News Analysis
Risk Management
Testing time
The sophistication of ABS pricing and valuation vendors and end-users alike has grown significantly in recent years. Corinne Smith tracks the industry's progress
The securitisation market's understanding of fair value has improved dramatically since the financial crisis, driven by increased transparency and ever-more sophisticated vendor solutions. However, progress still needs to be made in some areas, including standardisation of reporting and availability of loan-level data.
The ABS market generally has become more diversified since the financial crisis, according to Anthony Belcher, director EMEA valuations at Interactive Data. "It's no longer the case that everything is rated triple-A and priced at 20bp-30bp over," he notes. "Now there is more focus on understanding the structure and the issuer of a deal, rather than simply relying on country, sector and rating."
Consequently, pricing and analytics vendors are required to be very sophisticated and invest significantly in creating flexible, granular tools to stress deals across a number of different dimensions. Given that standard models aren't appropriate for ABS, experienced evaluators are also integral to a pricing service because they know what to look for in terms of changes across the market.
"It's necessary to understand what's going on in each deal and the underlying assets. While there may be some similarities within master trusts, for instance, each transaction has its own unique characteristics," Belcher says.
Taking Markit's approach as an example, the firm operates different valuations business models in the US and Europe. In Europe it is a contributed service based on prices provided by market-makers, but in the US an evaluated methodology is used. The European service began in 2005 with 10 market-makers, but now 22 market-makers are contributing prices.
The way that European ABS has been marked and priced has changed over the life of the service, according to Philippe Pagnotta, director structured finance at Markit. "We used to be challenged for differences of 1-2bp between the mark and traded price, but now we're challenged for differences of 5-10 cents," he explains.
He adds: "This is one area where we've adapted to market demand, which was to have the ability to challenge prices. It's especially critical when looking at distressed assets."
The reason for using an assumptions-based model in the US is that although Markit receives pricing information contributed by dealers, it isn't enough to cover the universe of ABS in that market. "The US market is much larger and more illiquid than in Europe. For example, there are approximately 75,000 unique non-agency RMBS CUSIPS and there is no way that dealers could provide that many prices, so we use a sample of the universe to extrapolate appropriate yields," says Matthew Fiordaliso, vp at Markit.
He continues: "But there are so many moving parts. It would be helpful to have greater standardisation around reporting of prepayments and so on, to make the identification of comparable data more straightforward."
These days information is generally more readily available to incorporate into valuation frameworks, driven by issuers either providing data directly to investors or via mandatory disclosure programmes. But Luis Amador, senior director, valuations & advisory at Moody's Analytics, agrees that improvements to the format of this information could still be made and suggests that TRACE may have an impact in this regard in the US.
"As TRACE begins disseminating more ABS data, it will be interesting to see the affect on pricing and how participants' views on valuations change. The industry may have a lot more information these days, but you still need to know what to do with it. While the fact that the securities don't trade very often is challenging, seasoned players can be expected not to overreact to the availability of this data," he explains.
Kevin McCarthy, md at Intex, also notes that challenges still exist for the more private sectors, such as CLOs. "They're private placements, so it's difficult to address this issue. CLO managers are willing to support existing investors in a deal, but unwilling to disclose information more broadly, which hinders the secondary market," he says.
Belcher points to the ECB/Bank of England loan-level data requirements and AFME's reporting template as positive first steps with respect to granularity of the underlying data and standardisation of reporting in Europe. Moreover, MiFID 2 is expected to drive the availability of securitised trade data in the region - albeit the rules still have to be finalised.
Fair value
When coming up with a valuation, it is necessary to analyse liquidity and market risk, as well as the credit component of a security. Improvements in measuring all three of these factors have also been made since the crisis, Amador observes.
He says: "Participants have historically had difficulty using waterfall, credit and macroeconomic forecasting models, so some work has been done to bring them all together."
Indeed, the market appears to be better educated now on the difference between price and value. Peter Jones, senior director at S&P Capital IQ, explains that a valuation takes into account all the component parts of a security's value, such as interest rates, collateral performance and cashflows - in other words, much more information is considered than simply where it trades today.
"A good example is a prime securitisation with high quality underlying collateral that is still performing, but has been marked down in a fire sale. The bond's inherent value will remain high because it will still receive its cashflows over time based on the high performing collateral, but the price is based on where it's trading today and not its long-term performance and present value," Jones says.
While the foundation of the investment community is built on analysis of price versus value, the concept of fair value and mark-to-market typically used within accounting practices and fund accounting has become the norm. "Market participants have probably always understood fair value, but the issue was whether they wanted to embrace it. But now - because of accounting rules - they have to disclose prices at fair value, which is driving usage of it," Belcher explains.
He continues: "The argument is ongoing about whether if someone is holding a position to maturity, they should be reporting its fair value, because it arguably creates additional volatility. IFRS 9 is yet to be finalised: the industry is still going back and forth about whether to use fair value or account for exposures at amortised cost."
Fiordaliso believes that the market's understanding of fair value has improved since the crisis. "During the crisis players had various outlooks, which contributed to different loss expectations. Now that bid-offers have come in, it helps to create a better understanding about what the price is. The more bids there are, the greater the understanding of fair value."
Market colour
Equally, market colour has always been an important part of the valuation process, but a degree of sophistication has developed around how to interpret it. "Only new issue triple-A bonds trade at par. The rest trade at a discount, irrespective of credit quality, so colour is important," confirms Pagnotta.
He adds: "But it's challenging to track all of the different BWICs coming to the market, especially given that not all bonds on the lists trade. Also, there are a significant number of tender offers being announced at the moment, so players need to be able to keep track of any unexpected market movements."
Alongside the demand for increased colour is the desire to understand the context of a price. Fiordaliso says: "Given the emphasis on transparency, we provide clients with all of the assumptions used when deriving a price. This then allows auditors and others involved in performing or checking valuations to tie out or test our calculations independently."
But providing supporting material alongside valuations isn't a straightforward process and involves a higher spend in terms of collecting and redistributing information. Moody's Analytics, for one, is working on an advanced comparability tool to enable users to dig deeper into the factors that differentiate two similar securities.
Jacob Grotta, md, structured products at Moody's Analytics, says that his firm also actively tries to help clients understand the impact of the economy on a security, given that there are so many macro factors to consider at present. He adds: "Regulatory and good business practice requirements mean that firms need to look further out than where they're trading today, so it is especially useful to identify a future trading range."
With this in mind, Intex has developed IntexCalc to facilitate transparency and allow users to identify historical trends and extrapolate forecasts. "Pre-crisis users applied standard prepayment assumptions, but now there is greater scrutiny of waterfalls, for example. Forecasts have evolved and are more forward-looking over longer time horizons; for example, stressing Greek redenomination risk. The level of investor sophistication has increased dramatically: the questions we used to get from arrangers are now being asked by investors," McCarthy notes.
He adds that participants are also increasingly running stress scenarios much earlier in the process of buying a transaction, typically prior to the REDs. "Investors are demanding models to stress collateral and gauge risk, and providing input back to the arrangers on areas of a new issue that they can potentially tweak. There is more interaction prior to the pricing of a transaction these days."
Valuation risk
Indeed, demand is rising for pre-trade valuations for the front office, especially among buy-side clients, as well as post-trade valuations for best execution purposes. Information is also increasingly being reported up into senior management to help them understand the organisation's valuation risk.
"The industry has recognised that there was overreliance on broker or counterparty pricing and so participants are building independent approaches between front office and back office. But this is difficult to establish without the necessary skill-sets and information and tools," Jones notes.
He continues: "Many firms are looking for more transparency and assumptive data, such as the number of trades or quotes on a security, the spread, prepayment speeds, loss severity or underlying benchmark that has gone into the valuation. The challenge for many institutions now moves to how to use that information in a meaningful way and building tools to enable meaningful comparison of multiple sources. It's challenging to process effectively all of the different information."
S&P Capital IQ, for one, is enhancing its assumptive, trade and transparency data as well as its asset class coverage from cash fixed income into credit derivatives. "There are niche participants in this sector, but the industry is looking for larger players to consolidate with these providers. S&P CIQ recently acquired CMA and R-Squared analytics and is bringing together valuation and pricing for fixed income cash and credit and combining this content with analytic capabilities," Jones notes.
He continues: "Valuation risk is an overarching theme from hedging for CVA to accounting for fund NAV. Institutions with credit strategies involving both derivatives and cash exposures need consistent data, pricing and analytics."
Intex is also in the process of expanding its asset class and jurisdiction coverage, in particular for esoteric ABS and covered bonds. "We're flexible enough to leverage our systems to achieve this, while bearing in mind that each asset class has its own characteristics to cater for and every jurisdiction has a different legal system," observes McCarthy.
Looking ahead, Fiordaliso anticipates that demand for independent third-party valuation services could rise, together with requirements for more sources to test the veracity of a price. He suggests that the industry will move away from relying solely on dealers for prices, with dealers also potentially becoming unwilling to provide prices due to liability concerns. At the same time, regulatory and auditory pressure is growing for clients to understand the inputs being used in valuation models.
In terms of how smaller investors are coping with increased reporting requirements, meanwhile, Belcher observes that they are generally moving away from investing in assets they don't understand or don't have the infrastructure to deal with effectively. "It's clear that in the current environment investors need to be more sophisticated before entering an ABS position," he concludes.
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Award winner revealed
Intex has won SCI's inaugural Pricing, Valuation and Risk Management Award. The results from SCI's survey to gauge customer satisfaction with structured finance vendors rank Intex as the best global service provider in 2012, followed by Moody's Analytics and S&P Capital IQ in joint second place.
The survey attracted 116 individual rankings across 75 questions from 36 respondents, ranging from advisors and broker-dealers to investors and issuers. They rated 17 vendors on client service, services, pricing and valuations, analytics, risk management, illiquid assets, regulation, ability to add value, reporting and value. Seven vendors (41%) received 91 (78%) responses between them.
Intex performed strongly across the board, receiving particular recognition in the pricing and valuations category. Moody's Analytics scored best overall for client service and S&P Capital IQ scored best in the risk management category. Bloomberg BVAL, although ranked fourth overall, was rated best for analytics. |
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News
Structured Finance
SCI Start the Week - 9 July
A look at the major activity in structured finance over the past seven days
Pipeline
Two transactions remained in the pipeline at the end of last week. The €226.4m Atlantes Finance No. 5 is a Portuguese consumer loan ABS and the €1.88bn FTA Pymes Santander 3 is a Spanish SME CLO.
Pricings
A quiet new issue market saw only three deals pricing last week. The prints consisted of an Australian non-conforming RMBS (A$300m Liberty Series 2012-1 Trust), a UK credit card ABS (£1.59bn Arran Cards Funding series 2012-2) and a French auto loan ABS (€631m Red & Black Auto France 2012).
Markets
US CMBS spreads remained largely flat last week, report Citi securitised products analysts. BWIC volumes for the last five days reached just over US$500m, compared to the weekly average of around US$1.3bn.
Generic 2007 duper spreads stand at 210bp over swaps, with GG10 dupers at 245bp. The analysts note that 2005 and 2006 vintage dupers backed by cleaner collateral are currently very tight, with LBUBS 2006-C1 A4s recently covered at 96bp over swaps. Additionally, the analysts note that the market has seen "a limited amount of trading in lower dollar price bonds as investors try to get hold of the next class in the stack to take control".
There was a noticeable agency/non-agency split within US RMBS, with the agency space seeing most of the action, according to Barclays Capital securitised products analysts. Treasury yields remained range-bound, with rates rallying off weak domestic data.
The analysts note that "agency MBS outperformed strongly over the short week, led by the lower coupons, as FN 3.5s and 4s ended the week up 8-9 ticks versus the swap curve", while lower coupon 15-year RMBS outperformed duration hedges by 3-6 ticks. Non-agency prices remained flat.
The European ABS market was quiet, largely due to the US holiday, say Deutsche Bank analysts. BWIC activity dropped from its €460m average to just €77m for the week, with only one primary issuance (Auto ABS RNBAF 2012-1) pricing in the market. They also point to mixed tender results, with BCP and BBVA both experiencing lacklustre take-up, but positive results for the UK Asset Resolution tender, including £466m of GRANM bonds.
Deal news
• Bradford & Bingley and Northern Rock Asset Management have disclosed the results for their tender offers on Aire Valley, Granite and Whinstone subordinate bonds. UK Asset Resolution accepted bonds equivalent to an outstanding nominal value of £534m, out of the approximately £1.19bn tenders received, for a total cost of around £400m.
• The New York Appellate Division has 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.
• Auction.com has released property-level details for three auctions scheduled for this month. They include an estimated US$814m of CMBS exposures, across 131 loans.
• Santander has 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.
• 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%.
• Three of the seven Invesco Asset Management CLOs being acquired by 3i Debt Management Investments 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.
• J Sainsbury, the borrower behind the Longstone Finance CMBS, has withdrawn without prepayment three properties from the portfolio. The properties represent 6.5% of the deal's total investment value and 8.5% of the total gross store area.
• Deutsche Bank has offered to buy back the Nexus4 Topaz Notes for 85.10. The price is said to be somewhat surprising, given the note traded in the high-70s to 80 immediately before the announcement last month.
Regulatory update
• The ASF has released a white paper on the single securitisation platform proposal outlined by the FHFA in its Strategic Plan. 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.
• The Irish government has published its draft Personal Insolvency Bill. The bill proposes to reform the existing bankruptcy regime and introduce three formalised non-judicial negotiated debt arrangements.
• Current proposals to reform pricing practices in the fixed income market are expected to 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, MiFID 2 may have a material negative impact on the region's real economy.
• The European Commission has adopted a delegated act, setting out the technical rules needed to ensure the uniform application and enforcement of the Short Selling Regulation. In particular, the delegated act specifies the cases in which sovereign credit default swaps are considered covered and therefore not banned in accordance with the regulation.
Deals added to the SCI database last week:
Bavarian Sky 3; Dolphin Master Issuer series 2012-1; Dutch Mortgage Portfolio Loans X; FCT Ginkgo Sales Finance 2012-1; Flagship Credit Auto Trust 2012-1; Gosforth Funding 2012-1; IBL CQS series 2012-1; JPMCC 2012-CIBX; Marche M5; RESIMAC Premier series 2012-1; and Santander Drive Auto Receivables Trust 2012-4.
Deals added to the SCI CMBS Loan Events database last week:
BSCMS 2006-PW12; CGCMT 2007-C6; CSMC 2006-C1; CSMC 2007-C1; DECO 2007-C4; DECO 2007-E2; DECO 2007-E5; ECLIP 2005-2; ECLIP 2006-1; ECLIP 2007-1; EMC VI; EURO 24; JPMC 2007-FL1; Longstone Finance; OPERA SCOT; REC 3; TITN 2006-2; TITN 2006-3; TITN 2007-2; TITN 2007-CT1; TMAN 3; TMAN 5; TMAN 6; TMAN 7; UBS 2007-FL1; WINDM VIII; WINDM XI; WINDM XII; and WINDM XIV.
Top stories to come in SCI:
Pricing and valuations survey
Brevan Howard Credit Catalysts profile
News
CDS
Equity tranche trades recommended
Short-dated equity tranches have emerged as a popular way of locking in strong credit fundamentals while limiting uncertain macro risks. However, due to persistent curve steepening, trades with similar in-the-money risk profiles but longer maturities also appear attractive.
Credit derivative strategists at Morgan Stanley note that the Markit iTraxx S9 June 2013 0%-3% tranche - which yields over 60% for a one-year trade - is a good example of a short-dated equity tranche trade. "These opportunities exist because, in reaction to volatility and binary tail risks, credit spreads overcompensate for default risks," they explain. "The equity tranche trades are a good way to monetise this risk premium and lean against the default risk, especially in the context of conservative corporate balance sheets."
However, the Morgan Stanley strategists suggest that given persistent curve steepening, it is tempting to stretch the short-dated equity theme a bit further out to trades with similar in-the-money risk profiles. They note, for example, that the iTraxx S9 10-year (June 2018) index is now priced for a 18% default rate and CDX IG9 10-year (December 2017) for a 8% default rate.
The 3%-6% and 3%-7% tranches are highlighted as one way of implementing such a long-term credit fundamental view, as "the added subordination is superior to owning select single name hedges and the time decay of such 'equity with subordination' type risk is quite attractive if the current credit environment continues".
In particular, the strategists recommend the iTraxx S9 10-year (June 2018) 3%-6% and IG9 10-year (December 2017) 3%-7% tranches as long low dollar price opportunities. "These bonds trade in the 40-50c range and have a yield of 13%-16%. Thus, if the target yield is 10%, an investor can afford to spend about 10-15c to buy macro hedges and minimise the MTM volatility."
An unhedged position in the five-year CDX HY15 15%-25% tranche is also recommended. This tranche has over 12% remaining subordination for under four years of risk, yet trades at over 1.5x the underlying index.
CS
News
CLOs
Volatility 'top concern' for CLO investors
Spread volatility has emerged as the top concern for respondents to JPMorgan's latest CLO client survey, which CDO strategists at the bank say is to be expected, given the pick-up in macro volatility. Regulatory reform dropped from this spot in prior surveys to third place, perhaps due to 'regulatory fatigue'.
The second most-cited concern was collateral defaults/distress - although if the responses are restricted only to investors, this spot is taken by CLO extensions. Finally, the 'other concern' category solely comprised the European debt crisis.
Meanwhile, the distribution of cash across the combined pool of investor and investor/manager respondents appears broadly unchanged from the prior survey taken at the end of Q1. The JPMorgan strategists note that a small drop in 'moderate' cash levels has been neutralised by an equal increase in 'high' cash levels. "It's impossible to guess when investors will deploy their cash, but the results suggest there is ample dry powder," they explain.
Appetite is broadly balanced across the CLO capital structure and between primary and secondary paper, although there is a slight bias towards adding mezzanine/subordinate positions. The ratio of buyers to sellers declined slightly to 7.9x from 8.5x in the previous survey. "When considered with the cash position results, this suggests CLO market technicals will strengthen, with more buyers than sellers - at least in our survey pool," the strategists continue.
In terms of what respondents believe is an appropriate primary US CLO triple-A spread, 125bp over Libor remains the most common overall expectation. However, if this is restricted to investors alone, the results for 125bp over are about equal with 150bp over.
The strategists observe that the tail out to wider spread expectations has consequently grown since the Q1 survey. This makes sense given recent pricings, with triple-A levels widening by about 20bp since May.
Similar to the last survey, respondents believe an appropriate primary US CLO equity return is 15%, suggesting that equity investors' return hurdles have been relatively sticky over the past few months.
CS
News
CMBS
Mixed maturity outcomes anticipated
European asset-backed analysts at RBS estimate that 31 European CMBS loans are due to mature this month, representing about €4.3bn of collateral. Given the discounted prices at which most bonds are trading, there is considerable value to be extracted by identifying loans that are likely to pay off, they note.
About €2.9bn of the loans coming due is euro-denominated, while the remainder are sterling-denominated backed by UK properties. This distribution is largely consistent with the pattern of outstanding loans, as is the distribution by property types, according to the RBS analysts.
Of the loans maturing this month, a number of different outcomes are expected. The Opera Finance (Scottish Retail) and Titan Europe 2006-4FS transactions are anticipated to be resolved successfully, with the loan being paid in full and the notes redeemed in the former and Terra Firma's purchase of Four Seasons likely to result in a full pay-down of the debt in the latter (SCI 30 April).
Signs of a thaw in connection with the Coeur Defense loan securitised in Windermere XII have also emerged, with a vote last week approving formal noteholder representation in the French safeguard case (SCI passim). Equally, an 80% LTV for the €186m Leibzig loan securitised in Infinity Soprano suggests that a refinancing is possible but not a certainty, the analysts observe.
At the other end of the spectrum are the loans securitised in Titan 2006-2, all of which have been extended. In particular, the Margaux loan reaches its extended maturity date this month, but with no apparent signs of resolution.
The analysts point out that the outcome of the loans maturing this month will be influenced by several factors. Many of them have relatively high LTV ratios and will have trouble finding new financing. However, all but a handful have significant equity remaining, providing borrowers with an incentive to find alternatives.
The number of non-performing loans - in other words, with DSCRs below 1x - is small. Indeed, only the German Retail (securitised in Titan 2007-CT1) and Mangusta (Titan 2006-1) loans are clearly in this category.
CS
News
CMBS
GRAND proposal wins support
GRAND CMBS bonds reacted positively in the secondary market to the proposed restructuring terms (SCI 10 July), with class A spreads moving from the low- to mid-90s to above 97 and junior tranches rallying by more than 20 points. If accepted, the refinancing is expected to lead to a 're-rating' of the transaction, with further significant price appreciation possible.
Deutsche Annington's proposal appears to have had a universally warm reception, with many suggesting that it offers more than the market had been expecting. Deutsche Bank ABS analysts, for example, describe it as "win-win": the de-levering, repayment schedule and note step-up being a 'win' for noteholders, while the refinancing is a 'win' for DAIG because it paves the way for an IPO.
Structurally, the proposed refinancing appears to address the market's major concerns. In particular, the 60% LTV is expected to attract Pfandbrief financing. DAIG has already refinanced two of its other smaller CMBS portfolios with Pfandbriefbanks.
At 60% LTV, the Deutsche Bank analysts believe that GRAND will be comparable to best-in-quality European CMBS and expect it to migrate over time to price at least as such. "In general we think the seniors are fair price relative to other CMBS, but still offer upside should the German multifamily sector migrate to pricing like UK RMBS plus a small premium for the balloon risk. The subs, despite a dramatic re-rating price-wise today, look cheap to us on any measure. In particular, the most junior F tranche looks cheap compared to benchmark CMBS - with comparable bonds (such as DECO 2011 CSPK) suggesting the potential for another 10 points of price appreciation."
Further, they suggest that in the medium term it there is no reason for the German multifamily CMBS sector to price significantly wider to UK prime RMBS, given that both products offer a play on sovereign systemic risk via a housing market-related debt product. While the added balloon risk inherent in German multifamily versus UK prime will command an added risk premium, at low LTVs this shouldn't be significant.
The analysts conclude that the strong price appreciation post-announcement should give comfort that the required threshold for approval - 75% of all noteholders and a majority of individual noteholders - can be achieved.
CS
News
RMBS
Eminent domain initiative slammed
San Bernardino County - along with two other cities in the area - has formed a joint powers authority, which wouldn't need permission from the respective city councils to use eminent domain rights to seize ownership of underwater mortgages unless public money is needed. ABS analysts at Barclays Capital suggest that a possible next step for the authority is to be funded by private investors, using the cash to buy current loans that are underwater at a 'fair price'. The borrower would then be refinanced into a new private or an FHA mortgage.
For the investors funding this programme to make money, this implies that the 'fair price' must be at a discount to the property's value, the Barcap analysts note. "With this discount, the price paid for the loan is likely to be much lower than the value of the lifetime cashflows expected to be paid on such a current loan. So, this programme - if implemented - is likely to be a transfer of wealth from existing investors in these loans to the city governments and the newer investors led by venture-capital firms, such as Mortgage Resolution Partners. Based on our limited understanding, it appears to us that the effect will be very similar to doing a FHA short refi with current investors taking a slightly higher loss and the difference going to the city governments and the new investors."
However, there are a number of challenges to overcome, not least the legal issue of whether eminent domain can be used to seize financial assets in this fashion - especially if the primary beneficiaries are private investors at the expense of existing investors, which include pension funds and mutual funds. Next, the plan appears to be exclusively targeted at mortgages in MBS that are not backed by the GSEs/GNMA, which the analysts say account for less than 10% of all mortgages in the country.
"The use of eminent domain requires the counties to show that the property seizure is for public use. If the programme targets less than 10% of all mortgages, it would be hard to justify this as being for public use," they observe.
Finally, new mortgage origination is likely to suffer, with new mortgagees bearing the costs of such a programme. Given that it effectively subordinates a first-lien mortgage to the local government, private lenders are likely to demand compensation in the form of higher interest rates and higher down payment requirements.
This, in turn, could increase the burden on the taxpayer as more mortgages will have to be backed by the GSEs/FHA. "In an environment where Congress is calling for efforts to revive private lending and to wean the mortgage market off of taxpayer assistance, such a move would be highly short-sighted and counter-productive, in our view," the analysts conclude.
CS
Provider Profile
CMBS
High-touch provider
Greg Winchester, md at TriMont Real Estate Advisors, answers SCI's questions
Q: How and when did TriMont Real Estate Advisors become involved in the CMBS market?
A: The company began in 1988 as Hatfield Philips, focusing on special servicing predominantly related to the thrift crisis in the US. We'd become the largest Resolution Trust Corporation contractor in the Southeast by the early 1990s. We then developed a large primary servicer and asset management business, with Lehman Brothers as the principal client.
In 2003 my colleagues John Charles and Ernest Davis and I purchased the North American operations of the business and renamed the company TriMont Real Estate Advisors. We've since transformed it into a multi-client company and are now involved with over 90 clients, which tend to be major global banks, insurance firms, private equity funds, real estate investment managers and government-related entities.
The company provides a variety of services, but our core competencies are special servicing, primary servicing, asset management, underwriting and due diligence services, and information management and reporting services. We also provide defeasance services, as well as operating advisory in the public finance, military housing and CMBS sectors.
We're headquartered in Atlanta, but have offices in Irvine, California, New York and the Netherlands. Our coverage extends to the rest of Europe and the UK, as well as Canada, Mexico and the Caribbean.
Q: How do you differentiate yourself from your competitors?
A: TriMont differentiates itself by providing a servicing and asset management platform, yet we think like an investor. We're a high-touch provider of customised services and solutions for complex deals.
The company is also the only true major independent special servicer in the CMBS industry. We're privately owned and don't invest in B-pieces or originate loans, so there is no competition with clients and we're more aligned with bondholders' interests. This absence of conflict will only increase in value to investors over time.
We're rated as a primary servicer, a special servicer and a construction servicer. Our experience in repositioning deals and construction loans is unique.
In addition, none of our peers can handle large, syndicated club deals for agent banks. The Plaza Hotel in New York is one example where we worked with a consortium of 12 lenders to convert the property into a mixed-use portfolio.
Other differentiators include our roots in special servicing, which go back almost 25 years, and the long tenure of senior management. The company has resolved over US$10bn of distressed debt in the last 10 years and has sold over US$4bn in REO.
Finally, we pride ourselves on our leading-edge technology. We provide custom-built portals for clients to access our property database and state-of-the-art reporting on their entire portfolio.
Q: What are your key areas of focus today?
A: TriMont has been involved with 49 CMBS transactions - representing US$54bn across 3700 assets - as a primary servicer, special servicer or operating advisor. The next 3-5 years in North America will be good for special servicers, especially in connection with small balance loans and REO properties, which banks are expected to increasingly begin shedding.
There is also a substantial opportunity to assist new CRE lenders and investors, helping them to get up and running quicker at a variable cost and based on best practices. They could be acquirers of pools of performing, non-performing or REO assets, or a mixture of all three.
The company has so far been mandated by 20 different European financial institutions, for example, to service their commercial real estate debt. UK and Irish banks, in particular, have been unloading their non-core portfolios. These are typically good-earning assets and were able to sell at a decent price, so the loss severities weren't as bad as those seen for Spanish assets say.
I expect a gradual, orderly increase in the number of European institutions unloading European assets this year and next. Whereas there were three major transactions last year, we'll probably see six this year and possibly more in 2013.
Another area of opportunity is construction in the US, for well-conceived projects. Lending remains highly selective: there is plenty of available credit, but not enough of the right projects to invest in.
Q: What major development do you need/expect from the market in the future?
A: The special servicing industry has improved over the last 24 months. Many servicers weren't adequately staffed, but they are now fully ramped up. While lack of experience may have been an issue initially, the volume of loans in special servicing has been so intense that the necessary skills were gained quickly.
Nevertheless, increased reporting and transparency around special servicer fees would be helpful for investors. PSA language could also be improved. 'Double-dipping' of special servicing fees, affiliate transactions and fair value market purchase options are legacy issues mostly confined to the three major special servicers, which need to be addressed.
Another positive development would be for more B-piece buyers to consider using independent special servicers and thus distance themselves from conflicts of interest. Some B-piece buyers aren't rated as special servicers, for example. In addition, independent special servicers who are not master servicers with competing origination platforms should be considered.
In terms of the CMBS new issue market, there needs to be better adoption of reform. GSE issuance is helping to clarify standards and the roll-out of CMBS 2.0 has made a significant difference. Smaller, simpler structures and stronger underwriting are huge pluses for the sector.
Underwriting excellence should be pursued and recognised. I'm not sure if changes related to the selection of rating agencies are sufficient and should continue to be discussed by the industry.
Ultimately, the market has and will continue to diverge into CMBS 2.0 and legacy trades. We're already seeing differentiation in terms of how the market views the credit quality of these two types of bonds.
CS
Job Swaps
Structured Finance
Modelling pro founds credit advisory
Thomas Aubrey, who previously ran Fitch Solutions, has founded Credit Capital Advisory. The firm was established to act as a channel for credit professionals that believe a new approach to credit modelling is required if credit risk management is to be improved and capital is to be preserved.
Prior to joining Fitch in 2007, Aubrey managed the Datastream, economics and fixed income business lines at Thomson Financial. He joined Thomson Financial in 2003 from FT Interactive Data, where he was financial markets group director.
Job Swaps
Structured Finance
UK, Italy SF specialist appointed
Ugo Giordano has joined Paul Hastings as partner. He is based in London and will focus on UK and Italian structured finance and securitisation transactions.
Giordano joins from Ashurst. He brings experience across capital markets, securitisation, structured products, leveraged and acquisition finance and securities regulation.
Job Swaps
Structured Finance
Lehman vet joins boutique
Glenn Kim has joined Moelis & Company in London as md. He will work across the firm's advisory businesses serving European sovereign and government sector clients and financial institutions.
Kim joins from Bundesrepublik Deutschland Finanzagentur, where he was a senior advisor on European Financial Stability Facility-related activities. Before that he spent more than 20 years at Lehman Brothers in a variety of roles, including as head of the counterparty team at Lehman Brothers International (Europe), where he led senior client negotiations for the unwinding of large estate assets and liabilities, including derivative portfolios, financing agreements and return of custody assets.
Job Swaps
CMBS
UK CRE partnership formed
Cornerstone Real Estate Advisers has appointed Laxfield Capital to originate and manage loans on its behalf in the UK. The agreement is part of Cornerstone's strategy to expand into the European CRE space.
Laxfield will help Cornerstone source, structure and manage property-secured senior loans, with an initial target lot size between £25m and £75m. Cornerstone will offer a fixed rate product with maturities ranging from seven years to 20 years.
News Round-up
ABS
Turkish transactions hit
Moody's has downgraded the ratings of 31 tranches in four Turkish future receivables transactions, while upgrading eight tranches in one transaction and confirming the ratings of 18 tranches in another three. At the same time, the agency has taken action on the underlying ratings of 30 tranches wrapped by financial guarantors in seven transactions. The ratings of nine tranches remain on review for downgrade.
The rating actions follow Moody's 3 July rating actions on the local-currency deposit ratings of several Turkish banks - including Akbank, Denizbank, Turkiye Garanti Bankasi, Turkiye Is Bankasi, Turkiye Vakiflar Bankasi and Yapi ve Kredi Bankasi - which are the originators of the eight affected transactions. The rating action on the local-currency deposit ratings of Turkish banks primarily reflects the combination of the agency's revised assessment of the linkage between the credit profiles of sovereigns and financial institutions globally and improved Turkish sovereign's creditworthiness. Under Moody's rating methodology and in the absence of any transaction-specific concerns, the rating assigned to a future receivables transaction is linked to the local-currency deposit rating of the originator.
The tranches benefiting from a financial guarantee provided by Assured Guaranty remain on review for downgrade, pending the results of the review on the guarantors' ratings.
News Round-up
Structured Finance
ED private placement completed
European DataWarehouse (ED) has successfully completed a private placement with 15 key investors, consisting largely of global banks and institutions. The placement was coordinated by Perella Weinberg Partners.
Proceeds from the placement will be used to finalise the build-out of ED, as well as to provide the business with ongoing working capital. Completion of the platform, which will include an extensive testing and system integration before the ECB loan-level data requirements become binding, is envisaged towards the end of 4Q12.
Fernando González, chairman of the ECB Technical Working Group on the ABS loan-level initiative and head of the risk strategy section at the ECB, comments: "ED is a cornerstone for the restoration of confidence in the ABS market. It will bring to fruition a central European repository and data handling infrastructure created for the market by the market. The Eurosystem has supported the creation of a single data-handling infrastructure from an early stage and plans to negotiate terms of use of ABS loan-level data."
ED is planning several workshops to help issuers, investors and data providers interfacing with its systems. The reporting process will start with RMBS transactions and will then be extended to CMBS and SME securities shortly after. Auto loan, consumer finance and leasing ABS transactions for inclusion in the Eurosystem collateral framework will also be subject to ED's validation processes in due course.
ED's governance structure currently envisages a supervisory board and a pricing committee, with the participation of the ECB and national central bank senior representatives as active observers. Its head office will be in Frankfurt.
News Round-up
Structured Finance
Loan-level data implementation scheduled
The ECB has released a timeframe for the implementation of loan-level data reporting for ABS. Provision of loan-by-loan information for RMBS will be mandatory as of 1 December 2012, with SME ABS and CMBS reporting to be implemented by 1 January 2013 and consumer finance, leasing and auto loan ABS reporting by 1 January 2014.
Loan-level data is to be provided based on the templates available on the ECB's website, at least on a quarterly basis. A nine-month phasing-in period applies for each asset class. Where loan-level data are incomplete on that date, they must gradually be completed in the course of that transitional period.
To monitor compliance with the loan-level template requirements and to check the timeliness, consistency and level of completeness of loan-level data, the single loan-level data repository will automatically check ABS for which loan-level data are submitted and assign them a score. This score will strictly reflect the specific requirements set out in the provisions governing the Eurosystem's collateral framework.
To enable effective reporting of loan-level data, the cashflow-generating assets backing an ABS must all belong to the same asset class. ABS that are unable to comply with the loan-level data reporting requirements because they consist of mixed pools of heterogeneous underlying assets or do not conform to any of the loan-level templates will remain eligible until 31 March 2014.
News Round-up
Structured Finance
ML3 auctions announced
The New York Fed has announced four more asset sales from the Maiden Lane III vehicle, with bids due by 12 July.
The first auction comprises three CDO tranches worth US$34.5m. Barclays Capital, Citi, Credit Suisse, Goldman Sachs, Guggenheim Securities, JPMorgan, Bank of America Merrill Lynch, Morgan Stanley, Nomura and RBS Securities have been invited to bid for the collateral.
The second auction comprises CMBS and CRE CDO collateral across eight tranches, for a combined total of US$38.28m. Barclays Capital, Citi, Credit Suisse, Goldman Sachs, JPMorgan, BAML, Morgan Stanley, Nomura and RBS are joined by Deutsche Bank and Jefferies as bidders in this sale.
The third auction consists of 60 non-agency RMBS tranches totalling US$263.51m. Barclays Capital, Citi, Credit Suisse, Goldman Sachs, Jefferies, JPMorgan, BAML, Morgan Stanley, Nomura and RBS will be joined by Amherst Security Group to bid in this sale.
The final auction involves further non-agency RMBS collateral: 110 tranches representing US$491.8m. Bidders are Barclays Capital, Citi, Credit Suisse, Goldman Sachs, JPMorgan, Merrill Lynch, Morgan Stanley, Nomura and RBS.
News Round-up
Structured Finance
Dodd-Frank provisions reviewed
SIFMA public policy and advocacy evp Kenneth Bentsen yesterday testified before the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises regarding the impact of the Dodd-Frank Act. Specifically, he focused on the implementation of the Volcker Rule, credit risk retention, Title VII and Section 165(e) single counterparty credit limits.
"It is essential that US regulatory agencies, in proposing regulations, consider and analyse both the individual aspects and combined impact of proposed rules that may place US financial markets at an unwarranted competitive disadvantage compared to those countries that have not implemented a comparable approach," Bentsen stated. "We urge US regulators to consider and address the interplay among reforms in the context of considering individual reforms."
With respect to the credit risk retention proposal, Bentsen specifically focused on the premium capture cash reserve account provision, which would sharply reduce incentives for residential and commercial lenders to utilise securitisation as a source of funding for their activities. Both SIFMA's buy- and sell-side members are strongly concerned that the proposal presents a serious obstacle to structuring securitisations by taking away a legitimate source of funds to enable sponsors to recoup costs and generate a reasonable return. Further, it would likely discourage many securitisation transactions, unnecessarily change some lenders' origination practices and increase the cost of some consumer loans.
In connection with derivatives, SIFMA's concern focuses on ensuring that the Title VII requirements are workable and that the benefits - as measured by how well rules accomplish their stated purposes - outweigh the costs. Bentsen urged regulators to avoid unintended costs and market impacts by carefully sequencing and phasing in the implementation of rules by category, type of participant, asset class and products within asset classes.
He remarked on the lack of coordination among both domestic and international regulators on OTC derivatives rulemaking, noting that there is "scant evidence" that there will be harmonised rules for swaps and securities-based swaps, even though there are businesses in which the line between the two products is an arbitrary distinction. Bentsen also noted the lack of international coordination between the CFTC and foreign regulators after the CFTC issued cross-border guidance that will likely have a significant impact on the international derivatives market.
Meanwhile, SIFMA does not support Section 165(e) of the Dodd-Frank Act in its current form because the proposal would "needlessly reduce liquidity in the financial system and dampen economic activity". The proposal requires large banking organisations to use new methodologies for measuring credit exposures that ignore their current approved internal methodologies.
"The new method is a crude measure that overstates exposures under any reasonable calculation methodology by a significant multiple. The effect of the new methodology for measuring credit exposure will be a reduction in market liquidity that may have a significant effect on markets more broadly," SIFMA notes.
The industry has suggested that high quality non-US sovereigns, individuals and CCPs should be exempted, while netting, the use of the full value of collateral and double default protection should be allowed. A second alternative would be to allow firms to use a 'stressed' version of the internal models they currently use to measure counterparty risk. Third, the Federal Reserve could use a supervisory stress approach that would require a covered company to use a replacement cost, calculated in accordance with regulatory capital rules for derivative transactions under specific stress scenarios.
Finally, regarding the Volcker Rule, Bentsen outlined SIFMA's key conceptual concerns, which include: an artificial distinction between permitted activities and proprietary trading; negative presumptions and reliance on hard-coded criteria; a transaction-by-transaction approach; and an overly specific and prescriptive compliance regime. He then discussed SIFMA's suggestions for reorienting the proposal.
To foster customer-oriented business, the association believes the agencies' hard-coded criteria should be recast as guidance that helps banking entities to differentiate client-focused business from other business. The agencies' guidance should explicitly recognise that maintaining a customer focus not only requires a commitment to buy from and sell to customers, but also requires obtaining positions in anticipation of customer flow and trading in the interdealer market in order to validate liquidity, volatility and pricing.
News Round-up
CDO
ABS CDOs on the block
Dock Street Capital Management has been retained to act as liquidation agent for the Maxim High Grade CDO II and BFC Genesee CDO deals. The former will be auctioned off on 18 July, while two separate public sales will be held for the latter on 19 July.
News Round-up
CDO
CDO tender surprises to the upside
Deutsche Bank has offered to buy back the Nexus4 Topaz Notes for 85.10. A recent Structured Credit Research & Advisory client alert suggests that this price is somewhat surprising, given the note traded in the high-70s to 80 immediately before the announcement last month and was not far from fair value relative to other Deutsche Bank bonds.
Deutsche Bank's Nexus Bonds programme was established in 2002 and issued the first listed CDO on the Australian Stock Exchange. The programme comprised four CDO investment products - Nexus1, Nexus2, Nexus3 and Nexus4 Topaz - the first three of which have already matured.
The Nexus4 CDO features an investor redemption facility, whereby Deutsche Bank has the right to provide a once-only buy-back price three years prior to the note's maturity at a price of its choosing. Tendered notes are expected to be redeemed on 9 July.
Nexus4 stopped paying interest to investors in August 2009. The income factor used to calculate the interest payable on the notes was reduced from 6.4396 to zero, following the Thomson restructuring credit event, to which the deal was exposed.
News Round-up
CDS
'Naked short' ban progresses
The European Commission has adopted a delegated act, setting out the technical rules needed to ensure the uniform application and enforcement of the Short Selling Regulation. In particular, the delegated act specifies the cases in which sovereign credit default swaps are considered covered and therefore not banned in accordance with the regulation. Investors can demonstrate that the sovereign CDS contracts they have entered into are covered by demonstrating either a quantitative or a qualitative correlation between the hedged assets and liabilities and the sovereign CDS.
The act also details technical rules on: how to calculate the significant short positions that must be disclosed to regulators or the market; the thresholds for different financial instruments that can trigger a short-term suspension of short selling by regulators; the decline in liquidity that triggers the possibility for Member States to suspend restrictions on uncovered short sales of sovereign debt; and the criteria to be taken into account when determining what constitutes an adverse development or event. The Implementing Regulation shall apply from 1 November, except for the provisions on the principal trading venue, which shall apply from the date of entry into force.
A related regulatory technical standard on short selling was also adopted by the Commission, based on a draft submitted by the European Securities and Markets Authority (ESMA).
News Round-up
CDS
CEEMEA index in the works
Markit is set to launch the first credit default swap index referencing CEEMEA corporate debt - the Markit iTraxx CEEMEA. The index will enable investors to gain or hedge exposure to the CEEMEA region's corporate credit risk and will include corporate issuers from multiple industry sectors.
Inclusion in the index is based on the liquidity of a company's CDS and the amount of debt outstanding in the market. The index is scheduled to launch in the third quarter, along with the Markit CDX LatAm Corporate index (SCI 6 June).
News Round-up
CDS
SEC approves swap definitions
The US SEC has approved rules and interpretations that further define the terms 'swap' and 'security-based swap', as well as whether a particular instrument is a 'swap' regulated by the CFTC or a 'security-based swap' regulated by the SEC. The action also addresses 'mixed swaps' - which are regulated by both agencies - and 'security-based swap agreements', which are regulated by the CFTC but over which the SEC has antifraud and other authority.
The rules and interpretations were written jointly with the CFTC and implement provisions of the Dodd-Frank Act. Once both agencies adopt the final rules, they will become effective 60 days after the date of publication in the Federal Register. The compliance date of the rules for purposes of certain interim exemptions under the federal securities laws will be 180 days after this date.
News Round-up
CDS
Margin consultation begins
The Basel Committee and IOSCO have published a consultative paper on margin requirements for non-centrally cleared derivatives. The report lays out a set of high-level principles on margining practices and treatment of collateral.
These policy proposals are articulated through a set of key principles that primarily seek to ensure that appropriate margining practices will be established for all non-centrally cleared OTC derivative transactions, the two authorities say. These principles will apply to all transactions that involve either financial firms or systemically important non-financial entities.
To prevent regulatory arbitrage, international consistency with regard to margin requirements and their implementation is crucial. To this end, the proposal is designed to achieve global consistency for margin requirements.
It is also important to consider the potential impact of margin requirements on financial markets and the broader financial system. The potential benefits must be weighed against the liquidity impact arising from the need for derivative counterparties to provide liquid, high-quality collateral when meeting margin requirements. The Basel Committee and IOSCO therefore plan to conduct a quantitative impact study (QIS) during the consultation period.
News Round-up
CDS
Increase seen in CDS liquidity
Fitch Solutions reports that CDS liquidity in the three major regions is higher than it was one month ago. European names have seen a bigger increase than those in North America, while Asia remained largely unchanged.
"Among European sovereigns, Germany has seen the biggest uptick in CDS liquidity, moving up three regional percentiles over the past month and 19 over the quarter, whilst overall Italy, Belgium and Spain remain in the top-five most liquid global sovereigns," comments Diana Allmendinger, director at Fitch Solutions.
She adds: "The market focus on Europe is reflected in corporate liquidity too, where CDS on BNP Paribas, Banca Monte dei Paschi di Siena and Banco Bilbao Vizcaya Argentaria are trading with the most liquidity amongst European corporate names."
In terms of spread movements, Fitch's Developed Market Sovereign Index shows that Cyprus, Portugal and Spain are at the widest levels in the index. Conversely, Finland, Germany and the Netherlands are at the tightest.
More generally, CDS on emerging market sovereigns are pricing well wide of those in developed markets. The exception is the Eurozone CDS Index, which continues to price wide of the Emerging Market Sovereign Index.
News Round-up
CLOs
CLO modelling error corrected
Moody's has placed 78 tranches from 15 European CLOs, currently rated Aa1 and below, on review for upgrade and upgraded two further tranches. The actions reflect a correction to the rating model the agency used for these transactions, as well as the generally stable performance of the affected tranches since the last rating action in 2011.
Prior to the correction, the rating model had not been grossing up the lagged recoveries on defaulting loans in the pool when modelling counterparty risk associated with loan participations. Had the recoveries been grossed up correctly, the model would have indicated a lower expected loss for each of the classes of notes at the time of the last rating action in 2011. A lower expected loss could have positively influenced the ratings of the affected notes, Moody's notes.
News Round-up
CLOs
Spanish SME CLO ratings resilient
Spanish SME CLO ratings are resilient in scenarios where the collateral performance significantly deteriorates but sovereign or counterparty risk does not increase, according to Fitch. This is despite the transactions' exposure to the real estate sector.
Under a severe stress, no losses are expected for double-A minus tranches, the highest rating achievable for Spanish structured finance transactions. "Spanish SME CLOs have built up a high level of credit enhancement through the continuing deleveraging of SME static portfolios," says Laurent Chane-Kon, director in Fitch's structured finance group. "As a result, double-A minus tranches can sustain a severe portfolio deterioration stress involving the collapse of the real estate sector in which 75% of SMEs from this sector would default and property prices would depreciate by 80%."
Of the deals rated double-A minus, 69% are driven by the sovereign risk-driven cap. These tranches benefit from a higher credit enhancement level, averaging 67%, and are not expected to be downgraded below investment grade under a severe portfolio deterioration stress.
However, sovereign and counterparty risk remains significant downside risks for Spanish SME CLOs. A further downgrade of Spain would result in a rating cap for structured finance transactions up to a maximum of six notches above the sovereign IDR. In addition, if transactions become subject to material counterparty risks that are not mitigated, ratings would be affected.
News Round-up
CMBS
Sainsbury CMBS sees property withdrawals
J Sainsbury, the borrower behind the Longstone Finance CMBS, has withdrawn without prepayment three properties from the portfolio. The properties - located in Ashford, Norwich and Northfleet - represent 6.5% of the deal's total investment value and 8.5% of the total gross store area.
Moody's notes that the withdrawal of the properties without prepayment is credit negative because it raises the leverage of the transaction and may reduce portfolio diversification. However, this is mitigated by the recent increase of the portfolio's vacant possession value.
In the agency's view, the VPV of the portfolio has increased since 2010, primarily because a number of the supermarkets have been extended and modernised. The total gross store area has increased by 8.6%. To a lesser extent, the portfolio also benefited from the positive net impact of store substitution in 2010, with the three incoming properties being overall more valuable than the two outgoing properties.
In itself, the loss of property diversification as a result of the withdrawal is not material enough to impact the ratings, however. The number of properties in the portfolio decreased to 51 from 54 by comparison to 52 at closing. Geographic diversification has improved slightly because two of the withdrawn properties were located in the South East area, which was over-represented in the portfolio.
Since closing, the notes have amortised to £778m from £868m. Over the same period, the portfolio investment value - including the value of the properties that were withdrawn - had increased by 23%. As a result, the LTV of the portfolio was 41% before the withdrawal, compared to 56% at close.
According to the transaction's documents, the borrower can withdraw properties from the securitised portfolio without prepayment, subject to the satisfaction of a number of tests and conditions.
Based on Moody's assessment of the value of the portfolio after the withdrawal and the overall current performance of the transaction, the agency has confirmed that the move will not result in an immediate reduction or withdrawal of the notes' current ratings.
News Round-up
CMBS
CRE auctions scheduled
Auction.com has released property-level details for three auctions scheduled for this month. Barclays Capital CMBS analysts estimate that about US$814m of CMBS exposures, across 131 loans, is included among the assets.
The first auction is scheduled for 15 July and comprises a mixture of property types and geographies. The largest CMBS property out for bid in this action is the US$36m Metro I Building securitised in COMM 2004-LB4. The loan has been in REO since August 2011 and was last appraised for US$18.6m in July 2011.
The second auction, on 25 July, comprises only multifamily properties - including the US$50m Westshore Cove building securitised in LBCMT 2007-C3. The loan transitioned to REO in May 2011and the most recent appraisal in August 2011 pegged the value of the property at US$40m.
The final auction is scheduled for 26 July and is made up of distressed hotel properties. The largest CMBS loan the Barcap analysts identified in this list is the US$14m Embassy Suites-Beachwood in JPMCC 2006-LDP7, which was appraised at US$11.2m in February.
News Round-up
CMBS
CMBS pay-offs inch up
The percentage of US CMBS loans paying off on their balloon date in June was anchored near its 12-month low, according to Trepp's latest pay-off report. Only 32.3% of loans reaching their balloon date paid off last month, compared to 29.4% in May, indicating that it remains challenging for borrowers to refinance.
The June total was well under the 12-month average of 42.7%. By loan count as opposed to balance, 55.2% of the loans paid off. On the basis of loan count, the 12-month rolling average is now 51.8%.
The disparity between the volume-based total and the count-based total indicates that it was mostly small balance loans that managed to pay off in June, Trepp notes.
Prior to 2008, the pay-off percentages were typically well north of 70%. Since the beginning of 2009, however, there have only been four months where more than half of the balance of the loans reaching their balloon date actually paid off.
News Round-up
CMBS
GRAND refi details released
Deutsche Annington has agreed non-binding heads of terms with the GRAND ad hoc noteholder group to refinance the deal via a scheme of arrangement (SCI passim). The agreement is pending approval from the remaining noteholders.
Under the agreement, the loan maturity date (currently 2016) will be extended by five years, in return for an increase in the blended note margin to 165bp. Shareholders, managed by Terra Firma, will also inject €504m in equity that - together with an updated valuation - will result in the deleveraging of the transaction to approximately 59.7% LTV and reduce the notes outstanding to approximately €3.8bn.
The borrower is committing to repay €1bn in the first year, €700m in the second, €650m in each of the third and fourth years, and the remaining amount in the fifth year. It aims to partially refinance the underlying portfolio during the extension period and ultimately expects the weighted average life to be 2.4 years.
DAIG has published a second factbook, which sets out a summary of a revised valuation of the underlying portfolio, a property and business plan overview, audited 2011 financials and financial projections. Additionally, it will host a conference call on 11 July to present its proposals.
Commercial changes to the documentation will then be set out in a more detailed heads of terms, which is expected to be produced during July and August. It is anticipated that during September, noteholders will be asked to execute lock-up agreements pursuant to which they would agree to vote in favour of a solvent scheme of arrangement to implement the refinancing.
The ad hoc noteholder group represents approximately 32% across the notes and comprises BayernLB, ING Investment Management, JPMorgan, Landesbank Baden-Württemberg, PIMCO and Standard Life Investments. When aggregated with the notes held by Terra Firma via Monterey Finance, the group's holdings represent approximately 37% of the notes outstanding.
DAIG is advised by Blackstone and Allen & Overy, while the ad hoc group is advised by Rothschild and Freshfields Bruckhaus Deringer.
News Round-up
CMBS
GBW sale supports MFH CMBS
A portfolio of 33,000 apartments being sold by BayernLB subsidiary GBW is expected to generate significant bidding interest, reflecting sustained demand for German multifamily housing (MFH) portfolios, Fitch notes. The agency says this supports its view that the diversified and durable income generated by well-managed MFH is a major strength for the three large German MFH CMBS - albeit balloon risk remains a concern, considering the size of the loans soon to reach maturity.
The number of MFH trades comprising more than 800 units rose to 21 in 2011 - up from 17 in 2010 - while the total number of units sold almost trebled over the same period, reaching 90,200 from 33,500. Average unit sale prices also rose to €50,000 from €41,000 and are now close to the pre-crisis peak of €53,000 achieved in 2007. The BayernLB sale is anticipated to bolster market confidence this year and next.
The sale may also help in setting a benchmark for the prospects of refinancing large German MFH CMBS, Fitch suggests. It is a similar size to Windermere IX, the smallest of the three major German transactions.
However, the BayernLB portfolio is particularly attractive because the properties are in Bavaria. The Windermere IX portfolio is situated in the less buoyant city of Dresden, making a precise comparison difficult.
The other two large German MFH CMBS - German Residential Funding and GRAND - are respectively about two and five times the size of the BayernLB portfolio in terms of the number of apartments.
News Round-up
RMBS
Eminent domain weighs on RMBS
Fitch believes that the potential use of eminent domain, as proposed by San Bernardino County (SCI 9 July), would negatively affect private label RMBS performance. Of particular concern are proposals that focus on borrowers who are current on their existing mortgage obligations and who would otherwise continue performing as expected but for the ability to restructure their mortgage via the eminent domain approach, the agency notes.
Because eminent domain provides a mechanism for local, county or state governments to seize mortgages at their market values, the holders of those seized loans could experience losses if these communities proceed. Because San Bernardino is the largest county in the US, the impact could be broad.
This area of California accounts for approximately US$14bn of non-agency mortgages and more than 46,000 of the loans have mark-to-market combined loan-to-value ratios of more than 100%. Roughly half of those underwater mortgages are current.
If the use of eminent domain were to proceed, it could be adopted in other regions and have a significant impact on the RMBS sector, Fitch suggests. In addition to pushing forward losses on performing loans, such a programme could have other unintended consequences, including negatively affecting mortgage interest rates and credit availability in affected areas.
Equally, the implementation of the programme could further weigh on investor confidence and appetite for private-label MBS going forward. But the agency believes that the likely legal challenges to invoking eminent domain may make the process "slow and difficult".
News Round-up
RMBS
Foreclosure standards improving
The mortgage settlement between US state attorneys general and the five largest mortgage servicers (SCI passim) has introduced more clarity to foreclosure standards and a marginal impact on private-label RMBS performance thus far, according to Fitch.
As per the settlement agreed upon five months ago, US$25bn was provided for borrower relief. Of that amount, US$10bn was allotted to principal reductions for borrowers who owe more on their mortgages than their homes are worth and are at imminent risk of default. The servicers can meet the settlement target amounts by providing the principal reductions to either portfolio loans on balance sheet or to securitised loans in private-label RMBS.
At the time the settlement was initially announced, it was uncertain whether the servicers would elect to disproportionately apply the reductions to securitised loans rather than portfolio loans. Fitch was also concerned that borrowers who could otherwise continue to make their mortgage payments would strategically default to become eligible for a principal reduction.
Over the last several months, principal reduction activity has increased in private label RMBS, albeit not significantly. Roughly 30% of loan modifications in June included a principal reduction, up from roughly 20% in February. However, that figure was increasing prior to the settlement.
Although practice varies materially by individual servicer, the combined activity of servicers included in the settlement is consistent with that of servicers not in the settlement. Thus, it appears some of the increased principal reduction activity in 2012 is likely a continuation of an earlier trend rather than a direct result of the settlement.
Equally, there does not appear to be any sign yet of a material change in the behaviour of underwater borrowers attempting to strategically default to qualify for a reduction. Current-to-delinquent monthly roll-rates for underwater borrowers have continued to improve slightly since the settlement was announced, consistent with the rate of improvement experienced prior to the settlement.
Meanwhile, the clarification of foreclosure standards has helped reduce some prior uncertainty as servicers waited for the final settlement terms. This may be reflected initially in increased foreclosure initiation rates, which rose to roughly 12% of delinquent loans in June.
However, it will take more time for servicers to fully implement programmes and procedures included in the settlement. As such, the full impact on RMBS transactions is not yet apparent.
News Round-up
RMBS
JHF future outlined
A government committee on the future of the Japan Housing Finance Agency has released its final conclusions. The JHF is to be an administrative agency.
"Other aspects of the conclusions are not particularly surprising and are unlikely to affect JHF MBS," note ABS analysts at Bank of America Merrill Lynch. "However, the report mentions the need to discuss the possibility of changes in MBS structure and it remains to be seen how the proposals are implemented."
One proposal is to change the MBS structure from the current pro-rata distribution of cashflow to a sequential distribution. Another is to issue two classes of MBS with different WALs.
In addition, JHF lending criteria is to be reviewed - including the implementation of stress tests and an enhanced mechanism for providing feedback to the competent ministries, while building up capital reserves. Private-sector RMBS issuance is also set to be promoted via the use of JHF guarantee-type mortgages.
News Round-up
RMBS
UKAR tender results in
Bradford & Bingley and Northern Rock Asset Management have disclosed the results for their tender offers on Aire Valley, Granite and Whinstone subordinate bonds (SCI 20 June). UK Asset Resolution accepted bonds equivalent to an outstanding nominal value of £534m, out of the approximately £1.19bn tenders received, for a total cost of around £400m.
The triple-B rated Aire Valley class C notes were repurchased for between 65.5 and 70.5, 10bp-12bp higher than their pre-tender levels, according to Interactive Data. Granite Funding 1 triple-B tranches were tendered for between 69 and 83, up to 15bp higher than their pre-tender levels. Granite Funding 2 triple-B tranches were tendered at 74/75 for the euro-denominated tranches, and between 72.5 and 75 for sterling-denominated tranches - around 15bp points higher than their pre-tender levels.
UK Asset Resolution also accepted a nominal amount of Whinstone 1 and 2 bonds. WHINS 1 class Bs were tendered for between 64 and 69, and the class Cs for 61-63. WHINS 2 class C bonds were tendered for 72.
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