Contents

Structured Finance

SCI Start the Week - 18 June

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

Pipeline
Several deals came and went last week for the pipeline. Come Friday evening, the only two remaining new arrivals were a US$1.24bn CMBS (JPMCC 2012-CIBX) and a US$219.9m FFELP student loans ABS (Scholar Funding Trust 2012-A).

Pricings
It was the busiest week in a long time for pricings. A total of 13 ABS, three RMBS, two CMBS and two CLOs printed over the course of last week.

The ABS included a US$225m container deal (CLI Funding V series 2012-1) and €999m lease ABS (Green FCT Lease 2012-1). They were joined by a pair of equipment ABS transactions (US$951.9bn CNH Equipment Trust 2012-B and US$705.4m MMAF Equipment Finance 2012-A).

Additionally, two FFELP student loan ABS deals (US$538.17m Academic Loan Funding Trust Series 2012-1 and US$679.2m EFS Volunteer No.3 2012-1) and three credit card transactions (US$1.5bn Chase Issuance Trust 2012-A3, US$400.49m GE Capital Credit Card Master Note Trust series 2012-4 and US$675.71m GE Capital Credit Card Master Note Trust series 2012-5) printed. The other ABS deals were all auto-related, comprising two auto loan ABS (€936m Cars Alliance Warehouse Italy and US$141.5m CPS Auto Receivables Trust 2012-B) and two auto lease ABS (US$801.31m Hyundai Auto Lease Securitization Trust 2012-A and US$1.25bn Volkswagen Auto Lease Trust 2012-A).

The RMBS prints consisted of €1.4bn BBVA RMBS 11 FTA, US$5bn-equivalent Gracechurch Mortgage Financing series 2012-1 and €13.641bn Stichting Orange Lion VII. The CMBS were €163m Credit Suisse European Mortgage Capital series 2012-1 and US$1.24bn FREMF 2012-K709.

The issuance was rounded off by a pair of CLOs - US$370.83m Apidos CLO IX and US$311.55m Slater Mill Loan Fund 2012.

Markets
Activity in the US CLO market was fairly slow last week, with participants focusing on the New York Fed's Altius CDO and Davis Square/West Coast CDO sales on Wednesday and Friday, report securitised product analysts at Bank of America Merrill Lynch. BWIC volume roughly halved from the week before, decreasing to US$282m through Thursday.

Investors are still favouring triple-A, shorter-duration paper. Secondary spreads for double-A tranches widened by 5bp, while triple-B and double-B tranches each widened by 25bp. Triple-A paper remained unchanged at 170bp.

Meanwhile, the US RMBS market is still being driven by European events, note Barclays Capital analysts. They report that lower coupon agency MBS were roughly flat on the week, with slower supply after the previous week's spike.

Real money activity has picked up and purchases by the US Fed remain steady. Higher coupon performance was positive, despite rolls ending the June-July cycle "very poorly", the analysts note.

Finally, US CMBS investors remain wary, note Citi securitised products analysts. They report that sentiment is still jittery, with "the volatility, macro turmoil and regulatory uncertainty" continuing to dominate. Considering balance sheet lenders' underwriting criteria, the analysts believe that maturing CMBS loans will have to rely on conduits to secure financing at balloon maturity. 

Deal news
• The New York Fed says that its loans to the Maiden Lane and Maiden Lane III vehicles have been fully repaid with interest. The original amounts of these loans were US$28.82bn and US$24.3bn respectively. Maiden Lane II repaid all of its obligations earlier this year (SCI 29 February).
• Further details about the revival - following its suspension in 2008 - of China's Credit Asset Securitisation Pilot Programme have emerged (SCI 4 April). The size of the programme is understood to be RMB50bn.
• The US$172m Larken Portfolio loan, securitised in LBCMT 2007-C3, has been modified. The loan transitioned to special servicing in May 2009, after NCF DSCRs slipped below 1x and occupancy declined to 86%.
• Morningstar has added the US$420m 1301 Avenue of the Americas loan - securitised in LBUBS 2006-C1 - to its watchlist, following the bankruptcy filing of the property's second largest tenant, Dewey & LeBoeuf. The law firm represents roughly 23% of the gross leasable area.
• Residential Capital has moved for permission to settle put-back claims held by approximately 392 RMBS trusts. Under the proposed settlement, the securitisation trusts would drop potential breach of representation and warranty claims - which are worth an estimated US$221bn - and in return would receive a US$8.7bn bankruptcy claim against debtors Residential Funding Co and GMAC Mortgage.
• US District Court Judge Robert Sweet last week ruled in the ongoing Ocala Funding litigation (SCI passim) that ABCP investors can sue over claims arising in documents, even though they were not parties to those documents, when their agent refuses to sue or allow the investors to sue. The decision is seen as credit positive as it holds that investors can step into a recalcitrant agent's shoes to enforce their rights.
• S&P has taken various credit rating actions on the Greek RMBS and ABS notes it rates. All ratings are now capped at single-B minus as a result of the agency's updated assessment of Greece's country risk and the implications of the country leaving the eurozone.
• Fitch has downgraded 234 tranches related to 156 Spanish structured finance (SF) transactions, following the downgrade of Spain's long-term foreign currency issuer default rating to triple-B from single-A. The affected tranches comprise 150 RMBS, 58 structured credit, 23 ABS and three CMBS classes from across 101 RMBS, 40 structured credit, 14 ABS and one CMBS deals.
• Last month's Maiden Lane III activity appears to have had "little to no" impact on spreads, according to Interactive Data, supporting the New York Fed's objective of not being an overtly disruptive market force. Indeed, the auctions seem to have been comfortably absorbed by the market.
• ZAO Raiffeisenbank (RBRU) has established a new diversified payment rights (DPR) securitisation programme in Russia. The first issuance under the programme - dubbed ROOF Russia DPR Finance Company - comprise US$125m series 2012-A and series 2012-B notes, which have been assigned single-A minus ratings by Fitch.
• A €7m Meyer & John senior bond, purchased by PULS CDO 2007‐1, has been declared a defaulted obligation in accordance with the transaction's prospectus. The move follows the company's inability to meet its April 2012 interest payment and the deferral of its other financial obligations.
• Following a hearing held on 4 June, the Circuit Court for Dane County, Wisconsin approved the two motions submitted by the Wisconsin Commissioner of Insurance, acting as the rehabilitator of the Ambac Assurance segregated account (SCI 18 May).

Regulatory update
• AFME and the European Financial Services Round Table have launched the Prime Collateralised Securities (PCS) initiative. The non-profit project aims to develop a label for high quality securitisations that meet best practice for quality, transparency, simplicity and standardisation.
• The US Federal Reserve's final market risk capital rule (SCI 8 June) has generally been welcomed for reflecting industry feedback, albeit some concerns remain. Crucially, the final rule modifies the simplified supervisory formula approach (SSFA) by replacing the flexible floor with an adjustment to risk weightings based on delinquencies of the underlying assets.
• The Bank of England is to commence operations under the extended collateral term repo (ECTR) facility, which was introduced in December 2011. Activation of the facility is intended to mitigate prospective risks to financial stability arising from a market-wide shortage of sterling liquidity by lending to the banking system against a range of collateral, including securitisations and covered bonds.
• The Basel Committee has published its report to the G20 on the implementation of its banking standards across member countries, ahead of the G20 Leaders Summit on 18-19 June. "With this report, the Basel Committee is following up on the commitments made by the G20 Leaders in Cannes to have Basel 3 implemented fully and consistently, and within the agreed timetable," comments Stefan Ingves, chairman of the Committee and governor of the Sveriges Riksbank.
• The US SEC has issued a policy statement describing the order in which it expects Dodd-Frank rules to take effect. It is requesting public comment on its plan to phase in final rules regulating security-based swaps and security-based swap market participants.

Top stories to come in SCI:
CDS market infrastructure developments
Global ABS conference write-up
TriMont Real Estate Advisors profile 

CLOs

Par building benefits outlined

CLO strategists at RBS have introduced a 'change in par' calculation, which measures the change in the par value of CLO assets - including cash - since inception. They believe it offers more of a like-for-like comparison than overcollateralisation tests.

The 'change in par' calculation aims to address the natural reduction in the collateral pool due to liability amortisation by adding back the net change in the liability balance. The RBS strategists examined the change in par for 267 reinvesting deals from the 2005-2007 vintages.

CLOs typically lost less than 2.5% of par at their worst point and have been slowly building par since the end of the financial crisis. The median deal in the RBS sample lost 1.49% of par.

However, many deals show a 1%-1.5% par loss, which the strategists believe is due to trading restrictions during the crisis forcing managers to return principal to investors. While 103 deals of the sample lost between 0% and 3%, 78 deals underperformed and 86 deals outperformed this measure.

During the crisis, when most loans were trading below US$85, deep discount obligation haircuts prevented managers from building par by purchasing discounted loans. However, some managers issued supplemental indentures to get par treatment for loans purchased at deep discounts.

Transactions that were able to continue purchasing assets at historically low prices because of supplemental indentures or flexible reinvestment language tended to outperform because they were able build par faster, the strategists observe. In addition, once loans bounced back above US$85, managers put their cash to use and began to rebuild the par they lost.

Another way managers build par is by selling a loan that increased in price. The average volume of transactions per deal since 2009 by the top-10 CLO managers is 118% higher than the rest of the 101 managers in our sample.

"In our analysis, we found deals that built par had 68% more trading volume than those that lost par," the strategists note. "Managers differentiated themselves by building par with trading gains and better asset selection. Unlike many manager actions, building par benefits both note investors - by building subordination - and equity investors, by increasing the equity's current net asset value and principal value at the end of the deal."

CS

CMBS

Larken B-note hope

The US$172m Larken Portfolio loan, securitised in LBCMT 2007-C3, has been modified. The loan transitioned to special servicing in May 2009, after NCF DSCRs slipped below 1x and occupancy declined to 86%.

The default was not entirely unexpected, according to CMBS analysts at Barclays Capital. While underwritten occupancy had been 100%, about 12% of the space had been occupied by a master lease, which was scheduled to expire two years after the loan closed.

Under the modification, the loan has been split into a US$90m A-note and a US$82m B-note, with a US$5.5m equity injection. The accrual rate of 5.63% is unchanged and the maturity date remains April 2017. A refi at a valuation less than the whole loan is only permitted during the last year of the loan term, while assumptions or partial sales from the portfolio are disallowed.

"The hope note has been split approximately at the existing ARA level," the Barcap analysts explain. "As such, interest shortfalls due to the deferred interest on the B-note will be similar to the existing monthly ASERs on the loan. However, there is some probability that the servicer could look to recoup unpaid advances from general interest proceeds, which could lead to a temporary spike in interest shortfalls."

The modification also stipulates certain NOI tests, which the borrower must meet - failing which a receiver will be appointed. The first threshold is set at US$8.65m at end-2013, subsequently rising by 4% every year.

In the event of a receivership, the borrower is allowed to pay off the loan at a discount for at least a sum equalling the A-note plus 25% of the B-note. The modification provides for a 12-month claw-back period for subsequent property sales.

Given the relatively thin slice of equity inserted between the A and B note and the comparatively low 5% preferred return, the analysts suggest that the B-note has a slightly better chance of eventually recovering some principal than other hope note modifications. The probability of some B-note principal recovery is also strengthened by the claw-back provisions and the NOI test, they conclude.

CS

RMBS

Tamweel sukuk marketing

Tamweel is in the market with its second international Islamic RMBS - the US$235m Tamweel Residential RMBS (Cayman) IV. The first such transaction from the six countries of the Gulf Cooperative Council was issued in July 2007.

The deal comprises a single class of notes, rated Aa3 by Moody's. Proceeds will fund the purchase of properties in Dubai and certain related receivables arising from home financings originated by Tamweel.

The portfolio comprises of 'Ijara' (lease-to-buy) contracts, denominated in AED. Under these contracts, a constructed property is acquired by Tamweel and subsequently given as a long-term lease to the customer for an agreed rent and specified period. The majority of leases contain a variable rent payment component, which is set according to the Tamweel base rate, with the weighted average of all leases covenanted to be set at least equal to or above 5.5%.

The transaction involves a dual SPV structure, whereby Tamweel will pass the legal title, assign the lease rental and all the associated rights and receivables arising from or related to the properties to Tamweel Residential RMBS (DIFC) IV (TRL), an SPC incorporated in the Dubai International Financial Centre. TRL will, in turn, assign all the rights and lease rental receivables to the issuer and hold the legal title of the properties and all of its assets as title agent in favour of the issuer. Due to the lease-based nature of Islamic home finance and unlike typical RMBS transactions, there will be a transfer of title of the pool properties to TRL, Moody's notes.

The underlying assets and liabilities of the transaction are structured to be Shariah-compliant. As such, the agency says the transaction has features that are not typical in conventional RMBS and the application of Arabic financial terminology may be commonplace throughout asset and structure documentation.

The deal is underwritten by Abu Dhabi Commercial Bank, Emirates NBD and UBS.

CS

Insurance-linked securities

Diversification benefits

John Wells, chairman at Leadenhall Capital Partners, answers SCI's questions

Q: How and when did Leadenhall Capital Partners become involved in the insurance-linked securities (ILS) market?
A: Leadenhall Capital Partners was established in May 2008, when Luca Albertini and I formed an investment management partnership with Amlin - the first such venture to be backed by a Lloyd's insurer. We were both previously involved with insurance-linked securities at Swiss Re.

We manage funds in the insurance-linked investments area. Unlike mortgage securitisations where losses are expected to be fairly consistent and the range of outcomes is expected to be narrow, catastrophe investments have long periods where they earn full returns as they are only exposed to the loss of significant principal as the result of a rare major event. When we look at opportunities, we target investments where over a 100-year period we would expect income to be a multiple of any losses that might be incurred.

At present, the highest return for a given level of risk can be found in cat bonds exposed to US hurricanes or earthquakes, which currently pay a much higher return for a given level of risk than those cat bonds exposed to European wind storms or Japanese earthquakes for example. Currently around 60%-70% of cat bonds are exposed to US risks and, if return is the only requirement, a portfolio would have just US risk. However, most investors do not want to have all their capital exposed to one event, so the challenge is to structure portfolios that have some diversification without giving up too much yield.

Other investors want more diversification and are prepared to give up some yield in order to lower their exposure to losses from a major insurance event. We manage funds that cater to both types of appetite.

We've had a lot of interest in the funds from Japanese investors. Mortality risk is attractive to pension funds because they typically have longevity exposure. Mortality assets aren't understood as well as natural catastrophe, which is one area where Leadenhall differentiates itself as an ILS manager.

Since the beginning of the year we have received around US$400m of new subscription/mandates, taking our assets under management beyond US$650m for the first time.

When an institution is looking at the impact of putting cat risk in their portfolios, they will look at the maximum likely downside, say with a 99.5% probability, and what they are likely to earn in a best-case year. If, for example, 5% of a pension fund's portfolio is in ILS and 30% of this may be lost due to a major insurance event, that represents a potential 1.5% loss to the pension fund's overall portfolio in that year. However, if this is expected to happen only once every 200 years and the ILS portfolio has a 12% annual return in years without losses, the investors may be happy that the contribution from the insurance assets to the overall portfolio of 60bp per annum in good years is sufficient to outweigh the downside risk.

Q: How else do you differentiate yourself from your competitors?
A: The first differentiation is our joint venture partner: Amlin has a 50% share in the Leadenhall management company and provided US$100m seed capital for our two funds. Teaming up with an insurance company is a significant advantage for investors as it means that, while Amlin benefits from access to capital markets expertise, we and our investors gain from Amlin's top-class reinsurance expertise.

The feedback loop between our portfolio managers and Amlin's reinsurance underwriters works well. This is a huge differentiator - no other ILS funds have this capability. Access to origination opportunities, underwriting skills, modelling and actuarial services and feedback on pricing and demand for traditional reinsurance transactions ensures that we can offer the best service to our investors.

The second differentiator is that we can use underwriting skills rather than just models to analyse opportunities, while a number of ILS managers rely only on the specialist models that produce risk numbers for cat bonds. While ILS models are useful tools and will likely improve going forward, there remains a high degree of variability between modelling firms for the same perils. We prefer to rely on underwriting skills that include unmodellable factors to assess risks and rewards.

Our third advantage flows from the first two. At any point in time, particular risks may come in cat bond, swap or private placement format, with different risk/return and liquidity characteristics.

As we have the tools and access to the infrastructure to analyse all of these, we are able to choose which asset and in which instrument format will best fit our investors' requirements. We can put together portfolios that present the best risk/reward for a given set of objectives.

Q: What are your key areas of focus today?
A: We employ a granular approach to investing. About US$330m is deployed across the two funds, representing about 100 different investments, while US$320m is in managed account format.

We wouldn't typically hold more than 5%-10% of an individual cat bond. We have a broad range of potential origination contacts, meaning that the business is scalable in terms of making larger investments in the future.

When we first started investing in 2008, most cat bonds were trading at a discount to par in the mid- to low-90s after the collapse of Lehman Brothers, with multi-strategy funds under pressure to sell due to redemptions. At first, 100% of our portfolio was cat bond investments, as these offered the best value.

But within a year, cat bond prices relative to private placement prices switched around. While the majority of our investments are now in private placements, we maintain some exposure to cat bonds to ensure that we have the right liquidity to meet quarterly redemptions and where they represent good value.

Liquidity in the secondary cat bond market remains pretty good and we will always try to capture any associated relative value opportunities either when there are sellers of bonds or when we have new subscriptions in the funds.

Q: What is your strategy going forward?
A: The ILS market will continue to grow and we will respond to investor demand to structure portfolios that meet their requirements. We're seeing significant interest on a managed account basis from major pension schemes around the world and expect that this will continue where funds have particular investment criteria. But we're also keen to continue growing the two funds for those who need a fund environment to make investments

Q: What major development do you need/expect from the market in the future?
A: Pension fund interest around the world in catastrophe bonds and other ILS is gaining momentum as pension funds search for investments that match their long-term horizons with the correct risk/reward criteria in a volatile world. ILS provide income, diversification and independence from equities and other fixed income assets.

As part of the ILS universe, cat bonds have remained liquid, even during stress periods. But many pension funds are only just beginning to get to grips with the ILS sector and what the different investment strategies within ILS have to offer.

While the record first-quarter cat bond issuance of US$1.49bn is positive, overall volume outstanding is unlikely to go past US$17bn at the end of the year. Even if we continue to see high issuance volumes until year-end, the cat bond sector still wouldn't represent more than 40% of the overall ILS market, which includes private placements and swaps as well. So we always try and ensure that investors include these in their permissible investments.

The private placement insurance-linked note market, which now stands at US$20bn-US$30bn, has been the success story of recent years. Private placements involve looking at the underlying insurance dynamics and the claims-paying ability of the counterparty. They tend to be one-year transactions, where liquidity is foregone in return for higher yields.

Pension funds, in particular, like private placements because they like getting paid for their ability to be longer-term investors. Assuming a nat cat event hasn't occurred, private placements are automatically redeemed at par, thus side-stepping the possibility of having to sell in adverse market conditions.

Cat swap volumes are also growing. The attraction of that product is that they're based on an index and benefit from standardised language, so are easier to put in place than private placements.

Until recently, most of those deals were done on US risk because of the lack of a reliable index elsewhere. Now, however, in Europe the PERILS index has been introduced with the aim of creating ILWs on European risks. We expect more deals to be done on this basis in the future.

CS

ABS

PCS Secretariat head named

Ian Bell has been named as the head of the PCS Secretariat, the PCS division responsible for day-to-day administrative and managerial operations (see SCI 12 June). Bell was most recently head of European structured finance at S&P. He has also served as general counsel at S&P and was previously capital markets partner at Clifford Chance.

Structured Finance

Credit ratings office established

Thomas Butler has been appointed director of the SEC's new Office of Credit Ratings. The office was created by the Dodd-Frank Act and is responsible for overseeing the nine registered Nationally Recognized Statistical Rating Organizations (NRSROs). Required among these responsibilities is conducting an annual examination of each credit rating agency and issuing a public report.

Butler will oversee a staff of approximately 25 lawyers, accountants and examiners responsible for examining and monitoring the NRSROs. Throughout his career, Butler has served in leadership positions through which he gained extensive knowledge about the role of credit rating agencies in the financial services sector. He spent 14 years working at Morgan Stanley Smith Barney and its predecessors, where he held senior executive positions for several business units.

Structured Finance

Insurance solutions head appointed

Christian Dinesen has joined StormHarbour in London as md and head of insurance solutions. He was most recently head of international credit research and European insurance credit analyst at Bank of America Merrill Lynch and before that served as head of S&P's European insurance practice.

Structured Finance

Former cfo jailed for fraud

Delton de Armas, former Taylor, Bean & Whitaker Mortgage Corp (TBW) cfo, has been sentenced to five years in prison for his role in a US$2.9bn fraud scheme. He pleaded guilty in March to one count of conspiracy to commit bank and wire fraud and one count of making false statements.

De Armas was guilty of failing to report mortgage fraud being committed at TBW and of helping to cover it up, including by lying to investors, banks, regulators and auditors. The fraud resulted in the failures of TBW and Colonial Bank as well as losses for Deutsche Bank and BNP Paribas.

De Armas defrauded investors in the Ocala Funding ABCP programme, which was used to raise funds for mortgage lending for TBW. De Armas knew that there were inadequate assets behind the ABCP and that investors had received falsified reports that hid that deficiency.

De Armas further falsified financial statements which were provided to Ginnie Mae and Freddie Mac for their determination on the renewal of TBW's authority to sell and service securities issued by them.

Structured Finance

PM joins credit fund

Keith Williams has joined Crestline Investors as md and senior portfolio manager. He will be responsible for growing Crestline's private credit strategies group and become co-portfolio manager of the Crestline Opportunity Fund II.

Along with Chris Semple, who was hired last year as director and associate portfolio manager, Williams brings experience in sourcing and underwriting distressed debt, leveraged loans, buyouts and structured products opportunities. The pair previously worked together at Goldman Sachs.

The private credit strategies group will focus on structured credit, corporate credit, distressed debt and equity and other opportunistic financing strategies. Williams joins from McKinsey & Company while Semple joined from Goldman Sachs.

Structured Finance

Credit opportunities trio hired

Crescent Capital Group's London subsidiary Crescent Credit Europe has expanded to meet growing investor demand for credit opportunities in the US and Europe. Steven Novick joins the firm as md, head of EMEA and Asia Pacific investor relations and business development, while Benjamin Blumenschein and James Scott-Williams join as senior associates.

Novick brings 18 years of investment banking and alternative investment capital raising experience to Crescent. He was previously responsible for global sovereign wealth fund coverage in the investment banking department of Credit Suisse. Prior to that, he founded and led the Middle East sovereign wealth funds and financial sponsors group in the investment banking division of Merrill Lynch.

Blumenschein joins Crescent from Bank of America Merrill Lynch, where he was an associate in the global distressed/special situations group. Scott-Williams was most recently an associate director in the corporate structured finance team at RBS.

CDS

OTC tech partnership formed

Calypso Technology has partnered with AcadiaSoft to integrate the MarginSphere service with the Calypso system. The partnership combines AcadiaSoft's automation of the margin process with Calypso's collateral management solution.

AcadiaSoft's MarginSphere is a messaging framework for collateral, providing an ISDA-compliant workflow which replaces traditional communication modes with an electronic interface. The Calypso system provides a cross-asset collateral management solution that is integrated with front-to-back office management of OTC derivatives and treasury products.

CDS

Firm expands EM sales, trading desks

Cantor Fitzgerald has expanded its emerging markets fixed income sales and trading business with a raft of appointments. The trading team is boosted by Marc Appel, Stephen Shaw and Ning Lin, while Peter Schept, Catalina Borrero, Raul Castells and Maurice Batista join on the sales side. They each become md at the firm.

Appel was previously at HSBC Bank USA where he headed the emerging markets credit derivatives team for Latin America. He has also held senior emerging markets credit derivatives positions within ABN Amro and served as WestLB director for emerging markets structured products.

Shaw was md at Macquarie Capital, where he was in charge of emerging markets credit trading. Lin was senior emerging markets credit trader at ABN Amro focused on Latin American corporate and sovereign debt and secondary market issuances and previously worked at HSBC where he developed new products for structured product analysis.

Schept joins from Susquehanna International, where he helped set up the emerging markets sales and trading platform, while Borrero joins from Barclays Capital and brings US and Latin American structured products experience. Castells comes over from Altima Advisors Americas while Batista joins from Renaissance Capital.

CLOs

Bellis moves to the buy-side

3i Debt Management has appointed Andrew Bellis as md and partner, reporting to Jeremy Ghose, managing partner and ceo of the firm. In his new role, Bellis will be responsible for 3i DM's strategic growth globally, reinforcing its ambition to grow in core and emerging markets and to play a leading role in consolidating attractive opportunities in Europe and North America.

Bellis has over 14 years of experience in originating and structuring CLOs. He was most recently global head of new issue CLOs at Credit Suisse, where he developed strong relationships with leading credit managers in Europe and the US, having worked on numerous cross-border transactions. Prior to this role, he held a number of senior positions at Bank of America Merrill Lynch, including the establishment of a franchise that structured numerous European CDO and CLO transactions and other leveraged fund raisings.

CMBS

London law firm makes CRE hire

Jeremy Trinder has joined Dechert's finance and real estate group. His practice incorporates all aspects of CRE, including loan origination and securitisation as well as workout and restructuring work. He also has experience in distressed debt.

Trinder was most recently at White & Case and has also had stints at Sidley Austin and Lovells. He will be based in the London office.

RMBS

Pepper gains Irish foothold

Pepper Home Loans Group has agreed to purchase GE Capital Woodchester Home Loans, the Irish residential mortgage business of GE Capital, as it expands into Europe. Pepper will also take over the servicing of GE Capital's Irish portfolio of personal, small enterprise and auto loans.

The newly-acquired company will be renamed Pepper Ireland and Pepper will hold all of the share capital. Most of the 192 GE Capital employees are expected to transfer to Pepper as part of the acquisition.

RMBS

MBS, rates team expanded

Zachary Pace, Aaron Read and Tai Vu have joined Gleacher & Company Securities' MBS and rates group. The group provides structured finance, research, sales and trading services on RMBS, ABS, US Treasury and government agency securities, CLOs, CDOs and other securities.

Pace and Read join as directors while Vu becomes vp. Pace joins from Bank of America where he was vp and traded RMBS. Read joins from Cantor Fitzgerald, where he was responsible for market making in various subprime mortgage products, second liens and consumer-oriented ABS products, while Vu joins from UBS, where he was MBS director.

ABS

Euro auto ABS back to basics

Signs of a move towards fixed-rate in European auto ABS issuance are encouraging, says Fitch. The agency welcomes the return to structural simplicity, but is uncertain about how investors will respond.

Fixed-rate notes do not require the hedging of interest rate risk, removing one source of counterparty risk. As well as simplifying transaction structures, the agency believes this is a helpful development while the number of eligible counterparties seems to be decreasing, thus concentrating counterparty risk.

Fitch notes that the trend towards simplicity has been seen throughout European auto ABS. There are now fewer pro-rata amortisation and more straight sequential transactions, while the proportion of Fitch-rated deals with revolving periods has halved since the crisis.

ABS

Card charge-offs in unexpected rise

Fitch's US credit card charge-off index has registered an increase for the first time this year (see also SCI 22 May). It rose by 27bp in April to 5.44%, but the agency still believes the outlook for the sector remains positive.

Fitch attributes the rise to day count mechanics at Citibank and says that, absent that anomaly, charge-offs would have remained flat. Delinquencies improved to reach 17-year lows and the percentage of receivables associated with accounts delinquent 60 days or more decreased by 11bp to 2.03%.

The prime monthly payment rate fell by 53bp to 21.44%, which is less than the average 88bp contraction typically seen in May, the agency says. Monthly payment rates have been essentially unchanged at around 21% over the past year.

Fitch's separate retail credit card index shows that gross charge-offs fell to 7.99% and are 260bp year-on-year. 60-plus day delinquencies have fallen below 3% for the first time in six years to reach 2.98%.

ABS

Credit card ABS stress tested

Most US credit card ABS trusts are well positioned to withstand a prolonged economic downturn beyond that experienced in 2008-2009, according to recent stress tests conducted by Fitch. The agency conducted one moderate and two severe stress scenarios across all US rated credit card ABS trusts to illustrate how ratings would perform in hypothetical, adverse macroeconomic environments.

Fitch stressed the three key performance metrics: gross yield, charge-offs and monthly payment rate (MPR). The moderate scenario reflects an economic deterioration more severe than the one seen during 2008-2009.

The first severe scenario is significantly worse than any observed deterioration, while the second severe scenario incorporates a 100% purchase rate stress. This stress would dramatically reduce the repayment speed of the bonds, reflecting an originator default where the credit card portfolio is completely run off.

Fitch's moderate scenario assumes that base-case charge-off levels double while base-case payment rate and yield decline by 20% and 30% respectively. The assumptions are consistent with an economic environment where unemployment reaches 12%-14%.

Breakeven multiples were then evaluated to determine what rating category stress can be supported in line with Fitch's credit card criteria. Under the moderate scenario, four of the 12 trusts' triple-A rated notes remain unchanged, while six migrate to double-A and two migrate to single-A. Also under this scenario, six of the 12 junior tranches drop to non-investment grade from triple-B.

All 12 trusts' triple-A rated notes under the first severe stress scenario will migrate at least three rating categories below current levels, while more than 50% of the trusts will migrate to below investment grade. This scenario also assumes that base-case loss rates would nearly triple and unemployment would exceed 20%. Fitch views the chances of a scenario occurring of this magnitude as extremely remote.

Structured Finance

Korean financial shock warning

Moody's says that Korean household loans have characteristics that make them vulnerable to financial shocks and tail risks arising from the European debt crisis and China's economic slowdown.

"This can lead to a deterioration in loan performance in Korea; in turn, exerting pressure on ABS and RMBS transactions," says Marie Lam, a Moody's vp and senior credit officer.

The agency notes that more Koreans are borrowing to pay for their living expenses, with a noticeable increase in borrowers from the older age and lower income groups. Further, Korea's low unemployment rate - which has stayed at 3% to 5% over the last few years - may not provide a cushion against the deterioration in loan performance because self-employed people, who make up about 23% of the employed population, have in general incurred much higher debt than households in general. Therefore, although loan performance is good currently, it is an unreliable indicator of future loan performance because of this structural weakness in the portfolio.

Moody's suggests that ABS transactions with unsecured receivables are particularly vulnerable because these transactions are revolving and securitise new receivables and new accounts from time to time. Secured mortgage loans are less susceptible, as they have accumulated more than 60% in equity, which provides a decent cushion against obligor defaults and any decline in property price.

"We believe the performance of the loans could deteriorate rapidly under a stressed scenario. However, our central scenario for Korea is that the economy will grow 3%-4% in 2012 and the banking system will remain stable," adds Lam.

Structured Finance

Sovereign-linked downgrades highlighted

S&P reports that rating actions on banks and sovereigns were once again the major factors affecting its European structured finance ratings in 1Q12. Both downgrades and upgrades increased, with most downgrades affecting RMBS transactions.

"We took 1,594 rating actions in the quarter, comprising 1,100 downgrades and 494 upgrades. This represents a significant increase from the previous quarter, which saw 393 downgrades and 272 upgrades," comments S&P credit analyst Sabine Daehn.

RMBS downgrades impacted 612 tranches across 252 transactions, with roughly 75% of them relating to counterparty and sovereign rating changes, and the remainder related to credit performance in the underlying portfolios. Overall, most downgrades affected the higher rating categories, with more than 70% affecting tranches with ratings in the single-A to triple-A rating categories.

The weakening economies in many eurozone countries may become the strongest driver of rating movements in the coming quarter, S&P notes. For RMBS especially, Spanish transactions remain under pressure. Furthermore, the agency's continuing review of UK RMBS transactions under its new criteria is likely to result in further rating changes.

"Ratings performance is likely to diverge further in line with the two-speed economic recovery that we're seeing in Europe. For example, the performance of asset-backed securities should follow a similar trend to RMBS, with a performance divide between northern and southern European countries likely to prevail," Daehn concludes. "Looking ahead, the impact of our updated counterparty criteria may be limited to a small number of transactions, but we may lower the ratings on up to 50% of covered bond programmes following the implementation of our updated covered bond counterparty framework."

Structured Finance

FGIC seeks rehabilitation

Benjamin Lawsky, superintendent of the New York State Department of Financial Services, has filed a petition with the Supreme Court of the State of New York for an order of rehabilitation for Financial Guaranty Insurance Company (FGIC). The petition seeks to allow the department to take possession of the insurer's assets and to conduct its business, while taking steps towards removing the causes and conditions that have made the rehabilitation proceeding necessary.

FGIC has consented to the commencement of the rehabilitation proceeding. The Court has entered an order to show cause and will hold a hearing on 28 June to consider entry of the rehabilitation order.

The superintendent, in his capacity as rehabilitator, intends to file a plan of rehabilitation that will provide fair and equitable treatment of FGIC's policyholders and other creditors. The move is being seen as the first step in the resumption of payments on outstanding claims against the insurer.

Structured Finance

DPCs eyed as SF counterparties

Demand for higher rated structured finance (SF) counterparties appears to be driving renewed interest in derivative product companies (DPCs). The move has prompted Fitch to issue an exposure draft outlining its latest views on rating such vehicles.

The agency notes that certain legal and structural aspects of DPCs did not perform as expected during the financial crisis, with many DPC programmes winding down as a result. Under its revised criteria, Fitch proposes to place greater emphasis on the credit strength and operational integration with the sponsor of the DPC as well as its standalone financial strength and operating profile.

Specifically, the agency is proposing that a DPC's final rating may be modestly above the issuer default rating (IDR) of the sponsor, with maximum achievable ratings likely to be in the double-A category. However, rating floors would also be assigned to the DPCs, reflecting their standalone structure, capitalisation and operational separateness from their sponsors.

Fitch proposes a floor rating of single-A for continuation DPCs if the vehicle is well-capitalised and appropriately structured, while a standalone rating floor for termination DPCs may be as high as double-A. The lower rating floor set for continuation vehicles reflects the long-tailed exposure to the sponsor and the reliance on a contingent manager to re-hedge the portfolio, potentially at a time of acute market stress, according to the agency. It says that the contingent manager's resources, skills, market access and ability to monitor the vehicle's activities are essential for a continuation DPC.

Fitch is also proposing to 'de-link' the ratings of DPCs from the ratings of their sponsors at the level of the rating floor, if the DPC is appropriately structured and capitalised. Therefore, the DPC's rating will migrate with the sponsor's rating until the rating floor is reached. In assigning the rating floor to a DPC, the agency will consider the following risk factors: legal risk and governance, counterparty credit risk, market risk, liquidity, capital modelling risk, collateral and capital, and operational risk.

In Fitch's view, continuation DPCs may be better suited as SF counterparties than termination DPCs, if appropriately structured with a rating floor of single-A.

Structured Finance

Maiden Lane loans repaid

The New York Fed says that its loans to the Maiden Lane and Maiden Lane III vehicles have been fully repaid with interest. The original amounts of these loans were US$28.82bn and US$24.3bn respectively. Maiden Lane II repaid all of its obligations earlier this year (SCI 29 February).

The successful repayment of the Fed's loans to ML and ML III marks the retirement of the last remaining debts owed to the bank that stemmed from the crisis-era interventions with Bear Stearns and AIG. The remaining assets from the ML and ML III portfolios will continue to be sold as market conditions warrant and if the sales represent good value for the public.

Proceeds from future sales in ML will be used to retire the subordinated loan extended by JPMorgan, after which the Fed will receive all residual profits. Proceeds from future sales in ML III will be used to repay the equity contribution extended by AIG, after which the Fed will receive two-thirds of residual profits.

Structured Finance

BoE launches extended repo facility

The Bank of England is to commence operations under the extended collateral term repo (ECTR) facility, which was introduced in December 2011. Activation of the facility is intended to mitigate prospective risks to financial stability arising from a market-wide shortage of sterling liquidity by lending to the banking system against a range of collateral, including securitisations and covered bonds.

The bank intends to hold an ECTR auction at least monthly until further notice, with the first to be held on 20 June. It will offer six-month liquidity against collateral pre-positioned for use in its discount window facility (DWF). The minimum bid rate in these auctions will be a spread to bank rate of 25bp.

All firms registered for access to the bank's DWF are eligible for ECTR auctions. The size of ECTR auctions will be announced the day prior to each operation and will be subject to a minimum of £5bn.

Structured Finance

SF data challenges surveyed

Principia Partners has released the findings of its ABS, MBS and CDO Market Pricing Survey. The results reveal the range of methodologies and services investors use to obtain market pricing for structured finance and structured credit securities. However, while there are multiple data sources for investors, many challenges remain when managing the growing universe of information across their structured finance positions (see also SCI 6 June).

Over 100 senior securitisation market participants from 60 organisations took part in the study during May. Of the respondents, 93% purchased pricing data from independent pricing services (IPS) for secondary market price marks. More significantly, however, 60% of investors said that they had to access at least two IPS to obtain pricing across their ABS, MBS and CDO positions - with 16% stating they used four or more sources across their structured finance investments.

In addition, 58% of investors polled indicated that they still relied on dealer marks for pricing. In the current environment where investor due diligence is the mandated norm for investors, 64% of respondents said they evaluated pricing in-house, alongside their third-party sources.

One message was consistent throughout, Principia notes. While data quality and price transparency from third parties were vital to investors, the access and integration of data sources across an operation was fundamentally important. From an operational perspective, this was seen as key to managing and using information from multiple sources for effective portfolio management, risk oversight and accounting purposes.

Geographical differences exist between the IPS used by US and EU investors, as well as how these services were used, depending on exposure to EU- or US-issued assets. US investors used a broader range of providers than EU investors, according to the survey. Ten suppliers have at least a 15% share of US investors, compared with just five suppliers used to this degree by the EU investor base.

"For price determination alone, investors may use two to five pricing methodologies and data sources across their assets. That doesn't even scratch the surface of the range of data or tools required to then go and independently monitor the credit performance of deals, or monitor a portfolio of diverse assets, hedges and liabilities," states Douglas Long, evp business strategy at Principia.

He adds: "Ideally, investors want less data sources. The leading data suppliers are moving towards 'one-stop shop' data solutions, but investors need more than just the data. They need the operational infrastructure and workflow control to bring it all together for effective investment decisions, risk management and accounting."

Structured Finance

APAC ratings remain stable

Fitch reports that Asia-Pacific (APAC) structured finance (SF) tranches remain largely stable, with 85% of the tranches maintaining their ratings in 2011, unchanged from 2010.

Downgrades outnumbered upgrades for the fourth year in a row and by an eight-to-one margin in 2011. The low number of upgrades last year can be partially attributed to the fact that about 46% of the Fitch-rated APAC SF universe carried triple-A ratings at the beginning of the year.

"As in previous years, negative rating actions in 2011 were concentrated in Japan CMBS, which made up 83% and 95% of the downgrades and impairments respectively," says Hilary Tan, director in Asia Pacific structured finance performance analytics at the agency.

Overall stability and impairment rates for Fitch-rated Asia-Pacific SF transactions compare favourably with those reported globally: 94% of investment grade tranches ratings remained unchanged or were upgraded (compared with 73.5% for global SF) and 97% (82.5%) of triple-A ratings remained stable. Impaired bonds and defaults accounted for 4.2% of bonds, compared with 8.4% globally, reflecting the stable performance of the SF market in Asia-Pacific relative to other regions.

The agency maintains a stable outlook on most SF ratings across APAC, reflecting the stability of asset performance.

CDO

CRE CDO delinquencies dip

Loan resolutions exceeded new US CRE CDO delinquencies over the past month, resulting in a net decline in Fitch's delinquency index for the sector. Delinquencies fell to 13% last month from 13.9% in April. The primary driver of the decline was the extension of the Kerzner International Portfolio loan, the agency notes.

A modification and extension through to 2014 of the Kerzner International Portfolio loan was completed in the May reporting period (see SCI's CMBS loan events database). Over US$135m in B-notes and rake bonds secured by the Kerzner Portfolio are contained in five different Fitch-rated CRE CDOs.

New delinquent assets in May consisted of five matured balloon loan interests, including three hotel loan interests, and five newly credit-impaired CMBS bonds. Offsetting these new delinquencies were 14 assets that were removed from the index last month. Other removals included one no longer credit-impaired bond, one term default brought current, two other recently extended matured balloons interests and five assets that were either sold at a loss or written down to zero.

CRE CDO asset managers reported approximately US$44m in realised losses in May. The largest loss - totalling US$14.2m - was related to the write off of a B-note secured by land in Orlando, Florida. The loan had been delinquent since its maturity date in early 2010 and a recent appraisal valued the property well below the B-note amount.

CDO

Further ML3 sales completed

Another US$5.2bn of Maiden Lane III CDOs was successfully sold by the New York Fed on Friday (15 June). Credit Suisse emerged as the winning bidder for the US$617.5m of Davis Square Funding II, US$850m of Davis Square Funding III and US$1.36bn of Davis Square Funding V assets. Bank of America Merrill Lynch won the auction for the US$896.15m of Davis Square Funding IV assets, while the US$1.44bn of West Coast Funding I was taken down by Citi. Goldman Sachs, Morgan Stanley, RBS and Wells Fargo also bid for the collateral.

CDO

Altius CDOs sold

Bank of America Merrill Lynch has emerged as the winning bidder for the US$1.1bn of Altius I Funding and US$852.46m of Altius II Funding CDO collateral auctioned yesterday from the New York Fed's Maiden Lane III holdings (SCI 6 June). Citi, Credit Suisse, Goldman Sachs, Morgan Stanley and RBS were the other bidders.

CDO

Two more ML3 sales due

The New York Fed has scheduled two further Maiden Lane III auctions for this month.

The first will take place on 25 June and comprise Davis Square Funding I (US$396.62m) and VI (US$1.37bn), Fort Sheridan ABS CDO (US$615.69m), Lakeside CDO II (US$387.94m), Monroe Harbor CDO 2005-1 (US$1.07bn) and Streeterville ABS CDO (US$392.33m) assets. Barclays Capital, Credit Suisse, Deutsche Bank, JPMorgan, Bank of America Merrill Lynch, Morgan Stanley, Nomura and RBS have been invited to bid.

The second sale will take place on 28 June and comprise Jupiter High-Grade CDO (US$98.57m), II (US$578.71m) and III (US$1.33bn), as well as Kleros Preferred Funding (US$522.92m) and II (US$607.83m) assets. Barclays Capital, Citi, Credit Suisse, Goldman Sachs, BAML, Morgan Stanley, Nomura Securities and RBS will bid in this round.

CDS

Call for global regulatory coordination

Regulators on both sides of the Atlantic must come together with real intent to establish a framework of inter-jurisdictional regulatory recognition and accreditation in order to address concerns over extraterritoriality and protectionism, a new report states. Commissioned by the EU-US Coalition on Financial Regulation, the report - entitled 'Inter- jurisdictional Regulatory Recognition: Facilitating Recovery and Streamlining Regulation' - cites the G20 call in 2010 for vigilance "to ensure open capital markets and avoid financial protectionism".

The member Associations of the Coalition say they have become increasingly concerned by growing elements of regulatory extraterritoriality and protectionism in both the EU and US programmes for regulatory overhaul. The Coalition recognises that there will be differences in the overarching legal systems, market practices and regulatory priorities of the EU and the US, but is strongly of the view that there is a common foundation between their regulatory policies, objectives, standards and outcomes. These are sufficient to secure a level of regulatory inter-reliance that will help to sustain the international competitiveness of transatlantic businesses, it says.

Importantly, such an approach is also expected to reduce legal risk, compliance complexity, regulatory uncertainty and transactional costs that will flow from what is an increasingly fragmented regulatory approach. The report argues that IOSCO's 38 Objectives & Principles of Securities Regulation provide an internationally-accepted foundation of regulatory adequacy.

The Associations recognise, however, that regulatory interdependence will require a greater degree of in-depth analysis and due diligence, if it is to be credible and effective. While it may be necessary to go beyond the IOSCO Principles in this way, particularly in the area of supervision and enforcement, it is believed that they are a credible starting point for building international regulatory accreditation.

Robert Pickel, ISDA ceo, comments: "ISDA fully supports industry and regulatory efforts to build a more robust and stable financial system. However, we do have serious concerns about the inconsistency of rules between key regulatory jurisdictions."

He adds: "The OTC derivatives market is an inherently global market that successfully operates across jurisdictions. Greater focus needs to be placed on ensuring a globally coordinated regulatory approach that ensures a level playing field and avoids the potential for fragmentation and regulatory arbitrage."

CDS

CDS price discovery role highlighted

IOSCO has released a report on the credit default swap market, which seeks to inform the ongoing regulatory debate on CDS and highlight some of the key policy issues emerging in the sector. The report was mandated by the G20 ahead of its summit that begins today in Los Cabos, Mexico.

The report notes that over the last several years CDS contracts have become more standardised, while electronic processing and central clearing of trades have increased. Further, it states that large amounts of CDS data have become publicly available and abundant research has been conducted to assess the role that CDS play in global financial markets.

Among the report's conclusions is that existing empirical evidence on many aspects of the CDS market tends to be mixed, such as on the impact of CDS on the orderly functioning of the primary and secondary markets of the underlying bonds and on creditor incentives. It concedes, however, that the CDS market is found to have an important role in the price discovery process.

CLOs

Reduced CLO trading activity seen

Managers of rated US CLOs reduced their trading activity again in 1Q12, furthering a trend that began four quarters ago, according to S&P. Part of the declining activity can be attributed to CLOs exiting their reinvestment periods over the last 12 months, which has generally limited their managers' ability to reinvest.

US CLO managers executed about US$6.2bn in trades in the first quarter, down from US$7.1bn in the prior quarter, S&P notes. The level of purchases dipped as well, dropping to about US$15bn, down from US$16.3bn in the prior quarter.

Managers purchased the most loans reported in the first quarter for their CLOs from the business equipment and services sector, replacing health care, which held the top position in the previous quarter and has since moved to the second position. Managers also sold the most loans from the business equipment and services sector, followed by health care. More than 20% of the loans that managers purchased and sold into their US CLOs came from these two sectors in the first quarter.

Cequel Communications was the most purchased name in 1Q12. Earlier this year, the company issued a US$2.2bn term loan and a US$500m revolver. S&P expects the issuance proceeds to be applied towards refinancing the company's term loan that comes due in 2013.

Though Cequel held the top position as the most-purchased name on a dollar weighted basis, Health Management Associates was the obligor whose loans were purchased by the most number of US CLOs (125). It was also the second-most purchased name on a dollar basis after Cequel Communications.

CMBS

US CRE prices slightly down

US CRE prices were down by 0.6% in April, according to the re-launched Moody's/RCA Commercial Property Price Indices (CPPI). Moody's says that price recovery has stalled since last autumn.

Apartment prices were down by 1.2% in April, after rising by 37.4% from their January 2010 trough. The CPPI shows that apartments in major markets started their recovery over two years ago and have since retraced 82% of their peak-to-trough decline.

All CRE sectors had flat to down prices in April, except the industrial sector, which gained 1.1% during the month. The central business district office sector in non-major markets has only retraced 7.5% of its peak-to-trough decline, while the major markets suburban office sector has seen prices fall by 14.4% over the last five months.

Prices across sectors for non-distressed properties in the major markets have recovered to 90.9% of peak levels, while distressed transactions are also showing price recovery in major markets, up by 27.8% from the trough 19 months ago. Distressed transaction prices in non-major markets continue to languish and have been essentially flat since 4Q09.

CMBS

Full recovery for Lembi loan

The US$90m Lembi portfolio, securitised in JPMCC 2007-LDP11, has been liquidated out of REO with full recovery. The pool consists of 11 multifamily and five mixed-use buildings in San Francisco. Both the associated US$25m B-note and US$17m mezzanine debt were held by Nomura.

The property was transferred to special servicing (with CWCapital) in February 2009, after the borrower drew down the debt service reserve and failed to pay a required annual deposit. After an initial delay in the foreclosure process due to the borrower's bankruptcy, the special servicer took the pool into REO in October 2010.

According to CMBS analysts at Barclays Capital, the properties performed well in REO, with occupancy at 99% and rent increases averaging 13% on lease renewals. Based on the improving underlying value, CWCapital was able to sell the portfolio with liquidation proceeds of US$103.5m at a valuation of US$156,000 per unit - largely in line with the most recent appraisal value of US$108m in February.

"This zero loss liquidation is not surprising, considering the outperformance of multifamily properties, particularly those in top-tier cities such as San Francisco," the Barcap analysts note.

Together with a pay-off at the original scheduled maturity for the US$90m note in JPMCC 2007-LDP11, proceeds from the sale were used to pay back US$9m of advances and US$680,000 of ASERs.

CMBS

CMBX delinquencies rising

Delinquencies continue to rise in the 2007 vintage CMBX.4 index, driven by a raft of loans that failed to refinance at their balloon date. At the same time, liquidation volumes remain elevated, with nearly US$1bn of loans exiting CMBX trusts this month.

The CMBX.4 60+ delinquency rate climbed to 12.6% in June, up from the 11.3% recorded last month. The 1.3% increase was almost entirely made up of maturing loans, note CMBS analysts at Barclays Capital.

The largest loan to report matured delinquent this month is the US$568m ING Hospitality Pool securitised in WBCMT 2007-C32 and C-33, both of which are constituents in CMBX.4. However, the loan is expected to pay off in the coming remittance period (see SCI's CMBS loan events database), which could bring down the overall delinquency rate on the index.

The only other index to show a slight increase in delinquencies this month is the 2005 vintage CMBX.1, with the 60+ rate rising by 20bp, largely due to seven-year loans failing to pay off on maturity. The other three indices recorded slight declines in their delinquency rates, as some previously modified loans were reported current in the June remittances.

Risk Management

iBoxx TRS offered

Markit has made a number of global iBoxx corporate indices available for trading in a standardised total return swap format. The aim is to enable investors to gain or hedge exposure to the corporate bond markets easily and efficiently through a fungible and transparent trading solution, the firm says.

The contracts will initially be available for the Markit iBoxx EUR Corporates, USD Domestic Corporates, GBP Corporates, EUR Liquid HY and USD Liquid HY indices. Armins Rusis, md and global head of data, indices and research at Markit, comments: "By supporting a standardised format, we are helping to create investor access to liquid derivative products to gain or hedge exposure to the asset class. This is good news for liquidity in the global bond markets."

RMBS

ResCap moves to settle put-backs

Residential Capital has moved for permission to settle put-back claims held by approximately 392 RMBS trusts, Lowenstein Sandler notes in a recent client alert. Under the proposed settlement, the securitisation trusts would drop potential breach of representation and warranty claims - which are worth an estimated US$221bn - and in return would receive a US$8.7bn bankruptcy claim against debtors Residential Funding Co and GMAC Mortgage. Since 2005 ResCap has repurchased approximately US$1.16bn in loans out of US$30.3bn in losses in an attempt to resolve such put-back claims.

RMBS

Dutch house prices to fall further

Fitch expects Dutch house prices to fall by around 7% further due to worsening macroeconomic factors. This would take house prices to about 18% below their 2008 peak levels and on par with prices in 2004.

The agency has marginally increased its peak-to-trough house-price decline from 15% because of the continuing rise in unemployment in the country. Uncertainty surrounding the housing market and government policy regarding the tax treatment of mortgages has also led to it to revise its forecast.

"We expect the government to rein in its strong support of the housing and mortgage market via favourable tax deductibility of mortgage interest payments as part of its plans to reduce its budget deficit to 3% from 4.8%," Fitch explains. "Our forecast is based on the assumption that changes to the tax treatment will be phased in gradually. If government action was more drastic, it could lead to a further revision."

A larger drop in house prices is unlikely considering the structural housing shortage in the Netherlands, the increasing affordability of houses and social security for unemployed borrowers.

Stringent underwriting standards means that default rates are among the lowest in the eurozone. During 2011 2,811 properties were foreclosed through auction, compared to 2,256 in 2009. The number of foreclosures is expected to only slightly increase in the next two years.

In terms of new supply, the lack of confidence in the housing market has resulted in a 30% drop in new dwellings, according to Fitch. The number of permits issued for new buildings is at the lowest level since the 1950s, so the agency expects the drop in new dwellings to continue.

The drop in house prices since 2008 has improved affordability, however. A slight increase in current mortgage rates is anticipated because of bank funding rates and the low level of competition in the Dutch mortgage market. But this is unlikely to impact the trend of increasing house price affordability over the next two years.

RMBS

Weak credit demand forecast for Spain

House prices in Spain have dropped by a nominal 22% since 1Q08. But fundamentals point to a further 25% decline, S&P says.

"House prices in Spain are a key variable in the performance of the country's economy. The housing boom built up unsustainable imbalances, such as an oversupply of dwellings, which will need to fully correct before a sustainable recovery takes place," comments Jean-Michel Six, EMEA chief economist at S&P.

The agency expects GDP to contract in real terms by 1.5% this year and by 0.5% in 2013. Investment and employment in the construction sector are now down to 12.7% and 6.8% of GDP, close to half of 2006 and 2007 levels respectively.

For Spain's housing market to recover, household debt needs to be reduced further, implying years of weak credit demand. Because of the heavy weight of unsold housing stock, S&P believes that the correction in housing prices is likely to be deeper and more prolonged than in the previous cycle: it could take up to four more years for the market to absorb the glut.

RMBS

Fannie, Freddie alignment encouraged

Fannie Mae and Freddie Mac must align their operations as much as possible, SIFMA says. It has set out a strategic plan urging the FHFA to view the GSEs together, rather than as separate silos.

The association believes that market performance indicates a crucial gap in the actual and perceived performance and liquidity of the MBS issued by the GSEs. It says this liquidity differential impacts the overall cost and efficiency of the GSE securitisation process and their ability to fund mortgage lending optimally.

"This plan will require collaboration between the regulators, the GSEs and the industry," says Chris Killian, SIFMA securitisation md. SIFMA believes the focus should be on improving the existing 'cheapest-to-deliver' securities in each market, which can be done independently of the strategic plan and should begin immediately.

SIFMA also wants to see: the alignment and modernisation of the infrastructure, with GSE systems upgraded; an alignment of the operations of the GSEs from underwriting to servicing; an alignment of the implementation of new initiatives and programmes, with MBS previously suffering due to differing implementations; and an alignment of security structures, with harmonisation of how security holders are paid.

RMBS

Irish RMBS rating drift examined

Underlying collateral performance has deteriorated sharply, arrears management practices have become increasingly 'borrower-friendly' and sovereign creditworthiness has declined over the past four years in Ireland. All of these trends have contributed to a downward drift in ratings on Irish RMBS, according to S&P.

While the Irish RMBS market accounts for only about 5% of total European RMBS issuance, the sector stands out due to its relatively weak recent credit performance. Total delinquencies in S&P-rated transactions have steadily risen since 3Q08 to reach an average of 16% in 4Q11.

About 10% of Irish mortgage loans have been restructured in some way, according to the Irish Financial Regulator, although servicers do not consistently report the effect on securitisations. Other borrower-friendly policies have kept the number of repossessions down, meaning that there is little data on realised loss severities, S&P notes. Against this backdrop, the effect of the upcoming Personal Insolvency Bill on RMBS is uncertain, but may accelerate widespread loan write-downs (SCI 14 March).

Irish residential property values have halved since their peak and the correction may not be over yet, in the agency's view. Further, the unemployment rate in the country is now close to 15%, up from less than 5% in 2007.

Almost €70bn in retained issuance has been structured since mid-2007, compared with over €20bn in investor-placed Irish RMBS issuance in the previous seven years. S&P suggests that this is due to troubled lenders securitising large portions of their mortgage books to maintain flexibility in their liquidity management.

RMBS

Granite, Aire Valley buy-backs announced

Northern Rock Asset Management (NRAM) and Bradford & Bingley (B&B) have announced tender offers for Granite, Whinstone 1 and 2 and Aire Valley subordinate notes. The two firms aim to strengthen their capital base by purchasing the notes at a discount to par. They intend to purchase approximately £500m of notes via a modified Dutch auction by 3 July.

Given that Granite subordinated bonds continue to trade at a significant discount to par, such a move was expected once NRAM completed its liability management exercises with the outstanding bank debt. Around £100m of subordinated bank debt now remains outstanding.

ABS analysts at Barclays Capital point out that NRAM is limited by the amount of capital available to it to carry out such liability management exercises. Furthermore, repaying the HM Treasury loan remains its first priority.

"These constraints are reflected in the relatively small size of the tender," the BarCap analysts note. "We also believe that the amount of notes repurchased from each transaction will have to be carefully managed so as not to lose significant risk transfer under Basel 3 and, consequently, lose all regulatory capital relief. This consideration will likely restrict the total amount of subordinate and mezzanine bonds bought back in future tenders as well, in our view."