Contents

CLOs

American influence

European CLO market moving towards US model

Recent developments in the European CLO market suggest that it is moving closer to a US-style model. After Cairn CLO III ended the market's lengthy hiatus (SCI passim), further issuance is expected throughout the year, with larger deal sizes and the increased use of covenant-lite loans both very possible.

"In the US there is price elasticity and investors are buying on a relative value basis. Although the European market is not as sophisticated yet, it is slowly moving towards the US-style market model," says Patrice Maffre, head of acquisition and leveraged finance, EMEA at Nomura.

A noticeable trend in the European market has been the willingness of investors to sacrifice margin in order to stay invested in a deal. In many cases, investors in existing CLOs have been perfectly happy to extend maturity rather than receive a repayment.

Peter Hurd, Nomura md, acquisition and leveraged finance capital markets, EMEA, notes that there has also been an increase in floating rate note issuance. He says: "We have seen strong FRN issuance in 2013 as CLOs choose to maintain their exposures to specific credits by refinancing loans with FRNs. However, the new CLOs are more restrictive in their ability to buy FRNs and that could reduce demand slightly."

The move towards a US-style model is partly being driven by an anticipated increase in cov-lite issuance in Europe over the next 12 months. While there has not yet been a pure European cov-lite deal, there have been indications that the market is becoming more 'cov-loose'.

"Investors have already shown they are comfortable with US deals containing European tranches, even when those tranches are cov-lite. That could mark a shift in investor appetite towards cov-lite in purely European deals as well," says Elizabeth Moore, Nomura's head of acquisition and leveraged finance capital markets, EMEA.

Deal sizes are also capable of growing. The Cairn CLO was sized at €300.5m and the Dryden XXVII Euro CLO 2013 and ALME Loan Funding 2013-1 deals which followed were similar (at €300m and €334.23m respectively).

Names currently in the pipeline, such as Alcentra's Jubilee CLO X (€392m) and GSO/Blackstone's Grand Harbour I (€404m), suggest that future deal sizes will be greater than those seen so far. "We are likely to see larger deals being issued in Europe, partly because of the ability to access the US market," notes Moore.

Indeed, deals of €2bn-plus - which a year ago would not have seemed possible - could eventually be seen, although not necessarily this year. While not all banks will be able to bring a transaction that large on their own, the major banks would each expect to be able to contribute a significant portion of a joint issuance at that size. Total European issuance for 2013 is expected to reach about €5bn, with around a dozen further CLOs set to join those that have already been issued this year.

"The amount of new CLOs to be raised this year is small relative to the €22bn of existing CLOs whose reinvestment period lapses by the end of 2013. However, we expect to see around 15 European CLO deals this year, with €4.5bn-€5bn of new issuance," Hurd concludes.

JL

ABS

US ABS still quiet, despite auto injection

Secondary US ABS activity was once again fairly light yesterday, with auto paper dominating the session. BWIC volume reached around US$74m, with SCI's PriceABS data listing 18 line items for the sector.

Among the auto names circulating yesterday were several Avis Budget Rental Car Funding tranches, including the AESOP 2011-1A A bond, which was talked in the 20s. AESOP 2012-3A B was talked in the low-100s.

Also out for the bid was AESOP 2012-3A A, which was talked in the low-70s, having previously been talked at 90 on 28 August 2012. Those Avis tranches were joined by AESOP 2013-1A A, which was talked in the low-70s, having been covered at 72 late last month.

In addition, CPS 2012-D B and CPS 2012-D C were talked in the mid/high-100s and high-100s respectively, while EART 2012-1A C and EART 2012-2A C were talked in the mid-200s and high-200s respectively. They were joined by the AMOT 2013-1 A2 tranche, which was talked in the 40s.

FIAOT 2012-2A D was talked in the low/mid-100s, having been talked at around 190 on 6 March, while also of interest was TAOT 2010-C A4, which was talked in the low-teens. The tranche's only previous appearance in the PriceABS archive saw it talked in the mid-singles on 22 June last year.

Among the other auto tranches out for the bid was one issued this year. SMAT 2013-1US A4A, from the SMART ABS series, was talked in the 50s.

Beyond the auto space, equipment ABS paper (such as GEEMT 2012-1 A3, which was talked in the 20s) and credit card paper (such as WFNMT 2010-A A, which was talked in the 30s) was being shown. The latter bond was previously talked in the mid/high-50s in June 2012.

Finally, the container ABS TAL 2013-1A A tranche was covered at 194, the same level at which it had been covered two days earlier. As recently as 3 April, the tranche was covered at 175.

JL

CLOs

Quiet week does not dent Euro CLO optimism

Activity in the European CLO sector slowed during this holiday-shortened week, but optimism remains high. A new Alcentra deal has been announced in the primary market, while equity paper has been well bid in secondary.

Alcentra is aiming to price Jubilee X by the end of this month, with senior tranche price talk at around 125bp. It joins a number of other deals queued up in the pipeline.

Secondary trading activity, meanwhile, is focused on equity paper. Harbormaster CLO 9 equity traded at a surprisingly high level, according to one trader, who reports that bidding on the tranche was fierce.

"We felt that equity tranche should be trading in the low/mid-70s and we bid mid/high-70s to get it, but we were told we would have to bid at least 80. I do not know who the eventual buyer was, but the fact that it went in the 80s came as a real shock," says the trader.

He adds: "Yield is less than 15% base case on that one, so it really is extremely tight. That said, it is very levered and if you do not have any defaults then you are going to get good returns, so you can see why people were so interested."

A number of small bid-lists circulated this week, but otherwise activity has been limited and spreads remain similar to where they were last week. The pause has given participants an opportunity to contemplate the changing nature of the market. The trader reports several discussions around the increased use of bond buckets in future deals, for instance.

"Everyone is very bullish about Europe at the moment and there is not the same focus on the US anymore. There has been some debate about what to do with bond buckets, with some players saying it is important to stick to loans," says the trader.

He points to Pramerica's experience in running a bond fund for a number of years in the case of its recent Dryden XXVII Euro CLO 2013 (which allows for up to 40% exposure to fixed rate assets, all of which are likely to be bonds), but admits that not all CLO managers are so comfortable with the assets. However, for those that are comfortable, it provides extra opportunities against the backdrop of limited loan supply.

"The bond market is currently larger than the loan market, so bond buckets are another way to access those attractive credits. Even though bond buckets are penalised in the ratings structure, they make sense due to the lack of loans and it helps to tap into assets to bring more CLOs. I think more bond buckets could be favourable," he concludes.

JL

Structured Finance

Eurosail judgements confirmed

The UK Supreme Court has handed down judgement on the Eurosail-UK 2007-3BL case, upholding previous judgements that the deal was not balance sheet insolvent and that a post-enforcement call option (PECO) would have no bearing on such a conclusion (SCI 9 March 2011). The outcome of the Lehman-originated RMBS case has implications for both UK securitisations and broader insolvency cases.

Certain A3 noteholders had attempted to declare an event of default under the notes on the basis that Eurosail was unable to repay its debts. This was due to the termination of currency swaps that had been entered into with - and guaranteed by - Lehman Brothers, resulting in the deal's audited financial statements showing net liabilities of almost £75m.

The noteholders argued that Eurosail's audited balance sheet showed an excess of liabilities over assets and that the loss of the currency swaps could not be recovered. An EOD would have seen payments made according to post-enforcement priority, whereby those A3 noteholders would rank pari passu with the existing A2 noteholders, rather junior to them as under the pre-enforcement waterfall.

Eurosail countered that it was not insolvent, not least because all liabilities were being paid as they fell due and its statutory audited balance sheet did not take into account the value of the issuer's claim against Lehman Brothers arising from the termination of swaps. Furthermore, it valued future liabilities denominated in dollars and euros as sterling liabilities using the exchange rates from when the balance sheet was drawn up and not those that will be in effect at redemption of the notes, which could be in 2045.

"As a secondary argument, Eurosail also stated that a balance sheet insolvency could never arise as the existence of a PECO meant that the notes were, for all practical purposes, limited recourse - i.e. Eurosail's liabilities would 'shrink to fit' the assets it had available in the same way as if traditional limited recourse language had been included. Eurosail was seeking to overturn the judgments of the High Court and the Court of Appeal on the issue as both had found that the existence of the PECO did not mean that a balance sheet insolvency could never arise," notes Reed Smith in a client memo.

The court found that Eurosail was not balance sheet insolvent and noted that movements of currencies and interest rates in the 32 years to 2045 cannot possibly be accurately predicted. However, it disagreed with Eurosail in upholding previous judgements that the PECO did not preclude the possibility of a balance sheet insolvency - although, while it is legally different from traditional limited recourse provisions, the court did note that economically the mechanism is similar.

The case will have ramifications beyond the securitisation market as it is the first time the application of the balance sheet insolvency test has been examined. While balance sheet insolvency in UK securitisations with a PECO may be difficult to prove, it means that a balance sheet EOD can still occur in such securitisations.

JL

Structured Finance

SCI Start the Week - 13 May

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

Pipeline
Two ABS, one ILS, one RMBS, one CMBS and four CLOs entered the pipeline last week. Of those deals, only the RMBS - a RUB2.504bn Russian deal - was non-US domiciled.

The ABS marketing last week comprised US$512m Hyundai Floorplan Master Owner Trust Series 2013-1 and US$200m New Jersey Student Loan Revenue Bonds 2013-1. The ILS was US$250m Residential Re 2013-1, while the RMBS was RUB2.504bn Mortgage Agent PSB 2013.

The CMBS was US$440m CGCMT-375P, while the CLOs were US$500m CIFC Funding 2013-II, Jubilee CLO X, US$139.65m KCAP Senior Funding I and US$400m KKR FINANCIAL CLO 2013-1.

Pricings
It was a busier week for completed issuance, with five ABS, three ILS, one RMBS, three CMBS and three CLOs printing.

The ABS new issues consisted of: US$700m Capital One Multi-asset Execution Trust 2013-2; US$920m CarMax Auto Owner Trust 2013-2; US$956.2m MOHELA 2013-1; US$224m New Mexico Educational Assistance Foundation Series 2013-1; and US$1.136bn Santander Drive Auto Receivables Trust 2013-3.

The ILS prints were: US$125m Armor Re Series 2013-1; US$150m Blue Danube II Series 2013-1; and US$250m Sanders Re Series 2013-1. The RMBS was A$1.15bn Apollo Trust 2013-1.

The CMBS pricings comprised: US$1.464bn FREMF 2013-K27; US$875m Irvine Core Office Trust 2013-IRV; and €1.075bn Taurus 2013 (GMF1).

Finally, the CLO new issues were: US$507m Benefit Street Partners 2013-2; US$413m Neuberger Berman CLO XIV; and €2.052bn PYMES Santander 5.

Markets
"The non-agency rally continued its momentum [last] week as prices moved higher with broader equity and credit markets," note Barclays Capital US RMBS analysts. Cash prices across sectors were higher by up to a point, with more than US$2bn of trading volumes.

The US CMBS market saw little change in secondary spreads early in the week, as SCI reported on Wednesday (SCI 8 May). Legacy conduit AM and AJ tranches saw some tightening, with the bulk of supply coming from 2005-2007 vintages.

US ABS activity was lighter and dominated by auto paper (SCI 9 May). BWIC volume reached around US$74m on Wednesday, with tranches such as AESOP 2012-3A B and SMAT 2013-1US A4A talked in the low-100s and in the 50s respectively.

Secondary activity also slowed in the US CLO market, according to Bank of America Merrill Lynch securitised products strategists. "Lack of supply, both in the primary and secondary markets, continues to push spreads tighter. Triple-As tightened another 5bp this week, while double-As, single-As, triple-Bs and double-Bs tightened by 10, 15, 10 and 15bp respectively."

In addition, the European CLO sector slowed during the holiday-shortened week, as SCI reported on Friday (10 May). A new Alcentra deal announced in the primary market (Jubilee X) and well-bid equity in secondary fuelled optimism in the sector, however. One trader reports that the level at which the Harbormaster CLO 9 equity tranche recently traded was surprisingly high, with investors competing strongly for the paper.

Deal news
• The UK Supreme Court has handed down judgement on the Eurosail-UK 2007-3BL case, upholding previous judgements that the deal was not balance sheet insolvent and that a post-enforcement call option (PECO) would have no bearing on such a conclusion (SCI 9 March 2011). The outcome of the Lehman-originated RMBS case has implications for both UK securitisations and broader insolvency cases.
• An unusual EOD notice has been issued for the Integral Funding CLO, after a scheduled optional redemption failed to complete on 15 April because of delays in the settlement of collateral sales. Although noteholders' risk of loss has not increased materially as a result, the experience highlights the small but non-trivial risk to CLO investors of relying on trustees' and managers' effective execution of activities relating to redemption.
• The court-appointed receiver for the estate of an alleged Ponzi scheme involving Management Solutions (SCI 14 February 2012) has released a new liquidation plan for a large portfolio of multifamily properties owned by the estate. The 34 properties include three loans securitised in CMBS 2.0 deals (accounting for US$30.8m), two loans securitised in legacy CMBS (US$10.7m) and four agency CMBS loans (US$59.6m).
• The ZUNI 2006-OA1 transaction last month received a payment of about US$50m emanating from loan buy-backs and loss reimbursements. The pay-out equates to around 15% of the bonds outstanding (US$322m), making it one of the larger instances of RMBS loan-level repurchases in recent months.
• The Higher Education Loan Authority of the State of Missouri (MOHELA) is proposing to sell approximately US$11.9m of student loans currently serviced by Great Lakes Educational Loan Services. This represents all of the 3,394 loans that are currently being serviced by Great Lakes and constitutes 1.4% of the 11th General Resolution ABS trust.
• Dock Street Capital Management has been appointed successor collateral manager on Orchid Structured Finance CDO. The ABS CDO was originally managed by ST Asset Management.
• BLC Bank and BSEC - Bemo Securitisation have closed a US$185m securitisation for Lebanese real estate company Solidere, constituting the largest-ever asset-backed issuance in the local capital markets. The transaction involves the establishment of a securitisation fund under Lebanese law for the purposes of liquidating at face value a portion of Solidere's land sales receivables portfolio.

Regulatory update
• The US House Financial Services Committee has passed a number of derivatives-related bills aimed at clarifying and amending Title VII of the Dodd-Frank Act. The bills seek to address cross-border, swaps push-out and end-user margin requirements.
• MBIA Inc and its subsidiaries have agreed a comprehensive settlement with Bank of America. MBIA Corp will receive a net payment of approximately US$1.7bn, consisting of around US$1.6bn in cash and US$137m principal amount of MBIA's 5.7% senior notes due 2034, as well as a US$500m line of credit.
• Société Générale has settled its pending litigations against MBIA which had challenged the insurer's 2009 restructuring. The settlement ends a dispute involving protection written by MBIA and its affiliates covering multiple structured credit products.
• The Sheet Metal Workers Local No. 33 Cleveland District Pension Plan has filed a class action lawsuit against 12 banks in the Illinois Northern District Court. The action alleges that the banks - together with ISDA and Markit - conspired to thwart competition in the CDS market, thereby raising fund managers' costs.
• The DTCC has filed a lawsuit challenging three interrelated actions by the US CFTC and asking a federal court to vacate the CFTC's approval of CME Rule 1001 and ICE Rule 211. It says the CME and ICE Rules are anticompetitive and undermine the core principles of the Dodd-Frank Act (SCI 17 January).
• RBS has disclosed in its 1Q13 Interim Management Statement that it received a Wells notice from the US SEC, informing it that the SEC staff is considering recommending the initiation of a civil or administrative action against RBS Securities Inc. The Wells notice arises out of an inquiry that the SEC staff began in September 2010, when it requested voluntary production of information concerning RMBS underwritten by subsidiaries of RBS during the period from September 2006 to July 2007.
• Assured Guaranty has reached a settlement with UBS to resolve claims related to RMBS that were issued, underwritten or sponsored by UBS and insured by Assured under financial guaranty insurance policies. Assured will receive an initial cash payment of US$358m.
• Mexican President Pena Nieto's affordable housing policies may have negative consequences for existing private-sector RMBS sponsored by Sofoles. This segment is already experiencing an increase in REOs as foreclosures have risen and servicers have been slow to dispose of existing inventories.

Deals added to the SCI database in the last two weeks:
Atrium X; Auto ABS FCT Compartiment 2013-1; Babson CLO 2013-1; Bavarian Sky Europe Compartment 1 Switzerland; Bosphorus 1 Re series 2013-1; Brookside Mill CLO; Citibank Credit Card Issuance Trust 2013-A1; CNH Capital Canada Receivables Trust series 2013-1; CSMC Trust 2013-IVR²; Delamare Cards MTN Issuer series 2013-1; Discover Card Execution Note Trust 2013-A3; Exeter Automobile Receivables Trust 2013-1; FNA 2013-1 Trust; FREMF 2013-K26; FREMF 2013-KS01; GE Dealer Floorplan Master Note Trust Series 2013-1; Global SC Finance II Series 2013-1; GSMS 2013-PEMB; Illawarra Series 2013-1 RMBS Trust; JPMCC 2013-FL3; JPMCC 2013-LC11; Master Credit Card Trust II series 2013-1; Monviso 2013; Nelnet Student Loan Trust 2013-3; Oak Hill Credit Partners VIII; Pelican Re series 2013-1; Sanders Re series 2013-1; Sequoia Mortgage Trust 2013-6; SLM Private Education Loan Trust 2013-B

Deals added to the SCI CMBS Loan Events database in the last two weeks:
BACM 2003-2; BACM 2004-1; BACM 2007-1; BLONN 2006-1; BSCMS 2005-PWR7; BSCMS 2007-T26; CD 2005-CD1; CMLT 2008-LS1; COMM 2003-LB1; COMM 2005-FL10; CSFB 2001-CP4; CSFB 2005-C1; DECO 2007-C4; DECO 2007-E5; DECO 2007-E7; DECO 7-E2; ECLIP 2005-2; ECLIP 2007-2; EPC 3; EURO 23; EURO 25; EURO 28; FLTST 3; GCCFC 2007-GG9; GMACC 2003-C2; GSMS 2006-GG8; INFIN SOPR; JPMCC 2003-C1; JPMCC 2003-PM1A; JPMCC 2005-LD2; LBUBS 2005-C5; LBUBS 2007-C1; LBUBS 2007-C2; MLCFC 2006-3; PROUL 1; TAURS 2006-1; TAURS 2007-1; THEAT 2007-1; TITN 2006-1; TITN 2006-2; TITN 2006-3; TITN 2007-2; TITN 2007-3; TMAN 4; TMAN 6; TMAN 7; WBCMT 2003-C9; WBCMT 2006-C29; WINDM XIV

Top stories to come in SCI:
Developments in CDS futures
Regulatory arbitrage in Asia Pacific
Trends in US non-agency RMBS

CLOs

Managers maintain CLO diversity

US CLO 2.0 managers have maintained good loan diversification, despite the market's rapid rise and the majority of loans being sourced from the 2012 and 2013 vintages. There have been concerns that managers may forgo diversity and focus on purchasing primary loans that are priced while a CLO is ramping its portfolio, but average collateral overlap for 2.0 deals is only slightly higher than for 1.0 deals.

Average overlap of all pair-wise comparisons across outstanding US CLOs is currently 17.5%, according to a recent Bank of America Merrill Lynch study. Deals issued closer to each other or sharing the same manager generally have higher overlap percentages.

Where the management of a portfolio was sold or transferred, the overlap increases with other deals controlled by the new manager. This would be a factor for investors to consider when looking at multiple deals from one manager or vintage, BAML CLO analysts note.

Even with the CLO 2.0 market's rapid rise, the lack of longer-dated warehouse facilities, the heated loan market and the majority of CLO 2.0 loans coming from 2012 and 2013 vintages, average collateral overlap across deals is only slightly higher than for legacy deals. The overlap between CLO 1.0 deals is about 20% and the overlap between CLO 2.0 deals is just 22%.

"Despite current market conditions, managers have been able to maintain diversification through several different means. First, some managers have been able to set up warehouse facilities through either their own funding or, in some cases, in partnership with equity buyers. Managers can also work both with a dealer's primary and secondary desks to line up collateral for them to purchase at closing," the analysts explain.

They continue: "Also, given the vast refinancing and repricing of the loan market over the past year, this alone has provided managers with a wide variety of loans to invest in. Finally, it is important to note that - given fast repayments in the underlying loan market and CLO reinvestment - the underlying portfolio mix and subsequent overlap concentrations are continually evolving over time."

The average pair-wise overlap is 17.5%, with less than 12% of comparisons having more than 30% overlap. In fact, 26.5% show zero collateral overlap and 30.6% have 10% or less overlap.

The average overlap for deals from the 2006 vintage is 26% with other deals from the same vintage, but only 7.5% with those issued from 2003 and 18.1% with those issued from 2012. The 97 most recently issued deals from last year that the analysts examined have an overall collateral overlap of 22.9%, but they only overlap 3.9% with 2004 vintage deals.

There is more considerable overlap between managers, however. From a group of 10 managers, the analysts note that five have an average overlap of more than 40% across deals. One particular manager has an average overlap of close to 60% among its deals, but only 16.2%-27.8% overlap with deals from other managers.

This is not so surprising, considering continual loan repayments and reinvestment, where managers have to invest in new loans for both seasoned and newer deals. With idiosyncratic underwriting and loan selection processes, a manager would be expected to select credits they like before looking to distribute the loans among different deals based on each deal's ramping or reinvestment needs.

JL

Structured Finance

SFIG adds director, mulls permanent board

The Structured Finance Industry Group (SFIG) has named Richard Johns as executive director. He will assume responsibility for leading the organisation and report to the board of directors, currently chaired by Reggie Imamura.

Johns has more than 16 years of experience in the securitisation industry. He joins from Ally Financial, where he was md and head of global funding and liquidity. He has also worked at Capital One Financial as the head of global capital markets and MBNA in the corporate finance sector.

SFIG has also announced that it will be headquartered in Washington DC and maintain a presence in New York. Work has begun to replace the interim board with a formal one, with members expected to be selected by mid-year.

Structured Finance

Capital markets quintet on the move

A group of five partners from Dentons will leave the firm to join the capital markets practice of rival Alston & Bird. Four of the partners will be based in New York, with one in Washington DC.

The Washington-based lawyer is Stephen Ornstein, who specialises in federal and state regulation of real estate, as well as residential and commercial mortgage finance. He counsels national mortgage companies, mortgage insurers, financial institutions and others in complying with mortgage and consumer lending regulations.

Scott Samlin works with Steve Ornstein in counselling national mortgage companies, mortgage insurers and other financial institutions regarding compliance issues. He is the former executive director for the residential mortgage and lending compliance business at Morgan Stanley, where he helped oversee the operations of Morgan's whole loan trading desk and its affiliated mortgage loan servicer, Saxon.

Richard Simonds focuses his practice on the representation of issuers and underwriters in RMBS, CMBS and ABS. Asset types include residential, multifamily and small-balance commercial mortgage loans as well as equipment leases, personal unsecured loans and SBA loans.

James Cotins specialises in structured finance, including all aspects of the securitisation of loans and securities backed by commercial real estate. He primarily focuses on CMBS and CRE CLOs.

Matt Lyons works with Cotins in representing the main participants in CMBS, CRE CLOs and other CRE-related financing transactions, including sponsors, issuers, underwriters, collateral managers, advisors, loan sellers, bond insurers and rating agencies.

Structured Finance

Bank, MBIA reach settlement

Société Générale has settled its pending litigations against MBIA which had challenged the insurer's 2009 restructuring. The settlement ends a dispute involving protection written by MBIA and its affiliates covering multiple structured credit products.

Structured Finance

Rating agency announces next global SF head

James Wiemken is set to become senior md and global head of structured finance at S&P. He will be based in New York and take on the role from 1 July, reporting to global head of analytics and operations Paul Coughlin, who he is succeeding.

Wiemken will directly manage all aspects of the structured finance business in North America and provide leadership and coordination for the global structured finance department. He has most recently been serving as lead analytical manager for covered bonds, structured credit and CMBS, based in London.

Structured Finance

Credit opportunities fund eyes IPO

CVC Credit Partners European Opportunities Limited is embarking on an IPO of ordinary shares for a target issue in excess of €300m. The company intends to list the shares on the main market of the LSE.

The share capital will be denominated in euro and sterling. The directors expect 99.75% of the gross proceeds - less short-term working capital requirements - from the placement in an existing European credit opportunities investment vehicle managed by CVC Credit Partners Investment Management.

"A combination of structural change among historic lenders to the European leveraged loan market and the refinancing needs of sub-investment grade companies are generating significant opportunities in the credit space," comments Richard Boléat, chairman of CVC Credit Partners European Opportunities Limited.

He adds: "The proposed listing of CVC Credit Partners European Opportunities Limited enables public markets investors to directly access an attractive asset class through an innovative vehicle offering a fundamentally different approach to shareholder liquidity. Offering a double liquidity mechanism alongside CVC Credit Partners' track record in the sub-investment grade debt capital markets constitutes a unique proposition that will resonate well with potential investors."

CDO

Further Orchid deal transferred

Dock Street Capital Management has been appointed successor collateral manager on Orchid Structured Finance CDO. The ABS CDO was originally managed by ST Asset Management.

Under the terms of the appointment, Dock Street agrees to assume all the responsibilities, duties and obligations of the collateral manager. The agreement does not alter the responsibilities, duties and obligations of the collateral manager in a meaningful way, according to Moody's.

The agency has confirmed that the move won't result in the withdrawal, reduction or other adverse action with respect to the deal's ratings. In reaching this conclusion, it considered the experience and capacity of Dock Street to perform the duties of collateral manager to the issuer.

Orchid Structured Finance CDO III was transferred to Dock Street in November (see SCI's CDO manager transfer database).

CDS

Broker acquisition announced

GFI Group has agreed to acquire certain assets of Phoenix Partners Group. It will take on around 32 brokers in New York and London as well as additional operational and management staff.

Phoenix follows a hybrid credit business model, combining voice broking with electronic execution. It also provides equity services to a largely institutional, financial client base.

CLOs

US credit alliance established

HarbourVest Partners and CIFC Asset Management are forming a strategic partnership to work together on private credit investment strategies. HarbourVest will become a minority shareholder of CIFC and enter into a revenue-sharing arrangement for investment advisory fees generated by jointly-branded private debt programmes.

HarbourVest began investing into credit funds in 1995 and has been active in the European senior loan market since 2010. CIFC's focus on US senior secured corporate loans is expected to complement HarbourVest's existing expertise across mezzanine debt, European senior loans and private equity.

CLOs

Mid-market financing group formed

Babson Capital Management has formed a subsidiary to provide financing to middle-market companies and specialised industries globally. Babson md Mike Hermsen will serve as ceo for the new Babson Capital Finance (BCF) group, reporting to Babson ceo Tom Finke, who will also serve as BCF chairman.

The formation of BCF consolidates Babson's existing global middle-market leveraged finance and energy finance investment teams into one unified platform. The strategic realignment is expected to enable the firm to expand its origination and investments in a broad range of products, including middle-market senior and second-lien loans, subordinated debt and private equity co-investments.

CLOs

Ares announces senior changes

Ares Capital Corporation (ACC) has promoted president Michael Arougheti to ceo and four Ares Capital Management (ACM) executives to officer roles within ACC. Arougheti has served as president since ACC's IPO in 2004.

Kipp deVeer has been promoted to president. He will also continue to serve as a senior partner in the private debt group of Ares Management and as a member of ACM's investment committee.

Eric Beckman has been promoted to evp. He will also continue to serve as a senior partner in the private debt group of Ares Management and as a member of ACM's investment committee.

Mitchell Goldstein has been promoted to evp. He will also continue to serve as a senior partner in the private debt group of Ares Management and as a member of AMC's investment committee.

Michael Smith has also been promoted to evp. He will also continue to serve as a senior partner in the private debt group of Ares Management and as a member of ACM's investment committee.

CMBS

New home for CMBS head

RBS director of CMBS and CLO strategy Richard Hill is leaving the bank to join Morgan Stanley. He will be based in New York and report to Vishwanath Tirupattur.

Hill will become head of CRE debt research at Morgan Stanley. Previous roles include a position in the corporate treasury group at Bank of America, svp at Village Solutions Company and vp at Banc of America Securities, where he structured and executed CRE CDOs.

CMBS

Fixed income vet enlisted

Michael Blum has joined the fixed income team at Brean Capital in New York, where he will report to CMBS trading md Kurt Kaline. He joins from Davidson Kempner Capital Management.

Blum has experience across fixed income, particularly in mortgage-backed securities. Before Davidson Kempner he was an associate on the CMBS desk at Nomura and fixed income research vp at Goldman Sachs.

CMBS

CRE specialist joins boutique bank

Marvin Cash has joined Asgaard Capital as head of real estate and structured products in Charlotte, North Carolina. He joins from The Rowan Group, which he established two years ago to provide services to CRE credit strategy funds.

Cash has previously worked at Cadwalader, Wickersham and Taft working on CMBS and held a similar role at Parker Poe Adams & Bernstein. He has also managed CRE CDOs at Wachovia Securities and advised on CRE CDOs at Katten Muchin Rosenman.

CMBS

Agency broadens CMBS ratings availability

Morningstar Credit Ratings has begun providing CMBS ratings to Trepp clients through the Trepp CMBS Analytics platform. Morningstar will also distribute its CMBS pre-sale analysis through the same platform, including pre-sale reports, asset summary reports and loan analysis summary tables.

CMBS

CMBS servicer agreements boost presence

KeyBank Real Estate Capital has entered into a series of agreements that will substantially increase its commercial mortgage servicing business. It is purchasing certain commercial mortgage servicing rights from Bank of America and a CMBS special servicing portfolio of about US$14bn.

KeyBank will purchase substantially all of the third party CMBS and special servicing rights from Bank of America's global mortgages and securitised products business. This portfolio also includes servicing for a variety of private investors.

KeyBank has also entered into a long-term sub-servicing agreement with Berkadia Commercial Mortgage and agreed to acquire Berkadia's CMBS special servicing business. Under this agreement, Berkadia will act as sub-servicer on all CMBS primary servicing acquired from Bank of America.

The Bank of America transaction will make KeyBank one of the top-three largest named servicers of commercial/multifamily loans in the US. After closing the agreement with Berkadia, it will also be the fifth largest CMBS special servicer.

Insurance-linked securities

Capital markets group targets catastrophe risk

Bermuda-based Sirius International Group has formed a dedicated team to lead its strategic initiative in ILS and reinsurance capital markets. It will be jointly led by Michael Halsband in New York and Deanne Nixon in Bermuda, both of whom will report to Allan Waters, president and ceo of Sirius Group.

Halsband joins from Deutsche Bank where he was most recently director in the capital markets and treasury solutions group. He was previously vp at Goldman Sachs where his responsibilities included origination, structuring and marketing of sidecars, cat bonds and other insurance securitisations.

Nixon has been with Sirius for ten years, most recently as svp for Sirius International Insurance Corporation's Bermuda branch, where she held core responsibilities for the company's US property catastrophe, retrocessional, ILW and cat bond assumptions.

Insurance-linked securities

Reinsurance duo to lead capital markets push

AQR Re has expanded its presence in Bermuda with the hires of John Lummis as ceo and Paul Karon as vice chairman. AQR is committed to develop products and strategies that combine capital markets expertise with reinsurance.

Lummis was formerly coo and cfo at RenaissanceRe, where he was responsible for strategy, finance and operations. He has also served as an advisor to various hedge funds and private equity funds and held several roles as a member of the management team of the insurance holding company USF&G Corp.

Karon stood down as Americas chairman of Aon Benfield last year. He has also served as ceo, president and coo of Benfield Inc.

Risk Management

Euroclear, DTCC to collaborate

Euroclear and the DTCC are to create a joint collateral processing service to increase efficiency, reduce risk and support the growing collateral needs of industry participants. Initially, they will offer automatic transfer and segregation of collateral based on agreed margin calls relating to OTC derivatives and other collateralised contracts.

The joint service will reduce settlement risk, increase transparency around collateral processing on a global basis and provide maximum asset protection for all participants. The DTCC and Euroclear will also establish mutual links, permitting firms to manage collateral held at both firms' depositories as a single pool.

The venture will be operated as an industry cooperative and will provide open and non-discriminatory access to all other collateral processing providers, including custodians, CSDs and ICSDs, that wish to link their services to the joint service.

Risk Management

CVA tool brought to South African institutions

Markit has announced a commercial partnership with IQ Business. It will leverage IQ's South African presence to provide Markit Analytics services in the country.

Markit Analytics provides financial institutions with integrated and scalable pricing and risk management solutions to help them calculate credit valuation adjustment (CVA), funding valuation adjustment (FVA), internal model capital for CVA, counterparty credit risk (CCR) and market risk.

Risk Management

Vendor targets EMEA growth

Quantifi has appointed Bruno Piers de Raveschoot as head of EMEA. He will be based in London and serve as a member of the firm's management committee.

Raveschoot was most recently EMEA and APAC president at NICE Actimize and has also worked as Europe vp at Poet and business development vp at CSFB. He will now help Quantifi continue to expand its European footprint, following strong performance in the region last year.

RMBS

ResCap agreement given more time

The US Bankruptcy Court last week granted ResCap an additional 30 days (to 6 June) to file a Chapter 11 restructuring plan. The move provides ResCap and Ally more time to reach an agreement with the creditors, who are contending that the US$750m contribution proposed by Ally is too low an amount to absolve it of all future liabilities with respect to ResCap (SCI 16 April).

The court granted ResCap a 60-day extension of exclusivity period earlier in March, but it was not able to come up with a plan during that period. Failure to reach an agreement will add to uncertainty over the timing and the amount that RMBS investors receive in rep and warranty claims.

RMBS

DOJ fraud case to proceed

The US Department of Justice is set to proceed with its action against Bank of America in connection with the packaging and sale of MBS to Fannie Mae and Freddie Mac. Federal prosecutors in New York filed a civil fraud lawsuit against the bank last October, alleging that Countrywide implemented - and Bank of America inherited and continued to operate - a home loan programme known as the 'hustle', which effectively eliminated the underwriting review of mortgage loans that Countrywide originated and that Fannie and Freddie later guaranteed (SCI 25 October 2012).

According to a recent Lowenstein Sandler memo, US District Judge Jed Rakoff allowed the Justice Department to proceed with its claims brought under the Financial Institutional Reforms, Recovery and Enforcement Act (FIRREA), but granted the bank's motion to dismiss claims brought under the False Claims Act. In his order, Judge Rakoff wrote that he would issue the reasons for his decision in a forthcoming opinion.

RMBS

Spanish special servicer established

Copernicus, a new Spanish special servicer, has been established to help clients deal with the country's distressed real estate assets. Copernicus uses an integrated technology platform to allow for the efficient management, follow-up and monitoring of assets.

The servicer already manages property portfolios from three Spanish banks. Its offering covers the entire management cycle of property portfolios, ranging from the identification of opportunities and their correct organisation to negotiation or workouts, litigation, property management and property sales and rentals, with an integrated management model that allows clients to save time and optimise costs.

Jose Néstola is founder and ceo and has previously worked at Salomon Smith Barney, Citigroup and Nikko Securities. He leads a multidisciplinary team with extensive experience in the distressed market.

RMBS

Wells notice disclosed

RBS has disclosed in its 1Q13 Interim Management Statement that it received a Wells notice from the US SEC, informing it that the SEC staff is considering recommending the initiation of a civil or administrative action against RBS Securities Inc. According to a Lowenstein Sandler memo, the Wells notice arises out of an inquiry that the SEC staff began in September 2010, when it requested voluntary production of information concerning RMBS underwritten by subsidiaries of RBS during the period from September 2006 to July 2007.

The SEC commenced a formal investigation in November 2010 and the potential claims relate to due diligence conducted in connection with a 2007 offering of RMBS and corresponding disclosures. RBS has submitted a response to the Wells notice. The bank previously announced (in May 2012) that the SEC had completed an investigation into its RMBS practices.

RMBS

NY firm adds SF lawyer

Hunton & Williams has added Brent Lewis to its structured finance and securitisation practice as counsel in New York. Lewis' practice focuses on corporate finance and securitisation. He represents issuers, underwriters, servicers, originators and others in public and private securitisations involving residential and commercial mortgage loans.

ABS

Great Lakes loan sale proposed

The Higher Education Loan Authority of the State of Missouri (MOHELA) is proposing to sell approximately US$11.9m of student loans currently serviced by Great Lakes Educational Loan Services. This represents all of the 3,394 loans that are currently being serviced by Great Lakes and constitutes 1.4% of the 11th General Resolution ABS trust.

The transaction would also remove Great Lakes as a sub-servicer for the trust. The proceeds from the loan sale will be kept in the trust as available funds, with the current parity levels of 120.6% senior and 107.37% total remaining the same after the sale, according to Fitch.

The agency has reviewed collateral stratification and balance sheet pre- and post-sale and determined that the move will not have an impact on the existing ratings at this time.

ABS

Varied PDL performance highlighted

While payroll deductible loans (PDLs) exhibit lower default rates than traditional consumer loans, asset performance varies by country, Fitch reports.

"Regulatory frameworks, originator profiles, loan characteristics and origination processes are key country differentiators that influence diverging performance across the region," confirms Bernardo Costa, senior director in Fitch's Latin America structured finance group.

PDLs are granted to formal employees and social security recipients. They are repaid by automatic pay-cheque deduction, which significantly mitigates willingness-to-pay risks, Fitch notes. Payroll deductions are used in the vast majority of loan products in Latin America, from personal loans in Brazil to mortgage products in Mexico.

Fitch rates securitisations backed by PDLs in Brazil, Mexico, Argentina, Chile, El Salvador and Panama. The agency says that understanding country-specific nuances is critical to determining if a structured finance transaction can ultimately rely on the payroll deduction mechanism.

Unemployment and loss of life are the leading drivers of delinquencies in PDLs. In certain countries, payroll loans may also be exposed to operational inefficiencies in the origination process or subordination to a senior deduction.

In Brazil, loan prepayment rates for PDLs are much higher than those of traditional consumer loans, as competition among payroll lenders has caused many borrowers to refinance. Despite interest rates and payment terms similar to those of Brazilian PDLs, Mexican PDLs exhibit low prepayment rates.

Structured Finance

Counterparty criteria tweaked

Fitch has updated its criteria for the analysis of counterparty risks in structured finance transactions and covered bond programmes. The criteria has been published for the first time in one criteria report, which combines content from previously separate reports. The update contains limited analytical changes and no rating impact is expected.

Combining the criteria is intended to provide simplicity, in view of the high degree of commonality in approach, while retaining various covered bond-specific considerations relating to the dual recourse to the issuer or other structural features. In addition, Fitch has expanded its criteria for the analysis of ratings where transaction parties fail to implement remedial actions upon the downgrade of direct support counterparties below eligibility threshold levels.

Where the counterparty exposure is purely operational in nature, note or bond ratings may exceed those of the counterparty by up to three notches. However, if the counterparty provides any material credit support, the note or bond ratings will be capped at the rating of the counterparty in the absence of any other mitigants. While this criteria update will have no immediate rating impact, it may impact rating actions in the event of future counterparty downgrades and a failure to implement expected remedial actions, Fitch notes.

The agency has also updated the advance rates for government bonds to reflect updated data, leading to a number of small changes.

Structured Finance

National, MBIA Inc ratings raised

S&P has raised its financial strength rating on National Public Finance Guarantee Corp to single-A from triple-B and removed it from credit watch, where it was placed with positive implications last week (SCI 9 May). At the same time, the counterparty credit rating on MBIA Inc has been raised to triple-B from single-B minus and removed from credit watch. The outlook on both companies is stable.

The rating on National reflects S&P's view that MBIA Corp no longer acts as an anchor on the National rating following the settlement with Société Générale that ends litigation challenging National's split from MBIA Corp in 2009 (SCI 10 May). It also reflects the company's stable and strong earnings and low potential for stressed losses, given the risk profile of the insured portfolio. Minimal volatility in the insured portfolio reflects a history of strong underwriting.

Prospectively, National compares favourably with competitors as a result of its distribution channels, customer relationships and management's underwriting expertise, according to S&P. The insurer's current inactive state is an offsetting factor, however, since it's not writing new business. In addition, its liquidity is weakened by low cashflow generation that depends predominantly on investment income.

S&P's rating on MBIA Inc reflects its view that National is its principal source of debt-servicing and holding company expense needs, and follows standard holding company notching criteria. The agency expects MBIA Inc's cash and short-term investments to cover these obligations through 2014 - an important factor for the rating. The continued estimated tax escrow release in January 2014 and 2015 related to the tax-sharing agreement and National's expected ability to pay dividends also support MBIA Inc's liquidity, it notes.

The outlook on National is stable based on S&P's expectation that the company could begin writing business, gain market acceptance and show favourable competitive characteristics. If the insurer does not meet those expectations, the agency could lower the rating - or, if it exhibits sustainable competitive advantages, it could raise the rating.

The stable outlook on MBIA Inc reflects the view that the company's liquidity is adequate to meet its debt-servicing and holding company expenses.

Structured Finance

MTS branches out stateside

European electronic fixed income marketplace MTS plans to launch a platform for US institutional investors. The platform will enable US buy-side participants to directly access real-time pricing and execute European, as well as US government, agency, mortgage and corporate bonds with major dealers.

MTS Markets International has received approval for membership as a FINRA-regulated broker-dealer and will be led by Mark Monahan as chief executive. He was previously ceo of Ballista Securities and ceo of ICAP Electronic Brokerage in the Asia Pacific.

The launch of the US dealer-to-client marketplace later this year will enable clients to benefit from price transparency provided by a deep pool of dealer liquidity, MTS says. The moves comes as ongoing economic challenges keep Europe in the spotlight and US investors are increasingly looking to access fixed income markets in the region.

The company plans to provide request-for-quote based execution with 30 major liquidity providers and access to click-to-trade functionality on the MTS BondVision dealer pages, as well as distribute market data.

Structured Finance

Moroccan covered bond rules prepped

Legislation for Africa's first covered bond market - in Morocco - is only at a preliminary stage and requires further clarification before it's ready for investors, according to S&P. Under the proposed covered bond legislation, universal banks will be allowed to issue on-balance sheet mortgage covered bonds (called Obligations Sécurisées Hypothécaires (OSHs)) and public sector covered bonds (referred to as Obligations Sécurisées Territoriales (OSTs)).

The proposed framework foresees a cover pool that's monitored by an independent trustee and covered bonds that are clearly defined as a dual-recourse instrument. Bondholders have the first recourse to the issuing bank that's tasked with ensuring a performing cover pool of eligible assets and maintenance of all stipulated requirements, as long as the issuer is not in default. Bondholders also receive a priority claim on the assets in the cover pool in case of a default of the issuer.

"We expect the Moroccan covered bond framework to evolve further this year as its planned introduction date draws near," comments S&P credit analyst Karlo Fuchs. "However, whether Moroccan covered bonds will become an accepted funding product in the European markets and provide similar benefits to investors is as yet unclear. There are important details still to be finalised via additional circulars that we understand will be published later this year. Only then we will know what the first African covered bonds will finally look like."

One question that remains to be answered is whether the Moroccan authorities will look to attract an international investor base for covered bonds, as has occurred in countries such as Korea or Panama. The draft law currently does not allow for the registration of privileged hedging arrangements. S&P therefore believes there would initially only be domestic and local currency-denominated issuances.

Morocco's covered bond law is expected to be submitted to parliament later this year and finalised before the end of the parliament session in July.

Structured Finance

MBIA ratings upgraded

S&P has raised its financial strength rating on MBIA Insurance Corp to single-B from triple-C, with a stable outlook. At the same time, it raised its financial strength rating on National Public Finance Guarantee Corp to triple-B from double-B, credit watch positive. MBIA Inc's single-B minus long-term counterparty credit rating was also placed on credit watch positive.

The rating action on MBIA Corp reflects S&P's view that potential stress on the company's liquidity position has lessened as a result of the announced settlement with Bank of America (SCI 7 May) and that the company is unlikely to come under regulatory control during the next 12 months. The rating also reflects its view of the company's small capital base relative to the risk of its insured portfolio; poor operating performance, which is expected to continue; and lack of competitive advantage to improve its financial position in the next 12 months. The rating reflects the company's run-off status and S&P's belief that this corporate profile is unlikely to change in the near term.

The rating action on National reflects the agency's view of the company's strengthened capital adequacy position and financial risk profile, following MBIA Corp's repayment of the intercompany loan. The rating on National also reflects S&P's view that MBIA Corp continues to act as an anchor on the National rating, pending final resolution of litigation challenging National's split from MBIA.

Finally, S&P's rating on MBIA Inc reflects the operating companies' limited dividend capacity and the holding company's weak liquidity position. The monoline's cash and short-term investments are expected to cover its debt-servicing needs and operating-expense obligations through 2014. The continued estimated tax escrow release in January 2015 and 2016 related to the tax-sharing agreement could also provide additional liquidity.

The positive credit watch on National and MBIA Inc reflects S&P's view that the companies will likely settle with the remaining plaintiff in its transformation case in the near term, given the recent settlement with BofA. The agency believes that the settlement and subsequent resolution of litigation would allow National to be recognised as a separate legal entity, maintain the assumed book of business and capital, and begin writing business once it demonstrates favourable market acceptance and competitive characteristics. If a settlement is achieved, National's financial strength rating would be single-A, with a stable outlook, reflecting its stand-alone credit profile.

Structured Finance

UCO rating identifier unveiled

In line with a commitment to open communication in its change control process, S&P is introducing a new 'under criteria observation' (UCO) rating identifier. The identifier is intended to identify which issuer and issue ratings could be affected by a criteria change, as well as address requirements under the EU's Regulation No. 1060/2009.

The new UCO identifier will be assigned to ratings potentially affected by a criteria change on the same day that new criteria become effective. It will remain appended to potentially affected ratings, pending S&P's review of such ratings under the relevant changed criteria.

In effect, the UCO identifier acts as a 'bridge' between the effective date of the changed criteria and the date when a rating is reviewed under the changed criteria, according to the agency. It will remain in place until the conclusion of the review under the changed criteria, at which time the rating and/or outlook may be affirmed, changed or placed on credit watch.

CDO

Coronado buy-back completed

Barclays Capital has waived the minimum tender condition of its tender offer to purchase for cash all of the outstanding class A1, class B1 and class B2 notes of Coronado CDO (SCI 15 April). Consequently, it has accepted for purchase all notes tendered pursuant to the offer and expects to pay the applicable purchase price promptly to holders that tendered their notes.

CDS

CDS notionals continue to decline

The BIS has released OTC derivatives statistics at end-December 2012. The data shows that notional amounts for credit default swaps continued to decline last year, from US$26.9trn at end-June 2012 to US$25.1trn by year-end.

This brought the cumulative reduction since end-June 2011 to US$7.3trn, partly due to the ongoing compression of contracts among dealers, the BIS says. In the second half of 2012, the reduction was concentrated among reporting dealers and in maturities over five years. Contracts with foreign counterparties dropped to US$19trn at end-December 2012, whereas those with counterparties headquartered in the reporting dealer's home country increased from US$5.4trn at end-June 2012 to US$6.1trn at end-December 2012.

CLOs

Limited CLO updates introduced

Moody's is rolling out limited updates to the determination of default and recovery rate assumptions in CLOs for instruments other than first-lien loans. These instruments typically constitute no more than 10% of CLO portfolios and include senior secured, senior unsecured and subordinated bonds, senior secured floating rate notes, as well as second-lien and senior unsecured loans.

Moody's expects the impact of the methodology update to be neutral for the majority of existing CLOs. It does not expect the methodology update to affect the ratings on any European CLOs.

The rating agency will complete its review of these transactions within six months. It has placed on review for upgrade the ratings of nine US CLOs and three CBOs because of material exposures to instruments other than first-lien loans.

Moody's will use its corporate family rating (CFR), when available, to determine the default probability of both first-lien loans and less common instruments. "We will use the CFR, regardless of instrument type, because we believe that the same probability of default applies to all of the obligations of a given obligor," says Danielle Nazarian, a Moody's svp. "Our recovery rate assumptions will depend on the type of instrument and the gap between the rating of the instrument and the obligor's Moody's default probability rating, which is the CFR when available. We will also harmonise our recovery rate treatment of senior secured bonds, second-lien loans and senior secured floating rate notes as one group, and senior unsecured loans, senior unsecured bonds and subordinated bonds as another."

Moody's also modified its treatment of lagged recoveries. It will continue to assume a gross-up rate of 7% per annum, but will cap recoveries by a value based on a 1.5-year recovery lag assumption. The goal is to derive recovery rate caps simply and consistently.

Additionally, the agency believes that the only appropriate remedies following a rating downgrade of a revolving noteholder are replacement by a P-1-rated entity, a guarantee from a P-1-rated entity or the complete draw-down of the facility by the CLO.

Moody's also updated its assessment of the risk to CLOs from the temporary investment of cash in eligible investments and will designate the risk as 'medium' for typical cashflow CLOs.

CLOs

Shift seen in Euro loan maturities

S&P's updated study of collateral pools backing European cashflow CLOs finds that the peak in leveraged loan maturities has shifted out to 2016 and 2017, from 2014 and 2015 in its previous study two years ago. One likely reason for this outward shift in loan maturities is that much existing CLO documentation allows collateral managers to continue reinvesting in certain circumstances, even after the reinvestment period has ended. Despite the transaction entering its amortisation period, CLO managers may therefore continue to recycle some principal proceeds by investing in assets with longer maturities in order to keep the CLO invested.

Another factor contributing to the trend in loan maturities has been the emergence of amend-to-extend transactions (A2Es). "These restructuring agreements on the CLO's underlying leveraged loans result in an extension of the loans' final maturity, as well as often changing the margin on the loan. In our view, CLO noteholders should remain vigilant to this trend, as A2Es could affect the credit risk of CLOs' underlying loan portfolios, as well as sometimes exposing noteholders to market value risk," comments S&P credit analyst Emanuele Tamburrano.

S&P reviewed the collateral portfolios of 193 European cashflow CLOs based on data as at end-2012 and compared its findings with similar analyses based on data as at the end of 2011 and 2010. "Between end-2010 and end-2012, the maturity profile of leveraged loans backing the CLOs shifted outward significantly," observes S&P credit analyst Sandeep Chana.

He adds: "This phenomenon might be expected while the CLOs in question are still in their reinvestment periods and managers reinvest principal proceeds in longer-dated assets. However, we note that even CLOs whose reinvestment periods had already ended by end-2011 saw a subsequent increase in underlying loan maturities. In our view, reinvestments after the reinvestment period, refinancings, restructurings and A2E transactions have all contributed to this trend."

At the end of 2012, €15bn of leveraged loans backing European CLOs were due to mature in 2017. This compares with €8.9bn based on end-2011 data and only €6.5bn in our previous study based on end-2010 data.

CMBS

CRE set for slow, steady improvement

The performance of all commercial real estate sectors will continue to improve throughout 2013, but at a slower pace, according to Moody's 1Q13 US CMBS and CRE CDO surveillance review. The agency says this is due to persistent economic concerns.

Sector fundamentals will drive improving market conditions, making a significant rise in losses on loans backing US CMBS unlikely. "Commercial real estate continues to benefit from limited construction and positive absorption, which have supported a positive market dynamic, despite lingering concerns about the strength of the economic recovery," says Michael Gerdes, Moody's md and head of US CMBS & CRE CDO surveillance.

He adds: "As in the fourth quarter of 2012, multifamily and hotel both performed strongly and will continue to do so over the next year, albeit at a more modest pace. The recovery of office and retail has been more muted, but performance will strengthen in tandem with employment and economic growth."

Moody's central global scenario hasn't changed: it calls for subdued GDP growth in the US of around 2% for 2013. Business confidence is expected to strengthen as the economy continues to recover at a slow but steady pace.

Moody's commercial mortgage metrics (CMM) weighted average base expected loss - which provides a forward-looking distribution of credit risk for commercial real estate loans - declined to 8.3% from 8.4% in 4Q12, while the base expected loss for conduit/fusion transactions the agency rates rose to 9.1%, up from 8.9%. The overall CMM base expected loss has been relatively stable and will remain at around 8% until delinquencies start declining at a faster pace.

The overall share of specially serviced (SS) loans declined by 27bp to 11.04% in 1Q13, from 11.31% in the previous quarter. Performing SS loans accounted for 17.67% of the SS conduit loan universe by balance in 1Q13, down by 190bp from 19.57% in 4Q12. This was in large part due to faster work-outs of non-performing five-year SS loans from 2006-2007 relative to new loans that entered special servicing in the first quarter.

In terms of individual sectors, retail is anticipated to experience modest gains, with positive rental growth by end-2013. Vacancy rates declined by 30bp, the largest drop since 2005.

Office vacancy and rental rates are also expected to improve moderately in 2013, with market performance differentiating according to regional employment growth. In addition, absorption is likely to continue to outpace completion in the next few months, which will assist in the sector's continued slow but steady recovery.

Hotel will continue to grow, but at a slightly slower pace. Year-over-year RevPAR was up by 6.4% in 1Q13 from 1Q12, with the greatest increases in both chain scale and luxury hotels. The top market performers were Oahu Island, Hawaii, and Miami-Hialeah, Florida.

Finally, multifamily is also expected to continue performing well. Absorption continues to outpace completions and vacancy rates remain low, while rents are still growing but at a slower rate. Fifteen markets had vacancy rates below 4%, including Miami and Newark, both of which boasted vacancy rates of less than 3%.

CMBS

Balloon risk remains for MFH deals

Fitch reports that refinancing activity has been strong in German multifamily (MFH) CMBS transactions, but balloon risk still remains.

"There has been considerable refinancing activity in the German multifamily sector over the past year," says Alessandro Pighi, senior director in Fitch's European structured finance team. "A number of large sales and refinancing transactions have also been executed and the first two post-crisis German multifamily CMBS have been priced, indicating continued investor interest. These are certainly positive indicators for outstanding CMBS deals."

The two largest transactions - German Residential Asset Note Distributor and German Residential Funding - together account for three-quarters of the total outstanding securitised German MFH debt balance. "Fitch's concerns for German vintage multifamily CMBS transactions remain focused on balloon risk," says Tuuli Krane, director in Fitch's European structured finance team.

For the large German MFH transactions with experienced sponsors, asset performance has not posed a risk during the transaction terms since 2006/2007. "Both the collateral and the loan performance of the largest transactions have remained stable or even improved over the past few years. This is visible across a number of performance indicators, which include rental levels, vacancy rates, coverage ratios and leverage," says Mario Schmidt, associate director in Fitch's European structured finance team.

CMBS

Pro forma concerns raised on 375 Park

Fitch has released an unsolicited comment on CGCMT 2013-375P, a CMBS backed by a single loan on the Seagram Building located at 375 Park Avenue in New York. The agency says that the deal contains significant pro forma income that makes the credit enhancement insufficient at the triple-A ratings level.

Fitch considers the building to be one of the most prestigious in New York City and believes that the loan is unlikely to incur losses, even at full debt levels. However, it notes that downgrade risk could be material in an environment similar to the recent recession, with the realisation of pro forma income almost impossible to predict.

A major reason for highly rated bonds in CMBS 1.0 being downgraded is pro forma income - underwritten when the loans were made in 2005 through 2008 - not being fulfilled. Often, the downgrades are one or two categories.

For that reason, Fitch has been vocal in its resolution not to include pro forma income in analysing loans in CMBS 2.0 deals. As such, the most senior class of CGCMT 2013-375P would have received no higher than a single-A rating from the agency.

The Seagram Building encompasses 830,000 square-feet of office and retail space. As of April 2013, the property was 90.2% leased to approximately 60 tenants, with an average in-place rent of US$106/sf for office tenants and US$27/sf for the two restaurant tenants.

Based on initial information presented to Fitch, net operating income (NOI) at the property has been: US$53.56m in 2010 (with an average occupancy of 96.9%); US$56.75m in 2011 (96.6%); and US$54.08m in 2012 (94.4%). This compares to the issuer's NOI of approximately US$74m and average occupancy assumption of 96.7%.

Citi and Deutsche Bank co-originated the ten-year interest-only US$782.8m fixed rate loan, with approximately US$607.4m securitised through investment grade notes. When Fitch reviewed the deal, the co-originators had underwritten US$20m in pro forma income, which still seems to be the case in the final deal.

The pro-forma income consisted of: US$10.2m from the mark-to-market of rents, assuming US$135/sf for floors 2-12, US$145/sf for floors 13-38 and US$125/sf for the retail space; US$7.8m from the lease-up of vacant space from 90.2% to 96.7%; and US$2.2m from a recent re-measurement of the building, increasing the total floor space to 858,000 square-feet.

Fitch provided preliminary feedback of US$510m at the investment grade level and was not asked to rate the transaction. The agency's value was approximately US$711 million, using a capitalisation rate of 7% to account for the class A property's location and market-leading stature. In order for it to have rated the transaction at issuance levels, Fitch would have had to either give credit to the pro forma income line items or use a capitalisation rate near 5.75%, well below those seen in stressed environments.

Due to the use of pro forma income, the agency is concerned with refinance risk, given the overall leverage and the lack of amortisation on the loan. Based on its calculations using a 30-year amortisation schedule and assuming a 7% interest rate, the year-end 2012 NCF would have to increase by 39% to attain a 1.2x coverage on the US$782.8m first mortgage and increase by 77% to attain a 1.2x coverage on the entire US$1bn debt amount.

CMBS

CMBS late-pays reach 2009 low

US CMBS late-pays declined by 19bp in April to 7.44% from 7.63% a month earlier, according Fitch's latest index results for the sector. This comes as new delinquencies (of US$747m) dipped below the US$1bn mark for the first time since February 2009 (US$980m). The last time new delinquencies were lower was in October 2008, when they came in at just US$458m and the overall late-pay rate stood at a mere 0.51%.

In April, resolutions of US$1.5bn outpaced new additions to the index by nearly two-to-one. However, Fitch-rated new issuance volume of US$1.8bn fell short of run-off of US$2.1bn.

The volume of CMBS loan resolutions is likely to remain strong, with the share of real estate owned (REO) assets at an all-time high, representing 45% of total outstanding delinquencies by balance. The share of REOs is even higher for large loans, at 57% by unpaid balance, as of last month. With large assets having now made their way through the foreclosure process, CMBS delinquencies should drop further - sometimes sharply - as those assets are sold.

Current and previous delinquency rates are: 9.82% for industrial (from 9.41% in March); 8.39% for office (from 8.5%); 8.38% for multifamily (from 8.91%); 8.01% for hotel (from 7.71%); and 7.1% for retail (from 7.09%).

CMBS

Low Euro CMBS repayments to continue

Moody's expects the repayment rate for European CMBS loans maturing in 2Q13 to remain at the historically low levels seen during the first quarter. The repayment rate dropped to 29% in 1Q13 from 35% in 2012.

"We base our expectations on the specific characteristics of the loans with original scheduled maturity dates in 2Q13 and Europe's weak macroeconomic outlook," says Andrea Daniels, a Moody's svp - manager. "An additional factor underpinning our expectations is the constrained lending environment for commercial real estate, combined with the CMBS real estate assets' predominantly secondary quality."

In Moody's view, 24 loans (representing €2.6bn) with scheduled maturity dates in 2Q13 will likely not repay because the loans have both higher Moody's loan-to-value (LTV) ratios and lower Moody's debt yield than the 34 loans that matured in the first quarter. Moody's LTV is the key determinant of whether loans default or repay with a loss, or prepay, repay at maturity or extend.

Of loans with a Moody's LTV higher than 100%, 95% either defaulted or repaid with a loss. Furthermore, all loans with a Moody's LTV below 65% either repaid at maturity or the lender extended them.

Moody's debt yield is also relevant in predicting outcome. In 1Q13, Moody's debt yield stood at 7.2% for defaulted loans in contrast to 11.7% for loans that repaid at maturity.

Insurance-linked securities

Cat bonds set for record issuance

US$520m of catastrophe bond issuance was offset by US$352.5m of maturities in 1Q13, resulting in an increase of US$4167.5m in risk capital outstanding, according to GC Securities. The firm expects the market this year to approach, if not exceed, the record for annual issuance of US$7bn set in 2007.

This forecast is dependent on cat bond market pricing remaining stable and non-US peak peril sponsors taking advantage of particularly attractive conditions to bring sizeable issuances to the market during the balance of 2013. "Spreads in the catastrophe market tightened significantly during the first quarter of the year, driven by strong demand from investors seeking additional deployment opportunities," comments Cory Anger, global head of insurance-linked securities (ILS) structuring at GC Securities.

He adds: "Although the low interest rate environment has made the catastrophe market more attractive to institutional capital, it is not the primary driver of inflows. Rather, we are seeing significant demands in part because of the 'decoupling' of pricing between the traditional reinsurance and capital markets. While traditional reinsurance has capital constraints for peak risk zones, such as Florida, the cat bond market may be able to offer capacity at a lower price point because it does not have the same capital costs."

Two natural peril-exposed cat bonds closed during the first quarter: US$270m Caelus Re 2013-1 and US$250m Everglades Re series 2013-1. The issuance drove total risk capital outstanding in the sector to an all-time high watermark of US$15bn and marks the eighth consecutive quarter of growth, up by more than 17% since end-1Q12.

Given scheduled maturities for the balance of 2013 and expectations about the current deal pipeline, risk capital is anticipated to increase over the balance of 2013. The level of expected additional issuance from GC Securities, for one, should support further growth of US$17bn-US$19bn of risk capital outstanding.

The firm notes a continued and demonstrated broadening of investor interest in the catastrophe risk market. For example, smaller and mid-size ILS managers are generating new mandates from institutional asset managers. In addition, a growing number of non-specialised but sophisticated institutional investors are participating in the 144A market on a direct basis.

"The catastrophe risk market is demonstrating its readiness to transition from 'adolescence' to 'young adulthood'," comments Chi Hum, global head of distribution for ILS at GC Securities. "We are seeing that conservative institutional asset managers have largely accepted catastrophe risk as a component of a mainstream investment strategy. The broadening investor base is certainly a positive trend for the long term, as it increases the level of available capacity without leaving the market susceptible to reckless capital. Looking forward to the balance of 2013, capacity from the alternative markets has never been more competitive."

Risk Management

Collateralisation impact highlighted

Achieving collateral efficiency and operational efficiency in a mixed clearing and collateralisation environment will cost the financial industry in excess of US$53bn in infrastructure and technology investments, according to a new Celent survey. The cost of collateralisation is expected to increase by up to 20%, driven by additional initial margin requirements and credit/opportunity costs associated with sourcing eligible collateral.

A significant area of concern is the anticipated 100%-150% growth in margin call traffic, as predicted by respondents to the Celent survey. Such an explosion in margin calls has important repercussions for operational capacity, resources and a firm's flexibility to manage collateral efficiently in the new market environment.

Approximately half of respondents (48%) have not completed operational preparations to address regulatory requirements or margin call increases. Of those who have, gaps seem to remain, with firms citing margin call inefficiencies in operations (43%) and limitations of existing systems (38%) as significant challenges.

Firms cited an urgent need to improve efficiency drags around margining processes. The degree of automation and efficiency in how firms are able to manage and enable decisions around collateral is expected to become the number one competitive advantage going forward.

Finally, collateral is expected to become a key influencer of changing trade economics, directly impacting buy-side portfolios and financial returns.

Risk Management

Reporting protocol released

ISDA has launched the ISDA 2013 Reporting Protocol, which contains a counterparty's consent to the disclosure of information. It is intended to facilitate market participants' compliance with mandatory trade reporting requirements.

ISDA is also publishing Side Letters (Principal and Agent versions), which parties can enter into bilaterally, that contain the same consent language as found in the Protocol. To the extent that parties may need to satisfy additional disclosure requirements, it may be possible to incorporate such additional requirements into the Side Letters on a bilateral basis.

ISDA has published separate Protocols facilitating compliance with certain requirements of the US Dodd-Frank Act (SCI 14 August) and will soon publish a Protocol doing the same for EMIR requirements. These Protocols also include disclosure consents.

The Reporting Protocol is intended to be more generic than the Dodd-Frank and EMIR Protocols, while being consistent with them. The association says that the Reporting Protocol may be particularly useful for market participants who - due to the nature of their trading activity - may not be required to comply with certain provisions of the Dodd-Frank and EMIR Protocols but who nonetheless face trade reporting obligations.

Risk Management

Clearing risk management tool prepped

The first futures commission merchant (FCM) has completed production testing for Traiana's central risk management infrastructure for swaps clearing. This firm is now ready to go live with clients trading interest rate derivatives and credit default swaps on swap execution facilities (SEFs) or designated contract markets (DCMs) with pre-trade order screening, as required under Dodd-Frank. Five additional FCMs, as well as buy-side, fund servicing and order management firms are currently in the process of joining the service and production testing.

Based on Traiana's proven cross-asset CreditLink platform, the service is designed to enable clearing firms and buy-side firms to manage trading and clearing limits in low latency for interest rate, credit and FX swaps. Firms will be able to pre-screen orders to trade swaps prior to execution, ensuring certainty of clearing acceptance by their clearing member at the time of execution, Traiana says.

RMBS

Foreclosure legal risk highlighted

A borrower in California has successfully obtained an injunction against a foreclosure sale on his property. The borrower alleges that Bank of America, the servicer on the loan, violated the Homeowners Bill of Rights (HBR) ban on dual tracking by filing for foreclosure sale before responding to a request for a loan modification.

The HBR allows the borrower to claim reasonable attorney fees from the servicer/lender where a borrower can successfully obtain an injunction. The borrower's attorney is claiming US$20,255 in legal fees and costs, which could exceed US$50,000-US$60,000 if the case proceeds further.

MBS analysts at Barclays Capital indicate that such increased legal risk could drive servicers to pursue judicial foreclosures over the non-judicial process, thereby reducing the risk on injunctions and bearing legal costs but at the cost of potentially lengthening the foreclosure and liquidation timelines. The performance data in the three months since the onset of 2013 have exhibited signs of this slow-down in California, the analysts note.

The 60+ to foreclosure roll rate and foreclosure to REO roll rate have trended towards the judicial average from being closer to the average of non-judicial states, according to the Barcap analysts. In addition, CDRs have dropped to 8-9 in the last two months after remaining in the 10-13 range over last year.

RMBS

Countrywide hearing on track

Objector discovery has commenced in preparation for the 30 May hearing in the New York State Court on Bank of America's proposed US$8.5bn Countrywide settlement. At present, the entities opposed to the settlement include AIG, Triaxx, the Boston, Chicago, Indianapolis, Pittsburgh Federal Home Loan Banks and a number of other investors.

Barclays Capital MBS analysts' base-case forecast is that the settlement is approved and investors receive cashflows as soon as late-2013/early 2014. "A long appeal/trial process could still derail that timeline, but we believe that to be less likely," they add. "Countrywide bonds are, however, pricing in a 70%-80% likelihood of the settlement cash flowing through in the next 6-12 months, so the upside from current levels is limited, unless the settlement amount increases substantially."

RMBS

Cashflow modelling error disclosed

Moody's has placed the ratings of 228 tranches from 94 US RMBS issued by several issuers on review with the direction uncertain. An additional six tranches from three related transactions remain on review for downgrade. The amount of securities affected by the move is US$11.5bn.

The review actions reflect errors in the Structured Finance Workstation (SFW) cashflow models previously used by Moody's in rating the affected transactions, specifically in how the model handles principal and interest allocation. The cashflow models used in the past rating actions had incorrectly used separate interest and principal waterfalls, or incorrectly used commingled waterfalls.

In the majority of the impacted deals, all collected principal and interest is commingled into one payment waterfall to pay all promised interest due on bonds first, then to pay scheduled principal. With commingling of funds, even principal proceeds will be used to pay accrued interest, which could result in reduced principal recovery for bonds outstanding.

For example, in Ameriquest Mortgage Securities Series 2005-R10 and Opteum Mortgage Acceptance Corporation Asset Backed Pass-Through Certificates 2005-5, the model should not have commingled collected principal and interest into one waterfall. Rather, it should have maintained separate principal and interest waterfalls until after independent principal and interest payments were made.

Moody's is also adjusting certain of its methodologies to reflect its current view on loan modifications. As a result of an extension of the Home Affordable Modification Program (HAMP) to 2013 and an increased use of private modifications, the agency is extending its previous view that loan modifications will only occur through the end of 2012. It is now assuming that the loan modifications will continue at current levels into 2014.

These methodologies only apply to pools with at least 40 loans and a pool factor of greater than 5%. Moody's says it may withdraw its rating when the pool factor drops below 5% and the number of loans in the pool declines to 40 loans or lower, unless specific structural features - such as a credit enhancement floor - allow for the transaction to be monitored.

RMBS

Distressed inventory trends examined

An analysis of Morningstar's Distressed Inventory Index suggests that over a one-year time period overall distressed inventory has decreased by 19%, while the number of liquidations has declined by 14%. The rating agency further estimates that it will take 40 months to clear the national distressed inventory - which is down by three months from the levels seen one year ago.

Morningstar says its key observations of distressed inventory over the past year include: higher short sales as a percentage of liquidations; slower liquidation rates; and fewer months of inventory. The number of distressed properties, as of February 2013, is approximately one million - down by more than 40% from the December 2009 peak and down by 19% from a year ago.

According to the agency, the distressed inventory is declining steadily because: fewer stressed properties are entering the distressed inventory, as a result of improved loan performance; and properties are still being liquidated through the distressed inventory pipelines, albeit at a declining rate. Despite the increased use of short sales in 2012, fewer properties overall are being liquidated and so the improvement to the distressed inventory due to short sales is constrained.

Nationally, the average months to clear distressed inventory shows only a slight improvement from a year ago. As of February 2013, the average months to clear distressed inventory stands at 40 months versus 43 months for 1Q12. During that time, short sales as a percentage of total distressed sales has increased from 45% to 53%.

The regional variation in liquidation rates became noticeable in the middle of 2008 and continued to expand throughout 2012. As of February 2013, Morningstar's estimate of the months to clear the distressed inventory in judicial states is 64 months compared to 27 months for non-judicial states. This is a factor of almost 2.4 times as long in judicial states as in non-judicial states.

A pronounced regional variation of liquidation speeds is also clear from the analysis. The average months to clear the distressed inventory for the top-20 MSAs is 47 months (or 38 months, excluding the outlier New York MSA), as of February 2013.

For the New York MSA, the estimate is 215 months, followed by 79 months for Boston and 59 months for Miami. Each of these MSAs is located within judicial states.

As of February 2013, the average FICO score at origination for borrowers in the distressed inventory was 660, compared to 698 for non-distressed borrowers. In addition, the distressed loans have higher average original and current combined-LTV ratios (HPI adjusted) and a much higher percentage of distressed loans have been modified.

RMBS

Weaker performance forecast for UK BTL

The continued growth of the UK buy-to-let (BTL) market could lead to weaker future performance of the sector, especially where lenders are targeting amateur and first-time landlords rather than professional investors, Fitch says. The latest quarterly figures from the Council of Mortgage Lenders show that BTL mortgages increased to 13.4% of total outstanding mortgage lending in the UK at end-March, up from 13% the previous quarter and 12.9% at end-1Q12. At the peak of the housing market, BTL represented around 10% of total lending.

The attractive returns on rental investments available today provides an opportunity for investors to beat the low returns from savings and other investments. However, Fitch believes that reversion rates in the market, which are now typically over 4% above the base rate, will make many investments unsustainable once interest rates return to more normal levels.

Pre-crisis reversion rates tended to typically range between 0.5% and 2% above the base rate, enabling investments to provide a positive return at higher interest rates. Under today's typical reversion rates, returns may significantly diminish in the long term, leading to poor performance - particularly among those with little experience of managing an investment property in a stressed environment.

In the financial crisis, Fitch observed that while the professional landlord sector of the market performed relatively well, the performance of the amateur landlord sector was much less impressive. The performance of typical transactions made up of pre-crisis BTL lending to amateur landlords saw three-months plus arrears rates rise above 4% in some instances, whereas similarly seasoned transactions that were more representative of the professional BTL sector saw arrears rates of less than 2%, according to the agency's data.

Although BTL mortgage arrears have been low and repossessions subdued over the last couple of years, supported by a buoyant rental market and low interest rates, Fitch suggests that conditions are unlikely to remain so favourable for BTL in the longer term. When BTL cases are repossessed, losses against the property value can be substantially more than for owner-occupied property. Based on a recent study of UK repossessions, the agency reports that the typical discount on sale for BTL cases was around 50% higher than that suffered on owner-occupied property.

RMBS

Freddie embarks on portfolio sales

Freddie Mac is said to have put out a US$1bn bid-list, as it embarks on a sale of up to US$5bn in legacy non-agency RMBS over the course of the year. The collateral primarily comprises higher-dollar seasoned assets that are expected to appeal to a wide audience and are in limited supply.

The GSEs are required to sell 5% of their holdings other than agency MBS this year (SCI 5 March). Structured product analysts at Wells Fargo estimate that the 5% represents about US$30bn for Fannie Mae and about US$26.7bn for Freddie, based on their 31 March 2013 total portfolio sizes of US$598bn and US$534bn respectively.

"In our opinion, it seems a good time to sell such assets, with spreads at historical tights due to low supply, Fed and BOJ QE efforts absorbing a huge amount of high-quality fixed income assets, and improving housing credit fundamentals. We think that, to the extent the GSEs sell these assets in a rather controlled fashion, markets will absorb the supply easily and spreads will not be too much affected," the Wells Fargo analysts observe.

It is anticipated that Freddie will sell another US$1bn of its RMBS holdings next month, depending on market conditions.

RMBS

LMI ratings reviewed

S&P says that the ratings on some Australian and New Zealand prime RMBS could be affected by the outcome of its criteria review for rating insurance companies. The firms under review include some lenders' mortgage insurance (LMI) providers and reinsurers that play a role in providing LMI cover for housing loans.

The LMI providers or reinsurers under observation that may affect Australian RMBS are: AIA International, Genworth Financial Mortgage Indemnity, Genworth Financial Mortgage Insurance, MGIC Australia, Mortgage Risk Management, QBE Lenders' Mortgage Insurance and Westpac Lenders Mortgage Insurance. If one or more LMI providers are affected, S&P will review each of the RMBS for its exposure and structural support mechanism in place to assess the impact.

The agency currently expects very few triple-A rated RMBS to be affected, based on its most recent sensitivity analysis, even if the ratings on the LMI are affected. For any triple-A rated notes that are impacted, the magnitude of impact is anticipated to be small. However, S&P notes that the subordinated tranches in most prime RMBS structures have significant exposure to LMI providers and a rating dependency to that of the LMI provider, due to the minimal additional support available.

RMBS

Shelly Mac poised for issuance

The US SEC has declared effective a shelf registration statement filed by Shellpoint Partners last October via its subsidiary depositor, Shellpoint Mortgage Acceptance (Shelly Mac). Shelly Mac may now issue public RMBS, with the shelf initially funded up to US$2bn of issuance capacity.

Shellpoint says it intends to be a significant issuer of new issue RMBS, as well as helping to define new market standards and practices. The firm plans to securitise loans originated by its wholly-owned subsidiary New Penn Financial, which offers agency, government-backed and prime-quality non-agency residential mortgage loans to borrowers in 47 states.

RMBS

Affordable housing to hit Sofoles RMBS?

Fitch warns that Mexican President Pena Nieto's affordable housing policies may have negative consequences for existing private-sector RMBS sponsored by Sofoles. This segment is already experiencing an increase in REOs as foreclosures have risen and servicers have been slow to dispose of existing inventories.

Fitch believes the policy changes could put further pressure on future sales of these REOs as prospective new home buyers are lured closer to urban centres by potential incentives. RMBS servicers will continue to compete to unload these non-performing assets that in many cases are concentrated in some of the outlying areas of Mexico. With legal and maintenance costs rising and the sales cycle lengthening for this segment, recovery rates may come under additional pressure, having already decreased over the past three years from 70% to 50% on Fitch-rated RMBS transactions.

The President's strategy on housing affordability has focused on three main areas: better coordination on housing policy; intelligent and sustainable urban development processes; and growth in housing supply to cope with demand, while improving quality of life. Many of these policies are designed to promote housing projects - either vertically or horizontally constructed - closer to city centres. The new Secretaria de Desarrollo Agrario Territorial y Urbano is the federal body supervising these changes.

For the leading Mexican homebuilders, these policy objectives will cause a strategic shift away from building large developments of mainly single-family homes on city peripheries. Homebuilders are redefining their construction strategy and resizing in order to manage these policies, Fitch notes.

Infonavit intends to set up a fund to promote multifamily construction. It will pay homebuilders 70% of the project's value when the construction is halfway completed.

Earlier this year, the Sociedad Hipotecaria Federal - a national development bank - announced that it will provide first-loss partial credit guarantees for up to 30% of commercial bank funding granted to homebuilders. These measures are expected to assist homebuilders to adapt to the changing landscape within Mexico in order to mitigate any potential disruption in housing supply.