Contents

CMBS

US CMBS slips wider

The US CMBS secondary market moved a little wider in yesterday's session, although the trend for the past week has generally been tightening. GG10 Dupers were being quoted at swaps plus 170/168, wider than the previous close of 162 over, while legacy fixed seniors and re-REMICs were each also 2bp wider.

Interactive Data figures put total BWIC volume for US CMBS at US$335m. "Legacy, re-REMIC and CMBS 2.0/3.0 senior spreads are all marginally wider on the day. BWIC volume has increased from the prior session and is at a moderate level. In terms of supply, there is a mix of various vintage securities out for bid," Interactive Data adds.

SCI's PriceABS BWIC data shows that yesterday's widening has not negated the tightening witnessed over the days beforehand. BSCMS 2007-PW16 AM was covered at 212bp, a week after its previous cover of 220bp on 31 October. As recently as 15 October, talk was ranging from 250bp to 275bp. The tranche first appeared in PriceABS back in May, where it was talked in the mid/high-400s.

A US$4.1m slice of JPMCC 2007-CB20 ASB was covered at 44bp. That is tighter than the 79bp that a US$8.165m piece was covered at on 24 August, when it was also being talked in the low/mid-90s. The session also saw a comparatively wide cover for MSC 2007-IQ14 A4, but this too is tightening; it was covered in yesterday's session at 134bp, having previously been covered at 150bp, 198bp and 225bp on 1 October, 23 August and 6 August, respectively.

The CSMC 2007-C4 A4 tranche does appear to have gone considerably wider. It was talked yesterday at 170bp, having been covered at 154bp on 24 October. However, the same tranche was talked at 188bp on 5 October and 200bp on 25 September.

RMBS

RMBS takes a step back

The holiday-shortened week has begun with secondary US non-agency RMBS activity down from Friday's session. Prices were slightly lower yesterday, although still high relative to levels in previous weeks.

Interactive Data figures put non-agency BWIC volume at US$258m for the session. "BWIC volume is light to start the week, coming in at less than half of Friday's total," the firm notes. "Dealer guidance appears in the range of recent market colour. Furthermore, dealer offering levels are generally stable from the prior session, with the exception of select option ARMs, which are being offered up to US$0.5 lower."

The slight fall in prices is noticeable in SCI's PriceABS data, which shows prices softening for tranches such as CHASE 2007-S1 A7 and RALI 2005-QS12 A4. The former was covered in the low/mid-90s, having been talked in the mid-90s on 9 November and 11 October. The latter was eventually covered yesterday in line with Friday's talk in the low/mid-90s.

In addition, US$22.5m of the US$25.6m LMT 2006-6 4A5 tranche was covered yesterday at par, compared to the talk in the 102 area that it had attracted in the prior session. The subprime US$4.5m CWL 2005-BC4 M5 tranche is also noteworthy: it was talked in the mid-70s but actually traded in the mid-80s.

JL

Structured Finance

SCI Start the Week - 12 November

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

Pipeline
Many of the deals that joined the pipeline last week went on to price soon after, but a couple remained come the end of the week. These consisted of a UK auto ABS (£301m Turbo Finance 3) and one CMBS (US$568m BBUBS Trust 2012-TFT).

Pricings
Issuance last week was heavily skewed towards ABS. Eight ABS deals, three CLOs, two RMBS and a single ILS priced.

The ABS prints comprised three credit card deals (US$250m Discover Card Master Trust 2012-B3, US$700m Dryrock Issuance Trust 2012-1 and US$300m Dryrock Issuance Trust 2012-2), three student loan deals (US$1.174bn Nelnet Student Loan Trust 2012-5, US$536.4m PHEAA Student Loan Trust 2012-1 and US$260m Rhode Island Student Loan Authority Series 2012-2), a structured settlements deal (US$200.28m JGWPT XXVII) and a timeshare deal (US$191.26m Silverleaf Finance XV series 2012-D).

The CLOs were €3.18bn FTA PYMES Santander 4, US$414m ING IM CLO 2012-4 and US$624.5m Race Point VII CLO. The RMBS comprised £1bn Gosforth Funding 2012-2 and US$500m-equivalent Pepper Prime 2012-1 Trust, while the ILS was €176m Atlas Reinsurance VII.

Markets
A positive tone prevailed in the secondary US RMBS market last week, as SCI reported on 6 November. Non-agency supply began the week at an elevated level, with prices continuing their trend of recent weeks to inch higher.

It was a similar story for US CMBS, although prices did widen on Wednesday. SCI's PriceABS data shows that spreads were still comfortably inside where they had been a few weeks earlier, with tranches such as BSCMS 2007-PW16 AM covered at 212bp, in from 220bp a week before and 275bp a fortnight before that.

Citi US ABS analysts note that consumer ABS remained attractive last week. "Among triple-A sectors, the longer WAL credit card classes offer the most pick-up to our price target. The 7- and 10-year cards earn swaps plus 35bp and 55bp, picking up 10bp and 21bp to the price targets respectively." ABS sectors with any pick-up to Citi's price targets tightened over the last month, with subordinate credit cards and autos looking cheap.

Activity in the secondary CLO market was also strong, as SCI reported last week (SCI 7 November). PriceABS showed over 100 line items for the sector, with liquidity particularly strong at the bottom of the capital structure.

However, European RMBS activity was fairly quiet last week, with little change in the secondary market. "Spreads for most asset classes have closed the week unchanged, with only peripheral jurisdictions - Italian, Spanish and Irish RMBS in particular - moving tighter," note JPMorgan RMBS analysts.

Deal news
• S&P has updated its European CMBS rating criteria. The criteria will apply to all new and existing ratings on European CMBS and come into force on 6 December.
• Details are beginning to emerge on the extent of Superstorm Sandy's impact on catastrophe bonds. Moody's believes the estimated insured property losses of US$7bn-US$20bn are credit negative for Combine Re Series 2012.
• Chenavari Investment Managers is set to replace Alpstar Management as collateral manager on the Alpstar CLO 1 and 2 transactions. Consent of controlling noteholders via a written resolution is required by 12 November for this to occur.
• The auction to settle the credit derivative trades for Hibu (formerly known as Yell) LCDS is to be held on 15 November. The firm missed interest and principal payments which were due at the end of last month.
• An auction will be conducted on 23 November for Collybus CDO I.
• Moody's has placed the Euro and US MTN programmes of Links Finance on review for possible downgrade. The move follows the placement of Bank of Montreal's Aa2 rating under review for possible downgrade on 26 October.

Regulatory update
• The US Department of Education issued final regulations last week to help more financially distressed federal student loan borrowers lower their monthly payments. Moody's believes these changes are positive for private student loan securitisations but mixed for FFELP.
• The US SEC has charged Walter Morales and his firm Commonwealth Advisors with defrauding investors over millions of dollars in losses from RMBS investments. The investigation is on-going.
• The Federal Court of Australia has ruled that S&P misled investors by giving ABN Amro's Rembrandt 2006-3 CPDO a triple-A rating. The rating agency and the bank are both judged to have misled those Australian councils which purchased the Rembrandt notes.
• Quantifi has released a whitepaper comparing alternate methods for calculating CVA capital charges under Basel 3. It is published jointly with consultant Jon Gregory and covers the difference in capital charges between the simple and more advanced approaches and the capital relief which can be achieved.
• Celent has released a report on the implications of the Dodd-Frank Act for non-US firms. The report notes that the impact on foreign banks will be "widespread and long-lasting", altering trading strategies and operations for most of the large swap trading firms globally.

Top stories to come in SCI:
Focus on Australian RMBS
CDS short selling regulatory impact
US CMBS note auctions
October EMEA CMBS maturity outcomes

ABS

Kildare makes UK expansion

Kildare Capital has founded Kildare Capital (UK), an FSA-registered firm with a full-service ABS trading desk which will focus on student loan ABS. Francesco Paolo Bellopede will serve as director of compliance and operations in London.

Structured Finance

Credit hedge fund adds trio

400 Capital Management has made key additions to its portfolio management, quantitative analytics and operations teams. Dan Krup, Michael Zang and Steve Hemmes all join in senior roles.

Krup joins from Western Asset Management as director of asset-backed credit and special situations portfolio management. He will lead the firm's efforts in researching, sourcing and analysing opportunities within consumer and commercial ABS portfolios and financings for the firm's various mandates.

Zang joins from the Chicago Trading Company as director of quantitative analytic and systems programming. He will be responsible for developing and enhancing the firm's proprietary credit analytics and its integration broadly within the firm's portfolio, risk management and operational platforms.

Hemmes joins from Sancus Capital Management as associate in operations. He will support the trading, clearing, cash management, valuation and treasury functions of the firm.

Structured Finance

Law firm expands Asian footprint

Paul Hastings has expanded its Asian presence with a new office in Seoul, Korea. It will be led by Jong Han Kim and Daniel Kim and complement the existing offices in Beijing, Hong Kong, Shanghai, and Tokyo.

Structured Finance

Firm adds development, operations heads

Coherence Capital Partners has hired Philipp Levy as member, partner and head of business development and Edgar Benavides as partner and head of operations. The firm was founded earlier this year by Sal Naro (SCI 3 February).

Levy joins from Mudrick Capital Management, where he was head of marketing and investor relations. He has over 25 years of experience in the financial markets in New York, London and Zurich.

Benavides joins from the capital markets advisory practice of PricewaterhouseCoopers, where he was a project manager. He has particular expertise in the Dodd-Frank regulatory reform act and its impact on the OTC derivatives market.

Structured Finance

Cadwalader adds London partners

Cadwalader, Wickersham & Taft has recently added two partners to its London office. Stephen Day has joined from Mayer Brown, while Yushan Ng has moved over from Linklaters.

Day is capital markets partner, advising on a range of structured finance and securitisation transactions, with a focus on complex cross-border deals. Ng is financial restructuring partner, with particular experience in structuring and executing loan-to-own transactions.

CDS

Firms in OTC derivative valuations partnership

SIX Financial Information has teamed up with Numerix to produce OTC derivative valuations. Valuations for a wide range of vanilla and OTC derivative instruments will be available as part of the new evaluated pricing service.

The first phase of the partnership has already been developed and includes CDS and interest rate swaps. Additional asset classes will be added over the coming months.

CLOs

UK debt firm acquired

Greenwich Loan Income Fund has entered into an asset sale and purchase agreement with BMS Specialist Debt Fund. Greenwich will purchase certain BMS assets for £11.6m in ordinary shares.

BMS will continue to be managed by Ewan Stradling, Martin Ling and credit expert Shane Lanigan, who previously worked at Elgin Capital trading leveraged loans for the Dalradian European CLO series of funds.

CMBS

NY CMBS JV formed

Greystone has formed Greystone Bassuk Group in a joint venture with The Bassuk Organization. The new group will provide expanded real estate and financial services, including creative debt and equity financing, to CRE clients with multifamily assets across the US.

Greystone Bassuk Group will combine the national reach and expanded platform of Greystone with The Bassuk Organization's experience and knowledge of the New York marketplace. It will share office space within Greystone's New York headquarters.

CMBS

Starwood launches European debt platform

Starwood Capital Group has formed Starwood European Finance Company (StarFin), a European real estate finance platform. StarFin exists to take advantage of financing opportunities arising from property owners needing to refinance existing loans that are maturing and ongoing demand for new real estate debt capital which is no longer widely available from the banking system.

Cushman & Wakefield will be a partner and investor in StarFin through its investment management arm Cushman & Wakefield Investors Limited (CWI). CWI will help source financing opportunities and provide market intelligence and research.

StarFin will be led by Starwood Capital's European management team, including senior md Jeff Dishner and head of European debt Peter Denton. It will focus on the UK and Northern European real estate markets and will follow a broad loan origination and acquisition model, investing across a combination of senior, whole, subordinated, bridge and development loans with a maximum portfolio loan-to-value of 75%.

Insurance-linked securities

Manager adds to risk, operations teams

Twelve Capital has appointed Andrew Townend as partner and Bruno Müller as coo. The hires will strengthen the ILS investment manager's risk analysis capabilities and operations management.

Townend takes responsibility for credit assessment of companies issuing bonds with potential for inclusion in Twelve Capital's funds and portfolio management of those funds. He joins from Swiss Re, where he managed credit risk in structured reinsurance contracts, and before that worked at JPMorgan working on credit analysis supporting derivatives transactions with counterparties in EMEA.

Müller's main responsibilities at Twelve Capital will be finance and operations. He joins from Clariden Leu, where he was responsible for product finance and controlling within the asset management division. Prior to Clariden Leu he spent 12 years at Credit Suisse Asset Management.

RMBS

REIT makes management changes, expands

William Roth has been named as Two Harbors Investment Corp cio, effective 1 January 2013. Matthew Koeppen has been promoted to md and William Greenberg also joins the firm from UBS as md.

Roth was previously co-cio along with Steven Kuhn. Kuhn will now focus on his role at the firm's external manager, Pine River Capital Management, where he is partner and head of fixed income trading.

Koeppen has been at Two Harbors for two years, having previously worked at Black River Asset Management. At Black River he managed a securitised products portfolio including RMBS, interest-only securities and derivatives.

Greenberg was head of investment bank risk control strategy at UBS. Before that he was head of the mortgage strategy and solutions group, responsible for RMBS and whole loans issued by UBS. He has also served as co-head of US trading at SNB StabFund, managing legacy RMBS, ABS and CMBS securities and loans.

RMBS

REIT subsidiary acquisition mooted

Annaly Capital Management has proposed to acquire all the shares of CreXus Investment Corp that it does not already own. CreXus has approximately 76,630,528 shares of common stock outstanding, of which Annaly holds 9,527,778 (or 12.4%).

Annaly proposes to acquire the shares for US$12.50 each, representing a 13% premium to CreXus' last reported share price. The proposal is subject to negotiation of definitive documentation.

RMBS

Disclosure settlement reached

JPMorgan has disclosed in its latest quarterly 10-Q filing that an agreement in principle has been reached to settle two US SEC investigations related to MBS offerings. The investigations were in connection with delinquency disclosures for a single transaction and potential claims against Bear Stearns entities, according to a recent Lowenstein Sandler client memo. The latter relates to disclosures concerning settlements of claims against originators involving loans included in a number of Bear Stearns securitisations.

The agreement in principle is subject to approval by the SEC, as well as court approval. JPMorgan revealed in February that the SEC had been investigating it since January 2012 regarding disclosures in offering statements, as well as problems with loan origination at Bear Stearns.

RMBS

First Amendment defence rejected

Cook County Circuit Judge Mary Anne Mason has denied an S&P motion to dismiss a lawsuit brought by the Illinois Attorney General against the rating agency. The suit was filed in January and alleges that S&P and its parent company, McGraw-Hill, misled investors about the objectivity of S&P's high ratings for RMBS that later defaulted. In her decision, Judge Mason rejected S&P's First Amendment defence, finding that "courts have long held that neither the federal nor state constitutions protect false, misleading or deceptive practices".

ABS

India SF delinquencies to rise

Fitch predicts a rise in delinquencies in portfolios backing Indian structured finance transactions as a result of recent floods in the Andhra Pradesh region. The floods are expected to disrupt loan collections in affected districts and impact borrowers' ability to repay.

The agency believes Indian SF transactions are generally resilient due to sufficient credit enhancement that has been built up through amortisation. Of the 13 Indian transactions it rates, 11 are backed by vehicle loans with a 19% exposure to Andhra Pradesh and are expected to withstand stressed losses from the default of all loans in the region. The other two transactions - both originated by Shriram City Union Finance - are expected to be more greatly affected due to high portfolio concentration of 78% in the region.

ABS

More mixed news for SLABS

The US Department of Education issued final regulations last week to help more financially distressed federal student loan borrowers lower their monthly payments. Moody's believes these changes are positive for private student loan securitisations but mixed for FFELP.

The final rule makes it easier for FFELP and Direct Loan borrowers to apply for the current income-based repayment plan (IBR) and increases borrowers' awareness of it. The rule also creates a new income-contingent repayment plan for new Direct Loan borrowers based on President Obama's pay as you earn (PAYE) repayment initiative.

Increased use of IBR or PAYE is credit positive for private student loan ABS, but mixed for FFELP securitisations, Moody's notes. For private student loans, IBR and PAYE will help borrowers avoid default by reducing debt burdens, but the consequences for FFELP securitisation depend on whether they have negative or positive excess spread.

"Increased use of IBR and the subsequent lengthening of the loan term is credit negative for securitisations with negative excess spread because the negative spread erodes the asset base longer. In addition, increased use of IBR is credit negative because it will reduce cash flows for the notes and cause the notes to pay down more slowly, increasing their weighted average lives," says Moody's.

On the other hand, FFELP securitisations with positive excess spread will see increased credit quality from lowering defaults and lengthening loan pool lives, increasing the total excess spread available to pay principal, which is positive. However, there is still the negative that increased use of IBR will reduce cash flows for the notes.

Structured Finance

Long-only UCITs fund minted

Algebris Investments has launched Algebris Financial Credit Fund, a long-only financial credit UCITS fund. The fund will invest globally, primarily in debt securities with fixed and variable coupons, which may be rated at or below investment grade.

The fund may also invest in other financial instruments, such as convertible securities, hybrid securities, preference shares, subordinated debt and deposits. Algebris is led by Davide Serra.

Serra comments: "The Algebris Financial Credit UCITS Fund was launched to give onshore long-only investors across Europe access to our financial credit expertise and sector focus. We have been managing credit strategies since 2009 and have significantly outperformed the benchmarks. We believe there are very interesting opportunities in this space as the regulation changes brought on by Basel III are rolled out."

Structured Finance

Basel 3 implementation delayed

In light of the volume of comments received following the release of three notices of proposed rulemaking in connection with regulatory capital, the Fed, FDIC and OCC have stated that they do not expect any of the proposed rules to become effective on 1 January 2013. The proposals suggested this date as an effective date for the regulations, but many industry participants have expressed concern that they will have insufficient time to understand the rule or to make necessary systems changes by then.

SIFMA president and ceo Tim Ryan comments: "Regulators have appropriately acted to give the industry more time to implement these new capital standards and ensure that each of their systems is updated to comply with Basel 3. We remain committed to working with the regulators to ensure compliance with Basel 3 capital standards to ensure the safety and soundness of the financial system while not constricting bank's ability to lend, facilitate capital formation and significantly contribute to our economic recovery."

The US federal banking agencies say they will take operational and other considerations into account when determining appropriate implementation dates and associated transition periods.

Structured Finance

Libor litigation rating impact predicted

Banks will likely be able to absorb any future regulatory fines from the alleged manipulation of Libor within their annual earnings, according to Moody's. However, losses from potential litigation over such manipulation - though highly uncertain and difficult to quantify - could turn out to be much larger than any regulatory fines and would therefore be more likely to have credit-negative rating implications.

Moody's considers that potential risks to firms include: regulatory fines/penalties; litigation settlements; and reputational damage/strategic changes. The agency does not believe that the imposition of regulatory fines is likely to prompt rating actions on Libor panel banks, but says that negative pressure on ratings could develop following associated management upheaval or revelations of previously unidentified risk management/control failures.

Further, Moody's notes that the largest Libor panel banks have more earnings and capital with which to absorb potential losses. However, those banks are not necessarily less vulnerable than the smaller banks, especially if higher absolute transaction levels associated with the larger banks lead to larger litigation losses.

Well before any final court decision or legal settlements are reached, the agency expects numerous related legal and regulatory developments to occur over an extended timeframe. This should bring greater clarity to the likely impact of regulatory fines, potential litigation losses and penalties on the credit profiles of Libor panel banks.

Structured Finance

Project bond boost anticipated

An EU initiative to provide subordinated debt instruments for large infrastructure projects is likely to stimulate the European infrastructure project bond market by allowing for higher bond ratings than previously seen in the markets, according to S&P. Under the Europe 2020 Project Bond Initiative, the European Investment Bank will provide either loans or letters of credit - called project bond credit enhancements (PBCE) - to underpin the credit quality of senior debt issued by project finance issuers, so as to make them more attractive to institutional investors (SCI passim).

In a pilot phase, PBCEs will support between five and seven infrastructure projects in the transport, energy and broadband sectors. The European Commission is contributing €230m in capital for the pilot and the EIB is likely to leverage this capital three times through its own balance sheet. The EIB calculates that, because the initiative will offer credit enhancement for up to 20% of the senior debt of each project, at least €4.6bn of senior debt could be made available for new infrastructure projects.

"If properly inserted within the transaction structure, these PBCEs could enhance the credit quality and reduce the likelihood of default on senior debt," says S&P credit analyst Manuel Dusina. "However, in our opinion, credit enhancement in itself might not be sufficient to enhance the overall credit quality of a weak project. If an infrastructure project has a weak business profile, is exposed to a weak irreplaceable counterparty and/or has a transaction structure that doesn't sufficiently protect project creditors, then the presence of credit enhancement facilities - even if properly structured - would at best only delay the project's eventual demise rather than structurally enhance its long-term capacity to service senior debt in full and on time."

CDO

Redwood preps CRE CDO

Redwood Commercial Mortgage Corporation (RCMC), a Redwood Trust subsidiary, is in the market with a static cashflow CRE CDO. Dubbed RCMC 2012-CREL 1, the US$291.1m deal is backed by 30 subordinate commercial real estate assets secured by 76 underlying properties.

The portfolio comprises 24 mezzanine loans (accounting for 87.9% of the pool), four preferred equity interests (6.8%), one CMBS rake certificate (3.4%) and one B-note (1.9%). The top five assets are all mezzanine loans, including Plaza Mexico (9%), 55 West Monroe (7.4%), Gansevoort Park Hotel (6.9%), Wyvernwood Apartments (6.6%) and Sun Development Portfolio (6.1%). The top five assets represent 36% of the initial pool balance, and the top ten represent 57.4%.

The 76 underlying properties are located in 18 states, with the three largest state concentrations being in New York (23.7%), California (21.6%) and Illinois (11.5%). The pool has exposure to four property types with concentrations in excess of 10%: multifamily (27.9%), office (26.1%), hospitality (19.9%) and retail (15.7%).

Kroll Bond Rating Agency and Moody's have assigned preliminary BBB-/Baa3 ratings to the US$171.75m class A notes. An US$119.35m unrated equity tranche will be retained by RCMC.

Pentalpha Surveillance will act as operating advisor on the transaction, which was arranged by UBS.

CDS

Dodd-Frank extraterritoriality examined

Celent has released a report on the implications of the Dodd-Frank Act for non-US firms. The report notes that the impact on foreign banks will be "widespread and long-lasting", altering trading strategies and operations for most of the large swap trading firms globally.

Firms which engage in swap trading with US persons will have to adhere to Dodd-Frank. The CFTC has stated that a foreign branch or agency of a US person would be considered a US person. However, a foreign affiliate or subsidiary of a US person would not be considered a US person even if the swap-related obligations of such foreign affiliate or subsidiary are guaranteed by a US person.

"The regulatory status of any counter-party, as a registered swap dealer or otherwise, is immaterial when dealing in swaps with a US person. The transaction would still have to be regulated as per Dodd-Frank. In operational terms, this would require compliance with the transaction level requirements for the processing and reporting of such trades," says Celent.

The report adds: "There is a lack of clarity on the various steps that need to be taken and the delays in implementation have led to further confusion. Imposing additional overseas rules could be duplicative and also lead to jurisdictional conflicts. Non-US regulators may also be concerned about such an approach. Cost could be another important factor."

CDS

Collybus auction scheduled

An auction will be conducted on 23 November for Collybus CDO I. The trustee will sell the CDS on that date only if the sale would result in proceeds which are, together with the balance of all eligible investments and cash in the accounts, greater than or equal to the total redemption amount.

CDS

LCDS auction scheduled

The auction to settle the credit derivative trades for Hibu (formerly known as Yell) LCDS is to be held on 15 November. The firm missed interest and principal payments which were due at the end of last month.

CDS

OTC notionals decline

Total OTC derivatives notional amounts outstanding amounted to US$639trn at end-June 2012, according to the BIS, down by 1% from end-2011. The appreciation of the US dollar against key currencies between end-2011 and end-June 2012 contributed to the decline by reducing the US dollar value of contracts denominated in euros in particular.

Credit derivatives notional amounts declined to US$27trn. Gross credit exposures - which measure reporting dealers' exposure, after taking account of legally enforceable netting agreements - fell to US$3.7trn. Gross market values - which measure the cost of replacing existing contracts - dropped by 7% to US$25trn.

CLOs

Libor floor benefits examined

Libor floors have provided a boost to the interest payments paid by loans held within US CLO transactions, S&P says. This, in turn, has driven payouts to equity significantly higher.

CLO interest coverage ratios have risen along with the steady decrease in Libor rates, as the amount of interest due on the CLO liabilities decreases at a faster rate than the interest received on the loans held within the collateral pool. The weighted-average floor rate within US CLOs was 2.89% at 4Q09, according to S&P.

Floor rates have gradually fallen to 1.48% in 1Q12, along with a steady increase in the instances of loans that come embedded with the Libor floor feature. Univision Communications Inc, for example, is one of the most widely held issuers in US CLOs and is also among the top issuers with Libor floors. As a result, CLOs - especially those still in their reinvestment period - are trading into loans with Libor floors.

"Portfolios that started with a handful of loans with floors often now have more than half the collateral pool consisting of loans with Libor floors," S&P notes. "We have seen CLOs with as much as 90% of their collateral pools consisting of loans with floor components. About 80% of all CLOs that saw one or more ratings raised this year had floors on more than 25% of their total collateral."

When analysing cashflows for new issue CLO transactions or for surveillance of existing CLO transactions, the agency gives credit for the benefit received from Libor floors. If Libor rises, the floors would at some point have less impact; if Libor remains at its current low level, it would benefit overall CLO performance due to excess interest available in reinvesting and recent vintage transactions. However, S&P expects the market to make adjustments that could over time dilute these benefits.

CLOs

Loan rating service launched

Moody's has launched a new rating service for the US loan market, with the introduction of unpublished monitored loan ratings (UMLRs). The product has been developed in response to a growing market need for access to detailed credit analysis, the agency says.

"The UMLR product provides a definitive analysis that is identical to published ratings, thereby delivering - upon the borrower's request - a rigorous and detailed credit analysis to loan market participants," explains Andrew Harling, a Moody's svp. The move follows the introduction of UMLRs in EMEA in November 2011.

UMLRs are primarily intended to meet the needs of private companies in the syndicated leveraged loan market, being comparable to Moody's published ratings. The agency's CLO methodology will treat them as being identical to its published ratings and is intended to further bolster the analysis of the published ratings of CLOs that hold the relevant loans. A key feature of the UMLR is that Moody's will monitor and rate the credit quality of the company and facilities for the life of the loan, making the information available to a company's existing and prospective loan syndicate members solely through an electronic dataroom platform.

"All existing and prospective syndicate members will be able to view Moody's detailed analysis on a particular company by accessing the platform," says Harling. "The borrower company will provide details regarding the syndicate members to the dataroom provider, who will coordinate access to the dataroom."

The threshold level for the assignment of credit estimates to syndicated loans in the US market is US$300m. This compares to a €250m credit estimate threshold in EMEA.

Existing credit estimates will continue to be available, irrespective of the threshold, until a new buyout/new issuance, refinancing/recapitalisation or restructuring occurs. Moody's says it will endeavour to communicate the identification of situations where such triggers have been activated in response to fund manager requests. It will also endeavour to provide advance notice of the removal of a credit estimate in relation to a trigger activation.

In tandem with the introduction of UMLRs, Moody's has launched a new rating service for the US private placement market. The unpublished monitored private placement rating (UMPPR) platform offers rigorous and detailed credit analysis that is identical to published ratings. The product is intended to meet the needs of companies that do not access the public securities markets and wish to preserve the private nature of their corporate information.

CMBS

Manhattan CRE prices jump

Commercial real estate prices in Manhattan have increased by 16.3% over the last 12 months, meaning that New York City joins Boston as the major metropolitan areas with the greatest gains during that period. Nationally prices have climbed by 6.9% in the last 12 months and 28% since the January 2010 trough, but remain 21.8% below the December 2007 peak - gaining 1.4% in September, as measured by the Moody's/RCA Commercial Property Price Indices (CPPI).

By property type, the apartment sector has recovered to within 12.2% of its December 2007 peak value, while core commercial is 25.2% below its December 2007 value. Retail and suburban office prices continue to languish, with each sector down by approximately 2% over the last 12 months.

"Central business district office remains the star of the core commercial sectors, increasing by 5% and 19.7% over the last three- and 12-month periods respectively," says Tad Philipp, Moody's director of commercial real estate research.

Although major markets have outpaced non-major markets since the trough, non-major markets have set the pace over the past 12 months, up by 8.4% versus 5.3%. "Investors seeking higher yielding investments continue to search for acquisition opportunities in non-major markets," adds Philipp.

Among major metropolitan areas, Boston at 10.4% and New York at 8% have set the pace for price gains in the last 12 months. Washington DC initially saw the strongest post-trough recovery of the major metro areas, gaining about 42% from its 2Q09 trough through 1Q11. However, DC prices subsequently levelled off, reflecting concerns about future demand for US government space.

CMBS

Euro CMBS 2.0 principles finalised

CRE Finance Council Europe has released its 'Market Principles for Issuing European CMBS 2.0' (SCI 24 July). The principles aim to help re-establish confidence in the European real estate capital markets and stimulate the further development of European CMBS by addressing a number of legacy issues.

While the principles draw on the specific lessons learnt from legacy European CMBS transactions, they also include a number of positive structural features that have been implemented in recent transactions. Certain Bank of England and ECB eligibility requirements have also been taken into account.

The principles primarily focus on transaction structures, transaction counterparties and disclosure of appropriate levels of information.

CMBS

Criteria update to impact Euro CMBS

S&P has updated its European CMBS rating criteria. The criteria will apply to all new and existing ratings on European CMBS and come into force on 6 December.

A moderate impact on outstanding ratings is expected. Based on a test sample, S&P estimates the criteria could have a negative impact on 40% of tranches, with average rating movements of two notches. The impact on investment-grade ratings is likely to be greater than that on speculative-grade ratings.

The agency says the criteria update provides a more transparent framework for analysing CRE assets and transaction structures. Specific enhancements concern which credit characteristics and structural features affect the recovery assumptions used to determine ratings and refinement of the analysis of tail-period risks.

CMBS

CMBS loan payoffs stay elevated

The percentage of US CMBS loans paying off at maturity remained elevated last month. Trepp says 60.7% of loans reaching their balloon date paid off, over seven points down on September's level but still higher than normal.

The October total of 60.7% of loans by balance paying off was more than 16 points above the 12-month average of 44.3%. By loan count, 59.7% of loans paid off, moving the 12-month rolling average to 54.1%.

"Prior to 2008, the monthly payoff percentages were typically well north of 70%. Since the beginning of 2009, however, there have only been six months in which more than half of the balance of loans reaching their balloon date actually paid off," Trepp notes.

RMBS

SEC alleges RMBS fraud

The US SEC has charged Walter Morales and his firm Commonwealth Advisors with defrauding investors over millions of dollars in losses from RMBS investments. The investigation is on-going.

The SEC alleges that Morales and Commonwealth sold RMBS into Collybus CDO during the financial crisis at prices which were four months out of date, knowing the market had declined in the meantime. As the CDO investments continued to perform poorly, Commonwealth conducted a series of manipulative trades between hedge funds they advised to conceal a US$32m loss.

Morales and Commonwealth further lied to investors about the amount and value of RMBS assets held in the hedge funds and created false internal documents to justify their valuations, the SEC says. Morales is also alleged to have deceived Commonwealth's largest investor about its exposure to the Collybus CDO.

RMBS

Further credit watches resolved

S&P has completed a review of 1,488 ratings from 143 RMBS transactions issued between 1989 and 2008 backed by prime jumbo mortgage loans. Many ratings have been changed recently by the agency as a result of its revised criteria for surveilling pre-2009 US RMBS (SCI passim).

As a result of the review, 783 classes have been downgraded, with 160 ratings raised and 502 affirmed. Ratings were withdrawn on 80 classes.

The downgrades were primarily driven by increased losses due to an increase in default and loss multiples at higher rating levels. Upgrades were driven by the availability of credit support and the timing of projected payoff with respect to projected losses.

RMBS

Servicers continuing to evolve

S&P has released a report on US residential mortgage servicing trends since December 2007, based on data from its Servicer Evaluation Analytical Methodology (SEAM) questionnaires. The agency finds that the industry continues to evolve and implement revised servicing standards and processes.

"During the past few years, residential mortgage loan servicing has undergone numerous changes," says S&P servicer analyst Monica Perelmuter. "When delinquencies, defaults and losses were low, servicers focused on new loan boarding, payment processing, customer service and early-stage collection efforts. As they rose, servicers shifted their focus to late-stage collection efforts, loss mitigation efforts, foreclosure administration and management of real-estate-owned properties."

While servicers indicated that they have invested in technology and added to staff, the rate of increase in delinquencies made it difficult for some of them to maintain their servicing levels. "Regulators, investors, bankruptcy court judges, states and industry participants began to scrutinise servicing practices, processes and controls, including the foreclosure affidavit process. Servicers continue to modify their systems and processes to comply with regulatory requirements or incorporate industry best practices," Perelmuter adds.

The report also notes that delinquencies have begun to decline, while foreclosure and bankruptcy buckets continue to increase. Home prices have begun to stabilise, but eviction timeframes continue to rise and - along with increased servicing costs - have partially been contributing to rising loss severity rates.

"We believe the residential housing market has shown recent signs of stabilisation but recognise that servicing remains challenging for mortgages originated before the housing market downturn," Perelmuter concludes.

RMBS

TRACE adds TBA data

FINRA has begun disseminating TBA transaction information - including CUSIP, time of transaction, price and size - via TRACE. The US SEC has also approved a FINRA proposal to publicly disseminate transaction information in specified agency pass-through MBS, with the effective date of this proposal to be announced in a forthcoming Regulatory Notice.

The TBA market represents more than US$270bn traded on an average daily basis in 8,400 trades. The specified market represents approximately US$19bn traded on an average daily basis in 3,000 trades. Together, the markets represent more than 93% of par value traded in all asset- and mortgage-backed securities.

FINRA says it continues to study CMO and ABS. "As we look to increase transparency in collateralised mortgage obligations and asset-backed securities, we will seek an approach that takes into account their complex nature and different market dynamics," comments FINRA vp Ola Persson.

RMBS

More credit watches resolved

S&P has lowered its ratings on 587 classes from 177 US RMBS and removed 277 of them from credit watch with negative implications, 34 of them from credit watch with developing implications and one of them from credit watch with positive implications. The agency has also raised its ratings on 41 classes from 19 transactions and removed 19 of them from credit watch positive, nine of them from credit watch developing and one from credit watch negative. It also affirmed the ratings on 702 classes from 170 transactions and removed 29 of them from credit watch negative, 18 from credit watch developing and six from credit watch positive.

The transactions in this review were issued between 2002 and 2007 and are backed primarily by adjustable- and fixed-rate Alt-A, high LTV and Neg-am mortgage loans secured by first liens on one- to four-family residential properties. The move is a result of the implementation of revised criteria for surveilling pre-2009 US RMBS (SCI passim).

RMBS

Servicer switches support Mexican RMBS

Investors in 24 Mexican RMBS have replaced the portfolio servicers on the deals to ensure stable collection management and reporting, after the firms' operational abilities were affected by the recent downturn. The replacement process presented both a challenge and a business opportunity, according to S&P.

"Replacing a servicer in a securitisation can be complicated in any jurisdiction, given the layers of terms that govern the transactions and the various parties involved," says S&P credit analyst Mariana Zuluaga. "To date, the performance of the RMBS loans that the Mexican replacement servicers are managing has been mixed; overall, however, we have seen non-performing loan ratio growth decelerate about 12 months after a servicer substitution."

S&P credit analyst Daniel Castineyra adds that not all of the substitute servicers in Mexico were fully prepared to take on the new responsibilities. In that sense, many of them attained much of their experience and knowledge by working through their additional assignments.

"Despite the initial challenges associated with learning a new task by simply assuming the responsibility for it, we believe that the experience may strengthen the replacement companies' servicing capabilities and will help provide valuable insight for the future reestablishment of the Mexican RMBS market," Castineyra concludes.

RMBS

Trials set for FHFA claims

The FHFA is set to proceed with most of its claims against Bank of America Merrill Lynch and JPMorgan regarding losses suffered by Fannie Mae and Freddie Mac related to the purchase of RMBS, following two recent decisions by the US District Court for the Southern District of New York. The FHFA filed lawsuits against 17 financial institutions last year in connection with approximately US$200bn of securities sold to the GSEs (SCI 5 September 2011).

US District Judge Denise Cote last week found that the FHFA had sufficiently pled its claims against BAML, including claims for rescission and punitive damages, regarding US$57.5bn of RMBS sponsored or underwritten by Bank of America and its Merrill and Countrywide units. The court granted Merrill's motion to dismiss with respect to fraud claims based on LTV ratios and ownership-occupancy reporting, according to a Lowenstein Sandler client memo, finding that the FHFA had failed to sufficiently allege fraudulent intent for those claims.

Also last week, in denying most of JPMorgan's motion to dismiss, US District Judge Denise Cote found that there was sufficient factual support in the FHFA's 321-page complaint to make out a fraud theory regarding US$33bn of RMBS issued by JPMorgan, Bear Stearns and Washington Mutual. The court granted JPMorgan's motion to dismiss with respect to claims brought under Virginia securities law, as well as for fraud claims based on owner-occupancy and LTV ratios.

Trials for both cases are scheduled for 2 June 2014.