Contents

ABS

Euro ABS may stay quiet

It has been a typically quiet August for European ABS as traders take their holidays, although there has been some BWIC activity to keep those that remained at their desks occupied. However, there is a growing concern that this September may not bring the pick-up in activity that is traditionally seen.

"This has been a quiet month, which is what most people expected. There have been a couple of bid-lists out in the market and those have been well received," reports one trader.

SCI's PriceABS data shows a few European auto names which were out in mid-week, such as ECARA 2012-1 A, SCGA 2013-1 A and TURBF 3 A, which were all covered close to 100. "Execution has been good, but it is just that volumes have been low," the trader comments.

Secondary market activity will generally pick up after August as school holidays end and the last bank holiday passes by for London traders. This year, however, the trader is not so sure that the typical pattern will be followed.

"Traditionally everything picks back up after Labor Day, which of course is just around the corner now. From my conversations with other dealers I do not think that will happen this time," he says.

The trader adds: "There is not a lot of conviction that greater BWIC supply is coming imminently or that the primary market will take off. The consensus seems to be that European ABS trends are going to be driven much more by broader macro events, as indeed things increasingly seem to be these days."

JL

RMBS

Peripheral RMBS takes centre stage

Peripheral European RMBS has seen an up-tick in activity over the last couple of weeks and a plethora of Spanish and Italian names were out for the bid yesterday. SCI's PriceABS data recorded several successful covers from the session, including for TDAI 2 C, which was talked in the mid/high-60s and talked and covered in the low-60s.

AYTGH VIII A2 was talked between the mid-80s and mid/high-80s and at around 85, after making its PriceABS debut last week at the same levels of price talk. Also available was AYTGH VIII C, which was talked in the low-60s and low/mid-60s and covered at low-60s. The latter tranche had been covered twice already this year - first in January at 62 and later in June at 60.

Meanwhile, BCJAF 6 A2 was talked at high-88 and around 89 and covered at 89.056. The tranche failed to trade in June, but was covered in May at 90.11 - a year after being covered at mid-70.

BCJAF 6 B was also out for the bid, with talk in the mid/high-60s and a cover in the high-60s. The tranche had been covered six times already this year, most recently in May at 68.65.

Another BCJAF tranche - BCJAF 9 C - was talked in the low/mid-50s and talked and covered in the low-30s. It was previously covered at 27.5 on 12 June.

In addition, a number of UCI tranches were circulating, including UCI 9 A - which was talked at around 84 and covered at 83.85. The tranche had been talked in the mid-80s at the end of last week and was covered at 70.25 last October.

One other noteworthy Spanish name from the session was RHIPO 3 A, which was talked at around 95 and at high-95 before being covered at 95.75. The bond first appeared in PriceABS in June, when it was talked in the low-90s and later covered in the mid-90s.

A number of Italian names were also out for the bid yesterday, including CORDR 1 C. The tranche was talked in the low/mid-70s and mid/high-70s, which is also where it had been talked at the end of last week. In June last year the tranche was talked in the mid-50s.

CORDR 2 C was talked in the low/mid-60s and low-70s during the session. It was covered back in June at 72.01 and first appeared in PriceABS on 5 July 2012, when it was talked in the mid/high-50s.

Finally, VELAH 3 B was talked in the high-60s and low/mid-70s both yesterday and on Friday. At the start of last September, the tranche was talked variously between the low/mid-60s and low-70s.

JL

Structured Finance

SCI Start the Week - 2 September

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

Pipeline
Two ABS, one ILS, one RMBS and one CLO entered the pipeline last week and remained there by the weekend. Of these transactions, just two were US deals.

The ABS joining the pipeline were €500m Driver France FCT Compartiment 2013-1 and A$270m Flexi ABS Trust 2013-2, while the ILS was US$125m Atlas IX. The CLO was €300m North Westerly CLO IV, with the A$500m Progress 2013-1 Trust RMBS also marketing.

Pricings
It was not a particularly active week for new issuance, but there was some variety in the deals. The new prints consisted of one ABS, four RMBS, two CMBS and three CLOs.

The US$848m John Deere Owner Trust 2013-B was the single ABS to price, with the RMBS prints consisting of US$434.17m Agate Bay Mortgage Trust 2013-1, A$1bn IDOL 2013-2 Trust, US$346m Sequoia Mortgage Trust 2013-11 and US$157.2m VOLT 2013-NPL1.

The CMBS new issuance comprised US$485m COMM 2013-300P and US$177.5m InSite Wireless Group Series 2013-1. Finally, US$414m ACAS CLO 2013-2, US$417m Battalion CLO IV and US$376.5m Octagon Investment Partners XVII rounded the issuance out.

Markets
The European ABS market was quiet throughout August and that remained true last week. While BWIC supply was steady if unspectacular, the greater concern is that the traditional September up-tick in supply may not kick in as early as the market has grown used to, as SCI reported on 30 August.

"Traditionally everything picks back up after Labor Day. From my conversations with other dealers, I do not think that will happen this time," says one trader.

He adds: "There is not a lot of conviction that greater BWIC supply is coming imminently or that the primary market will take off. The consensus seems to be that European ABS trends are going to be driven much more by broader macro events, as indeed things increasingly seem to be these days."

US ABS volume was stronger, with auto bonds leading the way during a Wednesday session that topped US$300m in BWIC supply (SCI 29 August). SCI's PriceABS data shows names such as ALLYA 2010-4 A4, BAAT 2013-1 A3 and VALT 2011-1 A3 all out for the bid.

US RMBS non-agency supply was particularly high on Tuesday, as two CDO liquidations drove subprime volume (SCI 28 August). PriceABS shows a long list of subprime names from the session attracting price talk in the 70s, 80s and 90s.

Meanwhile, US CMBS spreads were flat to slightly wider last week. Barclays Capital analysts report that the widening was largely due to low volumes. Although four deals are due in September, they expect primary issuance to slow down in Q4.

2007 dupers widened by 5bp to plus 120bp and 2007 AMs also gave up about 5bp. AJs were flat on a lack of trading. CMBS 2.0 spreads held steady at the top of the capital stack, where dupers were at plus 103bp.

Finally, the US CLO market showed a bias towards 2006- and 2012-vintage paper early in the week, with talk largely concentrated in the 80s and 90s (SCI 27 August). C tranches were particularly prevalent, with talk at 97.38 for NAVIG 2006-1A C typical of the session.

Deal news
• As one of several Lehman Brothers UK non-conforming RMBS without a currency swap in place after Lehman's bankruptcy, the recent restructuring of MFD 2008-1 may give clues as to how similar deals will be restructured. The restructuring is said to be positive because it crystallises losses immediately, re-balances the deal and removes future FX risk.
• US$322m of distressed US CMBS loans are slated for sale via Auction.com in September, including the office property at 401 E. Ocean Boulevard, which backs a US$22m loan in LBUBS 2007-C1. The loan has been in REO since November and a December appraisal pegged the value of the property at US$17m.
• Punch Taverns' Punch A securitisation business profile has been revised down to weak by S&P, affecting the credit ratings on the class A1, A2, M1 and M2N notes. The B1, B2, B3, C and D1 notes have been affirmed and the outlook remains negative.
• DBRS has released an RFC on proposed changes to its methodology for rating and monitoring European SME CLOs. Comments are due by 30 September.

Regulatory update
• Six US federal agencies have issued a notice revising a risk retention rule proposed in 2011 as part of the Dodd-Frank Act. The rule would provide securitisation sponsors with several options to satisfy QRM requirements and is expected to reduce uncertainty for RMBS issuers and investors. It should also support stronger participation in jumbo loan activity by US banks.
• JPMorgan has been told to pay Leonard Blavatnik US$42.5m plus interest in a breach of contract lawsuit centred on RMBS investments. The decision was made by a New York state court after Blavatnik sued the bank for investing twice as much of his money in RMBS as his investment guidelines allowed.
• The Macroeconomic Assessment Group on Derivatives (MAGD) has published a report on the macroeconomic effects of OTC derivatives regulatory reform. The report finds that the net benefits of stricter OTC derivatives regulation outweigh the costs.

RMBS

Spanish RMBS bond switches touted

Using European DataWarehouse (ED) loan-level data, Deutsche Bank European securitisation analysts have examined the credit quality of 97 Spanish RMBS to uncover the extent of stressed mortgages across the sector. They identify relative value based on the ratio of credit enhancement relative to liquidation loss.

The 97 deals in the sample account for 85% by volume of Spanish investor-placed RMBS signed up to the ED. The Deutsche Bank analysts note that coverage is generally good, albeit there are issues with some mandatory fields being collected but not yet displayed.

Bankinter's BFTH and Santander's HMSF programmes display the best source of data, scoring A1 in the ECB mandatory field matrix. Banco Mare Nostrum's AYTCH and the multi-originator AYTH M2, Banco Popular's IMPAS 4, Banco Sabadell's TDAC deals and UCI's UCI 9 are among the worst - with scores of B2 or C1.

Additionally, the analysts find that arrears data reported in loan tapes do not necessarily match with investor reports. On average, 90d+ arrears stands at 3.8% using loan-level data, while it is 5.7% based on investor reports.

The sample has €3.8bn (7.5%) of loans in arrears, of which around €1.9bn (3.8%) are in arrears for more than three months. Arrears as a percentage of regional pools are shown to be highest in Murcia (18.3%) and Catalunya (11.2%). Comunidad Valenciana (10.8%), Balears (10.3%) and Andalucia (9.2%) follow.

While Murcia has the largest share of regional arrears, only 3.3% of the mortgage pool and about 8.4% of overall Spanish arrears are concentrated in the region. Catalunya and Valenciana contribute to 23.4% and 22.5% of national arrears respectively and remain more significant from a RMBS credit perspective, since a higher proportion of the pool - about 30% of the universe - is from these two regions.

When classifying arrears by indexed LTV bucket, about 14% of the Spanish RMBS loan universe is in negative equity. Arrears likelihood increases from about 5% to about 10% as indexed LTV increases from 30% to 90%.

Having calculated the liquidation loss of loans where the debt service to indexed income ratio is greater than 30%, the analysts suggest that if lenders were to liquidate all arrears in Spanish pools, the loss across the universe would be just 43bp. However, this average hides the significant variation across deals - with the highest arrears liquidation loss in later vintages, such as HIPO HIPO 10, TDAC 9 and CAJAM 2007-3.

Based on comparing credit enhancement to this liquidation loss metric, the analysts make four key relative value recommendations. First, switch from BFTH 13 A2 to BCJAF 6 A2 to pick up 15bp and reduce WAL. At 22%, credit enhancement for the latter bond is well above that of the former.

The second recommendation is to switch from SABA 1 A2 to HIPO HIPO-5 A to pick up 15bp while moving to a cleaner pool: total arrears for the latter bond stand at 6.3%, versus 10.3% for the former. Equally, credit enhancement is much higher: at around 20%, compared to 5.8%.

The third is to switch from BCJAM 4 A2 to RHIPO 8 A2A to pick up 10bp and reduce WAL. While credit enhancement for RHIPO 8 A2A is lower by about 1.3 points, total arrears (at 12.7%) for RHIPO 8 are lower than the 15.7% total arrears in BCJAM 4 A2.

Finally, the analysts recommend switching from BVA 3 A2 to HIPO HIPO-5 A for a 9bp pick-up in spread. The credit enhancement/liquidation loss and credit enhancement/total arrears ratios for BVA 3 A2 are lower than HIPO HIPO-5 A.

CS

RMBS

RMBS concentration concerns rising

European RMBS issuance has been limited so far this year, with the bulk of supply coming from a handful of Dutch programmes. The lack of paper has sparked concerns over concentration risk, which may force investors to look elsewhere.

European primary issuance has been focused on a handful of sectors, meaning that a growing number of investors are reaching their concentration limits already - whether those limits be by sector or by originator. Exemplifying these trends, of the €12.9bn of Dutch RMBS issued so far this year, only €3.8bn was publically placed.

The WAL for Dutch RMBS as a whole currently stands at 4.7 years, with the final currently outstanding bond due to be paid off in July 2041. The WAL for bonds that were placed with investors is shorter, at 3.4 years.

By projecting future bond pay-downs, Barclays Capital European securitisation analysts have identified when investors are expected to receive large redemptions. Those redemptions will enable them to invest in other sectors, as well as aiding technical factors as they reinvest within Dutch RMBS.

Dutch issuers may also see these pay-downs as an opportune moment to take advantage of these large redemptions. The timing of significant redemptions from some of the larger programmes will also reduce the concentration in those names for investors.

There are five months in which more than €2bn-equivalent principal from the placed bonds is due to be returned to investors. The first of these is March 2014, followed by September and December 2015, March 2016 and February 2019.

"Consequently, investors will receive high-principal pay-downs and look to invest their cash flows; however, if the primary market remains stagnant, they are likely to search for bonds driving the market tighter," the Barcap analysts note. "These points may also provide issuers with an opportunity to place a new transaction, benefiting from investors with cash to put to work."

Concentration risk remains a key concern for investors, particularly those limited to investing in euro-denominated paper or only in RMBS. Since the start of 2012, publically placed Dutch issuance has been limited to the ARENA, CITAD, DMPL, DUTCH, HERME, PHENY, SAEC and STORM programmes. The analysts expect issuance in the next few years to continue to be dominated by this concentrated group.

The most prevalent programme is STORM. Just over 11% of the programme will paid off by year-end and just over 18% by end-2014. Half of the currently outstanding bonds will paid off by October 2016, so concentration risk remains a long-term issue.

"As investors therefore search for investments, this will provide technical support to the overall Dutch RMBS secondary market and protect it at times of volatility, particularly as concerns also continue to grow regarding the state of the Dutch economy," the analysts conclude. "However, we are concerned that over a longer timeframe, if investors cannot find suitable investments, this could lead to a shift from the asset class into comparable sectors such as covered bonds."

JL

RMBS

Further g-fee rises under consideration

Recent FHFA statements suggest the GSEs could further increase guarantee fees. How far they eventually rise will depend on what kind of housing finance system emerges as private capital is encouraged back into the US mortgage market.

The FHFA believes the GSEs are not charging sufficient g-fees for certain risky loans. As the GSEs, FHA and VA have provided nearly 90% of mortgages originated since the crisis, it is also more generally felt that GSEs with implicit or explicit government backstops should not be the sole provider of credit in the residential mortgage space.

G-fees have been raised several times over the last two years, from 24bp in 2009 to 50bp now. The GSEs have meanwhile engaged in risk transfer transactions to reduce the risk borne by taxpayers and executing these transactions has also provided a useful input for calculating g-fees.

The FHFA is seeking g-fees at levels which could be expected to prevail in a competitive private sector market. "However, there is no clarity on what that private sector market is, or what private capital entering the market means," note RMBS analysts at Barclays Capital.

"Different housing finance models - bank portfolio lending based, non-agency securitisation based and hybrid GSE-private capital based - all lead to various levels of pricing for the same risk. The differences are driven by varying capital and return requirements, as well as other regulatory guidelines."

The Barcap analysts' pure government model has the GSEs guaranteeing entire pools without selling any losses. With a long-term cost of government capital of 5%, 150bp of capital and 10bp of losses the base case g-fee would be about 26bp, which is close to where they have historically been priced. In a stress case, however, g-fees would rise to around where they are now, at 55bp.

The model with government subsidised funding cost assumes the GSEs shed some risk to the private market and continue to fund capital at long-term rates of government-provided funding. It results in a base g-fee of 37bp, which is lower than currently and suggests current g-fees may be higher than needed.

The third model differs from the second only in that it assumes the GSEs or their successors use a cost of capital comparable to that used by private competitors. Assuming a 15% cost of capital the base case g-fee would be 56bp, or roughly equivalent to current levels.

The Barcap analysts conclude that g-fees are priced appropriately for a hybrid GSE model utilising a private capital rate of return. A comparison of agency and non-agency RMBS finds a 27bp credit cost and liquidity penalty implicit in non-agency execution relative to agency, suggesting that if g-fees were to rise by that amount a bank would technically be indifferent to executing via the agency or non-agency route.

Taking that into account, a future hybrid system where some government-related entity takes on losses, g-fees should be in the 60bp-70bp range. If bank lending provides private capital, then a 10bp-15bp rise would be needed to make banks indifferent between holding agency MBS and whole loans in their portfolios, while if the benchmark is steady and sustained non-agency MBS issuance using conforming collateral, g-fee levels need to be raised by another 25bp-30bp.

"G-fees look as if they are approaching a level that will significantly increase private sector involvement. Overall, further g-fee hikes will depend upon the path of GSE reform, the amount of capital various entities in the system are required to hold, and the cost of capital of these entities," say the analysts.

JL

Structured Finance

Starting early

Ivan Zinn, founding partner and cio at Atalaya Capital Management, answers SCI's questions

Q: How and when did Atalaya become involved in the structured finance markets?
A: Atalaya Capital Management has been around for about eight years now. We started out in corporate credit, but over the last five years we have started to focus more on structured finance. We see greater opportunities in specialty finance and in some consumer assets, so it is a case of going to where those opportunities are.

Typically we are creating bespoke financing or buying into non-traditional structured finance asset classes. While we could invest in an ABS or an MBS bond, we prefer to look at what forms the underlying for those securities.

Q: What are your key areas of focus today?
A: Our business broadly breaks down into three categories. We have our assets strategy, which looks at structured finance and structured credit, and we also engage in direct lending - which is typically corporate or real estate lending. However, a large part of what we do is related to our opportunistic bucket.

That last category is broadly buying assets that are coming off financial institutions' balance sheets, such as loans. Those may or may not be performing, but we will typically take on the entirety of a bank's relationship to a given borrower rather than just a slice of a loan. These are often secured by real estate, but could be secured by consumer assets or something else.

Our structured finance activities are generally focused on areas such as new, novel products that perhaps do not have the size or track record to tap traditional financing sources. The shock to the system in 2008 created dislocation for the traditional funding sources for these asset classes and so we have been stepping into that gap.

Q: Which market constituent is your main client base?
A: The bulk of our investors are endowments and foundations, pension funds and also some high net-worth investors. Given our unique structure, our investor base reflects clients able to take on opportunistic mandates with an element of illiquidity.

Atalaya won an award earlier this year as the best hybrid hedge fund. This is a bit of a grey categorisation, since we see ourselves as a hybrid between a traditional quarterly liquidity hedge fund and more of a 10-year private equity draw-down structure.

The nature of what we do is shorter-term than a true private equity structure with a 10-year life, but we are not looking to provide quarterly liquidity either. That structure does not always appeal to the average hedge fund investor, but we have created a home in this opportunistic hybrid category, which seems to have resonated with the broader investment community.

Q: How do you differentiate yourself from your competitors?
A: The fact that we are set up differently to a lot of the guys out there is one big way we differentiate ourselves, but it is not the only way. That said, we do occupy a very interesting part of the market.

We also typically deal with companies at an earlier stage of their life-cycle than many of our competitors would look to. By getting in early, we are able to take advantage of opportunities before our competitors know they are there.

For example, several years ago we were financing a company with quite a unique business model targeting a niche consumer marketplace. It could not tap traditional capital and we were able to step in and get a rate of return on our investment with them that was more than 20%. Then later another fund came in and took us out at about a 10% return and a year after that they were tapping the securitisation market and able to refinance everyone at 5%. When things run smoothly, that is what is supposed to happen.

Q: Which challenges/opportunities does the current environment bring to your business and how do you intend to manage them?
A: Broadly we are seeing economic improvement and companies are tapping into financing sources that were not previously available. A perfect world for us would include a few bumps in the road to make sure capital is not flowing in too rapidly, but the current environment provides plenty of scope to invest.

At Atalaya, we are always looking for new transactions. It is like a constant treadmill, where we are trying to keep a little bit ahead of where we see the market going or where capital markets have not yet reached.

We have been a buyer of auto loans, but the opportunity there is probably less than it was in the last couple of years. There has been demand for subprime auto paper, but we are now seeing a handful of other asset classes offering better relative value. Those are generally in these more novel, newer financing asset classes.

One example would be merchant card advances. That is something which most of the structured credit investor universe might not have looked at yet because historically it has been very small, but it is growing and it will cross their desks over time. As technology allows asset classes like that to proliferate, it becomes even more important to identify opportunities early on. Our challenge is to run a little faster on the treadmill every day.

Q: What major developments do you need/expect from the market in the future?
A: As credit investors, we always think the glass is half empty. There have been so many head-fakes from the Fed, and the latest monetary policy tightening means we will see some volatility. If that gets extreme, then it is a concern, but we do like to have a degree of volatility.

It is going to be a bumpy ride for the rest of the year, but the machines that are out making structured finance products will roll on and continue to find buyers. The interest rate environment will encourage people to continue to take some risk as well, so while it may not be a spectacular end to the year, it should be a solid one.

JL

Structured Finance

Structured credit pro in hedge fund role

Elena Ranguelova has joined Investcorp as head of credit and equity strategies in New York. It is a newly-created role in which she takes responsibility for supporting investments in emerging managers and Investcorp's Single Manager Platform hedge fund seeding business.

Ranguelova was previously global head of credit and event driven strategy research at Pioneer Investments. She worked at Goldman Sachs before that and began her career as a structured credit strategist at Lehman Brothers.

Structured Finance

Bank names new credit chief

Sun National Bank has appointed Imran Riaz as chief credit officer and svp. He will lead Sun's credit team and oversee the asset quality of the company's loan portfolio.

Riaz has experience across structured credit, asset-based lending and enhanced portfolio analysis. He was previously managing senior credit officer at TD Bank, where he spent 23 years in a variety of roles.

Structured Finance

Industry vets bolster fixed income unit

Canaccord Genuity has made a series of appointments to its fixed income team. Steve Lobb joins as senior md and head of US fixed income sales, while Barry Dennis, Dean Larson and William Ludington have all joined in structured products positions.

Lobb has over 25 years of experience in fixed income and was previously global head of credit sales at Société Générale. He has also served as head of structured credit at Credit Suisse, global head of structured credit at RBS, European head of capital markets at Scotia Capital and in a senior global markets role at Bank of America.

Dennis becomes senior md and head of US structured products. He was recently head of structured products at Sterne Agee and before that was a founding partner at Chapdelaine Credit Partners and a senior structuring and solutions representative at Merrill Lynch, where he specialised in derivatives and structured products.

Larson joins as US structured products md with broad experience in originating, structuring and selling structured solutions. He was previously co-head of structured products at Chapdelaine Credit Partners, head of credit sales and trading at Merrill Lynch Canada and a structured sales representative at UBS and Deutsche Bank.

Ludington joins as US structured products md. He has over 20 years of experience distributing complex risk transfer and structured product securities to institutional investors and has worked at CapRok Capital, UBS and JPMorgan.

Structured Finance

Agency brings in ratings vet

Morningstar Credit Ratings has appointed Vickie Tillman as president, starting in September. She will lead operations for the structured credit research and ratings business, reporting to equity and credit research svp Haywood Kelly.

Tillman previously spent three decades at S&P. She was most recently svp in McGraw-Hill's global strategy group.

Risk Management

OTC portfolio reconciliation partnership agreed

REGIS-TR and TriOptima have agreed to cooperate in providing portfolio reconciliation of trade repository data for OTC derivatives portfolios. Impending European regulatory deadlines mean financial and non-financial firms will have to start reconciling their OTC derivatives portfolios by 15 September, with trade reporting beginning in the new year.

Cooperation between REGIS-TR and TriOptima will help their mutual clients to meet regulatory obligations and operational goals. Data integration will enable triResolve clients to verify and reconcile transactions submitted to REGIS-TR and leverage triResolve's resolution workflow to identify and address any exceptions.

RMBS

NCUA sets sights on Morgan Stanley

The NCUA has filed suit in a federal court in Kansas against Morgan Stanley and other firms, alleging legal violations in the sale of more than US$566m of RMBS to the US Central and WesCorp corporate credit unions.

The suit alleges that misrepresentations were made about the underwriting and in the subsequent sale of the RMBS. The offering documents are alleged to have contained lies and omissions, leading to the securities being far riskier than represented.

The NCUA has similar actions pending against Barclays Capital, Credit Suisse, Goldman Sachs, JPMorgan, RBS, UBS, Wachovia and Washington Mutual. It has thus far settled with Citigroup, Deutsche Bank, HSBC and Bank of America (SCI passim).

ABS

UK card trusts to avoid mis-selling pain

The mis-selling of identity theft and fraud protection to UK credit card borrowers should not be detrimental to UK credit card trusts, says Fitch. The agency notes that payment protection insurance (PPI) mis-selling occurred on a larger scale without affecting trust performance.

Seven million borrowers could be entitled to compensation, with a compensation scheme set up under which £1.3bn could be paid out. However, Fitch believes card providers are taking more organised steps to address the issue than they did with PPI and does not expect UK trusts to be impacted.

ABS

Punch securitisation deemed weak

Punch Taverns' Punch A securitisation business profile has been revised down to weak by S&P, affecting the credit ratings on the class A1, A2, M1 and M2N notes. The B1, B2, B3, C and D1 notes have been affirmed and the outlook remains negative.

S&P has previously viewed Punch A as stronger than Punch B, but has now revised it down to Punch B's level. The agency believes the cash flow generation capabilities of the securitised assets in Punch A have weakened and is concerned that ongoing non-core pub disposals will weaken Punch A's competitive position in the tenanted pub industry.

The free operating cash flow generated by the Punch A estate remains insufficient to cover debt service on the class B, C and D notes, although Punch Taverns is supporting the securitisation to prevent a breach of the default covenant. Absent a restructuring, S&P believes they remain vulnerable to a default.

The rating agency believes it is questionable whether the class M notes will be repaid in a timely manner, although a default would happen after the class B, C and D notes. Therefore the class M notes have been downgraded from single-B plus to single-B.

The class A notes are still expected to receive interest and amortisation payments in a timely manner. However, the likelihood of increased cash flow stresses in the future has led the agency to downgrade the notes from single-A minus to triple-B.

ABS

Wage pressures weigh on Arsenal bonds

Arsenal Football Club's record signing of Mesut Ozil for £42.5m could be a concern for Arsenal Securities bondholders if it is followed by more significant transfers in the January transfer window, according to securitisation strategists at Barclays Capital. Increased wage pressures at the club raise the risk of the wage-to-revenue ratio rising above 70% - a level at which Fitch is expected to consider downgrading the bond from triple-B.

The full-year 2012 wage-to-revenue ratio stood at 61.1%, up from 54.8% the previous year. However, the Barcap strategists note that Arsenal has significant cash reserves remaining after the acquisition of Ozil. The club reported cash reserves of £123.3m in November and has since been involved in transfer dealings with a net outflow of £32m.

Further, financial ratios remain strong within the transaction at 3.77x debt service coverage but 1.2x on a consolidated basis. Although the consolidated coverage is tight, cash reserves are an important mitigant.

The AFCPZ 5.1418 29 bonds are marked at around 290, which the strategists believe looks like a fair price, given the slight increase in risk.

Structured Finance

STACR to receive NAIC designation?

NAIC appears to have abandoned its proposal to alter the process used to derive ratings for RMBS and CMBS positions held by insurance companies, which would have reduced NAIC breakpoints for most bonds taking losses or interest shortfalls (SCI 17 April). The organisation is now said to be examining the accounting and reporting framework for Freddie Mac's recent STACR deal to determine whether it should be classified and modelled as an RMBS.

If it determines that STACR is effectively an RMBS position, the transaction will be included in the 2013 year-end financial modelling process, at which time the securities would receive a NAIC designation. Barclays Capital RMBS analysts suggest that such an outcome would be favourable for the securities, as it could potentially increase insurer participation in future STACR-type transactions.

Structured Finance

Risk retention RFC released

Six US federal agencies have issued a notice revising a risk retention rule proposed in 2011 as part of the Dodd-Frank Act. The rule would provide securitisation sponsors with several options to satisfy the risk retention requirements.

The original proposal measured compliance based on the par value of securities issued in a securitisation transaction and included a premium capture provision. The new proposal would base risk retention requirements on fair value measurements and do away with the premium capture element.

The revised proposal would also clarify the definition of a qualified residential mortgage (QRM) and exempt QRM securitisations from risk retention. QRMs would have the same meaning as the term qualified mortgages as defined by the Consumer Financial Protection Bureau.

The proposal is being issued by the Board of Governors of the Federal Reserve System, the Department of Housing and Urban Development, the FDIC, the FHFA, the Office of the Comptroller of the Currency and the SEC. Comment is also requested on an alternative definition of QRM which would include certain underwriting standards.

Structured Finance

Second rescue fund closed

GSO Capital Partners has announced the final closing of its second capital solutions fund, GSO Capital Solutions Fund II, with total commitments of US$5bn. This represents an increase of over 50% from GSO's first capital solutions fund raised three years ago (SCI 14 July 2010).

GSO received support from both existing and new investors, with demand surpassing the fund's US$5bn hard cap. Investors in the fund include a diverse group of US state pension funds, corporate pension funds, sovereign wealth funds, insurance companies, endowments, foundations and family offices.

The fund provides rescue financing to distressed companies that face liquidity issues or need capital to avoid imminent bankruptcy or for their exit from bankruptcy. GSO has deployed over US$4bn in the strategy to date across a broad range of sectors and geographies, with a focus on North America and Western Europe.

CDO

CDO auctions due

Auctions have been scheduled for two ABS CDOs on 23 September. Collateral from the Libertas Preferred Funding I and Kleros Preferred Funding deals will only be sold if the proceeds equal their senior redemption amounts.

CLOs

Agency seeks SME CLO comments

DBRS has released an RFC on proposed changes to its methodology for rating and monitoring European SME CLOs. Comments are due by 30 September.

The proposed methodology updates correlation assumptions and introduces a new diversity model. It also brings recovery assumptions in line with those used for the agency's large credit CDO and European RMBS methodologies and clarifies the methods of computation of portfolio annualised default rates.

The new methodology would supersede the current one instituted in June 2011. Implications for outstanding ratings would vary, with negative implications for unsecured collateral.

CMBS

Euro CRE growth prospects 'weak'

Financial conditions in many European countries will remain unsupportive of commercial real estate collateral value growth, says S&P. Another year of very weak or negative growth is expected, which will affect European CMBS transactions.

Europe's five largest economies will all be impacted; despite signs of a slight pick-up in demand of good quality secondary real estate in the UK, values are expected to continue to lag a more robust prime property market. CRE values in Germany could continue to rise, but growth will slow into 2014.

Valuations are expected to fall further in Italy and Spain, with a relatively limited fall in the French real estate market. Spain is the weakest of the bunch.

"With collateral value growth sclerotic at best, if not negative, we do not expect a quick cure for restoring LTV ratio levels for existing CRE loans. We further expect that the volume of bank finance will remain constrained, focusing on relatively less risky assets in support of core franchise clients. In our view, these conditions point to a continuation of the long, slow workout of troubled assets in CMBS transactions and bank loan books alike," says the agency.

CMBS

Post-crisis tweaks strengthen Japanese CMBS

Moody's reports that, for the first time since the 2008-2009 financial crisis, no Japanese CMBS loan defaults have been recorded for a six-month period. The agency notes in its latest 'Structured Thinking: Asia Pacific' publication that the default rate of its rated CMBS loan portfolio significantly improved to zero in 1H13 from 43% in 2012 and 56% in 2011.

In 1H13 seven Japanese CMBS loans successfully repaid, of which three were fully repaid at maturity and four were repaid prior to their scheduled maturity dates. Some borrowers refinanced, while others sold their properties to third parties to pay off their loans.

Of the repaid loans, four were originated after 2008. Moody's says that CMBS loans originated after 2008 had more conservative property valuations and employed scheduled amortisation structures that made their repayments easier, thereby lowering the overall default rate. The agency expects future default rates to continue to remain low, as a result of these loan characteristics.

Lenders have applied more conservative property values since 2008 by increasing the capitalisation rate, owing to large falls in real estate prices. Increasing the cap rate and decreasing the value of properties ensure that they are not overvalued, thereby reducing their refinancing risks at maturity, according to Moody's.

A recent CBRE Quarterly Survey shows that the average cap rate used to value Tokyo office buildings significantly increased to 4.5% in April 2009 from 3.9% in April 2008. Loans backed by Tokyo office buildings account for around 70% of the performing loans portfolio that Moody's monitors.

Scheduled amortisation structures lower a property's loan-to-value (LTV) at maturity. As a result, the LTV at maturity could be lower than the LTV at origination, meaning that the loan is more likely to be refinanced. A lower LTV is therefore associated with a lower default risk.

Of the loans originated in 2008 that matured in 1H13, the weighted average LTV at origination was 66%, dropping to 61% at maturity. In Moody's CMBS loan portfolio, 44% of the loans originated after 2008 had scheduled amortisation, with the percentage rising to over 90% after 2010.

This is in contrast to the period before the financial crisis, where only a few CMBS loans employed scheduled amortisation because it would have significantly reduced return on equity. Less than 20% of loans originated in 2007 had scheduled amortisation, for example.

CMBS

CMBS delinquencies hit three-year low

The Trepp US CMBS delinquency rate fell in August for the third consecutive month. The rate dropped by 10bp to 8.38%, the lowest reading in three years, and has now fallen by 69bp over the last three months and 175bp over the last year.

About US$2.5bn of loans became newly delinquent in August, which was slightly higher than the July total. These loans put upward pressure of 46bp on the delinquency rate.

Helping to offset these new delinquencies were US$1.5bn of loans that cured. This put 28bp of downward pressure on the delinquent loan reading.

In addition, loan resolutions totalled almost US$1.1bn in August - down by almost 50% from US$2.05bn in July. Removing these distressed loans from the delinquent asset bucket created 20bp of downward pressure on the delinquency number.

Another US$453m in loans that had been delinquent paid off with no loss at all during the month, putting 8bp of downward weight on the calculation.

Risk Management

Private rating service unveiled

Moody's has launched a new service - dubbed Private Monitored Rating (PMR) - which seeks to deliver all the benefits of full credit analysis to companies without the assignment of a public rating. The product will be available to companies in all Moody's service areas, except Japan.

The agency says it has developed the new service in response to growing customer demand for independent credit analysis for internal corporate purposes and governance. The PMR is designed to provide customers with analytical insight into their credit quality through a definitive rating assigned at the corporate or institutional level. The rating will be generated through the same process as public ratings, but on a private basis solely for the customer's internal use.

PMR could also benefit customers contemplating near-term initial rated issuances either in the loan, private placement or debt capital markets by reducing financing execution timetables, as Moody's will have developed an analytical relationship through the PMR process.

Risk Management

Non-cleared margin requirements released

The Basel Committee and IOSCO have released the final framework for margin requirements for non-centrally cleared derivatives. Under the standards, all financial firms and systemically important non-financial entities that engage in non-centrally cleared derivatives will have to exchange initial and variation margin commensurate with the counterparty risks arising from such transactions.

The final set of requirements includes a number of modifications. First, physically settled FX forwards and swaps are exempt from initial margin requirements. Variation margin on these derivatives should be exchanged in accordance with standards developed after considering the Basel Committee supervisory guidance for managing settlement risk in FX transactions, however.

The framework also exempts from initial margin requirements fixed, physically settled FX transactions that are associated with the exchange of principal of cross-currency swaps. However, the variation margin requirements that are described in the framework apply to all components of cross-currency swaps.

Meanwhile, 'one-time' re-hypothecation of initial margin collateral is permitted, subject to a number of strict conditions. The aim is to help mitigate the liquidity impact associated with the requirements.

A number of other features of the framework are also intended to manage the liquidity impact of the margin requirements on financial market participants. In particular, the requirements allow for the introduction of a universal initial margin threshold of €50m, below which a firm would have the option of not collecting initial margin. The framework also allows for a broad array of eligible collateral to satisfy initial margin requirements.

Finally, the framework envisages a gradual phase-in period to provide market participants with sufficient time to adjust to the requirements. The requirement to collect and post initial margin on non-centrally cleared trades will be phased in over a four-year period, beginning in December 2015 with the largest, most active and most systemically important derivatives market participants.

Risk Management

Consultation launched on CCB location

The EBA has launched a consultation on draft regulatory technical standards (RTS) setting out criteria for identifying the geographical location of all relevant credit exposures - namely credit risk, trading book and securitisation exposures. These RTS will be part of the Single Rulebook aimed at enhancing regulatory harmonisation in the banking sector in the EU.

Under EU capital requirements rules, institutions at Member State level are required to hold countercyclical buffers (CCBs) to protect the banking system against potential losses when excess credit growth is associated with an increase in system-wide risks. The size of countercyclical buffers will depend on the countercyclical buffer rates set by national authorities and the portfolio distribution of the institutions.

In particular, the buffers to be held by individual institutions with cross-border activities will depend on the geographical location of their credit portfolios and not on the location of the institutions that hold these exposures. The geographical location is to be determined for certain credit risk, trading book and securitisation exposures, as set out in Article 140 of the Capital Requirements Directive.

The consultation paper outlines the principles behind the identification of the geographical location of these exposures, on the basis of which the institution-specific countercyclical buffer rates shall be determined. In particular, it proposes to use the location of the obligor or debtor as a general principle for the identification of the geographical location.

In order to ease the implementation of these standards for banks with limited cross-border activities and trading book activities, proportionality measures have been introduced with the aim of reducing the operational burden on these institutions.

The consultation runs until 1 November. The EBA is expected to submit these draft RTS to the European Commission for endorsement by 1 January 2014.

Risk Management

Regulatory equivalence assessments underway

ESMA has published its advice to the European Commission on the equivalence of regulatory regimes for OTC derivatives clearing, central counterparties and trade repositories (TR) of non-EU countries with EMIR. The authority considers third-country regimes equivalent where the legal provisions and the level of supervision and enforcement is similar to that of EMIR.

ESMA has assessed the equivalence of the regulatory regimes of Australia, Hong Kong, Japan, Singapore, Switzerland and the US. The third-country rules were compared with EMIR requirements for central clearing, reporting, CCPs, TRs and non-financial counterparties, as well as risk mitigation techniques for uncleared trades.

The regulatory regimes of Australia and Switzerland were found to be equivalent for CCPs. Conditional equivalence is proposed for: Hong Kong, Japan, Singapore and the US for CCPs; the US and Japan for central clearing, requirements for non-financial counterparties and risk mitigation techniques for uncleared trades; and the US for TRs.

The European Commission is expected to use ESMA's technical advice to prepare possible equivalence decisions. Where it adopts such a decision, certain provisions of EMIR may be dis-applied in favour of equivalent third-country rules and - depending on the specific area determined to be equivalent - ESMA may recognise within the EU a CCP or TR that is authorised outside the EU.

For Australia, Canada, Hong Kong, India, Singapore, South Korea and Switzerland, ESMA will be delivering its advice on areas not yet covered by 1 October. CCPs from third-countries that wish to continue to offering clearing services directly to EU clearing members will have to apply for ESMA recognition by 15 September.

RMBS

Another UCI tender underway

UCI has launched a tender offer for nine bonds across six of its RMBS. The bank is offering to buy back up to €200m of paper from UCI 10, 11, 12, 14, 15 and 17.

Three class A notes are being targeted for purchase prices of between 83 to 86, with a class A2 targeted at 76. Three class B notes are being targeted at between 62 and 67, while the two class Cs have a purchase price of 50 and 55.

UCI 14 A was covered at 79.75 yesterday, with talk in the high-70s and very high-70s, according to SCI's PriceABS data. In comparison, the purchase price of 84.5 being offered for the bond in this latest tender appears to be relatively generous.

The tender is being conducted via an unmodified Dutch auction and expires on 10 September, with settlement expected two days later. The rationale for the offer is UCI's continued management of its outstanding liabilities and the optimisation of its financial structure.

RMBS

OneWest deals hit by forbearance losses

A number of OneWest-serviced RMBS that were transferred to Ocwen recognised forbearance losses last month (SCI 5 July). For instance, ALBT 2007-OA1 recognised US$5.4m in past forbearance losses - amounting to 6% of unpaid principal balance - with the A2 bond being written down by US$5.8m.

A few deals from the MARM shelves took losses of 0.5%-1% of UPB, according to Barclays Capital figures. In addition, GSR 2006-OA1 and BCAP 2006-AA2 were hit, with US$8m (1.1% of UPB) and US$7.6m (2% of UPB) losses respectively.

Away from OneWest transactions, CMLTI 2006-FX1 also recognised losses related to prior forbearances of 2% of UPB.

RMBS

QRM proposal 'RMBS positive'

The latest proposal on the treatment of qualified residential mortgages (QRM) by six US regulatory agencies (SCI 29 August) will reduce uncertainty for residential mortgage originators, RMBS issuers and investors, says Fitch. It should also support stronger participation in jumbo loan activity by US banks.

The proposal would align QRM rules with existing mortgage risk retention standards mandated by the Dodd-Frank Act, which would simplify the underwriting and securitisation of prime borrower loans. Significantly, there is no requirement for a minimum down payment under the draft rule - avoiding a hurdle which the agency believes would have slowed the revival of the prime RMBS market.

RMBS

Eminent domain injunction supported

SFIG has filed an amicus curiae brief in support of Wells Fargo's motion for a preliminary injunction against the City of Richmond, California and Mortgage Resolution Partners (SCI 13 August). The case - which attempts to halt the city's proposed use of eminent domain to seize mortgage loans from private label securitisation trusts - is currently proceeding in the US District Court, Northern District of California, San Francisco Division.

"While SFIG recognises the challenges currently confronting municipalities and borrowers, the use of eminent domain to seize mortgage loans is an illegitimate tactic that undermines the integrity of the entire home mortgage system," comments Richard Johns, executive director of SFIG. "Allowing this type of practice is a short-sighted and unconstitutional idea. Not only would it do irreparable damage to the private mortgage market, undermining Congressional efforts to encourage private capital in the market, but it would also actually injure the local residents these efforts are supposed to be helping."

The brief points to significant risk on three levels. First, the private label RMBS market will be fundamentally shaken if the structure can be pulled apart by municipalities seizing loans, especially by cherry-picking individual performing loans.

Second, each trust which holds to-be-seized loans will be damaged by an amount that exceeds the face value of the loan, because the structure - as a fixed, geographically diverse pool - will be undermined. The brief explains: "The market value of the interests in the trust will likely decline by an amount that far exceeds the face amount of the loans seized. This injury may well be un-compensable through post-seizure compensation proceedings."

Third, each trust that holds to-be-seized loans is expected to lose the value of those loans - which the seizure programme seriously undervalues as part of its premise. The consequences will be felt by public and private pension plans, retirement accounts, college savings accounts, hospital and university endowments, and other funds, SFIG warns.

The brief also demonstrates that the programme would "harm prospective homeowners across the country by imposing new, unanticipated and unquantifiable risks upon investors in mortgages, depressing the value of mortgage-based investments and impeding the return of private capital to the residential mortgage market".

RMBS

End of Greek moratorium discussed

Lifting the mandatory freeze on repossessions and auctions of debtors' main residences would be positive for Greek RMBS and cover pools, Fitch says. The move would increase cashflows from recoveries and could shorten foreclosure timing assumptions. However, the increase in supply may prevent recovery rates and recovery times from returning to levels associated with a less distressed housing market.

A full assessment of the impact of lifting the moratorium would require additional detail on the scope of any exceptions and how they are determined, according to Fitch. While recent comments by senior politicians in Greece indicate that the moratorium will not be extended beyond end-2013, this is politically contentious.

From September 2010, when the moratorium was introduced, cumulative net defaults have risen and recoveries from Greek securitised residential mortgage portfolios in Fitch-rated RMBS transactions have not kept pace. They have fallen from around 13% prior to the moratorium to as low as 1% since it was implemented.

Lifting the moratorium would benefit Greek RMBS deals, which provision for full loan defaults, rather than just losses. Furthermore, the suspension on foreclosures in 2010 coincided with a substantial increase in arrears, suggesting that moral hazard concerns are legitimate.

However, the benefits of increased recovery cashflows would be partly offset by the pressure that additional excess supply may put on house prices. "Lenders would probably try to strike a balance between commencing auctions and flooding the market with new supply," Fitch notes. "But while this might limit house price volatility, it may counteract any benefits for average foreclosure timings, which the moratorium has significantly increased. Foreclosure timings may even lengthen, depending on the extent of the removal of auction restrictions."

The agency anticipates making further adjustments to its house price decline (HPD) or recovery timing expectations if the moratorium is lifted. These were last updated in July, when the base-case forecast for nominal average peak-to-trough Greek house price declines increased to 42% from 33%, in light of a very weak housing market and a lack of foreclosure data. Recovery timing expectations were also lengthened to five from four years, in part because of the extension of the mandatory auction freeze to end-2013.

RMBS

JHF RMBS credit risk up despite lower LTVs

The positive impact on RMBS of the Japan Housing Finance (JHF) lowering its maximum LTV from 100% to 90% for its Flat35 loans is offset by the increase of down payment loans provided by private institutions, says Moody's. The Flat35 housing-loan programme is funded through the JHF's RMBS programme.

Consumers who cannot afford the 10% down payment for a 90% LTV loan can now obtain down payment loans, making their effective LTV 100% instead of 90%. The higher debt-to-income ratio makes these Flat35 loans 30% more likely to default, calculates the agency.

Moody's expects more borrowers of JHF's Flat35 loans to take out down payment loans. Down payment loans in RMBS rated by the agency increased from ¥2.3bn in October 2012 to ¥9.3bn in June.

RMBS

Restructuring to provide UK NC blueprint?

As one of several of Lehman Brothers' UK non-conforming RMBS without a currency swap in place after Lehman's bankruptcy, the recent restructuring of MFD 2008-1 may give clues as to how similar deals will be restructured, believe Nomura ABS strategists. The restructuring is positive, they argue, crystallising losses immediately, re-balancing the deal and removing future FX risk.

The restructuring took place after the deal received proceeds from the bankruptcy estate and auctioned the remaining part of the claim. The total proceeds were US$119.6m, roughly 58% of the agreed claim amount of US$205m.

MFD and other deals have been converting loan payments on non-sterling bonds at spot rates. Euro and US dollar appreciation since the deal closed has meant that payments using the spot rate were effectively causing a loss to the transaction. The restructuring will now make the transaction balanced in terms of assets and liabilities, say the analysts.

The A notes have been redenominated from €647.3m to £554.7m and the B notes have been written down from £146m to £100m. The margin on the B notes has been increased from 2% to 3.2%.

Swap termination and auction proceeds of £76.8m will be used in next month's IPD to pay A notes £50.7m, B notes £10.7m, liquidity reserve £2m and residual holders £13.2m. A proposal has also been made to split the A notes into A1 and A2 and the Bs into B1 and B2 notes.

RMBS

UK RMBS affirmed after modelling error

Fitch has affirmed 55 tranches of 18 UK non-conforming RMBS. The action follows the detection of an error in a model used in the agency's surveillance analysis of UK RMBS ratings.

The error was related to the formula that calculates recovery rate assumptions in rating scenarios. The error marginally increased the assumed recoveries that the model takes into account.

The model error potentially affected analysis in relation to actions taken on 247 tranches in 31 UK non-conforming RMBS transactions on 12 August 2013. However, the error actually only affected the model output for 55 tranches in the 18 affected transactions. No other UK RMBS ratings were impacted by the error.

The results of the corrected models have been considered again by the rating committee, alongside all other relevant factors, resulting in the affirmations. While Fitch has no reason to believe that the model contains any other errors, a verification review is being conducted to verify the accuracy of other model formulae.