Contents

CMBS

Above and beyond

US CMBS market exceeds early expectations

The US CMBS market has gone from strength to strength in 2012. Spreads have rallied consistently, while loan maturity outcomes have been better than anyone predicted at the start of the year.

Increased interest in CMBS over the very short term has led to dramatic tightening in spreads. The Fed's introduction of QE3 has played a key role in this, with both CMBS 2.0 and pre-2008 bonds benefitting.

"Although CMBS issuance is a long way off what it once was, it has certainly been picking up and there is still very strong demand for it. Bonds are meeting with good acceptance and a significant part of that is due to relative value," says Tom Zatko, capital markets md at Cornerstone Real Estate Advisers.

He continues: "QE3 means that low rates are going to be with us for quite a while. There has been a sudden rush to go out and find yield and, compared to some relative value products, CMBS was seen as a product with fairly wide spreads. So the traditional buy-and-hold investors have been joined by those seeking relative value and that has seen demand increase strongly."

Annaly Capital Management notes that spread movements have been particularly strong for new issues. According to Annaly figures, the third-quarter rally saw 10-year triple-A new issue spreads drop from swaps plus 150bp-160bp to swaps plus 85bp-95bp. 10-year triple-A legacy CMBS have likewise benefited, rallying from around swaps plus 230bp-235bp to swaps plus 155bp-160bp, with mezzanine bonds rated triple-B and triple-B minus tightening by 125bp and 200bp-225bp respectively.

Spreads widened slightly earlier this month, before tightening dramatically last week (SCI 18 October), fuelling speculation that they could continue to tighten. Just how far they have left to grind tighter is unclear, but Zatko notes that they certainly have room to move.

He says: "Triple-A super seniors historically traded at swaps plus low-30s and they traded at that level for a long time. Right now, a similar bond would trade at around swaps plus 85bp or 90bp, so clearly there is still room for further tightening."

Zatko continues: "However, we are in a very low interest rate environment, so whether the market can get back to those historical levels really remains to be seen. At some point, people are just going to put a yield floor on things."

CMBS loan maturities have already begun revisiting historical levels. Deutsche Bank analysts note that over US$30bn of CMBS loans have already successfully paid off in full this year, with another US$11bn of liquidations. However, Zatko points out that there is a difference between the outcomes for longer underlying loans and shorter ones.

He says: "10-year loans have met with excellent success in refinancing, but the five-years have not met with the same kind of success. A large part of that is down to the fact that underwriting 10 years ago was far less aggressive as it became five, six or seven years ago."

Zatko continues: "There is also the fact that the 10-year loans have had longer to mature. The five-years just have not had long enough to dig out of that hole."

In certain ways, the positive performance is the result of a virtuous circle: as the market improves, the cost of borrowing goes down, so loans refinance and the market improves. The pace of liquidations has also been positive, with servicers finding that there are buyers who are willing and able to finance purchases.

Looking forward, Zatko expects the market to continue performing strongly. He says: "Issuance this year just might hit the US$40bn mark, which is more than most people had been expecting. Along with the improving picture for maturities, that is a strong positive for the market."

He continues: "CMBS lenders are now competitive against life insurance lenders, which for the past three years have been at a funding advantage. So, in addition to CMBS' traditional role of providing liquidity in secondary and tertiary markets, I think you will also see some high-profile properties that could have gone to an insurance company last year or earlier this year showing up in the CMBS market."

JL

Risk Management

Unaddressed questions

OTC margin requirements under the spotlight

Margin is the subject of much discussion across the OTC derivatives industry at present, given the aggressive competition to establish central counterparties (CCPs). However, at its broadest reach, the debate also touches on the unaddressed question of how an illiquid asset should be priced.

There are two sides to the current debate about margin, according to Rohan Douglas, ceo at Quantifi. One is the regulatory push to centrally clear standardised OTC products: there are different views on which products should be cleared, depending on the jurisdiction. The other is the aggressive competition to establish CCPs, particularly in the US.

Initial margin is supposed to take into account the volatility of an asset and involves a very complex calculation. Calculation of variation margin, on the other hand, is straightforward - providing there is an observable market for the asset.

Douglas suggests that CCPs may compete on initial margin. "The risk is that a CCP will be tempted to reduce initial margin to below a level that is prudent. This has prompted an industry drive towards standardised initial margin, so CCPs don't have to compete in this area. Clients also want standardised IM, due to operational requirements and the desire to have a consistent methodology."

However, while standardised margin calculations may be suitable for simple products, they aren't always appropriate for the more complex OTC products that may be pushed onto CCPs. A standard, simplified IM being used for more complex OTC products may dramatically increase the long-term risk profile of a CPP.

Indeed, CCPs concentrate risk. "CCPs are bankruptcy-remote, but they aren't immune to bankruptcy," Douglas explains. "CCPs aren't a cure-all - they won't eliminate counterparty risk, only transform it into systemic and liquidity risks. The most dangerous of these is liquidity risk."

He says that one solution is to be realistic about what the right tool is for a given purpose. "I don't believe CCPs are a viable solution for every OTC product and regulators accept that some products won't be cleared. There has been an understandable overreaction to the financial crisis, but some assets just don't fit into the new regulatory framework."

ISDA echoes the concept of risk not disappearing but just changing form in a recent derivatiViews comment. "Regulators have initiated margin proposals to enhance systemic resiliency by reducing counterparty risk. But in the process of doing so, they are about to decrease systemic resiliency by introducing healthy amounts of liquidity risk (caused by the shortage of collateral) and economic risk (caused either by the shortage of liquidity and/or by all the economic risks that are likely to remain unhedged)," the association notes.

However, it is specifically referring to the BCBS/IOSCO's proposal to impose a universal two-way initial margin requirement for non-centrally cleared derivatives (see also SCI 1 October). ISDA suggests that the proposal aims to replicate the mechanics found in the context of clearing, but says that extending these concepts to bilateral trades is inappropriate because "the parties involved are typically creditworthy entities on their own and back their creditworthiness with their own capital, as well as the proper use of credit mitigants".

Given that both parties to a bilateral trade will be required to post initial margin under the proposal while only one may default, the proposal is tantamount to insuring the same risk twice. Together with requiring IM to be segregated and not re-hypothecated, this could increase incremental collateral demand to an estimated US$15.7trn and drain liquidity from the market.

The debate about margin also touches on the essential question of how an illiquid asset should be priced. "This dilemma was at the heart of the crisis and still hasn't been addressed. Until we solve the problem of having to mark-to-market illiquid products held on trading books, this question will remain," Douglas observes.

But the requisite dialogue doesn't appear to be happening. "The industry has to find not only a regulatory piece to the puzzle, but also an accounting piece. Illiquid prices remain almost impossible to verify - using a best estimate, as recommended by regulators and accountants, doesn't really address the key issue of what an asset's market value is if it is something that doesn't have a market. The danger is that we could end up with a situation like we had with Libor, where participants are forced to come up with a price that they know may be incorrect," Douglas warns.

A similar conflict is emerging between regulators and accounting bodies regarding whether to price trades using CVA, DVA or FVA. Accountants say they should be priced using DVA, regulators specify CVA only and many market players in Europe particularly are coalescing around CVA and FVA.

Ultimately, Douglas believes that it's unrealistic to expect the financial system to be bankruptcy-proof because some institutions will at some point fail. "It's healthier to have a system that is equipped to cope with failure," he concludes. "The right solution is one that creates more competition, where the better-run banks survive and the badly-run ones are allowed to die."

CS

CLOs

CLO secondary supply surges

CLO secondary supply spiked yesterday, with 12 bid-lists reported to be circulating. That increased volume is reflected in SCI's PriceABS BWIC data, which displays 180 CLO line items for the session.

A comprehensive range of names were being shown yesterday, running the gamut from 2002-vintage paper to deals issued only this year. Bonds came from both the US and Europe, with all parts of the capital stack represented.

Recently-issued paper, in particular, proved popular. For example, the BLUEM 2012-1A B tranche was covered at 100.51. Tranches such as CIFC 2012-1A A1F and CGMS 2012-2A B2 were also covered at similar levels (101.25 and 101.5 respectively).

Older vintage paper did not miss out, however, with VENTR 2002-2A PREF covered at 10.05. 2003 bonds such as MAGNE 2003-5A D and SAGAM 2003-1X C1 were also out for the bid. The former did not trade, but was talked between the high-90s and low-100s; a small piece of the latter did trade, with talk in the low/mid-90s to high-90s range.

At the top of the stack, ATRM 4X A1A, AVLN3 1A A1 and KKR 2006-1A A1 all traded, having each been talked right around the 98 mark. In addition, subordinated paper proved popular: while ATRM 7A SUB did not trade, it was talked in the low/mid-100s and BRDG 2006-1A SUB was covered low-90s, with FOURC 2006-3A SUB also covered in the mid/high-40s.

There was also plenty of US mezzanine paper circulating, with tranches such as EATON 2007-9X C and MOMNT 2007-1X C covered at 89 and 88 respectively. They had each been talked in the high- or very high-80s on Wednesday.

Meanwhile, tightening was a clear trend among several European names. CELF 2006-1X D was covered at 58.9, having been previously covered at 53.8 on 6 September.

Similarly, GSCP 2007-4X C was covered at 70 in yesterday's session, having previously been covered at mid/high-50s on 1 August. HARVT V D has tightened from the mid-50s on 5 September to 62.75 yesterday, while LSME 1 A's price has increased from a 96.75 cover on 4 October to be covered yesterday at around 97.8.

JL

CMBS

US CMBS grinds tighter

In line with the rising prices seen this week in European CMBS (SCI 17 October), the secondary market in the US has been grinding tighter all week. That trend continued yesterday, although supply was noticeably lighter.

GG10 Dupers closed Tuesday's session at swaps plus 156 but were being quoted yesterday at swaps plus 155/150, according to Interactive Data figures. Legacy fixed AMs were 5bp-10bp tighter, with AJs 5bp tighter.

"Generic CMBS spreads are mostly tighter on the day. BWIC volume is light, having fallen nearly 45% from yesterday's moderate total. In terms of supply, there is a mix of various vintage securities from across the capital structure out for bid," Interactive Data adds.

The extent of the tightening over recent weeks is made very clear by SCI's PriceABS BWIC data. Spread levels for BSCMS 2007-T28 AM, for example, have more than halved since 12 June. At that time, a US$10.725m piece of the tranche was covered at 350, before a smaller US$2.3m slice was covered yesterday at just 160.

The tightening is still marked even within a shorter timeframe. A US$1.2m piece of MLMT 2008-C1 A4 was covered yesterday at 74, having been covered at 124 as recently as 30 August.

Other names circulating yesterday further underline this trend. The JPMCC 2006-LDP9 AM tranche was covered at 339, having been covered at 485 on 20 August. Additionally, the MLCFC 2006-4 AM tranche was covered at 224, after trading in the low/mid-300s on 13 August.

JL

RMBS

Mixed picture for Euro RMBS

Contrasting fortunes were in evidence in the European RMBS market last week. On the same day that a UK transaction achieved tight pricing in the primary market, a pair of legacy deals from the continent were declared to be in default.

"The positive development has been Paragon Mortgages 17, the UK buy-to-let RMBS, which priced on Thursday pretty tight to the lender's last offering a year ago," reports one trader. "The triple-A notes printed at 135bp over Libor, in contrast to the previous deal, where they came at 275bp over."

Paragon's £201m offering also saw the double-A notes price at 190bp over Libor and the single-As at 290bp over. They were small tranches and privately placed, but the trader notes that it is a positive sign that the market has appetite for such risk.

The less positive development is in connection with two Spanish transactions - TDA 25 and TDA 28, issued in 2006 and 2007 respectively - which have defaulted. Titulizacion de Activos SGFT, which manages the securitisations, says there is no alternative but to liquidate them.

"TDA 25 has about €150m of notes outstanding and TDA 28 has around €340m. They have each hit an event of default, which is a quite significant and very, very rare occurrence in this market," says the trader.

He continues: "Now it will be up to the senior noteholders to take control and decide what to do with the pools. It looks like they are going to liquidate the loans and recover what they can, but they really are not worth much."

Meanwhile, activity in the broader secondary market has been quiet to start the week, with only UK master trust paper out for the bid yesterday. PriceABS BWIC data shows that GRANM 2006-2 A5 was covered at 98.36, while PERMM 2009-1 A2 was talked at 102.7 - very close to the 102.77 it was talked at last Wednesday and the 100.93 it was covered at on 16 July.

JL

ABS

CFPB report 'mixed' for SLABS

The Consumer Financial Protection Bureau (CFPB) has released its first annual report on private credit student loans. The agency's proposals are largely benign for the student loan ABS market, although there are some areas of concern.

Citi ABS analysts note that the recommendations introduce three main risks for the market. While the proposals could encourage adverse selection resulting from CFPB's encouragement of refinancing, the analysts are also concerned by the advocacy of more liberal loan modifications and believe there are some inferences for potential bankruptcy dischargeability that they believe will continue to be a risk in future.

The CFPB's recommendations fall into two broad groups: recommendations for US Congress and recommendations for government agencies and regulators. That latter group includes the CFPB itself, the Department of Education and the Treasury.

For Congress, the CFPB recommends identifying opportunities to spur the availability of loan modification and refinance options for student loan borrowers. ABS analysts at Bank of America Merrill Lynch note that this could reduce defaults, but could also cause reduced liquidity and/or excess spread, increased severity for private loans and adverse selection for private loans. It could also lead to loan extension and negative amortisation, which the analysts believe would have mixed impacts.

For the agencies and regulators, the CFPB makes two main recommendations. The first is to assess whether efforts to correct problems in mortgage servicing could be applied to improve the quality of student loan servicing. The second is to continue initiatives to increase adoption of the income-based repayment programme for federal student loans.

The BAML analysts note that the first suggestion could reduce defaults, which they note is positive, but also has the potential to "improve/strain servicers' capabilities" and lead to "fewer/more negative headlines". The suggestion could also lead to increased costs.

The recommendation to continue encouraging the use of the income-based repayment programme for loans could again reduce defaults, but the fact that it could lead to loan extension and negative amortisation is seen as mixed, while the potential for reducing liquidity and excess spread is seen as negative for the market. The proposal would also make an impact on the Federal budget, which could pose a challenge.

The Citi analysts suggest that this initiative, if implemented, could benefit private student loan programmes by making more of the borrower's income available for private loan debt repayment.

The report also recommends encouraging: market participants to consider developing new terms in order to increase clarity when there are meaningful differences between Federal and private loans; lenders to utilise existing data sharing systems already in place between universities, lenders and servicers that identify whether a student has completed the degree programme; and financial aid professionals to conduct analyses to identify student segments at risk of financial distress.

JL

Structured Finance

SCI Start the Week - 22 October

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

Pipeline
Six new deals were announced last week that still remain in the pipeline. Half of those were ABS transactions, but there was also an RMBS and two CLOs.

The ABS comprised €578m Cars Alliance Auto Loans France V 2012-1, US$471m Edsouth Indenture No.3 Series 2012-2 and Glacier Credit Card Trust series 2012-2, a Canadian credit card deal. The RMBS was US$1.03bn Springleaf Mortgage Loan Trust series 2012-3, while the CLOs were US$497m Cerberus Offshore Levered I and €721.9m Promise Neo 2012-1.

Pricings
It was a very busy week for issuance, with 21 deals pricing. That figure includes 10 ABS, six of which were auto transactions.

The auto deals were: US$1.26bn Ally Auto Receivables Trust 2012-5; US$594.81m ARI Fleet Lease Trust 2012-B; US$600m Chesapeake Funding 2012-2; US$750m Nissan Auto Lease Trust 2012-B; Skr4.5bn Svensk Autofinans 1; and US$683.86m World Omni Auto Receivables 2012-B Owner Trust.

The rest of the ABS prints comprised two equipment deals (US$714.664m GE Equipment Transportation Series 2012-2 and US$257.67m Macquarie Equipment Funding Trust 2012-A), one student loan deal (US$674.6m NorthStar Student Loan Trust I 2012-1) and a timeshare deal (US$165.7m SVO 2012-A VOI Mortgage).

In addition, two RMBS (£201m Paragon Mortgages 17 and US$320.34m Sequoia Mortgage Trust 2012-5) and four CMBS priced. The CMBS consisted of US$272.8m COMM 2012-FL2, US$257m Fairway Outdoor Funding 2012-1, US$1.268bn FREMF 2012-K021 and US$1.05bn WFRBS 2012-C9.

Finally, four CLOs were issued: US$450m Apidos CLO X, US$720.43m CIFC Funding 2012-II, US$520m Galaxy XIV CLO and US$459.6m West CLO 2012-1.

Markets
CLO secondary supply was particularly strong towards the end of the week and was also particularly well received. Bank of America Merrill Lynch securitised products strategists note that mezzanine spreads tightened over the week as yield-hungry investors were met with insufficient supply. Triple-A spreads, however, remained at 125bp.

They add: "Despite increased concerns arising from disappointing corporate earnings and a sell-off in the equity markets, the CLO market continues to trade well. Of note, last Friday saw a US$63m buy-it-now list that saw a lot of interest. Most of the line items were purchased at the buy-it-now price prior to the BWIC. As a result of search for yield, focus remains in the mezzanine part of the capital structure, which still provides attractive spread pick-ups versus other credit sectors."

US ABS had a fairly active week, report Barclays Capital ABS analysts. The primary market saw almost US$6bn of issuance, but secondary activity was also up.

They note: "The main theme remains the search for yield, with paper that has any hint of spread continuing to be very well bid. In the generic consumer asset classes, the credit curve continues to flatten; spreads on shorter senior classes leaked wider on supply technicals, while mezzanine and subordinates tightened on strong investor demand."

Non-agency paper dominated US RMBS secondary activity, particularly at the start of the week, as SCI reported on Tuesday (SCI 16 October). Monday's session was mainly focused on subprime collateral. Non-agencies continued to trade tight throughout the week, while the Fed has been crowding competition out of the agency space.

After the week before last saw US CMBS spreads move marginally wider, last week saw them rally back with a vengeance. Deutsche Bank CMBS analysts note that LCFs were 10bp tighter on the week, with AMs and AJs moving 35bp and 25bp tighter respectively.

They add: "In our view, the fundamental issue facing investors now, especially with the Presidential election and year-end approaching, is do you monetise gains now or continue to 'ride the wave'? At the top of the capital structure, it is less obvious that meaningful compression lies ahead, but it is more likely there will be some tightening ahead."

It was a similar story for European CMBS. Here prices have edged higher over the month, as SCI reported on Wednesday (SCI 17 October).

SCI's PriceABS BWIC data for Tuesday's session shows that tranches such as PROUD1 A were covered wider than they were in late September. EPICP DRUM B does buck this trend, however.

Deal news
• A trial start date of 14 January 2013 has been set in connection with ResCap's proposed US$8.7bn settlement with 392 RMBS trusts. The trial is expected not to last beyond 17 January.
• Sound Harbor Partners will acquire the management contracts on US$2.2bn of leveraged loans held in Aladdin Capital Holdings' Landmark CLO funds. The funds will continue to be managed by William Lutkins and his team.
• NIBC is convening a noteholder meeting on 7 November to vote on restructuring proposals for Sound 1. An extension of the first optional redemption date by 12 months to November 2013 is being proposed, as well as an increase on the class A margin to 110bp from the original sep-up date and the other notes to increase to the original step-up margins from the November 2012 IPD.
• ING Global Investment Strategies is set to transfer the collateral administrator agreement for the Ajax Two CDO to Dock Street Capital Management. Moody's notes that the transfer won't result in a downgrade or withdrawal of the deal's ratings.
• Moody's notes that it would not have assigned a Aaa rating to Isobel Finance No.1, the first non-performing real estate loan portfolio CMBS transaction to come to market in EMEA (SCI 4 October). The agency says that the deal is not compatible with a Aaa rating because of the quality of the assets, its extra leverage due to swap termination payments, its principal allocation waterfall and the complexity of the underlying loans.
• Alianza Valores has structured the first trade receivables securitisation in the Colombian market. Originated by Coltejer, the COP22bn public placement exceeded the pre-agreed minimum amount of COP20bn for the first tranche of an issue for an aggregate amount of COP35bn.
• Bemo Securitization (BSEC) has arranged an auto ABS for T. Gargour & Fils (TGF), the exclusive distributor for the Levant of Mercedes-Benz passenger and commercial vehicles. Dubbed TGF Star, the main purpose of the transaction is to enable the company to enhance the structure of its clients' portfolio, as well as create an off-balance sheet financing platform to better manage its credit sales.

Regulatory update
• The CFTC Division of Swap Dealer and Intermediary Oversight has issued interpretative guidance letters to equity real estate investment trusts and asset-backed securities funds. The guidance states that such funds that meet certain criteria are not included within the definition of 'commodity pool' and their operators are not 'commodity pool operators' under the Commodity Exchange Act and the CFTC's regulations.
• New EU regulations governing short selling of EU equities, sovereign bonds and sovereign CDS will come into force on 1 November (SCI passim). Recent changes to the application of the rules are expected to negatively impact liquidity across a number of EU financial instruments.
• The Spanish 'bad bank' is to begin operations on 19 November. Dubbed Sareb, the vehicle will absorb up to €90bn in troubled assets.
• The US SEC has voted unanimously to propose capital, margin and segregation requirements for security-based swap dealers and major security-based swap participants. Under the Dodd-Frank Act, the margin rules are required to be appropriate for the risk associated with security-based swaps that are not cleared by a security-based swap clearing agency.

Deals added to the SCI database last week:
ALM VII; CAL Funding II series 2012-1; Etruria Securitisation (retained); GE Capital Credit Card Master Note Trust Series 2012-7; HLSS Servicer Advance Receivable Backed Notes series 2012-T2; Honda Auto Receivables 2012-4 Owner Trust; Hyundai Auto Receivables Trust 2012-C; IDOL Trust series 2012-2; Porsche Innovative Lease Owner Trust 2012-1; SLM Private Education Loan Trust 2012-E; and State Board of Regents of the State of Utah series 2012-1

Deals added to the SCI CMBS Loan Events database last week:
CSFB 2002-CP3; CSMC 2007-C1; CSMC 2007-C3; ECLIP 2006-1; ECLIP 2007-2; EMC 6; EURO 22; EURO 27; EURO 28; GCCFC 2004-FL2A; GCCFC 2006-GG7; GSMS 2007-GG10; JPMCC 2005-CB12; JPMCC 2006-CB15; JPMCC 2006-CB16; LORDS 1; MALLF 1; MLMT 2007-C1; MSC 2004-HQ4; MSC 2005-HQ7; MSDWC 2002-IQ3; PROMI 2; RIVOL 2006-1; TAURS 2006-2; TITN 2006-3; TITN 2007-2; TITN 2007-3; TITN 2007-CT1; TMAN 5; TMAN 6; TMAN 7; WINDM VII; and WINDM VIII.

Top stories to come in SCI:
US CMBS spread trends
CCP margin developments
Opportunities in CLO equity
Cross-sector relative value analysis

CDS

Short sale restrictions to hurt CDS liquidity

New EU regulations governing short selling of EU equities, sovereign bonds and sovereign CDS will come into force on 1 November (SCI passim). Recent changes to the application of the rules are expected to negatively impact liquidity across a number of EU financial instruments. In particular, the correlation test for sovereign CDS has been made more restrictive, the availability of cross-border hedging has been limited and the market-making exemption is likely to be narrowed.

Sovereign CDS net notional outstanding is already declining and distortions are emerging in CDS prices on sovereigns that are impacted by the regulation relative to their peers. "While there may be other factors at play, the upcoming months should show how much the recent changes to the regulation have contributed towards this. Other impacts we will be looking out for are distortions to pricing in related markets - such as government bonds, as well as financial and utility bonds - as investors are forced to proxy hedge using imperfect hedges," credit derivatives strategists at JPMorgan observe.

They suggest that the proposed narrowing of the market-making exemption by ESMA may adversely impact market liquidity. "Requiring an instrument-by-instrument exemption and a persistent market-making presence would likely discourage dealers from trading new issues, reduce the number of market-makers of each instrument and make illiquid instruments even more illiquid."

Short sale restrictions in CDS markets are untested, but most studies of short sale bans on equities point to higher bid/ask costs and lower volumes. Thus, an increase in the cost of trading for CDS market participants should be expected.

CS

CMBS

Mapeley swap disclosure confuses

Confirmation that an interest rate swap remains in place for the Mapeley loan, securitised in the European Loan Conduit No. 22 CMBS, has surprised the market. The news has prompted questions about the loan's recent restructuring.

European securitisation analysts at Deutsche Bank suggest that the recent confirmation of 20 January 2021 as the expiry of the swap appears to conflict with language in the deal's offering circular, which indicates that the swap will remain in place until the loan's final maturity in October 2012. This begs the question as to whether the swap should already have been terminated.

Consequently, the Deutsche analysts say it is "difficult to reconcile many things" about the restructuring announcements of recent weeks (see SCI's loan events database). In particular, under the restructuring, the swap breakage ranks pari-passu to principal to the senior loan. Yet, again, the transaction's OC indicates that this should only occur until the maturity date of the Mapeley loan.

Any misstatement of the hedging arrangements in the OC does not constitute a breach of representations and warranties, according to the analysts. However, they note that it would be beneficial for noteholders to be informed of the issuer's position on this, in the event that losses arise on the Mapeley loan.

The full notional balance of the swap hasn't been disclosed, but the analysts estimate that it is £59.9mn - implying that it is around £13.5m out-of-the-money. Further, with the Mapeley loan's liabilities ranking pari-passu, the LTV of the loan is 68% based on a 2005 valuation. But the lack of an updated valuation in itself is puzzling: why would a special servicer base their work-out on a valuation from seven years ago?

"While the equity contribution of the sponsor (£1m to date, with the potential of further advances at the October IPD) suggests they have confidence the portfolio is not underwater, it is something - while we think unlikely - we cannot rule out with 100% certainty," the analysts observe. "Our concerns are also assuaged - although not entirely eliminated - by the fact that the junior lender amounts are paid into escrow, although released after 90 days should no enforcement action be taken."

CS

ABS

Extra data for SF analysis platform

Interactive Data will now provide independent evaluated prices on RMBS, ABS and CMBS for use within Intex's INTEXcalc service. The data can be used as inputs for a range of single security and portfolio analytics reports, offering transparency and speed in analysing securities.

Structured Finance

CMO mark-up sanctions widened

FINRA has ordered David Lerner Associates (DLA) to pay approximately US$12m in restitution to affected customers who purchased shares in Apple REIT Ten and who were charged excessive mark-ups. The agency alleges that DLA sold the illiquid REIT without performing adequate due diligence to determine whether it was suitable for investors and used misleading marketing materials that presented performance results without disclosing to customers that income from the REIT was insufficient to support the distributions to unit owners.

FINRA also fined DLA more than US$2.3m for charging unfair prices on municipal bonds and CMOs it sold over a 30-month period and for related supervisory violations. In addition, DLA's founder, president and ceo David Lerner was fined US$250,000 and suspended for one year from the securities industry, followed by a two-year suspension from acting as a principal. The agency claims that Lerner personally made false claims regarding the investment returns, market values and performance and prospects of the Apple REITs at numerous DLA investment seminars and in letters to customers.

FINRA also sanctioned DLA's head trader William Mason US$200,000 and suspended him for six months from the securities industry for his role in charging excessive muni and CMO mark-ups. The sanctions resolve a May 2011 complaint, as well as an earlier action in which a FINRA hearing found that the firm and Mason charged excessive muni and CMO mark-ups (SCI 5 April).

Structured Finance

Law firm's SF head moves on

Addleshaw Goddard has added Paul-Michael Rebus as a partner in its capital markets, structured products and securitisation practice. He was previously head of securitisation and structured finance at Eversheds.

Rebus' practice covers asset-backed lending, structured financial instruments, securitisation, derivatives and financial regulation. As well as his stint at Eversheds he has previously worked at McDermott Will & Emery and at Baker & McKenzie.

Structured Finance

Magnetar appoints investment duo

Magnetar Capital has hired Carlos Mendez and Josh Eaton for its fixed income group. They will help source, structure and evaluate investment opportunities for the firm, with a focus on illiquid credit and special situations investments.

Mendez was previously head of the structured finance group at Sandler O'Neill. Eaton was md in the same group. Both Mendez and Eaton are based in New York.

Structured Finance

CRE vet to lead SF team

Fred Harmeyer has joined Cushman & Wakefield as senior md and head of capital markets for the eastern US. He will be based in New York.

In his new role Harmeyer will oversee the debt and structured finance, equity, sales and acquisitions, corporate finance and investment banking businesses for the region. He will also work with Steve Kohn to grow the debt and structured finance business nationally.

Harmeyer joins from High Rise Capital Management, where he was head of CRE debt investments and research. He has previously led Merrill Lynch's CMBS group and worked in the REIT space for Morgan Stanley Dean Witter.

Structured Finance

Fitch reorganises relationship team

Debbie Hartley has joined Fitch to lead it global investor development team. She will be based in London, reporting to head of global business relationship management Peter Jordan.

The rating agency has consolidated its investor-focused business staff into a global team under Hartley. The team will also work closely with Fitch Solutions.

Hartley was previously head of global investor marketing at Bank of America Merrill Lynch and investor relations director at Citigroup Alternative Investments. Earlier in her career she was a credit analyst with JPMorgan and an equity analyst with Morgan Stanley.

CDO

ABS CDO transfer due

ING Global Investment Strategies is set to transfer the collateral administrator agreement for the Ajax Two CDO to Dock Street Capital Management. Moody's notes that the transfer won't result in a downgrade or withdrawal of the deal's ratings. A US$6m slice of the transaction's C tranche was being shown in the secondary market yesterday, but did not trade, according to SCI's PriceABS BWIC data.

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

CDS

CDS vet joins Phoenix

Peter Hughes has joined Phoenix Investment Adviser in New York. He becomes senior research analyst and reports to Phoenix's founder and cio, Jeffrey Peskind.

Hughes specialises in high yield, distressed and investment grade corporate credit and will focus on the technology, business services, retail, restaurant and metals and mining sectors. He joins from Citi Capital Advisors, where he focused on identifying long and short investment opportunities in cash bonds, CDS and leveraged loans.

RMBS

Mortgage finance md appointed

Trez Moore has joined RBS as mortgage finance md. He takes responsibility for covering the GSEs and regulatory bodies in Washington DC and will report to mortgage finance head Jim Raezer and global head of mortgage and credit trading Scott Eichel.

Moore joins from Freddie Mac, where he was head of the strategic investment group. He has previously served as principal for risk management consulting at Huguenot Capital and worked earlier in his career at Luminent Mortgage Capital.

ABS

Card charge-offs continue to decline

US securitised credit card charge-offs decreased to 4.11% in September from 4.19% in August, according to Moody's Credit Card Indices. The agency expects the charge-off rate index to continue declining modestly.

"This month's improvement continues the steady declines since charge-offs peaked in the first quarter of 2010," comments Jeffrey Hibbs, a Moody's avp and analyst. "In September, the strong credit trends that have been driving the charge-off rate steadily lower for the past several years remain firmly in place."

The delinquency rate index increased to 2.39% in September, 7bp above the all-time low set last month. September typically features seasonally elevated delinquencies, according to Moody's, but this month's reading is just the second time since October 2009 that delinquencies have increased as the improving credit quality of collateral pools has overwhelmed seasonal patterns.

The principal payment rate index also receded from its all-time high set last month, but the overall third-quarter mark of 22.07% established a new high. The yield index slipped again to 18.38%, which led the excess spread index to decline by a single basis point, although it is still near its all-time high level.

"Historically low delinquencies and high payment rates underscore the exceptionally strong credit quality of securitised credit card receivables," adds Hibbs. "Issuers charged off the accounts of weaker cardholders at record levels during the recession and originators have added few receivables from new accounts to securitisations."

The result is credit card securitisations that almost exclusively comprise receivables of well-seasoned, high-quality cardholder accounts that have performed well - despite persistently high unemployment.

ABS

Auto ABS performance strengthens

US auto ABS loss rates have risen by 12% from levels seen in August, though performance was notably stronger in September than in past years to close out the third quarter, according to Fitch's latest index results for the sector. The agency notes that the sector continues to be bolstered by solid borrower credit profiles present in securitised auto loan pools, a strong wholesale vehicle market and the gradually improving US economy.

Prime 60+ day delinquencies stood at 0.39% in September, up slightly from 0.37% in August but representing a 30% improvement from the year before. Annualised net losses (ANL) moved up slightly to 0.28% in September from 0.25% recorded in the prior month, but were 50% improved year-over-year (YOY).

Cumulative net losses (CNL) were unchanged at 0.32% in September from the prior month, the lowest recorded level for September since 2002. This is a 50% improvement from September 2011, according to Fitch.

Used vehicle values were surprisingly flat in September, as this time of the year normally sees weaker values as dealers discount older models to make room for new models. The Manheim Used Vehicle Value Index was flat last month at 120.7, ending five consecutive months of decline.

The subprime sector, meanwhile, saw marginally weaker levels in September. Subprime 60+ day delinquencies rose by 7.4% to 3.48% versus August's level and were 9.4% above August 2011's level. Loss performance also declined slightly, with ANL rising 6.2% MOM to 5.65% in September, but was 12% lower than a year earlier in 2011.

ABS

Punch restructuring underway

Punch Taverns has released its results for the year ended 18 August. The pub operator also indicated that its debt restructuring process is finally underway.

The board has conducted an extensive review of the capital structure and determined that both securitisations (Punch A and B) are over-levered and unsustainable in their current form. It states that the restructuring should include one or more of: a material debt reduction; increase in debt maturities; and changes to the financial covenants. Optimal restructuring solutions and implementation timetables may differ for each securitisation, while operational covenant amendments are required to enable ongoing non-core disposals and further investment in core estate.

The board has already initiated discussions with major shareholders as well as other stakeholders and will extend these talks to bondholders in due course, according to credit analysts at RBS. "We continue to consider that there is no legal route for debt write-off without such debt being converted to equity and consider that any restructuring will need to incentivise the various bondholders to agree," they note.

Securitisation analysts at Barclays Capital expect Punch to propose changing the amortisation profile for the senior notes, combined with shortening legal final maturities and accelerated amortisation from disposals. As a quid pro quo, the mezzanine and junior bondholders could be asked to take some equitisation at a level that would see the par value of the bonds outstanding above current market prices but significantly lower than current par. In addition, the shareholders are anticipated to inject about £90m into the securitisations to avoid massive dilution.

"We continue to prefer being at the top of the capital structure in both Punch A and B securitisations, but - given the rally in prices - most of the bonds are starting to look expensive," the Barcap analysts note. "Punch A class A bonds now yield less than 8% and we think there is better value in the Unique class As and the Spirit bonds with returns of 8%-plus, both of which have superior assets."

Structured Finance

Data portal launched

Moody's Analytics has launched Moody's CreditView - Structured Finance, a solution that offers credit professionals a comprehensive and streamlined view of structured finance deal and industry information, the firm says. This holistic view encompasses term structured finance, ABCP and covered bond ratings, as well as deal details, performance data and relevant sector research and newsletters.

"Moody's CreditView helps our customers improve efficiencies, streamline their workflow and more easily access critical information," comments Andrea Blackman, md, product strategy and marketing at Moody's Analytics. "With the launch of Moody's CreditView for Structured Finance, credit professionals can now access all of the information about a structured finance transaction in a single view, allowing them to quickly scan their portfolios to better inform timely risk management decisions."

Structured Finance

Low losses projected for EMEA, APAC SF

With losses on global structured finance bonds largely clustered in US transactions, Fitch expects losses to be vastly lower on deals issued in the EMEA and APAC regions.

"Losses on European deals will likely be low because of the strong performance of consumer assets, such as mortgages, credit cards and auto loans," comments Kevin Duignan, head of global structured finance and covered bonds at Fitch. "Transaction structures have and will remain resilient to the prolonged economic weakness even in the more vulnerable peripheral markets."

The low losses that Fitch is projecting on EMEA transactions reflect the strong performance of RMBS transactions, which account for two-thirds of the EMEA balance. Fitch projects only 25bp of losses in this sector. The strongest performance is recorded on the main UK and Dutch prime sub-sectors, where no losses are expected.

In the smaller consumer ABS sector, losses are expected to reach 11bp. The main loss drivers are CMBS (which account for 33% of EMEA losses) and structured finance CDOs (29%).

Fitch assigned ratings to US$9.5trn of global structured finance bonds between 2000 and 2011. Of that balance, 1.5% has been written off to date. The agency expects additional losses of 3.3%, bringing total losses to 4.9%.

US transactions contribute 93% of all global structured finance losses. Fitch expects 7.8% of the balance issued in the US between 2000 and 2011 to be written off.

In contrast, the agency expects losses of only 77bp for deals originated in EMEA. Loss expectations for APAC transactions also remain low at 0.9%.

Structured Finance

Call for capital standards re-think

SIFMA has submitted comments to the OCC, the Federal Reserve and the FDIC regarding the agencies' proposals to implement new capital standards under Basel 3. The letter was co-signed by the American Bankers Association and the Financial Services Roundtable.

The comments generally raise concerns about the proposals' lack of risk sensitivity, the timing of their implementation, their significant divergence from internationally agreed-upon capital standards and the absence of any quantitative analysis to justify this divergence, as well as their adverse impact on the availability of credit and on the competitiveness of the US banking system.

To ensure the proposed bank capital standards strengthen the US banking system, the associations believe that: the agencies should re-propose the Standardized Approach Notice of Proposed Rule-making (NPR); important changes should be made to the Basel 3 Numerator NPR and the Advanced Approaches NPR prior to their finalisation; the agencies should conduct an empirical study of their proposals and take into account the results of the study, comments and other empirical analysis; and the effective date of the Basel 3 Numerator NPR and Advanced Approaches NPR should be deferred to no earlier than 1 January 2014, while deferring the effectiveness of the Basel 3 proposals for community banks and savings and loan holding companies to 21 July 2015.

Structured Finance

SIV ratings upgraded

Moody's has upgraded the ratings of Harrier Finance Funding's Euro and US MTN and CP notes. The move is due to the assignment and assumption of the SIV's assets and obligations from WestLB/Portigon to Erste Abwicklungsanstalt (EAA) acting as support provider (SCI 8 October).

Moody's explains that there is a direct linkage between the ratings of Harrier and EAA due to support by EAA to provide funding necessary to repay any maturing senior liabilities. This funding support is provided by EAA's commitment to purchase any senior debt issued by Harrier for the purpose of repaying at maturity any third-party held senior debt. Termination of such support is only to be triggered when there is no further debt outstanding that is held by a third-party investor.

Portigon continues to be the collateral manager and to perform minor administrative activities. Moody's believes that the operational risk posed by the fact that Portigon is no longer a public rated entity is negligible.

However, the agency notes that the SIV is subject to a high level of macroeconomic uncertainty, which could negatively impact the ratings of the notes. This includes uncertain credit conditions in the general economy and, more specifically, uncertainty associated with the underlying credits that could have a direct impact on the transaction.

Structured Finance

ECB collateral eligibility extended

The ECB has published details of the latest extension to its collateral eligibility requirements. The central bank will allow US dollar-, sterling- and Japanese Yen-denominated collateral to be used in its monetary operations from 9 November. The relevant haircuts are 16% for US dollar and sterling securities, and 26% for those denominated in Japanese Yen.

Structured Finance

Spanish bad bank progresses

The Spanish 'bad bank' is to begin operations on 19 November. Dubbed Sareb, the vehicle will absorb up to €90bn in troubled assets. A decree creating the entity is set to be adopted by the Spanish government on 16 November.

CDO

CRE CDO delinquencies unchanged

US CRE CDO delinquencies have remained at 11.6% for the second straight month, according to Fitch's latest index results for the sector. CRE CDO realised losses to-date are approximately 13% of par and the average modelled lifetime expected loss on Fitch's rated portfolio is 37.7%.

In September, asset managers reported approximately US$87m in realised principal losses from the disposal of 20 assets. The average recovery on these assets was 47%.

The largest reported loss was US$27.9m on a mezzanine loan backed by an REO Atlanta office property. The total loan balance of the CDO asset was written down to zero after an appraisal reduction was taken on the senior loan. Fitch anticipated the write-down and modelled no recovery on the loan at its last review of the related transaction.

CDO

Trups CDOs continue to stabilise

Quarterly defaults and deferrals for US bank Trups CDOs fell to their lowest level since 3Q08, far off the high-water mark of 22 seen during the last two quarters of 2009, according to Fitch's latest index results for the sector. Five defaulted bank issuers - totalling US$165.3m of collateral across 18 deals - defaulted on their Trups CDOs in 3Q12, slightly lower than the six banks that defaulted in 2Q12.

Elsewhere, five banks - representing US$56.5m of collateral in eight CDOs - began deferring interest on their Trups in 3Q12, the same amount seen last quarter. This represents the lowest number of quarterly deferrals since 1Q08, Fitch says.

Another encouraging sign is the increase in the number of issuers curing a prior deferral. In 3Q12, 13 banks - representing US$477.8m of collateral in 38 CDOs - resumed interest payments and repaid accrued interest on their Trups.

"This has been a year of stabilisation for bank Trups CDOs, with more of the same likely headed into next year," comments Fitch md Kevin Kendra.

CDO

ABS CDO auction due

MJX Asset Management has been retained to act as liquidation agent for Independence III CDO. The collateral will be sold in two auctions, to be held in New York on 30 October.

The first sale comprises aircraft ABS, CDO, CRE CDO, CMBS, manufactured housing and RMBS assets. The second will consist almost entirely of RMBS.

CDS

Tightening seen in sovereign CDS

CMA has released its 3Q12 global sovereign debt credit risk report, in which it names the top-ten most and least risky sovereigns, as well as the best and worst performers. Globally, sovereign CDS spreads tightened during the quarter, with only Tunisia widening significantly (by 16%).

European sovereign CDS rallied significantly, with volumes in Italy, France, Spain and Germany leading the traded volume data, according to the DTCC. The fourth quarter is likely to be key for Europe, as the market looks for a stabilisation of spreads rather than the volatility experienced in the first half of the year.

CDS spreads in Western Europe improved by 38% as the ECB, under Mario Draghi, initiated an unlimited bond buying plan to stabilise the euro. However, protection prices in Greece remain extremely illiquid, with default risks remaining high.

Meanwhile, CDS spreads in Spain reached another all-time high in Q3, jumping to 635bp on 24 July and then rallying strongly to 339bp on 14 September 2012. They ended the quarter at 384bp.

Finally, Denmark spreads tightened nearly 53% from 113bp to 52bps, with equivalent euro spreads in Germany at 24bp. This implies EUR/USD devaluation risk of 50%, according to CMA.

CDS

Muni coverage added

Numerix has released version 2.1 of Numerix LiquidAsset, its OTC derivatives pricing service. The offering introduces new support for municipal derivatives and securities.

"Clients now have the broad muni coverage and sophisticated functionality needed to price their muni portfolios in totality. Advisors are better equipped to document and explain the various risks tied to muni derivatives and muni issuers can provide internal stakeholders with a holistic view of risk for better contingency planning and liquidity management," comments Steven O'Hanlon, president and coo of Numerix.

CDS

Margin, segregation rules prepped

The US SEC has voted unanimously to propose capital, margin and segregation requirements for security-based swap dealers and major security-based swap participants. Under the Dodd-Frank Act, the margin rules are required to be appropriate for the risk associated with security-based swaps that are not cleared by a security-based swap clearing agency. The proposed segregation rules are intended to facilitate the prompt return of customer property to customers before or during a liquidation proceeding if a security-based swap dealer fails.

The SEC is seeking public comment on the proposed rules for 60 days following their publication in the Federal Register.

CLOs

CLO analytics strengthened

Codean has released Codean CLO Analytics version 3.0. The update provides amend-to-extend functionality, as well the ability to model reinvestment in a way that reflects actual asset manager behaviour, the firm says. It also allows users to run portfolio-of-deals analytics and incorporates other new features, such as multiple assumption sets.

CMBS

Isobel CMBS slammed

Moody's notes that it would not have assigned a Aaa rating to Isobel Finance No.1, the first non-performing real estate loan portfolio CMBS transaction to come to market in EMEA (SCI 4 October). The agency says that the deal is not compatible with a Aaa rating because of the quality of the assets, its extra leverage due to swap termination payments, its principal allocation waterfall and the complexity of the underlying loans.

"If we had rated the transaction, the senior notes would have been rated in the Aa category, while the more junior notes would have been rated at least three notches below the ratings currently on the transaction," comments Christophe de Noaillat, associated md at Moody's.

Securitisations of portfolios of non-performing commercial real estate loans can reach Aaa, although that can be a challenge. To achieve Aaa, according to Moody's, a transaction would have to have a majority of standard property types, no material exposure to swap mark-to-market, a transaction structure that maximises recoveries to senior noteholders and simple underlying loan structures without multiple stakeholders.

More than 90% of the assets in the loan portfolio backing Isobel are of secondary or tertiary quality, says the agency. More than half by asset value are operating assets - such as hotels, car parks and nursing homes - that are harder to sell than most commercial properties.

In addition, Moody's considers that hedging structures in the transaction reduce recoveries and make managing the assets backing the transaction difficult. The payment waterfall, in turn, allows recoveries to leak out of the structure.

The agency is also concerned that many of the loans in the portfolio backing the transaction involve multi-party agreements with varying seniority, making workouts more difficult to achieve.

CMBS

EMEA, US CMBS divergence underlined

Fitch has released a report highlighting that while the US CMBS market has shown continued growth over the past three years, its EMEA counterpart remains in limbo. US volumes remain barely 25% of the market's peak in 2007, but transaction numbers are nearly 50% of the 2007 level. In contrast, the EMEA market is likely to close its third year in succession with issuance below US$6bn-equivalent, less than 10% by number and volume of its peak in 2006.

The root of the issue appears to be that the bulk of the EMEA CMBS market was originated in the pre-crisis boom years of the property market, while the US market had a solid base of issuance over the previous 10 years. Problem loans abound in both markets, but this is affecting the US market rather less.

Huxley Somerville, heads of US CMBS at Fitch, says: "It's a bit of an anomaly that there is still demand from investors to buy new CMBS. However, yield considerations aside, Fitch believes it's because investors understand that the lax underwriting of 2006-2008 is no longer occurring and that there is a solid history of performance for transactions that came to market in the decade prior to 2005."

In EMEA, a larger proportion of transactions suffer from 'tranche warfare', typified by out-of-the-money investors frustrating the attempts of in-the-money investors to manage troubled loans. The same occurs in the US, but so far few transactions have been brought to a standstill because the troubled loans represent a smaller proportion of the securitised portfolio.

Fitch's EMEA CMBS head Euan Gatfield does see some hope arising from the Uni-Invest transaction, where the differing preferences of various classes of investor seemingly contributed to the notes defaulting at legal final maturity, after which senior bondholders were finally able to take control. "Perhaps now that there is evidence of senior noteholders' interests ultimately being served, this might discourage blocking manoeuvres from junior noteholders; so it may prove to be a useful, albeit quite unfortunate, precedent," he says.

A lack of bank lending rather than a lack of investor interest is holding back the EMEA market. A new or dormant breed of debt investors is gearing up to lend on commercial real estate, but that may not necessarily be via CMBS.

"In terms of issuers, Fitch does not see conduit lending coming back any time soon. The banks capable of doing this simply have too many problem loans on their books," Gatfield concludes.

CMBS

GIP loan restructured

Finance documents for the £114.61m Government Income Portfolio loan, securitised in the Windermere XI CMBS, have been amended to reflect an extension of the final repayment date for up to three additional periods (SCI 10 August). The restructure is subject to the satisfaction of various conditions.

The first extension of 12 months up to 15 October 2013 is subject to the disposal of seven properties to meet a £33.49m principal payment on the 15 October 2012 IPD, which will reduce the loan balance to £81.12m. European asset-backed analysts at RBS note that this payment is higher than the value attributed to the properties in the most recent valuation report and is higher than the release price, though they believe that the properties are undervalued.

The second and third extension periods of additional 12 months each will be granted if the loan balance is reduced to £76m on 15 October 2013 and £14m on 15 October 2014. A partial quarterly cash sweep also applies to allow surplus income to be applied towards the prepayment of the loan. Additionally, ICR covenant and weighted average lease term covenant have been waived during the extension periods.

CMBS

Improved outlook for Stuy Town loan

The Peter Cooper Village/Stuyvesant Town Tenants Association has confirmed its intention to bypass the special servicer and buy the property. Such a move would be a considerable positive for CMBS bondholders, but the fact that any resolution would have to be negotiated with the servicer provides a sticking point.

The US$3bn Peter Cooper Village & Stuyvesant Town loan is the largest in the CMBS universe. The loan's recently-reported 1H12 financials show significant improvement from FY2011 levels and Bank of America Merrill Lynch CMBS analysts estimate that the value of the property now exceeds the outstanding loan balance and even covers a large portion of the outstanding advances and expenses.

The letter from the tenants association reiterates the intention to buy the property for an amount that would satisfy obligations to CMBS bondholders. It does, however, state that CWCapital has been unwilling to engage in a discussion regarding the offer and accuses the servicer of simply gathering fees while stalling the resolution of the loan.

"Nonetheless, the thought that CMBS bondholders could ultimately be significantly repaid (if not in full) supports the idea that maybe the loan will be resolved more positively than was previously expected," note the analysts. Bonds from the deals that the loan collateralises - such as the MLCFC 2007-5 AJ tranche - have been trading several points higher on the back of the improved outlook for the loan.

Whether the Peter Cooper Village & Stuyvesant Town loan can be purchased by the tenants, who have been working with Brookfield Asset Management, depends on CWCapital. Although the tenants intend to approach CMBS bondholders directly, they cannot negotiate the resolution with anyone other than the servicer, meaning that their campaign would appear to be more about putting pressure on CWCapital than about taking any formal or legal action.

NPLs

FDIC structured sale closed

The FDIC has closed the fourth sale in its Small Investor Program, involving a competitive bidding process for an equity interest in a limited liability company. The LLC was formed by the FDIC in its receivership capacity to hold certain assets of the failed Tennessee Commerce Bank, which was closed on 27 January.

The FDIC placed a pool of 93 performing and non-performing commercial real estate loans, commercial acquisition, development and construction loans and credit facilities, and performing and non-performing residential acquisition, development and construction loans and credit facilities into the LLC. The aggregate unpaid principal balance of the pool is approximately US$166.2m, with the highest concentration of collateral in Tennessee.

The winning bidder of the equity stake was Tennessee Loan Acquisition Venture (TLAV), which is owned by a minority-owned business and entities controlled by Oaktree Capital Management. TLAV paid a total of approximately US$23.9m (net of working capital) in cash for its initial 25% equity stake in the LLC. TLAV will provide for the management, servicing and ultimate disposition of the LLC's assets.

The sale was conducted on a competitive basis, with thirteen bids received from ten investors on 1 October. Best and final offers were received from seven of the original bidders on 2 October.

The participating FDIC receivership will hold the remaining 75% equity interest in the LLC until all equity is returned. After the return of equity, the FDIC's interest in the LLC will decrease to 50% and the private owner interest will correspondingly increase to 50%.

Risk Management

Clearing agency rules adopted

The US SEC has adopted a rule that establishes standards for how registered clearing agencies should manage their risks and run their operations, in accordance with the Dodd-Frank Act. The new rule requires registered clearing agencies that provide central counterparty services to maintain certain standards with respect to risk management and operations.

Among other things, the rules set standards with respect to measurement and management of credit exposures, margin requirements, financial resources and margin model validation. They also establish certain recordkeeping and financial disclosure requirements for all registered clearing agencies, as well as several new operational standards for these entities.

The new rule 17Ad-22 will become effective 60 days after the date of publication in the Federal Register.

RMBS

RBA preps loan-level requirements

The Reserve Bank of Australia is introducing new eligibility criteria for RMBS in its operations. Issuers of RMBS will be required to provide more detailed information than is currently the case. The new information covers both transaction-related data as well as information on the underlying assets.

Currently, the information required by the Reserve Bank for RMBS to be repo-eligible is largely about the core attributes of the security. A triple-A credit rating from a recognised credit rating agency is also required.

The new reporting requirements are designed to promote greater standardisation of RMBS reporting and enhance information available on securitisations in the Australian market, since there is currently no regulatory standard for RMBS reporting and disclosures. A market 'best-practice' standard has been developed by the Australian Securitisation Forum and the Reserve Bank's requirements are consistent with these standards.

The specific information required by the Reserve Bank is set out in reporting templates, drafts of which are available on its website. One key requirement is for transaction information to identify the key features of a securitisation as generally disclosed in an investor prospectus.

Securities information should also include technical details to help identify the securities, the payment streams across the different tranches and the cashflow waterfall. In addition, pool information will provide summary data on the pool of mortgages backing the securities, while anonymised loan-level data will include de-identified loan information.

In the interests of broader transparency in the market, issuers will be required to make the completed reporting templates available to the public free of charge. Arrangements for public access can include provision of data via a secure website managed by or on behalf of the information provider, or through a data warehouse with expertise in handling the new reporting requirements.

Comments on the reporting templates should be made by 28 December. When the templates are finalised, an implementation period will apply for RMBS to give issuers time to develop the reporting systems necessary to comply.

When the Reserve Bank's Committed Liquidity Facility (CLF) is introduced in 2015, RMBS will potentially comprise a significant share of the securities that authorised deposit-taking institutions (ADIs) will hold to access the facility. It is therefore hoped that additional information requirements will allow the Bank to more precisely value these securities and assess their risk.

Draft reporting templates for other ABS, ABCP and CMBS will be made available in 2013.

RMBS

Libor class action filed

A group of Alabama homeowners has filed a putative antitrust class action in federal court in New York against a number of financial institutions for allegedly conspiring to manipulate Libor. According to the complaint, the alleged manipulation increased the interest rates on plaintiffs' mortgages, which were securitised in RMBS that the defendants backed or purchased.

A recent Lowenstein Sandler client memo cites the named defendants as Bank of America, Barclays Bank, Citi, Credit Suisse, Deutsche Bank, HSBC, JPMorgan and UBS. The plaintiffs allege violations of the Sherman Act, New York antitrust law and the Racketeer Influenced and Corrupt Organizations (RICO) Act and are seeking damages, restitution and attorneys' fees and costs.

The plaintiffs have asked that the lawsuit be consolidated with pending multidistrict litigation over the alleged conspiracy.

RMBS

High IG ratings 'unlikely' for SFR deals

Fitch says it is unlikely to assign a high investment grade rating to securitisations of single-family rental (SFR) properties. The agency notes several key challenges to rating REO-to-rent transactions.

One is the limited performance data at both the property and market level. The lack of manager performance history and track records also presents risks.

"While we have had conversations with some of the market-level data providers, one of which we found to have a robust data warehouse, the history only dates back to 2008-2009," Fitch notes.

Another key challenge is the investor's security interest in the collateral, which can consist of mortgages on the property or equity pledges. With the latter, a property is deeded to an SPE and a 100% equity pledge in the SPE is transferred to the trust.

The key risk associated with this structure is the potential for the issuer or sponsor to pursue bankruptcy of the SPE, should a deal underperform and investors seek to enforce their rights. In the absence of a recorded mortgage, the issuer/sponsor can potentially obtain post-petition debt secured by the underlying properties. While this may be viewed as a low probability/high severity event, Fitch is concerned that under a stress scenario, the noteholders would become unsecured creditors of the SPE.

A third key risk unique to REO-to-rent securitisations is their hybrid nature. "We view the single-family asset class as a cross between commercial and residential properties, as the rental streams and value of the underlying property would be used to repay the transaction. Given the lack of property-level performance and rental income history, we expect to conduct sensitivity analyses as a check on the viability of rents, cashflows and yields using the income capitalisation or cap rate approach. We also note that the cashflows and value are affected by the performance of the operator, as well as their business strategy and motivations," the agency adds.

Fitch expects its approach to the asset class to evolve in conjunction with the availability of data, the development of the transaction structure and track record of the property manager and sponsor.

RMBS

ResCap trial scheduled

A trial start date of 14 January 2013 has been set in connection with ResCap's proposed US$8.7bn settlement with 392 RMBS trusts. The trial is expected not to last beyond 17 January.

US Bankruptcy Judge Martin Glenn is set to allot 12 hours of the trial to supporters of the RMBS settlement - including ResCap, Ally Financial and the institutional investors involved in the deal - and 18 hours to the deal's opponents. The case is will be heard in the US Bankruptcy Court for the Southern District of New York.

RMBS

Aussie delinquencies set to stabilise

Moody's expects Australian mortgage delinquencies to stabilise, after a slight decline over the last 12 months. Regional disparity persists, however.

"In Australia, 30-plus day delinquencies have not fallen as much as had been expected from a 100bp cut in the Reserve Bank of Australia's (RBA) official cash rate between November and May this year, because the banks have not passed onto home owners the full extent of the rate reductions," says Arthur Karabatsos, a Moody's vp and senior analyst.

"Nevertheless, over the next 12 months, residential mortgage delinquencies in Australia will hold steady because we expect the country's unemployment rate to remain in the low- to mid-5% range. Also, any reductions in the cash rate will have limited benefits for mortgage holders, if lenders do not reflect the full extent of the reductions in their own home loan rates," adds Karabatsos.

At the same time, regional disparity persists, with higher delinquencies in regions with higher exposures to tourism, manufacturing and construction. Karabatsos continues: "Those with lower delinquencies have relatively more professional and government workers, as well as workers in education."

In terms of the five major capital cities, Brisbane and Sydney had the highest 30-plus day delinquencies of 2%, as of May. Perth was in third place, with 1.7%. Melbourne and Adelaide had the lowest delinquencies of 1.5%. These compare to the national average of 1.8%.

Moody's analysis also shows that borrower equity is a stronger driver of delinquencies than house price decreases. House prices in Lower Northern Sydney, for example, have suffered the largest fall in Sydney of 14% - yet the area has the lowest delinquencies in the city because of relatively high equity levels.

The biggest threats to the Australian economy and mortgage delinquencies are a deterioration in the euro area financial crisis or a sudden and large contraction in growth in China. Nonetheless, in comparison with other advanced economies, Australia is well placed to react to such scenarios, as the RBA can lower the official interest rate of 3.25%. The government also has room to introduce fiscal stimulus, as Australia has a low level of debt compared with other developed economies.

RMBS

Second PPIF liquidated

AllianceBernstein has become the second firm to liquidate its PPIP fund, following Invesco's move in Q1 (SCI 2 May). The fund returned a profit of US$474m to the US Treasury, reflecting an 18.7% annualised return over three years.

Among the remaining six PPIFs, AG GECC PPIF Master Fund had returned 30% of the US$4.4bn invested by end-Q2, while all others had returned only 5%-15%. The 3Q12 PPIP report is expected in the coming weeks and should provide more details on whether other funds are speeding up liquidations.

Given that investors can finance non-agency RMBS at higher leverage than the 1:1 leverage in PPIP, liquidation might be an attractive proposition, according to MBS analysts at Barclays Capital. "This is especially true for prime and Alt-A paper, where most PPIPs' holdings are concentrated. In addition, the PPIP structures require faster deleveraging after the first three years, reducing the attractiveness for equity investors somewhat. As such, we would not be surprised if more of the PPIP funds return investor money in the coming quarters."

The issue for non-agency RMBS is whether this will create any supply pressure. But the Barcap analysts note that demand for these assets remains strong, with PPIP funds unlikely to sell into weakness.

RMBS

LMI approach updated

Moody's has published its updated approach for evaluating lender's mortgage insurance (LMI) for Australian RMBS, following the receipt of market feedback on the proposed changes (SCI 31 May). At the same time, the agency has placed on review for downgrade the Aa2 rated class B notes issued by Crusade Euro Trust No. 1E.

LMI results in the need for less credit enhancement from other sources and Moody's will, under its new approach, measure the difference as the 'LMI benefit'. The LMI benefit is primarily a function of the insurer's claim-paying ability, which the agency expresses as the insurer financial strength rating (IFSR) of the mortgage insurer providing the LMI.

The updated methodology reduces the LMI benefit for loss adjustments resulting from the fact that LMI does not cover all losses on a portfolio. Moody's determines the loss adjustment rate (LAR) on an RMBS programme or transaction basis; the LAR assumption is typically in the range of 10% to 25%.

With the ratings of junior RMBS tranches, the agency assesses the adequacy of any structural protection to mitigate the risk of loss adjustments. If structural protection is adequate, then the ratings of the junior notes will correspond to the rating of mortgage insurer's IFSR.

Besides the Crusade Euro Trust No. 1E class B notes, Moody's says that the updated methodology affects some RMBS tranches already on review for downgrade - particularly the junior tranches, which in most cases are likely to be downgraded to below investment grade levels. In all, 103 tranches from a total of 88 Australian RMBS have remained on review for downgrade since April and May, following the rating actions taken on Australian mortgage insurers.

The agency expects to complete its review of the affected RMBS following the conclusion of its review of Australian mortgage insurers.

RMBS

MSR data service unveiled

Kamakura Corporation has begun publishing a simple and transparent yield curve data series for the valuation of mortgages and mortgage servicing rights (MSRs). The offering is designed to overcome a number of serious flaws in the conventional wisdom for mortgage and MSR valuation, the firm says. These are: reliance on the manipulated Libor swap curve; use of inconsistent models for prepayment, default and yield curve generation; and reliance on simplistic one-factor yield curve models that are inconsistent with 50 years of US interest rate history.

The Kamakura mortgage valuation yield curves are updated daily, with credit spread parameters updated weekly, and distributed via the firm's Kamakura Risk Information Services division. It is designed to meet the requirements of FASB's Accounting Standards Codification 860 on the transfers and servicing of financial assets.

RMBS

RMBS restructuring proposed

NIBC is convening a noteholder meeting on 7 November to vote on restructuring proposals for Sound 1. An extension of the first optional redemption date by 12 months to November 2013 is being proposed, as well as an increase on the class A margin to 110bp from the original sep-up date and the other notes to increase to the original step-up margins from the November 2012 IPD.

In the event that the proposals fail to get noteholder approval, the seller's intention would be to call the notes on their second optional redemption date in February 2013. An open tender offer, at par, is in place for all outstanding notes, according to ABS analysts at RBS. This is due to close on 24 October, with results announced on 30 October.

RMBS

UK non-master trust RMBS reviewed

Moody's has updated its loss assumptions in one prime and two buy-to-let (BTL) UK RMBS deals, following a performance review of the UK prime and BTL RMBS non-master trust sector. The affected deals are Trinity Financing, Auburn Securities 3 and Ludgate Funding Series 2007-FF1 respectively.

The rating agency has taken no rating actions on the deals, as the levels of credit enhancement available in Trinity Financing and Ludgate Funding Series 2007-FF1 offsets performance deterioration, and the ratings in Auburn Securities
3 are capped at the current level due to payment disruption risks. The remaining 35 transactions that Moody's rates in the sector are performing in line with expectations.

As of August 2012, cumulative losses as a percentage of Trinity Financing's original portfolio balance amounted to 0.2%, while loans delinquent by more than 90 days amounted to 5.3% of the current portfolio balance. After considering the current amount of realised losses and completing a roll-rate and severity analysis for the non-defaulted portion of the portfolio, Moody's has increased its lifetime expected loss assumption for the portfolio from 0.8% to 1.5% of the original portfolio balance.

As of September 2012, cumulative losses as a percentage of Auburn 3's original portfolio balance amounted to 0.02%, while loans delinquent by more than 90 days amounted to 0.4% of the current portfolio balance. Taking into account the performance of the underlying mortgage portfolio to date, Moody's has decreased its lifetime expected loss assumption for the portfolio from 0.8% to 0.3% of the original portfolio balance.

As of October 2012, cumulative losses as a percentage of the Ludgate transaction's original portfolio balance amounted to 1.7%, up from 1% as of October 2010. Loans delinquent by more than 90 days as a percentage of the current portfolio balance amounted to 3.8%, a decrease from 4.9% as of June 2009. Taking into account the performance of the underlying mortgage portfolio to date, Moody's has increased its lifetime expected loss assumption for the portfolio from 3.0% to 4.3% of the original portfolio balance.

RMBS

UK NC RMBS reviewed

Moody's has completed a performance review of the UK non-conforming (NC) RMBS sector and updated its portfolio loss assumptions in 17 transactions and MILAN CE in four transaction out of the 81 transactions reviewed. The review has no rating implications because the credit enhancement available under the corresponding notes fully offsets the effect of the increase of the loss assumption and the decrease of the loss assumption is not sufficient to upgrade the ratings.

In 11 out of the affected transactions - Clavis Securities 2007-1, EMF-UK 2008-1, Eurosail 2006-2BL, Eurosail 2006-3NC, Eurosail-UK 2007-1NC, Mortgages No. 7, Resloc UK 2007-1, RMAC 2003-NS3, RMAC 2003-NS4, RMAC Securities No. 1 series 2006-NS2 and RMAC Securities No. 1 series 2006-NS4 - Moody's has increased its lifetime loss assumption, as the performance of the underlying mortgage portfolios to date has been worse than previously assumed. The remaining six transactions (Mortgages No. 6, Preferred Residential Securities 2005-1 and 2006-1, RMAC 2004-NS3, Southern Pacific Financing 2005-B and 2006-A) are performing better than expected, with the agency consequently decreasing its lifetime expected loss assumptions for them.

Expected loss assumptions remain subject to uncertainties such as general future economic activity, interest rates and house prices. Lower than assumed realised recovery rates or higher than assumed default rates would negatively affect the ratings of the transactions.