Contents

CMBS

Market in need of direction

European CMBS currently looks cheap, but that is not enough to convince buyers to take the plunge as the secondary market remains quiet. BWIC activity has become more sporadic, although increased activity in the primary market could provide a boost.

"The week before Easter was very quiet. Before that, there had been a lot of BWICs, but over the last week or two those have really stopped," reports one CMBS trader.

He continues: "We did some bits and pieces, mainly in seniors, but overall there have been very few trades. There is no conviction from clients and there are not any forced sellers or anything like that right now."

While the start of this week was also quiet, the trader notes that there was a large BWIC yesterday which he says traded "surprisingly well". "There were fairly big sizes on seniors in that bid-list. There are a couple more BWICs out tomorrow with some mezz bonds and some more seniors, so we will see how those are received, but right now it feels very quiet," he adds.

What makes the situation slightly strange, according to the trader, is that CMBS is actually looking pretty attractive at present. But that is not proving to be enough to get people buying. He suggests investors may be being put off by events on the other side of the Atlantic.

"Nobody wants to make a call right now; they just want to sit and wait to see where other markets are heading. There has been a bit of a sell-off in the US CMBS market and I think that is having an effect. Obviously it is not the same market, but it is the same people who look at it and make comparisons. I think that makes people a bit hesitant to buy paper," he explains.

What may tempt buyers is multifamily CMBS, which is seeing some interest. "There have been some portfolio trades for German multifamily lately, so CMBS with multifamily exposure is still interesting. Of course, with that, people prefer to look down the stack to pick up some yield," the trader notes.

Finally, he says he has heard rumours about new issuance hitting soon, which could give the whole market a lift. "If there are clean deals, then there is certainly demand, so that might be something to wake the market up a bit. Until that happens or something else changes, though, nobody is taking a direction on anything."

JL

Structured Finance

SCI Start the Week - 16 April

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

Pipeline
A few new deals hit the pipeline last week only to price by Friday. Still standing at the end of the week were two RMBS transactions (Saecure 11 and A$696.75m SMHL Series Securitisation Fund 2012-1). Finally, Oxford Finance is also in the market with Oxford Finance Funding Trust 2012-1.

Pricings
It was a busier week for pricings. Five auto deals printed, along with four credit card ABS, two RMBS, a CMBS, an ABS and an ILS.

The auto deals were US$1.1bn AmeriCredit Automobile Receivables Trust Series 2012-2, US$2.37bn Bank of America Auto Trust 2012-1, €700m Bumper 5 UK, US$235m DT Auto Owner Trust series 2012-1 and US$1.5bn Toyota Auto Receivables 2012-A Owner Trust.

The largest credit card deal was US$1bn Discover Card Execution Note Trust 2012-2. It was joined by US$750m Penarth 2012-A, US$412.5m World Financial Network Credit Card Master Note Trust Series 2012-A and US$496m GE Capital Credit Card Master Note Trust Series 2012-3.

The US$1.25bn Holmes Master Issuer Series 2012-2 and A$744m IDOL Trust Series 2012-1 accounted for the RMBS issuance, while the CMBS was US$1.313bn FREMF 2012-K707 Mortgage Trust. The ABS that printed was US$400m Textainer Marine Containers series 2012-1 and the ILS was US$130m Akibare II.

Markets
Easter resulted in the European secondary market seeing lighter volumes than usual, although with "little of the weakness seen in the broader credit markets", say JPMorgan ABS analysts. Five transactions have been sold to investors in the European ABS primary market over the last couple of weeks, albeit with some on a private basis.

A quiet European CMBS market retained appetite for multifamily assets, as SCI reported on Thursday. BWICs have become somewhat hit-and-miss, although appetite for multifamily remains strong and fresh primary issuance is expected to provide a boost.

Although Maiden Lane III concerns are decreasing, the US CMBS market is still volatile. "Up and down, up and down; the CMBS market remains on a roller coaster ride but unlike an amusement park version, there does not appear to be anyone behind the control board," note Deutsche Bank CMBS analysts. BWIC volume is decreasing, with 25% last week not trading.

Uncertainty is also dominating the US RMBS market, according to securitisation analysts at Bank of America Merrill Lynch. It was a mixed week for the agency market as Fannie 6s outpaced Treasury hedges by 11 ticks, but performance at the other end of the stack was more subdued. While there was a bit of activity in the second half of the week for non-agency RMBS, the analysts note prices are weakening and expect that trend to continue.

Recent new issue US CLOs have pushed year-to-date supply above US$8bn, with primary spreads for triple-As tightening in to 125bp over Libor, report JPMorgan CLO analysts. 

Deal news
• The US$81m Grand Traverse Mall loan securitised in GECMC 2005-C4 has taken a US$19m loss. The loss looks to be due to a modification associated with Rouse Properties' purchase of the GGP-sponsored asset in February.
• The US$246m Atrium Hotel Portfolio loan has been put on Morningstar's watchlist because of worryingly low debt service coverage and the expiration of the loan's IO period. The loan is the largest in the ML-CFC 2006-3 transaction and represents 11% of the pool by unpaid balance.
• Apollo Capital Management (formerly Stone Tower Debt Advisors) has been retained to act as liquidation agent for Millstone II CDO. The collateral will be auctioned in six public sales in New York, four of which will take place on 19 April and the remainder on 26 April.
• VCAP Securities has been retained to act as liquidation agent for Manasquan CDO 2005-1. The collateral will be auctioned in two public sales taking place on 19 April.
• Fitch has downgraded 145 RMBS classes and affirmed one, following the transfer of certain mortgage servicing rights (MSRs) from Saxon Mortgage Services to Ocwen Financial Corporation. At the same time, all classes were removed from negative watch and assigned a negative outlook.
• Performance indicators for Portuguese mortgage loans securitised in RMBS transactions are misleading, says Fitch. The agency notes that originating banks' support for borrowers is masking the trust extent of past underperformance.
• Fitch has downgraded three classes of notes from the Preps 2005-2 and Preps 2007-1 SME CLO deals, due to the increased balance of the principal deficiency ledger (PDL). At the same time, the agency has affirmed the transactions' remaining three classes of notes, as well as the ratings of Preps 2005-1 and Preps 2006-1.

Regulatory update
• FHFA acting director Edward DeMarco has commented on the use of Treasury incentives to forgive principal on underwater borrowers, affirming a preference for forbearance over forgiveness. The announcement effectively rules out any principal forgiveness for GSE loans.
• A recent AFME survey of securitisation investors shows that the proposed Solvency II capital charges are likely to cause a permanent drop in securitisation funding, which could seriously reduce future growth in Europe. AFME is urging policymakers to delegate the assessment of securitisation capital charges to the EIOPA Technical Expert Group, or alternatively conduct further research.
• The Basel Committee has published the results of its Basel 3 monitoring exercise. A total of 212 banks participated in the study, including 103 Group 1 banks (those that have Tier 1 capital in excess of €3bn and are internationally active) and 109 Group 2 banks (all other banks). Under the study, average common equity Tier 1 capital ratio (CET1) of Group 1 banks was 7.1%, compared with the Basel 3 minimum requirement of 4.5%.

Deals added to the SCI database last week:
Akibare II
Ally Master Owner Trust series 2012-2
BAA Funding
Blue Danube 2012-1
Bumper 5
CSMC Trust 2012-CIM1
Doral CLO II
ECP CLO 2012-3
Freddie Mac SPC series K-501
Galaxy XII
Gemgarto 2012-1
GoldenTree Loan Opportunities VI
GreatAmerica Leasing Receivables Funding series 2012-1
Pelican Re
Penarth Master Issuer series 2012-1
Performer Financing 2012-1
Private Driver 2012-1
Private Driver 2012-2
Prudential Covered Trust 2012-1
Rayo Finance Ireland 1 (tap)
Sandown Gold 2012-1
Sequoia Mortgage Trust 2012-2
SLM Private Education Loan Trust 2012-B
STORM 2012-II
World Financial Network Credit Card Master Note Trust series 2012-A

Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-3; BACM 2005-4; BACM 2005-5; BACM 2007-5; BSCMS 2006-PW14; CD 07-CD4, WBCMT 05-C17 & CGCMT 06-C4; CGCMT 2007-C6; CSFB 2006-TFL2; DECO 2007-E6A; EMRF-2007-GIBR; EPICP DRUM; EURO 24A; FHSL 2006-1; GECMC 2005-C4; JPMCC 2005-CIBC12; JPMCC 2006-LDP9; JPMCC 2007-FL1; JPMCC 2008-C2; LBFRC 2007-LLFA; LBUBS 2007-C7; MESDG CHAR; MLCFC 2006-3; MSC 2005-HQ6; MSC 2007-XLF9; MSCI 2007-IQ16; OPERA FR-01; OPERA GER1; REC 3 ; TITN 2006-3X; TITN 2006-CT1A; TMAN 7; UBS 2007-FL1; Various (Best Buy closures); Various (New auctions); VEST 2; and WB 2007-C32.

Top stories to come in SCI:
US CMBS underwriting trends
Credit hedge fund activity
Counterparty risk management survey
Outlook for US private label RMBS
Structured credit recruitment trends

CMBS

German multifamily exposures eyed

Of the large German multifamily CMBS portfolios, only Grand will extend, suggest ABS analysts at Deutsche Bank.

The analysts cite GAGFAH's recent upbeat conference call on both the €1.1bn WOBA loan (split equally between WINDM IX and DECO 2007 E5X) and the €2.2bn GAGFAH 1 loan (securitised in GRF 2006-1), which mature in 2013, as a basis for this view. They also point to the recent IMMEO refinancing, which demonstrated that good quality portfolios with strong sponsors can attract high lending volumes.

Indeed, among the analysts' favoured exposures in the German multifamily space are presently the WOBA loan in DECO 2007 E5X and WINDM IX. Recent BWIC covers in the mid-90s on the A1 note in WINDM IX suggest that the market is pricing in material risk of the loan not repaying by its May 2013 maturity date. They believe that this scenario is unlikely.

Further, they favour TITN 2006-2, as far down the capital structure as the C note. The analysts believe that the recent move by the sponsor of the Margaux and Petrus loans to contact noteholders (see SCI CMBS Loan Events database) may be the precursor to a tender offer in the future. The liquidation of the two other loans in the deal (Labrador and Velvet) would be an additional prerequisite for any tender.

Finally, the analysts favour Grand junior and mezzanine notes. However, they admit that it is difficult to build up volume of such paper, potentially because of an entity related to the sponsor having sizeable holdings of the C, D and F notes.

CS

ABS

MBS, ABS heads moving on

Gleacher & Company Securities' head of MBS, ABS and rates and head of trading for MBS, ABS and rates are both leaving the firm. Robert Fine and Robert Tirschwell will each remain with the company on a temporary basis. Gleacher says it is considering both internal and external candidates for the positions.

Structured Finance

Senior credit advisor enlisted

Richard Whittle, former head of exotic credit derivatives at ABN Amro, has joined Lazard in London. He joins as senior advisor to the firm's structured credit advisory team.

Lazard's advisory team was founded last year and is led by Alan Patterson (SCI 9 June 2011). Whittle was at UBS before ABN Amro, where he spent five years before moving on in 2008.

Structured Finance

Southport names new cio

Michael Morrow has joined Southport Lane as cio. He also becomes president of the firm's asset management unit, Southport Lane Advisors.

Morrow takes responsibility for developing and managing the asset allocation strategies for all of Southport's portfolio companies as well as overseeing the firm's fixed income group. He joins from Intellectual Ventures, where he was structured finance director, and has previously worked at JPMorgan, Tahoma Capital and Microsoft.

CLOs

New Europe credit head named

Doug Henderson has joined Oak Hill Advisors in London as partner. He joins from Goldman Sachs and will lead the firm's European performing credit business.

Henderson succeeds Richard Munn, who is stepping down from his full-time commitment to the firm to become a senior advisor. Henderson was chairman of the European credit finance group in Goldman's investment banking division, responsible for the firm's structured finance, loan, high yield, restructuring and real estate finance businesses. Before Goldman he co-founded Merrill Lynch Asset Management's first non-investment grade loan fund.

CLOs

Newly-formed credit shop strengthened

Stephen Hickey has joined CVC Credit Partners (CCP) as member of the management committee, partner and chief risk officer. He will be based in New York and have global responsibilities, including chairing the newly-formed global portfolio committee, overseeing investments and the development of the firm's business and products.

Hickey joins from Goldman Sachs, where he spent 20 years in various senior roles, including global head of leveraged finance, co-head of global loans, member of the firm-wide risk and firm-wide capital committees and head of loan sales and secondary trading. Chris Stadler, managing partner of CVC Capital Partners, notes that Hickey's senior sourcing, risk management and investing expertise in the US and Europe across products and cycles will be "integral to the development of our business as we adapt to these changing markets for corporate credit". The expansion of the firm's credit business is expected to be synergistic to its private equity business.

The move follows the successful combination of CVC Cordatus Group and Apidos Capital Management, which was announced in January (SCI 4 January). Hickey will lead the business alongside Marc Boughton (ceo), Jonathan Cohen (chairman) and Chris Allen (group coo). Gretchen Bergstresser and Jonathan Bowers have been named senior portfolio managers.

CMBS

CRE trio join new office

Walker & Dunlop has hired three veteran originators for a new office in Fort Lauderdale. Paul Ahmed, David Gahagan and Lance Lehman each join as vp and will focus on financing income producing properties in the southeast region.

The group join from Grandbridge Real Estate Capital, where Ahmed and Gahagan were vps and Lehman was svp. All three specialise in originating and structuring CRE financing and investment sales for all property types.

Insurance-linked securities

ILS lawyer follows colleague

Richard Spitzer has joined Mayer Brown in New York as partner in the firm's insurance finance group and banking and finance practice. He specialises in catastrophe bond offerings, sidecars and other ILS.

Spitzer joins from Dewey & LeBoeuf, where he was corporate finance partner. His arrival follows the recent appointment of Stephen Rooney, who also left Dewey for Mayer's New York office this month (SCI 10 April).

Structured Finance

LCR, NSFR impact estimated

The Basel Committee has published the results of its Basel 3 monitoring exercise. A total of 212 banks participated in the study, including 103 Group 1 banks (those that have Tier 1 capital in excess of €3bn and are internationally active) and 109 Group 2 banks (all other banks).

The monitoring exercise results assume full implementation of the final Basel 3 package based on data as of 30 June 2011. Under the study, average common equity Tier 1 capital ratio (CET1) of Group 1 banks was 7.1%, compared with the Basel 3 minimum requirement of 4.5%.

In order for all Group 1 banks to reach the 4.5% minimum, an increase of €38.8bn CET1 would be required. The overall shortfall increases to €485.6bn to achieve a CET1 target level of 7%; this amount includes the surcharge for global systemically important banks where applicable.

For Group 2 banks, the average CET1 ratio stood at 8.3%. In order for all Group 2 banks in the sample to meet the new 4.5% CET1 ratio, the additional capital needed is estimated to be €8.6bn. They would have required an additional €32.4bn to reach a CET1 target 7%.

The Committee also assessed the estimated impact of the liquidity standards. Assuming banks were to make no changes to their liquidity risk profile or funding structure, as of June 2011, the weighted average liquidity coverage ratio (LCR) for Group 1 banks would have been 90% while the weighted average LCR for Group 2 banks was 83%. The aggregate LCR shortfall is €1.76trn, which represents approximately 3% of the €58.5trn total assets of the aggregate sample.

The weighted average net stable funding ratio (NSFR) is 94% for both Group 1 and Group 2 banks. The aggregate shortfall of required stable funding is €2.78trn.

Banks have until 2015 to meet the LCR standard and until 2018 to meet the NSFR standard.

Structured Finance

Minimal EMEA ABS impairments recorded

Moody's says that EMEA ABS has performed as expected since the onset of the financial crisis. Between 1January 2007 and 31 December 2011, the migration of investment grade securities to impairment/default was minimal.

Twenty-three EMEA ABS tranches rated investment grade at closing across 14 transactions became impaired during the period, amounting to 1% of 2,127 investment grade EMEA ABS tranches and 2% of 687 transactions issued. Only two of the 14 transactions experienced a principal loss. Moody's has not downgraded any senior tranche to Ca or C since the onset of the crisis.

Poor collateral performance, combined with low credit enhancement, was the overwhelming driver of impairment. Poor collateral performance because of the deteriorating macroeconomic situation in the euro area, combined with insufficient credit enhancement, was the reason for impairment in 12 transactions. Two other transactions became impaired following the bankruptcy of the seller/servicer, DSB, because of deteriorating performance.

Nine of the 12 transactions that became impaired because of poor collateral performance are Spanish. Two are Italian and one is Portuguese.

The two transactions that experienced principal losses were in the Italian Ares Finance series. They defaulted because of problems with the timing of recoveries for a portfolio of non-performing loans.

CDO

Positive CDO ratings trend noted

S&P upgraded 750 classes of structured credit notes in 1Q12, over a 75% jump from the 426 upgrades recorded in the previous quarter. Upgrades of US CLOs contributed significantly to the overall increase.

In terms of downgrades, the 241 S&P took is the lowest number in any quarter since 2007. The rating activity boosted the overall upgrade-to-downgrade ratio to 3.1 for the quarter. Most notable among the sectors, synthetic CDOs saw fewer downgrades this quarter than in the past four years.

S&P raised its ratings on 607 tranches from 148 US CLOs during the first quarter. The segment had its second-best quarter in terms of upgrades, just 90 short of the record 697 during 1Q11.

Of the upgraded transactions, 60% are still in their initial reinvestment period. S&P returned 49 of the total raised ratings to triple-A following post-issuance downgrades. Further, it upgraded 125 CLO notes to levels higher than their original rating.

On average, the agency raised CLO ratings by 2.21 notches during the quarter. Breaking this down further, investment grade ratings were raised by an average of 1.75 notches and speculative grade ratings by an average of 3.14 notches. CLOs continue to benefit from two key factors: decreasing default rates and improving credit trends among underlying corporate entities.

Meanwhile, upgrades among US synthetic CDOs dropped to 95 during 1Q12 from 156 in 1Q11. In line with current trends, the upgrades benefited corporate-backed synthetic CDO transactions. The drop in performance among synthetic CDOs is attributed to recent credit events in the credit default swap market, which has eroded existing cushions on rated tranches.

Downgrades also declined among synthetic CDOs, dipping to 88 in Q1, compared with 179 a year earlier. Transactions backed by investment grade corporate names were the primary reason for the trend, a shift from the CMBS-backed transactions that held most of the 2011 downgrades.

At quarter-end, a total of 248 ratings from 55 CLO transactions were on credit watch positive, indicating another favourable quarter for the asset class.

CDO

Trups CDOs reviewed on criteria update

S&P has published updated assumptions and methodology for rating US Trups CDOs, following a review of performance of the underlying bank trust preferred securities through the recent economic cycle, as well as certain banking regulatory changes. As a result, the agency has placed its ratings on 90 tranches from 66 Trups CDOs - representing an aggregate issuance amount of US$17.88bn - on credit watch with positive implications.

The criteria acknowledges that there is limited performance history for trust preferred securities in stressed conditions and much of the information available comes from the most recent downturn. During that time, the banks that issued the trust preferred securities held in bank Trups CDOs had a significantly higher rate of deferral than the issuers in the overall US banking sector.

S&P believes this performance data indicates potential adverse selection bias in the composition of the Trups CDO pools. Consequently, for purposes of analysing the currently deferring securities held by each of the Trups CDO transactions, the updated criteria provides a range of potential deferral cure (PDC) credit that can be applied as part of the analysis of the CDOs. At present, a PDC credit of 15% is being applied for the currently deferring securities held within S&P's Trups CDOs.

The agency's analysis and review were based on the following observations: fewer banks have deferred payments in recent quarters; approximately 40 banks held by Trups CDOs that S&P rates have cured their deferrals (out of approximately 520 that were deferring); the rate of US bank failures has slowed in recent quarters; the number of troubled banks reported by the FDIC has been reduced; and the unemployment rate in the US has started to improve. In S&P's view, this combination of factors corresponds to the 'medium' deferral cure expectation.

Generally, the criteria revisions reflect the agency's views of:

• The default patterns applicable to the level of economic stress associated with the ratings assigned;
• The recent performance data on bank-issued trust preferred securities held in the collateral pools of the Trups CDOs; and
• The incentive for larger banks to redeem their trust preferred securities due to US regulatory changes that phase out Tier 1 capital credit for such securities.

The criteria for rating US Trups CDOs continues to predominantly apply the basic methodologies, assumptions and modelling parameters currently used to rate corporate cashflow and synthetic CDOs.

S&P notes that the criteria revisions will likely result in upgrades to the senior tranches of many of the bank Trups CDO transactions it rates. Some of the senior-most tranches may move into the single-B and double-B categories, with a small number of tranches currently rated in the single-B and higher rating categories potentially seeing ratings move higher than the double-B rating category.

CDO

ABS CDO liquidation due

Apollo Capital Management (formerly Stone Tower Debt Advisors) has been retained to act as liquidation agent for Millstone II CDO. The collateral will be auctioned in six public sales in New York, four of which will take place on 19 April and the remainder on 26 April.

CDO

Minimal rise for CRE CDO delinquencies

CRE CDO delinquencies rose minimally in March to 13.6% from 13.4% the previous month, according to Fitch's latest index results for the sector. However, the dollar balance of delinquent assets has remained virtually the same as in February. The increased rate is due to the continuing decline in the total collateral balance as a result of realised losses and repayments.

Total collateral is down by approximately 22% from its original fully ramped balance. Most CRE CDOs rated by Fitch have begun paying down their liability structures.

Reinvestment in new assets is minimal, with only seven of the 33 rated CRE CDOs still in their reinvestment periods. Further, of those seven, five are currently failing overcollateralisation (OC) tests and any principal proceeds must generally be used to pay down the senior classes of the transaction.

In total, CRE CDO realised losses to-date are approximately 11% of par. Modelled expected losses on Fitch's portfolio averaged 37.5%, as of each CDO's last review.

As the agency has already anticipated high losses in its reviews as well as considered previously accumulated losses, further realised losses are not expected to impact most CRE CDO ratings. However, ratings on the most junior classes remain subject to volatility as future realised losses may differ from current expectations on specific CDOs.

New delinquent assets in March consisted of five new matured balloon loan interests and two term defaults, Fitch notes. Offsetting these new delinquencies, eight assets were removed from the index in the month - including two modified/extended loans, three formerly repurchased assets and three other assets disposed of at a loss.

CRE CDO asset managers reported approximately US$35m in realised losses in March. The largest loss, which totalled US$20.7m, was a full loss on a mezzanine interest backed by a mall located in Phoenix, AZ. A junior CMBS bond backed by the same asset, and contributed to an unrelated CDO, also realised a full loss.

In March, 31 of the 33 CRE CDOs rated by Fitch reported delinquencies ranging from 1.3% to 58.1%. Additionally, 39% of the rated CRE CDOs were failing at least one OC test.

Also in the reporting period, a CDO suffered an EOD when an A/B OC test failure fell below a minimum level. The controlling class waived the EOD, which otherwise would have necessitated an acceleration vote.

CDO

CDO defaulted obligation declared

A €6m senior bond issued by Geipel, which was purchased by PULS CDO 2007-1, has been declared as a defaulted obligation under the transaction's definitions. The move is in response to the lack of clarity around the company and whether it will meet its payment obligations in the future.

Geipel missed its interest payment for the first time in January 2012. A month later, the manager of the PULS deals - Capital Securities Group - was informed that the company had been deregistered and its assets transferred to a newly-incorporated successor company without knowledge or approval of PULS.

To date, requests for a clarification of the situation have remained unanswered by Geipel. Consequently, the manager has initiated legal action against the company and its owner.

CDS

FMI principles published

IOSCO and the Committee on Payment and Settlement Systems (CPSS) have published three documents that promote global efforts to strengthen financial market infrastructures (FMIs). These are: a report entitled 'Principles for financial market infrastructures'; a consultation paper on an assessment methodology for these new standards; and a consultation paper on a disclosure framework for the standards.

The principles support the G20 strategy to make the financial system more resilient by making central clearing of standardised OTC derivatives mandatory. CPSS and IOSCO members will strive to adopt the new standards by the end of 2012. Financial market infrastructures (FMIs) are expected to observe the standards as soon as possible.

The new standards replace the three existing sets of international standards set out in the core principles for systemically important payment systems, the Recommendations for securities settlement systems and the Recommendations for central counterparties. CPSS and IOSCO say they have strengthened and harmonised these three sets of standards by raising minimum requirements, providing more detailed guidance and broadening the scope of the standards to cover new risk-management areas and new types of FMIs.

Compared with the old standards, the new principles introduce new or more demanding requirements in many important areas, including: the financial resources and risk management procedures an FMI uses to cope with the default of participants; the mitigation of operational risk; and achieving the segregation and portability of customer positions and collateral.

The principles were issued for public consultation in March 2011. The finalised principles have been revised in light of the comments received during that consultation.

Comments on the two consultation documents are invited by 15 June. After the consultation period, the CPSS and IOSCO will review the comments received and publish final versions of the two documents later in 2012.

The CPSS and IOSCO, together with the Financial Stability Board, are also working on guidance for designing resolution regimes for FMIs. This work will be published in the coming months.

CDS

Derivatives valuation workflow supported

SuperDerivatives (SD) has launched what it describes as a next-generation platform for on-demand derivatives revaluation. Dubbed eValueX, the multi-asset platform allows institutions to manage the entire derivatives valuation workflow from file upload to valuation retrieval. The service is designed to enable users to view the market data used in the calculation of each trade and connect directly to the SDX front office platform for further investigation, scenario analysis and remediation.

CDS

Swaps reporting tool offered

Sapient Global Markets has launched CMRS, designed to help clients achieve a unified view of compliance across systems, asset classes and geographies. The system addresses OTC swaps data reporting requirements under Dodd-Frank Title VII and the European Market Infrastructure Regulation. It allows firms to collate data from disparate systems, translate it into the destination message format, deliver it directly to regulators and receive acknowledgement messages back from swap data repositories.

CDS

Hawker Beechcraft auction called

ISDA's Americas Determinations Committee has determined that a failure to pay credit event has occurred in connection with Hawker Beechcraft Acquisition Company, following the firm's entry into a forbearance agreement with lenders. An auction will be held in due course to settle LCDS on the entity.

CDS

Bank CDS spread differentiation noted

The earnings season has begun with CDS spreads on two major banks tightening and spreads on another underperforming, according to Fitch Solutions in its latest earnings commentary.

CDS on JPMorgan have tightened overall by 10% over the past quarter, although they exhibited some widening in recent weeks. Fitch director Diana Allmendinger notes, however, that such spread movement is "in line with the broader banking sector". CDS liquidity for JPMorgan increased over that time period, moving up by six rankings to trade in the seventh regional percentile.

Sentiment appears to be more solid overall for Wells Fargo, with its CDS tightening by 25%. CDS on the name have become slightly less liquid over the quarter and finished down two rankings to trade in the seventh regional percentile.

In comparison, Citigroup CDS spreads widened overall by 8% over the past quarter, but by 25% over the previous week. With CDS liquidity for the name now trading up in the second regional percentile, the market appears to be questioning the future direction of the price of credit protection on Citigroup's debt, according to Allmendinger.

CDS

'Positive' quarter for sovereign CDS

CMA has released its 1Q12 global sovereign debt credit risk report, in which it names the top-ten most and least risky sovereigns, as well as the best and worst performers. Overall, the quarter was positive for many sovereigns as the cost of global CDS protection reduced in comparison to last quarter, with many of the least risky sovereigns returning to levels seen before the eurozone debt crisis.

Among the highlights of the quarter was Greece exiting the top-10 risky sovereigns following the restructuring of its debt, being replaced by Cyprus. Portuguese CDS ended a volatile quarter with its spreads approaching 1800bp, while USA spreads tightened by 40%. Spain was the only sovereign not to tighten in the quarter.

CLOs

HCA seeking loan extension

HCA, the fourth largest CLO holding, is launching a loan extension. Securitisation analysts at S&P view the move as a credit negative for some transactions.

HCA is seeking to extend the maturity on term loans maturing in November 2012 and November 2013 to February 2016. Of the 199 CLOs exposed to these loans, 37 mature before the proposed loan extension date and could expose deals to market value risk. S&P estimates that CLOs hold 35% of the 2012 loan and 38% of the 2013 loan.

CLOs

ELLI default rate on negative trend

The S&P ELLI index rose to 5.3% in March from 4.9% in February, based on par amount outstanding, and is now at its highest level since July 2010. European asset-backed analysts at RBS note that the increase in the default rate was driven by a rise in the absolute volume of ELLI constituents falling into distress (the numerator of the default rate calculation), as well as a fall in the total par amount outstanding (the denominator of the default rate calculation), with the latter factor being the greater driver.

A total of 12 issuers defaulted or started the restructuring process over the trailing 12 months ended 29 March, compared with 11 issuers in the previous period ended 29 February. Klockner Pentaplast joined the distress list during the month, following the submission of its debt restructuring proposal. As such, the volume of institutional loan defaults rose by around €300m in March to end the month at €6.7bn.

The total par amount outstanding in the ELLI fell from €126bn in March 2011 to €109bn, as at March 2012. Consequently, as new issue volumes continue to be outweighed by loan redemptions - particularly as the stronger index constituents refinance via the high yield market - the RBS analysts expect the par amount outstanding in the index to shrink further and thus negatively impact the ELLI default rate.

CLOs

Preps CLOs facing refi risk

Fitch has downgraded three classes of notes from the Preps 2005-2 and Preps 2007-1 SME CLO deals, due to the increased balance of the principal deficiency ledger (PDL). At the same time, the agency has affirmed the transactions' remaining three classes of notes, as well as the ratings of Preps 2005-1 and Preps 2006-1.

The downgrades are primarily driven by the additional defaults that have occurred in the transactions since the last review in May 2011. The outstanding balance of the PDL in the Preps 2005-2 transaction has risen to €82.7m from €46.9m during this time. The outstanding balance of the PDL in the Preps 2007-1 transaction has risen to €49.8m from €39.3m.

The increased PDL balance has resulted in a lower outstanding performing pool balance that provides credit protection to the rated notes. The reduced available credit protection is sufficient to cover only a default of the largest obligor in Preps 2005-2 and the two largest obligors in Preps 2007-1 before the senior class A notes are undercollateralised.

The affirmations of the ratings in Preps 2005-1 and Preps 2006-1 are due to the higher available credit protection by means of overcollateralisation. In particular, the outstanding PDL balance in Preps 2005-1 has decreased to €43.2m from €45.2m at last review and the available credit protection is sufficient to provide for a default of the four largest obligors before the senior class A notes are undercollateralised. In Preps 2006-1, the outstanding PDL balance has risen to €48.1m from €43.1m at the last review and the available credit protection is sufficient to provide for a default of the three largest obligors before the senior class A notes are undercollateralised.

In all transactions, the class A notes will become undercollateralised if - following a default of these break-even numbers of largest obligors - the next-largest obligor defaulted.

A key risk in these transactions is the upcoming refinancing risk: all the loans are bullet loans maturing on the same day. To Fitch's knowledge, the companies have not already arranged refinancing. This risk is reflected in the credit rating and maintenance of the negative outlook of all notes rated above triple-C.

CMBS

Opera Uni credit bid voted in

Opera Finance (Uni-Invest) class A noteholders yesterday approved the credit bid option presented by TPG and Patron Capital (SCI passim), following their rejection of the consensual restructuring option. Class B, C and D noteholders voted in favour of the latter proposal, but the resolution required approval by 75% of each class.

Class A noteholders will now receive an immediate cash paydown of 40% of the class A balance, totalling approximately €143.5m (closing costs and other expenses are expected to be up to €7.5m). The remaining balance of new notes is to be paid over a term of four years, with two one-year extension options. The new notes will pay 300bp over Euribor, a PIK interest of 1%, an upfront fee of 0.25% and scheduled amortisation of 2% per annum.

Alternatively, Patron and TPG are offering 75% of par to acquire existing class A holdings from noteholders. Noteholders must submit their decision about receiving this additional cash consideration or the new notes by 24 April.

Following the acceptance of the credit bid option by the class A noteholders, the class B, C and D note balances will be wiped out.

European asset-backed analysts at RBS note: "Although there is considerable leakage of cash in the form of payments to the private equity firms, we believe this is a good outcome for the class A noteholders. While this is certainly a landmark event, we believe it is unlikely that CMBS maturing in the future will be allowed to go this far before restructuring. As such, this is unlikely to be a model for other transactions."

Marty McCarthy, ceo of Valad Europe, says his firm continues to believe that consensual restructuring of future CMBS defaults offers a credible alternative to investors who wish to retain control post-restructuring, while allowing the value of their underlying asset collateral to be maximised and disposed of in an orderly manner. "We look forward to working with other CMBS noteholders in the future, as we have done in the past on the Kefren and ECREL mandates, to provide genuinely innovative solutions to their restructuring needs," he adds.

CMBS

Keops loan repaid

The sale of the final remaining two properties under the Keops loan, securitised in Juno (Eclipse 2007-2), has resulted in the full repayment of the outstanding amount of the senior loan. The loan was outstanding by €13.35m-equivalent - accounting for 3.09% of the pool - before the repayment.

Previously, the sale of 276 underlying properties had been completed successfully through an auction (SCI passim) for a price of Skr4.103bn. Interim payments amounting to Skr3.7bn have so far been made to the senior lender.

CMBS

CMBS LTVs set to increase

The leverage on loans backing upcoming US CMBS conduit transactions is poised to increase, Moody's reports in its quarterly review of the sector. The agency notes that several conduits in its 2Q12 pipeline have collateral pools with average leverage approaching or exceeding 100% Moody's loan-to-value ratio (MLTV).

"While final pool composition is still subject to change, should the more highly levered Q2 transactions be issued as currently constituted, they will see from 50bp to 100bp of additional credit support across their investment grade rated bond classes," says Tad Philipp, Moody's director of commercial real estate research. "Should the adverse credit drift continue in future quarters, it will be met with further subordination increases."

Positive for the credit quality of the upcoming conduit deals is a significant pick-up in deal size and loan diversity, says Moody's. Average deal size is poised to increase by about 40% over Q1 to approximately US$1.3bn, while the effective number of loans as measured by the Herfindahl index will move from the low 20s to the low 30s.

The level of leverage in conduit loan pools in the first quarter of the year was stable. For the first quarter, MLTV was 94.8%, down slightly from 95.6% in 4Q11. The LTV ratio has remained stable in the mid 90s range for five consecutive quarters.

Preliminary indications from five conduit transactions Moody's expects to rate in the second quarter are that the average MLTV will increase by about 3% from first quarter levels. Two of the pipeline deals have average MLTVs of approximately 100%, while three have MLTVs consistent with the mid 90s levels of the Q1 deals.

A positive for the credit quality of future CMBS is that originators of conduit loans are offering spreads that are converging with those of other lenders. The lower spreads will make CMBS programmes more attractive to loan sponsors and will result in higher quality collateral backing CMBS loans, according to Moody's.

Insurance-linked securities

Record cat bond volumes posted

First-quarter catastrophe bond issuance hit a record US$1.49bn as investors deployed additional capital into the sector, according to Aon Benfield Securities' latest quarterly ILS update. The firm forecasts that full-year 2012 ILS issuance will be in the range of US$5bn to US$6bn.

A total of nine transactions closed in the first quarter, featuring both new and repeat sponsors. An additional three cat bonds totalling US$495m priced during the period but didn't close until 2Q12.

Aon Benfield's ILS Indices posted negative returns for the quarter, principally reflecting spread widening, with the All Bond and BB Rated Bond Indices decreasing by 0.06% and 0.14% respectively. However, this was an improvement over 1Q11 returns, which were negatively affected by mark-to-market losses from the Tohoku earthquake in Japan.

The US Hurricane Bond and US Earthquake Bond Indices decreased by 0.32% and 0.17% respectively during the period. For the trailing twelve months, all indices posted gains.

Paul Schultz, ceo of Aon Benfield Securities, comments: "We believe that the market fundamentals are conducive to further growth in this sector and are very pleased that issuance in the first quarter of 2012 came from both new and repeat sponsors."

Insurance-linked securities

ILS diversification play underlined

Catastrophe bond issuance volumes hit close to record levels of US$1.7bn in 1Q12, according to Clear Path Analysis in its latest report on the sector. The study also notes that institutional investors are increasingly considering allocating to the asset class as they seek to diversify their portfolios away from other, more mainstream financial market instruments.

"An investment particularly in catastrophe bonds can offer an important source of diversification on the asset and on the liability side for pension funds, which have exposure to longevity risk on their liabilities but are not exposed to natural catastrophe," comments Christophe Fritsch, head of ILS at AXA Investment Managers.

He adds: "Given their appealing risk-return profile which is dependent on the occurrence of natural events and not linked to economic factors, inclusion of insurance-linked securities in a portfolio of traditional asset classes could enhance the efficient frontier of the portfolio. Furthermore, by nature of their unique underlying risks and their low frequency, extreme loss distribution profile, catastrophe bonds are likely to remain a truly uncorrelated asset class yielding stable investment returns."

Several significant global disasters happened in 2011: US tornadoes and earthquakes in Japan and New Zealand made it one of the costliest years to date, in terms of economic losses. Michael Stahel, director at Clariden Leu, observes that timing is key when considering ILS.

"The best time to invest in cat bonds is typically in the year after a very severe insurance catastrophe and 2012 is providing investors with a very interesting point because 2011 to date is one of the worst years on record in terms of insurance losses," he explains. "Many don't realise that 2011 was actually worse than 2005, which saw hurricane Katrina devastating the shores of the US south coast. Last year, we saw several extreme events - the Japan earthquake and tsunami, the New Zealand earthquake, a very severe tornado and hurricane season, as well as the flooding in Thailand - which all together, based on Munich Re's latest assessments, totalled approximately US$110bn of actual insured losses."

Cat bonds represent only about a third of the total outstanding volume of insurance-linked assets. Even including private collateralised reinsurance transactions and side-car investments as part of the broader ILS space, they would still only represent about 50% of the market's current universe, the report notes.

Dirk Lohman, managing partner at Secquaero, comments: "An issue with limiting one's focus to catastrophe risk is that the risk being offered to the capital markets is relatively concentrated. Beyond alternative catastrophe instruments, the largest potential lies in ILS where the underlying insurance risk is linked to the performance of life risks. This could be event-driven, such as the risk of pandemic mortality, or it could be portfolio-based, such as the risk of a higher than projected mortality, morbidity or lapse behaviour."

Outstanding cat bond issuance stands at around US$12bn-US$13bn. This compares to about US$200bn in risk that trades each year in the traditional reinsurance market.

"There are a number of additional risks in this market, which can also help diversify or complement a portfolio. These can present new opportunities to investors than you would otherwise get from the cat bond market," concludes Greg Hagood, founding principal at Nephila Capital.

RMBS

Spanish scenario analysis released

Severe mortgage arrears in Spain may rise to a peak of 3.2% by the end of 2012 from 2.8% at the end of 2011, under baseline economic assumptions, according to a new scenario analysis report by S&P. However, in a more pessimistic scenario - where economic conditions worsen more than are currently forecast - the agency's analysis suggests that severe mortgage arrears may rise by nearly 30% to 3.6% by the end of 2013.

"Doubtful mortgage loans - those that are more than 90 days in arrears or that the lender may not repay fully - rose more than five-fold during the 2008-2009 downturn, before stabilising as lower interest rates fed through to borrowers and lenders began to enforce on problem loans," says S&P credit analyst Mark Boyce. "However, the number of doubtful loans has been picking up since the beginning of 2011, as economic conditions have continued to deteriorate and more recently mortgage rates have risen. This trend looks set to continue in the coming quarters, in our view."

The study considered three scenarios: baseline, pessimistic and optimistic. "Under the baseline scenario of continuing weakness in the housing market, high but stabilising unemployment and modest rises in mortgage rates, we found that the proportion of Spanish mortgage borrowers in severe arrears could rise by about 15% from the end of 2011 to peak at 3.2% by the end of 2012," Boyce adds. "In the pessimistic scenario, where the housing and labour markets deteriorate more sharply, arrears rates could rise by nearly 30% to 3.6%. But even in an optimistic scenario - where house price deterioration is less pronounced and unemployment falls, but interest rates also rise more quickly - we found that arrears could increase."

S&P's analysis suggests that the arrears rate has historically been linked to the following factors: unemployment, mortgage loan affordability, house prices and typical LTV ratios on new mortgage lending. Andrew South, a credit analyst at the agency, notes: "The Spanish economy is likely to suffer a mild recession in 2012 and 2013, in our view. Unemployment has been rising steadily for more than four years and reached nearly 23% in the fourth quarter of 2011. Rate rises, along with general macroeconomic weakness, could therefore keep many Spanish borrowers under financial stress in the coming months under a range of economic scenarios, in our opinion."

RMBS

Servicer 'clawback' practices in the spotlight

Morningstar has published a report that sheds light on residential mortgage servicer cashflow management practices, which reimburse them for previous advances from the collection account of current, creditworthy borrowers. The agency notes that such tactics are little known but are becoming increasingly more common.

These cashflow management practices are allowed when stipulated by pooling and servicing agreements (PSA), but implementation is at the servicer's discretion. The Morningstar study highlights two examples of tactics currently being used by servicers.

First, is the reimbursement of 'non-recoverable' advances. When a servicer determines that advances previously made are non-recoverable, it can reimburse itself from the pool of interest collected in a given month.

"In this situation, the servicer can actually 'claw-back' the overextended amount of advances that they deem to have made from the cashflow of performing loans, while the delinquent loans remain in the pool," the agency explains. "This deviates from our conventional thinking that the servicer would simply stop advancing at a calculated recoverability threshold and wait to be paid back from the proceeds of liquidated loans."

The second example involves loan modifications. When loans are modified, they become current, allowing servicers to reimburse themselves from the pool of interest collected in a given month. Morningstar warns that if modifications are lumpy, this practice could cause significant interest shortfalls, which in extreme cases could impact senior bonds.

RMBS

AEGON eyes dollar demand

AEGON Levensverzekering is in the market with Saecure 11. If - as expected - the transaction includes a US$500m three-year class A1a tranche, it will be the first Dutch RMBS in several years to tap dollar investors.

Another noteworthy feature of the deal is its long note maturity, reflecting the long maturity dates of a significant proportion of loans in the pool. Moody's notes that 26.4% of the portfolio has a maturity date after 31 December 2070. Combined with the borrowers' age, the agency assessed that 53.4% of the pool comprises loan parts whereby the borrowers would be older than 80 years at maturity of the loan and 49.4% would be older than 100 years at maturity of the loan.

Moody's applied an additional adjustment to its MILAN model for these loan parts as it views these loans as being riskier than the benchmark loan. "We are concerned about higher default frequencies because, given the current life expectancy in the Netherlands, the borrowers are likely to die before the maturity of the loan," it explains.

Arranged by JPMorgan, the €727.75m-equivalent transaction also comprises euro-denominated class A1b (AAA/Aaa), B (AA/Aa1), C (double-A), D (single-A), E and F notes whose sizes are to be determined. Fitch has assigned provisional ratings down to the class Ds and Moody's down to the class Bs.

The collateral consists of prime fixed and floating rate euro-denominated loans, with average seasoning of 39 months. The weighted-average original LTV ratio of the portfolio is 83.7%, while the weighted-average debt-to-income ratio is 27.7%.

RMBS

Paragon pension claim possible

Moody's has updated its analysis of potential legal risks in transactions originated by members of The Paragon Group to take into account recent legal developments. The agency finds that the risk of a Paragon SPV being subject to a pensions claim is not sufficiently remote as to be excluded from its ratings analysis. However, it considers the risk of a secondary tax liability arising as being sufficiently low as to have no rating impact.

The Paragon SPVs are exposed to potential secondary liabilities because, unlike typical securitisation issuers, they are members of the originator's corporate group. While the risk is low, Moody's says it cannot discount the possibility of the UK Pensions Regulator making a claim against the Paragon SPVs.

Paragon Finance is the operator of a defined benefit occupational pension scheme. Under the provisions of the Pensions Act 2004, the Pensions Regulator can, in certain circumstances, make a claim against a company that is "connected with" or an "associate of" the operator of such a scheme. It is arguable that the SPVs receive some benefits from their relationship with Paragon Finance, Moody's suggests.

If the Pensions Regulator were to institute insolvency proceedings against the Paragon SPVs, it could recover a maximum of £600,000 from each vehicle out of floating charge realisations and ahead of secured creditors. It would also be entitled to claim as an unsecured creditor, amounts remaining after all secured creditors had been paid in full.

Insolvency of the Paragon SPVs would have potentially negative consequences for the Paragon transactions, the most significant of which would be: the possible termination of swap agreements leading to swap termination payments; and the triggering of a note event of default, which could lead to the enforcement of security and possible negative consequences for junior and mezzanine noteholders. The relatively low amount of the priority claim that the Pensions Regulator would have compared with the potential negative consequences of insolvency could provide incentive for the relevant parties to come to an out-of-court settlement.

However, uncertainty over whether they would has led Moody's to conclude that insolvency risk for the Paragon SPVs as a result of a claim by the Pensions Regulator, while low, nevertheless cannot be excluded. The impact of insolvency would be greater for those Paragon transactions with swap agreements, although the risks are mitigated in transactions for which it is easier to obtain noteholder consent to settlement or specific provision is made in the documentation for the payment of settlement amounts to the relevant authority.