Contents

Structured Finance

Ratings differentiation

Call for improved assessment of derivatives risk

'Too big to fail' is emerging as a mainstream concern and with it come calls for the assessment of derivatives risk to be improved. For securitisation investors, better differentiation of risk in credit ratings is being put forward as one solution.

In a hypothetical scenario, where the securitisation industry could start over with regards to ratings frameworks, ex-Moody's svp William Harrington believes that ratings should be capped at single-A for deals that contain derivative hedges. At present, senior ratings don't distinguish between transactions that have a derivative at the top of the waterfall and ones that don't, even though downgrade risk is significantly higher for the former.

"Ratings caps would facilitate a more rational investment landscape that enables asset managers to look at their overall portfolio and identify which other factors - not just credit risk in the underlying - they might be sensitive to," he argues. "They could then hedge out their currency risk, for instance, on an exchange or leave the transaction unhedged and be compensated for associated risk. It would engender a better understanding of performance."

Harrington says that better differentiation of risk in ratings would create a clearer alignment of investment objectives across the spectrum from conservative institutional investors to risk-savvy sophisticated investors. He suggests that three distinct investment profiles could be targeted in this way: investors who would like to eliminate derivatives risk entirely; investors who can accept index/exchange risk but don't want derivatives risk; and investors seeking exposure to both index/exchange risk and derivative risks.

At issue is the limited number of ratings categories for structured finance, which means that hundreds of different outcomes converge on only 19 different ratings. "Different types of risks can be borne in securitisations and at present there is no way of distinguishing them. If variegated risks are reflected appropriately in a rating, it's then up to the investor which ones they can bear. A better way to gauge these risks would be to, say, designate them on a scale of one to a hundred," suggests Harrington.

This would also lessen the 'cliff effect' observable in current ratings approaches, whereby the minimal difference in expected loss between triple-A, double-A and single-A means that mild losses can move sharply down the capital structure.

Another issue that needs to be remedied, according to Harrington, is that information - such as differing underwriting standards, as well as nuances between asset classes and derivative type and counterparty - isn't typically disclosed to the end-users of ratings. Doing so would help investors and regulators gain a more granular sense of the risk involved.

"Publishing the vote tally in ratings committees would also help investors form opinions about contentious decisions, as well as follow rating patterns over time," he adds.

Harrington expects the drive towards central clearing of OTC positions will mean that derivatives return to their original function as hedging instruments. It may also force asset managers to scrutinise their derivatives documentation in more detail, thereby shedding light on how confirms are changing over time, for example.

"The broader issue is that assessment of derivatives risk needs to be improved," he observes. "It is analogous to the Y2K systems overhaul in that asset managers should be undertaking as much due diligence on derivatives risk as they do on credit risk. They now have two hedging options - via futures exchanges and OTC clearing."

Finally, event risk should be explicitly modelled by rating agencies, according to Harrington. This would include monitoring how many deals a counterparty is exposed to or whether any counterparty has an oversized exposure to a certain sector.

"There should be an upfront linkage between the ratings of a counterparty and the potential for flip clauses to be triggered," he concludes. "Ultimately, securitisations should be modelled according to whether they are fully hedged, partially hedged or unhedged. An overlay pertaining to where flip clauses are enforceable can be added where necessary."

CS

CLOs

Primary issuance hotly anticipated

With the European secondary markets subdued in the wake of Easter holidays, focus has turned to the CLO space. A few ABS bid-lists have kept the market ticking over and have been well received, but it is the anticipated forthcoming CLO primary issuance that is really garnering attention.

The €306.5m ALME Loan Funding 2013-1 and the €300m Dryden CLO XXVII transactions have been in the pipeline for some time, following Cairn's re-opening of the European CLO market in February (SCI 20 February). 3i Debt Management, Alcentra, Investec and New Amsterdam Capital Management are all also understood to be preparing European CLOs.

"People are expecting those CLOs to be well received. There is not a lot of paper out there at the moment, so any investors looking for a decent sized ticket will be particularly interested in primary issuance," reports one trader.

He continues: "It will be interesting to see whether it is sustainable over the course of the year. It looks like the deals getting done now have been worked on for a while and the secondary pipeline is a little sketchy at the moment."

Cairn CLO III showed that deal economics have become favourable once again, spurring other CLO managers to look at the sector. As more legacy CLOs run out of their reinvestment periods, that is also expected to have an effect on supply. Should the primary issuance anticipated in the near future come to market successfully, it would mark a significant milestone in re-establishing the sector, according to the trader.

He concludes: "From the people I have been talking to, there is no expectation that we will see three or four deals each month, but 10 or 12 deals a year seems reasonable. If each of those is around €300m, then - while we might not get back to the market's pre-crisis levels - it would be a huge improvement on the last few years."

A couple of European CLO tranches were circulating yesterday in the secondary market, according to SCI's PriceABS data. BBVAP 8 A2G was talked at 98.18, while TDCAM 3 A2 was talked at around 90.25.

JL

CMBS

US CMBS picks up pace

US CMBS secondary supply yesterday more than doubled the levels observed on Monday. Total BWIC volume stood at US$233m, with SCI's PriceABS data showing a slew of 2004-2006 vintage paper, as well as more recent Freddie Mac tranches.

"Generic CMBS spreads are unchanged on the day. In terms of supply, legacy fixed bonds - the majority of which are seniors - account for roughly 60% of the bonds out for bid," notes Interactive Data.

The fixed rate CD 2005-CD1 E tranche was one of several to be covered during the session. It was talked in the low-90s and mid/high-90s and covered at 97.4. Talk in January had been at around 90 and in the low/mid-90s, with the previous cover on 14 August 2012 in the high-60s.

BACM 2006-1 H was also out for the bid and talked in the mid/high-single digits, while BACM 2006-1 C was covered at mid-95 and talked in the mid-90s. That latter bond was covered on Monday in the low/mid-90s, when it was also talked between the low-80s and low-90s.

Another name of note circulating during the session was WBCMT 2004-C15 H, which was talked in the mid/high-80s and 90 area and covered at mid-80. It was being talked in the low-80s back in January.

More recent paper was also available. For instance, the US$11.6915m DBUBS 2011-LC1A B tranche was covered at 134 and talked in the low/mid-100s.

In addition, PriceABS picked up a number of Freddie K series tranches. KREMF 2012-K21 B was covered at 172, while FREMF 12-K21 C was talked at 260 and covered at 266 and FREMF 12-K23 B was talked and covered at 170. The C tranche from FREMF 13-K25, which priced in February of this year, was talked at 260 and covered at 268.

JL

RMBS

RMBS volume creeps up

SCI's PriceABS data shows an increase in US RMBS secondary activity for yesterday's session. Subprime supply was particularly prevalent, with a slew of senior and mezzanine tranches out for the bid.

"Overall BWIC volume has slightly picked up from the prior session, led by an increase in subprime bonds. Trading activity in fixed and ARMs is focused in prime collateral. Dealer offering levels are unchanged to slightly mixed day-over-day," Interactive Data observes.

One subprime tranche doing the rounds was RAMP 2006-RZ5 A2, which was talked in the low/mid-90s. The tranche's first appearance in the PriceABS database was on 26 July 2012, when it was talked in the mid-80s.

JPMAC 2006-WF1 A3A was also out for the bid. It was talked in the mid-60s, which is also where it was talked on 6 March, when it was last covered. The tranche's first recorded cover was in August last year, when it was covered in the high-50s.

Away from the subprime space, the Alt-A fixed RAST 2005-A11 2A1 tranche was talked at around the 70 area - slightly higher than the mid/high-60s talk it attracted the day before. In addition, a US$1.7m piece of the US$3.57m Alt-A hybrid CMLTI 2006-AR9 1A2 tranche was covered at 96 handle. It had been talked the day before in the mid/high-90s and was also covered in the mid/high-90s last month.

Other Alt-A paper, such as the US$80m BAFC 2006-7 1A3 tranche and the US$156.1m LXS 2007-10H 2AIO tranche, were also out for the bid. The largest name captured by PriceABS for the session was the US$367.783m MSM 2006-3AR 1AX, which was covered at 12.

Finally, fixed prime tranches - such as GSR 2005-5F 4A5 - were circulating yesterday. That tranche was talked around 104 and at a high-105 handle.

Prime and Alt-A hybrid volume was generally light, with nearly half of the supply coming from two blocks - BSARM 2007-3 1A1 and STARM 2007-4 2A2. Both of these bonds were also out on Wednesday.

JL

Structured Finance

SCI Start the Week - 8 April

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

Pipeline
The second quarter kicked off with a healthy number of new deals being announced. Of those transactions, one ABS, an ILS, two RMBS and three CMBS remained in the pipeline by the end of last week.

The ABS was Sfr200m Swiss Credit Card Issuance No.2 Series 2013-1 and the ILS was the US$100m Bosphorus 1 Re.

The RMBS consisted of ZAR1bn Amber House Fund 3 and €752.2m Storm 2013-II. The CMBS were US$1.75bn FREMF 2013-K712, US$260m GSMS 2013-PEMB and US$300m Wells Fargo Commercial Mortgage Trust 2013-BTC.

Pricings
It was another busy week for new issuance, with 19 prints to start the quarter. Eight ABS, two ILS, three RMBS, three CMBS and three CLOs priced.

The ABS new issues were: US$928.34m Ally Auto Receivables Trust 2013-1; US$1.1bn AmeriCredit Automobile Receivables Trust 2013-2; US$851.43m John Deere Owner Trust 2013-A; US$211.82m Oklahoma Student Loan Authority Series 2013-1; US$350m Prestige Auto Receivables Trust 2013-1; US$67.5m RISLA 2013 Senior Series A; US$185m Security National Auto 2013-1; and US$1.246bn SLM Student Loan Trust 2013-2.

The ILS prints comprised US$250m Everglades Re Series 2013-1 and US$200m Tar Heel Re Series 2013-1, while the RMBS pricings consisted of US$463.34m Sequoia Mortgage Trust 2013-5, US$835.114m Springleaf Mortgage Loan Trust 2013-1 and the remarketed €750m Citadel 2010-II. The CMBS new issues included US$390m CGRBS 2013-VNO5TH, US$285m Del Coronado Trust 2013-DEL and US$1.33bn SBA Tower Trust.

Finally, €675m IM Cajamar Empresas 5, US$343.8m JMP Credit Advisors CLO 2013-2 and US$500m Oaktree Enhanced Income Funding Series II rounded out the new issuance.

Markets
Activity in the US non-agency RMBS space picked up in the second half of the week, as SCI reported on Friday (SCI 5 April). Subprime paper once again led the charge, with SCI's PriceABS data picking up names such as RAMP 2006-RZ5 A2 and JPMAC 2006-WF1 A3A out for the bid.

Spreads remained range-bound for US CMBS, meanwhile, according to Barclays Capital analysts. Marginal tightening was seen for 2005-2007 AMs.

"New issue dupers stayed at ~S+85bp in the absence of any new conduit supply. We expect this to change in the coming weeks, with a series of conduit deals lined up to close in April. In the agency CMBS market, spreads widened 2-3bp on 10/9.5 DUS loans, while remaining roughly unchanged elsewhere," they comment.

Bank card bonds dominated the US ABS market at the start of the week, but a greater proportion of student loan and container ABS paper generated variety later on, as SCI reported on Wednesday (SCI 3 April). Tuesday's secondary trading flows picked up on Monday's.

PriceABS highlighted NCSLT 2006-4 A2 as one of the student loan tranches that was circulating. It was talked at 94 and at 96, having previously been covered at high-94 in January and at 93.16 in October last year.

In Europe, both primary and secondary markets were fairly quiet. Deutsche Bank analysts note: "Secondary markets remain quiet - while broader risk markets have absorbed and seemingly moved on from the Cyprus debacle - observable trading in European ABS has been muted on the back of the Easter holiday. The new issue pipeline, meanwhile, continues to remain meager."

Deal news
• Freddie Mac intends to start issuing pools of modified loans, which could offer a distinct investment opportunity. At the same time, the FHFA has announced a significant revision to the current modification process, which is set to increase the number of modifications executed and provide extra impetus to Freddie's plan.
• Ways of improving financing to the Dutch mortgage market are currently being considered by the country's authorities, in particular how to encourage increased participation from institutional investors. One proposal under discussion is the creation of a centralised Dutch mortgage bank (the NHI), which would issue multi-issuer standardised mortgage bonds (NHOs) explicitly wrapped by the state.
• CMBS note sale activity via Auction.com is expected to pick up this month, with four separate commercial property auctions scheduled. The largest among these is the Corridors I & II property, part of the US$39m TAG portfolio securitised in LBUBS 2005-C5.
• The majority of the controlling class of ACA ABS 2007-1 has directed the trustee (Wells Fargo) to dispose of the CDO's collateral. It is currently anticipated that the liquidation of the portfolio will be effected via one or more private sales.
• S&P has raised the issuer credit rating (ICR) on the Athilon CDPC to triple-B plus from double-B plus. At the same time, the agency affirmed its ratings on the senior subordinated, subordinated and junior subordinated notes. Its outlook on Athilon is stable.
• Auctions are due to be conducted for Longport Funding II and Trainer Wortham First Republic CBO IV. The sales for the transactions will be held on 19 and 22 April respectively.

Regulatory update
• The ECB deadline for submitting loan-level data to the European DataWarehouse has passed. Although most banks had signed up by February (SCI 22 February), the number of deals in the ED's system has increased significantly from around 200 at the end of that month to now stand at 557.
• MBIA Inc on 2 April won an appeals court ruling, whereby Bank of America could be required to repurchase securitised loans even if they are not in default. The New York state appeals panel found that MBIA is entitled to have Bank of America buy back a performing loan that it can prove "materially and adversely" affected its interest, thus reversing part of a lower court ruling.
• The NCUA has settled with Bank of America for US$165m for losses related to purchases of RMBS by failed corporate credit unions. The agency subsequently filed a petition with the Supreme Court of New York State to withdraw its objections against the US$8.5bn proposed Countrywide settlement.
• IntercontinentalExchange is seeking to establish ICE Trade Vault Europe as a trade repository for the reporting of swaps and futures trade data to meet EMIR requirements. Its launch remains subject to approval by ESMA.
• The CFTC has issued a final rule to exempt swaps between certain affiliated entities within a corporate group from clearing requirements under the Commodity Exchange Act (CEA), subject to a number of conditions. The rule permits affiliated counterparties to elect not to clear a swap if those counterparties are majority-owned affiliates whose financial statements are included in the same consolidated financial statements.

Deals added to the SCI database last week:
A-Best 8; Access Funding 2013-1; Adirondack Park CLO; AFG Series 2013-1 Trust RMBS; Alaska Student Loan Corporation Series 2013-A; American Credit Acceptance Receivables Trust 2013-1; Apidos CLO XII; ARI Fleet Lease Trust 2013-A; CAL Funding II series 2013-1; Carlyle Global Market Strategies CLO 2013-2; Cedar Funding II CLO; Dansk Auto Finansiering 1; ECP CLO 2013-5; Fifth Third Auto Trust 2013-A; GE Capital Credit Card Master Note Trust Series 2013-1; GoldenTree Loan Opportunities VII; Hardee's Funding/Carl's Jr Funding Series 2013-1; IDOL Trust Series 2013-1 RMBS; ING IM CLO 2013-2; Liberty Series 2013-1 Trust; Pontormo SME; Saecure 13; SC Germany Auto 2013-1; SC Germany Consumer 2013-1; Shackleton 2013-III CLO; Tralee CLO II; and Volvo Financial Equipment Series 2013-1.

Deals added to the SCI CMBS Loan Events database last week:
Capmark VII; CMLT 2008-LS1; COMM 2006-C7; CWCI 2006-C1; CWCI 2007-C2; DECO 2007-C4; DECO 6-UK2; DECO 7-E2; EURO 25; FORES 1; GCCFC 2007-GG9; GRF 2006-1; JPMCC 2005-LD2; JPMCC 2007-C1; JPMCC 2008-C2; JPMCC 2012-HSBC; LBUBS 2007-C6; LBUBS 2008-C1; MSC 2007-IQ15; PROUL 1; REC 3; RIVOL 2006-1; TAHIT 1; TITN 2007-3; TMAN 6; VWALL 1; WBCMT 2004-C11; WBCMT 2007-C30; WINDM VIII; and WINDM XII.

Top stories to come in SCI:
Focus on US single-asset CMBS
Filling the UK RMBS vacuum

CLOs

Lack of collateral concerns CLO investors

Limited collateral and a lack of arbitrage emerged as the two stand-out concerns for respondents to JPMorgan's Q2 CLO client survey. Overall, US CLO 2.0 triple-A spreads are anticipated to move below 100bp by year-end, with European spreads also expected to tighten.

US high-yield loan re-pricing and lack of European high-yield loan supply are weighing on market participants' minds, according to JPMorgan CLO analysts. Regulation also continues to cause consternation and ranked third on respondents' list of concerns, with regulatory changes by the FDIC and BIS potentially impacting bank investors.

Market volatility was the fourth most commonly cited concern. This ranks lower than the analysts expected, suggesting that more investors are pursuing a buy-and-hold strategy.

The proportion of investors and investor/managers with low cash balances has increased, almost exactly at the expense of high and very high cash responses. Of all the investors and investor/managers polled, 29% reported having at least a high level of cash, fewer than those who reported having a low level or a moderate level.

Respondents plan to invest fairly evenly in primary and secondary supply over the next six months, with primary mezzanine and subordinate debt proving most popular. At the same time, the number of sellers has increased from the previous survey, with the buyer/seller ratio declining from 10.1x to 5.5x.

Looking beyond the next six months, respondents expect year-end US CLO 2.0 triple-A spreads to move into the Libor plus 90bp-100bp range. Some respondents predicted spreads as tight at Libor plus 75bp, while some forecasts were a little north of Libor plus 120bp.

European CLO 2.0 triple-A levels are also expected to tighten, although not quite as much. The consensus response was that spreads would finish the year at Euribor plus 120bp, about 15bp-20bp tighter than current price talk.

The survey ran last month and garnered responses from 81 clients, including both CLO managers and investors. 50 of those respondents would consider investing in the primary US CLO space, while 33 would dip into European CLOs, 14 like the look of European CLOs with large bond buckets and eight would invest in emerging market CLOs with large bond buckets.

JL

CMBS

Special servicer changes examined

As US CMBS write-downs increase, shifting control higher up the structure, the number of special servicer changes is rising. The way distressed loans are handled will, in turn, change - impacting bond cashflows at both ends of the capital stack.

About half of the 100-odd changes in special servicers that have occurred over the past two years have been on pre-2004 vintage deals, according to Barclays Capital estimates. These transactions are at, or close to, their scheduled maturity date and are experiencing a rapid increase in losses due to maturity default resolutions. However, a substantial number of servicer changes are also occurring in the 2005-2007 vintages, where the share of distressed loans is many magnitudes larger and where special servicer resolution strategies may have more of an impact.

The spate of transfers has led to a steep increase in the number of deals being serviced by C-III and CWCapital, as well as a small increase in LNR-serviced deals. Barcap figures suggest that: 31 transactions have been transferred to C-III, while 12 have been transferred from the servicer; the corresponding figures for CWCapital and LNR are 22/6 and 15/12 respectively.

This consolidation of activity within the top-three special servicers also means that the somewhat smaller servicers, such as Berkadia and Midland, are losing market share. While eight deals have been transferred to Berkadia, for instance, 19 have been transferred from it.

Barcap CMBS analysts compared monthly delinquent to liquidation roll rates for deals that experienced a change in special servicer to gauge how these transfers affected resolutions. "The results are somewhat intuitive: deals where special servicing rights transferred to LNR experienced a big pick-up in liquidation rates. The same effect holds for deals which transfer to C-III, though the magnitude of increase in liquidation activity is more limited. However, for deals where the new special servicer is CWCapital, monthly liquidation rates actually fell after the transfer," they observe.

Given this sharp shift in resolution activity within transactions, the analysts suggest that investors in front cashflow CMBS tranches in particular should keep an eye on potential servicing transfers. A handful are due to occur in the coming months, including the transfer of LBUBS 2006-C6, MLCFC 2006-4 and CD 2006-CD2 from LNR to C-III (see SCI's CMBS loan events database).

CS

RMBS

Freddie to issue modified pools

Freddie Mac intends to start issuing pools of modified loans, which could offer a distinct investment opportunity. At the same time, the FHFA has announced a significant revision to the current modification process, which is set to increase the number of modifications executed and provide extra impetus to Freddie's plan.

The FHFA's new guidelines - dubbed the streamlined modification initiative - will come into effect on 1 July and require servicers to offer certain borrowers a streamlined standard modification. To be eligible, loans must be between 90 and 720 days delinquent, with a current LTV of more than 80%. A qualifying loan must also be at least 12 months seasoned.

"We believe the direct prepayment effects on agency MBS are minimal. Although loans must be repurchased prior to a modification, the GSEs already buy out loans automatically at 120 days delinquent. Since the vast majority of loans that are 90 days delinquent ultimately end up in the 120 days delinquent bucket anyway, this is likely to have only a marginal effect on prepayments," observe Barclays Capital RMBS analysts.

However, if the new guidelines drive modification rates up, they could provide extra momentum to Freddie Mac's plan to issue pools composed of modified loans. These would come with an 'M' prefix, with issuance set to begin this quarter.

The GSEs are required to reduce their retained portfolios by 15% each year and have had success with RMBS, where the market is willing to purchase performing assets. But it has been harder to sell whole loans, so securitising modified loans is expected to help decrease the share of these loans on the GSEs' books.

Given the large number of modified loans held in GSE-retained portfolios, there is substantial potential for issuance. Pools composed of modified loans should offer an attractive payment profile.

Freddie Mac plans to securitise 40-year, 30-year, 20-year and 15-year loans and says it will provide additional disclosures specifically for these pools, to be integrated at end-April. Those disclosures will include the updated credit score, estimated LTV, 36-month borrower payment history and the type of modification.

"The volume of modified loans is meaningful and could give rise to a new specified pool category. Granted, Freddie's R-pool programme failed to gain significant traction. However, modifications comprise the majority of GSE loss mitigation actions," note the Barcap analysts.

One million loan modifications were executed by the GSEs between 2010 and 2012. Assuming an average loan size of US$150,000, this equates to around US$150bn in unpaid principal balance, which is likely to increase in the wake of the FHFA's changes.

As the loans have been previously modified, many of the related borrowers are expected to have weak credit scores and high-LTVs. As many will already be struggling to make monthly payments, voluntary prepayment speeds are expected to be low, but involuntary speeds could be higher.

"Involuntary prepayments are likely to be a significant driver of overall speeds, in our view. Overall credit performance for modified loans is significantly better in the GSE space versus other sectors. That said, re-default performance is likely to depend on a number of factors," the analysts add.

The most important factors will be payment reduction, type of modification and number of months since modification. A meaningful reduction in mortgage payment should significantly improve a borrower's ability to service their loan, while more extensive loan modifications are more likely to improve credit performance. Finally, as defaults tend to be front-loaded, the number of months since modification should serve as a useful indicator of credit performance.

JL

RMBS

Servicer advances begin rebound

Servicer advance rates have reversed the downward trend that began in early 2009. As well as a potential increase in voluntary prepayment rates and lower realised loss severities, a positive effect on servicer advance rates on delinquent loans can therefore be expected.

The impact of declining servicer advances was felt most acutely in subprime deals and it is here that the trend reversal is also most noticeable. Overall delinquencies are also higher in subprime than in other collateral types and servicer advances therefore have a greater impact on trust cashflows and tranche valuation.

"Subprime advance rates fell farther and faster than those of their peers, likely a result of longer delinquency timelines and lower average recovery rates. However, subprime advances appear to have found a floor in August of 2012, in the mid-40s, and have even increased slightly since then," comment Morgan Stanley RMBS analysts.

A divergent trend between judicial and non-judicial states is also emerging. Advances in non-judicial states did not fall as far as those in judicial states and have recently increased markedly, while a slower housing recovery in judicial states has seen servicer advances plateau instead of increasing.

The number of servicers restarting advances on loans they had previously stopped advancing on has increased significantly in both judicial and non-judicial states, however. In non-judicial states, restarts have been anywhere up to 85%, while judicial state restarts are up to 56%.

As well as restarts, servicers can liquidate mortgages that they are not advancing on to increase their reported advance rate. This is where the discrepancy between judicial and non-judicial states becomes clearer, with Morgan Stanley estimating that the former removed an average of 1.2% of the population of loans they no longer advanced on in January 2013, while non-judicial states removed an average of 3.8%.

"This difference in liquidation rates is not a surprise. The bottleneck created by the necessity of completing foreclosures through the court system in judicial states leads to significantly longer timelines. These longer timelines serve to suppress liquidation rates in judicial states," the analysts note.

Meanwhile, Ocwen has lower average advance rates, higher restart rates and a larger balance of loans not being advanced upon than Nationstar, Bank of America, American Home and JPMorgan. Nationstar has a similar restart rate but a far smaller balance of loans not being advanced on.

Ocwen has restarted advances at a higher rate than any other servicer over the past six months and the loans on which it is re-advancing have only been in a non-advance state for an average of three months. In comparison, JPMorgan has a lower restart rate, but had been declining to advance on loans for an average of 10 months before making the decision to re-advance.

"This trend would lead us to believe that these enhanced restart rates might be a consequence of the myriad MSR transfers occurring in the subprime space. While we cannot categorically dismiss this notion, Ocwen and Nationstar have been servicing these non-advance loans for an average of about two years before making the decision to restart advances," the analysts observe.

Increasing servicer advance rates are positive for non-agency trusts as a whole, but the extent to which this is the case will vary across the capital structure. Increasing servicer advance rates and the resultant increase in soft enhancement will be especially positive for current-pays and second-pays as they pay down more quickly, while the interruption in subordination write-down delays the principal window from opening for last cashflow bonds.

JL

Structured Finance

MBIA bolstered by court rulings

MBIA Inc on 2 April won an appeals court ruling, whereby Bank of America could be required to repurchase securitised loans even if they are not in default. The New York state appeals panel found that MBIA is entitled to have Bank of America buy back a performing loan that it can prove "materially and adversely" affected its interest, thus reversing part of a lower court ruling.

The move follows the New York State Supreme Court's upholding last month of the New York State Insurance Department's decision to approve MBIA's transformation in February 2009. A group of 18 banks had initially challenged the approval in an Article 78 proceeding, although by the commencement of hearings before the Court only two banks remained (SCI passim). The Court rejected each of the banks' arguments that the Department's approval of the transformation was either arbitrary and capricious, or contrary to law.

Structured Finance

Restructuring partners added in London

Schulte Roth & Zabel has recruited Peter Declercq and Sonya Van de Graaff to expand its London office. They each come from Brown Rudnick and join Schulte's business reorganisation practice as partners, where they will report to Adam Harris.

Declercq's practice focuses on cross-border insolvencies, restructurings and distressed mergers and acquisitions. He currently represents the ad hoc bondholder group for structured notes issued by Lehman Brothers Treasury.

Van de Graaff's practice focuses on European restructuring, distressed investing and debt trading. Before Brown Rudnick she spent six years at Bear Stearns and is currently advising investors in connection with the Eurosail 2007-3 court proceedings.

Structured Finance

Bank names structured products vet EMEA ceo

Nomura has named Jeremy Bennett as ceo for EMEA. Scott Bugie has also been made head of the financial institutions group's ratings advisory division for the region.

Bennett has held non-executive director positions within Nomura's European businesses since 2010. His background is in structured products and derivatives and previous roles include global head of structuring at Credit Suisse and head of derivatives products in Asia for Bankers Trust.

Bugie's appointment will strengthen Nomura's capabilities in debt capital markets for financial institutions. He will report to Selim Toker and advise clients on ratings-driven transactions, on structuring new issues for maximum ratings credit and on strategic ratings advisory mandates. He spent 25 years at S&P and has also worked for the Federal Reserve Bank of San Francisco.

Structured Finance

Four join credit hedge fund

400 Capital Management has hired four new recruits to increase its investment and operations capabilities. Chi Lee, Edward Lee, Kara Bingham Regan and Yehuda Graber all join as directors.

Chi Lee takes responsibility for the sourcing, analysis and structuring of CLOs as well as structured credit and related derivatives opportunities. He was previously at Navigant Consulting, and before that UBS, Prudential Securities and Bank of America, where he developed and advised on credit derivative structuring, modelling and analysis.

Edward Lee takes responsibility for sourcing and structuring loan and mortgage origination and trading opportunities for the residential credit and whole loan trading group. He was previously an RMBS trader at Bank of America Merrill Lynch and has also worked for First Annapolis Consulting.

Bingham Regan joins the legal and compliance department. She was previously chief compliance officer at Sire Management Corporation.

Graber joins the firm's enterprise analytics development team and is responsible for the design and integration of 400's various proprietary and third-party analytic, operations and accounting systems. Graber previously designed and implemented proprietary and third-party analytic systems for RBS.

CDS

OTC processing partner buys out DTCC

Markit has acquired the ownership stake in MarkitSERV previously held by the DTCC. Markit and the DTCC founded MarkitSERV as a joint venture in 2009.

There will be no changes to the services provided by MarkitSERV. Jeff Gooch will remain as ceo of MarkitSERV and global head of processing at Markit.

CDS

Fund manager adds strategy head

Archview Investment Group has recruited Peter Carey as principal in charge of business strategy and capital formation. He joins from SkyBridge Capital, where he led the firm's hedge fund solutions business. Carey has previously worked on the restructuring of the New York Common Retirement Fund's hedge fund portfolio and in the institutional fixed income department at Bear Stearns.

CLOs

Palmer Square boosts credit capabilities

Jeffrey Fox has joined Palmer Square Capital Management from Sandler O'Neill, where he was md responsible for structuring and selling CLOs. He becomes executive director and takes on key responsibilities for Palmer Square's structured credit and CLO platform.

Prior to Sandler O'Neill, Fox was at Société Générale, where he was part of the US CDO, CLO and RMBS credit advisory team. Before that he was at JPMorgan and Bear Stearns, structuring Trups CDOs and CLOs.

CMBS

Rating agency adds CMBS quartet

Kroll Bond Rating Agency has added four analysts from Morningstar to its CMBS group. Steve Kuritz joins as senior director, Laura Shannon and Bill Peterson become directors and Mike Haas joins as associate.

All four will be focusing on surveillance and are located in a new office in Horsham, Pennsylvania. They will report to Eric Thompson, md and head of CMBS.

RMBS

NCUA settles with BofA

The NCUA last week announced a settlement with Bank of America for US$165m for losses related to purchases of RMBS by failed corporate credit unions. The agency subsequently filed a petition with the Supreme Court of New York State to withdraw its objections against the US$8.5bn proposed Countrywide settlement (see also separate article on put-backs).

NCUA has now successfully recovered more than US$335m in legal settlements. The settlement with BofA follows three similar agreements with Citi, Deutsche Bank and HSBC totaling US$170.75m (SCI passim). BofA did not admit fault as part of the settlement.

NCUA has filed ten lawsuits against several other firms - including Barclays Capital, Credit Suisse, Goldman Sachs, JPMorgan, RBS, UBS, Wachovia, Washington Mutual and Bear Stearns - alleging violations of federal and state securities laws in the sale of MBS to five failed corporate credit unions.

ABS

Bankruptcy declines supporting card ABS

Ongoing declines in US personal bankruptcy filings remain positive for credit card ABS collateral, according to Fitch. Following two consecutive year-over-year declines for 2011 and 2012, bankruptcy filings dropped further in the first quarter, ending 13.2% lower versus last year.

This figure is running well below the agency's initial 2013 expectations, which call for a for a 6%-7% full-year decline. Credit card delinquencies and charge-offs fell dramatically last year and held low throughout the first three months of 2013, with overall losses dipping below 4% to begin this year and delinquencies running 26% below 2012 rates.

The continued decline in bankruptcy filings is attributable to ongoing improvements in US consumer credit quality, including fewer initial jobless claims and a slowly downward-trending unemployment rate. Improvements in filings are expected to continue, should consumer behaviour remain disciplined.

"This will also depend on the sustainability of banks to remain careful in their underwriting standards. However, we believe that loosening of these standards has already begun, so the pace of improvement should begin to level off later this year," Fitch notes.

Consumer credit - led by auto and student loans - trended up for the eighteenth straight month in March and has increased at an 8% clip year-over-year during the past five months. Revolving credit, which is driven primarily by credit card usage, has been relatively steady hovering at the US$850m mark. This was a slight increase over the US$847.46m recorded in January.

Most recently, hiring was much slower than expected in March, with the economy adding fewer than 90,000 jobs. However, the unemployment rate fell to 7.6% as more people dropped out of the workforce calculation.

Structured Finance

BoJ boost for CLOs, MBS

The stronger-than-expected quantitative easing announced last week by the Bank of Japan is likely to boost the US securitisation market. Of the US$200bn in incremental demand that the BoJ has signalled, over half is forecast to spill into US fixed income over the course of the year, with CLOs and MBS in particular anticipated to benefit.

Several Japanese banks have long been active investors in triple-A rated CLO tranches. But the sector is now expected to start attracting Japanese life insurers as well.

"While asset allocation changes motivated by the BoJ actions will take time to be felt in the CLO market, we view this development to be positive for the Japanese investor sponsorship of the CLO product in the long run, which may offset possible rethinking of CLO investments by certain US domestic banks as a reaction to FDIC assessment changes," CLO strategists at Morgan Stanley observe.

Meanwhile, MBS have cheapened over the past few months, driven by a variety of factors - including lower bank buying due to concerns about higher rates. Consequently, a substantial portion of Japanese spill-over demand is expected to end up in MBS.

"The BoJ's QE announcement will likely fuel demand for risk assets," confirm MBS analysts at Bank of America Merrill Lynch. "The timing and strength of inflows into mortgages though is not clear cut across the Japanese investor base. Relative yield picks should spur demand from the life insurers; banks, on the other hand, may choose to make loans domestically and invest in equities."

Structured Finance

APAC natural disasters tested ratings assumptions

Fitch reports that the major natural disasters that affected the Asia-Pacific region from 2010 to 2012 have not had any rating impact on its rated structured finance transactions. Disasters over the period included the Japanese earthquake and tsunami of March 2011; the earthquakes of September 2010 and February 2011 in Canterbury, New Zealand; and the worst flooding in decades to hit Queensland, Australia and Thailand.

In each case the impact was immediate on portfolios that had exposure to the affected disaster zone, Fitch notes. Exposure was through direct property damage to loan collateral or through damage to infrastructure and workplaces that prevented borrowers continuing employment. Affected locations saw an immediate rise in arrears, but borrowers quickly recovered in the months following the disaster.

In most cases, transactions avoided significant exposure to the disaster through diversification. Data show that in the unlikely event that the impact felt in the immediate vicinity of the event was replicated nationwide, transactions would suffer, however.

Fitch says it analyses geographic concentration in all transactions it rates and its criteria include assessments of building standards and insurance for natural disasters in regions typically affected by these phenomena. Recent events have provided ample opportunity to test these assumptions and the agency has found no reason to change them as yet.

Structured Finance

'Negligible' set-off risk in Aussie SF

Moody's reports that the level of set-off risk in Australian RMBS, ABS and covered bond programmes is negligible based on the inherent features of these transactions, as well as their structural mitigants.

"For authorised deposit-taking institutions (ADI), set-off risks are mitigated through origination by a special purpose vehicle (SPV) or - in the case of equitable assignment programmes - through title perfection, lack of mutuality and waiver of set-off clauses," says Jennifer Wu, a Moody's vp and senior credit officer/manager. "In the case of non-ADIs, there are no set-off risks because the issuers do not take deposits, sell insurance or engage in other debt-incurring activities with borrowers, so no debt is owed to the borrower to set-off."

Moody's notes that under some ADI-sponsored transactions, the legal title to the collateral resides with an SPV or one of its subsidiaries - neither of which takes deposits, sells insurance or otherwise incurs debt vis-à-vis the borrowers. Therefore no debt is owed to the borrower to set-off.

Some ADI-sponsored RMBS transactions have the legal title to the collateral residing with the SPV. In addition, all ADI-sponsored ABS transactions originate the collateral in the subsidiary that is separately incorporated from the deposit-taking institution.

Structured Finance

Ratings tie-up announced

Moody's credit ratings are now available to institutional investors via Morningstar UK's suite of data feed solutions on a requested, bespoke basis. Institutional clients will be required to hold a Moody's ratings license in order to access the data.

Structured Finance

ED progress 'ahead of schedule'

The ECB deadline for submitting loan-level data to the European DataWarehouse passed last week. Although most banks had signed up by February (SCI 22 February), the number of deals in the ED's system has increased significantly from around 200 at the end of that month to now stand at 557.

As well as that progress, several more deals are still coming in and the ED reports that it is well ahead of its own internal estimates. Coverage of RMBS and SME deals is understood to now be almost full, with only a few small or expiring deals not yet added.

Structured Finance

Data integrity key to non-core divestments

A common trend is emerging in loan book audits executed on behalf of asset purchasers in Ireland and Spain, according to Rockstead - the significant level of data integrity breaches. The firm says this problem could be easily overcome by the lender embedding data integrity within their servicing operations long before divestment becomes a reality.

Rockstead notes that the first step in achieving data quality should be part of the lenders business-as-usual rhythm - having loan operators cleansing the loan data as part of their normal servicing activity. Step two is independent sampling of the loan book to provide management with a high degree of certainty.

Despite recent trades illustrating apparently high discounts, it is Rockstead's opinion that a number of the book trades expected to be executed in 2013 will be marketed with higher price expectations. "Part of the reason for that is a recognition that pre-sale data cleansing and pre-purchase due diligence are critical components of a successful trade," the firm explains. "While the exercise can be costly and time-consuming if not planned properly with the right partner, vendors can mitigate their exposure to cost and to price discounting by entering into a pre-sale programme, giving them greater certainty regarding the ultimate sale value and improving the chances of conversion."

Data verification is only one aspect of a typical due diligence project. Rockstead suggests that vendors divesting their interest in non-core operations should also prepare themselves for robust interrogation of all aspects of their: policies and procedures; complaints, FSO rulings and follow-through; loan security and credit agreements; internal and external audit performance; and regulatory compliance.

Structured Finance

Analytics platform unveiled

Venn Partners has launched Venn Risk Analytics (VeRA), a platform designed to provide an independent, transparent and consistent approach to the analysis and valuation of a broad range of structured finance products. The team behind it consists of leading ABS buy-side, sell-side, rating agency and professional advisory experience, according to the firm.

VeRA aims to help clients: demonstrate a high level of governance for risk management and reporting; establish a clear, transparent framework for regulatory and economic capital allocation; run consistent stress simulations across whole portfolios; identify investment opportunities and evaluate restructuring situations; and value complex and illiquid credit products. The twin fundamental market drivers for the development of the platform are the requirement of many financial institutions to better manage the billions of structured finance products they hold in their portfolios and the need to secure more sophisticated analysis of the new issuances emerging in many ABS markets.

CDO

Private disposition for ACA CDO

The majority of the controlling class of ACA ABS 2007-1 has directed the trustee (Wells Fargo) to dispose of the CDO's collateral. It is currently anticipated that the liquidation of the portfolio will be effected via one or more private sales. A final distribution will be made after the completion of liquidation at dates fixed by the trustee.

The first private sale is expected to occur sometime after 17 April. It will comprise US$11m (original face) of the LBRTS 2007-2A D tranche and US$10.25m of PYXIS 2007-1A D2s.

Separately, an auction for the Libertas Preferred Funding I CDO is due on 22 April.

CDS

SNS Bank results in

The final results for the SNS Bank CDS auction have been published. The auction was undertaken across two senior/sub buckets: the final price for Bucket 1 was 95.5, while the final price for Bucket 6 was 85.5. Twelve dealers submitted initial markets, physical settlement requests and limit orders to the auction.

CDS

Athilon upgraded

S&P has raised the issuer credit rating (ICR) on the Athilon CDPC to triple-B plus from double-B plus. At the same time, the agency affirmed its ratings on the senior subordinated, subordinated and junior subordinated notes. Its outlook on Athilon is stable.

The higher ICR primarily reflects S&P's view regarding the seasoning credit of Athilon's tranche CDS portfolio. The CDPC has not entered into new CDS transactions since 2008 and its CDS portfolio has been in natural amortisation.

As of 20 March, the underlying portfolio comprised 49 tranche CDS with a US$26.4bn total notional amount. The tranche CDS' weighted-average remaining maturity is approximately 1.25-years and the portfolio's last maturity is 20 June 2016. S&P notes that the tranche CDS portfolio's natural amortisation, the early termination of several tranche CDS and the underlying referenced corporate entities' stabilising credit performance have contributed to a significantly reduced required capital amount and provide a greater capital cushion against projected losses.

The affirmations on the senior subordinated, subordinated and junior subordinated notes reflect the agency's view that the credit enhancement for the notes is still consistent with the notes' respective rating levels.

CLOs

Dryden Euro CLO nears

Further details have emerged on Pramerica Investment Management's forthcoming European CLO - the €249m Dryden XXVII Euro CLO 2013. Guidance on the senior triple-A rated tranche is three-month Euribor plus 135bp area, a touch tighter than Cairn CLO III's senior print (see SCI's primary issuance database).

The transaction comprises seven classes of notes, with preliminary ratings assigned by Fitch and S&P: €90m A1As (AAA/AAA), €79.5m A1Bs (AAA/AAA), €31m Bs (NR/AA), €18m Cs (NR/A), €13m Ds (NR/BBB) and €17.5m Es (NR/BB+). The unrated subordinated tranche is sized at €51m.

The CLO is backed by a revolving pool, comprising euro-denominated senior secured loans and bonds issued by European borrowers. Under the transaction documents, if the concentration of the pool comprising assets paying a fixed rate of interest is between 20% and 40%, no additional hedging is required.

Fitch notes that the capital structure for the class A notes is less levered compared with pre-crisis CLO structures it rated. In addition, the class A notes benefit from minimum excess spread of approximately 3% at closing. The level of excess spread is lower compared to pre-crisis CLOs due to the increased spread levels.

Pramerica may invest up to 5% of the portfolio in corporate rescue loans, which may include debtor-in-possession loans or a potentially broader range of loans in other jurisdictions. In addition, the manager may engage in trading plans whereby it is able to trade groups of assets, up to 5% of the portfolio, as if they were a single asset for the purpose of the reinvestment criteria, subject to certain conditions.

The CLO has a three-year reinvestment period and a two-year non-call period.

CLOs

Loan mapping tool unveiled

Codean has released Codean Open Loan Mapping (Codean OLM), an open database of leveraged loans - including industries, spreads, maturities and alternative obligor names - for held by CLOs. Free registration provides access to all data, except for CLO holding information, which is available to paid subscribers.

Peter Jasko, Codean md, comments: "Loans often trade under a variety of names and have no common identifier. Mapping holdings across multiple portfolios has in the past been a painstaking or costly task. Codean OLM seeks to solve this problem by providing a free and open database of loan mappings."

CLOs

CLO risk retention plan proposed

In a comment letter to US federal agencies, the Loan Syndications and Trading Association last week proposed a new risk retention plan for CLOs that meets the requirements embodied in the Dodd-Frank Act, while also preserving the ability of market participants to originate new CLOs and continue a vital credit flow to financial markets and the US economy. The LSTA developed the new plan after federal agencies appeared unlikely to exempt CLOs from currently proposed guidelines - a position that the LSTA believes will shut down the market.

"In contrast to the agencies' proposed rule - which would require a CLO manager to purchase US$25m of notes for every new US$500m CLO - our proposal would envision CLO managers retaining 10% of the credit risk in a more manageable form," comments Bram Smith, executive director of the LSTA. "Our approach would continue to align the manager's interests with those of its investors, while more than fulfilling the Dodd-Frank risk retention requirements."

The LSTA's proposal would replace a CLO manager's current fee stream with a series of unfunded class M notes at each point in a CLO's capital structure. The notes, which would be owned by the CLO manager, would replicate the traditional fee stream and would alone expose the manager to more than 5% of the credit risk of the asset pool.

In addition, managers would purchase 5% of the equity tranche of the structure. Together, the unfunded notes and the equity purchase would expose the manager to more than 10% of the credit risk, doubling the 5% risk retention mandated by the Dodd-Frank Act.

While continuing to assert that the agencies do not have the authority to require managers to retain risk, a position vigorously disputed by the agencies, this proposal reflects an attempt to offer a solution that works for both CLO managers and fits within the parameters of Dodd-Frank, the LSTA says.

CMBS

CPPI inches up

The Moody's/RCA Commercial Property Price Indices (CPPI) national all-property composite index increased by 0.5% in February from its January level. The index's two components - apartment and core commercial - increased by 1.3% and 0.2% respectively for the month.

This month the CPPI report focuses on the relationship between metropolitan area price performance and loan losses since 2007. "There was a high correlation between peak-to-trough price decline and CMBS loan losses among the 20 metro areas tracked by RCA," comments Moody's director of commercial real estate research Tad Philipp. "Post-crisis price declines and CMBS loss severities in the six 'major market' metros were generally smaller than those of the other, non-major metros."

The six major markets saw an average peak-to-trough price decline of 37% and an average CMBS loan loss severity of 24.9%, according to Moody's. The 14 non-major markets fared significantly worse on both counts, suffering a price decline 47.3% - 10.3% greater than the majors - and an average loan loss severity of 37.6% (12.7% higher than the major markets).

"The two metro areas with the biggest peak-to-trough commercial price declines were Las Vegas and Phoenix, both declining by more than 60%," adds Philipp. "They were among the most hard-hit by the housing crisis and exhibited a residential-to-commercial spill-over effect."

Among the other findings from the latest CPPI report was that retail property prices increased by 2.7% and 8.1% over the past one- and three-month periods respectively, best among the core commercial sectors. The share of retail property sales transactions that are distressed transitioned over the past few months from approximately 30% to the high-teens, helping drive retail price gains.

Non-major market prices have outpaced major market prices over the last one- and three-month periods, and are only about one percentage point behind major market price gains over the last 12 months as investors search for higher yielding commercial property investments. For the last 12 months, there was a 5.3% gain in non-major markets, compared with a 6.5% gain in major markets.

CMBS

CMBS pay-offs inch lower

The percentage of US CMBS loans paying off on their balloon date registered 56.6%, according to the Trepp March pay-off report. This is about five points lower than February's 61.8% level, but well above the 12-month moving average of 50.9%.

By loan count as opposed to balance) 63.2% of loans paid off. The 12-month rolling average on this basis is now 59.4%.

"Loans from older vintages will continue to have a much better chance of paying off on time than loans from 2007," Trepp notes. "However, with new issue CMBS spreads at extremely tight levels and the Treasury curve near historic lows, the percentage of 2007 loans capable of refinancing today is as good as it has been any time since before the real estate bubble burst."

CMBS

CMBS loss severity dips

The number of US CMBS loans disposed with a loss in March was flat, while resolution volume fell by 12% on the basis of liquidated balance, according to Trepp. March average loss severity came in at 39.65% - 4.6 percentage points lower than February's level of 44.26%.

March liquidations totaled US$849.2m, relative to the 12-month moving average of US$1.35bn. The 76 loan liquidations resulted in US$336.7m in losses, translating to an average loss severity of 39.65% - above the 12-month moving average of 42.06%.

Special servicers continued to handle larger loans on average in March, with the number of CMBS conduit loans liquidated standing at 76 - significantly less than the 12-month average of 136. The average size of liquidated loans in March was US$11.17m - lower than February's US$13.22m but still above the 12-month average of US$9.92m.

CMBS

CMBS defaults trending down

The stabilisation trend continues for US CMBS, with new defaults falling to their lowest levels since 2008 when 364 loans totalling US$3.2bn defaulted. According to Fitch's latest annual loan default study, CMBS defaults fell for the third year in a row in 2012, coming in 46% lower than in 2011 and 67% off the 2010 peak.

"Commercial real estate loan defaults are on pace to decline again in 2013, albeit at a more modest pace," comments Fitch senior director Britt Johnson. "With new issuance gradually increasing and default levels likely to remain stable, cumulative CMBS defaults are not likely to exceed 14% by the end of this year."

The 2012 cumulative default rate was 13.4%. Unsurprisingly, 2007 deals remain the most problematic.

Of the new defaults in 2012, 58% came from the 2007 vintage. This is in stark contrast to older CMBS vintages, such as 2006 (18%) and 2005 (12%).

Office loans continued to lead defaults, with 45% (US$3.3bn) of the total number last year. Retail came in second, with 32.5% of the total (US$2.4bn), followed by multifamily with 7.2% (US$528m).

"Helping to keep new CMBS default rates stable is the fact that servicers are still modifying loans before a monetary default," adds Johnson. "If modified loans that were never categorised as in default are included, the 2012 cumulative default rate would be 15.8% instead of 13.4%."

CMBS

Up-tick in note sale activity forecast

CMBS note sale activity via Auction.com is expected to pick up this month, with four separate commercial property auctions scheduled. An estimated 68 properties securitised in CMBS are out for bid, accounting for about US$460m in outstanding balance.

The largest among these is the Corridors I & II property, part of the US$39m TAG portfolio securitised in LBUBS 2005-C5. The loan has been in REO since November 2011 and, assuming the property is sold for about US$10m-US$15m, Barclays Capital CMBS analysts expect US$25m-US$30m of losses to hit the deal in the coming months.

Another large loan up for bid is the US$23m Tempe Commerce, securitised in GSMS 2007-GG10. The last appraisal, at June 2012, pegged the value of the property at US$14.6m. But occupancy has fallen steeply since then, as GE Capital - which had occupied 53% of gross rentable area - vacated at the end of its lease term in June 2012.

In addition, four properties - accounting for US$20m of allocated balance - from the Schron Industrial Portfolio in GCCFC 2005-GG5 are also up for sale.

Insurance-linked securities

Turkish quake risk on offer

Bosphorus 1 Re series 2013-1, a parametric catastrophe bond, has hit the market. Sponsored by the Turkish Catastrophe Insurance Pool (TCIP), the notes are exposed to earthquakes affecting the Istanbul region between April 2013 and April 2016.

S&P has assigned a double-B plus preliminary rating to the US dollar-denominated class A notes. The move marks the first time it has rated a transaction using RMS' Europe Earthquake Model for Turkey. It is also the first time that TCIP has directly issued natural-peril insurance-linked securities.

A covered event occurs when an earthquake with a date of loss during the risk period takes place and results in a spectral acceleration greater than 0.1g for at least 10% of the calculation locations, as confirmed by the calculation agent. In RMS' risk analysis, two historical events - one in 1509 and one in 1766 - could have potentially reached the index attachment level. However, S&P notes that uncertainties remain on the events' intensity due to the lack of documentation at the time they occurred.

The agency also points out that the peril reporting agency, KOERI, has not yet reported on significant earthquake events affecting the Istanbul region. In fact, no comparison between reports from KOERI and those from another well-established reporting agency is available for significant earthquakes in the Istanbul region.

The funds in the collateral account will be invested in a money market fund managed by MEAG MUNICH ERGO Kapitalanlagegesellschaft. Munich Re is lead structurer and GC Securities co-structurer/sole book-runner on the transaction.

Risk Management

Call for IM rethink

ISDA notes in a recent derivatiViews publication that the thrust of the Basel Committee/IOSCO's second consultation on margin requirements for non-centrally cleared derivatives remain "more or less unchanged" from the previous consultation. The association warns that if initial margin (IM) requirements are implemented as proposed, the sheer quantum of them is likely to cause irreparable damage to market liquidity and to the general economy.

The second consultation asked market participants to comment on two specific areas: the treatment of physically-settled FX transactions and the question of re-hypothecation. At the same time, it requested feedback on the newly proposed phase-in of IM requirements, as well as the accuracy and applicability of the results from the quantitative impact study (QIS) conducted as part of the first consultation (SCI 18 February).

Among the broad themes that emerge from the second consultation is that the proposals are in line with those of the first consultation, calling for imposing a universal two-way IM requirement on all covered entities. However, the second consultation excludes entities with aggregate notional amounts of less than €8bn notional outstanding during the last three months of the preceding year.

ISDA says that while the regulators seem to acknowledge the potential impact of the IM requirements on liquidity, they attempt to mitigate these negative effects by phasing in the requirements, allowing limited netting to be used and contemplating possibility of some form of re-hypothecation.

Meanwhile, the published QIS results confirm ISDA's estimates as to the quantum of the proposed IM requirements. "If nothing else, the QIS results indicate even higher quantities of required collateral to meet the IM obligations (from US$1.7trn to roughly US$2.2trn, if all covered entities use internal models - and from US$0.8trn to US$0.9 trillion - and a potentially higher number, depending on how the €50m threshold is applied)," it says.

The association notes that there are some encouraging signs, such as the effort to exempt a number of smaller entities. But the metric used is notional amounts, which is deemed as not risk sensitive. Rather, the metric should take into account the hedging activities of the entity.

"Collateral serves a fundamental function in the secured financing market and is a source of liquidity as it is a substitute for money/credit," ISDA observes. "Removing trillions from the collateral market, however phased-in such requirements are, undoubtedly will have a negative effect on the economy."

Further, the IM requirements are highly pro-cyclical, hitting participants at the worst possible time when everyone is on a quest for liquidity. "In an effort to enhance systemic resiliency by reducing counterparty risk, we may be introducing other risks - such as liquidity and economic risk - that may make it harder to achieve a more resilient system," the association concludes.

The Basel Committee and IOSCO published the public responses to their second consultative paper last week. The regulators note that these responses will inform the final joint proposal on margin requirements on non-centrally cleared derivatives.

Risk Management

Collateral management tool offered

Misys has launched a new version of its commercial lending solution for financial institutions, which aims to increase transparency and analysis of the data most critical to sound credit and asset management decision-making. By partnering with several existing clients, various industry utilities and market standards organisations, the firm says it has created a solution that improves cost-efficiencies and eliminates costly error-correction by reducing manual entry and providing best practice-driven process flows. The new advanced collateral management module for Loan IQ allows users to efficiently create, track, maintain and analyse collateral and guarantees - and their relationship to covered loan obligations - in rich detail.

Risk Management

Reporting tie-up agreed

Sapient Global Markets is to offer its Compliance Management and Reporting System (CMRS) to customers connecting to the DTCC's swap data repository (SDR) reporting. CMRS aims to allow firms to collate vast amounts of data from disparate systems, translate it into the destination message format, deliver it directly to regulators and receive acknowledgement messages back from the DTCC. Additionally, it provides a single view of compliance, regardless of operating model and required reporting venue.

RMBS

AOFM ends RMBS investment

The Australian Office of Financial Management (AOFM) has announced that it will not make any new investments in RMBS, effective immediately. However, it may continue to hold its remaining RMBS holdings until maturity.

Specifically, the AOFM says it will not entertain sales that undermine the improvements seen in the market to date, but may sell to assist the price discovery process or to adjust the portfolio in line with the Treasury's latest directions. It has recently sold: A$146.5m of the IDOL 2011-2 A1 tranche (at 90bp over one-month BBSW, with a remaining WAL of around 2.1 years); A$25.25m of the SMHL 2011-2 AB tranche (at 205bp over, with a remaining WAL of around 4.3 years); and A$26.25m of the Torrens 2011-2 AB tranche (at 205bp over, with a remaining WAL of around 4.5 years).

The AOFM will continue to monitor primary and secondary market activity in formulating its advice to Treasury and the government.

RMBS

Mexican RMBS performance data enhanced

Moody's has rolled out two new products covering performance of Mexican RMBS - a Mexican RMBS Index and performance overview (PO) reports.

"The index offers a general overview of the performance of the Mexican RMBS market," comments Moody's svp Maria Muller. "We group deals according to common characteristics, such as vintage or originator, and include performance information illustrated by charts and other graphic materials."

PO reports, on the other hand, offer detailed performance information for individual structured deals in the Mexican market on a periodic basis. The POs are presented in a standardised format and use standardised calculations, which are designed to allow comparisons among different transactions.

"Moody's Mexican RMBS Index and the performance overview reports are part of Moody's efforts to provide investors and market participants with a more comprehensive coverage of performance data in the Mexican market," Muller adds. "Taken together, they will allow market participants to have a general view of the RMBS market trends and deep-down, detailed information on each RMBS transaction."

Moody's Mexican RMBS Index will usually be published mid-month on a periodic basis. The PO reports will be published on a monthly or bi-monthly basis, depending on the transaction's reporting frequency, starting this month.

RMBS

Sequester focus for ERFs

Fitch has published the 1Q13 US economic risk factors (ERFs) applied in its residential mortgage loan loss model. This quarter, the agency focuses on the relationship between ERFs and the sequester.

Of the major metropolitan areas, Washington D.C. and its surrounding area have the greatest dependency on federal spending, which is partly why home prices have performed better than the country as a whole since the financial crisis. The area has also experienced lower ERFs than the country as a whole and currently has a modest 1.13 ERF. However, Fitch does not believe its ERF currently reflects the potential economic risk of a disruption to federal spending.

ERFs are provided for selected states and for the top 25 MSAs. The ERF is a dynamic input employed in the agency's default probability analysis and loan loss model that accounts for regional and local economic risk.

RMBS

New Dutch mortgage bonds on the cards?

Ways of improving financing to the Dutch mortgage market are currently being considered by the country's authorities, in particular how to encourage increased participation from institutional investors. One proposal under discussion is the creation of a centralised Dutch mortgage bank (the NHI), which would issue multi-issuer standardised mortgage bonds (NHOs) explicitly wrapped by the state.

The funding gap between Dutch banks and institutional investors is estimated at €270bn for households and €190bn for businesses, according to JPMorgan figures. This shortfall has historically been funded by reliance on the capital markets, but both covered bond and securitised market access and pricing have become more volatile since the financial crisis.

NHOs would consequently offer an additional funding tool to the existing covered bond and RMBS routes. According to JPMorgan ABS analysts, NHOs would be backed by senior RMBS positions, in turn created from pools of NHG mortgage collateral held at the contributing banks. NHG mortgages are already guaranteed by Stichting WEW, which benefits from a backstop agreement with the Kingdom of the Netherlands, meaning that the new bonds would be 'double wrapped'.

Under the proposals, NHO bondholders would be guaranteed timely payment of contractual bond cashflows, with a claim on the Dutch government. The contributing banks would, however, remain ultimately responsible for bond cashflows - even if the underlying borrowers backing the RMBS do not pay on time. If a bank defaulted and the government was required to pay a NHO's cashflows, the sovereign would have a claim to the bank's estate.

RMBS

Buffer introduced for Swiss HPD assumptions

Uncertainty over Swiss property prices has increased over the last year; however, Fitch maintains its view that the market as a whole is still not experiencing a bubble. To reflect the increased uncertainty, the agency has introduced a buffer in its house price decline (HPD) assumptions.

Swiss house prices have risen faster than general income levels since 2000. The decoupling of house prices and real income growth to the point where price rises start to outstrip affordability is now comparable with that seen before the previous Swiss property crisis in the early 1990s, according to Fitch. It suggests that some regions - such as Lake Geneva, Zug, Zurich and some southern cantons - where price rises have been particularly pronounced have overheated.

But the agency doesn't believe there is a general property price bubble affecting the Swiss market as a whole. Swiss house prices have risen by an average of 4.4% year-on-year from 2000 to 2012. This is less than in the UK, Spain or France, although Swiss inflation has been considerably lower over the same period.

Vacancies remain low and demand is still high, driven by migration and the low interest rate environment. The signs of excessive risk appetite among both borrowers and lenders remain largely absent. Property purchases by cash buyers appear to be still motivated by the view of property as a safe-haven rather than a desire to speculate on rising prices.

Furthermore, the Swiss banking association last June moved to restrain lending volumes via voluntary commitments by banks, such as a minimum equity investment and minimum amortisation by the borrower. In February, the Swiss government also activated a countercyclical additional capital reserve requirement for banks, resulting in a higher risk-weight for domestic residential mortgages.

Average offer prices for flats and single family houses in Switzerland fell for the first time in five years in 2Q12, in what may be the first sign of a slowdown in the Swiss housing market, Fitch notes. Nevertheless, large regional differences in property price developments remain.

Flat prices in the Lake Geneva region rose by 11% in 2012 and by 32% in the last three years. At the other end of the spectrum, flat prices in the Berne area rose by only 4% in 2012, while the Swiss market average for flats is 7%.

Fitch says these differences increases its concerns on regional overheating and a possible house price correction. To provide a buffer against volatile price developments and a potential medium term price correction, the agency has introduced a buffer into its rating scenario dependent HPD assumptions.

The buffer is highest in low rating scenarios (single-B) and reduces in high rating scenarios up to zero in a triple-A scenario. This is because the HPD assumptions for high rating scenarios already incorporate a stronger price correction.

Geographically, the buffer is highest in the regions that saw the biggest house price increases over the last year. In most regions, it is 4% in the single-B rating scenario, but it is as high as 15% for flats and 8% for houses in the Lake Geneva region. Central Switzerland and Zurich have buffers of 6% for both flats and houses.