong agency supply has driven spreads wider, while prices have moved up in non-agency despite similarly heavy supply. With a relatively benign macro outlook, spreads are expected to continue to grind tighter.
US CMBS flows were light, with spreads unchanged, according to CMBS strategists at Bank of America Merrill Lynch. "Legacy conduit spreads were essentially flat for the third week in a row," they say.
BWIC volume has decreased since the start of the year. Large BWICs on Monday and Tuesday contained a number of CRE CDOs that the strategists understand did not trade.
European CMBS flows also slowed down considerably last week for the first time all month, according to CRE debt analysts at Deutsche Bank. "In total, there was only €20m of lists. Mezzanine prices in particular began to drift lower but there is still strong demand for IG rated bonds from 'simple' structures," they say.
The European CLO market continues to be inundated with BWICs, but market participants seem to be beginning to lose interest, as SCI reported on Wednesday. Single-A paper remains the most sought after but there are also signs of a little more interest further down the capital structure.
"Triple-Bs and double-Bs are starting to see a bit more interest. That is encouraging. However, the majority of enquiries are still right up the top of the capital structure," says one trader.
Meanwhile, in the US CLO market JP Morgan analysts report: "March 2012 witnessed the most CDO BWIC activity since January 2009, but the US$9.7bn tally comprises very large liquidations of ABS CDOs."
 

Deal news
• 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). The pair is offering either a consensual restructuring or a bid option to investors.
• The latest investor report for Aire Valley, Bradford & Bingley's UK RMBS master trust, indicates that it is close to breaching its non-asset trigger.
• 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.
• Songbird's latest results provide updated valuations and LTV ratios for the Canary Wharf CMBS. The LTV ratio in the securitisation improved to 72.5% from 73.7% and, after adjusting for amortisation over the year, this implies a valuation decline of -0.7%.
• The downgrade of Hawker Beechcraft to double-C by S&P will cause some CLO overcollateralisation ratios to decline, securitisation analysts at the agency note. The credit is held by about 75 CLOs, with aggregate exposure of US$200m.
• 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.
• 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.
• The €6m subordinated bond issued by Gruezi, which forms part of the collateral backing PULS CDO 2007-1, has been classified as defaulted. An investor in residential real estate, the company is facing an increasing number of lawsuits from customers intending to reverse their transactions, claiming formal mistakes during the purchasing process.
• 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.
• 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 neither a majority of the subordinated notes nor a majority of the rated notes objecting within 30 days of such an appointment.

Regulatory update
• The final European Council ban on naked shorting of sovereign CDS may be stricter than first anticipated, according to structured credit strategists at Citi. They note that regulators appear to be trying to capture trades in the US and Asia under the legislation, even though those regions would seem to be outside their jurisdiction.
• The European Parliament has approved the European Market Infrastructure Regulation (EMIR), which will regulate trade in OTC derivatives. The rules require OTC derivatives to be cleared through CCPs, with all derivative contracts to be reported to trade repositories.
• 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 recent Royal Decree will result in a higher incidence of payment in kind arrangements in the Spanish mortgage market, whereby banks take ownership of the property and borrowers' mortgage loan obligations are terminated. However, the impact on securitisation transactions remains unclear, Fitch says.
• 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.

Deals added to the SCI database last week:
7 WTC Depositor Trust 2012-WTC
BAMLL-DB 2012-OSI
Combine Re series 2012
Credit Acceptance Auto Loan Trust 2012-1
Drug Royalty LP1 series 2012-1
Prestige Auto Receivables Trust 2012-1
Turbo Finance 2
WFRBS 2012-C6

Deals added to the SCI CMBS Loan Events database last week:
BACM 2007-3; CD 06-CD3 & 07-CD4, CGCMT 06-C5 & 07-C6, CWCI 06-C1 & 07-C2; COMM 2007-C9; CSFB 2003-CPN1; CSMC 06-C3 & CSMC 06-C5; CSMC 2007-C4; CSMC 2007-TF2A; EMC VI; EPRE 1-A; EURO 27; JPM 2007-LDP10; JPMCC 2005-LDP1; JPMCC 2006-CB16; LBFRC 2007-LLF; LBUBS 2004-C1; MALLF 1; MLCFC 2006-4; OPERA UNI; TITN 2007-1; TITN 2007-2X; TITN 2007-CT1X; WBCMT 2005-C20; WBCMT 2007-C30; WINDM XI-A; & WTOW 2007-1.

Top stories to come in SCI:
US CMBS underwriting trends
Credit hedge fund activity
Impact of RMBS litigation on valuations
Structured credit recruitment trends

CDS

Naked CDS ban given short shrift

The final European Council ban on naked shorting of sovereign CDS may be stricter than first anticipated, according to structured credit strategists at Citi. They note that regulators appear to be trying to capture trades in the US and Asia under the legislation, even though those regions would seem to be outside their jurisdiction.

The risk of such additional regulator attention is expected to limit traders' appetite - a negative development, in the Citi strategists' view, because fast money provides much of the liquidity needed for an efficient two-way market. "Markets dominated by hedgers only, such as Italian sovereign CDS, tend to be inefficient despite huge volumes, with participants all the same way round. Trading may even virtually grind to a halt in sovereign CDS names where liquidity was only marginal anyway: eastern European names, Ireland, Austria, the SovX index and perhaps Belgium."

The strategists suggest that such unsympathetic treatment is intentional, with 'speculators' and hedge funds remaining a convenient scapegoat. "Many legislators will regard a punitive CDS regime with negative side-effects in terms of decreased liquidity as a beneficial intended consequence, in our view. We regard them as part of a wider policy of EU financial repression. An unintended consequence for regulators might be that investors seek to circumnavigate the rules by switching asset class and choosing to short financial or corporate CDS as a proxy to shorting sovereigns."

The new rules are due to be finalised in mid-April and come into effect on 1 November, but existing shorts (prior to 23 March) can be grandfathered until maturity. The provisional list of 'correlated assets', against which investors will be permitted to use short sovereign CDS positions as a hedge, are expected to be relatively broad. Exemptions should include market makers, primary market dealers, bond hedgers and CVA desks.

The fact that only market makers, for example, will be in a position to do CDS relative value trades creates the potential for distortions, according to the strategists. "The sovereign CDS basis might flex as investors adjust to the new information, but we think there are structural reasons for the basis to remain wide. We also think that as different CDS markets attract different types of investors, the market impact will not be uniform," they add.

The strategists also remain unconvinced by some of the compromise legislation that seeks to permit CDS trading for short periods under certain market conditions.

CS

CMBS

NPL CMBS hits the market

The first US non-performing CMBS in over a decade - Rialto Capital series 2012-LT1 - has hit the market. The US$132m transaction is collateralised by 271 mortgage loans securing 266 properties, 11 unsecured loans and 38 REO properties.

The total unpaid principle balance (UPB) of the loans and properties represented in the pool is US$526.1m. The sponsor - Rialto Capital Management (RCM) - purchased the assets for approximately US$224.1m. The underlying mortgage loans comprise a mix of performing loans (accounting for 27.6% of the purchase price), non-performing loans (58.6%) and REO properties (13.8%).

Of the CRE assets, around 96.3% are secured by standard property types prevalent in other CMBS transactions, including hotel, retail, office, multifamily, industrial, self storage and assisted living facilities. The remaining 3.7% of the CRE assets are more esoteric property types not typically securitised in other CMBS.

The deal consists of a single class of notes, provisionally rated triple-B minus and Baa3 by Fitch and Moody's respectively. JPMorgan and Wells Fargo are placement agents.

Unlike traditional CMBS structures, all collections will be aggregated and applied to a single waterfall, and there are no principal and interest advancing requirements. Liquidity is provided by two US$4m reserves to fund shortfalls in interest and working capital payments. Additionally, the asset manager is required to advance certain transaction-level operating expenses of the issuers and property protection payments.

Moody's notes that proceeds from liquidations of the resolved loans backing the securities will generally used to pay down rated debt before returning capital to the sponsors, thereby incentivising sponsors to execute timely and efficient resolutions. A credit positive for investors is that much of their principal is expected to be returned through the easier and quicker-to-resolve cases, while the slower-to-resolve cases will provide the return of equity to the sponsor, the agency adds.

But Fitch points out that the data available on the deal was limited compared to typical CMBS. The agency says it was provided with a comforted accountant's tape, two-page asset plans for every asset and third-party reports for most assets. For most assets, detailed historical performance, operating statements and rent rolls were not available; thus, it relied heavily upon third-party data in its recovery value estimates and inspected a significant portion of the assets.

The portfolio will be managed by Rialto Capital Advisors. Prior to securitisation, the assets were owned by Rialto Real Estate Fund in separate subsidiaries that held the loans and the REO. In conjunction with the transaction, the seller will sell the equity in the subsidiaries to the parent issuer in exchange for 100% of the membership interests in the parent issuer and the securitisation proceeds.

RCM has invested more than US$1.1bn to acquire more than US$5.2bn of primarily commercial real estate loans, assets and securities. It acquired and assumed management of about US$4.7bn in UPB of non-performing and distressed assets from nine different sellers during 2010-2011.

Two initial portfolios totalling more than US$3bn in UPB, purchased in February 2010 in partnership with the FDIC, were an aggregation of more than 5,500 distressed loans from 22 different failed banks taken over by the FDIC. To date, more than 560 loans have been resolved and another 1,650-plus loans - representing US$1.5bn in UPB - have been foreclosed and are now REO or were subsequently sold.

During 2010-2011, RCM acquired an additional US$1.7bn in UPB representing more than 1,600 distressed loans and REO assets - either on balance sheet or within the fund - through negotiated transactions primarily with regional banks.

CS

Structured Finance

Muni bond specialists recruited

Spring Mountain Capital has established a high yield and distressed municipal strategies group and hired a trio of high yield and distressed municipal bonds specialists. Garey Fuqua, Thomas Brophy and Sandra Matthews all join from Ofelia Capital.

Fuqua, Brophy and Matthews have more than 45 years of industry experience between them. Fuqua will lead the team and serve as md and group head of high yield and distressed municipal strategies. Before founding Ofelia he was co-portfolio manager for high yield municipal bonds at Aroya Capital and director at Cohen & Company, where he co-managed a large CDO portfolio.

Brophy becomes portfolio manager and Matthews becomes director of research and credit. Brophy has held various portfolio management roles at Aroya Capital, Neuberger Berman and Columbus Circle Investors, while Matthews also has portfolio management experience in high yield municipal bonds and CDOs.

Structured Finance

Securitised products team reorganised

Dale Westhoff is changing roles within Credit Suisse to focus on Locus, the bank's fixed income analytics platform for interest rate products, derivatives and structured products. He will work alongside George Oomman.

Westhoff previously led Credit Suisse's securitised products research team. He will be succeeded by Roger Lehman, who will take the position alongside his current role as lead CMBS strategist. Meanwhile, senior agency MBS strategist Mahesh Swaminathan will expand his responsibilities to oversee all of the bank's RMBS strategy.

CDS

ISDA DC constituents confirmed

ISDA has finalised which institutions will form the association's five regional Determinations Committees from 30 April. Each committee includes 12 dealer firms, of which two are consultative, and six non-dealer members, of which one is consultative.

The voting dealers for all regions are: Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley and UBS. The consultative dealer for all regions is Nomura and the voting non-dealers for all regions are Citadel, D.E. Shaw, BlueMountain Capital Management, PIMCO and Elliott Management Corporation.

BNP Paribas and Société Générale are voting dealer and consultative dealer, respectively, for the Americas, Europe, Asia ex-Japan and Australia/New Zealand. The regional dealers for Japan are Mizuho Securities (voting dealer) and BNP Paribas (consultative dealer). The consultative non-dealer for all regions is MetLife.

ABS

FFELP SLABS review hits

Moody's has placed on review for possible downgrade the ratings of 189 tranches in 24 US FFELP student loan ABS from eight issuers, following the publication of its new methodology for the sector (SCI 20 January). At the same time, five subordinate tranches in five transactions were placed on review for possible upgrade. Approximately US$7.5bn of securities are affected as a result of the reviews.

Of the tranches under review for possible downgrade, 34 in 19 securitisations from four issuers have increased expected defaults due to the implementation of the new methodology. The underlying pools in these transactions consist mostly of unseasoned Stafford and Plus loans.

While these loans have not experienced significant defaults to date, Moody's expects that a substantial portion of the cumulative expected defaults will occur in the future. Most tranches placed on review are subordinate notes currently rated Aa or A.

155 tranches in five securitisations from four issuers were placed on review for possible downgrade due to the alignment of interest rate scenarios used in monitoring FFELP deals and in initial rating assignment. A portion of the liabilities in the affected securitisations are funded by tax-exempt auction rate securities. The coupon payments for such securities are a multiple of an interest rate index, while the asset yield is equal to an index plus a spread.

As a result, the securitisations will have a disproportionate increase in the coupon payments as compared to the asset yield in a high interest rate scenario, Moody's says. The ratings placed on review are mostly Aaa and A ratings.

The review for possible upgrade is in connection with single-A rated subordinate tranches and is because the sponsor has decided to change the interest rate index on the loans from three-month financial commercial paper to one-month Libor, which has a positive credit impact as it reduces basis risk in these securitisations. In the future, Moody's says it may put on review for possible upgrade additional notes if issuers of certain 2012 and 2011 transactions change the loan index to one-month Libor.

The published methodology mainly differs from the one Moody's proposed in its RFC in that it includes some additional basis risk cashflow assumptions for one-month Libor indexed loans to reflect recently enacted legislation that allows holders of FFELP student loans to change the interest rate index on their loans. The published methodology also differs from the proposed one in how it applies cumulative defaults in its cashflow analysis. The agency has adjusted the default timing curve assumption to reflect it being applied to a different loan balance than originally proposed.

ABS

FFELP SLABS criteria tweaked

Fitch has updated its FFELP student loan ABS criteria. While largely unchanged from the perspective of rating methodology and analytical approach, the updates incorporate several enhancements to the agency's credit analysis.

These include: the revision of basis stress assumptions due to the special allowance payment (SAP) index change; highlighting the US sovereign rating as one of the key rating drivers; incorporating assumptions and stresses for rehabilitation FFELP loans; and consolidation with FFELP ABS surveillance criteria.

The recently passed bill H.R. 2055, the consolidated omnibus spending bill, includes a provision that changes the index upon which SAPs are based from a 90-day double-A financial CP rate to one-month Libor. The change took effect on 1 April.

In light of this change, Fitch has conducted a study of historical one-month Libor and CP and updated its basis risk assumptions. The agency estimates approximately 7% of existing FFELP ABS ratings may be favourably impacted by the changes; however, rating actions will be limited due to other qualitative factors that it considers.

Structured Finance

LBIE judgment welcomed

ISDA has welcomed the Court of Appeal's judgment handed down today in the appeal case of 'Lomas and others v JFB Firth Rixson, Inc and others'.

In the Firth Rixson case, four out-of-the-money corporate counterparties had declined to terminate their ISDA Master Agreements with Lehman Brothers International Europe (LBIE), relying on Section 2(a)(iii) of the ISDA Master Agreement not to make payments that they would otherwise have been required to make to LBIE.

The case was appealed to the Court of Appeal, where it was joined with the appeals of three other cases that raised the same or related issues. The hearing of the appeals took place in December 2011.

Section 2(a)(iii) makes it a condition precedent to a party's payment obligations that no event of default or potential event of default has occurred, and is continuing, with respect to the other party. It effectively 'suspends' the non-defaulting party's obligations to protect it from the credit risk of performing its own obligations to a party that may be unable to perform its own.

In the original case, while confirming that Section 2(a)(iii) is 'suspensive' in effect, Justice Briggs found that payments suspended under Section 2(a)(iii) are extinguished on the final payment date under the transaction. This surprising finding was at odds with the market's expectations and with the wording of the ISDA Master Agreement.

ISDA sought, and was granted permission, to intervene in the appeals to ensure that arguments reflecting the market's understanding of the construction of the agreement were made before the Court.

In a unanimous judgment, in which it essentially confirmed ISDA's position on all significant issues in the appeals, the Court of Appeal not only confirmed that Section 2(a)(iii) is suspensive, but also found that the suspension can be indefinite regardless of the final payment date of the transaction - thus clearly overruling Justice Briggs' finding that payment obligations suspended by Section 2(a)(iii) are extinguished on the last date for payment. As a consequence of this, it also overruled the troubling decision of Justice Flaux in the Cosco case that transactions that have reached their final payment date before the early termination date are excluded from the close-out calculation under the ISDA Master Agreement.

The Court of Appeal also affirmed the lower Court's rejection of the administrators' argument that the operation of Section 2(a)(iii) should be interpreted as being subject to a limitation that it may only be relied upon for a 'reasonable time' and confirmed, in one of the four appeals in which the issues were raised, that Section 2(a)(iii) does not breach the anti-deprivation or pari passu principles of English insolvency law.

The three other cases that raised the same or related issues are: Lehman Brothers Special Financing Inc. v Carlton Communications Limited; Pioneer Freight Futures Company Limited (in liquidation) v Cosco Bulk Carrier Company; and Britannia Bulk PLC (in liquidation) v Bulk Trading S.A.

Structured Finance

Chinese securitisation moves forward

A fully-fledged securitisation market in China looks to be edging closer following the announcement of a new pilot programme that will allow some Chinese commercial lenders to securitise financial assets, according to a new report from law firm Dechert.

Recent news reports indicate that the trial securitisation programme will involve up to US$7.9bn of securitised assets, the report says. "Eligible assets are likely to include, among others, loans to local Chinese government financing vehicles, which would address what has been an area of significant concern. One academic advisor to the People's Bank of China noted that asset securitisation could help Chinese banks transform illiquid assets into liquid assets."

However, Dechert notes that officials of the China Banking Regulatory Commission have expressed concerns about the proposed pilot securitisation programme and suggested that some Chinese banks may try to mix bad loans with good loans in pools to be securitised. Yan Qingmin, assistant chairman of the Commission, suggested that specific guidelines would have to be implemented before the pilot programme could move forward. In any event, it is expected to be a further two years before securitisations directed at foreign investors will be permitted.

Asset securitisations by Chinese banks and other Chinese financial institutions have historically been issued and traded in the interbank market, Dechert adds. "While corporate asset-backed securitisations are likely to be insignificant in the near term, more recent news reports have indicated that China's asset-backed securities and mortgage-backed securities markets could grow to about US$460bn within the next several years," it concludes.

Structured Finance

Basel 3 progress reviewed

The Basel Committee on Banking Supervision has published its second progress report on the implementation of Basel 3 by member countries. The Committee has also commenced a programme of peer reviews to assess whether its members' national rules and regulations are consistent with the globally agreed minimum standards.

These reviews will identify differences that could raise prudential or level playing field concerns. Reviews of the Basel rules adopted by the EU, Japan and the US are already underway.

The final component of the Committee's implementation programme entails a review of the results delivered by national rules to determine whether the outcomes are consistent across banks and jurisdictions. The initial focus is on the calculation of risk-weighted assets in both the banking book and the trading book. These reviews started at the beginning of 2012 and initial findings are expected to be presented to the Committee before year-end.

Structured Finance

Proprietary index valuation service offered

Pricing Partners has launched what it describes as a first-to-market valuation service for proprietary indices. The enhancement is designed to allow firms to price and benchmark their proprietary indices in an accurate and transparent manner.

Offering strategies with high alpha and low beta, proprietary indices have been developed by investment banks to mimic hedge funds - albeit with better transparency, as the trading rules are disclosed to investors. However, in order to guarantee transparency and accuracy, investment banks need independent organisation that can compute and incorporate these sophisticated trading rules and programmes in their valuation platform.

Structured Finance

Aussie, NZ SF macroeconomic drivers identified

S&P has identified five key macroeconomic factors that are most relevant to the credit quality of Australian and New Zealand structured finance securities. These factors are GDP growth, the unemployment rate, house prices, share market returns and the corporate credit risk premium.

The analysis explores the links between macroeconomic factors and structured finance rating movements. S&P began by studying historical correlation, then conducted a sensitivity analysis, as well as best-, expected- and worst-case macroeconomic scenario analyses to estimate the potential impact of the five macroeconomic factors on ratings transitions.

Australia and New Zealand have experienced only mild economic stress during the past 11 years and relatively stable ratings compared with the rating transition of global structured finance securities. The absence of rating performance data during the downturn as a result of this stability limits the ability to estimate how macroeconomic factors would change credit quality during a severe downturn in the countries, based on their experience alone, S&P notes. Consequently, the results show a considerably weaker correlation between the five macroeconomic variables and the rating movements of Australian and New Zealand structured finance securities than seen globally.

The agency believes the rating performance could track more closely to the global experience in an extreme case or its hypothetical worst-case scenario and therefore reference has been made to the global outcome. Under the worst-case scenario, which would be equivalent to the US Great Depression of the 1930s, triple-A ratings on Australian and New Zealand structured finance securities could transition to between the triple-B and triple-C rating category. However, various differentiating factors may mitigate the risk of the ratings on Australian and New Zealand structured finance securities migrating to the full extent estimated globally.

In recent times, Australia has benefitted from the insatiable demand for commodities from its trading partners in Asia, particularly China. Under S&P's base-case scenario for 2012, it expects the country to remain dependent on its mining boom as global economic uncertainties heighten. Overall the agency expects Australian and New Zealand structured finance ratings to remain relatively stable.

CDO

Trups ruling positive for performance

February was generally flat for US bank Trups CDO default and deferral trends, according to Fitch's latest index results for the sector. However, a development took place during the month that may have positive implications for future performance.

A legal suit brought by Trups holders led to a ruling that barred the sale of BankAtlantic to BB&T Corporation under the original terms whereby BB&T was not assuming BankAtlantic Bancorp's Trups. Following the ruling, BB&T amended the terms and proposed to assume the Trups obligations.

BB&T subsequently announced its intent to redeem the Trups in the near future. BankAtlantic has been deferring on its Trups interest obligations since February 2009. Perhaps more importantly, the ruling is likely to have favourable implications on the structure of future bank sales and lead to better terms for Trups holders, Fitch suggests.

This development comes as defaults increased to 16.78% from 16.74%, while deferrals increased to 15.07% from 14.92%. The combined rate now stands at 31.85%.

Two bank issuers defaulted in February, totalling US$15m of collateral in two CDOs. One of the banks was previously deferring.

Through the end of February 199 bank issuers, representing approximately US$6.3bn held across 83 Trups CDOs, were in default. Additionally, 373 deferring bank issuers were impacting interest payments on US$5.7bn of collateral.

CDS

High recovery seen in LCDS auction

The final price for Financiere Gaillon 7 LCDS was determined to be 98 at yesterday's auction. Four dealers submitted initial markets, physical settlement requests and limit orders to settle trades across the market referencing the entity. Deliverable obligations are denominated in euros.

CDS

Bond yield, CDS liquidity correlation continues

The recent rise in Greek government bond yields demonstrates the continuing correlation between liquidity in the sovereign credit default swap market and yields on the underlying cash bonds, according to Fitch Solutions. The agency notes that yields tend to fall when CDS liquidity is high and increase when CDS liquidity falls.

Yields on new Greek bonds, created as part of the recent debt exchange, have risen since they began trading. Some market participants are attributing the rise to the unwillingness of dealers to quote CDS prices while there is a possibility that new contracts could still be technically triggered with reference to the 9 March restructuring credit event.

While fundamental credit considerations are a more important driver of bond yields, the correlation between yields and CDS liquidity highlighted the importance of the latter in the sovereign bond market, especially at times of stress. As fears of a Greek debt restructuring grew last year, this relationship between CDS liquidity and yields remained intact.

Between August and October 2011 liquidity on Greece CDS fell from the 21st percentile of all CDS contracts down to the 84th percentile of all CDS contracts. At the same time, five-year bond yields more than doubled from 19% to 40%.

CDS

Zero recovery for ERC Ireland CDS

The final price for ERC Ireland Finance CDS was determined to be zero at yesterday's auction. Thirteen dealers submitted initial markets, physical settlement requests and limit orders to settle trades across the market referencing the entity.

CDS

EMIR approved

The European Parliament has approved the European Market Infrastructure Regulation (EMIR), which will regulate trade in OTC derivatives. The rules require OTC derivatives to be cleared through CCPs, with all derivative contracts to be reported to trade repositories.

Under the legislation, trade repositories will have to publish aggregate OTC positions according to asset class. They will be monitored by the European Securities and Markets Authority (ESMA), which will also be responsible for granting or withdrawing their registration.

ESMA's role has been strengthened by making it easier for it to block the authorisation of a CCP to operate on the EU's internal market. Binding mediation by ESMA in disputes among national authorities over the authorisation of CCPs has also been provided for.

The clearing obligation won't apply to pension schemes for three years, extendable by another two years plus one, subject to proper justification.

CCPs from third countries will be recognised in the EU only if the legal regime of the third country in question provides for an effective equivalent system for recognition. Further, implementation of the legislation is to be evaluated by the European Commission, including how effectively CCPs are supervised. The Commission will present a report no later than three years after the regulation's entry into force.

CDS

Eircom credit event called

ISDA's EMEA Credit Derivatives Determinations Committee has resolved that a bankruptcy credit event occurred in relation to Eircom Limited. The move follows Eircom Group's application to the High Court in Dublin for its subsidiary to be placed in Irish examinership. The Group says it has entered the examinership process with the objective of placing the company's balance sheet on a stable financial footing for the medium to long term, with reduced debt.

CLOs

Kinetic Concepts targeted

Kinetic Concepts was the most purchased loan by CLOs in 4Q11, according to securitisation analysts at S&P. They suggest that CLOs nearing the end of the reinvestment period likely bid up the short-dated tranche of the loan, which the company issued to target CLOs that have WAL constraints. Additionally, Texas Competitive Electric Holdings and Travelport remained some of the most sold names, but the average sale price of these credits declined from the prior quarter.

CLOs

SME CLO asset defaults

The €6m subordinated bond issued by Gruezi, which forms part of the collateral backing PULS CDO 2007-1, has been classified as defaulted. An investor in residential real estate, the company is facing an increasing number of lawsuits from customers intending to reverse their transactions, claiming formal mistakes during the purchasing process. Given the increasing volume of claims, the company is not expected to have the funds to pay the outstanding interest payments or repay the bond at maturity.

CLOs

Hawker Beechcraft cut hits OC ratios

The downgrade of Hawker Beechcraft to double-C by S&P will cause some CLO overcollateralisation ratios to decline, securitisation analysts at the agency note. The credit is held by about 75 CLOs, with aggregate exposure of US$200m. It represents 3.6% of the pool in one deal and 1% in nine other CLOs.

If the company defaults, it would be the largest loan default in the S&P/LSTA Leveraged Loan Index since 2010. LCD figures suggest that the default rate would jump from 0.21% to 0.51% by amount outstanding as a result.

CLOs

Key person clauses modified

The investment management agreements for the Stone Tower Credit Funding I, Stone Tower CDO, II, III, IV, V, VI, VII and Cornerstone CLO transactions have been amended to modify the definition of 'key person'. The amendment adds the names of two Apollo Global Management executives and one Stone Tower Fund Management (STFM) executive, and removes the names of two STFM executives. It also modifies the definition of 'key person event'.

The amendments are being undertaken in connection with the recently-announced acquisition by Apollo and its subsidiaries of Stone Tower Capital (SCI 16 December 2011). Upon the completion of the acquisition, STFM will become an indirect subsidiary of Apollo and will continue to serve as the manager on the affected deals.

Moody's has determined that the amendments will not cause the current ratings on the notes to be reduced or withdrawn.

CMBS

CMBS delinquency rate jumps

The US CMBS delinquency rate jumped by 31bp in March to 9.68%, according to Trepp. The value of delinquent loans is now US$58.1bn.

Newly delinquent loans - accounting for over US$5bn in total - put 91bp of upward pressure on the rate. Multifamily and office loans were the worst performing property types, with each suffering significant losses.

The office delinquency rate rose by 37bp, setting a new all-time high of 9.41%. The hotel delinquency rate dropped by 42bp and was the only major property type to improve.

For the second straight month, loss resolutions were relatively modest, Trepp notes. At about US$1bn, the number was lower than it has been in recent months.

The removal of these loans from the delinquent loan category attributed about 15bp of downward pressure on the delinquency rate. Loans that were cured in March put an additional 43bp of downward pressure on the rate.

CMBS

Liquidated loan volume remains muted

The volume of liquidated CMBS conduit loans remained muted in March, according to Trepp, just one month after posting the lowest total since November 2010. At US$995m, liquidations were about 23% below the 12-month moving average of US$1.3bn per month. Since the beginning of 2010, special servicers have been liquidating at an average rate of about US$1.08bn per month.

In March, liquidations came from 95 loans, compared to 93 loans liquidated in February. The 12-month moving average is 150 loans per month.

The average loan size for liquidated loans was US$10.5m in March. Over the last 12 months, the average size of liquidated loans has been US$8.6m, Trepp notes.

Losses from the March liquidations totalled about US$316m - representing an average loss severity of 31.77%. This is up by 6.22% points from February's 25.55% reading. However, the March loss severity reading is well below the average loss severity of 42.54% over the last 27 months and also below the 12-month rolling average of 43.51%.

CMBS

April set for large maturity volume

Fitch reports in its latest European CMBS bulletin that with another large volume of maturities coming due in April (23 loans accounting for €2.2bn), servicers will yet again be put to the test. Almost 60% of loans maturing this month are serviced by Capita Asset Services.

To date, 430 Fitch-rated EMEA CMBS loans have matured since the onset of the global financial crisis in 2008. Capita and Hatfield service most of these.

The trend of infrequent repayments continues: over two-thirds of the maturity defaulted loans serviced by these firms remain outstanding (by exit loan balance). Other servicers have much smaller volumes of matured loans in work-out.

Vintage is a key differentiating factor determining performance of maturing loans, Fitch notes. Most loans originated in 2004 or earlier years have repaid in full (80% by exit loan balance). These loans typically had greater equity at maturity because of lower LTV practices and lower net value declines.

Originated at the peak of the market, the majority of 2006 and 2007 vintage loans that have reached their maturity dates are still outstanding, however. This excludes any loans that previously prepaid prior to maturity. On the whole, LTVs are too high for them to be refinanced outright and in some cases negative equity rules out sponsor cooperation, Fitch says.

Fitch's Maturity Repayment Indices showed little movement during March, as the only maturing loan - the small-balance Zeloof Partnership loan securitised in Victoria Funding (EMC-III) - successfully redeemed. The prepayments of Immeo Residential Funding No. 2 and Opera Germany No. 1 will not affect the repayment index as the underlying loans prepaid more than six months before their maturity dates.

CMBS

Best Buy CMBS exposure analysed

Electronics retailer Best Buy has announced that it will close 50 big box stores in the US and shift to a business model emphasising smaller stores selling mobile phones, tablets and e-readers. Morningstar has released a report detailing CMBS exposure to the retailer.

News of the restructuring came as Best Buy reported its quarterly earnings: the retailer reported a fiscal fourth quarter net loss of US$1.7bn, compared to net income of US$651m for the prior-year period. The closures are scheduled to occur before end-2012.

Morningstar identified 318 commercial properties on its database securing 309 CMBS loans with an unpaid principal balance of about US$8.3bn with exposure to Best Buy as a tenant. The DSCR for 39 loans (representing 13% of the collateral) is less than 1.1x, including 20 loans (8%) with DSCRs less than 1x. Of the loans, 68 (25%) are currently on the Morningstar watch list, including 11 loans (6%) that are specially serviced, with projected losses of about US$78m on eight loans.

Best Buy occupies more than 20% of the GLA at 209 properties, more than 50% at 118 properties and 100% of the GLA at 86 properties. Despite the fact that the retailer will continue to honour its lease obligations, co-tenancy clauses for other tenants may enable such tenants to pay reduced rent that in-turn will negatively affect property revenue and could increase default risk - especially for those loans that have a DSCR hovering around 1.1x or less.

Increased maturity default risk is another consideration, according to Morningstar. Refinancing is jeopardised in situations where a Best Buy lease expires before the loan matures and the borrower is unable to re-lease or sub-lease the space. In cases where a Best Buy lease extends beyond the loan maturity date, lenders will be less willing to accept the risk of the borrower re-tenanting the vacant space.

Morningstar found 10 properties where Best Buy's lease expires in 2012 and another 16 properties with 2013 lease expirations. Within the 2012 lease expiration group, one such property secures a loan that also matures in 2012, while two properties with 2013 lease expirations secure loans that also mature in 2013.

CMBS

Elevated CRE liquidation activity to continue

Auction.com has released property-level details for two more commercial note/REO auctions, scheduled for the beginning of April. This comes after nearly US$1.5bn in auctions in February and March (see SCI CMBS Loan Events database).

Of the loans up for bid, MBS analysts at Barclays Capital have identified about US$312m that are securitised in CMBS. Among the large loans scheduled to be auctioned in April are the US$27.1m Philly Self Storage Portfolio in BACM 2007-3 and the US$27mn 1025 Country Road office building in CSMC 2007-C1.

The dispositions focus on the Northeast (New York, New Jersey and Maryland) for the 4 April auction and the southern states (Texas, Lousiana, Arkansas and Oklahoma) for the 12 April auction.

Meanwhile, some results from the 6-9 February auctions have begun to trickle into CMBS remittance reports. Based on the limited data available, the Barcap analysts note that suburban office properties up for bid have recorded 60%-70% severities, while multifamily properties have expectedly performed better, recording losses of 15%-20%.

The largest loan in the 5 March auction - the US$63m Empirian Chesapeake multifamily property securitised in COMM 2006-C8 - was reportedly sold for US$55m, implying a loss severity of 13%.

In addition to Auction.com, loans are being offered through Mission Capital and DebtX. As such, elevated liquidation activity is expected to continue in the coming months.

CMBS

Retail asset values impact Canary Wharf deal

Songbird's latest results provide updated valuations and LTV ratios for the Canary Wharf CMBS. The LTV ratio in the securitisation improved to 72.5% from 73.7% and, after adjusting for amortisation over the year, this implies a valuation decline of -0.7%.

It is difficult to reconcile this decline with a reported valuation increase of 1% across the seven main investment properties in the securitisation, Barclays Capital MBS analysts note. One potential explanation for the difference could be a substantial fall in the value of the retail assets in the transaction. Occupancy across the properties backing the deal was largely flat for the year.

Risk Management

Counterparty monitoring tool offered

State Street Corporation has launched its entity exposure monitor service, which calculates exposure to particular legal entities that asset managers and asset owners either do business with or have within their portfolios. The offering includes dashboards that investors can use to drill down into information about issuer and counterparty risk across all asset classes. It also features limit-setting and alerting capabilities that alert investors regarding overexposure to a particular legal entity.

RMBS

Strong performance for new US RMBS

The early performance of recently issued US RMBS transactions has been strong thus far, reflecting the high credit quality of the underlying mortgage pools, according to Fitch. Only a single borrower is delinquent of the approximately 1,800 newly-originated prime loans securitised in five Redwood Trust private-label transactions since the start of 2010. The agency expects the status of the single delinquent borrower to be resolved quickly due to an LTV ratio of approximately 50% and verified liquid reserves in excess of the loan amount.

Over the past year, a relatively small number of loans have missed payments within the transactions and all were resolved by the following month. Fitch believes the missed payments to date have generally been due to non-credit related issues, such as delays in pending refinances or confusion over the application of a curtailment payment.

Prepayment rates of the loans within the mortgage pools have generally been faster than initially expected due to the historically low mortgage rate environment. To date, approximately 75% of the loans issued in 2010 and 30% of the loans within the first pool issued in 2011 have already repaid in full.

The relatively fast prepayments have modestly affected the composition of the credit attributes in the remaining mortgage pools, Fitch notes. Relative to the initial pools, remaining borrowers have smaller loan amounts, lower credit scores and higher LTVs.

However, all compositional changes have been relatively minor to date. As such, the agency believes that the prepayments haven't resulted in a material change in credit risk in the remaining pools thus far.

Continued rapid prepayments may result in some adverse selection in the remaining mortgage pools, although structural features should help mitigate that risk. In addition to subordination floors designed to mitigate tail-risk as pools pay down, the shifting-interest principal distribution of the transactions has resulted in a material increase in credit support when measured as a percentage of the remaining mortgage pool.

The credit enhancement percentage for the senior class of the 2010 transaction has increased from 6.5% initially to over 18% today. Similarly, for the first pool in 2011, the senior class credit enhancement has grown from 7.5% to 10.5%.

RMBS

DLJ RMBS credit enhancement 'insufficient'

Credit Suisse is in the market with a US$730.44m prime RMBS - CSMC Trust 2012-CIM1 - backed by mostly seasoned first-lien, fixed-rate mortgage loans secured by single-family residences. Fitch believes, however, that the credit enhancement amounts indicated for the transaction are insufficient to reach the proposed ratings - particularly at the triple-A level.

The agency was asked to provide feedback on the deal, but was ultimately not asked to rate it due to its more conservative credit stance. Specifically, Fitch's analysis indicated that credit enhancement would need to be approximately 9.75% to achieve a triple-A rating versus the transaction credit enhancement level of 8%. In addition, all subordinate classes from double-A to double-B have credit enhancement that is lower than the agency's expectations.

Fitch explains in a non-rating action commentary that although it recognises that the pool is backed by high quality mortgage collateral, the agency concluded that the transaction contained relatively greater credit risk than comparable transactions it has rated over the past year. The agency's view was also influenced by the review of third-party due diligence results, which identified a substantial number of property value adjustments.

Of the collateral, 82% of the loans were originated by MetLife Home Loans and the remainder sourced by Quicken Home Loans Inc (accounting for 11%), PHH Mortgage Corp (7%) and Dubuque Bank (less than 1%). At origination, the loans were supported by considerable equity in properties that are geographically diversified across state and metropolitan areas.

In addition, Fitch points out the transaction does not provide for binding arbitration to resolve breaches on the MetLife-originated loans. While acknowledging the financial strength of the provider's parent, the agency believes that the lack of this provision or an alternative could result in extended resolution timelines and higher costs, should MetLife decide to contest repurchase requests. Other concerns - such as MetLife's limited operating history, MERS recording and the transfer of servicing for the deal's first distribution date - also factored into Fitch's analysis.

The transaction is rated by DBRS and S&P.

RMBS

Aire Valley nears NAT

The latest investor report for Aire Valley, Bradford & Bingley's UK RMBS master trust, indicates that it could start to wind down in 2Q12. The transaction will breach its non-asset trigger (NAT) and begin sequential amortisation when the outstanding collateral balance falls below £10.7bn. The balance stood at £10.8bn this month.

RMBS

High participation seen in Spanish tender

Bankia's Spanish RMBS tender offer - comprising 17 tranches over 12 CAJAM, BCJAF and BCJAM transactions - has resulted in a higher take-up than even the bank anticipated. Bankia had offered to purchase up to a maximum nominal value of €1bn via an unmodified Dutch auction, but investors tendered €2.38bn across all of the tranches, prompting it to repurchase a total of €1.37bn.

"Contrary to previous tender offers seen this year, investor participation was far better," ABS analysts at Barclays Capital note. "Given the performance concerns over many Spanish RMBS transactions and in particular over the higher LTV levels seen in the Caja Madrid transactions, it is no surprise that investors took the opportunity to reduce their exposure to these transactions. Even if these bonds were held in legacy books, investors found a price at which both they and Bankia were willing to trade."

RMBS

Royal Decree to have divergent effects

The recent Royal Decree will result in a higher incidence of payment in kind arrangements in the Spanish mortgage market, whereby banks take ownership of the property and borrowers' mortgage loan obligations are terminated. However, the impact on securitisation transactions remains unclear, Fitch says.

The agency believes that the decree will produce two distinct and opposite effects on the Spanish mortgage market. On one hand, repossession data from Fitch-rated RMBS transactions indicates that 'deed in lieu' arrangements are resulting in lower loan losses than those observed in traditional auctions. However, the scheme set out in the Royal Decree could also hurt performance by incentivising borrowers to 'hand over the keys', especially if they are facing a situation of negative equity, and thereby cut off banks' access to additional unsecured recoveries.

The impact on Spanish securitisation transactions remains unclear because mortgage loans in RMBS transactions are fully owned by securitisation vehicles rather than the originating bank, a situation which is not specifically discussed in the decree. In addition, transaction documents will in most cases limit the extent and magnitude of permitted variations to the terms of the underlying mortgages. Fitch will carry out a detailed legal review to assess the impact of the decree and to determine which, if any, transactions may be adversely affected.

The decree RD 6/2012, dated 9 March, enables payment in kind transactions for the most vulnerable households. Households that meet the criteria can enter a multi-step process with the lender.

The first step involves a restructuring or modification of their loan terms. Should this initial stage fail, the lender can opt to grant a haircut, typically 25% of the loan balance. If the lender chooses not to do so, it is obliged to accept a payment in kind transaction if it is requested by the borrower.

An additional provision of the decree permits the borrower to continue occupying the property for up to two years in exchange for an annual rental payment of 3% of the outstanding loan balance at the time when they lost control of the property.