Contents

Structured Finance

Not so bad

1Q12 exceeds SF recruiters' expectations

Structured finance recruiters are breathing a sigh of relief as activity over the first quarter managed to exceed expectations. Activity is still more limited than in previous years, but there have been some encouraging signs for Q2.

"Q1 really was not as bad as a lot of people had feared and there is more out there than I expected. We are seeing more and more conversations taking place, although actually closing things down remains tricky," says one London-based headhunter.

Lisa Wilson, managing partner at Invictus Executive Search, confirms that the start of this year has been an improvement on 4Q11. She also agrees that more conversations are taking place, but notes that "unfortunately conversations do not pay your bills". While the conversations are encouraging, they need to result in people moving jobs.

"We are busy, but it often feels like we are treading water; I am having the same conversations that I was having at the end of last year. The same people are still being interviewed without anything quite crossing the line," says Wilson.

However, Wilson feels that a change could be coming. She believes activity is set to pick up over the next few weeks; the restraint seen so far cannot go on indefinitely.

"People have been waiting for clarity about which way the market is going to go before going out to start hiring again. We do not have much more clarity, but at the same time I think people are bored of waiting," she says.

Wilson adds: "I think it is going to get much busier in the next few weeks and we could see a consolidated recruitment period of about six or seven weeks when everything everyone has talked about for the last six months is either going to happen or finally be forgotten about."

The other headhunter is also optimistic. He thinks it may take a little bit longer before the market picks up - he expects to see movement resume in the summer - but agrees that momentum seems to have built to the point that a return to recruitment activity is close.

"The sovereign crisis has panned out better than a lot of people feared. We finally got an answer on Greece; it did not blow up and it did not cause too much mayhem," he says.

He continues: "Even though Greece is a mess, everyone got used to the idea of it being an absolute disaster and it was not as bad as expected. It was not the end of the world and people can deal with it."

The headhunter says that the end of Q2 could be when movement picks up, especially if macro conditions remain fairly stable. The summer has not always been the best time for hiring, but the old recruitment cycle has been replaced, not least because of changes to how bonuses are paid. While that makes the first quarter less frantic, it also provides extra scope for hiring in Q2.

"Because people do not get paid huge cash bonuses anymore and instead get stock or have it deferred, it does not matter anymore whether someone has moved by March. You can move people in August if you want, because the cash is not such an important factor and you are just swapping stock for stock," notes Wilson.

She adds: "The old timescales have gone. The timescales this year though are the summer, the Jubilee and the Olympics. Summer is always slower, but this is a particularly long summer and that is going to be quiet. That is another incentive to get these moves finalised in the coming weeks."

Bonuses are still nowhere near where they were before the crisis. As well as changing the timing of moves, the new remuneration landscape is partly responsible for their lack of frequency, argues the London headhunter.

He says: "Everybody had a bad time with bonuses, so bonusing problems are not a factor in moving. You are not going to jump from one bank to another, say UBS to Goldman Sachs, because of bonuses."

The headhunter adds: "UBS was particularly bad, from what I heard, but most people are 40%-50% down on bonuses compared to last year. Maybe high yield guys are doing slightly better than that."

High yield is one area of the market that the headhunter believes could prove resilient. He says: "Areas like high yield and non-standard RMBS are very busy. The flip side of that though is that lots of places already have fairly sizable teams in place."

Another trend appears to be for staff to be brought in on short-term contracts. The headhunter explains that, with sign-off on headcount proving difficult, clients are asking him to find candidates who can move on medium-term contracts, perhaps with a view to being taken on permanently once they are in the door.

"Overall it has been a better start to the year than we expected and I think it will improve a bit more going forward," he says. "We are seeing more conversations and, as long as things continue to improve, we should see those conversations bearing fruit in the summer."

Wilson thinks those moves might come sooner. She concludes: "People either have to put up or shut up. You cannot have all the investment banks not doing anything for a whole year. Everything stopped in August; it cannot possibly not kick off until September."

JL

Structured Finance

Euro ABS catches its breath

The European ABS market has been taking a bit of a breather over the last couple of weeks but remains active. Spreads have generally only widened very slightly, with prime RMBS even tightening.

"It seems to have been a little quieter than it had been. All of April has been quieter than the first quarter of the year was. A lot of that has to do with the public holidays," reports one trader. He suggests that there is also a slight hangover from just how busy Q1 was.

"The volume of bid-lists from the first quarter was pretty unsustainable really. It had to slow down and it did slow down. The softer situation now is a combination of that heavy first quarter activity and the fact that the spotlight is back on global macroeconomic conditions; the renewed peripheral concerns are just dampening the mood a little," he says.

That said, the trader notes that BWICs are still coming out to the market and adds that they are still being well received. "We are still seeing a decent amount of paper, even if it is not coming on ten lists a day as it did last month," he says.

The trader continues: "One thing we are seeing though is that the bid-lists are becoming a bit less competitive than they were. The gap between winning bids and covers has grown. Part of that is probably a bit of fatigue in the market and the other part is that the dealers, who played such a significant role in the first quarter, have been slowly backing off for a while now."

The muted activity has left spreads reasonably stable. The trader reports that prime spreads are fairly flat, while "the better-name, higher beta stuff is flat to off a little bit". Paper from the periphery and that is more credit-challenged is pretty weak, which is to be expected, he adds.

He continues: "Prime ABS has held in very well compared to broader risk asset markets. UK and Dutch RMBS, for example, have even tightened by 2bp-5bp over the last couple of weeks. Anything prime and less than three years is around the 120bp mark now."

The ability of prime spreads to remain tight in the face of broader concerns should provide reassurance ahead of what the trader believes could be a testing time for the market. He concludes: "ABS is certainly looking up at clouds on the horizon, so we just have to see whether they materialise. A lot of what will happen to the ABS market will be driven by factors outside of fundamental ABS performance."

JL

Structured Finance

SCI Start the Week - 30 April

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

Pipeline
Last week saw half a dozen new deals join the pipeline. The transactions were varied, comprising two UK RMBS (Darrowby No.2 and Tenterden), one credit card ABS (Canadian Credit Card Trust series 2012-1), one auto ABS (US$145m CarNow Auto Receivables Trust 2012-1), one CLO (US$302.5m Cedar Funding) and an ILS (US$400m Mythen 2012-1 ILS).

Pricings
Once again there was a plethora of pricings during the week. RMBS led the way with four prints, while two CMBS, one CLO, two auto ABS and two student ABS deals were also issued.
The RMBS transactions comprised £330m Kenrick and £920m Leofric, both UK deals, as well as A$1bn SMHL Securitisation Fund 2012-1 and US$111m Vericrest Opportunity Loan Trust 2012-NPL1. In CMBS, the US$1.4bn GSMS 2012-ALOHA and US$1.1bn UBSCM 2012-C1 priced. The CLO was US$673.7m OHA Credit Partners VI.
Finally, the auto ABS prints were US$795m Enterprise Fleet Financing 2012-1 and €482m SCF Rahoituspalvelut, while the student loan issues were US$1.145bn Montana Higher Education Assistance Corporation 2012-1 and US$1.25bn SLM Student Loan Trust 2012-3.

Markets
The heavy flow of BWICs during Q1 seems to have caught up with the European ABS market. As reported last week in SCI, spreads have generally widened slightly, but with notable tightening seen in prime RMBS. One trader notes that BWICs are becoming slightly less competitive, with dealers backing away from the market.

It has been an interesting couple of weeks for European CMBS. Deutsche Bank CMBS analysts note that April was "the first occasion in European CMBS where there was a significant number of loans coming due [25] ...yet there was a clean sweep of every one failing to refinance". A €300m BWIC on Friday received good execution with covers around or exceeding initial price talk.

All eyes in US CMBS were on the New York Fed's Maiden Lane III MAX CDO auction, won by Barclays and Deutsche Bank (SCI 27 April). New supply has been well absorbed by the market, note Barclays Capital securitisation analysts.

They add: "Spreads rallied, as investor interest was focused on the large bid-list, with generic 2007 LCF compressing 10bp over last week and AM spreads coming in about 20bp. 2007 AJ tranches also gained, up 1-2 points from last Thursday's close."

US RMBS was also quiet as investors focused on the MAX CDO sale, say Bank of America Merrill Lynch analysts. After the sale, the non-agency market seems to have rallied slightly, but prices could still come under pressure in the near future from uncertain macro conditions. In the agency space, GN/FN 5 and 5.5 swaps are down by six and eight ticks respectively.
 

Deal news
• The Federal Reserve last week disclosed the amount it received from Credit Suisse and Goldman Sachs in the Q1 Maiden Lane II auctions. Credit Suisse paid US$6.81bn (52%) on the US$13bn in current face that it purchased in the first and third auctions, while Goldman Sachs paid US$3.53bn (57%) on the US$6.2bn in current face that it purchased in the second auction, according to Barclays Capital figures.
• Lloyds TSB has reportedly purchased at par plus accrued interest its target amount, which was undisclosed, of Mound and Pendeford RMBS notes under the recent tender offer (SCI 20 March). Together with the redemption of a number of Lothian bonds, the move is expected to result in the number of UK master trusts dropping from eight to five by the end of the year.
• The Supreme Court of the State of New York determined, at a hearing held last Tuesday on the US$8.5bn Countrywide settlement, that BNY Mellon can move ahead with an Article 77 proceeding. The alternative would have seen the case being heard through a plenary action.
• Morningstar has added the US$340m Maryland Multifamily Portfolio to its watchlist for near-term maturity. The senior debt is pari passu across two CMBS transactions - GCFC 2005-GG5 (accounting for US$200m of the deal) and GSMS 2006-GG6 (US$140m).
• Information about Credit Suisse's derivatives-linked bonus bonds, dubbed the 2011 Partner Asset Facility (PAF2), was included in its 1Q12 financial release. The transaction was designed to hedge the counterparty credit risk of a referenced portfolio of derivatives and their credit spread volatility, according to the release.
• Banco Santander has announced the results of its 33-bond tender offer, which comprised 12 RMBS, six ABS and 15 CLOs. In total, the bank indicated it would consider purchasing up to €750m and in the end bought €450.2m.
• The final property in the Gullwing Portfolio, securitised in the Eclipse 2007-1 CMBS, was sold on 18 April. Trepp expects the loan to be hit with a loss of more than 75% as a result.
• A sale agreement with the noteholders of Clio European CLO has been completed, pursuant to which all of the debt assets in the portfolio were sold to the noteholders. Noteholders surrendered to the issuer €179.27m class A1 notes, €59.38m class B notes, €39.1m class C notes and €134.71m subordinated notes with a principal amount outstanding equal to €412.47m. These notes were subsequently cancelled.

Regulatory update
• The CFTC/SEC final rule on swap dealer designation (SCI 19 April) exempts CDPCs and DPCs, at least during its phase-in period. The rule is credit positive for existing CDPCs as it exempts them from collateral posting requirements, but the rule is credit negative for DPCs because it eliminates regulatory minimum capital requirements that the market had expected would apply, according to Moody's.
• The US SEC has charged Egan-Jones Ratings Company (EJR) and its owner and president, Sean Egan, for material misrepresentations and omissions in the company's July 2008 application to register as an NRSRO for issuers of ABS and government securities. EJR and Egan are also charged with misrepresentations in other submissions to the SEC and with NRSRO record keeping and conflict of interest violations.
• The US SEC has charged H&R Block subsidiary Option One Mortgage Corporation with misleading subprime RMBS investors in several offerings by failing to disclose its deteriorating financial condition. Option One, now known as Sand Canyon Corporation, has paid US$28.2m to settle the charges.

Deals added to the SCI database last week:
BMW Vehicle Lease Trust 2012-1
CIT Equipment Collateral Notes series 2012-VT1
DT Auto Owner Trust 2012-1
FMBT 2012-FBLU
Ford Credit Auto Owner Trust 2012-B
Freddie Mac SPC series K-707
Honda Auto Receivables Owner Trust 2012-2
JPMCC 2012-C6
Marathon CLO IV
NXT Capital CLO 2012-1
Symphony CLO IX
Wheels 2012-1

Deals added to the SCI CMBS Loan Events database last week:
BACM 07-1, JPMCC 07-LDP1X & GECMC 07-C1; BACM 2004-4; BACM 2006-5; BACM 2007-1; CD 07-CD4, WBCMT 05-C17 & CGCMT 06-C4; CD 2006-CD2; CSMC 2006-C5; CSMC 2008-C1; CWCI 2007-C3; DECO 2005-E1X; DECO 2007-C4X; DECO 2007-E5X; DECO 2007-E7; DECO 9-E3X & EMC IV; ECLIP 2005-1; ECLIP 2005-2; ECLIP 2006-3; ECLIP 2007-1A; ECLIP 2007-2A; EMC VI; EPICP DRUM; EPRE 1-A; EURO 22A; EURO 24A; EURO 27; FLTST 3; GCCFC 07-GG11 & CGCMT 08-C7; GCCFC 2006-GG7; GECMC 2007-C1; GSMS 07-GG10 & JPMCC 07-LD11; GSMS 2007-GG10; JPMCC 2005-LDP2; MALLF 1; MLCFC 2007-6; MSC 2007-HQ12; OPERA UNI; TAHIT 1; TITN 2006-1A; TITN 2006-2A; TITN 2006-5; TITN 2007-2X; TITN 2007-CT1X; TMAN 3; TMAN 4; TMAN 7; UBS 2007-FL1; WBCMT 2006-C29; WBCMT 2007-C30; WINDM VIII; and WINDM XIV-A.

Top stories to come in SCI:
April EMEA CMBS maturity outcomes
Counterparty risk management survey

CMBS

Maguire sheds CMBS properties

Further details have emerged on the resolution of a number of CMBS properties sponsored by Maguire Properties (SCI 21 March). Maguire's 1Q12 financial results reveal that several assets have been sold or put into receivership so far this year.

The US$470m Two California Plaza loan, which is securitised in GSMS 2007-GG10 and had been widely expected to enter receivership, was finally placed into receivership on 23 March. The US$550m Wells Fargo Tower loan securitised in the same deal has also been sold.

Glendale Center (securitised in WBCMT 2006-C27) was placed in receivership at the start of the second quarter. The move is pursuant to an agreement with the special servicer that provides for a cooperative foreclosure and a general release of claims under the loan document at the conclusion of the foreclosure process, which has begun.

In addition, trustee sales have been held on 700 North Central and 801 North Brand (each securitised in GSMS 2005-GG4). They are now real estate owned (REO), which relieves Maguire's obligation on the loans.

The REIT also sold its interests in Wells Fargo Center and San Diego Tech Center (securitised in GSMS 2005-GG4 and CSFB 2005-C3 respectively), as well as its development rights and a land parcel at San Diego Tech Center to Beacon Capital Partners. Maguire received net proceeds from the sale of US$45m.

Finally, Maguire and Beacon entered into a joint venture agreement that will allow the former to continue owning Cerritos Corporate Center and Stadium Gateway (securitised in MLMT 2006-C1 and CD 2006-CD2 respectively). CMBS analysts at Deutsche Bank note that the agreement provides for a three-year lockout period, during which time neither partner can exercise the marketing rights under the new JV. Maguire maintains a 20% interest in the JV.

JL

Insurance-linked securities

ILS pricing discipline emerges

Faced with record new issue volumes, some ILS portfolio rebalancing was seen in the first quarter as investors digested the supply. Some lightened up on US wind risk, according to Willis Capital Markets & Advisory's latest ILS market update, with US wind bonds increasingly reflecting the spread widening seen in the primary market as the quarter progressed.

Indeed, although investors remain keen to diversify risks, recent deals have demonstrated pricing discipline that has impacted the secondary market. For example, existing Japanese peril bonds widened a touch during 1Q12 and the CEA's 2011 Embarcadero issuance traded down from its recent highs, as the new Embarcadero deal came to the market.

Equally, some trading in Johnston Re bonds was seen, as the Combine Re deal - which also has exposure to North Carolina - was marketed. The recent new issuance has driven investors to weigh their preferences for regions and perils, risk adjusted returns and particularly tested their underwriting mettle, WCMA suggests.

By the end of the quarter, secondary market pricing appeared to offer an attractive value proposition, with several new players looking to develop positions in the sector. "Although new capital has come into the market, it does not seem to be aggressively chasing cat bonds. There has been an increased interest in private collateralised covers from ILS investors who can participate in such trades," the firm adds.

The weighted average risk premium increased to 9.1% in 1Q12 from 8.8% the previous quarter. The market's strong momentum has continued into April, including the recent closing of a record US$750m in capacity for a single tranche for the Everglades Re transaction (see separate story).

While the medium-term outlook for the market remains encouraging, current spread levels could dampen demand for new issuance from potential sponsors in the short term. Nevertheless, growth in peak insured exposures is expected to create more demand in the future for protection from natural catastrophes. These peak risks will likely drive further capital markets involvement in the sector in coming years.

CS

Structured Finance

Law firm increases Russian presence

Allen & Overy has strengthened its Russian practice by hiring Igor Gorchakov and promoting Alexandra Fasakhova. Gorchakov becomes partner in the banking department, while Fasakhova will become international capital markets partner in June. Both are based in Moscow.

Gorchakov's practice includes general lending, securitisation, derivatives and project finance. He joins from Baker & McKenzie in St Petersburg, where he was also partner. Fasakhova has been with the firm for almost five years. She joined from Liniya Prava and has broad capital markets and securitisation experience.

Structured Finance

Law firm continues hiring spree

Claire Watson is leaving Linklaters to join Berwin Leighton Paisner (BLP). Her appointment follows the recent additions of Simon Small and Richard Todd, who have both become structured finance partners at the firm.

Watson will join BLP's real estate finance practice in London. She specialises in real estate finance and also has experience in investment grade lending, acquisition finance and structured finance.

Structured Finance

SF lawyer joins London office

Norton Rose has added a partner to its London structured finance and capital markets practice. David Shearer was most recently a partner in Allen & Overy's structured finance group.

Shearer's practice covers a broad range of structured finance and securitisation transactions, bond issuance, restructuring work and emerging markets. He spent almost 15 years at Allen & Overy and has also worked at Simpson Grierson.

CDS

ICE Clear adds member, hits milestone

HSBC Securities has joined as a member of ICE Clear Credit. The FCM will now be eligible to clear buy-side transactions through ICE's North American CDS clearing house.

The addition of HSBC Securities brings ICE Clear Credit's clearing membership up to 27. The total amount cleared through ICE's CDS clearing houses has also reached a significant milestone, as over US$30trn in gross notional value has been cleared - US$17.5trn through ICE Clear Credit and €9.9trn through ICE Clear Europe.

CDS

Avoca expands to meet US demand

Avoca Capital Holdings has appointed Stephen Holland as director of sales and marketing, with a focus on North America. Avoca says it is seeing increasing demand from investors in the region for the return and diversification offered by European credit markets.

Holland was most recently at Dublin-based hedge fund Abbey Capital. He previously spent 13 years as head of sales for Bank of Ireland Asset Management in the US.

CMBS

Canadian CRE firm opens NY office

Avison Young has opened an office in New York and recruited Arthur Mirante. Mirante joins the firm as principal and tri-state president and will be based in the new office.

Mirante will work alongside Avison Young principal Greg Kraut and also join the firm's executive operating committee. He joins from Cushman & Wakefield, where he spent 20 years and was ceo and later global development president.

Avison Young has been expanding from Canada into the US for some time and opened a San Francisco office earlier in the month. The firm says it will be hiring further for its New York office shortly.

Risk Management

Risk analytics partnership announced

Numerix and Everis have formed a partnership which will make Numerix pricing and risk analytics available via the Everis risk management product suite. The suite provides a risk and capital management solution to banks and insurers.

The agreement means Everis clients can leverage key Numerix functions such as cross-asset analytics, Monte Carlo simulation, random number generation, correlations estimation and date functions. The company says this will provide clients with a more robust pricing and risk solution, allowing greater modelling flexibility and calculation power for structuring, pricing and analysing derivatives and structured products.

ABS

Card charge-offs dip

US credit card charge-offs dropped slightly in March, as the charge-off rate index fell 3bp below its February level to 4.94%, according to Moody's Credit Card Indices.

"The charge-off rate index is at its lowest point since the second quarter of 2007, down by more than 55% from its 2010 peak," says Jeffrey Hibbs, a Moody's avp and analyst. "Some originators have started loosening their underwriting criteria, but so long as they don't add receivables from new accounts to securitisations, the credit mix in trusts won't deteriorate from current levels. Still, we expect the steady decline in the charge-off rate to come to an end, albeit gradually, and find a floor of around 4% by early 2013."

The delinquency rate index and the early stage delinquency rate fell to respective record lows of 2.73% and 0.72% in March, underscoring the exceptionally strong credit quality of securitised credit card receivables today. "And strong seasonal trends suggest that early-stage delinquencies will continue to fall throughout the spring, setting the stage for even lower overall delinquency rates further out," adds Hibbs.

Meanwhile, the payment rate index rebounded sharply from last month's seasonal weakness and set a new all-time high at 22.11%. Over the past three years, the payment rate index has grown by 570bp, equal to a 35% increase in the proportion of trust principal receivables repaid each month.

"Because of the growing return of principal, the purging of charged-off receivables and the fact that no new principal receivables are entering the trusts, trust balances have declined markedly since the onset of the credit crisis," says Hibbs.

Finally, the yield index and, by extension, the excess spread index also rose in March. The yield index has declined steadily for several quarters, but the excess spread index remains at a historically high level, as the decline in charge-offs has countered the contraction in yield.

"The contraction was due largely to the expiration of principal discounting initiatives that had artificially boosted yields. Most issuers have stopped discounting new receivables, although discounted legacy receivables still add about 50bp to the yield index, so this lift will fade over time," continues Hibbs.

The excess spread index is still healthy and well above historical norms. Moody's expects it to remain near its current historical high, as charge-offs continue to fall through the end of the year.

ABS

Private lending opportunity highlighted

A scheduled doubling of interest rates on subsidised undergraduate Stafford student loans could create a short-term opportunity for private lenders, according to Fitch. However, regulatory uncertainty with respect to the student lending business, a dwindling number of lenders in the space and longer-term interest rate dynamics are anticipated to result in little response from private lenders. Left with few alternative financing sources, future undergraduate students could face higher interest rates as a consequence.

President Obama has called for delaying the scheduled rate hike and on Monday Republican presidential candidate Mitt Romney said he supported maintaining the lower rate. Congress is scheduled to vote on the rate issue today.

The interest rate on subsidised Stafford loans is scheduled to double to 6.8% on 30 June, as part of the College Cost Reduction and Access Act of 2007. That bill phased in interest rate cuts beginning in 2008, eventually halving it to 3.4%. The increased rate would not be retroactive to existing loans and would only be applied to those taken out beginning 1 July, should the increase take place.

In the current interest rate environment, private lenders could potentially offer college students variable-rate loans that would initially be much cheaper versus a 6.8% subsidised Stafford loan rate. But while variable-rate loans may be cheaper now, they could prove to be more costly over the 10- to 30-year average maturity of the loans, should interest rates rise. Additionally, consumers who choose a private loan will incur interest costs while in university, whereas the government covers the interest on subsidised Stafford loans while the student is at university.

Significant legislative and political challenges continue to face the private student lending space, most notably uncertainty regarding private student loans being dischargeable in bankruptcy and the introduction of the Consumer Financial Protection Bureau. As a result, some banks have sharply reduced student lending activities, while others have exited the business altogether.

Fitch believes these dynamics create little incentive for private lenders to capitalise on what could be a short-term imbalance between Stafford-subsidised rates and private alternatives.

ABS

Auto ABS losses hit record lows

Strong used vehicle values and an improving economy are helping to propel prime US auto ABS losses to new record lows, according to Fitch's latest index results for the sector. Prime auto loan ABS delinquencies and annualised net losses (ANL) declined by 24% and 11% month-over-month (MOM) respectively.

Positive economic data, including lower unemployment in recent months, resulted in improved loss frequency during March. Prime 60+ days delinquencies dropped to 0.35%, the lowest level in over a decade, according to Fitch. Delinquencies were 31.4% lower during the month versus March 2011.

Prime ANL improved for the third consecutive month to a new record low of 0.34% in March, besting February's prior record low. ANL were 49.25% lower compared to March 2011. The Manheim Used Vehicle Value Index was at 126.2 in March, climbing five consecutive months in a row.

In the subprime sector, 60+ days delinquencies sank by 25% to 2.56% in March MOM, the lowest level in just under a year. Delinquencies were 2.7% lower in March versus a year ago. Subprime ANL skidded lower to 4.71% last month, a 29% improvement over February, and were 7.8% better than in March 2011.

Structured Finance

Solvency II calibrations questioned

Covered bonds would attract significantly lower capital charges than securitisations under Solvency II because of an excessively conservative calibration of the rules, Fitch notes. The difference in capital charges is expected to lead to increased covered bond issuance at the expense of securitisation.

The capital charges for triple-A rated covered bonds range between 0.7% and 6%, compared with prohibitively high capital charges of between 7% and 42% for triple-A rated securitisations. Based on discussions with market participants, regulators and stakeholders, Fitch understands that the calibration of the risk-rating factors for securitisation assets in the latest draft rules rely heavily on the performance of US subprime home equity loan securitisations.

"We consider it excessively conservative to calibrate rules for an industry as diverse as the global securitisation market based solely on the performance of one of its worst performing asset classes that largely no longer exists," the agency says. "The consistency of the approach is questionable. Other asset classes have not been treated similarly; for example, by calibrating corporate or bank charges around distressed sectors or countries."

Given the conservative calibration of the standard formula, the capital charges generated by this approach are likely to be different from those generated by insurers using internal models for securitisation assets. Internal models are based on the insurers' past experience with the asset class and available market information. Thus, they are likely to result in lower capital charges, given that a significant proportion of securitisation asset classes were significantly more stable during the financial crisis.

The differences may result in distorted incentives for insurers using different methods (see also SCI 6 October 2011). Many insurers using the standard formula may even consider pulling out of ABS as an investment class.

Structured Finance

Santander tender results in

Banco Santander has announced the results of its 33-bond tender offer, which comprised 12 RMBS, six ABS and 15 CLOs. In total, the bank indicated it would consider purchasing up to €750m and in the end bought €450.2m.

The tender was by way of an unmodified Dutch auction. Out of the 33 bonds, 20 saw no repurchases, according to MBS analysts at Barclays Capital.

The largest bond repurchased as a percentage of its current amount outstanding was a subordinate tranche, SHIPO 2 D, with the repurchased amount representing almost 80% of the current amount outstanding. SHIPO 3 A3 saw the greatest deviation between its average purchase price and the minimum tender price, at almost a 6% premium.

Structured Finance

Mixed fortunes for Euro, US primary markets

A marked divergence in structured finance issuance trends over the past three months has been highlighted by the latest rankings in the SCI league tables for bank arrangers in the structured credit and ABS markets.

The 1Q12 SCI league tables show that the US has seen a jump in issuance to US$78bn versus US$58bn in 1Q11, whereas Europe has seen a decline to €22bn against €32bn in the same period. The news is not all bad for European institutions, however, with two UK firms taking the top spot in both tables - Barclays Capital in the US and Lloyds TSB in Europe.

The league tables cover primary market transactions for asset-backed securities (ABS), commercial mortgage-backed securities (CMBS), residential mortgage-backed securities (RMBS) and collateralised debt/loan obligations (CDOs/CLOs). Qualifying deals are full primary securitisations that were publicly marketed and sold to third-party investors; i.e. were not privately placed or issuer/arranger retained or re-issues or re-securitisations.

SCI publishes its league tables on a quarterly basis. The numbers are based on the SCI deal database and are, where possible, corroborated with the firms involved.

The tables for 1Q12 can be found here.

Structured Finance

Stable outlook for APAC SF

Fitch reports that Asia-Pacific structured finance saw few downgrades in 1Q12, with the negative rating actions being a direct result of criteria changes and continued poor recoveries in Japanese CMBS. Elsewhere, asset performance was broadly little changed and the outlook on most ratings in the region is stable.

The agency made 264 affirmations, 29 downgrades and seven upgrades in 1Q12. Of the upgraded tranches, five were Indian ABS, one a Japanese CMBS and one an Australian RMBS. Also in Australia, nine downgrades resulted from the implementation of Fitch's revised Australian RMBS and lenders' mortgage insurance in RMBS criteria, both published in August 2011.

"Affirmations with stable outlook still dominate in Australia and New Zealand, reflecting Fitch's view that the underlying asset performance will remain stable and within expectations for the foreseeable future," comments Alison Ho, senior director in the agency's structured finance team and head of APAC SF surveillance.

Japanese SF tranches saw mixed performance, with 24 affirmations, 20 downgrades, one upgrade and two tranches placed on rating watch negative. "The Japanese downgrades were dominated by CMBS tranches, which were already rated in the distressed categories," says Ho. "They reflect the vulnerability of these tranches to the volatility of real estate recoveries in the workout of defaulted loans." Six of the affected notes were written down due to only partial recovery of an underlying loan and were downgraded to D.

India continued its stable performance with 55 affirmations and five upgrades. Three of the upgrades were due to the upgrade of the corporate undertaking provider, Mahindra and Mahindra Financial Services and satisfactory asset performance in the tractor loan sector. The remaining two upgrades were in relation to second loss credit facilities for transactions where substantial credit enhancement has built up as a result of stable asset performance and amortisation of senior rated tranches.

Other affirmations included 10 tranches from three RMBS transactions backed by assets in South Korea and two tranches from one CMBS transaction in Singapore. The affirmations reflect increased credit enhancement levels due to portfolio amortisation, as well as low defaults and delinquencies in the RMBS transactions.

CDO

MAX CDOs sold to bank consortium

The New York Fed yesterday sold the entirety of the MAX CDO holdings from its Maiden Lane III portfolio to a consortium consisting of Barclays Capital and Deutsche Bank following a competitive bid process (SCI 19 April). The transaction substantially reduces the ML III portfolio and loan at a desirable price, the Fed says.

"I am pleased with the level of interest and the results of this process, especially with the strength of the winning bid, which represents good value for the public and significantly exceeds the original price ML III paid for these assets," comments William Dudley, president of the New York Fed. "This successful sale marks another important milestone in the wind-down of our crisis-era intervention."

Consistent with the current investment objective of the vehicle, the New York Fed - through BlackRock Solutions - will continue to explore the sale of assets held by ML III. There is no fixed timeframe for future sales; at each stage, the Fed will sell an asset through a competitive process and only if the best available bid represents good value, while taking appropriate care to avoid market disruption.

CDO

Euro CDO overlap updated

The top-five referenced obligors in synthetic CDO portfolios that S&P rates in Europe are General Electric Capital Corporation, Goldman Sachs, Morgan Stanley, Volkswagen and Telecom Italia. Each name was referenced in more than 60% of transactions at the end of April. US obligors account for 38 of the 100 most-widely referenced obligors in European deals, followed by those in the UK (13), France and Germany (12 each).

CDS

Surge seen in sovereign CDS liquidity

As of last Friday's market close, average global CDS liquidity is at its highest level since March 2006, Fitch Solutions reports. This has been driven by a surge in liquidity for both developed and emerging market sovereigns over the past month.

"CDS liquidity on Belgium moved up seven regional percentile rankings in the past month, making it now the second most liquid sovereign behind Italy, while Germany and France also both experienced notable upticks in liquidity that have left their CDS trading in the thirty-fifth and fifth regional percentiles respectively," comments Diana Allmendinger, director, Fitch Solutions in New York.

In emerging markets, CDS liquidity on Columbia and Venezuela saw the biggest jumps of 15 and eight regional percentiles respectively. Fitch's developed and emerging market sovereign liquidity indices now stand at 7.63 and 7.78, versus 7.95 and 8.04 one month previously.

At the corporate level, the CDS market is showing greatest concern over prospects for the global technology sector. "In the past month, global technology has gone from being the least to the third least liquid sector, with average spreads widening by 14% - more than for any other corporate sector. In Europe, this has been led by Nokia, whose CDS jumped 73% wider during the period," Allmendinger adds.

CDS

DC workings reviewed

ISDA has published a paper that reviews the formation, structure and workings of its Credit Derivatives Determinations Committees. Since their formation in March 2009 as part of the big bang protocol, the DCs have considered more than 900 questions, of which approximately 96% have been decided unanimously.

On 83 occasions, ISDA says the DCs have been asked to consider whether a credit event had occurred. In 63 of those cases, the DCs decided that a credit event had in fact occurred.

CDS

CDPC upgraded

S&P has raised the issuer credit rating (ICR) on Athilon Capital to double-B plus from double-B. At the same time, the agency affirmed its ratings on the CDPC's senior subordinated, subordinated and junior subordinated notes. The outlook on Athilon is stable.

Approximately 99% of the reference entities in Athilon's portfolio are corporate and 1% is sovereign. The upgrade to the ICR reflects S&P's view regarding the seasoning credit of the CDPC's tranche CDS portfolio. It has not entered into new CDS transactions since 2008 and its CDS portfolio has been in natural amortisation.

As of 28 March, the underlying portfolio comprised 72 tranche CDS with a US$40.96bn total notional amount. The tranche CDS' weighted average maturity was approximately 1.65 years and the portfolio's last maturity is 20 June 2016. The tranche CDS portfolio's natural amortisation and the underlying referenced corporate entities' stabilising credit performance have contributed to a reduced required capital amount and have provided a greater capital cushion against potential losses, according to S&P.

In 2011, Athilon amended its operating guidelines to expand the types of investments in which it can invest its excess capital. According to the amended operating guidelines, the haircut to these newly added investment types is 100% for the purpose of the capital adequacy test related to the ICR.

The affirmations reflect S&P's view that the credit enhancement for the notes is still consistent with the notes' respective rating levels.

CDS

Bonus bonds unveiled

Information about Credit Suisse's derivatives-linked bonus bonds, dubbed the 2011 Partner Asset Facility (PAF2), was included in its 1Q12 financial release. The transaction was designed to hedge the counterparty credit risk of a referenced portfolio of derivatives and their credit spread volatility, according to the release.

The hedge covers approximately US$12bn notional amount of expected positive exposure from the bank's counterparties and comprises three layers: a US$500m first-loss piece, a US$800m mezzanine tranche and a US$11bn senior tranche. Credit Suisse retained the first-loss piece, while the risk of the mezzanine tranche was transferred to eligible employees in the form of PAF2 awards, as part of their deferred compensation granted in the annual compensation process.

The bank purchased protection on the senior tranche via a CDS, accounted for at fair value, with a third-party entity. There is also a credit support facility with this entity that requires Credit Suisse to provide funding to it in certain circumstances, which is accounted for on an accrual basis.

The transaction has a four-year life, but can be extended to nine years. Credit Suisse can terminate the third-party agreement for certain reasons, including specific regulatory developments.

CDS

CDS pricing service enhanced

CMA has introduced CMA Datavision Streaming, which builds on its existing same-day pricing services to enable front- and middle-office professionals to manage intraday counterparty risk, research and analyse trading opportunities and monitor market positions to make more informed execution decisions. The new product provides tick-by-tick pricing for OTC credit instruments, including CDS single names, indices and tranches and LCDS. Intraday curve data is also available for these products.

CDS

LCDS auction results released

The final price during yesterday's Hawker Beechcraft Acquisition Co LCDS auction was determined to be 63.5. During the auction, 10 dealers submitted initial markets, physical settlement requests and limit orders to settle trades across the market referencing the entity.

CLOs

NCRAM CLOs finally unloaded

Nomura Corporate Research & Asset Management (NCRAM) on Friday resigned as investment manager for Clydesdale Strategic CLO I and Clydesdale CLO 2005. The governing documents for the transactions have been amended to reflect a change in their names to Ares XIX CLO and Ares XX CLO respectively.

The name changes reflect a purchase agreement, dated 7 April 2011, pursuant to which NCRAM effected a sale and transferred to Ares Management all of its duties and obligations under the management agreement (see SCI's CDO manager transfer database). Moody's has determined that the move will not result in the reduction or withdrawal of its current ratings on any of the notes.

CLOs

A2E brings mixed implications

Sabre Holdings - the twelfth largest CLO holding - has launched an amend-to-extend transaction with mixed implications for CLOs, according to securitisation analysts at S&P. They note that while participation in the extension may expose transactions to market value risk, the ratings outlook on the credit has improved to positive and the extension comes with a 40% pay-down of the loan. 263 CLOs hold roughly 59% of the outstanding term loan, with 87 maturing before the extended loan's maturity date.

CLOs

Long-dated asset concentration examined

S&P has examined the concentration of long-dated assets - assets within a pool that mature after the deal matures - within the US CLOs it rates. While CLO investors typically have limited exposure to market value risk, significant concentrations of long-dated assets may increase such exposure, the agency says.

"We believe that a CLO with a significant concentration of long-dated assets could be exposed to market value risk at maturity because the collateral manager may be forced to sell long-dated assets for less than par in order to repay the CLO's subordinate rated notes when they mature," explains S&P credit analyst Robert Chiriani. "We attribute the increased CLO exposure to long-dated assets to an uptick in CLO collateral managers participating in underlying obligors' amendments to extend their loan maturities."

Because the repayment of a CLO note's outstanding principal at maturity depends on the payments the CLO receives from the underlying collateral pool, funds available to pay the notes at maturity could be less than anticipated if a collateral manager sells a long-dated asset on the open market for less than par value. In these cases, S&P believes that only the subordinate noteholders would likely be affected because most senior notes are sufficiently collateralised by loans that mature on or before the CLOs.

To gauge the extent of long-dated asset concentration in its rated CLOs, the agency reviewed the monthly trustee reports received through the first quarter of 2012. It identified 51 rated US cashflow CLOs that have long-dated asset exposures of 10% or more, representing about 8% of S&P-rated CLOs. S&P also identified 17 US cashflow CLOs that mature within the next five years and have long-dated asset exposures of 30% or more.

CLOs

Primus CLO unloaded

Primus Asset Management has assigned its rights and obligations under the existing collateral management for Primus CLO II to CypressTree Investment Management. Following the assignment, a sub-advisory agreement - under which CypressTree provides management services to the transaction - will be terminated.

Moody's confirms that its ratings on the notes will not be withdrawn, reduced or experience other adverse action as a result. The agency believes that the execution of the assignment agreement and the appointment of CypressTree as the replacement collateral manager will not have an adverse effect on the ratings of the securities.

In assessing the credit impact of the assignment agreement and the appointment of CypressTree, Moody's assessed the history of CypressTree and CIFC's collateral management of transactions comparable to the issuer. The analysis also considered that consent of the requisite noteholders had been obtained.

CLOs

Euro loan recoveries examined

Recovery rates in the European senior loan market have been strong and in line with the experience of the more mature US loan market, according to S&P's first-ever study of recoveries in the sector. The upsurge and subsequent slump in financial markets over the past decade has seen an expanded European leveraged loan market run its first economic cycle, providing a wealth of data from which to measure recovery performance, the agency notes. Previously, data on actual European recovery rates post-default has been limited.

"Although our study data include a high volume of so-called interim recoveries, we believe the results provide a realistic measure of the recovery experience of European leveraged loan investors, namely that senior loans have delivered strong recoveries. What's more, the recovery experience is similar to that of senior loans in the US," says S&P credit analyst David Gillmor.

The new study, which evaluated 101 known defaults, found that recovery rates on European first-lien debt have remained strong throughout the cycle, with a mean of at 76% by value between 2003 and 2010. This compares with a nominal recovery rate of 83.7% for US loan facilities between 1987 and 2011.

However, the nominal European recovery rate should be viewed with caution since it includes a high volume (65%) of interim recoveries, generally debt exchanges. If only ultimate recoveries are included, the recovery rates are materially lower, with a mean of 63%.

"We believe this difference is due to the high percentage of interim recoveries in which debt has been rolled over or extended," adds Gillmor. "As we track these new instruments to ultimate recovery, the recovered value for original investors in the facilities or notes may look different. In fact, there is a real possibility that ultimate recoveries will be lower than the interim figures indicate."

The study also reveals that senior unsecured debt - primarily speculative grade bonds - achieved recoveries of 48% between 2003 and 2010, which compares well with the US long-term empirical average of 51.8% for senior unsecured bonds or 45.9% for all bonds. Second-lien debt recoveries for the period from 2003 to date are low, with a mean of 31%, very similar to the mean mezzanine loan recovery rate of 30%. Senior secured recoveries for France and Spain are as good as or better than recoveries for the UK, despite the latter having what is considered to be a more secured creditor-friendly legislation.

Finally, the study showed markedly different outcome for recoveries on first-lien debt for publicly rated companies against S&P's portfolio of private credit estimates. Recoveries for publicly rated companies have a mean of 62% and a median of 66%, while those for credit estimates have a mean of 79% and a median of 91%.

CMBS

Extensions dominate April maturity outcomes

Fitch reports in its latest European CMBS bulletin that half of the loans that were originally scheduled to mature in April have had their maturity dates extended, increasing the overall proportion of extended loans to 40%. In total, around €9.5bn due since the onset of the global crisis remains outstanding in light of loan extensions, the agency says.

The majority of extensions granted have featured additional equity injections or have had their terms amended to prevent cash from being released to the borrower. While improvements in a loan's creditworthiness tend to be favourable for CMBS ratings, this must be set against the time remaining until bond maturity, Fitch notes.

The Maturity Repayment Index fell to 38.6% from 41.2% during April, due to the paucity of loan redemptions during the month. Of the 23 loans (accounting for €2.2bn) scheduled to mature in April, only two loans repaid in full, driving the unpaid balance of matured loans up by 17.4% to €15.6bn. Of the 276 loans that have matured since 2007, 108 have repaid in full, while 16 have realised a loss.

CMBS

Warner Building on watchlist

Morningstar has added the US$292.7m Warner Building loan to its watchlist for occupancy concerns. The loan represents over 15% by unpaid principal balance of the JP Morgan Chase 2006-CIBC15 CMBS.

For the six-month period ended 30 June 2011, the net cashflow DSCR was 1.27x, with net cashflow of US$11.8m. Occupancy was reported at only 47%, triggering the inclusion of the loan on the Morningstar watchlist.

The NCF DSCR and net cashflow for the 12 months ended 31 December 2010 were 1.25x and US$23.2m respectively. Occupancy was reported at 99%.

The building's largest tenant, Howrey, vacated as part of the law firm's bankruptcy plan. The November 2011 rent roll showed occupancy of only 47%, indicating that Howrey had fully vacated its space.

The 10-year, fixed rate interest-only loan is structured with a 6.26% coupon and maturity date of 1 June 2016. On 1 April 2006 the building was appraised for US$390m (US$647/sf), yielding a 75% LTV at issuance.

In October 2010, Canada Pension Plan Investment Board and Vornado announced a joint venture that acquired a 45% interest in two properties owned by Vornado, including the Warner Building. The deal valued the building at US$445m (US$737/sf).

With the decline in occupancy, Morningstar considers this loan a moderate near-term credit concern. A preliminary Morningstar analysis of the collateral suggests a value of about US$250m (US$415/sf), resulting in a US$42.7m value deficiency.

CMBS

Loss severities set to plateau

Loss severities on US CMBS reached a high water mark of 45% last year, according to Fitch's annual loss study for the sector. The agency suggests that loss rates may plateau at this level, as they continue to stabilise over the course of 2012.

A closer look at the numbers reveals that loss severities actually declined for most major property types, Fitch notes. Hotels were the lone exception, coming in second (at 55.4% loss severity) behind retail (56.4%) in 2011. Going forward, the sector that poses the greatest concern is office, the only CMBS asset type to have a negative outlook by Fitch.

Driving the stabilisation trend is higher resolution rates for loans in special servicing as property markets stabilise. The number of resolved CMBS loans climbed by nearly 14% in 2011 (at 1,620 loans totalling US$19.6bn) over the prior year (1,427 loans totalling US$19.4bn in 2010).

What may adversely skew the 2011 numbers over time, however, is the fact that some losses have been delayed. 669 resolved loans resulted in no losses last year, 408 of which were returned to the master servicer, while the remainder was classified as modified by special servicers. These loans - along with loans that have been modified into A/B note structures - run the risk of incurring losses in the future, according to Fitch.

CMBS

CMBX volatility returns

Citi CMBS analysts report that volatility returned to the CMBX indices earlier this month, with eurozone fears weighing on most risk assets and news of the Maiden Lane III sale amplifying the selloff in cash and synthetic CMBS markets. They cite CMBX.3 AJ as an example, which experienced a 6.1% decline during the week ending 6 April 6.

Contract volumes spiked during the week ending 13 April, as risk transfer activity significantly increased. A disappointing non-farm payrolls print continued the selloff through 10 April, after which a positive equity market fuelled a small recovery over the next couple of days. After the start of this recovery, the CMBX.3 AJ began to outperform other vintage AJs, according to the Citi analysts.

"The CMBX.4/3 and CMBX.3/2 AJ differential levels in 1H11 indicate that the CMBX.3.AJ has the potential to tighten further relative to the CMBX.2 and 4 AJs.
CMBX AJs and AAs are susceptible to increased volatility, as seen once again during the early April selloff," they note. "However, these tranches could be strong candidates for improvement if the market environment begins to mirror that of the better part of Q1. AJ.1 and AJ.2, for instance, are still cheap in our base and stress scenarios."

CMBX triple-As and AMs provide relative stability while holding more fundamental value, with triple-As and earlier-vintage AMs remaining cheap in Citi's base and stress scenarios and - with the exception of AM.5 - avoiding interest shortfalls.

CMBS

CMBS auctions continue apace

LNR has announced a US$254m sale of distressed assets through Eastdil Secured, comprising five loans securitised in CMBS trusts. Meanwhile, CWCapital has become the third special servicer to liquidate problem loans via large auctions.

The five loans being disposed of via Eastdil comprise 801 North Brand and 700 North Central (securitised in GSMS 2005-GG4), Metropolis Shopping Center (BACM 2007-3), Hookston Square (GCCFC 2005-GG5) and Sacramento Corporate Center (GCCFC 2007-GG9). The first four of these are in REO, according to CMBS analysts at Barclays Capital, while the fifth is listed as matured delinquent and will likely be sold via a note sale.

Typically, LNR has disposed of smaller assets in its special servicing portfolio through Auction.com. But these most recent assets are much larger in size (between US$27.46m-US$86m).

Previous note/REO auctions have been dominated by loans serviced by C-III and LNR. As a result, CWCapital deals have shown lower liquidation rates than those of its peers, the Barcap analysts note.

But the firm is reportedly now lined up to sell US$345m of distressed debt with Mission Capital Advisors. A broad pick-up in liquidation activity on CWCapital-serviced transactions is therefore expected over the coming months.

About US$360m of the circa US$1bn in note/REO auctions conducted in February-March (SCI passim) has so far shown up in CMBS remittance reports, the analysts estimate. "Losses on these loans vary sharply by property type; even on fairly distressed properties, multifamily severities are well below the mean, recording close to 35% severity. On the other hand, office and retail loans up for auction perform much worse, on average showing 75%-80% loss severities," they observe.

CMBS

CMBS delinquencies near record high

The Trepp CMBS Delinquency Rate jumped by another 12bp in April to 9.8%, after increasing by 31bp the previous month. The highest rate on record is 9.88%, set in July 2011.

Following two months of relatively modest loan loss resolutions at US$1bn or less, special servicer activity picked up in April, with over US$1.4bn in loss resolutions seen during the month. The removal of these loans from the delinquent loan category attributed about 24bp of downward pressure on the delinquency rate, Trepp notes.

Loans that were newly delinquent - about US$3.8bn in total - put upward pressure on the rate of about 64bp, while loans that were cured put 33bp of downward pressure on the rate. Added together, the impact of the loan resolutions, the effect of loans curing and the effect of newly delinquent loans created a net increase of 7bp in the rate. The remaining 5bp are a result of additions and subtractions to the denominator due to new CMBS issuance being added, loans paying off and other factors.

In April the office delinquency rate increased by 82bp to a new all-time high of 10.23%. The multifamily delinquency rate fell by 21bp, but remains the worst major property type with a rate of 15.18%. The industrial delinquency rate is down by 18bp and remains the second worst category.

Meanwhile, the retail delinquency rate dropped by 26bp to 7.98% and is still the best performing major property type. The hotel delinquency rate dipped by 8bp, closing in on office for the second best property type.

One category to watch, according to Trepp, is loans that are past their balloon date but current in their interest rate. This category now accounts for 1.16% of loans in the database, down slightly from 117bp last month.

CMBS

Atlantis restructuring resolved

Brookfield Asset Management has settled with a group of B-note holders in connection with the restructuring of the US$2.6bn debt on the Atlantis Resort in the Bahamas. The move paved the way for Kerzner International to transfer control of the asset - together with another Atlantis resort in Dubai - to creditors.

Hedge funds Canyon Capital and Trilogy Capital collectively held approximately US$120m of B-notes secured by Atlantis in the respective Canyon Value Realization Fund and Trilogy Portfolio Co. Arcturus Group and Brown Rudnick worked with the funds and their counsel to assert legal rights and devise restructuring options to achieve the settlement.

The settlement was consummated after the funds launched a successful legal challenge to Brookfield's restructuring proposal. The judge issued a temporary restraining order in January blocking the exchange, which led to the firm terminating its proposed deal.

"This settlement represents a great accomplishment in terms of crafting an outcome that allows every stakeholder to achieve its goals, despite very differing interests," comments Jonathan Mayblum, ceo and co-founder of Arcturus. "We navigated a complex deal structure and aligned note owners of different stature to attain a successful result."

Two Kerzner loans secured by eight properties, including the Atlantis, are securitised in COMM 2006-FL12 and CSMC 2006-TF2A.

CMBS

Four Seasons paydown expected

Terra Firma has surprised the market by acquiring Four Seasons Health Care for a total consideration of £825m, which will be financed through a mix of equity and new debt. All of the existing debt will be paid in full under the deal. European asset-backed analysts at RBS suggest that this will result in a paydown of all TITN 2006-4FS CMBS bonds, including the A2 note, which has an accrued overdue interest of £11.96m.

CMBS

US multifamily heating up

The rise in rents and occupancies in the US multifamily sector is close to the peak last seen before the beginning of the recession, according to Fitch. However, the agency believes that favourable demographics and limited supply should ensure that the market won't overheat.

Based on Fitch's research and a recent Freddie Mac report, multifamily property prices have risen since the lows of late 2009. But they still remain approximately 25% below their peak.

According to REIS, current national vacancy is 5.2%. This is the lowest recorded vacancy since 2001 and is meaningfully lower than the 8% in 2009. The significant reduction in vacancy can largely be attributable to the lack of new supply that has come on line since the start of the recession.

While occupancy and rents suggest multifamily may be nearing pre-recession peaks, the downside risk is not the same. There are several longer-term factors that are positive signs for multifamily, Fitch notes.

According to the US Census, the renter population is likely to grow from nearly 66 million this year to almost 70 million in 2025. And, despite the recovery, the number of multifamily buildings under construction still lags this growth.

CMBS

Q1 CMBS defaults analysed

Fitch's US CMBS cumulative default rate for fixed-rate CMBS increased to 12.96% as of 1Q12 - a 25bp rise from year-end 2011. The agency expects that the pace of new defaults in 2012 will be relatively stable compared to 2011 levels.

Newly defaulted loans for 1Q12 total US$1.7bn and number 155. Office loans, which led defaults in 2011, continue to lead defaults for the first quarter with 49% by balance (48 loans). Fitch expects office loans to continue to make up a greater component of defaults in the near term as leases signed at the height of the market are rolling into lower rent environments.

Retail loans made up the second largest component of defaults, with 29% by balance, but led by number of loans at 60. The retail sector continues to stabilise, but Fitch is cautious on the impact any store closings may have on the sector, especially for second-tier malls and single-tenant big box centres.

The majority (139) of newly defaulted loans were less than US$20m in size, with only 14 loans greater than US$25m. The larger loans were predominantly office loans, with nine sized over US$25m.

Four newly defaulted loans were greater than US$50m: Pacific Shores, a US$165.9m California office loan, securitised in BACM 2007-1 (with an additional US$165.9m pari passu piece in GE 2007-1 not rated by Fitch); Hilton Daytona Beach, a US$94.7m Florida hotel loan, securitised in MSCI 2007-IQ16; One Campus Drive, a US$80m New Jersey office loan, securitised in BACM 2006-3; and the US$56.2m New Jersey Office Pool, securitised in WBCMT 2007-C30. These loans all transferred to the special servicer in 4Q11 due to imminent default following a decline in performance and/or occupancy issues.

An additional 109 loans, with an original securitised loan balance of US$1.9bn in Fitch's portfolio, did not refinance at their 1Q12 maturity date. Fourteen of these loans, with a total of US$125m original securitised loan balance have since paid in full. Of the loans that did not refinance, 24 were from the 2002 vintage and 54 were from the 2007 vintage; seven from the 2002 and two from the 2007 vintage have since paid in full.

Insurance-linked securities

Multi-peril Mythen marketing

Swiss Re is marketing the first US and European wind catastrophe bond from a new shelf programme - Mythen Re. The US$400m deal offers the reinsurer first, second and subsequent event protection over three years.

Mythen Re aims to issue three classes of series 2012-1 notes - US$50m class As, US$100m class Es and US$250m class Hs - each with its own separate risk exposures. Moody's has assigned the three tranches provisional ratings of Ba3, Ba3 and B2 respectively.

The class A notes will provide protection to Swiss Re for US hurricanes on a per occurrence basis and based on the industry loss estimates provided by Property Claim Services (PCS) for a three-year period. The class E notes will provide protection for second and subsequent US hurricanes for three one-year risk periods, on a per occurrence basis and based on industry loss estimates by PCS. The qualifying first event must occur during any given one-year risk period in order to activate the protection against certain hurricanes for the remaining one-year risk period.

The class H notes will provide coverage for a three-year period to Swiss Re against two perils: European windstorms on a per occurrence basis, linked to PERILS industry loss estimates; and second and subsequent US hurricane events on a per occurrence basis, linked to PCS's industry loss estimates. The qualifying first US hurricane event needs to occur only once during the three-year risk period to activate the protection against certain US hurricanes.

The deal's collateral will utilise unsecured notes issued by the International Bank for Reconstruction and Development, which may redeem its notes at par on any coupon payment date after the first year. The issuer will use three separate collateral accounts to segregate the collateral for each class of notes respectively.

Insurance-linked securities

Everglades Re closes up 375%

Citizens Property Insurance's Everglades Re catastrophe bond has closed at US$750m, upsized from an initial target of US$200m (SCI 5 April 2012). The two-year single tranche hurricane deal priced at 1775bp over Treasury money market funds and has been rated single-B plus by S&P.

Everglades Re covers ultimate net losses of Citizens from hurricanes in the state of Florida on a per-occurrence basis. Ultimate net loss does not include extra-contractual obligations and losses in excess of policy limits. The notes cover 75% of losses in excess of US$6.35bn up to US$7.35bn.

There will be one annual reset, effective 1 May 2013, and it will be based on the cedants' exposures as of 31 December 2012. On the reset date, the attachment point for the notes will be reset to keep the probability of attachment and expected loss at 2.71% and 2.53%. The initial probability of exhaustion for the notes is 2.4%.

Goldman Sachs acted as structuring agent and bookrunner on the deal. Loop Capital Markets was co-manager.

Risk Management

Surveys underscore risk management progress

ISDA has released its 2012 margin survey and 2012 operations benchmarking survey at its 27th AGM in Chicago.

The 2012 margin survey reveals that market participants continue to expand their use of collateral to mitigate OTC derivatives credit exposures. Among large dealers, 84% of all transactions are now executed with the support of a collateral agreement, up from 80% in 2011, with 96% of all trades executed in the credit derivatives markets subject to collateral arrangements.

The survey shows that 76% of collateral delivered by respondents for non-cleared derivatives consists of cash, while the remaining 24% consists of government securities and other collateral. It also reports that 100% of large dealers and 75% of all survey respondents indicated that they proactively perform portfolio reconciliations.

"Over the past 12 years, the margin survey has provided a consistent set of benchmarks for collateral use," comments Robert Pickel, ISDA ceo. "As the survey clearly demonstrates, collateralisation remains among the most widely used methods to mitigate counterparty credit risk in the OTC derivatives market and market participants have increased their reliance on collateralisation over the years. In an evolving regulatory environment that seeks to reduce the counterparty risk associated with derivatives, the continued use of bilateral collateralisation has - in the same way as clearing - an important role to play in risk mitigation."

This year, the survey asked 14 large dealers to indicate their levels of collateralisation with central counterparties. The results revealed that large dealers delivered approximately US$50bn of collateral as margin in central counterparties - US$49.6bn in their executing broker capacity and US$700m in their clearing member capacity.

The survey also shows that active collateral agreements number almost 138,000, of which 85% are ISDA agreements. Gross credit exposure of OTC derivatives after netting and collateral is approximately 0.1% of outstanding notional amounts, ISDA notes.

Of the 51 firms that responded to the 2012 margin survey, 43 are banks or broker-dealers. The remaining participants consist of hedge funds, insurers, government agencies and government-sponsored entities.

Meanwhile, ISDA's operations benchmarking survey identifies and tracks operations processing trends in privately-negotiated OTC derivatives. The results are designed to provide individual firms with a benchmark against which to measure the promptness and accuracy of their trade data capture, confirmation and settlement procedures, as well as the level of automation of their operational processes.

Infrastructure improvements are reflected in the survey with the continuing decrease in confirmations outstanding. Credit derivatives, for example, show an average across all respondents of 0.4 business days' worth of aged outstanding confirmations, compared with 0.5 business days in last year's survey. To put these numbers in perspective, confirmations outstanding in 2008 were 6.4 business days' worth of business for credit derivatives.

The confirmation process for credit derivatives is shown to be completely automated, with 100% of eligible trades confirmed electronically.

Sixty-one member firms participated in the survey, which covers five OTC product groups - interest rate, credit, equity and commodity derivatives, as well as currency options.

Risk Management

CVA functionality enhanced

Pricing Partners has extended its CVA, DVA and bilateral CVA functionality to work on any trade at a portfolio level and to generate fast computation for marginal CVA, DVA and bilateral CVA. These new functionalities allow users to measure the impact of credit valuation adjustment counterparty-by-counterparty and to estimate the marginal impact of a new trade within a portfolio, the firm says. The aggregation mechanism at the portfolio level has been greatly optimised to reduce computing time to its strict minimum with lots of intermediate computation stored in memory.

RMBS

Busted swap recoveries begin

The three Eurosail busted-swap RMBS that agreed stipulated claims against Lehman entities - ESAIL 2007-5, 2007-6 and 2007-PR1 - have received the first recovery amounts under the settlement. The issuers received 20.35% of the total claim amount from Lehman Brothers Special Financing Inc and 3.4% of the total claim amount from Lehman Brothers Holdings Inc.

European asset-backed analysts at RBS note that these figures equate to about half the total recovery amount they had been assuming in their analysis. "The issuers have stated that these recoveries will be used to enter into a suitably rated replacement hedge - although, given the prospect for further amounts to be received over the coming quarters, we believe investors should anticipate some delay before these hedges are put into place," they add.

RMBS

Mortgage tool strengthened

Moody's Analytics has strengthened its Mortgage Portfolio Analyzer (MPA) tool, a risk management, stress testing and capital allocation service. As part of the update, the framework for modeling stressed macroeconomic scenarios, defaults, prepayments and severities has been enhanced.

"As banks respond to increased regulatory and economic uncertainty, they are faced with pressure to accurately measure and manage their exposure to risk related to RMBS and whole loan residential mortgages," says Ashish Das, md of research at Moody's Analytics. "The updated MPA will help banks to quickly run their mortgage portfolio under stressed scenarios, delivering greater transparency into the risk drivers and enhanced flexibility of use."

With the updated MPA, institutions can run their mortgage portfolios under the Fed's Comprehensive Capital Analysis and Review (CCAR), user-defined and Moody's Analytics' macroeconomic scenarios. Taking advantage of multi-threading technology, the service can run analyses of very large loan portfolios quickly and efficiently. It now allows users to run analyses of mixed portfolios of mortgage loans - including prime, subprime, Alt-A, HELOCS and NegAm - and automatically classify loans into prime or subprime categories.

RMBS

Debut MBS settlement cycle completed

The first settlement cycle run by the DTCC's new MBS central counterparty (SCI 13 March) achieved a 70% reduction in the mortgage securities pools and payments involved in settling the trades. The service netted the nearly 43,000 pool allocations underlying the trades down to less than 13,000.

As the month of April progressed, the processing of class B and C MBS trades through the central counterparty also brought significant reductions in the number of securities and payments that had to be delivered to complete the transactions, thus eliminating the movement of billions of dollars' worth of cash and securities. It netted down pool delivery instructions for class C MBS trades from about 37,500 to 11,500 - a 69% reduction.

Operated by DTCC's Fixed Income Clearing Corporation (FICC) subsidiary, the CCP provides the first-ever guarantee that matched MBS trades will be completed even if one side to the trade defaults or fails to deliver the pools of mortgage securities that underlie the trade. Because the settlement of an MBS trade often does not take place until months after the trade itself, the trade guarantee is a long-sought step for the securities industry.

Delivery entails the allocation of specific pools to be delivered against the netted TBA obligations. Because pools are frequently allocated and reallocated against numerous TBA settlement obligations, there can be multiple redeliveries, creating a process that's operationally inefficient and potentially error-prone. FICC's new CCP process allows it to net down offsetting allocations of pools against these delivery obligations, which can sharply reduce the number of settlement deliveries.

The new CCP services are being phased in from April through to June, so that FICC's member firms can adjust to new reporting and clearing fund requirements, as well as same-day collection of settlement debits and credits. By July, all the securities classes to be settled will have gone through the CCP.

RMBS

RMBS extension risk warning

Absent sponsor support, extension risk for scheduled and bullet notes remains significant for UK RMBS master trusts, Moody's warns.

Extension beyond a scheduled or bullet maturity can lead to the repricing of risk, low redemption rates and actual and potential trigger breaches in some trusts. These breaches affect principal payment allocation and can significantly affect yields.

"Looking at only the assets in the deals, all notes in the Aire Valley, Lanark, Langton and Lannraig master trusts extend under their current total redemption rates (TRR)," says Jonathan Livingstone, a Moody's vp-senior analyst.

The agency has assessed the overall extension-risk score for 80.9% notes in all trusts to be at least medium/high, which is a slight increase compared with the 73.8% recorded for 2011. This assessment reflects the reliance on a high proportion of scheduled notes without high accumulation periods and continuing historically low principal payment rates observed in the trusts.

Moody's notes that many trusts are structured such that they rely on the originator to refinance the notes on their due dates or else the risk of notes extending remains high. Lack of originator support and low repayment rates has meant that many of the scheduled amortisation notes in the Aire Valley and Granite master trusts, for example, have already extended past their expected maturity dates.

With the property market remaining stagnant amid tight credit conditions, TRRs will remain at around 15% over the next 12 months, which is significantly below their 34.5% average between 2005-2008. TRRs are also expected to remain under downward pressure from: tight lending conditions for buy-to-let (BTL), non-conforming and interest-only mortgages; the increasing portion of borrowers who are unable to refinance onto more attractive rates; trusts with greater exposure to loans with limited-income verification, interest-only features and higher-indexed LTVs; and continued historically low levels of unscheduled principal payments.

RMBS

Second 'disappointing' BPI tender

Banco BPI repurchased €77m of bonds under its second Douro Mortgages RMBS tender offer (SCI 24 April), representing slightly less than 4% of the current amount outstanding. With the fixed price tender levels set at 5-7 points above current secondary market levels at time of launch and between 7-10 points higher than the previous tender offer, the low take-up will still disappoint the bank, according to ABS analysts at Barclays Capital.

"Investors are seemingly comfortable with their Portuguese exposure and do not see these tender offer levels as providing enough premium to participate," they explain. The analysts believe that many of these bonds are currently held in legacy books at higher levels than those offered in the tenders and so investors are unwilling to crystallise these losses and taint their overall book.