News Analysis
Risk Management
Risk and reward
Leveraged credit investing becoming more complex?
Risk appetite for leveraged diversified credit is rising with the hunt for yield. But, at the same time, the infrastructure required to access the sector has become more complex.
Quantifi ceo Rohan Douglas confirms that credit has become the focus from both a risk and investment perspective. "Asset managers are under pressure to broaden their asset class and geographical coverage to chase yield. The asset management business is becoming more competitive and increasingly focusing on return."
He points to the recent growth in CDS index option volumes as one indication of rising risk appetite. DTCC data suggests that trading of the instruments increased by over 40% to US$98.8bn last month.
Angie Long, cio at Palmer Square Capital, notes that the increase in liquidity for CDS index options over the last few months is positive. "Higher volumes and greater participation mean that bid/offer spreads are now at a level where the buy-side can easily trade them. Transaction costs were prohibitively high previously."
Other ways of expressing a view in leveraged diversified credit that are gaining traction include standardised tranches of the on-the-run CDS indices and credit index futures. Details about composition changes and the structure of the contract are still being released for the latter product, albeit greater clarity is anticipated by the autumn.
Long welcomes the development of credit index futures as another way of bringing credit into the mainstream. "Futures are an efficient way to trade credit - providing the potential for tracking errors is well understood - given the ability to trade in smaller sizes," she says. "From our perspective, whether to trade futures on the long or short side will depend on the level at which the index trades. As new products come online, it makes sense to understand their benefits and weaknesses and trade around them."
Douglas believes that if the new contracts are successful, they could pave the way for other products to move closer to the OTC market, such as life insurance.
He adds that there is growing interest in broadly applying the techniques and technology of high-frequency trading to credit. But, at the same time, the infrastructure required to achieve this is becoming more demanding.
"The focus on risk is increasing because the world has become more complex," Douglas explains. "Credit market participants are faced with a variety of different choices, the costs of which aren't transparent. Ironically, there are high costs associated with central clearing, which aren't always obvious."
Long points out that there are growing pains each time there is a change in the market. "When the clearing rules became effective on 10 June, for instance, it took market participants a couple of weeks to get used to the additional reporting and so on that is required," she explains. "Since then, the market has been through a period of intense volatility - the highest volatility in 18 months - due to the Fed's taper talk and it was handled extremely well. The high volumes that were seen indicate that the new regulations are working fine."
Profitability analysis - in other words, calculating what a trade really costs - is nevertheless the current hot-button issue. Counterparty risk charges, such as CVA and FVA, and RWA regulatory charges depend on who your counterparty is, where you're clearing the trade and what type of trade it is. Pre-trade tools are increasingly being deployed to work out the real cost of posting collateral, for instance.
Long reckons that whether the new regulations have increased the costs of posting collateral depends on the size of the end-user. "For really small shops, the regulatory changes are beneficial; for big firms, they're detrimental. But it's about the same for firms in the middle," she observes.
Instead of posting collateral, corporate end-users could decide to use a CSA. Either way, given that some banks charge corporate clients RWA, Douglas argues that transparency needs to increase around breaking out the different costs embedded in the CVA charge.
"New regulations are designed to increase transparency. But, even if a bank discloses the different price components of the CVA charge, it still isn't clear what each component means," he says.
He continues: "The process isn't standardised because every bank approaches it in a different way. While there is consistency in how CVA is calculated, variations remain in how it's reported."
Given the regulatory push to simplify the market, another irony is that front office technology is becoming more complex and sophisticated. In particular, many banks have invested heavily in clearing connectivity and supporting real-time calculations. And although bank deleveraging has expanded the pool of experienced people available to recruit, disparity remains in the sophistication of sell- and buy-side participants.
Meanwhile, sophisticated banks aren't being rewarded for cultivating a risk culture. A recent study under the Regulatory Assessment Consistency Programme (SCI 8 July) indicates a circa 20% variation in the internal ratings-based approaches used to estimate credit risk across various investments among different banks, for example.
Douglas suggests that regulators and shareholders should encourage less sophisticated banks to step up their risk management efforts, as well as push to level the playing field in terms of how big and small banks report leverage and capital ratios. The idea is to simplify bank reporting, so that shareholders and investors can understand how well banks are managing their risk.
Further to this aim, it is crucial that regulation is aligned, according to Douglas. "The uneven enforcement of regulation creates uncertainty - the slightest difference in detail has unintended consequences. For example, the EU has exempted corporates from the CVA charge, but now it appears to be revisiting this decision."
He concludes: "The industry is still figuring out the cost of regulation to capital: once it does, many business lines are likely to be restructured or wound down because they have become non-core. While the market is awash with liquidity at the moment, the funding landscape might be significantly different in the future. This will be the next shoe to drop."
CS
back to top
Market Reports
ABS
Auto, aircraft ABS attract attention
Supply picked up yesterday and the US ABS secondary market saw a good variety of paper out for the bid. ABS BWIC volume increased to US$106m during the session, from only US$18m on Monday, with auto, aircraft and container bonds all circulating.
The up-tick in volume came even as much of the market's attention was focused on primary issuance. Over US$3bn of new issue volume was announced yesterday across deals backed by auto, credit card and student loan collateral.
Much of the secondary activity was focused on auto paper, with A3 bonds proving particularly popular. For instance, ALLYA 2011-3 A3 was talked in the 20 area, while both FORDL 2011-A A3 and WOLS 2011-A A3 were talked in the high-teens.
The NALT 2011-A A3 tranche was also out for the bid and talked in the high-teens. That tranche had been talked in the high-singles in March and covered at plus 6bp last October.
A couple of aircraft bonds were covered yesterday, such as TAF 1A A1, which was talked in the low/mid-50s and traded during the session. It was last covered at 61 on 11 April.
AIRPT 2001-1A A9 was talked in the mid/high-30s and also traded successfully during the session. The bond had also been talked in the mid/high-30s at the start of this week and the end of last week, having first appeared in the PriceABS archive on 30 May 2012, when it was talked in the low-60s.
Finally, a couple of container ABS bonds - CLIF 2013-1A NOTE and TAL 2013-1A A - were each talked in the low-200s during the session. The TAL tranche had been covered at plus 194bp on 8 May and on 6 May. Before that, it was covered at 175 on 3 April.
JL
Market Reports
Structured Finance
Euro CLO activity up
European CLO market participants spent yesterday poring over an ABS CDO BWIC, which came out late in the day. Meanwhile, in the primary market the recently-priced Cadogan Square CLO V has sparked some debate.
Yesterday's CDO bid-list traded well, according to one trader. It included names such as CAVSQ 1 A2, CAVSQ 1 B, CAVSQ 1 C, FAXT 2004-1X S and RENOR 1 IN - all of which appear in SCI's PriceABS archive.
CAVSQ 1 A2 was talked in the low-30s and covered in the low-40s, CAVSQ 1 B was talked in the low/mid-20s and covered in the mid-20s and the CAVSQ 1 C tranche was talked in the high-teens to low-20s and covered in the low-20s. FAXT 2004-1X S was also talked in the high-teens to low-20s but covered in the very high-40s, while RENOR 1 IN was talked in the very, very low-single-digits and covered in the singles.
Spanish CLO tranches have also been popular this week and a couple more surfaced yesterday, such as BBVAP 3 B and CMBAN 1 C. The former was talked in the low-90s and mid-90s, while the latter was talked in the low-70s and low/mid-70s.
In the primary market, meanwhile, Credit Suisse priced its €309.25m Cadogan Square CLO V deal. The triple-As printed at plus 135bp, although the trader notes that the mezzanine portion continues to be the toughest piece to sell.
"It is an issue of pricing. Mezz widened out a couple of weeks ago and then tightened back in. It is now wider than it was again, but the dealers are keen to see it get tighter," says the trader.
He continues: "However, you never know what the discounts are going to be. You really need double-Bs to be at least 700bp and for CSAM they are at plus 525bp. Considering US CLO double-Bs are in the 600s, the European ones should be wider than that."
The trader notes that Ares' European double-Bs are being talked at tighter levels than the manager's US double-Bs. He speculates that while this may be part of a push from dealers to tighten mezz spreads, it is unlikely to be successful.
Another noteworthy aspect of the Cadogan Square deal is that Moody's was the only rating agency to rate the entirety of the capital structure. "What is unusual here is that Moody's has typically been quite punitive on CLOs and people have been avoiding using them. Cadogan Square has much higher diversity than other deals though and in this case I think Moody's is the agency most likely to apply benefit to that diversity," says the trader.
He continues: "This deal has been designed for the equity and the manager is going to be managing for the equity. It is looking for a very high return, so we will see what the true price for mezz is."
Pricing in the primary market was being led by equity buyers, but it is now the triple-A investors that are dictating terms. There are very few active buyers, so it has become more important to accommodate them.
Further issuance is expected soon as deals are brought out in advance of September. ICG and Pramerica are predicted to be among the next to launch transactions.
"I have heard mixed things about Pramerica's deal Pinewood CLO 2013-1. Last week the word was that the manager was struggling to sell it because it has some fixed-rate tranches, but a couple of days ago I was told it was going well, which suggests the deal is coming soon," says the trader.
He continues: "Pramerica bought a portfolio off Investec and there were a lot of UK loans in there, which are not the best for a CLO. Pramerica did a lot of cherry picking in order to manage the deal and my understanding is they have managed to pick good assets."
JL
Market Reports
RMBS
RMBS dominates quiet session
US secondary RMBS proved the most active sector in an unusually quiet session yesterday. ABS and CMBS BWIC volume totalled US$100m between them, while US RMBS topped US$500m.
Non-agency paper accounted for more than half of that RMBS supply. However, as SCI's PriceABS data shows, several of those tranches did not trade.
In the prime fixed space, the CSMC 2006-8 3A1 tranche was talked in the low/mid-90s, but failed to trade. The same tranche was talked on 17 July 2012 in the low/mid-80s.
Another prime fixed CSMC tranche - CSMC 2006-2 5A6 - was talked in the low/mid-70s and high-70s, but also failed to trade. CSMC 13-8R 2A1 and CSMC 13-8R 3A1 were also out for the bid, talked in the mid-90s and low/mid-90s respectively.
Alt-A fixed paper outweighed prime during the session. CWALT 2007-15CB A5 was talked in the mid-80s and covered in the low/mid-80s, having been talked in the low/mid-90s two months ago.
As for hybrid paper, CMLTI 2005-7 2A1A was talked in the mid/high-90s and covered in the mid-90s, while INDX 2006-AR12 A1 was talked in the 80 area and very low-80s. In July last year the latter bond was talked in the low/mid-60s.
Slightly more subprime supply was observed than for other product types, although volume was still lower than last week's. There were more DNTs here too, such as OOMLT 2005-4 M1, which had been talked in the mid/high-80s.
The HASC 2006-OPT2 M2 tranche was talked in the high-60s, but also failed to trade. Talk earlier in the month was in the low/mid-70s and on 9 May was in the low/mid-80s.
SAST 2006-2 A3C, however, was successfully covered at mid-85. The tranche was talked in the mid-80s and mid/high-80s, having been talked in the mid-90s two months ago.
JL
News
Structured Finance
SCI Start the Week - 15 July
A look at the major activity in structured finance over the past seven days
Pipeline
The mix of deals added to the pipeline last week was skewed towards CMBS and CLOs. Only one ABS (US$1bn Volkswagen Auto Lease Trust 2013-A) and one RMBS (US$440m NRP Mortgage Trust 2013-1) began marketing, with five CMBS and four CLOs joining them.
The CMBS comprised: US$600m CGBAM 2013-BREH; US$1.54bn FREMF 2013-K29; US$1.3bn GSMS 2013-GC13; US$70m JPMCC 2013-ACMZ; and €1.409bn WFCM 2013-LC12. The CLOs were: US$500m Golub Capital Partners CLO 16; US$400m Highbridge CLO 2013-2; US$400m Ocean Trails IV; and US$407.5m Tall Tree CLO 2013-1.
Pricings
A more even distribution of deals printed last week, however. New issuance comprised three ABS, three RMBS, one CMBS and four CLOs.
Those ABS came from Australia, the US and Europe: A$400m CNH Capital Australia Receivables Trust Series 2013-1; US$842.31m Santander Drive Auto Receivables Trust 2013-4; and €606m SC Germany Auto 2013-2. All of the RMBS (€1.765bn Hypenn RMBS I, €1.917bn Lowland Mortgage Backed Securities No.2 and €2.2bn Marche Mutui 6) were European, as was the CMBS - the £260m Debussy DTC 2013.
Finally, the CLOs were: US$500m Ares Enhanced Loan Investment Strategy IR; €1.569bn Berica PMI; €309.26m Cadogan Square CLO V; and US$362.7m Telos 2013-4 CLO.
Markets
The US agency RMBS market largely outperformed last week. Wells Fargo RMBS analysts note that the belly and top of the stacks soundly beat their hedges.
"Down-in-coupon conventional 30-year 3.0s and 3.5s fared the best, followed by solid tightening in the belly production coupons. Conversely, the more HARP-exposed up-in-coupons - 5.0s and higher - actually lagged and underperformed mildly versus Treasuries and swaps," they add.
The non-agency RMBS market started the week quietly before coming back strongly on Tuesday, as SCI reported on 10 July. Supply for Tuesday's session was elevated across fixed, hybrid and subprime paper.
US CMBS spreads also recovered strongly mid-week, after encouragement from Federal Reserve chairman Ben Bernanke. Generic 2007 vintage dupers and AMs ended Thursday 5bp tighter than the previous week's close, at plus 125bp and plus 245bp respectively, according to Barclays Capital analysts.
BWIC volume was up in the US CLO market, meanwhile, with about US$570bn of bonds circulating. Bonds offered ranged from triple-A down to single-B, say Bank of America Merrill Lynch analysts, with around 20% not trading.
"The market tone improved towards the end of the week, with a wide variety of accounts coming into the market to look for cheap bonds. Tightening was seen in single-A to double-B tranches and 1.0 spreads concluded the week at 120bp, 160bp, 240bp, 325bp and 575bp," they say.
Spanish tranches remained popular in the European CLO market, while an ABS CDO BWIC on Thursday also had participants talking, as SCI reported on 12 July. SCI's PriceABS data shows a range of names from that BWIC, including CAVSQ 1 A2 and RENOR 1 IN.
Deal news
• The GSEs began liquidating their holdings earlier this year (SCI passim), with Freddie Mac selling around US$1bn in private label RMBS in May and Fannie Mae unloading about US$2bn in CMBS. Another US$1.1bn RMBS list - thought to be from Fannie or Freddie, although no formal announcement has been made - traded on 11 July.
• 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.
• Fitch has released an unsolicited comment on NRP Mortgage Trust 2013-1, Nomura Corporate Funding Americas's new prime RMBS. The transaction has insufficient credit enhancement to achieve a triple-A rating, according to the agency.
• Australian lender Pepper has announced an unsolicited bid for RHG (formerly RAMS Home Loans), which is currently in wind-down. Moody's suggests that a takeover by either Resimac or Pepper would be credit positive for outstanding RHG RMBS.
• 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.
Regulatory update
• The US Fed, the FDIC and the OCC have 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).
• The US Fed, the CFPB, the FDIC, the FHFA, the NCUA and the OCC have issued a proposed rule that would create exemptions from certain appraisal requirements for a subset of higher-priced mortgage loans. The proposed exemptions are intended to save borrowers time and money, as well as promote the safety and soundness of creditors.
• The recent Flagstar (SCI 4 April) and Countrywide (SCI 7 May) rulings indicate an increased willingness of courts to allow statistical sampling as evidence of pool-wide breaches of MBS representations and warranties. However, the cases also open up many questions regarding statistics and evidence, according to NewOak Capital.
• ESMA has released a discussion paper in preparation for the regulatory technical standards (RTS) that will implement provisions of EMIR regarding the obligation to centrally clear OTC derivatives. The aim of the consultation is to determine which classes of OTC derivatives need to be centrally cleared and the phase-in periods for the counterparties concerned.
• The EBA has launched a public consultation on draft regulatory technical standards (RTS) that set out the requirements related to prudent valuation adjustments of fair valued positions. The objective of these draft RTS is to determine prudent values that can achieve an appropriate degree of certainty while taking into account the dynamic nature of trading book positions.
• 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.
• Covered bond programmes from CIBC and RBC have become the first to be registered under the Canada Mortgage and Housing Corporation's (CMHC) new legal framework for covered bonds. Their approval follows updates on 27 June to CMHC's regulations for covered bonds.
• 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 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 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.
• 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.
Deals added to the SCI database last week:
Albion No. 2; COMM 2013-CCRE9; Horizon Funding Trust 2013-1; Mona Lisa Re series 2013-2; Orange Lion 2013-10 RMBS
Deals added to the SCI CMBS Loan Events database last week:
BACM 2004-1; BACM 2006-4; BSCMS 2007-BBA8; CD 2006-CD3; CSMC 2006-C3; CSMC 2007-C4; CSMC 2007-C5; DBUBS 2011-LC2; ECLIP 2006-3; ECLIP 2007-1; EPICP AYTN; EPICP DRUM; EURO 25; EURO 27; GCCFC 2005-GG5; GECMC 2004-C2; GMACC 2003-C3; GRF 2006-1; GRND 1; GSMS 2004-GG2; JPMCC 2005-LDP4; JPMCC 2006-LDP8 & JPMCC 2006-CB16; LBUBS 2006-C7; MLMT 2007-C1 & BSCMS 2007-PW17; MSC 2005-IQ10; OPERA CMH; TITN 2007-2; WBCMT 2007-C32
Top stories to come in SCI:
CLO structuring innovations
Basel 3 developments
News
CDS
Further CDS definitions details emerge
ISDA has released new information on the implementation of its revised credit derivatives definitions (SCI passim). The association expects the documentation to be in place in order for contracts using the new definitions to begin trading on 20 March 2014.
Before the definitions are finalised, a draft will be circulated to both ISDA's credit derivatives market practice committee and its documentation committee for comments. Certain elements, such as a new bail-in credit event (SCI 24 May), have already been circulated for feedback.
The bail-in credit event would only apply for new transactions on bank entities. It would be triggered by a government initiated bail-in of debt that is not subordinated to the reference obligation. The changes also include a provision that senior and subordinated debt will be tracked separately for the purposes of determining successor reference entities.
For sovereign reference entities, it is proposed that there should be the ability to settle a credit event by delivery of assets other than the currently defined deliverable obligations. The change would allow a CDS contract to be settled on the basis of an 'asset package', into which pre-identified benchmark bonds of the sovereign are converted on a credit event, so as to avoid a situation where sovereign bonds are restructured to be non-deliverable.
With Solvency II in mind, changes are also being considered for the issuance structures of subordinated debt issued by European insurers. However, no firm proposals are yet in place.
Many changes would apply globally, such as for restructuring credit events. For example, a credit event notice will no longer be required to trigger settlement after a Determinations Committee credit event announcement. Additionally, there will be provision for legally binding bond exchanges to trigger restructuring, as well as more clarification on the impact of a currency redenomination in relation to a restructuring.
ISDA says it is also considering proposals to amend Mod R/Mod Mod R settlement. This might entail reducing the number of maturity buckets and removing the need for enabling obligations.
Another change would be the introduction of standard reference obligations for more frequently-traded reference entities, which would apply to existing trades. This would standardise the procedures and standards for selecting a replacement reference obligation if the existing one is redeemed.
Furthermore, changes are anticipated to apply to successor provisions - such as a universal successor concept to allow a successor to be identified, even if the succession is not raised within the 90-day look-back period, in circumstances where a reference entity transfers the bulk of its assets and liabilities to another entity before ceasing to exist. When dealing with a non-sovereign entity, the removal of the need for a succession event to occur over and above the transfer of a sufficient amount of debt obligations to determine a successor is also proposed.
Other successor provision amendment suggestions include the introduction of a 'related event' concept in the wake of the removal of the succession event requirement for non-sovereign entities. This concept would specify when multiple debt transfers over a period of time should be aggregated to determine the proportion of debt that has moved to new entities. There would also be amendments to the sovereign successor provisions to bring them in line with non-sovereign debt transfer thresholds.
Meanwhile, technical changes to ISDA's qualifying guarantee definition are proposed, including release provisions for the transfer of assets and liabilities of a guarantor and details concerning caps on a guarantor's liability. There is also a proposal to clarify that statutory guarantees can be qualifying guarantees.
In addition, technical amendments have been suggested for bankruptcy credit events. One of these is that current references to 'consolidation, amalgamation or merger' should instead refer to circumstances in which a successor could be determined.
Finally, changes are being considered in connection with outstanding principal balance, deliverable obligation characteristics, Section 4.1 and Article I and III. With respect to Articles I and III, ISDA recommends that the process for triggering settlement should be clarified and simplified to reflect market-standard contracts.
JL
News
RMBS
REIT sales exacerbating MBS volatility?
US agency mortgage REITs have had to deleverage by US$29bn in MBS since 31 March, according to Deutsche Bank estimates. Under stress scenarios where the yield curve steepens further and MBS spreads widen, MBS analysts at the bank suggest that an additional US$12bn-US$23bn of deleveraging might be necessary, putting significant further pressure on pricing.
REITs have become an important part of the MBS market, not only because of the assets they hold, but also how they hedge them. Based on a novel approach to modelling REIT exposure to changes in rates, the Deutsche Bank analysts find that a steeper curve and wider MBS spreads could spur significant deleveraging across the sector.
For context, the US$29bn equates to roughly US$16bn of estimated 10-year equivalents. Given the composition of the REIT universe, the analysts expect the majority of sales to be in 30-year pass-throughs and specified pools in 3.5% and 4% coupons. In specifieds, both loan balance and MHA paper could be sold, as they are a significant portion of REITs' 30-year holdings.
The Deutsche Bank approach used the public filings of the largest REITs to build a model portfolio of assets and liabilities. The portfolio roughly matches the risk profile of the average REIT, allowing the analysts to estimate performance as rates, spreads and volatility moved since end-March. The approach also allowed them to stress the portfolio and estimate the need for further REIT deleveraging if rates continue to rise and spreads continue to widen.
The analysis indicates that REITs have likely spun off material flows in MBS and contributed to some of the widening and basis volatility in MBS. "Aggregate REIT deleveraging in the second quarter looks like it is equivalent to nearly 16% of the estimated delta hedging from mortgage servicers, making REITs a force worth monitoring," the analysts conclude.
CS
News
RMBS
Large list looks like GSE sell-off
Non-agency US RMBS have largely held on to their year-to-date gains, despite the uncertainty caused by suggestions of Fed tapering, whereas Treasuries and agency RMBS have been more strongly affected. The relative outperformance could open the door for the GSEs to liquidate their legacy holdings while market levels remain elevated, with a large list due out today.
Benchmark 10-year Treasury rates have risen by almost 100bp since the beginning of May, while FNMA 30-year 3% TBA prices have dropped more than eight points. In contrast, Interactive Data reports that evaluated prices for more credit-sensitive legacy non-agencies have largely held on to their gains, with higher beta bonds leading the charge.
The GSEs began liquidating their holdings earlier this year (SCI passim), with Freddie Mac selling around US$1bn in private label RMBS in May and Fannie Mae unloading about US$2bn in CMBS. Both lists were well received and another US$1.1bn RMBS list - thought to be from Fannie or Freddie, although no formal announcement has been made - is due to trade today.
IDC notes that there are several reasons to believe this list has been released by one of the GSEs, not least the fact that most of the securities are block-sized and 32 of the 41 line items comprise an entire tranche. Bidding instructions are also similar to Freddie's previous list.
The May list consisted mainly of subprime (US$302.2m), Alt-A hybrid (US$314.8m) and prime hybrid (US$322.2m) securities, with a small amount of prime fixed-rate paper (US$89.8m). Today's list is again approximately equal-parts subprime (US$462.1m), Alt-A hybrid (US$389m) and prime hybrid (US$323.8m) collateral, with a small amount of Alt-A fixed (US$68.4m) and POA (US$25.9m) securities.
"Bond quality appears to be slightly higher for [today's] list from a credit rating perspective, with most line items and the far majority of current face being investment grade-rated. In contrast, the [May] list contained slightly less than one-third in non-investment grade-rated paper," comments IDC.
Average evaluated pricing for this list is 97.3, slightly higher than the 96.6 for May's list. The bonds on both lists are mostly either floating-rate or hybrid (WAC) coupons.
Price talk distribution on the list has been fairly tight, with an average range of roughly three points, although for some lines there are differences of as much as 10 points. However, these latter tranches are generally small in size and therefore may be seen as less marketable from an institutional perspective.
JL
Job Swaps
Structured Finance
Rating agency expands European footprint
Moody's is opening an office in Warsaw as Poland's regional significance continues to grow. The agency has named Anna Jelowicka as general manager of Moody's Poland.
Jelowicka will lead Moody's operations in the country and take responsibility for directing and coordinating the rating agency's activities and managing key customer relationships. She has been with Moody's for six years, having previously spent a decade at Reuters, where she was an account manager.
Job Swaps
Structured Finance
PE firm buys into credit advisor
Dyal Capital Partners has agreed to acquire a passive interest in Waterfall Asset Management from the latter's original seed investor. Waterfall co-founders Jack Ross and Thomas Capasse will continue to lead the firm and control its operations and investment process.
As part of the transaction, Waterfall's principals will significantly increase their ownership over time. Kleinberg, Kaplan, Wolff & Cohen advised on the innovative deal structure and the transaction is expected to close later this quarter.
Job Swaps
Structured Finance
Alternative investment platform launched
An independent investment platform has been launched for investors and hedge fund managers. Dubbed ClearVest, the platform offers a total portfolio solution with what is described as an intelligent interface between a diversified offering of alternative managers, world-class research, institutional quality infrastructure and leading-edge technology.
ClearVest was founded by HedgeACT (which will provide the technology backbone), The Alpha Cooperative (which will provide personnel, risk management, middle- and back-office services) and Clearbrook Global Advisors (which will provide proprietary research and due diligence capabilities via an exclusive licensing agreement). The platform will launch with over 30 alternative investment managers, two-thirds of whom are not currently accessible on any other platform.
Users will be able to access a customised managed account solution with state-of-the-art infrastructure, including daily position reconciliation, daily risk monitoring and reporting, performance analytics, NAV calculation and complete investor reporting.
Job Swaps
Structured Finance
SME loan fund prepped
Tikehau IM has been selected to manage a loan fund targeting SMEs, following a request for proposal initiated by the Caisse des Dépôts et Consignations (CDC), the Fédération Française des Sociétés d'Assurances (FFSA) and 18 institutional investors. The fund - created at the initiative of insurance companies and the CDC - aims to provide loans to SMEs by directing available savings to growing companies.
Job Swaps
Structured Finance
Securitisation trading director joins
HSBC has appointed Eugene Gorelik as director for securitisation trading. He is based in London and forms part of the bank's efforts to grow its credit business in the region.
Gorelik previously traded ABS at Credit Suisse, also in London. Before that he was based in New York, working first for Cadwalader and then for Goldman Sachs.
Job Swaps
Structured Finance
Repo specialist brought on board
Rule Financial has appointed Catherine Houston as principal consultant in its domain group. She joins from RBS and will be based in London, reporting to domain group head Jim Warburton.
Houston has over 21 years of experience in financial services and specialises in operational processing and repo. Before RBS she was at ABN Amro, Dresdner Kleinwort Wasserstein and Goldman Sachs.
Job Swaps
Structured Finance
Tullett data deal expanded
S&P Capital IQ has come to a strategic agreement with Tullett Prebon Information (TPI). The deal covers broad use rights across all business units and divisions of its parent company McGraw Hill Financial and provides for expansive use and redistribution of TPI data.
TPI has historically provided S&P Capital IQ with OTC inter-dealer broker data but now all McGraw Hill companies will be able to utilise various TPI datasets - including RMBS and IRS - both internally and externally. The agreement also allows for the creation of derivative works and redistribution.
Job Swaps
Structured Finance
Bank forms CRE unit, names SF head
Opus Bank has created a new commercial real estate banking (CREB) division, comprised of its income property banking (IPB) and structured finance divisions. Dan Borland, IPB president since Opus' inception, has been named as CREB president and head of structured finance.
Prior to joining Opus Borland held senior positions at JPMorgan, Washington Mutual and Wells Fargo. Ed Padilla replaces him as head of IPB.
Job Swaps
CDS
Further antitrust suit brought
Four Danish pension funds have filed a lawsuit against a group of banks which they accuse of blocking the entry of exchanges into the CDS market. All of the accused are also subject to an antitrust investigation by the European Commission (SCI 1 July) and a separate lawsuit brought by a US pension fund (SCI 7 May).
This lawsuit is being brought by Unipension Fondsmaeglerselskab, Arkitekternes Pensionskasse, MP Pension - Pensionskassen for Magistre & Psykologer and Pensionskassen for Jordbrugsakademikere & Dyrlaeger. The case has been filed in the US District Court of the Northern District of Illinois.
The banks accused are Bank of America Merrill Lynch, Barclays, BNP Paribas, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley, RBS and UBS. Markit and ISDA are also listed as defendants in the case.
The funds allege that the dealers used their ownership and controls over clearing, data and other entities crucial to the market to block an independent clearinghouse from offering exchange-trading. By doing so, they denied market participants real-time price information and stopped new participants from entering the market, increasing costs for investors.
Job Swaps
CMBS
Large CRE transfer agreed
Commerzbank has agreed to sell its UK commercial real estate portfolio to a consortium comprising Wells Fargo and Lone Star Funds. The transaction includes €5bn in CRE loans as well as the relevant interest rate and currency hedging derivatives.
Also included in the transaction is the entire operational business of Hypothekenbank Frankfurt - formerly Eurohypo - in the UK. The employees are being transferred to Wells Fargo in the framework of their existing employment contracts.
Job Swaps
Insurance-linked securities
Hiscox strengthens ILS capabilities
Hiscox Re has named Michael Jedraszak as ILS director in London, responsible for overseeing Hiscox's strategy and planning around ILS. Jedraszak has been at Hiscox for eight years and will retain key strategic influence in the firm's international business until a new leader for that unit is appointed.
Job Swaps
Risk Management
Risk management specialist added
Twelve Capital has added Markus Stricker as risk management partner. As well as taking responsibility for risk management he will help to further drive the development of Twelve Capital's proprietary analytical tools.
Stricker has previously worked at SwissRe and Aon ReSolution and has consulting experience from roles at companies such as Tower Perrin Tillinghast. His most recent position was as vice chairman at research firm Risk Lighthouse.
Job Swaps
RMBS
NCUA RMBS action dismissed
A federal court in Kansas has dismissed an action by the NCUA against Barclays Capital as time-barred. The lawsuit was filed last year, alleging US$555m of RMBS was misrepresented when it was sold to the US Central and Western Corporate credit unions.
According to a Lowenstein Sandler memo, in dismissing the action as untimely the court relied on a recent decision in a different NCUA action to conclude that an 'extender statute', which provides for when claims can be brought by the NCUA as conservator or liquidator, cannot be tolled by an agreement executed between the parties. The court reasoned that the language in the extender statute was clearly intended to limit the NCUA's ability to bring claims.
Job Swaps
RMBS
Suit alleges ratings fraud
Liquidators of two Bear Stearns funds have filed a lawsuit in the New York Supreme Court against McGraw Hill Financial, Moody's Corp and Fitch Group. They are seeking more than US$1bn for fraudulent investment ratings on RMBS and CDOs.
The liquidators of Bear Stearns High-Grade Structured Credit Strategies (Overseas) and Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage (Overseas) allege that S&P, Moody's and Fitch intentionally misrepresented information concerning their independence, the accuracy of their ratings, the quality of their models and the extent of their surveillance. A Lowenstein Sandler client memo notes that the liquidators are seeking US$1.12bn in damages as well as punitive damages.
Job Swaps
RMBS
RHG takeover bids eyed
Australian lender Pepper has announced an unsolicited bid for RHG (formerly RAMS Home Loans), which is currently in wind-down. Meanwhile, RHG's board of directors has recommended that its shareholders accept a takeover proposal from former RHG director Trevor Loewensohn and Resimac.
Moody's suggests in its latest Credit Outlook, that a takeover by either Resimac or Pepper would be credit positive for outstanding RHG RMBS because both companies can service the mortgages themselves, whereas RHG delegates servicing to a third-party servicer. The takeover would also be credit positive for Resimac or Pepper because it would provide the companies with an additional source of income and expand its market share of residential mortgage borrowers.
With two rival bid offers, the takeover is likely to go ahead, according to Moody's. The takeover offer from Resimac received a strong endorsement from RHG's board of directors, particularly since the shareholders were offered 44 cents per share, an 11% premium relative to the weighted average share price over 30 days leading up to 5 July.
RHG delegates its servicing role to a third-party servicer, Unisys Mortgage Processing (RHG), on a renewable contract basis. However, Unisys can choose not to renew the contract, if for example it is no longer profitable to service the RHG portfolio as it winds down and the servicing fee diminishes.
If Unisys does not renew, RHG will have to implement alternative servicing solutions, including establishing an in-house servicing team or finding another third-party servicer. Moody's says that in-house servicing will be challenging for RHG because it will be difficult to cover fixed overhead costs as the mortgage portfolio winds down and the available servicing fee diminishes.
In contrast, Resimac has a mortgage administration and servicing team of 21 people and currently services a residential mortgage portfolio of around 13,000 loans amounting to A$3.3bn. Pepper has a mortgage administration and servicing team of 85 people and currently services a residential mortgage portfolio amounting to A$3.bn.
Based on RHG's financial report as of 13 December 2012, its current mortgage portfolio - including term RMBS and warehouse facilities - is around A$2.3bn. Moody's rates seven outstanding RHG transactions, amounting to around A$612m.
RHG's mortgage portfolio has been in wind-down since 2008, when the company sold its brand name RAMS to Westpac.
News Round-up
ABS
Alternative ABCP liabilities gain traction
Fitch reports that US ABCP conduit sponsors are developing alternative liability structures to minimise the potential increased costs of liquidity under the proposed Basel 3 liquidity coverage requirements. Sponsors are amending ABCP programme documentation to allow for the issuance of callable, puttable-callable and investor-option extendible notes.
"ABCP sponsors are essentially creating liabilities that would allow them to reduce the number of days over which they would be required to calculate expected cash outflows," says Fitch senior director Kevin Corrigan. "In turn, they are reducing the liquidity costs associated with those outflows."
Fitch expects issuance of these liabilities to increase as the structures are vetted and gain traction among ABCP offerings. The agency says it has received feedback from a number of investors who are comfortable with the liabilities and view them as an opportunity to pick up a bit more yield on a credit risk that is commensurate with traditional ABCP.
News Round-up
ABS
SLM cashflows suggest downside protection
In a run-off scenario, expected cashflows from the spun-off businesses of SLM Corp would be sufficient to repay the existing US$17.9bn of senior unsecured debt obligations to be spun off along with the new company, according to Fitch. The agency has undertaken a cashflow analysis of SLM's proposed spin-off, which included three single-factor stress scenarios - higher credit losses on the company's legacy private student portfolio, accelerated return of capital to shareholders, and an inability to securitise unencumbered private student loans.
Fitch estimates that senior unsecured debt will be repaid under each of these scenarios, albeit with less cash cushion in the case of accelerated capital return. On the other hand, the agency believes a combination of these factors would likely pressure the company's ability to repay debt in full.
Nevertheless, the agency believes this cashflow analysis suggests a degree of downside protection to SLM debtholders in a run-off scenario. Ratings assigned to SLM's outstanding debt reflect continued uncertainty regarding the long-term strategic direction of the company to be spun off.
Management has indicated that it does not intend to solely run off the assets and liabilities of the company, but will instead seek growth opportunities in other servicing and collections businesses (SCI 30 May). While these could create additional earnings capacity, they may also introduce incremental risk, according to Fitch.
The new company may also purchase private student loans from SLM Bank to support the brand, which could impact ratings, depending on the purchase details and amount of leverage utilised.
News Round-up
ABS
SLABS hit by counterparty downgrades
S&P has placed on credit watch with negative implications 23 tranches from across a number of student loan ABS transactions. The rating actions follow the recent lowering of its issuer credit ratings on Credit Suisse and Barclays Bank - the swap counterparties for the affected transactions - to single-A from single-A plus.
Twenty tranches from SLM Student Loan Trust 2002-7, 2006-4, 2006-6, 2006-10 and 2007-4 have been impacted, as well as one tranche from SLM Private Credit Student Loan Trust 2007-A and two from SLC Student Loan Trust 2008-1.
S&P's criteria for assessing counterparty risk provide an analytical framework for evaluating the structural features of counterparty obligations. In order to support the maximum rating stated in the criteria, counterparties must meet all of the framework's conditions. Any deficiencies may prompt the agency to lower the ratings to the maximum rating the counterparty can support.
S&P says it will evaluate the potential impact of the swap counterparty downgrade on the notes and expects to complete its review within the next 90 days.
News Round-up
Structured Finance
Hurdles remain for direct lending
Moody's notes in its latest Credit Insight publication that increasing numbers of non-traditional lenders - such as private equity firms, hedge funds and insurance firms -entering the direct lending space is credit positive for SMEs. The move is expected to increase loan supply and stimulate competition between lenders.
Blackstone, KKR, Avenue Capital and CVC Credit Partners have all raised money over the past couple of months to act as lenders to high-yield European corporate borrowers. Large European pension funds are investing close to 1% of their portfolios in leveraged loans, with investments expected to increase to 3% in the next couple of years.
Close to 80% of lending in Europe comes from banks that continue to focus on risk reduction and strengthening their balance sheets through deleveraging in order to meet regulatory requirements. In the next five years, the region could experience a €4trn funding gap as banks continue to be wary of lending to high-yield borrowers.
However, hurdles remain before non-bank lending becomes a true alternative to bank lending, according to Moody's. "The biggest obstacles include creating a direct lending infrastructure, developing local knowledge and facing the traditional illiquidity of the sector. Even though non-traditional lenders will not entirely replace bank lending to SMEs in the short term, they will provide initial access to financing at a time when traditional bank lenders are constrained."
News Round-up
Structured Finance
Inaugural project bond unveiled
The first transaction to be issued under the EU's Europe 2020 Project Bond Initiative hit the market last week. Dubbed Watercraft Capital, the €1.43bn bond will refinance outstanding loans in connection with the construction and operation of an underground gas storage facility off the northern Spanish Mediterranean coast.
Escal UGS (the 'ProjectCo') was granted a 30-year concession by the Spanish government in 2008 for the re-development of Castor - a depleted oilfield reservoir originally exploited in the 1970s-1980s - as a 1.9 billion cubic meter gas storage facility. By injecting and extracting gas into and from this geologically suitable reservoir, the aim is for ProjectCo to modulate and guarantee supply to the Spanish gas system.
The bond benefits from a second-lien secured letter of credit liquidity facility - the Project Bond Credit Enhancement (PBCE) instrument (SCI 29 November 2012) - provided by the European Investment Bank (EIB). The PBCE's maximum available amount will be €200m at issuance and will decrease as the bond amortises, covering a maximum of 20% of the outstanding bond.
This facility can be used under diverse stress scenarios, such as ensuring timely debt service and mandatory partial redemptions. Once used, outstanding PBCE will rank junior to the rated bonds.
S&P has assigned preliminary triple-B ratings to the bond, which was arranged by Santander, Bankia, Caixa Bank, Credit Agricole, Natixis, SG and BNP Paribas. Escal is 66.6% owned by ACS Actividades de Construcción y Servicios and 33.3% owned by CASTOR UGS (controlled by Dundee Energy). Enagas has an option to acquire half of ACS's current stake in ProjectCo upon the definitive commissioning of the asset by the Spanish authorities.
News Round-up
Structured Finance
Strong APAC performance observed
Fitch says that nearly 90% of its Asia-Pacific structured finance rating actions in 2Q13 were affirmations; 8% were upgrades, while just five tranches were downgraded.
Japan saw mixed rating actions during the quarter, with four downgrades, two upgrades and 12 affirmations. All downgrades were attributed to one multi-borrower CMBS transaction.
Australia saw 142 affirmations, reflecting the health of the domestic economy with increased credit enhancement and satisfactory asset performance. Upgrades were recorded in the non-conforming RMBS and non-conforming auto loan ABS sectors, due to increased credit enhancement and/or improved performance of the underlying loans. The only downgrade was to a small balance CMBS, reflecting Fitch's view of a possible default on the notes, given higher-than-expected expenses, low recoveries and low prepayment rates.
Nineteen Indian ABS ratings, five credit card ABS tranches from South Korea and one CMBS tranche from Singapore were also affirmed in the quarter, given satisfactory asset performance, continued build-up in credit enhancement and on-going expectations of economic stability in the region.
Most long-term ratings outstanding have stable outlooks, reflecting strong regional economic performance. Five ratings have negative outlooks and three have positive outlooks.
News Round-up
Structured Finance
Sovereign downgrade hits Italian deals
S&P has lowered its credit ratings on 118 tranches in 91 Italian securitisations. The rating actions follow the agency's 9 July lowering of its unsolicited long-term sovereign credit rating on Italy to triple-B from triple-B plus, due to the effects of further weakening growth on the country's economic structure and resilience, and its impaired monetary transmission mechanism.
Specifically, S&P has lowered its ratings on: 80 tranches in 56 RMBS, 36 tranches in 33 ABS and two tranches in two SME CLOs. The agency's criteria now cap ratings in transactions with underlying assets in Italy at double-A (previously double-A plus).
Among the affected ABS transactions, S&P lowered to triple-B from triple-B plus its ratings on 10 tranches in 10 series issued by Infrastrutture. These ratings are weak-linked to the agency's unsolicited long-term sovereign credit rating on Italy.
News Round-up
Structured Finance
Sovereign downgrade hits French deals
Fitch has downgraded three tranches related to three French structured finance transactions. The action follows the downgrade of France's long-term foreign currency issuer default rating (IDR) to double-A plus from triple-A.
The deals affected by the downgrades are Eole Finance, House of Europe 1 and House of Europe 3. Given their significant exposure to the French sovereign, the affected notes have been downgraded in line with France's rating.
News Round-up
Structured Finance
Call for a 'robust' FASB framework
S&P has responded to FASB's 'Proposed Accounting Standards Update, Financial Instruments - Credit Losses (Subtopic 825-15)'. The rating agency strongly endorses FASB and IASB's joint efforts to improve accounting recognition of financial instrument credit losses by substituting a model capable of accounting for expected risks for the current, incurred-loss model. However, it is concern that the update's present language remains overly broad and lacks a robust framework.
"We believe a forward-looking single measurement approach (such as FASB's CECL model), coupled with comprehensive quantitative and qualitative disclosures will better help analysts evaluate the adequacy of a company's credit loss reserves and provide greater insight into management's credit loss expectations that reside within its existing financial asset portfolios," notes S&P credit analyst Jonathan Nus.
He continues: "Estimation reliability concerns should not stand in the way of improved accounting and financial reporting. We prefer companies to reflect expected credit losses in a timely manner. To the extent management has concerns over the reliability and predictability of forecasted information, we prefer they derive their most informed estimate and disclose the amounts and basis for those estimates."
News Round-up
Structured Finance
RBS novation confirmed
Fitch confirms that there is no rating impact following the novation by RBS NV to RBS plc, ABN AMRO Bank and/or Bank Nederlandse Gemeenten with respect to the roles it covers across any European structured finance transaction. RBS plc notified the agency in May that, as part of the continuing transfers of business activities from RBS NV to RBS plc, it would novate a number of securitisation roles performed by RBS NV in various transactions across asset classes and countries - including liquidity facility provider and swap counterparty.
Fitch's counterparty criteria states that a counterparty with ratings of at least A/F1 and with an adequate threshold for remedial actions are deemed eligible to support the ratings of transactions up to triple-A. As the ratings of all counterparties involved in these novations are at or above this threshold, they are deemed as eligible counterparties.
Fitch says it will continue to monitor the affected transactions and take rating actions based on the performance of the underlying assets.
News Round-up
Structured Finance
AVA consultation begins
The EBA has launched a public consultation on draft regulatory technical standards (RTS) that set out the requirements related to prudent valuation adjustments of fair valued positions. The objective of these draft RTS is to determine prudent values that can achieve an appropriate degree of certainty while taking into account the dynamic nature of trading book positions. The consultation runs until 8 October.
These draft RTS present a methodology to calculate additional valuation adjustments (AVAs) for the purpose of determining the prudent value of fair valued positions. To take account of proportionality and namely of those institutions with limited exposure to fair valued positions, two approaches are proposed: a simplified approach, which can be used by institutions to calculate AVAs, provided their absolute value of on- and off-balance sheet fair valued assets and liabilities is below €15bn; and a core approach, which aims to provide a consistent framework for determining prudent valuation. In this respect, the core approach gives a clear indication of the level of prudence that institutions should aim at when estimating AVAs.
Before submitting these draft RTS to the European Commission for endorsement, the EBA will carry out a quantitative impact study (QIS) to assess the capital impact of the proposed approaches for the calculation of AVAs. The QIS will also be used to calibrate the thresholds and underlying assumptions of AVAs.
The EBA intends to finalise and submit the draft RTS to the European Commission in 2Q14, after completion of the QIS.
News Round-up
Structured Finance
CMHC update welcomed
Covered bond programmes from CIBC and RBC have become the first to be registered under the Canada Mortgage and Housing Corporation's (CMHC) new legal framework for covered bonds. Their approval follows updates on 27 June to CMHC's regulations for covered bonds.
The first key change included in the updated regulations applies to Canadian mortgage products that allow the borrower to have multiple distinct loans secured by only one mortgage. The new regulation requires an issuer to subordinate all parts of a 'shared-mortgage' loan to the single part in the cover pool, which should reduce cover pool losses, according to Moody's in its latest Credit Outlook publication.
The updated regulations require issuers to execute a security-sharing agreement, which sets the loan part included in the cover pool in a first-ranking position and supersedes the previous ranking of recovery claims. This requirement decreases the severity of loss on parts in the cover pool that previously shared a first-ranking lien with other parts by providing a senior claim on all recoveries to the loan part in the cover pool.
The second key update - which requires loans made or renewed beginning in July 2014 to include an express waiver of borrower set-off rights - also strengthens the credit quality of the cover pools. Borrowers in Canada that have deposits at the same bank with which they have a mortgage have the right to set off lost deposits against their loan balance if the bank defaults, unless they explicitly waive these rights. By restricting the ability to include mortgages with set-off rights in the cover pool, the updated regulations will limit the risk of increased cover pool losses owing to borrowers setting off deposit balances against mortgage balances.
These credit positive modifications support Moody's view that generally aligning CMHC's interests with those of investors is a strength of the new legal framework, the agency notes. "CMHC's motivation to ensure loan quality and lack of incentive to push weaker bank originations into the cover pool results in prudent, risk-mitigating rules for registered covered bonds in Canada."
News Round-up
CDO
Trups CDO criteria updated
Fitch has updated its rating criteria report for Trups CDOs to include an outline of the key assumptions for cashflow analysis. These assumptions form a range of scenarios with respect to redemptions in the underlying portfolios, default timing and interest rate stresses.
Over the past few years Fitch says it has observed meaningful levels of redemptions from large issuers. The agency believes that the phase-out of Tier I status for Trups of banks with assets at or over US$15bn as of 31 December 2009 will likely continue to contribute to early redemptions by the impacted issuers over the next few years. As such, its base-case assumption is that these large issuers call their remaining Trups by the end of the phase-out period in January 2016.
On the other hand, Tier I capital status was grandfathered for Trups issued by banks with less than US$15bn in assets in the final US regulatory capital rules. While Fitch has also observed meaningful levels of early redemptions from these smaller issuers, their ability to raise capital remains limited and - given the latest regulatory announcements - they are likely to have less of an incentive to call their Trups.
The agency believes its base assumption that Trups issued by smaller banks remain outstanding until their respective legal maturity dates is appropriate at this time. It will continue to monitor actual redemptions, changes on the regulatory front and capital raising conditions to inform its view of collateral prepayments.
Meanwhile, the slowing pace of deferrals and defaults and increasing cures, as well as demonstrated effectiveness of coverage tests to-date warrant a change in Fitch's approach, thereby an explicit credit will be given to excess spread expected to deleverage a Trups CDO. Though the agency believes that excess spread will remain a meaningful contributor to deleveraging of a Trups CDO, the possibility of early redemptions leads to significant uncertainty with regard to its future levels. As such, credit will be given only to near-term levels of excess spread, to the extent it is expected to be trapped by the failing coverage tests.
The impact of this criteria change will vary for each deal, but in general is expected not to exceed two rating categories.
News Round-up
CDS
Bankruptcy credit event called
ISDA's Americas Credit Derivatives Determinations Committee has resolved that a bankruptcy credit event occurred in respect of Cengage Learning Acquisitions. The firm filed a voluntary petition under Chapter 11 on 2 July.
News Round-up
CDS
CDSClear expands its reach
LCH.Clearnet has received permission to begin clearing credit default swaps for US clearing members through CDSClear. This is while LCH.Clearnet's application to the CFTC for registration as a derivatives clearing organisation (DCO) is pending. The move allows US members to clear proprietary CDS index trades through LCH.Clearnet's Paris-based CCP, with the aim of expanding the choice of institutions through which to clear CDS indices, as well as providing additional liquidity to the CDSClear service and the market.
News Round-up
CDS
Homex credit event called
ISDA's Americas Credit Derivatives Determinations Committee has resolved that a failure to pay credit event occurred in respect of Desarrolladora Homex. The Committee did not resolve to hold an auction in respect of outstanding CDS transactions on the name.
The move follows the expiration of the grace period on the payment of interest in relation to the firm's 11 December 2019 bonds. Homex says it does not plan to pay such interest at the moment.
News Round-up
CDS
US CDS 'best performer' in Q2
S&P Capital IQ global sovereign debt data for Q2 reveals that Argentina still tops the table of the most risky sovereign credits, despite some tightening over the quarter (23%). Central & South America (ex-Argentina) credit default swaps widened by 45% on average in the quarter, with spreads in Brazil approaching 200bp - a level not seen since October 2011.
"The quarter was eventful and volatile, with civil unrest taking place in Brazil, Turkey, Egypt; political tension in Portugal; slowing growth in China; and news that the US Federal Reserve Bank might start tapering quantitative easing - which prompted the start of a near doubling of interest rates and a remarkable sell-off in Latin America and Asian emerging markets," comments Jav Bose, head of derivative valuations at S&P Capital IQ.
Portugal's spreads managed to finish the quarter 4% tighter, even though the coalition government was on the verge of collapse as recession, high unemployment and a widening budget deficit prompted the finance minister to resign. However, spreads on the name have begun to widen again this quarter.
Western Europe tightened by 10% overall last quarter, as positive economic data in Italy and Spain drove spreads tighter in the countries. With respect to the top-ten least risky sovereign list, the UK and Czech Republic edged out Australia and New Zealand as CDS spreads widened above 50bp.
No change was observed in the top-three least risky sovereign credits - Norway, Sweden and Finland - which all end the quarter at 2-3bp tighter. The region continues to be a safe-haven in terms of CDS, as spreads tightened by 11% overall.
Meanwhile, the US climbed up a position to fourth, as its spreads tightened to 27bp from 37bp. This meant that it was the best performer in the quarter, aided by unemployment dropping to 7.6%, edging closer to the US Fed's target of 7%.
"US fiscal policy seems to be working, as the world's largest economy enjoys an improving employment rate, higher stock prices and a general bullish outlook from top CEOs," Bose continues. "This is in contrast to China, which saw CDS levels widen to 118bp as the growth rate slows and approaches 7.5%, topping the largest percentage widener table."
News Round-up
CLOs
Loan prepays drive CLO upgrades
Moody's has upgraded the ratings on 192 tranches in 95 US CLOs, totalling approximately US$4.5bn of outstanding rated balance. The magnitude of the upgrades range between one to three notches, with the ratings of all the affected tranches (except for those already upgraded to Aaa) remaining on review for upgrade. At the same time, the agency placed on review for upgrade the ratings on another 95 tranches in 63 CLOs, totalling approximately US$1.6bn of outstanding rated balance.
The rating actions are primarily a result of the substantial deleveraging of senior notes and increases in overcollateralisation (OC) levels, which improved the credit enhancement levels of outstanding tranches in the affected deals. The deleveraging and OC improvements primarily resulted from high prepayment rates of leveraged loans in CLO portfolios. Moody's estimates that all leveraged loan repayments - most of which were unscheduled - exceeded an annualised rate of 50% from January to June 2013, which is significantly higher than the average historical level of approximately 30% per annum.
All of the affected CLOs have exited their reinvestment periods and either cannot or have only limited capacity to reinvest loan repayment proceeds. As a result, these deals have applied and are expected to apply most repayment proceeds to amortise their liabilities.
Moody's endeavours to complete its analyses of all affected deals within 90 days.
News Round-up
CLOs
CLO growth underlined
Appleby has released its inaugural 'CLO Insider' report, which provides data and analysis on the global CLO market, focusing on the first half of 2013. A total of 98 CLOs closed in the first half of 2013, a significant increase on the 39 deals that closed in the first six months of 2012.
"With the value of the market growing over 260% since 2011, it certainly seems that institutional investors are continuing to find value in CLOs," comments Julian Black, Appleby's global head of structured finance. "With an estimated US$370bn in assets under management and growing, this market is blossoming as CLOs offer attractive risk-adjusted returns, as well as low default rates."
In the first six months of the year, the top-10 deals by value increased by an average size of US$40m over the second half of 2012 and a significant US$175m over the same period last year. With US$47bn of issuance, the first half of 2013 was the biggest half-year ever in terms of value for CLOs and CDOs. The average deal size for CLOs closed during this time was US$482m.
A handful of deals emerging from Europe - including Cairn CLO III, Dryden XXVII and Grand Harbour I - were issued under Rule 122a. The Appleby report suggests, however, that European activity for the remainder of 2013 is fairly unpredictable.
"We are seeing a trickle of deals emerging from Europe, but we will be monitoring this market with interest against the backdrop of Europe being a tougher market and proposed regulatory changes within CRD IV, which may stall the market. Both these factors could lead to an unsettled time," Black adds.
The report also finds that triple-A spreads have narrowed markedly over the last few months, dropping to near 115 in 2Q13. A range of investors were involved at each of the different tranches of capital structure, including Japanese banks and US pension funds that typically invest at the triple-A level, where yields were around 140bp over Libor at end-2012.
Meanwhile, a core set of arrangers dominate the CLO market, with Citi leading the ranking for the first two quarters of 2013 at 20 deals worth US$9.5bn. Bank of America Merrill Lynch (US$6.5bn), Morgan Stanley (US$6.1bn), Wells Fargo (US$4.0bn) and RBS (US$3.6bn) follow.
"For the remainder of the year, we expect to see the re-emergence of other asset classes," Black concludes. "In particular, we are seeing commercial real estate (CRE) CLOs re-emerging and we expect to see this area as a growth sector going forward."
News Round-up
CMBS
CMBS pay-offs dip
The percentage of US CMBS loans paying off on their balloon date registered 58.5% last month, according to the latest Trepp pay-off report. This reading is one point below the May level of 59.5% and the second lowest of the year.
The June pay-off percentage is slightly above the 12-month moving average of 57.4%. By loan count as opposed to balance, 66.2% of loans paid off. The 12-month rolling average by loan count is now 62.7%.
News Round-up
CMBS
Hotels track apartment price rises
The rise in full service hotel prices is keeping up with that in apartments, according to the latest Moody's/RCA CPPI report.
Full service hotel prices have risen by 52.3% and apartment prices by 55.3% since 4Q09. In the 12 months ending 31 May, apartment prices rose by 12.9%, more than triple the 3.4% rise in the core commercial sector.
Limited-service hotel prices remain below their 4Q09 level, but have risen by 9% since their 3Q10 trough. Retail was the only core commercial sector in which prices rose over the previous one-, three- and 12-month periods.
Since the January 2010 national all-property composite price trough, the major markets have greatly outperformed the non-major markets, although the growth in prices in the latter has matched the 6% rise in the former over the last 12 months. The national all-property composite index decreased by 0.6% in May; the apartment component (which constitutes around 28% of the composite) increased by 1.3%, while the core commercial component (which constitutes around 72%) decreased by 1.3%.
Moody's expects prices to remain flat or decline over the near term as improvements in occupancy rates and rents due to rising employment lag the drag on value resulting from higher borrowing costs.
News Round-up
CMBS
REO sales drive late-pay decline
Fitch reports that US CMBS late-pays declined by 19bp in June to 7.18% from 7.37% a month earlier, the lowest level since March 2010. The decline was fuelled by the sale of US$622m (in stated loan balance) of REO assets across 34 Fitch-rated transactions, mostly from 2005-2007 vintages. This compares with just US$262m in May.
The June REO sales were led by two loans: the original US$138m Silver City Galleria (securitised in JPMCC 2005-LDP4) and the US$115m Continental Towers (COBALT 2006-C1). Both assets were sold at significant losses (see SCI's CMBS loan events database).
Several other large REO assets are poised to be sold in the coming months, which likely to drive the CMBS delinquency rate even lower. This includes a portfolio of REO assets that ORIX Capital Markets has placed for sale.
In June, resolutions of US$1.2bn outpaced new additions to the index of US$709m. Additionally, Fitch-rated new issuance volume of US$5bn kept ahead of US$2.1bn in portfolio run-off, causing an increase in the index denominator. Re-defaults of struggling properties - such as the Park Hyatt Aviara Resort - will continue to slow improvements on an otherwise favourable picture for CMBS delinquencies, the agency notes.
Current and previous delinquency rates are: 9.77% for industrial (from 10.81% in May); 8.35% for hotel (from 7.70%); 8.18% for office (from 8.35%); 7.59% for multifamily (from 7.91%); and 6.74% for retail (from 6.92%).
News Round-up
CMBS
REO assets tipped for auction
Only two properties securitised in US CMBS are set for a note sale via Auction.com in August.
The first is the US$42.9m Tallahassee Mall securitised in CSFB1999-C1, which has been in REO since January 2011. The latest reported appraisal (from September 2010), pegged the value of the property at only US$4.5m.
The loan was deemed non-recoverable in mid-2011 and the servicer has stopped advancing P&I payments. Barclays CMBS analysts expect the asset to be liquidated with 100% losses, although some minimal shortfall reimbursement is possible if the sale price exceeds foreclosure costs.
The other property out for bid next month is the US$37.4m Shoppingtown Mall in LBUBS2001-C3, which has been in REO since December 2011. A June 2012 appraisal pegged the value of the property at US$22m. The loan is carrying about US$3.5m in servicer advances and another US$900,000 in ASERs.
News Round-up
CMBS
GRAND redemption due
Each of the GRAND REF note issuers are expected to prepay in full tomorrow, followed by the redemption of the CMBS notes on the 22 July IPD. The move follows DAIG's successful IPO last week: the company is partially funding the repayment with an unsecured loan, which was contingent on generating IPO proceeds of at least €400m (see SCI's CMBS loan events database).
With effect from 22 July, all interest rate swap and cap transactions entered into between the issuer and Barclays Bank will be novated to DAIG. After de-listing the notes, an orderly winding-up of the issuer will commence.
The GRND 1 B tranche was covered at 99.951 yesterday on the news. The bond was last covered (at 99.651) on 26 March, according to SCI's PriceABS archive, with talk dipping as low as 99.5 since then.
News Round-up
Insurance-linked securities
Storm surge bond debuts
GC Securities and Goldman Sachs are in the market with what is believed to be the first natural peril catastrophe bond whose trigger is linked solely to storm surge. Dubbed MetroCat Re series 2013-1, the transaction provides parametric coverage for First Mutual Transportation Assurance Co (FMTAC), a subsidiary of the New York Metropolitan Transportation Authority.
S&P has assigned a preliminary double-B minus rating to the deal's three-year class A notes. A covered event is a storm or storm system that has been declared by National Weather Service to be a tropical cyclone, tropical storm or a hurricane, which generates an event index value that equals or exceeds 8.5 feet for Area A or 15.5 feet for Area B.
Area A comprises The Battery, Sandy Hook and Rockaway Inlet, while Area B covers Kings Point and East Creek. RMS' modelling demonstrated that The Battery and Kings Point are the two tidal gauges that are most highly correlated with the MTA's exposures. Therefore, the trigger structure has focused on capturing surge levels at tidal gauges in these areas.
The modelled probability of attachment, expected loss and exhaustion point are all 1.67%. The current probability of attachment, expected loss and exhaustion point based on RMS' medium-term rates for the notes are 1.71%.
FMTAC can extend the maturity of the transaction in one-month increments for up to 12 months, without any preconditions, with a 2% step-up in spread. The deal can also be extended in one-month increments for up to 12 months, upon the occurrence of a covered event that is evidenced by an extension verification report prepared by RMS as calculation agent. In this scenario, the spread will step up by 0.3%.
FMTAC will prepay the initial quarterly interest spread at closing and will prepay each subsequent quarterly interest spread 50 days prior to each payment date. The amount of the payment will be based on an accrual period of 95 days.
News Round-up
Risk Management
CCP consultation underway
The EBA has launched a consultation on draft implementing technical standards (ITS) on the reporting of the hypothetical capital of a central counterparty (CCP). These ITS will be part of the Single Rulebook aimed at enhancing regulatory harmonisation in the banking sector in Europe. The consultation runs until 30 September.
The draft ITS relate to prudential requirements for banks' exposures to central counterparties. In particular, they specify a reporting frequency on a quarterly basis and the template for the information that a CCP has to deliver to all credit institutions and investment firms that are clearing members, as well as to the supervisory authorities competent for those clearing members. Furthermore, the draft ITS specify the conditions under which the supervisory authorities may request an increase in the reporting frequency.
The EBA is expected to submit these draft ITS to the European Commission for endorsement by 1 January 2014.
News Round-up
Risk Management
Pre-trade tool released
Markit has enhanced its front office analytics solution to enable financial institutions to calculate the costs of funding and capital resources of their OTC derivatives trades in a single application. The new Integrated Resource Management (IRM) solution is designed so that customers can dynamically manage their balance sheet resources and optimise trading decisions prior to execution.
Paul Jones, director at Markit Analytics, comments: "By bringing our established CVA, risk-weighted assets and initial margin solutions together, our customers can run interactive scenarios with ease to understand the trade-offs between these components. This was made possible by the speed of the Markit Analytics engine and is the first of its kind."
News Round-up
Risk Management
Counterparty risk survey completed
Over 120 senior traders and chief risk officers were surveyed at a recent seminar to gain insight into the approaches taken towards counterparty credit risk and Basel 3. The seminar was hosted by Quantifi, Ernst & Young and PRMIA.
Among the key findings from the survey was that the majority of banks have Basel 3 projects in progress (71%), but are still not ready for the counterparty credit risk elements of the regulations. Banks are also continuing the trend of creating CVA desks to more actively monitor and hedge credit risk (50%). A significant number of banks, however, continue to manage across multiple groups (35%).
Finally, data management (45%), performance and scalability (18%), and analytics (16%) were considered the most important components of an effective counterparty risk solution.
News Round-up
Risk Management
Clearing consultation begins
ESMA has released a discussion paper in preparation for the regulatory technical standards (RTS) that will implement provisions of EMIR regarding the obligation to centrally clear OTC derivatives. The aim of the consultation is to determine which classes of OTC derivatives need to be centrally cleared and the phase-in periods for the counterparties concerned.
The discussion paper outlines ESMA's approach in determining: the characteristics of OTC derivative classes that should be subject to the clearing obligation; the dates from which the clearing obligation takes effect, including any phase-in and the categories of counterparties to which the obligation applies; and the minimum remaining maturity of the OTC derivative contracts referred to under EMIR. The paper also provides a high-level analysis of the current readiness of derivative asset classes regarding the clearing obligation on the basis of some of the criteria that ESMA will take into account when defining the classes for central clearing.
The clearing obligation only applies to financial counterparties and non-financial counterparties above the clearing threshold. Currently, 13 CCPs provide OTC clearing for five asset classes - interest rate derivatives, credit derivatives, equity derivatives, FX and commodity derivatives - within the European Union.
The discussion paper is open for feedback until 12 September. ESMA will use the feedback received to draft its technical standards on the clearing obligation, which will be presented in future public consultations.
News Round-up
Risk Management
Pre-trade service gains traction
Traiana reports that its pre-trade clearing certainty initiative is gaining momentum, with the support of a number of FCMs and trading venues. The service has been built in consultation with major clearinghouses and is designed to manage trading and clearing limits in real-time for interest rate, credit and FX swaps.
Barclays, Bank of America Merrill Lynch, Citi, Goldman Sachs and JPMorgan are the first clearing firms signed up to use Traiana's CreditLink service to manage swap clearing limits. It is also connected to 12 potential swap execution facilities (SEFs) and designated contract markets (DCMs), including GFI Group, iSwap, Javelin, MarketAxess, TeraExchange and trueEX.
CreditLink supports request-for-quote and request-for-streaming trading using a centralised limit check (Ping model) and also gives FCMs and their clients the ability to distribute limits directly to specific trading venues or CCPs to minimise latency (Push model).
????
News Round-up
Risk Management
Risk analytics platform enhanced
OpenGamma Platform 2.0 is being rolled out, offering advanced stress-testing capabilities, performance improvements and extended asset class functionality. The service provides real-time availability of critical trading and risk analytics required by front-office traders, quants, portfolio managers and risk professionals. Key enhancements include support for credit derivative products, such as single-name and index CDS and CDS options.
News Round-up
RMBS
Risk-sharing deal debuts
The first in a series of hotly-anticipated Freddie Mac risk-sharing transactions (SCI 8 July) has been announced. Dubbed Structured Agency Credit Risk (STACR) series 2013-DN1, the securities are linked to the credit risk of a pool of recently-originated residential mortgage loans.
The deal comprises two floating-rate tranches: US$200m 2.19-year M1 notes and US$200m 8.21-year M2 notes. Credit Suisse is structuring lead and sole bookrunner; Barclays Capital is joint lead, while Morgan Stanley, Citi and CastleOak are co-managers.
The reference pool comprises 96,389 loans with an aggregate original balance of US$23.7bn and an average balance of US$239,298. The weighted average credit score is 766, while the weighted average DTI is 32%.
All loans in the reference pool were acquired by Freddie Mac between 1 July and 30 September 2012 and were securitised into a mortgage participation certificate by 31 January. The assets are current fixed-rate, 30-year one- to four-unit first lien loans, with LTVs of 60%-80%. None of them were originated under a government programme.
STACR 2013-DN1 is the inaugural capital markets transaction under the FHFA's credit risk transfer initiative and is designed to provide credit protection to Freddie Mac. The securities will be general obligations of Freddie Mac and are designed to have similar characteristics to private label RMBS structures.
Freddie Mac intends to issue multiple STACR deals this year and then move into more programmatic issuance in 2014.
News Round-up
RMBS
Appraisal exemptions extended
The US Fed, the CFPB, the FDIC, the FHFA, the NCUA and the OCC have issued a proposed rule that would create exemptions from certain appraisal requirements for a subset of higher-priced mortgage loans. The proposed exemptions are intended to save borrowers time and money, as well as promote the safety and soundness of creditors.
The proposed rule would exempt loans of US$25,000 or less, certain 'streamlined' refinancings and certain loans secured by manufactured housing from the Dodd-Frank Act appraisal requirements. The proposal is comes in response to public comments previously received.
Comments on the proposal are welcome until 9 September. Compliance with the final rule will become mandatory on 18 January 2014.
News Round-up
RMBS
NRPMT 2013-1 concentration scrutinised
Fitch has released an unsolicited comment on NRP Mortgage Trust 2013-1, Nomura Corporate Funding Americas's new prime RMBS. The transaction has insufficient credit enhancement to achieve a triple-A rating, according to the agency.
Fitch notes that the deal is backed by high quality originations from First Republic Bank (FRB), with the loans characterised by strong attributes. However, it has a high degree of geographic concentration, as nearly 75% of the loans are located in California.
Additionally, concentration exists in metropolitan statistical areas (MSAs) where Fitch believes that home prices are particularly overvalued. As such, the agency says that the credit enhancement (CE) for the senior class would need to be between 9% and 10% in order to achieve a triple-A rating. The transaction is currently structured with CE of 7.6%.
California production is approximately 18%-20% higher than most post-peak Fitch-rated prime securitisations. The agency believes that geographic concentration can expose transactions to weak performance in a single region or industry. Due to the geographic concentration risk present in the pool, it would apply a 75% increase to the default frequency assumption.
Another important factor is that four of the top-ten MSAs represented in the transaction have market value declines (MVDs) of over 20% and make up approximately 50% of the pool. The agency's MVD for the entire pool, at 18%, is also several percentage points higher than most other new Fitch-rated prime RMBS.
Over the last year, home prices in many California MSAs have grown by more than 15%, which Fitch does not view as being supported by economic fundamentals. Because of these movements, the agency sees these price levels as increasingly overvalued, with a heightened risk of home price declines.
The collateral attributes of NRPMT 2013-1 are consistent with other collateral pools from FRB, which Fitch considers to be an above average mortgage originator. The portfolio consists of 30-year fixed-rate mortgages extended to borrowers with strong credit profiles (weighted average FICO of 770) and significant liquid reserves. At origination, the loans were supported by considerable equity in properties, with the pool benefiting from a weighted average CLTV of 66%.
News Round-up
RMBS
Irish code of conduct 'credit positive'
The Central Bank of Ireland on 1 July introduced a revised code of conduct for lenders, governing how they must deal with mortgage borrowers that are in arrears. Among other things, the revised rules remove the limit on how often lenders are allowed to contact delinquent borrowers, clarify when they can treat borrowers as uncooperative, and potentially reduce the time it takes lenders to start repossession proceedings. S&P says it views these changes as broadly credit positive for senior RMBS, although an immediate impact on its Irish RMBS ratings is not anticipated.
Under the revised code, an uncooperative borrower is broadly one who doesn't provide the information that the lender needs to assess the borrower's financial circumstances. A lender is allowed to start repossession proceedings immediately after classifying a delinquent borrower as 'not cooperating', but must allow a grace period for cooperative borrowers. Lenders are required to send a warning letter to borrowers - advising them that they must take specific actions within 20 business days - before classifying them as 'not cooperating'.
For cooperating borrowers, lenders cannot start repossession proceedings before the latter of eight months after the date that arrears first arise and three months after the end of the mortgage arrears resolution process (MARP). The MARP generally begins on the date when arrears first arise and ends when either a lender offers a struggling borrower an alternative repayment arrangement and the borrower refuses to accept it or the lender does not offer the borrower an alternative repayment arrangement.
Lenders may offer borrowers in arrears some alternative repayment arrangements that were not included in the previous code, including equity participation, split mortgages and partial mortgage write-offs.
S&P suggests that the revised code potentially lowers the grace period before lenders can start repossession proceedings. The clarifications around the definition of uncooperative borrowers, along with the warning letter could also prompt faster responses from borrowers, accelerating the arrears resolution process. In some cases, this could also lead to speedier repossessions, according to the agency.
Meanwhile, the removal of the limit on the number of times per month that lenders can contact borrowers in arrears could allow lenders to manage arrears cases more flexibly. This may lead to a modest increase in collections on delinquent accounts, potentially slowing the rise in arrears, S&P notes.
News Round-up
RMBS
Statistical sampling examined
The recent Flagstar (SCI 4 April) and Countrywide (SCI 7 May) rulings indicate an increased willingness of courts to allow statistical sampling as evidence of pool-wide breaches of MBS representations and warranties. However, the cases also open up many questions regarding statistics and evidence, according to NewOak Capital.
For example, the firm notes that the applicability of such reasoning to class actions is unclear where the problem of commonality of claims arises. "Could a sampling of one or more security trusts be used to allege breaches in others with unknown distributions?" it asks.
Mortgage pools display a wide variety of salient characteristics that can be grouped into cohorts, such as origination channel, geography, size, FICO and LTV. But the pitfalls of sampling relate to the degree of normality of the underlying distributions, to the methods of sampling, and to the representation and interpretation of results.
Stratification seems to offer the most intuitively appealing approach to sampling specific breaches of representations and warranties, NewOak suggests. "Design of the stratification method requires special care. As the number of strata deserving separate examination increases, the required total sample size - 'n' - also increases."
The five basic sampling techniques comprise: random, systematic, stratified, clustered and convenience. Of the five, convenience - selecting readily available samples without any other representative considerations - is in many cases both the most tempting and the least reliable, NewOak asserts.
The firm says that some of the issues to consider when using statistical sampling of mortgage whole loans in MBS litigation include: whether the sampling technique is well-calibrated to the plaintiff's allegations; whether damages should be extrapolated proportionally to the relationship between the sample finding and the population size; and whether statistical adjustments are needed in the calculation of damages as related to defects not considered material, not warranted against, not leading to actual loss or against which some recovery was experienced or is expected.
structuredcreditinvestor.com
Copying prohibited without the permission of the publisher
