Contents

CLOs

Sub paper sparks feeding frenzy

Yesterday's session saw a spike in CLO supply, with equity paper in hot demand. Tiering among subordinated notes is in evidence, as SCI's PriceABS BWIC data shows a wide range of covers and talk.

The highest cover of the session was at 176.27 for WOODS 2006-7X SUB. It was talked yesterday between the low-160s and high-170s, which is where it had also been talked on Monday. The tranche was last covered on 14 September at 177.

Another Wood Street tranche - WOODS 2006-6X SUB - was covered yesterday at 110.5. Talk had been between the high-100s and low-110s.

The lowest cover for a subordinated tranche was for FOURC 2005-1X SUB. It was covered at 33.27, with talk ranging from the low-20s to mid-30s. It had been talked on Monday in the mid-30s.

Babson paper also attracted interest during the session. BABSN 2004-1X SUB was talked from the high-50s to high-60s and covered at 62.55, while BABSN 2005-1X SUB was talked between the low-70s and mid-80s and covered at 81.55. BABSN 2006-1X SUB was covered at 71.32, having been covered at 72 a day earlier.

DUANE 2006-2X SUB was also covered, having been talked between the mid/high-60s and low-70s. It was previously covered in the mid-60s on 23 August.

Other names of interest from the session include EATON 2006-8I SUB, LCM 5I SUB, GALXY 2006-7A SUB and KATO 8A SUB, which were talked in the low/mid-120s, 110 area, very low-70s and mid-60s respectively.

JL

RMBS

Healthy start for RMBS

October kicked off with some decent secondary activity for US RMBS, particularly for non-agency paper. Offering levels are higher than they were over the summer, but remain in line with those seen in the last couple of months.

SCI's PriceABS BWIC data shows 138 RMBS line items for yesterday's session, with Interactive Data estimating that non-agency volumes stood at US$605m. "Trading flows are concentrated in ARM collateral today, with a large AON list accounting for the majority of the sub-sector's supply. There is a stable tone in the market, with dealer indications generally in line with recent market colour," Interactive Data notes.

This ARM supply can be seen in PriceABS, with examples such as the option ARM tranche CWHL 2006-OA5 2A1. A US$22.7m slice of the bond was talked between the low/mid-60s and mid-60s yesterday, with a US$41.3m piece being talked in the mid-60s. Similarly sized slices were previously talked in the low/mid-60s (on 6 September), 60 area (16 August) and low-50s (18 June).

Subprime paper was also out for the bid yesterday. The LBMLT 2006-WL1 2A3 tranche was talked between the low-80s for a US$2.1m piece and mid/high-80s for a US$1.1m piece. A larger US$43.7m chunk was covered in the mid/high-80s on 20 September, after a more modest US$4m slice was talked in the high-60s on 13 June.

Another name of note is JPMMT 2005-A6 3A3. A US$10.2m piece - accounting for almost half of the prime hybrid tranche - was talked in the mid/high-70s. Other JPMMT 2005-A6 paper was circulating regularly in August.

JL

Structured Finance

SCI Start the Week - 1 October

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

Pipeline
A few new deals joined the pipeline last week. CLOs make up the majority, but ABS, ILS and CMBS are also represented.

The CLOs include Benefit Street Partners CLO I, ING IM CLO 2012-3 and OZLM Funding II. The ABS is a lease deal (€78m TDA Lico Leasing III FTA), while the ILS is US$300m Multicat Mexico 2012-1 and the CMBS is US$876m COMM 2012-CCRE 3.

Pricings
ABS accounted for the bulk of the week's prints. Two auto deals (US$833m Ford Credit Auto Lease Trust 2012-B and A$151m Liberty Funding 2012-1A), one container deal (US$250m Beacon Container Finance 2012-1) and three credit card deals (US$500m Citibank Credit Card Issuance Trust 2012-A1, US$700m Golden Credit Card Trust series 2012-5 and US$500m Golden Credit Card Trust series 2012-6) priced.

In addition, two RMBS and two CLOs were issued. The RMBS comprised €12.5bn Dolphin Master Issuer 2012-II and €959m Holland Mortgage Backed Series 18, while the CLOs were US$523m Dryden XXIV and US$520m Venture XI CLO. Finally, a US$1.13bn CMBS - JPMCC 2012-C8 - rounded the supply out.

Markets
US CMBS spreads changed very little last week, report Barclays CMBS analysts. "The post-QE3 rally in the duper space took a breather [last] week, with spreads in the duper part of the curve roughly unchanged from [the previous] Thursday's levels. Even then, the CMBS market held up better than broader equity markets, where the latest rumblings from Europe pushed the S&P 500 index 10 points lower over the week." AMs and AJs continued to rally, however, with 2007 vintage AMs tightening by around 10bp over the week.

Meanwhile, BWIC supply for the US non-agency RMBS market was unchanged last week, say Citi securitised products analysts. They note that prices were flat across all sectors and 1-2 points lower in ABX on small selling. In agency RMBS, 30-year production MBS outperformed duration hedges by 10-14 ticks.

The US CLO market saw US$600m in BWIC volumes through Thursday, with several sellers looking to take advantage of the recent tightening, according to structured products strategists at Bank of America Merrill Lynch. "The BWIC volumes were concentrated primarily in mezz and equity. CLO secondary spreads tightened across most of the capital structure. Legacy triple-A spreads tightened by 5bp, double-A remained flat and single-A tightened 10bp. Triple-B and double-B spreads tightened by another 25bp," they note.

European ABS was unscathed by the softening in broader credit markets, Deutsche Bank ABS analysts report. They note that ABS primary and secondary activity both point to further tightening.

"Given the extent of the rally in core vanilla sectors - auto ABS now pricing at 25bp, UK prime RMBS c.50bp for new issue in size - we see limited scope for tightening beyond current levels," they add.

Dutch paper was the flavour of the week for the European RMBS market, as SCI reported on Tuesday (SCI 25 September). SCI's PriceABS BWIC data shows the week starting with a couple of lists featuring Dutch near-prime paper, including a single-name list for a €3.118m slice of EMFNL 2008-1X A2, covered at 94. Analysts at JPMorgan add that, by the end of the week, UK prime triple-As had moved to levels not seen since January 2008. 

Deal news
• Several large rent-regulated US multifamily CMBS loans could see long resolution processes and uncertain workout outcomes, according to CMBS strategists at Citi. Limited disclosure on specific rent regulation complicates valuing and projecting financials for such properties.
• Banco Santander Totta has announced an unusual exchange offer for investors in three senior tranches of its RMBS, as part of a liability management exercise. The lender is proposing to switch holders of the HIPOT 1 A, 4 A and 5 A2 bonds into a Santander covered bond (SANTAN Float 01/12/14).
• Unicredit has published the results for all bonds subject to its recent tender, apart from four Cordusio tranches - CORDR 1 C, 2 C, 4 C and 4 D - whose offer deadline was extended to 27 September. The bank accepted €571.96m nominal value of notes out of the €985.75m offered via an unmodified Dutch auction.
• Arbor Realty Trust has privately placed a US$125m CLO, becoming the first commercial mortgage REIT to tap the sector. Dubbed Arbor CLO 2012-1, the notes are secured by 18 whole loans and A-notes.
• Blackrock is set to be removed without cause as collateral manager for Toro ABS CDO II. A majority-in-interest of preference shareholders has directed the issuer to appoint Vertical Capital as successor collateral manager on the transaction.
• Deutsche Bank priced its hotly anticipated Vitus CMBS. The €754m transaction, dubbed Florentia, refinances the Vitus Immobilien German multifamily portfolio securitised in Centaurus (Eclipse 2005-3).
• The proceedings in the High Court of England initiated by Pearsanta, the junior lender in the Alburn Real Estate Capital (REC 6) CMBS (SCI 27 June), have been struck out without further order of the Court. The move follows Pearsanta's failure to pay the joint defendants a second instalment of security for costs on 31 August.
• It has emerged that GRAND CMBS noteholders which were not part of the ad-hoc group involved in discussions with DAIG chose the REF note servicer as a separate conduit for providing comments on the restructuring proposal. The REF note servicer received comments from approximately 15% of noteholders expressing a desire for improvements to certain elements of the heads of terms, but DAIG says it will not be undertaking any further negotiation of the heads of terms.

Regulatory update
• The FHFA is seeking to increase GSE guarantee fees for single-family mortgages that they acquire in five states - Illinois, Connecticut, Florida, New Jersey and New York. Such state level pricing not only marks a change from the desire to smooth out regional differences in mortgage pricing, but also indicates that certain local factors - such as foreclosure timelines - could play a role in determining borrowing costs for otherwise perfectly creditworthy borrowers.
• The US federal banking regulatory agencies have reopened the comment period on the Dodd-Frank rule establishing margin and capital requirements for swap dealers, major swap participants, security-based swap dealers and major security-based swap participants. The comment period - which originally ended on 11 July 2011 - was reopened to 26 November 2012 to allow interested parties more time to analyse the issues and prepare their comments.
• The European Securities and Markets Authority (ESMA) has published its technical standards on the Regulation on OTC derivatives, central counterparties and trade repositories (EMIR), which set out the specific details of how EMIR's requirements are to be implemented. They have been sent to the European Commission for their adoption as EU regulations.
• The NCUA has filed suit in Federal District Court in Kansas against Barclays Capital, alleging that the bank violated federal and state securities laws through misrepresentations in the sale of MBS to US Central Federal Credit Union and Western Corporate Federal Credit Union. The price paid for the securities by US Central and WesCorp exceeded US$555m.

Deals added to the SCI database last week:
AMMC CLO XI; Apollo Series 2012-1 Trust; Atrium VIII; Carlyle Global Market Strategies CLO 2012-3; CNH Equipment Trust 2012-C; Cronos Containers Program I series 2012-2; Crown Point CLO; Dutch MBS XVII; Education Loan Asset-Backed Trust I series 2012-1; Enterprise Fleet Financing Series 2012-2; Eurus III; Flatiron CLO 2012-1; Florentia; FREMF 2012-K20; FREMF 2012-KP01; GE Equipment Midticket Series 2012-1; LCM XII; RMS 26; Scholar Funding Trust 2012-B; Sequoia Mortgage Trust 2012-4; Sound Point CLO I; Toyota Auto Receivables 2012-B Owner Trust; United Auto Credit Securitization 2012-1; Westlake Automobile Receivables Trust 2012-1; and WFRBS 2012-LC5.

Deals added to the SCI CMBS Loan Events database last week:
CD 2006-CD3; COMM 07-C9 & CD 07-CD5; CSMC 07-C5 & 08-C1; DECO 9-E3; ECLIP 2005-3; EPICP DRUM; EURO 21; EURO 24; GCCFC 2006-GG7; GRND 1; JPMCC 06-LDP7 & JPMCC 06-CB16; JPMCC 2006-LDP9; LORDS 1; OPERA GER²; REC 6; TMAN 6; and WBCMT 2007-C30.

Top stories to come in SCI:
Counterparty de-linkage frameworks

Structured Finance

EWSM prepared for lift-off

The European Wholesale Securities Market (EWSM) is expected to start listing debt and structured finance securities imminently. The joint venture between the Irish Stock Exchange (ISE) and Malta Stock Exchange (MSE) is awaiting designation as a recognised exchange by HMRC for withholding tax purposes, having been first announced in February.

Marketing efforts for the EWSM have been broadly based. ISE debt products manager James Johnston says that feedback has been favourable, with arrangers and law firms welcoming another listing option based in Southern Europe.

"The choice of jurisdiction matters for issuers - they want the listing process to be as streamlined as possible, with certainty of timing. In Europe the acknowledged listing venues for debt and structured finance securities are Ireland, London and Luxembourg. We received feedback that there was room for another venue and recognised Malta as a jurisdiction which provided a different geographical focus," he confirms.

Indeed, a key strength of the EWSM is that its reviewing authority - Malta Financial Services Authority (MFSA) - operates a smooth listing process, according to Johnston. The regulator is committed to a three-day review period for initial submissions and a two-day review of subsequent drafts, meaning that it is possible to list a security within two weeks. It has also waived its approval fees for two years, so pricing is extremely competitive compared to other jurisdictions.

Brian Kelly, manager of ISE Listing Services, adds that the MFSA has a proactive track record regarding regulatory change and is often the first regulator to issue guidance on matters of interest to the market. He points to life settlement securitisations as an example: in contrast to other authorities - which appear to have been influenced by the negative press surrounding the sector - the MFSA says it is willing to review them, providing they comply with the Prospectus Directive and other conditions appropriate to the product type.

Kelly explains: "The debt market is evolving all the time and becoming more complex; there may not be the time or inclination at some authorities to review new products. The MFSA has expressed a willingness to engage in direct communication with issuers and their advisers in relation to new products."

Given the historical coverage of the Irish, London and Luxembourg listing venues and their location in Northern Europe, the EWSM is targeting issuers across the Mediterranean - Italy, Spain, Greece and Turkey - and Africa.

The ISE owns 80% of the EWSM, with the MSE having a 20% shareholding. The ISE's international primary markets division acts as promoter of the market and the exchange provides primary market infrastructure, listing and other corporate services. The MSE acts as the market operator and provides secondary market services.

CS

CDO

Further Lehman CDO judgements possible

The Federal Court in Australia has ruled in favour of three councils in a class action brought against Lehman Brothers Australia. The findings could pave the way for the judgement to be extended to other organisations that either sold or distributed CDOs and capital protected notes to councils, or advised councils to buy them.

The Federal Court action was taken by Wingecarribee and Parkes Shire Councils (New South Wales) and City of Swan (Western Australia), representing 69 other councils, charities, not-for-profit and church groups. The councils were represented by Piper Alderman and the action was funded by IMF (Australia).

The claimants collectively lost over A$200m from investments in CDOs purchased from Lehman's Australian subsidiary prior to 2007. They alleged misleading conduct, breach of contract, breach of fiduciary duty and negligence on the part of Lehman Australia in its marketing of the CDOs.

In his judgment, Justice Steven Rares ruled that Lehman had engaged in deceptive and misleading conduct, negligence, breach of fiduciary duties and breach of contract. Two further key findings of the ruling were that: CDOs and capital protected notes linked to investments that could not be classified as 'conservative' should not have been sold to councils; and CDOs and capital protected notes linked to other asset classes should be defined as derivatives and not securities. Councils have never been permitted to invest in derivatives and Piper Alderman is said to be examining cases against other major banks.

The judgment in favour of the three lead applicants include findings of fact and law common to all 72 councils, charities and church groups, whose claims may now proceed by either settlement or a simple claims resolution process. The judgement is subject to appeal, however.

If there is no appeal, the next stage will be for the parties to work out how the judgement will be applied to each member of the class, based on the findings for the three lead litigants. In a recent client memo, Structured Credit Research & Advisory estimates that if all claims are allowed, investors will receive around 25c on the dollar.

"For the judgement to be extended beyond the three councils to others, there will need to be a common basis established," the firm notes. "If this cannot be done, those in a similar situation to the three councils will likely be fully compensated, while others that are deemed to be in a very different situation will not receive the same recompense. This latter group may include professional fund managers, who may be deemed to be more sophisticated than councils and cannot (or do not wish to) claim Lehman acted as an advisor to them."

The Court decision follows the High Court's rejection in 2010 of a controversial earlier arrangement obtained by liquidators for Lehman, PPB Advisory, on behalf of related Lehman Brothers creditors. This arrangement sought to limit the funds available to the claimants from the estate of Lehman Australia. As a result of this judgment, those parties are now entitled to a fairer share of the estate.

PPB announced last month that an in principle agreement has been reached to unwind the nine remaining CDOs from the Dante programme - Coolangatta, Merimbula, Kakadu Restructure, Endeavour, Miami and Global Bank Note (SCI 2 February 2012). The agreement has been negotiated by JWS representing the Belmont Park group of investors, with further details expected to emerge this month.

Lehman Brothers Holdings Inc is currently making six-monthly distributions on claims recognised against the Lehman estate. These distributions started in March and the second payment was made on 1 October.

CS

CMBS

Rent regulation complicating workouts

Several large rent-regulated US multifamily CMBS loans could see long resolution processes and uncertain workout outcomes, according to CMBS strategists at Citi. Limited disclosure on specific rent regulation complicates valuing and projecting financials for such properties.

The Citi strategists warn that the US$195m New York City Apartment Portfolio (securitised in MSC 2007-IQ14) and the US$133m Three Borough Pool (WBCMT 2007-C33) are likely to see their resolution processes complicated by rent regulation issues. The recent default of the US$375m The Belnord loan (JPMCC 2006-LDP) is only the latest development caused by this unique CMBS risk.

In most cases it is hard to assess the landlords' exposure to the J-51 tax ruling, which is what derailed the US$3bn Stuyvesant Town &Peter Cooper borrowers' business plan (SCI passim). In other cases, such as with the US$90m Meyberry House loan (securitised in CSMC 2007-4) or the US$84m The Renaissance loan (WBCMT 2007-C33), it is not immediately clear from deal documents if the property is even rent regulated.

"Only consulting the Rent Guideline Board (RGB) list of New York rent stabilised properties suggests the properties indeed contain rent regulated apartments. But the precise breakdown of rent-regulated versus market-rate units could remain elusive," the strategists explain.

They add that the diverse outcomes on the rent-regulated loans that have already been resolved also makes projecting outcomes harder. For example, the US$192.1m Manhattan Apartment Portfolio (GECMC 2007-C1) was liquidated in November 2011 for a US$87.1m loss (42.7% loss severity). In contrast, the US$210m Savoy Park (CSMC 2007-C1) reportedly recently sold for US$210m, suggesting that limited losses can be expected (see SCI's CMBS loan events database).

A couple of smaller loans also appear to be performing better than the larger loans. For instance, the US$62.5m 175 West 72nd Street (JPMCC 2007-LD11) has a decent 1.38 DSCR and the US$46.5m 190 East 7th Street (MSC 2007-IQ15) seems to at least be able to service its debt payments.

Nevertheless, issues could be percolating even on these loans, the strategists note. The servicer notes for the former loan that DSCR had dropped in 2011 to 1.06 due to an increase in utilities and maintenance, while the servicer notes for the latter that the rent roll was not received and leasing updates have been requested.

The latest DSCR levels on most rent-regulated loans remain depressed. Pre-origination NOI levels have not significantly improved, so the loans have not been able to reach their underwritten DSCR. In fact, the most recent available NOI on many of the loans are roughly consistent with historical pre-origination levels, implying that there has been limited conversion activity.

CS

CMBS

Enforcement opportunities highlighted

A divergence between the relatively few strong European CMBS transactions and the larger number of deals backed by weaker loans has emerged in recent weeks, driven by weakness in the commercial property market and the lack of available financing. European asset-backed analysts at RBS suggest that significant value can nevertheless be found in the senior tranches of these weaker transactions.

The main reason for this view is that a number of factors - including conservative valuations - are putting pressure on servicers to enforce more aggressively. "Even with enforcements, we expect that the senior bonds in these transactions will recover par in most reasonable scenarios," the RBS analysts explain. "Further, the enforcements actually increase their value by shortening the cashflows. Indeed, in many of these transactions, we believe that the average life of the senior bond could be as short as 1-3 years - much shorter than the legal maturity of the notes."

Most valuers are now factoring in a severe recession, often assuming that vacant space will not be rented for years, as well as high cap rate assumptions. For example, a recent valuation of the Government Income Portfolio in WINDM XI applied an average cap rate of 12.43%, despite half the leases expiring after 2021 and the fact that the tenant is the UK government.

Low valuations are effectively advising servicers that postponing enforcement is likely to result in further erosion of value, the analysts observe. As a result, the 'extend and pretend' strategy of the 2008-2010 period has been replaced with a more aggressive enforcement strategy. In aggregate, over half of all loans that are maturing are expected to be enforced.

Disposals are anticipated over the next two years for the Peach loan securitised in TMAN 6, the Mozart loan in TMAN 7 and Sunrise II, resulting in substantial pay-downs to the senior bonds. Another factor that may accelerate property disposals is that some bonds - such as EMC 4 and TAURS 4 - are approaching legal maturity.

"With prime RMBS now trading tighter than 50bp to Libor and high quality European CMBS trading as tight as 150bp, we believe that these liquidating [bonds] offer good value. They also have the potential to tighten significantly, if the current rally is sustained," the analysts conclude.

CS

RMBS

G-fee hike to slow NY prepays

The FHFA is seeking to increase GSE guarantee fees for single-family mortgages that they acquire in five states - Illinois, Connecticut, Florida, New Jersey and New York. Such state level pricing not only marks a change from the desire to smooth out regional differences in mortgage pricing, but also indicates that certain local factors - such as foreclosure timelines - could play a role in determining borrowing costs for otherwise perfectly creditworthy borrowers.

"Higher mortgage fees are proposed on the states where default-related costs are significantly higher than the national average. However, it might be contentious that borrowers with pristine credit will have to pay a fee based on their state of residence," explain RMBS analysts at RBS.

The planned upfront fee would increase by 15bp in IL, 20bp in FL, CT and NJ, and 30bp in NY. Depending on the loan size, the fee could add anywhere between US$40 to US$100 per year to mortgage payments beginning in 2013, according to the RBS analysts.

"Given that New York prepayment levels are already lower than many other states due to its higher mortgage taxes, an additional 30bp g-fee hike will further slow refinancing activity in the state. We believe that pools with high NY geographic concentrations should provide good prepayment protection," they observe.

Another factor that has affected state level refinancing recently is HARP implementation, with prepayment activity becoming quite diverse across states as a result. In the past year CA mortgages prepaid faster than average, CT and NJ were largely on par with average, while NY and FL were slower than average.

The analysts suggest that g-fees will become more uniform between large and small lenders, thus higher fee increases will be incurred by bigger lenders. However, higher g-fees may not help the housing recovery for states such as Florida and Illinois, given that they are typically passed on from lenders to borrowers as an adjustment to the mortgage interest rate.

CS

RMBS

Unusual exchange offer unveiled

Banco Santander Totta has announced an unusual exchange offer for investors in three senior tranches of its RMBS, as part of a liability management exercise. The lender is proposing to switch holders of the HIPOT 1 A, 4 A and 5 A2 bonds into a Santander covered bond (SANTAN Float 01/12/14).

The RMBS were previously tendered by the originator in March. The actual exchange price this time around will be determined by an unmodified Dutch auction, although - at 85%, 78% and 75% respectively - the minimum exchange prices are already around five points higher than the previous tender levels from March. The maximum delivery amount under the exchange will not exceed €600m, which equates to the full size of the SANTAN covered bond issue, according to European ABS analysts at JPMorgan.

Using the minimum exchange price as an input and a prepayment speed of 4%, they calculate discount margins significantly inside generic Portuguese RMBS levels, suggesting relatively appealing pricing in the RMBS leg of the exchange. On the covered bond leg, SANTAN 10/2014 3.25% is the closest traded alternative, which was at a cash price of 97/99 earlier this week.

Generically participation in the exchange reduces duration of exposure to Totta and Portuguese housing risk, assuming non-call of the RMBS, the JPMorgan analysts suggest. Portuguese covered bonds include defined extension risk of over one year, however.

"For bank holders specifically, we see the improved terms at the ECB repo facility for covered bonds versus RMBS collateral as potentially important. For fund holders, the switch to a higher running spread on the covered bond is likely to be attractive, in our view," the analysts observe.

They add that the overriding consideration when determining participation is likely to be the accounting treatment of the existing RMBS holdings, with hold-to-maturity accounts unlikely/unable to participate in the exchange. For available-for-sale investors, particularly those in HIPOT 4 and 5, they believe that participation in the exchange looks favourable.

CS

Structured Finance

Trio join due diligence firm

Rockstead has recruited three new staff to help drive its expansion plans. Country managers have been appointed in Ireland and Spain, and the firm's sales capability has been strengthened.

Paula ter Brake will represent the business from the recently opened office in Dublin and Alberto Goldar will do the same from the Madrid office. Ter Brake has 16 year's experience in the Irish financial services sector, including a global appointment within GE. Goldar joins with a 20-year track record within the international mortgage and banking sector, including appointments at Citi in both B2B and B2C consumer finance divisions.

Meanwhile, Roger Brown has been named sales director - UK and Ireland. He was previously sales and marketing director at Portillion.

Structured Finance

Capital markets partner moves on

Elana Hahn is set to join Fraser Milner Casgrain in Toronto. She will become partner at the firm, working within the capital markets, financial services and cross-border teams.

Hahn has spent the last 12 years in London, most recently as partner at Morrison & Foerster. She will continue her practice as an English lawyer and as a Canadian (Ontario) lawyer.

CDO

Structured credit group formed

Imperial Capital has formed a structured credit group and recruited Keith Grimaldi to oversee it. He joins as md and head of structured credit trading in the firm's New York office, reporting to Tom Corcoran, president of Imperial Capital.

The new unit will concentrate on the trading and distribution of structured credit-related securities globally, with an initial focus on CLOs and CDOs. Grimaldi's responsibilities will focus on building a business that will trade, value and provide advice for institutional fixed income clients on CDOs and other structured credit securities and securitised products backed by corporate debt.

Grimaldi joins Imperial Capital with 30 years of experience in securities trading, sales and origination, primarily in securitised products of all asset types. He was most recently senior md and head of CDOs and structured credit trading at Cantor Fitzgerald. Before that, he was md and global head of the CDO group at UBS Securities.

RMBS

MBS coverage boosted further

Gleacher & Company Securities has hired Mark Ginsberg and Felix Partow as mds in its MBS and rates division. The pair will be based in the firm's New York office.

Ginsberg previously served as md on the MBS trading desk at Sandler, O'Neill + Partners, where he structured and traded new-issue CMOs and mortgage derivatives for the firm. Over the course of his 15-year career, Ginsberg has held numerous MBS trading positions, including at Deutsche Bank and Goldman Sachs.

Partow was most recently a md and partner at KGS Alpha, where he also served as head of MBS derivatives trading. He previously held MBS sales and trading positions at Princeridge Group and Amherst Securities.

RMBS

REIT adds jumbo specialist

Dan Koch has joined Two Harbors Investment Corp as md. He was previously responsible for sourcing jumbo prime loan acquisitions at Redwood Trust.

Koch has also previously worked at Morgan Stanley, where he was responsible for executing agency and non-agency loan sales and securitisations. Before that he was at Charter One Bank and US Bancorp.

RMBS

Working Group lodges lawsuit

New York Attorney General Eric Schneiderman has announced a lawsuit against JPMorgan Securities, JPMorgan Chase Bank and EMC Mortgage. It is the first lawsuit to be brought by the RMBS Working Group, of which Schneiderman is co-chair.

The suit relates to fraudulent misrepresentations and omissions in the sale of RMBS by Bear Stearns, which was bought by JPMorgan during the crisis. Schneiderman says investors were deceived as to the quality of loans backing the RMBS, causing US$22.5bn of losses to date.

Schneiderman's complaint alleges that Bear Stearns led investors to believe the quality of the loans in its RMBS had been carefully evaluated and monitored, which was untrue. Defects that were uncovered were ignored, he adds.

Investors could yet suffer further losses. Another US$30bn in unpaid principal on mortgages remains in trusts sponsored or underwritten by Bear Stearns. Of that amount, 43% is either 90 days past due, in foreclosure, in bankruptcy or considered REO.

ABS

Canadian card ABS gains traction

Year-to-date new issue activity from Canadian-domiciled credit card ABS sponsors has reached C$7.1bn, a level not observed since 2008, according to S&P. Cross-border transactions have accounted for approximately 60% of total new issuance in 2012 - a trend that it is expected to continue.

"In our opinion, strong US investor interest in Canadian receivables, coupled with a relative funding cost advantage and diversification benefit for Canadian issuers has helped fuel the cross-border trend. As the volume of cross-border issuance grows, we believe it is important to recognise the differences in consumer behaviour and capital structures between the Canadian and US markets," S&P observes.

Both RBC (through Golden Credit Card Trust) and CIBC (through CARDS II Trust) have completed cross-border series this year, and other large Canadian bank issuers will likely consider this funding option if they can achieve relative cost savings or diversify their funding base, the agency suggests. Smaller Canadian issuers have also been active in the domestic market this year after remaining quiet in 2011.

Both National Bank of Canada (through Canadian Credit Card Trust) and Canadian Tire Bank (through Glacier Credit Card Trust) originated new transactions in Q2. On the other hand, sellers with US parents have either pulled back or sold their Canadian credit card portfolios, so no further issuance is expected from Algonquin Credit Card Trust, Broadway Credit Card Trust, Gloucester Credit Card Trust and Score Trust.

Approximately C$1.1bn of credit card ABS is scheduled to mature by the end of 2012 and C$6.7bn of upcoming maturities is due in 2013. "Given the recent level of new issuance activity, we believe many issuers will refinance these maturities as ABS remains a cost effective, diversified funding source and an asset class with strong investor demand," S&P notes.

The performance of Canadian credit card receivables continues to improve on a year-over-year basis. The Canadian credit card quality index (CCQI) charge-off rate declined to 3.8%, as of July 2012, from 4.2% in July 2011. In comparison, the US bankcard CCQI declined to 3.8% from 5.4% over the same period.

While charge-offs in each country have declined from their recessionary peaks, the performance improvement in the US has been much more pronounced, albeit Canadian payment rates remain significantly higher than those in the US. However, consumer vulnerability to rising unemployment or increasing debt service costs continues to increase, which could lead to higher charge-offs and delinquencies in Canadian trusts in 2013.

Structured Finance

Unicredit tender results in

Unicredit has published the results for all bonds subject to its recent tender (SCI 12 September), apart from four Cordusio tranches - CORDR 1 C, 2 C, 4 C and 4 D - whose offer deadline has been extended to today. The bank accepted €571.96m nominal value of notes out of the €985.75m offered via an unmodified Dutch auction. Average prices varied between 40.6 (CORDR 3 D) and 98 (LOCAT 2004-2 B), according to European ABS analysts at RBS, implying an average discount of 10.3%.

Structured Finance

Spanish stress test results in

Oliver Wyman has released the results of its detailed stress tests of the Spanish banking sector, revealing a capital need of €59.3bn under the stressed scenario, in line with market expectations. This capital need falls to €53.75bn after mergers and deferred tax assets are taken into account.

According to the results, seven banks would require capital injections: Bankia/BFA, Catalunyabank, NCG Banco, Banco de Valencia, Banco Popular, BMN and Ibercaja/Caja3/Liberbank. Economy Secretary Fernando Jimenez Latorre has stated that Spain will tap €40bn of the €100bn bailout package to recapitalise the banks.

Credit strategists at RBS calculate that Spanish banks will need to generate an additional €134bn of capital over the next three years, driven by rising non-performing loans and greater capital requirements under Basel 3. "The top banks like Santander and BBVA will likely be able to earn their capital shortfall without requiring external aid. For the others, we estimate that a capital injection of around €80bn will be required."

They believe that deferred tax assets are unlikely to reduce capital needs, since they are only of value if the banks are able to make a profit again in the future. "In our view, many of the banks that require capital injections will not return to profit for many years, if ever, while some are unviable and will be put into resolution."

CDS

Margin re-think required

ISDA has released a comment letter in response to the BCBS-IOSCO Consultative Document 'Margin Requirements For Non-Centrally Cleared Derivatives', endorsing the collection of variation margin (VM) between covered entities as a means to promote systemic resiliency. However, the association believes that the current margin proposals raise a number of key issues that effectively undermine the stated objectives of the BCBS-IOSCO study.

In particular, ISDA notes that mandatory initial margin (IM), as proposed, is not an effective means to achieve the study's objectives. The association strongly opposes the requirement for a universal two-way exchange of IM between financial firms and systemically important non-financial firms. It says the application of the proposals as stated will result in substantial increases in required collateral, which will lead to major disruptions in the market for collateral, which will in turn cause enormous pressure on market liquidity with the potential for significant dislocation to the general economy.

ISDA estimates that the combined effects of the proposed rules are likely to lead to a significant liquidity drain on the market, estimated to be in the region of US$15.7trn-US$29.9trn for IM only. Furthermore, the proposed IM requirements would have significant pro-cyclical effects in times of stressed financial markets, further demonstrating why IM is not an effective tool in the effort to increase systemic resiliency. The association believes that the Basel 3 capital framework is a more appropriate tool for achieving systemic resiliency.

While ISDA supports the study's three main objectives - creating systemic resiliency, promotion of central clearing and the preservation of market and collateral liquidity - it urges BCBS-IOSCO to conduct a thorough impact study before imposing margin requirements. The association believes that the proposed requirements will have serious negative effects on the markets as a whole, in terms of liquidity drain, collateral demand and transaction costs.

CDS

EMIR standards released

The European Securities and Markets Authority (ESMA) has published its technical standards on the Regulation on OTC derivatives, central counterparties and trade repositories (EMIR), which set out the specific details of how EMIR's requirements are to be implemented. They have been sent to the European Commission for their adoption as EU regulations.

The standards define the details of derivatives transactions that need to be reported to trade repositories. ESMA has clarified that reporting of collateral can be undertaken on a portfolio basis and that reporting of mark-to-market values is only applicable to counterparties under the obligation to calculate them on a daily basis.

The document also sets out how the clearing thresholds will operate. Employee benefits and acquisitions will be covered by the hedging definition, while the values of the level of the threshold (from €1bn to €3bn, depending on the asset class) and the way to calculate the non-hedging positions (gross notional value) has been kept mostly unchanged compared to the consultation paper.

In addition, risk mitigation techniques for OTC derivatives that are not centrally cleared - such as timely confirmation, portfolio compression and reconciliation - have been clarified. ESMA has introduced phase-in periods for all requirements and adjusted the frequency of reconciliation. The requirements for clearing members under an indirect clearing arrangement have also been substantially modified, but still ensure equivalent protection to indirect clients.

Finally, a set of organisational, conduct of business and prudential requirements for CCPs - including margin requirements, default fund, default waterfall, liquidity risk management and investment policy of CCPs - have been defined. ESMA has maintained the 99.5% minimum confidence interval for OTC derivatives, but clarified that a lower percentage can be used for products similar to exchange-traded ones.

The two-day minimum liquidation period for margin calculation has been maintained, but increased flexibility has been introduced for the models applicable to portfolio margining. But the skin in the game, as a percentage of the minimum capital, has been reduced to 25% from the initial 50%.

CDS

Margin comment period reopened

The US federal banking regulatory agencies have reopened the comment period on the Dodd-Frank rule establishing margin and capital requirements for swap dealers, major swap participants, security-based swap dealers and major security-based swap participants. The comment period - which originally ended on 11 July 2011 - was reopened to 26 November 2012 to allow interested parties more time to analyse the issues and prepare their comments. The move follows the recent publication of the consultative document on margin requirements for non-centrally cleared derivatives by the Basel Committee and IOSCO (SCI 9 July).

CDS

SDR reporting strengthened

OpenLink Financial is set to expand its suite of Dodd-Frank regulatory compliance solutions with the DTCC service fr swap data repository (SDR) reporting. This solution will soon enable interest rate, credit and commodity market participants to comply with US CFTC SDR reporting requirements, the firm says. SDR reporting tools are a key part of OpenLink's suite of Dodd-Frank compliance solutions and will offer another option that supports reporting of CFTC required swap data including, primary economic terms (PET), confirmation, continuation and valuation data.

CLOs

Survey suggests strong CLO technicals

The results from JPMorgan's latest global CLO client survey suggests that market technicals are likely to remain strong. Responses indicate that the search for yield continues, with spread expectations that are tighter than today's levels.

For the first time in recent CLO surveys, all respondents cited the lack of supply as their top concern, pushing spread volatility to second place. As both investors and managers picked lack of supply as a dominant concern, CDO strategists at JPMorgan suggest this signifies that investors are frustrated by limited amounts of CLO paper and managers are worried about finding enough loan collateral for new issue CLOs. Effects of regulations ranks third, followed by collateral distress and extension risk.

Risk appetite is broadly balanced between primary and secondary, with a bias towards mezzanine and subordinate exposures. The buyer/seller ratio has jumped to an all-time high of 13.6x from 7.9x last quarter, indicating that the trend of strong market technicals will continue.

Expectations of where US CLO primary triple-A spreads will be at end-1Q13, meanwhile, are between 100bp-125bp over Libor. Over the next six months, about 85% of investors surveyed believe spreads will be tighter than 145bp, 74% believe spreads will be equal to or tighter than 125bp and 25% believe spreads will be equal to or tighter than 100bp.

The consensus on an appropriate European CLO primary triple-A spread is barbelled between 175bp over Euribor and greater than or equal to 200bp over, which is roughly where secondary spreads are today (190bp).

In terms of expectations for 2013 issuance, most respondents believe that US CLO issuance will reach US$40bn-US$50bn. Survey participants mostly don't have a view or chose US$5bn for European CLO issuance expectations, which is about what US CLO issuance was when the market restarted in 2010.

CMBS

LORDS 1 concerns raised

New information published on the London & Regional Debt Securitisation 1 (LORDS 1) CMBS suggests that noteholders are exposed to greater risk than previously identified, according to Fitch. The information includes updated collateral valuations and details of a long-dated swap, the presence of which was not previously publicly disclosed.

Including the mark-to-market of the swap, the securitised loan-to-value ratio (LTV) now stands at 98%, considerably in excess of Fitch's previous estimate. This implies renewed downward pressure on the ratings of both classes of notes, the outlooks on which are already negative in light of refinancing risk. The loan is due this month and, with the whole loan LTV now at circa 129%, the agency is concerned about the prospects of repayment by bond maturity in October 2014.

The proposed note extension and margin uplift suggests that Fitch's concerns are shared by the borrower, London and Regional (L&R). A business plan has been published that includes a staged reduction in leverage to a more moderate level through actions such as the sale of assets, key new lettings, a partial write-down of the B loan, restructuring of the swap and injection of equity towards capital expenditure - all subject to noteholder consent.

The advanced nature of negotiations for both the sale of the King William Street property and a new letting at Trinity Bridge House (see SCI's CMBS loan events database) should allow for deleveraging over the short term, Fitch says. Meanwhile, a £30m refurbishment of St Georges Court - of which about £6m is being provided by the sponsor up to January 2013 - provides a promising avenue to increase collateral value, albeit at the cost of bearing completion risk.

"The generally high quality of the collateral allows for a longer-term view being taken by L&R, whose proactive stance is a welcome signal for LORDS 1. However, the positive steps the borrower intends to take are held in check by an unhealthy level of leverage," Fitch concludes.

CMBS

CMBS delinquencies continue to improve

The US CMBS delinquency rate fell by 14bp to 9.99% in September, according to Trepp, bringing the rate below 10% for the first time since April. The improvement follows a notable 21bp drop in August, the largest one-month decline since November 2011.

Loan resolutions remained elevated in September, with over US$1.77bn in loans resolved with losses, up sharply from US$1.5bn in August. The removal of these loans from the delinquent loan category accounted for 32bp of downward pressure on the delinquency rate.

Loans that were newly delinquent - around US$3.3bn in total - put upward pressure of about 59bp on the rate. Loans that cured in September put downward pressure of 48bp on the rate.

Added together, the impact of the loan resolutions, the effect of loans curing and the effect of newly delinquent loans created a net decrease of 21bp in the rate. The remaining difference is due to the repayment of performing loans, loans becoming defeased, the amortisation of existing loans and the addition of new deals to the pool.

Trepp says that the delinquency rate should continue to see considerable downward pressure in the months to come for several reasons. "First, we see no reason for the volume of loans being resolved each month to drop. The appetite for distressed real estate remains high, while borrowing costs remain extremely low. This should allow special servicers to operate at a high speed for the foreseeable future."

Second, the CMBS new issuance market has seen a renaissance over the last three months. This has led the market to raise its expectations for securitisation volume over the next six months. Given that Trepp includes new deals in its numbers and new deals tend to perform well, the new loans should dilute the troubled legacy loans that still exist.

Finally, on a relative basis, fewer loans will come due over the next year. This should make maturity defaults somewhat less of a concern than they have been for the past year.

CMBS

US CMBS loss severities decline

After reaching a two-year high the previous month, US CMBS loss severities for September fell back in line with recent norms, despite liquidation totals ticking up for the third month in a row. Average loss severity came in at 37.87% last month, down significantly from 53.29% in August, according to Tripp.

Servicers continued to pick up the pace in September as liquidations hit US$1.53bn, relative to the 12-month moving average of US$1.36bn. The 160 loan liquidations during the month resulted in US$578.9m in losses, driving the loss severity reading down by 1,542bp. This month's severity level is below the 12-month moving average of 42.63%.

Since January 2010 servicers have been liquidating at an average rate of US$1.15bn per month and the 12-month average for number of loans liquidated is 144.

The average size of liquidated loans in September fell to US$9.55m from August's US$10.21m. This drop is in line with the 12-month average of US$9.4m.

CMBS

Loans in special servicing decline

After reaching a high-water mark of US$92bn in June 2010, the balance of US CMBS loans in special servicing fell to US$80.5bn through June of this year, according to Fitch. Loans are also spending more time in special servicing.

The number of months for loans in special servicing has increased to over 18, as of June 2012, the agency says. This represents a notable change from just under 11 months, as of June 2010.

"After a large number of CMBS loans were worked out last year, special servicers are now grappling with the more challenging assets that will take longer to resolve," says Fitch md Stephanie Petosa. "These loans are usually larger, complicated loans which often are not the best candidates for liquidation."

This is leaving smaller CMBS loans as the most likely candidates to be liquidated, a trend that Fitch expects to continue. Out of the US$105.5bn resolved since 2010, less than half by balance (46%) have been liquidated. A closer look shows that by count the number of liquidated loans is substantially larger: 71% of the 7,074 loans have been liquidated.

CMBS

Pearsanta claim struck out

The proceedings in the High Court of England initiated by Pearsanta, the junior lender in the Alburn Real Estate Capital (REC 6) CMBS (SCI 27 June), have been struck out without further order of the Court. The move follows Pearsanta's failure to pay the joint defendants a second instalment of security for costs on 31 August.

An initial procedural hearing was held on 29 June and a case management hearing was held on 31 July. At the case management hearing, the Court ordered Pearsanta to pay an amount for security of costs of the defendants by 14 August and a further amount by 28 August. It ruled that a failure to pay these amounts would result in the junior lender's claim being struck out and that judgment in their favour with costs could be obtained by the defendants.

The defendants and the junior lender subsequently executed a settlement agreement, pursuant to which Pearsanta will pay an amount to each of the defendants in respect of their costs, the junior lender has waived its right to appoint a special loan servicer in the future and covenants not to transfer any of its rights under the junior loan unless the transferee agrees to be bound by the same restrictions and waivers.

Fixed charge receivers from Savills Commercial and administrators from Moorfields Corporate Recovery are continuing to implement the managed and structured disposal strategy of the portfolio. The borrower is cooperating fully with the enforcement and disposal process.

CMBS

EMEA CMBS maturity wave due

Fitch's European CMBS maturity repayment index improved to 44% by end-3Q12, compared with 40.6% at end-2Q12. The positive trend observed in the last quarter is unlikely to continue, however.

24 loans securitised in EMEA CMBS transactions are coming due this quarter, 22 in the month of October alone. "The chances of refinancing are doubtful for almost two-thirds of EMEA CMBS loans facing maturity in the next three months," says Euan Gatfield, md at Fitch.

The agency notes that 15 of the loans maturing in 4Q12 have a loan-to-value ratio of above 80%, thus limiting the chances of successful repayment. In addition, nine loans have already been extended at previous maturity dates.

"Servicers are now taking a tougher line on extensions, meaning that more defaults are likely, especially as more EMEA CMBS transactions enter their tail periods," adds Gatfield.

CMBS

Galleria Towers watchlisted

Morningstar has added the US$232m Galleria Towers loan - securitised in JPMCC 2006-LDP9 - to its watchlist, following a drop in the net cashflow debt service coverage ratio (NCF DSCR) and occupancy, as of 31 March. According to the servicer, the decline in occupancy is due primarily to the departure of Highland Capital, which occupied roughly 8% of the gross leasable area on a lease that expired in December 2011.

For the 12-month period ended 31 December 2011, the NCF DSCR was 1.22 with net cash flow of US$16.5m. Occupancy was reported at 89%.

In the first quarter of 2012, the NCF DSCR fell to 1.06. Net cashflow for the same three-month period was US$14.3m and occupancy declined to 77%.

After the addition of the loan to Morningstar's watchlist, the servicer reported more recent financial information, which shows a further weakening in the NCF DSCR to 0.99 as of 30 June. Annualised net cashflow for the six-month period ended 30 June was US$13.4m, while occupancy remained at 77%.

The annualised 2Q12 net cashflow is roughly 17% below the 'at issuance' underwritten expectation of US$17.3m. Since origination, full-year net cashflow has achieved underwritten expectation only once - in the period ended 31 December 2008, when cashflow was reported at US$17.6m.

Scheduled tenant rollover is moderate over the near to intermediate term. Leases for roughly 5% of the GLA are set to expire through June 2013, while leases for roughly 21% are scheduled to mature between July 2013 and June 2014. Among the leases due to expire in 2013 is FedEx/Kinko's, which is the largest tenant, encompassing 205,811 square-feet (14% of the GLA) on a lease that is scheduled to expire in August 2013.

With the decline in occupancy and corresponding drop in NCF DSCR and net cashflow, as well as scheduled lease expiration through June 2014, Morningstar considers this to be a moderate near-term credit concern. A preliminary analysis of the collateral yields a 136% LTV, suggesting that there is a value deficiency.

Risk Management

Risk transfer study published

TABB Group has released a benchmark study commissioned by the World Federation of Exchanges (WFE), entitled 'The New Global Risk Transfer Market: Transformation and the Status Quo'. One of its findings is that margin shortfall in OTC derivatives trading reached an estimated US$2.6trn at end-2011, a cost that could be reduced to several hundred billion dollars based on product selection changes.

"A war is being waged between forces of the status quo and forces of transformation of the global risk transfer market (GRTM)," says Paul Rowady, a TABB senior analyst. "It has the potential to shift product selection for hedging and trading purposes from exotic and bespoke trade structures to standardised and clearable swaps, futures and new futurised/hybrid swaps."

Although dealers and their customers in the US and Europe say they expect the GRTM's historical growth to resume its former trajectory once reforms are in place, TABB believes the real story to track is the volatility of volumes, liquidity and product selection caused by reform and economic uncertainty. According to TABB estimates, the OTC derivatives market reached a new all-time high of US$709trn of notional values outstanding by December 2011, before compression. On the basis of estimated total notional turnover in the GRTM of US$4.1 quadrillion as of the end of 2011, the exchange-traded derivatives market remains larger than the OTC derivatives market, at 55% versus 45%.

As much as 40% of notional value outstanding is already being cleared, with an additional 39% being potentially clearable, says Rowady. "To mandate clearing and margin requirements during an era of deleveraging - when collateral becomes painfully scarce - is a bitter pill to swallow for many financial entities. These margin requirements may continue to make exchange-traded and other standardised products more attractive."

But, according to TABB, central clearing is appropriate for correcting long-standing flaws in market structure caused by an over-concentration of exposures among a relatively small number of dealers. However, the most exotic products are not clearable, so questions remain as to how much new margin and other requirements will make exotics less attractive and whether hedging practices will shift toward greater use of standardised products.

RMBS

Delay expected for Rescap recoveries

Rescap secured bondholders have ended an agreement to support Ally Financial's reorganisation plan. The ad-hoc steering committee - representing US$2.2bn of junior secured Rescap noteholders - has withdrawn its support for the plan, given the protracted nature of the legal proceedings thus far and the chance to improve its negotiating position in future disputes with other creditors.

According to Ally, Rescap's agreement with RMBS investors regarding their US$8.7bn in rep and warranty claims (SCI passim) is unaffected by this development. However, the timing of recoveries on these claims may be extended as creditors propose competing reorganisation plans once Ally's exclusivity period ends on 20 December.

RMBS

FGIC rehab plan filed

FGIC's court-appointed rehabilitator, the New York state insurance regulator, last week filed a proposed rehabilitation plan with the New York Supreme Court. The proposal involves a portion of the monoline's policy claims - initially set at 15%, but potentially increasing to 30.4% - being paid in cash.

The remaining claim amount would be reimbursed in the form of a deferred payment obligation (DPO), which would accrue annually at a 3% interest rate. The plan also extinguishes US$3.8bn notional of CDS that FGIC had guaranteed for a cash payment of US$51.5m.

Once the court approves this rehabilitation plan, policyholders will have to re-file their claims within 90 days of the plan effective date. Claims will be paid within 60 days of the claims submission deadline.

RMBS analysts at Barclays Capital suggest that the plan puts the FGIC claims at somewhat of a disadvantage versus the plan proposed in the Ambac rehabilitation, where the claimants are paid 25% in cash with the remainder paid via a 10-year 5.1% surplus note. In FGIC's case, the rehabilitator has estimated that the average ultimate recovery to policyholders will be approximately 24%-25% on a net present value basis.

Ambac began making payments on its segregated account last week, under its reorganisation plan. As of 30 June, there was US$32.1bn in net par exposure for policies in the account and US$3.6bn in claims.

RMBS

Rate cuts boost Aussie RMBS

Australian mortgage performance is expected to improve in the third and fourth quarters, following a series of interest rate cuts, the most recent being a 25bp cut yesterday (2 October). In a sign of that mortgage performance is benefiting from the rate cuts from end-2011, delinquencies in the Australian prime RMBS sector have already decreased to 1.54% in 2Q12 from 1.6% the previous quarter, according to Fitch.

In its latest quarterly Dinkum report, the agency notes that the improvement in arrears was most evident in the 30-59 days and 60-89 days bucket (down by 7bp), as a small number of borrowers who increased their spending during the Christmas period and then fell into arrears in 1Q12 have cured their delinquency status and recovered from the seasonal spending shock.

"The decision by the Reserve Bank of Australia to cut cash rates since last November has provided some relief to households and will continue to do so," comments James Zanesi, director in Fitch's structured finance team.

Arrears in the 90+ days bucket continue to be higher than historical levels, however. This may be explained by a stagnating housing market, resulting in longer time periods to sell properties, and by an increase in hardship cases.

More susceptible borrowers, such as self-employed households, continue to face challenges in meeting their mortgage obligations. Fitch's Dinkum Low-Doc Index recorded an increase in 30+ days arrears to 7.19% in 2Q12 from 7.08% in 1Q12. Delinquencies in the low-doc segment have historically been 2x-2.5x those of full-doc loans, but in the 12 months to end-June 2012 they were 4.5x higher.

RMBS

ESAIL 2007-5 stalemate continues

The extraordinary resolution to appoint Deutsche Bank as auction agent has been approved by Eurosail UK 2007-5NP class B1c, C1c and D1c noteholders, having been passed by the class A1a and A1c noteholders on 7 August. However, the trustee is unable to agree to the implementation of the proposal in its current form.

The extraordinary resolution sanctions Deutsche Bank to manage the auction process of the sale of US$170m of stipulated claims against Lehman Brothers under hedging agreements for a fee of 0.4% of the stipulated claim amount. US$40.4m has already been paid out, according to RBS. The sale proceeds arising out of the claim sale agreement (less the auction fee and hedging costs of €0.4m) would also be paid to Deutsche Bank for the replacement counterparty in relation to the hedging agreement.

However, the trustee's position to seek the determination of the Court in connection with the replacement hedging agreement remains unchanged. The trustee - after consultation with leading and junior counsel in August - concluded that there are sufficient doubts as to whether the replacement hedging agreement is in line with the transaction documentation, after the proposal was challenged by the residual certificateholders.

The issuer is considering its next steps and noteholders will be further updated in due course.