Contents

Structured Finance

Smart sourcing

Non-core asset dispositions eyed

With large US funds increasingly entering the European secondary ABS market in search of yield, European funds are having to be smarter about sourcing assets. Working with a bank seller to restructure residual positions is emerging as one important option.

The easiest way to source assets in the European secondary ABS market is to be added to BWIC distribution lists, but new US fund entrants tend to become dominating in bid-list activity because they need to deploy larger amounts of cash per month. They also typically focus more on benchmark transactions, buying paper in size.

One segment that is consequently overlooked is bonds in niche sectors. "There is less competition in the mezzanine space, with only a few players participating in that segment," confirms Joern Czech, partner at SCIO Capital. "We can be more considered about the bonds we buy because we only have to deploy up to €50m per month without jeopardising our strategy."

Another way of sourcing assets that is gaining traction is by helping banks dispose of some of their positions for capital relief purposes. This is an area where European funds can differentiate themselves from US funds, leveraging on the networks and relationships they've established across the region.

"An increasingly important way of sourcing assets is to talk directly with bad banks, for instance," explains Czech. "Where a risk manager has decided to sell an asset off the balance sheet, we can assist by helping to restructure the position. These are often residual pieces that need to be deconsolidated."

The process can take up to three months to complete and typically involves creating and testing a model for each transaction based on bespoke assumptions. Given that they will then hold the asset on their own books, funds are finding that they perhaps have an advantage over investment banks in this area because they can be more discreet.

"It makes sense for banks to sell from a risk-weighted asset perspective. But they are also trying to avoid crystallising losses: if the sale or its pure intention isn't publicised, it's easier to liquidate from an economic perspective," suggests Czech.

One segment that both US and European funds are piling into at present is peripheral ABS. However, in line with SCIO Capital's conservative approach, Czech warns against the binary nature of such assets.

"It's impossible to quantify the political risks attached to bonds from peripheral jurisdictions; thus, it's impossible to judge whether they're over- or undervalued," he notes. "We seek to eliminate risks that can't be hedged. Political turmoil clouds the economic picture in peripheral jurisdictions: it's impossible to foresee what politicians will do next week, no matter how good your models are or how good your due diligence is."

Czech suggests that the European secondary ABS market isn't overcrowded yet, albeit he expects more participants to enter. "European investors are gradually waking up to the opportunity, but later than some US players. The latter have more experience in secondary markets and more of a trading mentality due to the originate-to-distribute model, whereas Europeans have a buy-to-hold mentality because the market was mainly driven by banks as originators and investors. This is also why European assets tend to generally show better quality than US assets, as European banks retained the residual portions of the deals they originated."

More entrants should help stabilise bid-offer spreads and volatility, as well as increase liquidity. At the same time, supply-demand imbalances will remain because the market is shrinking due to limited new issue activity.

Czech is optimistic about the quality of the assets coming onto the secondary market at decent cash prices. "Plenty of banks are deleveraging and looking to dispose of assets, which haven't necessarily established a bad bank. Many of them have sat on their portfolios and have been proved right about prices coming back."

With this in mind, SCIO Capital plans to launch a new opportunity fund at the end of April, featuring quarterly liquidity. It will focus on supply-demand imbalances and move up the capital stack to more liquid tranches, targeting 10%-12% IRRs.

"We see the current market as an 18- to 24-month opportunity. It remains a challenging environment, but there are plenty of opportunities for the right strategies," Czech concludes.

CS

CLOs

CLO subs steal the show

A flurry of US CLO subordinate tranches were out for the bid yesterday. Several more senior tranches were also among the 125 CLO line items picked up by SCI's PriceABS data for the session, although names from the top of the capital structure were not so common.

The US$24.99m CIFC 2012-1X SUB tranche was the largest subordinated tranche seen in the secondary market yesterday. It was talked from the low/mid-70s through to the low/mid-80s, in the mid/high-80s, in the high-80s and in the low/mid-90s before trading in the high-80s. Talk for the name on Monday had been in the low/mid-70s.

The LCM 5I SUB tranche was also talked in the mid/high-80s, as well as in the mid-90s and 95 area, but did not trade. Talk the day before had also been in the 95 area, while the tranche's previous cover from October last year was at 104.

In addition, the MDPK 2007-5A SUB tranche was talked in the low/mid-140s, low-150s and in the 154 area but did not trade. Talk the day before had been in the 154 area for the bond.

Meanwhile, senior paper proved scarcer during the session, although a few names of note did make an appearance. For instance, a US$20.937m piece of the ATRM 5A A1 tranche was talked at 98.06, at low-98 and at 98 handle, with a cover at 98.35. Its previous cover came on 6 March and was at 98.13.

The US$9m ABCLO 2007-1A A1B tranche was also circulating and was talked from the low/mid-90s up to the mid-90s, with a cover at 94.35. Finally, the US$10m GCLO 2006-1A A1B tranche was talked at 88.12, the same level as on Monday.

JL

CMBS

Euro CMBS market picks up

The European secondary CMBS market still has not returned to the level of activity seen at the start of the year, but it has picked up over the last couple of weeks. Some sizable bid-lists have been circulating, with mezzanine paper continuing to attract hedge fund investors.

"Activity is still a little muted, but it has been better lately," reports one trader. "A couple of big BWICs were circulating and those have traded either around expected levels or slightly lower."

Second- and third-pays have been the most active part of the market as hedge funds continue to seek out higher-yielding paper. As has been the case for other European ABS sectors, real money has largely remained on the sidelines.

"It is going to stay fairly quiet until Easter, but we have started seeing better two-way flows. One of the more liquid names was once again TMAN 7; that was up by about 35 cents last week, but this week the seniors have been pretty stale," says the trader.

He continues: "Grand paper has been a bit more active as well. Grand mezzanine bonds have traded up by half a point or so."

What appears to be holding the market back is the large number of real money investors and even hedge funds awaiting new issuance before committing to the market. While real money investors prefer primary issuance for the opportunity it provides to place big orders, many fast money investors seem to be waiting to see how new issues affect the secondary market.

"I think that when new issuance comes, it will print tight. There has been a lot of talk about Deutsche Bank refinancing the Chiswick Park transaction, but we have not heard anything concrete on that," notes the trader.

He adds: "That would just add to a list of European and UK CMBS refinancings we have seen lately. The most recent was REC 3, which this week announced that it has been refinanced."

A REC 3 tranche - REC 3 A - shows up in SCI's PriceABS data from yesterday's session. The tranche was talked in the 99 area, which is also where it was talked on Wednesday. It was previously covered at 97 on 26 October 2012 and at 93.46 on 7 June 2012.

A couple of other names of interest include TITN 2006-2A E (which was talked in the mid-50s and mid-60s and covered at 70), as well as WINDM X-X C (which was also covered at 70 having been talked at 50, in the mid-60s and in the mid/high-60s). This Windermere tranche first appeared in the PriceABS archive in May 2012, when it was covered at 55.2.

JL

CMBS

US CMBS attracts attention

Secondary supply was light across the US markets yesterday, although a good amount of CMBS did get snapped up. Total bid-list supply was around US$172m, with a further US$31m in IOs also out for the bid.

"Generic CMBS spreads are mostly wider on the day. BWIC volume is light to start the week. In terms of supply, 2006 vintage floaters account for more than half of the bonds out for bid," observes Interactive Data.

GG10 Dupers were quoted yesterday at swaps plus 139/136, having closed out last week at 135bp over. CMBS 2.0 and 3.0 seniors were also 1bp wider, with junior triple-As 2bp wider.

SCI's PriceABS data shows that a number of tranches were covered in the session, among them a US$1.3m piece of BACM 2007-5 A3 which was covered at 102.24. That tranche was also covered last month at 103.16 and before that was covered back on 11 October 2012 at 106.9.

A trio of FREMF tranches - 2012-K706 C, 2013-K24 C and 2011-K701 C - also attracted covers at 253, 261 and 254, respectively. There were also three JPMCC 2006-FL2A tranches, with the B and C tranches covered at 96 and 95.24 and the D tranche successfully traded.

The session also saw further JPMCC paper in the form of the JPMCC 2007-LD11 AM tranche, which was covered at 397 and talked at 410. It traded earlier in the month and was covered last month at 441. The same tranche was covered in December at 525.

The D, E, F and G tranches of LBFRC 2006-LLFA were also out for the bid. The first two were covered in the very high-90s while the F tranche was covered at 95.16 and the G tranche was traded.

Additionally, there were also a couple of GCCFC tranches of note. The GCCFC 2007-GG9 AM tranche was talked and covered at 190. The tranche has appeared several times in PriceABS and its earliest recorded cover was at swaps plus 469bp on 12 July 2012.

Meanwhile, the GCCFC 2005-GG3 A4 tranche was also traded in the session. It has appeared in PriceABS less frequently than the 2007-GG9 AM tranche, but was previously talked at 45 after being covered at 50 in October.

JL

Structured Finance

Securitisation splinter group formed

The Structured Finance Industry Group (SFIG), a new trade industry advocacy group, has been formed in the US. Its creation comes in the wake of a major division within the ASF, which saw over 20 members resign.

PNC Capital Markets' Reggie Imamura has been named as chairman of the SFIG board, which will feature a board of directors representing a broad cross-section of the industry. The group intends to represent all sectors of the structured finance and securitisation markets, including accounting firms, investors, issuers, law firms, rating agencies, securities dealers, servicers, technology firms and trustees.

One source reports that the creation of a new body became inevitable because the ASF had "no compliance" and the role of executive director Tom Deutsch was causing too many problems. "Nobody knew what anyone was getting paid, even though the final structure of the organisation was supposed to have been sorted out and put in place by now with full transparency," he says.

"The feeling among the members was that Deutsch wanted the organisation to be his own little project, with no external interference from members," the source adds. He notes that discontent around decision-making had been growing for some time and contrasted the situation with the ESF and other similar trade organisations, where a paid employee remains a figurehead with the board responsible for "making the plays".

Many firms have already pledged to actively participate in SFIG's formation, including: 1st Financial Bank USA; Amherst Securities; Andrew Davidson & Co; Bank of America; Cadwalader, Wickersham & Taft; Citi; Credit Agricole CIB; Credit Suisse; Deutsche Bank; Discover Financial Services; Ernst & Young; Fitch Ratings; Ford Motor Credit Company; GM Financial; Morgan Stanley; PNC Capital Markets; RBS Securities; SNR Denton; Societe Generale; Wells Fargo; and Wilmington Trust.

The ASF, for its part, is continuing with its advocacy work. It submitted a comment letter to the Basel Committee yesterday in connection with revisions to the securitisation framework (see separate story).

JL

Structured Finance

SCI Start the Week - 18 March

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

Pipeline
Another wave of deals began marketing last week. There were three ABS, an ILS, an RMBS and three CMBS remaining in the pipeline when the week ended.

The ABS comprise student loan deals US$144.73m Alaska Student Loan Corporation Series 2013A and US$211.5m Scholar Funding Trust 2013-A, as well as equipment lease ABS US$766m GE Equipment Transportation Series 2013-1. The ILS was US$250m Everglades Re Series 2013-1.

The RMBS was US$576.4m Sequoia Mortgage Trust 2013-4, while the CMBS were US$390m CGRBS 2013-VNO5TH, US$410m GSMS 2013-NYC5 and ZAR².225bn Precinct Funding 1.

Pricings
It was a bumper week for new issues. As well as seven ABS, two RMBS, four CMBS and five CLOs priced.

The ABS prints were: US$555.556m American Express Issuance Trust II Series 2013-1; US$185m CPS Auto Receivables Trust 2013-A; US$170.79m Educational Enhancement Funding Corp Series 2013; US$200m Ford Credit Floorplan Master Owner Trust 2013-2; US$1.03bn Ford Credit Auto Lease Trust 2013-A; US$216.7m JGWPT XXVIII; and US$300m Sierra Timeshare 2013-1.

The RMBS prints comprised A$200m Liberty Series 2013-1 Trust and A$763m-equivalent RESIMAC Triomphe Trust 2013-1. The CMBS were: US$569m GS Mortgage Securities Trust Series 2013-G1; US$1.28bn JPMCC 2013-C10; US$160m MSC 2013-ALTM; and US$147m Unison Ground Lease Funding Notes Series 2013-1.

Finally, the CLO pricings consisted of: US$417.3m AMMC CLO XII; US$400m Denali Capital CLO X; US$461.5m JFIN CLO 2013-1; US$303.95m MCF CLO II; and US$600m MJX CLO XIII.

Markets
The European CMBS secondary market continued to gradually build up steam last week, as SCI reported on Friday (15 March). Mezzanine paper continues to attract hedge funds, but real money investors remain elusive.

"It is going to stay fairly quiet until Easter, but we have started seeing better two-way flows. One of the more liquid names was once again TMAN 7; that was up by about 35 cents," reports one trader. He adds: "Grand paper has been a bit more active as well. Grand mezzanine bonds have traded up by half a point or so."

JPMorgan analysts note that European ABS secondary market flows were relatively quiet, with a few BWICs hitting investors' screens towards the end of the week. "As a consequence, spreads closed the week broadly unchanged, with only Spanish RMBS seniors benefiting from some tightening," they add.

Meanwhile, non-agencies rallied in the US RMBS market as wider economic data remained positive. Cash prices in the sector were up by half a point on the week.

Barclays Capital RMBS analysts note that in the agency space the mortgage basis outperformed modestly. They comment: "FN 3s outperformed their duration hedges by 1+ tick, while 3.5s were up by four ticks. Rolls, however, continue to stay strong, with 3 and 3.5 Apr-May rolls about 2-3 ticks special."

In US ABS the focus for the secondary market was largely on FFELP student loan ABS. On a combined basis, bid-lists included notes issued by 14 trusts with an aggregate remaining balance of about US$412m.

"Although the list was sizable for the secondary market, secondary spreads were largely unchanged. We continue to believe the FFELP ABS sector offers value to investors," say Bank of America Merrill Lynch securitised products strategists.

The spread pick-up for private student loans versus legacy CMBS A4 increased to 25bp, due to CMBS tightening. Auto loan spreads widened by a few basis points, but equipment ABS fared better, widening by only 3bp so far this month.

Finally, the US CDO space saw a heavy influx of CRE CDO supply on Tuesday in particular, as SCI reported on 13 March. SCI's PriceABS data also shows some rare collateralised fund obligation paper (CFO) out for the bid.

In the CRE CDO space, a couple of LNR tranches - LNR 2003-1A B and LNR 2003-1X B - both traded, with talk for each at 99 or the 99 area. Among the CFOs, names such as TENZI 1A B1 were being talked in the low/mid-80s - and this was still the case come Friday.

Deal news
• 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 European Investment Fund, UniCredit and Federconfidi have signed the first Competitiveness and Innovation Programme (CIP) securitisation agreement to support SMEs in Italy. The transaction will facilitate SME access to an additional €60m of loans.
• 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.
• Cajamar Caja Rural has announced a tender offer for nine RMBS bonds and one SME CLO bond, launching the first ABS/RMBS tender of the year. No maximum purchase amount has been disclosed, with €1.6bn currently outstanding across the 10 tranches.
• 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.
• 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.
• 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.
• The Massachusetts Securities Division, a division of the Office of the Secretary of the Commonwealth of Massachusetts, and Deutsche Bank Securities Inc (DBSI) have entered into a consent order in connection with the Division's investigation into DBSI's failure to disclose conflicts of interest related to the US$1.56bn Carina CDO.
• 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-HE1 and sold to Freddie Mac.

Regulatory update
• The Structured Finance Industry Group (SFIG), a new trade industry advocacy group, has been formed in the US. Its creation comes in the wake of a major division within the ASF, which saw over 20 members resign.
• The ASF has submitted a comment letter to the Basel Committee in response to its 18 December consultative document (SCI 19 December 2012). The letter outlines several guiding principles that the association believes should be embodied in any framework for determining capital for securitisation purposes.
• The first compliance deadline of the European Markets and Infrastructure Regulation (EMIR) came into force on 15 March. The derivative rules will apply initially to financial and non-financial counterparties located in the EU and later to entities trading outside the EU under certain circumstances.
• The IASB has 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.
• 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.
• 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.

Deals added to the SCI database last week:
ACAS CLO 2013-1; ALM Loan Funding 2010-3; Ares XXVI CLO; CLI Funding V Series 2013-1; Enterprise Fleet Financing Series 2013-1; Eole Finance; FREMF 2013-K502; Golub Capital BDC 2010-1; Greywolf CLO II; ICE 3 Global Credit CLO; Intu (SGS) Finance 2013 series 1; JPMCC 2013-C10; OCP CLO 2013-3; Santander Drive Auto Receivables Trust 2013-2; Sound Point CLO II; and WFRBS 2013-C12.

Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-3; BACM 2008-1; BSCMS 2006-PW14; CSMC 2006-C4; CSMC 2007-TFLA; DECO 2011-CSPK; DECO 6-UK2; ECLIP 2007-2; EPICP DRUM; EURO 25; GCCFC 03-C2, BSCMS 04-T14 & MSC 04-T13; GCCFC 2005-GG5; GCCFC 2006-GG7; GECMC 2003-C1; GMACC 03-C2 & GECMC 03-C2; GMACC 2002-C3; JPMCC 06-LDP7 & 06-CB16; JPMCC 2005-CB11; LBUBS 2007-C6; MLCFC 2006-4; MLMT 2003-KEY1; MSC 2007-HQ13; OPERA CSC3; RIVOL 2006-1; TAURS 2006-1; TAURS 2006-2; TITN 2005-CT2; TITN 2006-5; and TITN 2007-3.

Top stories to come in SCI:
Focus on EMIR
US RMBS buy-back trends

CLOs

CLO market faces FDIC re-think

Additional regulatory changes coming into force on 1 April are set to impact the CLO market. The changes concern how US CLOs and leveraged loans are treated when computing FDIC assessments against bank deposits.

The changes will apply to large and highly complex institutions, which are defined as having more than US$10bn and US$400bn in assets respectively. Under the new rules, most leveraged loans and CLOs now count as 'higher-risk' commercial and industrial (C&I) loans, while securities and subprime loans count as 'higher-risk' consumer loans. Guidelines have also been provided for which securitisations backed by these loans are also classified as higher-risk.

To determine whether a C&I loan is considered higher-risk, a bank must evaluate whether the loan meets certain criteria based on the loan's amount, purpose, materiality and leverage. It applies to new loans made from 1 April for new borrowers, with refinancings of existing C&I loans counting as higher-risk if the loan is less than five years old and the borrower meets certain leverage tests.

The criteria for a higher-risk loan include: an original amount of at least US$5m; that original amount being 20% or more of the total funded debt of the borrower; being issued for the purpose of a buyout, acquisition or capital distribution; and the borrower's operating leverage ratio as defined as the total debt to trailing 12-month EBITDA being greater than four or its senior debt to 12-month EBITDA being greater than three.

"Higher-risk securitisations are then defined as deals where more than half of the underlying assets meet the criteria for higher-risk C&I loans, higher-risk consumer loans or non-traditional mortgage loans. A bank needs to determine whether a securitisation falls under this category using information as of the date of issuance," explain Bank of America Merrill Lynch securitised products strategists.

For dynamic pools, the 50% threshold is based on the highest amount of higher-risk assets allowable under the portfolio guidelines. The BAML analysts note that "almost all" CLOs would fall under such a classification, but point out that a bank only has to evaluate the securitisation based on information at the time of issuance and does not have to monitor it thereafter.

Higher-risk assets are then used to work out concentration scores. For large institutions, the higher of the higher-risk assets versus Tier 1 capital and reserves is measured against the growth-adjusted portfolio concentration metric.

The higher-risk asset concentration includes construction and land development (C&D) loans, higher-risk C&I loan, non-traditional mortgages, higher-risk consumer loans and higher-risk securitisations divided by Tier 1 capital and reserves. Growth-adjusted portfolio concentrations are measured using different loans and securities including C&D, CRE, first lien residential mortgages and RMBS, junior mortgage liens, C&I, credit card and other consumer loans that are weighted by risk weights based on historical losses.

For highly complex institutions, the FDIC looks to the highest of three ratios. The same higher-risk assets versus Tier 1 capital and reserves is instead compared to the bank's top-20 counterparty exposure divided by Tier 1 capital reserves and the ratio of the largest counterparty exposure versus Tier 1 capital and reserves.

Both counterparty metrics look at the exposure at default associated with derivatives trading and securities financing transactions, in addition to the gross lending exposure, including all unfunded commitments for each of the counterparties.

The analysts looked at several large banks with deposits from US$30bn up to US$250bn to examine the potential impact of these changes on the CLO market. They note that the impact depends on an institution's Tier 1 capital, C&D loans, deposit base, criticised assets, reserves, portfolio concentrations and leverage.

For one examined bank, an increase in its CLO investment to 1% of its assessment base would increase its assessment rate from 3.4bp to 3.5bp. "This incremental assessment would translate into a 7bp deduction relative to the CLO spread. In this analysis, we assumed a base primary triple-A spread of 110 DM, so the effective spread for the CLO would end up being 103 DM," the analysts observe.

By contrast, a second bank had a 53bp impact if CLOs accounted for 7.5% of its assessment base and had a large percentage of C&D loans, so its base assessment rate would be higher at 7.3bp. "We believe that most highly complex institutions - those with assets greater than US$500bn, some of which have been buyers in the primary CLO market - should not be impacted by the new rules. These banks' assessments will probably be constrained by the other competing counterparty measures, especially for those banks with large derivatives books," the analysts suggest.

They continue: "Some large banks may see an increase in their assessments for incremental CLO investments. This has been one segment of the broadening CLO investor base that has emerged as a marginal incremental buyer over the past year."

A final rush of new deals prior to 1 April is expected, with triple-A spreads potentially coming under pressure after the deadline as the market adapts to the changes. Further, as legacy transactions will not be included in the higher-risk asset bucket, they could begin trading at a premium to CLOs issued after the deadline.

"It may end up being similar to CLO 1.0 deals with securitisation buckets, which cause those to be treated as resecuritisations under SSFA guidelines - resulting in higher capital charges for banks. To date, the market has not really differentiated between the two," the analysts conclude.

JL

Structured Finance

Bank names global TAS chief

Deutsche Bank has appointed Sriram Iyer as global head of trust and agency services (TAS) within its global transaction banking (GTB) division. The TAS unit provides trustee, agency, escrow and related services to corporate clients, government agencies and financial institutions.

Iyer will be based in London and report to Satvinder Singh. He has been at the bank for 16 years, most recently based in Dubai as head of GTB for the MENA region. He has also served as coo for GTB in Asia-Pacific and as regional head for TAS in Asia.

Structured Finance

Distressed debt vets move on

Courage Capital Management has recruited distressed debt industry specialists John Klinge and Scott Imbach. They each join as senior md and will open a Los Angeles office to lead the firm's investment efforts for its credit opportunities strategy.

Klinge joins from Levine Leichtman Capital Partners (LLCP), where he was senior md and chief credit officer. He has also worked for William E Simon & Sons Special Situation Partners and spent 15 years at Bank of America.

Imbach also joins from LLCP, where he was md and worked closely with Klinge. Prior to that he was founding partner at Empyrean Capital Partners and principal at Canyon Capital Advisors.

CDO

DB settles over Carina CDO

The Massachusetts Securities Division, a division of the Office of the Secretary of the Commonwealth of Massachusetts, and Deutsche Bank Securities Inc (DBSI) have entered into a consent order in connection with the Division's investigation into DBSI's failure to disclose conflicts of interest related to the US$1.56bn Carina CDO. DBSI submitted an offer of settlement and has been fined US$17.5m.

The Division asserts that DBSI, in its capacity as a Massachusetts-registered broker-dealer, engaged in dishonest or unethical conduct and failed to supervise its employees because: its employees knew of, but failed to disclose conflicts of interest that arose from DBSI's involvement in structuring, underwriting, marketing and selling Carina; and DBSI Special Situations Group (SSG)'s intention to purchase CDS protection referencing other CDOs whose performance was expected to be similar to the performance of Carina. In autumn 2005, an md in the SSG proposed that the SSG and Magnetar Capital co-invest in and purchase CDS protection on CDOs with certain structural features. They ended up co-investing in at least six different CDOs with a combined notional value of over US$10bn, according to the complaint.

CDS

Bank boosts derivatives clearing groups

BNY Mellon has added five new members to its global derivatives clearing team in the US and Europe. The appointments come as the bank looks to adapt to the renewed demand being driven by regulatory and market changes.

Mark Gonzalez becomes US coo for derivatives clearing services, based in New York. He has over 14 years of experience within clearing and trading organisations as a partner and coo at both Ardmore Park Capital and Capstone Holdings Group and as an operations manager at Pioneer Futures.

Gregory Chemin becomes business head of derivatives clearing services, based in Frankfurt. He was previously at HPC in France and at Newedge in Germay and has over a decade's experience in derivatives.

Paul Dex, John Guthrie and Thomas Twomey will lead the company's regional efforts to identify and develop new opportunities in the listed and OTC markets. Dex will be based in London while Guthrie and Twomey will be in New York.

Dex previously held sales roles at RBS and Skandinaviska Enskilda Banken. Guthrie has worked at Credit Suisse, Lehman Brother and Deutsche Bank Securities, while Twomey has held posts at OptionsCity, Zone Equity Group and GFI.

CLOs

Loan specialist enlisted

Cutwater Asset Management has appointed Alex Jackson as md and head of its bank loan group. He will help expand the firm's leveraged loan and high yield capabilities and build out a related products suite, including CLO management.

Jackson was most recently deputy cio and CLO portfolio manager at CIFC Corp. Before that, he served as portfolio manager at JH Whitney & Company and has also originated and structured non-investment grade corporate loans at ING and National Westminster Bank.

CLOs

Credit manager adds in Americas, Europe

Alcentra has appointed Jack Yang as md and head of Americas business development and Michael Johnson as md and head of UK direct lending. Yang reports to Paul Hatfield, president and head of Alcentra US, while Johnson reports to Graeme Delaney-Smith, head of European direct lending and mezzanine investments.

Yang takes responsibility for leading Alcentra's marketing and business development efforts in the US, Canada and South America, tailoring investment solutions that use leveraged loans, high yield bonds, distressed debt and structured credit. He was previously head of business development at Onex Credit Partners and Highland Capital and also served as global head of leveraged finance at Merrill Lynch.

Johnson will help build Alcentra's UK direct lending business and will also serve as portfolio manager for strategies related to HM Treasury's business finance partnership. He was previously head of European leveraged capital markets at Cantor Fitzgerald and has nearly three decades of experience in the industry.

CLOs

Mid-market APAC lending opportunities targeted

Olympus Capital Asia has launched Olympus Capital Asia Credit (OCA Credit) in Singapore and recruited structured credit veterans Nitish Agarwal and Gary Stead to lead the new business. The lender believes there is a growing opportunity in the region as many international banks are pulling back because of regulatory capital constraints.

Agarwal joins from Barclays and has been made md and cio. Stead has also joined as md and was most recently at Shearwater Capital, having also served as ceo of Fortress Investment Group Australia.

The structured lending business will serve mid-sized corporations in Asia-Pacific by providing structured loans of US$20m-US$100m with two to three year maturities. OCA Credit expects to hold and manage the loans through maturity and partner with selected long-term investors on larger deals.

CMBS

REIT acquisition offer made

Annaly Capital Management has made an offer to purchase all the shares of CreXus Investment Corp that it does not already own. The acquisition was agreed back in January (SCI 31 January 2013).

The offer has been made through a newly-formed subsidiary - CXS Acquisition Corporation - and amounts to US$13 per share plus a sum approximating a prorated portion of the dividend which the tendering stockholder would have received. The CreXus board of directors has determined to recommend that CreXus stockholders tender their shares in response to the offer.

RMBS

NCUA's claims dismissed as time-barred

The US District Court for the Central District of California has dismissed as time-barred claims based on seven out of eight certificates in the NCUA's US$491m lawsuit against Goldman Sachs concerning RMBS (SCI 11 August 2011). The NCUA alleges that Goldman violated federal and state securities laws and made material misrepresentations about the quality of RMBS it sold to now-failed federal credit unions US Central and Western Corporate.

In dismissing as untimely the claims, the court found that tolling under American Pipe - the US Supreme Court case pursuant to which the filing of a class action tolls the statute of limitations for all members of the purported class until the class certification issue is resolved or a member opts-out - did not apply to the seven certificates because the NCUA did not sufficiently allege that those certificates were the subject of an earlier putative class action. Claims concerning those seven certificates should have been filed no later than early 2009, a Lowenstein Sandler client memo notes.

The court denied Goldman's motion to strike paragraphs that Goldman viewed as duplicative of allegations that other parties made in other actions.

ABS

Stable performance forecast for esoterics

Moody's expects the performance of asset classes backing US commercial and esoteric ABS to be stable in 2013.

"With event risk in general declining, most of the kinds of risk we have to watch out for now are idiosyncratic; that is, risks specific to an issuer or asset class," says Michael McDermitt, a Moody's senior credit officer. "This would include, for instance, the adverse effects of a food-borne illness event on a quick service restaurant whole business securitisation or of severe drought on agricultural equipment loans and leases."

Credit quality of new transactions will be similar to that of past transactions, the agency suggests. With credit stabilising, both credit enhancement and structures will be similar to those of 2012 transactions. One potential risk is a rise in both the risk appetite of obligors and the risk tolerance of originators/sponsors, as a result of which collateral characteristics could weaken - albeit marginally - and deal structures could become less credit-protective.

Issuance will be backed predominantly by familiar assets, albeit with a few new sponsors entering the market or new asset classes emerging, according to Moody's. New sponsors by definition lack the securitisation experience that anchors expectations for new deal performance. New asset classes - such as renewable energy-related assets - are starting to emerge, but won't constitute a significant portion of issuance volume.

Regardless, transaction structures will be similar to those of the past, given the success of existing structures so far. They will incorporate operational risk mitigants, such as back-up servicers and control party mechanisms.

ABS

Straight-A winding down

As it enters its senior year, the Straight-A Funding ABCP programme continues to provide liquidity to a market still in need of it, according to Fitch. The vehicle issues ABCP to fund FFELP student loans purchased from lenders between May 2009 and June 2010, but is set to terminate in January 2014.

"Straight-A married Bush-era legislation with securitisation technology to allow for the smooth origination and financing of student loans throughout the liquidity and financial crisis," comments Fitch senior director Kevin Corrigan. "The Straight-A programme is an excellent example of how the structured finance markets were actually being utilised to facilitate credit for a greater good."

The programme peaked at nearly US$40bn in outstandings before beginning to wind down in mid-2010. Through regular loan amortisation and term-outs throughout the last year, outstandings are now below US$14bn.

"With appetite for student loan ABS strong, issuers are tapping the Libor term floater market to refinance the conduit paper," adds Corrigan. The term floater market for FFELP SLABS has gradually improved since the end of 2011.

ABS

Settlement boosts tobacco ABS

A 13 March settlement between 17 US states, the District of Columbia and Puerto Rico and several tobacco manufacturers should have a positive impact on cashflows for certain Fitch-rated tobacco settlement ABS transactions, the agency says. The 'stipulated partial settlement award' - initially proposed between these parties in December 2012 - relates to the non-participating manufacturer (NPM) adjustment provisions contained in the master settlement agreement (MSA) for 2003-2012.

Under the agreement, US$4bn in disputed payments currently escrowed will be released to the participating states and territories, while original participating manufacturers will receive credits against those states' future MSA payments. Disputed NPM adjustments will remain in place for those states that are not party to the agreement.

The settlement is net cash positive to those states participating and, by extension, their related securitisations. Fitch views this development as a credit positive, although the ratings impact will be limited given the cap applied to tobacco settlement ABS.

The resulting one-time cash payment to tobacco bonds should benefit turbo bonds that have fallen behind their original maturity schedules. As this settlement ends the uncertainty surrounding this complex legal issue, we anticipate renewed interest in tobacco settlement securitisation, by states that have not yet securitised as well as those that have already securitised and seek to refinance their existing debt at lower interest rates.

In addition to the District of Columbia and Puerto Rico, the 17 states in the settlement include: Alabama, Arizona, Arkansas, California, Georgia, Kansas, Louisiana, Michigan, Nebraska, Nevada, New Hampshire, New Jersey, North Carolina, Tennessee, Virginia, West Virginia and Wyoming.

ABS

Spanish tariff securitisations downgraded

Fitch has downgraded five securitisations backed by Spanish electricity tariff deficits from single-A minus to triple-B plus. The downgrades reflect the structural imbalance and the negative trend observed on the overall electricity system cashflows, as well as the uncertainty of the regulatory environment affecting the electricity sector.

Despite the government's efforts during 2012 to tackle the ongoing tariff deficit problem, Fitch believes that the Spanish electricity system will likely continue generating tariff deficits beyond 2013. Based on the provisional liquidation reports obtained from the Comision Nacional de Energia's (CNE) website during 2012, total tariff deficit annuities now represent approximately 21% of regulated system revenues, compared with 12% a year ago.

The agency believes that the significant relative increase of tariff deficits as a proportion of regulated revenues is a consequence of weak economic prospects that suggest lower demand for energy consumption, increase in green energy subsidies and also that tariff deficits securitised through FADE are being remunerated at an annual coupon rate of 5% - which, in itself, is adding pressure to the overall system stability. Moreover, it considers the implementation of material additional pricing increases to provide enough incremental regulated revenues that largely mitigate the system deficits unlikely in the short term, considering that the government already applied rises to the end-consumer tariffs last year.

Fitch acknowledges that the transactions have been receiving cashflows to service their debt as expected. However, since the system is still generating tariff deficits that are being financed by the utility companies in Spain, the continuity of the electricity system and repayment of the system costs will rely on the ability of these companies to actually finance the imbalances.

The affected transactions are: Alectra Finance, Bliksem Funding, Rayo Finance 3, Rayo Finance 4 and Delta SPARK Limited 2008-1. Downgrade pressure on the notes could be triggered if the sector cashflow imbalances increase over the next two years or there is a substantial change in the credit quality of Spain or the Spanish electricity utility sector. The notes could be upgraded if the economic environment in Spain improves and the imbalances are eliminated.

ABS

Canadian ABCP performance still strong

Performance across Canadian ABCP remains strong, according to Moody's first quarterly report for the sector, which covers 4Q12. The rating agency has also launched a new web page dedicated to Canadian structured finance.

Of the new transactions added to the Canadian ABCP programmes in the fourth quarter of 2012, 40% were used to finance residential mortgages, 34% financed auto loans and lease receivables and 24% financed trade receivables. Residential mortgages also made up 95% of the asset additions/increases by existing sellers.

The Canadian ABCP quarterly report complements Moody's existing research and provides a snapshot of the market focusing on the composition and activity of each conduit. The new Canadian web page also covers ABS, CMBS, RMBS and covered bonds.

ABS

Falling default rate for private SLABS

Moody's expects the annualised private student loan default rate to continue falling year-over-year in 2013, while remaining higher than pre-recession levels.

"We will continue to see high rates of default because the unemployment rate - the key credit driver of student loan defaults - will remain high at 7%-8%," says Moody's avp-analyst Tracy Rice. "Improving unemployment will help borrowers repay their loans. However, high student loan debt and lower earnings will continue to make repayment difficult."

The annualised default rate in 4Q12 was 4.5%, according to Moody's Private Student Loan Indices. This figure is down considerably from 5.2% in 4Q11, for the third consecutive quarter of sizeable year-over-year improvement. But the rate remains nearly twice as high as it was prior to the recession.

The 90-plus delinquency rate in Moody's PSL Indices was 2.5% in the fourth quarter, down from 2.7% during the same period the previous year, for the eleventh consecutive quarter of year-over-year improvement. Ninety-plus delinquencies are expected to continue to drop slowly, as they have since peaking in mid-2009.

Structured Finance

Eligible investment guidelines updated

Moody's has updated its general guidelines for the temporary investment of cash in structured finance transaction accounts, including rating standards for banks holding such accounts. The rating implementation guidance report applies globally to all structured transactions and is expected to result in a limited number of negative rating actions.

The report provides rating standards for a transaction's eligible investments, depending on their maturity and the transaction rating, and specifies the types of instruments that qualify as eligible investments. It also provides rating standards for banks holding accounts in structured transactions and explains how the choice of banks and eligible investment for the temporary use of cash affects Moody's analysis of structured finance transactions.

The effect of the bank and eligible investment standards on structured transactions depends on the degree of linkage between the bank or eligible investments and the credit quality of the structured securities. The guidelines indicate thresholds for bank ratings according to the degree of linkage, which can be weak, medium or strong.

"Transactions in which the bank holds or has invested a substantial amount relative to the liabilities have a strong linkage, given the risk of default and negative implications on recovery and enhancement," comments Moody's svp Kent Becker. "Conversely, weak linkage occurs when transactions have relatively small amounts of cash held by the bank, or the eligible investments are small relative to the outstanding amount of liabilities."

The agency also considers whether a transaction facilitates the effective replacement of the bank in the event the bank rating declines below certain levels.

Structured Finance

Formula-based ratings approaches critiqued

S&P has published its response to the Basel Committee's consultative document on revisions to the Basel securitisation framework (SCI passim). The agency believes that the proposals include some positive elements, while also raising a number of significant concerns.

Among the positive elements is the reduced potential for sharp changes in securitisation capital charges through economic cycles - the so-called 'cliff effect'. The proposals may also help to reduce the potential for mechanistic reliance on external credit ratings in regulations, in line with broader ongoing efforts under the coordination of the Financial Stability Board, which S&P supports.

However, in seeking to reduce the framework's reliance on external ratings, the proposals increase its reliance on various formula-based approaches. These generally do not take into account the full range of factors that can affect the creditworthiness of a securitisation exposure, potentially undermining the framework's risk sensitivity, according to S&P.

Because the proposed framework includes at least five different approaches to calculating securitisation capital charges, there is also significant scope for inconsistencies in treatment between different banks and/or jurisdictions. "In particular, the proposals could further exacerbate the already 'uneven playing field' between banks that use the internal ratings-based approach for the securitisation's underlying assets and those that use the standardised approach. These effects could make banks' regulatory capital ratios more opaque and complex for external market participants to interpret," the agency notes.

Notwithstanding the Committee's aim of ensuring more prudent capital charges for some securitisation exposures, S&P questions whether the losses experienced by securitisations globally since the 2007-2008 financial crisis warrant the scale of increase in capital charges that the proposals would result in, especially for investment grade tranches. The agency's analysis suggests that in many situations the Revised Ratings-Based Approach (RRBA) leads to significantly higher capital charges than the other proposed approaches, which suggests the RRBA may be incorrectly calibrated.

"Although the proposals envisage various capping mechanisms to mitigate the risk of excessively high capital charges, our analysis suggests that these caps could determine capital charges in many situations, rather than being an exception," S&P notes. "This undermines the overall framework's risk sensitivity, since different tranches with different characteristics and risk profiles may often be subject to the same capital charge cap."

Structured Finance

Solar securitisation working group convened

The US Department of Energy's National Renewable Energy Laboratory (NREL) has convened a Solar Access to Public Capital (SAPC) working group, with the aim of enabling securitisation of solar PV assets and associated cashflows. SAPC's primary efforts centre on the standardisation of power purchase agreements, leases and other documents relevant to residential and commercial deployment, as well as the development of robust datasets to assess performance and credit default risk. These activities are designed to allow projects to be grouped into tradable securities.

Securitisation is expected to attract additional investors to the solar asset class, enabling the industry to tap a larger and more liquid pool of capital than currently available. The working group includes over 60 members representing some of the leading organisations in the fields of solar deployment, finance, counsel and analysis. The members include: Bank of America Merrill Lynch; Bingham McCutchen; Capital Fusion Partners; Chadbourne & Parke; Crédit Agricole; K&L Gates; Kroll Bond Ratings; Orrick, Herrington, & Sutcliffe; Rabobank; Sidley Austin; and S&P.

NREL senior financial analyst Michael Mendelsohn comments: "Access to low-cost public capital offers the potential to significantly lower the cost of solar energy."

SAPC will also provide a forum for some of the leading voices in the industry to discuss the range of barriers, risks, opportunities and best practices in the creation of a solar securities market. It says that public capital vehicles could take various forms, including ABS, master-limited partnerships, REITs and other debt products. The NREL-led effort is funded under the DOE's Sunshot Initiative.

Structured Finance

Basel 3 monitoring study released

The Basel Committee has published the results of its latest Basel 3 monitoring exercise. The study is based on the reporting processes set up by the Committee to periodically review the implications of the Basel 3 standards for financial markets.

A total of 210 banks participated in the study, comprising 101 Group 1 banks (those that have Tier 1 capital in excess of €3bn and are internationally active) and 109 Group 2 banks (all other banks). While the Basel 3 framework sets out transitional arrangements to implement the new standards, the monitoring exercise results assume full implementation of the final Basel 3 package based on data as of 30 June 2012.

No assumptions were made about bank profitability or behavioural responses, such as changes in bank capital or balance sheet composition. For that reason, the results of the study are not comparable to industry estimates, the Committee states.

The average Common Equity Tier 1 capital ratio (CET1) of Group 1 banks was 8.5% under the exercise, as compared with the Basel 3 minimum requirement of 4.5%. In order for all Group 1 banks to reach the 4.5% minimum, an increase of €3.7bn in CET1 would be required.

The overall shortfall increases to €208.2bn to achieve a CET1 target level of 7%; this amount includes the surcharge for global systemically important banks. For comparison purposes, the sum of profits after tax and prior to distributions across the same sample of Group 1 banks between 1 July 2011 and 30 June 2012 was €379.6bn.

Compared to the December 2011 exercise, the aggregate CET1 shortfall with respect to the 4.5% minimum for Group 1 banks has fallen by €8.2bn. At the CET1 target level of 7%, the aggregate CET1 shortfall for Group 1 banks has fallen by €175.9bn.

For Group 2 banks, the average CET1 ratio stood at 9%. In order for all Group 2 banks in the sample to meet the new 4.5% CET1 ratio, the additional capital needed is estimated to be €4.8bn. Banks in this group would have required an additional €16bn to reach a CET1 target of 7%; the sum of these banks' profits after tax and prior to distributions between 1 July 2011 and 30 June 2012 was €22.9bn.

Having recently revised its liquidity coverage ratio, the Committee notes that LCR results will be presented in the report on December 2012 data. However, the weighted average of the other Basel 3 liquidity standard - the net stable funding ratio - was 99% for Group 1 banks and 100% for Group 2 banks under the exercise.

Structured Finance

Further CRA improvements required

ESMA has published its second annual report on its supervision of credit rating agencies (CRAs) in the EU. The report focuses on its investigation into bank rating methodologies and the follow-up work to the March 2012 report on deficiencies in CRAs rating processes, governance and control mechanisms.

ESMA says it has identified progress by CRAs in their activities, including: improved disclosure of methodologies and ratings; internal control resources; involvement of senior management in governance; and record-keeping practices. However, the report finds that CRAs have not sufficiently embedded the main requirements of the CRA Regulation in their organisations.

Indeed, ESMA believes that improvements are still necessary in respect of: the consistent application and comprehensive presentation of rating methodologies; the empowerment and resourcing of analytical and control functions; the monitoring and surveillance of ratings; and the reliability of IT infrastructures. These issues will form the basis for much of ESMA's supervision activities as outlined in its 2013 work plan.

ESMA's previous focus on bank ratings was driven by their linkage with sovereign ratings, the number of methodological changes implemented over the period under investigation - September 2010 to August 2012 - and the significant rating activity in financials in 2H11 and 1H12. The bank rating methodologies of Fitch, Moody's and S&P were examined in respect of: set up, monitoring and review of rating methodologies; implementation of methodologies throughout the rating process; internal mechanisms to ensure consistent application of rating methodologies; and disclosure of methodologies.

These enquiries revealed shortcomings in the processes of disclosure and implementation of changes in bank rating methodologies, the rigorous and systematic application of methodologies and the review process of methodologies. The remedial action plans ESMA has put in place require CRAs to: incorporate all relevant factors, models, assumptions and criteria in their methodologies; improve public disclosure of the methodologies; maintain adequate records with reference to analytical specifications of rating instruments; develop proper procedures relating to changes in methodologies; improve the internal review process of performance of the methodologies; and ensure minimum standards of information quality and timeliness.

Structured Finance

Basel MSFA critiqued

The ASF has submitted a comment letter to the Basel Committee in response to its 18 December consultative document (SCI 19 December 2012). The letter outlines several guiding principles that the association believes should be embodied in any framework for determining capital for securitisation purposes.

These principles include: promoting understanding by banks of the risks associated with their securitisation exposures; focusing on actual performance of assets, which is the primary driver of the performance of a securitisation exposure, and the credit support available to a given risk position within an securitisation structure after factoring in the assets' performance; functioning to facilitate dynamic and timely adjustment of capital in a manner that is consistent with and proportionate to changes in asset performance and the resulting risk profile of a given exposure; and being premised on data that is available to all market participants and should otherwise comport with standard market practices.

As such, the ASF's letter includes detailed comments on the consultative document that are intended to address and mitigate any inconsistencies contained in the revised framework with the principles. In particular, the letter focuses on the use of a modified supervisory formula approach (MSFA), which the association argues should be at the top of any securitisation capital framework hierarchy and should be expanded to be used by any bank that has the necessary information.

The ASF will be meeting with the Basel Committee's ratings and securitisation workstream of regulators to discuss the consultative document on 23 April.

Structured Finance

Capital treatment warning issued

The Basel Committee's revised proposals on the capital treatment of securitisation exposures (SCI 19 December 2012) could limit the appetite for structured notes among banks, Fitch reports. The agency warns that this could restrict the availability of structured finance as a funding source for the wider economy.

Fitch also notes that, in its view, the proposals do not reflect historical and expected performance globally. "The new proposals result in a significantly higher capital requirement for securitised holdings. Senior tranches - which are more likely to be sold to investors than junior positions - are worst affected and the proposals ignore the improved credit protection in new deal structures since the financial crisis," the agency adds.

Sample capital charges calculated for a stylised prime RMBS transaction with a notional value of US$100 show that overall charges for all noteholders increase to between US$6.3 and US$8.2 under the new proposals, from a maximum of US$4.6 under Basel 2. In many cases there would be little or no capital relief for holding only a portion of the risk in the underlying portfolio compared with keeping the entire pool of assets on balance sheet, Fitch observes.

The high capital charges that result from the proposals are only comparable with the US experience, where losses have been skewed by the severe underperformance of subprime and Alt-A RMBS and certain types of CDOs. Fitch forecasts total losses of just 0.2% on its rated EMEA RMBS transactions issued during 2000-2011.

The proposed revised ratings-based approach seeks to reduce the cliff effect that resulted from multi-notch downgrades of senior tranches during the financial crisis. But it seems to achieve this by increasing the extent of capital that would need to be held against triple-A rated charges in the first place, according to Fitch. This is despite the fact that post-crisis transactions benefit from better-originated, higher-credit-quality assets and greater credit protection.

The agency says that in aiming to more closely align the standardised approach and the internal ratings-based approach, the revised proposals arguably create a more - rather than less - complex system, with more choices for banks and local regulators under both new systems (hierarchy A and hierarchy B) and the potential for regulatory arbitrage.

Structured Finance

Securitisation tipped to bridge funding gap

Prime Collateralised Securities (PCS) has published a White Paper, entitled 'Europe in Transition', which outlines ways of bridging the European economic funding gap. The organisation estimates that the funding gap will reach at least €4trn over the next five years, representing the sum of what PCS expects the new regulatory capital and liquidity rules will take out of the system and what a conservative economic estimate believes needs to go into the system to generate growth.

Unless this funding gap can be bridged, PCS believes that European governments and businesses face the potential of an economic wasted decade - a long-term period of stagnation, similar to that experienced in Japan. According to the paper, there are two courses of action to avoid such stagnation: either banks must increase the amount of capital they hold or non-bank sources must replace the lost funding.

The paper sets out how four key factors combine to constrain banks' ability to raise capital: dilution, uncertainty, business model and no more 'too big to fail'. Given current demands on European public expenditures, the primary gap will consequently have to be addressed through Europe's capital markets.

The paper further examines the hurdles that lie in the way of such capital market funding in Europe and sets out why the most likely, tested and scalable channel available for such funding in Europe is securitisation. In addition, it reviews the issues raised by the challenging past of securitisation in light of the role played by certain securitisations in the crisis.

Based on thorough analysis of five years of crisis, the aspects that divide strong and resilient securitisations - which will be needed to bridge the funding gap - from those that failed so dramatically in 2007/2008 and should not form part of Europe's future are clearly identified.

Ian Bell, the head of the PCS Secretariat, comments: "We believe that, as the acute bank and sovereign crisis of the last few years appears to be receding, the task of providing for the long-term funding of the European real economy is posing a critical challenge for policymakers across the continent. With this paper, we hope to contribute to one of the most important debates taking place today; one that is central to Europe's transition to a stable and prosperous future. Europe's future prosperity is conditional on bridging this funding gap and the paper identifies ways to do that - pivotal is having a healthy high-quality securitisation market."

Structured Finance

Varied SF impairments seen in 2012

Global structured finance (SF) rating and impairment activity varied widely by sector and rating category in 2012, according to Fitch. Downgrades overall remained in line with those seen in 2011; however, the number of active ratings declined year-over-year by close to 20% and this contributed to a higher overall SF downgrade rate of 37% versus 31% in 2011. Upgrades remained muted, affecting 2% of ratings.

The US RMBS sector continued to account for the vast majority of downgrades with 80% in 2012. These were due to a combination of the expansion of Fitch's US RMBS loan loss model to the subprime and Alt-A sectors and adverse selection in remaining US prime pre-2005 pools. The application of rating caps to Spanish RMBS ratings following Fitch's sovereign downgrade also negatively affected RMBS rating performance.

The SF impairment rate declined to 5.4% in 2012 from 9.4% in 2011. There were no impairments recorded in any SF sector at the triple-A level in 2012. The impairment rate remained low across investment grade (IG) bonds at 0.11% in 2012, compared with 18.5% at the non-investment grade (NIG) level.

Moreover, there were no IG impairments reported in the ABS or structured credit (SC) sectors. The IG RMBS impairment rate was 0.15% and the CMBS rate 0.10% in 2012.

Structured Finance

Peripheral ratings on review

Moody's has placed on review for downgrade the ratings of 60 classes of notes in 41 RMBS and seven ABS transactions from Spain, Italy and Ireland due to potentially insufficient credit enhancement. The determination of the applicable credit enhancement that drives the rating actions reflects the introduction of additional factors in the agency's analysis to better measure the impact of sovereign risk on structured finance transactions (SCI 12 March). The introduction of the new factors will also affect the outcome of the rating reviews it initiated in 2012 for ABS and RMBS securities in Ireland, Portugal, Italy and Spain.

Moody's anticipates that potential downgrades relating to the introduction of the new adjustments will generally be around three notches. Moreover, they will mostly affect mezzanine and junior classes in: ABS transactions backed by SMEs and leases, auto-loans and consumer assets; as well as RMBS transactions in Ireland, Portugal, Spain and Italy. The rating agency plans to conclude within six months all open rating reviews related to the adjustments.

The reviews will also consider the increase in counterparty risks resulting from a deteriorated sovereign credit environment where fewer viable counterparties are able to serve as transaction parties. The inability of key transaction parties to perform their roles and difficulty in replacing them increases the risk of payment disruption and performance deterioration, Moody's says.

Structured Finance

Cajamar brings first tender of the year

Cajamar Caja Rural has announced a tender offer for nine RMBS bonds and one SME CLO bond, launching the first ABS/RMBS tender of the year. No maximum purchase amount has been disclosed, with €1.6bn currently outstanding across the 10 tranches, according to Barclays Capital figures.

All of the bonds offered in the latest tender were previously offered in March 2012. The minimum prices offered are, on average, seven points higher this time.

In its previous tender offer, the bank repurchased €86.9m of RMBS bonds from a maximum targeted amount of €300m.

The tender offer expires on 21 March, with the results announced the following day. Barcap ABS analysts suggest that many investors will be keen to participate, but - as shown by the performance of the 2012 tender offer - may again choose to tender their bonds at higher prices than the minimum quoted levels.

"Consequently, the repurchase volumes will again depend on Cajamar's appetite to accept bonds at a higher price because it retains the choice of the repurchase price and volume as this tender offer is carried out using an unmodified Dutch auction," they note.

A total of almost €13bn of ABS bonds were repurchased last year across 30 tender offers.

CDO

Trups CDO defaults decrease further

Combined defaults and deferrals for US bank Trups CDOs further decreased to 29% at the end of Feb from 29.2% at the end of the previous month, according to Fitch. There were no new deferrals year-to-date through the end of February, compared to four new deferrals over a comparable period in 2012.

New defaults are also trending lower, with only one new default year to date compared to four last year. Cures continued to trend higher, with 10 cures year to date compared to seven last year.

At end-February, 216 bank issuers were in default, representing approximately US$6.4bn held across 79 Trups CDOs. Additionally, 329 deferring bank issuers were affecting interest payments on US$4.5bn of collateral held by 78 Trups CDOs.

CLOs

CIP securitisation agreement signed

The European Investment Fund, UniCredit and Federconfidi have signed the first Competitiveness and Innovation Programme (CIP) securitisation agreement to support SMEs in Italy. The transaction will facilitate SME access to an additional €60m of loans. Within the framework of the CIP, the EIF has been allocated €1.1bn to be split between venture capital (under the High Growth and Innovative SME Facility (GIF)) and guarantees (under the SME Guarantee Facility (SMEG)).

CMBS

Fair value to drive CMBS tiering?

US CMBS price tiering could start to emerge this year, as investors begin differentiating between special servicers on a deal. CMBS analysts at Bank of America Merrill Lynch anticipate that special servicers' approach to fair value purchase options will increasingly influence investors' buying decisions.

"To the extent bondholders do not want to purchase bonds from deals that are specially serviced by specific companies, it could result in far-reaching negative consequences," they explain. "This could include bonds that trade with less liquidity, bonds that trade wider than do like bonds that are specially serviced by a different entity or - in a more draconian scenario - dealers becoming reluctant to engage a specific special servicer for a new issue transaction because it may be harder to sell the bonds."

Despite the detail that a special servicer must incorporate when determining fair value, appraising an asset is an inexact science, which can result in a 'grey area' that can push a reported fair value higher or lower than what investors may deem to be realistic. Consequently, although a special servicer may arrive at its honest opinion of fair value, the potential appearance of impropriety through the conflict of interest can lead already suspicious investors to become increasingly cautious.

C-III has stated that it will exercise the fair value purchase option if it sees fit - even though it has, to date, been used less than 1% of the time. LNR Partners, meanwhile, does not exercise fair value options due to the potential for negative interpretation.

Looking ahead, the BAML analysts suggest that if 'questionable' appraisals or modifications result in a negative economic impact to a trust, investors are likely to be more diligent in showing their displeasure by voting with their chequebooks. "Therefore, as previously modified or specially serviced loans begin to refinance or move to their terminal states over the next year, we expect to see price trends emerge depending on which special servicer is at the helm," they conclude.

CS

CMBS

Mall benchmarking survey prepped

Trepp and the International Council of Shopping Centers (ICSC) are set to produce an analysis of shopping centres in the US. The collaboration, which will focus on the collection and analysis of benchmark and performance data, leverages Trepp's detailed information of nearly 20,000 shopping centers and ICSC's research organisation.

The analysis, which will be offered to the ICSC membership, is aimed at helping commercial real estate practitioners better understand the position of shopping centre properties by providing detailed income and expense data. The analysis will be based on two key data sources: Trepp's database of properties; and a survey of shopping centre owners and management companies.

The benchmark analysis represents an expansion of the collaboration between ICSC and Trepp. Since 2009, ICSC has maintained access to Trepp's monthly reports to better serve the research requirements of its 58,000 members.

The ICSC-Trepp benchmarking survey will be opened to participants in mid-April.

CMBS

2013-ALTM ratings slated

Moody's says its credit evaluation of Morgan Stanley Capital I Trust 2013-ALTM CMBS is significantly different from that provided in reports published by other rating agencies. The credit protection for the principal and interest classes of the transaction - which is backed by the Altamonte Mall in Altamonte Springs, Florida - is insufficient, in the agency's opinion, relative to the ratings assigned by three other rating agencies.

Moody's considers the ratings on all of the classes to be between four and six notches too high, based primarily on the value it would assign to the mall. "Given Altamonte's mid-tier position in the highly competitive greater Orlando market and the potential volatility of its cashflow, we assigned it a value 35% lower than the appraised value," says Tad Philipp, director of CMBS research at Moody's. "This discount is consistent with other recent Moody's-rated single-borrower transactions, and one which allows sufficient cushion for interest rates to rise and cashflows to fall, while still providing a refinance exit cushion appropriate for investment grade ratings."

Moody's used a capitalisation rate of 8.5% to assess the mall's value, as opposed to the 7% rate another agency used. The valuation that results from a 7% cap rate is inappropriately high for assessing refinancing risk, according to Moody's.

The agency has previously noted that a key part of its credit analysis is determining how well a mall is positioned for long-term survival (SCI 8 June 2012). "We use a 7% cap rate for only the highest-quality malls, those with strong competitive positions and durable cash flows," continues Philipp. "In an environment of low interest rates, low cap rates are inappropriate because they don't sufficiently address refinancing risk; in this case, when the Altamonte loan matures in 12 years."

Two other agencies did use higher cap rates, of around 7.8%. But they also used higher advance rates - investment grade equal to approximately 80% of initial value, in contrast with Moody's 69.5% - to reach the same ratings.

"Given Altamonte's weaker position, we think that the risk of a decline in sales and thus a decline in net income available to service debt is significant," Philipp adds. "This weakness justifies our higher cap rate and lower advance rate, despite the low risk that Altamonte will fail during the loan term."

The transaction was rated by Kroll Bond Rating Agency, Morningstar and S&P.

CMBS

Latest Coeur Defense ruling deemed credit positive

The 28 February decision from the Versailles Court of Appeal is a positive development in the Coeur Défense case, says Moody's. The decision confirms the enforceability of security assignments of lease receivables even upon insolvency of the lessor.

A decision from the same court last year was deemed credit negative (SCI 26 March 2012), but the latest ruling limits the vulnerability of secured creditors to the insolvency of borrowers established as corporate SPVs and is therefore credit positive for French CMBS transactions. It does not affect standard ABS and RMBS transactions.

In 2008 the French courts opened safeguarding proceedings at the request of the SPV owning the property. This decision clearly states that insolvency proceedings do not affect the validity and enforceability of the issuer's rights over the lease receivables and consequently the SPV is not commingling the payments of rents by the lessees in its estate, helping mitigate the impact of the previous proceedings.

CMBS

Shortfalls hit HQ13 super seniors

MSC 2007-HQ13 has become the first US conduit CMBS to see interest shortfalls hit the super senior classes. Prior to the March remittance report, shortfalls had reached the AJ class, but now classes A2, A3, A1A, AM and X have been affected.

Thus far, nine classes of bonds have been extinguished by collateral losses, according to Trepp. This has made the F class - originally rated triple-B plus - the first loss tranche. The F class' balance has already been reduced by almost 75%.

Still to be processed is a loss on the Pier at Caesars. This US$80.5m loan was carrying a US$62.7m appraisal reduction - enough to wipe out all bonds up to the AJ class. The amount was bumped up to over US$80m this month - indicating that a 100% loss (or more) is possible, enough to wipe out 25% of the AJ class.

Trepp notes that the interest shortfalls on the super seniors could be around for a while. According to the March remittance report, the Pier loan still has US$9.4m in advances left to be reimbursed to the master servicer.

Risk Management

LBIE settlement raises valuation issues

Lehman Brothers Finance AG (LBF) has reached a settlement with Lehman Brothers International Europe (LBIE), through which significant value is expected to be returned to the LBF estate. The move also has wider implications for derivatives documentation.

The English Court of Appeal last week issued judgment in the appeal made by LBIE against the decision of Justice Briggs in the first instance concerning the legal effect of a side letter entered into by LBF and LBIE relating to various back-to-back OTC derivative transactions between LBIE and LBF. At first instance, the judge found in favour of LBF to the effect that no value should be given to the side letter in the close-out calculation for these derivative transactions. The Court of Appeal found in favour of LBIE and determined that it should be taken into account.

"The appeal decision will have no impact on LBF or LBIE if the settlement becomes effective as anticipated," explains Guy Usher, partner at Field Fisher Waterhouse, which advised LBF. "However, it is a very significant decision in the OTC derivatives market as the Court of Appeal has decided that the valuation principles applicable to the 1992 ISDA Master Agreement - which have become hard law by virtue of a series of court cases since Lehman collapsed - are not to be applied in the same way to the 2002 ISDA Master Agreement."

He adds: "The difference in valuation approach probably affects about half of today's ISDA Master Agreements and will mean that on the same facts there could be very different outcomes under the two agreements."

LBIE was represented by Linklaters partners Richard Holden and James Gardner.

Risk Management

Many firms unready for EMIR

The first compliance deadline of the European Markets and Infrastructure Regulation (EMIR) comes into force tomorrow, with many firms expected to be unable to meet the deadline. The derivative rules will apply initially to financial and non-financial counterparties located in the EU and later to entities trading outside the EU under certain circumstances.

Technical standards designed to implement the requirements were completed on 23 February (SCI 6 March). These obligations require financial and certain non-financial counterparties to provide a daily valuation and timely confirmation of trades from 15 March, with other operational requirements phased-in during the remainder of 2013.

EU legislators have set out this unusually short implementation period in a push to meet their overdue G20 commitment to introduce derivative reforms by end-2012, according to PwC. Crispian Lord, regulation partner at PwC, comments: "The complexity of these new obligations and the short timeframe in which firms have to comply mean that many firms just aren't ready for this Friday's deadline. Regulatory fatigue is also a factor as many firms are being hit by an unprecedented amount of new post-reform regulation to implement and comply with."

He adds: "Regulators may well take a pragmatic view of firms which are not compliant by the deadline. However, they will require firms to provide evidence that they are acting in good faith and doing everything they can to comply as soon as practically possible."

More detailed EMIR technical standards and secondary legislation will be produced during 2013 - namely those addressing EMIR's extra-territorial application, identifying clearing mandatory contracts, rules on capital, margin and collateral for non-centrally cleared trades, and third country equivalence. The regulation introduces three categories of requirements: reporting of all derivative transactions to EMIR trade repositories; centrally clear all OTC derivatives deemed clearing-eligible with EMIR authorised central counterparties; and fulfil margin and collateral requirements and clearing-like operational risk management processes.

While EMIR is expected to reduce counterparty credit risk and improve derivative trading operational efficiency, market participants fear that the new and higher collateral requirements will contribute to a global liquidity shortage, increase the cost of trading and reduce hedging, and concentrate systemic risk in central counterparties.

RMBS

Tunisian RMBS ratings lowered

Moody's has downgraded the global and national scale ratings of the senior notes in FCC BIAT-CREDIMMO 1 and FCC BIAT-CREDIMMO 2, as well as the global scale ratings of the junior notes in FCC BIAT-CREDIMMO 2. The agency has also affirmed the global and national scale ratings of the junior notes in FCC BIAT-CREDIMMO 1 and the national scale ratings of the junior notes in FCC BIAT-CREDIMMO 2.

The rating actions are prompted by the downgrade last month of Tunisia's government to Ba1, on review for downgrade, from Baa3. The rating actions also reflect the increased counterparty risk following the downgrade of Banque Internationale Arabe de Tunisie (BIAT) to Ba2, on review for downgrade, from Ba1 on 8 March.

The downgrade primarily reflects the weakening of the Tunisian government's credit profile, as captured by Moody's recent downgrade of Tunisia's government bond rating by one notch to Ba1, on review for further downgrade, and the lowering to Baa2 of the local currency country ceiling on 28 February. As a result of the downgrade, the maximum rating that the agency will assign to a domestic Tunisian issuer is Baa2.

BIAT acts in various roles in the transactions, including servicer, cash manager, collection account bank and issuer account bank. Due to the lack of back-up servicing arrangements, the recent downgrade increases the risk of payment disruption in the transactions, according to Moody's.

Similarly, since collections are transferred every month from the collection accounts to the issuer accounts and given the size of the reserve funds (15.46% and 4.63% of current total notes balance respectively), BIAT's weakened creditworthiness also increases the exposure to commingling and cash loss risks. The rating changes in both transactions incorporate the increased linkage of BIAT's ratings to that of the notes.

To date, the overall performance of both transactions has been in line with Moody's initial expectations. This is evidenced by the relatively low cumulative net defaults of 0.49% and 0.97% for FCC BIAT-CREDIMMO 1 and FCC BIAT-CREDIMMO 2, considering the low pool factors of 21.5% and 34.5% respectively. Similarly, delinquencies have stabilised after reaching a peak in mid-2011.

RMBS

MBIA-wrapped RMBS hit

S&P has lowered its ratings on 145 classes from 72 US RMBS that are insured by MBIA Insurance Corp. The move comes after the agency lowered its financial strength rating on MBIA to triple-C from single-B (SCI 5 March). The outlook on the monoline remains negative.

The underlying collateral for the affected transactions consists of Alt-A, prime jumbo, subprime, closed-end second-lien and home equity line of credit (HELOC) securities. Two re-REMIC securities that are not bond-insured were also part of this review due to the underlying class being bond-insured by MBIA and the insured payments are passed through to the re-REMIC securities.

S&P says it will continue to monitor its ratings on all US RMBS classes that MBIA insures and take rating actions as appropriate.

RMBS

Ally offloads MSRs

Ally Bank is set to sell a portfolio of agency mortgage servicing rights (MSR) to Ocwen Financial Corp. The transaction comprises MSRs related to mortgage loans with an unpaid principal balance of approximately US$85bn, as of 31 January, as well as an estimated US$5bn of agency MSR created based on commitments made through the end of February. The purchase price for the MSR assets is estimated to be approximately US$585m, as of end-January, and the sale includes the transfer of the representation and warranty liabilities associated with the majority of the loans sold.

As part of the agreement, Ally also has the right to sell Ocwen its remaining MSR portfolio in a subsequent closing. This portfolio is in excess of US$30bn by UPB and contains borrowers who have the ability to refinance in the near term. Ally says it has received interest in this portfolio from other financial institutions and is currently evaluating the best option for the bank.

The transaction is expected to close in stages over the next few months and is subject to approval by Fannie Mae and Freddie Mac.

Separately, Ally Bank also completed the sale of its correspondent and wholesale broker mortgage operation on 28 February to Walter Investment Management Corp.