Contents

Structured Finance

BWIC service launched

SCI has today launched a BWIC service covering auctions in Europe and the US for the four main structured finance asset classes - ABS, CDOs/CLOs, CMBS and RMBS.

The platform has been updated on a daily basis with BWIC prices/covers representing a range of collateral since 1 May. It already includes nearly 500 prices and the SCI site now has a price search facility based on this BWIC information. The data is also available in a daily file that is emailed to users so that they can integrate it with their proprietary trading and risk systems.

Subscribers to this service will receive data covering, where available:

1. ISIN/CUSIP
2. Ticker/deal name
3. Price/cover
4. Deal size

For example, this is an extract of the file subscribers received on 4 May:

Subscribers committing at launch will be offered a discount on the initial service. If you would like to receive a daily test file of BWIC data to determine its usefulness, email SCI*.

*Data as seen by SCI's data partners. Strictly one trial per desk, tracking software will be installed. No sharing or forwarding of data files is permitted. A subscription agreement applies.

Structured Finance

SCI Start the Week - 14 May

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

Pipeline
Three new deals entered the pipeline last week and remained there on Friday. Leading the way was a US$1bn CMBS originated and arranged by Goldman Sachs, Citigroup and Jefferies (GSMS 2012-GCJ7), which was joined by a US$150m DPR ABS from Banrisul (BRSR Diversified Payment Rights Co series 2012-1).

Pricings
The week also saw plenty of pricings, with three CLOs, two RMBS and five ABS prints.

By far the largest transaction to price was Mercurius Funding Compartment Mercurius-1, a €4.124bn CLO. It was joined by US$307.25m Atlas Senior Loan Fund 2012-1 and €674.28m Asti Finance PMI 1. The RMBS prints comprised A$300m Pepper Residential Securities No. 9 and £439m Tenterden Funding 2012.

The ABS prints were US$642.7m Chesapeake Funding 2012-1 (auto fleet), US$698.5m EFS Volunteer No. 2 series 2012-1 (student loans), US$750m GE Dealer Floorplan Master Note Trust 2012-2 (auto floorplan), US$1.249bn Santander Drive Auto Receivables Trust 2012-3 (auto non-prime) and US$250m TAL Advantage 2012-1 (containers).

Markets
The US RMBS market last week saw significant price action for higher coupon agency mortgages, according to Barclays Capital securitisation analysts. They say: "After several weeks of steady tightening, super-premiums widened sharply, with 4.5s-6s down 5-9 ticks versus swap hedges week-on-week. This was in the aftermath of yet another pick-up in higher coupon speeds in the May prepayment print." FNCL 3.5-4.5 cohorts fell by 3-6 CPR and 4.5s-6s came off by one to three ticks.

The US ABS sector had a relatively good week, with spreads ending the week either unchanged or tighter, say Bank of America Merrill Lynch ABS analysts. FFELP ABS tightened by 3bp, for example. Even against wider economic concerns, they believe strong technicals and fundamentals in the ABS market - coupled with the success of the recent Maiden Lane sales - should be supportive of spreads.

After a relatively busy period, the European ABS pipeline has now run dry, suggest JPMorgan analysts. Last week saw good flow across the majority of European securitisation asset classes in the secondary market, with a broad range of investors looking to add risk.

Granite triple-Bs are off by 1.5 points on the week in the European RMBS market, with Deutsche Bank analysts also noting softening in GRANM seniors. While the pipeline is "relatively threadbare for this time of year", they believe the anticipated Fosse issuance will prove a much more important pricing point for the sector than last week's Tenterden issuance.

Meanwhile, the Deutsche Bank analysts believe the US CMBS market remains highly susceptible to headline risk, with JPMorgan's US$2bn loss impacting spreads even more than the Maiden Lane III auctions. Bid-list activity remained elevated for the week. European CMBS also saw significant bid-list activity, with a £200m list on Thursday exhibiting particularly strong execution. 

Deal news
• SCI has launched a BWIC service covering auctions in Europe and the US for the four main structured finance asset classes - ABS, CDOs/CLOs, CMBS and RMBS. The platform has been updated on a daily basis with BWIC prices/covers representing a range of collateral since 1 May. It already includes nearly 500 prices and the SCI site now has a price search facility based on this BWIC information.
• Bradford & Bingley's Aire Valley UK RMBS master trust has breached its non-asset trigger, after the collateral balance fell below the £10.7bn minimum. Secondary market liquidity for the paper is consequently expected to rise, as repayment prospects for different note series become aligned.
• The New York Fed has sold the entirety of the TRIAXX CDO holdings from its Maiden Lane III portfolio to Merrill Lynch, following a competitive bid process. Consistent with the current investment objective of ML III, the Fed - through BlackRock Solutions - will continue to explore the sale of assets held by the vehicle.
• The New York state court hearing the US$8.5bn Countrywide RMBS settlement case reached an agreed discovery schedule that reduces the possibility of a protracted legal process. Interveners in the case, such as Walnut Place, had requested thousands of loan files from Countrywide in the discovery process to help bolster their case that the settlement amount agreed on by BNY Mellon was too low.
• 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.
• 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.
• 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.
• S&P reports that the US Federal Housing Finance Agency's REO-to-rent programme 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.
• AnaCap Financial Partners has reached a final closing on its AnaCap Credit Opportunities Fund II, successfully hitting its £350m hard cap. The fund was oversubscribed after just six months.
• Cheyne Capital Management has launched two UCITS IV-compliant funds - the Cheyne Global Credit Fund and the Cheyne European Real Estate Bond Fund. The UCITS funds have been launched in response to investor demand and their investment portfolios are based on those of two existing flagship Cheyne strategies.

Regulatory update
• The Reserve Bank of India's guidelines on securitisation transactions - published on 7 May - could promote the long-term growth of the Indian securitisation market, pending clarity on the tax treatment of pass-through-certificates (PTCs), Fitch says. The agency believes that the requirement for a minimum holding period for each loan before it becomes eligible for securitisation is a credit positive, as this would eliminate first-payment default risk.

Deals added to the SCI database last week:
American Home Mortgage Servicer Advance Revolving Trust 1 series 2012-1
BAA Funding A19
Beluga Master Issuer series 2012-1
CarNow Auto Receivables Trust 2012-1
Cedar Funding
Credico Finance 10
Darrowby No. 2
Enterprise Fleet Financing series 2012-1
Everglades Re
FREMF K-018
Golub Capital Partners CLO 11
GSMS 2012-ALOHA
Highway 2012-I
Kenrick No. 1
Kimi 1 (SCF Rahoituspalvelut)
Leofric No. 1
Missouri Higher Education Loan Authority series 2012-1
Montana Higher Education Assistance Corporation 2012-1
Nelnet Student Loan Trust 2012-1
OHA Credit Partners VI
Performer Financing 2012-2
Race Point VI
Saecure II
SLM Student Loan Trust 2012-3
Trafigura Securitisation Finance series 2012-1
UBSCM 2012-C1
Vesteda Residential Funding II (tap)
VOLT 2012-NPL1

Deals added to the SCI CMBS Loan Events database last week:
BSCMS 2007-PWR16; BACM 2003-1; BACM 2005-1; BACM 2007-5; BSCMS 2002-TOP6; BSCMS 2004-TOP16; BSCMS 2006-PW14; BSCMS 2007-PWR17; CD 2006-CD2; COMM 06-FL12 & CSMC 06-TF2A; COMM 2006-C8; COMM 2006-FL12; CSFB 2004-C3; CSMC 2007-C3; DECO 2007-C4X; DECO 2007-E5X; DECO 9-E3X; ECLIP 06-1 & ECLIP 06-4; ECLIP 2005-2; EURO 26; FHSL 2006-1; FLTST 3; GCCFC 2006-GG7; GMACC 2004-C2; GSMS 2007-GG10; JPMCC 07-C1 & JPMCC 08-C2; JPMCC 2006-LDP9; LBCMT 2007-C3; LBUBS 2003-C8; LBUBS 2005-C2; Lehman 2007-LLF C5; MESDG CHAR; MLCFC 2007-5; MLCFC 2007-6; MSCI 2007-IQ16; OPERA FR-01; REC 5; REC 6; Several; TAURS 2007-1; TITN 2006-2; TITN 2006-3; TITN 2006-4FS; TITN 2006-CT1; TITN 2007-2X; TITN 2007-CT1; TMAN 6; TMAN 7; USAF 2006-1A; WBCMT 07-C32 & 07-C33; WBCMT 2005-C19; WBCMT 2007-C30; WBCMT 2007-C34; WFRBS 2011-C2; WINDM IX & DECO 14; WINDM XIV-A; WTOW 2006-3.

Top stories to come in SCI:
April EMEA CMBS maturity outcomes
EMEA ABS issuance trends
US student loan ABS update
Valad Europe profile
Leadenhall Capital Partners profile
Counterparty risk management survey

RMBS

Rescap MSR sale welcomed

Rescap's Chapter 11 filing (SCI 14 May) is being seen as an overall positive for holders of MBS issued by Rescap entities. MBS analysts at Barclays Capital note that the sale of the Rescap mortgage servicing rights to Fortress means bondholders are highly unlikely to see any significant disruption in cashflows.

"The sale effectively removes the uncertainty that a splintering of the MSRs could occur, leaving the net negative value servicing rights - primarily MSRs on low balance non-agency subprime deals - at the bankrupt estate," they add. "However, given that Nationstar has historically implemented more loan modifications and has a greater frequency of stop advances than Rescap, MBS holders are likely to see some changes in servicing performance."

The MSR sale is expected to be completed by late 2012, but is subject to the results of an auction that will be conducted by the bankruptcy court. Under the terms of the sale agreement, Nationstar will purchase: MSRs on US$201bn UPB of mortgages and US$173bn UPB in subservicing contracts, of which 68% are on loans insured or owned by the GSEs; and US$1.8bn of advance receivables.

The servicing rights will be purchased for US$700m in cash, while the advance receivables will be purchased effectively at par, according to the Barcap analysts. Nationstar will contribute US$450m of the cash used to purchase the servicing assets directly, while the remaining amount will come from Newcastle and other Fortress affiliates.

Upon closing, the acquisition will make Nationstar the largest non-bank residential mortgage loan servicer and one of the largest residential mortgage loan originators in the US. With this transaction, the firm anticipates adding more than 2.4 million customers to a customer base of over one million, and growing its total servicing and sub-servicing book to approximately US$550bn.

Separately, as part of the bankruptcy plan, an agreement was reached between 17 RMBS institutional investors and Rescap to settle rep and warranty claims on MBS deals issued by Rescap subsidiaries. Non-agency MBS holders of 392 securitisation trusts issued between 2004 and 2008 (accounting for US$221bn in original face) will receive a stipulated rep and warranty claim of US$8.7bn (3.9% of original unpaid principal balance). This claim will entitle bondholders to receive recoveries on the claim on a pro-rata basis with other senior unsecured creditors.

The analysts estimate that the current face of the 392 trusts stands at US$63bn, suggesting an average stipulated claim of 13.8% to MBS holders. "Assuming recoveries of 25% on the senior unsecured claims, MBS holders could receive an average payout of 3.5% of current face (US$2.2bn in proceeds) once the bankruptcy plan has been approved and executed," they observe. "It is unclear how the money would be allocated across trusts/bonds. That said, a Countrywide settlement-like scenario would benefit front pays and cuspy bonds the most."

CS

RMBS

Negative equity impact underlined

US house prices are expected to remain around current levels for the remainder of this year and begin rising slowly during 2013 and 2014. However, credit risk will remain elevated even for seasoned loans, with borrower equity the key determinant in terms of RMBS performance.

US house prices have stabilised in so far as they've stopped falling like a rock, observes RangeMark Analytics president Richard Cooperstein. "Normal growth in house prices averaged around 4% a year for the last 30 years and the US mortgage finance system is built on such growth. But we're far from this level of growth at present and are unlikely to get there any time soon. Thus credit risk will remain elevated even for seasoned loans," he adds.

Conventional wisdom holds that borrowers who are current on their mortgage loans and survived 3-4 years of stress will be fine. But Cooperstein argues that this isn't necessarily true and that time isn't the magic ingredient.

"Equity is what really matters: borrowers without equity are at risk to varying degrees, depending on how financially fragile they are. Subprime borrowers tend to have less stable incomes and so they typically default more often," he explains.

From a relative value perspective, this suggests that investors cannot assume that current loans are finished defaulting and so they must test structures against sizable default risk from these loans. Defaults won't disappear simply by flushing the delinquency pipeline, Cooperstein adds.

Borrower access to liquidity is another key attribute. "The greater access to liquidity a borrower has, the less likely they are to default because they can withstand financial stress, and the more they have to lose by defaulting. It's standard economic opportunity cost," Cooperstein continues.

Rate, payment, term and balance modifications all typically improve RMBS performance - albeit the majority of borrowers who were modified early on all re-defaulted. History shows that only when meaningful improvements in equity occur does performance begin to improve, according to Cooperstein.

"Borrowers respond better to modifications that change incentives in predictable ways. Consequently, investor models need to reflect financial incentives, as well as fundamentals," he explains.

Access to loan-level data, together with the ability to quantify the impact of modifications and house price movements on future performance within complex structures is necessary to reliably determine value, Cooperstein concludes. "The non-agency RMBS market is hard to trade on instinct: it rewards the ability to analyse complexity. Together with the unstable mortgage policy landscape, this complexity is the reason why the sector still offers relatively high returns."

CS

RMBS

Aire Valley breaches NAT

Bradford & Bingley's Aire Valley UK RMBS master trust has breached its non-asset trigger, after the collateral balance fell below the £10.7bn minimum. Secondary market liquidity for the paper is consequently expected to rise, as repayment prospects for different note series become aligned.

Aire Valley comprises six issuers and nine issuances of outstanding notes. It is a fully socialist master trust, whereby each class of notes receives its share of principal based on the outstanding balance of its rated notes.

In October 2008, a step-up trigger was breached following the partial redemption of the series 2007-2 class A1 notes. This caused the transaction to stop substituting, resulting in no new loans being sold into the trust.

Consequently, the trust has been declining in size since then. Given the current prepayment rate of 3.56%, the minimum trust size was expected to be breached this quarter, causing a non-asset trigger event (SCI 29 March).

Aire Valley class A notes will now redeem on a pro-rata basis across all issuers, followed sequentially by other classes. The seller will only receive principal after all of the notes are repaid.

The immediate future for note amortisation in the trust is complicated, however, by a reserve fund drawing to enable the last remaining bullet bond to be repaid in full last month. Future principal receipts will be used - together with any excess spread - to repay the £72m drawing, which is likely to result in no principal payments on any notes for two months, according to European asset-backed analysts at RBS.

Based on the experience of Northern Rock's Granite master trust, the Aire Valley NAT breach could nevertheless drive improved liquidity in the secondary market for the paper. "Class A notes are now all nearly interchangeable, having identical payment profiles and only differing in terms of their currencies, coupons and step-up dates," the RBS analysts note. "In practice, this has been increasingly the case since the onset of the financial crisis and the slowdown in CPRs on the underlying pool caused a backlog of scheduled redemptions - the key difference now being that redemptions should stay pro rata, even if CPRs suddenly picked up."

Certainly, S&P views the new allocation of payments as being potentially beneficial for the master trust's ratings. It notes that the collateral pool's performance has improved over previous quarters, with total delinquencies falling to 4.25% from 6.52% and 180+ day arrears declining to 1.26% from 2.81% since August 2010.

Cumulative losses currently stand at 1.46%. However, annualised excess spread is low at 0.62%, due to low margins in the pool. These low margins result from the underlying loans in the pool being originated at a time when there were less stringent underwriting criteria and a more competitive UK buy-to-let market.

Against this backdrop, S&P has taken various credit rating actions on all nine series of notes issued by the trust. The move follows the application of its updated UK RMBS criteria and 2010 counterparty criteria.

Under its new criteria, the agency's updated credit adjustments result in a higher weighted-average foreclosure frequency (WAFF) and a higher weighted-average loss severity (WALS). This has led to an overall increase in the required credit enhancement for each rating level.

The increase in credit enhancement levels for the class C and D notes in all series is robust, according to the agency, and - combined with the non-asset trigger event - this more than mitigates the small rise in credit enhancement required under its UK RMBS criteria. As such, the agency has raised its ratings on these notes to single-A and triple-B respectively.

Due to a sufficient increase in credit enhancement, the class A and B notes are also able to pass S&P's cashflow scenarios at higher rating levels after the application its new UK RMBS criteria. However, following the application of the agency's 2010 counterparty criteria, it considers that the maximum potential rating that can be achieved on Aire Valley's notes is linked to the issuer credit rating (ICR) on the bank account provider - HSBC. However, where it rates the currency swap counterparties below the rating on the bank account provider, S&P applies a further cap to the ratings on the notes.

The currency swap counterparties in the Aire Valley master trust are Credit Suisse, Deutsche Bank and RBS. Consequently, where the series contain currency notes, the highest potential rating that can be achieved is the ICR on the currency swap provider plus one notch.

As a result, with the exception of 2007-1 series 1 and series 2, S&P has affirmed its ratings on the class A and B notes at double-A minus. This is equivalent to the ICR on the account bank or the ICR plus one notch on the relevant swap counterparty.

CS

ABS

Ex-BoE adviser joins ABS team

Philippa Charlton has joined Cairn Capital's ABS team in London. Her primary focus will be to build the firm's secured funding asset management (SFAM) business.

Charlton now reports jointly to cio Andrew Jackson and head of SFAM Adam Barrett. She was most recently senior adviser within the Bank of England's markets division advising on structured credit exposure and has previously worked at ABN Amro and Bankgesellschaft Berlin.

ABS

Credit analyst moves on

Guillaume Langellier has joined Friends Life as ABS credit analyst. He is responsible for buy-side credit research on consumer ABS, RMBS, CMBS and WBS.

Langellier was most recently at Aviva Investors where he was also a credit analyst. Prior to that he worked at Fitch as head of WBS and he has also held posts at Lazard, UBS Warburg and Calyon.

Structured Finance

Securitisation vet moves on

Carrington Holding Company has appointed Bill King as cio and head of asset and risk management. It is a newly created role with responsibility for Carrington Capital Management and Carrington Investment Services.

King has over 20 years of experience in securitised products, including trading ABS, CDOs and CMBS. He joins Carrington from Citadel, where he was head of securitised products. King has also worked at Donaldson Lufkin & Jenrette and at Merrill Lynch.

Structured Finance

Gleacher boosts credit group

Gleacher & Company Securities has expanded its investment grade credit group with three new mds. William Pope, Thomas Giardi and David Nixon join from Citigroup, US Bancorp and Mitsubishi UFJ Securities, respectively.

Pope was director in credit trading at Citi, specialising in corporate bonds and CDS of high-grade telecom, media, technology and cable companies. He has also held posts at Caprok Capital, Merrill Lynch, Salomon Smith Barney, Fuji Bank and Discount Corporation of New York.

Giardi has more than a decade of corporate bond trading experience and Nixon has spent more than 25 years in fixed income sales, including senior credit sales roles at Mitsubishi UFJ Securities, Knight Libertas and Barclays Capital.

Structured Finance

Agency reshuffles for global focus

DBRS has formed a Canadian board of directors as part of a reorganisation intended to give the agency a more global focus. Huston Loke, formerly DBRS president, has left as part of the reorganisation.

The new board is comprised of DBRS chairman Walter Schroeder and ceo David Schroeder as well as independent directors George Mathewson and Juan Carlos Garcia Centeno. The board will monitor the development of credit policy and methodologies as well as the effectiveness of internal controls and compliance processes.

There is no change in the legal structure of the DBRS group of companies in Canada, the US and Europe arising from the reorganisation. DBRS says the move is intended to provide greater integration of senior management and staff for increased global regulatory, business and market alignment.

Structured Finance

StormHarbour makes raft of appointments

StormHarbour has made 13 senior appointments across sales and trading, structuring and advisory and capital markets. Each of the new arrivals will be based in London.

Per Mario Floden, Darron Weinstein, Andrea Pittaluga and Vincent Pena have joined to expand StormHarbour's European real estate and CRE business, with Floden and Weinstein becoming co-heads of the real estate group.

Rizwan Hussain and Alejandro Gonzalez-Ruiz have joined to cover special situations and alternative assets. They will focus on disposals and monetisation of performing and non-performing loan portfolios and illiquid fixed income assets.

Juliano Mattar has joined to cover emerging markets sales and will be responsible for structuring and distribution of emerging markets fixed income products. Shehreyar Hameed has joined as md for MENA and will focus on origination and fund distribution, while Shammi Malik has also joined the sales and trading team to focus on ABS and CMBS trading.

Nicholas Fentem has joined the capital markets group to lead the rates structuring team, focusing on the trading and structuring of interest rate derivative products. Aishwarya Dahanukar joins the financial institutions team, focusing on funding and capital management solutions for StormHarbour's financial institution clients.

Finally, Ingrid Weston and Verena Butt have joined the European infrastructure finance team, responsible for financial advisory, structuring and debt and equity capital raising services.

CDO

SF lawyer jumps ship

Barbara Goodstein has joined Mayer Brown in New York as banking and finance partner. She was previously partner at Dewey & LeBoeuf, which has recently seen a string of departures (SCI passim).

Goodstein's transactional and restructuring experience includes CDOs and CLOs as well as structured and general commercial financings of assets, including auto, trade, health care, timeshare and lease receivables. She also has extensive debt workout and restructuring experience.

CDS

Change of leadership at JPMorgan

JPMorgan Chase has changed its chief investment office leadership team in the wake of its US$2.3bn CDS loss. Matt Zames has been installed as cio to lead the team.

Rob O'Rahilly becomes leader of the chief investment office for EMEA in the reshuffle, while Christopher Chan will continue to be responsible for Asia. Both O'Rahilly and Chan will report to Zames.

Marie Nourie will become cfo for the global group and report to both Zames and Doug Braunstein. Chetan Bhargiri will become chief risk officer of the investment group, reporting to John Hogan.

CLOs

Ex-Citi strategist joins CLO manager

Former Citi structured credit research director Eduard Trampolsky has emerged at CIFC as a senior fund strategist, where his focus is understood to be CLOs and ABS CDOs. Prior to Citi he was in the quantitative analytics group at Barclays Capital.

CLOs

Carador PM replaced

GSO Capital Partners International has appointed Mark Moffat as the new portfolio manager for its listed CLO vehicle Carador. He replaces Miguel Ramos-Fuentenebro, who is no longer with GSO Blackstone. All other members of the GSO Blackstone structured credit investment team remain unchanged.

All investments made by Carador will continue to be approved by GSO Blackstone's seven-person global structured credit investment committee, which now includes Moffat as a member. He joined GSO Blackstone in January 2012, following the firm's acquisition of Harbourmaster Capital Management and its affiliates (SCI 6 October 2011), where he was co-head of the business.

CMBS

New arrival to co-head CRE debt platform

TriLyn has set up an investment management platform focused on high yield CRE debt. TriLyn Investment Management will be co-managed by TriLyn founder Mark Antoncic and John Feeney, who joins from Brookfield Investment Management.

Feeney has 30 years of industry experience, including managing commercial and residential real estate securities as well as various fixed income portfolios. He held several different positions at Brookfield and its predecessor companies, including ceo and head of the investment committee.

CMBS

CRE debt firm formed

The investment team behind the European Real Estate Debt Fund and Duet Real Estate Finance - led by Dale Lattanzio, Cyrus Korat and Rob Clayton - has formed DRC Capital, an independent investment adviser and asset manager dedicated to European real estate debt. The firm's remit is to provide institutional investment products and debt capital in the sector.

RMBS

Allonhill dropped as OCC consultant

The OCC has directed Allonhill to cease reviewing files related to the Independent Foreclosure Review as a primary independent consultant or subcontracted consultant. The OCC took this action after Allonhill reported work for third parties that the OCC determined to be inconsistent with the independence requirements for independent consultants.

The work at issue involved prior review for third parties of loans that are part of the same pool of loans that Allonhill was reviewing as part of the Independent Foreclosure Review. The OCC says the decision does not reflect on the quality of work performed to date by Allonhill but is necessary to ensure the independence of the loan review process going forward.

Allonhill responded by stating that it believes the OCC's action is wholly without merit. Sue Allon, founder and ceo of the firm, comments: "At Allonhill, we have always been committed to the highest levels of integrity and transparency. While we have the utmost regard for the objectives of the Independent Foreclosure Review process and its positive impact on the mortgage industry, we are profoundly disappointed by the OCC's decision. We look forward to continuing to provide the highest quality of services to our clients and helping this country recover from the mortgage crisis."

ABS

Unique buybacks progress

Enterprise Inn's first-half results reveal - perhaps earlier than expected - that the pub operator has bought back and cancelled £29m of class A4 notes from its Unique securitisation, plus an additional £10m A4 and £2m A3 notes since end-March. The average price for the A4 notes was 76p, according to European asset-backed analysts at RBS.

Enterprise is targeting total repurchase and cancellation of £74m of debt by September 2013. A combination of advance payments on the A2N notes and the A3/A4 buybacks should be sufficient to ensure that it can continue to pay dividends from Unique, the RBS analysts suggest.

The results also show a positive 1.5% like-for-like sales growth in the substantive estate, as well as a circa 30% improvement in pub net income for non-substantives under the Beacon Pub initiative. While the overall estate's like-for-like sales fell by 1.6%, underlining the challenge faced in the non-substantive portfolio, the results are expected to provide a decent backdrop for refinancing the bank facility by year-end.

Given such positive news and the fact that Unique class A3 and A4 leverage is now lower than that of the Punch B class As, Barclays Capital ABS analysts point to the value left in the Unique class As. "Whilst the yield differential has closed significantly between the two securitisations over the past few months, we believe there is still 100bp pick-up in yield to be found in the Unique class As relative to Punch B class As," they note.

Structured Finance

Credit linkage approach explained

Moody's has commented on its approach to evaluating the impact of global and European bank credit deterioration on structured finance (SF) securities. The move follows the announcement on 15 February that it had placed on review for downgrade the ratings of 114 European banking groups and additional non-European firms with large capital market franchises.

A deterioration in the credit quality of banks negatively affects SF securities because of the various roles that banks play in SF transactions, Moody's explains. Credit linkage between these SF securities and the counterparties arises because of the risk that a bank will fail to perform its role and cause a payment disruption or permanent losses on the securities. The degree of credit linkage also depends on the roles of the banks, the relevant jurisdictions, the nature of the transactions and the presence of protection mechanisms.

SF securities that primarily rely on payments from banks acting as their underlying obligor or guarantor have direct credit linkage with these banks; the weaker the bank, the weaker the securities. As a result, bank rating changes will translate directly into rating changes on these securities, the agency adds.

Moody's placed on review for downgrade the ratings of securities from 240 SF transactions worldwide with direct linkage to the affected banks following its announcement of the banks' rating reviews (SCI 20 February). Because these securities have direct credit linkage with the affected banks, the agency says it will downgrade these securities soon following the bank downgrades.

Most other SF securities have indirect credit linkage to banks: a bank's failure doesn't automatically lead to a payment disruption on the SF security. For these indirectly linked securities, Moody's rating actions depend on its assessment of their degree of credit linkage to the banks.

Following bank downgrades, the agency will first take negative rating actions on SF securities with the highest credit linkage to the affected banks. In parallel, it will monitor the implementation of protection mechanisms without taking immediate rating action on SF securities with indirect but not critical linkage to the downgraded banks. Failing the implementation of such mechanisms, Moody's will take additional negative rating actions depending on the degree of credit linkage between SF securities and the affected banks.

Moody's rating actions on securities with indirect credit linkage will depend on its assessment of their degree of linkage to affected counterparties. This assessment will focus primarily on: the degree of reliance on the counterparty for full and timely payment on the securities; the respective ratings of the security and the counterparty; and the likelihood that transaction parties will implement protection mechanisms, as well as their ability to reduce credit linkage. Typical mechanisms to reduce credit linkage take the form of the replacement of counterparties and the posting of cash collateral if Moody's downgrades counterparties below a specific rating threshold.

Structured Finance

Strong take-up for Sabadell tender

Banco Sabadell has announced the results of its 41-bond tender offer. Investors appear to have participated strongly, driven largely by eurozone concerns.

The tender consisted of 21 RMBS, six ABS and 14 CLOs across both Banco Sabadell's own transactions and also from Caja de Ahorros del Mediterráneo transactions. The bank indicated it would consider purchasing up to €200m of its own issuance and €800m of CAM transactions via an unmodified Dutch auction.

Banco Sabadell bought back €923.5m, comprising less than its targeted amount from its own issuance but more than expected from the CAM transactions. €3.1bn bonds were tendered by investors out of a total current amount outstanding of €7.5bn.

In total, €803m of RMBS were repurchased, compared to €4.9m of ABS and €115.6m of CLOs. Out of the 41 bonds tendered, seven saw no repurchases.

Of the bonds that were repurchased and where a minimum price was noted in the initial tender offer, the average price paid is higher for all but four bonds, according to ABS analysts at Barclays Capital. The highest differential was for TDAC 7 A3 notes, where the average purchase price of 76 was 14 points higher than the minimum purchase price.

"It comes as no surprise that investors elected to participate heavily in this tender offer, given the current concerns over the banking system in Spain and the continuing crisis engulfing Greece. Banco Sabadell had the opportunity to accept far higher volumes than it did and it would not be a surprise if these bonds were re-tendered in the future, particularly if the eurozone crisis escalates and prices fall as a result," the Barcap analysts conclude.

Structured Finance

Third LTRO anticipated

European investors are anticipating the possibility of another long-term refinancing operation (LTRO) next year, according to Fitch's quarterly credit market investor survey. The agency believes that another round of cheap three-year financing from the ECB will be necessary for some banks because they will not have been able to deleverage sufficiently by the time the second LTRO needs to be repaid.

The survey highlighted investors' concerns over eurozone banks' funding problems. 38% of respondents thought a third LTRO would be necessary, compared with 16% who thought the near €1bn of three-year funding released so far should buy enough time to address banks' structural funding imbalances. Additionally, 25% of investors said they would not invest in any European senior unsecured bank debt. However, most banks still have access to short-term money, with three-quarters of respondents saying they would purchase short-term paper from banks outside the eurozone periphery.

The shot-in-the-arm from the second LTRO is already fading, with respondents having turned less bullish on issuance volumes and more bearish on spread developments for the sector over the next 12 months. Only 12% of survey participants ranked banks as their top investment choice, down from 27% in the prior quarter and behind high yield, investment grade corporates and emerging market sovereigns.

Central bank and policymakers' actions appear to have muted investors' concerns with regards to refinancing. Only 13% of investors said the bank segment faced the highest refinancing challenge, down from 22% last quarter and from the high of 49% in 4Q11 when the sector was ranked higher than sovereigns for the first time.

Fitch believes the wholesale funding markets will remain volatile for banks this year and especially tough for those in peripheral eurozone countries. While Q1 presented many banks with an opportunity to get ahead of - in some cases even complete - their funding plans for 2012, this was borne out by a sharp contraction in issuance in April on the back of renewed eurozone fears.

The 2Q12 survey was conducted between 27 March and 4 May, and represents the views of managers of an estimated US$5.6trn of fixed income assets.

Structured Finance

Call for further clarity on RBI guidelines

The Reserve Bank of India's guidelines on securitisation transactions - published on 7 May - could promote the long-term growth of the Indian securitisation market, pending clarity on the tax treatment of pass-through-certificates (PTCs), Fitch says. The agency believes that the requirement for a minimum holding period for each loan before it becomes eligible for securitisation is a credit positive, as this would eliminate first-payment default risk.

The requirement to hold between 5%-10% of the issuance may not represent a dramatic shift for Indian originators, who have in any case provided the first-loss credit enhancement in most transactions. But it is likely to result in less use by originators of third-party guarantees for the second-loss credit facility, Fitch suggests.

The RBI states that banks "should not offer credit enhancements in any form" or liquidity facilities in direct assignment deals, where investors are assigned the scheduled cashflows arising from a pool of loans together with the underlying security. Disallowing credit enhancement would make direct assignment less attractive for banks, as it would render it effectively impossible to achieve anything other than a very low rating.

Fitch notes that this would potentially reduce volumes in the Indian new issuance market, where direct assignment deals have constituted the bulk of activity in recent years. Nevertheless, the agency believes that a shift back towards PTC issuance via SPVs/trusts could ultimately boost the sector.

In particular, direct assignment deals have traditionally been put together for a single investor because it is difficult for more than one entity to have a charge on a pool of loans simultaneously. A move back towards SPV/trust-based issuance would make it easier to sell a single deal to multiple investors and may also lead to a more liquid secondary market for PTCs.

The RBI is set to issue a separate circular on the reset of credit enhancement in securitisations. If allowed, this would potentially make PTC issuance more attractive to issuers. Investors also need clarity on the tax treatment of PTCs from the Indian courts, after the tax authorities attempted to tax income earned on PTCs by mutual funds.

Meanwhile, the minimum standards set by the RBI for the disclosure of information could have multiple benefits for the Indian securitisation markets - including improved standardisation in information dissemination and transparency, leading to greater investor confidence and a wider investor base. Fitch also expects a boost to investor knowledge of the product from the requirement that investors stress-test their securitisation exposures and monitor underlying credit quality.

Structured Finance

Cheyne UCITS funds minted

Cheyne Capital Management has launched two UCITS IV-compliant funds - the Cheyne Global Credit Fund and the Cheyne European Real Estate Bond Fund. The UCITS funds have been launched in response to investor demand and their investment portfolios are based on those of two existing flagship Cheyne strategies.

Both funds offer weekly liquidity. The Cheyne Global Credit Fund is actively managed and provides exposure to investment grade and crossover credit, primarily in North America and Europe, where the team believes credit spreads are currently pricing in too much downside given the very robust fundamentals of most corporate balance sheets.

The Cheyne Real Estate Bond Fund, meanwhile, focuses on high quality real estate-backed bonds. The team says it has identified a compelling investment opportunity arising from the structural dislocation in Europe's €1.4trn real estate debt market, offering attractive yields with strong downside protection.

Structured Finance

Credit opportunities fund closes

AnaCap Financial Partners has reached a final closing on its AnaCap Credit Opportunities Fund II, successfully hitting its £350m hard cap. The fund was oversubscribed after just six months.

The fund targets performing, semi‐performing or non‐performing consumer and SME debt across Europe, requiring granular analysis and active asset management. It seeks to capitalise on the rapidly evolving market opportunity in this space, driven by the need for financial institutions to de-lever after years of over-expansion. The pace of financial asset sales is further magnified by weak underlying economic activity and high unemployment, as well as significant changes to the banking regulatory framework and the dramatic contraction of wholesale and securitisation funding.

The fund has a three-year investment period and an eight-year life. Investors include the State of New Jersey, Hamilton Lane and Ohio Public Employees Retirement System.

CDO

TRIAXX CDOs sold

The New York Fed has sold the entirety of the TRIAXX CDO holdings from its Maiden Lane III portfolio to Merrill Lynch, following a competitive bid process.

"The winning bids, which were materially higher than the original prices ML III paid, demonstrate continued interest in these assets and represent good value for the public," comments William Dudley, president of the New York Fed.

Consistent with the current investment objective of ML III, the Fed - through BlackRock Solutions - will continue to explore the sale of assets held by the vehicle. 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

CRE CDO next on the block

The New York Fed plans to auction its holdings of the Putnam CDO from the Maiden Lane III portfolio on 22 May, accounting for circa US$700m current face of the US$1.4bn transaction. Approximately 65% of the underlying collateral is CMBS/CRE, according to Bank of America Merrill Lynch estimates, including US$570m of dupers, US$115m of AMs and US$176m of AJs. MBS analysts at the bank expect dealers to attempt to re-REMIC this CDO according to collateral type and quality.

CDS

Rescap credit event called

ISDA's Americas Credit Derivatives Determinations Committee has resolved that a bankruptcy credit event occurred in respect of Residential Capital, following its Chapter 11 filing yesterday (14 May). An auction will be held in respect of outstanding CDS transactions referencing the entity.

CDS

CDS gap out on 'unrest'

Unrest among North American banks and European sovereigns have driven global credit default swap (CDS) spreads nearly 5% wider, according to Fitch Solutions.

JPMorgan's US$2bn trading loss, unsurprisingly, led to spreads on the bank widening by 20% at the end of last week and a further 7% yesterday (14 May). More notable is the ripple effect it seems to be having on other major banks, according to Fitch. For instance, Wells Fargo and Capital One's spreads have both widened by 14%.

Elsewhere, renewed concern over the eurozone credit crisis also led spreads on European sovereigns 5% wider last week and a further 5% wider yesterday. Portugal was at the forefront of the CDS widening last week, with its spreads coming out by nearly 12%.

Other notable movers include France and Spain, with CDS on each country widening by over 8%. Meanwhile, Eastern European sovereigns led the sell-off yesterday, with CDS spreads on Romania, Slovakia and Bulgaria moving 7%-8% wider.

CDS

Clearing service expands

LCH.Clearnet has launched an international CDSClear service, an extension to the established domestic French offering it introduced in March 2010. The firm says CDSClear now offers an innovative, multi-jurisdictional CDS clearing framework. CDSClear clears Series 5 and above of the Markit iTraxx Europe, HiVol and Crossover indices, which together comprise 129 contracts.

CDSClear currently works with four French member banks: BNP Paribas, Credit Agricole, Natixis and Société Génerale. Following the launch, LCH.Clearnet will now be working with an additional 10 international institutions - Bank of America Merrill Lynch, Barclays, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley and UBS.

The newly launched international service builds on LCH.Clearnet's extensive OTC clearing and default management expertise, the firm says. "The default management processes introduced by CDSClear are unique to the cleared CDS market and have been carefully designed to manage the unique characteristics of the credit derivative markets within the context of the current regulatory environment."

CDSClear will shortly launch its intra-day clearing service and European single name CDS will be introduced later this year, with offsets against CDS index products, subject to regulatory approval. CDSClear is also actively working towards delivery of an international client clearing service later this year, including a US offering.

CDS

Credit factors service launched

Markit has introduced a new set of tools to help traders and risk managers identify the correlations between changes in the value of credit default swaps and movements in stock and options markets. The new data service, dubbed Markit Credit Factors, provides customers with sentiment signals for CDS.

The credit factors can be used in evaluating the expected performance of CDS and include fundamental, technical and macroeconomic-based indicators. These factors span nine categories, including measures of relative value, earnings momentum, earnings quality and price momentum. In total, the Markit Credit Factors library includes more than 80 measures and covers the global universe of more than 1,500 single name CDS.

A seven-year back-test of a trading model that applied Markit's Credit Factors to selected US high yield corporates shows a 5.84% average monthly spread change difference between CDS names indicated to widen versus those indicated to tighten. The research suggests that a CDS portfolio strategy based on the model could have earned 21.15bp per month, on average.

Markit Credit Factors is the first product to be launched by Markit Data Analytics & Research, the business unit formed by Markit after it acquired Quantitative Services Group in November 2011.

CDS

OTC valuation service enhanced

Interactive Data Corporation has expanded its OTC derivatives valuation service to include independent evaluations of CDS and select CDS indices. The enhancements are designed to provide additional transparency into CDS and CDS index evaluations, thereby helping clients to more effectively value their diverse portfolios and enhance their risk management and compliance practices.

The CDS evaluation service covers a wide range of single name corporate, sovereign and US municipal entities, as well as CDX and iTraxx index trades. The platform is supported by Vantage, Interactive Data's web application that provides clients with extensive data and transparency into the fixed income market and the company's evaluations.

CDS

CDS pricing service strengthened

Fitch Solutions has expanded its CDS pricing service to include single name CDS derived bid-offer spreads and CDS benchmark curves that show average CDS values by rating level, industry sector and region. The move aims to facilitate greater transparency within the global credit derivatives market.

"The addition of derived bid-offer spread data will provide valuable new insight - especially for names outside the regularly traded universe - into market confidence around a CDS price, whilst our new CDS benchmark curves will enable more effective peer analysis of the most illiquid names," comments Thomas Aubrey, md at Fitch Solutions.

The derived bid-offer data is based on spread band, liquidity ranking and regional weightings and covers 3000 global names. The benchmark curves are based on the same liquidity-based methodology as Fitch's existing suite of CDS indices.

Fitch's CDS pricing service already covers ABCDS, loan CDS, CDS benchmarking, CDS liquidity scores and CDS spread indices, which - in addition to the new derived bid-offer spreads and benchmark curves - are all delivered to users in a single standardised feed via Fitch's integrated data service (IDS).

CDS

CDS redesign proposed

In a recent research paper, Darrell Duffie and Mohit Thukral - respectively finance professor at Stanford Graduate School of Business and Stanford economics student - propose tying sovereign CDS settlements to the face value of new bonds that are given to bondholders per unit face value of old bonds. The resulting CDS payment would approximate actual bondholder losses, allowing for better sovereign default risk management and CDS pricing that more accurately reveals sovereign default risk, they suggest.

The paper recognises that CDS contracts in their present form only cover a small fraction of bondholder losses in the event of a sovereign debt restructuring. This is tied to the fact that current CDS contracts only pay buyers of protection based on the price of the sovereign's outstanding bonds, even if the sovereign has just exchanged its legacy bonds for a much smaller amount of new bonds. This CDS payout ignores the additional loss to a bondholder from the effect of this 'haircut'.

Duffie and Thukral began their research following the restructuring of Greek sovereign debt in March. They propose a straightforward redesign of CDS contracts that would allow settlement based on the market value of whatever the sovereign government gives the bondholder in exchange for each old bond; this market value would be determined in a settlement auction.

Further, the redesigned CDS contract would allow settlement based on the market value of the entire exchange package. This would mitigate one of the problems that arose with the Greek debt restructuring; namely, that the protection payment ignored the remainder of the exchange package.

In this way, the team's proposal also provides a mechanism whereby the bond market can digest the complex instruments that may be created in a sovereign debt restructuring. This is important because not all bondholders are well situated to deal with the package of instruments they may receive in a restructuring, according to the paper.

ISDA is reportedly at present working on overhauling the CDS contract, in light of industry concerns that emerged after the Greek restructuring. Its credit steering committee is said to be considering the concept of the whole asset package being deliverable into the CDS auctions and determining how to codify this into the CDS definitions.

CMBS

Lakeside Mall on watchlist

Morningstar has added the US$168m Lakeside Mall to its watchlist for a decline in occupancy. The senior debt is pari passu across two CMBS transactions - COMM 2005-LP5 and GE Commercial Mortgage Corporation 2005-C1.

Lakeside Mall is secured by 643,375sf of a 1,478,375sf regional mall in Sterling Heights, Michigan. All of the anchors own their stores and pad sites, except for Macy's Men and Home, which owns the store only and pays ground rent to the borrower. The Sears location is not among the list of stores scheduled to close per the February 2012 store closure list published by Sears.

The loans transferred to the special servicer in April 2009 following the chapter 11 bankruptcy filing of the borrower General Growth Properties. GGP emerged from bankruptcy in January 2010 and the loans returned to the master servicer in April 2010 with modified terms.

Originally, the loans were structured as five-year fixed rate amortising notes, with a 4.28% coupon and a scheduled maturity date of December 2009. Modified loan terms included an extension of the maturity date to June 2016. The borrower was to pay 'catch-up' amortisation for the period that the loans were in bankruptcy.

Additional modified terms require the loans to begin amortisation in January 2013, according to a 25-year schedule that will increase debt service to US$529,833 a month. Based on the year-end 2011 net cashflow, this would equate to a 1.08 net cashflow DSCR. Then in January 2016, the loans are required to amortise according to a 20-year schedule, which will further increase debt service.

For the 12-month period ended 31 December 2011, the NCF DSCR was 1.62 with net cashflow of US$13.8m. Physical occupancy was reported at 75%, which triggered its inclusion onto the Morningstar watchlist this month.

First quarter 2012 reporting by GGP suggests economic occupancy is 83%. The NCF DSCR for the 12 months ended 31 December 2010 was 1.34 with net cashflow of US$15.6m. Occupancy was 91%.

Occupancy for the anchor tenants remains at 100%, while in-line occupancy has fallen to 67%. A January 2012 rent roll review by the servicer indicates leases for roughly 14% of the GLA are expected to expire throughout this year. Leases for an additional 8% of the GLA are scheduled to expire throughout 2013.

On 18 October 2004, the asset appraised for US$305m (US$474/sf), yielding a 64% LTV at issuance. In April 2009 the collateral appraised for US$156m ($242/sf).

With the decline in occupancy and expected increase monthly debt service over the near term, Morningstar considers this a low to moderate risk of default. A preliminary Morningstar analysis places a value of about US$162m (US$252/sf) on the collateral, suggesting a value deficiency of about US$6m.

CMBS

CMBS loan events updated

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

09/05/2012
Deal: TITN 2006-CT1
Property: Woolgate Exchange
Balance: £233.92m
Event: updated market value of £265m, as of 21 March
Description: special servicer requesting further updated valuation, as restructuring of tenant expected to have impact on value

04/05/2012
Deal: TITN 2006-2
Event: independent review suggests liquidity facility EOD is not outstanding, thus issuer is entitled to make standby drawing
Description: parties discussing how liquidity facility & cash management agreements should operate going forward

May
Deal: JPMCC 07-C1 & JPMCC 08-C2
Property: Westin Portfolio
Balance: $103.7m & $102.8m
Event: loan extended by 15y until Feb 2033; rate reduced to 0%; fully prepayable
Description: bankruptcy court reportedly ordered modification as part of a reorganisation of borrower Transwest Resort Properties

There are now 1,723 searchable loan events, dating back to March 2011, on the database. Click here for more.

CMBS

CMBS late-pays inch higher

US CMBS delinquencies rose for the second straight month while the volume of REO assets continued to climb, according to Fitch's latest index results for the sector.

Late-pays rose by 10bp in April to 8.53% from 8.43% in March. This was largely expected, with five-year loans originated in 2007 now starting to come due, the agency notes.

Another notable trend is the increased amount of REO assets, which are making up a larger share of the index. REO assets now represent one-third of all delinquencies, reaching US$11.1bn in scheduled loan balance in April.

New 2007 delinquencies topped US$1bn in each of the last three months. One bright spot was that large volumes of 2007 loans previously reported as 'non-performing matured' have been falling out of the index since March.

Industrial and multifamily CMBS also showed notable improvements last month, according to Fitch. Office remains the most cause for concern, with delinquencies jumping by another 37bp in April.

Current and prior month delinquency rates for each of the major property types are: 11.64% for multifamily (from 12.61% in March); 10.20% for hotel (from 10.35%); 9.34% for industrial (from 10.91%); 8.36% for office (from 7.99%); and 7.39% for retail (from 7.23%).

CMBS

Commercial REO impact analysed

Fitch says it believes the recent increases in commercial REO assets are significant enough to bring down the CMBS delinquency rate. The agency expects the rate to vary by about 25bp in both directions in 2012, with the current REO inventory putting downward pressure on the delinquency rate as it is liquidated.

In April, REO assets exceeded US$11bn in scheduled loan balance for the first time. But stark differences remain in REO trends by state.

For instance, in states where non-judicial foreclosure is allowed, the inventory of REO assets has increased by 64% since the beginning of 2011. The inventory in judicial-only states jumped by 111% during the same term.

For the current inventory of REO assets, it took on average 179 days to foreclose on properties in power-of-sale states. It took almost twice as long (323 days) in judicial-only states. Fitch believes that the current REO inventory from judicial-only states represents older stock that is finally making its way through the system.

This is reflected in the volume across the states: Georgia topped the list at 9.1%, followed by Nevada (8.8%), Arizona (7.3%), Michigan (5.6%) and Colorado (4.7%) - all power-of-sale states. Of note, the US$363m Bank of America Plaza in Atlanta and US$136m Citadel Mall in Colorado Springs inflated the rates for Georgia and Colorado.

Without those loans, Georgia would have come third at 5.8%. Colorado, at 2.4%, would have dropped by seven places.

The metropolitan areas with the largest REO assets were Atlanta, the Inland Empire, Phoenix, Las Vegas and Chicago. Fitch data shows that current appraisals on these assets have declined by 57% from issuance appraisals and their values are 35% below current scheduled loan balances. Approximately 70% of the REO assets were from 2006 and 2007, when pro-forma underwriting was prevalent.

CMBS

DPO claw-back provisions eyed

Concerns over CMBS borrowers potentially withholding information from the special servicer during DPO negotiations have emerged. Special servicers appear to be addressing these concerns by introducing claw-back provisions, according to CMBS analysts at Citi.

They explain that such provisions are typically heavily negotiated, with the terms ranging from 12 to 24 months. "It appears that the real intent of these provisions is to gain some leverage with the borrower. Indeed, borrowers would usually have more information than a servicer would have access to."

The claw-back provisions could potentially prevent situations where the borrower has a 'side deal' with a sale or refinance lined up for a higher amount than the DPO, or in the case where leasing information is being withheld. However, it is understood that if - after the DPO - the borrower adds value by capital improvements or otherwise and then sells for a higher amount, the borrower can keep that upside.

The Citi analysts note that they're not aware of cases where servicers have actually executed on the provision, but they understand that servicers are trying to strengthen the language in their documents. This is expected to improve the provisions' enforceability in the courts.

CMBS

CMBS loan pay-offs tick up

The percentage of US CMBS loans paying off on their balloon date reverted to the 12-month average, according to Trepp's April pay-off report. This uptick comes one month after the reading hit its second lowest level in 12 months.

In April, 42.2% of loans reaching their balloon date paid off, which is just under the 12-month average of 44%. By loan count, 56.8% of the loans paid off. On the basis of loan count, the 12-month rolling average is now 51.1%.

Prior to 2008, the payoff percentages were typically well north of 70%. Since the beginning of 2009, however, there have only been four months where more than half of the balance of the loans reaching their balloon date actually paid off.

CMBS

CMBS note auctions due

Auction.com has released details of two large note and REO sales scheduled for this month. MBS analysts at Barclays Capital estimate that the auctions account for nearly US$375m of CMBS loans out for bid.

The largest of these loans is the US$41m Baldwin Complex, securitised in CMAT 1999-C1. The loan has been in foreclosure since June 2011 and was last appraised in January for US$15m.

ASERs and outstanding advances alone account for nearly US$6m, and additional liquidation fees could send expenses higher, the Barcap analysts suggest. With the starting bid for the property set at US$5m, they expect eventual severities to be in the 80%-90% range.

Another large loan scheduled to be auctioned this month is the US$18m 300 North Martingale asset, securitised in GCCFC 2007-GG9. The loan had been scheduled to mature in December 2011 and has been listed as 'non-performing matured' since April.

NPLs

Spanish 'bad bank' welcomed

The Spanish government last week announced the second phase of the Royal-Decree-Law of 3 February, which details its plan to resolve the country's banking crisis.

Among the proposed measures is that general provisions on real estate exposure will increase to 30% from 7%, an extra €30bn, before year end. This is in addition to the €53.8bn already announced.

The government will also hire two auditors to undertake the valuation of all banks' entire loan portfolios, with the FROB purchasing CoCo bonds from those banks unable to raise the provisions independently. In addition, a 'bad bank' is to be created, taking the form of an asset management company that will purchase non-performing and foreclosed real estate loans from the other banks. The prices paid for these loans will likely be linked to the values ascribed by the auditors, with private investors expected to buy into the vehicles.

Credit analysts at RBS note that the plan is a positive step in respect of the bank recapitalisation process and for Spain to regain credibility with the involvement of external auditors. But they point out that the measures take into account problematic real estate exposure only (at €184bn), which is a small fraction of the total domestic loan book of Spanish banks (€1.7trn). Therefore, the risk remains that capital injections and nationalisations today may put public finances on the hook for larger amounts in the future.

Risk Management

Collateral optimisation tool offered

4sight Financial Software has launched a collateral optimisation module for its Xpose Collateral Management system. The solution allows financial firms to run automated availability checks based on a counterparty's acceptability and concentration schedules. The system will then propose the cheapest-to-deliver collateral within schedule.

The collateral optimisation system can also run collateral allocations across all of a firm's counterparts and across business lines, including securities lending, repo and OTC derivatives. This allows the system to show the discrepancy between the firm's actual collateral cost and optimum collateral cost. The system bases actual collateral cost on current allocations and optimum collateral cost on the best possible allocations.

Furthermore, the module also allows users to run 'what if' scenarios to allocate collateral against underlying clients in the collateral pool without booking any collateral movements. This allows users to collateralise their underlying clients in the optimum manner, within their customers' acceptability and concentration guidelines. It also identifies any surplus collateral for reinvestment and frees up valuable liquidity, the firm notes.

RMBS

ResCap files for bankruptcy

Residential Capital has filed voluntary petitions for relief under Chapter 11. The move is one of a number of strategic actions being taken by Ally Financial to strengthen its longer-term financial profile and accelerate repayment of the US Treasury's investment.

"The action by ResCap will enable Ally to achieve a permanent solution to its legacy mortgage risks and put these issues behind us," comments Ally ceo Michael Carpenter. "This action, along with pursuing alternatives for the international businesses, will allow Ally to focus 100% of its energies on further strengthening its already leading US auto finance and direct banking franchises."

The firm says it sees significant opportunities to broaden and strengthen this business domestically. "In addition, our US direct banking platform, Ally Bank, helps to power our auto business and its consumer-value proposition has attracted a strong and loyal customer base in the growing direct banking segment. Together, we believe these businesses, which represent the core of the company, are a winning combination and will continue to deliver value for our shareholders and provide opportunities to complete the important task of repaying the remaining investment of the US taxpayer," Carpenter continues.

Ally has paid approximately US$5.5bn to the US Treasury, which has enabled the taxpayer to recover about one-third of the investment made in the company. Upon successful completion of the announced strategic initiatives, Ally expects to have returned a total of two-thirds of the taxpayer's investment.

In connection with the Chapter 11 filing, ResCap has reached agreement with certain of its key creditors - including Ally - on the terms of a prearranged Chapter 11 plan. ResCap and its origination and servicing platform are expected to operate in the normal course during this process.

A key feature of ResCap's prearranged Chapter 11 plan is proposed settlements among Ally, ResCap's Chapter 11 estates and certain of ResCap's creditors that provide for the release of all existing and potential claims between Ally and ResCap, as well as a release of all existing or potential causes of action against Ally by third parties. The settlements also contain milestones for ResCap to emerge from Chapter 11 by year-end.

Ally has agreed to take certain steps to support the stability of ResCap and its mortgage servicing platform during the Chapter 11 cases, including: making a cash contribution of US$750m to the ResCap Chapter 11 estate upon confirmation of the plan; making a stalking-horse bid for up to US$1.6bn of ResCap-owned mortgages currently marked at 45% of unpaid principal balance; and providing ResCap with a US$150m debtor in possession financing facility. ResCap has also obtained support for its prearranged Chapter 11 restructuring from the ad hoc steering committee representing ResCap's junior secured notes, as well as other certain noteholders, and to date has affirmative support from entities holding US$781m of these notes.

In addition, institutional investors in RMBS issued by ResCap's affiliates and holding more than 25% of at least one class in each of 290 securitisations have agreed to support ResCap's reorganisation. These 290 securitisations have an aggregate original principal balance of more than US$164bn. The settlements reached with these creditors and with ResCap are subject to Bankruptcy Court approval.

RMBS

Countrywide discovery schedule agreed

The New York state court hearing the US$8.5bn Countrywide RMBS settlement case reached an agreed discovery schedule that reduces the possibility of a protracted legal process, according to ABS analysts at Barclays Capital. Interveners in the case, such as Walnut Place, had requested thousands of loan files from Countrywide in the discovery process to help bolster their case that the settlement amount agreed on by BNY Mellon was too low.

However, Judge Kapnick appeared reluctant to expand the scope of discovery to what would have occurred in a litigation hearing and, therefore, limited the number of loan files to be requested from Countrywide to between 150 and 500. The court also set a deadline for the discovery process of early 2013 and scheduled a settlement hearing starting on 19 February 2013.

"While it is still possible for Walnut Place and other interveners to appeal the decision by Judge Kapnick, the appeal process could run in parallel with discovery and therefore be less likely to cause an interruption in the hearings," the Barcap analysts explain. "Overall, we consider the news to be positive for Countrywide investors, as the likelihood of a significant delay in the settlement payout from a lengthy discovery process appears to have been curtailed. We continue to expect that the settlement cash will be paid to investors in mid-2013."

RMBS

High severities likely for some Irish RMBS

Moody's anticipates loan loss severities of up to 70% for some Irish RMBS. The agency notes that the steep decline in Irish house prices in recent years has dramatically increased LTV levels of Irish mortgages, pushing the majority of borrowers "alarmingly deep" into negative equity.

While loan loss severity estimates for Irish RMBS differ considerably from transaction to transaction, losses are expected to reach 70% at the upper end of the range. The variation in loss severity can be attributed to vintage and LTV levels at the close of the transaction, Moody's notes. The more seasoned transactions benefited from a certain degree of house price appreciation before the housing market downturn and tend to have lower LTVs at close.

Further, over half the loans in even the best pools are in negative equity, whereas nearly every loan is in negative equity in the worst pools, according to Moody's. Average LTVs based on the trough house price level reach 200% in some transactions.

Moody's suggests that forbearance measures will only serve to push loss severities higher as loans accrue lost interest, while the slow housing market recovery will impair distressed borrowers' ability to materially reduce negative equity levels. "While debt forgiveness would lead to immediate write-downs and reduce accrued lost interest levels, it would have only a minor impact on overall loss severity," the agency observes. "In cases where a borrower defaults because of an inability to pay (as opposed to an unwillingness to pay) and because property values will not return to pre-crisis levels, debt forgiveness is a positive measure if it allows borrowers to return to performing status."

As traditional forbearance measures are proving insufficient to help borrowers, new legislation is being proposed that would allow for debt forgiveness (SCI 14 March). The agency suggests that if the legislation is implemented, it would lead to immediate mortgage debt write-downs, forcing an earlier realisation of losses than with forbearance and therefore limiting lost interest.

Moody's recently downgraded Celtic 12 and Fastnet 2, and placed on review for downgrade the ratings of 16 senior notes in six other Irish RMBS. During the review, the agency will assess whether current credit enhancement levels are sufficient to support the ratings of these notes under stressed scenarios. It says it is particularly concerned that exposure to negative equity in the mortgage pools backing the notes could lead to high loss severities.

RMBS

Principal reduction impact analysed

Fitch reports that principal reductions are unlikely to change long-term ratings for US RMBS.

The agency notes that most ratings for transactions with the largest potential for reductions are already distressed. Further, the settlement target of at least US$10bn in principal reductions represents just 10% of underwater principal in non-agency RMBS. Finally, servicers are likely to look to their own portfolios first or apply reductions based on eligibility criteria that are consistent for all loans.

The ratings impact will ultimately hinge on the volume of strategic defaulters, the amount of the reduction offered and re-default rates post-modification, according to Fitch. The agency conducted sensitivity analyses and found that RMBS losses would be lower than currently expected if principal forgiveness is offered to delinquent borrowers - even if half of them re-defaulted post-modification. However, this could increase the likelihood of losses associated with strategic defaults, which would offset this benefit, particularly when larger amounts were assumed to be forgiven.

RMBS losses will also depend on whether servicers will cease offering forgiveness once settlement targets are met, their effectiveness at identifying borrowers in need versus those who are not, and the net present value calculations in determining eligibility.