Contents

Structured Finance

SCI Start the Week - 2 July

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

Pipeline
Three transactions remained in the pipeline at the end of last week. They comprised a student loan ABS (US$21.19m Vermont Student Assistance Corporation series 2012A), an Australian non-conforming RMBS (A$300m Liberty Series 2012-1 Trust) and a catastrophe bond (Queen Street VI Re).

Pricings
Last week also saw prints from a variety of asset classes. RMBS was the most represented, with the €857m Dutch Mortgage Portfolio Loans X, £950m Gosforth Funding 2012-1, €1.2bn Marche Mutui 5, €153.8m Dolphin Master Issuer 2012-1 and US$293.59m Sequoia Mortgage Trust 2012-3 all pricing.

The CLO market was the next best represented, with the US$510.7m OZLM Funding, US$523m Madison Park Funding IX, US$356.9m Dryden XXIII Senior Loan Fund and US$464m CIFC Funding 2012-1 all printing. In addition, three auto-related transactions (US$1.4bn Santander Drive Auto Receivables Trust 2012-4, US$109m Flagship Credit Auto Trust 2012-1 and €800m Bavarian Sky 3), one consumer loan ABS (€794m FCT Ginkgo Sales Finance 2012-1) and one CMBS (US$1.22bn UBS-Barclays 2012-C2) were issued.

Markets
For the most part the global structured finance markets last week saw secondary spreads stay steady on light volumes as traders waited on developments in the EU.
One exception was the US CMBS market, which, according to analysts at Bank of America Merrill Lynch, saw two-way flows outside of BWIC activity - particularly in the AM and AJ space - that were noticeably higher than they have been in the last few weeks as yield buyers returned to the market. Increased activity and an improved market tone helped spreads on 2006-2007 vintage last cashflow triple-As and AMs to tighten by approximately 10bp and 35bp respectively, they say. In addition, renewed interest and liquidity in the AJ space pushed prices higher.
Elsewhere, in ABS markets either side of the Atlantic spreads were mostly unchanged. European ABS analysts at Deutsche Bank note: "For now, secondary ABS markets continue to hold steady, with Granite triple-Bs being quoted at 69/69.75, higher post last week's tender announcement."
The US CLO market also saw secondary spreads unchanged on the week. There, BAML CLO analysts say: "Investors continue to show a preference for triple-A shorter-duration paper with quality management, which offers attractive spread relative to safe-haven government bonds. We believe that CLOs will continue to perform well amidst broader economic uncertainty heading into the second half of the year."

Deal news
• Pearsanta, the junior lender in REC 6, has begun High Court proceedings to confirm the appointment of Solutus Advisors as special servicer on the deal. In what is believed to be a first for the European CMBS market, the judge will be asked to decide between the legal enforcement of a contract and fiduciary duty towards the outstanding noteholders.
• Picton Property Income has refinanced its ING (UK) Listed Real Estate Issuer CMBS via £209m debt facilities provided by Aviva and Canada Life.
• The New York Fed last week sold the Davis Square Funding I and VI, Jupiter High-Grade CDO I, II and III, Kleros Preferred Funding I and II, Lakeside CDO II, Monroe Harbor CDO 2005-1, Sheridan ABS CDO and Streeterville ABS CDO assets from the Maiden Lane III vehicle.
• The process to approve the ResCap stalking-horse bidder suggests that it will be a fairly competitive final auction. Berkshire Hathaway and Fortress Investment Group submitted multiple bids during the process, with Fortress finally approved after it raised its original offer and cut its break-up fee. Berkshire successfully replaced Ally's stalking horse bid for the loan portfolio, however.
• The likelihood of the Pelican 2 and 3 transactions being called has jumped, following Caixa Economica Montepio Geral's recent tender offer. The bank offered to purchase up to €300m across 10 Portuguese RMBS bonds and one bank capital security via an unmodified Dutch auction.
• Coast Capital Asset Management is proposing to transfer the collateral management agreement for Coast Investment Grade 2002-1 to Crescent Capital Group.
• The expected servicing transfer date for 160 US RMBS from Aurora Loan Services to Nationstar Mortgage is 1 July. Moody's confirms that the move won't result in a reduction or withdrawal of the current ratings on the affected transactions.
• Almost €2.5bn of outstanding European CMBS debt - across 32 loans - falls due in July, the largest monthly volume to date in 2012. Thirteen loans extended over the last year have inflated this total by €1.5bn.
• Moody's has downgraded a number of structured finance notes directly exposed to the declining credit quality of certain US and European firms with global capital market operations that the agency downgraded on 21 June. At the same time, the ratings on approximately US$37bn of ABCP have been impacted.
• S&P has placed on credit watch negative its credit ratings on 30 tranches in 30 funded synthetic CDO transactions. The actions are in connection with the agency's recently published counterparty criteria.

Regulatory update
• The ECB is set to reduce the rating threshold and amend the eligibility requirements for certain ABS, thereby broadening the scope of the measures to increase collateral availability that were introduced on 8 December 2011.
• Continued uncertainty relating to aspects of the Dodd-Frank Act appears to have caused many traditional RMBS issuers to delay their issuance plans. Of particular concern are the details surrounding the definition and creation of an exemption from the risk retention requirements for qualified residential mortgages. Some further clarity on the matter is hoped for in the third quarter of this year.
• ESMA has launched a consultation on its technical standards under EMIR. The measures are designed to reduce risks in the OTC derivatives market, improve transparency and ensure that sound and resilient central counterparties will be applied in practice.
• The US SEC has adopted rules that establish procedures for its review of certain clearing agency actions, in line with the Dodd-Frank Act. The rules detail how clearing agencies will provide information to the agency about security-based swaps that the clearing agencies plan to accept for clearing.

Deals added to the SCI database last week:
American Express Credit Account Master Trust series 2012-1
AmeriCredit Automobile Receivables Trust 2012-3
BAA Funding A21
Cabela's Credit Card Master Note Trust series 2012-II
ELIDE FCC Compartiment 2012-1
FCT Cars Alliance Auto Loans France 2012-1
FREMF 2012-K709
Marriott Vacation Club Owner Trust 2012-1
Navistar Financial 2012-A
Scholar Funding Trust 2012-A
Turquoise Credit Card Backed Securities (Series 2012-1)

Deals added to the SCI CMBS Loan Events database last week:
BACM 07-1 & JPMCC 07-LDPX; BACM 2000-1; BSCMS 2007-PW15; BSCMS 2007-PWR17; CD 2007-CD4; CGCMT 2007-C6; CSMC 2007-C1;CSMC 2007-C4; EMC VI; EPOP ARL 2; GCCFC 2007-GG11; GSMS 2005-GG4; ING (UK) Listed Real Estate Issuer; JPMCC 06-LDP8 & WBCMT 06-C28; JPMCC 2005-LDP2; JPMCC 2006-LDP9; JPMCC 2007-LD11; JPMCC 2007-LDP11;JPMCC 2007-LDP12; LBCMT 2007-C3; LBUBS 2007-C1; LBUBS 2007-C7; LBUBS 2008-C1; MLCFC 2007-6; MSC 2007-HQ13; MSC 2007-IQ13; MSC 2007-IQ16; OPERA UNI; PROMI 2; RBSCF 2010-MB1; REC 6; TITN 2007-CT1; & WINDM XII

Top stories to come in SCI:
Pricing and valuations survey
US CLO market update
TriMont Real Estate Advisors profile
Brevan Howard Credit Catalysts profile

Structured Finance

SF trading head named

Laila Kollmorgen has joined Raymond James Financial as head of European structured finance trading. She was previously md and head of European ABS/CDO trading at Cohen & Company and head of secondary ABS trading at BNP Paribas.

Structured Finance

Investment pro appointed

Stefano Loreti has joined Haymarket Financial as a partner and head of structured credit investing. He previously spent six years as senior portfolio manager at Cairn Capital in London, responsible for the management of over US$20bn in global ABS and CDO securities. Loreti has more than 15 years of experience in managing and analysing a wide range of structured credit assets, most recently at Wharton Asset Management and Abbey National Treasury Services prior to joining Cairn Capital.

Structured Finance

Index giant created

The McGraw-Hill Companies and CME Group have launched S&P Dow Jones Indices, the world's largest provider of financial market indices. The joint venture combines S&P Indices' leading position in equity, commodity, real estate and strategy indices with Dow Jones Indexes' strengths in equity, commodity, emerging market, target date and dividend indices. The aim is to create new risk management index products and trading opportunities for both institutional and retail customers on a global basis.

Alexander Matturri, executive md of S&P Indices, has been named ceo of S&P Dow Jones Indices and Lou Eccleston, president of S&P Capital IQ, will chair the company's seven-member board. The board comprises five directors designated by McGraw-Hill and two by CME Group: Robert Shakotko, md, S&P Dow Jones Indices; Charles Teschner, evp, global strategy & corporate development, McGraw-Hill; Elizabeth O'Melia, svp, treasury operations, McGraw-Hill; John Pietrowicz, senior md, business development and corporate finance, CME Group; and Scot Warren, senior md, equity index products and index services, CME Group.

Under the terms of the joint venture, McGraw-Hill owns 73% of S&P Dow Jones Indices, while CME Group owns 24.4% through its affiliates and Dow Jones & Company indirectly owns 2.6%. The company will be part of the new McGraw-Hill Financial Company, following the separation of The McGraw-Hill Companies into two public companies.

Structured Finance

ASF reshuffle announced

The Australian Securitisation Forum has appointed Andrew Jinks of Clayton Utz to its National Committee to ensure that the association retains legal representation following the departure of KWM's Stuart Fuller. RBS' Sarah Hofman replaces Fuller as deputy chair, while Tim Hughes has been elevated from deputy chair to ASF chairman.

CDO

CDO management transfer proposed

Coast Capital Asset Management is proposing to transfer the collateral management agreement (CMA) for Coast Investment Grade 2002-1 to Crescent Capital Group. Fitch has confirmed that the move is unlikely to impact the transaction's outstanding ratings.

The agency notes that the most senior class in the deal is currently rated triple-C, indicating that default appears a real possibility for the notes. In addition, the CDO is no longer in its reinvestment period and all overcollateralisation tests have been failing. Given the above, the manager's capabilities are no longer a rating factor for this transaction.

Under the CMA, contingent collateral management fees will be paid before interest to the class A notes. However, the impact on the notes from a rating perspective is mitigated by the cushion available between the notes' credit enhancement level and triple-C level losses.

Further, due to the senior coverage test failure, interest proceeds have been redistributed from subordinate classes to pay down the class A notes. On the last two payment dates, the class A notes received approximately US$3.1m from interest proceeds, significantly exceeding the contingent collateral management fee of 20bp per annum.

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

CLOs

CLO business development role filled

Black Diamond Capital Management has appointed Jean Fleischhacker as senior md, business development. In her new role, Fleischhacker will lead the structuring and marketing for CLOs, other structured products and mezzanine debt, as well as head new product development.

Fleischhacker will be based in the firm's Greenwich, Connecticut office, working alongside Michael Moreno, head of marketing and investor relations and a principal of Black Diamond. She has over 25 years of experience in the financial services industry, most recently as md at Babson Capital, heading global distribution.

CLOs

Invesco trio disclosed

Three of the seven Invesco Asset Management CLOs being acquired by 3i Debt Management Investments (SCI 31 May) have been identified as Invesco Coniston, Invesco Mezzano and Invesco Garda. A purchase and sale agreement has been entered into by the two firms in connection with the transactions. The sale is expected to be completed on 27 October, subject to the approval of 66.67% of noteholders to 3i becoming successor collateral manager.

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

Risk Management

Collateral services unit formed

BNY Mellon has established a new unit, dubbed global collateral services, to serve broker-dealers and institutional investors facing rapidly expanding collateral management needs as a result of current and emerging regulatory and market requirements. The unit brings together BNY Mellon's global capabilities in segregating, allocating, financing and transforming collateral on behalf of clients, including its broker-dealer collateral management, securities lending, collateral financing, liquidity and derivatives services teams. It will be led by Kurt Woetzel, senior evp and head of global operations and technology.

Risk Management

CMA acquired

S&P Capital IQ has acquired Credit Market Analysis (CMA) from CME Group, as part of the agreement to establish the S&P Dow Jones Indices joint venture (SCI 2 July). The purchase of CMA - along with the recently announced acquisitions of R² Financial Technologies (SCI 13 February) and QuantHouse - provides S&P Capital IQ with the components necessary to offer its clients broad market data and risk analytics platforms in the industry, the firm says. CMA will be integrated into S&P Capital IQ's existing pricing and data businesses, expanding its asset class coverage for data and pricing and adding the technology to move into intraday quotes on derivative and other OTC securities.

RMBS

MBS vet recruited

Bryan Caisse has joined Performance Trust Investment Advisors (PTIA) as senior portfolio manager. He will be responsible for running a mortgage-backed fixed income portfolio and help oversee the risk of the portfolios for PTIA, while executing the company's current business strategy, including raising additional assets and building out the product lines. He will team up with PTIA president Douglas Rothschild and cio Peter Cook.

Caisse has over 21 years of experience in the financial services industry. Previously, he was president of Huxley Capital Management in New York.

ABS

Prime auto losses inch up

Following strong performance in the spring, US prime auto loan ABS losses crept up slightly last month, according to Fitch's latest index results for the sector. However, the agency reports that auto ABS performance remains on track with annualised net losses (ANL) standing at 0.18% in May, 61% below 2011's figure.

Prime ANL moved up by 1bp month-over-month (MOM) and were virtually unchanged in May. 60+ days delinquencies moved up to 0.38% during the month from 0.33% in April. This represents a 15% increase as the indices typically exhibit softer performance starting in early summer.

The Manheim Used Vehicle Value Index stood at 125.1 in May, still near its record after coming off the peak 126.2 level recorded in March this year. Factors supporting strong used vehicle values include low new car inventories, lower incentives and improved availability of credit, which is supporting sales of both new and used vehicles.

Subprime ANL performance exhibited marginal improvement in May. ANL dropped to 3.76%, from 4.16% in April, and was unchanged over May 2011's level. 60+ days delinquencies crept up to 2.60% in May, 12% above April's level and 20% higher than a year earlier.

ABS

Subprime auto ABS overheating?

Moody's suggests that the US subprime auto lending market is beginning to resemble its condition in the 1990s, when overheated competition led to poor underwriting that drove up securitisation losses. As in that earlier period, capital is pouring into the sector and the issuance of subprime ABS is booming, the agency observes.

"It is too early to predict whether today's subprime lending market will deteriorate as it did in the 1990s, but the early similarities between then and now suggest that losses will climb if competition intensifies," says Moody's vp Peter McNally.

Over the last two years, because of the sector's profitability, a large amount of private equity investment has gone into subprime auto lenders - many of which are relatively small, specialty finance companies. Moody's says the interest of investors from outside the subprime auto market niche and the potential for increased competition carry the risk that losses could increase if a race for profits and market share lowers underwriting standards.

The growth in the market can lead to capacity issues, says McNally. "When losses rise quickly, inexperienced lenders have trouble servicing a loan portfolio that requires more attention."

Net losses in subprime auto ABS jumped from under 3% in early 1995 to over 10% in December 1997. For the past several years subprime auto loan performance has been strong, with the net loss rate currently below 4%. However, the credit quality of pools securitised in 2011 and 2012 indicate that credit has loosened since 2010, according to Moody's. Issuance of subprime auto ABS is on pace this year to exceed the robust issuance of 2011, which comprised 24 deals totalling US$14.3bn.

However, the agency notes several differences between today's market and the overheated market of the 1990s. One credit positive for today's market is that most lenders no longer practice gain-on-sale accounting, whereby lenders capitalised securitisation gains and credited them to equity, which made their balance sheets look stronger than they were. Another is that the market is not yet overcrowded with new lenders: Moody's counts 13 active securitisers at the moment, compared with 34 issuers in 1997.

An important credit negative is that transactions are no longer backed by monoline guarantors. These bond insurers absorbed losses on transactions that would have otherwise defaulted in the 1990s and took over transaction servicing from failing lenders.

ABS

Equipment criteria unveiled

Kroll Bond Rating Agency (KBRA) has released its methodology for rating US equipment lease and loan ABS. The rating agency's analytic approach for rating these transactions incorporates the originator and servicer's operational and financial strength, the quality and expected performance of the underlying assets, and an analysis of the transaction's structure.

KBRA's rating assignments on equipment leasing ABS are based upon the adequacy of available credit enhancement and liquidity to ensure the timely payment of interest and principal by the legal final maturity date. The analysis focuses on estimating a pool's cumulative gross loss, as well as the cumulative net loss. The agency says it may use several approaches to estimate expected losses for a securitised pool, depending on its size and diversification.

ABS

New deal boosts Russian ABS market

In what is seen as a breakthrough for the Russian securitisation market, ZAO Raiffeisen Bank - the Russian subsidiary of Raiffeisen Bank International (RBI) - has completed a Diversified Payment Rights (DPR) securitisation secured by pledges of ZAO Raiffeisenbank's current and future US dollar and euro receivables.

The European Bank for Reconstruction and Development (EBRD) provided US$50m of funding while other international institutions including the IFC (International Finance Corporation) were also involved. The transaction was arranged by RBI and WestLB.

The seven-year bonds were issued through a private placement made for the bank by Roof Russia DPR Finance Company, a special purpose company incorporated in Luxembourg.

This is the first such operation by a private Russian bank since the beginning of the financial crisis and re-introduces asset-backed financing instruments onto the Russian market, according to a statement from the EBRD. The EBRD completed six structured deals in Russia before the crisis, but this is the bank's first in the country to be secured on future cash flows.

The structure will allow ZAO Raiffeisenbank to reduce its reliance on client deposits and funding by its parent RBI at a time when both local and international markets are under stress and raising longer-term funds is challenging. The funds raised by this EBRD investment will also enable ZAO Raiffeisenbank to expand its mortgage lending business in Russia.

ABS

RFC issued on two rating proposals

Moody's is seeking market participants' comments on two proposals affecting how it assesses structured finance transactions globally. The first proposal supplements Moody's existing framework for de-linking swap counterparty risks by outlining an approach to assessing credit linkage to swap counterparties. The second proposal provides specific guidelines on how the choice of banks and eligible investment for the temporary use of cash affects Moody's analysis of structured finance transactions other than asset backed commercial paper (ABCP).

Swaps, particularly those that hedge interest rate and currency risk, are in many structured finance transactions and the agency notes that recent credit pressures on swap counterparties have led to more breaches of swap triggers and collateral and transfer provisions in swaps have become increasingly less consistent with Moody's published de-linkage framework.

To assess the degree of linkage to a swap counterparty and its rating impact in a transaction, Moody's proposes to examine 1) the rating of the counterparty; 2) the extent of deviations from the de-linkage framework; 3) the exposure to the swap counterparty and the type and duration of the swap; 4) the amount of credit enhancement supporting the notes; 5) the size of the relevant tranche; and 6) the rating of the notes before accounting for the effect of linkage (the lower the target rating of the notes, the less likely that linkage will have a rating impact).

Implementation of the proposal is likely to be rating-neutral for most structured finance transactions, but will probably result in select negative rating actions. Moody's expects that rating downgrades will in general be between one and three notches. However, the impact is likely to be greater for certain transactions, particularly those with large exposures to relatively lowly rated counterparties.

The proposed update on the temporary investment of cash in structured finance transactions other than ABCP addresses the risks to a transaction's cash flows with respect to the prudent management of the funds that flow from the borrowers through the transaction to the ultimate investor. Moody's addresses these risks by establishing eligibility standards for the investments of a transaction's deposited or reinvested cash, as well as for the banks that provide the transaction accounts that contain eligible investments.

The effect of these bank and eligible investment standards on structured transactions depends on the degree of linkage between the bank or eligible investments and the credit quality of the structured securities. Transactions in which the bank holds or has invested a substantial amount relative to the liabilities have a strong linkage, given the risk of default and negative implications on recovery and enhancement. Conversely, transactions in which the amount of cash a bank holds or the eligible investments are small relative to the outstanding amount of liabilities have a weak linkage.

The proposed guidelines indicate thresholds for bank ratings according to the degree of linkage. Moody's also considers whether a transaction facilitates the effective replacement of the bank in the event the bank rating declines below certain levels.

The proposed changes to the guidelines, if implemented, would result in a limited number of negative rating actions, says Moody's.

ABS

Spanish deals hit

Moody's has downgraded to A3(sf) the ratings of 583 securities across 328 structured finance transactions, including ABS, RMBS and CDOs. Moody's has also placed or maintained on review for downgrade the ratings of most Spanish ABS, RMBS and CDOs.

There are three drivers for themost recent downgrades. The first relates to Moody's decision on 26 June to lower the Spanish country ceiling, and therefore the maximum rating that Moody's will assign to a domestic Spanish issuer including structured finance transactions backed by Spanish receivables, to A3, in connection with its downgrade of Spain's government bond ratings to Baa3 from A3 on 13 June and the initiation of a review for further downgrade.

The second is increased counterparty risks, following Moody's downgrade of various Spanish banks' long-term ratings and the placement of those bank ratings on review for further downgrade on 25 June. The third driver is Moody's intention to re-assess the credit enhancement levels consistent with each structured finance rating category, given the deteriorating credit conditions in Spain.

ABS

Student loan deals downgraded

The correction of an input error along with poor performance of private student loans has prompted Moody's to downgrade 26 classes of bonds issued by Vermont Student Assistance Corporation. The underlying collateral consists of student loans originated under the Federal Family Education Loan Program (FFELP), which are guaranteed by the US government for a minimum of 97% of defaulted principal and accrued interest and student loans originated under the Corporation's various private loan programmes.

Moody's corrected an input error that occurred during the previous rating action on February 16, 2012. For the taxable auction rate securities, the coupon rate is defined as the minimum of the 91 day Treasury Bill Rate (T-Bill) plus a spread and a fixed annual rate. According to the transaction documents, the spread over the T-Bill rate increases from 1.2% to 1.75% when the ratings of the bonds are downgraded to less than A3. For the tax-exempt auction rate securities, the coupon rate is calculated as the product of the applicable percentage and the S&P Weekly High Grade Index. The applicable percentage increases from 175% to either 200% or 250% when the ratings of the bonds are downgraded below A3 and Baa3, respectively. At the time of the previous rating action, Moody's did not take this rating trigger into account and continued using 1.20% as the spread over T-Bill and 175% as the applicable percentage, even though the ratings of the bonds were downgraded below A3. The current ratings reflect the correct spread and applicable percentage.

The second driver of the downgrades is the worse than expected performance of private student loans in the underlying collateral pool. Moody's increased its lifetime default expectation for the private student loans originated under most of the Corporation's private loan programmes. Its lifetime expected defaults for the private student loan pool increased from 16% at the time of the 2007 issuance to 26%. The rating agency's current expected defaults on the remaining balance of the private student loan pool is 22%.

Structured Finance

MiFID 2 liquidity warning

With an important vote looming on MiFID 2 on 9 July, TABB Group believes that current proposals to reform pricing practices in the fixed income market will seriously undermine trading firms' ability to provide liquidity, increase trading costs for investors and make it more difficult and expensive for governments and companies to raise capital. In the face of Europe's already stressed debt markets and in conjunction with Basel 3, the proposals may have a material negative impact on the region's real economy, the firm says.

TABB Group further notes that debt markets cannot be viewed in the same light as equity markets and therefore require different investment, distribution and trading structures. While equity is predominantly traded on exchanges, most fixed income instruments are still traded bilaterally OTC. The firm suggests that increased transparency may force market participants to trade only sufficiently liquid bonds in order to reduce their trading costs and this will impact primary issuance as well as secondary trading.

CDO

Trups CDO defaults stable

US bank Trups CDO defaults and deferrals remained relatively stable this past month, according to Fitch's latest index results for the sector.

Defaults remained at 16.9% at the end of last month, while deferrals rose slightly to 15.6% from 15.5%. The increase in the rate of deferrals was due to the addition of two new deferrals from March and April not accounted for in the prior month's index because of the reporting time lag. This was partially offset by the resolution of two deferrals in May (one cure and one exchange).

Through the end of May, 204 bank issuers were in default, representing approximately US$6.4bn held across 83 Trups CDOs. Additionally, 368 deferring bank issuers were impacting interest payments on US$5.9bn of collateral held by 84 Trups CDOs.

CDO

ML3 auction completed

The results of yesterday's Maiden Lane III auction have been released. Bank of America Merrill Lynch successfully bid for the US$578.71m Jupiter High-Grade CDO II and US$522.92m Kleros Preferred Funding assets. Credit Suisse won the US$1.33bn Jupiter High-Grade CDO III and US$607.83m Kleros Preferred Funding II collateral, while RBS took down US$98.57m of the Jupiter High-Grade CDO. Barclays Capital, Citi, Goldman Sachs, Morgan Stanley and Nomura Securities also participated in the auction.

CDS

Clearing agency rules adopted

The US SEC has adopted rules that establish procedures for its review of certain clearing agency actions, in line with the Dodd-Frank Act. The rules detail how clearing agencies will provide information to the agency about security-based swaps that the clearing agencies plan to accept for clearing. The information is intended to aid the SEC in determining whether such security-based swaps are required to be cleared.

The SEC also adopted rules requiring clearing agencies that are designated as 'systemically important' to submit advance notice of changes to their rules, procedures or operations if the changes could materially affect the nature or level of risk at those clearing agencies.

Most of the final rules will become effective 60 days after the date of publication in the Federal Register.

CDS

ICE preps SDR

The CFTC has provisionally approved ICE Trade Vault as a swap data repository (SDR) for the commodity and energy, interest rate swaps, credit default swaps and FX asset classes. The CFTC's approval of ICE Trade Vault is provisional until the agency completes final rulemakings on SDR regulations, which are anticipated later this year.

ICE Trade Vault will initially focus on commodity and energy markets, building on ICE's decade-plus experience operating OTC energy markets and ICE eConfirm, its electronic trade confirmation paltform. ICE is evaluating opportunities in the other asset classes for which it received approval.

A beta version of ICE Trade Vault was released this spring and is expects to go live later this year, so customers can begin submitting data before final reporting rules take effect. ICE is also working with international regulators to ensure compliance with all the current and prospective regulations relating to SDR-related facilities in Europe and Asia.

CMBS

CMBS servicer improvements reviewed

Following a review of recent US CMBS modifications and liquidations, Fitch says that although servicer disclosure is improving, there is still room for improvement. The agency focused on three main items: workout alternatives, disclosure of fees and use of affiliates.

Fitch found that the workout alternatives considered are not easily obtainable. Special servicers generally include alternatives and rationale for selection in their initial business plan, which are presented to their internal credit committees and the controlling classholder.

Some pooling and servicing agreements allow for investors to obtain business plans following a workout. When plans are not available, investors can utilise historical special servicer comments to get a sense of the success the servicer was having with the alternative chosen. Investors should keep in mind that most special servicers will 'dual track' a resolution by pursuing a workout and foreclosure simultaneously.

The agency notes that some servicers are better than others in terms of disclosing borrower paid fees; the disclosure using the tools currently available has improved at most of the special servicers. Specifically, using the CREFC IRP modification template has proven a good method for disclosing fees, modification terms and impact to the waterfall, Fitch suggests.

It also reviewed both the longer template and the historical modification report and found that while most special servicers include statements in the template that provide detail on fees collected from the borrower versus paid by the trust, others have not yet included this information in their narrative. For a modification that is described using the shorter report, there is no specific field to discuss fees; there is a comment field, but it is rarely used for this purpose.

Once a loan is liquidated, the special servicer comments included in the CREFC IRP cease as it is no longer a specially serviced loan. Fitch would encourage servicers to consider adding a final special servicer comment on liquidated loans, which could include information on fees earned by the servicer, use of affiliated companies, fees earned by the affiliate and if a fair value market purchase option was exercised.

CMBS

ARA hits Royal Mint Court

The £72.45m Royal Mint Court loan, securitised in the Equinox (Eclipse 2006-1) CMBS, has been hit by an £82.23m appraisal reduction. The market value of the loan was £114.73m at origination in December 2005, with the new value representing a decrease of approximately 72%, resulting in a senior LTV of 223%.

The loan is secured by four office properties located in London. The buildings are fully let with an average lease of 1.91 years and the total NOI received from the properties last quarter was £2.03m, according to Trepp.

All debt service payments were made by the borrower for the April IPD. However, if the loan is sold at its updated appraisal value, approximately £39.95m of expected losses would be applied to the bonds. The class E and D notes would be written off completely, while the class Cs would see a write-down of approximately £11.37m (or around 63% of their current balance).

The appraisal reduction is believed to be due to the short weighted average lease term and high likelihood that the largest tenant's lease will expire in December 2013. The transaction's initial securitised balance was £83.18m, with a maturity date of 16 October 2013.

CMBS

Heavy EMEA CMBS maturities due

Almost €2.5bn of outstanding CMBS debt - across 32 loans - falls due in July, the largest monthly volume to date in 2012, according to Fitch. Thirteen loans extended over the last year have inflated this total by €1.5bn.

For loans maturing this month, two CMBS stand out. All five of the loans securing DECO Series 2005 - Pan Europe 1 and Perseus (European Loan Conduit No. 22), both due in 2014, mature this month - which leaves just two years in which the special servicer must react to any defaults. Such a response is increasingly likely to involve selling collateral under time pressure and in a soft market.

Most loans that are reaching the end of previous extensions did enjoy tangible cash benefits, either from cash injection or cash sweep. However, those that were granted one-year extensions during 2011 have only experienced limited amortisation (none by more than 5%).

Of the 32 loans now falling due, 10 have balances in excess of €100m. Loan size remains a limiting factor when borrowers come to refinance, as in particular banks' appetite for risk continues to wane.

Fitch expects its repayment index to deteriorate, as financing conditions have not improved for secondary European commercial real estate assets on which the bulk of EMEA CMBS is secured.

CMBS

CMBS loss severities dip

US CMBS loan resolutions and loss severities cooled off in June, according to Trepp, with liquidations down by 19% from May's US$1.6bn. The average loss severity reported for this month is 38.37%, marginally lower than the 12-month moving average of 43% and a 5.5 point drop from the previous month's 43.87% reading.

At US$1.34bn, liquidations were a notch higher than the 12-month moving average of US$1.3bn per month. Since the beginning of 2010, special servicers have been liquidating at an average rate of about US$1.12bn per month, Trepp notes.

The number of CMBS conduit loans liquidated in June was 149, down by 3% on the previous month and generating a loss of US$513.7m. This count is around 3% above the 12-month moving average of 145.

The average loan size for liquidated loans was US$8.98m in June. Over the last 12 months, the average size of liquidated loans has been US$8.92m.

CMBS

Picton CMBS refi agreed

Picton Property Income has entered into conditional agreements for two separate long-term debt facilities, totalling £209m in aggregate, ahead of its secured loan maturities in January 2013. The transaction could provide a blueprint for future European CMBS refinancings.

The new facilities will be provided by Aviva (£95m) and Canada Life (£114m), with LTV covenants of 65%. On completion of the transaction - which is expected next month - Picton will refinance its CMBS (the ING (UK) Listed Real Estate Issuer) and existing bank loan.

The financing has a staggered maturity profile of 10, 15 and 20 years. Based on current benchmark pricing, the cost of debt (4.4%) is anticipated to be lower than current arrangements. In order to facilitate an early repayment of its existing facilities, the company will incur swap break costs in July, which had a liability of £5.1m as at 31 March.

The new arrangements also provide for orderly repayment through an agreed amortisation profile that is consistent with the group's long-term debt reduction strategy. Additionally, the company has approximately £8m of smaller non-core unsecured assets and these continue to be held for disposal as part of an orderly realisation process.

Under the transaction, the company will undertake an element of corporate restructuring to facilitate two bilateral pools of assets, providing debt to be made available to two group vehicles - one for each lender - on a reflective non-recourse basis.

Michael Morris, Picton Capital ceo, comments: "These new debt facilities provide the company with a much more balanced debt exposure and staggered maturity profile. With the increased financial stability and flexibility that this transaction provides, we are now able to focus on the active management of the underlying portfolio."

Picton will now consider further the options available to facilitate repayment of its zero dividend preference ZDP shares. The company's advisors have consulted with a number of existing holders of its ZDPs and several have indicated an interest in an extension to the term. It is therefore currently investigating potential options for a mechanism that would allow investors to elect to extend the maturity of their ZDPs.

id3 Capital Partners and Bishopsfield Capital Partners were joint financial advisers to Picton on the transaction, providing debt arranging and structuring services to the company.

CMBS

Special servicer difficulties highlighted

The legal wrangling over the Alburn Real Estate Capital (REC 6) CMBS (SCI 27 June) exemplifies the difficulties faced by special servicers in the current market.

Pearsanta - the junior lender on the transaction - is said to have asked Savills not to sell any properties from the REC 6 portfolio, indicating that it disagrees with a structured sell-down. It is therefore possible that if Solutus Advisors is appointed special servicer, it may also be asked not to sell any properties - which appears to conflict with the class A noteholders' and CBRE's views about maximising recoveries.

Given that the junior loan has the embedded right to both appoint and replace a special servicer, it also begs the question that if Solutus doesn't do as it's asked, will the firm be removed as special servicer? Solutus appears to be in a difficult situation because, if it is appointed special servicer on REC 6, it will be required to act in accordance with the servicing standard to maximise recoveries for all noteholders.

The class A noteholders are understood to have reservations about whether a special servicer is required, when the actions a special servicer would typically consider - such as assessing various restructuring and enforcement strategies - have already been taken and any delay could further diminish value. Additionally, the special servicer fees are expected to come out of the deal's cashflow at the noteholders' cost.

The class A noteholders may also have concerns about Solutus' experience and operations. Fitch recently assigned the company a commercial special servicer rating of CSS4, implying that the servicer wouldn't meet the rating requirements under the REC 6 documentation. The agency notes the rating reflects a business that is "yet to reach maturity and the small operational team that lacks breadth of special servicing experience compared to peers".

REC 6 is fairly unique in that the rights to replace the special servicer remain with the junior lender as long as at least 25% of the original loan is outstanding. In the majority of CMBS transactions, such rights would typically move up the capital structure as the value of the property falls.

Pearsanta is understood to have effectively bought a deeply out-of-the-money option when it acquired the £12m junior loan last September. The junior lender isn't expected to see any recoveries under any reasonable scenario considered by market analysts or by CBRE and the borrower in their previous analysis. There is speculation that it is linked to the borrower, however.

CMBS

CMBS delinquencies inch up

The US CMBS delinquency rate increased by 12bp in June to 10.16%, according to Trepp. This new all-time high comes just one month after cracking through the 10% barrier.

The increase in the delinquency rate was driven by weak performance among lodging, office and retail loans. The only major property type to improve in June was the industrial segment. Multifamily loans ended the month unchanged.

Currently, US$59bn in loans are delinquent, excluding loans that are past their balloon date but are current in their interest payments. There are US$75.9bn in loans with the special servicer.

Loans resolved with losses decreased from May's total. About US$1.4bn in loss resolutions were seen in June, down from US$1.6bn a month earlier.

The removal of these loans from the delinquent loan category attributed about 24bp of downward pressure on the delinquency rate. In addition, loans that were cured put downward pressure of 45bp on the rate.

On the other hand, loans that were newly delinquent (almost US$4.5bn in total) put upward pressure on the rate of about 77bp. Added together, the impact of the loan resolutions, the effect of loans curing and the effect of newly delinquent loans created a net increase of 8bp in the rate. The remaining difference is a result of additions and subtractions to the denominator due to new CMBS issuance being added, loans paying off and other factors.

RMBS

Irish insolvency bill published

The Irish government has published its draft Personal Insolvency Bill (SCI 14 March). The bill proposes to reform the existing bankruptcy regime and introduce three formalised non-judicial negotiated debt arrangements.

Under the proposals, automatic discharge will drop from 12 to three years, more in line with European norms. A new independent body, the Insolvency Service, will be responsible for overseeing the non-judicial personal insolvency system.

Two of the negotiated debt arrangements - the debt relief notice (DRN) and the debt settlement arrangement (DSA) - concentrate on unsecured debt. The third - the Personal Insolvency Arrangement (PIA) - focuses on both secured and unsecured debt, and will directly impact mortgage debt and by extension Irish RMBS, according to ABS analysts at Deutsche Bank.

Under a PIA, an insolvent debtor who meets certain criteria may propose a negotiated mortgage debt settlement to one of more of their creditors. The arrangement must be supported by at least 65% of creditors and at least 50% of secured and unsecured creditors in value terms.

The draft bill outlines a range of repayment options that may be in a PIA, including principal reduction and payment deferral. "While the PIA raises the spectre of principal mortgage debt forgiveness, it is important to state that the solvency test is all important. Certainly a blanket mortgage debt forgiveness programme is not being considered, while other bilateral debt restructuring schemes - such as interest only and term extensions - are likely to be more favourable propositions for lenders in the majority of arrears cases. In reality, recognition of the current arrears/repossession problem is positive for all stakeholders - borrower, lender and RMBS noteholder," the Deutsche analysts observe.

RMBS

Review prompts HMI rating changes

Santander last week released a new prospectus for its Holmes Master Issuer RMBS programme that contains a number of changes to the trust's required ratings. The move comes as Moody's reviews for downgrade the lender's long- and short-term ratings, which currently stand at A/A2/A and A-1/P-1/F1 respectively.

Among the changes made to the prospectus, ABS analysts at JPMorgan note that the minimum rating requirement for the seller to add collateral to the master trust has been lowered from A-1/P-1/F1 to A-3/P-2/F2. In addition, the minimum rating for Holmes Funding to be able to acquire an interest in trust property has also been lowered to A-2/P-2/F2 from A-1/P-1/F1 previously.

Without these changes, it appears that Moody's review for downgrade could have had potentially negative consequences for the Holmes programme. The JPMorgan analysts suggest that while downward pressure on the issuer's long-term rating could have led to remedial action being required under the Funding and issuer swaps, loss of the P-1 rating would have affected the swaps, the bank accounts and more importantly could also have precluded the issuer from selling new mortgages to the programme without the rating agencies' consent.

"The lowering of the required ratings for collateral addition should therefore be seen as a necessary step in an environment with continued downward pressure on bank ratings and also aligns Holmes' trigger with that already in place in [Santander's] other UK RMBS programme, FOSSM," they observe. "We are, however, somewhat surprised that the amendments have been made without the explicit consent of investors in HMI. In this case, we can only assume that the trustee agreed that the amendment was in the noteholders' best interests."

RMBS

Walnut Place dismissal upheld

The New York Appellate Division last week affirmed the lower court's dismissal of claims by investor group Walnut Place against Bank of America, concerning the bank's handling of US$1.1bn in RMBS. Walnut Place filed its complaint in February 2011, alleging that Countrywide Financial misrepresented the quality of loans backing the RMBS and that Bank of New York Mellon - the trustee for the securities - failed to sue Bank of America upon Walnut Place's request.

Lower court judge Justice Barbara Kapnick ruled in March that Walnut Place's lawsuit was premature because it came just a few days after Walnut Place had asked the trustee to sue Countrywide. Moreover, Justice Kapnick found that the proposed US$8.5bn settlement between Bank of America and Bank of New York Mellon - a settlement to which Walnut Place objected - was evidence that the trustee took action in response to Walnut Place's complaints, Lowenstein Sandler notes in a recent client alert.

Walnut Place then appealed Justice Kapnick's decision in April, arguing that Bank of America was using the no-action clause in the governing agreements to block the rights of noteholders, despite decades of New York precedent allowing noteholders to remedy wrongs done to the trust. In affirming dismissal, the appellate division found that Justice Kapnick correctly decided that the no-action clause in the governing PSA limited noteholders' right to sue to circumstances where there has been an event of default, which involves only the master servicer. According to the court, the PSA did not contemplate actions by noteholders to remedy breaches of the agreement.

RMBS

Aurora servicing transfer reviewed

The expected servicing transfer date for 160 US RMBS from Aurora Loan Services to Nationstar Mortgage is 1 July. Moody's confirms that the move won't result in a reduction or withdrawal of the current ratings on the affected transactions.

In determining the credit impact of the transfer of servicing to Nationstar, Moody's reviewed: the firm's servicing practices and compared them to Aurora's practices; its ability to handle the proposed transfer; the percent of each transaction's outstanding principal balance that is being transferred; and the impact that potential cashflow disruptions or increases in expected losses in the deals could have on the performance of the securities.

Aurora is assessed at SQ4+ as a primary servicer of prime residential mortgage loans and SQ4 as a subprime servicer of residential mortgage loans. While Nationstar does not have a formal servicer quality assessment, the agency has evaluated its ability to service this type of collateral and considers its overall servicing to be adequate.

Moody's view is based primarily on its opinion that the affected transactions are not materially sensitive to potential changes in servicing strategy that may occur after the transfer. The agency also relied on the representation by Nationstar that it will, for a period of 24 months, defer the recovery of certain outstanding advances that have been made to the affected RMBS trusts if recovering those advances would cause the trust to default on its obligations to make monthly net swap payments or interest distributions to holders of investment grade bonds.

RMBS

Pelican calls anticipated

The likelihood of the Pelican 2 and 3 transactions being called has jumped, following Caixa Economica Montepio Geral's recent tender offer. The bank offered to purchase up to €300m across 10 Portuguese RMBS bonds and one bank capital security via an unmodified Dutch auction.

In total, it repurchased €144.4m of RMBS bonds and €41.3m of the bank capital security. Of the RMBS bonds offered for tender, two saw no repurchases (PELIC 1 B and PELIC 1 C) and two (PELIC 3 B and PELIC 3 D) saw almost their entire amount outstanding repurchased, according to ABS analysts at Barclays Capital.

"Given that Caixa Economica Montepio Geral now hold much of the Pelican 3 transaction, we expect that this deal may well be called and sooner than its May 2016 call date, if it chooses to restructure the transaction. The same may well apply to Pelican 2, given the levels of repurchases, and in this transaction no noteholder meeting would need to be called because the transaction is already past its September 2010 call date," they note.

The bank states in the tender offer results announcement that it intends to retain the notes until maturity, although it may elect to dispose of some or all of the notes, or cancel them.

RMBS

Single agency disagreements highlighted

The ASF has released a white paper on the single securitisation platform proposal outlined by the FHFA in its Strategic Plan (SCI 22 May, 2012). The paper outlines ASF members' views on a single agency security, which is potentially the first step toward the FHFA's longer-term single platform goal.

Securitisation strategists at Barclays Capital comment that the white paper indicates that there is still a lot of work to be done before a single TBA market can be launched. "The GSEs are already making progress on some of the proposals, including the new pooling and servicing agreement and revised disclosure and reporting guidelines. However, there is much work to be completed on uniform servicing standards," they note.

The key hurdle to a single security is likely to arise from the differences between investors and originators on g-fee pricing and perceived credit exposure to each GSE, suggest the strategists. Additionally, it is also unclear whether either GSE would prefer to use the pooling and delivery infrastructure of the other.

"Overall, it is also clear that the launch of a single security is likely to be a long drawn affair. As such, it should have minimal pricing implications for the GLD/FN swap," they add.