Contents

Structured Finance

Law firm adds SF trio

Cadwalader, Wickersham & Taft has elected new partners, including a trio of structured finance specialists. Cheryl Barnes and David Burkholder each become capital markets partners, while Holly Marcille Chamberlain becomes corporate partner.

Barnes has more than a decade of experience in securities and structured finance and specialises in mortgage pass-throughs and REMICs. She is based in Washington, DC.

Burkholder concentrates on structured finance, with a focus on CMBS, structured mortgage loan participations and warehouse lending. He also has significant CDO experience and is based in Charlotte, North Carolina.

Chamberlain practices real estate finance and securitisation law, representing financial institutions for the origination of mortgage loans secured by commercial properties. She is also based in Charlotte, North Carolina.

CDO

Lehman CDO suit settled

CIBC has reached a settlement to remit US$149.5m (US$110.3m after tax) to the Lehman Estate. The settlement brings to a close proceedings opened two years ago (SCI 22 September 2010).

CIBC recognised a gain of US$841m in the wake of Lehman Brothers' 2008 bankruptcy filing, resulting from the reduction to zero of its unfunded commitment on a variable funding note (VFN) issued by a CDO. That reduction followed certain actions of the indenture trustee for the CDO following the bankruptcy filing as Lehman was the guarantor of a related CDS agreement with the CDO.

In 2010 the Lehman Estate instituted proceedings against numerous global financial institutions, indenture trustees and note-holders, including CIBC, relating to this and more than 40 other CDOs, claiming that the indenture trustees' actions were improper and that CIBC was obligated to fund the VFN.

CDO

ABS CDOs transferred

Cairn Capital is replacing Aladdin Capital Management as collateral manager on Altius I Funding, Altius II Funding and Citius I Funding. Moody's has determined that the assignment of the collateral management agreements for the ABS CDOs will not impact any current long-term rating on the notes. In reaching its conclusion, the agency considered the experience and capacity of Cairn to perform duties of collateral manager to the issuers.

For other recent CDO manager transfers, clicke here.

CDS

ICE closes in on NYSE Euronext

IntercontinentalExchange will acquire NYSE Euronext in a stock-and-cash transaction next year, while their subsidiaries, ICE Clear Europe and LIFFE Administration and Management, have entered into a clearing services agreement. Under the agreement ICE Clear Europe will provide clearing services to the London derivatives market of NYSE Liffe.

The acquisition was unanimously approved by the boards of both companies. The transaction is valued at US$33.12 per NYSE Euronext share, for a total of US$8.2bn.

ICE paid approximately 67% of the US$8.2bn in shares and the rest in cash. NYSE Euronext shareholders can receive consideration in cash, ICE shares or a combination of the two.

The transaction is expected to close in the second half of 2013, subject to regulatory approvals in Europe and the US and approval by shareholders of both companies. ICE will maintain the NYSE Euronext brand and have dual headquarters in Atlanta and New York.

CLOs

CIFC snags CLO chief

John Wu has joined CIFC Corp as md and portfolio manager focusing on structured investments. He has 16 years of financial industry experience and specialises in structured credit and CLOs.

Wu was previously head of CLO structuring at UBS. He has also held senior roles at China International Capital Corporation, Deutsche Bank and Goldman Sachs.

RMBS

BAML sued by Merrill trusts

Two Merrill Lynch RMBS trusts, acting through the trustee US Bank, have filed a complaint in New York state supreme court against two Merrill units and Bank of America. The action - filed on behalf of Merrill Lynch Mortgage Investors Trust series 2006-RM4 and 2006-RM5 - alleges that the defendants refused to repurchase the loans underlying the securities, in violation of the contracts governing the securitisations.

According to the complaint, a forensic review of the loans underlying the securities found that thousands of the loans suffered from breaches of representations and warranties and did not have the represented characteristics, a recent Lowenstein Sandler memo notes. The plaintiffs further allege that Merrill Lynch refused to honour its repurchase obligations to the trusts, claiming that all of its liability to the trusts had been released in connection with a bankruptcy settlement with ResMAE, the loan originator.

ABS

SLABS outlook remains negative

The outlook for US student loan ABS remains negative, says Moody's. That is the case for both private loan and FFELP securitisations.

Moody's says securitisations of private student loans will contain loans of slightly stronger credit quality in 2013 than they did in 2012. Collateral performance of outstanding securitisations will improve modestly but still be weak because of the wider economy.

There is an elevated downside risk for collateral performance for private loan ABS because of the possibility of a recession caused by sharp fiscal tightening in 2013. However, Moody's says collateral performance would not deteriorate to the extent that it did during the last recession because loan pools in securitisations are stronger now.

Fiscal challenges for the US government and its credit standing will continue to be the key risk for FFELP securitisations. Overall performance will remain weak in 2013.

"Defaults on the loan pools backing most FFELP securitisations will continue being high because the new college graduates will be looking for a job during a weak economy characterised by high unemployment rates," says Moody's vp and senior credit officer Irina Faynzilberg. "Net losses on the pools, however, will continue being low because of the US government guarantee of defaulted loans."

ABS

PAYE repayment plan welcomed

Fitch believes that the 'Pay as You Earn' income-based student loan repayment plan could have a positive impact on FFELP ABS portfolios. The programme is designed to modify Federal direct loans and may reduce the financial pressure on some student loan borrowers that may also carry FFELP loans.

"We believe it is possible that the new programme could help some borrowers avoid default on their other loans, including existing FFELP loans. We also believe this programme could become more commonly used than the existing plan," the agency notes.

The Obama administration finalised the 'Pay as You Earn' plan last month and it is expected to begin today (21 December). The plan will cap a borrower's monthly federal student loan repayment at 10% of their monthly discretionary income. It also will forgive any unpaid loan principal after 20 years of payments.

Some studies of the effects predict the plan will benefit borrowers with high student loans and high incomes the most, including professional students and graduate students. Eligible borrowers must have taken their first federal student loan on or after 1 October 2007 and at least one Federal direct loan on or after 1 October 2011.

Fitch suggests the plan will be more successful than the existing plan because the modifications are more meaningful. The existing plan caps repayment at 15% of monthly discretionary income and forgives remaining principal after 25 years of payments.

ABS

Italy, Spain ABS reviews complete

Moody's has revised key collateral assumptions in 29 Italian and Spanish ABS transactions backed by consumer and auto loans. New loss assumptions generally have no rating impact, although certain transactions have been downgraded.

The rating revisions follow the agency's review of the Italian and Spanish auto and consumer loan sectors and were primarily driven by collateral performance deterioration as a result of the broader economic environment in both countries. Moody's has a negative outlook for Italian and Spanish auto and consumer loan collateral.

Structured Finance

Further Basel questions answered

A fresh set of FAQs on Basel 3's counterparty credit risk and exposures to central counterparties has been released. The latest publication includes clarification on the default counterparty credit risk charge, the CVA capital charge and asset value correlations. It also includes FAQs relating to the interim framework for bank exposures to CCPs.

Structured Finance

SF loss risks 'overestimated'

The Basel Committee on Banking Supervision's latest proposals on the capital treatment of securitisation exposures are inconsistent with the strong performance of most structured finance securities, says Fitch. The agency believes the proposed capital treatment could significantly dent appetite for securitised debt among banks.

The Basel Committee estimates that its proposals would sharply increase risk weights and Fitch believes those rises would result in excessive capital charges relative to the low actual losses on most structured finance notes. The risk weighting for a triple-A rated senior tranche would rise from just 7% to 58% under each of the Basel Committee's proposed hierarchies.

Similarly, a double-A five-year senior tranche would see risk weights rise from 8% to 75%. Fitch expects total actual losses on the bonds it rates which were issued from 2000 to 2011 to be less than 5%, with US RMBS accounting for the majority.

European RMBS transactions are expected to see losses of just 0.2%, while Fitch-rated UK and Dutch prime RMBS are not expected to see losses. US ABS should see losses of 0.5% and European ABS should see losses of 0.2%.

Pre-2008 deals account for over 99% of the total losses Fitch predicts. Post-crisis transactions benefit from higher credit quality and greater credit protection.

The Basel Committee announced a consultation on its securitisation framework earlier this week (SCI 19 December). It is considering two possible systems, with responses due by 15 March 2013.

Structured Finance

IOSCO publishes rating agency reports

IOSCO has published two reports on credit rating agencies (CRAs). The first is a final report on internal controls and the second is a consultation report on supervisory colleges.

The final report on internal controls brings to a close a process which began in the first half of the year (SCI 25 May). It provides an overview of the internal controls and conflict of interest procedures adopted by a diverse array of CRAs.

The internal controls report will inform IOSCO's CRA code of conduct review, which is currently underway. The report aims to increase public understanding of the internal workings of CRAs, and to enable CRAs to compare their internal controls and procedures with those of their peers.

The second report recommends establishing supervisory colleges for internationally active CRAs and provides preliminary guidelines on how to establish and operate them. By creating CRA colleges supervisors could enhance their risk assessment and oversight by co-operating across jurisdictions, IOSCO says. The closing date for responses to the consultation report is 15 February 2013.

Structured Finance

Canadian covered bonds 'riskier'

Moody's believes new guidelines from the Canada Mortgage and Housing Corporation (CMHC) will result in greater credit risk for new programmes because they prohibit the inclusion of insured mortgages and cash as an eligible asset in covered bond programmes, regardless of oversight and disclosure requirements. CMHC published details of its legal framework for covered bonds earlier this month (SCI 19 December).

"Credit risk will be higher in new programmes than in existing programmes, which are backed by government-insured mortgages because the law will prohibit having insured mortgages as collateral or cash as an eligible asset in new programs," says Todd Swanson, Moody's avp.

Moody's does believe the guidelines have features which are positive for investors. They require disclosure of detailed cover pool data, compliance with a comprehensive set of tests to protect against credit risks and an independent cover pool monitor to oversee compliance with collateral requirements, while CMHC's mandate to promote a healthy housing market also aligns with the interests of covered bond investors.

Structured Finance

ESMA provides forbearance guidance

ESMA has issued a public statement on forbearance practices in IFRS financial statements. It is concerned that a lack of consistency amongst issuers raises issues over the transparency and accuracy of their financial statements.

The ESMA statement deals with the definition of forbearance practices, their impact on the impairment of financial assets and the specific disclosures relating to forbearance activities that listed financial institutions should include in their IFRS financial statements. It is part of broader work on forbearance practices also being undertaken by the European Banking Authority and European Systemic Risk Board.

ESMA says it is concerned that the lack of clarity in financial issuers' financial statements regarding their treatment of forbearance-related practices could affect an issue's financial performance and position, with consequences for investors and markets. By promoting a consistent approach to the definition of forbearance, measurement of impairment and related disclosures, ESMA says investors can be confident that financial statements accurately reflect credit risk exposures.

As forbearance measures are extended due to a borrower's financial difficulties, ESMA says issuers must: identify whether a loss event has impacted estimated future cash flows; base its impairment calculations on the estimated future cash flows and not the contractual cash flows; and apply a heightened level of scepticism when estimating the future cash flows.

Disclosures provided by financial institutions regarding their forbearance practices in their annual IFRS statements should include: details of the types of forbearance practices undertaken during the reporting period; a description of the risks related to the forbearance practices undertaken; accounting policies applied in respect of the forborne assets; and a description of any changes in these aspects from the prior period.

Structured Finance

ESMA seeks CRA opinions

ESMA has launched a consultation paper on guidelines for the scope of credit rating agencies (CRA) regulation. Concerns about CRA 3 were highlighted earlier this month (SCI 6 December).

The draft guidelines aim to clarify certain aspects of the regulation to registered rating agencies and other market participants such as national securities markets regulators. ESMA says it has been prompted to issue the guidelines after its experience of the registration process and the enforcement of the perimeter of the CRA regulation under the new EU supervisory regime.

The draft guidelines address: the obligation for rating agencies to register with ESMA; credit rating activities and exemptions from registration; private ratings; establishment of branches outside the EU by registered CRAs; specific disclosure best practices; and enforcement of the scope of CRA regulation.

The closing date for responses is 20 February 2013 and an open hearing on the consultation will take place on 22 January 2013.

CDO

Euro ABS CDOs reviewed

Fitch has completed a review of European high grade and mezzanine ABS CDOs, which addressed the ratings on 193 tranches across 36 cash and synthetic transactions. The majority of deals were affirmed, with eight tranches being downgraded from six transactions.

The senior most note in transactions invested in originally high grade ABS are now for the most part rated triple-C and below, Fitch notes, whereas senior notes in mezzanine transactions are for the most part rated double-B and above. The majority of transactions have or are about to exit their reinvestment period. As a result, the average pay down on the senior most notes was 13% of the original note balance over the course of the year, with the average note factor of 67% of the original balance.

The downgrades were caused by rating migration in the underlying portfolios, with the most prominent sectors being RMBS, CMBS and to a lesser degree commercial ABS. The majority of negative ratings activity took place in core countries versus the periphery. However, some 20% of downgrades were in Spanish RMBS and were driven to an extent by the imposition of country ratings caps on transactions due to the downgrade of the Kingdom of Spain.

Fitch says that reported WALs were often based on optimistic prepayment assumptions. The agency applied extended WALs based on seniority and sector in the review process.

Notwithstanding the slowing prepayment rates, a significant number of assets paid in full as a result of originator calls and tenders. The agency also observed partial pay-downs of mezzanine transactions that have become the first-pay tranche in their respective capital structures. The vast majority of payments in full occurred in Northern European jurisdictions, including the Netherlands, Germany and the UK in the RMBS, CMBS and commercial ABS sectors.

CDO

ABS CDO on the block

An auction has been announced for Sunrise CDO I. It will be held on 14 January, but the trustee shall only sell the collateral if the sale results in proceeds greater than or equal to the auction call redemption amount.

CDO

Trups CDO cures trending higher

US bank Trups CDO defaults and deferrals remained stable at 30.7% of the original collateral notional balance by the end of November, according to Fitch. Defaults and deferrals remained stable at 17.4% and 13.3% respectively.

There have been 27 new deferrals year to date through the end of November, compared to 73 new deferrals over a comparable period in 2011. New defaults are also trending lower, with 19 new defaults year to date compared to 40 last year.

Cures continued to trend higher, with 40 cures year to date compared to 33 last year.

At the end of November, 214 bank issuers were in default, representing approximately US$6.6bn held across 83 Trups CDOs. Additionally, 348 deferring bank issuers were affecting interest payments on US$5bn of collateral held by 83 Trups CDOs.

CDO

Endeavour vote rescheduled

In the first of the votes to unwind the nine series comprising A$250m of Australian CDOs in limbo as a result of the Lehman default, insufficient bondholders voted to form a quorum and the resolution failed to pass. The quorum requirement was 75% of the noteholders submitting votes of either 'yes', 'no' or 'abstain', with 75% of the votes cast being in favour of passing the extraordinary resolution.

Only 53% of noteholders' votes - all 'yes' - were counted as valid, according to a recent Structured Credit Research & Advisory client note. The reasons for failure were varied, but revolve around operational issues rather than voter apathy or those opposing the extraordinary resolution deciding not to vote as a de-facto 'no' vote.

A second meeting for Endeavour bondholders only has been scheduled for 11 January, with the quorate requirement reduced to 25%. If the Endeavour bondholder vote fails, none of the CDOs will be unwound, as the extraordinary resolutions for each series are linked to each other such that all series must pass the resolution for any series to be unwound.

Later bondholder meetings for all the other eight series held on 19 December have been confirmed as successful. "Hopefully, with investors as a whole keen to settle, the second Endeavour bondholder meeting will pass the resolutions and the unwind can then proceed to the execution stage," SCRA notes.

Support for the unwind has been widespread, as proposed settlement payouts are close to par and above in some cases.

CDO

ABS CDO auction unsuccessful

The auction for RFC CDO I announced last month (SCI 10 December) did not lead to a sale of the securities because bids were not sufficient to meet the redemption amount. Consequently, an auction call redemption will not occur on the 15 January distribution date.

CDO

Upcoming CDO auctions announced

An auction has been scheduled for 11 January for Bristol CDO I and for 18 January for the Belle Haven ABS CDO. In each case the collateral will only be sold if the highest bid results in the sale proceeds being at least equal to the auction call redemption amount.

CDS

Cross-border swap reprieve announced

The CFTC has announced that it will delay cross-border enforcement of certain derivatives requirements mandated by the Dodd-Frank Act until July 2013. The move is intended to provide market participants with more time to understand their obligations, to foster an orderly phase into the new regulatory regime.

Non-US swap dealers and major swap participants, as well as foreign branches of US swap dealers and major swap participants, can comply with the transaction-level requirements of their local jurisdictions for swaps with non-US counterparties. They must still comply with all transaction-level requirements under Dodd-Frank for swaps with US counterparties.

There is also a reprieve from the requirement that a person include the aggregate notional value of swap dealing transactions entered by its affiliates under common control when determining whether its swap dealing activities exceed the de minimis threshold. The exemptive order expires on 12 July 2013.

CDS

EMIR standards adopted

The European Commission has adopted nine regulatory and implementing technical standards to complement the obligations defined under EMIR. They were developed by the European Supervisory Authorities and have been endorsed by the Commission without modification. The adoption of these technical standards finalises requirements for the mandatory clearing and reporting of transactions, in line with the EU's G20 commitment made in Pittsburgh in September 2009.

One technical standard submitted by the European Securities and Markets Authority (ESMA) on the specific point of colleges for central counterparties was not endorsed because of concerns as to the legality of some of the provisions. The Commission says it will ask ESMA to redraft the standard and it will be adopted at a later stage.

There are three key elements to the technical standards. With regard to OTC derivatives, the regulatory technical standards specify the provisions of EMIR related to indirect clearing arrangements, the clearing obligation procedure, the public register, access to a trading venue, non-financial counterparties and risk mitigation techniques for OTC derivatives contracts not cleared by a CCP.

With regard to central counterparties, the regulatory technical standards specify the provisions of EMIR related to the requirements for CCPs, as well as the capital, retained earnings and reserves of a CCP. The implementing technical standards specify the format of the records to be maintained by CCPs.

With regard to trade repositories, the regulatory technical standards specify the provisions of EMIR related to the minimum details of the data to be reported to trade repositories, the details of the application for registration as a trade repository, as well as the data to be published and made available by trade repositories and operational standards for aggregating, comparing and accessing the data. The implementing technical standards specify the format and frequency of trade reports to trade repositories and the format of applications for registration of trade repositories.

The regulatory technical standards will be published in the Official Journal of the European Union immediately following the receipt of 'non-objection' from the European Parliament and Council. The European Parliament and Council have one month to exercise their right of scrutiny, with this period extendable by an additional one month at their initiative. The regulatory technical standards will then enter into force on the twentieth day following that of their publication.

The implementing technical standards are not subject to the right of scrutiny of the European Parliament and Council. They will therefore be published in the Official Journal of the European Union right after their adoption and will enter into force on the twentieth day following that of their publication. Nevertheless, the provisions under the implementing technical standards will only take effect once the associated regulatory technical standards enter into force.

CDS

CCP consultation paper launched

ESMA has published a consultation paper on guidelines for the assessment of interoperability arrangements for CCPs. The guidelines clarify the obligations for national regulators on how to assess existing or new interoperability arrangements between CCPs.

From 2013, CCPs will have to obtain authorisation under EMIR in order to do business within the EU. ESMA's guidelines seek to improve the rigour and uniformity of standards applied when assessing CCPs' interoperability arrangements and define what national regulators should look at in assessing those arrangements.

ESMA's draft guidance focuses on: legal risk, including the rights and obligations of CCPS; fair and open access, to remove non-risk barriers to future expansion of interoperability arrangements; risk management, to ensure prudent management of any interoperability arrangement; collateral deposits, which should be ring-fenced so that collateral is always available in a timely manner; and cooperation between national regulators, to ensure a smooth approval process for interoperability arrangements.

The closing date for responses to the consultation is 31 January 2013. The feedback received will be used to finalise the guidelines for use by national regulators when receiving applications for interoperability arrangements by CCPs under EMIR.

CMBS

Mixed outcomes for EMEA CMBS

The total number of EMEA CMBS loans in special servicing declined in November, according to Moody's, as five loans left special servicing and three loans were newly transferred. At the end of the month, 145 loans were in special servicing across the large multi-borrower and single-borrower transactions monitored by the agency.

Two loans entered special servicing due to non-payment at maturity (see SCI's CMBS loan events database): the €53m Skoduv Palace loan (securitised in Titan Europe 2007-2) and the €25m H&B Retail loan (securitised in Quirinus (European Loan Conduit No. 23)). The Skoduv Palace loan represents the only loan in special servicing with collateral in the Czech Republic: the security is an office property located in Prague.

The other entry in the past month was the €60m Fish loan (securitised in Talisman - 5 Finance). The loan - backed by a mixed-use property in Hamburg, Germany - experienced a covenant breach ahead of its maturity date in July 2013. A revaluation of the property in June put the total leverage, including the €12m B-loan, at a high level of 159%.

For the Belgian Bonds and Quattro Syndicate loans, consensual sales involving the borrowers resulted in full recovery of principal for the noteholders in Odysseus (European Loan Conduit No. 21) and Deco 12 - UK 4 respectively. The timing of the work-out was approximately 3.7 years for the Belgian Bonds loan and 2.9 years for the Quattro Syndicate loan. One additional loan - Berlin Residential, securitised in Silenus (European Loan Conduit No. 25) - was repaid in full by the borrower after failing a loan-to-value covenant and being transferred into special servicing in June 2011.

Of the two loans that were worked out with losses, the severity of loss on the €5m Junior Den Tir loan (securitised in Juno (Eclipse 2007-2)) is 100%. The loss has been allocated to the class D noteholders after the loan met the eligibility criteria in the synthetic transaction. The other loan that has realised a loss is Industrial Realisation, securitised in Deco 12 - UK 4.

At the end of November, the weighted average Moody's expected principal loss for loans in special servicing was 39%.

CMBS

Euro CMBS in restructuring first

The €4.3bn GRAND transaction, the largest CMBS ever issued in Europe, has been restructured. Unusually, it has been implemented by a solvent scheme of arrangement, which is a first for a CMBS restructuring.

CMBS

Sale agreed for large CMBS loan

A sale agreement has been reached for the largest loan backing TITN 2007-CT1X. A sale agreement for the €261.6m Xanadu loan has now been entered into and the property sale is expected to be completed by 18 April.

Xanadu accounts for around 30% of TITN 2007-CT1X. The base purchase price for the loan sale is just over €180m and the base purchase price for the property sale is €176m. These prices are subject to adjustment upon completion.

Trepp notes that the securitisation market value of the loan was €350m in October 2006. The updated valuation in August 2011 was €190m and the latest valuation, as of November 2012, was €176.8m.

The loan was backed by seven office properties located in Germany and was transferred to special servicing in January 2012. Four of the other five top loans in the transaction (HUGO, German Retail Portfolio III, Deutsche Bahn Portfolio and German Retain Portfolio I) are currently in default.