Contents

Structured Finance

Euro ABS treading water

The summer was expected to be quiet for European ABS and that is how it has proved so far. The last week has not seen a lot of activity, although that is not down to a lack of potential buyers.

"There is a lot of buying interest in the market right now, but it is not translating into a lot of buying activity. There just are not a lot of bonds around, so things have been staying pretty quiet," reports one ABS trader.

While the flow of BWICs has been stronger for CLOs, CMBS and RMBS, it has been more of a trickle for ABS. "Dealers' inventories are very light and the steady flow of bid-lists that we had for the first half of the year has pretty much dried up. Most of the dealers' runs are bid-only," says the trader.

He continues: "You do see occasional bonds come out, but not too much. That is further driving potential sellers' expectations as to what kind of pricing they can get, increasing the gulf between buyers and sellers."

The trader cites the fact that there appears to be very little soon to come through the new issue pipeline as reason to believe the market will remain quiet for another month yet, before coming back to life in September. He concludes: "Spreads have been grinding tighter on the back of the lack of activity. There are people who would not mind spending some money, but they have nothing to spend it on right now. I do not see that changing right away, but then things will pick up again after August."

JL

CMBS

New CMBS trade

US CMBS spreads ground tighter yesterday, ending a three-day period of widening. The benchmark GSMS 2007-GG10 A4 tranche outperformed the broader market, according to Trepp, finishing at 230bp - 10bp tighter than at Tuesday's close.

Bid-list volumes stood at around US$400m yesterday and on Tuesday, twice as much as the total seen on Monday. Out of almost 70 CMBS line items for the session, SCI's PriceABS BWIC data shows a couple of noteworthy trades in recently-issued transactions.

US$20m in current face of JPMCC 12-WLDN class A notes were covered at 149, while US$10m UBSBB 2012-C2 class Es were covered at 770. In comparison, US$4m of the COMM 2012-CR1 D tranche was talked at low-700s.

RMBS

Secondary RMBS still strong

The strong supply seen in secondary US RMBS continues, with prime hybrid, Alt-A hybrid and option ARM bonds well represented in yesterday's bid-lists. It has been a week of elevated BWIC activity for ARM paper in particular, with Interactive Data figures indicating that the market is on pace to reach record volumes.

One line item captured in SCI's PriceABS BWIC data from the session is the Alt-A hybrid BAFC 2005-B 3A1 tranche (US$68.8m current face), which was talked at mid/high-70s. Another is the US$28.4m prime hybrid MARM 2006-2 1A1 tranche, for which price talk was in the mid-70s.

The data also shows noteworthy subprime RMBS activity: US$3.5m JPMAC 2005-OPT1 M2 and US$6m CWL 2004-7 MV5 - one of 22 Countrywide bonds out for bid yesterday - were talked respectively at mid-70s and mid/high-20s. The former was talked at mid-60s on 19 July.

JL

Structured Finance

SCI Start the Week - 30 July

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

Pipeline
One new deal remained in the pipeline at the end of last week. It is an auto ABS: the ZAR891m Torque Securitisation.

Pricings
Three auto ABS also priced last week, as well as a handful of student loan ABS and others. The auto deals were €723.6m FCT Auto ABS Compartiment 2012-1, US$689.7m AESOP Funding II 2012-3 and US$612.6m GE Dealer Floorplan Master Note Trust 2012-3.

The largest number of prints was in the student loan sector. These included: US$526m Educational Funding of the South Series 2012-1; US$531m Iowa Student Loan Liquidity Corporation; US$424.3m Nelnet Student Loan Trust 2012-3; US$463.2m North Texas Higher Education Authority Series 2012-1; and US$640m SLM Private Education Loan Trust 2012-D.

The issuance was rounded off by an ARS 110m consumer loan deal (Supervielle Personales 6), US$250m container ABS (Global SC Finance II series 2012-1), £650m RMBS (Silk Road No.3), US$610m wireless tower ABS (SBA Tower Trust Secured Tower Revenue Securities Series 2012-1) and a pair of CMBS - US$1.2bn FREMF 2012-K019 and US$625m GSMS 2012-SHOP.

Markets
A slight slowdown in new issue volume and some near-term pressure in other securitised products helped to move spreads in all US ABS sectors tighter, according to Bank of America Merrill Lynch securitised products strategists. Primary issuance was down from US$8.6bn to US$2.7bn on the week.

Private student loan ABS moved 10bp-20bp tighter for senior classes, with subprime auto loan ABS up to as much as 10bp tighter. "The private student loan sector benefited from a better-than-expected report released by the CFPB and the Department of Education. For the first time in weeks, the private student loan ABS market outperformed CLOs and CMBS A4 [tranches]," they note.

US CMBS spreads joined in the broader rally. Barclays Capital securitised products analysts believe the fact that dealers continue to add to their CMBX AJ short positions could be a sign of higher dealer cash inventory in the credit space.

They add: "Generic 07 LCF spreads were marginally tighter from last Thursday's close, coming in 2bp to finish the week at 191bp over swaps. There was some tightening in the AM part of the curve as well, as 07 AMs were trading at 425bp over swaps, about 5bp lower than [the previous] week."

It was a week of strong BWIC activity for US non-agency RMBS, as SCI reported on Wednesday and Friday (27 and 29 July). Prime hybrid, Alt-A hybrid and option ARM bonds were all particularly well represented in bid-lists during the week. Tuesday saw particularly large BWIC volumes, with US$2.72bn of names out for bid, including a glut of Countrywide senior bonds.

European CMBS has been trading up as the market continues "a near relentless search for yield", according to Deutsche Bank asset-backed analysts. The recent publication of CMBS 2.0 best practices (SCI 24 July) should provide a useful framework for future CMBS deals and the analysts believe they will encourage a return of confidence and further market development.

Finally, a lack of activity in European ABS is not down to a lack of potential buyers, as SCI reported on Thursday (SCI 26 July). One trader says: "There is a lot of buying interest in the market right now, but it is not translating into a lot of buying activity. There just are not a lot of bonds around, so things have been staying pretty quiet." The gulf between buyers' and sellers' expectations is widening, although the market is expected to snap out of its quiet spell shortly. 

Deal news
• Maguire Properties has released its second-quarter results, shedding light on a number of CMBS properties sponsored by the company. Among the results' highlights is Maguire's confirmation that it has agreed with the special servicer to keep title of Two California Plaza, which secures a US$470m loan securitised in GSMS 2007-GG10, until a buyer for the property is found or a foreclosure is completed.
• Credit Suisse has emerged as the successful bidder on six CDO tranches offered in recent Maiden Lane III sales. The deals are: Broderick CDO 1 (for a face amount of US$724.58m), Mercury CDO II (US$620.86m), Adirondack 2005-1 (US$689.19m), Adirondack 2005-2 (US$949.3m), Laguna ABS CDO (US$679.57m) and Toro ABS CDO I (US$699.71m).
• Western Asset Management Company has begun winding down its legacy securities PPIF, pursuant to an agreement with the US Treasury. The firm opted to end the fund's investment period on 15 July, rather than extend it to 5 November.
• Fortress Investment Group is seeking to liquidate the remaining assets in the Eurocastle CDO II and III transactions, prior to redeeming the notes on 20 September. For it to proceed, written resolutions must be executed by the holders of at least 75% in principal amount of each class of notes.

Regulatory update
• The Basel Committee has issued interim rules for the capitalisation of bank exposures to central counterparties (CCPs), effective from January. It has also revised paragraph 75 of the Basel 3 rules as regards its application to derivatives.
• CRE Finance Council Europe has published a consultative document outlining principles for new CMBS issuance. Entitled 'Market Principles for Issuing European CMBS 2.0', the document aims to help bring confidence back to the European real estate capital markets and stimulate the further development of European CMBS.
• Moody's has welcomed the Australian Prudential Regulation Authority's (APRA) requirement for banks to deduct from their common equity Tier 1 holdings subordinated tranches of securitisations originated by a third party. The rating agency suggests that such a conservative measure will support bank stability by ensuring there is adequate capital to cover first-loss positions.
• The Walnut Place investor group has withdrawn as intervenor in the Article 77 proceedings to ratify the Countrywide RMBS settlement. The group had previously sought to extend the scope of the discovery by reviewing thousands of loan files, while BNY Mellon - as trustee - had argued that this was not required.
• ICE Clear Credit has launched real-time, trade-date clearing of the Markit CDX.EM index for buy-side and dealer-to-dealer trades. The launch of CDX.EM series 16 and 17 augments the list of over 40 cleared North American indexes available for client clearing at the CCP.

Deals added to the SCI database last week:
Ally Master Owner Trust Series 2012-3; Ally Master Owner Trust Series 2012-4; American Credit Acceptance Receivables Trust 2012-2; Arran Cards Funding series 2012-2; Atlantes Finance No. 5; BAA Funding A22; Belgian Lion RMBS II; Chase Issuance Trust 2012-4; CIFC Funding 2012-1; CSMC Trust 2012-CIM2; Dryden Senior Loan Fund XXIII; DT Auto Owner Trust 2012-2; FCT Auto ABS Compartiment 2012-1; Ford Credit Auto Owner Trust 2012-C; Fortress Credit Funding V; Fortress Credit Funding VI; FREMF 2012-K710; FTA PYMES Santander 3; Golden Credit Card Trust Series 2012-3 ; Golden Credit Card Trust Series 2012-4 ; Gramercy Park CLO; Harley-Davidson Motorcycle Trust 2012-1; Honda Auto Receivables 2012-3 Owner Trust ; Hyundai Auto Receivables Trust 2012-B; IBL CQS series 2012-2; Icaro Finance ; JGWPT XXVI series 2012-2; JPMCC 2012-HSBC; Lanark Master Issuer series 2012-2; Liberty Series 2012-1 Trust; Madison Park Funding IX; Mortgage Agent Uralsib 01; MSBAM 2012-C5; Neuberger Berman CLO XII; OZLM Funding; Red & Black Auto France 2012; Sequoia Mortgage Trust 2012-3; Sierra Timeshare 2012-2 Receivables Funding ; SLM Student Loan Trust 2012-5; SME Grecale; Sunrise series 2012; TAL Finance I series 2012-A; UBS-BAMLL 2012-WRM; UBS-Barclays 2012-C2; World Financial Network Credit Card Master Note Trust series 2012-B; World Financial Network Credit Card Master Note Trust series 2012-C; and World Omni Auto Receivables Trust 2012-A.

Top stories to come in SCI:
July EMEA CMBS maturity outcomes
CLO documentation
Securitisation of counterparty credit risk

CMBS

Beacon payout concerns highlighted

Beacon Capital Partners is reportedly shopping five Seattle-area office buildings for around US$800m. The move has reignited concerns about the relatively low payout that CMBS investors have received from the collateral releases to date (SCI 4 October 2011).

Of the remaining Beacon Seattle & DC Portfolio properties, Eastdil is understood to be marketing the former Washington Mutual Tower at 201 Third Avenue in downtown Seattle for around US$540m, as well as the City Center Bellevue for about US$209m. CBRE is said to have listed three buildings backing the Plaza East and Plaza Center & US Bank Tower loans as a package for US$250m.

Seven assets have so far been released from the portfolio since the loan was modified in 2010, totalling US$800m of original balance allocation. CRE debt strategists at Deutsche Bank note that these properties were sold for approximately US$1.3bn, but only paid down the portfolio's outstanding balance by US$900m. They add that estimated sale prices for the newly announced properties also exceed the loan balance allocations.

"If the five named properties are all released at the expected prices, the trust debt will be reduced by another US$300m, bringing the outstanding balance to US$1.5bn," the Deutsche strategists explain. "By our estimates, at that point there will be US$550m of excess proceeds from all sales to date - even though the total sales amount is over US$2.3bn - while the portfolio balance will only have declined by half that amount. One reason for the difference is that three of the sales were cashflow pledges and not a fee or leasehold interests."

They suggest that another potential issue is that once the reserve account cap is reduced, roughly only 5% of subordination will be left for the remaining collateral securing the portfolio. "Although the track record of sales has been good so far, much of the success is attributable to 'cherry picking' and, as a result, we believe the last properties to be resolved will be the most distressed and could take a greater than 5% loss."

However, even if the assets pay off at par, the associated CMBS trusts will likely be subject to permanent interest shortfalls that over time generate significant losses - despite total proceeds from the collateral exceeding the original securitised balance of US$2.7bn. "The exposure to negative selection bias combined with the massive amount of sales proceeds which have 'leaked out' to the borrower call in to question the rights of investors as de facto senior lenders. For current investors or potential investors of the related deals, we recommend reducing exposure to AJs and senior mezzanine bonds," the strategists conclude.

CS

RMBS

FHFA initiatives welcomed

FHFA acting director Ed DeMarco has updated Senators Johnson and Shelby on various initiatives currently being pursued by the agency, two of which likely have near-term implications for MBS markets.

First, gradual adjustments in the guarantee fee structure will be introduced, with further details to be released towards the end of this month. Given that mortgage rates are at all-time lows and the increase will be phased in, the immediate effect on prepayments is unlikely to be significant, according to MBS analysts at Barclays Capital. But they suggest that two types of borrowers could be affected by the move: those in lower coupons or who are credit-impaired are likely to see larger hikes in g-fees relative to cleaner credit borrowers.

"FHFA's earlier analysis showed that these borrowers were being significantly cross-subsidised. A hike in g-fees for these loans should result in additional call protection for investors against future refis," the Barcap analysts note.

As lenders are likely to ramp-up loan closings before the fee hike, a short spike in prepayments can be expected. However, as with the hike in March, changes in rate levels could overcome this effect.

The second initiative involves clarifying rep and warranty guidelines. The existing process evaluates loans for put-backs once they have turned delinquent, but the proposed new standard increases scrutiny of loans at origination to detect defects. Subsequently, loans that perform successfully for some period of time will avoid put-backs, but for very limited reasons.

The FHFA plans to release these guidelines in September. "A bright-line approach that precisely defines the factors that could lead to a put-back would reduce uncertainty among lenders. This should lead to more mortgage lending and potentially tighten the significant primary-secondary spreads currently evident," the analysts conclude.

CS

Structured Finance

Distressed EM head joins

Julio Herrera has joined Oaktree Capital Group to manage a new emerging market opportunities investment strategy. He will focus on distressed and dislocated corporate and sovereign debt.

Herrera was most recently president of Fintech Advisory and has more than 20 years of experience in undervalued and distressed assets in emerging markets. Before Fintech he headed emerging market corporate fixed income research for Lehman Brothers, served as vp at ING Capital Holdings and worked as a credit analyst and portfolio manager at RRH Capital Management.

Structured Finance

Gleacher build-out continues

Gleacher & Company Securities has recruited seven professionals to its MBS & Rates division in New York. Glen Riis and Samir Shah have joined the firm as mds, along with directors Eric Baeri, Samuel Herrnson, David Kaplan, Anthony Mun and Jeffrey David Weaver.

Riis previously served as the CMBS portfolio manager at Treesdale Partners, where he managed the firm's investment activity in CMBS/CRE-related products. Shah joins Gleacher & Company with more than 25 years of experience in mortgage and asset-backed securities trading, having most recently been md in the structured products group of Tejas Securities Group.

Kaplan comes from Rochdale Capital Management, where he specialised in structured finance products. Mun and Weaver join from Ally Securities, where the former was a director on the institutional sales & trading desk and head of the mortgage sales desk and the latter was director of MBS sales.

Baeri was previously a director in the rates trading sector at Newedge, while Herrnson was a director in asset management sales at Aladdin Capital.

CDO

Coast CDOs transferred

Coast Asset Management has assigned the collateral management agreements for the Coast Investment Grade 2000-1, 2001-1 and 2002-1 CDOs to Crescent Capital Group. The assignment and novation assigns to Crescent all of Coast's rights, title, duties, liabilities, obligations and interests in the deals. Under the assignment and novation, Crescent assumes and agrees to perform the assigned rights and obligations.

Moody's has determined that the move will not result in the immediate withdrawal, reduction or other adverse action with respect to any senior rating on the notes. In reaching its conclusion, Moody's considered the experience of Crescent in managing transactions similar to the affected CDOs.

CDS

Hedge fund adds credit head

Derrick Herndon has joined PVE Capital as portfolio manager and head of long corporate credit in London. He joins from UBS, where he was md and European head of credit trading.

Herndon has previously served as European head of credit trading at Credit Suisse, global head of portfolio management at TD Securities and senior high yield bond trader at Bankers Trust.

CLOs

New Navigator manager named

CIFC Corp is entering into a five-year strategic relationship with GE Capital. As part of the agreement, CIFC Asset Management will take over from GE Capital Debt Advisors as collateral manager for four Navigator CLOs, representing approximately US$700m.

Under the agreement a commercial council comprised of senior members of both GE Capital and CIFC will be formed to discuss business opportunities between the two firms and to facilitate third party investment advisory referrals. CIFC ceo Peter Gleysteen and GE officer Neeraj Mehta are expected to serve as co-chairs.

GE Capital will receive one million shares of CIFC common stock and warrants to purchase two million shares of a newly created class of non-voting CIFC preferred stock. GE Capital will also receive US$4.88m in cash and has the right to appoint an executive to CIFC's board of directors.

CLOs

Middle market group formed

Babson Capital Management has set up a new middle market lending group in Chicago. Ian Fowler, Brian Baldwin and Mark Flessner each join the group as mds having previously worked together at Freeport Financial and GE Capital.

The new group will focus on companies owned by private equity firms or outstanding management teams. It will complement Babson's existing mezzanine and private equity group, which provides debt and equity co-investments for mergers and acquisitions and leveraged buyouts.

CMBS

New CMBS JV formed

MC Asset Management Holdings and Five Mile Capital Partners are launching MC-FMC Commercial Real Estate Finance Management. The joint venture will underwrite and originate commercial mortgages through a subsidiary to be used in CMBS pools.

Mitsubishi Corporation will provide MC-FMC with a US$100m financing facility. MCAMH and FMC say that, with third-party leverage, MC-FMC will have the capacity to originate over US$1bn of loans annually.

CMBS

Cantor hires CMBS vet

Kenneth Margala has joined Cantor Commercial Real Estate (CCRE) from UBS. He joins CCRE as director and will be focused on loan origination.

Margala specialised in CMBS, bridge and mezzanine transactions at UBS and has experience as a real estate consultant for a variety of financial institutions, as well as having previously served as a regional manager for Merrill Lynch and Goldman Sachs. He is based in Newport Beach, California and reports to Anthony Orso, CCRE ceo.

CMBS

Knight hires CMBS pair

Knight Capital Group has hired Robert Cestari and David Simek as CMBS mds. Cestari will serve as head of CMBS and CRE debt trading while Simek becomes head of CMBS sales. They each join from PrinceRidge Group.

Cestari was head of CRE debt trading at PrinceRidge and previously held posts on the buy side at Apollo Real Estate Advisors and Winthrop Realty Partners. Earlier in his career he also worked at Nomura as head of the CMBS trading and syndication desk.

Simek was head of sales and trading for CMBS and CDOs at PrinceRidge. Before that he was portfolio management and trading md at Highland Capital Management and fixed income sales md for Merrill Lynch and UBS. He began his career at Nomura, where he was fixed income sales and trading md.

RMBS

Majority of NCUA claims to proceed

The Federal District Court in Kansas has denied the majority of the defendants' motions to dismiss in connection with the NCUA's lawsuits over losses from MBS purchased by US Central Federal Credit Union. As liquidating agent for the failed US Central, the agency filed two lawsuits against RBS, Wachovia and nine other defendants that were involved in issuing 29 RMBS bonds purchased by the bank (SCI 30 November 2011).

The lawsuits, which were consolidated by the court, alleged violations of federal and state securities laws and misrepresentations in the sale of the securities to US Central. The court granted part of the defendants' motions to dismiss and denied the remainder, with the result that 80% of the claims continue forward.

The lawsuits covered by the court's ruling are similar to several other cases previously filed by NCUA as liquidating agent for US Central and Western Corporate Federal Credit Union against JPMorgan, Goldman Sachs and others. NCUA has previously settled claims worth US$170.75m with Citigroup, Deutsche Bank and HSBC.

ABS

Dryrock sheltered by safe harbour

Barclays Bank Delaware (BBD) has established a new US credit card ABS programme, Dryrock Issuance Trust, which is expected to boost volumes in the sector. Dryrock will also be the first credit card ABS trust to issue under the FDIC's safe harbour rule that was adopted on 27 September 2010.

The rule provides issuers with more flexibility to amend trust documentation and collateral than the grandfathered safe harbour rule that most credit card deals currently follow, according to Moody's in its latest Credit Card Statement publication. "Unlike older credit card securitisations, Dryrock will comply with the FDIC's new safe harbour rule to isolate the trust's assets from those of the sponsoring bank in the event of the receivership of the bank. By comparison, auto loan securitisations - which employ a different trust structure than credit cards - cannot avail themselves of the grandfathered rule and thus have been complying with the new safe harbour rule for over a year and a half. To date, the vast majority of US card issuers have opted to isolate assets through the FDIC's grandfathered safe harbour rule."

Unlike the grandfathered rule, the new safe harbour rule does not require card trusts to be in compliance with pre-September 2009 accounting standards. Under the grandfathered rule, the sponsor cannot alter the trust in a way that would violate FAS 140 if the sponsor wants to preserve the isolation of the trust's assets in the event of the bank's receivership. Given the difficulties inherent in maintaining compliance with an expired accounting standard, sponsors of older trusts have made few- if any - changes to their trust documents or collateral in recent years.

BBD is the sponsor and servicer of Dryrock. The portfolio will consist of Visa, MasterCard and American Express co-branded and non-co-branded credit card accounts.

ABS

Auto losses hit new low

Prime auto annualised net losses (ANL) dropped by 22% in June over May to a new record low of 0.14%, according to Fitch. This was mainly driven by the strong 2010-2012 driving performance as the weaker 2008-2009 transactions have mostly paid off.

Prime delinquencies were stable in June, with 60+ delinquencies up by just 2bp to 0.40% from 0.38% in May - a 5.26% increase month-over-month (MOM) - but were 16.67% lower year-over-year (YOY). Prime cumulative net losses (CNL) also exhibited improvement in June and were 7.5% lower than in May, at 0.37%.

In the subprime auto sector, meanwhile, 60+ days delinquencies stood at 3.12% in June - 20% higher on both a MOM and YOY basis. ANL increased MOM by 4% to 3.91% from 3.76% in May, albeit a 6.7% improvement YOY.

The Manheim index has seen a steady slide over the past four consecutive months, Fitch notes, declining most recently to 123.4 in June from 125.1 in May as supply and demand in the wholesale vehicle market level off. Despite this levelling off, used vehicle values are healthy and recovery rates in auto ABS transactions remain elevated. Used vehicle values have just come off their record highs in recent months and June's level is still robust on a historical basis, with both production and inventory levels tight and demand for both new and used vehicles strong.

Structured Finance

Uncertainty weighs on European structured finance

The marked divergence seen either side of the Atlantic in structured finance issuance volume trends in 1Q12 continued throughout Q2, according to the latest SCI league tables for bank arrangers in the structured credit and ABS markets.

The 2Q12 SCI league tables show that sovereign and economic uncertainty are continuing to hold back supply and demand for European paper. Half-year structured finance issuance measured by SCI stands at €40.5bn in 2012 versus €58.5bn at the end of Q2 last year.

Meanwhile, in the US volumes continue to grow year on year. The end of 2Q12 sees issuance volume in the year to date at US$173bn against US$140bn the previous year.

In terms of arrangers, the top spot in both the US and Europe has changed hands over the quarter. JPMorgan now leads in the US and RBS heads the European table.

The league tables cover primary market transactions for asset-backed securities (ABS), commercial mortgage-backed securities (CMBS), residential mortgage-backed securities (RMBS) and collateralised debt/loan obligations (CDOs/CLOs). Qualifying deals are full primary securitisations that were publicly marketed and sold to third-party investors; i.e. were not privately placed or issuer/arranger retained or re-issues or re-securitisations.

SCI publishes its league tables on a quarterly basis. The numbers are based on the SCI deal database and are, where possible, corroborated with the firms involved.

The tables for 2Q12 can be found here.

CDO

Trups CDO defaults, deferrals drop

A flat May gave way to a notable drop in June for US bank Trups CDO defaults and deferrals, according to Fitch's latest index results for the sector.

Defaults rose to 16.95% from 16.92% last month, but were tempered by deferrals, which fell to 14.65% from 15.60%. June's results brought the combined bank default and deferral rate to 31.6% from 32.5%.

The drop in the combined default and deferral rate was primarily due to six banks resuming interest payments and repaying accrued interest on their Trups in June, Fitch says. This development affected US$320.5m of collateral across 28 CDOs.

Countering the increase in cures, two banks defaulted last month, totalling US$13m of collateral in two CDOs. Elsewhere, three banks began deferring interest on their Trups last month, representing US$8.5m of collateral in three CDOs.

At the end of June, 206 bank issuers - representing approximately US$6.4bn held across 83 Trups CDOs - were in default. Additionally, 363 deferring bank issuers are impacting interest payments on US$5.5bn of collateral held by 83 Trups CDOs.

CDO

Nine more ML3 assets sold

The results of the final Maiden Lane III CDO auction for July have been announced. The New York Fed unloaded assets from across nine transactions yesterday, bringing the total for the month to 20.

Citi has emerged as the successful bidder for the Bernoulli High Grade CDO I (US$856.38mm in current face), Cascade Funding CDO I (US$107.29mm), Reservoir Funding (US$168.61mm) and Witherspoon CDO Funding (US$484.12m) assets. Credit Suisse took down the Summer Street 2005-HG1 (US$541.16m), Orient Point CDO (US$1.23bn) and Verde CDO (US$506.9m) assets. Barclays Capital won the Summit RMBS CDO I (US$113.68m) auction, while RBS took down Belle Haven ABS CDO (US$443.89m).

Deutsche Bank, Goldman Sachs, Bank of America Merrill Lynch and Morgan Stanley were also invited to bid for the collateral.

CDS

CCP, valuation adjustment rules issued

The Basel Committee has issued interim rules for the capitalisation of bank exposures to central counterparties (CCPs), effective from January. It has also revised paragraph 75 of the Basel 3 rules as regards its application to derivatives.

The Committee's framework for capitalising exposures to CCPs builds on the new CPSS-IOSCO 'Principles for Financial Market Infrastructures', which are designed to enhance the robustness of the essential infrastructure - including CCPs - supporting global financial markets. Where a CCP is supervised in a manner consistent with these principles, exposures to such CCPs will receive a preferential capital treatment. In particular, trade exposures will receive a nominal risk-weight of 2%.

In addition, the interim rules allow banks to choose from one of two approaches for determining the capital required for exposures to default funds: a risk-sensitive approach; or a simplified method, under which default fund exposures will be subject to a 1250% risk weight, subject to an overall cap based on the volume of a bank's trade exposures.

In developing these rules, the Committee says it recognised the need to create incentives to increase the use of central counterparties, even where this is done via indirect clearing. The interim rules therefore include provisions on indirect clearing that allow clients to benefit from the preferential treatment for central clearing.

The interim rules aim to allow for a full implementation of Basel 3, while still recognising that additional work is needed to develop an improved capital framework. Further work in this area is planned for 2013.

Meanwhile, the Committee's revision of paragraph 75 of Basel 3 is designed to ensure that an increase in the credit risk of a bank does not - via a reduction in the value of its liabilities - lead to an increase in its common equity. While this rule was originally developed in the context of debt instruments issued by banks, the principle extends also to fair valued OTC derivatives. However, the application of paragraph 75 to derivatives was not straightforward, the Committee notes.

After consideration of responses to its consultative document on this issue, the Committee has confirmed its intention to proceed with the baseline proposal included in the consultative document and has agreed that valuation adjustments to derivative liabilities arising from the bank's own credit risk should be fully derecognised from the calculation of common equity at each reporting date. While recognising that this rule might go beyond the principle in paragraph 75 for non-derivative liabilities, the Committee believes that valuation adjustments to derivative liabilities raise a wide range of prudential concerns and therefore that conservatism should drive the policy framework in this area. In addition, it believes that it is currently not feasible to implement alternative approaches in a consistent and sufficiently robust manner.

The deduction from Common Equity Tier 1 of all accounting valuation adjustments to derivative liabilities arising from a bank's own credit risk will be phased in, starting with 20% in 2014 and rising by 20% per year thereafter until full deduction occurs from 1 January 2018.

CDS

SEF market structure examined

GreySpark Partners has published the first of three reports on swap execution facilities (SEFs). Entitled 'SEFs - the business landscape', the report explores how the market structure for swaps trading might evolve.

GreySpark maintains that there are only a handful of true multi-asset providing SEFs. It also identifies a general trend towards high through-put, low latency electronic central limit order book (CLOB) trading for rates and credit, with quote-based functionality still important for dealer-to-client (D2C) flows and complex FX and credit products.

The other reports in the series focus on the SEF technology landscape and SEF aggregation.

CDS

FMI RFC issued

The CPSS and IOSCO have published for public comment a consultative report on the recovery and resolution of financial market infrastructures (FMIs). It follows a report on principles for FMIs published in April, which called for FMIs to have effective strategies, rules and procedures to enable them to recover from financial stresses (SCI 16 April).

This most recent report seeks to outline the issues that should be taken into account for different types of FMIs when putting in place effective recovery plans and resolution regimes. The report also seeks consultees' views on a number of technical points related to these issues. Comments are invited from all interested parties and should be sent by 28 September 2012.

CLOs

Spanish SME CLOs well protected

Most double-A rated tranches of Spanish SME CLOs would retain an investment grade rating even in the event of 75% of SMEs in the real estate sector defaulting and commercial and residential property depreciating by over 80%, according to Fitch. The ability to withstand such severe stress mitigates their exposure to the real estate sector.

Fitch notes that two-thirds of the double-A tranches are subject to a five-notch sovereign risk-driven cap. For those tranches, credit enhancement averages 67% and they would remain investment grade even in the severe scenario outlined above.

"Indeed, capped tranches would only experience losses under circumstances that we think are wholly implausible. An example of this would be if cumulative default rates in the portfolios - that is, the cumulative share of the portfolio balance ever to be more than 90 days in arrears at any time in the life of a deal - reached 90% and property market value declines exceeded 80%," Fitch says.

Under the severe scenario, a majority of the remaining double-A tranches would be downgraded below investment grade but would not be expected to record losses.

CMBS

CMBS delinquency rate moves higher

The US CMBS delinquency rate set an all-time high once again this month, increasing by another 18bp to 10.34%, according to Trepp. This latest move puts the delinquency level up by 97bp since February and makes July the fifth straight month in which the rate has increased.

The only major property type to improve was the retail loan segment. Lodging, office, residential and industrial loans all saw higher delinquency rates this month.

Loans resolved with losses stayed essentially flat with June's total: about US$1.4bn in loss resolutions were seen in July. The removal of these loans from the delinquent loan category attributed about 24bp of downward pressure on the delinquency rate.

Loans that were cured put an additional 40bp of downward pressure on the rate. Loans that were newly delinquent, totaling about US$4.6bn, put upward pressure on the rate of about 81bp. 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 17bp basis points in the rate.

CMBS

CMBX 'poised to appreciate'

With CMBX levels remaining fairly high, spread widening is being seen as an opportunity to add exposure, as many of the indices seem poised to appreciate on a long-term basis. Citi CMBS strategists suggest that the indices could also benefit in the short-term from a general market rally fuelled by additional central bank monetary accommodation.

Most of the CMBX indices continued their rally into the end of June and then remained flat in early July on low holiday volumes. Activity in the week ending 13 July saw appreciation in AJ tranches, as well as the relative outperformance of the AJ.3 over the AJ.4, according to the Citi strategists.

In the week ending 20 July, the AJs experienced heavy selling on profit-taking, deepening eurozone concerns and weak US economic data points. The indices continued to follow the market down earlier this week on continued economic concerns.

Nevertheless, a number of relative value trading opportunities remain with a few AM/AJ differentials at the high ends of their ranges, the strategists note. "In terms of vintage trades, the AJ.2/1 spread differential has reached its highest level in over a year. Triple-As, AMs and AJs remain attractive from a fundamental perspective, with most base and stress scenario model results indicating pricing below fair value."

CMBS

CMBS default rate 'better than expected'

Fitch's cumulative default rate for fixed rate US CMBS increased to 13.2%, as of 2Q12 - a 25bp rise from the previous quarter but slightly better than the agency's expectations. Earlier this year, it predicted that cumulative defaults would reach 14.5% by year-end.

New defaults for 2Q12 total US$2.1bn across 143 loans. Following the trend from the first quarter, office and retail loans make up the largest components of new defaults, at 44% and 34% by balance respectively. By number of loans, retail leads with 60 newly defaulted loans having an average loan balance of US$13.7m, compared to 47 newly defaulted office loans with an average balance of US$17.8m.

Hotel loans saw only six new defaults this quarter. Fitch notes that the hotel cumulative default rate has declined by 13bp from 1Q12.

The majority - 113 - of the 143 newly defaulted loans had a balance of less than US$15m; only 12 loans had a balance greater than US$25m (ranging between US$33m and US$223m). Three newly defaulted loans were greater than US$100m: the $223.4m MSKP Retail Portfolio, securitised in ML-CFC 2007-6; the US$190m One Congress Street, securitised in Wachovia 2007-C30; and the US$185m Bethany Maryland Portfolio-II, securitised in LBUBS 2007-C2.

An additional 88 loans, with an original securitised loan balance of US$2.2bn in Fitch's portfolio, did not refinance at their 2Q12 maturity date. Seven of these loans, with a total of US$139m original securitised loan balance, have since paid in full - four of which were multifamily. Of the loans that did not refinance, 50 were from the 2007 vintage.

CMBS

CMBS loss severity dips

US CMBS liquidation levels remained mostly unchanged last month, following a 19% drop in resolutions in June, according to Trepp. July saw an average loss severity of 37.96% on US$1.38bn in resolutions.

The July loss severity fell below the 12-month moving average of 42.8%, while resolution volume landed slightly above the 12-month average of US$1.29bn. Since January 2010, servicers have been liquidating at an average rate of US$1.12bn per month.

The number of CMBS conduit loans liquidated in July was 163, up by 10.6% from June and above the 12-month average of 144. The average size of liquidated loans in July was US$8.48m, lower than the 12-month average of US$9m.

This month's 163 loan liquidations resulted in US$525m in losses, down by just 41bp from June. The July loss severity reading was below the 31-month average of 42.27%, thanks in part to 22 loans with losses of less than 2%.

CMBS

Rise in Euro CMBS repayments

Last month saw increased European CMBS repayment activity, according to Fitch's latest bulletin for the sector. Total debt of €900m was repaid across 13 loans, which were either due to mature during the month or were previously extended or in workout.

Most of the loans that repaid were expected to do so by Fitch. They were all either secured on prime quality assets in prominent locations, small-ticket loans with moderate Fitch LTVs or benefiting from strong income under long leases. "Consequently, while any repayment is a welcome reminder that finance can be sourced for solid commercial real estate propositions, the news does not allay Fitch's concerns about the prospects for secondary quality collateral, on which the bulk of the CMBS portfolio is secured," the agency notes.

After a bumper July, during which 32 loans fell due, only one - sized at (€16.1m) - matures in August. A high Fitch LTV and relatively short lease term suggest that timely refinancing is unlikely, the agency says. However, with ten years until legal final maturity and a current DSCR of 1.85x, there may be sufficient flexibility to allow for a managed deleveraging, subject to re-letting prospects.

Risk Management

CVA platform launched

Markit has launched a Basel 3-compliant solution integrating the management of CVA and internal model capital. Markit Analytics CVA & Capital is a unified simulation engine allowing banks to calculate CVA, funding valuation adjustment and internal model capital for CVA, counterparty credit risk and market risk.

The product covers all asset classes from vanilla products to highly complex path-dependent derivatives. Capabilities include pre-trade inception charging, credit checking, post trade profit and loss and capital management.

Markit has also enhanced the overnight indexed swap discounting methodologies for its portfolio valuations service. It should allow for more accurate valuations of collateralised and uncollateralised trades, which is particularly relevant for calculating the margin requirements specified in CSAs.

RMBS

Alignment for HARP 2.0 reps

Freddie Mac has announced plans to amend its Relief Refinance Mortgage Program, which includes HARP 2.0, by aligning requirements for mortgages LTV ratios that are equal to or less than 80% with those for mortgages with LTV ratios greater than 80%. The alignment change is designed to eliminate many representation and warranty responsibilities on the original loans being refinanced, regardless of the borrower's LTV ratio.

Further details are scheduled to be announced to lenders by mid-September, so that they can start taking applications shortly thereafter for loans to be delivered as early as 1 January 2013. The move is expected to result in an up-tick in cross-servicer refinancing and increase prepayment speeds on pre-HARP pools, especially those of slower-paying servicers.

Freddie Mac is also further evaluating the Relief Refinance programme by specifically focusing on its Open Access offering to determine the best approach to maximise its reach to eligible borrowers and assist lenders in managing capacity.

Paul Mullings, svp and interim head of single family at Freddie Mac, comments: "Once implemented, the changes will give lenders a new measure of certainty and ease when they help borrowers with Freddie Mac-owned or guaranteed mortgages take advantage of today's historically low mortgage rates. This will help us build on the success of the HARP 2.0 and Relief Refinance Mortgage programmes of helping more than 1.3 million Freddie Mac borrowers."

RMBS

IO loan warning

Low incentives for borrowers to refinance and rising risk aversion among mortgage lenders have contributed to a sharp decline in interest-only lending in the past five years. According to S&P, prepayment rates could remain low as the current interest rate environment means that a significant number of borrowers have little economic incentive to remortgage.

"Our analysis shows that - under new lending rules - only 11% of borrowers will likely be able to refinance onto new interest-only loans and have an economic incentive to do so, compared with 40% under previous rules. We based our analysis on a sample of about 1.5 million mortgage loans backing prime UK RMBS transactions that we rate, using the most recent data from first-quarter 2012," comments S&P credit analyst Mark Boyce.

The proportion of interest-only borrowers defaulting at loan maturity is also likely to pick up in the coming years. "About a third of interest-only loans in our sample mature in the next 10 years, but we estimate that almost 70% of these borrowers have not reported the repayment vehicle they intend to use to redeem the loans. Many interest-only borrowers may intend to sell their current property to pay off the loan, but we found that most do not currently have enough property equity to buy another home at the average price in their region without an outside source of savings or new debt," Boyce adds.

In 1Q12, 90-plus day arrears for interest-only loans were almost twice as high as for repayment loans in S&P's sample. One explanation may be that lenders are switching some struggling borrowers' loans from a repayment to an interest-only basis in order to lower the scheduled mortgage payments.

This may lead to a negative selection bias in the interest-only loan sample. However, many interest-only loans and borrowers also display other higher-risk characteristics, such as self-certified borrower income, 'jumbo' balances or higher leverage.

Boyce concludes: "We expect interest-only loans to continue exhibiting higher arrears in the short term, due to a greater prevalence of some risk factors."

RMBS

Italian RMBS assumptions tweaked

Fitch has updated its criteria assumptions for assessing credit risk in Italian residential mortgage loan pools. The main changes are to certain criteria assumptions that focus on lower rating categories, which reflect where Italy is in the economic cycle. Assumptions at higher categories generally remain unchanged.

"The macroeconomic variables affecting default probability have deteriorated. Fitch forecasts for lower GDP growth and higher unemployment than previously envisaged; therefore, foreclosure frequency assumptions at lower rating levels have been revised upwards slightly to better reflect the weakened economic outlook whilst considering that they already incorporate a cushion to account for cyclicality," comments Daniela Di Filippo, director in Fitch's European structured finance team in Milan.

House price growth in Italy was lower than in other European countries during the boom up to 2008. The decrease in nominal house prices has been limited so far to 10%, driven by the deteriorating Italian macroeconomic situation and credit tightening from lenders. Since the Italian economy is still under pressure as a consequence of the ongoing eurozone debt crisis and recovery is not expected before 2014, Fitch believes there is room for further price falls of up to 13%.

The agency has slightly lowered its high prepayments stresses below triple-B to reflect that actually observed prepayment rates came back to the traditional 5% after the peak in 2007. Low interest rates and credit tightening are expected to further reduce borrowers' incentives to refinance with competitors; therefore, Fitch expects borrowers' willingness and ability to prepay will continue to stay low.

The updated criteria assumptions are not expected to result in rating actions on existing RMBS transactions, since most rating actions taken to date already reflect the factors that have been added to the criteria development process.

RMBS

Servicer advance ratings criteria issued

Morningstar Credit Ratings has released new issue RMBS servicer advance receivable ratings criteria. The rating agency says it methodology is designed to be easy to understand and consistently applied to all advance securitisations while incorporating issuer-specific quantitative and qualitative data.

Advance types include principal and interest, escrow and corporate advances. P&I advances cover delinquent payments of principal and interest due from the individual mortgages. Escrow advances are the payments made to preserve the mortgage lien, such as advances for unpaid taxes and insurance. Corporate advances are expenses related to the foreclosure and REO process that are incurred to maintain the property value and to dispose of the property.

P&I advances may be recovered by the servicer at the loan-level or pool-level, while escrow and corporate advances are generally only recoverable at the loan-level. Loan-level advances are generally reimbursable from cashflows of the loan and recovered at the time it is modified, cured of its delinquency or liquidated.

Pool-level advances are reimbursable by cashflows from the pool of loans in the underlying trust and are generally reimbursed monthly. Therefore, pool-level advances usually have faster recovery rates than loan-level advances, Morningstar notes.

RMBS

Syncora-wrapped RMBS on positive watch

Moody's has placed on review for upgrade the ratings of 34 US RMBS tranches guaranteed by Syncora Guarantee, impacting approximately US$1.4bn of securities. The action is due to the review for possible upgrade of the monoline's Ca insurer financial strength rating, following its recent settlement with Countrywide.

In return for releases of all of Syncora's claims against Countrywide and Bank of America Corporation arising from its provision of insurance in relation to 14 first- and second-lien transactions, the monoline received a cash payment of US$375m. In addition, in an effort to terminate other relationships between the parties, Syncora transferred assets to subsidiaries of Bank of America Corporation and subsidiaries of Bank of America Corporation transferred or agreed to transfer to the monoline certain of its preferred shares, surplus notes and other securities.

Separately, since the release of Syncora's 1Q12 statutory financial statements, the monoline has remediated several credits with total cash disbursements of approximately US$96m. The combined effects of these moves are expected to have a materially positive effect on its surplus as regards policyholders that will be reflected in its second-quarter statutory financial statements.

RMBS

Portuguese house price forecast updated

Fitch expects house prices in Portugal to fall by another 15%, implying a peak-to-trough decline of 28%, up from its previous assumption of 10%. The agency has revised its expectation as part of its updated RMBS rating criteria for the country.

The impact on RMBS transactions from a change to the house price forecast will be compensated by a reduction in the discount assumption applied to house prices for being sold quickly, Fitch notes. This has been reduced to 30% from 39% in light of extensive market data, including loan-by-loan analysis on approximately 5,000 foreclosed properties sold in the period 2000-2010.

The change in the agency's house price expectation reflects the worsening macroeconomic conditions and takes into account affordability trends. Fitch now expects GDP to contract by 3.7% this year and unemployment to reach 14% by 2013.

The fall in house prices is driven by affordability rather than any expected increase in supply. Affordability ratios in Portugal have deteriorated as prices have grown faster than wages.

In 2006 house prices peaked at seven times GDP per capita. The ratio has now fallen to a more manageable 5.4 times and, although this is likely to drop further to five times, the level is still up from 3.7 times back in 1995.

Affordability will also be hampered by tightening credit standards, which reflects the difficulty banks are having in accessing credit. Banks are deleveraging in an attempt to improve their capitalisation ratios and rebalance their loans-to-deposit ratio, as computed by the Bank of Portugal, to 120% by year-end 2014 from 144% as of 2011. This has pushed up the typical interest rate on new housing credit to above 4.2% from an average interest rate on all existing housing loans of just 2.6% as of March 2012, which in turn is the main factor supporting Fitch's assumption of prevailing low voluntary prepayments at below 5%.

The total number of dwellings has expanded by one million units since 1998, representing 21% growth, while the population remained constant. While approximately 13% of housing units are vacant, the country does not suffer from a material property overhang as the number of new properties being built is at the lowest level for 20 years.

Fitch has reviewed the impact of the revised criteria assumptions on existing transactions and expects a limited number of downgrades as a result. Downgrades are likely to occur on mezzanine and junior tranches of deals with a weak performance outlook.