Contents

RMBS

Government-sponsored exits?

GSE sell-offs raise questions about future

Fannie Mae and Freddie Mac are in the process of moving around US$60bn in guaranteed mortgages over to private investors by the end of the year. That would provide some of the largest blocks of mortgage credit risk ever offered and open up a new stream of investable assets, but it also raises the question of what happens to the GSEs when all their assets are sold.

"A lot of this is politically driven. The government effectively had to bail out Fannie and Freddie and taxpayers took a big hit. However, now the government has the opposite problem because the GSEs are making money again and that money is going into the Treasury, so the government does not want to give that revenue up," says Dan Castro, president at Robust Advisors.

While the market consensus seems to be that there should be some role for the government to act as a backstop and provide protection, Castro believes overall control of the GSEs should be taken out of government hands, with the assets moved out and the GSEs replaced. The question is what should replace them.

Castro notes that with politicians in charge, a solution could take a long time. Although he says it would be nice to be able to take the government completely out of the picture, he acknowledges that only the government has enough resources to protect against "catastrophic risk".

"The implicit government guarantees are also important for liquidity. If you compare agency RMBS with non-agency, there is a world of difference in credit risk and liquidity, and having some government backing keeps things liquid," he says.

Senators Bob Corker and Mark Warner have introduced a bill providing for the eventual wind-down of the GSEs and their replacement with a new, single enterprise. This would be dubbed the Federal Mortgage Insurance Corp (FMIC) and all the resources of the FHFA and GSEs would be transferred to it.

FMIC would be a guarantee entity, similar to the FDIC or Ginnie Mae, which would provide the catastrophic protection which Castro notes is needed. It would cover losses after other private-capital enhancements have been wiped out.

"The Corker/Warner bill certainly provides a more definitive proposal surrounding GSE reform than we have seen post-crisis," comment Wells Fargo RMBS analysts. "With this, there may likely be a more succinct focus and better momentum toward finally transforming US housing finance into the landscape of the future, so that the industry can finally operate under a stable regulatory framework."

However, even with a clear plan in place, it could still take a long time to implement such reform. Congress would need to pass legislation for this to happen and Castro does not believe that can take place before next year's mid-term elections. It could well be 2015 before there is any meaningful movement, by which time other issues are bound to be higher on the agenda.

Unwinding the GSE portfolios will require a lot of paper to be moved on to private investors, such as the approximately US$60bn that has to be moved by year-end. Over time the market can absorb that much paper, but moving too much, too soon could be harmful - as the market has experienced previously.

"We have seen these things before. In 2007/2008 when liquidity dried up and REITs were selling bonds, they were dumping US$20bn in a month and it just crushed the market," says Castro.

A larger problem may be the Fed's much-discussed QE tapering. Castro points out that the Fed pulling back from its monthly US$85bn in purchases for just a few weeks would quickly outweigh the US$60bn of GSE assets.

"US$30bn from each of the GSEs is not nearly as important as the Fed pulling out because it is less than one month of Fed buying. With that in mind, were the Fed to avoid cutting back while this GSE paper comes to the market, then it should balance out. If you do it too quickly, it is going to be a problem, but if you do it in a measured way hopefully it does not hurt things."

One complicating factor is that Mel Watt could be about to replace FHFA acting director Ed DeMarco. The Senate Banking Committee could recommend Watt for a full Senate vote, which the Wells Fargo analysts expect would be before the August recess.

The analysts also believe the likelihood of Watt being confirmed has recently increased and feel he would differ from DeMarco in a couple of key ways relating to RMBS. "Watt will have more of a focus on public-policy issues, including supporting some sort of principal forgiveness programme and expanding HARP; and Watt will have less of a focus on maintaining the safety and soundness of the GSEs," they suggest.

Despite his intentions, Watt could probably only affect modest changes, considering political and financial constraints. The GSE's current profitability, as Castro notes, also blunts the impetus for change.

Whatever happens to the GSEs in the future, in the meantime Freddie is set to sell new securities that reference the first-loss piece on a pool of recently originated mortgages. Details of the transaction have not yet been disclosed, but the structure is expected to mimic a senior/subordinate non-agency deal and consist of two sequential-pay floating-rate notes.

JL

Structured Finance

Europe reacts to unusual RMBS, ABS deals

It has been an interesting couple of weeks in European RMBS and ABS, with noteworthy primary issuances in each sector grabbing investors' attention. A quiet end to this week is expected as the US marks Independence Day, although activity in the secondary markets has been relatively strong up to this point.

"European RMBS spreads definitely widened out on the back of Bernanke's taper talk, with Dutch spreads for example now back out to their end-2012 levels. However, a lot of paper has been offered as well, so it is not just a case of bids reducing," reports one trader.

SCI's PriceABS data shows plenty of European RMBS out for the bid in yesterday's session, but the trader reckons that the most noteworthy development of the week was a preplaced deal from ING - Orange Lion 2013-10. JPMorgan is understood to have been a major investor in the transaction.

"This ING deal had a slightly strange structure. It has no call option or step up, so the bond would naturally be longer than the five years to call," he explains.

He continues: "There was speculation that this structure might be a way to avoid paying so much to swap counterparties by cutting the swap out of the transaction. But, even without a call or step up, it will still need a swap because it is swapping fixed loans to floating bonds. I think the main reason for this structure will be a reverse inquiry from an investor, who is looking for longer exposure than the usual five years."

Another interesting feature is the fact that the class A notes will receive a spread of 150bp. Despite some widening, a more typical structure with A1 and A2 notes would still only be expected to pay the A2s around 90bp, so it remains a very large spread.

"All we know is the spread on the A notes because the cashflows for the other tranches have not been disclosed yet. I am actually quite anxious to see what the structure turns out to be and whether it is something we will see being repeated in the future," the trader says.

Another noteworthy recent issuance was last week's auto ABS from Volkswagen - Driver Eleven. The initial spread target was mid/high-20s. But - after the market failed to absorb that - the official guidance had to be widened out to 30bp-35bp, before eventually being placed at the tight end of that revised guidance.

"You often see talk wider than guidance, but it is very unusual to see guidance that is wider than the talk. Obviously the timing was difficult because the market was widening, but it just goes to show that even Volkswagen does have to follow the market," the trader says.

Meanwhile, the secondary market has seen a large number of Spanish BWICs for both RMBS and ABS bonds. The reception for the bid-lists has been mixed, with a few bonds failing to trade.

Given the recent rally in legacy paper, there is also now the potential for legacy supply to increase. The big question is how much further that rally can go.

"Banks will not be the natural buyers for legacy mezzanine paper because of all the regulatory restrictions affecting them, while hedge funds will not buy paper paying only 200bp. With that in mind, it will be interesting to see how far the sector continues to rally before investors are put off," the trader observes.

He adds: "A year ago hedge fund participants would probably have 10% yield targets. That number will have gone down by now because it is not reasonable in this environment; paper does not yield 10% anymore without substantial risk."

Looking ahead, the trader is expecting a quiet period for both secondary RMBS and ABS. With summer finally here, it could take a while for meaningful primary issuance to emerge - particularly in RMBS, where little supply is expected from the UK in general, while the next Dutch deal might not come until September.

JL

CLOs

Secondary CLOs are all talk

After a difficult June for the secondary US CLO sector, this month has begun with a couple of covers and DNTs. Market participants appeared to take a cautious approach yesterday, with SCI's PriceABS data showing plenty of talk but no trades.

The sell-off in June saw generic US CLO secondary spreads widen by about 70bp month-over-month for legacy single-A tranches, with triple-Bs trading 125bp wider and double-Bs 185bp wider. Liquidity dried up as well, with DNTs climbing to over 30% of volume from around 10% in May. Primary CLO issuance remained strong, however, with 15 deals totalling US$7.25bn.

Bonds out for the bid yesterday included legacy paper from 2005 up until 2007, as well as CLO 2.0 paper from last year and this year. Talk for the vast majority of the tranches was in the 90s or low-100s.

An exception to that rule was the EMPOR 2007-3A E tranche, which was talked at 86.75. It is one of the bonds that failed to trade at the start of this month and was last successfully covered at mid-99 on 13 June.

DUANE 2007-4A C was also circulating and talked at 93. Last month the tranche was covered in the low/mid-90s, when it was also talked in the mid-90s.

Among the other 2007-vintage names, the KKR 2007-AA D and KKR 2007-1X E tranches make for an interesting comparison. The former was talked at 100.5 and the latter was talked at 95.88.

Older names - such as DMCLO 2006-1X D (talked at 95.63) and DUANE 2006-2X E (talked at 93.5) - were also circulating, while RMPRT 2006-1A C was talked at 91.75. Last month it was talked at 90 handle, in the low-90s, in the low/mid-90s and in the mid-90s, with a cover at 94.75.

2005-vintage tranches such as SUMLK 2005-1X B1L and TRMN 2005-1X B1L were talked at 98.5 and at 98.63 respectively during the session. OAKC 2005-4X C1 was talked at 97.25, while OAKC 2005-4X C2 was talked at 100.38.

As for CLO 2.0 paper, SHACK 2012-1A D was talked at 98.5. On 15 March it was talked at 100 handle, above 100, at 100.11 and around 101. DNTs were recorded for the bond in both February and March.

Finally, a couple of tranches were seen from this year, including LCM 13A D. That bond was talked at 96.5 yesterday, having traded last month when it was being talked between the high-90s and 100 area.

JL

RMBS

US RMBS makes welcome return

The US RMBS secondary market sprang back to life yesterday after a string of quiet sessions before and after 4 July. SCI's PriceABS data shows around twice as many US RMBS tranches for Tuesday's session as it does for Monday.

Supply was elevated across fixed, hybrid and subprime paper, with total volume estimated at US$930m. Tomorrow's session is also set to be busy, with a US$1.1bn seasoned bid-list due.

Fixed rate supply was up sharply, with both prime and Alt-A bonds circulating. As with the other subsectors, most bonds were from the 2005-2007 vintage.

Among the paper out for the bid, a US$45.298m piece of the prime fixed WFMBS 2005-17 1A1 tranche was talked in the high-90s. The bond was talked at 100 handle on 24 June and around 106 earlier that month.

A US$19.513m piece of the Alt-A CWALT 2005-10CB 1A5 tranche was talked in the mid/high-90s, as it had been in the prior session. A US$14.548m piece of CWALT 2007-12T1 A5 was also out for the bid, talked in the low/mid-80s.

Hybrid volume has also picked back up to a moderate level. Over half of yesterday's supply came from 2006-vintage paper.

There was a US$17.694m piece of BSARM 2005-2 A1, which was talked in the high-90s and traded during the session. It had been talked in the very high-90s a week previously.

In addition, the Alt-A hybrid BAFC 2007-C 7A2 tranche was talked in the low/mid-30s, but did not trade. The option ARM SARM 2005-19XS 1A1 tranche was out for the bid and talked in the mid-80s.

Subprime volume was elevated too, with a liquidation list in focus. Offerings were mostly unchanged with a stable tone.

One of the subprime bonds available yesterday was MSAC 2006-HE1 A4, which was talked in the mid/high-70s and traded during the session. Earlier this year, it was talked in the high-60s but failed to trade.

Finally, the GEWMC 2005-2 A2C tranche circulated and was talked in the mid-70s, having been talked in the high-70s last month. The tranche was covered twice in October last year, both times in the mid/high-70s.

JL

RMBS

No holiday for Euro RMBS

Although secondary markets on either side of the Atlantic were quiet yesterday, some activity was observed in European RMBS. Seldom-seen Portuguese bonds were doing the rounds, as well as UK non-conforming paper.

One of the Portuguese tranches captured in SCI's PriceABS data is ATLAM 1 A, which was talked at 88. It was previously covered at 90.31 on 30 April and at 82.14 on 26 November.

Another was LUSI 4 A, which was talked at 71.5. The tranche was talked last month between 75.75 and in the mid/high-70s and covered at 76. Before that there are no recorded covers other than on 18 October 2012, when it was covered at 68.05.

In addition, non-conforming bonds - such as a First Flexible No.5 tranche and a pair of Paragon Mortgages tranches - were out for the bid. The First Flexible tranche - FLEX 5 A - was a DNT in Tuesday's session, but was talked yesterday at 91.

As for the Paragon paper, PARGN 9X AA was talked at 89, marginally higher than the 88.75 talk it attracted on 21 June - at which time it failed to trade. The tranche's first appearance in the PriceABS archive was on 8 May 2012, when it was covered at 79.25.

PARGN 12X A2A was also circulating and talked at 88.5. It was covered last month at 87.25. The tranche first appeared in PriceABS a year and three days ago, at which time it was talked in the mid/high-70s.

Other tranches of note from the session include a pair of Granite bonds - GRANM 2007-1 3C1 and GRANM 2007-2 3C2 - each of which was talked at 86.75. Talk last month on the former ranged from around 88 to 93 handle, while the latter had been covered in Wednesday's session at very high-86, when it was also talked around 86.5, around 87, at 87 and at 87.5.

Also out for the bid were AIREM 2006-1X 2B2 - which was talked at 77, after talk last month had been between the high-70s and low-80s - and BRNL 2007-1X D4A. The Brunel tranche was talked at 78, marking the first time it has appeared in the PriceABS archive.

In terms of more recent vintages, BRASS 2011-1 A was talked at 100.8 and covered at 101.22, while BRASS 2012-1 A1 was talked at 99.7 and covered at 99.75.

JL

Structured Finance

SCI Start the Week - 8 July

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

Pipeline
Despite a predictably quiet week for the market, nine new deals were added to the pipeline. These transactions comprised two ABS, two RMBS and five CLOs.

The ABS were €606m SC Germany Auto 2013-2 and US$375m TACSEE Funding Co. The RMBS consisted of €225m Rural Hipotecario XIV and US$875.44m Springleaf Mortgage Loan Trust 2013-2.

Finally, the CLOs comprised: US$500m Ares Enhanced Loan Investment Strategy IR; €1.569bn Berica PMI; €309.26m Cadogan Square CLO V; €847.7m Geldilux TS 2013; and €410m Herbert Park CLO.

Pricings
A little more variety was observed among the new issues last week. As well as an ABS, four ILS, two RMBS and two CMBS printed.

The ABS issuance was the US$638m Tobacco Settlement Financing Corporation (Louisiana) Series 2013A. The ILS comprised: €150m Green Fields Capital Series 2013-1; US$125m Mona Lisa Re series 2013-2; US$75m Queen Street VIII Re; and US$100m Tradewynd Re series 2013-1.

The RMBS prints included £326m Albion No.2 and €2.044bn Orange Lion 2013-10. Finally, the US$1.3bn COMM 2013-CCRE9 and US$961.2m JPMCC 2013-C13 CMBS rounded the issuance out.

Markets
The European RMBS market maintained a level of activity, even as other sectors effectively closed for the holiday in the US, as SCI reported on Friday (SCI 5 July). Thursday's session saw peripheral paper from Portugal circulating, as well as a few UK non-conforming bonds.

The market was possibly still digesting ING's Orange Lion 2013-10, which one trader notes had an unusual structure (SCI 4 July). "It has no call option or step up, so the bond would naturally be longer than the five years to call," he explains. "I think the main reason for this structure will be a reverse inquiry from an investor, who is looking for longer exposure than the usual five years."

US RMBS was quiet, even at the start of the week (SCI 2 July). Dealer offering levels were largely unchanged to begin the quarter, with subprime supply holding up better than other non-agency sectors.

SCI's PriceABS data shows subprime names such as CARR 2006-NC1 M2 (talked in the low/mid-20s) and CWL 2006-2 M2 (talked in the high-single digits), which did not trade. By contrast, PPSI 2005-WCH1 M5 traded successfully during Monday's session.

US CMBS secondary activity picked up a little after a quiet start, before shutting down for Independence Day, as SCI reported mid-week (SCI 3 July). PriceABS shows covers for BSCMS 2004-PWR6 A6, BSCMS 2005-PWR8 A4, BSCMS 2006-PW11 A4, BSCMS 2006-T24 A3, BSCMS 2006-T24 A4 and BSCMS 2007-T26 A4, amid strongly divergent price talk.

A couple of other tranches of note include CGCMT 2006-C4 A3 (which was covered at 111, after having been previously covered at 58) and LBUBS 2007-C2 AM, which traded with price talk in the mid/high-300s, 400 area and mid/high-400s. Talk on the latter tranche had been in the high-200s on 15 May and the previous cover was at 293 on 25 April.

Deal news
• Nationstar intends to revise the reporting of principal forbearance modifications, resulting in approximately US$1bn in losses for RMBS collateralised with loans it services, with the revision likely to occur in the July distribution. Fitch expects the impact to be concentrated in classes currently rated double-C or below and currently does not anticipate significant rating changes as a result of the revision.
• Deutsche Annington has postponed its IPO, which was planned for 3 July, citing adverse market conditions. The company was seeking to raise €1.1bn, which would have contributed to the full repayment of the GRAND CMBS before the October 2013 IPD.
• An unusual catastrophe bond, sponsored by AIG, is expected to close this week. Dubbed Tradewynd Re 2013, the transaction features a variable attachment point, designed to provide the sponsor with risk management flexibility.
• Bankia has announced a tender offer for 17 senior Spanish RMBS tranches - across 12 2004-2007 vintage CAJAM, BCJAF and BCJAM transactions - in a repeat exercise of its previous offering for the same bonds last year (SCI 28 March 2012). The bank is offering to repurchase up to €500m of paper, half of what it had planned in its 2012 tender offer.
• Swiss Re Capital Markets has priced Green Fields II Capital Series 2013-1, which at €280m is the largest European windstorm catastrophe bond ever issued and the largest euro-denominated deal to date. The deal's single tranche priced at three-month Euribor plus 252bp and has been rated double-B by S&P.
• The loan modification programme that Patrimonio plans to implement in connection with eleven Mexican RMBS could have mixed results, depending on the transaction and the assumptions used in the analysis. The agency says it will monitor the implementation and results of the programme as information becomes available.
• BlueMountain Capital Management has been appointed replacement investment manager to Channel Capital under the provisions of a new investment management agreement. The terms of the appointment do not alter the responsibilities, duties and obligations of the investment manager under the prior investment management agreement.

Regulatory update
• The US Fed has approved a final rule to implement the Basel 3 regulatory capital reforms and certain changes required by the Dodd-Frank Act. The final rule establishes an integrated regulatory capital framework that addresses shortcomings in capital requirements - particularly for larger, internationally active banking organisations - that became apparent during the recent financial crisis, while minimising the burden on smaller, less complex financial institutions.
• The European Commission (EC) has informed a group of investment banks of its preliminary conclusion that they infringed EU antitrust rules by colluding to prevent exchanges from entering the credit derivatives business. If this is found to be the case then the companies in question could be fined 10% of their annual worldwide turnover.
• As of 1 July, interest rates on federal direct subsidised loans (FDSL) for US college students will double to 6.8%. Although the increase is being portrayed as harmful to students who would be driven further into debt, Moody's expects the overall effect on student loan securitisations to be minimal.
• Fitch believes that the Chinese securitisation market is underdeveloped, reflected in the small programme size of the third round of the credit asset securitisation (CAS) pilot programme launched in May 2012 at RMB50bn (US$8.2bn). The programme limit - accounting for less than 0.1% of the commercial banking system's assets in the country - is insufficient to fulfil the needs of Chinese banks, according to the agency.
• The Basel Committee has released two consultative papers on the treatment of derivatives-related transactions under the capital adequacy framework.
• The Commercial Real Estate Finance Council is releasing CREFC IRP version 7.0, with an effective date of 1 October 2013. The latest version of the CMBS reporting template comprises a number of changes.

Deals added to the SCI database last week:
AA Bond Co; Alba 2013-1; Alchera; Ares XXVII CLO; Credit Suisse ABS Repackaging Trust 2013-A; CSMC Trust 2013-HYB1; CSMC Trust 2013-IVR4; Driver Eleven; Ford Floorplan Auto securitization Trust series 2013-F1; Gallatin CLO V 2013-1; Green Fields II Capital series 2013-1; Halcyon Loan Advisors 2013-2; Ibis Re II series 2013-1; JPMCC 2013-C13; LCM XIV Partnership; Massachusetts Educational Financing Authority Issue K series 2013; MSBAM 2013-C10; Mythen Re series 2013-1; OHA Loan Funding 2013-1; Queen Street VIII Re; Sequoia Mortgage Trust 2013-9; Shellpoint Asset Funding Trust 2013-1; Tramline Re II series 2013-1

Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-3; COMM 04-LB2 & 04-LB3, GECMC 04-C2 & GMACC 04-C1; DECO 2005-C1; DECO 2007-E7; ECLIP 2006-3; GRND 1; GSMS 2004-GG2; JPMCC 06-LDP8 & 06-LDP9; JPMCC 2005-CB13; JPMCC 2005-LD1; NEMUS 2006-2; OPERA CMH; RIVOL 2006-1; TAHIT 1; TAURS 2006-1; TITN 2007-2

Top stories to come in SCI:
CLO structuring innovations
Basel 3 developments
Credit investment trends

CDS

Synthetic risk touted over cash

US fixed income markets are pricing in the beginning of the end of extraordinary central bank support and it is having a material impact on rates and credit spreads. But - even as cash bonds struggle to deal with technicals - the benchmark CDX IG index is nearly 10bp tighter over the course of 2013, according to Morgan Stanley figures.

Indeed, CDS has been a bright spot in the investment grade credit market, with such tightening representing an excess return of almost 1%. Credit strategists at Morgan Stanley recommend owning risk in synthetic form over cash to avoid the risk of higher rates and dollar prices. However, they note that relative risk-reward is more balanced today than earlier in 2013 and thus demands a more tactically nuanced view on the market as a whole.

The strategists project a three-month forward CDX IG spread base-case of 77bp versus the current reference of 85bp, or 8bp tighter from current levels. The bull and bear cases are 19bp tighter and 2bp wider at levels of 66bp and 87bp.

The major drivers of this forecast include incrementally higher but still low producer price inflation, positive inventories growth, incrementally lower systemic risk as measured by the TED spread and marginally less net protection buying. Cash spreads may, in turn, tighten if a range-bound rates environment continues.

The current reading based on Fed discourse is that tapering of asset purchases will likely begin later this year, with the current round of QE formally ending in mid-2014, if the Fed's expectations for employment and inflation are realised. Morgan Stanley economists believe that the market has overreacted to some of the Fed's rhetoric, with the current level of yields expected to be sustainable.

Nevertheless, the strategists warn that many bouts of rates volatility and policy expectation adjustments can be expected over the next several quarters. "From a valuation perspective, a world without extraordinary central bank support is perhaps one that is easier to rationalise, as we can depend more on history and traditional valuation techniques. The rise in rates - though painful from a total return perspective for fixed income investors - is a healthy outcome for the credit markets, as it reduces the significant yield headwinds for both total return and asset-liability based investors," they conclude.

CS

CMBS

Delay forecast for GRAND repayment

Deutsche Annington has postponed its IPO, which was planned for 3 July, citing adverse market conditions. The company was seeking to raise €1.1bn, which would have contributed to the full repayment of the GRAND CMBS before the October 2013 IPD.

With a securitised balance of €3.2bn as of April 2013, DAIG had planned to repay GRAND with several secured loans (accounting for €940m) and the proceeds of a new term loan facility or corporate bond issuance (up to €2.5bn combined). The firm aimed to partially or fully draw the term loan facility before October 2013 (see SCI's CMBS loan events database).

However, European securitisation analysts at Barclays Capital note that one of the condition precedents for drawings under the facility is that DAIG generates gross IPO proceeds of at least €400m. In addition, S&P's senior unsecured credit rating (BBB/A-2) is subject to the successful closing of the IPO.

The Barcap analysts suggest that it is now more likely that GRAND will be repaid fully in 2014, assuming an unchanged refinancing strategy. In order to stick to the planned redemption strategy and timeline, they reckon the options that are available to DAIG include: trying to place the postponed IPO before October 2013, enabling the company to draw under the term loan; asking the term loan lenders to waive the IPO condition precedent for a drawing under the loan; or conducting a large senior unsecured corporate bond issuance.

These options are expected to be difficult to pursue, given the dependence of the term loan facilities and the corporate rating (and, by extension, a successful corporate bond issuance) on the IPO. "We think it is more likely that DAIG will aim to conduct its IPO later in 2013 or early 2014, to issue a corporate bond after the IPO (or draw under the terms loans, if still possible) and to redeem GRAND before the July 2014 IPD. This assumes that the refinancing strategy does not change substantially following the postponed IPO," the analysts observe.

Nevertheless, a substantial partial repayment on the October 2013 IPD remains likely. A portion of the secured loans is anticipated to be used to refinance some of the GRAND REF note issuers, given the €1bn redemption target for the first year, as per the transaction's restructuring.

CS

RMBS

Prepays set to move sharply lower

Total FNCL pay-downs fell by 9% month-on-month in June to US$40.5bn at 24.6 CPR, according to Barclays Capital figures, as two fewer processing days and a decline in HARP activity overwhelmed a modest decline in driving rate. The focus is now expected to turn to the July/August reports, where a cumulative 100bp increase in US mortgage rates will likely force prepayment speeds sharply lower.

FNCL 2010/2011/2012 3.5s respectively decreased by 2.5/2.3/2 CPR (to 22.9/19.6/13.4 CPR), while 4s decreased by 1.9/1.6/1.2 CPR (to 28.5/24.5/15.4 CPR) and 4.5s decreased by 2.1/1.9/1.7 CPR (to 38.2/30.7/25.5 CPR). Post-HARP cohorts declined by 1-2 CPR across coupons, with 2010 FN 4.5/5s declining slightly more than expected, and pre-HARP 2006-2008 collateral fell by 1-3 CPR - with FN 6/6.5s impacted the most.

The declines in pre-HARP cohorts were broad-based across most servicers, Barclays Capital MBS analysts report. Pools serviced by Wells and Chase had the most pronounced declines, while 2006-2008 speeds for Bank of America-issued pools increased by 1-2 CPR. BoA-issued pools with a high concentration of recently transferred loans did not experience substantial pick-ups from either Green Tree or Nationstar, however.

Nevertheless, at current rates, the Barcap analysts expect pre-HARP speeds to remain at elevated levels. "These borrowers continue to have substantial incentive to refinance, even after accounting for the sell-off thus far. In addition, the pre-HARP sector remains prone to negative headwinds in the form of MSR transfers and increased processing capacity," they explain.

In terms of timing, mortgage driving rates are set to decline by 45bp next month and another 40bp-50bp the month after. Consequently, the analysts anticipate pay-downs to fall sharply, starting with the August report and continuing in the September report.

Given expectations of a higher rate environment, the non-agency RMBS market is set to move away from a refi-driven mentality for the first time in years. Areas that are therefore likely to garner increased scrutiny in the coming months include baseline discount speeds, as well as LLB/MLB/HLB and MHA/CQ/CR discount speeds.

CS

Structured Finance

Transaction banking leader added

Susan Skerritt is to join Deutsche Bank's global transaction banking (GTB) division as regional head for the Americas. She will be based in New York and report to GTB head Werner Steinmueller and North America ceo Jacques Brand.

Skerritt has more than 30 years of transaction banking experience and was most recently evp and global head of business strategy and market solutions at BNY Mellon. She has also worked at Treasury Strategies, Morgan Stanley, Ernst & Young, Manufacturers Hanover Trust and JPMorgan.

CDS

Investment manager change for CDPC

BlueMountain Capital Management has been appointed replacement investment manager to Channel Capital under the provisions of a new investment management agreement. The terms of the appointment do not alter the responsibilities, duties and obligations of the investment manager under the prior investment management agreement. Channel and BlueMountain have also concluded a transitional services agreement designed to support BlueMountain to ensure a continued high degree of credit risk management and operational support to the CDPC.

Moody's confirms that the move will not result in the qualification, reduction, suspension or withdrawal of the ratings of any class of the CDPC's debt securities or counterparty obligations. In reaching its conclusion, the agency considered the experience and capacity of BlueMountain to perform duties of investment manager to the company. It says it will continue to monitor the ratings of the debt securities issued by the company.

CLOs

Exclusive CLO portfolio advisor appointed

Advantage Insurance Holdings has entered into a long-term agreement for GSO Capital Partners to serve as Advantage's exclusive portfolio advisor. GSO will be responsible for deploying the capital and surplus of Advantage's subsidiaries into CLOs and other investments.

The Advantage portfolios will be managed by Mark Moffat at GSO's London-based affiliate, GSO Capital Partners International. Moffat is a senior md and currently serves as primary portfolio manager for another product holding a diversified portfolio of CLO investments.

CMBS

CREFC adds analysis, relations vp

The CRE Finance Council has appointed Christina Zausner as industry and policy analysis vp. It is a newly-created role in which she will analyse industry data and trends and write reports for distribution to the CREFC membership and general public.

Zausner will also be part of the CREFC's government relations initiatives, helping to increase the group's presence and relationship development with policy makers. She previously spent 10 years at the Federal Reserve Bank of New York and has worked in London for Lloyds and in Moscow for Leucadia National Corporation.

CMBS

Real estate debt platform prepped

Brookland Partners is launching Brookland Financial, a new intermediary platform to connect parties in the real estate debt markets. The platform will act for both borrowers and lenders and is being led by Nassar Hussain, Brookland Partners founder and managing partner.

Brookland Financial has access to two independent teams and can provide investors with a full debt arranging solution through its network of lenders or a competitive financing offer from its lending clients. It will be able to combine sourcing, arranging, structuring, underwriting, execution and distribution across a diverse range of real estate debt products.

RMBS

UK servicer appoints operations chief

Paul McMillan has joined mortgage servicer Acenden as coo. He reports to ceo Amany Attia and joins the company's operational management committee.

McMillan joins from Ulster Bank and has held several roles in Ulster's parent bank, RBS. He will be based in High Wycombe and take responsibility for all the core operating teams in the business.

RMBS

Dutch bank adds senior analyst

Ruben van Leeuwen has joined Rabobank as senior ABS analyst. He joins from ABN Amro and will provide sell-side research with a focus on Dutch RMBS and covered bonds.

At ABN Amro he was a fixed income strategist, portfolio manager and senior US economist. His various roles included covering Dutch and global credit markets and the development of fixed income investment strategies.

ABS

Negative outlook for UK WBS

Fitch says that the outlook for UK whole business securitisations (WBS) remains predominantly negative, largely due to weak economic conditions and the consequent pressures on consumer and government spending. In particular, the main UK WBS sectors - pubs and care homes/hospitals - are expected to continue to struggle in the latter stages of 2013.

The UK government's surprise move to lower the duty on beer by 1p per pint at end-March and to eventually scrap the duty escalator on beer was welcome news for the pub sector. However, the duty on other alcoholic drinks was left in place. Furthermore, plans to introduce minimum pricing for alcohol - which could have helped pubs to better compete with low-price alcohol sold in supermarkets - seem less likely to materialise anytime soon, Fitch notes.

The weak UK economy will continue to challenge the pub companies' profitability, but margin compression is expected to slow. Managed pubs (notably those selling food) still offer an appealing value proposition, driving footfall/revenues, and recently invested pubs (for example, Spirit) should continue to grow.

Fitch expects tenanted pubs' woes to continue, with further declines in rent and beer incomes. They are hampered by their chronic underinvestment, with both pubcos and tenants having limited financing capacities. Some established players with flexible leases, prudent rent setting and capex planning (such as Greene King) and newly set-up franchise agreements (Marston's) should be relatively resilient, however.

Finally, the potential implementation of a statutory code to protect the tenants of pubcos from perceived unfair treatment would be credit negative for major tenanted pubcos in the short to medium term, while over the longer term the code could reduce tenant failure rates.

In the healthcare sector, meanwhile, continued pressure on NHS and local authority budgets and negotiation by medical insurers mean that care homes' and hospitals' EBITDAR margins are likely to decline further - back to below the 30% level observed less than a decade ago from around 35% today.

Fitch expects the ratings of individual care home and pub transactions to be driven in the near term by the terms of debt restructuring (pubs) and refinancing (care homes and hospitals) exercises. Care homes with longer tails between loan and bond maturity are expected to be less affected in the short term, while junior pub bonds are likely to be more volatile.

An (unexpectedly) stronger UK economic output or an easing of austerity measures would alleviate (at least temporarily) some of the healthcare funding issues and improve consumer discretionary spending power (benefiting pubs). Government plans to introduce a surveillance body to monitor care homes' financial performance - to prevent another Southern Cross scenario - could also be positive, Fitch concludes.

ABS

Venture debt ABS closes

Specialty finance company Horizon Technology Finance Corporation has completed its debut securitisation. The US$90m Horizon Funding Trust 2013-1, backed by venture capital debt, is rated A2 by Moody's and was arranged by Guggenheim Securities.

The notes bear a fixed interest rate of 3% and have a stated maturity date of 15 May 2018. The transaction has enabled Horizon to both reduce and fixe the interest rate on a large portion of its borrowings, enabling the firm to lower future interest expense and reduce floating interest rate risk.

ABS

Insolvencies weigh on leasing ABS

An increase in German corporate insolvencies in 1H13 is expected to result in a moderate increase in default rates in commercial leasing ABS transactions, according to Fitch, although the agency does not anticipate any impact on current ratings. The first-half increase is consistent with its deal-by-deal base-case default assumptions and so observed default rates should remain below those assumed in higher rating stress scenarios.

Corporate insolvencies in Germany have increased to 15,430 companies in the first half of 2013 compared with 14,920 companies in the year-earlier period, according to Creditreform. This 3.4% increase is the first in Germany since the recessionary year of 2009 and is mostly due to the slowing economic activity in the country during the past months. For all of 2013, Creditreform expects between 30,000 and 31,000 companies to become insolvent, an increase of between 4.5% and 7.9% compared with 2012.

Fitch expects the increasing trend in corporate insolvencies to translate into moderately rising default rates in structured finance transactions, where the securitised portfolios contain contracts originated with corporate obligors. Most of the insolvencies have been SMEs and this trend is expected to continue, as smaller companies are more sensitive to weaker exports caused by the continuing recession in the eurozone.

As a result, a significant change in performance is not anticipated for large balance sheet SME CLOs, where borrowers typically have higher turnover levels. A more pronounced impact is likely on default performance of commercial leasing ABS transactions, where the lessees are usually smaller.

Structured Finance

RFC issued on CRA3 implementation

ESMA has published a discussion paper dealing with the implementation of the CRA3 Regulation, which entered into force last month (SCI 19 June). ESMA is required to draft regulatory technical standards (RTS) regarding: disclosure requirements on structured finance instruments (SFIs); the European Rating Platform (ERP); and the periodic reporting on fees charged by rating agencies.

The SFI draft RTS will specify: the information that issuers, originators and sponsors of structured finance instruments established in the Union must publish; the frequency with which the information is to be updated; and the presentation of the information by means of a standardised disclosure template. The ERP draft RTS will specify: the content and format of ratings data periodic reporting to be requested from registered and certified CRAs for the purpose of on-going supervision; and the content and the presentation of the information - including the structure, format, method and timing of reporting that credit rating agencies are to disclose to ESMA. The final draft RTS will specify the content and the format of periodic reporting on fees charged by credit rating agencies for the purpose of on-going supervision by ESMA.

ESMA is seeking comment to assist in its preparation of the draft RTS, to be published for consultation in early 2014. The discussion paper is open for comments until 10 October. ESMA must submit the draft RTS to the European Commission by 21 June 2014.

Structured Finance

Feedback sought on EMEA set-off

Moody's is seeking feedback on its proposed approach for assessing set-off risk in securitisation and covered bonds transactions in EMEA, as well as on its general approach to assessing set-off risk. The agency is considering several changes to its existing methodology, in particular for Dutch set-off risk.

Moody's proposed approach is substantially the same as its existing published methodologies, save that the rating agency will: no longer assume that borrowers will set off deposits in the period between bank default and payment by the relevant deposit guarantee scheme; and give value to the Dutch deposit guarantee scheme. Based on the agency's preliminary analysis, the implementation of the proposal is likely to have a positive impact of one or two notches on a small number of ratings.

Structured Finance

Scope for litigation expanding?

As litigation with respect to loan origination and other issues stemming from the financial crisis begins to ebb, a number of other areas are emerging as potential foci of investor scrutiny and regulatory compliance, according to NewOak Capital. The firm suggests that while some of these matters may appear to be solely the domain of consumer rights and protection, what could be viewed as deficient for the consumer may also be deemed as inadequate asset servicing from an investor's perspective.

Among the areas highlighted by NewOak are fair servicing standards: servicing activities that inadvertently result in disparate borrower treatment may also indicate that the servicer lacked adequate procedures to consistently adhere to its own policies and procedures. Foreclosure 'dual tracking' issues are another area, together with force placed insurance - which is now prohibited by new regulations, but often involved processes that may well have generated excessive costs if not properly implemented.

Additionally, closer inspection of HAMP and non-HAMP modification activity could lead to allegations that a servicer did not properly accommodate borrower requests for modifications or did not consistently offer borrowers a non-HAMP alternative if they failed a HAMP modification. Finally, the basis for loss mitigation decisions could be challenged for reasonableness, given that a number of assumptions are involved.

CLOs

Changes in bank CLO holdings eyed

Changes in the way US banks pay deposit insurance premiums to the FDIC may precipitate a shift in the composition of bank leveraged loans and CLOs in second-quarter financial statements, Fitch reports. The agency says that the changes have the potential to influence demand for triple-A rated CLO tranches, pushing banks into higher-risk pieces of recently issued securitisations, or force some banks to reduce their future holdings of CLOs.

The amount of premiums to be paid by insured institutions under the FDIC's revised approach is now calculated, in part, using a scorecard method that factors in a bank's exposure to higher-risk assets - including leveraged loans and CLOs. The assessment level is not influenced by the relative risk of CLO holdings, suggesting that some banks may look increasingly to lower-rated tranches in order to cover the assessment through better pricing.

The rule went into effect on 1 April (SCI passim), meaning that any significant changes in banks' CLO holdings could begin showing up in second-quarter financial results released next month. Fitch believes the introduction of the new approach on 1 April may have pulled demand for CLOs forward somewhat into the first quarter, thus elevating first-quarter-ending asset levels.

Quarterly data provided by Highline Financial indicate that total CLO holdings for US banks stood at US$56.6bn as of 31 March, up by 24% year-over-year. The largest trading banks still account for the vast majority of total industry CLO holdings, with JPMorgan having the largest in dollar terms at about US$27.3bn.

Other big banks have also stepped up CLO investments since early 2012. Wells Fargo, in particular, has grown its CLO portfolio to US$15.3bn at the end of the first quarter, up by 90% from a year earlier. Citigroup's holdings stood at US$4.5bn, while PNC also grew its CLO book to US$2.1bn in 1Q13 from US$323m in 1Q12.

Some large regional banks, as well as some very small institutions are also increasing CLO investments as net interest margins have been compressed and alternative asset yields remain low. In addition, growing concern over interest rate risk once the Fed begins to exit its quantitative easing programme may be steering many banks toward floating-rate CLOs, according to Fitch.

CMBS

CMBS loss severity jumps

Average loss severity on liquidated US CMBS loans this month saw its biggest month-over-month increase since last August, according to Trepp, with a majority of the losses in the greater than 2% category. Severity came in at 56.49%, up from May's reading of 48.15% and above the 12-month moving average of 44.02%.

The number of loans disposed with a loss in June stands at 107 (resulting in US$704.9m in losses), up from 82 in May. June liquidations totalled US$1.24bn, relative to the 12-month moving average of US$1.29bn.

The average size of liquidated loans in June was US$11.66m, above May's US$10.36m and the 12-month average of US$10.41m. Since January 2010, servicers have been liquidating at an average rate of US$1.17bn per month.

CMBS

Weak outlook for EMEA CMBS loan maturities

While the number of EMEA CMBS loans coming due this quarter is once again large, only a few are expected to repay, according to Fitch's latest quarterly index report for the sector. Loan-to-value (LTV) levels are increasing, in some cases quite sharply. In parallel, many of the loans coming due are already in poor shape, the agency notes.

"Ten loans maturing this quarter are already in default and special servicing due to covenant breaches and payment defaults," explains Mario Schmidt, associate director in Fitch's EMEA CMBS team.

As in the previous quarter, the first month is a potentially volatile one, with 24 CMBS loans coming due - before seeing a bit of a reprieve for the remainder of the quarter (three loans mature in August and September). Of the 27 loans that came due last quarter, only five have repaid in full, with standstill agreements in place for most of the remaining loans.

While Fitch's Maturity Index has been on an upwards trajectory - increasing to 52.8% last quarter from 46.9% in 1Q13 - this is partly because maturity dates for loans that are extended are pushed back. And, given the steady shift in maturing loans from the UK to Germany - where servicers are more cautious about accelerating loans - the agency expects many loans to be extended.

CMBS

Pick-up expected in Euro CMBS shortfalls

Moody's expects further interest shortfalls to occur in respect of legacy European CMBS. Note-level interest shortfalls are more likely for transactions with loan-level appraisal-reduction mechanisms and increased loan-level interest shortfalls, as well as substantially reduced loan pools, particularly if issuer level costs are higher on a certain interest payment date.

"Specific transaction structures exacerbate the recently observed interest shortfalls in European CMBS transactions," explains Deniz Yegenaga, a Moody's avp. "While the deteriorating performance of the underlying loan pools is the principal cause of the interest shortfalls, we have classified the drivers of recurring and widely observed interest shortfalls into three major categories: reduced collateral value, which reduces the external liquidity support; defaulting loans, which increase issuer costs; and repayments, which decrease interest income."

Moody's notes that external liquidity facilities contain provisions that limit the maximum amount that the issuer can draw to bridge the temporary cashflow shortfalls of underperforming loans. Thus, the funds available to the issuer can be insufficient to pay note interest.

Issuers face increasing costs if the performance of the underlying loan pool deteriorates and ultimately junior noteholders suffer interest shortfalls. In addition, in some transactions various third-party invoices occur on the same certain payment dates, exerting further strain on cashflows available to pay note interest.

In multi-loan pools with a wide dispersion of underlying loan margins, the repayment or prepayment of the higher-margin loans can immediately decrease the interest income available to the issuer against a fixed-margin liability structure, says Moody's. In addition, with decreasing income from the loan pool, the fixed costs of the issuer may represent a large share of the issuer's income available. Thus, the income might be insufficient to pay the note interest.

Insurance-linked securities

Flexible cat bond debuts

An unusual catastrophe bond, sponsored by AIG, is expected to close next week. Dubbed Tradewynd Re 2013, the transaction features a variable attachment point, designed to provide the sponsor with risk management flexibility.

The US$125m five-year single-tranche of notes is rated single-B plus by S&P and is expected to pay 825bp over the US money market fund yield. Aon Benfield and BNP Paribas are joint bookrunners on the deal, with Aon and GC Securities as joint structuring agents.

The notes cover losses from named storms, earthquakes and ensuing damage caused by related earth shake, fire following and sprinkler leakage, liquefaction, tsunami and ensuing flood that result in claims or liability on a per occurrence basis. For named storms, the covered area comprises: Alabama, Arkansas, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Mississippi, Missouri, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Vermont, Virginia, West Virginia and the District of Columbia, as well as the Gulf of Mexico and the Caribbean. Losses due to earthquakes reported by the US Geological Survey are covered in all 50 states of the US, the District of Columbia and Canada.

The notes cover 25% of losses between the initial attachment level of US$4.5bn and the initial exhaustion level of US$5bn. AIG will be required to retain 5% of the ultimate net loss.

The sponsor has the discretion to increase the risk to noteholders after one year and maintain this level of risk over the remaining four years of the bond. Based on AIR's sensitivity case analysis, the current probability of the bond attaching is 1.71%. AIG can raise this to 2.2%.

S&P says its rating is based on the reset probability of attachment at the highest level. If the attachment point is reset to 2.2%, the coupon on the bonds would increase by an amount that reflects current market conditions plus a margin.

There will be four annual resets, effective on 1 July 2014, 2015, 2016 and 2017.

In addition, S&P notes that Tradewynd Re includes a broad trigger. Events occurring outside the covered area can trigger the bond, so long as they cause damage within the covered area. The composition of insured properties can also change over time.

Finally, the maturity date can be extended for all (or a pro rata portion) of the notes by up to 36 months beyond the scheduled redemption date to allow for loss development and reporting. However, the risk period will not be extended.

Risk Management

RWA consistency examined

The Basel Committee has published its first report on the regulatory consistency of risk-weighted assets (RWAs) for credit risk in the banking book. This study is a part of its wider Regulatory Consistency Assessment Programme (RCAP), which aims to ensure consistent implementation of the Basel 3 framework.

The study draws on supervisory data from over 100 major banks, as well as additional data on sovereign, bank and corporate exposures collected from 32 major international banks as part of a portfolio benchmarking exercise. It finds considerable variation across banks in average RWAs for credit risk in the banking book.

This variation in RWAs can be explained by broad differences in the composition of banks' assets, reflecting differences in risk preferences as intended under the risk-based capital framework, according to the report. However, there is also material variation driven by diversity in bank and supervisory practices.

Through a portfolio benchmarking exercise, meanwhile, the study found a high degree of consistency in banks' assessment of the relative riskiness of obligors. That is, there was a high correlation in how banks rank a portfolio of individual borrowers.

Differences exist, however, in the levels of estimated risk - as expressed in probability of default (PD) and loss-given default (LGD) - that banks assign. These differences drive the variation in risk weights attributable to individual bank practices and could result in the reported capital ratios for some outlier banks varying by as much as 2 percentage points from a 10% risk-based capital ratio benchmark in either direction - although the capital ratios for most banks fall within a narrower range.

Notable outliers are evident in each asset class, with the corporate asset class showing the tightest clustering of banks around a central tendency, and the sovereign asset class showing the greatest variation. The low-default nature of the benchmark portfolios and the consequent challenges in obtaining appropriate data for risk estimation may be one factor contributing to differences across banks, the report suggests, especially for banks' estimates of LGDs in the sovereign and bank asset classes.

The report also includes a preliminary discussion of potential policy options that the Committee could pursue in seeking to minimise excessive practice-based variations. It says it is conscious of the need to ensure that the capital framework retains its risk sensitivity, while at the same time promoting improved comparability of regulatory capital calculations by banks.

Risk Management

Second CVA consultation begins

The European Banking Authority has launched a second consultation on draft regulatory technical standards (RTS) for credit valuation adjustment risk. The aim is to further specify how a proxy spread should be determined for the calculation of own funds requirements and to provide additional details on a limited number of smaller portfolios.

These RTS will be part of the single rulebook designed to enhance regulatory harmonisation in Europe. The consultation runs until 25 September 2013.

The proposed draft RTS do not deal directly with the Value at Risk (VaR) spread methodology, but specify the criteria this methodology has to satisfy to allow for a proxy spread to be used in the calculation of the advanced CVA adjustment. In particular, they specify how the rating, industry and region criteria should be incorporated in a proxy spread.

The EBA is expected to submit these draft RTS to the European Commission for endorsement by 1 January 2014. Before submission to the Commission, the EBA will review the draft RTS to include the feedback arising from the consultation process.

Risk Management

CSA risk review tool offered

eClerx has launched its ISDA Credit Support Annex (CSA) Document Risk Review solution, which aims to allow financial institutions to strategically mine information comprehensively and accurately from CSAs for more informed management of credit and legal risk. The idea is to leverage the data pre-trade to ensure derivative transactions are priced correctly and post-trade to optimise collateral movements across counterparties.

As a result of regulatory mandates, the information in ISDA CSA documents has become critical to firms' credit risk management and planning. On average, more than 65% of agreements contain discrepancies when compared against representations in client systems. The eClerx tool provides access to information clients have legally agreed to but do not have the ability to systematically act upon, due to the unstructured nature of the information embedded within faxed PDF documents and image files.

In addition to the new product, clients will have access to eClerx's existing pre‐validated capture forms, taxonomical database and data capture rule set, as well as an operational reporting suite to govern the process and analytics suited to each consuming department within a financial firm.

Risk Management

Internal audit code released

The Chartered Institute of Internal Auditors (IIA) has published a new code designed to enhance risk management within financial institutions. In line with the recent report of the UK Parliamentary Commission on Banking Standards - which calls for improvements to internal audit's ability to flag concerns about the management of risks as one element in improving the governance and behaviour within banks - the code aims to improve the overall effectiveness of the internal audit function, helping it play a more active role in preventing future problems in the financial services sector.

The new code will provide UK financial services firms with a sector-specific benchmark against which boards and regulators can assess the effectiveness of their internal audit functions. To boost internal audit's role, the code states that the chief internal auditor should have sufficient standing and authority to challenge the executive - a particular area of concern raised by the Banking Standards Commission's report - and communicate its concerns to the board via the appropriate board committees. Another key recommendation is that internal audit should assess whether the organisation's processes and actions are in line with its values, ethics, risk appetite and other policies.

The new code builds on the IIA's existing international standards for best practice internal audit and responds to concerns of many - including the financial services regulators - that expectations of internal audit have been too low. It takes account of guidance issued last year by the Basel Committee and earlier this year by the US Fed.

The code was finalised after an extensive consultation programme. Over 100 submissions were received from industry and other parties in response to the call for comments.

Risk Management

BHC leverage ratio strengthened

The US Fed, the FDIC and the OCC yesterday proposed a rule to strengthen the leverage ratio standards for the largest, most systemically significant US banking organisations. At the same time, the FDIC approved an interim final rule and the OCC approved a final rule identical in substance to the final capital rules issued by the Fed on 2 July (SCI 3 July).

Under the proposed leverage ratio rule, bank holding companies with more than US$700bn in consolidated total assets or US$10trn in assets under custody would be required to maintain a tier 1 capital leverage buffer of at least 2% above the minimum supplementary leverage ratio requirement of 3%, for a total of 5%. Failure to exceed the 5% ratio would subject covered BHCs to restrictions on discretionary bonus payments and capital distributions.

In addition, the proposed rule would require insured depository institutions of covered BHCs to meet a 6% supplementary leverage ratio to be considered 'well capitalised' for prompt corrective action purposes. The agencies are proposing a substantial phase-in period for the rule, with an effective date of 1 January 2018. The NPR has a 60-day public comment period.

Meanwhile, the FDIC's interim final rule allows the agency to seek comment on the interactions between the revised risk-based capital regulations and the proposed strengthening of the leverage requirements for the largest and most systemically significant banking organisations.

RMBS

Freddie credit quality examined

Kroll Bond Rating Agency has published an analysis of Freddie Mac's historical performance data that considers the potential performance of risk-sharing reference pools, given current origination trends. Credit performance of jumbo prime mortgages and Freddie Mac mortgages were found to be highly comparable when controlling for characteristics, such as FICO, LTV, balance and income/asset documentation.

Freddie Mac has released a comprehensive loan-level database that includes origination and performance data for approximately 15.7 million mortgages. An important application of this data is in the analysis of proposed 'risk-sharing' securitisations that Freddie Mac (and Fannie Mae) may issue, KBRA says.

Given that the current private RMBS market for newly originated mortgage loans consists primarily of prime jumbo mortgages, the agency also compared the performance of these loans to the Freddie Mac sample. Among the key findings of the analysis is that Freddie Mac default and loss rates were much higher for vintages that experienced severe home price declines. The worst vintage was 2007, which experienced an estimated aggregate home price decline in excess of 18% with 12.3% of the original vintage balance liquidated to date.

Another key finding is that rapid and significant improvement in credit characteristics sharply curtailed Freddie Mac mortgage liquidation rates, which fell from 8.3% for the 2008 vintage to 0.9% for the 2009 vintage. Current Freddie Mac originations continue to be of very high credit quality, with a weighted average FICO score of 767 and a WA loan-to-value ratio (LTV) of 70% for the 2012 vintage.

"The recently-released Freddie Mac dataset offers valuable insights into the credit characteristics and historical performance of that GSE's collateral throughout the mortgage refinancing boom, the subsequent financial crisis and the current post-crisis environment," KBRA observes. "Comparison to jumbo prime shows great similarities in credit risk between the two products when controlling for loan characteristics. This strongly suggests that the credit analysis tools developed for analysing jumbo prime loans can be productively applied to agency mortgages."

RMBS

Social housing arrears jump on 'bedroom tax'

The UK National Housing Federation has published a report showing the impact of the government's controversial 'bedroom tax' on housing association arrears in Merseyside. First impressions suggest that the reduction in housing benefit is having a negative impact on housing association bonds, with the step-change in arrears as high as that seen in peripheral European RMBS between 2010 and 2011.

In the first four weeks since the change to housing benefit was implemented in April 2013, 14,197 households moved into arrears with their rent. For about 6,000 of these households, this was their first time in arrears. Given there are around 140,000 housing association homes in Merseyside, Barclays Capital ABS analysts estimate that this represents arrears of 10% for total households, of which 4% have entered arrears for the first time.

The Barcap analysts anticipate that housing association bonds with interest cover that is less than 1x will be softer on the back of this report. However, housing association bonds with good levels of interest cover - such as Affinity Sutton, Sanctuary and Places for People secured bonds - should be unaffected by such an increase in arrears from a credit perspective.

The bedroom tax - otherwise known as 'under occupation rules' - had been expected to increase tenant turnover, as well as potentially increasing arrears. Social housing tenants with one or more unused bedrooms had their housing benefit cut in April and have either had to pay extra money to rent a property with an unused bedroom or move to a smaller property.

In addition to difficulties paying for this increase in rent, housing associations have drawn attention to the shortage of housing with one or two bedrooms, making it difficult for those choosing to move to a smaller property. The National Housing Federation estimates that the bedroom tax cuts an average of £14 a week from a household with one spare room and £25 a week for those with two or more spare rooms.

RMBS

Repeat Bankia tender under way

Bankia has announced a tender offer for 17 senior Spanish RMBS tranches - across 12 2004-2007 vintage CAJAM, BCJAF and BCJAM transactions - in a repeat exercise of its previous offering for the same bonds last year (SCI 28 March 2012). The bank is offering to repurchase up to €500m of paper, half of what it had planned in its 2012 tender offer.

Similar to the 2012 offer, Bankia's latest tender will occur by way of an unmodified Dutch auction. The minimum purchase price for the bonds ranges between 67 and 94, according to Barclays Capital figures, compared to 60-91 a year ago.

In the previous tender Bankia repurchased €1.37bn - more than it had initially targeted - with the offering being one of the most successful in 2012. Investors reportedly offered to tender €2.38bn across the tranches. Of the bonds tendered, the CAJAM 2006-2, CAJAM 2007-3 and BCJAF A3 tranches were ultimately not accepted.

The latest tender offer expires on 17 July, with the results announced the following day.