Contents

CMBS

Hitting the wall

Mixed outcomes as Euro CMBS deals reach maturity

Last month saw another spike in European CMBS maturities as the sector finally reached the much-discussed maturity wall. About €2.3bn matured in April with mixed results, raising concerns ahead of the next spike in a couple of months.

Around €20bn of European CMBS loans mature this year, with a further €37bn due in 2013. European asset-backed analysts at RBS note that the number of loans paying off has dropped sharply; from an average of 20%, April saw only one loan in 25 - Zeloof, securitised in EMC3 - pay off in full.

The prevailing theme has been standstills. Out of the 25 loans maturing last month, the RBS analysts report that four were extended - including the Petrus German multifamily loan in Titan 2006-2X, despite an LTV of 111% - and seven entered into standstills. Some of these standstills - such as two loans in each of DECO 2005-E1X and Titan 2007-2X - should see the loans pay off fully in the next few months, but others are still in danger of defaulting.

Four loans did default and are headed for enforcement. Somewhat surprisingly, three of these are large London office loans. One is the Lloyds Building loan, which is fully occupied and demonstrates that it is not only vacant real estate in smaller European cities that has had difficulties.

Another four loans are in consensual restructuring and recoveries are only expected to be partial. All in all, the analysts believe "the outcomes of the loan maturities in April were not terribly encouraging".

However, Matthew Grefsheim, director of special servicing at Hatfield Philips, sees some positives. He says: "There might not have been much refinancing, but then this month there was the sale of Devonshire Square. That is not something that I worked on but that was a loan that was extended and was taken care of."

He adds: "Everybody knows it is not a good market right now for refinancing secondary real estate, but then you could argue that Devonshire Square is secondary and that is a very positive story. Times are not easy, but there are positive stories in the market and it is not all doom and gloom."

Grefsheim points to a few loans with April maturities where Hatfield Philips anticipates a positive outcome. He notes that not many Hatfield-serviced loans matured in April, although a few small Deutsche Bank loans that they service have been transferred to special servicing this quarter.

"From our loans, we had a loan in April with an automatic extension and another that was already in special servicing. There was a Deutsche Bank one that was extended a while ago and there is another Deutsche loan where I am confident there will be some very positive news shortly. There was not anything that came in April that we are expecting significant losses on," he says.

Grefsheim continues: "We have another one which matured in January. It is in central London and likely to result in a full payout. For quite a few of our loans that have matured, there is already a borrower-led liquidation in process. We are hopeful they will result in full pay-off, but if they do not then the process to realise value has already started on a lot of those."

Although maturity defaults cannot be avoided all the time, Grefsheim says a lot of the troubled loans have already come to special servicing. The Monnet loan securitised in Titan 2006-3X has been in special servicing for three years, for example.

"That is not going to end in a great result for the bondholders. But if I had been a balance sheet lender with that on my books and squeezed interest out of it for two or three years, it probably would have been worse," Grefsheim adds.

In a piece of good news, Terra Firma acquired Four Seasons for £825m at the end of the month (SCI 30 April). The move is particularly positive for Titan 2006-4FS, but other UK CMBS transactions backed by health care and care homes - such as Titan 2007-1 and EPIC Barchester - may also feel a knock-on benefit.

The £425m A1 and £175m A2 tranches of Titan 2006-4FS should be paid off in full as a result of the purchase, as should a £125m IGI loan. "This is clearly very good news for the bonds. Both the bonds have been trading in the high-90s, suggesting that the market has been expecting such a development," note the analysts.

CMBS maturities generally peak on interest payment dates, so the next maturity spike is due in July. The month is set to see around £1.8bn of UK loans and €7bn of euro-denominated loans maturing, including Coeur Defense in Windermere XII and several of the loans securitised in Windermere VII.

The latest news on Spain, Italy and Greece does not improve financing prospects for European secondary real estate. But Grefsheim believes the only way to avoid continued pain is for those who are holding debt to be more realistic about the value of what they are holding.

He concludes: "The more realistic you are in your approach, then the less of a shock July and other maturity spikes will be. Not all of these situations can end in great results for bondholders, but to the extent that you are able to resolve the situation as quickly and efficiently as possible without the continuation of extending and pretending you will get the best result."

JL

ABS

SLABS appeal

Student loans attractive as uncertainty clears

The US student loan ABS sector has its fair share of uncertainties to contend with, but the recent conclusion of S&P's FFELP review removes one of them. While political interference is harder to predict and becoming more of an issue, private paper is looking increasingly attractive.

S&P placed FFELP ABS transactions on negative watch in June last year. Ignoring municipal securities transactions, securitised products strategists at Barclays Capital note that 271 classes have been affirmed and 508 downgraded (with 436 downgraded to the US sovereign rating and 72 below that). All of the changes were due to the downgrade of the US sovereign rating.

The conclusion of S&P's review is a boost for the market, removing one of the larger uncertainties affecting FFELP ABS. MeasureOne's Guido van der Ven believes that investors will view the end of this uncertainty as a positive much more than they will view the downgrades as any cause for concern.

He says: "Investors are less reliant on what the security ratings are and are more reliant on actual performance of the underlying loans. Investors are now looking at the underlying performance of the portfolio of loans much more closely than in the past."

Van der Ven continues: "I'd be surprised if spreads changed much following the ratings announcements. I suspect that the announcement was already discounted in the market."

The Barcap analysts concur. They note that "so long as investors are not ratings-constrained...they should be buying FFELP ABS" and believe the US government's student loan guarantee will remain good regardless of its rating. Some investors will be forced to sell, however.

"Some triple-A funds may be in a situation where securities that have been downgraded must be sold. Some of these fund managers may have already sold the positions that their internal models indicated were likely to be rated less than triple-A," notes van der Ven.

However, the market is not free from uncertainty yet. The presidential election - whether won by incumbent Barack Obama or Republican presumptive nominee Mitt Romney - brings with it an increased likelihood of an eye-catching policy announcement or two.

The interest rate on undergraduate subsidised Stafford student loans is set to double to 6.8% in July. It applies to loans with first disbursement dates on or after 1 July 2012 and will affect 7.4 million students.

Student loan ABS would be unaffected because the interest rate only applies to newly originated loans, which are being originated by the government and not securitised. However, the Barcap analysts note that "this is the beginning of the electoral spotlight shining on this sector. Because education finance reform proposals play well politically and, as presidential candidates engage in the quest for the youth vote, we expect to hear more about education finance issues".

Both Obama and Romney were quick to voice their opposition to the planned increase in interest rates on student loans. Other election promises they might make - such as debt forgiveness - could have a greater impact on ABS.

"It is such a political football and I think every politician wants to curry favour with constituents. Free stuff is the easiest way to curry favour, but the problem is that they are trying to cure cancer with an aspirin," says van der Ven.

He continues: "The problem is not the student loan, the problem is tuition inflation. Politicians do not know what to do about tuition inflation, so they don't talk about it. This is certainly something to keep an eye out for though. You are going to see politicians talking about measures, such as debt forgiveness or bankruptcy dischargeability."

Looking ahead, van der Ven is optimistic about the market's prospects. "There have been new deals recently and they have priced pretty well. They are very well structured and collateral is performing well. New private credit loans are being underwritten to higher standards, so student loan ABS is a market which is going to continue to grow."

Mark Hale, cio at Prytania Investment Advisors, confirms that most US student loan ABS transactions exhibit strong fundamentals and remain very attractive on a risk/reward basis. He attributes this to the disappearance of much of the historical buyer base, with conduits and SIVs deleveraging or winding down, and a small number of issuers remaining.

"The student loan ABS sector is comparatively neglected and some deals are quite stressed or complex and hard to model, meaning that some of the return is in the perceived complexity premium," Hale adds. "For example, some investors didn't realise quite how complicated the auction rate securities transactions were. Some deals also have low ratings, which is tricky for ratings-constrained investors."

But Hale points out that it is no longer possible for Prytania to acquire cheap FFELP paper compared to the low point of the crisis in 2008/2009. He says that there is now more value to be found in private student loan ABS or in mixed private/FFELP securities.

JL

CLOs

Active CLO market seeks stability

The European CLO market is alive with BWICs, but buyers and sellers are struggling to meet in the middle. While mezzanine bonds - in particular - appear attractive, ongoing eurozone concerns are weighing heavily on participants' minds.

"This week there has been a bunch of BWICs and the market has been really busy. It has mainly been mezz stuff that has been asked, but the issue is that price talk has just been all over the place," reports one CLO trader.

He continues: "Price talk has seen 10 points or more difference. That is something you hardly ever get and it really is a sign of how much uncertainty there is in the market."

The main trend in the CLO sector this week has been the discrepancy between the prices sellers are looking for and the amount that buyers are willing to bid. The trader says he is working on a few things at present where "the difference between what these guys are after is huge", which he blames squarely on the negative news coming from Europe.

"I think buyers are expecting things to drop, whereas the sellers are fast money accounts who picked up bonds over the last few months and are looking to make a gain. Something will have to give. That said, where there has been selling, a lot of it is coming from Germany," he adds.

All of the uncertainty and ominous European omens suggest that further spread widening is likely. While bids for triple-As remain firm, the trader reports that they are getting progressively weaker for AMs.

He says: "Some double-B paper traded up at 2100 DM last week; it was an Avoca VI tranche on a BWIC. That traded way higher than the level I expected; I was sure this would have been mid- to high-30s and it went in the 40s. I understand that was taken on by a dealer, so it might be lower now."

Finally, the trader believes the ongoing eurozone crisis is only headed in one direction. He concludes: "There has been a lot of bad news and it looks like it will be getting worse and worse. The Greek exit has gone from being a possibility to a certainty and that does not send the right message for Europe. The issue is stability; there was a lot of American money lined up, but all this instability is putting people off."

JL

Structured Finance

SCI Start the Week - 21 May

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

Pipeline
It was a fairly busy week for the pipeline, with several new deals appearing. Among them is a US$1.54bn student loan ABS from Sallie Mae (SLM Student Loan Trust 2012-4) and a €560m auto ABS (FCT Autonoria Compartment Autonoria 2012-1). Those deals were joined by a US$150m ILS (Long Point Re III) and a US$270m CMBS (JPMCC 2012-WLDN). Finally, there are also two new CLOs: US$368m Babson CLO 2012-II and US$595.5m OHA Credit Partners VI.

Pricings
It was an even busier week for pricings. Seven ABS deals, two RMBS transactions and five CLOs printed last week.
The ABS prints were led by US$1.6bn Chase Issuance Trust 2012-A1, together with US$600m Gracechurch Card Programme Funding series 2012-3, US$500m Triton Container Finance III series 2012-1 and US$250m Cronos Containers Program I series 2012-1. Three auto ABS deals also priced: US$1bn Nissan Master Owner Trust Receivables Series 2012-A; US$250m Nissan Master Owner Trust Receivables Series 2012-B; and C$540m Ford Asset Securitization Trust 2012-R1.
The RMBS deals were the US$4bn-equivalent Fosse Master Issuer 2012-1 and A$500m Progress 2012-1 Trust. Finally, the five CLO prints were US$409.8m BlueMountain CLO 2012-1, US$353m Kramer Van Kirk CLO 2012, US$485.5m LCM CLO XI, US$283.5m Sugar Creek CLO 2012 and US$425m Venture X CLO.

Markets
The European ABS primary market "continues to see a steady, albeit comparatively thin, flow of deals", according to ABS analysts at JPMorgan. Secondary spreads on vanilla asset classes such as credit cards have tightened, but peripheral ABS moved wider over the week as Greek and Spanish concerns predominated.

The European CMBS market saw Friday deliver significant BWIC activity for the third week running, say CMBS analysts at Deutsche Bank. One list saw nearly £200m circulating and execution remained strong, with covers around the 300 DM level, barely wider than the execution seen in earlier weeks.

BWIC activity was also strong for European CLOs, as SCI reported on Thursday. The gulf between buyers' and sellers' valuations proved too great to overcome in some cases, but mezzanine bonds were generally popular. "I think buyers are expecting things to drop, whereas the sellers are fast money accounts who picked up bonds over the last few months and are looking to make a gain. Something will have to give," notes one trader. Double-B paper traded at 2100 DM, which caught the trader off guard.

It was a relatively good week for US ABS, although the secondary market was rather quiet, according to securitised products strategists at Bank of America Merrill Lynch. Spreads on auto ABS sponsored by Ally Financial were largely unchanged, despite the ResCap bankruptcy filing.

Private student loan ABS saw spreads widen by 5bp-10bp, with subordinated classes widening by as much as 100bp. Spreads on shorter-dated private student loans outperformed the CDS levels for Sallie Mae, which widened over the week.

In a familiar story, the US RMBS market was last week characterised by heightened risk aversion because of Europe, say MBS analysts at Barclays Capital. Lower agency coupons "performed well into the sharp bull-flattening in the Treasury curve over the week". Fannie 30-year 3s-4s were up four to seven ticks versus swaps. Higher coupons continued to perform poorly.

Finally, the US CMBS market saw spreads widen. CMBS analysts at Citi note that dupers widened from 20bp to 30bp across vintages.

They say: "Along with broader markets, CMBS experienced a steep sell-off this week. GG10s widened by 30bp, equities were down by about 3.9% and the VIX increased over five points to 24.5. Investors moved into the safe-haven of Treasuries, as the 10-year Treasury yield declined by 17bp."
 

Deal news
• Rescap's Chapter 11 filing 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.
• Deutsche Bank CRE debt analysts suggest that the recent modification of the Glenborough Portfolio loan, securitised in COMM 2007-FL14, may be "one of the more questionable modifications to date". They indicate that the modification affords the borrower an explicit financing advantage at the bondholders' expense.
• Deutsche Annington appears to be making progress in respect of its restructuring proposal for the GRAND CMBS, with an announcement expected by the end of 3Q12. It is now almost a year since discussions with noteholders commenced (SCI 30 June 2011).
• Fitch has commented on the question of whether the extension of the Kerzner International Portfolio loan violated the terms of the COMM 2006-FL12 deal documents. The recent modification of the Kerzner loan included a three-year extension until 9 September 2014.
• The container ABS sector has had an active second quarter. So far, four new deals have hit the market, while secondary trading in pre-crisis, floating-rate transactions picked up during the first two weeks of May.
• 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.
• Banco Sabadell has announced the results of its 41-bond tender offer. Investors appear to have participated strongly, driven largely by eurozone concerns.
• 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.
• 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.
• Indicus Advisors has assigned the investment management rights for the Queen Street CLO I and II transactions to Ares Management. The agreement has received the consent of the controlling class and Moody's confirms the move won't result in ratings downgrades on the notes.

Regulatory update
• SIFMA has responded to the request for comment on FINRA's proposed rule to begin disseminating data for agency MBS traded as specified pools. The association believes the proposal has the potential to negatively impact participant confidentiality and therefore participant desire to transact in the market.
• The Senate Insurance and Investigations & Government Operations Committees are considering conducting an inquiry and holding hearings related to MBIA Insurance Corp's 2009 restructuring that was approved by the former New York State Insurance Department. The move is in connection with litigation alleging that MBIA withheld material information from the State Insurance Department when the monoline sought the Department's approval for its restructuring.
• 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.
• A hearing in the Rehabilitation Court relating to Ambac Assurance's motion concerning a settlement with the US Internal Revenue Service over the tax treatment of CDS contracts (SCI 28 February) is scheduled for 13 June. Another hearing in the Rehabilitation Court has been scheduled for 4 June, which could see the monoline begin making interim policy claim payments to segregated account policyholders.
• 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.

Deals added to the SCI database last week:
Asti Finance PMI
Atlas Senior Loan Fund
Chesapeake Funding series 2012-1
EFS Volunteer No. 2 series 2012-1
GE Dealer Floorplan Master Note Trust series 2012-2
Mercurius Funding Compartment Mercurius-1
Santander Drive Auto Receivables Trust 2012-3
TAL Advantage IV series 2012-1
Tenterden Funding

Deals added to the SCI CMBS Loan Events database last week:
EXCAL 2008-1; GCCFC 2007-GG9; GECMC 2006-C1; GECMC 2007-C1; JPMCC 07-C1 & JPMCC 08-C2; JPMCC 2007-LDP11; MLCFC 2006-4; MLCFC 2007-9; MLMT 2005-MKB2; MSC 2006-IQ12; OPERA SCOT; PROMI 2; REC 6; TAURS 4; TITN 2007-2; TITN 2007-3; Various (auctions on auction.com); WBCMT 2006-WH7A; WBCMT 2007-C30; WBCMT 2007-C34; WBCMT 2007-WHALE 8; & WINDM X

Top stories to come in SCI:
US student loan ABS update
Hybrid ARM investment strategies
Valad Europe profile
Leadenhall Capital Partners profile
Counterparty risk management survey

CLOs

CLO post-reinvestment activity examined

CLO strategists at RBS have published a report examining the post-reinvestment choices that managers made in 2011. Of the deals in the study that reinvested, most were found to have unusually lenient reinvestment language.

Based on their transaction database of 260 post-reinvestment CLOs, the RBS strategists found that 41% of managers - representing 106 deals - purchased US$4.4bn of assets last year. Transactions can typically reinvest if they performed well, their requirements are lenient or if performance improved as a deal deleveraged.

In terms of each manager's average purchase amount per deal, the strategists noticed that six managers had considerably higher averages than the rest of the pack. To understand why some deals reinvested more than others, they broke the sample down into two categories - those that purchased more than US$98m last year (16 deals which purchased an average of US$143m) and the rest, which purchased less than US$98m (90 deals which purchased an average of US$21m).

Of the deals that reinvested, most were found to have unusually lenient reinvestment language, including some that had no liability rating, maturity matching or WAL restrictions. Many of these deals actively sold credit risk and credit-improved securities.

Indeed, the 16 deals sold an average of US$34m, compared to US$14m for the other 90. In total, the 16 deals account for 26% of the total sales.

Further, the RBS data shows that the 16 transactions amortised less and retained more excess spread than the others.

Meanwhile, US$2.65bn amendments were accepted in post-reinvestment CLOs during 2011. Extending transactions past their legal final maturities can create long-dated assets that may impact double-B tranches.

"We believe some managers are more likely than others to accept amendments that exceed legal finals. However, new issue deals have language that limits amendments; specifically, their ability to violate weighted average life tests and exceed the legal final," the strategists conclude.

CS

CMBS

Westin loan mod questioned

The recent court-approved modification of the Westin Portfolio loan, securitised in JPMCC 2007-C1 and JPMCC 2008-C2, has taken the market by surprise. The modification - which extends the loan by 15 years and slashes its coupon to zero - exposes fresh intricacies of the US bankruptcy code that CMBS investors now face, according to CMBS strategists at Citi.

They note that because the Westin collateral value was significantly below the outstanding mortgage, the CMBS lenders appear to have made a so-called 1111(b)(2) election. This provides an under-secured creditor with a stream of payments equal to the present value of its collateral and totalling the creditor's total claim. A creditor would usually make such an election when it believes that the collateral securing their claim is undervalued, potentially allowing them to capture the value of a future appreciation of the collateral.

"In the Westin case, the lender's election allows it to keep the roughly US$247m outstanding claim as secured debt. But the present value of the borrower's actual stream of payments will equal only roughly US$99.4m (the court-determined US$92.5m collateral value plus cash on hand)," the Citi strategists explain.

However, despite initially making the 1111(b)(2)election, the lenders later objected to the amended versions of the borrowers' reorganisation plan. LNR, as special servicer, is believed to be appealing the bankruptcy court's decision (see SCI's CMBS loan events database).

The strategists note that senior bondholders may also question decisions the CMBS trusts made at the bankruptcy court. In particular, the 1111(b)(2) election stretches out the stream of payments the trusts receive, rather than provide the trusts with a more near-term payment. The relatively low US$92.5m valuation the court attached to the properties may also be questioned: the most recent reported appraisal from April 2011 is US$112.5m.

The Arizona Bankruptcy Court approved the Westin Portfolio modification as part of the confirmation of the Transwest Resort Properties bankruptcy reorganisation plan. The plan will provide the secured CMBS lenders with replacement notes, carrying new terms.

CS

CMBS

GRAND restructuring imminent?

Deutsche Annington appears to be making progress in respect of its restructuring proposal for the GRAND CMBS, with an announcement expected by the end of 3Q12. It is now almost a year since discussions with noteholders commenced (SCI 30 June 2011).

Deutsche Bank securitisation analysts suggest that increased media chatter is indicative that an announcement on the terms of a restructure may be imminent. They also point to Deutsche Annington's business model, which remains oriented to an IPO in the next few years. The company's ceo believes that this is achievable at a 60% LTV.

The borrower reportedly plans to inject equity of several hundred million euros as part of the restructure. The proposal is also likely to entail waves of mini-refinancings at the REF level over several years, probably through to 2018.

Further, a revaluation is expected to be released for the properties, showing an increase on the 2006 valuation. The present valuation of €7.7bn is roughly consistent to a net cold rent multiple of 12.5x, equating to a 73% LTV at the securitisation level, according to the Deutsche analysts.

"If the goal is to get the LTV to 60% by 2013 and the GRND portfolio is to be consistent with this, we estimate the minimum equity injection will be in the range of €500m-€800m. For example, a 5% increase in the value of the portfolio on the 2006 valuation would require circa €800m additional equity to get to a 60% LTV," they observe.

The analysts' base case is for the waterfall to remain pro rata, with a step-up in margin on the notes. Over the long run this could range from minimal to near recent Pfandbriefe bank lending levels in the 160bp-170bp range.

They indicate that the step-up will largely depend on the ability of the structure to fund higher interest payments. The GRND ICR at the January IPD was at 1.15x, due to the hedging procedures of the transaction. Until the hedges roll off in 2013, this will likely limit the ability to inject equity.

The analysts note that - based on the waterfall remaining in pro-rata mode - the indicative basis of at least 5-6 points between classes of notes seems too wide, making the mezzanine and junior notes the most interesting. "Our one caveat is that it can take patience/time to accumulate size in the lower tranches - a fact we have always assumed is related to the fact that an entity related to the sponsor is a significant holder."

Any restructuring proposal will need to be approved under a UK Scheme of Arrangement, requiring a threshold of 75% of total outstanding bonds.

CS

CMBS

Glenborough modification questioned

Deutsche Bank CRE debt analysts suggest that the recent modification of the Glenborough Portfolio loan, securitised in COMM 2007-FL14, may be "one of the more questionable modifications to date". They indicate that the modification affords the borrower an explicit financing advantage at the bondholders' expense.

The major terms of the modification include: a two-year maturity extension and one-year extension option, subject to no default and at least a US$25m prepayment; cashflow to be trapped in a lockbox account and disbursed to permitted disbursements; CE/TI/LC reserve to receive deposits equal to US$1.25/sf (US$298,360/month); and lender to waive the default interest and late charges relating to the maturity default. In addition, while the margin for the trust will remain unchanged, the margin for the non-trust junior participation and mezz debt will increase to 7.5% and 11.35% respectively.

The Deutsche analysts note that margin on the trust debt is roughly 425bp below current market levels, equating to about US$17m of saved annual interest expense for the borrower. Assuming the optional extension period is exercised, the cumulative interest savings is US$50m, even after accounting for the partial principal repayment that is required to exercise the option.

Further, the new margin on the subordinate debt equates to more than US$45m a year. If this is paid to the borrower and combined with the financing subsidy on the senior loan, it equates to US$62m a year - a 7.75% cash-on-cash yield to Blackstone's purchase price of the portfolio, according to the analysts.

In addition, the terms of the modification state that once the lockbox balance exceeds US$6m, cashflow may be used to pay down the loan balance. The 'permitted disbursements' are not defined clearly, so it is possible that interest on the B note and possibly the mezzanine debt could qualify, the analysts observe.

Finally, given that the market value of the property was in excess of the debt, the analysts question whether the cost of foreclosing was really in excess of the subsidies the borrower will accrue during the modification term. "To that end, it's also clear that Blackstone would not have assumed control of the portfolio only to get foreclosed on less than a year later. That should have provided the servicer with additional negotiating leverage, enough to secure a modest principal repayment immediately. Although the pricing impact on the related AJ bond was probably only around 1-2 points, the larger impact is the additional evidence this modification furnishes to the next borrower looking for a sweetheart deal."

CS

ABS

PPL appoints permanent treasurer

Mark Wilten, who has been serving as interim treasurer at PPL Corporation since April, will take on the position permanently next month. He is currently treasurer at Nissan North America and Nissan Motor Acceptance Corporation.

Wilten's previous roles include European securitisation associate director at Deutsche Bank, principal finance and asset securitisation executive director at WestLB and securitisation executive director at Rabobank.

Structured Finance

Chairman, successor for new IOSCO board

The International Organization of Securities Commissions (IOSCO) has appointed Masamichi Kono as chairman of its new board. He will hold the post until March 2013 before being replaced by Greg Medcraft.

Kono is vice commissioner for internal affairs at Japan's Financial Services Agency and has been chairman of IOSCO's technical committee since 2011. The technical committee, executive committee and emerging markets committee advisory board have been combined to create IOSCO's new board.

Medcraft is chairman of the Australian Securities and Investment Commission. He has almost three decades of experience in investment banking, including a period as global head of securitisation for Société Générale in New York.

Structured Finance

Consultancy adds structured products trio

SFC Associates has expanded its structured products capabilities with three additions. Chi Lee, Robert Maroney and Chester Spatt each become affiliates.

Lee specialises in the structuring, pricing and trading of ABS CDOs, CLOs, CMBS and RMBS. He joins from Navigant Consulting and has previously served as head of the ABS derivatives desk at UBS, global structured products vp at Bank of America and structured finance avp at Prudential Securities.

Maroney has a depth of experience in as a mortgage finance professional and credit analyst, including expertise in mortgage loan origination, underwriting and securitisation. He was most recently RMBS ratings avp at Moody's and has also held senior posts at WaMu Capital and Goldman Sachs.

Spatt is a professor at Carnegie Mellon University. His expertise includes the securities markets, where he specialises in ARS. He has previously worked at the US SEC.

CLOs

Queen Street CLOs transferred

Indicus Advisors has assigned the investment management rights for the Queen Street CLO I and II transactions to Ares Management. The agreement has received the consent of the controlling class and Moody's confirms the move won't result in ratings downgrades on the notes.

For information on other CDO manager transfers, see SCI's CDO manager transfer database.

CLOs

Oak Hill boosts client coverage

Declan Tiernan has joined Oak Hill Advisors as client coverage md. He is based in London and will be primarily responsible for managing investor relationships in Europe and the Middle East.

Tiernan joins from UBS, where he was head of alternative fund distribution. He has previously held positions at Deutsche Bank and HSBC, where he was responsible for marketing structured and alternative credit products to European and Middle Eastern investors.

CMBS

CRE vet promoted

American Realty Capital (ARC) has promoted Andrew Winer from svp and head of debt capital markets to cio of ARC Global Daily NAV Trust (ARC Global). ARC Global will invest in the US and also in Europe, where it will partner with UK-based Moor Park Capital Partners.

Winer has extensive CRE experience. He joined ARC at the start of the year and previously spent 17 years at Donaldson, Lufkin & Jenrette and Credit Suisse, where he was responsible for the pricing, hedging and execution of CMBS. Earlier in his career he worked within Arthur Andersen's structured products group.

RMBS

Citi given RMBS fine

FINRA has fined Citigroup Global Markets US$3.5m. The fine is for providing inaccurate mortgage performance information, supervisory failures and other violations relating to its subprime RMBS. Citi has neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

FINRA says Citi posted data for its RMBS deals that it should have known was inaccurate and which could have affected investors' decisions. Furthermore, when it learned that the data was inaccurate, it did not correct the problem "until years later".

The regulator found that from January 2006 to October 2007 Citi posted inaccurate mortgage performance data on its website that was not corrected until this month. It was informed that the data was inaccurate and did not correct it. Citi also lacked the procedures to verify RMBS pricing and failed to maintain required books and records, FINRA says.

ABS

UK card ABS stress tested

Fitch says UK credit card master trusts remain resilient against a hypothetical severe economic deterioration in three stress tests the agency has conducted. The resilience is driven by the level of credit enhancement and improved performance of most trusts to pre-financial crisis levels.

The three scenarios demonstrate the immediate stress required to see multi-category downgrades of Fitch's UK credit card ratings. The moderate stress reflects an economic deterioration where unemployment rates increase to about 11%-13%.

As a result, charge offs increase by 75% and yield and monthly payment rate (MPR) are both reduced by 20% from the current level reported by the trusts. In this scenario, five out of six trusts' triple-A notes would remain at that level, with some of the lower rated notes migrating by one rating category.

The first severe stress assumes an economic deterioration with unemployment of 18%-21%. Charge offs would double from their current level, with yield and MPR declining by 35%. Fitch considers such an extreme scenario to be remote and well beyond the realm of more plausible downside scenarios; even so, all of the triple-A notes would remain investment grade.

The second severe scenario incorporates a 100% purchase rate stress, significantly reducing the repayment speed of credit card receivables. This scenario can be connected to the originator defaulting and the credit card portfolio being wound down, rather than the business being continued by a successor purchaser.

In addition, Fitch considered a performance stress akin to the moderate stress. As a result, two triple-A notes would be downgraded to sub-investment grade, with all other triple-A notes remaining investment grade.

ABS

Container ABS appetite surging

The container ABS sector has had an active second quarter. So far, four new deals have hit the market, while secondary trading in pre-crisis, floating-rate transactions picked up during the first two weeks of May.

Year to date, pre-financial crisis container spreads have tightened by more than 100bp. Spreads on post-crisis deals, meanwhile, have compressed by 50bp-75bp.

This quarter's new issuance comprises: US$250m TAL Advantage IV series 2012-1, US$275m Cronos Containers Program I series 2012-1, US$400m Textainer Marine Containers series 2012-1 and US$275m Triton Container Finance III series 2012-1. The latter two deals were upsized, indicating the strength of investor appetite for container assets.

Structured products analysts at Wells Fargo believe that investor demand should continue to be strong. "Compelling relative value, especially compared to investment grade corporate names, and increased investor familiarity with container ABS should help maintain demand," they explain. "In addition, the shrinking consumer ABS market - and the need to invest cash - should provide technical support to container ABS."

The Wells Fargo analysts also point out that leasing fundamentals in the sector are strong, with utilisation rates - while slightly lower in the first quarter - remaining quite high. However, they note that concerns over slower growth in China and the worsening situation in Europe have driven container trade growth estimates lower.

Older vintage container paper offers spreads in the low-200bp context, with triple-B ratings and WALs in the 1-2 year range. Post-crisis deals offer relatively high fixed-rate coupons, with spreads in the low-300bp range at single-A ratings and five-year WALs.

ABS

Citibank spike skews card charge-offs

US securitised credit card charge-offs rose by 27bp in April to 5.21% from 4.92% the month previously, according to Moody's Credit Card Indices. A significant increase in the charge-off rate of the Citibank trust caused the rise. The increase for Citibank will reverse course in the coming months and Moody's expects the charge-off rate index to resume falling over the next several quarters to end 2012 at about 4%.

Historically low delinquencies and high payment rates continue to attest to the improved average credit quality of receivables in the credit card trusts, according to Moody's. "Issuers have charged off accounts of weaker cardholders at record levels in the recent recession and originators have added few new accounts to securitisations," says Jeffrey Hibbs, an avp and analyst at the agency. "The improved credit quality of trusts' receivables will support strong credit performance in credit card trusts throughout the coming year."

Aside from the sharp increase for the Citibank trust, charge-offs in April among the other five largest trusts were flat to slightly lower. The Citibank spike was due to a portion of delinquent balances from last November reaching its 180-day threshold for charge-offs, combined with the technical impact on the annualisation factor stemming from fewer collection days in April pursuant to Citibank's day count policies.

Meanwhile, the delinquency rate index declined by another 14bp to 2.59% in April from 2.73% in March and reached a new record low for the third consecutive month. "The improvement in the delinquency rate index was again ubiquitous throughout early, mid- and late-stage delinquencies," adds Hibbs. The early-stage delinquency rate reached an all-time monthly low of 0.66% in April, down from 0.72% in March.

The payment rate index declined by 62bp to 21.49% in April, from 22.11% the previous month. Moody's says the slide was expected, after the index reached an all-time high in March, buoyed by the seasonal effects of tax refunds. So far in 2012, the payment rate index is still more than a full percentage point higher than it was last year, although the pace of improvement is beginning to slow.

Finally, the yield index fell by 23bp to 18.56% in April, from 18.79% in March, and it remains more than 250bp below the April 2011 level. The decline is in large part owing to the expiration of most issuers' principal discounting initiatives, which artificially boosted their trust yields.

Higher charge-offs and a lower yield led to a decrease in the excess spread index to 10.55%, in April from 11.08% in March, Moody's notes.

ABS

Sovereign ceiling kicks in

FGA Capital has announced the first publicly marketed post-crisis Italian auto ABS - A-BEST 7. The transaction has caused a stir because the most senior class in the capital structure is rated double-A plus due to the Italian sovereign ratings ceiling (see also SCI 7 February).

"It will be interesting to see investor reaction to the deal, as it is the first step towards double-A becoming the new triple-A," observes one ABS trader. "There's no reason why it shouldn't - Italian ABS are generally performing well, but are trading at wider spreads because of the ratings cap and periphery status."

FGA is expected to market the €314m senior tranche and retain the rest of the structure.

Structured Finance

RBC debuts US public covered bond

RBC recently filed a registration statement with the US SEC for the first public offer of covered bonds in the US. The filing was made in reliance on a no action letter issued by the SEC staff that addresses the conditions under which the covered bonds could be registered. Morrison & Foerster advised the bank on the filing.

To date, all offerings of covered bonds in the US have been offered under Rule 144A. But with SEC registration, covered bonds become a mainstream capital markets product.

The covered bonds to be registered will be issued under the bank's existing global covered bond programme, utilising the same cover pool that supports the covered bonds previously issued by the bank. RBC uses a contractual structure to issue covered bonds, utilising a separate entity to hold the cover pool and act as the guarantor.

The SEC staff views a guarantee from a separate entity as a separate security requiring registration. While RBC qualifies for shelf registration on Form F-3, the guarantor does not, meaning that the bank needed relief from the SEC staff in order to enable the guarantor to register on Form F-3 in the form of a no action letter.

Structured Finance

Ambac rehab hearings scheduled

A hearing in the Rehabilitation Court relating to Ambac Assurance's motion concerning a settlement with the US Internal Revenue Service over the tax treatment of CDS contracts (SCI 28 February) is scheduled for 13 June. Another hearing in the Rehabilitation Court has been scheduled for 4 June, which could see the monoline begin making interim policy claim payments to segregated account policyholders.

If the interim payments are approved by the Rehabilitation Court, the segregated account will begin paying 25% of each permitted policy claim that has arisen since the commencement of the rehabilitation proceedings for the segregated account and 25% of each policy claim submitted and permitted in the future. Ambac Assurance expects to begin making these payments no sooner than 3Q12. As of 31 March, approximately US$3.2bn in segregated account policy claims were outstanding.

Ambac has also received approval from its regulator, the Wisconsin Office of the Commissioner of Insurance, to exercise call options to purchase approximately US$939m in aggregate par amount of surplus notes issued by Ambac Assurance on 7 June 2010, for an aggregate cash payment of approximately US$278m.

Structured Finance

Greek deposit flight warning

iTraxx indices are near last year's highs on concerns that Greece will exit the euro. At the same time, the prospect of capital controls being implemented in the country adds jump-to-default risk to corporate credit.

Greek banks are technically insolvent due to PSI losses and need at least the first tranche of the €50bn IMF recapitalisation plan to be disbursed, according to credit analysts at RBS. "Without it, they are likely to face severe capital flight and may not be able to access funding from the ECB, which cannot lend to insolvent institutions. The next election on 17 June will be key: an unstable government could delay bank recapitalisations and accelerate deposit flight further, eventually causing banks to run out of liquidity or collateral," they add.

Banks in Spain and Portugal need capital as well, due to rising bad loans and increasing regulation. Contagion from Greece could spread through deposit flight and increased reliance on central bank liquidity, resulting in bondholder subordination and downgrades.

Yet European corporate balance sheets appear to be strong enough to withstand this scenario, the RBS analysts suggest. "In particular, high yield firms in the iTraxx Xover generate more than half of their revenues outside Europe, have diversified their funding base away from banks and termed out their debts since the crisis began: they need to repay less than 3% of total bonds for the remainder of the year. Xover valuations have spiked on sovereign fears and currently compensate for around a 50% default rate over the next five years, paying 240bp per turn of balance sheet leverage - a record high."

The analysts consequently recommend buying protection on the periphery-heavy iTraxx Xover sub financials index and selling protection on iTraxx Xover.

Meanwhile, Citi credit analysts believe the best way to position against JTD risk arising from capital controls is via flatteners at the front end of the curve. "Capital controls could potentially be very disruptive to corporates, but for countries in the EMU we believe any such measures would seek to minimise the impact on the functioning of the internal market. However, in the event of disorderly EMU exit scenarios, harsher forms of capital controls - such as a moratorium on servicing of international debt - could become a real risk, with a much more tangible impact on corporate bondholders," they conclude.

Structured Finance

Greek country ceiling lowered

Fitch has downgraded Greece's long-term foreign and local currency issuer default ratings to triple-C from single-B minus and its short-term foreign currency IDR to single-C from single-B. At the same time, the agency has revised the country ceiling to single-B minus, with all Greek structured finance ratings now capped at this level.

As a result, 32 structured finance notes that were rated above single-B minus have been downgraded. The SF tranches that were previously on rating watch negative have been maintained on RWN as a result of the uncertainty surrounding the political situation in Greece. Fitch expects to downgrade these notes further in the event that Greece exiting the euro becomes probable.

Additionally, the ratings of two tranches that are credit-linked to the sovereign's long-term IDR have been downgraded.

The downgrade of Greece's sovereign ratings reflects the heightened risk that Greece may not be able to sustain its membership of Economic and Monetary Union. In the event that the new general elections scheduled for 17 June fail to produce a government with a mandate to continue with the EU-IMF programme of fiscal austerity and structural reform, an exit from EMU would be probable. A Greek exit would likely result in widespread default on private sector, as well as sovereign euro-denominated obligations.

In the event of a Greek exit, Fitch says it would treat the forcible re-denomination of sovereign and private sector debt into a new Greek currency as a default event in line with its distressed debt exchange rating criteria.

The agency notes that, as well as exacerbating economic and financial risks facing other European sovereigns, a Greek exit from EMU would break a fundamental tenet underpinning its sovereign and other ratings in the eurozone. Consequently, it would place all eurozone sovereign ratings on RWN following the Greek elections if it assesses that the risk of a Greek exit from EMU is probable in the near term.

CDO

CRE CDO late-pays inch up

The slow upward trajectory in late-pays continued this past month for US CRE CDO delinquencies, according to Fitch's latest index results for the sector. Delinquencies rose slightly in April to 13.9% from 13.6% in March.

New delinquent assets in April consisted of four matured balloon loan interests and two newly credit-impaired CMBS bonds. Offsetting these new delinquencies were nine assets that were removed from the index, including four assets disposed of at a loss, two modified/extended loans and three securities no longer impaired.

CRE CDO asset managers reported approximately US$28m in realised losses in April, Fitch notes. The largest loss - totalling US$14.6m - was a full loss on a mezzanine interest backed by a portfolio of hotel properties located throughout the US.

Current delinquency rates for all asset types are: 31% for land (representing 5% of total collateral); 21% for construction (1%); 20% for hotel (15%); 13% for office (24%); 13% for industrial (1%); 12% for retail (7%); 12% for multifamily (15%); 11% for rated debt (23%); 5% for condo (1%); and 6% for other (5%). The remaining 2% in collateral consists of uninvested principal proceeds.

In April, 31 of the 33 CRE CDOs rated by Fitch reported delinquencies ranging from 1.3% to 51%. Additionally, 39% of the rated CRE CDOs were failing at least one overcollateralisation test.

CDO

Mixed results for Trups CDOs

Deferrals for US bank Trups CDOs fell slightly this past month while defaults increased, according to Fitch's latest index results for the sector.

Deferrals decreased to 15.5% from 15.9%, as of 30 April, while defaults rose to 16.9% from 16.8%. The combined bank default and deferrals within Trups CDOs now stands at 32.4%.

The movement upward in defaults was driven by three banks defaulting last month, representing US$57m of collateral across four CDOs. All three defaults were previously deferring. Tempering the default increase, however, were five banks that resumed interest payments and repaid accrued interest on their Trups during the month.

Through the end of April, 204 bank issuers - representing approximately US$6.4bn - held across 83 Trups CDOs are in default. Additionally, 368 bank issuers have deferred, impacting interest payments on US$5.8bn of collateral held by 84 Trups CDOs.

CDO

Putnam CDO sold

Credit Suisse has emerged as the successful bidder for the US$690.5m Putnam Structured Products CDO collateral auctioned yesterday by the New York Fed in the latest round of Maiden Lane III sales (SCI 15 May). Citi, Goldman Sachs, Bank of America, Morgan Stanley, Nomura and RBS also participated in the auction.

The next ML III sale - involving US$1.67bn of Duke High Grade Funding CDO assets - is scheduled for tomorrow. Citi, Deutsche Bank, Goldman, Guggenheim Securities, BAML, Morgan Stanley and RBS are bidding for the collateral.

The Fed on 18 May announced it had decided to postpone the auction of the Duke CDO after it "became aware that there was additional information concerning the Duke CDO that had not been made available to the bidders". It then announced on Monday that the auction was to be resumed as originally planned.

CDS

Publisher credit event called

ISDA's Americas Credit Derivatives Determinations Committee has resolved that a bankruptcy credit event occurred in respect of Houghton Mifflin Harcourt Publishing Company. An auction will be held in respect of outstanding CDS transactions on the name.

Separately, the auction to settle the credit derivative trades for Residential Capital CDS is to be held on 6 June.

CMBS

City Point restructuring terminated

Restructuring talks for the £429m City Point loan, securitised in Ulysses (ELOC No. 27), have been terminated. The transaction had been subject to restructuring discussions since October 2011 and was granted a number of standstills to remedy the interest payment default (see SCI's CMBS loan events database).

However, following the expiry of the latest standstill on 18 April, the borrower has advised that the restructuring discussions are no longer active with any of the related parties. The special servicer, Morgan Stanley Mortgage Servicing, is consequently evaluating all options to maximise value for secured creditors.

New information on the portfolio has also been disclosed, according to European asset-backed analysts at RBS, which was initially provided only to the restricted noteholders. The vacancy rate in the underlying office building is 8%, while 11.5% of the building is available for sublease and 12% of the total lease expires by 2016.

Capex is approximately £6m and estimated 2012 NOI is £22.45m. Estimated whole loan swap mark-to-market stands at £111.5m, as at 19 April, and running JPUT structure costs are expected to be around £4m.

Post-restructuring, net disposal proceeds were anticipated to total circa £570m, assuming an exit in 2017.

CMBS

Kerzner question resolved?

Fitch has commented on the question of whether the extension of the Kerzner International Portfolio loan violated the terms of the COMM 2006-FL12 deal documents (see SCI CMBS loan events database).

The recent modification of the Kerzner loan included a three-year extension until 9 September 2014. However, the COMM 2006-FL12 servicing agreement contains a clause prohibiting the servicer from extending a loan by more than two years. This would have limited the Kerzner extension to September 2013.

Despite the apparent two-year extension limitation, it is the participation agreement - not the servicing agreement - that is the prevailing document, according to Fitch. The special servicer, Wells Fargo, relied upon the flexibility allowed by the participation agreement (which has no two-year limit clause), as well as the servicing standard in determining its greatest-recovery approach. Likewise, Wells Fargo received unanimous consent from the controlling holder and all participants.

Extension limits may help gauge bonds' duration, but longer final rated maturity dates of deals (in this case December 2020), as well as the servicing standard afford special servicers additional flexibility. Fitch views special servicer flexibility as important in avoiding bond defaults, so long as the servicer is adhering to standards set forth in the governing documents.

CMBS

CMBS loan events updated

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

16/05/2012
Deal: TITN 2007-2
Property: MPC A Portfolio
Balance: €428.53m
Event: updated value of €388.59m, as of 31/12/11 (decrease of €218.19m from 31/12/10), triggering subordinate lender control valuation event; valuation event occurred due to payment default at maturity
Description: class F now controlling class

11/05/2012
Deal: EURO 25
Property: Berlin Residential Portfolio
Balance: €33.98m
Event: loan defaulted on extended maturity at 7 May; maturity further extended to 7 Nov; €5.3m repayment following sale of 4 properties; €150k amortisation & borrower to repay €17m by 7 Aug
Description: LTV breach waived

May
Deal: COMM 06-FL12 & CSMC 06-TF2A
Property: Kerzner Portfolio
Balance: $2.29bn
Event: more details on modification: $100m principal repayment; final payment due 9/9/14; continuation of Kerzner's management for 2% fee at Atlantis and 3% at Ocean Club

There are now 1,764 searchable loan events, dating back to March 2011, on the database. Click here for more.

CMBS

German CMBS losses crystallised

Fitch reports that five EMEA CMBS loans in its ratings universe suffered a loss during 1Q12, two of which were secured by the German multi-family housing portfolios backed by the bankrupt Level One Group. The three other loans that suffered a loss during the quarter were the Solstice and DT Berlin loans (both securitised in Cornerstone Titan 2007-1) and Agora Max Portfolio (securitised in Indus (ECLIPSE 2007-1)).

Net recoveries from Level One portfolio sales resulted in significant losses. The complex nature of the bankrupt borrowing group is reflected in the lengthy workout process, Fitch notes - both loans had been in workout since 2008.

"Four of the five loans that suffered a loss were secured on assets located in Germany, making these the first losses to be crystallised in this jurisdiction," says Mario Schmidt, associate director in Fitch's EMEA CMBS team. "Fitch expects to see increased enforcement activity throughout 2012 as more loans reach their maturity dates. In turn, this will lead to more loss allocations to the bondholders."

Of the 257 loans that have matured since the onset of the credit crisis, only 103 had repaid in full as of end-1Q12. 16 loans have suffered a loss following a maturity default.

A further 85 loans (accounting for €8.1bn) are scheduled to mature between April and December 2012. Upcoming bond maturities in 2014 for eight of these transactions may limit the remaining options available to servicers.

Risk Management

OTC pricing platform enhanced

Numerix has released Numerix LiquidAsset 2.0, which it describes as a rapidly deployable solution to price the most common set of liquid OTC derivatives. Built on Numerix CrossAsset, LiquidAsset is available on the desktop through Microsoft Excel or can be integrated into proprietary or third-party systems with the Numerix LiquidAsset SDK.

By incorporating derivative models into simple pricing and utility functions, LiquidAsset is designed to grow with the specific trading and valuation needs of any derivative market participant. Version 2.0 offers a number of new features, including enhanced instrument coverage for multi-curve pricing and portfolio-level risk analysis.

Risk Management

Clearing platform enhanced

Calypso Technology has released Calypso V13. The latest version builds on the cross-asset processing platform and aims to help customers take advantage of opportunities created by the new OTC market structure in clearing and collateral management.

Calypso V13 enables clearing member organisations to rapidly deploy comprehensive house and client clearing services for interest rates, credit derivatives and FX products, with initial/variable margin calculations across multiple clearinghouses, integrated collateral management and treasury and liquidity services. A variety of enhancements have been included in the new release, which are designed to meet the analytical and workflow requirements of OTC derivatives front-office operations that have been redefined by recent market structure changes. In addition, the latest curve generation methodology, new integrated cross-asset pricing and market data management capabilities, as well as real-time analytical reporting tools are included.

RMBS

Specified pool proposal mooted

SIFMA has responded to the request for comment on FINRA's proposed rule to begin disseminating data for agency MBS traded as specified pools (MBS-SP). The association believes the proposal has the potential to negatively impact participant confidentiality and therefore participant desire to transact in the market.

The proposal would implement shorter reporting timeframes for MBS-SP (initially two hours, then one hour), as well as real-time dissemination of trade information. Volume information would be capped at US$10m, with trades above that amount displayed as '10+'.

SIFMA notes that a critical consideration in the MBS-SP market is the nature of trading. Most MBS-SP trades, for smaller pool sizes, are trades of whole pools.

Because the MBS-SP market is very granular and ownership very often is in the form of whole pools, the protection that dissemination volume caps provide in other more widely-held markets will not accrue to MBS-SP to the same extent they accrue to TBA MBS, for example. Given that most market participants track which pools they trade to and from their various counterparties, SIFMA members are concerned that sensitive information regarding trading strategies, volumes, identities and positions will be compromised if the proposal is implemented without amendment. Over time, market participants will be able to develop quite detailed and precise estimates of other participants' strategies and positions.

The association is concerned that the implementation of dissemination of trade information may create market distortions through incentives to obfuscate trading strategies or by making the market less attractive to its participants. Instead, SIFMA proposes that for pools with an original face amount below US$1bn, CUSIP information would not be shown on disseminated trade reports. Instead, that field would be populated by 'MBS-SP' or some similar indicator.

RMBS

MBIA probe mooted

The Senate Insurance and Investigations & Government Operations Committees are considering conducting an inquiry and holding hearings related to MBIA Insurance Corp's 2009 restructuring that was approved by the former New York State Insurance Department. The move is in connection with litigation alleging that MBIA withheld material information from the State Insurance Department when the monoline sought the Department's approval for its restructuring (SCI passim).

The New York State Senate says it has an obligation to ensure regulated entities provide New York's state government with complete and accurate information, which is particularly necessary when an insurance company seeks approval to restructure itself in a way that could negatively impact policyholders or customers. Thus, it will continue to monitor events and take action if necessary.

RMBS

FHFA strategic plan released

The FHFA last week released for public comment its strategic plan for 2013-2017. The plan provides more detail on proposals to increase the guarantee fee and create a new securitisation platform.

The FHFA reiterated in the strategic plan that increasing guarantee fees addresses its twin goals of shrinking the GSEs' footprint in the mortgage finance market and improving the financial condition of the GSEs. But the plan also points to greater risk-based pricing adjusted for borrower risk characteristics. Although no timetable has been proposed for implementing these increases, a state-level g-fee matrix is expected to be released by August.

In terms of introducing a securitisation platform, the FHFA's intent seems to be more long-term and generic than simply implementing a single TBA market. According to the plan, it will draw upon the existing operational and information technology abilities and infrastructure of the GSEs to design a new open-ended securitisation platform.

ABS analysts at Barclays Capital suggest that the platform can be thought of as a new trustee that securitises loans for various issuers under its shelf and sets the standards for servicing agreements, deal structures and cashflow mechanics. The aim is for structure to evolve into a public utility that can be utilised by all lenders for securitisation.

In the intermediate term, the FHFA expects such a platform to enable issuance of a single security by both the GSEs. "However, implicit in that statement is the assumption that the existence of such a structure is necessary for a common security," the Barcap analysts note. "Given that the FHFA itself expects the new platform to take time to set up, it seems unlikely that we will see a common security from both GSEs in the near future."

The FHFA has outlined an aggressive timetable for implementing risk-sharing deal structures. In such deals, the GSEs are likely to sell some of the risk from their mortgage holdings to the private market, with the first such transaction to occur before 30 September.

RMBS

AIREM disruption due

Principal payments for Aire Valley UK RMBS are likely to be disrupted over the next couple of months by a £72.5m reserve drawing to meet the expected maturity date of the last bullet bond in April. European asset-backed analysts at RBS note that the drawing will be recouped from principal receipts (accounting for £30m) and excess spread (£4.6m) until it returns to its £380m target size.

"Monthly principal collection rates suggest this process is unlikely to be completed in June, but that a limited principal payment should be made in July," the analysts indicate.

RMBS

GSE buyout concerns raised

Freddie Mac has announced US$330m of buyouts from various pools due to the resolution of certain "contractual matters". The move is likely to renew concerns about buyouts driven by policy changes.

While full details on all pools affected by the buyouts were not released, Freddie provided a list of pools for which the share of balance to be bought-out exceeded 5%. These pools represent a total outstanding balance of US$1.3bn, were mostly issued in 2010 and 2011, and were originated entirely by Bank of America. The buyouts span 30-year, 20-year, 15-year securities, as well as ARMs.

ABS analysts at Barclays Capital point out that the GSE stated in its latest Q1 filing that it had changed its rep and warranty sampling methodology. They consequently suggest that the buyouts may be related to this new sampling system.

"If these are rep and warranty repurchases on post-HARP loans originated under a fairly tight underwriting regime, then they will generate concerns around buyouts on newly originated loans," the Barcap analysts observe. "This will be especially true for higher SATO and HARP loans."

It is unclear if other originators are being targeted and whether this is a process that will be revisited at regular intervals. But another concern would be whether similar buyouts are being considered at Fannie Mae, according to the analysts.