Contents

ABS

Euro ABS holding steady

The first transaction with a Prime Collateralised Securities stamp (SCI 15 November) priced yesterday, with little fanfare. The deal comes amid a variety of new issuance and strong secondary market activity.

"There has been a bit of variety among European ABS issuance recently and that is good to see. Generally deals seem to be well received, but I would say that the first PCS deal - Santander's Norwegian auto ABS Bilkreditt 3 - really came and went without any fanfare," reports one trader.

He continues: "The label does not seem to have affected pricing at all and I think nobody will really care about it until the regulators start to take it seriously. Investors are not getting any additional disclosure with PCS beyond what the market has already been getting for the last year or so."

The secondary market has also been active. SCI's PriceABS data shows that a number of recently-issued auto names were covered yesterday at over par.

For example, HIGHW 2012-1 and TURBF 2012-1 A tranches were covered during the session at 100.81 and 100.67 respectively, both largely in line with previous covers and talk. Additionally, BUMP 2012-5 A1 was covered at 100.99, having been traded earlier this month at 101.02.

"Secondary bid-lists have traded pretty well. It seems like dealers are bulking up inventory to go into the New Year and auto paper has been popular lately, as it generally is," the trader notes.

He concludes: "Spreads have been pretty flat over the past week or so, although the periphery is still trading in a little bit. What we are going to see now is a very quiet session as the US observes Thanksgiving and then the market will start to coast into year-end."

JL

CMBS

TMAN bucks flat market trend

The European CMBS market may be starting to wind down for the year, but the last week has still seen a fair level of activity. TMAN 7 remains among the most liquid deals, despite insolvency proceedings being opened for the Brahms loan and standstill for the Handel loan being extended until later this month (see SCI's loan events database for more).

"The last week or so has not been very busy in CMBS, but we have seen a couple of BWICs circulating, albeit without prices really moving. The lists have not been huge, but there was one yesterday, for example, with a few mezz positions on it," reports one trader.

He continues: "In general, good demand remains for senior and high quality paper - anything at around or above a 60s cash price. But for mezz bonds, it is much more difficult to get client traction. The street has seen some TMAN 6s and TMAN 7s trading, but other than that it has been hard to spark interest."

The trader attributes the quiet tone to the drop in activity as the US observed Thanksgiving, as well as a general trend of investors beginning to close their books for the year. "Most people have had a fairly good year and just want to now ride out the last few weeks without adding too much risk," he explains.

The trader adds: "General credit indices widened out a lot and then tightened in again, so it has also been a bit more volatile recently and maybe people are looking for some direction. TMAN 6 and 7 have both traded up a little bit, but only by 10 or 20 cents, and other paper has not moved much."

SCI's PriceABS data shows that the TMAN 7 A tranche was talked in yesterday's session at between 95.5 and 95.65, having been covered at 95.305 on 9 November. This continues a gradual creep upwards for the name, which has occurred over the last couple of quarters. The same tranche was covered at 86.62 in June.

JL

RMBS

Liquidation boosts RMBS supply

Tuesday proved a busy session for the secondary US RMBS sector. Non-agency BWIC volume was up by 40% on Monday's levels to an estimated US$687m, with SCI's PriceABS data showing subprime talk edging higher.

"Subprime maintains its position as the most active sub-sector, propped up by a morning CDO liquidation," notes Interactive Data. "In the ARM space, less creditworthy bonds across all product types are in focus, while 30-year Alt-A collateral dominates the line items in fixed rate. Dealer offering levels are generally stable day-over-day."

Among the noteworthy subprime names circulating yesterday was CARR 2005-NC1 M2. The tranche was talked in the high-80s, up from the low/mid-80s where it was talked the day before; talk back on 28 and 29 August moved from the mid-70s to high-70s.

Meanwhile, the JPMAC 2006-WF1 A3A tranche was talked in the low-60s, up slightly from the very low-60s talk of 19 October and high-50s cover it attracted on 9 August. The FFML 2004-FF10 A3 tranche also made its first appearance in the PriceABS archive and was talked in the high-90s.

Alt-A fixed paper such as RAST 2006-A8 3A4 was talked in the low/mid-80s, up from a cover of 77 in mid-September. RAST 2006-A8 1A4 was also talked in the 90 area.

The Alt-A hybrid tranche IMM 2005-2 1A1 was talked between the mid-80s and very low-90s, having also been talked in the very low-90s on 14 November and mid-80s on 18 October. The prime hybrid GSR 2005-AR3 5A1 tranche was talked in the mid/high-80s, close to the high-80s talk from 18 October.

Finally, Countrywide paper continues to circulate. CWALT 2004-6CB A, CWALT 2006-J4 2A13 and CWL 2005-4 MV4 bonds were all out for the bid, talked in the 90 area, low/mid-80s and mid/high-40s respectively.

JL

Structured Finance

SCI Start the Week - 26 November

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

Pipeline
With Thanksgiving shortening last week in the US, there was a slight drop in the number of deals joining the pipeline. The week saw two ABS, three CMBS and one CLO added.

The ABS were: FCT FAST, a €1.15bn factoring receivables securitisation; and IM CITI TARJETAS 1, an €840 credit card deal. The CMBS comprised: C$525m Bay Wellington Tower Senior Secured Mortgage Bonds, US$1.41bn FREMF 2012-K22 and US$278m STRIPs Series 2012-1. The CLO was US$500m Octagon Investment Partners XIV.

Pricings
As with the week before, auto ABS accounted for most of the new issues, although there were also plenty of CLOs. In total, six auto deals priced, along with one RMBS, one CMBS and five CLOs.

The ABS prints consisted of: €631m Auto ABS 2012-2, €765m-equivalent Bilkreditt 3, US$150m Centre Point Funding Series 2012-2, £1.65bn Driver UK Master Compartment 1, €500m FTA Santander Consumer Spain Auto 2012-1 and €562m Globaldrive Auto Receivables 2012-1.

The RMBS new issue was SAECURE 12, while the CMBS was US$1.39bn GSMS 2012-GCJ9.

Finally, the CLO prints comprised: US$412.5m Anchorage Capital CLO 2012-1, US$620m Carlyle Global Market Strategies CLO 2012-4, €2.4bn FONCAIXA PYMES 3, US$413m KVK 2012-2 and US$291m RCMC 2012-CREL 1.

Markets
The European ABS market saw the issuance of the first PCS-approved deal last week, as SCI reported on Thursday (SCI 22 November). Despite the label seemingly having little effect on pricing, both the primary and secondary markets have been active.

"Secondary bid-lists have traded pretty well. It seems like dealers are bulking up inventory to go into the New Year and auto paper has been popular lately, as it generally is," one trader noted. "Spreads have been pretty flat over the past week or so, although the periphery is still trading in a little bit."

The US CMBS secondary market, meanwhile, saw supply surge ahead of Thanksgiving - as reported in SCI on Wednesday (SCI 21 November). Tuesday's session saw a high number of AJ tranches out for the bid.

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

The US RMBS secondary market was also busy, as SCI reported on Tuesday (SCI 20 November). Monday's session was dominated 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. Dealer offering levels at the start of the week were holding steady, with a lot of Countrywide paper being shown.

Deal news
• Bank of America has 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.
• Gagfah's latest quarterly results contain two key updates for CMBS investors, relating to GRF 2006-1 and the €1bn WOBA loan split between WINDM IX and DECO 2007 E5. Management plans to refinance a portion of the debt via a new CMBS.
• 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.
• PIMCO is proposing to transfer its asset management responsibilities for Pacific Coast CDO to Cairn Capital. The replacement is expected to become effective today (26 November), provided the requisite noteholders or shareholders do not object before then.
• 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.
• Noteholder meetings for PARGN 7, 8, 9 and 10 have been scheduled on 13 December, on 14 December for PARGN 11, 12 and 13, and on 18 December for PARGN 14, 15 and PPAF 3. The reason for the meetings is to discuss an extraordinary resolution, as suggested by Moody's, to enhance the structural features of the transactions.
• Morningstar has added the US$75.9m Shops at Sunset Place loan, securitised in JPMCC 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.
• 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.

Regulatory update
• The EU's ban on speculative positions in sovereign CDS came into effect this month. While regulators believe the ban can shield Europe from unscrupulous investors, there are doubts about its efficacy and concerns about unintended consequences.
• New York Attorney General Eric Schneiderman has filed a complaint against Credit Suisse 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).
• The FHFA is to proceed with most of its claims against Barclays and Goldman Sachs in connection with losses that Fannie Mae and Freddie Mac suffered related to the purchase of RMBS (SCI passim). Trials have been scheduled to begin in January 2015 and 29 September 2014 respectively.
• 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.

Deals added to the SCI database last week:
AmeriCredit Automobile Receivables Trust Series 2012-5; Ascentium Equipment Receivables 2012-1; Chase Issuance Trust 2012-8; Chase Issuance Trust 2012-9; CNH Equipment Trust 2012-D; Dryden XXV Senior Loan Fund; FCT Autonoria Compartment Autonoria 2012-2; Ford Credit Auto Owner Trust 2012-D; Gosforth Funding 2012-2; Halcyon Loan Advisors Funding 2012-2; Icon Brand Holdings Series 2012-1; Madison Park Funding X; Mythen Re series 2012-2; Queen Street VII Re; Series 2012-1E REDS Trust; Turbo Finance 3.

Deals added to the SCI CMBS Loan Events database last week:
BSCMS 2005-PWR7; CD 2006-CD2; CSMC 2006-C2; CSMC 2006-C3; CWCI 2006-C1; DECO 7-E2; DECO 9-E3; ECLIP 2006-2; ECLIP 2006-3; ECLIP 2007-2; EMC IV; EPICP CASP; EURO 19; EURO 23; GRF 2006-1; GRND 1; LBUBS 2006-C7; LORDS 1; MLMT 2005-MKB2; TAURS 2006-1; TITN 2007-CT1; TMAN 5; TMAN 7; WINDM IX & DECO 07-E5; WINDM VII; WINDM XIV.

Top stories to come in SCI:
Post-election US housing outlook
Year-end outlooks

RMBS

Clarity increasing on RMBS settlements

Mortgage litigation settlements have accelerated in recent months. Increasing clarity around potential outcomes is consequently expected to help in restarting the non-agency RMBS market.

The most common types of lawsuits relate to claims of breaches of loan representations and warranties or securities fraud in the chain of the mortgage securitisation process (SCI passim). Foreign institutions - predominantly European banks - make up the largest litigant constituency, representing about 29% of cases filed, according to MBS analysts at Bank of America Merrill Lynch.

A few large US insurance companies have also filed cases, as well as some pension funds. US asset managers make up a substantially smaller population of outstanding cases (5%).

To date, several large US investors have banded together and attempted to negotiate settlement agreements before pursuing legal action. However, these negotiations have broken down, which may lead to these investors pursuing litigation.

The BAML analysts note that litigation has impacted a wide swath of the non-agency market. For 93 cases where they were able to find CUSIPs for the securities impacted, over 1,675 deals and 18,824 CUSIPs were involved. Of these 93 cases, 37% relate to subprime securities and 31% relate to alt-A securities.

The analysts estimate that cases involving an individual RMBS or CDO account for approximately 60% of outstanding litigation. In these cases, if the plaintiff were to prevail, recoveries and damages would be paid solely to them and their lawyers.

Meanwhile, at least seven class action RMBS settlements have been launched to date. Additionally, two global settlements have been agreed to by large banks. The analysts suggest that global settlements have the broadest impact for non-agency investors, as proceeds will generally be distributed to all investors with current positions, depending on the waterfall and capital stack.

In terms of price sensitivity of sample bonds to projected recoveries from a hypothetical global settlement, alt-A and option ARM pass-through securities could see 4-5 points of appreciation from the increase in cashflow and reduction in ultimate principal write-downs. The most price appreciation is expected to occur in last cashflow and mid-pay subprime securities.

Timing of the distribution, on the other hand, has a somewhat immaterial impact. For the sample subprime current pay bond, although the recovery decreased its WAL, the impact was muted since it was not forecast to take any principal write-down.

CS

RMBS

Basis switch increases Dutch appeal

Dutch RMBS currently offers particularly cheap exposure to core Europe. The traditional Dutch/UK prime RMBS basis has completely reversed from the beginning of the year, with front-pay bonds and longer-dated back-pays especially attractive.

"While other European vanilla ABS markets have rallied strongly during the course of 2012, Dutch RMBS pricing remained relatively sticky and has largely not benefited from the tighter re-pricing of European mortgage/asset-backed risk," note RMBS analysts at Deutsche Bank.

Dutch four-year back-pay bonds are currently pricing 35bp-40bp wide to comparable UK paper. At the start of 2012, the basis was around 30bp the other way, as it has generally been for a few years. Dutch front-pay bonds are around 30bp tighter than at the start of the year, but the Dutch/UK prime basis is inverted here too.

While Dutch RMBS is cheap compared to other European paper, tiering within the sector is also emerging. Deals from smaller sponsors with lower ratings are generically trading wider than the rest of the segment, with SNS Reaal's HERME and HOHO bonds generally trading around 20bp wider.

Short-dated whole-pay tranches, such as HERME 17 A, and short-dated back-pays - such as HERME 14 A2 - offer spreads of around 70bp-80bp, which is far wider than other bonds that are similarly close to their call date. The Deutsche Bank analysts note that this could offer low spreads in a non-call scenario, relative to where five-year paper trades versus worst-case extension cashflows.

If there is no call, the analysts favour back-pay bonds from larger, higher-rated institutions because of the steep WAL extension in a non-call scenario. Arena 2007-1 A would extend from a less than two-year WAL to 11.8-year WAL at 5 CPR without a call, for example. For back-pays or whole-pay senior tranches, a WAL of 4.5 years trades 50bp-60bp wider than a one-year WAL.

However, the same WAL extension doesn't occur for front-pay bonds, even in a non-call scenario. Therefore sponsor risk is reduced and, barring an unlikely deterioration in credit performance in the next two years, a switch to pro-rata - that would delay cashflows - is unlikely.

"In our view, these bonds look one of the cheapest on a risk-adjusted basis among new issue core European senior asset-backed sectors," the analysts note.

They forecast that in 2013 Dutch issuance will grow by 40% from this year's total to €14bn, driven by the seven most prominent sponsors in the sector. The sector "continues to be the stand-out European RMBS market" in terms of credit performance, with late-stage arrears now down to 0.762%. Further, downward pressure in the housing market will likely be offset by increased clarity around mortgage interest tax relief.

JL

ABS

European infrastructure debt group formed

BlackRock has hired Philippe Benaroya, Chris Wrenn and Gilles Lengaigne to launch a European infrastructure debt investment unit in London. The trio previously worked together at Blackstone/GSO.

The team will initially focus on the needs of financial investors such as insurance companies served by BlackRock's financial institutions group, helping them review opportunities to invest in investment grade infrastructure debt assets in sectors such as transportation, social infrastructure and regulated utilities.

Benaroya was md and co-head of European infrastructure debt at Blackstone. He has 18 years of infrastructure and project finance experience.

Wrenn has worked in infrastructure and structured finance for over 25 years and joins BlackRock as md and co-head of European infrastructure debt. He has previously worked at Financial Security Assurance, UBS, MBIA-Ambac International and Blackstone/GSO.

Lengaigne has 10 years' experience in structured and infrastructure finance and joins BlackRock as European infrastructure debt director. He was infrastructure debt principal at Blackstone/GSO Capital Partners.

Structured Finance

Former credit chief joins BondFactor

Mark Adelson has joined BondFactor as chief strategy officer. He was until recently chief credit officer and then executive md at S&P and has more than 25 years of senior level credit experience.

Adelson specialises in RMBS and CDOs. He is a founding member of Adelson & Jacob Consulting and has previously held senior posts at Nomura and Moody's.

CDS

Credit group completes split

Assenagon Credit Management is changing its name to XAIA Investment. The rebranding completes the credit group's split from the Assenagon Group, which began in the summer (SCI 19 July).

Previous employees will continue to work for XAIA Investment and its existing fund strategies will remain unchanged, but will be renamed. The Assenagon Credit Basis, Assenagon Credit Basis II and Assenagon Credit Debt Capital funds will be renamed XAIA Credit Basis, XAIA Credit Basis II and XAIA Credit Debt Capital, respectively.

CMBS

CR IM expands to meet Irish challenge

CR Investment Management is opening an office in Dublin, led by newly-appointed director Chris Ogle. The company expects €70bn of distressed Irish real estate portfolios to come to market by 2015 and believes its expertise in the management of CRE portfolios can help resolve the distress in the market.

Ogle was previously at Lehman Brothers and more recently served as advisor to the UK Treasury in the investment management team at the Asset Protection Agency, where a significant part of his role related to the resolution of Irish assets.

ABS

Continued resilience for Euro ABCP

Moody's reports that the European ABCP market has demonstrated resilience, despite uncertainty surrounding regulatory changes and the economic environment. The agency notes that investors and sponsors have increased activity when possible.

Negative rating trends meant that the downgrades envisaged for European ABCP sponsoring banks in 2011 materialised in 2012, thereby affecting the ratings of their sponsored conduits. As a result of the bank downgrades, a further eight conduits in the EMEA region are now rated Prime-2. Some of these conduits continue to add sellers and most continue to issue ABCP, however.

European CP issuance increased to 41% of total issuance, up from 29% in August 2011. In addition, CP maturities have lengthened this year, with renewed and growing investor interest in three- to six-month maturities.

Notwithstanding the recent trend towards full support, investors are increasingly looking through to the underlying assets in the conduit portfolios. Asset type and performance appear to be the critical factors in assessing ABCP, after bank credit quality.

Although there are signs pointing towards a modest increase in volumes, performance is expected to remain stable in 2013.

Structured Finance

Survey highlights 'cautious optimism'

European fixed income investors overwhelmingly supported the ECB's decisive action last month, signalling improving fundamental credit conditions for sovereigns and banks in Fitch's quarterly investor survey. More than one-third (35%) of investors also voted for financials as their most favoured investment choice, more than doubling the 17% holding that view in the prior survey.

Respondents expressed cautious optimism on the resolution of the eurozone crisis, with 81% stating that recent policy announcements represent major positive steps, although significant risks remain. A clear majority of 80% also believe the ambitious plans for a banking union will be realised, although most expect the start date to be delayed.

The increased optimism about the banking sector was also evident in views on refinancing risk, with a much reduced proportion of survey respondents ranking banks as the segment facing the biggest challenge. Overall, investors continued to rank sovereigns the worst affected in this regard.

Structured Finance

Disclosure principles published

IOSCO has published its final 'Principles for Ongoing Disclosure for Asset Backed Securities' report, which is designed to provide guidance to securities regulators that are developing or reviewing their regulatory regimes for ongoing disclosure for ABS. The eleven principles were developed as a complement to IOSCO's 'Disclosure Principles for Public Offerings and Listings of Asset-Backed Securities', which was issued in 2010.

The principles recommend that updated information regarding ABS should be disclosed in reports prepared on a periodic basis, with the occurrence of material events and other ad hoc information released in event-based disclosure reports. Periodic and event-based disclosure should contain sufficient information to allow investors to independently perform due diligence in their investment decisions regarding the specific ABS. The information disclosed in ongoing reports should not be misleading or contain any material omissions and should be presented in a clear and concise manner, without reliance on boilerplate language.

Further, the person/entity responsible for publishing the disclosure and the person/entity responsible for gathering the information from others involved in the ABS should be clearly identified. Material information that is disclosed to any investor, market participant or other third party should be provided to all investors, market participants and other third parties at the same time. Regulation should also ensure that the ongoing information is stored to facilitate public access to it.

The principles-based format of the ABS ongoing disclosure principles allows for a wide range of application and adaptation by securities regulators, according to IOSCO. They do not apply to securities backed by asset pools that are actively managed, such as CDOs, or that contain assets that do not by their terms convert to cash.

Structured Finance

Loan-level reporting timelines lengthened

The ECB has adjusted its timeline for the start of loan-level data reporting requirements as part of the Eurosystem's collateral framework, to allow for the smooth implementation of what it deems as necessary amendments to Guideline ECB/2011/14 at the national level.

For RMBS and SME transactions, the reporting requirements will now be mandatory as of 3 January 2013. For CMBS, the reporting requirements will be mandatory as of 1 March 2013. The nine-month transitional phase for each asset class, starting on these dates, will also be adjusted accordingly.

The date of entry into force remains as originally announced - 1 January 2014 - for ABS deals.

Structured Finance

MBIA indenture amendments completed

MBIA says it has successfully completed a consent solicitation resulting in the amendments to indentures governing its 6.4% Senior Notes due 2022, 7% Debentures due 2025, 7.15% Debentures due 2027, 6.625% Debentures due 2028 and 5.7% Senior Notes due 2034. Bank of America had previously tried to obstruct the move with a tender offer to purchase at par the monoline's outstanding senior notes due 2034 (SCI 20 November).

The amendments substitute National Public Finance Guarantee Corporation for MBIA Insurance Corporation in the definitions of 'restricted subsidiary' in the indenture, pursuant to which the notes were issued. The amendments allow the firm to avoid a default on its own debt if MBIA Corp is placed into a rehabilitation or liquidation proceeding.

MBIA received the consents of holders of a majority in principal amount of all outstanding notes under the 1990 indenture voting as a single class, as well as from holders of a majority in principal amount of the outstanding 5.7% Senior Notes due 2034 issued under the 2004 indenture. MBIA has made cash payments of US$10 for each US$1,000 in aggregate principal amount of notes for which consent was provided. The monoline also repurchased approximately US$170m of outstanding principal amount of notes issued under the 2004 indenture in privately negotiated reverse inquiry transactions directly from consenting noteholders.

Structured Finance

MBIA-wrapped deals hit

Moody's has downgraded the ratings of 179 classes of US structured finance securities wrapped by MBIA Insurance Corp, following the monoline's downgrade to Caa2 (SCI 20 November). Approximately US$9.33bn of securities - backed by first- or second-lien US residential mortgages, private student loans, RMBS, CMBS and ABS - are affected. The agency notes that its ratings on structured finance securities that are guaranteed by a financial guarantor are generally maintained at a level equal to the higher of the rating of the guarantor or the published/unpublished underlying rating.

Structured Finance

Paragon noteholder meetings due

Noteholder meetings for PARGN 7, 8, 9 and 10 have been scheduled on 13 December, on 14 December for PARGN 11, 12 and 13, and on 18 December for PARGN 14, 15 and PPAF 3. The reason for the meetings is to discuss an extraordinary resolution, as suggested by Moody's, to enhance the structural features of the transactions.

The proposed changes are intended to deal with any risk of performance disruption in respect of mortgage administration and cash management by appointing Structured Finance Management as substitute administrator facilitator. They also seek to allow the issuer to make payments as part of the pre-enforcement priority of payments, by way of settlement, to any unsecured claimants up to £600,000.

CDO

CRE CDO delinquencies up

US CRE CDO delinquencies registered their first increase since June of this year, according to Fitch's latest index results for the sector. Delinquencies rose to 12.2% in October, up from 11.6% the previous month.

Newly delinquent assets in October consisted of five matured balloon loans, four credit-impaired securities and two term defaults. Conversely, assets that are no longer delinquent included four recently extended matured balloons, two assets disposed of at losses and one CMBS asset that is no longer considered credit-impaired.

Asset managers reported approximately US$47m in realised principal losses during the month from the disposal of three assets, which had minimal recoveries. The largest reported loss was US$24m related to the write-down of a preferred equity position on a large office portfolio located throughout Southern California.

CDO

OAT-linked deals downgraded

Moody's has downgraded the ratings of three structured finance securities that are linked to France's government bond rating. At the same time, the agency placed on review for downgrade the ratings of 12 CLO combination notes with a partial exposure to French treasuries.

The rating action was prompted by the weakening of the French government's credit profile, as captured by Moody's recent downgrade of France's government bond rating to Aa1 (negative) from Aaa (negative). The affected notes are all linked to the rating of the Government of France.

Specifically, the rating of the notes issued by Argon Capital, Arosa Funding and Custom Markets Securities move in tandem with the rating of the Government of France because they each repackage French government bonds as the underlying collateral. As a result, noteholders are exposed to the credit risk of the underlying collateral of these transactions, whose ratings move in lock-step in each case.

Each of the CLO combo notes affected by the rating action, meanwhile, is a combination of a piece of equity from its respective CLO and an OAT strip.

CDS

IM concerns highlighted

ISDA has published an analysis of initial margin (IM) requirements for non-centrally cleared OTC derivatives under current regulatory proposals. The analysis is based upon data submitted by member firms to the Basel Committee and IOSCO joint Working Group on Margining Requirements (WGMR), as part of its Quantitative Impact Study.

The findings highlight three significant industry concerns (see also SCI 23 October). First, the level of IM required under the BCBS-IOSCO proposal is significant, ranging from US$1.7trn to US$10.2trn depending on whether internal models or standardised schedules are used.

Second, the increased amount of IM that would be required in stressed conditions will result in greatly increased demand for new funds at the worst possible time for market participants. This pro-cyclicality, which could increase IM requirements by a factor of three, could have major adverse systemic consequences.

Third, the use of thresholds - which are designed to decrease IM requirements - will actually amplify the pro-cyclicality of the IM requirement during market stresses and add to systemic risk concerns.

ISDA believes that current margin proposals for non-cleared swaps could have a harmful impact on systemic resiliency. The association supports instead a three-pillar framework for ensuring systemic resiliency that is based upon a robust variation margin framework, mandatory clearing for liquid, standardised products and appropriate capital standards.

With regard to cross-border matters, ISDA notes that areas of concern include the creation of uneven playing fields for market participants, overlapping and duplicative rules and uncertainties in jurisdictional authority. The association says it is essential that market participants have clarity about how and where they are regulated. Markets need a level playing field and globally coordinated approach for all rules, with consistency across jurisdictions together with a consistent implementation timeline, it concludes.

CDS

Restructuring credit event called

ISDA's Asia Ex-Japan Credit Derivatives Determinations Committee has resolved that a restructuring credit event occurred in respect of GTL Infrastructure. The move follows GTL Infrastructure's issuance of, by way of a cashless exchange, US$111.74m zero coupon compulsorily convertible bonds due 2017 and US$207.55m interest bearing convertible bonds due 2017 and the cancellation of its US$300m zero coupon convertible bonds due 29 November 2012. The DC voted not to hold an auction to settle credit derivative trades on the entity.

CLOs

Cov-lite comeback analysed

US covenant-lite loans have made a significant comeback in the leveraged finance market, reflecting investor willingness to take on more risk in exchange for higher yields, according to Fitch. Cov-lite loan issuance totals US$49bn year-to-date.

Cov-lite issuance represented 31% of institutional loan issuance in October alone, the highest percentage since the end of the financial crisis. The growth of both cov-lite and leveraged loan issuance remains supported by the growth of the primary CLO market. Over US$37bn of CLOs have been issued year-to-date, versus US$13bn in all of 2011, with CLOs representing approximately 45% of the current leveraged loan buyer base.

Fitch notes that many borrowers have recently combined an asset-backed lending (ABL) revolver in conjunction with a cashflow-based cov-lite term loan. The combined ABL and covenant-lite structure provides a borrower with greater flexibility and more advantageous pricing. However, an ABL revolver ahead of a cov-lite term loan could adversely impact future recovery rates on cov-lite loans.

Based on the limited number of defaults, Fitch estimates the average cov-lite term loan recovery rate to be between 55%-60%. This compares to an average overall loan recovery rate of approximately 62% between 2008-2009, when most of the defaults occurred.

CLOs

New CLO managers reviewed

Moody's reports in its latest CLO Interest publication that it has assigned ratings to nine CLOs from eight new managers year-to-date through 30 September. CLOs from new managers accounted for over 10% of the deals it rated during this period.

"This level of new manager activity is the highest since the flurry of new entries into the CLO management business during the peak years of the credit cycle in 2005 and 2006, after which new manager entries disappeared almost entirely, when both leveraged loan and CLO volumes plunged in the second half of 2007," the agency notes.

A majority of the eight new managers are affiliates of private equity firms or other sponsors with deep pockets. Three of the eight have the backing of PE firms: Onex, Sound Point and Benefit Street. Another three have sponsors with substantial capital.

Och-Ziff, for example, is a hedge fund and alternative asset management company with around US$30bn in assets under management. Highbridge's parent, which is affiliated with JPMorgan, has a diversified investment platform that includes hedge funds, private equity and asset management products. NXT also has the sponsorship of a number of private equity firms and other institutional investors.

"Sponsors with deep pockets have the capital to finance the equity tranche in a new CLO, often one of the hardest tranches to place in the open market," Moody's continues. "The eight new managers purchased either half of or the entire equity tranches of the CLOs they manage. In some cases, the new manager also invested in the mezzanine or junior tranches of the deals it manages [SCI 2 July]."

New managers also benefit from the diversified platforms of their sponsors, thus creating economies of scale for collateral sourcing, research capability, marketing and operations.

Moody's notes that two of the eight new managers comprise entire teams of investment professionals that were previously employed by existing or former CLO managers. "These teams' proven track records of working together to handle the complexities of a CLO business, as well as their connections to previous investors, give them an edge in attracting investors over other new managers. Three of the remaining managers have also brought on at least one or more senior professionals with experience managing pre-crisis CLOs."

Furthermore, all of the new mangers have extensive experience - typically 10 to 20 years - managing leveraged loan portfolios. Some also have experience handling distressed and workout situations, which adds credibility when marketing a CLO, according to Moody's.

PE firms are branching out into CLO management as the leveraged buyout business slows. In 2Q12, for instance, leveraged loan deal volume fell by 17% from the first quarter and the amount of PE investment was also the lowest for any individual quarter since 2009.

From the perspective of investors, they tend to have more say regarding the terms of deal documents when they work with new CLO managers. The reinvestment provision appears to be key: by demanding tighter reinvestment restrictions, senior investors can reduce potential extension risk. Indeed, reinvestment periods in the new managers' CLOs are typically shorter than in the average CLO: only two of the nine deals have four-year reinvestment periods; the others range from two to three years.

As a result of investors' demands, new managers' CLOs also often prohibit purchases after the end of the reinvestment period. Additionally, four of the nine deals have a key manager event, which allows the controlling class to terminate the reinvestment period or remove the manager for cause if one or more key team members depart.

CMBS

Multifamily CMBS on the cards

Gagfah's latest quarterly results contain two key updates for CMBS investors, relating to GRF 2006-1 and the €1bn WOBA loan split between WINDM IX and DECO 2007 E5. Management plans to refinance a portion of the debt via a new CMBS.

Regarding the WOBA loan, European securitisation analysts at Deutsche Bank note that since the summer Gagfah's strategy has been to sell the portfolio. However, in the conference call accompanying the results management discussed two options, either a sale or refinancing.

The Deutsche Bank analysts suggest that a sale is the more likely outcome, with completion expected in 1Q13. But - should this not be forthcoming - they believe the debt is refinanceable, given the WOBA portfolio's low LTV of 56.5%.

"Either way, we continue to expect repayment of the loan on or around its May 2013 maturity date," they observe.

In connection with GRF 2006-1, management is planning at this stage to refinance the €2.1bn loan ahead of its August 2013 maturity via disposals, pfandbriefe and a €600m five-year multifamily CMBS. "We expect strong demand for German multifamily product in coming years and believe Gagfah's plan to be realistic," the analysts conclude.

CMBS

Sell-off seen in CMBX

After fluctuating widely in early October, the CMBX index has sold off as poor corporate earnings and renewed risks from Europe impacted the broader market. CMBX.3.A and CMBX.4.A were especially affected by the pull-back, according to MBS analysts at Citi, with prices falling by 6.15% and 6.39% respectively through last week. CMBX indices have now given back most QE3-driven gains and are back at early-September levels.

Although AM and AJ tranches appear to be undervalued in the long term, given fiscal cliff-induced uncertainty, they are likely to remain volatile in coming weeks. Interestingly, the Citi analysts note that the CMBX.2/1 AM differential narrowed recently as the CMBX.2/1 AJ differential widened.

Meanwhile, delinquency rates across the CMBX indices mostly decreased over the past month. CMBX.5's delinquency rate decreased by 93bp to 10.66%, while CMBX.4's rate dropped by 67bp to 12.66%. Only CMBX.1 saw its delinquency rate increase, by 41bp to 8.62%.

While the foreclosure delinquency rate decreased uniformly, accounting for much of the improvement, this was partially off-set by a general increase in the REO rate.

CMBS

More defaults predicted ahead of refi wall

Moody's expects the EMEA CMBS refinancing wall to reach its peak in 2013, when 135 loans with a current securitised balance of €16.1bn will need to be refinanced. More maturing loans are consequently likely to default in 4Q12, as the refinancing wall approaches.

"The combination of tight lending conditions, weak macroeconomic outlooks and the predominance of secondary quality collateral assets will result in a repayment rate below 50% through 2013," says Andrea Daniels, a Moody's svp - manager.

In the agency's view, lending conditions have deteriorated over the past few years, with the repayment rate for the first nine months of 2012 standing at 35% compared to the 65% level last seen in 2009. The 3Q12 repayment rate was 50%, however, with 20 loans fully prepaying or repaying and thus significantly better than during the first half.

Moody's notes that a key determining factor for whether maturing loans are refinanced is the LTV ratio. Nearly 93% of loans with a Moody's LTV greater than 80% defaulted at maturity in the third quarter, the agency says. It had projected a medium high or high default probability for all loans that defaulted at maturity.

The Moody's debt yield is also relevant in predicting the outcome for third-quarter loan maturities: 6.8% for defaulted loans compared to 8.7% for loans that repaid at maturity.

CMBS

Rare Canadian CMBS marketing

Brookfield Asset Management is in the market with a rare Canadian CMBS. Dubbed Bay Wellington Tower Senior Secured Mortgage Bonds, the transaction comprises a single C$525m tranche of notes with a preliminary Moody's rating of A2.

The deal is sponsored by Brookfield Canada Office Properties, a publically traded Canadian REIT, with the proceeds being used to refinance existing mortgage debt on the property and for general corporate purposes. It is collateralised by a single loan backed by a first-lien commercial mortgage related to a class A office property, including the 1.30 million square-foot 47-storey Bay Wellington Tower, as well as economic interests in the retail and parking facilities of the complex commonly known as Brookfield Place, Toronto, Canada.

Bay Wellington Tower is one of the premier office towers in Canada, benefiting from its superior amenities, views and proximity to Union Station. The tenants are paying some of the highest per square-foot rental rates recorded in the market, according to Moody's, as the building has a proven track record for attracting globally recognised investment grade quality occupants. In addition to its long-term cashflow potential and cachet, the agency believes the building's trophy status would consistently attract a large number of potential investors whenever it trades in the future.

CMBS

B-piece growth predicted

S&P suggests that the number of active B-piece buyers should not constrain US CMBS issuance in 2013. The agency puts the total size of the non-agency B-piece market in 2012 at about US$1.8bn, absorbed by eight buyers.

The leading B-piece buyer this year has been Rialto Capital (accounting for six deals), closely followed by Eightfold Capital (five), according to S&P. "Based on our issuance estimate and prevailing subordination levels, the total is likely to fall in the US$2bn-US$3bn range next year, edging closer to 2004's total (US$2.9bn). The total B-piece investment during the peak years was roughly US$5-US$6bn, with about a dozen participants," the agency notes.

Risk Management

Pricing platform strengthened

Numerix has released Numerix CrossAsset version 10.2. New functionality includes: innovative risk techniques to accelerate the computation of exposures and CVA/PFE for large portfolios of swaps; performance enhancements to improve CVA calculation time for portfolios of credit derivatives and the addition of the CIR model for credit pricing and CDS valuation; and the inclusion of PaymentStream Builder, which allows users to price any deal streamlining the creation of 80% of the most commonly traded derivatives.

RMBS

Italian RMBS reviewed

Moody's has downgraded three senior notes and 10 junior notes across seven Italian RMBS, further to its reassessment of all rated Italian RMBS. The rating agency's reassessment takes into consideration: its updated European RMBS rating methodology; ongoing collateral performance deterioration; and the deterioration of the ratings of the Italian sovereign and the transactions' counterparties over the last 12 months.

The downgrades are driven primarily by the revision of key collateral assumptions and range from 1-4 notches, with an average of two notches. Moody's says it has also revised key collateral assumptions in 71 other transactions, which did not result in any rating change due to sufficient credit enhancement. In addition, the reassessment concludes the review of five tranches in three transactions placed on review on 8 June, following the release of the rating agency's updated methodology for rating EMEA RMBS transactions.

The ratings downgraded as part of this latest rating action, as well as Italian RMBS previously placed on review, remain on review for downgrade pending the reassessment of credit enhancement levels required to address the increased country risk exposure and/or the rating impact resulting from linkage to weaker counterparties.

Moody's has revised key collateral assumptions on 78 of the 121 Italian RMBS transactions that it currently rates. In particular, portfolio loss assumptions have been revised due to worse-than-expected collateral performance, which resulted in higher expected losses.

The agency has also reassessed the credit quality of outstanding Italian RMBS portfolios to determine the MILAN credit enhancement in line with its updated methodology for rating EMEA RMBS transactions.

RMBS

Further FHFA claim to proceed

The FHFA is to proceed with most of its claims against Barclays in connection with losses that Fannie Mae and Freddie Mac suffered related to the purchase of US$4.9bn worth of RMBS (SCI passim). A trial in this action is scheduled to begin in January 2015, according to a recent Lowenstein Sandler memo.

In deciding Barclays' motion to dismiss, US District Judge Denise Cote ruled that the FHFA could proceed with all of its claims except for claims against SABR (a Barclays-owned depositor) and the individual defendants that were brought under the Virginia Securities Act. In Judge Cote's opinion, Virginia's securities law is more limited than federal law and does not impose liability for misstatements about securities that the defendants did not themselves sell. Judge Cote did not rule on Barclays' other arguments for dismissal, including arguments that the FHFA's claims are time-barred because the agency was on notice when many of the securitisations were downgraded a year before it became conservator for Fannie and Freddie.

RMBS

Spanish RMBS hit

Moody's has taken rating actions on 156 Spanish RMBS, affecting approximately €62.5bn of debt securities, further to its reassessment of the entire Spanish RMBS market. The rating agency's reassessment takes into consideration continued collateral performance deterioration, its updated European RMBS rating methodology and ongoing deterioration in the credit quality of the Spanish sovereign and transactions' counterparties.

Specifically, Moody's has downgraded the ratings of 196 notes previously rated at the country ceiling and 61 notes previously rated below A3, as well as confirming the ratings of 63 notes. The agency downgraded the senior notes by an average of one to two notches and junior notes by an average of one to four notches. The downgrades are driven primarily by revised key collateral assumptions, following Moody's reassessment of the entire Spanish RMBS sector.

As part of the rating action, Moody's has also concluded its rating review of 16 Spanish RMBS placed on review on 8 June, following the release of its updated methodology for rating EMEA RMBS transactions. At the same time, the agency has revised key collateral assumptions in 25 other transactions, which did not result in any rating action due to sufficient credit enhancement.

Notes rated at the country ceiling with sufficient credit enhancement and adequately mitigated exposure to counterparties have been affirmed. All Spanish RMBS notes rated above Ca and not affirmed remain on review, pending reassessment of required credit enhancement to address country risk exposure. Some tranches are also on review pending assessment of rating linkage to counterparties.

Moody's expects a contracting Spanish economy and high unemployment in 2013, as the government pursues austerity measures to cut the budget deficit. The oversupply of houses, weak demand and Spanish eviction moratorium - which came into effect this month - will contribute to uncertainties relating to the timing and amount of future recoveries on repossessed properties, the agency notes.

It has revised portfolio loss assumptions because of worse-than-expected collateral performance. Moody's has also reassessed the credit quality of outstanding Spanish RMBS portfolios to determine the credit enhancement (MILAN CE) required under the senior tranche for it to achieve the country ceiling. The rating agency has increased lifetime expected losses (EL) in 82 RMBS and the MILAN CE assumptions in 167 transactions.