Contents

ABS

Autos, cards lead ABS charge

US auto and credit card ABS paper was being shown on Friday as the secondary market began to open up. SCI's PriceABS data shows 21 ABS line items from the session.

"Secondary market activity has picked up as the week comes to a close, while the primary market remains quiet. An afternoon list containing blocks of senior auto and credit card bonds, with generally shorter WALs and mostly recent vintages, accounts for nearly all of [the session's] supply," notes Interactive Data.

Among the credit card names circulating were two Chase Issuance Trust bonds and a GE Capital Credit Card Master Note Trust tranche, which all attracted covers. For instance, a US$7.6m piece of the GEMNT 2011-1 A tranche was covered at 7.5bp, with talk ranging from 6bp to the low-teens.

Meanwhile, US$3.1m of CHAIT 2007-A8 A was covered at 5bp, tightening from its previous cover last year of 8.5bp. A US$11m piece of CHAIT 2012-A9 A9 was covered at 11.5bp, with talk as tight as 10bp.

In the auto space, the tightest cover was seen for TAOT 2011-B A2, at -1bp. The name was talked in the low-singles and at 1bp.

VALET 2012-2 A2 - which was previously covered on 6 December at 2.5bp - was covered at 1bp, with talk up to the mid-singles. Finally, the HART 2012-C and PILOT 2012-1 A2 tranches were both covered at 4bp.

JL

CMBS

CMBS AJs lead market restart

The US CMBS secondary market has been among the quickest to start up in 2013. Yesterday's session was particularly notable for the volume of AJ paper circulating, with SCI's PriceABS data showing 35 CMBS AJs among the session's 120 line items.

AJ CMBS had also dominated Wednesday's session and some of the names out yesterday - such as WBCMT 2007-C33 AJ - were also seen in the first session. The US$8.5m WBCMT tranche was covered yesterday at 92, slightly higher than talk from the day before, which had been at 90 and 91. The previous cover for the tranche back on 6 November was in the low/mid-80s.

The WBCMT 2006-C27 AJ and WBCMT 2006-C29 AJ tranches were also covered, with talk for each around 90. The US$15.4m MLMT 2007-C1 AJ tranche, meanwhile, was talked between the mid-50s and low/mid-60s, showing limited movement from the mid/high-50s talk it was attracting on 25 October.

A couple of other names of interest include the US$9.5m BACM 2006-5 AJ, which was talked in the mid-70s, having last been covered in the mid/high-60s, and the US$19.4m JPMCC 2006-LDP9 AJ, which was talked in the low- and low/mid-70s, having last been covered at 70. Finally, beyond the AJ space there were also a number of AM and A4 bonds out for the bid, with even some D and X notes thrown in, such as COMM 2012-CR4 D and JPMCC 2012-C8 XB.

CMBS

Time out for US CMBS rally?

US CMBS secondary spreads slowed their march into tighter territory yesterday, with some tranches even widening slightly. BWIC volume for the sector stood at around the US$300m mark, with SCI's PriceABS data showing 111 CMBS line items.

"For each of the first four days of 2013, the CMBS market saw spreads fall smartly. On Tuesday the market took a time-out of sorts, but we would not exactly call it a losing session. For while legacy super seniors were modestly wider, spreads on dented 2007 AMs and AJs narrowed and new issue triple-B spreads continued to tighten," says Trepp.

Spreads on later vintage legacy super seniors and the tighter 2005- and 2006-vintage AMs and AJs were wider by 1bp-2bp over the session. Weaker AMs and AJs continued to improve, but the GSMS 2007-GG10 A4 bond ended the day 2bp wider at 122bp.

One particular bid-list grabbed the attention of traders: a pair of 2006 C class bonds was out for bid at the same time. "One covered in the low-90s, while the other covered in the high-40s - indicating just how much room there can be between mezz bonds from some of the weaker vintages," Trepp explains.

This trend is also apparent in the PriceABS archive. BACM 2006-1 C was covered in the low/mid-90s, with talk down to the low-80s, while WBCMT 2006-C29 C was covered in the high-40s, with talk ranging from the low-40s to 60. Another C class bond - CSMC 2006-C5 C - was talked in the low-40s.

In addition, a considerable amount of AM and AJ paper was out for the bid yesterday. Among others, BACM 2007-2 AJ was covered at 93 and MLCFC 2007-5 AM was covered at 279.

JL

RMBS

BofA effect seen in secondary RMBS

US RMBS secondary supply remains moderate so far this year. Around US$434m of BWIC volume was seen yesterday across agency and non-agency, with SCI's PriceABS data showing 97 RMBS line items from the session.

"Overall BWIC volume is slowly returning to pre-holiday levels," says Interactive Data. "Dealer offerings are mostly unchanged from the prior session."

Certain non-agency bonds are being offered higher, while agency offering levels have widened slightly. The knock-on effect of Bank of America's settlement with Fannie Mae and agreed MSR sales (see separate article) was apparent in the high volume of Countrywide paper being shown.

Some Countrywide tranches - such as CWALT 2006-13T1 A11 (talked in the 80-area), CWL 2006-14 M2 (talked in the low-single digits) and CWALT 2007-25 1A2 (talked in the low/mid-80s) - each made their first appearance in the PriceABS archive. Others, such as CWHL 2006-17 A2, are more familiar.

The CWHL tranche was talked in the mid-90s and in the high-80s yesterday. It was previously covered back in July 2012 at 86 and has been talked in the high-80s since then.

Washington Mutual paper also circulated during the session, with 13 WAMU and WMALT tranches being shown. WAMU 2005-AR8 2AB3 was talked in the mid/high-80s and at around 90, having last been covered at 86.25 on 8 November.

Additionally, the WAMU 2007-HY1 4A1 tranche was talked in the low/mid-80s and at 80, in line with previous talk in December and November. It was last covered on 10 October at 78.

Subprime names, such as RASC 2005-AHL3 A3, were also out for the bid. The US$20.8m tranche was talked in the low-90s, in line with talk from Friday's session.

JL

CMBS

Titan property sales positive

The multifamily properties securing Titan Europe 2006-2's Petrus loan have been sold. The buyer and sales price have not been disclosed, but the price is understood to be in excess of the amounts outstanding under the loan and is a better-than-expected outcome, helping to reduce expected principal loss for the CMBS.

CMBS analysts at Barclays Capital expect note that the main beneficiaries will be the mezzanine classes. "In our January 2012 base case, net of enforcement costs, we expected a €20m loss on the Petrus loan and recoveries in 2014-15. The higher-than-we-expected sales price and likely lower recovery costs are positive news for the transaction, as is the likely allocation of excess Petrus sales proceeds to the Margaux loan," they add.

The Petrus loan defaulted in July 2012, three months after being extended until January 2013, when the Margaux loan granted to the same borrower defaulted on its maturity date. The Petrus loan was transferred into special servicing following the default, although the public notification of these events was delayed while discussions about the property disposals were ongoing.

The most recent valuation of the Petrus properties as of December 2011 is €209m, compared with a loan balance of €208m. The Barclays analysts calculate that the sale price could be approximately €220m and estimate net recovery proceeds at €212m-€215m.

"Compared with our earlier recovery estimate, we now assume lower enforcement costs given that the property sale originated from a 'performing' loan. In addition to the net sales proceeds, the transaction will benefit from Petrus loan excess rental cash flow for at least two quarters," say the Barclays analysts.

They add that this will add approximately €4m to recoveries and believe that the Margaux loan could benefit from €8m-€10m excess Petrus loan recoveries. The loss estimate for the Margaux loan has been halved to €5m.

The Velvet loan is due to mature this month. The special servicer had aimed to sell the underlying properties by the end of 2012, but there has been no announcement of it having done so.

The Barclays analysts continue to expect €40m principal losses for the Velvet loan. Meanwhile, the borrower for the €43.8m Labrador loan filed for insolvency last month and the loss estimate there is €23m.

In total, principal loss for Titan Europe 2006-2 is now expected to fall between €50m and €70m, down from the €85m-€110m expected a year ago. Classes J, H and G are expected to be affected by losses, as may classes F and E, while class A could see a nearly full pay down this year and full redemption in 2014.

JL

CMBS

Trading pick-up predicted for CMBX 6

Markit CMBX Series 6 is due to launch on 25 January (SCI 8 August 2012), featuring a new sub-index. Given increased demand for a transparent hedging tool referencing newer CMBS issuance, the index is expected to be actively used by both issuers and investors.

CMBX 6 will comprise six sub-indices - AAA, AS, AA, A, BBB- and BB - each referencing 25 bonds from a portfolio of 25 CMBS offerings issued in 2012. The new AS sub-index effectively replaces both the AM and AJ tranches from prior series, given that newer CMBS structures generally do not feature both AM and AJ tranches.

The contract structure will use the same rules and payment calculations as the original CMBX Series 1 - 5 indices. However, CMBX 6 selection criteria allow deals to be rated by rating agencies not permitted under the old rules, including DBRS, Kroll and Morningstar.

TRX transaction volumes doubled from the previous month to almost US$1bn in December in anticipation of CMBX 6, as well as the expiration of the December contract, according to CRE research analysts at Deutsche Bank. "The index rolled at the end of the year and is now at all time tights. Even though future upside in TRX will track broader markets, the product is still compelling due to its funding advantage and leverage. Besides the launch of CMBX 6, another headwind for the index in January will be the deluge of new issue deals," they explain.

Meanwhile, CMBX volumes declined by about 15% in December versus the prior month. Most trading occurred in the Series 1 index, with activity almost double that of Series 3 and 4. Volume in the AAA sub-indices was more than triple that seen in the AM and AJ sub-indices.

"Although the furious year-end rally has lifted AAA prices to 2012 highs, AJ indices are still only halfway back to their 2011 levels, while senior AAA and AMs are nearly there," the Deutsche analysts observe. "That should make those indices better technical shorts in 2013 and - given that the senior indices face more extension risk than AJs, which have mainly credit risk - the AAA credit curve should continue to flatten once there is more clarity on loan resolutions this year. Further down in credit, some accounts are moving in to AA and A, mostly in seasoned series on hopes of a strong recovery."

CS

RMBS

Cliff bill briefly buoys market

US agency MBS outperformed both Treasuries and swaps after Congress passed a bill last week to avert the so-called 'fiscal cliff'. However, suggestions that the Federal Reserve may stop buying assets by end-2013 then spooked the market and swiftly undid those gains.

The bill is expected to be positive for the housing recovery in the country. It extends the Mortgage Forgiveness Debt Relief Act of 2007, which protects homeowners from paying taxes on the unpaid portion of debt resulting from short sales and loan modifications, and also reinstates a relief on mortgage insurance premiums that had previously expired in 2011.

In addition, the bill increases tax rates on capital gains from 15% to 20% for high-earning individuals and households, while excluding a capital gains tax increase for the sale of a primary residence of up to US$500,000. Congress did not change the mortgage interest deduction, thereby continuing tax relief for homeowners.

"The combination of tax relief on mortgage insurance premiums and debt forgiveness should have a very positive impact on housing recovery, helping to avert the crisis many short sales may face without the tax-break extension. Additionally, the mortgage interest deduction should continue to provide incentives for home ownership, supporting housing recovery," note RMBS analysts at RBS.

Investor appetite for risky assets increased on the back of the fiscal resolution, sparking a sell-off in Treasuries. Ten-year Treasury yields rose to 1.83% - the highest level since September.

"Meanwhile, the curve steepened considerably, with the slope of 2s10s soaring to 1.6%. The refinanceability of the agency MBS market could be somewhat hindered in a steep curve environment, as the rising 10-year yield has led 30-year mortgage rates to increase slightly from 3.40% to 3.45%," the RBS analysts observe.

Thirty-year agency MBS were six ticks tighter versus the swap curve in lower coupons and 3-4 ticks tighter in higher coupons on the first trading day after the fiscal cliff bill was passed. Compared to Treasuries, 30-year coupon 3s were eight ticks tighter and 4s were 3-5 ticks tighter versus 5/10 year blends.

However, after the Fed indicated on Thursday that it may end its bond buying this year - with "several" members advocating such a change of approach - that outperformance came to an end. Thirty-year MBS 3s widened by two ticks versus the swap curve, losing all gains from the previous trading day.

Other risky assets, such as IOS, performed well. "On the hedge-adjusted basis, IOS 3.5s through 5s outperformed their collateral hedges by 2-5 ticks, while 5.5s and higher lagged their corresponding collateral by 2-6 ticks," the analysts note.

JL

Structured Finance

Bank boosts Europe, Asia credit teams

Nomura has grown its structured credit trading team with a trio of new recruits. All three are ultimately responsible to global head of structured credit trading Munish Varma.

In Europe, Gavin O'Neill and Alex Mahler join as md and executive director, respectively, and will focus on special situations. They will be based in London and will be tasked with expanding the firm's illiquids offering, leveraging previous experience at JPMorgan and Citi.

In Asia, Pradeep Kanwar joins as vp and will be based in Hong Kong, reporting locally to Chris Howe. He has spent six years trading and managing complex credit products - most recently at JPMorgan - and will focus on strengthening Nomura's traditional structured credit business in Asia ex-Japan.

Structured Finance

Law firm gains China partner

Rose Zhu has joined Cadwalader, Wickersham & Taft's corporate group as partner. She joins from K&L Gates, where she specialised in capital markets, mergers & acquisitions and bank financing transactions, and will be based in Beijing.

Structured Finance

JPM vet moves on

James Staley is joining BlueMountain Capital Management from JPMorgan, where he spent more than 34 years and was most recently investment banking ceo. He becomes managing partner and will join BlueMountain's management, risk and investment committees as he focuses on cultivating relationships and developing new strategies for the firm.

Structured Finance

Houlihan, Milestone union agreed

Houlihan Lokey has acquired Milestone Advisors and will now incorporate Milestone's team into its existing financial institutions group. The acquisition combines Houlihan Lokey's global footprint, capital markets products, restructuring and valuation capabilities and financial sponsor relationships with Milestone's extensive financial institutions expertise across the depository institution, specialty finance, distressed real estate and financial technology sectors.

Most of the former Milestone personnel will join Houlihan Lokey's offices in McLean, Virginia, and Milestone ceo Eugene Weil will become co-head of financial institutions within corporate finance, alongside current head Michael McMahon. John Nelligan, Jeffrey Levine and Timothy Stute, previously Milestone partners, will continue as mds in the combined organisation.

Structured Finance

Sound Harbor grows credit business

Sound Harbor Partners has appointed Dean Criares as partner and chairman of its loan funds business. The firm has also acquired the management contracts for over US$1bn of leveraged loans.

Criares was previously senior md and partner of The Blackstone Group. He founded Blackstone Debt Advisors and served as co-head of the GSO debt funds group.

The management contracts acquisition furthers Sound Harbor's efforts to grow its credit-focused investment platform by expanding its client base, investment talent and assets under management. Sound Harbor's loan funds strategy continues to be managed by William Lutkins, Thomas Bancroft and a team of investment professionals.

CDS

High yield expertise acquired

Palmer Square Capital Management is acquiring a majority interest in Fountain Capital Management. The move boosts Palmer Square's alternative and credit investment capabilities.

Fountain Capital Management specialises in managing high yield bond and bank loan portfolios, with a focus on the higher quality portion within high yield credit. Palmer Square is part of Montage Investments and Fountain Capital will now have access to Montage's distribution team throughout the US as it seeks to expand its presence.

Insurance-linked securities

ILW pro recruited

JLT Reinsurance Brokers has appointed Paul Thyer as partner. He becomes a member of the firm's London non-marine treaty team and will focus on property retrocession, property reinsurance and industry loss warranties.

Thyer was most recently associate director of BMS Re. He has 32 years' experience within the reinsurance industry as a London market retrocession, reinsurance and ILW broker.

RMBS

Landesbank seeks RMBS redress

Landesbank Baden-Wuerttemberg (Landesbank) has filed actions in New York state court against Goldman Sachs and Morgan Stanley. Both actions relate to RMBS purchases made by Landesbank.

A recent Lowenstein Sandler memo notes that the action against Goldman Sachs accuses the investment bank of issuing offering materials containing material misrepresentations and omissions underlying approximately US$88.9m of RMBS that Landesbank purchased. Morgan Stanley is accused of issuing false or misleading offering materials in connection with US$49.9m of RMBS.

ABS

Further prime, subprime auto divergence

US prime auto ABS continued to perform strongly at the end of 2012, but the latest index results from Fitch show that subprime loans again took a step back. The agency expects stable asset performance for prime auto ABS this year, with a continuing positive rating outlook.

Prime auto ABS had the strongest year-to-date, with losses dropping to record lows of between 0.14% and 0.53%. Prime 60-plus day delinquencies dropped from 0.37% in October to 0.36% in November, representing a 21.7% improvement year-over-year.

Prime cumulative net losses for November improved 3.3% month-over-month and were 48.2% lower than in November 2011, while annualised net losses were 32.1% stronger than in the previous year.

Subprime 60-plus day delinquencies decreased 5.4% in November to 3.53%. However, annualised net losses increased 4.4% month-over-month and 0.5% year-over-year to 6.72%.

ABS

Continued credit card ABS improvement

US securitised credit card charge-offs decreased from 4.07% in October to a six-year low of 3.90% in November, according to Moody's latest index report. The improvement extends the steady decline since charge-offs peaked in 2010 and the charge-off rate index is now expected to remain between 3.5% and 4.5% over 2013.

The delinquency rate index remained unchanged in November at 2.37% and the early-stage delinquency rate was a single basis point lower at 0.69%, says Moody's. Both metrics are close to their all-time lows but have seen their rate of improvement slow down, suggesting limited future charge-off improvement.

Meanwhile, S&P's index data shows that the Canadian credit card charge-off and 30-plus day delinquency rates were unchanged in November, at 3.8% and 2.4%, respectively. The payment rate, yield and excess spread each decreased modestly to 36.0%, 21.4% and 13.6%, respectively, from 39.0%, 21.8% and 13.8% in October.

Structured Finance

LCR amendments endorsed

The Basel Committee has endorsed a package of amendments to the formulation of the Liquidity Coverage Ratio (LCR). The package has four elements: revisions to the definition of high quality liquid assets (HQLA) and net cash outflows; a timetable for phase-in of the standard; a reaffirmation of the usability of the stock of liquid assets in periods of stress; and an agreement to conduct further work on the interaction between the LCR and the provision of central bank facilities.

HQLA will be split into two groups: Level 1, which includes cash, central bank reserves, and certain sovereign and central bank debt; and Level 2, which includes certain government debt securities, corporate bonds, RMBS and equities. Level 2B assets - including certain RMBS rated double-A or higher, with a 25% haircut - will be permitted for up to 15% of the HQLA.

The LCR will be subject to phase-in arrangements, which align with those that apply to the Basel 3 capital adequacy requirements. Specifically, the LCR will be introduced as planned on 1 January 2015, but the minimum requirement will begin at 60% - rising in equal annual steps of 10 percentage points to reach 100% on 1 January 2019. This graduated approach is designed to ensure that the LCR is introduced without disruption to the orderly strengthening of banking systems or the ongoing financing of economic activity, according to the Committee.

The Committee agreed that in times of stress "it is entirely appropriate for banks to use their stock of HQLA, thereby falling below the minimum" - although this will be at the national regulator's discretion. European asset-backed analysts at RBS note that the assumption for cash outflows also appears to have been relaxed significantly.

Additionally, since deposits with central banks are the most reliable form of liquidity, the interaction between the LCR and the provision of central bank facilities is deemed to be critically important. The Committee will therefore continue to work on this issue over the next year, as well as develop disclosure requirements for bank liquidity and funding profiles. It will also explore the use of market-based indicators of liquidity to supplement the existing measures based on asset classes and credit ratings.

Structured Finance

DPC criteria updated

Fitch has updated its rating criteria for derivative product companies (DPCs). The agency confirms that it will look to the DPC's stand-alone credit strength, as well as the sponsor's, when rating vehicles engaging in standardised, liquid derivatives.

Under the criteria, a ratings floor of single-A will apply for continuation DPCs that are well-capitalised and appropriately structured, whereas a ratings floor of double-A may be assigned to termination DPCs. A DPC's final rating is expected to be the higher of its stand-alone rating floor or one notch above the sponsor's long-term issuer default rating. The rating is expected in most cases to migrate with the sponsor's rating until the rating floor is reached.

The criteria address DPCs that intermediate or guarantee plain vanilla derivative transactions on behalf of the sponsor, as well as those that act as a counterparty or guarantor for structured finance transactions. Fitch notes that a given DPC's structure and trigger events should not negatively impact the SF transaction, relative to its SF counterparty criteria.

The criteria do not apply to more bespoke derivatives, however, including those that may be associated with SF transactions such as balance guaranteed swaps or swaps with highly customised reference rates. The agency plans to continue its dialogue with the market to assess various proposals that are designed to intermediate more bespoke derivatives.

Structured Finance

LCR move welcomed

The inclusion of RMBS in the Basel 3 Liquidity Coverage Ratio (SCI 7 January) has been welcomed as a resounding positive for the market. Together with the postponement of the full implementation of the LCR and a reduction in the overall level of required liquid assets, the news has sparked the beginning of what is expected to be a gradual tightening in spreads as a result.

Under the new Level 2B category, LCR-eligible RMBS assets must: be rated at least double-A and full recourse in nature; not be a bank's own transaction; have an average LTV at issuance of below 80%; and comply with risk retention requirements. From a European perspective, the minimum double-A rating means that only UK and Dutch RMBS would be eligible, due to sovereign caps in many jurisdictions. However, the high LTVs typical in the Dutch market could preclude even those assets, according to European securitisation analysts at Barclays Capital.

The analysts are surprised that SME ABS were not included as LCR assets, given their role in servicing the real economy. But they point out that the Basel Committee appears to be open to considering amending the rules, so it would be unsurprising if SME ABS is included and potentially some concessions made for Dutch RMBS at a later date. If the PCS initiative is deemed a success, concessions may also be made for PCS-certified transactions in the future.

Structured Finance

QRM rules awaited

Final clarity as to what constitutes a qualified mortgage and the likelihood of increased issuance will be key developments that will shape the coming year for US RMBS, according to Fitch.

The Consumer Finance Protection Bureau's (CFPB) is expected to release the final definitions for qualified mortgages (QM) this month. "Securitisation of QRMs exempts issuers from risk retention and premium capture requirements, so resolving these definitions will be a critical breakthrough for restarting the private-label RMBS market," comments Fitch senior director Suzanne Mistretta. "Finalisation will, at a minimum, provide clarity to the market and allow institutions - particularly banks - to assess the costs of re-entering the market."

Investor demand remains strong, thanks largely to solid performance of RMBS 2.0 transactions, and new issue activity is already on tap to rise in 2013. At the same time, several key announcements by the Federal Housing Finance Agency this year are supportive of a housing and mortgage market recovery. They include the announcement of the streamlined short sale process and rep and warranty repurchase framework.

However, there is a disparity in the recovery among many metropolitan statistical areas (MSAs). For instance, markets in Detroit, Phoenix and Atlanta are stabilising, with some even beginning to turn around. Conversely, key states such as New York and New Jersey are still struggling with a backlog of distressed inventory and long liquidation timelines.

But Mistretta observes: "Inventory is declining and distressed liquidations have sharply dropped, while mortgage delinquencies are improving for most sectors."

Structured Finance

Stable performance predicted for Asian SF

Moody's expects the performance of structured finance transactions in Asia to be largely stable in 2013.

The credit quality of receivables in new and existing Korean credit card and auto loan transactions, for example, will remain stable. Korea's economic fundamentals have improved since the 2008 global financial crisis and Moody's expects overall continuity in the current economic policies when the newly elected president, Park Geun Hye, takes office in February.

"Similarly, the credit quality of residential mortgage loans in new and existing RMBS transactions will remain unchanged and stable in 2013, as low loan-to-value ratios and an increase in the number of fixed-rate loans will offset the adverse effects from high household debt and declining property prices," says Joe Wong, a Moody's avp and analyst.

For CMBS transactions in Singapore, the agency believes that new deals will have similar features - such as high quality properties, low loan-to-value ratios and high debt-service coverage ratios - that are present in existing transactions. "On the other hand, an uncertain outlook for the global economy coupled with Singapore's slowing GDP growth will restrain the increase in property prices in 2013," says Marie Lam, a Moody's vp and senior credit officer.

New balance sheet CLOs in Asia (ex-Japan) will also have features similar to transactions in 2011 and 2012. Country risk exposures are anticipated to remain diversified in the reference pools.

Additionally, the utilisation of conservative CDS structures - such as long loss determination periods, improved loss estimation methods and conservative replenishment criteria - will continue. The outlook for the underlying reference pools is also stable.

With regard to covered bonds in Asia (ex-Japan), Moody's notes that the framework for the market is still developing. "There has been strong interest from market participants across the region, with some developments in legal, regulatory and market activities, as covered bonds are seen as alternative funding tools," says Jerome Cheng, a Moody's vp and senior credit officer.

The agency expects Singapore's regulatory authority to publish guidelines for covered bonds soon, while jurisdictions such as Malaysia, India and Hong Kong are studying the feasibility of introducing covered bonds to their markets. Each of these jurisdictions is likely to adopt a similar approach as Korea to facilitate the development of covered bonds, Moody's notes.

CDS

Edison auction scheduled

An auction to settle the credit derivative trades for Edison Mission Energy CDS is to be held on 16 January. ISDA's Americas Credit Derivatives Determinations Committee last month resolved that a bankruptcy credit event occurred in respect of the name (SCI 19 December 2012).

CDS

Indian CDS guidelines reviewed

The Reserve Bank of India has reviewed its guidelines on CDS, based on feedback received from the market and the suggestions of the Technical Advisory Committee on Money, Foreign Exchange and Government Securities Markets. In addition to listed corporate bonds, CDS contracts are now also permitted on unlisted but rated corporate bonds.

In addition, end-users are now allowed to unwind their CDS position with the original protection seller at a mutually agreeable or FIMMDA price. If no agreement is reached, the unwinding has to be done with the original protection seller at a FIMMDA price.

CDS contracts are permitted on securities with an original maturity of up to one year.

CMBS

Fresh CMBS loan maturity wave

CMBS loan maturities continue to pose challenges in Europe. The latest Fitch index shows 36 loans coming due in 1Q13, with refinancing for most looking unlikely.

Of those 36 loans, 35 mature this month alone. "22 maturing loans have a Fitch loan-to-value ratio above 80%, making refinancing doubtful," says associate director Mario Schmidt. "For the 13 of these CMBS loans that are believed to be in negative equity, the prospects are particularly grim."

In 10 cases the rated bonds will mature three years later. Schmidt notes that will place the servicer or special servicer under extra time pressure, which may restrict the use of forbearance and therefore lead to more property disposals.

Fitch's maturity index stands at 47.2% in January 2013, meaning that 47.2% of the balance of the loans that have reached maturity has been repaid. That is slightly up from 44% in October 2012.

CMBS

IRET Portfolio watchlisted

Morningstar has added the US$123m IRET Portfolio loan, securitised in the CGCMT 2006-C5 CMBS, to its watchlist due to a decrease in DSCR and occupancy. Two of the nine properties in the pool are occupied by single tenants, with lease expirations for the largest tenant in each property fairly well-staggered over the next few years.

The portfolio was appraised for US$151.6m at issuance. While this equates to an issuance LTV of 81%, the sponsor contributed US$26m of cash into the deal at closing.

The 10-year loan is scheduled to mature in October 2016, but the portfolio has trended downwards over the past three years, according to Morningstar. Occupancy has slipped from 100% in 2010 to 92% in 2011 and 82% currently. As a result, revenues have dropped by 22% from US$20.5m in 2010 to US$16m in 2012.

Expenses have also fallen, but at only a 7% rate over the same period. Consequently, DSCR - which had been outperforming underwriting as recently as 2010 and was still a healthy 1.22x in 2011 - has now fallen just below break-even.

Morningstar says it doesn't view the loan as a significant default risk currently, as the portfolio has historically performed well and the sponsor is experienced. However, without significant re-leasing of space in the near term, concerns over cashflow will rise. Furthermore, based on the most recent cashflow, the agency believes that the loan may currently be over-levered.

CMBS

CMBS loss severities decline

Average US CMBS loss severity ended up at 37.06% last month, or 516bp lower than November's 42.22%, according to Trepp. December liquidations stood at US$1.33bn, relative to the 12-month moving average of US$1.39bn.

The 119 loan liquidations in December resulted in US$491.4m in losses, with the average loss severity dipping below the 12-month moving average of 40.16%. The loan workout pipeline slowed slightly, as the number of loans liquidated was less than the 12-month average of 140.

The average size of liquidated loans last month was US$11.14m, just below November's US$11.17m, but still higher than the 12-month average of US$9.92m.

Meanwhile, the Trepp CMBS delinquency rate - 9.71% - remained unchanged in December from the previous month. The number of newly delinquent loans decreased from November to December, totaling around US$3.2bn last month. While there were fewer new delinquencies, the number of delinquent loans resolved with losses also decreased, with just over US$1.1bn resolved.

Among the major property types, the office sector was the only segment to see a higher delinquency percentage in December - increasing by 29bp. This weakness was enough to offset gains in other major property types, Trepp notes.

Forward-looking data suggests that the rate will see further improvement in the coming months. Special servicers are continuing to resolve non-performing loans and new CMBS deals are being added to the index, diluting the pool of non-performers.

CMBS

CMBS pay-offs dip

Trepp reports that last month 54.5% of CMBS loans reaching their balloon date paid off, compared to 62.6% in November. Despite the fall off, the December rate remains well above the 12-month moving average of 47%.

By loan count as opposed to balance, 68.5% of loans paid off in December. On this basis, the pay-off percentage reached its highest level since Trepp began tracking pay-offs in August 2008. The 12-month rolling average by loan count is now 57%.

Insurance-linked securities

Innovative sidecar debuts

Argo Group International has formed Harambee Re 2013-1, its debut sidecar transaction. Unlike other sidecars, which typically write either reinsurance or retrocession business, the vehicle is believed to be the first to support both a reinsurance and an insurance portfolio.

Harambee Re provides capacity of approximately 5% of premium income for specific property portfolios that represent two of Argo Group's core businesses: Argo Re, its reinsurance operation; and Colony Specialty, its excess and surplus lines segment. The sidecar covers the 2013 accident year.

Argo Group president and ceo Mark Watson comments: "Harambee Re enables us to grow the size of two of our core businesses without adding materially to the Group's exposure to the volatility associated with US earthquakes and hurricanes."

The establishment of Harambee Re builds upon the firm's insurance-linked securities transactions, Loma Reinsurance 2011-1 and Loma Reinsurance 2011-2.

RMBS

Legacy RMBS ratings change

S&P has reviewed 837 ratings from 147 RMBS transactions issued between 1999 and 2007, backed primarily by US Alt-A, high LTV and negatively amortising mortgage loans. It has lowered ratings on 333 classes, raised ratings on 31 classes and affirmed ratings on 436 classes.

Of the 333 downgraded classes, 168 saw ratings downgraded by more than three notches. The downgrades were largely driven by increased losses due to an increase in the agency's default and loss multiples at higher rating levels. Of the 31 upgraded classes, 10 were by more than three notches.

The actions help to resolve credit watches which S&P instituted last year (SCI 16 August 2012). The move was prompted by changes to the rating agency's criteria for surveilling pre-2009 US RMBS ratings.

RMBS

Home prices overvalued?

Fitch believes that recent home price growth in the US is being driven more by technical factors than fundamentals. For this reason, the agency's sustainable price projection is more sombre than that observed by current market trends. However, it suggests that the price growth trends in certain locations are indeed supported by fundamentals and its view is more positive in these cases.

Fitch's sustainable market value decline forecast for the US increased to approximately 10% this quarter, reflecting the agency's view that real prices remain overvalued. From a regional perspective, its projections for home price movement trajectories vary widely, with many of the hardest-hit markets at or below sustainable values and posting impressive recoveries.

While in real terms Fitch projects that national prices are 10% overvalued in an expected scenario, the agency believes that nominal prices are roughly 2% above sustainable levels nationally, as inflation and a stronger economic recovery push prices higher.

RMBS

Varied performance outlook for prime

Fitch's 2013 outlook for house prices and prime residential mortgage performance varies greatly across Europe, the US and Australia. Substantial concerns remain for the peripheral eurozone markets, while the others are said to be generally more stable.

The agency anticipates the largest further house price declines for peripheral countries, due to a bleak outlook for mortgage availability, unemployment, economic growth and consumer confidence. House prices are expected to decline by an additional 13% in Italy and Portugal, 15% in Spain and Greece, and 20% in Ireland.

In contrast to Fitch house price forecasts for most countries, the house price assumption for Ireland is a conservative estimate, reflecting various downside risks. It is, however, also conceivable that Irish prices stabilise sooner and at a higher level than the agency's base case assumption suggests.

Smaller further price corrections - unlikely to exceed 10% - are expected for the UK, the Netherlands, France and Belgium. In Fitch's view, Germany has the strongest house price fundamentals and is likely to see continued house price growth over the next few years. The outlook for Australian and US house prices is also relatively solid, given the sound macroeconomic outlook for both countries.

The affordability outlook for new housing transactions and loan originations is generally positive, given low interest rates and the material house price corrections that have occurred in many countries. Average new loan debt service capability has particularly improved in the US and Ireland, and is also slowly becoming a positive factor in other countries, such as Portugal and Spain.

Affordability ratios at first glance appear to be weaker in the fixed-rate markets of the Netherlands, France, Belgium and Germany - though this is largely mitigated by the lower vulnerability of fixed-rate borrowers to interest rate shocks. Relatively high affordability indicators for Australia are largely driven by high average house prices.

Australian household debt-to-income levels have risen significantly over the past decade. However, the combination of flattening house prices and policy rate cuts has eased affordability pressures.

Although new loans have become more affordable in a number of countries, access to mortgage finance is forecast to remain the main bottleneck throughout 2013.

Meanwhile, Fitch's lowest average lifetime default probability expectations - of between 2% and 6% - are for residential mortgage portfolios from European core markets and Australia, as well as new US prime originations. This is due to relative macroeconomic robustness, as well as the more positive outlook for key performance drivers. Performance indicators are particularly strong in the Netherlands, Germany, Belgium, France and the UK.

The Italian, Portuguese and prime Spanish markets also mostly feature relatively stable mortgage performance history, according to Fitch. Despite steady past performance, the agency assumes higher default probabilities than in core markets due to recent upticks in arrears and default rates, high unemployment as well as uncertainty related to macroeconomic imbalances and sovereign creditworthiness.

The third group with the most pessimistic default outlook consists of Greece and Ireland, with average lifetime default rates forecast to reach 18% and 25% respectively.

RMBS

Servicers reach foreclosure settlement

A number of mortgage servicing companies have reached an agreement with the OCC and the Federal Reserve Board to pay more than US$8.5bn in cash payments and other assistance to help borrowers. The sum includes US$3.3bn in direct payments to borrowers and US$5.2bn in assistance, such as loan modifications.

The mortgage servicing companies are Aurora, Bank of America, Citibank, JPMorgan, MetLife Bank, PNC, Sovereign, SunTrust, US Bank and Wells Fargo. They have been subject to enforcement actions for deficient practices in mortgage loan servicing and foreclosure processing.

Fulfilment of the agreement would meet the requirements of the enforcement actions that mandated that the servicers retain independent consultants to conduct an independent foreclosure review (SCI 23 November 2011). The servicers could then end that review and replace it with a broader framework, allowing for more timely payments.

RMBS

Servicer assessment criteria released

Moody's has published its new methodology for assessing RMBS servicer quality (SQ), following a request for comment in July 2012. The framework includes a number of enhancements to the agency's evaluation of US residential mortgage servicers.

First, Moody's has augmented servicers' loan level performance data from its portfolio with performance data from securitisation trusts. "In analysing a servicer's collections roll rates, cure rates and foreclosure process effectiveness, we use monthly data from the trusts," says Moody's vp and senior credit officer William Fricke. "The trust data is more timely and it also allows us to incorporate the performance of servicers that we do not assess."

The agency has also implemented a formalised weighting system for the performance categories it considers in its SQ assessments. These categories comprise collections, loss mitigation foreclosure timeline management, loan administration and servicer stability. In addition, the updated methodology includes data on re-defaults of modified loans as part of the performance analysis.

The servicers covered by the methodology include those that service prime loans, subprime loans, Alt-A loans, second-lien loans, high loan-to-value loans and manufactured housing loans.

Moody's notes that the SQ assessments address the incremental impact of the servicer on the performance of the loans, not the underlying credit quality of the loans, which is generally beyond the servicer's control.

RMBS

Nationstar, Green Tree ratings eyed

Fitch says it is monitoring the servicer ratings of Nationstar Mortgage and Green Tree Servicing, following Bank of America's announcement that it plans sell MSRs to the firms (SCI 8 January). Given the scale of the transactions, as well as the on-going integration of Aurora Bank's servicing assets at Nationstar and GMAC Mortgage's assets at Green Tree, the agency is in active dialogue with the firms to assess how the acquisitions will be managed from both a timing and resources standpoint.

The transfers will occur in multiple stages and are anticipated to be completed by end-3Q13. Nationstar is expected to purchase MSRs on approximately 1.3 million residential loans totalling US$215bn, while Green Tree will purchase MSRs on approximately 650,000 residential mortgage loans totalling US$93bn.

Fitch currently rates Nationstar RPS2 as a primary servicer of subprime and Alt-A product, and RSS2 as a special servicer. Green Tree is rated RPS2 as a primary servicer of prime, subprime, HLTV, HELOC and second lien product, and RSS2+ as a special servicer. All ratings have a stable outlook.

At this time, the agency believes that the BofA transactions will not impact either of the servicers' ratings, as they already reflect the firms' capacity planning. However, a significant deterioration in operational capability or portfolio performance could result in a servicer rating downgrade or rating watch.

As of 30 September 2012, Nationstar's servicing portfolio comprised of over 1.1 million loans totalling US$198bn, including over 247,000 first and second lien subprime loans (totalling US$56bn) and 43,000 Alt-A loans (totalling US$11.4bn). Over 270,000 loans totalling US$46.8bn are in special servicing. The BofA MSR acquisition is expected to increase the firm's servicing portfolio by approximately 100% over the course of 2013.

As of 30 September 2012, Green Tree's servicing portfolio consisted of 970,393 loans with an unpaid principal balance (UPB) of approximately US$78.6bn. The portfolio is composed of 37% MH product, 24% closed end second product, 30% agency product (including prime), 7% subprime product and 2% HELOC/HLTV.

Completion of the GMAC Mortgage transfer is expected to increase Green Tree's residential servicing portfolio by approximately 40.5%, while the BofA MSR acquisition will increase the portfolio by an additional 59.8%. Walter Investment Management also recently entered into a definitive agreement to acquire the mortgage servicing platform of MetLife Bank, which is likely to provide Green Tree with significant scalable capacity.