Contents

CMBS

CMBS spreads grind tighter

US CMBS secondary spreads came in markedly yesterday as the market continues to grind tighter. SCI's PriceABS BWIC data has 111 line items for the session, with supply remaining steady if unspectacular.

Interactive Data figures place CMBS bid-list volume for Wednesday at US$146m, plus approximately US$310m of GNMA IOs that were also out for the bid. GG10 dupers, which had tightened to close on Tuesday at swaps plus 195, tightened further and were being quoted yesterday at swaps plus 188/186.

"Generic CMBS spreads are tighter on the day. Consistent with the prior few sessions, bid-list volume remains light. In terms of supply, various vintage credit paper accounts for half of the bonds out for bid," Interactive Data notes.

This variety is reflected in the PriceABS archive. For instance, a US$6m slice of UBSBM 2012-WRM E (accounting for about 46% of the tranche) was covered at swaps plus 293 yesterday. It was talked as tight as swaps plus 250 and on 10 August had been covered at 295.

In addition, a US$9.8m piece of LBUBS 2007-C2 AM was covered at swaps plus 500. A slightly larger US$10m piece had been covered 515 just a day earlier. It has been traded fairly frequently, with a US$13.7m and a US$5m piece each being covered at 500 in recent weeks (on 16 August and 30 July respectively).

Interactive Data notes that legacy fixed seniors were 2bp tighter, AMs 5bp tighter and AJs 8bp over the session. A US$1.5m slice of another fixed rate deal - CSFB 2005-C6 AJ - was talked at 315, which is comfortably inside the 350 cover that a US$6.537m piece achieved on 28 August.

JL

CMBS

Secondary spreads still tightening

Monday's session demonstrates just how far spreads in the US CMBS secondary market have tightened over the last few weeks. Trading activity yesterday was relatively light, but paper that changed hands did so at tight levels.

SCI's PriceABS BWIC data shows that the CSMC 2006-C5 A3 tranche, for example, was covered yesterday at 104, having been covered at 132 as recently as 30 August and at 142 earlier in that month. Back on 28 June, the tranche was being covered at 170.

A pair of FREMF tranches - 2011-K704 B and FREMF 2012-K705 C - further illustrate the point. The former was covered in yesterday's session at 245, a month to the day after being covered at swaps plus 268 and two months after having been talked at 320. The latter was covered yesterday at 376, having been covered at 426 on 8 August.

A final name of interest is WBCMT 2006-C23 A5. This is its first appearance in the PriceABS archive. A US$30.99m piece of the tranche was talked at around 75 and at 63, but was actually covered tighter at 59.

JL

ABS

Esoteric ABS capital treatment critiqued

Certain non-traditional ABS sectors are vulnerable to spiking to 100% risk-based capital requirements under the new US bank trading book rules, owing to their non-conformity with classic consumer ABS structures, performance measurement and regulatory definitions. Citi securitisation strategists argue that stranded assets, dealer floorplan, rental car, franchise, aircraft and container ABS represent secured corporate credit risk and so the associated trading book risk-based capital should reflect this.

"Certain off-the-run securitisations closely resemble EETCs, which UK regulators already accept as corporates for regulatory capital purposes," the strategists explain. "The UK's FSA classifies EETC securities - which employ securitisation technology - as corporate securities. This viewpoint appears to affirm our assessment that the economic substance of these structures is more corporate bond-like than securitisation-like."

A common factor to all six sectors is elevated servicing risk in relation to the structure, given that they securitise operating assets. "The servicing function is not passive, which is typical of self-liquidating consumer finance receivables. The operating company is also the only obligor for certain sectors, highlighting the corporate nature of the risks," the Citi strategists add.

Further, while dealer floorplan, stranded assets, rental car, franchise, aircraft and container ABS structures benefit from securitisation technology, their leverage, risk profiles and economic substance are at odds with securitisation regulatory definitions. According to the joint US regulatory agencies' rules, exceptions to these three factors would appear to disqualify these sectors as securitisations.

The simplified supervisory formula approach (SSFA) utilises performance measurements that typically apply to consumer finance receivables in its risk weighting calculation. These traditional performance measures are not relevant for more esoteric ABS and are generally not reported, according to the strategists, given that such transactions are generally future flow or inventory financing structures.

They suggest that dealers would likely cease to make active markets in these sectors if the risk-based capital costs spiked. "The lack of available delinquency data for these sectors (because it is inapplicable) could cause an unwarranted full deduction of capital. This could ultimately drive up the cost of doing business for the affected entities and their customers, which benefit from ABS market financing."

CS

ABS

Volume forecasts revised higher

Structured products strategists at Wells Fargo predict that total US consumer ABS issuance will reach US$170bn for full-year 2012 - approximately a 60% increase over 2011. They expect about US$20bn of new consumer ABS in September alone, assuming the usual seasonal patterns hold and there are no macroeconomic or political disruptions, with the issuance pace remaining brisk in October and November.

Prime auto ABS continue to dominate the consumer ABS market by a margin of more than two to one, according to the Wells Fargo strategists. However, a revival in credit card, subprime auto, student loan and floorplan ABS has also contributed to a larger-than-expected increase in issuance this year.

As of 14 September, 42.6% of new issue ABS had original maturities of two years or less, down from 47% in April. Increased issuance of longer average-life credit card, student loan and floorplan paper has contributed to this modest shift. This measure was just 20% in 2007, but the strategists don't expect the maturity schedule to return to that kind of mix.

"The price discovery afforded by new deals indicates a market on firm footing, in our view," they add. "Strong demand and tighter spreads are drawing more issuance to the securitisation market, which improves transparency and liquidity, in our opinion. Tiering among issuers and sectors remains meaningful and we view it as offering good relative value opportunities."

The strategists cite dealer floorplan ABS as an example. Issuance in the sector has reached US$11bn so far this year and they believe that the significant spread concession to benchmark prime auto paper offers good relative value.

Potential risks to this outlook include a weaker economic recovery and stalling consumer credit growth, an overhang of student loan debt on potential borrowers, certain policy prescriptions that could further limit ABS, and presidential politics and the fiscal cliff.

CS

Structured Finance

SCI Start the Week - 17 September

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

Pipeline
Activity last week was dominated by deals pricing, but a few names also joined the pipeline. These included two Australian securitisations and three CMBS.

The Aussie deals comprised: Impala Trust No.1 - Sub Series 2012-1, a A$232.5m medical equipment ABS; and SMHL Securitisation Fund 2012-2, a A$500m RMBS. The CMBS consisted of US$259m COMM 2012-LTRT, US$195m Oaktree Real Estate Investments/Sabal Series 2012-LV1 and US$1.154bn Wells Fargo Commercial Mortgage Trust 2012-LC5.

Pricings
New issuance was extensive last week, with no fewer than 11 auto ABS, six further ABS prints, an RMBS, two CMBS and four CLOs pricing.

The auto deals were: US$1.265bn Ally Auto Receivables Trust 2012-SN1; S$750m BMW Floorplan Master Owner Trust 2012-1; US$147m CPS Auto Receivables Trust 2012-C; US$252m Credit Acceptance Auto Loan Trust 2012-2; US$300m Exeter Automobile Receivables Trust 2012-2; US$1.351bn Ford Credit Master Owner Trust A Series 2012-4; US$747m Ford Credit Master Owner Trust A Series 2012-5; US$1.546bn Mercedes-Benz Auto Receivables Trust 2012-1; US$1.6bn-equivalent Motor 2012-1; US$500m USAA Auto Owner Trust 2012-1; and €1.03bn VCL Multi-Compartment 16.

The remaining ABS consisted of Alaska Student Loan Corp series 2012A (US$54.42m), 2012B-1 and 2012B-2 (US$93.44m), US$1.249bn SLM Student Loan Trust 2012-6, €855m FCT Copernic 2012-1 and US$400m PFS Premium Finance Series 2012-B - the latter two consumer and insurance ABS respectively.

The RMBS print was A$1bn Apollo Series 2012-1, while the CMBS were US$335m BAMLL Trust 2012-CLRN and US$1.8bn UBS-Barclays 2012-C3. Finally, the CLO issues comprised US$166m Crown Point CLO, US$518m LCM XII, US$465m Marea CLO and US$564m Marine Park CLO 2012-1A.

Markets
The US CMBS market saw secondary spreads tighten dramatically last week, as SCI reported on Thursday (SCI 13 September). PriceABS BWIC data showed several names each being talked comfortably inside their levels of a few days earlier. GG10 dupers were also said to have tightened from 195 on Tuesday to 188/186 on Wednesday.

Meanwhile, securitised products strategists at Bank of America Merrill Lynch believe the Fed's most recent policy announcement has significantly reduced potential tail scenarios for the US CLO market. "As in other markets, interest in CLOs remains strong, especially now as investors adapt their strategies to an even more extended period of low rates. BWIC volumes remained elevated at US$650m [last] week, following [the previous] week's US$1bn. In particular, some investors have been taking advantage of the big run-up in equity prices, with US$150m in for the bid," they say.

The US RMBS secondary market also saw tightening, as SCI reported on Tuesday (SCI 11 September). Increased supply since Labor Day seems to have brought out additional buyers and fuelled a grab for yield.

The European ABS market saw €2.5bn of paper sold into the primary market, bringing issuance to date for the year up to €170m (€50m of which has been placed), note ABS analysts at JPMorgan. Secondary spreads continued to grind tighter, with big gains seen in peripheral jurisdictions as market confidence returned.

Deal news
• Most of the revised transaction documents have been settled between Deutsche Annington (DAIG) and the advisors to the ad-hoc group of noteholders in connection with the proposed GRAND restructuring. DAIG intends to complete a second restricted period for the ad-hoc group and commence a lock-up solicitation process by 19 October, with the first court hearing anticipated for the third week of November. On that basis, the proposed plan is expected to be effective prior to the end of 2012.
• Pearl Diver Capital has closed its third CLO opportunity fund, a Guernsey-based private equity-style GP/LP structure. The fund - dubbed Pearl Diver Capital Fund III - closed with US$234.1m in commitments, with the capital locked in over several years.
• The September remittance for BACM 2005-3 includes a new appraisal for the US$114.4mn Marley Station loan. The underlying property is one of the malls that had been left out of Simon Property's acquisition of Farallon's stake in the Mills portfolio in March 2012.
• Unicredit has announced a tender offer for 22 Cordusio RMBS, F-E Mortgages, Capital Mortgages, Locat and F-E Gold bonds. The liability management exercise will be undertaken via an unmodified Dutch auction. The offer period will expire on 24 September, with settlement expected on 27 September.
• Permanent TSB has launched a tender offer for Fastnet Securities 2 notes across the capital structure via a modified Dutch auction. The early tender deadline is 28 September, with a final deadline of 5 October.
• A proposal to replace Invesco Senior Secured Management with 3i Debt Management Investments as collateral manager on Theseus European CLO has been terminated. Noteholders of the class A1, A2A and A2B notes outstanding were asked in July to consent to a written resolution approving the appointment. The notes will become unblocked, effective from 10 September, following the termination.
• Moody's has downgraded to A3 the ratings of 24 securities across 12 Irish RMBS, of which seven were also placed on review for further downgrade. The agency has also placed on review for downgrade an additional 15 Irish RMBS senior and subordinated notes.
• Moody's has downgraded to Baa3 the ratings of 47 securities across 32 Portuguese ABS and RMBS. The agency has also placed on review for downgrade the ratings of a further 90 Portuguese ABS and RMBS securities.

Regulatory update
• The US Fed announced that it will now be focusing solely on agency MBS purchases, with a new Operation Twist target of US$40bn each month . The Fed also gave its strongest indication yet that interest rates will be kept low, even if the economic outlook begins to improve.
• Certain non-traditional ABS sectors are vulnerable to spiking to 100% risk-based capital requirements under the new US bank trading book rules, owing to their non-conformity with classic consumer ABS structures, performance measurement and regulatory definitions. Citi securitisation strategists argue that stranded assets, dealer floorplan, rental car, franchise, aircraft and container ABS represent secured corporate credit risk and so the associated trading book risk-based capital should reflect this.
• The FHFA has launched a new representation and warranty framework for Fannie Mae and Freddie Mac conventional loans sold or delivered on or after 1 January 2013. The new approach - which is part of a broader series of strategic initiatives called seller-servicer contract harmonisation - aims to clarify lenders' repurchase exposure and liability on future deliveries.
• Mortgage Resolution Partners (MRP) has written to the FHFA contesting the agency's right to stop MRP's eminent domain plan (SCI passim). The firm argues that FHFA lacks oversight rights with regard to the purchase of loans not owned by Fannie Mae and Freddie Mac.
• SIFMA has sent a letter to Representative Spencer Bachus, chairman of the House Financial Services Committee, in response to his request for comment on legislative alternatives to the Volcker Rule. The letter was co-signed by the Financial Services Roundtable.
• ICP Asset Management and its founder and president Thomas Priore have agreed to settle the US SEC's charges that they defrauded several CDOs they managed. A settlement in principle had been agreed last month (SCI 17 August).

Deals added to the SCI database last week:
AmeriCredit Auto Receivables Trust 2012-4; BXG Receivables Note Trust 2012-A; Chase Issuance Trust 2012-A5; Chase Issuance Trust 2012-A6; FirstMac Mortgage Funding Trust No.3 series 2-2012; Progress 2012-2 Trust; SMART ABS series 2012-3EQ Trust; Storm 2012-IV; and Willis Engine Securitization Trust II 2012-A.

Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-3; BACM 2007-2; BACM 2007-5; BSCMS 2005-T20; CSFB 2004-C1; DECO 2007-C4; EMC VI; EURO 25; GCCFC 2005-GG3; GCCFC 2005-GG5; GCCFC 2006-RR1; GECMC 05-C4 & GMACC 06-C1; GRAND; LBUBS 2006-C1; LORDS 1; MLCFC 2006-2; MSC 07-XLF9, BALL 07-BMB1 & UBSCM 07-FL1; MSDWC 2003-HQ2; TMAN 6; TMAN 7; WBCMT 07-C32 & 07-C33; and WBCMT 2007-C34.

Top stories to come in SCI:
European RMBS issuance trends
Relative value implications of CLO calls
Counterparty de-linkage frameworks

CLOs

CLO 1.0, 2.0 compared

The strong new issue US CLO market has sparked debate over the relative value of primary (CLO 2.0) versus legacy (CLO 1.0) deals. A new analysis questions whether the spread pick-up of legacy CLOs is sufficient to compensate for the additional risk of the CLO 1.0 structure for similar ratings profiles.

CLO strategists at RBS have introduced a CLO relative value analysis comparing CLO 2.0 new issue discount margins and CLO 1.0 secondary discount margins across the capital structure. The study is based on a historical regression analysis to project where generic new issue and legacy CLO tranches should be trading relative to each other at a given point in time.

It is commonly understood that new issue CLOs are more debt-friendly than legacy CLOs (SCI 24 August), while the secondary market offers wider spreads and greater discounts. However, key differences between CLO 2.0 and CLO 1.0 transactions - including credit enhancement levels, indenture language and structure, weighted average lives and credit quality of the assets - complicate the analysis.

"In theory, the market should efficiently price in these differences, but time-and-again the markets have proven to be anything but efficient. We therefore believe it's important to develop a framework to systematically assess what is 'rich' and what is 'cheap'," the RBS strategists explain.

As of end-August, their analysis indicates that new issues are relatively cheap to CLO 1.0 bonds across the capital structure by approximately 9bp, 51bp, 41bp, 128bp and 151bp for triple-A, double-A, single-A, triple-B and double-B tranches respectively. The strategists consequently suggest a couple of trade recommendations to reflect these findings.

For ratings-sensitive accounts that participate primarily at the top of the CLO structure, they believe there is opportunity in the CLO 2.0 triple-A space for more tightening. But perhaps more importantly, the strategists note that CLOs offer great relative value compared to other structured products.

Alternatively, for equal or better levels of subordination, investors could pick up 175bp by investing in triple-B 2.0 notes over single-A 1.0 bonds and double-B 2.0 bonds over triple-B 1.0 securities. "While the new issue bonds have greater convexity than secondary bonds, we believe investors are sufficiently compensated for this risk," the strategists observe.

Spreads continue to rally in both the new issue and legacy CLO sectors, resulting in a decline in the relative cheapness of CLO 2.0 bonds compared to CLO 1.0 bonds, according to the strategists. "Despite the tightening, we believe there is still relative value opportunity in CLO 2.0 versus 1.0, particularly in mezzanine bonds. We continue to find value in CLO 2.0 triple-A bonds, as they have lagged the rest of the capital stack."

CS

ABS

IFM makes Euro expansion

Industry Funds Management (IFM) has appointed David Cooper as investment director for its debt investments group. He will be based in London and lead IFM's infrastructure debt expansion into the UK and Europe.

Cooper joins from Barclays, where he was head of the infrastructure and structured project finance team. He has also worked at RBS and HBOS.

Structured Finance

European corporate trust team expands

Michael Whelan has joined US Bank Global Corporate Trust Services as svp and head of relationship management. He is based in London reporting to corporate trust md Tom Cubitt.

Whelan will head the three existing relationship management teams covering conventional debt, structured finance and CDOs. He joins from BNY Mellon, where he was corporate and sovereign debt md, and has previously held management positions at UBS, HSBC and JPMorgan.

Structured Finance

Rating agreement to include SF ratings

Deutsche Börse has signed an agreement with Fitch Solutions to deliver low-latency credit rating announcements via its AlphaFlash news feed. The feed will initially roll out Fitch's sovereign debt rating announcements, with structured finance ratings set to be added in the coming months.

The sovereign debt rating announcement will include upgrades, downgrades and rating outlook revisions. As well as structured finance ratings, it is also anticipated that ratings for supranationals, corporates and financial institutions will also be added shortly.

Structured Finance

Restructuring vet recruited

David Resnick has joined Third Avenue Management as president. He also becomes a member of the firm's investment team.

Resnick was previously chairman of Rothschild's global financing advisory practice, where he led the restructuring, debt advisory and equity advisory businesses. Before that he founded the restructuring group at Peter J Solomon Company and held a variety of positions within the restructuring and investment banking groups of Lazard Freres and Merrill Lynch.

Structured Finance

Bad bank created

Deutsche Bank is set to establish a bad bank under its recently announced Strategy 2015+ plan, which will be led by cfo Stefan Krause. The creation of the non-core operations unit (NCO) will accelerate the process of shedding risk-weighted assets from non-core activities, the bank says.

The NCO holds approximately €135bn risk-weighted assets, as of June, including €100bn of collateral from the investment bank that will see a securitisation portfolio and IAS 39 reclassified assets transferred. The aim is to sell the assets, beginning with an initial €45bn reduction in holdings by March 2013.

Deutsche Bank says that Strategy 2015+ defines a framework to develop the private & business clients, corporate banking & securities and global transaction banking divisions, bolstered by a new fully integrated asset & wealth management division.

Structured Finance

Morningstar to offer Fitch data

Morningstar now offers Fitch credit ratings data within its bespoke suite of website tools and data feed solutions. Fitch's data covers all of the agency's rated global sectors, issuers and securities and includes credit ratings, watches and outlooks.

CDO

Key man replacement made

Declaration Management & Research has replaced key management personnel in respect of seven structured finance CDOs - Independence I, II, III, IV, V and VI CDOs, and Straits Global ABS CDO I. Three managers specified in the transactions' documents as key management personnel of the collateral manager are no longer employed by Declaration.

The collateral manager proposes to replace these key management personnel with three employees of Manulife Asset Management, an affiliate of Declaration, with the effective date of the proposal 31 August. Holders of at least 75% of the aggregate outstanding amount of all notes may within 30 days of this proposal object to any of the officer replacements.

Since all of the affected transactions are currently static and are no longer actively managed by Declaration, Fitch says it doesn't expect this change in personnel to have any impact on the existing ratings of the notes in each of the transactions.

CLOs

Affiliate takes on manager's CLO

Halcyon Loan Investors, an affiliate of the existing collateral manager, has replaced Halcyon Structured Asset Management as collateral manager on Halcyon Structured Asset Management European Long Secured/Short Unsecured CLO 2008-1. Moody's has determined that the assignment and assumption agreement will not cause the current ratings of the notes to be reduced or withdrawn.

CLOs

CLO specialist makes move

Neil Hamilton is joining Paul Hastings in London as partner. He specialises in CLOs and CDOs and will begin his new role at the start of October.

Hamilton joins from Clifford Chance. He spent 12 years at the firm, most recently as structured finance partner.

CLOs

Business development md enlisted

Highland Capital Management Europe has appointed Jess Larsen as business development md. He was most recently at Bank of America Merrill Lynch, where he served as director in its European capital intro team.

Larsen has previously served as partner and head of sales at VCM Fund Management and at Range Capital. He has also worked for UBS and HSBC.

CLOs

Firm makes client coverage hires

Oak Hill Advisors has appointed Dalia Cohen as head of investor relations. Eric Storch has also joined the firm as md and will have business development, client coverage and marketing responsibilities.

Cohen joins from JLL Partners, where she was head of marketing and client coverage. She previously held a similar role at Trimaran Advisors and was also cfo of a credit hedge fund managed by Trian Credit Partners. Before that she worked at DoubleClick and Morgan Stanley.

Storch joins from GSO's customised credit strategies group, where he was co-head of institutional marketing. He has also worked at Seix Investment Advisors as head of alternatives and structured products, as well as holding posts at MBIA Asset Management and Kidder Peabody.

CLOs

Manager transfer blocked

A proposal to replace Invesco Senior Secured Management with 3i Debt Management Investments as collateral manager on Theseus European CLO has been terminated. Noteholders of the class A1, A2A and A2B notes outstanding were asked in July to consent to a written resolution approving the appointment. The notes will become unblocked, effective from 10 September, following the termination.

CMBS

Multifamily duo recruited

Prudential Mortgage Capital Company has expanded its multifamily team, naming Patrick McAllister and Laurie Morfin directors of multifamily originations. The pair reports to Jim Hensley, a principal and agency production manager for the multifamily team.

McAllister will be based in Prudential's San Francisco office, while Morfin will be based in a new Carlsbad, California office. They are both responsible for originating loans nationally on behalf of the company's agency lending business, including Fannie Mae and Freddie Mac.

Before joining Prudential, McAllister was a director and originator for Wells Fargo Multifamily Capital. He also held senior positions at Cohen Financial and Eastdil Realty. During the course of his career, he was responsible for originating agency, life company, CMBS, hard money and construction loans.

Morfin also joined Prudential from Wells Fargo Multifamily Capital, where she served as a director and originator. Earlier, she was a director of Wells Fargo's CMBS origination group, responsible for originating and closing CMBS loans. She was also a loan originator for Nationwide Insurance and an asset manager for Union Central Life Insurance Company.

CMBS

EMEA CMBS servicing ops offloaded

Deutsche Bank is seeking to sell its European CMBS servicing operations to Situs. The bank already transferred its primary servicing role for four transactions to Situs Asset Management, effective from Friday (14 September), and has sub-delegated to the firm its duties under the servicing agreement in respect of nine others.

The four EMEA CMBS impacted by the servicing transfer are: Deco 15 - Pan Europe 6, Deco 5 - UK Large Loan 1, DECO 6 - UK Large Loan 2 and Vanwall Finance. Moody's notes that the assignment to Situs will not result in a reduction or withdrawal of the ratings of the notes. The agency says its opinion addresses only the credit impact of the action.

In connection with the proposed transfer, Moody's met with the representatives of the existing servicing team at Deutsche Bank and the staff at Situs. The agency reviewed various aspects of Situs's servicing platform and considers these to be sufficiently well developed to enable the company to provide the servicing function for the affected transactions.

The Situs Companies - the US-based parent company of Situs Europe, which in turn owns Situs Asset Management - has been active in the primary and special loan servicing business since 1990. It was acquired in October 2011 by Helios AMC, a Ranieri Partners-sponsored company. The European arm, which was established in 2004, currently services €3.7bn of debt (across 435 loans) through its Copenhagen and Frankfurt offices.

The staff at Situs Europe comprises 40 employees with backgrounds in banking, valuation, accounting, loan servicing, asset management, engineering and law. The current employees of Deutsche Bank are expected to be retained by Situs in its London office. The servicing team at Deutsche Bank currently comprises seven asset managers and a director, who will continue servicing the affected transactions post transfer to Situs.

It is also envisaged that Situs will retain Deutsche Bank's loan operations system for loan servicing administration and cash management for at least two interest payment dates after the servicing transfer. Situs's loan operations team will take over following this transition period.

Furthermore, Situs will retain the existing investor reporting application for at least two IPDs after the servicing transfer. Following this, Situs intends to use a new investor reporting package that is anticipated to include additional information on the respective loan pools.

The transactions affected by the sub-delegation agreement are: DECO 7 - Pan Europe 2, DECO 8 - UK Conduit 2, DECO 9 - Pan Europe 3, DECO 10-Pan Europe 4, DECO 11 - UK Conduit 3, DECO 12 - UK 4, DECO 14 - Pan Europe 5, DECO 17 - Pan Europe 7 and DECO Series 2005-UK Conduit 1. Approximately €5.8bn of CMBS notes, representing the securitisation of 83 commercial mortgage loans secured by properties across the UK and Continental Europe, are impacted by the move. None of the special servicing arrangements for the underlying loans have been affected by the sub-servicing agreement.

Under each servicing agreement, the servicer is allowed to enter into sub-servicing agreements with third parties, provided that all conditions under the appointment of sub-contractors or delegates are fulfilled. Moody's understands that the Deutsche Bank servicing team will continue to be involved in servicing the loans, in particular in respect of the debt service payment collections and the reporting of such to the transaction parties. Situs will take over all other functions.

RMBS

Further Two Harbors addition

Two Harbors Investment Corp has announced a further hire, with Nicholas Smith joining as md. He was previously capital markets cio at GoldenTree Investment Management.

Smith was responsible for GoldenTree's residential mortgage investment platform, including investments in whole loans and mortgage servicing rights. He has previously worked as a senior financial analyst at GMAC ResCap.

RMBS

Real estate lawyer recruited

David Kaplan has joined Allonhill as general counsel. His practice covers structured finance and securitisation, with a focus on real estate.

Kaplan joins from Braddock Financial Corp, where he also served as general counsel, and has previously worked at Cadwalader, Wickersham & Taft and Sidley Austin. He will be based in Denver.

ABS

UK credit card ABS rebounds

S&P has published its 2Q12 UK credit card ABS index report, which shows that performance has remained stable despite tough economic conditions. Charge-offs and delinquencies both decreased quarter-on-quarter and new issuance increased.

"The stable credit performance of UK credit card ABS master trusts despite persistently high unemployment rates reflects our view that the volume of delinquencies is more sensitive to absolute changes in the number of those newly unemployed," says S&P credit analyst Tim Mulligan.

Charge-offs decreased by 36bp over the quarter to 6.12%, while total delinquencies decreased by 33bp to 3.51%. New issuance for the first two quarters totalled €4.6bn, which is up from €3.1bn for the same period last year.

ABS

Trade receivables programme minted

Finacity Corporation and ING Belgium have facilitated the successful closing of a pan-European trade receivables securitisation for Sonae Indústria SGPS. The securitisation programme will provide Sonae Indústria with cash proceeds of up to €100m through the on-going purchase of receivables from its European operations.

Finacity and ING Belgium acted jointly to set the transaction up. ING Belgium structured and funded the transaction, while Finacity provided analytic and structuring support, and serves as on-going administrator and back-up servicer.

ABS

Auto ABS performance stabilising

US auto ABS performance stabilised in August, with losses improving after the previous month's dip, according to Fitch's latest index results for the sector. Prime annualised net losses (ANL) dropped by 24% in August to 0.25% from 0.33% the previous month, a 47% improvement year-over-year (YOY).

Cumulative net losses (CNL) declined by 11% month-over-month (MOM) to 0.32% from 0.36%. However, this was a 50% improvement YOY - an indication that the slight MOM improvements in August are still significantly better than levels recorded last year.

60+ days delinquencies from the prime sector dipped slightly (3%) MOM to 0.37% from 0.38%. Since last August, prime delinquencies have improved by approximately 28%.

The subprime sector also exhibited stable performance this past month, with 60+ days delinquencies rising to 3.24% from 3.17%, only a 2% increase MOM. The stability in this sector has been driven largely by 2010-2012 subprime deals, which have been subject to stronger underwriting standards than weaker 2007-2009 vintages that have mostly paid down. Subprime ANL increased to 5.32% in August from 4.74%, a 12% increase MOM but showing no change YOY.

Structured Finance

IASB update welcomed

The IASB has issued a draft of its long-planned update of general hedge accounting rules. Moody's suggests in its latest credit outlook that the new rules are a positive development for investors because the revised reporting guidelines provide a better description and linkage between a company's risks and its corresponding risk-mitigations. However, the agency warns that because accounting and controlling of derivatives is inherently complex and the update will replace some of the existing bright-line rules with qualitative guidance, users must be cognisant that auditors and securities regulators will need to closely monitor how companies apply the new rules.

The existing standard relies heavily on extensive rules that make it difficult and cumbersome for some hedging activities to qualify for hedge accounting, according to Moody's. In particular, the hedge has to be within a range of 80%-125% effective. It is often the case that an entity will choose not to apply hedge accounting because of the strict limitations and complexities of its use, which can add volatility to reported income in cases where much of that volatility has actually been hedged.

The most significant development in the new rules is the removal of these arbitrary prescriptive bands, which is expected to result in more economically realistic financial reporting that is more in tune with the reporting entity's risk management framework. The ineffective portion of a hedge will continue to be recognised immediately in earnings, as is currently the case. Improved disclosure requirements will also better delineate the linkage between the risks an entity faces, what management is doing to manage those risks and how effective these strategies are.

The IASB will begin finalising the new rules in December and they will become effective in 2015. Its accompanying project on revising the rules for macro-hedges is still in a relatively early stage.

Structured Finance

Euro reporting improving

Better reporting in EMEA structured finance transactions has seen nearly one-third of deals merit a higher issuer report grade (IRG) since Fitch re-launched IRGs last year (SCI 15 November). The agency notes that while there is still room for improvement, with just 12.4% of transactions receiving the highest 4- or 5-star grades, discussions with report providers that followed the re-launch showed that many welcomed the opportunity to address weaknesses in reporting.

The improvement has not been uniform, however, with better quality reporting seen in deals that are marketed to investors than in those retained for use at central bank liquidity facilities. That said, ECB and Bank of England reporting requirements have driven some improvement and may continue to do so, although some of the information that Fitch considers important in its IRG scorecards - such as counterparty information - is not incorporated into their templates.

Perhaps reflecting the fact that many recent auto and consumer loan ABS issues have been publicly placed, this sector has the highest proportion of 5-star grades (at around 25%). Over three-quarters of CMBS deals only achieve a 1-star IRG, mostly due to the omission of counterparty information. However, a relatively high proportion (11%) achieve 5-stars - reflecting the importance of third-party servicers and cash managers in the sector, some of whom have taken the opportunity to improve their reports.

For RMBS, 12% of deals get a 4- or 5-star IRG, compared with no deals in November. Around half of the RMBS deals that only receive one star are lacking five items or less in their reports that would be needed for a higher grade, suggesting that the IRG could be improved relatively easily. However, issuer feedback suggests that IT or other logistical limitations could make this more challenging than it appears.

Fitch expects Dutch RMBS IRGs to improve when the standardised reporting template being developed by KPMG is launched in the near future.

Structured Finance

Irish country ceiling lowered

Moody's has downgraded to A3 the ratings of 24 securities across 12 Irish RMBS, of which seven were also placed on review for further downgrade. The agency has also placed on review for downgrade an additional 15 Irish RMBS senior and subordinated notes.

The rating actions follow Moody's decision to lower the Irish country ceiling from A1 to A3 on 6 September. The main driver for the rating review placements is the agency's intention to reassess credit enhancement adequacy for each of the rated notes, given the increased risk of economic and financial instability.

Ireland's new country ceiling reflects the elevated risk for economic and financial dislocations. The weakness of the economy constitutes a substantial risk factor to non-government issuers in the country because income and access to liquidity and funding could be sharply curtailed to all classes of borrowers. The lower ceiling also reflects the risk of exit and redenomination in the unlikely event of a default by the sovereign.

Moody's has further concluded its review of 10 ratings in three Irish RMBS (Celtic 14-16) transactions that were placed on review for downgrade on 14 May due to low level of credit enhancement in consideration of the large exposure to negative equity loans in the underlying collateral. The credit enhancement available to the senior notes has substantially increased following a restructuring of these transactions executed in August.

CDO

ABS CDO auction due

Wells Fargo, as trustee for the transaction, will conduct an auction for RFC CDO I on 1 October. The collateral will only be sold if the liquidation results in sale proceeds, together with the balance of all eligible investments and cash in the accounts, greater than or equal to the redemption amount.

CLOs

CLO opportunity fund closed

Pearl Diver Capital has closed its third CLO opportunity fund, a Guernsey-based private equity-style GP/LP structure. The fund - dubbed Pearl Diver Capital Fund III - closed with US$234.1m in commitments, with the capital locked in over several years.

The fund will focus its investments primarily on post-2011 US CLOs, targeting majority control positions in equity tranches and potentially junior mezzanine tranches to help CLO managers achieve execution certainty. Pearl Diver will look to add value by working closely with the selected managers on credit and structure at inception.

CMBS

Institutional investors outperform CPPI

Commercial real estate properties owned by institutional investors outperformed the national all-property composite, as measured by the Moody's/RCA Commercial Property Price Indices (CPPI), during both the run-up to the peak and the post-trough recovery through July 2012. Overall US commercial real estate prices, meanwhile, were down by 1.2% in July.

In a new analysis examining the buyers and sellers of commercial property, Moody's found that institutional investors have recovered roughly 60% of their peak-to-trough value decline while the market as a whole has recovered roughly 40%. A review of the strength of the recoveries in the two largest of the six markets designated by CPPI as major - New York and Los Angeles - and that of large US cities just outside that group found some significant contrasts.

"New York has had a strong post-crisis recovery and is about 7% off its peak, while the recovery in Los Angeles started to lose momentum in 4Q11 and has regained less than half of its peak-to-trough decline," says Tad Philipp, Moody's director of commercial real estate research. "While three major Texas metros (Houston, Dallas and Austin) have recovered more than half of their peak-to-trough decline, Atlanta has struggled to regain pricing traction and has recovered one-quarter of its peak-to-trough decline."

As to the national composite, the drop of 1.2% month-over-month confirms the trend that the strong recovery in US commercial real estate prices that commenced in early 2010 has lost steam over the last three quarters. "One of the main drivers of value growth, cap rate compression driven by historically low financing costs, has largely played out while the other main driver, income growth, has yet to fully kick in because of the persistently weak economy," says Philipp.

Within property types, apartments - in keeping with their generally strong fundamentals and liquidity - have been the best performing property sector over the last three months, up by 2.3%. Among the four commercial property types, the best performing over the last three months was retail, up by 1.5%. The other commercial segments trended flat to down.

CMBS

Favourable news sparks CMBX rally

After trading in the same range all summer, favourable news from Europe and the US Fed last week was enough of a catalyst to set CMBX on fire, according to CRE debt analysts at Deutsche Bank. All indices were up on the week by between one to four points, with AJs and AMs outperforming. In the older series, the rally extended all the way down to single-As.

"Considering the dearth of available paper for investors to buy in the cash space, there should be an up-tick in leveraged synthetic transactions to take advantage of the current market environment," the Deutsche analysts indicate. "The credit curve continues to steepen below the AJ level, as liquidations erode subordination levels, and no amount of monetary stimulus can help those bonds. But for 'in the money' tranches, the support for risk assets from global central banks will facilitate another rally (at least in the short term) and the basis between AJs and AMs should decline."

The vintage curve also flattened in the triple-A space amid acceleration of the deleveraging process. To take advantage of the underperformance of levered CMBS, the analysts suggest going long the AJ.3 and 4 indices.

"We expect the credit curve to [continue flattening] and, while other products have retraced nearly all of their widening over the last year, the AJs still have a long way to go," they explain.

CMBS

CMBS late-pays continue to decline

Delinquencies on office loans are still creeping higher as overall US CMBS late-pays continue to fall, according to Fitch's latest index results for the sector. Overall CMBS delinquencies declined by 9bp last month to 8.39%, from 8.48% in July.

In August, approximately US$2bn of loans were resolved and removed from the index, compared to US$1.7bn of new delinquencies added to the index. The largest addition to Fitch's index was the US$678m Skyline Office Portfolio (securitised in GECMC 2007-C1, BACM 2007-1 and JPMCC 2007-LDPX), which contributed to office delinquencies rising by 29bp. A potential loan modification is currently being discussed (see SCI's CMBS loan events database).

Retail delinquencies, meanwhile, rose by 3bp during the month. The largest retail loans becoming newly delinquent are the US$71.4m and US$18.5m cross-collateralised and cross-defaulted Algonquin Commons Phase I and Phase II loans, which are secured by two retail properties totalling 564,790 square-feet in Algonquin, IL.

The latest delinquencies by property type are: 10.82% for hotels (from 11.46% in July); 10.18% for multifamily (from 10.89%); 8.54% for industrial (from 8.68%); 8.72% for office (from 8.43%); and 7.43% for retail (from 7.40%).

Risk Management

Counterparty risk webinar scheduled

SCI, in association with Fitch Solutions, is hosting a webinar on credit and counterparty risk management at 3pm UK time/10am Eastern on 25 September. Complimentary registration is available here.

Join SCI and industry leaders from Fitch Solutions as they present findings from the 2012 SCI/Fitch Solutions survey of global counterparty risk managers. Those polled indicated that while counterparty risk management has increased in importance since the financial crisis, risk management practices and sophistication levels still vary widely across institutions.

Fitch Solutions will examine how data needs have changed and address the growing demand for CDS liquidity and market-based risk indicators to assess credit risk during the call. The webinar will also include an interactive session on risk management approaches, as well as a Q&A session.

RMBS

Dutch securitisation association prepped

A new Dutch Securitisation Association (DSA) is expected to launch imminently. The project was initiated by Holland Financial Centre (HFC) in October 2010, with the aim of representing parties involved in Dutch RMBS and improving capital market access for issuers.

HFC members have also defined a standard for future RMBS issuance, which is expected to be formalised by 1 October. The standard will contain: a template for investor reports; a template table of contents for prospectuses; and a list of the approximately 200 most used definitions in Dutch RMBS that have now been aligned between the different legal counsels and issuer programmes.

The standard in respect of investor reporting was developed based on feedback from investors, rating agencies and other third parties. The standard in respect of documentation was defined with the support of the five major law firms in the Netherlands involved in ABS.

In parallel to developing the DSA standard for Dutch RMBS, Dutch issuers have also been actively involved in the pan-European Prime Collateral Securities (PCS) initiative. One of those criteria for Dutch RMBS bonds will be compliant with the DSA standard.

The Nederlandse Vereniging van Banken (NVB) and the Verbond van Verzekeraars (VVV) will jointly facilitate the operations of DSA going forward. The associations are currently in the process of appointing a director, who will be responsible for the day-to-day activities of DSA.

RMBS

Irish negative equity warning

High levels of negative equity will drive losses in Irish RMBS to 9.5% based on defaults peaking at around 20% in early 2013, according to Moody's. However, uncertainty over the full extent of losses remains, as a result of the growing effect of moral hazard.

"The key driver of future defaults in Irish RMBS pools will be loans originated with high LTVs in the run-up to the crisis, which are now in the deepest negative equity," notes Anthony Parry, a Moody's vp. "Higher LTV loans, which we estimate are now in negative equity, have a default rate of 21.7% - 1.7 times the rate observed for loans not in negative equity."

However, moral hazard is also having a growing effect on loan defaults. Without the strictest of controls in place, moral hazard will drive default rates even higher and increase losses on Irish mortgage loans, Moody's warns.

The current dearth of repossessions and the recently proposed personal insolvency legislation is starting to result in higher defaults due to moral hazard. Obligors with loans in negative equity are more likely to default, even when they have the financial capacity to pay, because they stand to benefit most from the legislation.

"We spoke to a number of servicers to get their views on current market trends. They had mixed opinions on the effect of moral hazard on default levels to date," says Steven Becker, a Moody's analyst.

The agency received estimates from only negligible levels up to as much as 40% of current arrears, which are attributable to borrowers who are not truly unable to pay. Unlike most of the servicers it spoke to, Moody's expects defaults on unsustainable mortgage debt to typically result in debt forgiveness rather than repossession.

Other characteristics will persist as key default drivers, but will be outweighed by the impact of negative equity on future defaults. These key default drivers to date include: self-employed borrowers; loans taken out for the purpose of a buy-to-let investment; and loans originated outside of Dublin and Cork.

RMBS

SHP model enhanced

Fitch's sustainable home price model (SHP) now provides projections at the metropolitan statistical area (MSA) and division level. Projections are available for 379 MSAs, which account for 95% of mortgage originations. Both the MSA and state-level projections will be released quarterly.

The MSA projections will take precedence over state-level values for analytical purposes in Fitch's US RMBS loan loss model. The MSA version includes enhancements to the calculation process, as well as an additional factor in its assessment of sustainable values.

In addition to population, housing starts, income, mortgage rates and unemployment, the model now incorporates a rental value index that better captures price dynamics in supply-constrained markets such as San Francisco and New York, Fitch says. The agency will continue to provide state and national price expectations, which are currently unchanged from last quarter's decline estimate of 8%.

The pace of economic growth is proving inadequate to counter the effects of sizeable remaining foreclosure inventories across the country, Fitch observes. On a positive note, cities most affected by the housing downturn are showing signs of stabilisation and have even recorded robust year-over-year increases.

RMBS

Fresh twist from Fed

Operation Twist had been expected to continue with around US$50bn of Treasury and agency MBS purchases each month, so the Fed's latest announcement that it will now be focusing solely on MBS purchases has come as something of a surprise. The Fed also gave its strongest indication yet that interest rates will be kept low even if the economic outlook begins to improve.

The new Operation Twist target is for US$40bn of agency MBS purchases each month. Barclays Capital RMBS analysts say that this focus solely on MBS was unexpected, but note that the Fed has not completely closed the door on future Treasury purchases, so there could be further action in the future.

"Altogether, we interpret today's action as a bold shift in Fed policy. On the one hand, the committee significantly strengthened its commitment to a low rate environment and embarked on an open-ended purchase program. These moves indicate the accommodation switch has been "turned on" and the data have to tell the committee when to stop," say the analysts.

They continue: "On the other hand, boldness has been traded for more uncertainty, as the overall amount and duration of Fed purchases will be dependent on evolving economic conditions. Whereas with past Fed purchase programs, market participants had fairly concrete knowledge about the total amount of purchases and time horizon over which these purchases would be conducted, the current open-ended purchase program provides less information up front."

RMBS

Boost for mortgage lending, housing?

Fitch says that the new representation and warranty framework announced by the FHFA (SCI 12 September) could potentially have a positive impact on both the mortgage lending and housing markets.

The new framework places greater emphasis on quality control review processes to be applied when loans are delivered to Fannie Mae and Freddie Mac earlier in the loan process and improves clarity around repurchase requests. Fitch believes that these changes, coupled with improved underwriting processes, could ease lender liability concerns on new loan production and spur broader credit availability.

"The banking industry is still plagued with very high mortgage repurchase expenses, mainly related to the 2005 to 2008 vintages," the agency explains. "As the industry generally began to tighten underwriting standards in early 2009, credit availability was greatly reduced. With a refinancing wave underway, mortgage lending has been one of the few streams of revenue growth for the banks, as they struggle to generate earnings amidst higher capital thresholds, increased regulatory costs and elevated litigation expenses."

Although the FHFA proposal would effectively create more clarity for the industry, there are other issues that the banking industry still have to contend with - namely the future of housing reform and the GSEs, capital implications related to mortgage servicing rights under Basel 3 and regulatory uncertainties related to the Consumer Financial Protection Bureau - which could all act to constrain credit availability, Fitch concludes.

RMBS

FSTNT 2 tender, restructuring launched

Permanent TSB has launched a tender offer for Fastnet Securities 2 notes across the capital structure via a modified Dutch auction. The early tender deadline is 28 September, with a final deadline of 5 October.

The tender is running concurrently with an extraordinary resolution to amend the transaction as a result of Permanent TSB's downgrade. The proposed changes include: a credit support annex with Permanent TSB as swap counterparty and an account with BNP Paribas to hold collateral posted under the swap; the appointment of BNP Paribas as back-up cash manager and replacement account bank in respect of certain transaction accounts; modification of the swap agreement rating triggers to require transfer of the swap only if Permanent TSB is downgraded below triple-C by both S&P and Moody's; an update of the mortgage management agreement with respect to loan enforcement procedures to reflect current regulatory requirements of the Central Bank of Ireland; and a permanent waiver against any defaults that may have occurred under the swap agreement, mortgage management agreement, notification requirements or other obligations arising as a result of the downgrade of Permanent TSB.

Noteholder meetings are scheduled for 10 October. Tender results will be announced on 12 October and settled on 17 October.

RMBS

MRP fights back

Mortgage Resolution Partners (MRP) has written to the FHFA contesting the agency's right to stop MRP's eminent domain plan (SCI passim). The firm argues that FHFA lacks oversight rights with regard to the purchase of loans not owned by Fannie Mae and Freddie Mac. MRP's letter is in response to a register notice that FHFA issued in August, in which it predicted that MRP's eminent domain plan would result in steep losses for the GSEs and the Federal Home Loan Banks.