Contents

CMBS

Multifamily list dominates CMBS session

US CMBS BWIC volume more than doubled yesterday to US$857m. Spreads tightened slightly and SCI's PriceABS data shows a number of senior bonds which attracted covers during the session.

GG10 Dupers were quoted yesterday at plus 163/160, having closed on Wednesday at plus 162. Legacy conduit fixed seniors, AMs and AJs were 1bp, 2bp and 4bp tighter, respectively. Re-REMICs were 1bp-2bp tighter, while CMBS 2.0 triple-A seniors were 2bp tighter.

The heavy BWIC selling was dominated by a US$750m list of multifamily directed A1A and AMA tranches. Most of the paper was 2006 and 2007 vintage, but there was also a 2013-vintage tranche - FREMF 2013-K502 B - which was talked at plus 200 and traded during the session.

A US$48.5m piece of the BACM 2006-4 A1A tranche was talked in the high-90s and at 100, with a cover at 104. A US$51.35m piece of BACM 2007-1 A1A was also out for the bid, talked at 115 and around 125 and covered at 124.

CGCMT 2006-C5 A1A was talked at and around 100 and was ultimately covered at 101. CGCMT 2007-FL3A H was also circulating, talked in the low/mid-90s, as it had been in the prior session.

GSMS 2007-GG10 A1A was talked at 150 and the 160 area and was covered at 165, while JPMCC 2006-LDP7 A1A was talked at 95 and around 120, with a cover at 103.

BSCMS 2007-PW18 AMA was talked in the low/mid-200s and around 200 and covered at 200. When it was out for the bid last month it failed to trade and so its last successful cover was on 27 February, when it was covered at 185.

A couple of other tranches of note from the session are CSMC 2007-TFLA G and GCCFC 2006-FL4A H. The former was talked in at mid-90, while the latter was talked at low/mid-90.

JL

CMBS

CMBS supply up, spreads stagnant

US CMBS secondary supply picked up from less than US$100m on Monday to almost US$500m yesterday. However, spreads flat-lined as economic data weighed on investors' minds.

"The day started out promisingly, with morning deal sheets pointing to tighter spreads among legacy super seniors, AMs and AJs. Disappointing US manufacturing data took the wind out of the sails of the CMBS market and spreads ended the day largely unchanged," Trepp notes.

The benchmark GSMS 2007-GG10 A4 bond was flat on the day at 155bp. SCI's PriceABS data shows both GSMS 2005-GG4 D and GSMS 2005-GG4 E were also out for the bid, talked in the mid-80s and mid-60s respectively.

Despite the lack of spread movement, only one DNT was recorded for yesterday's session and that was for BACM 2007-3 AJ. The tranche was being talked in the mid-500s.

Other bonds met with more success, such as WBCMT 2007-C30 AJ, which was talked in the low-500s and covered at mid-530s. The tranche was previously covered in May at 405, 410 and 475.

In addition, a cover for CD 2007-CD5 AJA was observed at plus 344. That bond was being talked in the low/mid-300s, mid-300s, at plus 335 and at 375.

AM bonds, such as CSMC 2007-C4 A1AM, also successfully traded. That tranche was talked at plus 335, at 350, in the mid/high-300s and around 400.

Another AM tranche - MLCFC 2007-5 AM - was talked in the mid-200s. Back on 1 February, the same tranche was talked in the mid/high-200s and very high-200s, as well as in the 280 area. It was covered on 8 January at 279.

Much of the supply consisted of AMs and AJs, but other paper was out for the bid too. BSCMS 2007-PW18 E was talked at 20, low-20 and the low/mid-20s, while LBUBS 2008-C1 E was talked in the mid-20s, mid/high-20s and at 30.

A couple more interesting tranches from the session are GECMC 2003-C1 H and GCCFC 2003-C2 G. The two 2003-vintage tranches were covered at 100.5 and at 101.03 respectively. The former had not previously appeared in the PriceABS archive, although the latter was captured last August, when it traded with talk in the mid-90s as well as at plus 300 and in the low/mid-400s.

JL

RMBS

No Monday blues for US RMBS

US RMBS secondary supply started the week strongly, with BWIC volume on Monday of US$387 for agency RMBS and US$410m for non-agency. SCI's PriceABS data captured many non-agency names that were out for the bid in the week's first session, including a good number of subprime bonds which traded.

A spike in subprime supply was a significant contributor to the overall increased BWIC volume. However, supply will pick up even more tomorrow when a widely-anticipated US$2bn BWIC is due to hit the market, with many market participants already speculating on what execution the large legacy bond seller bringing that list will achieve.

Much of this subprime supply came from 2006-vintage paper, such as the CWL 2006-6 2A2 tranche which was talked at 95 handle and in the high-90s. That bond also traded during the session.

The CWL 2006-5 tranche was likewise traded during the session. It was talked at 95 handle and in the high-90s and was covered in the mid-90s.

SAIL 2006-2 A4 was also out for the bid and talked in the high-teens, low-20s and mid/high-20s. It was covered yesterday at low/mid-20s, which is where talk had been last week.

SAIL 2006-BNC1 A5 also traded and had similar talk to SAIL 2006-2 A4. The talk on the BNC1 A5 tranche was in the high-teens, low/mid-20s and mid/high-20s.

BWIC supply was also strong away from subprime, although largely limited to talk. Alt-A tranches such as WMALT 2005-10 2A9 and RALI 2007-QA1 A3 were among those other names out for the bid.

The WMALT tranche was talked in the mid-80s. The same tranche was also spotted back in December, when it was talked in the low-80s and low/mid-80s.

As for the RALI tranche, that was talked in the very low-70s. It was talked last month in the low/mid-70s. Almost a year ago on 17 August 2012 it was talked in the low/mid-50s, before moving into the 60s before year-end.

Option ARM tranche LXS 2005-7N 1A1A was talked in the mid-80s, which is where it was also talked on Thursday. It first appeared in the PriceABS archive on 11 July 2012, when it was talked in the mid-60s.

There was also prime paper available, such as the hybrid BOAMS 2005-I 1A1 tranche, which was talked in the mid-80s. The same tranche had also been talked in the mid-80s on 14 January, at which time it was also talked in the low-80s.

JL

Structured Finance

SCI Start the Week - 22 July

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

Pipeline
After only seeing a single deal in the previous week, ABS returned to the pipeline last week. Three new ABS deals were announced, together with two ILS, three RMBS, one CMBS and four CLOs.

The ABS comprised: US$267.4m AEPOH 2013-1; US$173m JGWPT 2013-2; and US$1bn Nissan Auto Receivables 2013-B. The ILS were MetroCat Re Series 2013-1 and US$150m Northshore Re Series 2013-1.

The RMBS were made up of: ZAR1.6bn Fox Street 1; €150m Rural Hipotecario XVI; and US$400m STACR 2013-DN1. The CMBS was US$218.5m STORE Master Funding Series 2013-2.

As for the CLOs, US$417.4m CIFC 2013-III, Emerson Park CLO, €307m Harvest CLO VII and US$193.5m OHA Loan Funding 2013-2 rounded out the pipeline.

Pricings
In addition, considerably more new ABS issuance was seen than in the previous week. Along with three RMBS, three CMBS and three CLOs, there were eight ABS prints in the week.

The ABS new issuance comprised: US$900m Chase Issuance Trust 2013-6; US$550m Discover Card Execution Note Trust 2013-4; US$1.5bn Honda Auto Receivables 2013-3 Owner Trust; US$331m PHEAA 2013-2; €400m Retail Automotive CP Germany 2013; US$325m Sierra Timeshare 2013-2; US$155m Sonic Capital Series 2013-1; and US$1.25bn Volkswagen Auto Lease Trust 2013-A.

The RMBS prints comprised: US$440m NRP Mortgage Trust 2013-1; €225m Rural Hipotecario XIV; and €530m Rural Hipotecario XV. As for the three CMBS, they were: US$600m CGBAM 2013-BREH; US$1.3bn GSMS 2013-GC13; and €1.409bn WFCM 2013-LC12.

Finally, the CLO prints consisted of: €310.5m Ares European CLO VI; US$414m North End CLO; and €400m St Paul's CLO II.

Markets
While most sectors were quiet at the start of last week, the secondary US RMBS market remained busy (SCI 16 July). SCI's PriceABS data shows a number of names from the session, although many non-agency tranches failed to trade.

Among the DNTs were bonds such as CSMC 2006-8 3A1 OOMLT 2005-4 M1. However, other tranches did trade successfully, such as SAST 2006-2 A3C, which was covered at mid-85.

In the agency space, lower coupons ground tighter over the week. Barclays Capital RMBS analysts report that FN 3s, 3.5s and 4s were up by 10 to 12 ticks versus Treasury hedges.

"Dovish comments by Chairman Bernanke and reduced volatility also helped the basis outperform. The outperformance was largely focused towards the lower coupons, with higher coupons rising only moderately," they add.

Despite the quiet start, US ABS activity did pick up, as SCI reported on Wednesday (SCI 17 July). Tuesday's session in particular saw a variety of paper out for the bid, with auto, aircraft and container bonds all circulating. Much of the auto talk was in the teens and low-20s.

US CMBS BWIC volumes also picked up and finished the week strongly, with US$857m circulating on Thursday, as SCI reported (SCI 19 July). Spreads tightened and a number of senior bonds - such as BACM 2006-4 A1A, CGCMT 2006-C5 A1A and GSMS 2007-GG10 A1A - attracted covers during the session.

Secondary volume for US CLOs was muted last week and totalled only around US$300m, according to Bank of America Merrill Lynch analysts, with several days almost bereft of bonds. The market appears to have moved into summer mode, with relatively light activity.

Most bonds offered on CLO BWICs this week were investment grade, with the exception of a few equity tranches. CLO 1.0 spreads remain unchanged down the capital structure at 120bp, 160bp, 240bp, 325bp and 575bp.

Deal news
• 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 July remittance for LBUBS 2007-C2 indicates that US$773m of delinquent loans have been liquidated at an average 40% loss severity, wiping out nine outstanding mezzanine bonds and imposing a 10% loss on the AJ note. The spurt in liquidations was widely expected and follows an auction of the trust's delinquent loans by Orix (SCI 30 April).
• Each of the GRAND REF note issuers have prepaid in full, with the redemption of the CMBS notes expected on the 22 July IPD. The move follows DAIG's IPO: the company is partially funding the repayment with an unsecured loan, which was contingent on generating IPO proceeds of at least €400m.
• Eight of the 20 properties securing the £162.3m Mapeley loan, securitised in the Deco 6 - UK Large Loan 2 CMBS, have been sold since the loan was accelerated and enforced a year ago (see SCI's CMBS loan events database). So far, the work-out process appears to have been relatively successful.
• The first transaction to be issued under the EU's Europe 2020 Project Bond Initiative has hit the market. 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.
• 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.
• 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.

Regulatory update
• US Representative Mel Watt is strongly tipped to become the next FHFA director. His successful nomination could escalate RMBS policy concerns, although an over-reaction would present a strong buying opportunity.
• 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.
• The ECB's governing council has adjusted its risk control framework to tighten covered bond rules in favour of ABS. The changes provide updated haircuts for marketable instruments and an expanded list of collateral which will be accepted under the permanent Eurosystem collateral framework.
• ISDA has launched a new protocol and reporting guidance note. The ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol is intended to allow swap market participants to amend agreement terms to reflect certain portfolio reconciliation and dispute resolution obligations imposed by regulation on OTC derivatives, central counterparties and trade repositories.
• The Reserve Bank of Australia has published its finalised cashflow waterfall reporting template for repo-eligible RMBS. The template is one of four new reporting templates that will need to be completed for RMBS to be considered for eligibility for repurchase agreement with the Reserve Bank from 31 December 2014.
• ESMA has launched a consultation on draft regulatory technical standards (RTS) designed to implement EMIR provisions related to OTC derivative transactions by non-EU counterparties in certain cases and prevent attempts by non-EU counterparties to evade EMIR's provisions. The paper clarifies the conditions where EMIR's provisions regarding central clearing or risk mitigation techniques would apply to OTC derivative trades undertaken by two non-EU counterparties that have a direct, substantial and foreseeable effect in the EU.
• The Reserve Bank of Australia, Australian Prudential Regulation Authority and Australian Securities and Investments Commission have released a report on the Australian OTC derivatives market. The report constitutes the latest advice from the regulators regarding mandatory requirements for trade reporting, central clearing and platform trading of OTC derivatives.
• 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.
• 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.
• 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.
• 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).
• The European Council's proposal to give depositors preference over senior unsecured creditors would be credit positive for EMEA RMBS and ABS. The proposal would increase the likelihood of undisrupted payments to depositors of a defaulting institution, increase potential recoveries on defaulting deposits and potentially mitigate set-off risk.

Deals added to the SCI database last week:
BASS Master Issuer series 0-2008-I (tap); CNH Capital Australia Receivables Trust Series 2013-1; Debussy DTC; Hypenn RMBS I; Lowland Mortgage Backed Securities 2; Marche Mutui 6; Santander Drive Auto Receivables Trust 2013-4; SC Germany Auto 2013-2; Tradewynd Re series 2013-1

Deals added to the SCI CMBS Loan Events database last week:
BACM 2003-1; BACM 2003-2 & BACM 2004-1; BSCMS 2007-PW15; COMM 2004-LB3A; CSFB 1999-C1; DECO 6-UK2; DECO 9-E3; ECLIP 2006-1; ECLIP 2006-3; EMC IV; EURO 22; FB 2005-1, LBUBS 2005-C5 & BSCMS 2005-T20; GCCFC 2007-GG9; GECMC 2003-C1; GECMC 2006-C1; GRND 1; GSMS 2006-GG8; JPMCC 2005-CB13; JPMCC 2005-LDP4; JPMCC 2007-FL1; JPMCC 2007-LDPX; LBUBS 2001-C3; LBUBS 2005-C1; LBUBS 2007-C2; MLCFC 2006-3; MLMT 2005-LC1; MLMT 2005-MCP1; RIVOL 2006-1; TAURS 2006-3; TITN 2006-3; TITN 2006-CT1; TITN 2007-2; TITN 2007-CT1; TMAN 5; WINDM VII; WINDM X; WINDM XI; WINDM XIV

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

RMBS

Watt appointment could bring opportunity

US Representative Mel Watt is strongly tipped to become the next FHFA director. His successful nomination could escalate RMBS policy concerns, although an over-reaction would present a strong buying opportunity.

The Senate banking committee could confirm Watt's nomination as soon as today (18 July), which would be the first step towards a Senate vote. Bank of America Merrill Lynch ABS analysts now reckon that vote would be less contentious than it once looked and believe that the nomination reaching such a stage would be tantamount to a confirmation of the appointment.

While a successful nomination could escalate policy concerns - such as expanding HARP refinancing opportunities, broadening of loan modifications and the development of new GSE and housing reform plans (see SCI 8 July) - the BAML analysts believe the market could over-estimate the ultimate impact. That would present investors with a possible opportunity.

First of all, as Congress has increased its own focus on housing finance and GSE reform, whoever the next FHFA director turns out to be is expected to have a less significant role in the GSE reform debate than acting director Ed DeMarco has had. As well as the FHA Solvency Act 2013, Congress has put forward the Corker/Warner bill calling for the replacement of the GSEs, so a future FHFA director could be expected to administer directives rather than create new policies.

Second, the economic facts on the ground have changed. Watt himself has already told the Senate banking committee that principal forgiveness is not needed as much as it was. The improving economic climate means that aggressive policy actions are less likely to be a focus in the future.

The risk that the Obama administration may look to push refinancing or principal forgiveness plans remains. But increasing dependency on the GSEs through such programmes would be counter-productive when the government is trying to reduce its footprint, shrink the GSEs and strengthen the FHA.

"These mitigating factors aside, Representative Watt's confirmation could draw market attention to the potential for a HARP date extension and risks of re-HARPing," the analysts note. "The number of eligible conventional borrowers is limited at 150,000 GSE borrowers on a one-year date extension to May 2010."

A parallel move to extend the FHA-grandfathered MIP eligibility would apply to as many as 1.5 million FHA borrowers if the eligibility date were extended to May 2010, the analysts estimate. That would increase the risk of FHA revenue loss from the higher MIPs.

"Given the FHA's need to shore up its Mutual Mortgage Insurance Fund, foregoing possible fees would not appear to make economic sense, however, as we estimate the opportunity cost could be in the US$5bn-US$6bn range - potentially higher," say the analysts.

While spread volatility - especially in GNMA and higher coupons - is expected upon the confirmation of a new FHFA director, there is also likely to be an over-estimation by the market of the impact on prepayment speeds. Impacted securities could be repriced to 10-15 CPR faster than current levels and a buying opportunity could thus develop if the analysts' more benign outlook proves accurate.

JL

CDO

Confidence boost

Will bespoke single tranches make a comeback, asks Anu Munshi, partner at B&B Structured Finance

Last month, JPMorgan and Morgan Stanley scrapped plans to launch a synthetic CDO. Apparently there wasn't enough interest from investors in the senior most tranche.

But if investors were interested in the mezzanine and junior tranches, JPMorgan or Morgan Stanley could create bespoke single tranches for them. Activity in such tranches ran into hundreds of billions of dollars pre-credit crisis. There are reports of banks currently structuring such bespoke tranches for their clients, but it is tough to tell the volumes as these are one-off, customised deals.

Currently certain factors would seem to encourage the resurgence of bespoke single tranches. From an arranging bank's perspective, not having to line up investors for every part of the capital structure for a synthetic CDO - instead creating single tranches for investors based on their investment requirements - could be a more efficient way to structure deals.

However, creating such bespoke tranches involves taking on more risk for the bank than arranging a fully distributed synthetic CDO. The risks involve dynamically managing the spread, default, correlation and recovery risks of the portfolio underlying the single tranche as the bank has created a single tranche out of a portfolio of credit risk.

Banks today may not be as willing to take on such risks as they were before the credit crisis. Some banks have exited the single tranche market completely; so there is an opportunity for the banks that are willing to revive this business. However, regulatory capital requirements have reduced the profitability of these products for banks, so banks will have to weigh the costs and benefits of the business overall and potentially of each deal, before determining whether this is a worthwhile exercise.

From an investor's perspective, the overall low yield environment may spur some to look at more structured products for a better yield within a rating category. Investment grade rated single tranches could be an attractive alternative to high yield bonds, which can be volatile and have taken a hit with the recent increase in yields.

But even if investors are interested in buying a certain tranche - say a single-A rated tranche - of a fully distributed synthetic CDO, they may not be comfortable with buying a single-A rated bespoke single tranche with the same underlying portfolio as the synthetic CDO. This is because the bespoke tranche has been tailored for the investor, so there are no other investors in the deal. The resulting lack of liquidity - particularly at a time when liquidity is at a premium - may keep investors at bay.

Further, the regulatory push to increase transparency and encourage central clearing in derivatives could work against single tranches as their structured and tailored nature precludes them from being centrally cleared. Over time, as more derivatives are centrally cleared, bilateral and tailored derivatives are likely to become less liquid - further reducing the liquidity of bespoke tranches.

Even if some investors are dipping their toes into the single-tranche waters again, we are still far from seeing a resurgence in volumes à la 2005-2007. The fact is that CDOs and single tranches depend on ratings. And one of the painful lessons from the credit crisis was the market's over-reliance on rating agencies.

Part of the reason there isn't enough interest in the senior most tranches of synthetic CDOs is that many investors who bought these in the past suffered downgrades and were forced into distressed sales or restructuring their tranches at less favourable terms. Much confidence needs to be restored in this area before investors start piling back in.

Will bespoke single tranches make a comeback? The trickle has begun, but it may be a while before the market is flooded with them again.

Structured Finance

Markit appoints Japanese operations head

Markit has named Matthew Serynek as md and head of operations in its Tokyo office. He will be responsible for developing the company's presence in Japan and fostering new relationships with customers. Serynek was most recently president of SunGard Japan.

Structured Finance

Aite expands Asian footprint

Aite Group has acquired consultancy firm Solution Services. The firm provides financial and IT industry information, news distribution and consulting services for Japanese clients. The two companies have previously worked closely together but the acquisition gives Aite Group greater direct access to Japanese clients and increases its footprint in Asia-Pacific.

Structured Finance

No rating impact from REIT merger

Spirit Realty Capital and Cole Credit Property Trust II have merged to create a publicly traded triple-net-lease REIT, with the combined company taking on the Spirit Realty name. Moody's has confirmed that the move will not result in the downgrade of the Spirit Master Funding Series 2005-1, Spirit Master Funding II Series 2006-1 and Spirit Master Funding III Series 2007-1 triple-net-lease receivables-backed ABS notes. In assessing the potential impact on the ratings of the notes, the agency focused on the ownership structure of the combined companies and the capital structure.

Structured Finance

Muni bond insurance company formed

Assured Guaranty has launched Municipal Assurance Corp (MAC), a new municipal bond insurance company. It will complement the municipal bond insurance businesses of Assured Guaranty Municipal Corp (AGM) and Assured Guaranty Corp (AGC), which jointly own the company.

MAC has been capitalised to approximately US$800m through cash and securities contributed by AGM and AGC. It will avoid many of the difficulties facing most start-ups thanks to a US$1.5bn investment portfolio and access to Assured Guaranty's existing operational infrastructure and enterprise risk management systems.

MAC's underwriting guidelines and credit policies limit its business to municipal bonds only in S&P municipal risk categories 1 and 2. These are generally the most common and well understood sectors of the market.

Structured Finance

Asset manager boosts team

Stenham Asset Management has appointed Damian Brannan as md, allowing cio Kevin Arenson to focus exclusively on investment management and risk control. Brannan will also become a member of Stenham's investment advisory committee.

Brannan will work closely with Arenson and senior executive Dominique Montier to provide client service and deliver investment returns. He was most recently at Union Bancaire Privee, where he was head of hedge fund advisory for the UK and Asia.

Structured Finance

Post-trade processing solution provided

Accenture and Broadridge Financial Solutions have launched a post-trade processing solution to help banks in Europe and Asia-Pacific reduce post-trade processing costs and adapt to new regulations and technology. Accenture Post-Trade Processing combines Accenture's global capital markets industry expertise with Broadridge's post-trade processing technology.

The solution has also been designed to accommodate other technology, such as reconciliations and corporate actions processing, which is provided by SmartStream. Société Générale is the solution's first client and a number of the bank's employees are expected to join Accenture.

The new product will offer scalable, cost-efficient securities processing. It is intended to reduce cost-per-trade, provide access to real-time collective trading information, reduce the complexity of complying with trading and accounting regimes and to enable clients to launch new products and enter new markets quickly and easily.

CDS

Asset manager adds credit PM

Chris Boas has joined CQS in London as a senior portfolio manager for credit long/short strategies. He was previously at Longwood Credit Partners, which he founded after leaving Citadel Securities (SCI 5 January 2011), and he has also worked at Morgan Stanley.

CDS

Credit spread futures alliance formed

CME Group and trueEX have forged a strategic partnership to develop trueEX credit spread futures contracts based on the S&P indices which launched earlier this year (SCI 11 April). The contracts will be distributed on CME Globex, while CME Clearing will provide trueEX with clearing services.

CLOs

Credit manager adds Goldman vet

DFG Investment Advisers has appointed Philip Darivoff as chairman both of DFG and of parent company Vibrant Capital Partners. He previously spent 27 years at Goldman Sachs, most recently as a member of the firm's structured finance capital committee and director of the firm's office of alumni relations.

Darivoff joined Goldman Sachs as an associate in the mortgage securities department. He also went on to serve as head of capital markets, co-head of corporate bonds and chairman of credit capital markets.

CMBS

CMBS production head named

Greystone has appointed Robert Russell as head of CMBS production and md for the firm's Fannie Mae and Freddie Mac platform. He will be based in New York and report to Joe Mosley, executive md for Fannie Mae and Freddie Mac lending.

It is a newly-created position in which Russell will coordinate the firm's production of CMBS loans and originate multifamily Fannie and Freddie loans for Greystone's agency platform. He joins from Pillar Multifamily, where he was chief production officer, and has also worked at Wachovia Securities, Credit Suisse, Donaldson Lufkin & Jenrette and Nomura.

Insurance-linked securities

Risk modeller names coo

AIR Worldwide has appointed Bill Churney as coo. He will take responsibility for all product management, software product development, global business development, marketing, consulting and client service activities.

It is a newly-created position for the catastrophe modelling firm. Churney has spent 11 years at AIR and previously worked in product management and operations management at McMaster-Carr and Charles River Associates.

Risk Management

Risk manager promotes administrative chief

Kamakura Corporation has promoted Martin Zorn from chief administrative officer to president and coo. Warren Sherman has been named vice chairman, while Ardi Tavakol and Mark Slattery each become md.

Zorn will oversee all day-to-day operations and serve Kamakura's risk management clients. He has spent the last two years at Kamakura, before which he worked at Tennessee Commerce Bank, Integra Bank and Wachovia, the latter for over 20 years.

RMBS

Mortgage firm recruits SF pro

Stonegate Mortgage Corporation has further strengthened its structured finance team with the addition of Julianne Ilstrup. She becomes structured finance svp and will work with the firm's non-agency RMBS team to build Stonegate's capabilities to execute securitisations.

Ilstrup will report to structured finance evp Eric Scholtz, who joined earlier this year (SCI 30 January). She joins from US Bank and has previously worked at Green Tree Servicing, GMAC, Bank One, Fried Frank and Sidley Austin.

RMBS

Administrator role transferred

Due to a potential conflict of interest relating to its role as securities administrator on Natixis 2007-HE2 and as an originator of loans sold into RMBS mortgage trusts, Wells Fargo is assigning its duties to pursue repurchase obligations to Computershare Trust Company. Under the deal's governing document, Computershare is identified as the separate securities administrator. Wells Fargo will remain the named securities administrator and continue to be governed by all other securities administrator duties as identified in the PSA.

Fitch notes that the ratings on the transaction will not be affected by this assignment. The agency's highest outstanding ratings on the deal are no higher than single-C. Additionally, the outstanding ratings do not consider credit for repurchase proceeds; therefore, the assignment to Computershare to perform the repurchase claims duties are viewed as having no impact to the outstanding ratings.

RMBS

UBS settles FHFA claim

UBS has reached an agreement in principle with the FHFA to settle claims relating to US RMBS offerings between 2004 and 2007 (SCI 28 July 2011). The case is one of a group of cases related to RMBS offerings filed by the FHFA against 18 financial institutions.

The settlement, which is subject to documentation and final approvals by the parties, would encompass pending RMBS-related litigation brought by the FHFA against UBS on behalf of Fannie Mae and Freddie Mac, as well as certain unasserted claims. The full cost of the settlement is covered by litigation provisions established by UBS during 2Q13 and in prior periods.

Details of the agreement weren't disclosed, but the bank is believed to have set aside around US$748m for claims related to this line of business.

ABS

ECB provides ABS collateral boost

The ECB's governing council has adjusted its risk control framework to tighten covered bond rules in favour of ABS. The changes provide updated haircuts for marketable instruments and an expanded list of collateral which will be accepted under the permanent Eurosystem collateral framework.

The ECB has reduced the haircuts applicable to ABS eligible under the permanent and temporary Eurosystem collateral framework and adjusted risk control measures for retained covered bonds. It has also decided to replace the current requirement of two triple-A ratings for the six classes of ABS subject to loan level reporting requirements with a requirement for two single-A ratings.

The eligibility criteria and haircuts applied to national central banks to pools of credit claims have also been adjusted. This also affects certain types of additional credit claims eligible under the temporary Eurosystem collateral framework, which should lead to greater consistency and generate collateral gains without affecting the overall risk contribution of additional credit claims.

As well as adjusting the risk control framework, the ECB says it is also continuing to investigate how to help improve funding conditions for SMEs, in particular by possibly accepting SME-linked ABS guaranteed mezzanine tranches as Eurosystem collateral.

ABS

EC proposal 'credit positive'

The European Council's proposal to give depositors preference over senior unsecured creditors would be credit positive for EMEA RMBS and ABS, says Moody's in a Credit Insight note. The proposal would increase the likelihood of undisrupted payments to depositors of a defaulting institution, increase potential recoveries on defaulting deposits and potentially mitigate set-off risk.

Set-off risk could be further reduced by a proposal to create a European deposit guarantee scheme (DGS) to cover deposits above current national protection levels. Under the Council's bail-in approach, covered deposits would be excluded from bail-in and uncovered deposits would have preference over the claims of ordinary unsecured and non-preferred creditors.

That preference of eligible depositors could increase the overall cost of funding for banks and increase losses for senior unsecured creditors. However, Moody's notes it would also decrease the burden on DGSs by lowering the probability that they will be required to intervene.

"Assuming a bank loss of 10% of the total liabilities (as seen in the collapse of Dexia), the loss for senior unsecured creditors of the 10 largest European banks may increase from 2% to 7%, if senior unsecured debt were subordinated to deposits, whereas the average loss to be covered by a DGS would be zero," says Moody's.

Ranking deposits above senior debt also increases potential recoveries on defaulting deposits. In the event of a default on deposits, Moody's says it would expect higher recoveries from the insolvent estate for depositors, but even a recovery of 100% will not necessarily mitigate set-off risk.

ABS

Dignity tap to finance acquisition

Funeral services provider Dignity plans to tap its Dignity Finance whole business securitisation. At the same time, the transaction's security group will acquire a new Dignity entity.

Dignity Finance closed in April 2003 and has already been tapped twice since then -in February 2006 and September 2010 - as permitted by the transaction documents. As on the closing and the previous tap issuance dates, Dignity Finance will on-lend the proceeds of the current tap issuance to the borrower - Dignity (2002) - as an advance payment on an underlying issuer-borrower secured loan.

Several amendments were made to the transaction at the time of the last tap issuance, including: permission for non-obligors to make and finance acquisitions or developments; and permission for obligors to acquire either assets or shares of non-obligors. An entity named Dignity Finance No. 2 (DF2L) has since been incorporated to acquire assets outside the security group.

DF2L has executed a number of acquisitions, the largest of which occurred in January 2013 with the purchase of most of Yew Holdings and its subsidiaries. As a result of these acquisitions, DF2L owns 61 funeral locations, two crematoria and a portfolio of 9,200 unfulfilled pre-arranged funeral plans.

In conjunction with the current tap issuance, the Dignity group will undergo a restructuring whereby an entity in the security group will be permitted to acquire DF2L's entire issued share capital. As a consequence, DF2L and its subsidiaries will join the securitisation group as obligors for the issuer-borrower secured loan and provide their assets as security.

In accordance with the amendments executed in conjunction with the 2010 tap issuance, the acquisition of DF2L's shares is subject to security trustee consent. This will require the Dignity group to satisfy a number of conditions, including the prior refinancing of the external debt raised to fund DF2L's acquisitions.

To comply with this condition, the borrower Dignity (2002) will use part of the proceeds from the tap issuance to repay DF2L's existing external indebtedness. The borrower will use the remaining proceeds - net of fees, an £18m deposit into the elective capex account and a payment to Dignity's pension scheme - to make a payment to Dignity. This payment will, in turn, enable Dignity to return proceeds to its shareholders.

The latest tap issuance comprises two tranches of fixed-rate notes: £34.3m class As (with preliminary S&P ratings of single-A) and £40.7m class Bs (triple-B). Notes outstanding will total £444.8m following closing of the tap.

ABS

FBT proposal weighs on Aussie auto ABS

The Australian government last week proposed changes to the Fringe Benefits Tax (FBT) rules, which would make it more onerous for individuals to claim tax breaks on vehicles purchased under novated leases and salary sacrifice arrangements. The changes will lead to a deterioration of the credit quality of future auto ABS transactions, according to Moody's, due to the reduction in new novated leases agreements that are typically the best performing contract types in auto ABS transactions. Additionally, the changes will benefit existing and future ABS transactions as recovery rates on defaulted auto loans will improve, owing to a reduction in new car sales.

Moody's suggests that the proposed changes will have the largest impact on future issuance from Macquarie Leasing's SMART programme, given the high proportion of novated leases in its transactions. Programmes that will benefit most from increased recoveries are Liberty, Crusade, Reds, Bella and SMART - mainly because of their high exposures to auto loans. Additionally, programs with higher gross losses - which include non-conforming loans, such as in the case of Liberty - will benefit more than programmes with lower gross losses, such as SMART, because of a higher dependence on auto recovery rates.

Novated leases within securitised portfolios generally perform better than other contract types. For example, in Macquarie's SMART programme, novated leases outperform other contract types on both an actual gross and net loss basis by approximately 55%-60%.

A novated lease minimises defaults and losses because employers make the lease payments on behalf of their employees, thereby ensuring payment. Furthermore, most of the individuals under novated leases are employed by large corporates, as well as state governments and government authorities.

Novated leases usually account for 55% to 70% of collateral in SMART transactions. The SMART programme accounted for 44% of auto ABS issuance in 2012 and 50% of outstanding Australian auto ABS transactions. By comparison, Westpac's Crusade programme and Capital Finance Australia's Bella programme had approximately 12% novated leases in their most recent transactions and account for 22% and 8% of outstanding Australian auto ABS transactions respectively.

Structured Finance

TRACE adds specified, SBA securities

FINRA has begun disseminating via TRACE information for specified pool transactions in agency pass-through MBS and SBA-backed securities. This represents approximately 3,500 trades, totalling US$18bn in par value, on an average daily basis.

TRACE will disseminate transaction information, such as the time of the trade, price and volume. For security identification, in lieu of the CUSIP, FINRA will provide the key characteristics of the security. Transactions must be reported to TRACE within two hours of execution and are disseminated as soon as received (the reporting timeframe will be reduced to one hour after six months).

Soon FINRA intends to file proposed rule amendments with the SEC to disseminate information on additional types of ABS, such as credit card, auto and student loan ABS.

Structured Finance

Updated swap linkage RFC out

Moody's has published a request for comment on its proposed approach to assessing the rating impact of linkage to swap counterparties in cashflow structured finance transactions. The report replaces the swap linkage RFC that the agency published last summer (SCI 3 July 2012).

If implemented, the proposal is likely to be rating-neutral for most structured finance transactions, but could result in some downgrades. Moody's expects most of these downgrades to be limited to between one and three notches. However, the magnitude may be greater for certain transactions, particularly those with large exposures to lower-rated counterparties.

Under Moody's proposed approach, the rating impact of swap linkage depends on a variety of factors, including: the rating of the counterparty; the rating trigger provisions in the swap documents; the type and tenor of the swap; the amount of credit enhancement supporting the notes; the size of the relevant tranche; and the rating of the notes before accounting for the effect of linkage. The agency says it has made several changes to the proposed approach as a result of comments received from the market following its 2012 RFC.

The key changes are: the introduction of enhanced collateral formulas, allowing for a greater notching uplift in Step 1; the expansion of the linkage tables to cover more swap currencies and tenors; additional guidance on the treatment of various special cases that were not covered in the 2012 RFC; and the inclusion of the criteria currently set out in Moody's cross-sector rating methodology, which it plans to withdraw as a separate report. The agency has also developed an excel tool, dubbed the swap linkage tool, to assist market participants in the application of its proposed approach.

Feedback is invited on the proposal by 31 August. Moody's expects to publish the methodology shortly thereafter.

Structured Finance

SIV hit by sponsor downgrade

Moody's has downgraded by a notch the ratings of Carrera Capital Finance's US and Euro CP and MTNs. The SIV is managed and sponsored by HSH Nordbank.

The move reflects the rating action on HSH Nordbank, whose long-term rating was downgraded to Baa3 from Baa2 and its short-term rating was downgraded to Prime-3 from Prime-2 on 11 July. Noteholders are exposed to the credit risk of HSH Nordbank and therefore the SIV ratings move in lock-step.

There is a direct linkage between the ratings of Carrera Capital and HSH Nordbank due to the commitment by HSH to support the senior debt obligations of the SIV through note purchase and liquidity facility agreement, as well as through a committed repo facility. The current liabilities outstanding are limited to the repo and liquidity facility because currently there are no debt securities outstanding under the Euro and US MTN programmes.

CDO

No new CRE CDO delinquencies

For the first time in five years, no new US CRE CDO delinquencies were reported last month, according to Fitch's latest index results for the sector. The overall late-pay rate fell to 11.8% in June from 12.7% in May, as 15 assets were removed from the index.

The removed assets included ten assets disposed of at losses, two defaulted assets that paid in full, two loans repurchased by asset managers in May and one matured balloon loan that was recently extended. While one large loan default could swing the CRE CDO delinquency rate back up rather quickly, the decline in late pays in recent months is an encouraging sign for the market, Fitch notes.

CDO managers reported approximately US$55m in realised principal losses in June from asset disposals. The average loss on these assets - including both loans and securities - was 51%.

CDS

EMIR protocol released

ISDA has launched a new protocol and reporting guidance note. The ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol is intended to allow swap market participants to amend agreement terms to reflect certain portfolio reconciliation and dispute resolution obligations imposed by regulation on OTC derivatives, central counterparties and trade repositories.

The protocol also includes a disclosure waiver relating to reporting and record keeping obligations under EMIR. ISDA will also publish a standard agreement based on the protocol which could be used between market participants to comply with the obligations on a bilateral basis.

CDS

Green light for European index clearing

LCH.Clearnet has received regulatory approval to clear CDS index transactions for European clients through CDSClear. The CCP expects to be able to offer single name CDS clearing soon.

CDSClear's index clearing service provides portability through its asset tagging solution, which allows clearing members to track which of their client-related non-cash collateral and positions could be transferred to another member in the event of a default, in line with EMIR requirements. It also streamlines the legal documentation process between clients and clearing members, the CCP says.

Clearing members will continue to benefit from the ability to post non-cash collateral on a pledged account opened in the books of a central securities depository (CSD) to cover their margin requirements.

CLOs

Volatility cited as biggest CLO concern

CLO supply is predicted to reach US$34.5bn and €3.6bn in the second-half of the year, according to JPMorgan's latest client survey for the sector, implying a full-year global forecast of about US$87bn. End-2013 spread targets for US and European triple-A primary spreads are mainly concentrated around the Libor plus 110bp-120bp area, with a significant Libor plus 100bp population.

Market volatility is cited as the biggest concern by respondents, given the pick-up in broader market volatility. Lack of arbitrage and lack of collateral are in second and third place. Collateral stress is in last place, suggesting few concerns about credit loss.

Respondents see value in both US and European primary and secondary CLOs. In primary, triple-A and equity are most favoured, with some interest in BBB/BB bonds. In secondary, there is more interest in BBB/BB bonds than in other parts of the capital structure.

Meanwhile, the market's buy/sell ratio jumped to a series high of nearly 20:1, with very few sellers. Buys are concentrated in mezzanine/subordinated debt and in equity.

Finally, CLO investors appear to be most sensitive to post-reinvestment period language (such as WAL test and long-dated bucket terms), followed by re-pricing/re-financing terms. Managers also cited post-reinvestment period language, suggesting that managers would like flexibility in WAL tests.

CLOs

FATCA delay 'credit positive' for CLOs

The US Internal Revenue Service's decision to delay FATCA implementation -scheduled to begin on 1 January 2014 - by six months is credit positive for CLOs with offshore issuers, according to Moody's in its latest Credit Outlook publication. The move is expected to save the administrative burden and expense of FATCA compliance during that time, extend applicability of FATCA's grandfathering exclusion and increase the potential for achieving other avenues of FATCA relief prior to implementation.

FATCA requires that foreign financial institutions, which the statute defines as including CLO issuers formed outside the US, provide specified information on their US accounts to the IRS or withhold 30% of payments to US accounts from US sources. For those CLOs that seek to avoid withholding payments to investors, the delay provides more time to complete the administrative preparation for compliance reporting, while saving six months of the administrative costs of compliance. Compliance costs will depend on the nature of a CLO's assets and investors, varying from a few thousand dollars annually to much more.

The IRS also extended FATCA's 'grandfathering' exclusion, which will apply to assets outstanding at initial implementation. Therefore, distributions a CLO receives from assets outstanding on 30 June 2014 need not be included in FATCA reporting of payments a CLO makes to US investors or withheld against, so long as none of the assets undergoes a 'material' amendment after 30 June 2014. A related consequence of this extension is that currently existing assets will also have another six months to make material amendments without losing FATCA grandfathered status, Moody's notes.

The delay could also allow more jurisdictions to finalise intergovernmental agreements with the US Treasury before FATCA implementation starts. For example, the Cayman Islands does not yet have one, although discussions are in progress.

CMBS

CTL criteria updated

S&P has updated its methodology and assumptions for rating credit-tenant lease (CTL) transactions. The criteria apply globally to CMBS comprised of either one (single tenant) or a pool of CTL loans and similar exposures, where the transaction is rated based primarily on the credit risk of the underlying property's credit tenant. They can also apply to other types of transactions globally where the cashflow for the securities is derived wholly or partially by CTL loans and similar exposures, such as ABS.

S&P says that while the criteria revisions reflect some developments in the CTL, CMBS and commercial real estate markets, the fundamental methodology is generally consistent with the previous approach. Among the changes from the previous approach is a refinement of the methodology for CTL pooled transactions to use simulated portfolio default rates to determine stresses at different rating levels, consistent with the methodology in other sectors.

The methodology also includes a lease rejection analysis, consistent with the analysis for CMBS transactions, to determine projected losses upon default. Finally, the criteria include a supplemental largest obligor default test to provide a more robust and consistent analytical framework.

In addition, the framework has been enhanced to include qualitative adjustments to determine whether transaction-level factors could affect a transaction's credit quality, as well as to enable the analysis of a CTL transaction when a tenant or other transaction party becomes unrated. Typically this only occurs in limited situations and involves an analysis of the recoveries on the real estate collateral in various stress scenarios, consistent with the applicable regional criteria for a stand-alone CMBS.

The updated criteria aren't expected to affect current ratings on CTL transactions due to the limited revisions to the methodology.

CMBS

Conduit CMBS standards 'slipping'

Loan leverage and the share of interest-only loans in conduit CMBS reached new highs for the CMBS 2.0 market in 2Q13. With debt service coverage also moving downwards, Moody's says conduit loan underwriting quality is now similar to 2005 vintage loans and declining rapidly.

"The credit lessons learned from the poorly underwritten loans in the peak CMBS 1.0 vintages had a 'term' of only five years or so," says Tad Philipp, Moody's CRE research director. "However, as conduit leverage and default risk have risen, so have our credit enhancement levels."

Moody's-rated transactions have seen conduit loan leverage rise from 98% in the first quarter to 102.6% in the second. It was one of the sharpest increases in a single quarter and the agency expects leverage to continue rising.

The DSCR fell from 1.82 to 1.68 in the same period and is expected to continue to decline, but not below the long-term average. LTV is now at a level consistent with early 2006, although above-average debt service coverage means overall credit quality is more closely related to 2005 vintage CMBS, says the agency.

Cutbacks in GSE lending volume will lead to a greater share of multifamily loans in CMBS 2.0 conduits. Moody's notes that the quality of multi-family collateral in CMBS in recent quarters has been among the lowest of the major asset classes and warns that "an otherwise strong asset class could perform badly if collateral underwriting and sponsor quality are poor".

CMBS

Clean-up for LBUBS 07-C2 delinquencies

The July remittance for LBUBS 2007-C2 indicates that US$773m of delinquent loans have been liquidated at an average 40% loss severity, wiping out nine outstanding mezzanine bonds and imposing a 10% loss on the AJ note. The spurt in liquidations was widely expected and follows an auction of the trust's delinquent loans by Orix (SCI 30 April).

The gross proceeds of US$550m collected on the loans was a little bit better than the combined most recent appraisals, which totalled US$520m, according to CMBS analysts at Barclays Capital. After taking into account P&I advance recoupment, ASER reimbursements, non-recoverable advances and selling costs, the properties netted US$462m in principal.

The largest loan to be liquidated was the US$185m Bethany Maryland Portfolio II, which sold for US$144m versus a US$169m appraisal, leading to a 30% loss. Among the other large loans out for bid, the US$165m One Alliance Center asset sold for US$143m in gross proceeds (well above its US$80m appraisal), while the US$133m Duke Cleveland East Suburban Portfolio of Ohio sold for just below its US$74m appraisal (leading to a 58% principal loss).

Losses from the sales wrote off the B-K mezzanine notes and 10% of the originally triple-A rated AJ class. At the top of the structure, the US$462m in principal proceeds paid off the A2 and AAB tranches, 17% of the last cashflow A3 tranche and nearly 30% of the multifamily directed A1A tranche.

The Barcap analysts note that the sale dramatically cleans up the delinquent pipeline for LBUBS 07-C2, leaving just two loans with US$6.6m of balance in special servicing. However, they suggest that some risk remains from the currently performing loans: US$32m of them are running DSCRs below 1x and another US$200m are reporting financials below 1.2x DSCR.

Additionally, at nearly 40% of outstanding balance, the deal now has a high concentration of collateral in the Washington, DC area and is exposed to future US government budget cuts.

CMBS

Mapeley work-out gains momentum

Eight of the 20 properties securing the £162.3m Mapeley loan, securitised in the Deco 6 - UK Large Loan 2 CMBS, have been sold since the loan was accelerated and enforced a year ago (see SCI's CMBS loan events database). So far, the work-out process appears to have been relatively successful.

The combined gross sales proceeds for six of the eight properties (£15.5m) were slightly below the combined January 2012 valuation (£16.6m) and £10.6m below the initial allocated loan amount (£25.9m), European securitisation analysts at Barclays Capital observe. However, two property sales announced last week were for prices substantially above the January 2012 valuation: the Hercules House property was sold for £23.5m versus a valuation of £12.4m and the Rhyd-Y-Car BP property was sold for £8m versus a valuation of £2.7m.

The aggregate amount generated by the eight property disposals represents 63% of the January 2012 valuation of the portfolio, with the special servicer (Hatfield Philips) generating a 'profit' of £15.3m. Compared with the initial allocated loan amount for the properties sold, the special servicer is also now only £3.8m 'behind'.

The Barcap analysts expect a net principal recovery allocation of approximately £32m for the July IPD, including enforcement costs. While the gross property sales proceeds of the four properties sold in time for the July IPD were £36.8m, allocation of the proceeds is also likely to trigger swap termination payments of approximately £2.5m.

The analysts' principal loss forecast for the Mapeley loan is £90m, based on their expectation that the remaining twelve properties will be sold for their 2012 valuation (£43.1m). In terms of timing, orderly property disposals are anticipated to continue until end-2015.

CMBS

Cerberus grows German holdings

Cerberus Capital Management affiliates have acquired two portfolios of German real estate properties: the Phoenix portfolio of nine shopping centres formerly owned by Wells Fargo; and the Monsoon portfolio of ten retail properties, which secures the Countrywide Kaufland loan securitised in EPIC Drummond (see SCI's CMBS loan events database).

The Phoenix portfolio includes a combined floor space of 92,000 square-metres, with properties located across Germany. The private sale, following a competitive process, enabled Wells Fargo to remove the non-performing loans associated with these properties from its balance sheet. The insolvency administrator was BBL Bernsau Brockdorff & Partners.

The Monsoon portfolio has an aggregate floor space of 263,677 square-metres. The asset was purchased on an all-cash basis through a multi-level tendering procedure led by Dutch insolvency administrator Barend de Roy van Zuidewijn of the law firm AKD.

ACREST Property Group has been engaged to coordinate asset management, letting and property development for properties in both the Phoenix and Monsoon portfolios. ACREST and Cerberus have previously worked together on various portfolios over the last few years, including Woolworth and Metro Cash & Carry stores and the Rebound portfolio.

Risk Management

IRS central clearing recommended

The Reserve Bank of Australia, Australian Prudential Regulation Authority and Australian Securities and Investments Commission have released a report on the Australian OTC derivatives market. The report constitutes the latest advice from the regulators regarding mandatory requirements for trade reporting, central clearing and platform trading of OTC derivatives.

The report focuses primarily on the case for mandatory central clearing. Based on an assessment of current activity and practices in the Australian OTC derivatives market, as well as overseas developments, the regulators recommend that the government consider a central clearing mandate for US dollar-, euro-, sterling- and yen-denominated interest rate derivatives. The initial focus of such a mandate should be dealers with significant cross-border activity in these products.

The regulators say they do not see a case for mandating North American- and European-referenced credit derivatives at this time. However, in the lead up to the regulators' next market assessment, further information will be sought about Australian market participants' counterparty exposures in these products and the breadth of central clearing of these products.

The regulators will monitor for a further period Australian banks' progress in implementing appropriate clearing arrangements for Australian dollar-denominated interest rate derivatives, before recommending mandatory central clearing.

The regulators have not made a specific recommendation regarding a mandatory platform trading obligation at this time, but will continue to monitor developments in other jurisdictions and seek more detailed information on activity in the Australian market. Similarly, the regulators will continue to monitor developments in market participants' risk management practices - including collateralisation, trade compression and portfolio reconciliation.

With the finalisation of ASIC's trade reporting and trade repositories rules, the Australian authorities have introduced a broad-based mandatory trade reporting obligation for OTC derivatives.

Risk Management

Non-EU counterparty consultation underway

ESMA has launched a consultation on draft regulatory technical standards (RTS) designed to implement EMIR provisions related to OTC derivative transactions by non-EU counterparties in certain cases and prevent attempts by non-EU counterparties to evade EMIR's provisions. The paper clarifies the conditions where EMIR's provisions regarding central clearing or risk mitigation techniques would apply to OTC derivative trades undertaken by two non-EU counterparties that have a direct, substantial and foreseeable effect in the EU.

The proposed RTS would only apply when two counterparties to the same transaction are established outside the EU, their jurisdictions' rules are not considered equivalent to EMIR and where one of two conditions are met. The first condition is that one of the two non-EU counterparties is guaranteed by an EU financial counterparty for at least €8bn of the gross notional amount of OTC derivatives entered into and for an amount of at least 5% of the OTC derivatives exposures of the EU financial counterparty; the second is that two non-EU counterparties execute their transactions via their EU branches.

The provisions in the draft RTS also aim to prevent the evasion of regulatory requirements, such as would be the case if derivatives contracts between non-EU counterparties were being concluded without any business substance or economic justification, and in a way to evade clearing obligation and risk mitigation provisions.

Risk Management

Reporting tool released

Torstone Technology has released a new Inferno module that consolidates OTC derivative trades from multiple front office systems and feeds them into global trade repositories automatically. The aim is to help financial institutions comply more easily and accurately with the transparency and reduced risk goals of new global regulatory reporting requirements under EMIR and Dodd-Frank.

The technology is based on the open industry standard FpML messages for OTC products. Trades can be fed either in real-time or uploaded automatically at the end of the day. Data feeds from multiple front office systems are consolidated, so that all the uploaded OTC details are viewable within the one system.

Risk Management

Consultation begins on LCR standards

The Basel Committee has issued for consultation liquidity coverage ratio disclosure standards, following the publication of the LCR standard at the beginning of the year (SCI 7 January). The aim is to balance the benefits of promoting market discipline against the challenges associated with disclosure of liquidity positions under certain circumstances, including the potential for undesirable dynamics during periods of stress.

The Committee believes that it is important that banks adopt a common disclosure framework to help market participants consistently assess the liquidity risk position of banks. Moreover, to promote consistency and ease of use of disclosures related to the LCR, it has agreed that internationally-active banks across Basel member jurisdictions will be required to publish their LCR according to a common template.

Comments on the consultative document should be submitted by 14 October.

Risk Management

AVA QIS underway

The EBA has launched a quantitative impact study (QIS) to assess the capital impact of its proposals for the calculation of additional value adjustments (AVAs). The move follows the publication of its consultation paper on draft RTS on prudent valuation (SCI 11 July).

The QIS - which will be carried out in coordination with national supervisory authorities - will also be used to calibrate the thresholds and underlying assumptions of AVAs. The EBA expects 75-100 banks across the EU, including large and small institutions, to participate in the exercise.

National supervisory authorities are responsible for ensuring banks' participation in the QIS. In this respect, the EBA has prepared a standardised QIS template that participating banks will be requested to fill in.

The QIS should be completed on a 'best efforts' basis. Banks are encouraged to use this exercise to prepare for the implementation of prudent valuation requirements, which will take place towards the end of 2014.

Participating banks are expected to submit the results of the QIS exercise to their respective national supervisory authorities by 15 November, based on end-September data.

RMBS

RFC issued on Russian MBS

Moody's has published a request for comment on the impact of legislative amendments on Russian onshore MBS. In particular, the amendments - which came into effect in January 2013 - have reduced the risk of issuer liquidation upon recording a negative asset ratio by prohibiting voluntary issuer self-liquidation.

Prior to these amendments, Moody's assumed that an issuer with a negative net asset ratio would be self-liquidated and its assets would be sold, so it incorporated the associated market value risk into the modelling. Following an extensive review of the amendments, the agency proposes to change this assumption and will no longer model the risk of issuer liquidation.

Based on a preliminary analysis, Moody's expects that rating upgrades as a result of this change will generally be limited to between one and two notches and affect a limited number of onshore RMBS transactions. Possible limitations to the upgrades include operational risks and linkage to the originator.

The MBS legislation provides a purpose-designed statutory framework for an SPV issuing MBS bonds (the Mortgage Agent). The Mortgage Agent must be incorporated as a joint stock company, which means that the Joint Stock Company Law, Civil Code and Insolvency Law also govern the SPV's activities. As a result, the risk of issuer liquidation stemming from the Mortgage Agent's negative net assets cannot be excluded and is the most prominent legal risk among those identified by Moody's for domestic Russian RMBS transactions.

Amendments to the MBS legislation are designed to raise the level of Mortgage Agent protection to the level of bankruptcy remoteness traditionally expected from an SPV, Moody's notes. While the prohibition of voluntary self-liquidation does not completely eliminate the risk of the liquidation of the Mortgage Agent upon breaching the minimum net asset ratio, the agency views the likelihood of this liquidation scenario to be sufficiently remote so as to have no rating significance. It also takes into consideration other relevant factors, particularly the fact that the MBS Law considers the state of the mortgage collateral (rather than the net asset ratio) as a determining indicator for assessing the proper performance of the Mortgage Agent's obligations.

RMBS

Non-agency roll rates hit post-crisis lows

US mortgage performance continues to improve as the rate of new delinquencies across all sectors trend down, according to Fitch's latest mortgage market index results. In aggregate, non-agency roll rates from current to delinquent have improved to their lowest levels since early 2007.

Fitch's delinquency (DQ) roll rate index declined to 2% for 2Q13, down from 2.4% in 1Q13 and 2.2% in 2Q12. "The improved roll rates are driven most notably by home price increases, steady job growth and positive selection among borrowers remaining in the mortgage pools," comments Sean Nelson, director at Fitch. Prime mortgage loans originated before 2005 remain an area of concern, as they continue to struggle due to concentrations of adversely-selected borrowers.

Rates of new mortgage delinquencies are seasonal: second-quarter delinquency rates typically post the lowest levels as a result of borrowers receiving tax refunds. However, Fitch still expects long-term improvement, even when taking seasonality into account.

"Since 2010, second-quarter roll rates have improved year-over-year," says Nelson.

RMBS

UK refinancing activity on the up?

Lower interest rates on new loans in the past year mean that up to half of UK mortgage borrowers might now be both willing and able to refinance, up from about one-third a year ago. A new S&P report highlights how the incentive to remortgage fell sharply between 2008 and 2010, consistent with declining mortgage payment rates. However, more recently, the gap between standard variable rates and the rates on new loan products has widened once again and is now close to pre-2008 levels.

"More borrowers whose loans are past their introductory period could be financially better off by redeeming their existing loans and remortgaging. In May 2013, the volume of mortgage redemption payments rose by 20% year-on-year and the volume of remortgage approvals hit a two-year high," says S&P credit analyst Mark Boyce.

To further quantify how many borrowers are both willing and able to refinance, the agency analysed a sample of about two million mortgage loans backing UK prime RMBS transactions that it rates. It estimated the size of each borrower's incentive to remortgage as the difference between the market-average SVR and the average interest rate on a new two-year fixed-rate loan, which in turn depends on the borrower's loan-to-value (LTV) ratio.

Boyce continues: "Our analysis suggests that borrowers with an indexed LTV ratio of up to 85% would now typically have an incentive to remortgage. By contrast, in 1Q12, we estimate that only those with an LTV ratio below 75% had an incentive. As a result, we estimate that 51% of borrowers in our sample pool (by mortgage balance outstanding) might be both willing and able to remortgage, up from 35% a year earlier."

RMBS

Negative outlook for Ocwen ratings

Fitch has assigned RSS3 and RPS3 (negative outlook) residential servicer ratings to Ocwen Loan Servicing across the subprime, prime, alt-A, HELOC and closed-end second lien categories. The agency says that the rating actions are based on Ocwen's highly integrated technology environment and robust investor and borrower websites.

Ocwen is currently operating two separate servicing platforms: its legacy servicing operation utilising its proprietary REALServicing system as its core servicing system (which has completed its integration of Homeward Residential); and the residential servicing platform previously used by Residential Capital's GMAC Mortgage, which utilises FiServ's LoanServ as its core servicing system. The servicer ratings that are the subject of the rating action are for Ocwen's legacy servicing operation and do not include the platform acquired from ResCap.

The rating actions reflect management changes since Fitch's prior review, integrating a number of servicing managers from recently acquired platforms, as well as a number of internal audit findings that had a negative impact on the assessment of the operating areas involved. In addition, the ratings take into account the agency's concerns surrounding Ocwen's high concentration of servicing operations located off-shore and the company's financial condition. Finally, the ratings reflect its overall concerns for the US residential servicing industry, which include the ability to maintain high performance standards while addressing the rising cost of servicing and changes to industry practices mandated by regulators and other parties.

Ocwen operates its servicing platform from sites in West Palm Beach and Orlando in Florida; Addison, Coppell and Houston in Texas; and global servicing sites in Bangalore, Mumbai and Pune, India; and Montevideo, Uruguay. Fitch notes that the company's staffing strategy places a heavy emphasis on off-shore operations, with the majority of the servicing for non-agency RMBS loans handled off-shore.

As of 30 June 2013, Ocwen serviced over 1,003,566 loans totalling US$161.3bn, a 36% increase in loan count from its servicing portfolio as of 30 April 2012. The portfolio consists of 70.4% subprime first lien, 14.3% alt-A first lien, 6.9% prime first lien, 0.3% HELOC and 1.6% closed-end second lien product by loan volume.

The special servicing portfolio consisted of 43,783 loans totalling US$10.3bn. This includes 277,642 loans totalling US$50.7bn that Ocwen boarded in February and March 2013 from Homeward Residential.

Ocwen recently announced the potential acquisitions of approximately 350,000 loans totalling US$82.5bn from IndyMac Mortgage Services and 45,000 loans totalling US$500m from Greenpoint Mortgage Funding.

RMBS

Spanish interest floor ruling 'credit neutral'

BBVA, Cajamar and NCG Banco have eliminated the interest floor clauses in more than 500,000 Spanish mortgages, after they were declared as unfair in a recent Tribunal Supremo ruling. This change - which will lead to a decrease in interest collections, but will not affect cashflows - is credit neutral for the interest-hedged deals originated by the banks, according to Moody's in its recent Credit Insight publication. Conversely, it is credit negative for BBVA RMBS 11 - the only unhedged transaction - although it should not trigger any rating action in the deal.

The decrease in the instalments paid by borrowers is also expected to slightly reduce default probabilities. Approximately one-third of the loans are subject to interest rate floors, which average 3.1%.

From a cashflow perspective, a decrease in interest collections significantly below the existing interest rate floors is anticipated for the 14 Spanish RMBS deals Moody's rates and that the three banks originated. This is because borrowers will start to pay the actual index reference (typically 12-month Euribor) plus the applicable margin.

However, the impact on cashflows for RMBS deals will be neutral in 13 out of those 14 transactions, as they are hedged against interest rate risk through swap agreements. Moody's does not expect any impact because swap counterparties typically pay the interest due on the notes while they receive the actual interest paid by the portfolio, which neutralises the impact for the issuer of the elimination of interest floors.

The impact for the only deal with no swap in place will be credit negative, as the interest collections will be effectively reduced. This transaction has benefited from significant levels of excess spread, given the interest floors existing at the assets side.

According to Moody's estimations, the excess spread will drop from 2.04% to approximately 0.9%. However, the decrease in excess spread on BBVA RMBS 11 should not trigger any rating action, as no benefit was given to floors in the modelling when assessing interest rate risk in the transaction.

RMBS

RMBS 2.0 set to broaden?

The clarification of Basel 3 risk weightings associated with US residential mortgages is expected to facilitate the broadening of the '2.0' non-agency RMBS market from a prime jumbo low-LTV sector to somewhere further down in credit, such as borderline Alt-A/prime borrowers with higher LTVs. It could also spur improved fundamental credit performance for legacy RMBS.

Residential mortgage risk weightings under the Fed's final Basel 3 rule will be maintained at current levels. The final rule assigns a 50% risk-weighting to first-lien mortgages and a 100% risk-weighting to all other 1-4 family mortgage exposures, rather than the proposed 35% to 200% risk-weighting range based on the mortgage's LTV and underwriting standards.

The new rule also makes it beneficial for banks to hold a property's first- and second-lien mortgages because it treats "the sum of both loans as a first-lien exposure". ABS analysts at Wells Fargo expect this to create a better source of demand for second-lien MBS and improve overall execution on new second-lien mortgages.

The Wells Fargo analysts believe that the ruling will enable the private label market to reclaim some origination market share by eliminating the LTV uncertainty component of risk weightings associated with RMBS. "It should facilitate bank investors' decisions to purchase or hold RMBS assets on their balance sheet," they conclude. "We also think it will improve borrower access to credit, especially for current Alt-A borrowers with high LTVs that have not been eligible to refinance into conforming loans."

RMBS

US home prices up as economies lag

The disconnect between rising home prices and sluggish local economies is particularly wide for many US cities, according to Fitch's latest quarterly home price report. Broadly speaking the picture is stabilising, with real home prices rising nearly 6% last year, although several cities are bucking this trend.

The rating agency note that home prices were up 17% for Detroit as of 4Q12, while the city's unemployment rate was over 11%. Las Vegas saw a 13% increase in home prices from the end of 2011 despite a 10% unemployment rate. Californian cities such as Los Angeles, Sacramento and Riverside are in similar situations.

RMBS

Cashflow waterfall template finalised

The Reserve Bank of Australia has published its finalised cashflow waterfall reporting template for repo-eligible RMBS. The template is one of four new reporting templates that will need to be completed for RMBS to be considered for eligibility for repurchase agreement with the Reserve Bank from 31 December 2014.

After extensive consultation, the RBA published in April final templates covering security-, transaction- and loan-level information, and published for consultation a draft cashflow waterfall template (SCI 25 April). The consultation period on the cashflow waterfall template closed on 15 May, during which time the bank received four submissions that focused on compliance costs, external auditor validation, confidentiality and liability issues.

A number of changes have been made in response to the submissions received: the external audit requirement for the waterfall programme will be removed; certain commercially sensitive information will not be required to be made available in the publicly reported template, though this information will still need to be reported to the Reserve Bank; certain small legacy RMBS and small self-securitised RMBS from ADIs subject to APRA's minimum liquid holdings framework will be exempt from the waterfall reporting requirement; and issuers will be able to include appropriate liability disclaimers with their publicly reported RMBS waterfalls.

The RBA intends to release its draft templates for ABS by the end of September.

RMBS

Eminent domain prohibition encouraged

Legislation proposed by US Congressman John Campbell to prohibit Fannie Mae and Freddie Mac from purchasing, the FHA from insuring and the Department of Agriculture from guaranteeing, making or insuring a mortgage located in a municipality that has used the power of eminent domain to seize a residential mortgage has been welcomed by SIFMA. The association recommends that Congress quickly passes the bill to protect taxpayers and investors and encourage the return of private capital. Adopting ill-advised plans to seize mortgage loans from Main Street investors pose a risk to the safety and soundness of both the GSEs and FHA's insurance fund, and will serve to further delay the return of private capital in housing finance, it notes.

RMBS

Eurosail proposals put forward

Fitch has affirmed 30 tranches of six Lehman currency swap transactions and placed five tranches of Eurosail-UK 2007-5NP on rating watch negative (RWN).

Following the bankruptcy of Lehman Brothers and the subsequent termination of the respective currency swaps, the seven UK non-conforming RMBS transactions continue to be exposed to foreign currency movements. Given the movement of FX rates against the issuers compared with rates seen at transaction close, all of the transactions remain significantly under-collateralised, according to Fitch. However, at present, the agency believes that the notes are able to pass their respective stress scenarios.

In the past, the divergence between the reference rates payable on the notes and the rates received on the underlying collateral have also led to low - and in some instances - insufficient levels of excess spread in the transactions. However, the respective reference rates have converged more recently, resulting in the generation of healthier levels of excess spread such that reserve funds remain fully funded.

Fitch notes that in EMF-UK 2008 - the only transaction without a fully-funded reserve fund - larger losses incurred on the sale of repossessed properties led to an increased reserve fund draw of £44,000 in June 2013.

For the Eurosail 07-5 transaction, meanwhile, two proposals have been put forward to noteholders. One is a replacement hedging agreement with Goldman Sachs, while the other is a restructuring, involving a redenomination of the euro tranches into sterling and a write-down of the tranches. For this reason, the notes have been placed on RWN, which will be resolved following the outcome of the intended replacement agreement.

Each of the seven issuers has begun receiving payments from the Lehman estate. Currently at 33.2% of the allowed claims on each of the transactions, these funds are being retained by the issuers.