Contents

CMBS

US CMBS secondary supply up

It was a busy session yesterday for US CMBS, with volume up by almost 50% over the previous day. SCI's PriceABS data shows over 150 CMBS line items, with 2012 paper particularly prevalent in the mix of securities out for the bid.

The largest slice of a 2012 deal to attract a cover was US$10m of WFRBS 2012-C9 XA, which was covered at 175. A US$2.5m piece of the WFRBS 2012-C9 C tranche was covered in the 240s, while a US$4.5m piece of WFRBS 2012-C8 A3 was covered at 84.

A couple of COMM 2012 tranches were also covered yesterday. A US$5m piece of COMM 2012-CR1 A3 was covered at 85 and US$2.5m of COMM 2012-CR4 AM was covered at 127. Talk on 27 August for a US$20m piece of the former had been at 104.

Finally, a US$5m slice of the MSBAM 2012-C6 AS tranche was covered at 125.

At the other extreme for vintages, GSMS 1999-C1 G was also out for the bid. A US$7.2m piece of the tranche was covered yesterday at 91.1.

Other noteworthy names circulating during the session include an NCUA-guaranteed tranche - NGN 2011-C1 2A - which was covered at 100.9, as well as the FHMS K019 and FHMS K021 X1 tranches from Freddie Mac, which were both covered at plus 200. FHMS K019 X1 had been covered on 5 November at 190.

JL

CMBS

AJ surge for US CMBS

US CMBS secondary supply is surging ahead of the Thanksgiving holiday. SCI's PriceABS data shows 248 CMBS line items for yesterday's session, with an abundance of AJ tranches out for the bid.

Interactive Data notes that GG10 dupers were quoted at swaps plus 174/172 yesterday, which was unchanged from the previous close. "Generic CMBS spreads are unchanged on the day. BWIC volume has increased from the prior session. In terms of supply, various vintage credit paper accounts for nearly half of the bonds out for bid."

AJ paper originated between 2005 and 2007 accounted for much of that supply. Considerable tightening was seen for the CSFB 2005-C6 AJ tranche, which was covered at 260bp over. It was previously covered at 350bp on 28 August, according to PriceABS.

MLMT 2005-CIP1 AJ was also covered at 350bp, with talk circulating up into the high-300s. The bond was covered at 417bp on 28 August.

Spreads on other names remained largely in line with previous levels. GMACC 2006-C1 AJ did not trade, but was talked between the low-80s and 84, close to talk on 8 November of between 85 and the mid/high-80s.

WBCMT 2006-C27 AJ was covered at 83, with talk ranging from the low-80s to the mid-80s. Talk on the tranche the day before had been in the low/mid-80s and the previous cover, on 19 September, was at 83.12.

COMM 2007-C9 AJFL also showed very little movement and was covered at 76. Although talk the day before for the bond had been in the low-70s, the previous cover was at 74 on 18 September.

Another noteworthy name that traded during the session is JPMCC 2005-LDP5 AJ. Talk on that tranche was between plus 240bp and the low-300s.

JL

RMBS

Euro RMBS hits highs

Activity in the European RMBS secondary market has been particularly strong over the last couple of days. Granite triple-B spreads - now at 82 - are at their best levels since the crisis. They began the year in the very-low 50s (SCI 26 January).

"Yesterday a fairly large BWIC of non-conforming RMBS was circulating. The collateral was mezzanine third-pay and fourth-pay names, so still investment grade but not triple-A," says one trader.

He continues: "The paper traded very well at around 500DM. It has brought the market to levels that we have not seen all year for those sorts of assets. In fact, I do not think we have seen those levels since the crisis."

Although the trader says he does not know who the buyers for the paper were, he notes that it was particularly well absorbed. Fresh bid-lists out today are expected to either match yesterday's strong reception or else not trade at all.

"Today some slightly more interesting lower-rated tranches are out for bid, with some second- and third-loss pieces being shown. If this paper does trade, then it could be at really tight levels, so that is well worth keeping an eye on," the trader notes.

Also worth monitoring is the primary market. Paragon has announced its intention to issue two deals in 2013, which the trader expects to fall separately in each half of the year. He concludes: "It really suggests that we might see something of a fuller issuance calendar next year for non-conforming deals and that is great news."

JL

RMBS

RMBS in solid start to short week

The US RMBS secondary market was dominated yesterday by non-agency subprime activity, where the focus was on an all-or-none BWIC with a mix of mezzanine and senior paper from various vintages. Overall dealer offering levels held steady as the holiday-shortened week got off to a solid start.

Interactive Data figures put total US RMBS BWIC volume at US$697m for the session, with SCI's PriceABS data capturing a range of names out for the bid. Subprime names such as FFML 2005-FF12 A2B and FFML 2006-FF4 A2 were talked in the mid-90s and high-80s respectively. The latter remains at the same level as it was on 1 October.

In addition, 13 unique CWALT tranches were circulating yesterday, as Countrywide paper was widely shown. A US$5m piece of CWALT 2006-24CB A19 was covered at 60, while a US$1.83m piece of CWALT 2006-42 1A1 was covered at 51.

CWALT 2006-30T1 2A1 and CWALT 2007-17CB 1A6 were also covered in the session. Additionally, a range of other Countrywide 2005- and 2006-vintage CWL paper was covered, although the largest slice - a US$10m piece of CWL 2006-2 M2 - did not trade.

JL

ABS

Pubco's bonds look attractive

Enterprise Inns' full-year results show improved like-for-like net income and decreased debt net of cash. The group has purchased and cancelled £65m of the fixed rate Unique securitisation notes, but Spirit bonds may still offer superior value.

Enterprise's like-for-like net income is down by 1.2% for the year, marking a material improvement on last year when it was down 4.3%. Barclays Capital ABS analysts note that bonds across Enterprise's securitisation and debenture have performed "exceptionally well", up by 21% in aggregate, with the pubco's full-year results continuing to support current bond valuations.

The Barcap analysts attribute the change in sentiment towards Enterprise in the bond markets to four achievements. The group secured a refinancing of its bank facility, which expires in 2013, and has seen operating performance stabilise.

It has also clarified that it can avoid default in the securitisation in 2014, when amortisation of the fixed rate bonds starts. Finally, ongoing disposals have so far been at or around book values.

Disposals of underperforming pubs generated £67m, with another £24m from sale-and-leaseback arrangements and £117m from sale of exceptional pubs, for a total of £208m - just above guidance of £200m. Guidance for disposals next year is £150m, of which £40m will come from the Unique securitisation.

"Paying back the bank facility and prepaying the Unique bonds continues. Drawings on the bank facility are now down to £310m versus £364m after Q3. Drawings on the bank facility should be below the £220m forward start amount commencing from December 2013 by early next year," the analysts say.

Enterprise has now bought back £2m of the class A3 and £63m of the class A4 bonds. That keeps the securitisation one year ahead of its amortisation schedule, which is necessary to avoid dividend block and default. The analysts note that Enterprise is not guiding for further material purchases on its class A bonds to meet covenants and all of the floating A2N bonds have now been repaid.

They conclude: "Given recent performance price appreciation and while we think the bonds are attractive at these levels, yielding 8% in the Unique class As, we think that there is better value to be found in Spirit where there is lower leverage, better operating performance and similar yields to maturity."

JL

Structured Finance

SCI Start the Week - 19 November

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

Pipeline
It was another reasonably active week for the pipeline. Four new ABS deals, one ILS, one RMBS, two CMBS and two CDOs were added last week.

The ABS were all European auto deals. The largest was €952.5m Private Driver 2012-3, which was joined by the €765m-equivalent Bilkreditt 3, €425m FTA Santander Consumer Spain Auto 2012-1 and €531m Globaldrive Auto Receivables 2012-A.

The ILS was US$250m Residential Reinsurance Series 2012-II and the RMBS was SAECURE 12. The CMBS comprised US$1.39bn GSMS 2012-GCJ9 and US$950m VNDO 2012-6AVE.

Finally, the CDOs consisted of US$412.5m Anchorage Capital CLO 2012-1 and US$291m RCMC 2012-CREL 1.

Pricings
ABS once more dominated new issuance. Last week's prints comprised 11 ABS, one whole business securitisation, three RMBS and four CLOs.

Auto deals accounted for five of the ABS pricings, while there were also two equipment deals, two credit card deals and one student loan deals. The auto ABS consisted of: US$1bn AmeriCredit Automobile Receivables Trust Series 2012-5, €560m FCT Autonoria Compartment 2012-2, US$1.073bn Ford Credit Auto Owner Trust 2012-D, US$159.8m Tidewater Auto Receivables Trust series 2012-A and £332m Turbo Finance 3.

The equipment ABS were US$112.46m Ascentium Equipment Receivables 2012-1 and US$677m CNH Equipment Trust 2012-D; the credit card ABS were US$650m Chase Issuance Trust 2012-8 and US$350m Chase Issuance Trust 2012-9; and the student loan ABS was US$786m Vermont Student Assistance Corporation 2012-B. The WBS was US$600m Icon Brand Holdings Series 2012-1.

Meanwhile, the RMBS issued last week included: A$1bn-equivalent Series 2012-1E REDS Trust, A$450m Light Trust No.4 and US$301.47m Sequoia Mortgage Trust 2012-6. The new issue CLOs were US$497m Cerberus Offshore Levered I, US$524m Dryden XXV, US$425m Halcyon Loan Advisors Funding 2012-2 and US$802m Madison Park Funding X.

Markets
Secondary market activity was up for US CLOs last week. Securitised products strategists at Bank of America Merrill Lynch put BWIC volume at about US$530m.

"We expect trading volumes will pick up after Thanksgiving and then taper off as we move into December as investors close their books. With volatility in the broader credit markets including the loan space, secondary CLO spreads widened out slightly with triple-A and double-A spreads out 5bp and triple-B and double-B spreads wider by 25bp," they note. The analysts add that the equity bid remains strong, while the primary market has continued to exceed expectations.

Activity in the US CMBS market picked up towards the end of the week, as SCI reported on Friday (SCI 16 November). Thursday's session saw BWIC volume up by almost 50% on the previous day, with 2012 paper particularly prevalent. A US$10m slice of WFRBS 2012-C9 XA was covered at 175, while names such as COMM 2012-CR4 AM and MSBAM 2012-C6 AS were also covered.

The US ABS secondary market saw a bit of widening ahead of expected primary issuance, report Barclays Capital ABS analysts. They note: "Investors were selling ahead of the new issue pipeline to make room for new product. This resulted in dealers adding to inventory and a slight widening in front-end and higher-quality paper. Investor demand for yield also contributed to continued tightening pressure in the off-the-run and esoteric sectors."

Non-agency US RMBS got off to a slow start, as SCI reported on Wednesday (14 November). Prices on Tuesday were down on where they had finished the week before, although still high relative to levels in previous weeks.

Finally, the European RMBS secondary market was particularly strong, as SCI reported on Thursday (15 November). Granite triple-B spreads reached their best levels since the crisis and large BWICs circulated on both Wednesday and Thursday.

Deal news
• The Prime Collateralised Securities (PCS) initiative (SCI passim) has officially opened for business with a series of board appointments. The Irish Stock Exchange, True Sale Initiative and KPMG have also been confirmed as screening partners to assist in checking key documentation.
• 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.
• SIFMA has revised its standard master securities forward transaction agreement (MSFTA), in conjunction with the Treasury Market Practices Group (TMPG). The aim was to create a more broadly acceptable document that can support the TMPG recommendation that forward-settling agency MBS transactions be margined by both parties in order to mitigate counterparty and systemic risk.
• 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).
• Early indications are that damage to CMBS collateral caused by Hurricane Sandy is limited, based on information that S&P has received from servicers. The damage to many properties is still in the early stages of assessment, however.
• The impact of Hurricane Sandy on the catastrophe bond market is likely to be muted based on current estimates, with little impact on new pricing, according to Willis Capital Markets & Advisory (WCMA). The scope and scale of the storm means it is unlikely that any bonds will be triggered solely by Sandy.
• AerCap Ireland, the servicer on Aircraft Lease Securitisation (ALS), has sold its equity interest in the transaction to a subsidiary of Guggenheim Partners as part of a portfolio management strategy. Under the agreement, AerCap will continue to service and manage the aircraft portfolio.

Regulatory update
• 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.
• CREFC Europe's ICA Committee has released a consultation document entitled 'Guidelines for intercreditor agreements in UK commercial real estate finance transactions - 2013'. The guidelines have two key aims: to promote consideration of a common set of issues in intercreditor agreements; and to engender confidence in market participants that an acceptable arrangement between the different and frequently conflicting interests of different creditors is achievable.
• 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.
• The FHFA is set to proceed with most of its claims against Bank of America Merrill Lynch, Deutsche Bank and JPMorgan regarding losses suffered by Fannie Mae and Freddie Mac related to the purchase of RMBS. 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).
• The US SEC has issued its second annual staff report on the findings of examinations of credit rating agencies registered as Nationally Recognized Statistical Rating Organizations (NRSROs). The agency determined that with one exception, all NRSROs appropriately addressed the staff's recommendations in the first annual report in 2011 (SCI 3 October 2011).

Deals added to the SCI database last week:
Adriatico Finance RMBS series 2012-1; American Express Credit Account Master Trust Series 2012-4; American Express Credit Account Master Trust Series 2012-5; Atlas Reinsurance VII; Atlas Senior Loan Fund II; California Republic Auto Receivables Trust 2012-1; COMM 2012-CCRE4; Discover Card Master Trust 2012-B3; Dryrock Issuance Trust 2012-1; Dryrock Issuance Trust 2012-2; FCT Ginkgo Private Compartment 2012-1; FREMF 2012-K711; FTA PYMES Santander 4; Gallatin CLO IV 2012-1; GE Dealer Floorplan Master Note Trust series 2012-4; Golden Bar (Securitisation) series 2012-2; ING IM CLO 2012-4 ; JGWPT XXVII series 2012-3; MOTEL 2012-MTL6; Nelnet Student Loan Trust 2012-5; PHEAA Student Loan Trust 2012-1; Race Point VII CLO; RESIMAC Series 2012-1NC; Shackleton II CLO; Silverleaf Finance XV series 2012-D; SLM Student Loan Trust 2012-7; UBI BBS 2012; UBI BPA 2012; UBI BPCI 2012.

Deals added to the SCI CMBS Loan Events database last week:
BACM 2006-6; CGCMT 12-GC8 & WBCMT 05-C16; CGCMT 2006-5; CSMC 2006-C4; CSMC 2007-C1; CSMC 2007-C3; DECO 2005-C1; DECO 2006-C3; DECO 2006-E4; DECO 7-E2; DECO 9-E3; ECLIP 2005-2; ECLIP 2006-3; EMC IV; EMC VI; EPICP CASP; EURO 21; EURO 23; EURO 25; FUNBC 2002-C1; GCCFC 06-GG7 & LBUBS 06-C4; GMACC 2004-C2; GRND 1; JPMCC 2003-CIBC7; JPMCC 2005-CIBC11; JPMCC 2006-CB15; JPMCC 2007-FL1; JPMCC 2007-LD12; JPMCC 2007-LDP11; LBUBS 2007-6; LBUBS 2007-C2; MLCFC 2007-9; MLMT 2003-KEY1; MLMT 2005-CK11; MSC 2007-HQ13; PROMI 1; RIVOL 2006-1; TITN 2006-3; TITN 2007-CT1; TMAN 4; TMAN 5; TMAN 6; WINDM VII; WINDM XI; WINDM XIV.

Top stories to come in SCI:
CDS short selling regulatory impact
US CMBS note auctions

CMBS

LPA breaches eyed

The difficulty and expense of proving CMBS loan purchase agreement breaches has historically limited the number of rep and warranty settlements in the space. However, loss expectations in certain instances could mean that the economics of litigation start to make more sense in the coming years.

Most LPAs for US conduit deals have language that requires loan sellers to repurchase loans that are found to be in breach of representations and warranties. These could include cases where the reported mortgage loan schedule is not "true and accurate in all material respects" or if the loan falls outside the definition of a "qualified mortgage". Among other criteria, the qualified mortgage condition could require that "the fair market value of the interest in real property which secures such mortgage loan be at least equal to 80% of the principal amount of the mortgage loan" and "substantially all of the proceeds of such mortgage loan were used to acquire, improve or protect the portion of such commercial or multifamily residential property".

However, MBS analysts at Barclays Capital note that proving rep and warranty breaches is a long, expensive process and hard to ascertain without access to individual loan tapes. Further, special servicers may not currently have sufficient incentive to pursue such lawsuits.

"While deal losses may be somewhat lower if settlement cash were to flow through, they are unlikely to benefit the current controlling classes, which remain very deeply out of the money," the Barcap analysts add. "However, when control starts to shift higher in the structure, closer to the cusp of eventual loss expectations, the economics might start to make a little more sense."

While they do not for the moment recommend assigning any upside from this while valuing bonds, the analysts suggest that rep and warranty litigation is an issue that investors should keep an eye on, given the potential benefits. They point to a couple of precedents within the CMBS space.

First is Nomura's August 2006 US$67.5m settlement with Orix, regarding alleged breaches of reps and warranties on the US$50m Healthcare at Hyde Park loan securitised in ASC 1997-D5. The counsel for the special servicer argued that the loan failed the qualified mortgage test. As a result of the settlement, the deal saw US$15m of principal pay-downs, after accounting for ASER/advance reimbursements and servicer expenses.

More recently, two LaSalle multifamily deals - LASL 2006-MF2 and LASL 2006-MF3 - received some pay-downs, after Lonestar funds reportedly negotiated a settlement with Bank of America. The special servicer of the deals had earlier initiated a claim against BofA for breaches in rep and warranties made by LaSalle Bank.

CS

RMBS

MBIA wraps at risk?

Bank of America last week announced that it had made a tender offer to purchase at par any and all of MBIA Inc's outstanding senior notes due 2034. The move is seen as a clear negative for MBIA-wrapped non-agency RMBS.

The tender offer follows MBIA's announcement on 7 November that it would solicit consent from its senior noteholders to amend its debt indentures by substituting National Public Finance Guarantee Corporation for MBIA Corp in the definitions of 'Restricted Subsidiary' and 'Principal Subsidiary'. The proposed indenture amendments, if approved by more than 50% of the noteholders of each series of MBIA Inc notes, would allow the firm to avoid a default on its own debt if MBIA Corp is placed into a rehabilitation or liquidation proceeding. BofA's tender offer seeks to obtain ownership of at least 50% of one series of MBIA notes in order to block MBIA's consent solicitation.

The solicitation suggests that MBIA Corp may not have the liquidity available to continue paying its claims over the next several quarters or that the insurer is concerned that its regulator may move to place the operating entity into rehabilitation, according to MBS analysts at Barclays Capital. They further indicate that Bank of America's motivation for the tender offer could be to force MBIA to accept its settlement offer regarding the insurer's rep and warranty claims. With additional cash from a settlement, MBIA Corp could potentially continue as a going concern over the near term and avoid pushing the holding company into default.

The Barcap analysts note that such developments are a clear negative for MBIA-wrapped non-agency RMBS, as they suggest that payments on the guarantees could be suspended or reduced sometime over the next year or two. "While it is possible that MBIA could agree to a higher-than-expected settlement or could obtain liquidity through other means, the risk is that the insurance regulator could move to place the operating entity into rehabilitation, in order to gain more leverage in negotiating a settlement with Bank of America. As such, we would caution investors in these securities to focus on the intrinsic value of the underlying collateral...rather than heavily rely on the MBIA wrap in their valuation."

Adding to developments, Moody's says it has concluded its review of MBIA Corp - initiated at the end of last year (SCI 20 December 2011) - by downgrading its insurance financial strength rating to Caa2 from B3. The agency has also downgraded the senior debt rating of MBIA Inc to Caa1 from B2. The rating outlooks for both firms are developing, reflecting the divergent possibilities for the firms' credit profiles over the near-to-medium term.

Moody's says the downgrade of MBIA Corp reflects a number of factors, including the insurer's weak liquidity position. At 30 September, MBIA Corp had approximately US$386m of liquid assets - a modest amount relative to the insurer's contingent liabilities. Further, the agency cites: the ongoing deterioration of MBIA's commercial real estate portfolio that could lead to meaningful claims in the near future and threaten MBIA's already strained liquidity; the likelihood that any potential global settlement with Bank of America over outstanding claims would be consummated at terms characteristic of a distressed exchange; and the likelihood of a claims payment deferral or other regulatory intervention at MBIA Corp, absent a settlement with Bank of America, should significant claims materialise.

Meanwhile, the downgrade of MBIA Inc's senior debt primarily reflects the credit linkage between MBIA Inc and its MBIA Corp subsidiary, given the cross-default provision in MBIA Inc's senior debt indentures. Moody's also notes the limited liquidity at MBIA Inc relative to potential debt repayments due under a possible cross-default with MBIA Corp. At 30 September, MBIA Inc had US$432m of liquid assets and US$897m of senior notes outstanding.

Finally, the agency cites Bank of America's recent tender offer, which - if successful - could prevent MBIA from removing the cross-default provision between MBIA Corp and MBIA Inc.

CS

Structured Finance

PCS label up and running

The Prime Collateralised Securities (PCS) initiative (SCI passim) has officially opened for business with a series of board appointments. The Irish Stock Exchange, True Sale Initiative and KPMG have also been confirmed as screening partners to assist in checking key documentation.

The PCS board now comprises: Francesco Papadia, former director general for market operations at the ECB, who will lead the board as chairman; Anneli Peshkoff, former Spanish secretary of state for the economy; Gregor Gruber, board member at Allianz Investment Management; Gaelle Philippe Viriot, head of ABS at Axa Investment Managers; Richard Bartlett, head of corporate debt capital markets at RBS; Mirco Bianchi, head of group finance at UniCredit; Michaela Ulrici, chair of the board at NautaDutilh; and Ian Bell, head of the PCS Secretariat.

The PCS Secretariat is expected to issue its first label next month, reportedly in relation to a Santander transaction.

Structured Finance

Structured products vet moves on

Joe Mevorah has joined Houlihan Lokey as financial advisory services (FAS) md. He will be based in New York and report to Jack Berka, senior md and global head of FAS.

Mevorah will oversee financial institutions coverage for FAS, working closely with the firm's financial institutions group. He specialises in RMBS, ABS, distressed debt, bank recapitalisation and capital markets.

Mevorah joins from Gleacher & Company, where he was md. Before that he was md at Sunrise Securities and DCM director at Macquarie Securities.

Structured Finance

ERC launches structured group

European Risk Capital (ERC) has launched a structured trade and commodities finance group. The new initiative is expected to focus on capital raising relative to trade flows across a wide range of commodities, particularly in emerging markets.

In addition to primary origination via ERC's London-based group, the new platform's structuring and distribution capacity shall be enhanced by Jean-Francois Khan in Paris. Khan is founder of Fi-Nest EURL, the specialist emerging markets and structured trade finance boutique, and former structured commodities finance banker at VTB Bank.

CDO

ABS CDO transfer mooted

PIMCO is proposing to transfer its asset management responsibilities for Pacific Coast CDO to Cairn Capital. The replacement is expected to become effective on 26 November, provided the requisite noteholders or shareholders do not object before then.

The terms of the proposed amended and restated collateral management agreement have remained almost identical, with only minor differences that are not material to the ratings of the transaction, according to Fitch. The agency notes that the move is unlikely to impact the transaction's outstanding ratings.

The most senior class in the transaction is currently rated triple-C, indicating that default appears a real possibility for the notes. In addition, Pacific Coast is no longer in its reinvestment period and is in an EOD. Given the above, the manager's capabilities are no longer a rating factor for the transaction, Fitch says.

Click here for information on other recent CDO manager transfers.

CDO

Dock Street adds to ABS CDO roster

Dock Street Capital Management has been appointed successor collateral manager on the Jupiter High-Grade CDO IV and Orchid Structured Finance CDO III transactions under amended and restated collateral management agreements. The ABS CDOs were originally managed by Maxim Advisory and ST Asset Management respectively.

Moody's notes that the amendments don't alter the responsibilities, duties and obligations of the collateral manager in a meaningful way. The agency confirms that the move won't result in the withdrawal, reduction or other adverse action with respect to any current ratings on the notes. In reaching this conclusion, it considered the experience and capacity of Dock Street to perform duties of collateral manager to the issuers.

See SCI's database for other recent CDO manager transfers.

CLOs

Ex-Citi CDO structurer hired

StormHarbour Securities has hired Brian Stoker as md in New York. He will be responsible for CLO structuring and fixed income sales.

Stoker has previously served as financial and business services group head at HBS Angel Investing Club, research analyst at Carson Capital and vp at Merrill Lynch, where he structured CLOs and traded RMBS, ABS and CDOs. He also served as director of ABS CDO and CLO structuring at Citigroup and was charged by the SEC in relation to a CDO he structured there, but cleared of wrong-doing earlier this year (SCI 15 August).

CLOs

European investor relations head joins

3i Debt Management has appointed Melissa Tessier as director. She will focus on investor relations in Europe, having held similar roles at Bank of America Merrill Lynch and AXA Investment Managers.

Tessier will report to Andrew Bellis, who joined the firm as partner in the summer (SCI 14 June). She was most recently senior director at Cantor Fitzgerald, where she focused on origination and distribution of European and US structured credit products.

CMBS

CMBS loan services firm targets Florida

Hart Advisors Group has expanded its CMBS loan restructuring services by opening an office in Miami. Michael Mogull, principal and director of business development, will lead the team. He has extensive experience in the CRE industry in Florida, having formed the Mogull Group there prior to joining Hart Advisors.

Hart Advisors says the new office is a reflection of the growing number of loan defaults in Florida and the number of east coast clients the firm is now working with. With many borrowers lacking knowledge and experience of restructuring with a special servicer, the firm believes it will be well placed to help them navigate the complex CMBS process.

RMBS

Further hires for MBS group

Gleacher & Company Securities has added Brendan Keane and Robert Miller as mds in its MBS and rates division, marking 19 appointments to the team since the summer (SCI passim). Keane and Miller will both be located in New York.

Keane joins from CoreLogic, where he was svp and national accounts director. He was also a member of the advisory data valuation group. Before CoreLogic, Keane was md at Credit Suisse Securities and a member of Prudential Securities' fixed income and investment banking departments, where he supervised its real estate ABS group.

Miller joins after three years as an independent financial consultant and contractor. Before that he was a senior RMBS and ABS trader at Genworth Investments and also spent eight years as executive director in JPMorgan Chase's home equity trading and mortgage securitisation team.

RMBS

RMBS disclosure charges settled

In coordination with the RMBS Working Group, the US SEC has charged JPMorgan and Credit Suisse with misleading investors in offerings of RMBS. The firms agreed to pay more than US$400m combined, with the money to be distributed to harmed investors.

The SEC alleges that JPMorgan misstated information about the delinquency status of mortgage loans that provided collateral for an RMBS offering in which it was the underwriter (SCI 13 November). The bank received fees of more than US$2.7m and investors sustained losses of at least US$37m on undisclosed delinquent loans.

JPMorgan also is charged for Bear Stearns' failure to disclose its practice of obtaining and keeping cash settlements from mortgage loan originators on problem loans that Bear Stearns had sold into RMBS trusts. The proceeds from this bulk settlement practice were at least US$137.8m. The bank has agreed to pay US$296.9m to settle the SEC's charges.

According to the SEC's order against Credit Suisse, the firm similarly failed to accurately disclose its practice of retaining cash for itself from the settlement of claims against mortgage loan originators for problems with loans that the bank had sold into RMBS trusts and no longer owned. It also made misstatements in SEC filings about when it would repurchase mortgage loans from trusts if borrowers missed the first payment due.

The firm made US$55.7m in profits and losses avoided from its bulk settlement practice, and its investors lost more than US$10m due to Credit Suisse's practices concerning first payment defaults. It has agreed to pay US$120m to settle the SEC's charges.
According to the SEC's complaint against JPMorgan filed in federal court in Washington, DC, federal regulations under the securities laws require the disclosure of delinquency information related to assets that provide collateral for an asset-backed securities offering. The SEC alleges that in the prospectus supplement for the US$1.8bn RMBS offering that occurred in December 2006, JPMorgan made materially false and misleading statements about the loans that provided collateral for the transaction.

The SEC's complaint also alleges that Bear Stearns' bulk settlements covered loans collateralising 156 different RMBS transactions issued from 2005 to 2007. Loan originators were usually required by contract to buy back loans that suffered early payment defaults or had other defects.

However, Bear Stearns frequently negotiated discounted cash settlements with these loan originators in lieu of a buy-back on loans that were owned by the RMBS trusts. The firm - both before and after the merger with JPMorgan - then kept most of the bulk settlement proceeds. The firm failed to disclose the practice to investors who owned the loans.

According to the SEC's order instituting a settled administrative proceeding against Credit Suisse, the firm and its affiliated entities misled investors in 75 different RMBS transactions through the bulk settlement practice. From 2005 to 2010, the bank frequently negotiated bulk settlements with loan originators in lieu of a buy-back of loans that were owned by the RMBS trusts. Credit Suisse kept the bulk settlement proceeds for itself and failed to disclose the practice to investors who owned the loans.

In nine of the 75 RMBS trusts, Credit Suisse failed to comply with offering document provisions that required it to repurchase certain early defaulting loans. It also applied different quality review procedures for loans that it sought to put back to originators, instituted a practice of not repurchasing such loans from trusts unless the originators had agreed to repurchase them, and failed to disclose the bulk settlement practice when answering investor questions about early payment defaults.

The SEC's order also found that Credit Suisse made misleading statements about a key investor protection known as the first payment default (FPD) provision in two RMBS offerings. It misled investors by falsely claiming that "all first payment default risk" was removed from its RMBS and, at the same time, limiting the number of FPD loans that were put back to the originator.

RMBS

Working Group sets sights on Credit Suisse

New York Attorney General Eric Schneiderman has filed a complaint against Credit Suisse Securities and its affiliates for making fraudulent misrepresentations and omissions in the sale of RMBS prior to 2008. It follows another RMBS Working Group lawsuit which was lodged last month against JPMorgan (SCI 3 October).

RMBS sponsored and underwritten by Credit Suisse in 2006 and 2007 have suffered losses of more than US$11bn. Schneiderman says Credit Suisse misled investors as to how carefully it had evaluated the loans in its RMBS and lied about how closely they would be monitored. The Attorney General is seeking investor damages to recoup the losses, as well as other equitable relief.

ABS

ALS equity transferred

AerCap Ireland, the servicer on Aircraft Lease Securitisation (ALS), has sold its equity interest in the transaction to a subsidiary of Guggenheim Partners as part of a portfolio management strategy. Under the agreement, AerCap will continue to service and manage the aircraft portfolio.

The portfolio comprises 50 aircraft valued at approximately US$1bn, leased to 26 different airlines. "We believe that aviation finance is an attractive investment sector and this transaction provided a compelling investment opportunity for a segment of our clients," comments Scott Minerd, Guggenheim Partners cio. "Working in concert with our commercial aviation investment management group, Guggenheim Aviation Partners, we are able to leverage extensive expertise in evaluating aviation investments for our managed account clients."

ABS

Electricity tariff ratings at risk

Moody's is to maintain on review for downgrade the A3 ratings of the ABS transactions backed by Spanish securitised electricity tariff deficits that the rating agency currently positions above the sovereign's rating. This reflects uncertainty surrounding the details of the country's proposed energy reform bill, which is expected to pass by year-end.

Moody's is seeking to clarify whether the nature of the securitised tariff deficit rights may change as a result of the new accounting treatment being considered in the draft reform bill. The agency believes that there is uncertainty as to whether the securitised rights may become, at least partially, sovereign liabilities instead of their current status as fully secured obligations of the electric system guaranteed by law.

As part of its aim to curtail the chronic Spanish electricity tariff deficit, the government is set to assume €2.5bn of the deficit by taking €2.1bn of past tariff deficit annuities and interest onto the state budget.

Moody's considers the assets backing the notes in the Spanish electricity tariff deficits to be high quality receivables, given their current backing by laws and regulation. For this reason, the agency currently rates the notes at the Spanish country ceiling, which is above the rating of the government. Its review will now consider the terms of the new energy bill and assess whether these turn past tariff deficit receivables into liabilities of the Spanish government only, rather than receivables repaid through the revenues of the Spanish electricity system, as in the current legal framework.

The ratings of the affected transactions were initially downgraded and placed on review for further downgrade in July, following the downgrade of Spain's government bond ratings and the initiation of a review for further downgrade on 13 June.

ABS

Annington tap possible

Terra Firma is set to acquire Annington Homes from Nomura for £1bn of new equity, as well as new debt and the assumption of the existing debt. The new owner is also reportedly considering issuing a £500m PIK note subordinated to the securitised debt.

The proposed terms include a five-year non-call period, which credit analysts at RBS suggest means that the existing securitisation will remain largely unchanged for that period. However, they point to the possibility of a tap of the existing securitised deal - which, in their view, would require an extension to the legal final of the notes to satisfy Fitch's criteria, repayment of the B3 notes in full and adherence to the LTV covenants.

"We continue to consider that the acquisition reflects the significant equity value embedded in the estate, combined with a bondholder-friendly structure," the RBS analysts state.

Nomura in 1996 acquired approximately 57,000 residential properties in the UK Ministry of Defence's married quarters estate and formed Annington to manage it. The estate - which now comprises almost 40,000 properties - has been managed by Terra Firma for the past 10 years.

The acquisition is due to be completed by the end of 2012.

ABS

Card charge-offs continue to improve

Securitised credit card charge-offs, as measured by Moody's Credit Card Index charge-off rate, decreased to 4.07% in October from 4.11% a month earlier. The improvement extends the steady decline since charge-offs peaked in 1Q10.

The delinquency rate index decreased in October to 2.37% and remains 5bp above its August level, which marked an all-time low for the indices, while the early-stage delinquency rate index increased for a fourth consecutive month in October to 0.70% and is now 5bp above this summer's nadir. The increase marked the fifth consecutive month of flat to higher early-stage delinquencies, a streak that has not been seen since the second half of 2008. The trend in early-stage delinquencies suggests that further improvement in the charge-off rate will be limited, Moody's notes.

Meanwhile, the payment rate index rebounded from last month's decline and remains near its all-time high. The payment rate index has been above 22% for seven of the first ten months of this year.

Finally, the yield index increased to 18.65% in October from 18.38% in September and the excess spread index climbed to an all-time high of 11.8% from 11.42%. In the coming months, as charge-offs decline slightly and yields remain stable, the excess spread index is expected to remain strong.

ABS

Strong values supporting auto performance

Strong wholesale vehicle values drove yet another decline in US auto ABS losses in October, according to Fitch's latest index results for the sector. Prime cumulative net losses recorded the lowest level to date at 0.3%, a 6% improvement month-over-month (MOM) from September. This is a 50% decline year-over-year (YOY), as borrower credit quality of newer ABS has improved through the year.

60+ day delinquencies also dropped for prime auto loans (0.37% for October), representing a 23% improvement YOY and a 5% drop MOM. Prime sector delinquencies have stabilised since 2H12 with the US economy showing gradual improvement.

Subprime delinquencies have also remained stable through 2H12, with negligible movement in levels since June. 60+ day subprime delinquencies came in 3.73% in October, a 7% increase MOM and 20% increase YOY.

October annualised net losses (ANL) improved YOY for both prime and subprime sectors, while losses ticked up MOM. Prime ANL rose to 0.34%, a 40% improvement YOY but up by 21% MOM; subprime ANL improved by 7% YOY, yet increased by 14% MOM.

The Manheim Used Value Index gained 1%, increasing to 121.9 in October, up from 120.7 in September.

Structured Finance

Dutch Securitisation Association minted

The Dutch Securitisation Association - a project that was initiated by Holland Financial Centre two years ago - is now open for business (SCI 17 September). The association has also released a voluntary standard for Dutch securitisation transactions, based on market feedback.

The move marks the culmination of Dutch issuers working with investors and other stakeholders to establish ways to improve transparency and reduce complexity in the Dutch securitisation market. A website will be made available as part of the initiative, displaying relevant information on Dutch securitisations. The intension is to contribute to a healthy and internationally competitive position for Dutch transactions.

Structured Finance

NRSRO findings disclosed

The US SEC has issued its second annual staff report on the findings of examinations of credit rating agencies registered as Nationally Recognized Statistical Rating Organizations (NRSROs). The agency determined that with one exception, all NRSROs appropriately addressed the staff's recommendations in the first annual report in 2011 (SCI 3 October 2011).

The latest findings identified at one or more NRSROs include: the methodology applied to rating certain securities appears to have been changed, but the change was not publicly disclosed for several months; certain securities were not timely downgraded in accordance with policies and procedures related to rating watch status; methodologies were published and disclosed inconsistently and in a less-than-transparent manner; and directors were not actively exercising their required oversight duties.

In addition to the recommendations to NRSROs based on the 2012 examinations, the SEC's Office of Credit Ratings will also promote compliance between examinations by sending letters to the designated compliance officers at all of the firms as issues arise. The first letter urges NRSROs to review SEC rules on preventing the misuse of material non-public information and avoiding unfair, coercive or abusive practices with respect to credit ratings.

Structured Finance

IOSCO releases securitisation recommendations

IOSCO has published a final report, entitled 'Global Developments in Securitisation Regulation', which proposes a series of recommendations aimed at ensuring securitisation markets develop on a sound and sustainable basis. The recommendations provide a roadmap towards convergence and implementation of approaches to incentive alignment, in particular regarding risk retention requirements.

The final report: makes observations about the role sound securitisation markets can play in supporting economic growth, as well as the role regulation can play in reducing systemic risk and restoring investor trust and confidence; summarises key issues in relation to approaches to risk retention, transparency and standardisation; and makes recommendations in relation to risk retention, transparency and standardisation. It also identifies other medium- or longer-term priorities for policy consideration.

IOSCO observes that risk retention requirements better align the incentives of originators/sponsors of securitisation products and, in particular, investors. Further, enhanced disclosure requirements about the underlying assets, waterfall and performance of securitisation structures will help inform investors and have the potential to re-build investor confidence in the securitisation market. Finally, it notes that greater availability of information will also help reduce the reliance on credit ratings agencies.

The Financial Stability Board (FSB) is in the process of reviewing reforms of securitisation markets, as part of its ongoing work for the G20 on the shadow banking sector. In this context, the FSB requested that IOSCO conduct a stock-taking exercise on certain aspects of securitisation and develop policy recommendations as necessary.

Structured Finance

Peripheral rating actions explained

Moody's expects that Dutch, German and UK ABS and RMBS will come under minimal further pressure following recent actions on bank ratings and current proposed changes to the agency's structured finance methodologies. However, the likely impact of both factors on RMBS and ABS in Spain, Portugal, Italy and Ireland will range from moderate to significant.

Moody's anticipates that less than 10% of transactions in European countries with an Aaa country ceiling - France, Germany, the Netherlands and the UK - would be affected by fewer than two notches, with the remainder unaffected.

Meanwhile, deterioration in Irish, Italian, Portuguese and Spanish ABS and RMBS will be driven by: deterioration of the credit quality of sovereign and financial institutions serving as transactions' parties in the past 12 months; June updates to Moody's European RMBS rating methodology and its approach to analysing set-off risk in Italian transactions; continued collateral performance deterioration and/or greater uncertainty about future performance; proposed methodology changes to capture the effects of rapid and significant country credit deterioration on structured finance transactions; and proposed approaches to assess the linkage to swap counterparties, account banks and eligible temporary cash investments in structured finance transactions. Many structured finance transactions in countries where the country ceilings are below Aaa are affected by a combination of these drivers.

In Spain, Portugal, Italy and Ireland, ratings have been lowered to the country ceiling and the majority of senior, mezzanine and subordinated ratings affected were placed under review for downgrade. Moody's expects to undertake an initial phase of rating actions that will be completed by the end of 4Q12, to incorporate ratings drivers that have developed in the past 12 months.

Ratings that are likely to be further affected by a detailed assessment of pool performance, country risk and counterparty exposure, as well as proposed methodology updates will remain on review. Moody's will address these changes in a second phase of rating actions, which is expected to be concluded by 2Q13.

CDS

Bankruptcy credit event called

ISDA's Americas Credit Derivatives Determinations Committee has resolved that a bankruptcy credit event occurred in respect of Overseas Shipholding Group, after it filed voluntary Chapter 11 petitions on 14 November. The DC is holding a separate meeting today (16 November) to discuss whether an auction should be held for the name.

Separately, the final price for Yell LCDS was determined to be 50 at yesterday's auction (SCI 8 November). Four dealers submitted initial markets, physical settlement requests and limit orders to the auction to settle trades across the market.

CDS

Overseas Shipholding auction due

The auction to settle the credit derivative trades for Overseas Shipholding Group is to be held on 6 December. The firm filed voluntary Chapter 11 petitions on 14 November (SCI 16 November).

CDS

Sovereigns drive CDS liquidity decline

Global CDS liquidity has steadily declined since the end of July, according to Fitch Solutions, with the firm's global index closing at 9.09 as of Friday's market close compared to 8.81 on 31 July. This has been driven by the sovereign sector, where both Fitch's developed and emerging market indices have experienced the biggest falls in liquidity, moving from 7.55 to 8.17 and 7.6 to 8.3 respectively since mid-summer.

Part of the overall global liquidity decline may also be due to the short selling ban on European sovereigns, which came into effect on 1 November (SCI passim). Comparing publicly available trade data from the DTCC from the week ending 18 November with the same period a year earlier shows that European sovereign net notionals as a percentage of gross notionals have reduced on average by 16% over the year. This suggests that dealers may have been closing out short positions post the ban coming into place.

However, Fitch suggests that as liquidity across the whole of the global CDS market is also showing a slow decline, the short selling ban is unlikely to be the main contributing factor to this broader trend.

CLOs

Euro CLOs stress tested

Fitch-rated European triple-A CLO tranches can withstand significant stress driven by the knock-on effects of lowly rated cyclical corporates struggling to refinance debt as it comes due, the agency notes.

Cyclical credits have lower free cashflow than their counterparts in other sectors and, as such, are more likely to default or go to their lenders seeking maturity extensions in return for margin increases. Fitch believes that these margin increases may reduce the corporate's ability to maintain market position and invest in its business, hence reducing the eventual recovery, should the corporate default.

The agency incorporated these potential stresses in a moderate and severe scenario, whereby cyclical corporate loan maturities are extended, recoveries are haircut and forced sales take place on maturity of the holding CLOs. In a moderate scenario, 90% of triple-A rated notes retain their rating or are within one rating category.

However, in the severe scenario, over 70% of triple-A rated tranches are downgraded by more than one category, with some 42% moving to non-investment grade. The magnitude of downgrades in the severe stress is driven by the forced sale of buckets of loans, which extend over the legal maturity of the relevant CLO through maturity extensions.

The severe scenario would be driven by a prolonged European banking crisis, whereby European banks continue to eschew leveraged loans due to capital and funding pressures and an alternative funding source does not appear in the region. Fitch made certain assumptions regarding the ability of companies to pay additional margin in loans, which assume a collapse in earnings for the companies in question to the extent that any increase in funding cost may not be viable.

CLOs

CLO maturity wall reducing

Codean has updated its study of the maturity profile of leveraged loans held by US and European CLOs for 3Q12. The report finds that the 2014 maturity wall has been significantly reduced, with considerable effort over the last six months to reduce the size of these maturities (SCI 26 October).

The share of US loans maturing in 2014 has dropped by approximately six points and now makes up 13.5% of all US loans, according to Codean. Hence in March 2012, this share was approximately 16.5%.

The 2015 wall still looms large for Europe, however. In contrast to 2011, the region has nevertheless had a more active six months shifting its maturity profile.

CMBS

Belnord blots delinquency improvements

US CMBS late-pays fell by 8bp last month to 8.29% from 8.37% in September, according to Fitch. Delinquency rates for all major property types, except multifamily, improved in October.

The multifamily rate would have improved if not for the US$375m Belnord loan re-entering the index. The borrower was permitted to use reserve funds to bring the loan current, after which the loan was expected to become delinquent again. As of 31 October, the loan became 60-days delinquent again and is now 90-days delinquent.

In October, resolutions of US$1.4bn outpaced additions to the index of US$1.3bn. In addition, US$4.6bn in Fitch-rated deals closed in October, more than offsetting US$3.4bn in portfolio run-off. The net effect bolstered the improvement in the rate.

Hotel late-pays in particular continued their dramatic improvement, falling by another 66bp in October to their lowest level in nearly three years.

Current and prior month delinquency rates for each of the major property types are: 10.45% for multifamily (from 9.95% in September); 9.58% for hotel (from 10.24%); 8.76% for industrial (from 9.03%); 8.72% for office (from 8.83%); and 7.35% for retail (from 7.48%).

CMBS

Limited storm damage predicted for CRE

Early indications are that damage to CMBS collateral caused by Hurricane Sandy is limited, based on information that S&P has received from servicers. The damage to many properties is still in the early stages of assessment, however.

One master servicer that received borrower responses for about one-half of its serviced loan portfolio identified in the path of Hurricane Sandy reported limited to no property damage in most cases. When collateral damage was noted by other servicers, in several cases it consisted of minor roof and window leaks due to high winds and rain.

S&P nevertheless expects delays in tenant rent payments for those businesses that have been materially affected. For properties affected by the hurricane and experiencing weak financial performance, this event could be the trigger that puts some of these properties into default, the agency warns.

Impacted borrowers may postpone making their debt service payment obligations until insurance claims are processed. Insurance reimbursements and negotiations are expected to be slow and drawn out. As a result, a spike in delinquencies and transfers to special servicers could occur in the next few months, according to S&P.

"It could be months before the extent of the damage is assessed and the insurance coverage that is in place is determined for each property," the agency notes. "However, in the short term we don't expect much of an impact on bondholders, as servicers will likely advance principal and interest payments - provided that they deem the advances recoverable. We would expect servicers to advance at least for the first few months, even if they are unable to contact the borrowers to assess the damage, so long as the appropriate insurance policy is in effect and provides adequate coverage to recover the advance."

Properties in New York and New Jersey - representing US$71bn, or 16%, of collateral backing S&P-rated CMBS - are expected to account for a large amount of any reported collateral damage. The largest CMBS asset - accounting for over US$3bn in outstanding principal balance - in New York State is the Stuyvesant Town complex in New York City. CW Capital, the asset manager for the property, reports that several buildings sustained extensive mechanical damage due to flooded basements.

According to CW Capital, the existing insurance policy on the property provides for ample insurance recovery. It also noted, however, that it is in the early stages of damage assessment and the claims evaluation process.

In light of the information received to date, lender insurance requirements and interim servicer advances, S&P does not anticipate any major CMBS rating actions due to the storm.

CMBS

Intercreditor guidelines out for comment

CREFC Europe's ICA Committee has released a consultation document entitled 'Guidelines for intercreditor agreements in UK commercial real estate finance transactions - 2013'. The guidelines have two key aims: to promote consideration of a common set of issues in intercreditor agreements; and to engender confidence in market participants that an acceptable arrangement between the different and frequently conflicting interests of different creditors is achievable.

The guidelines are intended to be applicable to lending transactions that are funded directly by lenders (with no intention to subsequently securitise them) and to those that are funded through the capital markets. CREFC Europe's Intercreditor Working Group recognises that there is no 'one size fits all' solution to all issues, and that many matters will remain open to negotiation and to tailoring to the requirements and characteristics of each transaction.

The consultation period is open until 20 January 2013.

CMBS

Scramble to determine mortgage insurance

Even before Superstorm Sandy hit, obtaining reliable evidence of commercial mortgage insurance had been difficult. Now, S&P reports that process has become even more challenging as affected property owners, mortgage servicers and lenders scramble to determine coverage limits and deductibles for damage caused by the storm.

During the agency's servicer evaluation reviews, servicers consistently have reported difficulties in obtaining commercial property insurance policies. Some servicers estimate that they have received 60%-70% of their loans' renewal insurance policies, while others report that only 30%-40% of their loans have full renewal policies.

In either case, servicers have to rely on other transitory forms as proof of coverage until they receive their renewal policies. And when the actual policy does arrive, the servicer must then review and interpret it - a process that requires specially trained personnel.

The servicers S&P rank report that they frequently identify multiple deficiencies in the policy documents, which then must be corrected.

CMBS

Sunset Place on watchlist

Morningstar has added the US$75.9m Shops at Sunset Place loan, securitised in JPMC 2010-C2, to its watchlist due to a drop in occupancy. Occupancy at the property fell from 89% at year-end 2011 to 75% as of June 2012.

At deal issuance, anchor tenants at the property included AMC 24 Theatres, LA Fitness, Gameworks, Niketown and Barnes & Noble. Only one tenant, AMC 24 Theatres, accounted for more than 10% of total base rent.

An October 2012 comparison of the tenant list provided at closing to a store directory on the property's website showed three tenants no longer in occupancy: Casa & Ideas (6.5% of GLA), Niketown (6%) and Pottery Barn (2.3%). Casa & Ideas and Niketown vacated during the summer of 2012, while Pottery Barn vacated at the beginning of the year.

The sponsor of the borrower and non-recourse carve-out guarantor is Simon/Rosche Bakery Associates, the strength and strong leasing record of whom helps mitigate the increased risk, according to Morningstar. While the agency doesn't believe that the loss of these tenants has caused an immediate value deficiency on the loan, it will closely monitor re-leasing efforts and future tenant rollover.

CMBS

CMBS improvements to continue

S&P reports that credit trends for US commercial CMBS were in line with its projections through the third quarter. The agency says it expects CMBS credit metrics to continue improving into 2013.

"In our opinion, some of the same factors that drove our 2012 forecast are still in place," explains S&P credit analyst Larry Kay. "Looking forward, our 2013 forecast also considered what we believe will be an additional year of job growth, a continuation of the commercial property recovery and vintage seasoning. In addition, with almost all of the 2007-vintage five-year term loan maturities now behind us, next year's maturities will be dominated by more seasoned loans."

He adds: "Over a 20-plus-year history, we have observed lagged cross-correlations between the unemployment rate and the commercial mortgage delinquency rate. Based on this relationship and our unemployment rate forecast, we expect that the delinquency rate could fall by as much as 100bp in 2013. The projection is further supported by improving property fundamentals and collateral performance in 2013, as well as expanded lender sources, increased liquidity and fewer maturity defaults."

For 2013, the agency is also forecasting that the pay-off rate for maturing fixed-rate loans is expected to exceed 70%, the loss severity rate will find stability in the 30% range and the upgrade-to-downgrade ratio should improve. In the short term, however, other factors could pressure the delinquency rate - such as the fiscal cliff and delayed debt service payments as borrower's process insurance claims due to Hurricane Sandy.

S&P notes that the multifamily and lodging sectors appear to be in the mid-innings of recovery with slower growth rates than previously experienced, whereas the industrial, retail and office sectors are in the early stages of recovery. The office sector is expected to lag the other sectors, as lackluster job growth will constrain tenant space commitments and the demand for office space.

Insurance-linked securities

Cat bonds relatively unscathed by Sandy

The impact of Hurricane Sandy on the catastrophe bond market is likely to be muted based on current estimates, with little impact on new pricing, according to Willis Capital Markets & Advisory (WCMA). The scope and scale of the storm means it is unlikely that any bonds will be triggered solely by Sandy.

However, if losses mount and early estimates prove to be wrong, some bonds could be at risk, WCMA warns. Some commentators believe that the significant business interruption and demand surge/loss amplification component to the event could trigger greater losses than those currently estimated.

The latest Insurance-Linked Securities Market Update from WCMA reports that three new catastrophe bonds were issued in 3Q12 totalling US$525m, down slightly from four transactions totalling US$676m in the same period a year earlier. Total non-life issuance for the first three quarters of 2012 stands at US$4bn, up from US$2.3bn for the first three quarters of 2011.

Bill Dubinsky, head of ILS at WCMA, says: "The third quarter is typically a quiet period for new catastrophe bond issuance and 2012 was no exception. But in the short term, the market outlook is very positive. Spreads have tightened in the primary and secondary markets since the late second quarter and there has been strong investor demand and successful execution at the lower end of pricing guidance."

The firm's forecast for total 2012 issuance remains in the US$5.5bn-US$6bn range. "Over time we expect the catastrophe bond market will expand to encompass more risks and shift towards a greater acceptance of indemnity-triggered structures. However, we expect more rapid growth will continue to be observed in simpler, private collateralised reinsurance transactions," Dubinsky adds.

Risk Management

Clearing platform rolled out

Eurex Clearing has launched EurexOTC Clear. The service initially only supports interest rate swaps, but functionality in other asset classes will be rolled out next year.

The new OTC clearing service is based on Eurex Clearing's segregation solution - the individual clearing model - which offers strong protection and portability, with full individual segregation of positions and customer collateral. At the same time, the service will deliver capital efficiencies, including a cross-product service portfolio, a broad eligible collateral spectrum and a portfolio risk management solution dubbed Eurex Clearing Prisma.

The launch was supported by Eurex Clearing's cooperation banks: Barclays, Citi, Credit Suisse, Deutsche Bank and JPMorgan. In addition, Commerzbank, HSBC, RBS, UBS and Basler Kantonalbank joined the service for the production start. All ten members have successfully cleared their first transactions via EurexOTC Clear.

BNP Paribas, Goldman Sachs, Morgan Stanley, Nomura, NordLB, Société Générale and other market participants are preparing to join the service as clearing members, Eurex says.

RMBS

LMI sensitivity decreasing

The sensitivity of Australian triple-A rated prime RMBS to lenders' mortgage insurance (LMI) providers has continued to decrease, according to S&P. At the same time, however, the credit quality of subordinated classes remains highly dependent on the credit quality of LMI providers and the continuation of their strong claims payout ratios.

Without giving credit to LMI, about 79% of triple-A rated prime RMBS are likely to remain at their current rating level. "Given that most housing loans backing a typical Australian prime RMBS tend to have LMI covering losses up to 100% of the principal balance plus accrued interest for every loan, any deterioration in the financial strength of LMI providers could affect the ratings assigned to RMBS," says S&P credit analyst Vera Chaplin.

She adds: "However, most triple-A rated notes have benefited from continued strong loan repayments in a relatively stable economic and labour market. Loan repayment has seen an overall borrower equity gain and higher credit enhancement as a percentage of outstanding balance for triple-A rated notes in a typically sequential debt-payment mechanism in most Australian RMBS."

The downside risk is the extent of a flow-on effect of the continued weakness in the global economic outlook on Australia's economy and housing market. A hard-landing scenario that sends the country into a recession, with a significant increase in unemployment, could see higher losses because household indebtedness to disposable income remains high and property prices could soften further. However, S&P believes the likelihood of this scenario is low in the near term.

RMBS

Further RMBS rating actions taken

In its latest set of rating actions as a result of the implementation of its revised criteria for surveilling pre-2009 US RMBS (SCI passim), S&P has lowered the ratings on 232 classes from 103 transactions and removed five of them from credit watch with negative implications and 36 of them from credit watch with developing implications. The agency has also raised ratings on 16 classes from 12 transactions and removed three of them from credit watch positive. In addition, it has affirmed the ratings on 567 classes from 159 transactions and removed six from credit watch developing and one from credit watch positive.

The transactions in this review were issued between 2004-2007 and are backed by adjustable- and fixed-rate Alt-A and negatively amortising mortgage loans secured primarily by first liens on one- to four-family residential properties.

RMBS

Scratch-and-dent ratings targeted

In its latest set of rating actions as a result of the implementation of its revised criteria for surveilling pre-2009 US RMBS (SCI passim), S&P has focused on adjustable- and fixed-rate subprime, scratch-and-dent and FHA/VA mortgage loan transactions. The agency has taken two lots of rating actions: one targeting deals issued between 1999-2007 and the other targeting deals issued between 1994-2008.

In the first action, S&P lowered its ratings on 1,036 classes from 347 transactions and removed 781 of them from credit watch with negative implications, 185 of them from credit watch with developing implications and one of them from credit watch with positive implications. The agency also raised its ratings on 47 classes from 34 transactions and removed 20 of them from credit watch with positive implications and 26 of them from credit watch with developing implications. In addition, it affirmed ratings on 1,518 classes from 381 transactions and removed 241 of them from credit watch negative, 169 of them from credit watch developing and 64 of them from credit watch positive.

In the second rating action, S&P lowered its ratings on 461 classes from 204 transactions and removed 250 of them from credit watch with negative implications, 145 of them from credit watch with developing implications and three of them from credit watch with positive implications. The agency also raised ratings on 24 classes from 21 transactions and removed 11 of them from credit watch with positive implications and 11 of them from credit watch with developing implications. In addition, it affirmed the ratings on 1,400 classes from 345 transactions and removed 104 of them from credit watch negative, 164 of them from credit watch developing and 136 of them from credit watch positive.

RMBS

UK repossession rates to rise?

Repossession rates in the UK could rise slightly in the coming quarters, leading to about 35,000 and 39,000 repossessions in 2012 and 2013 respectively, according to a scenario analysis report published by S&P.

"The annual repossession rate has been declining since 2009 and touched a five-year low in 3Q12. Nevertheless, high unemployment, weak house prices and sluggish wage growth are still pointing to weak credit performance for UK mortgage borrowers in the coming quarters, in our view," comments S&P credit analyst Mark Boyce.

The report uses updated economic assumptions to project repossessions from September 2012 until December 2013. "We believe that part of the reason for relatively resilient mortgage performance is that many lenders remain reluctant to foreclose on severely delinquent loans, opting instead to relax the original loan terms. This trend is difficult to both measure and predict, and introduces uncertainty into our repossession forecasts," Boyce adds.

RMBS

Two-way margining introduced

SIFMA has revised its standard master securities forward transaction agreement (MSFTA), in conjunction with the Treasury Market Practices Group (TMPG). The aim was to create a more broadly acceptable document that can support the TMPG recommendation that forward-settling agency MBS transactions be margined by both parties in order to mitigate counterparty and systemic risk. Indeed, while many provisions were updated, a significant change is that the new agreement provides only for two-way margining.

RMBS

Dutch mortgage changes welcomed

A new coalition agreement between the two largest political parties in the Netherlands contains measures that will reduce leverage for new borrowers while existing Dutch borrowers' affordability remains largely unaffected, Moody's reports. The agreement calls for the introduction of an annuity repayment structure for new mortgages and a widening of the middle income tax band, combined with gradual reduction of mortgage interest tax deductibility.

"We anticipate that the credit quality of new mortgage loans will improve from January 2013, as the requirement for an annuity repayment structure will reduce loan-to-values," says Jeroen Heijdeman, a Moody's avp-analyst.

Since only high-income Dutch obligors will be positively affected in the short term and negatively in the long term by the anticipated income tax band change, Moody's views this change - combined with gradual reduction of mortgage interest tax deductibility - as neutral to the affordability of the majority of Dutch homeowners. The agency notes that after years of homeowners facing uncertainty about their tax position, the new measures will clear up this issue and serve to improve liquidity in the Dutch housing market. House prices are still expected to decline in the short term, however.

RMBS

Ocwen ranking on watch

S&P has placed its 'above average' rankings on Ocwen Loan Servicing on credit watch negative as a residential mortgage subprime, special and subordinate-lien servicer. The move is a result of Ocwen's recent purchase - pending regulatory approval - of Residential Capital's mortgage loan servicing unit (SCI 25 October).

The acquisition follows Ocwen's purchase of Homeward Residential. As a result of these acquisitions, its portfolio will approximately triple in size from 789,000 accounts, as of 30 September.

S&P says it wants to assess the company's ability to properly integrate and service such a large number of accounts. The agency will continue to monitor Ocwen's acquisition progress and take ranking actions as appropriate.

Meanwhile, S&P's 'above average' residential subprime, special, subordinate-lien and manufactured housing rankings remain on a stable outlook for Green Tree Servicing. The firm is a subsidiary of Walter Investment Management Corp, which was jointly awarded the highest and best bid for GMAC Mortgage with Ocwen.

RMBS

Further FHFA claim to proceed

The FHFA is to proceed with most of its claims against Deutsche Bank in connection with losses suffered by Fannie Mae and Freddie Mac related to the purchase of US$14.2bn worth of RMBS. A trial has been scheduled for 2 June 2014 (see also SCI 14 November).

In denying most of Deutsche Bank's motion to dismiss, US District Judge Denise Cote found that there was sufficient factual support in the complaint to make out a fraud theory. The court granted the bank's motion to dismiss with respect to fraud claims based on owner-occupancy and LTV ratios.

RMBS

Dutch RMBS restructured

NIBC is set to restructure the Sound I RMBS by extending its first optional redemption date (FORD) by 12 months to November 2013 and increasing the class A notes' step-up margin to 110bp from the original 25bp. Margin on the mezzanine and junior notes will also step up this month and will be set at levels defined by the original FORD. The swap counterparty, RBS, has agreed to cover the increase of the interest margin on the notes.

Extraordinary resolutions pertaining to the restructuring were adopted by all noteholders at a meeting on 7 November. Fitch understands that the restructuring was initiated in order to incentivise the class A noteholders not to offer their notes in the par tender offer by NIBC and remain invested at the new terms, while providing NIBC with an additional year of funding.

Separately, the agency has been notified that Bank Nederlandse Gemeenten will replace RBS as the liquidity guarantor in Sound I and NIBC as the liquidity provider in Sound II respectively. The replacement follows the breach of the liquidity guarantor required rating triggers defined in the transaction documentation.

RMBS

Another FHFA claim to proceed

The FHFA is to proceed with its fraud claims against Goldman Sachs in connection with losses suffered by Fannie Mae and Freddie Mac related to the purchase of US$11.1bn worth of RMBS. A trial has been scheduled for 29 September 2014 (SCI passim).

In denying Goldman's motion to dismiss, US District Judge Denise Cote found that there was sufficient factual support in the complaint to make out a fraud theory. The court granted the bank's motion to dismiss with respect to fraud claims based on owner-occupancy and LTV ratios, however.