Contents

Structured Finance

US supply sees sharp up-tick

US secondary market activity has picked up significantly across the board, with SCI's PriceABS archive listing over 700 line items for yesterday's session. Bid-lists in each of the ABS, CMBS and RMBS sectors boosted supply.

While a wide variety of collateral types were out for the bid in the ABS sector, a sizeable list of student loan floaters dominated the focus. Similarly, a large US$1.1bn pre-announced list of 2006-2007 vintage multi-family A1A tranches grabbed attention in CMBS. Finally, a large list of investment grade ARM RMBS bonds was scheduled to trade yesterday afternoon, according to Interactive Data.

Of note, SCI's PriceABS shows that the SLMA 2003-7X A5B tranche was covered at 95.25 during the session. A number of other Sallie Mae, as well as Student Loan Corp bonds were out for the bid.

Among the CMBS circulating yesterday, COMM 2006-C7 A1A was covered at 99. The CSMC 2006-C3 AM bond, meanwhile, was covered at 165.

A diverse range of talks and covers was also observed in the RMBS sector. CWALT 2006-OA1 2X was talked in the high-60s, while MRFC 2002-TBC2 A was talked at low/mid-90s before failing to trade.

CS

CMBS

Euro CMBS reacts to taper delay

The Fed's decision not to taper (SCI passim) - and the subsequent boost to risk assets - appears to have caught many market participants off-guard. European CMBS secondary activity was lifted by the tide, with many tranches trading yesterday.

"Thursday was really busy after the 'no taper' announcement. I do not think desks were expecting it and we saw plenty of BWICs coming out," says one trader.

He adds: "The BWICs out yesterday traded very strongly. We have been seeing more selling than buying, but the market is still trading up."

Hedge funds were heavily involved with the bid-lists and there was a considerable amount of trading for senior CMBS bonds. Interest was also high for mezzanine names.

"Senior activity was strong, but the money-good mezzanine tranches are trading also. While there is some risk in mezzanine CMBS, that paper also generally traded higher than price talk," says the trader.

He continues: "People are looking for yieldier paper, but still prefer to stay in the money-good cash price bonds. In general I think we are all still waiting to see where things shake out."

The trader is uncertain what the Fed's decision not to taper will mean in the medium or long term. While he feels it is a positive signal for the short term, it also means that the economic recovery is taking longer than had been expected.

"We are going to see some volatility as the market makes sense of it and gets comfortable. In the meantime, if the environment stays stable for a few days, I think we will see a lot of people coming into the space," he observes.

Of the names out for the bid during the session, OPERA CMH B was covered in the mid-90s. SCI's PriceABS data shows that price talk for the bond from August last year was entirely in the 20s and 30s.

Meanwhile, DECO 7-E2X C was talked yesterday in the high-70s and very high-70s to 80 area and covered at 80.77. The tranche was covered in July at 75.72 and first appeared in PriceABS in June 2012, when it was covered at 63.06.

DECO 7-E2X D was also out for the bid and covered at 61, with talk in the 20s, mid-30s and mid/high-50s. Price talk on DECO 9-E3X F was in the very low-singles.

PriceABS also recorded covers for the ECLIP 2006-3 A, EHMU 2007-1 A, EPICP BROD R, GRF 2013-1 A, TITN 2006-3X A, EURO 25X C, EURO 25X D, TITN 2007-CT1X A2, WINDM XIV-X A and WINDM X-X D tranches during the session.

JL

Structured Finance

SCI Start the Week - 23 September

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

Pipeline
Five ABS were added to the pipeline last week, all of which were auto deals. Two RMBS, one CMBS and two CLOs were also announced.

The ABS pipeline entrants comprised: US$205m CPS Auto Receivables Trust 2013-C; E-CARAT 2; €500m Kimi 2013-1; SCF Rahoituspalvelut 2013; and A$430m SMART ABS Series 2013-3 Trust. The US$507.8m PMT Loan Trust 2013-J1 and A$750m Series 2013-2 WST Trust accounted for the RMBS, while the CMBS was US$1bn COMM 2013-LC13. The CLOs were US$592.2m Ableco Capital and €361.34m Chester Street.

Pricings
It was a very busy week for new issuance. Pricings comprised 13 ABS, five CMBS and seven CLOs.

The only euro-denominated deal to print last week was €720m VCL 18, which was one of three auto deals along with US$231.9m DriveTime 2013-2 and US$200m Westlake Automobile Receivables Trust 2013-1. Five of the ABS pricings were credit card deals: US$731.11m American Express Issuance Trust II Series 2013-2; US$650m Citi Credit Card Issuance Trust 2013-A7; US$600m Citi Credit Card Issuance Trust 2013-A8; US$250m Citi Credit Card Issuance Trust 2013-A9; and US$600m Golden Credit Card Trust 2013-2.

The remaining ABS new issues were: US$110.63m BXG Receivables Note Trust 2013-A; US$200m Dong Fang Container Finance 2013-1; US$446.86m GE Equipment Midticket 2013-1; US$324.98m Leaf Commercial Capital 2013-1; and US$624m SLM Private Education Loan Trust 2013-C.

As for CMBS, US$425m Boca Hotel Portfolio Trust Series 2013-BOCA, US$1.115bn CGCMT 2013-GC15, C$400m SCG 2013-CWP Hotel Issuer, US$185.5m VFC 2013-1 and US$1bn WFRBS 2013-C16 printed. Finally, US$514.4m Apidos CLO XV, €336m Carlyle Global Market Strategies Euro CLO 2013-2, US$318m Kingsland VI, US$520m Northwoods Capital X, US$514m OCP CLO 2013-4, US$833m Symphony CLO XII and US$409m WhiteHorse VII accounted for the CLO issuance.

Markets
The US non-agency RMBS secondary market saw volumes of US$8bn last week, with BWICs accounting for US$3bn, according to analysts at Wells Fargo. "Prices continue to be relatively stable through the Fed announcement Wednesday [SCI 19 September]. New issuance has been slow, with only three deals coming to market in August, and a second deal in September, so far," they add.

US CLO BWIC volumes stood at around US$200m for the week, after sellers unwound positions the week before and decided to stay on the sidelines for the Fed's taper announcement. Bank of America Merrill Lynch strategists report that CLO 1.0 deals comprised the majority of BWIC volumes until a number of 2.0 deals came to market on Friday.

They comment: "Triple-A 1.0 tranches accounted for around 40% of this week's volumes. Amid relatively light secondary activity, 1.0 spreads remained unchanged from last week."

Meanwhile, US CMBS rallied after the announcement that tapering would not start just yet, with generic 2007 dupers ending the week 5bp tighter at swaps plus 115bp. Barclays Capital CMBS analysts note that super senior spreads on new issue collateral also tightened and 10-year dupers were being quoted at plus 99bp at Thursday's close, 6bp tighter than the previous week.

European CMBS activity was also lifted in the wake of the tapering announcement, as SCI reported on Friday (20 September). One trader reported that desks had been caught off-guard by the Fed's decision.

"I do not think desks were expecting it and we saw plenty of BWICs coming out," he says. "The BWICs traded very strongly. We have been seeing more selling than buying, but the market is still trading up."

Finally, the European ABS market witnessed a number of UK whole business securitisation bonds out for the bid to start the week, as SCI reported on 17 September. Credit tenant-linked CMBS tranches were also out in Monday's session. SCI's PriceABS data recorded covers ranging from 113 to 280 for the names.

Deal news
• The fortunes of the Co-operative Bank's outstanding Leek and Silk Road deals are more closely tied to the originator's financial health than most UK RMBS, due to noteholder put options inserted after the lender failed to call the transactions (SCI 14 April 2011). Investors are concerned that the bank may not be able to fund the note redemptions, given the need to raise £1.5bn of additional capital (SCI 18 June).
• Spanish bad bank SAREB last month completed its first sale of an REO portfolio, dubbed project Bull. The transaction was structured as a Fondo de Activos Bancarios (FAB), a new vehicle that is a hybrid between asset securitisation funds and collective investment vehicles.
• September remittances indicate that the US$656m Innkeepers portfolio - securitised in LBUBS 2007-C6 and LBUBS 2007-C7 - has paid down. The move was widely expected, given that the asset has been open for prepayment since its December 2011 modification and owner Cerberus was shopping for a new loan in June (see SCI's CMBS loan events database).
• Access Group's series 2004-2 FFELP securitisation class A2 notes are not expected to pay down in full by their final maturity date of 25 January 2016, a failure that will constitute an EOD. The remaining class A3 through A5 notes should pay down before their final maturity dates, while the class A2s should pay down in about 20 months after their final maturity date.
• An auction is slated for RFC CDO I on 30 September. The collateral will only be sold if the proceeds are greater than the redemption amount.

Regulatory update
• The Fed's meeting this week was widely expected to herald the dawn of tapering, but rising interest rates have forced a delay. The announcement that QE will continue for the foreseeable future provided a boost for US RMBS.
• The Dutch government is set to purchase - via the National Mortgage Institute (NHI) - up to €50bn of RMBS backed by NHG mortgages from banks over the next five years (SCI 4 April). The NHI will issue bonds guaranteed by the government to finance these purchases.
• ESMA has updated its EMIR implementation timetable. The key change relates to the registration of the first trade repositories (TRs), which was not expected to occur until 24 September.
• The Mexican Congress is expected to pass a new fiscal reform bill that could take effect next year. The bill aims to increase tax revenues for the federal government, but is credit negative for outstanding Mexican RMBS because it would lead to higher delinquencies and higher losses.
• Regulators in the US and UK have fined JPMorgan for failings related to its chief investment office (CIO) (SCI passim). Collectively, it will pay the US SEC, Federal Reserve, OCC and the UK FCA approximately US$920m.
• The Kansas District Court last week allowed the NCUA to proceed with its claims against a number of financial institutions in connection with the sale of RMBS to credit unions. The NCUA alleges that the originators of the loans underlying the RMBS systematically abandoned the stated underwriting guidelines, resulting in securities that were riskier than defendants disclosed.
• The US Court of Appeals for the Third Circuit has affirmed a district court decision dismissing as time-barred a securities class action against UBS in connection with a pension fund's losses from RMBS. Plaintiffs alleged that UBS - which securitised mortgages obtained from loan originators Countrywide and IndyMac Bank - misrepresented in the RMBS offering documents the quality of the underwriting standards used to issue the loans.

Deals added to the SCI database last week:
Acis CLO 2013-2; Avis Budget Series 2013-2; Citibank Credit Card Issuance Trust 2013-A6; Dryden 30 Senior Loan Fund ; Exeter Automobile Receivables Trust 2013-2; FCT Ginkgo Compartment Consumer Loans 2013-1; Ford Credit Floorplan Master Owner Trust A series 2013-5; Garrison Funding 2013-2 ; HLSS Servicer Advance Receivables Trust 2013-T6; Hyundai Auto Receivables Trust 2013-C; Impala Trust No. 1 - Sub Series 2013-1 ABS; M&T Bank Auto Receivables Trust 2013-1; Neuberger Berman CLO XV ; Paragon Mortgages 18; SLM Student Loan Trust 2013-5; STORM 2013-IV; Textainer Marine Containers III series 2013-1; Toyota Auto Receivables 2013-B Owner Trust; World Omni Auto Lease Securitization Trust 2013-A

Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-5; BACM 2006-1; BACM 2006-4; BLONN 2006-1; BSCMS 2006-PW12; BSCMS 2007-PW18; BSCMS 2007-T26; CD 2005-CD1; CGBAM 2013-BREH; CGCMT 2006-C4; CGCMT 2007-C6; CMLT 2008-LS1; COMM 2003-LB1A; COMM 2006-C8; COMM 2007-C9; COMM 2013-THL; CSMC 2006-C4; CSMC 2006-C5; CSMC 2007-C1; CSMC 2007-TF2A; DECO 2007-E5; ECLIP 2006-3; Extended Stay America Trust 2013-ESH; GCCFC 2006-GG7; GCCFC 2007-GG9; GSMS 2004-GG2; GSMS 2005-GG4; GSMS 2006-GG8; GSMS 2011-GC5; JPMCC 2006-LDP8; JPMCC 2006-LDP9; JPMCC 2007-CB19; JPMCC 2007-LD12; JPMCC 2007-LDP11; JPMCC 2011-FL1; JPMCC 2012-CBX; JPMCC 2012-FL2; LBUBS 2004-C1; LBUBS 2004-C2; MSC 2004-HQ3; MSC 2004-T13; MSC 2004-T15; BSCMS 2004-PWR4; LBUBS 2006-C3; LBUBS 2006-C4; LBUBS 2007-C1; LBUBS 2007-C6; LBUBS 2007-C7; LBUBS 2008-C1; MESDG CHAR; MLCFC 2006-3; MLCFC 2007-8; MLMT 2004-BPC1; MLMT 2006-C1; MSC 2006-T23; MSC 2011-C2; MSC 2011-C3; TAURS 2006-2; TITN 2006-3; TITN 2007-2; TMAN 5; WBCMT 2005-C22; WBCMT 2007-C30; WBCMT 2007-C31; WFRBS 2011-C3; WINDM X; WINDM XIV

Top stories to come in SCI:
US CMBS modification trends
Australian RMBS issuance activity

CLOs

CLO diversification on the up

A new JPMorgan overlap study implies that diversification among the top loan issuers across the US CLO market has increased. However, the currently challenged CLO arbitrage is expected to continue testing managers' ability to navigate through portfolio diversity issues, such as WAL limits.

The JPMorgan sample represents 1045 CLOs containing roughly US$302bn of assets. The sample comprises 260 CLO 2.0 deals (at US$116bn) and 773 CLO 1.0s (at US$182bn). Based on this sample, CDO strategists at the bank have mapped 3,005 unique asset issuers for a total of US$253.7bn.

The top 50 loan issuers represent 20.35% of the US CLO universe, lower than the 21.3% recorded in February and the 29% recorded in June 2006. CLOs also appear to have held better quality/higher price assets than the broader S&P All-Loan index throughout the crisis, evident in the lower defaulted asset balances in managed CLOs. However, as loan prices recovered and default rates fell, the price gap between the CLO sector and the index have narrowed.

For example, the average loan price of the top 50 issuers is US$98.99, as at 16 September (or US$98.65 weighted in the entire sampled US CLO collateral universe). This is about half a point to a point higher than the S&P All-Loan index, at US$97.79.

When loan prices were still in the low US$90s, the average price of the CLO top 50 were about US$2.7 to US$3.5 higher than the S&P All-Loan index price. Moreover, the top 50 names showed as much as 37.1% concentration in February 2012, before CLO 2.0 issuance picked up steam.

With respect to the largest single-name issuers, the top-10 issuers remain unchanged from February, with nine of the top-10 also present in last year's top-10. The 12 newcomers to this year's top-50 list include Ineos, FMG, Chrysler, Lawson Software, Alere, Reynolds, BBN, Grifols, KAR Auction, Catalent, Toys R Us and Weight Watchers.

In terms of CLO sector exposures, Healthcare (representing 14.3% of assets held) still accounts for double the second-highest ranked Electronics (7.1%). The top-15 represented industry sectors remain relatively unchanged, with the one newcomer - oil and gas (at around 0.25%) - knocking out utilities (at around 0.01%). The only other major change seen in the top-15 sector rankings was finance jumping up to fourth (at around 0.84%).

According to LCD, loan downgrades have surpassed upgrades since last summer and remain at just above a 1:1 ratio. The JPMorgan strategists peg the median Moody's US CLO WARF at 2796 - a slight deterioration from 2725 in May.

The average default and triple-C buckets in 2006-2007 vintage US CLOs increased from 2.28 % and 5.85% in February to 2.74% and 6.27% currently. However, the strategists highlight both greater dispersion and adverse selection across seasoned pools as deals amortise.

"Looking at US CLO 2.0s alone, the median pool WARF also deteriorated from 2610 in May to an average of 2740 now, which echoes the challenge in primary arbitrage and increased rating downgrades. But there is again wide tiering and CLO 2.0 pools still remain cleaner than the broader universe," they observe.

CS

RMBS

RMBS prices to follow ratings upwards

US RMBS rating upgrades picked up steam in the second half of 2012, boosting the prices of the affected tranches in their wake. As many as 2,000 more bonds could be in line for an upgrade, with cleaner jumbo and Alt-A bonds most likely to see uplifts to investment grade.

Upgrade activity almost stopped between 2008 and 2011, but 3,800 bonds have been upgraded since the start of 2012. Bonds upgraded from below investment grade up to investment grade can see significant price increases. Bonds already trading close to par experience less of an impact, while bonds trading at around 40-60 dollar price have increased by 10%-12% across sectors in the weeks following an upgrade and by 20%-30% in subprime.

Bonds trading in the 60-80 dollar price range experienced price rises of 5%-7% overall and upwards of 10% for subprime. There have also been increases for bonds trading in the 80-90 dollar price range, although they have been smaller.

From almost 4,000 upgrades on non-IO tranches analysed by Barclays Capital RMBS analysts, slightly under half have been to investment grade ratings. About 40% of the upgrades were for subprime tranches, with less than 30% each for jumbo and Alt-A and a small percentage for option ARM tranches. Upgrades have averaged three or four notches, with half of the upgrades from 2005 bonds, and 2004 and 2006 vintages the next most common.

Moody's and S&P account for the majority of the upgrades, while Fitch is only responsible for 200. S&P has upgraded more jumbo and Alt-A bonds than Moody's, and Moody's has upgraded more than twice as many subprime bonds as S&P.

Around 95% of all originally investment grade bonds from the 2005-2007 vintages were downgraded as a result of the financial crisis. Improving housing and mortgage credit fundamentals have resulted in loss expectations and delinquencies declining relative to credit enhancement.

The Barcap analysts use enhancement-to-delinquency ratio as a proxy for loss coverage multiples (LCMs) beyond which they believe rating agencies will upgrade bonds. There is some variation depending on where in the capital structure a bond sits, with mezzanine tranches exposed to larger losses and therefore tending to have higher thresholds for upgrades than senior bonds, as well as some variation by rating agency.

Based on enhancement-to-delinquency ratios and model-based LCMs, the analysts identify 1,500-2,000 potential upgrades to investment grade, mostly concentrated in 2003-2005 jumbo and Alt-A tranches. This includes around 280 bonds trading below a 90 dollar cash price.

"While some of these bonds are likely to have been above these thresholds for many months now, this does not necessarily reduce the likelihood that they get upgraded. We would, however, be wary of bonds with very low loan counts. Since the loss multiple methodology is based on the variability around base-case losses, it can be argued that deals with low loan counts will likely have higher variability of losses and, hence, should require higher loss multiples," the analysts observe.

Bonds currently priced below 90 are likely to see the biggest price increases. The analysts believe that the CWHL and WAMU shelves each have 18 bonds fitting this criteria likely to be upgraded, while WFMBS has 17.

The RAMC, HVMLT, RALI and CMSI shelves all have double-figure totals likely to be upgraded. The FHASI, GMACM, JPMMT, CHASE, CSFB, RAST, CWALT, DSLA, BOAMS, SARM, ARSI and MSM shelves all also have at least half-a-dozen bonds trading below 90 dollar cash price that are likely to be upgraded.

JL

Structured Finance

London law firm adds two

Cadwalader, Wickersham & Taft has appointed Bruce Bloomingdale and Jeremiah Wagner to its capital markets practice in London. They each focus on securitisation and structured finance.

Bloomingdale specialises in financial transactions, cross-border securitisation and asset-backed lending. He joins from Mayer Brown in the US, where he was head of the finance practice.

Wagner also joins from Mayer Brown, where he was an attorney in Chicago. He brings experience in structured finance, securitisation and derivative transactions across a range of asset classes and advises clients on regulatory matters related to banking and securitisation.

Structured Finance

Investment bank adds SF vet

GreensLedge has appointed Lesley Goldwasser as a managing partner in New York. She will help define the firm's strategic direction and support the business' growth.

Goldwasser was previously at Credit Suisse, where she had global responsibility for the hedge fund strategic services unit. Before that she was co-head of global debt and equity capital markets at Bear Stearns, where she held global responsibility for structured products, and in a separate stint at Credit Suisse she held management positions including responsibility for the ABS and non-agency RMBS trading desks.

Structured Finance

Investor info company expands

DealVector has added Kroll Bond Rating Agency president Jim Nadler to its advisory board and appointed Jim Kranz as head of business development. The company has also exceeded its funding goal.

Nadler is president and coo at Kroll. He has previously served as corporate development vp at General Re and was also evp at Fitch, where he led the structured finance group.

Kranz was formerly national sales manager at Advent Software and takes responsibility for identifying new market opportunities and leading strategic initiatives to grow DealVector's business. He has also held executive positions at CRA RogersCasey, Cap Spring, BARRA, Capital Management Sciences and Knight-Ridder Financial.

Structured Finance

Barclays credit trader joins asset manager

ECM Asset Management has appointed Chris Telfer as specialist portfolio manager in London. He will trade financials and sovereigns across ECM's strategies and report to co-cio Ross Pamphilon.

Telfer was previously a credit trader at Barclays Capital, working on credit derivatives, leveraged loans and distressed trading. Before that he was at Morgan Stanley.

Structured Finance

Independent credit advisory formed

Rod Moulton has launched Euro Credit Risk (ECR) with headquarters in London and offices in Milan and Madrid. The firm will offer independent expertise to investors, hedge funds, investment banks, loan providers and other parties holding or acquiring legacy loan portfolios of secured, unsecured or commercial debt.

Moulton serves as ceo, while George Patellis will serve as chairman. Moulton was previously md at Clayton Euro Risk and sales and marketing director at Rockstead, while Patellis has worked for Titua, Lehman Brothers and Pepper Home Loans.

Structured Finance

Advocacy group elects permanent board

SFIG has elected a permanent board of directors, consisting of representatives from 40 member organisations. The board will oversee all of the group's policy initiatives, advocacy efforts and events.

The board includes eight directors each from investors, banks and issuers. Accounting firms, rating agencies, law firms, servicers, research firms and trustees are also represented. Board members will serve two-year terms.

Reggie Imamura of PNC Financial Services Group will continue as chairman of the board, with Christopher Haas of Bank of America Merrill Lynch serving as vice chairman. Gregg Silver of 1st Financial Bank USA will serve as treasurer and Jordan Schwartz of Cadwalader, Wickersham & Taft will serve as secretary.

The executive committee includes Tom Davidson of GE Capital, Howard Kaplan of Deloitte & Touche, Valerie Kay of Morgan Stanley, Samuel Smith of Ford Motor Company and Kevin Sweeney of Discover Financial Services.

Executive director Richard Johns, appointed earlier this year (SCI 9 May), will report to the board. SFIG has also elected chairpersons for its committees and task force working groups.

CDS

Heavy penalty for derivatives group failings

Regulators in the US and UK have fined JPMorgan for failings related to its chief investment office (CIO) (SCI passim). Collectively, it will pay the US SEC, Federal Reserve, OCC and the UK FCA approximately US$920m.

The size of the total fine is one of the largest on record, potentially marking a move towards stricter enforcement by regulators. The fact that JPMorgan has admitted culpability instead of agreeing to a settlement where it neither admitted nor denied the charges, as is typically the case, also sets the settlement apart.

The SEC's charges were settled for US$200m, a month after two former traders were charged (SCI 15 August). The SEC also criticised JPMorgan's internal controls and senior management for letting the CIO group conceal its massive losses.

In settling the SEC's enforcement action, JPMorgan admitted accounting controls were "woefully deficient", senior management knew the scale of the hidden losses, senior management failed to keep JPMorgan's audit committee informed and the audit committee was unable to function effectively.

The SEC's order requires JPMorgan to cease and desist from causing any future violations of the Securities Exchange Act of 1934. The US$200m penalty may be distributed to harmed investors via a fair fund distribution.

A US$300m penalty will be paid to the OCC. A further US$200m will be paid to the Federal Reserve, while the UK's FCA has fined JPMorgan £137.61m and said there were "flaws permeating all levels of the firm".

CMBS

New hire to boost CRE capabilities

Jason Carney has joined Atalaya Capital Management in New York as the firm looks to expand into CRE financing. He joins as principal and has previously worked at Ridgeline Partners, Palatine Capital Partners, Silver Point Capital, Mission Capital Advisors and Third Avenue Management.

Risk Management

OTC operator names credit chief

Cactus Raazi has joined Tradeweb Markets as head of North American credit. He will report to Tradeweb president Bill Hult. Raazi was previously at Nomura, where he was global head of spread product sales and has also worked at Goldman Sachs.

Risk Management

Risk management specialist joins REIT

Two Harbors Investment Corp has appointed Robert Rush as risk management md. He will report to Paul Richardson, who serves as partner and chief risk officer for Pine River Capital Management.

Rush was previously at UBS in New York, where he worked in risk strategy, RMBS, CMBS and ABS roles as well as serving as head of CDO and esoteric asset trading for UBS' workout group. He held various investment management and research positions before joining UBS.

RMBS

NCUA files RMBS, Libor suits

The NCUA has filed lawsuits against Morgan Stanley and eight other institutions over the sale of nearly US$2.4bn in RMBS to Southwest and Members United corporate credit unions. As with similar suits filed by the agency (SCI passim), it alleges that the securities were faulty and led to the two credit unions collapsing.

As well as Morgan Stanley, the NCUA has filed suits against Barclays, JPMorgan, Credit Suisse, RBS and UBS for sales to both credit unions and against Goldman Sachs, Wachovia and Residential Funding Securities for sales to Southwest. Southwest and Members United paid more than US$416m for the securities in the Morgan Stanley suit and more than US$1.9bn for those sold by the other defendants.

NCUA's suits allege the firms made misrepresentations in the underwriting and sale of the RMBS. It has separately filed suit against 13 international banks alleging Libor manipulation, which the agency says further contributed to the downfall of the two corporate credit unions as well as US Central, WesCorp and Constitution.

RMBS

Suit dismissed as time-barred

The US Court of Appeals for the Third Circuit has affirmed a district court decision dismissing as time-barred a securities class action against UBS in connection with a pension fund's losses from RMBS. Plaintiffs alleged that UBS - which securitised mortgages obtained from loan originators Countrywide and IndyMac Bank - misrepresented in the RMBS offering documents the quality of the underwriting standards used to issue the loans.

According to a Lowenstein Sandler memo, lead plaintiff Pension Trust Fund for Operating Engineers alleged that it suffered approximately US$5m in losses on its investment when homeowners defaulted on their payments in the run-up to the mortgage crisis of 2008. The district court, applying an inquiry notice standard, determined that plaintiffs' claims were untimely under Section 13 of the Securities Act of 1933 and dismissed the action with prejudice.

On appeal, the Third Circuit disagreed with the district court - finding that the timeliness of Securities Act claims under Sections 11, 12(a)(2) and 15 should be measured against a discovery standard, not an inquiry notice standard. Nevertheless, it agreed with the district court that the claims were untimely, finding that the Section 13 statute of limitations would have run, at the latest, in November 2009.

ABS

SLABS EOD forecast

Moody's notes in its latest ABS Spotlight that Access Group's series 2004-2 FFELP securitisation class A2 notes will not pay down in full by their final maturity date of 25 January 2016, a failure that will constitute an EOD. The remaining class A3 through A5 notes should pay down before their final maturity dates, while the class A2s should pay down in about 20 months after their final maturity date. However, if a majority of class A investors elect to change the principal payment priority from sequential to pro rata, the class A3 notes will also miss their maturity date.

A significant shift in the composition of the collateral pool towards longer-term consolidation loans has slowed note amortisation in the deal. Nevertheless, strong performance of the student loan ABS to date and ample credit enhancement is expected to lead to the eventual full repayment of all notes.

Upon an EOD, a simple majority of the then-outstanding class A note investors can accelerate the repayment of the notes and change the priority of payments from sequential to pro rata. But Moody's suggests that the class A investors are highly unlikely to obtain the simple majority necessary to make the switch to a pro-rata pay structure.

Investors in classes A2 and A3 would not be incentivised to implement such a switch because doing so would delay their notes' full repayment and lead to a default in the payment of class A3 principal. Investors in classes A4 and A5 would not constitute a majority, even though they would benefit from the pro-rata principal payments.

A slew of student loan consolidations contributed to an unprecedented rate of Stafford loan prepayments during the 2005-2007 academic years. In Access Group's 2004-2 securitisation, prepayments climbed to more than 50% in 2005 because borrowers prepaid existing Stafford loans with proceeds from new consolidation loans. By the end of the transaction's unusually long 40-month revolving period, 94% of the collateral pool consisted of consolidation loans, up from 44% at closing.

Because consolidation loans have longer repayment terms than Stafford loans, the average remaining term of the underlying collateral pool increased from 220 months at closing to 285 months at the end of the revolving period.

ABS

Reporting required for card ABS

The ECB is to introduce loan-level reporting requirements for credit card ABS, when these are used as collateral in the Eurosystem's monetary policy operations. The provision of loan-level information for these instruments will be mandatory from 1 April 2014, with a nine-month phasing-in period.

Under the requirements, loan-level data must be provided at least on a quarterly basis or within one month of the interest payment date. Where loan-level data are incomplete on 1 April 2014, they must gradually be completed in the course of the phasing-in period.

To enable effective reporting of loan-level data, the credit card cashflow-generating assets backing an ABS must consist of a homogeneous pool, so that loan-level data can be reported in a single template that matches the underlying assets. ABS backed by credit card receivables that do not comply with the loan-level data reporting requirements because they consist of mixed pools of heterogeneous underlying assets or do not conform to any of the loan-level templates will remain eligible for use as collateral until 31 March 2014, subject to compliance with all other applicable provisions.

ABS

Tobacco arbitration decision 'credit positive'

The decisions reached by an arbitration panel regarding claims by US tobacco manufacturers that 15 states did not diligently enforce certain statutes for calendar year 2003 are credit positive for some tobacco securitisations, according to Moody's. However, the agency notes that while the decisions could be indicative of the decisions for other years beyond 2003, it is possible that future arbitration panels could reach a different conclusion regarding enforcement of the statutes in those years.

The arbitration panel concluded that nine of the 15 states enforced the statutes, including four states that sponsored Moody's-rated securitisations. The goal of the statutes is to prevent tobacco manufacturers that did not join the Master Settlement Agreement (MSA) from gaining a competitive advantage over those that did join.

"The panel concluded that diligent enforcement occurred in four states that sponsored securitisations Moody's rates: Iowa, New York, Ohio and Washington," says Moody's vp and senior credit officer Irina Faynzilberg. "MSA payments to these states will increase between 9% and12% with the recovery of certain disputed amounts that the participating tobacco manufacturers had previously withheld or deposited in escrow instead of paying to the states."

States that did not diligently enforce the statutes in 2003 will be subject to a 50%-60% reduction in their 2014 MSA payment from the tobacco manufacturers, since the MSA deems the non-enforcer states responsible for the tobacco manufacturers' market share loss. This means that non-enforcer states will receive around US$500m less in MSA payments next year.

"The arbitration panel's decisions may indicate that panels convened in the future to examine diligent enforcement of the statutes for subsequent years will reach similar conclusions," adds Faynzilberg. "Panel members were unanimous on all of the decisions and states may have continued to enforce their statutes in subsequent years as diligently as in 2003, which would be credit positive for the securitisations we rate."

Nevertheless, there are factors that could add risk to this scenario. Subsequent panels might reach different conclusions since: the MSA does not define "diligent enforcement"; the individuals on the panels could change yearly; and unlike in litigation, the current arbitration panel's decisions are not binding upon future panels.

Structured Finance

Special situations fund closed

Universal-Investment and XAIA Investment have closed their joint fund XAIA Credit Debt Capital for new subscriptions. The firms report that the fund's volume has more than tripled since the beginning of the year, from €243m to over €750m.

The investment strategy involves targeted investments in special situations across the capital structure. The aim of closing the fund is to prevent a dilution of returns from impacting current investors. The medium-term objective is to reopen the fund, depending on capital market developments.

In applying market-neutral strategies, XAIA takes advantage of structural distortions and inefficiencies in financial markets to systematically achieve stable, long-term returns with limited volatility and a low correlation to other investment classes.

Structured Finance

Portfolio loss metrics introduced

Fitch has introduced new measures in connection with its expectations for portfolio losses for EMEA structured finance and covered bond programmes. Dubbed portfolio loss metrics, the measures are designed to improve the transparency of the agency's opinions on expected asset pool performance and provide a consistent framework for comparison of asset portfolios and tranches.

The aim is to provide complementary information alongside ratings, offering market participants a way to directly compare asset pools based on Fitch's expectations for losses. "Our expectations for asset portfolio losses form one of the building blocks of our rating analysis and it is important these opinions are transparent to investors," says Andrew Currie, the agency's head of surveillance for EMEA structured finance. "Because they are based solely on asset characteristics, the metrics allow investors a clear understanding of our opinions on the asset portfolios, disregarding structural features and stresses that may distort the underlying view."

Fitch believes portfolio loss metrics will be most useful in benchmarking individual asset pools against others in their sector and the sector as a whole.

Structured Finance

Waiting for tapering

The Fed's meeting this week was widely expected to herald the dawn of tapering, but rising interest rates have forced a delay. The announcement that QE will continue for the foreseeable future provided a boost for US RMBS.

"Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further," the Fed notes. "The committee sees the downside risks to the outlook for the economy and the labour market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months - if sustained - could slow the pace of improvement in the economy and labour market."

Credit analysts at RBS believe the primary reason that tapering has been delayed is the rise in market rates. They expect rates/MBS will continue to have a better bid for the rest of this week and recommend taking profits in the balance of the week.

"Hold onto the longer-term theme trades - the September script was to play for a rally into and out of the Fed, then look to fade the range extremes after that. So far so good, we continue to hold to this game plan," they add.

In line with expectations, the Fed did push back on recent rate moves through 2016 forecasts. The 2016 Fed funds rate forecasts are generally around 2%, lower than the 2.25%-2.5% that was discussed before the meeting.

Volatility is expected as economic data and the US debt ceiling debate influence thinking, while a new Fed chairman still needs to be nominated. The make-up of the FOMC will also change, with Richard Fisher and Charles Plosser replacing more dovish colleagues as voting members.

Structured Finance

Interactive portal launched

Fitch has launched 'The Why? Forum', an interactive website where leading thinkers from the rating agency and beyond share insights about the important themes at play in global markets and the economy. The portal includes articles, videos, interactive data presentations and event previews, with aim of allowing Fitch analysts to be even more accessible and Fitch data to be more interactive.

"Transparency is a priority at Fitch, from explaining the methodologies underlying the ratings to discussing the factors driving them. The Why? Forum adds a new dimension to our transparency by sharing why we think what we think about the sweeping trends that matter to market participants," comments Paul Taylor, president and ceo of Fitch.

Structured Finance

NAIC scenario update discussed

The NAIC is proposing to update its macroeconomic assumptions that it will use when valuing non-agency RMBS and CMBS at year-end. The changes are expected to be positive for both asset classes.

For non-agency RMBS, the most significant change is that the NAIC's peak-to-trough home price assumptions are significantly more lenient than they were last year, Barclays Capital analysts note. Under the conservative and most conservative scenarios, overall home price peak-to-trough declines are forecast to be 34% and 46% respectively versus 37% and 60% under last year's assumptions. In contrast to last year, the NAIC also kept probability weights assigned to each economic scenario the same.

"Overall, we expect the more lenient home price assumptions to be a positive for non-agencies and possibly lead to NAIC ratings upgrades for some bonds that were previously rated below NAIC 1. However, it is still difficult to determine the extent of any upgrades or downgrades to NAIC ratings, as they will depend on whether PIMCO made any adjustments to its non-agency credit model and whether the rally in non-agency prices this year will offset some of the benefit from the more lenient home price forecasts," the Barcap analysts observe.

Meanwhile, for CMBS, there have been slight adjustments in the price trend and timing of the trough. In the base case, the model assumes that CRE prices fall by 5% over the coming three years before recovering slightly. In the conservative case, prices are assumed to drop by 12%, with a 17% drop in the most conservative scenario. Again, the relative weightings of the four scenarios are unchanged from last year.

"In sum, the proposed CRE assumptions for 2013 appear to be slightly positive for the CMBS sector; we expect a few bonds to move from non-zero to zero loss status, due to the improvement in the most conservative scenario," the analysts note. "That said, the adjustments made to the forward CRE price assumptions appear to be relatively small. While NAIC designation 1 prices may improve slightly as a result, the change in assumptions is unlikely to have a big effect in terms of expanding or contracting insurer demand for CMBS assets."

NAIC has requested comments on the proposal, with its Valuation of Securities Task Force expected to finalise the scenarios in a meeting on 3 October.

Structured Finance

Eximbank debuts MIGA guarantee

Jefferies has acted as sole arranger and joint lead manager of a €400m structured financing for the Export-Import Bank of Hungary. Dubbed MAEXIM Secured Funding, the transaction represents the first time the World Bank's Multilateral Investment Guarantee Agency (MIGA) has guaranteed a bond with non-honouring of sovereign financial obligation coverage.

The deal comprises two Fitch-rated tranches: €380m triple-A class A1 notes and €20m double-B plus A2s. As a result of its triple-A rating and considerable investor demand, the class A1 notes priced at 2.125%. The deal lowered Eximbank's all-in cost of funding and diversified its investor base away from traditional emerging markets.

CDS

Codere credit event called

ISDA's EMEA Credit Derivatives Determinations Committee has resolved that a failure to pay credit event occurred in respect of Codere Finance (Luxembourg) SA. An auction is to be held in due course in respect of outstanding CDS transactions on the name.

CLOs

Limited impact from SME CLO update

S&P has published a transition study in connection with the implementation of its updated criteria for assessing European SME CLOs (SCI 11 January). The agency says the move has had a relatively limited negative ratings impact, affecting approximately one-third of its SME CLO ratings universe.

Following the publication of the updated criteria, S&P placed its ratings on 100 European SME CLO tranches in 33 synthetic and cashflow transactions on credit watch negative while it assessed the potential rating impact. Of these 100 ratings, only 62 were eventually lowered. The agency either affirmed or raised its ratings on the remaining tranches to reflect its view that these tranches had enough credit enhancement to maintain their current ratings.

The analysis nevertheless shows that synthetic European SME CLO transactions had a higher average downgrade rate than cash transactions. "In our opinion, this is mainly due to synthetic transactions' lower level of credit enhancement than their cash counterparts. Synthetic structures also have a higher degree of concentration in the portfolio and therefore are more likely to trigger one of the supplemental tests," S&P notes.

Tranches further down the capital structure experienced more significant downgrades, partly because more of these tranches had experienced credit deterioration resulting from weak collateral performance. Among the speculative-grade CLO tranches, the agency downgraded 22 (73%), with an average downgrade of 3.27 notches.

CMBS

Better underwriting seen in tertiary CRE

Morningstar has undertaken a study of over 90,000 US commercial real estate loans with origination dates between 1997 and 2008. The agency says that the performance history of these loans implies default risk endogeneity in tertiary market loan origination.

As the CRE sector continues to recover, secondary and tertiary markets are becoming an attractive alternative to the standard core markets, such as Los Angeles, San Francisco, New York and Washington DC. Increased competition in major markets is driving cap rates down, thereby encouraging many investors to accept more risk for increased return by investing in secondary and tertiary market commercial real estate.

Yet Morningstar notes that the non-primary markets are often misunderstood. "There is a general perception that gateway and primary markets are deeper and have greater demand to capture; conversely, many investors feel that there is too little opportunity and too much risk in smaller markets. Whether or not this is true, perception often plays a greater role than reality when it comes to investing."

The designation of a market as gateway, primary, secondary or tertiary is often central to the decision-making process and the perceived measurement of default risk, according to the agency. The paper argues, however, that a hidden element to this theory is that market designation is endogenous to the loan origination and property sale processes.

"This endogeneity implies that the supportable empirical relationship between market designation and default has been mitigated through underwriting," Morningstar explains. "Traditionally, lenders have underwritten loans in perceived riskier markets to higher standards, requiring compensating factors such as higher DSCRs, lower LTVs, property type limitations and loan balance limitations. These higher standards have resulted in tertiary market loans performing at a level comparable to gateway market loans."

CMBS

CMBS auctions scheduled

US$480m of US CMBS assets are slated for sale on Auction.com next month. The assets include two properties behind the US$123m Southern California Portfolio loan, securitised in GCCFC 2007-GG9.

The two properties are the Savi Tech Center and the Yorba Linda Business Park, which represent approximately US$79m in allocated balance. Based on the latest appraisal of US$99.5m from January, losses on the loan could reach 30%-35% if the remaining assets are sold within a year, according to CMBS analysts at Barclays Capital.

Another large property due to be auctioned is the US$34m Blairstone Office Building, securitised in MLCFC 2006-2. The property is carrying an appraisal of just US$6.3m and is vacant after losing its single tenant in May 2012.

The transaction has a total of US$61.6m in loans up for auction in October. Other deals with large auction exposure include LBUBS 2007-C6 (with US$41.6m) and GSMS 2006-GG6 (with US$36.1m).

CMBS

Data centre CMBS discussed

Retail co-location businesses are behind a move to begin securitising data centre contracts, Moody's reports in its latest ABS Spotlight publication. But the agency notes that while the contractual cashflows from data centres could be attractive to the securitisation market, the high rents these centres currently command are unlikely to continue in the long term.

"Trends for the data centre industry are currently very favourable, owing to the rise in demand for internet and data storage, as well as the growth of information technology infrastructure outsourcing and cloud computing. However, lease rates will be at risk in the event of an oversupply of data centre capacity, resulting from low barriers to entry or a decline in demand as a result of technological changes," Moody's explains.

Lead-times of up to two years to construct high-quality data centres have resulted in a lag in meeting rising demand. However, well-established players with good sources of funding or private equity backing could expand or enter new markets to satisfy growing demand, creating a risk of oversupply and driving competition.

Typical service contract terms averaging two years make co-location data centres vulnerable to oversupply pricing risk when leases are renewed, according to Moody's. Data centre pricing is relatively commoditised for operators that offer typical, non-differentiated products and services, and these operators will be susceptible to price declines as they compete for customers in the event of oversupply.

Rapid changes in the technology industry could also result in higher customer churn. Technological advancements could lower demand for retail co-location services because new technologies might not need as much server space or power as the current network equipment customers have installed in their leased data centres, so they could therefore reduce the amount of space they rent. In addition, customers could defect to other companies, especially when upgrading their own technology equipment - a cycle that typically lasts 3-5 years.

If a property can no longer operate as a data centre, it would need to convert to an alternative use, which could command much lower tenant rents than the US$75-US$150 per square-foot typically realised in data centres. Given the lower income profile of probable alternative uses, the liquidation value of a failed data centre upon foreclosure could decline significantly, Moody's warns.

CMBS

GSA mod 'better than expected'

A modification template has been released for the US$284m GSA Portfolio loan, securitised in JPMCC 2007-LD11. The loan transferred to special servicing in May 2012 after failing to pay off at its scheduled maturity date (see SCI's CMBS loan events database).

The portfolio consists of nine office properties - which were appraised at US$217.5m in May - principally leased by the US General Services Administration (GSA). Barclays Capital CMBS analysts note that budget cuts have reduced the GSA's office space needs and added tenant roll-over risk for many of the properties.

The modification comprises a US$250m/US$34m A/B note split, with the borrower contributing US$20m of new preferred equity, of which US$15m will immediately pay the A note down to US$235m and the remaining US$5m will be placed in reserves. The loan has also been extended five years past its original maturity to May 2017.

Monthly excess cash will be split equally between paying down the A-note principal and repaying the preferred equity, after being used to build up reserves for the first twelve months. In a capital event, excess cashflows after repaying the A-note principal and the preferred equity will be split 40% to the B-note and 60% to the borrower.

The creation of the B-note should reduce interest cashflows by approximately US$175,000 to the trust, further increasing shortfalls on the AJ tranche. However, the Barcap analysts reckon that overall the modification is better than expected for the trust, as the A-note is cut at a relatively high 115% LTV, compared to the standard cut of 105% LTV.

"In the event that the borrower is able to stabilise the future leasing schedule, we expect the A-note to pay down early, given that the coupon is well above the market rate. As with most A/B modifications, we do not expect any recoveries on the B-note," they conclude.

CMBS

CMBS loan resolutions tallied

US CMBS special servicers resolved a total of US$17.09bn across 974 loans during the first half of 2013, according to Fitch. Of these, 58% were resolved through liquidation and 42% through modification.

Of the US$9.88bn liquidated, US$4.07bn was liquidated with recoveries greater than 85%. Thirteen loans sized at over US$50m had recoveries greater than 85%. Six separate servicers performed the 13 work-outs.

Seven of the thirteen loans transferred to the special servicer due to a maturity date default. In most cases, the servicer was negotiating a modification while also pursuing foreclosure.

CMBS

Servicer turnaround times improving

US CMBS special servicer turnaround times are improving, S&P reports. If a servicer doesn't respond to a borrower consent request in a timely manner, it impacts borrower performance and could lead to loan defaults.

The length of time it takes a servicer to respond to a consent request may be affected by factors outside its control, however - including the number of requests it receives, the types of requests and the failure of borrowers to provide all the necessary documentation. S&P believes that delays often also occur if a servicer isn't prepared to complete a number of tasks quickly. These tasks include assessing the type of borrower request, whether it complies with language contained in the loan covenants, whether the loan is performing as agreed to or is in danger of becoming a non-performing loan, if the approval of a special servicer is required and understanding the borrower's desired deadline for a decision.

The agency analysed the borrower consent request response time of 30 primary and master and 39 special servicers from 31 December 2007 to 31 December 2012. For the first half of 2013, it analysed the same data for slightly fewer servicers: 26 primary and master, as well as 34 special servicers.

The analysis shows that the number of days it took to resolve a consent request remained relatively stable in 2008, with the average loan assumption taking 70 days to complete. On average, partial releases of collateral (for easements, condemnations or sales) took 55 days, defeasance took 41 days and leasing consents required 27 days.

As the recession wore on, these timelines began to lengthen: the average time required to resolve assumptions peaked at 97 days in 2011. This was up by 39% from 2008, when consent request turnaround times were still within what S&P views as a historical average range of 60 to 80 days.

In 2012 response times for most borrower consent request types began to shorten, even though servicers reported 13,557 customer requests for the year ending 31 December 2012 - almost double the totals reported from 2009 and 2010. Consent requests fell into four categories last year: 81% leasing; 10% loan assumptions; 5% defeasance; and 4% partial releases of collateral.

The 2012 data indicate that the number of days required for time to resolution by third-party and external approvers shrank significantly from January to December. "In our opinion, this could mean that primary and master servicers are handling a larger share of consent requests, which we believe may be beneficial to the borrowers," S&P notes. "If borrowers continue to work with primary and master servicers, then their loans will likely not be transferred to the special servicer because certain provisos in the loan documents typically allow the primary/master servicer to retain or hold the loan prior to transferring to the special servicer. In addition, by cooperating with the primary/master servicer, the borrowers may not be incurring additional fees, and the borrowers may maintain their relationship and communications with their original contacts."

The shorter resolution times may also reflect improved customer service. Although the number of days for releases increased from the first half of 2012 to the second half of 2012, this is not inconsistent with the overall trend.

The trends observed in 2012 continued into the first half of 2013. Borrower consent resolution times from primary servicers and master servicers declined, while the overall external approval timeline from the special servicer and/or the third party improved marginally.

"The data suggest that commercial servicers continue to concentrate on customer service to expedite the borrower consent process. We believe that this approach could increase overall borrower satisfaction and - from a servicer's standpoint - improve the quality and reporting transparency for investors and lenders," S&P observes.

The first-half 2013 analysis indicates that on average assumptions took 82 days through the final approval process, while leasing consents took 31 days, loan defeasance took approximately 29 days and partial releases of collateral took 27 days. S&P anticipates that servicer response times to borrower consent requests will continue to shorten. The improving economy is also expected to result in falling request volume as borrowers make payments more consistently.

CMBS

New York mods completed

Iron Hound Management Co has completed over US$400m in CMBS loan modifications and refinancing on two New York-based properties, following its recent expansion into loan debt and equity placements. The transactions involved are COMM 2006-C8, GCCFC 2007-GG11 and CGCMT 2008-C7 (see SCI's loan events database).

Iron Hound structured the pay-off of the US$106m defaulted loan and the placement of new debt with Starwood Capital on Two West 46th Street and 369 Lexington Avenue - backing COMM 2006-C8 - for sponsors Joe Stavrach and Faraj Srour. The firm also worked with LNR to restructure the US$300m Bush Terminal loan, securitised in GCCFC 2007-GG11 and CGCMT 2008-C7 (SCI 11 September).

"This is the second modification that Iron Hound arranged on this asset for sponsor Ruby Schron," explains Iron Hound principal Robert Verrone. "In the most recent modification, a team from Belvedere, Jamestown and Angelo Gordon were brought into the deal. Iron Hound arranged the assumption and restructured the existing modification to give the new borrowing entity the ability to put more capital into the project, gain a higher preferred return and more favourable back-end splits."

The complex is in the midst of a 10-year modernisation and preservation programme and will use the cash injection for post-Hurricane Sandy repairs, among other asset improvements.

CMBS

CMBS recovery rates 'remain uncertain'

Recovery rates for US CMBS loans in special servicing remain uncertain, Fitch says. The agency notes that the 66% recovery rate on loans liquidated during the first half of 2013 and the decline in volume of CMBS loans in special servicing are signs that the commercial real estate market is improving. The rise in commercial real estate values has supported the increase in resolutions.

The percentage of CMBS loans in special servicing now stands at 9%, having peaked at 12% in 2010. CMBS special servicers resolved a total of US$17.09bn (across 974 loans) during 1H13; 58% were resolved through liquidation and 42% through modification. Their combined recovery rate was 80%.

In Fitch's view, because the loans that are left to be resolved are larger and more complicated, they may not be resolved at the 80%-85% recovery rates observed since 2009. The recovery will depend on many factors, including property type, market, property values and special servicer capabilities. The agency notes that some of the refinanced CMBS loans are beginning to appear in new CMBS transactions.

Risk Management

Cross-border representation doc launched

ISDA and Markit have launched the ISDA Cross-Border Swaps Representation Letter on ISDA Amend. The document allows market participants to provide counterparties with the representations for US person status needed to determine whether compliance with various swap regulations is required by the CFTC's Interpretive Guidance.

The guidance is related to when the CFTC will assert jurisdiction over swap transactions that have a non-US element. Compliance with many provisions of the guidance is required by 9 October.

To assist in gathering this information in a consistent and efficient manner, ISDA and Markit made the representations found in the Cross-Border Swaps Representation Letter available via ISDA Amend. The document is not a protocol and, therefore, no adherence letter is required.

RMBS

Increased mortgage, RMBS volume expected

The unexpected decision by the US Fed to maintain its bond purchases will likely spur increased mortgage volume over the near term, Fitch says. In recent months mortgage rates have increased sharply in response to concerns over a Fed pull-back, with the average 30-year mortgage rate standing at 4.46%, according to the Freddie Mac Primary Mortgage Survey published on 28 June. This rise in rates had also begun to weigh on mortgage application volume, with a sharp decline in refinancing activity.

Fitch believes that the Fed's action will reverse some of these recent trends. "We expect mortgage interest rates to decline and give a short-term boost to mortgage volume, as borrowers look to take advantage of the temporary reprieve. While still representing a very modest part of the mortgage market, a short-term boost in mortgage volume may also result in a modest increase in RMBS volume later this year," the agency notes.

RMBS

Richmond injunction dismissed

US District Judge Charles Breyer last week dismissed the preliminary injunction lawsuit that Wells Fargo and Deutsche Bank filed against Richmond, California, having previously ruled that it was "not ripe" (SCI 13 September). The judge reportedly decided to dismiss the suit altogether rather than pause court proceedings because the trustees' claims depend on "future events that may never occur".

The ruling does not, however, address the constitutionality of the programme or whether the proposed prices for the loans reflect their fair market values. Consequently, if the city council does eventually vote to seize any loans via eminent domain, the trustees can re-file their lawsuit and attempt to obtain an injunction against the seizures.

RMBS

Aussie RMBS downgraded on tail risk

Moody's has downgraded 27 tranches and 11 counterparty instrument ratings (CIRs) across 19 Australian RMBS. These ratings were placed on review after the agency published its approach to addressing tail risk in Australian RMBS that pay principal pro-rata (SCI 20 June).

The affected tranches are senior and mezzanine bonds from transactions that pay principal pro-rata with ineffective or no triggers to switch to pay principal sequentially. The CIRs are for basis swaps and fixed-rate swaps that cover RMBS transactions until the last loan is fully repaid, and which are from transactions without sufficient liquidity floors.

Moody's notes that 11 tranches from nine Puma trusts remain on review for downgrade. The sponsor is in the process of implementing structural remedies to address tail risk. Once implemented, the agency will evaluate whether the remedies are sufficient under a stress scenario and will then conclude its review.

RMBS

Pre-crisis RMBS features re-emerging

Some issuers of US private label RMBS have re-introduced structural features that were common in pre-crisis deals and which can increase the risks to certain senior bonds in the event of very high mortgage losses, Moody's reports. The agency suggests that transactions incorporating super-senior support bonds, exchangeable securities, principal-only (PO) bonds and pool interest-only (IO) bonds deviate from standard cashflow allocations and pose analytical challenges.

This is because their risk profiles are affected not only by the absolute level of losses and prepayments, but also by the timing. "Given the seniority of the bonds and the strong credit quality of recent transactions, the bonds will incur losses in only low-probability scenarios. However, these features will influence the bonds' ultimate losses in those scenarios," says Kruti Muni, a Moody's svp.

Other structural features that have not yet returned but were common in pre-crisis transactions - such as non-accelerating senior (NAS) bonds and planned and targeted amortisation classes (PACs and TACs) - also expose bonds to tail risks in high-loss scenarios, the agency notes.