Contents

ABS

Uncommon names in ABS frame

Following an up-tick in ABS secondary supply last week, healthy BWIC activity continued yesterday. In particular, SCI's PriceABS data shows some rarely seen aircraft and container names out for the bid.

Having been talked in the low-80s on Thursday last week and then low-80s and low/mid-80s on Friday, the AIRSP 2007-1X G1 aircraft lease tranche traded yesterday. AIRSP paper has not been frequently seen, although the AIRSP 2007-1A G2 tranche was circulating in December, when it was talked in the high-70s.

The BBAIR 2007-1A G1 tranche also traded yesterday, having been talked in the high-80s at the end of last week. Meanwhile, ACST 2007-1A G1 was covered at 93.38, having been talked in the low/mid-90s on Friday and at 93 on both Friday and Thursday.

Among the other esoteric names out for the bid yesterday, a US$25m slice of the TMCL 2011-1A A tranche was talked around the 370 area on its first appearance in the PriceABS archive. Additionally, a US$18.5m piece of TCF 2012-1A A was talked in the 260 area. That tranche was covered at 307-312 on 5 June 2012, when it was also talked at around 315.

CDO

CRE paper underpins CDO supply

The US CDO secondary market saw a heavy influx of CRE CDO supply yesterday. But some rare collateralised fund obligation (CFO) paper out for the bid also attracted attention during the session.

SCI's PriceABS data shows a number of CRE CDO names from Tuesday's session, including the PRIMA 2006-CR1A A2 tranche, which was talked at between 101 and 102, at 102 and at 103 but did not trade. When it was talked at 100.5 back on 28 September 2012, it was also covered at 102.07.

In addition, a US$43.124m piece of the NMCRE 2007-2A A1A tranche circulated yesterday. Although it did not trade, it was talked in the low/mid-90s and mid-90s.

Talk for the NMCRE tranche the day before was in the low/mid-90s and last week was at 94. Its most recent cover was in the low/mid-90s on 28 February and its first PriceABS appearance was on 16 July 2012, when it was talked at around 80 and the high-70s.

MWEST 2007-1A A1 and AHR 2004-1A A were also out for the bid, as well as a trio of Putnam CRE CDO tranches. PTNM 2003-1A A1LT, PTNM 2003-1A A1LB and PTNM 2003-1A A1LC were each talked in the low/mid-90s. All three tranches first appeared in the PriceABS archive in May last year, when they were talked in the high-80s.

Rounding out the CRE CDO supply were two LNR tranches - LNR 2003-1A B and LNR 2003-1X B. Both tranches were traded, with talk from various sources for each at 99 or the 99 area. The former was previously covered on 13 December 2012 at 98.17.

Intriguingly, several CFO tranches also appeared in the mix yesterday and are understood to be scheduled to trade on 18 March. These included TENZI 1A B1 (which was talked in the low/mid-80s), TENZI 1A C (talked from the high-60s to 70) and TENZI 1A D1 and D2 (which were each talked in the low/mid-60s).

JL

CLOs

Euro CLO mezz widens

The European mezzanine CLO secondary market weakened somewhat to start the month. Single-As are trading at about 50DM wider, although more senior and strong equity paper remain well bid.

"The most exciting development recently was this big BWIC from the US from GoldenTree. There were some sizable positions on the list and it was interesting to see these guys actually trade quite a bit of it, because that is not what normally happens," says one trader.

"The other interesting thing is that dealers are now long on single-As and triple-Bs and are not actively bidding," he continues. The trader suggests that around half of the bonds on the list traded, with single-As moving out to around 450DM.

"In February, everything was below 400DM. But now we have also seen a Euro Galaxy single-A being offered at 450DM. That is a good bond, so there has been definite weakening in the market. In February you would never have seen anyone putting an offer at 450DM on a good single-A," the trader adds.

Triple-B tranches are trading at around the 700s, with Wood Street CLO VI paper recently seen at about 750DM. Given that original triple-Bs are creeping into the 600DMs, the trader suggests investors may be better off investing in loans.

"The mezz area has definitely weakened in the CLO space. A lot of dealers piled up in January and February and then also a lot of fast money guys came in last year who are now looking to sell," says the trader.

He continues: "On top of that, single-As below 400DM are not so attractive, so perhaps those levels were not sustainable. The dealers got long and it got to levels where it is just not as attractive anymore."

Double-A paper remains very well bid, but that paper has been only rarely seen. Strong cash-flowing equity is also in demand.

SCI's PriceABS data shows that a couple of E tranches - from the AVOCA V-X and HARVT IV transactions - were both talked in the low-70s yesterday. The former was previously talked in the low/mid-60s last month and in the mid/high-30s back in July 2012.

JL

RMBS

RMBS ticks over as secondary supply slows

US RMBS non-agency secondary supply was notably lighter in yesterday's session. A number of names were successfully covered, however, with dealer talk showing slight movement.

BWIC volume for non-agency RMBS was US$326m, according to Interactive Data. "Bid-list supply is down across all major collateral segments, with this week's aggregate total running at the lowest level observed year-to-date. Dealer offering levels are mixed but mostly unchanged," the firm observes.

Light supply was observed for prime fixed and Alt-A fixed paper, in particular, with BWICs focused on off-the-run re-REMIC names. Subprime volume was also light, with offering levels unchanged to mixed and a good amount of 2004-2007 vintage Countrywide paper circulating.

CWL 2005-4 MV5 was talked in the session at both 50 and in the mid/high-20s, having been talked in the high-20s last month. CWL 2006-12 M1, meanwhile, was talked in the low single-digits.

In addition, supply in the prime and Alt-A hybrid space was limited. Senior bonds off Alt-A and option ARM deals accounted for the bulk of the activity during the session.

The re-performing fixed-rate CBASS 2006-RP2 A2 tranche was talked in the mid/high-90s. SCI's PriceABS data shows the same tranche was talked in the mid/high-80s on 13 August 2012.

The CBASS 2006-RP2 M1 tranche was also out for the bid. It was talked in the mid-50s, having been covered in the low-40s on 29 November last year.

A few noteworthy covers emerged during the session. The RAMP 2003-RS7 MII1 tranche was talked in the low-90s and covered in the mid-80s, while a US$5m piece of LBMLT 2005-1 M3 was traded.

Another US$5m piece of PPSI 2005-WHQ2 M2 was also traded, having been talked in the low-50s in November last year. However, a US$5m slice of AMSI 2005-R3 M4 did not trade.

Finally, CMLTI 2007-AMC4 A2B was talked in the low/mid-80s and covered in the mid-80s.

JL

ABS

Punch class Ms organise

Punch Taverns has released a positive trading statement and still expects to meet guidance on full-year operating profit, achieve disposals above book value and complete a consensual restructuring by the summer. However, this may prove optimistic, as investor groups begin to organise themselves.

Punch A class M noteholders are the latest investor group to hire advisors, a move which didn't surprise Barclays Capital MBS analysts. The noteholders are likely to be the most negatively affected by Punch's recently proposed capital structure amendments (SCI 11 February).

The class M noteholders are thought to be looking to reduce their targeted WAL - which would been extended by five years under the restructuring proposal - by negotiating for more amortisation from disposals at the bottom of the cash waterfall at the expense of the class A notes. The class As currently price at a premium to par, so extension is not a negative outcome for those noteholders.

"In return, we believe the class As are likely to ask for a coupon uplift to enhance their returns, amortisation senior in the capital structure to protect their asset backing and at the same time a trigger to switch the additional amortisation for the class Ms towards the class As. We do not think the class Ms will want to draw on the liquidity facility to rank senior to themselves to pay the class B, C and D debt service and as a result their discussions will be mainly with the class As," the Barcap analysts add.

The Punch A class Bs are still seen as having the most to gain from the proposed restructuring. Their current pricing is around 52 and they have a running yield of 15%-16%, with the proposals reducing the risk of a short-term forced sale and improving the chances of recovery.

JL

Structured Finance

SCI Start the Week - 11 March

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

Pipeline
Last week was the busiest the pipeline has been for a while, largely due to five new CMBS being announced. There were also four new CLOs, three ABS, two ILS and an RMBS.

The CMBS were US$240m Citigroup Commercial Mortgage Trust 2013-SMP, US$342m COMM 2013-GAM, US$1.07bn FREMF 2013-K502, US$275m LCCM 2013-GCP and US$160m MSC 2013-ALTM. The newly-announced CLOs consisted of US$400m Denali Capital CLO X, €315.8m Dryden CLO XXVII, US$350m NXT Capital CLO 2013-1 and US$576m Venture XIII CLO.

The ABS were US$20.9m Newtek Small Business Loan Trust 2013-1, US$67.5m RISLA 2013 Senior Series A and €549m SC Germany Auto 2013-1 UG and the ILS were US$250m Merna Re IV series 2013-1 and US$200m Tar Heel Re series 2013-1. Finally, the RMBS was A$500m RESIMAC Premier Series 2013-1.

Pricings
It was also a decent week for CMBS issuance. There were four CMBS prints, four CLOs, four ABS, an ILS and two RMBS.

The CMBS were US$500m and US$1.3bn American Tower Trust I Secured Tower Revenue Securities Series 2013-1A and Series 2013-1B, as well as the £800m Intu (SGS) Finance 2013 series 1 and US$1.2bn WFRBS 2013-C12.

The CLOs were US$898.7m Ares XXVI CLO, US$413m Greywolf CLO II, US$791m ICE 3 Global Credit CLO and US$512m OCP CLO III.

US$250m CLI Funding V Series 2013-1, US$100m Collateralized Servicer Advance Receivables Trust Series 2013-MM1, US$700m Enterprise Fleet Financing Series 2013-1 and US$1.27bn Santander Drive Auto Receivables Trust 2013-2 accounted for the ABS. The ILS was US$200m Caelus Re 2013.

Lastly, the RMBS were US$600.2m Sequioa Mortgage Trust 2013-3 and A$500m Triton Trust No.2 Bond Series 2013-1.

Markets
The US RMBS market saw non-agency secondary supply tail off towards the end of the week, as SCI reported on Friday (SCI 8 March 2013). SCI's PriceABS data revealed a good deal of Countrywide paper circulating during Thursday's session and showed tranches such as CWL 2005-4 MV5 and CWL 2006-12 M1 talked in the mid/high-20s and in the low single-digits, respectively.

The US CMBS market ended the week slightly tighter, with 2007 LCFs compressing 2bp and 2007 AJs up half a point. Barclays Capital CMBS analysts note that 3.0 spreads went lower during the week, but remain well wider than the January tights. 2007 Dupers finished the week at swaps plus 118bp, 2bp tighter than they started the week. Generic 2007 AMs tightened 5bp to swap plus 235bp.

A slow start to the week also affected US ABS, as SCI reported (SCI 5 March 2013). There were several student loan tranches out during Monday's limited session, with PriceABS showing a large piece of GCOE 2006-1 A11L being talked in the low/mid-90s.

It was a case of mild mezzanine weakening for the European CLO market. One trader reports that single-As are now trading about 50DM wider, although more senior paper and strong equity both remain well bid.

"In February, everything was below 400DM. But now we have also seen a Euro Galaxy single-A being offered at 450DM. That is a good bond, so there has been definite weakening in the market. In February you would never have seen anyone putting an offer at 450DM on a good single-A," the trader says.

Deal news
• Fitch has downgraded Alburn Real Estate Capital (REC 6)'s class A, B and C notes and affirmed the class D and E notes. The CMBS tranches are now all rated single-C, reflecting the insufficient residual collateral value in the transaction to repay the class A notes in full by their maturity in October 2016.
• Provisional changes to the Markit CDX IG index constituents have been published ahead of the roll to Series 20. The new index is scheduled to start trading on 20 March.
• Seasoned Sallie Mae private student loan subordinated paper, having recently traded in the 675bp-700bp area, is expected to gap in on the back of last week's pricing of a subordinated SLMA tranche. Described as an "excellent" print by ABS analysts at JPMorgan, the US$132m 5.66-year A2/A rated SLM Private Education Loan Trust 2013-A class Bs came at swaps plus 238bp, notably tighter than initial guidance.
• Investors last week received monies from the redemption of nine of the outstanding Lehman Brothers Dante Series CDOs, bringing a 4.5-year legal battle to an end. The average pay-out was 99.8 cents on the dollar, with individual security redemptions varying between 86 and 112, according to a recent Structured Credit Research & Advisory client memo.
• Northern Rock (Asset Management) last week filed a lawsuit in the Supreme Court of the State of New York against several UBS entities in connection with the Kleros Preferred Funding VI CDO. The firm alleges that UBS sold it US$48.5m of Kleros VI notes knowing that the underlying assets were 'toxic'.

Regulatory update
• Mandatory swap clearing in the US for four categories of CDX and iTraxx CDS will begin next week. Even with that deadline looming large, a significant number of managers are understood to remain unready for the changes.
• The final hearing on Bank of America's proposed US$8.5bn settlement over alleged rep and warranties breaches on Countrywide loans is scheduled for 30 May. The New York State Supreme Court has given all parties until 3 May to file briefs in support or opposition of the settlement.
• Bank of America last week made public a July 2012 settlement agreement with the New York Fed, in which the bank was released from all fraud claims on mortgage securities that the Fed purchased when it bailed out AIG in 2008. Bank of America filed the settlement agreement in a Los Angeles federal court, where it is a defendant in a lawsuit that AIG filed accusing the bank of misrepresenting the quality of more than US$28bn of securities that AIG purchased.
• The regulatory technical standards under the European Market Infrastructure Regulation (EMIR) were published last week, with the deadline for a number of requirements under the regulation confirmed as 15 March. Under the rules, non-financial end users will be required to clear transactions if their derivatives activity exceeds thresholds of €1bn-€3bn (after hedging), depending on the asset class.
• The OCC and the US Federal Reserve have released amendments to their enforcement actions against 13 mortgage servicers for deficient practices in mortgage loan servicing and foreclosure processing. The amendments require the servicers to provide US$9.3bn in payments and other assistance to borrowers.
• SIFMA, ISDA and the Managed Funds Association (MFA) have released a summary of results from a member survey, where over 84% of respondents indicated that the five request for quotes (RFQ) rule proposed by the CFTC would result in increased transaction costs. Additionally, nearly 70% of respondents indicated they would migrate to other markets if required to post five RFQs.

Deals added to the SCI database last week:
ACIS CLO 2013-1; ALBA 4; Cabela's Credit Card Master Note Trust Series 2013-I; Caelus Re 2013; CIFC Funding 2013-I; CSMC Trust 2013-TH1; Direct Capital Funding IV series 2013-1; Fortress Credit BSL; Hyundai Auto Lease Securitization Trust 2013-A; IM Grupo Banco Popular Empresas V; Institutional Mortgage Capital series 2013-3; Medallion Trust series 2013-1; Sequoia Mortgage Trust 2013-3; SGE Funding Trust No. 1 Repo Series No. 1; SLM Private Education Loan Trust 2013-A; TICC CLO 2012-1; Triton Trust No.2 Bond series 2013-1.

Deals added to the SCI CMBS Loan Events database last week:
BACM 2006-2; BSCMS 2006-PW12; CSFB 2004-C5; CSFB 2005-C2; CSMC 2006-C4; ECLIP 2006-2; GRND 1; GSMS 07-GG10, LBUBS 04-C1 & BACM 06-3; JPMCC 2003-CIBC7; JPMCC 2004-CB8; LBCMT 2007-C3; MSC 2011-C1; OPERA CMH; RIVOL 2006-1; TAURS 2006-2; TITN 2006-3; TMAN 6; TMAN 7; Various; WBCMT 2006-C27; WFRBS 2011-C3; WFRBS 2012-C6.

Top stories to come in SCI:
Focus on European CLOs
Progress report on European OTC derivatives regulation
Credit fund strategies update
The relationship between CVA and single-name CDS

CLOs

Wave of CLO 2.0 re-pricings forecast

CLO 2.0 deals are starting to reach the end of their non-call periods and tighter loan spreads are encouraging equity holders to redeem transactions sooner than many investors seem to have anticipated. Several 2010 CLOs have already been refinanced, called or re-priced (SCI 7 March) and the trend is set to continue for 2011-vintage deals.

CLO analysts at RBS note that 20 out of 26 CLOs issued in 2011 will exit their non-call periods this year, giving equity holders the ability to exercise redemption options. The first deal from that vintage - Fraser Sullivan V - has already been refinanced into a CLO called Jamestown II (see SCI's primary deal database), and more re-pricings are expected to follow.

"We expect this trend to continue in 2013 as more 2011 deals exit their non-call periods. This may set the tone for a similar pattern in 2014 for 2012 vintage CLOs," the RBS analysts observe.

Loan spreads have tightened by more than 100bp over the last two months. These tighter loan and liability spreads have made equity holders more likely than ever to call, refinance or re-price 2.0 deals, argue the analysts - leaving senior note investors facing reinvestment risk and lower realised returns than they might currently assume.

On the other hand, double-B and single-B bonds purchased at steep discounts in the primary market may be even more attractive than previously thought. "Coupon spreads on these tranches are still well above 400bp and their 10 point-plus discounts to par can lead to greater than 10% returns if deals are called in two years," the analysts explain.

Generic CLO 2.0 triple-A discount margins have decreased from 140 at the end of 2012 to 110 at the end of February. Double-A DMs decreased from 225 to 175, single-As from 350 to 275, triple-Bs from 525 to 375 and double-Bs from 750 to 590.

3i Debt Management - which last year acquired the Fraser Sullivan CLO management platform (SCI 2 August 2012) - saw its weighted average cost of funding decline by 12bp, from 195bp to 183bp, after refinancing Fraser Sullivan V. The leverage to equity also increased from about 7x to 9x.

In the wake of recent refinancings and re-pricings, investors are driving changes to the structure of new issue CLOs. For example, the class A1 tranche in the recent Sheridan Square CLO featured a make-whole call-protection clause. The holder of the make-whole will continue to receive proceeds from the time the deal is called until the make-whole date specified in the deal documents.

"Another form of 'protection' to combat the effect of an early redemption is that some investors have asked for steeper discounts to their bonds. While discounts are commonly given in mezzanine notes (one of the reasons we favour them), we have also seen some deals in 2012 and 2013 offering triple-A notes at discounts to par," the analysts add.

Finally, while several 2011-vintage deals are expected to re-price later this year, the 2012 cohort promises to provide the largest wave of refinancing - which will largely occur next year. Nearly half of all CLO 2.0 deals will end their non-call periods in the second half of 2014.

JL

CMBS

Office bucks watchlist trend

Knowing which criteria triggered a servicer watchlist (WL) placement can be helpful in predicting the likelihood of a CMBS loan default, according to Barclays Capital CMBS analysts. By constructing a historical time series of WL codes, they find that 90% of watchlist determinations are driven by one of two factors - financial conditions and lease rollovers.

A currently performing loan can be placed on WL by the servicer if it breaches one of several criteria, including a drop in financials, upcoming lease expirations, deteriorating property conditions or other borrower issues. The time series shows that a loan placed in WL exclusively due to deterioration in financials has only a 10%-15% likelihood of default. However, this rises to almost 35% for office/retail loans that report both financial deterioration and upcoming lease expirations.

The Barcap analysts note that while the share of watchlisted loans has been trending lower since late 2011, the major outlier is the office sector, where WL loans have steadily increased to make up 24% of outstanding balance.

Ignoring maturity-related notifications, they estimate that about 2% of all current loans are newly placed on WL every month. Here, too, office loans show a steadily increasing trend over the past three years.

However, the likelihood of a WL loan eventually defaulting appears to be dropping, as the broader economy slowly recovers. The analysts estimate that 15% of all WL loans are eventually transferred to special servicing, although this increases to 20% for office properties.

The Barcap analysis shows that sometimes loans are watchlisted for a few months before being removed, likely as a result of a temporary dip in finances, late payment of taxes or property repairs. But, for loans that stay in WL for more than a year, the likelihood of default rises to 30%.

"While watchlist information is clearly useful for predicting defaults on vintage collateral, we expect it also to gain importance for new issue loans in the coming years," the analysts observe. "Most new issue loans currently on WL have been placed due to rent abatements or Hurricane Sandy-related effects, both of which should be temporary. However, we do find some instances where investors can pick up early indications on emerging credit problems from watchlist codes/commentary, especially on somewhat smaller loans."

CS

ABS

Asset finance partner named

Berwin Leighton Paisner has promoted a raft of senior associates to its partnership, including asset finance group member Jamie Wiseman-Clarke. He is based in London and the appointment is effective from 1 May 2013.

ABS

ED adds central bank economist

The European DataWarehouse (ED) has appointed José Manuel González-Páramo as chairman. He will oversee the direction of the ED as it seeks to provide full disclosure and transparency for investors in ABS.

González-Páramo was a member of the ECB's executive board until 2012, with responsibility for market operations and monetary policy implementation. Before that he was a member of the governing council of the Bank of Spain as well as a member of its executive committee.

Structured Finance

Capital markets legal pro added

Jaroslaw Hawrylewicz has joined O'Melveny & Myers in New York as senior counsel. The structured products and derivatives specialist will be a member of the firm's capital markets practice.

Hawrylewicz was most recently head of the equity derivatives and synthetics legal group at Barclays Capital. He previously worked at Lehman Brothers as svp and began his legal career at Davis Polk & Wardwell.

Structured Finance

Fitch adds sales chief

Fitch Solutions has appointed Julian Acquari as global head of sales. He will be based in London and report to md Gloria Aviotti.

Acquari will lead the firm's sales efforts for its suite of fixed income products and services. He joins from Monster.com, where he held sales and strategic planning roles, and previously led the sales team at Dun and Bradstreet.

Structured Finance

Smith Breeden director returns

Carl Bell has returned to Smith Breeden Associates as a principal and senior portfolio manager. As a senior member of the firm's investment team, he will focus on the analysis and trading of structured credit, including non-agency RMBS, CMBS and ABS. Bell will also continue to serve on Smith Breeden's board of directors; he has served as an outside director since 2011.

Bell has 22 years' experience of managing fixed income investments, specialising in high yielding distressed real estate credit. Most recently, he co-founded Five Ten Capital, a real estate investment management firm focused on deploying capital into distressed single-family homes through an REO-to-rental strategy. He served as director of research at Smith Breeden Associates from 1991 to 1997.

CDO

CRE CDO transfers due

Gramercy Capitol Corp affiliate GKK Manager is set to transfer its collateral management rights and obligations for Gramercy Real Estate CDO 2005-1, Gramercy Real Estate CDO 2006-1 and Gramercy Real Estate CDO 2007-1 to CWCapital Investments. Consent to the assignment of the collateral management agreements from the majority of the respective controlling classes has been obtained, as required by the transaction documents.

In conjunction with the collateral manager change, an amended and restated special servicing agreement, as well as amended and restated collateral manager agreements will be executed. CWCapital Asset Management will be appointed as the successor special servicer replacing SitusServ, subject to the satisfaction of certain conditions.

Further, CWCI will be appointed as the successor advancing agent for both transactions.

Fitch has determined that CWCI's capabilities are consistent with the current ratings assigned to the notes of the 2005-1 and 2007-1 transactions. The agency confirms that the transfer will not result in a withdrawal or downgrade of the ratings assigned to any of the notes.

CWCI currently manages 15 CDOs and serves as disposition consultant on an additional eight transactions.

CDS

DTCC gets go-ahead for Japan subsidiary

The DTCC's registration to establish a Japanese OTC derivatives trade repository with the Financial Services Agency of Japan has been approved. DTCC will begin operating this service ahead of the J-FSA's mandated 1 April deadline for market participants in Japan to begin reporting their OTC derivatives transactions directly to regulators or to a third-party trade repository.

Based in Tokyo and operated by the company's DTCC Data Repository (Japan) subsidiary, this is the first trade repository to be approved and established for the Japanese market. It will support trade reporting across credit, equity, interest rate and FX derivatives.

DTCC's DDRJ subsidiary is also operating a client support office in Japan to help participants in this market comply with current and future regulatory requirements.

CLOs

Manager boosts development, client services teams

Highland Capital Management has appointed Nikki Gill as director of business development and David Lyon as director of client services. They will both report to Clay Shumway, head of business development.

Gill takes responsibility for developing and executing the firm's global growth initiatives related to new products, fund formation, strategic growth and asset gathering. She was formerly a global markets director at Bank of America Merrill Lynch with a focus on Asian institutional sales and before that was a senior investment analyst at William M Mercer Investment Consulting.

Lyon takes responsibility for the guidance of prospective investors through due diligence and funding processes. He was formerly a director at TPG Capital and a hedge fund accountant at Maverick Capital.

CMBS

US CMBS head recruited

Arbor Commercial Mortgage has appointed Todd Hirsch as evp and head of CMBS finance and distribution. He is based in New York and will oversee Arbor's national CMBS origination and syndication platforms.

Hirsch was formerly md and head of European finance at Credit Suisse, where he was responsible for managing the firm's European CMBS portfolio. Previous roles within Credit Suisse also include a stint as US CMBS md and real estate director.

CMBS

CRE intelligence hub launches

A customisable, real-time business intelligence hub for the global commercial real estate industry dubbed myCREOpoint has launched. It is intended to help market participants mitigate risk, generate business and save time.

myCREOpoint has been under development for over two years with support from an advisory board that includes Hearst business development vp Patrick Brennan, former Apple Computers board member Phil Schlein, former Ernst & Young global head of real estate Michael Evans and Petra Capital Management ceo Andy Stone.

The offering uses 10,000 sources and filters out redundant headlines, false positives, specific time wasting tweets, profanities and dead links to leave only useful information. "What differentiates myCREOpoint is its ability to identify, qualify and present the most influential and best industry sources by topic directly and instantly," comments Jean-Claude Goldenstein, CREOpoint ceo and myCREOpoint co-founder.

RMBS

Mortgage vet to oversee integration

Vericrest Financial has appointed Joe Anderson as chairman and ceo, effective immediately. He will lead the integration of Vericrest with Caliber Funding as the firms combine to create a full-service residential mortgage banking organisation offering both loan origination and servicing solutions.

Anderson was formerly senior md of Countrywide Home Loans' prime retail lending division, leading all origination channels. He has also held senior roles with other mortgage organisations, leading capital markets functions including securitisation, hedging and product development.

Anderson will also eventually become chairman and ceo of the combined company. The integration is expected to be completed within six months.

RMBS

FHFA files against HSBC

The FHFA has filed a lawsuit in the New York Supreme Court against HSBC Finance Corporation and Decision One Mortgage Company, alleging that defendants breached their representations and warranties, and failed to repurchase certain residential mortgage loans pursuant to agreements with Decision One. Decision One is said to have agreed to buy back defaulting residential mortgage loans that were part of a pool of loans that were securitised in HASC 2007-HE1and sold to Freddie Mac.

According to the FHFA's summons with notice, Decision One misrepresented the quality of the mortgage loans in the pool and HSBC - as Decision One's successor-in-interest - is contractually obliged to cure or repurchase from the trust those mortgage loans where representations and warranties have been breached and those breaches are continuing. The FHFA is seeking specific performance of the defendants' repurchase obligations and damages of approximately US$165m, according to a Lowenstein Sandler client memo.

ABS

Auto ABS expected to weather depreciation

Vehicles are likely to depreciate to a greater degree this year, though not enough to present any major obstacles to US auto loan and lease ABS, according to a new report developed by Black Book and Fitch. The report will be released on a quarterly basis and aims to highlight key trends tied to auto supply and demand that drive vehicle depreciation rates and ultimately impacts the auto ABS sector.

Vehicle depreciation rates averaged just under 13% in 2012, compared to a historical range of 15%-18%. Auto ABS has benefitted from relatively benign depreciation rates over the past two years, which has resulted in low loss rates of under 0.45% on auto loan ABS and strong residual values gains of 11% in auto lease ABS transactions through year-end 2012.

Black Book expects vehicle depreciation rates in 2013 to remain low but rise to the lower end of the historical range. The average monthly depreciation on wholesale values of one to five year-old vehicles was 2.1% in late 2012.

During the last quarter of 2012 compact cars, entry level cars, entry mid-size cars and upper mid-size cars depreciated at inflated levels of monthly averages of 3.3% and 1.5% respectively, even with high gas prices. However, Fitch believes that auto loan ABS asset performance will still benefit from healthy used vehicle values in 2013.

This is the case even as vehicle depreciation rises as higher used vehicle volumes enter the wholesale vehicle market. "A higher amount of auto leases coming due this year will squeeze residual values down marginally from current elevated levels, but not enough to impact auto ABS asset performance materially," says Fitch senior director Hylton Heard.

The Black Book-Fitch Vehicle Depreciation report is a joint venture by the two companies utilising Black Book's used vehicle depreciation data. "Auto lenders are continuously searching for ways to assess risks related to changes in values to automobiles backing retail loans and leases and ultimately loss rates, and this new report helps to identify risk exposure levels for various individual vehicle segments," comments Tom Cross, president of Black Book.

ABS

Looser underwriting eyed in auto ABS

Competitive industry pressures - particularly in the subprime sector - are driving looser underwriting, which may in turn push losses modestly higher in US auto ABS, according to Fitch. However, low actual losses, strong average credit quality and stable or increasing credit enhancement levels should help steer auto ABS performance away from any significant deterioration.

FICO and credit tier distributions are providing one of the clearest indications of loosening underwriting standards, Fitch says. Since mid-2012, the agency has seen increasing originations geared towards more inclusion of the bottom most tier FICO scores.

"With the lowest tier FICOs beginning to make up a larger percentage of an overall ABS pool, losses have the potential to accelerate over time," comments Fitch md John Bella.

Competitive pressures are likely to be most acute in the subprime sector, where the agency notes that over 20 subprime issuers have come to market with ABS transactions since 2008. Some experts are also predicting that the wholesale markets will weaken somewhat. These - along with used car prices - are areas that Fitch will be watching closely, since any softening outside these current expectations might worsen the outlook for losses.

Another trend worth noting is the increasing amount of innovation emerging in auto ABS structures. The sector has historically focused on traditional features, such as simple sequential pay structures, and relatively short average lives that have kept losses very low. However, innovations not seen since 2007 are beginning to show up again in new auto ABS deals, making them potentially more volatile if the broader economy deteriorates.

ABS

Stable outlook for Canadian ABS

Moody's outlook remains stable for Canadian auto and credit card ABS and for the country's seven covered bond programmes. The stable outlook reflects the very strong collateral attributes in both credit card and auto ABS in Canada. Neither sector is expected to be able to match their strong 2012 levels of issuance, however.

Although originators of auto loans continue to increase the concentration of loans with extended terms in new transactions of up to 84 months, borrower quality as measured by credit scores remains consistent for both older and more recent vintages. Michael Buzanis, vp and senior credit officer at Moody's, notes: "While we expect stable and strong auto ABS performance, a period of economic weakness or consumer credit stress would result in higher default and loss levels on loans that have extended terms. Weak-but-positive growth in the Canadian economy and stable unemployment rates will keep auto loan defaults at current low levels through this year."

The long-term ratings of bank sponsors of credit card ABS remain high, which supports a stable outlook for their related credit card-backed ABS. Card collateral comprises highly seasoned accounts from prime quality obligors, which points to continued strong performance. However, the sector faces a stable-but-weak economic outlook and a Canadian unemployment rate that is not likely to decline, so performance will not improve much further.

Meanwhile, the credit quality of all seven Canadian covered bond programmes is stable based on the strong financial standing of the sponsors and the high quality of the residential mortgage collateral, says Moody's. Canadian covered bond issuers' ratings were downgraded in 2012 but are stable at Aa3 or better levels, so the credit quality of their covered bonds is expected to remain stable.

The Canadian auto and card sectors accounted for 95% of issuance in 2012, with the latter sector seeing record issuance of C$9.5bn. "Cards will again dominate issuance in 2013 and the majority of that issuance will be in the US 144A market," comments Buzanis. "Modest auto ABS issuance by Ford Credit Canada and equipment ABS issued by CNH Capital Canada and CIT will round out total 2013 issuance."

Attractive alternative funding options and RBC's purchase of Ally Credit Canada could dampen auto ABS issuance in 2013, which - at about C$1.5bn - will be lower than last year's level. Credit card issuance is expected to be in the C$8bn range for the year.

ABS

Container ABS criteria issued

Moody's has published a methodology report that details its global approach to rating ABS backed by shipping containers. It reflects the rating agency's analytical approach to ABS deals backed by intermodal containers used primarily in cargo shipping and by the lease payments generated by the containers.

"In a typical container lease ABS transaction, a special purpose vehicle issues securities and uses the proceeds from the securitisation to purchase containers and the leases on those containers," says Xiaochao Wang, a Moody's vp. "Interest and principal payments to securitisation investors are funded in part by the lease payments and in part by the proceeds from any sales of the containers during the life of the securitisation."

The methodology identifies several quantitative factors in determining credit risk in container lease ABS, including: the extent to which the pool of containers remains leased throughout the securitisation (the utilisation rate); the rate at which lessees default; the daily revenue rate earned; the residual values of the containers when they come off lease and are sold; the transaction's storage and operating expenses; the potential impact of manager default on the cashflow; and - for a transaction with floating rate obligations - the effect of interest rate fluctuations.

"In determining our final rating, we may adjust the model-indicated output based on qualitative factors," says Wang. "For example, we may make adjustments for factors such as pool concentrations in certain types of containers, the extent to which the pool composition can change over time, unusual strengths or weaknesses of the manager, the transaction's back-up servicing arrangements or the transaction's specific legal risks."

Structured Finance

Italian ratings cap lowered

Fitch has downgraded 103 tranches - 69 RMBS, 15 ABS, 12 CMBS and seven structured credit assets - related to 69 Italian structured finance transactions (50 RMBS, 11 ABS, five CMBS and three structured credit deals) and four CLNs that reference Italian government bonds. The agency has also revised the outlook on 13 tranches of nine Italian RMBS transactions to negative.

The downgrades follow the lowering on 8 March of Italy's long-term foreign currency issuer default rating (IDR) to BBB+/negative from A-/negative. Following the sovereign downgrade, Fitch has revised its ratings cap on Italian SF transactions to double-A plus from triple-A, thereby maintaining a six-notch differential between the sovereign IDR and the highest achievable SF ratings.

The ratings cap reflects the agency's concerns that the weakening sovereign increases the likelihood of extreme macro-economic or other event risk that could undermine the performance of securitisations. The negative outlook on all tranches rated double-A plus reflects the outlook on the sovereign rating.

Fitch notes that the six-notch ratings cap for Italy, the highest among eurozone peripheral countries, reflects its view that: the Italian real estate market has not experienced bubble conditions and a subsequent wider collapse; contingent risks from the Italian banking sector are limited; SF asset performance has remained relatively robust compared with other eurozone peripheral countries; and the current exposure of Italian SF transactions to Italian financial institution counterparty risk is moderate and largely already mitigated where it exists.

The agency warns that some counterparty-related downgrades could follow in the event of rating actions on Italian financial institutions following the sovereign downgrade. However, it does not expect counterparty-related actions to be extensive, due to the limited exposure and mitigants that have already been put into place.

Structured Finance

Country credit deterioration factors added

Moody's has released a report describing adjustments for determining loss distributions using two additional considerations - the maximum achievable rating in a given country (the local current country risk ceiling, or LCC) and the applicable portfolio credit enhancement for this rating. The two additional factors will account for the impact of situations in which the availability of information limits the predictability of severe stress scenarios in a given country, the agency says.

This report incorporates feedback in response to Moody's request for comment on assessing the impact of rapid country credit deterioration on structured finance (SCI 22 August 2012). The agency says it will shortly update the market on any rating actions arising from this adjustment to its analysis.

The two additional factors will be introduced into Moody's primary asset methodologies to determine loss distributions. This revision aims to allow the agency to systematically capture risks associated with a sovereign's credit deterioration in the loss distribution. It will also enable it to consistently assess the credit implications of such risks across the capital structure, including mezzanine and junior tranches.

In the coming months, Moody's will also update its methodologies relating to multi-country portfolios, such as CDOs, ABCP and CMBS.

Structured Finance

Uncertainty remains under latest IASB draft

The IASB last week published an exposure draft on the recognition of impairment losses for financial assets on financial institutions' balance sheets. The proposed model would require firms to recognise impairment losses on an accelerated basis vis-a-vis current rules, which are expected to more closely align financial statements with the economics of lending and investing.

However, because the IASB proposal differs from the FASB proposal of December 2012, it hinders global accounting convergence. Nevertheless, Moody's notes in its latest Credit Outlook publication that either model would be an improvement over the current accounting regime.

The IASB's proposed impairment model would require firms to recognise credit losses on a staged basis, with 12-month expected credit losses recognised at inception of the asset and lifetime credit losses recognised if and when there has been a significant deterioration in credit quality observed for the asset. Furthermore, interest income would accrue on the basis of the net carrying value of an asset (amortised cost less loss reserve) when a credit loss has actually been incurred, rather than accruing on the basis of the gross carrying amount of the asset.

This staged approach will result in earlier credit loss recognition than under the current rules, which delay the recognition of a credit impairment allowance until a default has already occurred.

During the financial crisis, the default threshold caused credit loss recognition well after market credit deterioration made it apparent that losses would occur, leading to investor speculation and confusion as to the timing of recognition. The IASB's intention is to eliminate the default threshold in the recognition of expected credit losses, thus accelerating the recognition of losses.

However, it retains a transfer notion in that credit losses and interest income will change as assets are transferred between stages of loss recognition. Moody's believes that the subjectivity inherent in this transfer notion, as well as practical differences in the imprecise estimation of expected credit losses, will be sources of investor uncertainty.

Further, the IASB proposed model and the FASB proposed model differ materially, according to the agency. The boards tentatively agreed in 2011 on a 'three-bucket' approach for measuring impairment of financial assets that is very similar to the IASB's recent proposal. The FASB moved away from this model to a current expected credit loss (CECL) model, which would require firms to recognise impairment allowances for their current estimate of expected lifetime credit losses on their portfolio of financial assets at each reporting date.

Structured Finance

Listed fund debuts

TwentyFour Asset Management has launched the TwentyFour Income Fund, which aims to generate a net total return of between 7% and 10% by investing in the lower-rated, less liquid tranches of European ABS. Following a successful fund-raising working with Numis Securities, ordinary shares in the Guernsey-incorporated closed-ended fund began trading on the London Stock Exchange yesterday (6 March).

The fund's dividend target is 5% in the first financial year and then 6% per annum thereafter. It is the firm's first closed-ended fund and takes AUM to over £1.7bn.

The launch was driven by demand from existing clients seeking to access this part of the market that has previously been the domain of banks and institutional investors.

Structured Finance

Sukuk issuance increase continues

Global sukuk issuance grew for the fourth year in a row in 2012 and is expected to become even more mainstream over the next few years. Issuance reached about US$138bn last year and S&P notes there is "little to hinder" further strong performance.

Malaysian sovereign and sovereign-related issuers largely dominate issuance, with Gulf Cooperation Council (GCC) countries also contributing a significant amount. Funding needs and large infrastructure investments are likely to fuel growth.

S&P believes this will be especially true for GCC issuers. The rating agency predicts a number of banks will come to market to refinance existing debt and to meet the credit needs of corporate clients, particularly in project finance.

CDO

ABS CDO on the block

An auction is being held for Independence IV CDO on 28 March. The collateral will be sold only if the proceeds are at least equal to the auction call redemption amount. The underlying assets comprise RMBS, CMBS and ABS CDO securities.

CDS

New iTraxx series to trade wider

The provisional membership list for the new Series 19 iTraxx indices has been published ahead of its 20 March launch. The changes between the new and old series are in line with market expectations, according to credit strategists at Citi.

There will be four name changes in iTraxx Main, all due to liquidity considerations, and six changes in Crossover. The names leaving the on-the-run Crossover index trade too tight, but three of the names entering it - Cerved, Techem and Smurfit Kappa Acquisitions - do not yet have liquidly traded CDS.

Telecom Italia leaves the on-the-run Main index, after Moody's recently changed its outlook to Baa3 stable, and will enter Crossover Series 19. Repsol leaves Crossover - for spread reasons - but will not be entering iTraxx Main Series 19 because Moody's upgrade to stable occurred on 1 March and ratings for the Series 19 indices are considered as of 28 February.

According to Citi calculations, Series 19 indices will trade wider than Series 18 indices mostly due to the six-month longer maturity of Series 19 indices and the steepness of single name CDS curves. "Historically, protection buyers tend to roll their short risk positions shortly after the index roll, pushing the new on-the-run index wider versus the off-the-run index. We expect this to be the case this time around as well," the strategists observe.

CDS

Credit index futures prepped

ICE is set to introduce four credit index futures contracts starting in May. The contracts will be based on the Markit CDX (IG and HY) and iTraxx (Main and Crossover) indices, and are subject to review by the CFTC.

The Markit CDX and iTraxx credit index futures contracts are designed to allow credit market participants to access and hedge the corporate credit market in a cost-effective and efficient manner. The 'when issued' contracts will be based on the series following the on-the-run series. This eliminates the risk of an index constituent default in the 'when issued' contract, as only non-defaulting entities will be included in the index when constituted as the next on-the-run contract, ICE says.

Credit index futures contracts will be listed twice a year for expiration on the dates the new series begins trading in the swaps market. At expiration, any open contracts will be cash-settled based on the Markit-ICE End of Day Settlement price of the five-year swap.

The contracts will be listed by ICE Futures US and cleared at ICE Clear US. ICE says it will introduce additional credit index futures contracts based on market feedback and demand.

CDS

CDX 20 set to roll wider

Provisional changes to the Markit CDX IG index constituents have been published ahead of the roll to Series 20. The new index is scheduled to start trading on 20 March.

Two names will be removed from the current index - one because of a downgrade to high yield (CenturyLink) and the other due to low liquidity (Canadian Natural Resources). They will be replaced by two liquid financial names: Genworth Financial and Block Financial.

The average spread of the removed names (185bp) is similar to the average spread of the additions (215bp), implying that the constituent changes are likely to have a small impact on the size of the roll. Based on fair-value spreads, Bank of America Merrill Lynch forecasts the roll to be 10bp (Series 20 wider): 9bp due to six-month maturity extension (from December 2017 to June 2018) and 1bp due to the change in constituents.

CDS

Margin warning sounded

ISDA has published a paper entitled 'Non-Cleared OTC Derivatives: Their Importance to the Global Economy'. The paper explains what non-cleared OTC derivatives are, who uses them and why. It outlines the evolution of clearing in the OTC derivatives markets, why some - but not all - OTC derivatives will be cleared, the types and benefits of non-cleared OTC derivatives and the impact of the regulatory proposals in this area.

The non-cleared segment of the OTC derivatives market includes many important products with significant value to the economy, ISDA states. These products enable industrial companies and governments to effectively finance and manage risk in their operations and activities and help pension funds meet their obligations to retirees. They also help support economic growth by enabling banks to lend to corporate and individual customers.

ISDA warns that current regulatory proposals regarding margin requirements for non-cleared OTC derivatives pose significant threats to the continued functioning of this vital market segment. Such proposals also fail to fully consider the lessons learned regarding margin practices during the recent financial crisis, the association concludes.

CLOs

CLO 2.0 re-pricings analysed

Many of the first CLO 2.0 deals are reaching the end of their call-protected period, with some transactions issued considerably above current spread levels. Indeed, two 2010-vintage US CLOs last month undertook re-pricing exercises to take advantage of recent spread tightening.

First, Apollo Credit Management refinanced the class A1, A2, B, C and D notes of ALM Loan Funding 2010-3 - whose re-investment period and two-year call protection have ended - through an optional redemption and new note issuance. The spread on the notes was cut from 170bp, 250bp, 300bp, 400bp and 600bp to 80bp, 160bp, 230bp, 330bp and 425bp respectively as a result. S&P also upgraded the ratings of the mezzanine notes by four notches.

The senior tranche has a WAL of only 1.25 years at 25 CPR, according to Intex, and is overcollateralised at 143.53 OC (versus the 135.59 OC threshold). CLO analysts at Deutsche Bank note the senior tranche's tight print, considering that other triple-A rated tranches with similar WALs are currently being covered at around 125bp in the secondary market.

The second CLO to re-price is Golub Capital BDC 2010-1, whose call protection ends in July. Under an amendment to the middle-market transaction, the class A notes were increased by US$29m to US$203m, while the class Bs were increased by US$2m to US$12m. The spread on the senior tranche was reduced from 240bp over Libor to 174bp.

At the same time, the deal's call-protection and reinvestment periods, as well as the final maturity were all extended by two years to July 2015.

The Deutsche Bank analysts suggest that the recent Sheridan Square CLO print provides some sense of the pricing of call protection. The transaction's senior tranche was split into two, with the class A1 note featuring a three-year call-protection period and the A2s structured with two-year call protection. The former priced at 105bp over Libor, while the latter came at 117bp over (see SCI's primary deal database).

CMBS

Q4 CMBS loss severities analysed

The weighted average loss severity for all loans backing US CMBS that liquidated at a loss was 40.8% in 4Q12, the same as the prior quarter, Moody's reports. From 1 January to 15 December 2012, US$15.8bn of CMBS loans liquidated, consistent with the same period from the previous year.

The weighted average loss severity for all liquidated loans, excluding those with losses of less than 2%, was 53.1% - a slight increase from 52.7% in the third quarter. Loans with losses of less than 2% account for 23.6% of Moody's sample size by balance.

"Loans backed by manufactured housing and mobile home properties had the highest weighted average loss severity, at 48.3%, while loans backed by self-storage properties had the lowest weighted average loss severity, at 33.6%," says Moody's vp and senior credit officer Keith Banhazl.

The three vintages with the highest loss severities are 2006 (at 50.6%), 2008 (at 47.5%) and 2003 (at 43.1%). As of December, these vintages constitute 30.7% of CMBS collateral and 31.4% of delinquent loans.

"For the 2005, 2006 and 2007 vintages, we expect aggregate conduit losses - inclusive of realised losses - of 7.7%, 11.2% and 13.4% respectively of the total balance at issuance, with most of the losses yet to be realised," Banhazl continues. "The aggregate realised loss for those vintages is currently 2.6%."

Of the 10 metropolitan statistical areas (MSAs) with the highest dollar losses, New York had the lowest severity, at 21.4%, and Detroit had the highest, at 58.7%.

Two notable liquidations took place during the quarter, both related to multifamily portfolios: City View Portfolio I and the Babcock & Brown FX 1 Portfolio (see SCI's CMBS loan events database). The City View Portfolio I loan liquidated with a US$65.3m loss for a loss severity of 94.6%, while the Babcock & Brown FX 1 Portfolio liquidated with a US$61.3m loss for a loss severity of 77.3%.

CMBS

CMBS pay-offs dip

The percentage of US CMBS loans paying off on their balloon date has exceeded 60% for the fifth time in the last six months, according to Trepp's January pay-off report. In February, 61.8% of loans reaching their balloon date paid off - a decrease of about five percentage points from the January reading. The rate is well above the 12-month moving average of 49.2%.

By loan count (as opposed to balance), 62.6% of loans paid off. The 12-month rolling average on this basis is now 57.7%.

CMBS

REC 6 hit by low recovery projections

Fitch has downgraded Alburn Real Estate Capital (REC 6)'s class A, B and C notes and affirmed the class D and E notes. The CMBS tranches are now all rated single-C, reflecting the insufficient residual collateral value in the transaction to repay the class A notes in full by their maturity in October 2016.

Fitch estimates that 25% of the senior tranche's current balance will be ultimately recovered, whereas all mezzanine and junior tranches will be written off without any further principal payments. Asset sales commenced in July 2012 and nine individual assets have been sold piecemeal, as well as 29 marketed in bulk, known as the Ruby Portfolio.

As five of the Ruby assets still await consent from the respective landlords, 33 sales have been completed to date for £80.4m. The respective assets were valued at £93.6m in April 2012. The individual sales typically achieved prices close to/in excess of the valuation, while the Ruby portfolio was sold for approximately 20% less than its 2012 value due to the declining weighted average lease length and occupancy level.

After deducting sales costs and senior expenses, net proceeds of £70.6m were allocated towards the redemption of the class A notes. The resulting advance rate of the senior notes stands at approximately 200% and will increase further once the landlords authorise the remaining five Ruby sales.

Of the then remaining eight assets, three are not income-producing; and a large portion of in-place portfolio rent is scheduled to expire in 2013. Fitch incorporated these characteristics in its recovery projections.

CMBS

Loan mods help drive delinquencies lower

Two large loan modifications helped drive US CMBS delinquencies lower for a ninth straight month, according to Fitch's latest index results for the sector. CMBS late-pays declined by 30bp in February to 7.61%, from 7.91% a month earlier. In addition, the dollar balance of delinquent loans fell below the US$30bn mark for the first time since February 2010.

The sharp drop was fuelled by the impending resolution of two high-profile loans - the US$195.1m Babcock & Brown FX 3 portfolio (securitised in CSMC 2006-C4) and the US$190m One Congress Street (WBCMT 2007-C30), both of which are being modified - and their removal from Fitch's index. The drop in the delinquency rate was also helped by the largest month for new CMBS issuance in over five years.

Seven Fitch-rated transactions totalling US$6.62bn closed in February. This topped the previous post-recession high of US$6.57bn that closed in November of last year.

The industrial sector catapulted into the number one delinquency spot due to the addition of the US$148.8m StratReal Industrial Portfolio II (securitised in JPMCC 2007-LDP10) to the index. Rates for all other property types improved month-over-month. Current and previous delinquency rates are: 9.61% for industrial (from 8.69% in January); 9.14% for multifamily (from 9.73%); 8.32% for hotel (from 8.76%); 8.18% for office (from 8.33%); and 7.35% for retail (from 7.43%).

CMBS

Strong year expected for US lodging

The US lodging sector is expected to experience another strong year in 2013, although the rate of growth will be slightly lower than last year, according to Moody's. US nominal RevPAR should reach a new high this year and surpass the 2007 peak, albeit it will remain below the peak when adjusted for CPI.

"We are anticipating RevPAR growth higher than 5%," says EJ Park, a Moody's vp. "We also expect RevPAR to continue to grow in 2014 and beyond, although at a slower pace."

The industry has clearly reversed course since the financial crisis, when RevPAR declined by 16.5% in 2009. US RevPAR grew 6.8% in 2012, extending the positive momentum that began in 2010.

"Top markets outperformed small ones in 2012 on the rebound in business travel. With occupancy levels reaching 60% for two years now, rate increases are driving RevPAR growth," adds Park.

RevPAR growth is credit positive for CMBS loans backed by hotels, including single-borrower/large loan transactions and multi-borrower conduit deals, in which hotel loans constitute as much as 20% of the collateral. Increased RevPAR and the resulting higher bottom line boosts the cushion available to service debt, while also funding reserves or expenditures for capital projects, helping hotels maintain their revenue-generating potential. However, because its ratings take into account the cyclical nature of hotel cashflows, Moody's does not expect to take many rating actions as a result of the recent improvements in revenue.

CMBS

Schron portfolio sales ongoing

It has emerged that seven properties from the US$317m Schron Industrial Portfolio, securitised in GCCFC 2005-GG5, were sold via auction.com last November (SCI 30 October 2012). The note sales resulted in around US$30m of principal pay-downs and US$10m of advance/ASER reimbursement in the February and March remittances.

The appraised value of the remainder of the portfolio fell by US$41m to US$176m this month, indicating that the sales were roughly in line with the appraised values of the properties, according to CMBS analysts at Barclays Capital. They add that the sales price on the liquidated properties indicate a 42% severity after taking advances and ASER reimbursement into account. This translates to a US$22m loss to the trust, which will likely be realised only once all the assets are sold.

"Based on the current appraisal, we expect that the remaining assets will likely be liquidated at 40%-45% severities on the outstanding loan balance. In the meantime, advances/ASERs should continue to accrue on the remaining loan balance, which should add to severity in future sales, even if gross proceeds remain steady," the Barcap analysts note.

The next auction is scheduled for 25 April for nine properties with US$59m of allocated balance. Proceeds are anticipated to flow into the trust in 3Q13.

CMBS

Apartments lead CRE price performance

US commercial property prices across the board were effectively flat in January, according the Moody's/RCA Commercial Property Price Indices (CPPI) national all-property composite index. Over the last three years, however, Moody's found that apartment performance is leading that of hotels and homes.

"Of the major types of properties where people sleep, apartments have been the clear price performance leader over the last three years," says Moody's director of commercial real estate research Tad Philipp.

The national all-property composite index decreased by 0.1% in January, consolidating gains that took place amid the surge of transaction activity during 4Q12. Apartment and core commercial prices each declined by 0.1%, resulting in the national composite's relatively flat performance.

Apartments have reversed approximately 80% of their peak-to-trough price decline, while hotels and homes have reversed 19% and 17% respectively. Strong fundamentals and ample liquidity have propelled apartment prices to within 8% of their November 2007 peak.

"Hotels have been grinding out a price recovery, driven largely by three consecutive years of rising revenue per available room," says Philipp. "Debt capital for hotels has improved with the resumption of commercial mortgage backed securities-based lending, with hotels constituting as much as 20% of recent conduits."

He adds that home prices are recovering, but at a slower pace than that of either apartments or hotels. Home prices have increased by 9% from their March 2012 trough, compared with 13.9% for hotels from their March 2010 trough and 50.3% for apartments from their December 2009 trough.

Moody's reports that retail prices have increased by 6.9% over the past three months, exceeding the gains in suburban and central business district (CBD) offices by three or more percentage points. Industrial was the only core commercial sector to decline over the last three months, decreasing by 1.3%.

Major market prices have gained 7.8% over the past 12 months, says Moody's, outpacing the gain in non-major markets by 2.5 percentage points. Major market prices have increased by 45.1% since the trough, more than twice the price appreciation of the non-major markets.

Risk Management

Portfolio management suite offered

DataQuick has launched a portfolio management intelligence suite that aims to provide configurable solutions to meet clients' specific portfolio requirements, solve their portfolio management problems and identify high-return opportunities. The offering identifies credit, collateral, lien and transaction risks found within each lender's or investor's portfolio - enabling users to identify and capitalise on credit, collateral and portfolio opportunities to support business strategies. Users can also apply business rules to determine reserve calculations and make decisions on individual properties within the portfolio.

The solution consists of four core components that can be utilised cohesively or individually to address customers' unique challenges and to create a custom cascade. The four components address lien data, lien positioning logic, automated credit and lien analysis, and automated analysis and decisioning through DataQuick's National Property Database, Precision Lien Model (PLM), ARTAdvisor and PortfolioQ respectively.

Risk Management

MarkitSERV activity ramps up

MarkitSERV reports that 148 buy-side firms and swaps dealers used the platform to match and process approximately 190,000 cleared OTC swap trades last month, ahead of the beginning of mandatory clearing in the US yesterday. These transactions included nearly 9,000 cleared buy-side trades.

MarkitSERV provides a single point of connectivity for swap market participants to route trades to eight major clearinghouses that are registered with the CFTC as derivatives clearing organisations (DCOs) for OTC credit and rates products, as well as trade parties with real-time updates of clearing registration status and clearing broker take-up. The platform automatically determines for trade parties whether a trade is subject to mandatory clearing based on Regulation 50.4 (which defines which classes of swaps must clear) or Regulation 50.25 (which defines the compliance schedule for swap market participants).

The CTFC-registered DCOs to which MarkitSERV is connected are: CME, ICE Clear Credit, ICE Clear Europe, LCH.Clearnet (SwapClear US), LCH.Clearnet (SwapClear UK) and Options Clearing Corp (OCC). It is also connected to Eurex Clearing and LCH.Clearnet (CDSClear), both of which have DCO registrations pending with the CFTC.

Risk Management

Third stress test completed

The largest US bank holding companies have continued to improve their ability to withstand an extremely adverse hypothetical economic scenario and are collectively in a much stronger capital position than before the financial crisis, according to the Fed's latest stress test summary results.

Reflecting the severity of the stress scenario - which includes a peak unemployment rate of 12.1%, a drop in equity prices of more than 50%, a decline in housing prices of more than 20% and a sharp market shock for the largest trading firms - projected losses at the 18 bank holding companies would total US$462bn during the nine quarters of the hypothetical stress scenario. The aggregate tier 1 common capital ratio, which compares high-quality capital to risk-weighted assets, would fall from an actual 11.1% in 3Q12 to 7.7% in 4Q14 in the hypothetical stress scenario.

Despite the large hypothetical declines, the aggregate post-stress capital ratio exceeds the actual aggregate tier 1 common ratio for the 18 firms of approximately 5.6% at the end of 2008, prior to the government stress tests conducted in the midst of the financial crisis in early 2009. This is the third round of stress tests led by the Fed, but is the first year that it has conducted stress tests pursuant to the Dodd-Frank Act and its implementing regulations.

Risk Management

EMIR protocol launched

ISDA has launched the March 2013 EMIR Non-Financial Counterparty (NFC) Representation Protocol and a Timely Confirmation Amendment Agreement. The two documents are the first in a series of tools that ISDA plans to make available to market participants to facilitate their compliance with EMIR.

The former document is designed to allow swap market participants to simultaneously amend multiple ISDA Master Agreements for the purpose of facilitating compliance with certain Know Your Counterparty requirements of Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories. The latter is a form of agreement that market participants can use as part of their tool-kit for compliance with the obligation imposed by EMIR to provide timely confirmation of the terms of an uncleared OTC derivative contract.

The protocol will be open until ISDA designates a closing date. Compliance with certain of EMIR's requirements for which the Protocol may be relevant is required by 15 March.

Risk Management

Valuations platform strengthened

S&P Capital IQ has broadened its coverage of derivatives and other complex financial instruments. Valuations are available via a feed or a secure web-based solution that is designed to enhance the valuation process - from trade upload and mapping, through to reporting and challenges. As part of these efforts, and thanks to the integration of CMA (SCI 3 July 2012), and credit default swaps and interest rate swaps coverage in particular has been increased.

RMBS

Canadian mortgage RFC issued

Moody's has issued a request for comment on a proposal affecting how it analyses the credit risk of Canadian non-insured mortgage pools. The agency plans to use the proposed approach in conjunction with its existing methodologies to rate covered bond and ABCP transactions backed by such pools.

The proposal centres on Moody's residential mortgage collateral analysis model MILAN, which is a key element of its loan- and portfolio-level evaluation. Calibrating MILAN for Canada primarily entailed benchmarking the Canadian residential real estate market to other jurisdictions that also use MILAN.

In this case, Moody's has adapted parameters from the Australian implementation of MILAN. Using Australia MILAN as a benchmark for Canada is appropriate, the agency says, because of similar factors affecting both countries.

These factors include: the macro-economy, much of which is driven by developments in the commodity sector; banking, with regulated, stable and highly concentrated institutions; real estate markets characterised by significant housing price appreciation in recent years; and consumer credit cultures that are historically conservative, with comparable consumer debt loads.

Nevertheless, a number of the underlying assumptions and parameters that determine MILAN credit enhancement outcomes in Australia will differ for Canada. Among the most important of these differences are the MILAN settings associated with regional concentrations and home price stress rates, as well as the use of consumer credit scores in applying MILAN in Canada.

Comments are invited through 15 April. Following the comment period, the primary rating methodology for rating transactions backed by Canadian residential mortgage pools will be the global MILAN framework for rating RMBS transactions.

RMBS

Post-crisis RMBS prepays examined

Prime mortgage borrowers in US RMBS pools issued since the start of 2010 are still prepaying at rapid rates, reflecting the refinance incentives driven by low mortgage rates, Fitch says. Historically, high refinance activity has left poorer quality borrowers in mortgage pools, which in turn has increased performance volatility. For recent RMBS, however, the credit implications have been modest to date due to the high overall credit quality of the original pools.

Last month, prime RMBS mortgage pools issued since 2010 reported an average conditional prepayment rate (CPR) of approximately 42%, according to Fitch. This is more than twice as fast as the rates of outstanding prime loans securitised in earlier vintages.

The elevated prepayment rates have resulted in rapid declines to the mortgage pool balances. In fact, only 12% of the original balance of the sole transaction issued in 2010 remains outstanding today. Additionally, pool balances for both transactions issued in 2011 have paid down to less than half their initial amounts.

The credit quality of the prepaid loans has been, on average, only marginally better than the remaining loans. When compared with the remaining loans, those that have prepaid have slightly higher FICO scores (774 versus 771) and slightly lower loan-to-value ratios (63% versus 66%). As expected, the prepaid loans have higher coupons (4.8% versus 4.4%) and have a higher concentration of adjustable-rate mortgages (25% versus 6%), Fitch notes.

The agency does not view the change in the credit risk of the remaining pools as material, however. This is supported by the continued strong performance of the remaining borrowers. Of the more than 6,000 prime loans securitised since 2010, only one loan is seriously delinquent, as of the most recent reporting date.

Additionally, any potential increase in credit risk caused by prepayments has been more than offset by an increase in credit enhancement percentage due to the transactions' bond payment priority. The senior class credit enhancement percentage has more than doubled from the time of issuance for all transactions issued in 2010 and 2011.

But it appears unlikely that transactions issued in late-2012 and 2013 will experience similar prepayment behaviour. While mortgage rates declined to close to 140bp from early 2011 to July 2012, rates have remained relatively stable since then. This has provided borrowers with less incentive to refinance recently originated loans.

The weighted-average coupons of the mortgage pools securitised in late-2012 and early 2013 are among the lowest in RMBS history, according to Fitch. As such, it is possible that mortgage borrowers from that period never experience strong rate refinance incentives.

Even a relatively modest increase in mortgage rates from today's levels could result in relatively slow prepayment behaviour. This is particularly true for fixed-rate mortgages. Fixed-rated CPRs below 10% could occur, potentially for a sustained period of time.

A sustained period of slow prepayments could have credit implications for RMBS bonds. Prime RMBS structures typically distribute all unscheduled principal collections to the senior class during the first five years of the deal. After that, the principal distributions shift increasingly towards a pro rata share for subordinate classes.

Slower prepayment rates during the initial five-year period result in increased exposure for the senior class later in the transaction's life. Fitch considers this scenario in its rating analysis and will continue to focus on the credit implications of changing prepayment behaviour as the market eventually transitions into a period of slower refinancing activity.

RMBS

Direction change for German house prices

The rise in German house prices in 2011-2012 was less pronounced in the wealthiest parts of the country, reports Fitch. This is a deviation from the long-term trend which has seen prices fall fastest in the wealthiest regions, suggesting that demand may be moving from less affordable houses to more affordable apartments.

Fitch calculates that house prices in the wealthiest regions rose by 2% in 2011-2012. This was less than the 3% increase in house prices in the second- and third-wealthiest categories, although apartment price rises have continued to be most pronounced in the wealthiest category, up by 9.1% in 2012 from a year earlier.

RMBS

UK non-conforming arrears plummet

S&P has published its 4Q12 UK RMBS index report, which shows that UK non-conforming mortgage arrears fell to their lowest level since 2008 during the quarter.

The level of severe and total arrears has decreased in mortgages that back UK non-conforming RMBS transactions that the agency rates. It attributes this to a combination of persistently low interest rates and the high level of seasoning for the transactions in the index. As a result, S&P expects the current pattern of arrears performance to continue in the first half of 2013.

By contrast, while the level of arrears in the underlying collateral backing UK prime RMBS transactions that the agency rates remained stable quarter-on-quarter, prime mortgage borrowers remain under financial pressure due to the worsening economy.

RMBS

Servicer loan sales eyed

One lawsuit that grabbed the market's attention last week is the KIRP versus Nationstar Mortgage case, in which Nationstar is alleged to have harmed investors by selling non-performing loans via the auction.com platform. Bank of America Merrill Lynch MBS analysts suggest that the issue is similar to the eminent domain challenge (SCI passim), where the key question likely will be whether the auction amount truly represents maximum recovery.

Selling of such loans by servicers has long been touted as an obvious solution to the housing and financial crisis. If loans are sold out of an RMBS trust at a deep discount, the buyer would be in a position to restructure the loan by including substantial principal forgiveness. But the reason this solution has not been implemented is the threat of litigation by investors in the trust, who might have argued that recoveries were not maximised by the servicer.

Given the success of REO-to-rental programmes, the BAML analysts point to the possibility that loan auction values ultimately could reach levels that are attractive to investors in discount dollar bonds who receive principal far earlier than had previously been expected. "However, before that point is reached, the outcome of this litigation will first need to be determined," they note.