Contents

RMBS

Secondary split seen in RMBS

The US RMBS secondary market has had a mixed start to the week, with agency supply up but non-agency BWIC volume markedly down. SCI's PriceABS data shows several covers for agency bonds during yesterday's session, but fewer for non-agencies.

Agency RMBS supply reached almost US$1bn yesterday, boosted by several large derivatives lists. Interactive Data notes that BWIC execution was mixed, but generally weaker at the lower end of price talk.

PriceABS shows that both FNR 2013-18 QS and FHR 3919 LS did not trade during the session, although tranches such as FHR 4120 ST did. Several other tranches achieved covers, including FNR 2013-76 SC, which was covered in the mid-20s.

Meanwhile, non-agency RMBS supply was up compared to Friday's levels, but remained light. "Fears of bloated dealer inventories, unpredictable servicer behaviour and the approaching quarter-end all appear to be weighing on sentiment. Dealer inventory offering levels have resumed their downward trend, with multiple line items available at lower dollar prices to start the new week," comments Interactive Data.

The Alt-A fixed MALT 2005-5 5A2 tranche was talked in the low-90s yesterday before trading, while the Alt-A hybrid IMM 2005-2 1A1 tranche was talked in the 90 area. Subprime tranches, such as MSAC 2005-HE1 M1, were also out for the bid. That tranche was talked in the mid/high-90s before trading.

Most of the paper circulating during the session was from the 2005 vintage, but a couple of names from earlier vintages were also seen. GSAMP 2003-SEA2 A1 traded in the session (having been talked in the mid/high-90s), with the MSDWC 2002-AM2 M1 tranche also trading (having been talked in the high-90s).

JL

Structured Finance

SCI Start the Week - 10 June

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

Pipeline
New deals continued to join the pipeline last week, with three ABS, two RMBS and two CMBS announced. The ABS were US$205m CPS Auto Receivables Trust 2013-B, US$153m Nations Equipment Finance Funding I and US$15.87m Vermont Student Assistance Corporation Senior Series 2013A.

The RMBS were US$460.16m Sequoia Mortgage Trust 2013-8 and A$500m Series 2013-1 Harvey Trust. The newly announced CMBS comprised €2.1bn German Residential Funding 2013-1 and US$1.25bn JPMBB 2013-C12.

Pricings
New issuance for the week was largely skewed towards CLOs, although five ABS, five RMBS and a CMBS also priced. In total, eight CLOs printed during the week.

The ABS new issues consisted of: €494.55m Auto ABS FCT Compartiment 2013-2, US$700m Chesapeake Funding Series 2013-1, US$300m CLI Funding V Series 2013-2, US$583.95m PHEAA SLT 2013-1 and €3.5bn Quarzo 2013. The RMBS prints comprised: US$304m EverBank Mortgage Loan Trust 2013-2, US$843m-equivalent Lanark Master Issuer Series 2013-1, US$350m Nationstar Mortgage Advance Receivables 2013-T1, US$350m Nationstar Mortgage Advance Receivables 2013-T2 and US$300m Nationstar Mortgage Advance Receivables 2013-T3. The £380m UNITE (USAF) II CMBS also priced.

Finally, the CLO issuance consisted of: US$514.6m Anchorage Capital CLO 2013-1, US$516.75m Avery Point II CLO 2013-2A, US$465m Catamaran CLO 2013-1, US$426m GLG Ore Hill CLO 2013-1, €300.32m GoldenTree Credit Opportunities European CLO, US$519.4m KKR Financial CLO 2013-1, US$517m Mountain Hawk II CLO and US$600m OZLM Funding IV.

Markets
Last week saw the second largest weekly issuance total of the year for the US CLO market, pushing year-to-date issuance to US$43bn across 89 CLOs. Another US$16.72bn is understood to be in the pipeline, according to JPMorgan fixed income strategists.

"This week, new issue spreads widened considerably, reflecting macro driven volatility. Although we observe primary triple-As widened 5bp on the week, there is increased tiering among prints and hence greater difficulty in arriving at 'mid' levels," they comment.

It was a strong start to the week for US ABS, as SCI reported on 4 June. Large quantities of US auto, credit card and student loan ABS were out for the bid, with both recent vintages and pre-crisis names appearing in SCI's PriceABS data.

Among the names out for the bid were BAAT 2012-1 A2, ACCSS 2005-A A2 and AMXCA 2008-5 A. The BAAT tranche traded during Monday's session, while ACCSS and AMXCA were talked in the high-90s and very low-singles, respectively.

Spreads in US CMBS moved sharply wider last week, with vintage AJs dropping by five points and new issue triple-Bs giving up 60bp, note Barclays Capital CMBS analysts. The moves were driven by heightened volatility in the broader credit and equity markets, with generic 2007 dupers moving 20bp wider to finish the week at swaps plus 125bp.

US RMBS non-agencies also saw some weakening, with bonds trading substantially lower for the first time since QE3 was announced. Bank of America Merrill Lynch structured products strategists point out that bid/ask spreads exceeded three points in many instances, with the high level of BWIC activity actually leading to a remarkably low number of trades.

"At these levels, investors do not appear particularly incented to sell and the motivation of many of the lists appear to be aimed more at gaining price transparency as opposed to repositioning portfolios," they explain. "The largest weakness continues to be seen in Alt-A, while subprime received substantially more interest on the dip. The bonds that did trade were oftentimes lifted by hedge funds and opportunity funds, and we generally saw trades clearing 2-3 points lower than where we opened the week."

Deal news
• Further details of the Kennedy Wilson/Värde Partners Europe restructuring proposal for the Opera Finance (CMH) CMBS have been disclosed ahead of a noteholder meeting on 26 June. The proposal involves the acquisition of all the properties for cash in a pre-pack enforcement sale undertaken by a receiver (see SCI's CMBS loan events database).
• CREFC Europe has released 'Guidelines for interest rate hedging in European CRE finance transactions'. The association established a hedging working group last year to study and report on interest rate hedging practices used in European CRE finance transactions.
• Newcastle Investment Corp has divested 100% of the assets in Newcastle CDO IV. The firm sold US$153m face amount of collateral at an average price of 95% of par. The sale will result in US$77m of third-party debt being paid off at par and the termination of the trust.
• The second auction of the year is being held for Independence IV CDO on 27 June, after proceeds from an auction in March failed to meet the required redemption amount. The underlying assets comprise RMBS, CMBS and ABS CDO securities.

Regulatory update
• The US SEC is proposing to reform the way that money market funds operate in order to make them less susceptible to runs that could harm investors. The proposal includes two principal alternative reforms that could be adopted alone or in combination.
• The Consumer Financial Protection Bureau (CFPB) has amended its ability-to-repay rule for small creditors, community development lenders and housing stabilisation programmes (SCI 11 January). It has also revised the rules on how to calculate loan origination compensation for certain purposes.
• The American Securitization Forum has submitted a comment letter in response to the Uniform Law Commission's (ULC) draft residential real estate mortgage foreclosure process and protections. The ULC is proposing to reverse the holder in due course doctrine, which currently provides that a mortgage assignee that paid value for a loan in good faith and that lacked notice of certain claims and defenses to payment that the borrower has against the original lender takes the loan free of those claims and defenses; the assignee remains subject to real defenses, such as duress.
• ESMA has published technical advice evaluating the impact of the regulation on short selling and certain aspects of credit default swaps on European financial markets. The document is in response to a European Commission request for technical advice to inform its report to the European Parliament and Council on the impact of the regulation, due by end-June.
• ESMA and the EBA have published their final report setting out their 'Principles for Benchmark-Setting Processes in the EU'. The principles are designed to address the problems identified with benchmark-setting processes and will provide benchmark users, administrators, calculation agents, publishers and data submitters with a common framework for carrying out these activities.
• Former Goldman Sachs trader Fabrice Tourre has failed in his attempt to narrow a US SEC lawsuit against him by eliminating a fraud claim based on foreign transactions. The SEC filed the lawsuit in 2010, alleging that Tourre defrauded investors in the Abacus 2007-AC1 CDO by failing to disclose the role of hedge fund Paulson in selecting the underlying securities and betting against them (SCI passim).
• New York Attorney General Eric Schneiderman has filed a lawsuit against HSBC Bank USA and HSBC Mortgage Corporation for failing to follow state law in its foreclosure actions. By failing to lodge certain paperwork in a timely fashion, HSBC and other companies are alleged to have prevented homeowners from accessing settlement conferences which could help them keep their homes.

Deals added to the SCI database last week:
Ally Auto Receivables Trust 2013-SN1; Atlantes SME No. 2; Bavarian Sky German Auto Loans I; CarNow Auto Receivables Trust 2013-1; CSMC Trust 2013-IVR3; Florence; JP Morgan Mortgage Trust 2013-2; NewMark Capital Funding CLO 2013-1; Residential Reinsurance series 2013-I; Tryon Park CLO

Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-6; CD 2006-CD3 & GSMS 2006-GG8; CD 2006-CD3 & MSC 2006-IQ12; CGCMT 2005-C3; CMLT 2008-LS1; CSMC 2006-C1; CSMC 2006-C5; CSMC 2007-C3; CSMC 2007-C4; CWCI 2006-1; CWCI 2007-C3; DBUBS 2011-LC3; DECO 2007-C4; ECLIP 2006-3; EMC VI; GCCFC 2005-GG5; GECMC 2005-C2 & GECMC 2005-C4; GECMC 2007-C1; GMACC 2003-C1; GSMS 2007-GG10; INFIN CLAS; JPMCC 2005-CB11; JPMCC 2005-CB13; JPMCC 2006-LDP 7 & JPMCC 2006-CB16; JPMCC 2008-C2; MLCFC 2007-5; MLCFC 2007-7; MLMT 2006-C1; MLMT 2006-C2; OPERA CMH; RIVOL 2006-1; TITN 2006-5; TITN 2007-2; TMAN 6; VNDO 2012-6AVE; WBCMT 2006-C25; WBCMT 2007-C30; WINDM VIII; WINDM XIV; WTOW 2007-1

Top stories to come in SCI:
Developments in Russian RMBS

CMBS

GRAND redemption nears

GRAND sponsor Deutsche Annington (DAIG) intends to list on the Frankfurt Stock Exchange. As it seeks to rebalance its funding, the likelihood of the GRAND CMBS being redeemed on or before its October IPD has greatly increased.

DAIG plans to move towards a mix of secured and unsecured funding and has taken out several secured loans and entered into an unsecured €2.5bn term loan facility with JPMorgan and Morgan Stanley. It is also planning to refinance some of its remaining secured loans with unsecured loans.

Proceeds from refinancing loans, the term loan facility and a corporate bond issuance are expected to be used to repay GRAND on the October IPD at the latest. Unlike Gagfah, DAIG is unlikely to issue a new CMBS as part of its financing strategy transition and instead is anticipated to rely more heavily on corporate bonds.

This would increase funding diversification and flexibility. Barclays Capital CMBS analysts note that it may also save DAIG from having to restructure GRAND's largest REF notes issuer, which would reduce restructuring costs. The GRAND repayment also removes lender-friendly debt from DAIG's balance sheet, which will help it to list on the stock exchange and to issue corporate bonds.

The Barcap analysts believe that significant DAIG-sponsored CMBS issuance is now unlikely in the short or medium term. The financing strategy involves encumbering only 50% of its property portfolio, down from close to 100% at the end of last year.

"Assuming an average LTV of 65% for secured debt, the company plans to have €3.2bn mortgage debt in the medium term, down from €6.3bn as per end-2012. Of the €6.3bn mortgage debt as per end-2012, €1.2bn is long-term debt (maturity in 2037)," the analysts note.

DAIG refinanced €715m of GRAND earlier this year using secured loans and has this month taken out a further €940m in secured loans. The long-term debt and new mortgage debt are unlikely to be refinanced in the short or medium term.

"In addition, the difference to the longer-term target of €3.2bn secured debt is likely to consist of subsidised debt that will remain in place. For these reasons, we do not expect that part of the new unsecured term debt will be converted into secured debt and then securitised as a German multi-family CMBS," the analysts add. Instead DAIG is expected to take on more unsecured debt and inject equity to further repay secured acquisition financings.

JL

RMBS

Large list divergence observed

US non-agency RMBS prices had been hovering near their highs in the run-up to last month's pair of unusually large bid-lists. Thereafter the above-average supply, together with shifting views on QE tapering appeared to strain risk appetite.

Freddie Mac brought a US$1.1bn list on 15 May (SCI 17 May), before Lloyds came to the market with a US$8.7bn list on 30 May (SCI 31 May). Interactive Data notes that cumulative Street positions rose over the month for both investment grade and non-investment grade securities, before diverging sharply when the second list came out.

The advent of the Lloyds list prompted a Street positioning jump of around US$1.2bn for investment grade securities, while non-investment grade security ownership fell by around US$2bn. That single day almost reversed the position from the two previous weeks, leaving the Street net longer by US$1.5bn in investment grade and net shorter by US$1.3bn in non-investment grade since early May.

"The impact of excessive supply due to the back-to-back large BWICs, combined with typical month-end balance sheet limits, appeared to weigh in on pressures to lighten inventory in late May. In fact, dealers continued lowering offer levels in the latter half of the month and have not yet returned to a neutral stance," Interactive Data observes.

As well as pressure in dealer positions, there were differences in execution between the lists. The Freddie list was comprised of better performing bonds than the Lloyds list and this was reflected in higher re-offer prices. Trade prices averaged US$2.1 points higher than mid-value price talk for the former list, but execution was around US$1 point below mid-talk for the Lloyds list.

"With growing unease about the possible impact of Fed tapering, as well as its uncertain market repercussions, these two large bid-lists may have caught the tail-end of the extended rally in non-agency RMBS," notes Interactive Data. "There may be early indications that dealers and investors are already taking pause to reassess their risk appetite for non-agency RMBS."

JL

Structured Finance

Linking-in credit

Mike Manning, DealVector co-founder and ceo, and Dave Jefferds, co-founder and coo, answer SCI's questions

Q: How and when did DealVector become involved in the structured finance markets?
MM: The system has been live for two months or so, although of course we have been developing for longer than that. We really are filling a gap in the market and providing a service that investors tell us they have been crying out for.

DealVector is 'LinkedIn' for assets. We allow investors in CDOs, CLOs, derivatives, hedge funds and other alternative assets to find other members of their deals for the first time. Investors do not typically know who else is in their deal, but in many cases they need to get in contact with each other - if they want to restructure or call a deal, for example.

Q: How do you differentiate yourself from your competitors?
MM: It is a Silicon Valley approach to a Wall Street problem. Here in California, we do not tend to think beyond the IPO. But IPOs are a fraction equities markets, and equities are a fraction of the fixed income markets.

The fixed income markets, however, require domain-specific knowledge that people out here just do not have. Conversely, on Wall Street people do not think about building community-based websites to address information asymmetries, so we are combining our expertise to give the best of both worlds.

DJ: There is nobody else doing what we do and I cannot think of many other attempts to do it either. The product is well fit to the needs of the financial community. You cannot just create an entirely open system like a social network and expect it to be applicable to the financial community.

Obviously investors do not want their entire portfolio to be open to their competitors to view online, so with our system we have made sure that this is simply not possible. You also do not want to be chasing people on the phone all the time, so our system allows you to narrow-cast your outbound and inbound messaging into the tightly defined group you want to target.

Q: What are your key areas of focus today?
DJ: Part of our solution is a 'less-is-more' approach. That is part of what makes it work. We are not trying to set up another big trading platform; we just want to be a relationship conduit and we do not look to control the relationship once it has been established.

Users can treat us like a smart phonebook. They input the kind of users they want to communicate with and the deal that is relevant to that communication. That means you may be open to talking to anyone in the market or you may just want to talk to other investors or just the trustee or somebody else.

Once you have narrowed it down by deal and user type, you can open a dialogue with other members under the cover of an anonymised numeric ID. While you do not know the identity of the person with whom you are communicating - and they do not know yours - you can still be confident that they are legitimate deal participants, because part of DealVector's service is that we validate network members.

If two parties mutually decide that they want to "drop the mask", we will simultaneously share contact information though our 'contact escrow' feature. They can then take it offline and communicate however they want.

MM: Like all networks, one of the things we face is a chicken-and-egg issue. One of the ways we have tackled that chicken-and-egg issue is by pre-marketing the platform before going live. That has allowed us to sign up about two dozen top-tier clients to the platform, including: insurers such as Ambac, MBIA and Assured Guaranty; hedge funds like Eton Park, Pine River and Tetragon; and advisors and brokers like Perella Weinberg and Guggenheim Securities.

The response has been remarkably good. I expected that the top-tier firms might be reluctant to embrace a democratisation of information flow, but actually it turns out that everyone views the lack of information in the market as a problem.

It is effectively a tax on the market that manifests itself in the form of deals that do not happen and restructurings that cannot be done. So our experience has been that the idea of bringing increased efficiency to communications is being embraced by a wide variety of market participants, because there is a view that this will make these markets more attractive and help them grow.

Q: What is your strategy going forward?
MM: The next big step for us is to complete our capital raise, which we are in the middle of at the moment. We are raising money in order to scale up and job number one is to get more people on the platform.

We believe people will be open to joining because we are giving them a chance to change the market dynamics and make them function better. We are passionate about this, so we want to talk to as many people about it as we can.

While the site is fully functional and supporting deals and messaging right now, we will also continue to add new products. There will be new offerings according to what people tell us they want.

Q: What major developments do you need/expect from the market in the future?
DJ: Well, we see ourselves as a major development in the market, of course. But, in terms of market evolution, there is clearly a bifurcation in the structured market between CLOs which are booming and other sectors that are still lagging. We have a real, direct application with respect to helping new issuers in the market.

On the secondary side, there is still a lot that is in work-out mode. We think we can help facilitate the market moving forward in a more constructive way. It is surprising how often you cannot connect with the people you need to connect with and, if we can fix that problem, then I think that would be a big development for the market.

MM: With CLO 2.0 coming out, there have been a lot of changes to deals to make them more robust. But we think there is also an opportunity for issuers and managers to adopt our product at the outset of a deal and encourage investors to sign on to it.

That would be another link in the chain to strengthen the resilience of our market. That is the thing we would most like to see: new issuers as they come to market promoting this idea as an adjunct to all the other things the market is putting in place.

JL

Structured Finance

Pair join credit hedge fund

400 Capital Management has appointed John Bateman as cfo and Tami Witham as director. They will both be based in New York.

Bateman will take responsibility for the firm's financial and tax activities. He was previously coo and cfo for technology, media and telecom investment banking, precious metals trading and emerging markets fixed income trading at Credit Suisse.

Witham will be responsible for managing current and prospective client relationships and for providing communication and expertise on the firm's product strategy. She was previously a family investment officer at GenSpring Family Offices and has also served as a fixed income client portfolio manager at Goldman Sachs, having begun her career selling RMBS, CMBS and ABS for Banc of America Securities.

Structured Finance

Insurance pro joins law firm

Daniel Rabinowitz has joined the insurance practice group of Kramer Levin Naftalis & Frankel in New York. He becomes a partner in the firm and brings expertise in transactional and regulatory matters within the insurance industry, including capital markets, securitisation and structured finance.

Rabinowitz is currently chair of the insurance law committee at the New York City Bar Association. He was previously at Chadbourne & Parke and has also worked at Sullivan & Cromwell and LeBoeuf, Lamb, Green & MacRae.

Structured Finance

SFIG appoints advisors

The Structured Finance Industry Group (SFIG) has retained the advisory firms of Kristi Leo and Armando Falcon to build on its momentum in membership growth. They will help the group to engage with a wider range of market participants and regulators.

Leo and her firm will work alongside SFIG as a resource for all member groups, focusing on assisting members with education and advocacy efforts. Leo was until recently at Deutsche Bank, where she co-managed US origination and banking for the structured finance unit.

Falcon Capital Advisors will work on SFIG's regulatory efforts in Washington, DC, with a focus on mortgage-related issues. Falcon has 25 years of experience with national financial legislative issues.

Structured Finance

Securitisation group appoints acting head

Christopher Killian has been named as acting head of SIFMA's securitisation group. He takes over from Richard Dorfman, who took on the role three years ago (SCI 20 April 2010).

Killian has been with SIFMA since 2005, serving as securitisation md. Before that he was an accountant at Bank One, where he was responsible for investor reporting and accounting for the bank's retail securitisation programmes.

Structured Finance

Dock Street UK acquired

Zolfo Cooper has expanded its financial advisory & restructuring services practice following the acquisition of Dock Street Capital Management UK (DSUK). Dock Street Capital Management's operation in the US is not affected by the deal and the firms will look to collaborate on opportunities going forward.

There will be no change in the business currently undertaken by DSUK, with asset liquidation and auction services on behalf of institutional clients continuing to be provided by Majharul Haque and Mark Williams. DSUK will be renamed Zolfo Cooper Capital Management and Haque and Williams will be partners in the new entity.

Prior to co-founding DSUK in 2012, Haque was head of the ABS business at KBC Financial Products, where he was responsible for the overall management and oversight of its US$7bn portfolio of structured credit securities. He and his team then managed the structured unwinding of the portfolio post-financial crisis and optimised the return from the sales process.

A co-founder of DSUK, Williams was previously head of the CDO and structured credit business for KBC Financial Products UK, where he was responsible for a €24bn legacy multi-asset CDO portfolio. Following the onset of the financial crisis, he and his team were responsible for the orderly wind-down and de-risking of this portfolio.

CDO

Abacus trial to proceed

Former Goldman Sachs trader Fabrice Tourre has failed in his attempt to narrow a US SEC lawsuit against him by eliminating a fraud claim based on foreign transactions. The SEC filed the lawsuit in 2010, alleging that Tourre defrauded investors in the Abacus 2007-AC1 CDO by failing to disclose the role of hedge fund Paulson in selecting the underlying securities and betting against them (SCI passim).

Lowenstein Sandler notes in a client memo that in moving for partial summary judgment, Tourre argued that certain claims relating to offers made to European clients were not subject to Section 17(a) of the Securities Act of 1933 (Securities Act), relying on the Supreme Court's decision in Morrison v. National Australia Bank Ltd., 130 S.Ct. 2869 (1010) - which effectively limited federal securities regulation to transactions with a connection to the US. US District Judge Katherine Forrest rejected Tourre's argument and denied his motion for partial summary judgment, ruling that he could be held liable for fraudulent conduct in connection with the transactions as long as he was in the US when the offer was made.

Judge Forrest also denied in part and granted in part the SEC's motion for partial summary judgment, ruling that the interstate commerce and domestic elements of the claims under Section 17(a) of the Securities Act and Section 10(b) of the Securities and Exchange Act of 1934 were satisfied.

The trial is set to begin on 15 July in the US District Court for the Southern District of New York.

CDS

ISDA appoints full-time chairman

ISDA's board of directors has named Stephen O'Connor as full-time chairman. He will continue to be involved in derivatives industry reform and take a more active role in driving ISDA's strategic initiatives.

O'Connor has served as ISDA chairman since April 2011, but the pace and scope of regulatory reform and ISDA's related initiatives has prompted the board to make the role a full-time commitment. He has been on the board since 2008 while serving as md at Morgan Stanley.

CMBS

Resi originator builds CRE team

Freedom Mortgage Corporation has launched a commercial real estate lending division in New York. It will be led by Mary Davenport, Nichole Kim and Shawn Townsend and will initially focus on mortgage originations from US$2m-US$10m for CMBS execution.

Davenport was most recently at RBS Securities. She has also worked at Prima Capital Advisors, as co-head of CMBS investments at Capmark Investments and in CRE roles at Vertical Capital and American Capital Access.

Kim joins from Rialto Capital Management, where she was vp. She has also worked at Nomura, Credit Suisse and TIAA-CREF.

Townsend was most recently managing partner at Velocity Advisors. He has also served as head of capital markets at Gramercy Capital and held senior roles at JPMorgan and Oasis Real Estate Partners.

Insurance-linked securities

Reinsurer creates capital markets role

Ben Rubin will join AXIS Re as capital markets evp next month. It is a newly-created position in which he will take responsibility for managing and developing relationships with third-party capital providers and report to ceo Jay Nichols. Rubin was previously at Bank of America Merrill Lynch, where he was involved in capital markets, mergers and acquisitions, private equity and ILS.

Risk Management

Analytics acquisition agreed

Thomson Reuters has acquired OTC derivatives analytics vendor Pricing Partners. The acquisition is expected to complement Thomson Reuters Pricing Service (TRPS), its evaluated valuations service.

Pricing Partners enhances TRPS pricing abilities for structured notes, interest rate, equity, credit, commodities and FX derivatives, as well as hybrid products. It also strengthens its range of pricing tools and risk analytics.

Thomson Reuters and Pricing Partners already have an established working relationship under which Thomson Reuters has used Pricing Partners Price-it, a proprietary financial library covering all major asset classes.

RMBS

Bank adds resi mortgage vet

Nomura has enhanced its financial institutions team with the appointment of Anthony Viscardi as md. He will advise clients in the residential mortgage industry and leverage Nomura's trading and securitisation capabilities to help clients meet their financing needs.

Viscardi joins from Deutsche Bank, where he spent five years in the investment banking team (SCI 12 November 2008). He has previously worked for Barclays Capital and Lehman Brothers.

ABS

Revised Punch proposal welcomed

A revised restructuring proposal from pub operator Punch appears to address some of the main concerns with the previous proposal (SCI 11 February), while also containing a number of optional extras. The flexibility and improvement in terms for senior bondholders mean that the restructuring is more likely to be agreed, according to MBS analysts at Barclays Capital.

"We would expect the bond prices to improve on the back of this announcement in Punch A class A and otherwise be neutral for the junior bonds in Punch A and across Punch B," they note.

Revisions to the restructuring proposal include no cash distributions up to the group level, a cash-out option for senior bonds in both the Punch A and B transactions, an option to take slower-pay amortisation in punch A class A and accelerated amortisation for senior bondholders. In addition, disposal covenants have been tightened, with the inclusion of a minimum repayment covenant.

The price of the cash-out option for bondholders is yet to be announced, but will be conditional on acceptance of the revised restructuring proposals. "In our view, the cash-out option is likely to be priced at a level which is at a discount to the market value of the bonds, given this might be viewed as a less risky option for bondholders. However, particularly for the Punch A class A bondholders, we think there is sufficient demand for these bonds in the secondary market for these bonds to be bought back at market levels," the Barcap analysts observe.

Punch trading performance has improved, with core estate like-for-like income falling by only 0.7% in Q3 versus the 3.3% decline year-to-date. The analysts note that disposals are on track, with 246 pubs sold slightly above book value at £340,000 per pub on an 18x EBITDA multiple.

PUNTAV 5.883 10/15/26 bonds were circulating in the secondary market on Friday, according to SCI's PriceABS archive, but did not trade.

Structured Finance

SCI conference line-up revealed

The final panellists have been announced for SCI's 6th Annual Securitisation Pricing, Investment & Risk Seminar, which is taking place on 13 June in New York. The event is being held at Bank of America's offices at 4 World Financial Center.

The conference will focus on risk management and pricing/valuation issues, as well as trading and secondary market strategies. The programme consists of a series of roundtables and panel debates, as well as workshops on CLO/RMBS valuation methodologies and CLO analytics.

Speakers include representatives from: ADP, Babson Capital Management, Bank of America Merrill Lynch, Bloomberg, Christofferson Robb, Conning, Deloitte, Deutsche Bank, Duff & Phelps, Grant Thornton, GreensLedge Capital Markets, Grenadier Capital, Guggenheim Partners, Interactive Data, Jefferies & Co, Kanerai, KPMG, LSTA, Mizuho, Moody's Analytics, NewOak Capital, PF2 Securities, Prudential, RangeMark, Reed Smith and Wells Fargo. The event is sponsored by Bank of America Merrill Lynch, Bloomberg, Duff & Phelps, Interactive Data, Moody's Analytics, PriceServe and Vichara Technologies.

So far, 175 attendees have registered and the conference is almost full. To attend, buy-side firms should email SCI for a registration code; sell-side and service suppliers click here to register.

Structured Finance

SME covered bonds tipped for growth

Following such issuances in Turkey and Germany, SME-backed covered bonds (SME CBs) are gaining traction in Europe, according to Moody's. The agency expects the product to feature in other jurisdictions, such as Italy, Spain and France.

The lack of bank financing and the current relatively low level of investor demand for SME ABS imply that SMEs will need to find alternative funding sources, Moody's says. Further, it has observed an apparent current market preference towards secured debt instruments, while the regulatory treatment of covered bonds has thus far been favourable.

The agency notes that solid SME performance is critical to achieve sustainable growth in most economies worldwide and that European politicians and economic authorities have promoted credit availability to SMEs. At the same time, central banks and policymakers have differentiated covered bonds from other bank debt instruments.

For example, the proposed EU Directive on the restructuring and resolution of credit institutions may exempt covered bonds from sharing losses. Central banks have also treated covered bonds favourably as collateral against other asset classes.

Structured Finance

MMF reform 'premature'

The US SEC is proposing to reform the way that money market funds operate in order to make them less susceptible to runs that could harm investors. The proposal includes two principal alternative reforms that could be adopted alone or in combination.

One alternative would require a floating net asset value (NAV) for prime institutional money market funds. The other alternative would allow the use of liquidity fees and redemption gates in times of stress. The proposal also includes additional diversification and disclosure measures that would apply under either alternative.

SIFMA's asset management group (AMG) believes that the need for additional regulation is premature in light of the SEC's 2010 reforms, but says it is encouraged by the limited scope of the proposal. It suggests that the imposition of redemption gates and fees is the most effective path forward.

"Overly broad regulation of MMFs, including a general mandate to float net asset values, would lead to serious negative consequences for the US financial system and the broader economy and would be ineffective in preventing runs," comments Timothy Cameron, md and head of SIFMA AMG. "Investors would have fewer choices for cash investing and would lose the benefits of these relatively safe and highly liquid products that provide an attractive alternative to a deposit account. Corporations and financial institutions would find it more difficult and more expensive to access the short-term funding they need to carry out their daily operations, pay their employees and spur the economic growth that creates jobs."

The public comment period for the proposal lasts for 90 days after its publication in the Federal Register.

Structured Finance

Benchmark-setting principles published

ESMA and the EBA have published their final report setting out their 'Principles for Benchmark-Setting Processes in the EU'. The principles are designed to address the problems identified with benchmark-setting processes and will provide benchmark users, administrators, calculation agents, publishers and data submitters with a common framework for carrying out these activities.

The two authorities stress the importance of the principles being implemented by all market participants, with the aim of reinforcing the robustness of the procedures, ensuring transparency to the public and creating a level-playing field. They will review the application of the principles after 18 months, although that time-frame may be altered as necessary, while further work on possible transaction-based alternatives will be carried out in the near future.

ESMA and the EBA have coordinated their work with current initiatives underway at EU, Member State and international level and have worked towards aligning the principles with those being developed by IOSCO. Further to comments received during the consultation process, modifications were made to the proposals to address: continuity (ensuring that contingency provisions are in place, if the continuity of a benchmark is at risk); and liquidity requirements (the data used to construct a benchmark should represent accurately and reliably the underlying assets or prices, interest rates or other values measured by the benchmark and should be based on observable transactions entered into at arm's length).

Structured Finance

New names added to SCI line-up

Only a few tickets remain for SCI's 6th Annual Securitisation Pricing, Investment & Risk Seminar in New York. Over 200 attendees have registered for the event, which is being held tomorrow (13 June) at Bank of America's offices at 4 World Financial Center.

New panellists have been added to the line-up over the last few days, including representatives from Hildene Capital Management and PartnerRe Asset Management. The conference will focus on risk management and pricing/valuation issues, as well as trading and secondary market strategies. The programme consists of a series of roundtables and panel debates, as well as workshops on CLO/RMBS valuation methodologies and CLO analytics.

To attend the event, click here to register.

Structured Finance

Spanish legislative changes examined

Recent changes to Spanish mortgage legislation could increase loan repossession periods and potentially push up realised loan losses, according to S&P. At the same time, new guidelines that Spanish banks must employ when classifying loan restructurings in their financial statements may increase the transparency of lender asset quality.

Two laws - Ley 1/2013 and Decreto Ley 6/2013 - became effective on 15 May and 9 April, introducing new rules to protect at-risk borrowers (SCI 29 May). On 30 April, meanwhile, the Bank of Spain released new criteria that banks must apply when making decisions on loan restructurings and refinancings, and when classifying such loans in their financial reports.

If lenders that issue securitisations opt to update transactions' servicing statements to reflect their new reporting methodology, some investor reports - notably for RMBS and SME ABS - could begin to provide investors with useful information about the levels of restructured loans, S&P suggests. In the short term, however, the agency notes that these new criteria may lead to a decrease in the reported performing collateral balance in some transactions.

"While we don't know how many borrowers will qualify for protection under the new laws, we expect that the time-to-recovery for some defaulted mortgage loans will rise. Given falling house prices in Spain, this could also push up ultimate loan losses. However, we expect the impact on RMBS to remain small," comments S&P credit analyst Mark Boyce.

S&P believes that Decreto Ley 6/2013 in Andalucía, which allows for government expropriation of properties in some instances, could weaken investor confidence in local property rights. "This could hold back investment, possibly dragging down house prices further, in our view. That said, we expect the central government to challenge the law before Spain's constitutional court," Boyce continues.

CDO

ABS CDO on the block again

An auction is to be conducted for RFC CDO I on 28 June. An auction was previously conducted for the deal on 28 March, but sale proceeds didn't meet the auction call redemption amount.

CDO

Second CDO auction due

The second auction of the year is being held for Independence IV CDO on 27 June, after proceeds from an auction in March failed to meet the required redemption amount. The underlying assets comprise RMBS, CMBS and ABS CDO securities.

CDS

Urbi CDS settled

The final price for Urbi Desarrollos Urbanos Bursatil de Cap Variable CDS was determined to be 19 during yesterday's auction. Twelve dealers submitted initial markets, physical settlement requests and limit orders to settle trades across the market referencing URBI, Desarollos Urbanos, Sociedad Anonima Bursatil De Capital Variable.

CDS

Bankia CDS settled

Thirteen dealers submitted initial markets, physical settlement requests and limit orders to the Bankia CDS auction yesterday. The auction was undertaken across four senior/subordinate buckets: the final price for CDS in bucket one was 96.25; for bucket two, it was 88.5; for bucket three, it was 86.5; and for bucket four, it was 87.5.

CLOs

First issuer for EWSM

The European Wholesale Securities Market (EWSM) has announced its inaugural listing. Grand Harbour I, a CLO registered in the Netherlands, listed seven classes of securities on the EU-regulated market on 5 June. The transaction was arranged by Citi, with Mediterranean Bank acting as initial seller and sub-advisor to the collateral manager GSO/Blackstone Debt Funds Management.

CLOs

Latest Euro CLO prints

GoldenTree Asset Management has priced a European CLO that is said to not comply with risk retention criteria. The €300.32m-equivalent Goldentree Credit Opportunities European CLO 2013-1 - via Morgan Stanley - comprises eight tranches of floating- and fixed-rate notes.

Rated by S&P, the triple-A senior notes consist of: €82m A1s (that priced at 135bp over six-month Euribor), €35m A2s (2.44%) and £15.32m A3s (2.64%). The remainder of the capital structure includes €39m double-A rated class B notes (that priced at 305bp over), €21m single-A class Cs (300bp), €21m triple-B class Ds and €28m double-B class Es. The unrated equity tranches is sized at €59m.

The transaction is backed by a revolving pool of senior secured loans and bonds issued by European and US borrowers.

CLOs

CLO services strengthened

Markit has added new loan performance data and analytics to its set of services that streamline the construction and management of CLOs. The Loan Performance Database calculates current and historical performance and risk factors for syndicated loans, including return, yield and duration.

It provides analytics that help portfolio managers systematically identify assets that are suitable for their portfolios and a new tool to monitor how the market and specific assets are performing. For performance calculations, the database draws on Markit's industry-leading loan pricing and loan transaction and reference datasets.

CMBS

Second Gagfah CMBS prepped

Goldman Sachs and Bank of America Merrill Lynch are in the market with German Residential Funding 2013-1, Gagfah's much-anticipated second German multi-family CMBS (SCI passim). The €2bn transaction refinances a loan advanced to the sponsor, which in turn refinanced a loan previously securitised as part of the German Residential Funding deal.

GRF 2013-1 comprises five tranches of notes rated by DBRS and Fitch: €1.22bn triple-A rated class As, €239.8m double-A class Bs, €137.0m single-A class Cs, €274.1m triple-B class Ds and €102.8m BBBLow/BBB- class Es. Fitch notes that the transaction benefits from good geographical diversification, with some concentration in Berlin (19% of collateral by market value) and Hamburg (10%).

The portfolio's performance has been stable, according to the agency, with occupancy fluctuating between 95%-96% since 2009. Over the same period, the portfolio's net cold rent per square-metre has also increased to €5.30 from €5.10. Minimum capital expenditure requirements, agreed as part of privatisation agreements with local authorities and covenanted in the loan agreement, should also support portfolio performance.

Taking into account the €228m 'senior continuing' debt, the reported LTV is 65%. Annual scheduled amortisation of 0.5% per annum will reduce the exit LTV to 62.5% by loan maturity. This leverage is slightly higher than for multi-family CMBS peers.

The deal also benefits from a six-year tail period between loan scheduled maturity (2018) and legal final maturity of the notes (2024), although the borrower has a one-year extension option. Another material feature is that the issuer waterfall changes after loan maturity, so that interest on the class A and B notes will rank ahead of principal, with remaining funds allocated on an IPIP basis from class C through to E.

CMBS

Beacon Seattle proceeds reported

The recent sale of the Wells Fargo Center has resulted in an estimated US$267m pay-down for the Beacon Seattle & DC portfolio, based on remittance data available for BACM 2007-2, the first of the Beacon CMBS to report in June. At a reported US$390m, the ultimate selling price for the property was higher than expected.

Approximately US$15.6m in deferred interest on the loan also appears to have repaid. According to CMBS analysts at Barclays Capital, this amount was paid as interest in the BACM 2007-2 trust, but may be accounted for differently in the other transactions (MSC 2007-IQ14, MSC 2007-HQ12, BACM 2007-2, BSCMS 2007-PW16, WBCMT 2007-C32 and WBCMT 2007-C31).

Since the pari passu component of the Beacon Seattle loan in BACM 2007-2 is protected from losses by a junior note securitised in Nomura CRE CDO 2007-2, no losses were reported on this deal. There is a chance, however, that some of the other pari passu components which aren't supported by the CDO could record losses this month.

The pay-down reduces the total loan balance to approximately US$1.3bn for the 10 remaining properties. The Barcap analysts note the possibility of back-ended losses on some of these buildings where performance has lagged.

"The release price schedules on the better properties, which are often set lower than the allocated balance, means that the benefit of cross-collateralisation on the portfolio is reduced," they observe.

CMBS

CMBS late-pays declining

US CMBS late-pays declined by 7bp in May to 7.37% from 7.44% a month earlier, according to Fitch's latest index results for the sector. Meanwhile, delinquencies for transactions issued post-2009 (CMBS 2.0) stood at just 0.03%.

The tighter post-recession credit environment, coupled with low interest rates is helping to keep newer CMBS delinquencies hovering near zero. Conversely, the peak vintage (2006-2008) delinquency rate remained high at 11.6%, compared with 6.75% for transactions issued in 2005 and prior.

Fitch says it is closely monitoring several underperforming loans in 2.0 deals, including two that may enter the index in the coming months, both of which turned 30-days delinquent last month. The loans are a US$13m multifamily loan (securitised in WFRBS 2011-C3), which has fallen one-month late in payments twice since the start of the year; and a US$7m multifamily loan (FREMF 2011-K10), which has been late every month since January.

In May, resolutions of US$1.01bn fell just shy of new additions to the index of US$1.02bn. However, strong Fitch-rated new issuance volume of US$5.4bn outpaced run-off of US$1.9bn, thus causing an increase in the index denominator.

Current and previous delinquency rates are: 10.81% for industrial (from 9.82% in April); 8.35% for office (from 8.39%); 7.91% for multifamily (from 8.38%); 7.7% for hotel (from 8.01%); and 6.92% for retail (from 7.10%).

CMBS

CRE solution strengthened

Trepp and The Rockport Group have released TreppPort 2.0, an enterprise level commercial real estate solution. The new release advances the capabilities of the web-based platform to deliver a mobile, interactive visualisation of real estate exposure, the two firms say.

Rick Trepp, chairman of Rockport, states: "Even when clients are away from their desks, they can see what's happening in their CRE-related portfolios in one centralised place. The solution integrates the client's internal data with third-party market data, such as Trepp, in real time to deliver complete insight. The upshot is clients can make decisions quicker and better manage their risk."

CMBS

CMBS underwriting standards eyed

US CMBS issuance has climbed to US$39bn so far this year, compared with about US$15bn during the same period in 2012. Conduit/fusion transactions account for about US$23bn of the 2013 CMBS total. S&P believes that these new deals -especially those issued during the second quarter - are riskier compared with 2012 and other recent vintage conduit/fusion deals.

The agency suggests that underwriting standards are slipping. "Borrowers have increased leverage, riskier interest-only (IO) loans have become more prevalent and the percentage of lodging collateral - which S&P considers one of the riskier property types - is climbing. While retail concentrations have declined due to numerous single-borrower mall transactions, this property type - which is facing challenges from the growth of online sales and increased competition - could again appear in greater concentrations in conduit transactions during the second half of 2013. The practice of pro forma underwriting - which gives credit to potential future increases in property revenue and was popular in riskier CMBS transactions before the 2008 crisis - is creeping back into some loans, mostly in primary markets," it observes.

Loan structures are also weakening in certain areas, such as cash management provisions and recourse, according to the agency. Letters of credit are currently far more common than actual upfront cash reserves and, in some cases, borrower guaranties have substituted for upfront and ongoing reserves. Moreover, performance-based cashflow triggers that cut off the borrower's access to net property-level cashflow are becoming less stringent and occasionally don't apply until a loan EOD, S&P reports.

At the same time, more CMBS originators are entering the market, raising competition for a finite supply of loans and potentially driving further deterioration in underwriting standards. The agency estimates that there may be 30-plus active conduit CMBS originators by end-2013, up from the 25 that reportedly contributed to 2012 deals.

While only six firms have purchased non-agency B-pieces year-to-date, down from nine in full-year 2012, about 15 firms are active bidders in the sector. More competition among B-piece buyers may potentially lessen their collective ability to 'kick out' undesirable loans over time.

S&P points out that purchases have been relatively concentrated among a select group of firms. Year-to-date, three buyers purchased nearly 80% of non-agency B-pieces: Eightfold Real Estate Capital (six), Rialto Capital Management (five) and LNR Partners (three).

Lodging properties account for 16% of conduit CMBS pool balances in 2013 so far, up from full-year concentrations of just 3% in 2010, 10% in 2011 and 13% in 2012. The increased exposure likely reflects the strong performance of US hotel properties since 2011.

Revenue per available room (RevPAR) increased by 5%-8% in 2010-2012 after a disastrous 2009, when it declined by 17%. S&P's lodging analysts expect a 4%-6% national increase in US RevPAR during full-year 2013. But the agency has traditionally considered hotels to be one of the riskiest property types, given that they've historically been especially vulnerable to macroeconomic downturns.

Meanwhile, retail concentration in 2013 conduit deals has declined to about 32% year-to-date, from a high of 55% on average within 2010 vintage transactions. Most indications point to tepid demand for space, except at high-end malls in prime locations.

Among retailers that are frequent tenants in CMBS loans, overall creditworthiness fell during the past 12 months. S&P's CMBS Tenant Index (CTI) measures the weighted average 10-year corporate default rate of the top 70 exposures, of which approximately 50 are retailers. Based on this measure, tenant credit weakened during the past year, moving to a BB-/B+ equivalent weighted average credit rating from BB/BB-.

Much of the moderate deterioration in the CTI since March 2012 reflects downgrades of several top-10 retail tenants, including J.C. Penney, Walgreen and Best Buy. As of the last CTI update on 31 May 2013, eight tenants have negative credit outlooks associated with their ratings, while three have positive ones. Nevertheless, the last three monthly CTI readings have shown slight improvement, with the measure falling to 22.1% from 22.4%.

In contrast, multifamily and other residential assets are on the rise as a percentage of collateral pools in 2013 transactions. However, part of this increase reflects the inclusion of some non-traditional residential real estate assets, including manufactured housing, student housing and military housing.

"We consider student housing a less stable multifamily property type, due to high turnover rates, greater wear and tear, shorter lease terms, competition with on-campus housing and reliance on the particular college or university from which it draws its tenant base. These residential assets also tend to be located in secondary and tertiary markets, with fewer barriers to entry than primary markets," S&P notes.

The agency concludes: "At this point, we are not seeing the same levels of deterioration in loan standards and credit metrics that were prevalent in 2006-2007. Nevertheless, we are seeing some signs of heightened risk and will continue to monitor the deals we rate for further signs of declining loan and pool quality that could eventually lead to increased defaults and losses."

Insurance-linked securities

Private ILS platform minted

Tokio Solution Management and GC Securities have launched a private catastrophe bond platform called the Tokio Tensai Platform. The aim is to provide sponsors with a more efficient platform for funding excess of loss catastrophe reinsurance in the private capital markets.

The platform is an alternative to the traditional Rule 144A offering process. Tokio Solution will allow clients to sponsor catastrophe bond transactions through Shima Reinsurance, a Bermuda-domiciled Class III Segregated Accounts Company. GC Securities will serve as a placement agent for each of the private placements through Shima Re.

Through a simplified and standardised process, the Tokio Tensai Platform is designed to significantly reduce the time and cost traditionally associated with sponsoring catastrophe bonds by utilising Shima Re's platform and proprietary shelf documentation. It will also allow clients to customise coverage along a range of triggers and reinsurance structures.

Chi Hum, md at GC Securities, comments: "This joint effort between GC Securities and Tokio Solution provides capital markets access to an underserved segment of (re)insurance buyers, whose capacity needs are below the threshold amount needed to justify a traditional Rule 144A catastrophe bond issuance. The advantages of capital markets capacity previously available only to the largest of capacity buyers will now be made available to a broader client segment."

Risk Management

Standard CSA released

ISDA has published the 2013 Standard Credit Support Annex (SCSA), which seeks to standardise market practices in collateral management for OTC derivatives. It removes embedded optionality in the existing CSA, promotes the adoption of overnight index swap (OIS) discounting and aligns the mechanics and economics of collateralisation between the bilateral and cleared OTC derivative markets, the association says. In addition, the SCSA seeks to create a homogeneous valuation framework, reducing current barriers to resolving novations and valuation disputes.

The SCSA is a market-driven initiative with a flexible implementation approach that allows firms to move at the pace they deem appropriate. Market participants have the option of adopting the new SCSA or continuing to use the current CSA. ISDA will support both documents and expects that a number of market participants will move to the new SCSA over time because of the benefits it offers.

The SCSA retains the operational mechanics of the current CSA but amends the collateral calculation, so that derivative exposures and offsetting collateral are grouped into like currencies, or 'silos'. The SCSA contemplates the sole use of cash as eligible collateral for variation margin.

Each currency silo is evaluated independently to generate a required movement of collateral in the relevant currency. This aligns bilateral collateral structures and economics to be more consistent with margin approaches adopted by global clearing houses.

To avoid cross-currency risk, a new net settlement process has been deployed alongside the SCSA - the implied swap adjustment (ISA) methodology. This process enables parties to net various silo collateral flows into a single payment with a single currency.

Risk Management

Data verification enabled

TriOptima is set to support data verification and portfolio reconciliation of DTCC's trade repository data, as requested by triResolve clients for their OTC derivatives portfolios. The firm becomes the first portfolio reconciliation provider to receive directly DTCC repository data for this purpose.

Raf Pritchard, ceo of triResolve, comments: "Making repository data directly available to the reconciliation process contributes to data accuracy and creates opportunities to combine workflows and simplify operations. Given the rapid pace of change in the market, TriOptima's strategy is to connect to multiple platforms across the OTC derivatives landscape, including central clearinghouses, confirmation platforms, repositories and other emerging providers of trade processing and data store functionality."

Stewart Macbeth, president and ceo of DTCC's Deriv/SERV subsidiary, adds: "Giving our clients' service providers access to repository data is a way to assist our clients in meeting their regulatory obligations and operational goals efficiently. Open access is a critical goal in the new OTC derivatives landscape and the TriOptima connection will facilitate portfolio reconciliation for firms."

Risk Management

Pre-trade credit checks rolled out

Two vendors have announced their expansion into pre-trade credit checking for OTC derivatives.

Markit says that Bank of America Merrill Lynch, Citi and Goldman Sachs have become the first futures commission merchants (FCMs) to use MarkitSERV Credit Centre, its pre-trade credit checking solution. MarkitSERV Credit Centre aims to provide clearing certainty for trades executed in electronic and hybrid marketplaces.

MarkitSERV Credit Centre provides buy-side firms, regional banks and other institutions that access clearing through FCMs with a consolidated view of the credit available to them. It also helps institutions determine how they deploy their credit lines among multiple execution venues.

FCMs will update credit lines in real-time during the trading day as client portfolios change and electronic execution venues will "ping" the MarkitSERV Credit Centre to confirm the availability of credit at the time a trader wishes to post a price or execute an order, removing the risk of a trade failing because a client firm has exceeded its credit limit. The service can also be used for checking and managing credit lines required for off-facility voice and block trades.

Meanwhile, Tradeweb Markets says it has supported the first electronic indicative pre-trade credit check between a buy-side client and a futures commission merchant (FCM) for an OTC transaction. Using the firm's electronic credit checking solution, the customer successfully received an indication of available credit from JPMorgan as the clearing bank and executed a cleared interest rate swap trade.

Integrated at the point of execution, this functionality enables customers to check for credit with their clearing banks using ping- or push-based protocols ahead of executing a swap transaction in an efficient and cost-effective way, minimising latency and ensuring information security and confidentiality. In addition to pre-trade credit-checking, the firm offers clients flexible access to liquidity through a range of trading protocols and connectivity to all major clearinghouses currently handling CDS and IRS transactions.

Tradeweb plans to register as a swap execution facility (SEF) in the US, pending final rules from regulators.

Risk Management

Risk calculation tie-up agreed

Markit has licensed Quartet FS' ActivePivot offering - an aggregation engine that provides a high performance view of transactional data - within its Markit Analytics platform. The integration is designed to enhance the way Markit Analytics' customers visualise stochastic risk calculations, such as risk weighted assets (RWA), credit valuation adjustment (CVA) and initial margin (IM), including pre-trade limit checks across these measures.

ActivePivot will also aggregate the thousands of vectors generated by the Markit Analytics engine in real-time, leading to sub-second marginal netting node and impact analysis for IM. The aim is to enable customers to calculate margins for cleared and uncleared products in real-time across multiple central counterparties, helping them determine the most efficient trading strategy.

Risk Management

Clearing template launched

ISDA and the Futures and Options Association (FOA) have launched the ISDA/FOA Client Cleared OTC Derivatives Addendum. It is a template for cleared swaps market participants to document the relationship between a clearing member and its client for purposes of clearing OTC derivatives transactions across CCPs that use the principal-to-principal client clearing model.

The Addendum is designed to be a supplement to an ISDA Master Agreement or FOA futures and options agreement. ISDA will shortly publish a form of Paragraph 11 to the English Law Credit Support Annex that can be used with the Addendum, to be followed by a form of Paragraph 13 to the New York Law Credit Support Annex.

Anthony Belchambers, ceo of the FOA, says: "Without standard industry OTC clearing documentation, clients would be obliged to sign up to prescribed terms with each CCP separately. The ISDA/FOA Addendum facilitates OTC client clearing through all the major CCPs under existing terms of business (ISDA Master or F&O Clearing Terms), thus obviating the need to negotiate separate sets of terms for each clearing solution."

Risk Management

Cross-referencing tool introduced

S&P Capital IQ has launched a new tool designed to improve users' ability to identify systemic and counterparty risk while reducing operating costs. Its new business entity cross reference service provides immediate cross-reference capabilities for over two million public and private entities using standardised and proprietary identifiers, including all available legal entity identifier (LEI) codes.

The service aims to enable clients to efficiently recognise the linkages of business relationships, thereby improving operational efficiencies, reducing overhead costs and strengthening client on-boarding and risk management functions. It is available through the Xpressfeed delivery platform.

Risk Management

Clearing standard gains traction

FCMs Bank of America Merrill Lynch, Barclays, JPMorgan and UBS have confirmed their support for the Clearing Connectivity Standard (CCS) initiative to standardise reporting for cleared OTC derivatives (SCI 25 October 2012). Custodian banks BNY Mellon, JPMorgan, Northern Trust and State Street also support the standard.

The clearing broker support for CCS is the latest step in an industry push to standardise the OTC derivatives margin statement reconciliation process for all market participants. The adoption of CCS is expected to streamline the client on-boarding process and reduce the overall cost and operational risk associated with managing multiple disparate reporting formats.

CCS provides standardised connectivity and reporting for central counterparty-eligible interest rate and credit default swap products through LCH.Clearnet, the CME Group and Intercontinental Exchange. Other future enhancements are expected to include conversion of the standard from a CSV template to FpML, under the guidance of the ISDA CCS Steering Committee and the FpML Working Groups.

Risk Management

Buy-side clearing begins

Barclays reports that it cleared the industry's first single-name credit default swap client transactions for two buy-side clients. The transactions were cleared first by Citadel and then by MKP Capital Management, through ICE Clear Credit, with Barclays acting as clearing broker. In both instances, the clients benefitted from portfolio margin netting, the bank says.

The transactions were executed and cleared as the US SEC announced on 7 June that it would permit select FCMs to clear single-name CDS positions for clients and allow portfolio margining across CDS and security-based CDS. Barclays is now able to provide clearing clients with the ability to achieve portfolio margin netting across approximately 300 eligible single-name CDS and CDS index trades.

Risk Management

Swaps push-out transition granted

The US OCC has granted seven banks extra time to comply with the swaps push-out rule under Dodd-Frank by extending its effective date by two years. The rule seeks to prevent entities that receive government backstops from participating in certain trading activities that are deemed to be risky. Banks must undertake swaps activity via separate arms or forgo federal support to comply.

The rule officially takes effect on 16 July. The banks believed to have been granted this transition period are Bank of America, Citi, HSBC, JPMorgan, Morgan Stanley, Wells Fargo and US Bancorp.

SIFMA has welcomed the OCC's actions. "The swaps push-out provision was added late into the Dodd-Frank Act, without proper vetting by Congress, and has been criticised by federal regulators," comments Kenneth Bentsen, the association's president. "[This] action gives market participants clarity on what they need to do and when they need to take action to restructure this particular part of their business, given regulators have not done any work on issuing implementing regulations."

RMBS

Legacy RMBS tipped for limited upgrades

The improving US housing market and stable macro environment are supporting legacy US RMBS performance, though the sector still has persistent challenges to overcome, according to Fitch. Signs of the turnaround in RMBS include improving new delinquency roll-rates and declining loss severities on liquidated loans.

These trends have resulted in improved rating stability and positive rating momentum in 2013. Fitch has conducted rating reviews on every US RMBS class it rates in the last six months. Year to date, the agency has upgraded approximately 480 RMBS bonds and currently has a positive outlook on roughly 800 bonds.

However, many RMBS securities continue to face sizeable risks that will limit the number of upgrades this year. Among them are high delinquency pipelines, increased tail risk caused by adverse selection and a high percentage of borrowers that remain underwater on their mortgages. Furthermore, cashflows remain vulnerable to servicer actions, including advancing policies and modification reporting.

Looking ahead, Fitch expects future upgrade activity to be concentrated among classes with relatively short remaining lives within sequential payment priority transactions. Classes with a positive outlook are disproportionately concentrated in re-REMICs issued since the start of 2010, seasoned manufactured housing transactions and subprime deals issued between 2003 and 2005.

The agency has also seen collateral improvement in 2006-2007 RMBS deals, but notes that positive collateral trends will generally lead to improved principal recoveries on distressed classes rather than rating upgrades. Of classes issued from 2006 to 2007, 94% currently hold a rating below triple-C, including 74% of classes that have already defaulted.

More conservative rating stress assumptions than those applied prior to the financial crisis - particularly for investment grade stress scenarios - will also stem the amount of rating upgrades, Fitch notes.

RMBS

SAREB sales underway

The start of property sales by Spain's bad bank - SAREB - underscores Fitch's negative view on the country's residential property market, the agency says. As the pace of disposals by SAREB speeds up, it will add to supply, which may further depress prices.

SAREB announced last week that it has closed sales of 550 homes in three months from late February. Taking into account the 800 more sales that SAREB says are pending and the further 2,200 preliminary offers that have been made on properties, the total could rise to 3,550. The figures do not include the results of a sales campaign conducted at the recent Madrid International Real Estate Exhibition.

Nevertheless, the rate of actual sales will have to be accelerated for SAREB to meet its target of selling 42,500 homes in the next five years, given its 15-year deadline to liquidate the portfolio. The portfolio includes over 55,000 homes.

This could prompt increased selling by banks, some of which have already begun lowering prices and accelerating disposals in anticipation of supply from SAREB depressing prices further. SAREB has a 15% annual return on equity target and its majority shareholders are the banks that it will compete with as a seller in the residential property market.

Fitch does not expect Spanish house prices to trough before end-2014 at the earliest, although there may be earlier signs of stabilisation in regions that experienced less dramatic pre-crisis housing booms. "Overall, the imbalance between supply and demand means we think it will take several years to absorb the entire stock of properties that have to be sold by both SAREB and private lenders," the agency notes.

Official sources suggest a stock of unsold new properties in Spain of around 700,000 units. Around 114,000 newly built properties were sold last year. At that rate, it will take more than six years to clear the existing property overhang.

RMBS

Forborne principal to be reclassified?

Fitch has reviewed 92 RMBS transactions previously serviced by Homeward Residential and acquired by Ocwen Financial in December 2012. The trusts reported unusually large realised losses last month due to a revision in the reporting of principal forbearance modifications performed prior to July 2012 (SCI 3 June). For Fitch-rated transactions, the realised loss was approximately US$450m, or roughly 3% of the affected trusts' outstanding pool balances.

Following the review, the agency has affirmed 843 classes, downgraded 20 and placed 19 on rating watch negative. One class of notes paid in full.

The classes placed on watch negative are in trusts where the realised loss reported in May does not appear to fully reflect the revised loss amount provided by Ocwen to Fitch. A portion of the revised losses may yet to be realised in all of the trusts, the agency notes.

The ratings of classes in the trusts most affected by the revisions had generally already experienced significant downgrade activity.

Historically, there has been inconsistency in the servicer reporting of forbearance amounts. Pooling and servicing agreements for transactions issued prior to 2010 generally do not explicitly address whether servicers are to report the forborne principal as a loss.

Additionally, the Home Affordable Mortgage Modification Program (HAMP) introduced in 2009 did not initially provide guidance to servicers on how to report forbearance modifications. This was later clarified by the Treasury Department in June 2010 by directing servicers to report HAMP forbearance amounts as losses and trustees to allocate forborne principal as realised losses at the time of the modification. Any repaid forborne principal will be distributed to investors as a subsequent recovery.

Subsequent to the Treasury's guidance, servicers and trustees generally reported forborne principal as a loss for HAMP modifications and typically for non-HAMP modifications as well. However, the treatment varied for forborne principal on previously completed modifications, according to Fitch. Some servicers retroactively reported all previously modified amounts as losses, while other servicers only revised the reporting on new modifications and left the reporting on prior modifications unchanged.

For Homeward-serviced transactions which Wells Fargo served as the master servicer or the trustee, Homeward and Wells Fargo began reporting forborne principal for new modifications in a manner consistent with the Treasury's guidance in July 2012 but did not retroactively reclassify the reporting for modifications completed prior to that date. Upon recently completing the portfolio transfer to Ocwen as a subservicer for Homeward, Ocwen and Wells Fargo agreed upon a reclassification of prior forbearance modifications to maintain consistency with the reporting method used from July 2012 forward.

Based on feedback provided from servicers, Fitch believes it is not uncommon for a servicing portfolio to contain loans with forborne principal not reported as a loss. Servicing acquisitions could potentially lead to a reclassification of forborne principal as an immediate realised loss in some cases, the agency suggests.

Fitch currently expects that any future reclassifications of forborne principal will primarily affect bonds with distressed ratings by accelerating losses, which - in many cases - are likely to eventually occur. Of loans affected by the May reclassification, the agency estimates the current weighted average loan-to-value to be approximately 140% (including the forborne principal). Despite more than two-thirds of the loans benefitting from more than one modification (including the forbearance modification), over 30% of the loans are currently severely delinquent.