Contents

CMBS

Good week for Euro CMBS

This week has seen a rise in activity in European CMBS. Spreads have stayed fairly flat, while BWICs are still being well received, with seniors generating increasing interest.

"The market has been fairly quiet for a while and this week has not been a complete change, but there has been a bit more buying activity from clients," reports one trader. "Activity in the Street has also increased on the back of that - as soon as some dealers get lifted, then everyone else seems to get excited and trades up too."

An example of this was seen with TMAN7, which the trader says traded up a bit yesterday. "The bond has gone from the low-87s at the beginning of the week to something more like the high-87s now, so it is up by half a point or so," he notes.

BWIC activity also remains fairly consistent. The trader says one particularly large list hit the market last Friday and another two days ago.

"Both of those traded fairly well, although I think the one this week was stronger. For quite a while now BWICs have been trading very well. Really that is a bit of a surprise because client activity has not always been so strong but, for the larger lists at least, trading has been good," he explains.

The trader is upbeat about the prospects for next week and the market going forward. He says: "This has been a positive week and interest in seniors is certainly picking up. At the minute, that interest is only really coming from hedge funds though; the real money guys don't seem to be doing anything much at the moment."

JL

Structured Finance

Euro BWICs post record volumes

The 'risk-on' rally in the European securitisation market sparked record bid-list activity in 1Q12. At €4.1bn, BWIC supply during the quarter was almost twice that seen in 1Q11, according to Citi estimates.

Bad banks and other 'wind-down' portfolios were active sellers of securitised assets in the first quarter. The increase in BWIC supply was easily absorbed by the market, however, with spreads tightening even across riskier sectors.

RMBS dominated the bid-lists, accounting for 71% of Q1 BWIC supply (compared to 58% in 1Q11). Over half (56.2%) of the bonds were UK RMBS (split 26.9% prime and the remainder non-conforming), with PIIGS RMBS representing nearly 40%.

Indeed, the peripheral market proportion of total RMBS supply grew in 1Q12 to €1.12bn versus €185m a year previously, the Citi figures show. Spanish and Italian RMBS accounted for 32.3% combined, with peripheral spreads tightening by 200bp-375bp during the quarter.

Despite accounting for a large percentage of new issuance and outstandings, Dutch RMBS made up only 3.2% of the bid-lists during Q1. Citi ABS analysts consequently suggest that the paper is tightly held by investors due to its strong collateral performance.

Meanwhile, the supply of European CMBS increased each month in 1Q12, rising from €110m in January to €320m in March. CMBS spreads tightened by 100bp over the quarter.

"CMBS should continue to be a regular part of bid-lists as downgrades continue and loans are extended, driving some investors to sell. Demand for CMBS bonds should also remain strong as the sector continues to offer high yields," the analysts note.

Senior supply remained steady during the period, ranging from €163m to €300m, with the exception of two weeks in January when less than €80m circulated and another week when it surged to €488m. At the same time, the proportion of subordinate classes being sold increased, moving from a weekly average of €44m in January to €133m in March.

Given this backdrop, the analysts recommend purchasing select off-the-run bonds mixed with core assets to pick up yield as part of a credit barbell strategy. In particular, they like senior Italian and Portuguese RMBS, older vintage Spanish RMBS and first-pay non-conforming RMBS.

CS

CDS

Credit-picking strategies recommended

The current environment makes for a good credit-picker's market, according to credit derivative strategists at Morgan Stanley. They suggest that a good credit-picking market requires above-average dispersion, volatility, spreads and liquidity - while having something to debate in the macro environment "to separate winners from losers".

Investors are currently focused on identifying convex ways of implementing this view in a top-down manner, the Morgan Stanley strategists note. A healthy backdrop on the default risk side suggests that going long subordinate tranche risk, balanced with single name hedges, is one such strategy.

The strategists cite three primary drivers of value in investment grade and high yield junior tranches at present: tail name pricing and distribution; tranching and remaining subordination; and correlation and portfolio risk allocation. They recommend four trades that capitalise on these drivers.

First is going long the IG9 seven-year (Dec 14) equity tranche, using some of the proceeds to hedge out default risk in a handful of the tail names. "While we like the traditional 0%-3% tranche, we see even better value in the thicker, more defensive 0%-7%," the strategists explain.

The second trade they put forward is going long the HY15 five-year (Dec 15) 0%-15% tranche versus the HY10 five-year (Jun 13) 15%-25% tranche. "Given the tail name overlap and current risk allocation, we like going long equity risk in the newer HY15 and pairing it with the 15%-25% tranche of HY10, which has only 2% remaining subordination."

The third recommendation is to go long the IG17 five-year (Dec 16) 3%-7% tranche outright, given the low dispersion in the underlying portfolio and potential for tail formation. At 5x the index spread, this tranche appears to offer attractive returns for the default profile.

Finally, the strategists recommend going long the HY15 five-year (Dec 15) 15%-25% tranche outright as a way to monetise the default premium in the HY15 index, without taking first-loss exposure.

CS

CLOs

Up-tick in CLO calls predicted

Many 2004-2007 vintage US CLOs have reached or are approaching the end of their reinvestment periods. If primary spreads tighten further, this could drive an up-tick in CLO refinancings and calls over the next two years.

CDO analysts at Wells Fargo calculate that 34% of the current CLO universe will be beyond its stated reinvestment period by the end of this quarter. This figure jumps to 46% by year-end and reaches 75% by the end of 2013.

Once a CLO is out of reinvestment, manager activity, post-reinvestment period indenture language, loan prepayment rates and ratings downgrades can influence its amortisation speed. But the Wells Fargo analysts observe that senior notes typically pay down by more than 50% between year one and year two of post-reinvestment.

An up-tick in CLO calls could also impact principal paydowns in the coming months. As senior notes amortise, equity returns are compressed, meaning that calls become more economical.

"Generally, a call begins to make sense 1-2 years past the reinvestment period," the analysts note. "Of course, the direction of the loan market can have a large impact on future CLO calls. Also, call economics can vary if the controlling equity was acquired in the secondary market at a discounted price."

Given the likelihood of more CLOs being called, they recommend that risk-averse investors look for opportunities in seasoned pre-crisis double-A notes. These bonds generally have strong credit support levels and can withstand very high stress scenarios without taking a loss. In addition, they should realise upsized returns if the CLO gets called.

For investors with a stronger risk appetite, the analysts recommend going further down the capital structure of seasoned CLOs, as these tranches should realise even greater returns upon a call.

At US$5.1bn, April saw the largest CLO new issue volume since the financial crisis. Year-to-date primary issuance now totals US$10.9bn.

CS

RMBS

Austerity budget to impact Dutch RMBS

Changes to the mortgage regime in the Netherlands have been agreed as part of the new Dutch austerity budget. These changes could impact Dutch RMBS - particularly prepayment speeds - although more information is needed before their full impact can be assessed.

The budget has been agreed in the wake of the fall of the Dutch government last week. It aims to implement significant structural reforms to reduce mortgage debt and promote confidence in the housing market.

From January 2013, newly originated mortgages will have to be 30-year repayment mortgages in order for interest payments to be tax deductible. Maximum LTVs are also being reduced from 106% to 100%.

While RMBS analysts at JPMorgan don't expect the budget announcement to result in notable arrears or default performance deterioration, they do predict a change in mortgage borrower behaviour, which will in turn impact the Dutch RMBS market. "We expect existing borrowers, who are currently benefiting from a tax efficient mortgage, to elect to remain on their existing, financially-attractive deal. While this would likely have a dampening effect on prepayment speeds in outstanding RMBS deals as borrowers become more reticent to refinance, the presence of call features in transaction structures will curtail any significant impact on investors," they observe.

The JPMorgan analysts suggest that investors would essentially become less reliant on pre-call bond amortisations and more reliant on originator call action, which they note has been supportive in the majority of cases so far. If borrowers are unable to port their existing mortgages when they move, however, the impact on existing RMBS prepayment speeds would be less significant.

The period before implementation next year is expected to see an increase in house buying as potential homebuyers look to take advantage of the tax efficiency of the current product. This should not have a significant impact on the RMBS market, although it should give a short-term boost to housing market activity.

The new regime is likely to make mortgages less affordable, particularly for first time buyers. "We should, however, expect RMBS backed by future origination to experience higher prepayment speeds than the 'legacy cohorts' as amortisation cashflows increase under the repayment mortgages," note the analysts.

They add: "In terms of the outlook for pricing of existing Dutch RMBS, despite the uncertainty the mortgage market proposals have presented the securitisation market, we doubt we will see a direct translation into wider pricing. Rather, a period of reflection while we await the emergence of programme details seems the more likely outcome."

JL

ABS

MBS, ABS co-heads recruited

Gleacher & Company Securities has replaced Robert Fine and Robert Tirschwell, who announced last month that they would depart the firm (SCI 13 April). Perrin Arturi and Donald Ullmann will each join as executive md and will co-head the firm's MBS, ABS and rates division.

Arturi joins from RBS, where he was md and specialised in the trading of pass-through securities. He has also held senior trading roles at UBS and Bear Stearns.

Ullmann was most recently at Keefe, Bruyette and Woods, where he was head of fixed income trading and co-head of fixed income sales. He has also held several roles at Merrill Lynch, including head of MBS sales and research.

Structured Finance

EM debt team recruited

Schroders has expanded its fixed income team with four appointments to focus on emerging market debt relative return. The new arrivals are James Barrineau, Fernando Grisales, Alec Moseley and Chris Tackney.

Barrineau becomes head of Latin American fixed income and co-head of emerging market debt. Grisales becomes senior portfolio manager and Moseley becomes senior portfolio manager and sovereign research analyst.

Barrineau, Grisales and Moseley join from Ice Canyon and previously worked together at Alliance Bernstein. Grisales and Moseley will both report to Barrineau, who in turn will report to Karl Dasher, global head of fixed income.

Tackney also joins as senior portfolio manager and will report to Wes Sparks, head of US fixed income. Tackney has previously worked as Asia credit trader at Credit Suisse, emerging market credit portfolio manager at Black River Asset Management and emerging markets portfolio manager at BlackRock Advisors.

Structured Finance

SF pair promoted to partner

Appleby has promoted two of its structured finance lawyers to partner. Alan Bossin specialises in ILS and Sarah Demerling focuses on Islamic finance and CDS. Both are based in Bermuda.

Bossin is a member of Appleby's insurance team and focuses on the formation of SPVs and risk transference vehicles as well as structured finance, securitisation, derivative and transformer type transactions.

Demerling is the local team leader for Islamic finance and a senior member of the structured finance team in Bermuda. She specialises in OTC derivative transactions, ISDA transactions, securities offerings and mergers and acquisitions.

Structured Finance

Capital boost for credit fund

Eiffel Credit Opportunities, the long-short European credit fund managed by Eiffel Investment Group, is to receive approximately US$40m of acceleration capital from the newly launched EMERGENCE seeding platform. The additional capital brings its assets to around US$100m.

EMERGENCE pools capital from major French institutional investors. Its absolute return unit is managed by NewAlpha Asset Management.

The Eiffel Credit Opportunities fund makes discretionary investments in credit instruments of European corporate and financial institutions. It relies on a bottom-up research-driven investment process coupled with a dynamic management of market exposure to compose a portfolio of about 15-30 long and short credit positions.

The fund is managed by Emmanuel Weyd, who has run credit strategies at Eiffel Investment Group since 2009. He was previously md on the credit desk of JPMorgan's proprietary trading division in London.

Structured Finance

Rating agency reshuffles in Australia

Ben McCarthy, previously acting head of Fitch Australia and head of structured finance for Asia-Pacific, is now set to focus purely on structured finance. John Miles takes over as head of Fitch Australia, responsible for daily operations in Australia and New Zealand. Both are based in Sydney.

CDS

Japan credit strategist joins

Takashi Miura has joined Morgan Stanley as a credit strategist. He is based in the Tokyo office and covers Japan's credit markets, including corporate bonds and CDS.

Miura joins from Goldman Sachs, where he spent 12 years. Prior to that he worked at Rating and Investment Information.

CDS

ISDA board members elected

ISDA has elected three new directors and re-elected 10 further directors at its AGM in Chicago. The new directors are Elie El Hayek, Fujio Nishio and Richard Prager.

El Hayek is md and global markets executive committee member at HSBC Bank and Nishio is chief manager of derivatives trading, global markets sales and trading at Bank of Tokyo-Mitsubishi UFJ. Prager is md and head of global trading at BlackRock and a member of both the BlackRock portfolio management group executive committee and BlackRock operating committee.

The re-elected directors are: Guillaume Amblard (BNP Paribas); Martin Chavez (Goldman Sachs); Bill de Leon (PIMCO); Michele Faissola (Deutsche Bank); Diane Genova (JPMorgan); Jeroen Krens (RBS); Stephen O'Connor (Morgan Stanley); Eraj Shirvani (Credit Suisse); Emmanuel Vercoustre (AXA Bank Europe) and Lili Wang (ICBC).

CMBS

Real estate partner joins

David Stewart has joined Mayer Brown as real estate partner. Stewart specialises in CMBS, particularly the purchase of B-pieces. He joins from Latham & Watkins and will be based in New York.

RMBS

Pass-through MBS heads hired

Michael Marsallo and Mark Schultz have joined Daiwa Capital Markets America's MBS group. Together they will lead Daiwa's mortgage-backed pass-through desk.

Marsallo and Schultz join from MF Global, where they also shared responsibility for pass-through trading. Marsallo worked at UBS before MF Global and Schultz has previously worked at Countrywide Capital Markets and Yamaichi.

RMBS

RMBS directors appointed

PrinceRidge has expanded its RMBS group with five new directors. Brendan Kissane and Ken Perschetz become part of the firm's trading team and Jeff Hingst, Tony Mun and Jeff Weaver join the sales group.

Kissane specialises in trading specified pool mortgages. He has previously worked at Ally Securities, Mizuho Securities and Nomura Securities. Perschetz specialises in ARMs and has previously worked at Oppenheimer, Nomura, Sandler O'Neil and Bear Stearns.

Hingst spent almost two decades selling RMBS at FTN, Barclays and Bear Stearns before joining PrinceRidge. Mun has previously held positions at Ally, Deutsche Bank and Credit Suisse, while Weaver has worked at Ally, Robert Baird and RBS.

RMBS

Business development md joins

Jenine Fitter has joined Clayton Holdings as business development senior md. She will be responsible for sales and business development initiatives across all of Clayton's offerings, including credit risk management, due diligence, consulting and special servicing.

Fitter joins from Digital Risk where she was mortgage solution sales svp. She has also held senior sales roles at CoreLogic, S&P and Fitch and will report to Tom Donatacci, business development evp.

ABS

ABS fund unveiled

Prytania Investment Advisors has launched the Metreta Fund, a global fund investing in the senior tranches of ABS. The fund is designed to offer institutional investors a liquid, low credit risk portfolio of assets generating a stable yet enhanced return in excess of 150 over Libor.

The first close of the Metreta Fund, with US$57m, extends Prytania's current suite of global structured finance funds. The fund offers investors access to weekly liquidity for base management fees of 15bp.

Mark Hale, cio of Prytania Investment Advisors, comments: "The continued resilience of senior structured finance in light of turbulent credit markets and global macroeconomic woes offers institutional investors superior risk/reward and low volatility when compared to a wide range of other near cash products, such as bank debt, EU sovereign debt and corporate bonds. Metreta complements Prytania's existing fund products and we expect economies of scale to develop as the fund grows, helping offset the natural spread tightening anticipated as the revival in structured finance continues."

He adds: "Institutional investors that run large cash balances increasingly want enhanced returns for their cash, but are often not willing to invest in instruments where the risks are not clear. Giving clients full transparency on what we invest in, providing clients with the option to 'drill down' into each underlying asset and publishing continuous updates is a key service Prytania can provide."

Structured Finance

PPIF wind-downs continue

The latest PPIP report indicates that funds have stepped up their total distribution rates. Total distributions increased by about US$1bn for the quarter.

Excluding Invesco, which concluded winding down its PPIF last quarter, total distributions on equity picked up from an average of about 10% to 15% between 4Q11 and 1Q12. Most of this increase is attributed to two funds - the AG GECC and Oaktree - which increased distributions from about 11% to 29% and 25% respectively, according to Barclays Capital ABS analysts.

Further PPIP wind-downs are expected, as deleveraging makes structures less attractive for the equity. In addition, privately available financing opportunities continue to improve, meaning that PPIFs are becoming less efficient vehicles to own non-agency bonds for certain investors. For the most part, the Barcap analysts anticipate this process to have a minimal effect on prices.

Structured Finance

Pricing service rolled out

RiskSpan has added daily independent pricing for structured securities to its offering of risk management services. The new service incorporates constant calibration utilising an audit-compliant process to generate pricing for structured securities. It covers RMBS, CMBS, ABS, agency pass-throughs, agency CMOs, mortgage whole loans, CDOs and Trust Preferred securities.

Structured Finance

Spanish ABS hit by sovereign downgrade

S&P has taken various credit rating actions on 98 tranches in 85 Spanish securitisations. The move follows the lowering of the agency's long-term sovereign rating on the Kingdom of Spain to triple-B plus from single-A in light of the country's deteriorating economic conditions

Specifically, S&P has: lowered its ratings on 53 tranches in 50 RMBS; lowered and kept on credit watch negative its ratings on one tranche in one RMBS; lowered its ratings on 35 tranches in 25 SME CLOs; lowered and kept on credit watch negative its ratings on one tranche in one SME CLO; lowered its ratings on six tranches in six ABS; and lowered its ratings on two tranches in two Spanish CDOs.

Following the sovereign downgrade, the agency has based its subsequent rating actions in Spanish securitisations on the application of its non-sovereign ratings criteria. Under these criteria, the highest rating S&P would assign to a structured finance transaction is six notches above the investment grade rating on the country in which the securitised assets are located. Therefore, its ratings on transactions with underlying assets in Spain are now capped at double-A plus.

For transactions issued under the ICO-FTVPO subsidy programme, the agency is reviewing the impact of the sovereign downgrade on tranches rated above the rating on the sovereign. The sovereign rating action has also affected its view of the creditworthiness of various Spanish issuers, including banks that are counterparties in Spanish structured finance transactions.

S&P says it is assessing the effect of its rating actions on Spanish banks on its ratings in structured finance transactions. In some cases, the review will result in a downgrade of those notes that are directly linked to the ratings on the counterparties. In others, the remedy period has started and the agency is waiting to see what remedy actions the banks take during that period.

CDO

ABS CDO liquidation scheduled

Dock Street Capital Management has been retained to act as liquidation agent for Jupiter High-Grade CDO VI. Qualified investors are invited to bid on the collateral at two sales held on 17 May.

CDO

CRE CDO on the block

The trustee for Dillon Read CMBS CDO 2006-1 has posted a notice advising that the transaction is to be liquidated via a public auction. An EOD occurred in September 2010 and, pursuant to Section 5.2(a) of the indenture, the majority holders of the controlling class can declare the principal of the notes to be immediately due.

According to CRE debt analysts at Deutsche Bank, the CDO is interesting in that it is primarily collateralised by synthetic 2005/2006 vintage mezzanine CMBS exposures. It also holds a small amount of synthetic CRE CDO exposures and some REIT paper, as well as some cash CMBS bonds. In all, the transaction represents around US$650m of CMBS exposure.

In terms of linkages between other CDOs, the Dillon Read notes are held by NSTAR 2006-7 and NSTAR 2007-9.

CDO

Liquidation for ABS CDO pair

Dock Street Capital Management has been retained to act as liquidation agent for the West Trade Funding CDO II and III transactions. Two public auctions are to be held for each deal, with the former's sale scheduled for 15 May and the latter's a day later.

CDO

Trups CDOs upgraded

S&P has raised its ratings on 42 tranches from 20 US Trups CDOs, representing a total issuance amount of US$6.18bn, and removed 35 from credit watch positive. In addition, the agency affirmed its ratings on eight other Trups CDO tranches.

The rating actions reflect the application of S&P's updated Trups CDO criteria (SCI 17 April). Some of the transactions have also benefitted from improvements in their underlying collateral portfolios, including cessation of deferrals that had been occurring and changes in the credit quality of the small banks that issued the trust preferred securities collateralising the CDOs. Additionally, the rating actions reflect significant paydowns made to the senior notes of the CDO.

The agency says it will resolve the status of the remaining Trups CDOs with ratings on credit watch within the next three months.

CDO

Triaxx CDOs on the block

The New York Fed has initiated a competitive bid process in response to several strong reverse inquiries for holdings in the two Triaxx CDOs in the Maiden Lane III portfolio. BlackRock Solutions, the investment manager for ML III, will conduct the bid process for the entirety of the Triaxx CDO holdings consistent with past practices.

Nine broker-dealers have been invited to submit bids for the Triaxx CDO holdings based on their expressions of interest in the assets: Barclays Capital, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley, Nomura Securities and RBS. All-or-none bids will be due for each of the two CDOs on 10 May, at which point the New York Fed will decide whether to sell either or both, depending on the strength of the best bids.

CDS

Eircom results in

The final prices of first- and second-lien Eircom LCDS were determined to be 62 and 7.125 respectively at yesterday's auction. Three dealers submitted initial markets, physical settlement requests and limit orders to settle trades across the market referencing the name.

CDS

Sino Forest CDS settled

The final price for Sino Forest Corp CDS was determined to be 29 during this morning's auction, the first to be held in the Asia ex-Japan market. 12 dealers submitted initial markets, physical settlement requests and limit orders to settle trades across the market referencing the entity.

CMBS

CMBS loss severities revert to mean

After two months in which CMBS loss severities fell sharply, the numbers reverted to the mean in April - both in terms of loss severity and volume of loans resolved - according to Trepp. At US$1.4bn, liquidations were about 9% higher than the 12-month moving average of US$1.31bn per month.

In comparison to liquidations in February and March, this number is much closer to the 12-month moving average. In February, the volume of liquidations was only 68% of the 12-month moving average; in March, it was only 77% of the average.

Since the beginning of 2010, special servicers have been liquidating at an average rate of about US$1.09bn per month. The number of CMBS conduit loans liquidated in April was 148, a 56% uptick from the 95 in March.

The average loan size for liquidated loans was US$9.7m in April. Over the last 12 months, the average size of liquidated loans has been US$8.9m.

Losses from the April liquidations totalled about US$612m, Trepp notes, representing an average loss severity of 42.68%. This was up by 10.91% from March's 31.77% reading and up by 17.13% from February's 12-month low of 25.55%.

The April loss severity reading is on par with the average loss severity of 42.55% over the last 28 months, as well as the 12-month rolling average of 43.72%.

CMBS

Call for servicing disclosure

Kroll Bond Rating Agency (KBRA) has offered its views on special servicer conflicts of interest (see also SCI 12 March), suggesting that investor unease in this area could largely be resolved through better disclosure and transparency through industry-wide standardised reporting. Consequently, the agency says it is supportive of efforts by the Commercial Real Estate Finance Council to expedite enhancements to its investor reporting package (IRP) on these topics.

"As most pooling and servicing agreements require the most recent version of the IRP to be reported on a monthly basis, it would be a critical element in restoring investor confidence in the CMBS servicing practices. KBRA has had dialogue with and has been privy to industry discussions with the special servicers that have expressed support for reporting enhancements, as well as the willingness to provide additional information to investors," it adds.

In KBRA's view, the IRP should include reporting that clearly identifies the disclosure of affiliate services and related fees paid, as well as an explanation of the resolution to provide additional transparency and accountability. Similarly, greater clarity and transparency surrounding fair value purchase options can be achieved by incorporating fields in the IRP to better identify when such options have been exercised. In addition, there could be better disclosure surrounding the facts and circumstances the special servicer considered to conclude that the fair value purchase option would result in the highest and best resolution for the trust, according to the agency.

Meanwhile, recent PSAs have addressed 'double dipping' by incorporating language that requires the special servicer to offset corrected loan fees charged to the trust with modification fees they have collected from the borrower. However, KBRA believes that further work can be done by the industry to standardise the document language, which varies from deal to deal.

CMBS

Slow growth seen in CRE

Slow growth in the US economy is translating into slow growth for the commercial real estate property markets, according to Moody's 1Q12 US CMBS and CRE CDO Surveillance Review.

"We expect modest growth in 2012 in the commercial real estate markets, with a rise in investment activity and lending and stability in the market performance of the core property types," says Moody's md Michael Gerdes. "The US economy is slowly adding jobs, despite uncertainty about the European debt situation and employment, and real estate values are moving in a positive direction."

With the exception of retail, all of the core property types experienced rental growth in 4Q11. The retail sector is expected to improve in 2012, however, as unemployment rates decline and wage growth resumes.

Employment reports are positive but slow, which also bodes well for the office property market, although a recovery will take time. The overall office vacancy rate remains at 16%. Urban central business districts continue to outperform the suburban markets.

In contrast, the hotel market has been performing strongly. Supply remains essentially the same, but demand has been strong for all segments except for midscale hotels, Moody's notes. The agency anticipates the lodging sector's RevPAR to continue to improve and finish the year at a rate of 5%, which was last seen in 2010.

Finally, demand for multifamily continues to rise, with occupancy standing at 95%. Effective rents, which rose by 4.9% in 2011, are now above their pre-recession highs. Completions have been slow, but are expected to outpace absorption for the first time since 2009, dampening further significant occupancy and rent gains.

Moody's expects the multifamily sector to remain stable, with sustainable growth.

CMBS

Plantation Place assumed

The Plantation Place building, securing the REC 5 single-asset CMBS, has been acquired by Moise Safra. The sale and subsequent assumption of the debt highlights the strong recovery for institutional quality assets in global capitals, according to CRE debt analysts at Deutsche Bank.

The property purchase price of £500m is roughly 10% higher than the MR appraised value from 3Q10 and 40% higher than the appraised values in 2008/2009. In fact, the price is close to the one achieved in the sale that was the basis for the CMBS loan (£527m).

The Deutsche Bank analysts note that the move is a mild positive for the REC 5 transaction because of the sales price and the financial resources of the new sponsor. They believe that the likelihood of the loan successfully paying off on its maturity date next summer has increased meaningfully.

Of all the London office exposures, the analysts suggest that only the City Point office building - securitised in ELOC 27X - will suffer a loss.

CMBS

CMBS loan events updated

45 new loan events have been added to the SCI CMBS loan events database. These include:

03/05/2012
Deal: REC 5
Property: Plantation Place
Event: property sold to Moise Safra for £500m & debt assumed; part of proceeds used to cure LTV EOD
Description: increased likelihood of loan paying off at maturity next summer

02/05/2012
Deal: TITN 2007-CT1
Property: Hugo
Balance: €180.5m
Event: updated market value of €119.7m, as of 10/1/12 (vs. €231.85m at origination); Velizy property tenant Peugeout's lease to expire on 7 July
Description: change of control - Barwa RE shares in subsidiaries transferred to Centuria Holdings (Hugo property manager) for €1

27/04/2012
Deal: COMM 06-FL12 & CSMC 06-TF2A
Property: Kerzner Portfolio
Event: Kerzner transferred control of Atlantis resorts to Brookfield Asset Management
Description: loan reportedly extended by 2 years to Sep 2014

There are now 1,704 searchable loan events, dating back to March 2011, on the database. Click here for more.

RMBS

REO-to-rent deals in the works?

S&P reports that the US Federal Housing Finance Agency's REO-to-rent programme, which aims to help clear the inventory of foreclosed REO properties from Fannie Mae and other government-sponsored entities, has captured the attention of the securitisation market.

The programme began soliciting bids from qualified investors on approximately 2,500 properties in eight of the hardest-hit metropolitan areas earlier this year. And, given the current extent of the REO inventory and its potential to grow, the potential market may be sizable.

"Drawing from existing securitisation structures, REO-to-rent securitisations could take a number of forms," says S&P credit analyst Jaiho Cho. "The rental streams from a pool of underlying REO assets could potentially provide a steady cashflow to back such transactions and these structures could also incorporate proceeds from the eventual sale of the properties into their cashflows."

A hypothetical REO-to-rent securitisation could resemble a mortgage-backed securitisation in which a pool of property assets secures the transaction, except that rental streams - rather than mortgage payments - would provide the cashflow, S&P suggests. Another possibility is a hybrid structure similar to triple-net-lease securitisations, in which the lease payments themselves are pledged as collateral, with the properties providing some level of recovery support.

"The securitisation approach may offer a number of advantages to investors and other market participants," Cho adds, "including its ability to achieve economies of scale, its capacity for efficient allocation of resources and its use of risk tranching to allow investors with different risk appetites to participate."

Potential credit considerations would likely include rental income, operating expenses and other costs, the geographic diversification or concentration of the portfolio and the proceeds from eventual property sales. The property manager's expertise in large-scale residential real estate management and ability to manage subservicing arrangements may also be a credit consideration.

"Investors looking for alternative ways to invest in the US housing sector may view the REO-to-rent market as a compelling, if still nascent, asset type," Cho continues. "As the pilot REO-to-rent programmes continue to launch, investors and other market participants will likely become more comfortable with the framework - and REO-to-rent securitisations could, as a part of this market, contribute to a much needed rebooting of the US real estate market."

RMBS

Shadow inventory exhibits regional variation

S&P's estimate for the time it will take to clear the shadow inventory in the US fell by one month to 46 months in 1Q12. Although national residential mortgage liquidation rates appeared stable during the quarter, they varied widely between states, preventing significant reduction in the agency's months-to-clear estimate.

The regional variations in the speed at which servicers can clear the loans are primarily due to differences in foreclosure procedures, S&P notes. As of 1Q12, its months-to-clear estimate in judicial states is almost 2.5 times as long as non-judicial states, at 84 and 35 months respectively.

The volume of distressed US non-agency residential mortgages remained extremely high at US$354bn in the first quarter, but it has declined in each quarter since mid-2010. This latest number represents slightly less than one-third of the outstanding non-agency RMBS market in the US.

S&P's first-quarter months-to-clear estimates were mixed for the various metropolitan statistical areas (MSAs) it tracks: 11 of the top-20 MSAs reported lower months-to-clear estimates for 1Q12 than the previous quarter. In the other nine MSAs, however, the agency's estimates rose. The New York City MSA has the highest months-to-clear, at 202 months.

The rate at which properties enter the shadow inventory slowed during the first quarter to the lowest level since May 2007. Due to this improvement, the speed at which servicers can liquidate or cure non-performing loans will determine the size of the shadow inventory going forward, according to S&P.

RMBS

Spanish RMBS stress tested

Most Spanish RMBS show resilience to a further collapse in house prices and a jump in mortgage defaults under two stress tests that Fitch put the transactions through. The two scenarios aim to demonstrate the stress required over the next three years to see multi-category downgrades of the agency's Spanish RMBS ratings, including most of the triple-B and triple-A rated notes.

The first stress is a low probability but plausible scenario in which an additional 7% of the current mortgage portfolio defaults. This is more than twice the 3% cumulative default rate observed since the start of the financial crisis, while nominal house prices drop by a further 36%. In such a scenario all triple-A rated bonds remain investment grade with 86% keeping their triple-A status, but the majority of triple-B rated tranches would be downgraded with one-third being pushed to triple-C or lower.

In the more severe scenario, defaults increase to 17% of the current mortgage portfolio, while house prices fall by an additional 58%. Fitch says it considers such an extreme scenario to be very remote and well beyond the realm of more plausible downside scenarios. Even so, over 80% of triple-A rated transactions repay in full at maturity in the stress test results.

Vintage and past performance make the largest difference to the stress the notes can withstand. In terms of vintages, the oldest and newest transactions fared the best. The oldest transactions benefited from better loan origination standards and a build up in subordination, while the new transactions benefited from higher day one credit enhancement.

The stress test only looks at collateral deterioration. However, sovereign and counterparty risk also influence rating stability. In the event of a sovereign downgrade to the triple-B category from the current single-A, Fitch expects Spanish RMBS triple-A ratings to be downgraded to the double-A category.