Contents

Structured Finance

Master stroke?

Aussie regulator considers master trust merits

Speculation is growing that the Australian Prudential Regulation Authority (APRA) might allow securitisation through master trusts. Such a move could transform the Australian RMBS market and open up new asset classes.

While common in other markets, master trusts have not taken off in Australia before now. One investor believes that it is post-crisis comparisons with those other markets which are pushing the Australian regulator to consider change.

"I have been in securitisation since it started here and this is an evolutionary process. The market has always been segregated deal after segregated deal and that has worked so far," she says.

The investor continues: "Now, one of the things APRA is doing is looking at offshore markets and seeing how those work and how pricing levels compare. Demand was very high before the crisis, but now that the market has been tested and there are fewer investors, it is all the more important to explore different structures to suit different needs."

Master trust structures would be attractive to investors both within Australia and from further afield. As well as appealing to the current securitised investor base, investors from a vanilla bond background may well find a bullet structure easier to handle than existing note types.

"Investors would like to see the option of a soft bullet come up more often. The current structure's reliance on amortisation does not suit everyone," says Jonathan Rochford, portfolio manager at Narrow Road Capital.

He continues: "Amortisation mechanics are not simple and it can be tricky to calculate how favourable the CPR will be and what the effect will be when it comes to trading in the secondary market. Even with a fairly standard RMBS deal, there are a lot of technicalities to be considered."

Master trusts could make Australian deals more attractive to international investors in particular. Rochford notes that overseas buyers could arbitrage the additional spreads offered by Australian mortgages and says soft bullets could tighten deal pricing levels by 10bp-20bp.

However, while the investor agrees that bullet structures are something investors like, she is less sure that there is proven hard demand. It also remains unclear what form master trusts would take and exactly what APRA will and will not allow.

She says: "It is good for the Australian market to have the product option, but there are a lot of unknown factors, such as we do not know whether date-based calls will be allowed. The obvious place to start is with the four major banks, but whether they embrace master trusts will all rest on what relative value can be extracted from these issuances."

Rochford notes that lower cost of funding would be a significant draw for issuers. The ability to offer new types of ABS would also be attractive.

"There has been talk of the big regional banks looking to master trusts as a way of getting better pricing. Using a master trust vehicle for a high volume of issuance could lower their funding costs considerably," he says.

It does, however, beg the question of how much issuance is possible. While RMBS investors are comfortable to invest below triple-A because of the security offered by mortgage insurance, ABS structures would not have that protection.

"Overseas investors would be interested if there was a soft bullet because the swaps would become easier to deal with at the senior level. However, finding buyers for the B-pieces would be harder and the Australian market only contains a very small number of people who could analyse those and take them on," says Rochford.

He continues: "Unrated paper could be a problem. APRA seems to be indicating that it would want B tranches to be unrated, but it has the potential to be a concern for investors who are used to seeing double-A ratings on subordinated notes."

Another concern for some investors would be the nature of the revolving asset pools. Australian RMBS deals are currently completely funded in advance of investment, so investors are able to perform thorough due diligence and confidently predict future performance.

With a master trust, the loans change and - although new loans are expected to be of a similar quality - it reduces that certainty for investors. For credit card ABS transactions, the entire pool could change within a five-year period, so investors are placing trust in issuers rather than in the loans.

"You are swapping known for unknown, trusting a brand name rather than the assets themselves. I do not think a lot of people are doing detailed due diligence, but those that are drilling deeper will be a little uncomfortable with that idea of assets changing. Ongoing due diligence, where investors go into the originator's offices and inspect the pool several times a year, becomes critical to ensure that credit standards do not slip," says Rochford.

While master trusts could pave the way for credit card and other ABS transaction types, a lot depends on how restrictive APRA is. The investor notes that there has been speculation that master trusts may only be allowed for home loans.

She says: "Fundamentally, introducing master trusts means issuers have the full benefit of product choice. It will not be a case of floodgates opening, but if the banks can extract good funding from markets such as credit card ABS, then they will embrace the structure."

When master trusts might be introduced is unknown and the investor suggests even APRA may not have a timescale. After the successful introduction of covered bonds in the country in recent years, master trusts represent the next frontier.

"Introducing master trusts would change the game for bond managers. It would provide a real fixed term alternative to just giving money to the major banks," says Rochford.

He concludes: "For the smart investors who know asset classes and know default risks, there could be a major shift to lending to the assets rather than lending to the brand name or the banks. Master trusts do not do that completely, but it is a step along the road because you remove many of the unknown risks that exist in a bank. Ultimately, nobody knows all the risks in a bank; not even the bank's management, as the London 'whale' recently proved to us."

JL

Structured Finance

Euro ABS, RMBS markets 'calm'

The European ABS and RMBS markets continue to exhibit healthy if unspectacular levels of activity. Primary issuance continues, while secondary market supply has picked up since the summer slow-down.

One trader reports that this past week has been "calm" in the absence of strong positive or negative drivers. Secondary market activity has been steady.

"We have certainly seen a bit of bid-list activity this week and the market seems pretty well supported. I would describe it as firm and stable right now, neither rising nor falling," says the trader.

A few auto ABS tranches were circulating mid-week. SCI's PriceABS data shows that the BUMP 2011-2 A, BUMP 2011-4 A, COMP 2012-1 A, HIGHW 2012-1 A and TURBF 2012-1 A tranches were all covered during Wednesday's session between 100.34 and 100.76.

"Spreads have returned to the kind of levels we were last seeing in May, before the summer kicked in. For ABS, were are either at or very close to tights for the year. But it is a little different for prime RMBS, where spreads are probably a little bit wider," says the trader.

The market is not expected to be disturbed by any events next week, with BWIC supply likely to remain constant. The next big change is anticipated to come about from the US debt ceiling discussion.

"Already the market in Europe is turning its attention to the US debt ceiling and that will be the next event to drive market sentiment. That said, of course, there could always be unforeseen circumstances before that to change things - which, in our market, you can never rule out," says the trader.

As for the primary market, he notes that auto ABS deals - such as E-CARAT 2 and a couple of Finnish transactions - are ready to hit the market. Yorkshire Building Society's prime UK RMBS Brass No.3 is also expected to price to solid demand.

JL

CLOs

Vintage variety for CLO session

Paper from 2006 and 2007 dominated US CLO secondary trading yesterday. Bonds from deals issued as recently as this year and as long ago as 2003 were also captured by SCI's PriceABS data, however.

Price talk for the 2013 tranches was concentrated from the mid-80s to the mid-90s. An example of the former was the APID 2013-12X F tranche, which had also been talked in the mid-80s and mid/high-80s on 10 June.

CIFC 2013-2A B2L was talked in the mid/high-80s, very high-80s, 90 area and very low-90s and was covered at very high-80s, after talk in the prior session had been around 87. The CRMN 2013-1X F and TELOS 2013-4X E tranches were each also talked in the high-80s.

The CIFC 2013-1X E tranche was talked in the low-90s. It had been talked in the low/mid-90s, mid-90s and mid/high-90s on 29 May, when it was covered at a low/mid-94 handle.

Also from the 2013 batch was another CIFC tranche - CIFC 2013-2A B1L - which was talked in the mid-90s, the same level as in the session before. The tranche was covered on 26 July at 95 handle.

Other recently-issued names were also available, such as the CGMS 2012-1A D tranche, which was talked at mid-99 handle and at 100. It was covered at 100 handle in April.

Similarly, the SYMP 2012-9A D tranche was also talked at and around par. Its previous cover was on 5 June at 100 handle.

At the other end of the vintage scale, SIL 2003-1A B1 and SIL 2003-1A B2 both traded during the session. Each had been talked on Monday and Tuesday at around par.

BBAY 2004-1A A1 also traded during the session, having been talked at high-99 handle the day before. BBAY 2004-1X A2 also traded, having been talked at mid-99 handle on Tuesday.

Likewise, VAHA 2004-1A A2 traded during the session. It had been talked earlier in the week in the mid-90s.

Many of the bonds offered on yesterday's bid-lists were from 2006 and 2007 vintage deals. Some notable examples include ICES 2007-1A C, COPPR 2006-1A B, CECDO 2007-14X A2B and WOODS 2006-6A C, which were covered at 85.11, 92.5, 93.1 and 94 respectively.

In addition, the BATLN 2007-1X B tranche was covered at 95.5. The name was covered at mid-88 in September last year.

Also of note were a trio of additional CIFC tranches. CIFC 2006-2A B1L and CIFC 2006-2X B1L were each covered in the mid-90s, while CIFC 2013-2A B2L was covered in the very high-80s.

JL

CMBS

CMBS starts week with steady session

US CMBS BWIC volumes remained steady yesterday as spreads generally widened. Over US$200m was out for the bid, with SCI's PriceABS data showing a mix of names from the session and a number of covers.

One of the trades from the session was the BACM 2005-2 A5 tranche, which was being talked at 80 at the start of last month. There was also the DBRR 2012-EZ1 A tranche which was covered at 60, having been covered at 63 on 17 July, at 54 on 26 June and at 28 on 6 March.

The WBCMT 2005-C20 A7 tranche was covered at 94. It had been covered at week earlier at 95 and before that was covered in October last year at plus 37. The WBCMT 2005-C17 B tranche was also out for the bid and talked at 190.

The BSCMS 2005-T20 A4A tranche was covered at 92, having been covered at 87 a week earlier and at 80 at the start of the month. Last December the tranche was covered at 42 and on its first appearance in the archive back on 2 May 2012 it was covered at 70.

Other BSCMS tranches such as BSCMS 2006-PW12 AM, BSCMS 06-PW13 A1A and BSCMS 2006-T24 AM were also out for the bid. Meanwhile, WMCMS 2007-SL3 A was covered at 100.44 on its first appearance in the PriceABS archive.

There was also agency paper, such as GNR 2009-117 SC, which did not trade. That tranche was previously talked on 21 August 2012 at 13.08.

Other GNR tranches did trade successfully. GNR 2010-31 SA was covered at low/mid-16 and GNR 2010-68 SD was covered at very high-15, while GNR 2010-42 DS was covered at low-16 - just over a year earlier, on 24 September 2012, it was covered at 15.28.

A large list has also been pre-announced for trading tomorrow. It is understood to contain more than US$445m of 2006 and 2007 A1As.

JL

Structured Finance

SCI Start the Week - 30 September

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

Pipeline
The number of deals joining the pipeline slowed a little last week, although there was still a good variety. Three new ABS were announced along with an ILS, two RMBS and two CMBS.

The ABS were C$704m Ford Auto Securitization Trust series 2013-R4, RUB10bn HC Finance and Hollis Receivables Term Trust II 2013-1. The ILS was €200m Calypso Capital II.

The RMBS were Brass No.3 and Genesis Trust II Series 2013-1, while the CMBS were US$1.2bn COMM 2013-CCRE11 and US$575m JPMCC 2013-INN.

Pricings
The pace of issuance also eased off last week. As well as seven ABS there was one RMBS (€1.37bn Castilho Mortgages), one CMBS (US$1bn COMM 2013-LC13) and one CLO (US$592.174m Ableco Capital).

The ABS were: US$350m Ally Master Owner Trust Series 2013-3; US$775m Chase Issuance Trust 2013-7; US$205m CPS Auto Receivables Trust 2013-C; US$636.2m Emerald Aviation Finance Series 2013-1; US$399m Nelnet Student Loan Trust 2013-5; A$500m SMART ABS Series 2013-3; and €133m VCL Master Compartment 1 Series 2013-2.

Markets
Secondary market activity was slow but steady last week for European ABS and RMBS, as SCI reported on Friday (SCI 27 September). The absence of strong positive or negative drivers has contributed to a calm market, with SCI's PriceABS data showing auto paper out for the bid in the middle of the week.

The mortgage basis continued to tighten for US agency RMBS in the fallout from the Fed's decision not to taper, according to Barclays Capital analysts. Rates also rallied, with 10-years moving 35bp below the 3.0% high reached three weeks ago.

"Mortgages outperformed versus Treasury-hedged, with the middle of the stack faring best. FN 4s outperformed by eight ticks while 3s and 3.5s were up by four and six ticks, respectively. 15-year collateral also tightened, with a down-in-coupon bias," the analysts comment.

Bonds in the US non-agency RMBS market also traded well, according to Bank of America Merrill Lynch securitised products strategists. Trading volumes dipped as odd-lot and smaller sized bid-lists predominated. "One of the more notable lists consisted of 29 line items of higher dollar priced bonds with a current face of US$150m which traded on Wednesday," the analysts comment.

The US CLO market witnessed good variety, as SCI reported (SCI 26 September). Wednesday's session mainly comprised paper from 2006 and 2007, but PriceABS also recorded tranches from vintages as distant as 2003 and 2013.

Deal news
• Performance has been weak for European CMBS loans secured by German retail properties. A Barclays Capital analysis of 69 securitised loans predicts total principal losses of €1.4bn for the affected deals, with an average loss severity of 26%.
• Greystone has closed a CMBS transaction for US$38.75m on behalf of a suburban Cleveland-based multifamily property owner. The loan has a 10-year term, with only three years of interest at a rate of 2.35% over ten-year swaps.
• Declaration Management & Research is set to transfer the asset management responsibilities for the Independence II CDO to Cairn Capital. The replacement is expected to become effective on 30 September.
• The September session of the US$8.5bn Countrywide settlement hearing has ended, without a conclusion. The objectors' one remaining witness - Georgetown law professor Adam Levitin - is now scheduled to provide his testimony on 14-15 November, after which both sides will offer their closing arguments.
• 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.
• 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).
• 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).
• 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.

Regulatory update
• Speculation is growing that the Australian Prudential Regulation Authority (APRA) might allow securitisation through master trusts. Such a move could transform the Australian RMBS market and open up new asset classes.
• The US District Court for the Southern District of New York has allowed the US Department of Justice to proceed with its civil mortgage fraud lawsuit against Wells Fargo in connection with the bank's participation in the FHA's Direct Endorsement Lender Program. DOJ filed its complaint in October 2012, accusing Wells Fargo of falsely certifying to the US Department of Housing and Urban Development that more than 100,000 loans were eligible for FHA insurance when in fact the bank was engaging in reckless origination and underwriting of the loans.
• Proposed changes to retention rules could reduce issuers' advance rates in securitisation and limit their options to sell the equity stake or move down the risk spectrum in student loan ABS deals, Fitch suggests. State issuers would be exempted from the rules, however.
• The US Fed has issued two interim final rules that clarify how companies should incorporate the Basel 3 regulatory capital reforms into their capital and business projections during the next cycle of capital plan submissions and stress tests. The horizon for the next capital planning and stress-testing cycle runs from 4Q13 to 4Q15, thereby overlapping with the implementation of Basel 3.
• 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.
• 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.
• 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 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.

Deals added to the SCI database last week:
American Express Issuance Trust II Series 2013-2; Apidos CLO XV; Boca Hotel Portfolio Trust 2013-BOCA; BXG Receivables Note Trust 2013-A; Carlyle Global Market Strategies Euro CLO 2013-2; CGCMT 2013-GC15; Citibank Credit Card Issuance Trust 2013-A7; Citibank Credit Card Issuance Trust 2013-A8; Citibank Credit Card Issuance Trust 2013-A9; Dong Fang Container Finance (SPV) series 2013-1; DT Auto Owner Trust 2013-2 ; FREMF 2013-K32; GE Equipment Midticket series 2013-1; Golden Credit Card Trust series 2013-2; Kingsland VI; LEAF Receivables Funding 9 series 2013-1 ; Northwoods Capital X; OCP CLO 2013-4; SCG 2013-CWP Hotel Issuer ; SLM Private Education Loan Trust 2013-C; Symphony CLO XII ; VCL 18; VFC 2013-1; Westlake Automobile Receivables Trust 2013-1; WFRBS 2013-C16; WhiteHorse VII

Deals added to the SCI CMBS Loan Events database last week:
BACM 07-2, BSCMS 07-PW16, MSC 07-IQ14 & 07-HQ12, WBCMT 07-C31 & 07-C32; BAMLL 2012-CLRN; BSCMS 07-PW17, BSCMS 07-PW18 & MLMT 07-C1; BSCMS 2005-PWR9; CD 2006-CD2; COMM 2006-C7; CSFB 2003-C4; CSMC 2006-C4; CSMC 2006-C5; DECO 2005-C1; DECO 2007-E5; ECLIP 2006-1; ECLIP 2007-2; GCCFC 2007-GG9; JPMCC 2005-LDP1; JPMCC 2005-LDP4; JPMCC 2007-CB19; JPMCC 2007-LD11; JPMCC 2008-C2; LBUBS 2004-C7; LBUBS 2007-C1; LBUBS 2007-C6; LBUBS 2007-C7; MALLF 1; MLCFC 2006-2; MLMT 2005-MKB2; MSC 2005-IQ9; MSC 2007-IQ16; OPERA GER3; TITN 2007-2; TMAN 5; WINDM VIII

Top stories to come in SCI:
Risk retention ramifications for US CLOs
Consequences of the Fed's 'no taper' announcement

CMBS

Costly losses for German retail loans

Performance has been weak for European CMBS loans secured by German retail properties. A Barclays Capital analysis of 69 securitised loans predicts total principal losses of €1.4bn for the affected deals, with an average loss severity of 26%.

German retail properties back €5.3bn of loans across 27 European CMBS looked at by the Barclays Capital analysts. "Their performance has been largely dismal: 47% are currently past their (initial or extended) maturity date; approximately 76% are past their initial maturity date," they note.

Based on reported values, the aggregate securitised LTV for the loans is 102%, with 27 loans on aggregate €890m in negative equity. Around a quarter of the properties have not been revalued since loan origination, so the true negative equity number is likely to be even higher.

Around €1.1bn (22% of the securitised loan balance) is due to mature between October and December this year, with the same amount maturing in 2014. Only 10% of the €3.4bn not-yet-matured whole loans are expected to be repaid on time. The transactions that will be most strongly impacted are Opera Finance Germany 2, Talisman 6, Infinity Soprano, EMC 4, EMC 6, Deco 9 and Deco 10.

The single loan securitised in Opera Germany 2 was extended from October 2011 to October 2013 and the CMBS maturity is in October 2014. The borrower has requested a loan restructuring and six-month standstill agreement (see SCI's CMBS loan events database), which the analysts believe will help the borrower to repay the securitised senior loan in full before CMBS maturity, but would likely result in a partial principal loss for the junior loan.

The Treveria I loan securitised in both Deco 9 and EMC 4, meanwhile, was transferred into special servicing in 2010. Disposals have been ongoing since 2011 and are expected to reduce the final principal loss to €150m, which would be split evenly between the two securitisations, resulting in small losses for EMC 4 class B notes.

"Work-out of the Treveria I loan gives some insight into the time it takes to sell a German property portfolio over time: while sales picked up in recent quarters, it took the special servicer 1.75 years to sell 22 properties (on average three properties per quarter). Assuming six properties are sold each quarter, it will likely take another 1.5 years until the Treveria I loan work-out is finalised," the analysts note.

Deco 9 is also backed by the €114.2m PGREI portfolio loan. A timely repayment in July 2014 is thought to be unlikely and the properties securing the loan will likely have to be sold in 2015 and 2016. Principal loss for the loan is predicted to be €50m, totalling €125m in principal losses for the securitisation, leading to losses up to the class C notes.

The Infinity Soprano transaction's EHE Pool 1A loan is expected to default on its October 2013 maturity date, leading to a failure to pay credit event that will cause the transaction to switch to sequential pay. A principal loss of €115m is expected in 2H17.

A credit event is also expected for the smaller EHE Pool B loan, leading to property sales and a final loss and recovery determination in 2015. A realised loss of €3m is expected, but as the other loans backing the securitisation are not expected to experience principal losses, the total loss expectation for Infinity Soprano is €118m - meaning value breaks in class C.

Talisman 6's Orange loan is expected to experience principal loss of €65m for the securitised loan portion, with a €27m loss for the Coconut loan, a €37m loss for the Peach loan and a €9m loss for the Apple loan. Total expected principal losses for the CMBS are €214m, which will result in a 55% principal loss at the class B level.

Deco 10 is also expected to see value break in class C, which would suffer a 55% principal loss. The loss expectation for EMC 6 would see value break at the class C notes as well, which would suffer a 67% principal loss. Fleet Street Finance 2 is expected to repay in time for its 2014 maturity date, however.

JL

ABS

Modelling pro joins portfolio management team

Deer Park Road Corp has appointed Rick Fontana as associate portfolio manager. He will focus on helping manage the recently-formed Burgess Creek Fund (SCI 3 April), which focuses on deeply discounted RMBS and ABS.

Fontana will report directly to portfolio manager Scott Burg. He has previously worked at TD Securities in New York and has strong experience in modelling and analysing RMBS and ABS. He has also worked at Pursuit Partners, Fortis Investments and E*TRADE.

Structured Finance

SFIG continues to build

SFIG has hired Sonny Abbasi as director for RMBS policy issues and Sairah Burki as director for ABS policy issues. They will both report to executive director Richard Johns.

Abbasi will focus on GSE reform and efforts to support a return of private capital to the RMBS market. He was previously director of MBS policy at Fannie Mae and has also worked at McKee Nelson and at Orrick, Herrington & Sutcliffe in structured finance roles.

Burki will focus on the range of proposed and anticipated rules which will affect ABS asset classes, including Basel 3, risk retention and credit rating agency reform. She was previously director of treasury policy at Capital One and has previously worked at Xerox, UBS and the Federal Reserve Bank of New York.

Structured Finance

SF lawyer moves to London

Milbank, Tweed, Hadley & McCloy has boosted its leveraged finance practice with the addition of Laetitia Costa as special counsel in London. She was previously based in Paris and her structured finance expertise will expand the firm's offering. Costa joins from Clifford Chance and has also worked for Allen & Overy, Ashurst and Freshfields Bruckhaus Deringer.

Structured Finance

Capital markets origination addition made

Michael Tamburrino has joined Citi in New York as an associate. He will work on capital markets origination for the global securitised products group.

Tamburrino was previously at PricewaterhouseCoopers, where he was a manager. Tamburrino spent five years at PwC working in the financial instruments, structured products and real estate group.

Structured Finance

Asian SF pro appointed

VTB Capital has appointed Jason Fung as head of Asia financing structuring. He will be responsible for developing the firm's structured finance business in the region.

Fung will be based in Hong Kong and report to head of international private finance structuring Peter Firmin and to Asia ceo Damian Chunilal. Fung was previously head of the North Asia and emerging markets financing group at Credit Suisse and has also worked at Citi in structured finance and fixed income in the Asian markets, particularly China.

CDO

ABS CDO transfer due

Declaration Management & Research is set to transfer the asset management responsibilities for the Independence II CDO to Cairn Capital. The replacement is expected to become effective on 30 September, provided noteholders do not object before that date. Terms of the proposed replacement collateral management agreement have remained almost identical, with only minor differences that are not material to the ratings of the transaction, according to Fitch.

The most senior class in the transaction is currently rated single-C, indicating that default appears inevitable for the notes. In addition, Independence II is in an EOD. Consequently, Fitch does not expect the novation to have any impact on the ratings of the notes.

For other CDO manager transfers, see SCI's database.

CMBS

CMBS delinquencies dip further

The Trepp US CMBS delinquency rate fell for the fourth consecutive month in September. The rate dropped 24bp from August to 8.14%.

The delinquency rate is now at its lowest level for three years and is 185bp lower than it was one year ago. There were US$1.7bn in new delinquencies last month, a decline from US$2.5bn in August.

US$1.9bn of loans cured during September and loan resolutions totalled just under US$873m. There are still US$44bn in delinquent US CMBS loans, excluding those that are past their balloon date but current on interest payments.

Retail remained the best performing property type and industrial continued to perform worst. The office delinquency rate had the best month-to-month improvement with a 29bp drop, while lodging loans saw a 12bp increase.

Insurance-linked securities

Capital markets group strengthens in ILS

Willis Capital Markets & Advisory has appointed Brad Livingston as ILS vp. He will be based in New York and help to drive Willis' continued expansion into the ILS space. Livingston was most recently a broker at Guy Carpenter, where one of his roles was to originate, structure and market ILS for global insurance and reinsurance companies.

Insurance-linked securities

Arrival to boost ILS expansion

Neil Strong has joined Securis Investment Partners in London as head of business development. He will help to expand the firm's ILS and reinsurance capabilities.

Strong was previously at Execution Nobel, where he spent six years and served as partner. He joins in a newly-created role.

Insurance-linked securities

ILS trader follows former boss

Justin Hull has joined Aspen Capital Markets as a portfolio manager in New York. He was previously an ILS trader at PartnerRe and has also worked at Citi as an associate. Aspen Capital Markets was set up earlier this year by Brian Tobben (SCI 17 April), who was head of ILS at PartnerRe.

Risk Management

Leadership change for OTC platform

Markit has named Jeff Gooch as cfo. He was previously head of processing, ceo and chairman of MarkitSERV, the information company's OTC derivatives trade processing platform.

Gooch will remain chairman of MarkitSERV. Brad Levy will take over as global head of processing and ceo of the derivatives platform, having previously served as co-head of Markit's information business.

Gooch has been at Markit for six years, having previously worked at Morgan Stanley as head of global fixed income operations. He has also worked at Ernst & Young.

RMBS

Cantor enlists agency specialist

Christopher Obara has joined Cantor Fitzgerald in New York as a director. He was previously at Pierpont Securities, Ally Securities, Nomura and UBS and focuses on agency RMBS trading and structuring.

RMBS

Structured pro takes Freddie role

James Mackey is joining Freddie Mac as evp and cfo, replacing the retiring Ross Kari. He joins next month and will report to ceo Donald Layton.

Mackey was most recently evp and cfo at Ally Financial. Before that he was at Bank of America, where he held various roles including md within the global structured products group.

RMBS

Court allows RMBS claims to proceed

A Federal Court in New York has ruled that the FDIC can proceed with its claims against several major banks in connection with US$388m of RMBS purchased by the now-defunct Colonial Bank (SCI 15 August 2012).

The defendants include JPMorgan, Citigroup, Ally Securities, First Horizon, Credit Suisse, Deutsche Bank, HSBC, Merrill Lynch, RBS and Wells Fargo. The FDIC alleges the defendants "stuffed" the RMBS with poor quality loans before marketing them as safe investments, according to a Lowenstein Sandler client memo.

RMBS

Fraud suit to proceed

The US District Court for the Southern District of New York has allowed the US Department of Justice to proceed with its civil mortgage fraud lawsuit against Wells Fargo in connection with the bank's participation in the FHA's Direct Endorsement Lender Program. DOJ filed its complaint in October 2012, accusing Wells Fargo of falsely certifying to the US Department of Housing and Urban Development that more than 100,000 loans were eligible for FHA insurance when in fact the bank was engaging in reckless origination and underwriting of the loans.

Ruling on Wells Fargo's motion to dismiss, US District Judge Jesse Furman allowed the government to pursue its claims under the Financial Institutional Reform, Recovery and Enforcement Act and the False Claims Act. The court dismissed the government's common law fraud claims as untimely, according to a Lowenstein Sandler client memo.

ABS

Risk retention to impact SLABS advance rates

Proposed changes to retention rules could reduce issuers' advance rates in securitisation and limit their options to sell the equity stake or move down the risk spectrum in student loan ABS deals, Fitch suggests. State issuers would be exempted from the rules, however.

If the proposal is accepted in its current form, Fitch says it would expect most FFELP ABS deals to continue to be eligible to earn triple-A ratings at issuance. The proposed risk retention rules would be limited to the 2%-3% non-reimbursable portion of federal guarantee for most transactions. Most FFELP ABS transactions structured with 102%-104% senior parity and 100%-101% total parity at closing typically achieve triple-A ratings for senior notes and single-A for subordinated notes.

The proposed rule would require issuers to retain 5% of private student loan ABS deals. This rule would not have had an impact on most private student loan transactions issued since the financial crisis began, as these deals were typically structured with more than 5% credit enhancement levels at closing.

Most triple-A rated deals start with 20%-30% overcollateralisation (OC) while single-A rated deals begin with 5%-15% hard OC retained by the issuer as equity. However, if issuers attempt to increase the advance rate by reducing the residual piece or carving out lower rated tranches, the 5% retention rule would create an OC floor in terms of how far issuers can move down the spectrum.

Loans may be exempted from the proposed rule if they reach the longer of either two years or 33% pool factor. In Fitch's view, this exemption would be prudent as most defaults in student loan ABS occur in the first few years after loans enter repayment. However, the agency believes that few will be eligible because the 33% pool factor hurdle is significant.

ABS

Green bank to boost renewables ABS

The New York State Energy Research and Development Authority (NYSERDA) is seeking to establish a green bank, with a primary mandate to facilitate securitisation for renewable energy technologies. It is anticipated that the bank will offer: warehouse lines for pooling financial assets, such as solar panel leases and power purchase agreements; take first loss positions in renewable energy securitisations; and issue guarantees for ABS backed by financial assets originated by renewable energy project developers.

Several other states have undertaken renewable energy financing programmes, while the Department of Energy's National Renewable Energy Laboratory's (NREL) solar access to public capital (SAPC) working group provides a forum for the development of a framework for solar securitisation (SCI 20 March). But the SFIG describes the New York State initiative as "perhaps the most flexible and comprehensive government approach to date". In particular, the green bank stands out because it will commit capital to specific transactions.

The bank is seeking to reallocate US$165m in uncommitted NYSERDA funds to serve as its initial capitalisation, with the expectation of growing it to US$1bn. SFIG suggests that the greatest potential for the bank to kick-start a securitisation approach to renewable energy financing lies in the assumption of first loss positions. These may be represented by the provision of a loan loss reserve, the purchase of a subordinate tranche or the issuance of a credit guaranty.

The green bank also proposes to assist in financings deeper down in the credit spectrum: as low as 600 FICO for residential customers and 'class 3' businesses for commercial and industrial customers. "By covering some of the risks of a securitisation, the green bank could take some of the pressure off of both the rating agencies and the initial investors, which should facilitate structuring as well as marketing," SFIG observes.

A recent NREL report cites several vehicles as having a good potential application to renewable energy: ABS, structured debt products, master limited partnerships (MLPs) and REITs. Of these vehicles, the latter two require legislative or regulatory changes to enable them to be used by the renewable energy industry, according to SFIG.

While ABS and structured debt products therefore appear to have the most potential, the application of securitisation technology to renewable energy financing has proved challenging. Among the reasons frequently cited are: the rating agencies have yet to settle on a methodology for this asset class; the lack of standardisation in the underlying loan, lease and PPAs that may make a pool more difficult analyse; and the lack of performance data over time, with respect to the performance of the equipment as well as the performance of obligors.

The SAPC project has so far published standard contracts for the 0% down residential lease and the commercial PPA. In addition, SFIG notes that other features being addressed by developers and marketers of potential securitisation transactions include the characterisation of the renewable product being sold or leased (physical equipment, electricity or 'savings').

ABS

Regional banks step up ABS issuance

Securitisation activity among large US regional banks has picked up significantly over the past few weeks, opening up new funding options for auto assets in particular. Fitch suggests that the revival of auto ABS issuance is partly an effort by these banks to gain some regulatory relief on capital and liquidity requirements.

Aside from Huntington Bancshares, few large US regional banks have been frequent issuers of auto ABS paper recently. However, Fifth Third, M&T Bank and other lenders have launched new deals (see SCI's new issue database). Many of these transactions have been upsized from initially proposed levels.

Access to the auto ABS market has remained good, despite widening spreads seen during the summer - though year-to-date issuance volume is down by around 3% from 2012. Large regional banks are relatively small players in the overall market, but their importance could grow as more deals are completed, Fitch observes.

Banks are likely viewing the openness of the market as an opportunity to swap out less liquid loans for securitisations that stay on the balance sheet but receive more favourable treatment under Basel 3 with respect to capital and liquidity. In some cases, the deals have included a large share of a bank's total auto loan book.

For example, collateral in M&T's recent US$1.4bn ABS transaction represented over 60% of its total auto loans. Fifth Third's recent US$1.3bn ABS transaction was collateralised by a pool of loans exceeding 10% of the bank's total auto loan balance, as of 30 June.

Fitch believes that the recent openness of the auto ABS market for regional banks is a potential precursor to a revival in credit card ABS activity by the same institutions, possibly by early 2014. A pick-up in card ABS deals would also likely reflect continued improvement in asset quality and a desire by some large regional card issuers to broaden funding sources.

ABS

Auto performance atypical for August

US auto prime annualised net losses (ANL) crept up by 3% in August over July's level, showing much less of an increase during this historically weaker period, Fitch reports. Also atypical for August, used vehicle values were strong during the month, helping to contain loss severity on defaulted loans.

Prime 60+ days delinquencies stood at 0.33% in August, unchanged from July and 10.8% lower year-over-year (YOY). They have averaged 0.34% in 2013, down from 0.39% in 2012. As with losses, delinquencies continue to be low historically entering the weaker autumn months.

Prime ANL stood at 0.32% in August, just 1bp higher over July. August's rate was 28% higher YOY, but still remains low historically.

Prime cumulative net losses (CNL) were 0.26% for August, 3.7% lower month-over-month (MOM) and 18.8% lower YOY. The 2013 CNL vintage is producing the best annual vintage performance to date, according to Fitch.

In the subprime sector, meanwhile, 60+ days delinquencies were stable MOM at 3.21%, only 2.6% above July and virtually unchanged YOY. Subprime ANL jumped 18.4% MOM to 5.27% in August, but were 1% below the level recorded in August 2012.

ABS

Singapore card rules 'credit positive'

Changes to credit card and unsecured credit rules in Singapore finalised this month will improve the credit quality of securitisation receivables, according to Moody's. The agency says the changes will improve underwriting standards and the overall quality of obligors, providing securitisation transactions with greater protection against the default of weaker obligors.

The revised rules require financial institutions to obtain updated credit information from an obligor before increasing credit limits or after receiving information that the obligor has a potential credit issue, starting from December. Institutions must also review a borrower's outstanding debt and credit limits from June 2014 and then from June 2015 they will be unable to grant unsecured credit to an obligor whose total outstanding unsecured borrowing among all financial institutions has exceeded 12 months of the obligor's income for 90 days or more.

ABS

Positive card performance continues

The US government shutdown is unlikely to impact US credit card ABS, according to Fitch. Ratings are likely to remain stable as the market continues to flourish.

Fitch's prime chargeoff index performance metrics for August reached new lows while monthly payment rate (MPR) and excess spread reached all-time highs. 60-plus day delinquencies are still dropping at a steady pace, making a rise in chargeoffs before year-end increasingly unlikely.

The prime 60-plus day delinquency index declined for a sixth straight month to reach an all-time low of 1.27%. The chargeoff index declined to 3.33%, which is a seven-year low.

The prime MPR index increased 22bp to 26.27. The prime gross yield index declined 3% although Fitch notes that excess spread remains robust; one-month excess spread fell 42bp, but three-month average excess spread rose 5bp to a new record high.

The retail chargeoff index was flat month-over-month at 6.08% and retail 60-plus day delinquencies rose. Both measures are down 10.98% and 9.70%, respectively, from a year ago.

The retail gross yield index increased 31bp and the retail MPR index also increased. ABS ratings on both prime and retail credit card trusts are expected to remain stable given available credit enhancement, loss coverage multiples and structural protections.

Structured Finance

ESMA clarifies AIFM requirements

ESMA has published final guidelines on reporting obligations for alternative investment fund managers (AIFMs). Under the guidelines, hedge funds, private equity and real estate funds must regularly report certain information to national supervisors.

The guidelines clarify provisions of the Alternative Investment Fund Managers Directive (AIFMD) to provide more comprehensive and consistent oversight of AIFM activities. ESMA has also proposed introducing additional periodic reporting, including value-at-risk or the number of transactions carried out using high frequency algorithmic trading techniques.

Managers need to report investment strategies, exposure and portfolio concentration. The additional proposal would add AIFs' risk measures, liquidity profile and leverage.

Structured Finance

Group expounds AFA proposal's merits

The working group led by Georges Duponcheele has published two research papers dealing with key aspects of its proposed arbitrage-free approach (AFA) to securitisation capital. They cover the applicability of the AFA and the impact of maturity effects.

The group has developed both the AFA and Simplified AFA as a response to the Basel Committee's capital proposals (27 June 2013). It believes the two papers confirm the AFA as a universal and sound framework for calculating regulatory capital requirements.

CDO

Pair of CDOs on the block

An auction has been slated for Longport Funding II on 21 October. The trustee shall sell the collateral debt securities only if the sale would result in proceeds sufficient to meet the auction call redemption amount.

The following day will see an auction for Libertas Preferred Funding I. Again, the collateral will only be sold if the proceeds are greater than the redemption amount.

Meanwhile, an auction held yesterday for RFC CDO I failed to attract bids which would result in high enough sales proceeds. Therefore an auction call redemption will not occur on the 15 October distribution date (SCI 17 September).

CDO

CDO pricing service launched

Thomson Reuters has launched a new evaluated CDO pricing service, covering ABS CDOs, CRE CDOs and Trups CDOs. The offering provides end-of-day valuations based on asset-level analysis and aims to provide customers with greater transparency into the complex CDO market. Securities are priced by a team of evaluators, with access to analytics and current market colour, which is then applied to a fundamental cashflow analysis.

CDS

Spreads tighten as purchase looms

The credit default swaps (CDS) market appears to have reacted favourably to plans by Lixil and the Development Bank of Japan to buy a majority stake in Grohe Holding GmbH, according to a study by Fitch Solutions. Grohe's spreads are 48% tighter than they were at the end of August.

Spreads are 82% tighter than a year ago as market sentiment towards Grohe continues to improve. Fitch notes that current pricing suggests protection against a default in line with the triple-B investment grade space.

CDS liquidity has decreased slightly for Grohe, from the ninth global percentile to the 12th, but is still relatively high. The majority stake will be purchased for US$4.1bn and represent 87.5% of the company.

CLOs

CLO equity economics concern investors

Market participants do not believe risk retention rules should apply to CLOs and responses to JPMorgan's latest client survey show it is not just CLO managers who are saying so. However, CLO equity concerns are causing even greater worry than risk retention.

Investor cash positions for the start of the final quarter are generally higher than they were in Q3, so while it is unknown how many investors will put their cash to work there is at least dry powder ready. The number of investors reporting low to moderate cash balances has decreased, with 33% saying they have a high level of cash.

Buying intentions have reached a new record in JPMorgan's survey series since 2009 and the add/reduce ratio is now at 25:1. Those participants who anticipate investing in the coming months intend to do so in CLO mezzanine and subordinated debt.

For relative value in primary deals, around two-thirds of investors favour triple-A paper. They are more split on where to find value in the secondary markets; only a third of respondents identified US or European triple-A as providing better value than lower-rated tranches, with US double-B paper particularly popular.

Respondents also made suggestions for US regulators to consider. A popular recommendation was to allow for partial non-recourse financing from a third-party, while adjusting horizontal slice treatment and definition was also popular. Another idea was to grant original loan underwriting banks the option of retaining non-term loan B tranches in the open market CLO approach.

The most frequent concern was CLO equity economics, with risk retention regulation not far behind. CLO spread volatility, loan fundamentals and interest rates were all also weighing on respondents' minds.

CMBS

Multifamily origination expands

Greystone has closed a CMBS transaction for US$38.75m on behalf of a suburban Cleveland-based multifamily property owner. The loan has a 10-year term, with only three years of interest at a rate of 2.35% over ten-year swaps. The firm says it closed the deal in 35 days and expects to close a number of additional deals before year-end.

Launched earlier this year, Greystone's CMBS programme supplements its Fannie Mae, Freddie Mac and FHA services. The firm originated approximately US$3.4bn of Fannie Mae, Freddie Mac, Affordable, FHA and Bridge multifamily business in 2012.

CMBS

Servicers switching strategies?

With improving US commercial real estate fundamentals, commercial mortgage loan servicers have begun shifting gears to prepare for continued growth in lending. In particular, the industry has seen a number of mergers and acquisitions, as well as greater CMBS B-piece buyer participation.

"Some servicers' business strategies are once again predicated on growth, as opposed to taking advantage of market distress," confirms S&P servicer analyst Andrew Foster. "The additional money pumped into the system has strongly benefited markets in the short term. However, we are less certain as to the possible long-term costs."

C-III Capital Partners, CWCapital and LNR Partners traditionally dominated the B-piece market and also served as special servicers for their transactions. Consequently, they maintain the majority market share (at approximately 82%) for legacy CMBS transaction special servicing assignments, S&P notes.

From 2010 to 2012, a similarly small pool of B-piece buyers dominated the CMBS market's recovery. As a result of the lower number of active bidders, these early CMBS 2.0 transactions had credit characteristics and prices that were highly favourable to the B-piece buyers' investment objectives. More recently, however, new issue B-pieces are selling for higher prices, despite what S&P views as a decline in credit quality of recent CMBS transactions.

The number of B-piece buyers has grown significantly this year and currently stands at approximately 15, including AllianceBernstein, BlackRock, CBRE, Cerberus Capital, Eightfold Real Estate Capital, H/2 Capital, Raith Capital and Rialto Capital. S&P suggests that a large supply of B-piece buyers may make it more difficult to maintain underwriting standards and collateral quality in US CMBS transactions.

"In our view, more buyers may translate into less market discipline because issuers may have fewer concerns of potential 'kick-outs' of troublesome loans. With only three B-piece buyers, originators had fewer options for loan sales and had to maintain credit and underwriting standards that would meet the requirements of at least one of the three. With an expanded pool of potential B-piece buyers, originators may have additional underwriting flexibility," the agency explains.

Meanwhile, M&A activity in the space received a boost this year when Starwood Property Trust and Starwood Capital Group acquired LNR Property (SCI 25 January). The transaction was noteworthy for the focus of the strategy: in addition to taking advantage of growth in special servicing fees and ancillary opportunities created by a distressed environment, Starwood Property Trust also projects growth by originating loans.

More recently in May, Ares agreed to buy multifamily lender Alliant Capital, which originates loans and provides asset management and servicing primarily through Fannie Mae's delegated underwriting and servicing programme. S&P suggests that the acquisition will enable Ares to deliver a more diverse set of loan products, in particular adding a permanent financing option for customers.

In December 2012, a Blackstone affiliate acquired CTIMCO and subsequently renamed it Capital Trust Blackstone Mortgage REIT - albeit the special servicing business line continues to operate as CTIMCO.

The process of working through distressed mortgages is likely to end with the special servicing industry shrinking because fewer personnel are required once there are fewer defaulted loans to restructure and resolve, S&P observes. "More servicers, particularly special servicers, appear to be positioning for growth in lending. While fewer personnel will be needed to work out loans, growth in lending should create new opportunities for those with work-out experience. As in previous upturns, we believe many of these loan work-out professionals will prove invaluable as new business models are developed."

CMBS

Servicer replacement approach outlined

Fitch says it is increasingly being asked by new controlling class holders (CCH) to provide 'no downgrade letters' for the appointment of replacement special servicers, as losses continue to erode the control positions of legacy CMBS transactions. The agency notes that it will no longer provide individual rating confirmation letters with regard to these transfers as long as the transfer of servicing is to a Fitch-rated special servicer, with a rating of CSS3 or better.

Consistent with historical practices, Fitch would not downgrade or withdraw ratings as a result of a transfer to a special servicer with a rating of CSS3 or better; instead it would expect to be notified following the servicer transfer. Ratings of CSS3 or higher reflect its assessment of servicers' capability to take on reasonable levels of additional servicer assignments, the agency adds.

Fitch has provided approximately 25 rating confirmations for transfers of servicing so far this year. The agency expects servicing transfers to continue at a high pace as realised losses are incurred and the shift of the CCH occurs. It says it has been in contact with CREFC, which is putting together a working group to determine best practices for transfers of special servicing.

NPLs

Spanish NPL warning issued

The rise in Spanish non-performing loans (NPLs) recently announced by the Bank of Spain is likely to continue as banks reclassify some refinanced loans and reduce the support they have provided to their structured finance transactions, Fitch says. If the rate of increase continues, the agency says it could trigger a review of its probability of default assumptions for individual borrowers in Spanish RMBS and covered bonds.

At a national level, the jump in the NPL ratio for residential mortgages to 5.2% from 3.2% a year earlier is particularly significant because the stock of mortgage debt only decreased by 5% over the year, according to Fitch. This means that rising NPLs rather than falling mortgage volumes drove the increase.

"We believe the increase is partly due to banks reclassifying some refinanced transactions as non-performing after the Bank of Spain required them to re-analyse these. This review is required to be completed by the end of this month and is therefore likely to contribute to a further increase in NPLs. In addition, the amount of support banks provide to structured finance transactions will continue to fall, which may also push up NPLs and the number of modified loans within structured finance transactions," Fitch observes.

The agency currently estimates that loan modifications account for 6% of the RMBS portfolios it rates, with arrears over 90 days inclusive of defaults standing at 5.4%, as of 2Q13 compared with 4.2% in 2Q12. If the national NPL ratio for residential mortgages reaches 6%, it will very likely trigger a review of our probability of default assumptions for Spanish residential mortgages, Fitch warns.

The latest data from Bank of Spain shows the entire private loan book NPLs of 11.6% to be much higher than residential mortgage NPLs at the end of June, with an increase from 9.7% a year earlier. This mainly reflects a €225bn drop in the national private loan book (80% of which came from SMEs) and an €8bn increase in NPL entries.

Risk Management

SEFs set to improve pricing transparency

Fitch says that swap execution facilities (SEFs) are likely to improve pricing transparency for traders of interest rate swaps and other credit derivatives. The venues could over time begin to generate meaningful revenue streams for firms offering voice and electronic execution of derivative transactions, as required under Dodd-Frank, according to the agency.

"However, we believe that in the near term regulatory uncertainty around SEF rules - namely definition of 'required' and 'permitted' transaction and cross-border treatment - could dampen liquidity, affecting volumes and ultimately revenues," it notes.

Nevertheless, Fitch sees the move as an important step in allowing swap participants to more easily gain access to pricing data. This should ultimately contribute to more efficient interest rate swap and CDS market activity.

As of 25 September, 18 institutions submitted applications to the CFTC to operate SEFs. So far, 13 firms have received temporary registration approval, including BGC Partners and GFI Group. Bloomberg was the first organisation to gain temporary approval as an SEF operator (SCI 6 August).

CFTC Chairman Gary Gensler noted at a recent conference that applications by prospective SEFs were receiving only "cursory" reviews, suggesting that more participants are likely to emerge before the 2 October application deadline. Given the relatively large number of prospective competitors in the SEF space, Fitch believes the SEFs that attract the most liquidity and are dominant in a specific asset class will gain market share over time. For some smaller inter-dealer brokers, high regulatory and operational cost hurdles may have discouraged entry and could lead to industry consolidation.

Risk Management

Credit-checked index trade completed

MarketAxess SEF Corp has completed the first live credit default swap (CDS) index trade using Traiana's CreditLink service as the credit hub to verify pre-trade credit limits. JPMorgan acted as the clearing member for the buy-side participant on the trade.

"Our clients require efficient and effective pre-trade credit checking processes," comments Andres Choussy, global co-head of OTC clearing for JPMorgan. "In volatile markets, you can't afford to have your trade cancelled post execution, which is why we will continue working with Traiana, MarketAxess and the broader industry to ensure that each party to an electronic transaction has clearing commitments from their FCMs and the clearinghouses before their trade is executed."

Risk Management

Basel 3 incorporation rules issued

The US Fed has issued two interim final rules that clarify how companies should incorporate the Basel 3 regulatory capital reforms into their capital and business projections during the next cycle of capital plan submissions and stress tests. The horizon for the next capital planning and stress-testing cycle runs from 4Q13 to 4Q15, thereby overlapping with the implementation of Basel 3.

The first interim final rule applies to bank holding companies with US$50bn or more in total consolidated assets. The rule clarifies that in the next capital planning and stress-testing cycle, these companies must incorporate the revised capital framework into their capital planning projections and into the stress tests required under the Dodd-Frank Act using the transition paths established in the Basel 3 final rule. This rule also clarifies that for the upcoming cycle, capital adequacy at large banking organisations would continue to be assessed against a minimum 5% tier 1 common ratio.

The second interim final rule provides a one-year transition period for most banking organisations with between US$10bn and US$50bn in total consolidated assets. These companies are this autumn conducting their first company-run stress test under the rules implementing the Dodd-Frank Act. They will be required to calculate their stress test projections using the current regulatory capital rules during the upcoming stress test to allow time to adjust their internal systems to the revised capital framework.

The interim final rules also clarify that companies will not be required to use the advanced approaches in the Basel 3 capital rules to calculate their projected risk-weighted assets in a given capital planning and stress-testing cycle, unless the companies have been notified by 30 September of that year, prior to the start of that capital planning and stress-testing cycle.

RMBS

Further delay for Countrywide pay-out

The September session of the US$8.5bn Countrywide settlement hearing has ended, without a conclusion. The objectors' one remaining witness - Georgetown law professor Adam Levitin - is now scheduled to provide his testimony on 14-15 November, after which both sides will offer their closing arguments.

Closing arguments are expected to continue for three days, suggesting that the trial could be completed by 20 or 21 November. If the judge reaches a decision on the case sometime in 1Q14, the settlement payout could theoretically reach investors sometime in the first half of next year, Barclays Capital RMBS analysts observe.

However, they point out that several hurdles remain that the trustee and institutional investors must overcome before the settlement is paid out. The most significant risk to an expedited pay-out appears to be the objectors' request to conduct discovery on all factual and legal investigations and evaluation of put-back claims by BNY Mellon's in-house and outside legal counsel.

Another risk is that if the judge rules against the objectors, they could file an appeal, which would likely delay the pay-out by at least several more months. Finally, if the judge ultimately rules against the settlement, all parties may be forced to go back to the drawing board.

"A court decision against the settlement would either result in new negotiations between Bank of America and investors or, in a worst case scenario, Bank of America could simply decide to file its Countrywide subsidiary for bankruptcy and litigate over its potential for successor liability in court," the Barcap analysts suggest.

Given the obstacles that must be overcome, they believe that settlement recoveries to investors are likely to be delayed to late-2014/early-2015, predicated on the assumption that the judge rules in favour of the trustee but that the appeals process takes at least several months to resolve. However, if Bank of America is able to reach a side settlement with AIG and the federal home loan banks before the trial concludes - or if key objectors withdraw for some other reason - the pay-out to investors could be substantially accelerated. Similarly, a decision by Bank of America to increase the total settlement amount - thus resolving most of the objectors' concerns - could also expedite payouts.

RMBS

Used condos not negative for Japan RMBS

The rise in the number of used condominiums for Japanese investment-purpose condo loan RMBS is credit positive, says Moody's. They have higher DSCRs and are in better locations than new condos, thereby providing better loan affordability and generating steady cash inflows for obligors.

Used condos now account for between 30% and 40% of the total rated condo loan RMBS. They are generally seen as credit negative due to concerns about the quality of maintenance and renovation.

However, Moody's notes used condo loans are less likely to default than new condo loans and rents are not far from those of new condos. The agency estimates used condos have DSCRs around 1.8 on average, while new condos average DSCRs of 0.9. Difficulties with locating new condos have also contributed to secondary market volumes for used condos rising rapidly.

RMBS

MILAN introduced in Russia

As a result of legislative amendments which came into effect this year, Moody's has updated its approach to modelling Russian RMBS and will now use the MILAN framework. The amendments are intended to raise mortgage agent protection to the level of bankruptcy remoteness traditionally expected from an SPV.

The legislation stipulates that an SPV must be incorporated as a joint stock company, making it subject to the nation's civil code, joint stock company law and insolvency law, leading Moody's to conclude that issuer liquidation stemming from a mortgage agent's negative net assets is the most prominent legal risk for domestic transactions. The country's legal changes also prohibit voluntary issuer self-liquidation, which Moody's will no longer model.

As a result of the new modelling assumptions, the rating agency has upgraded credit ratings of notes for six transactions. The affected tranches are the class A notes of Europe 2012-1, NOMOS and Vozrozhdenie 2, the A2 notes of AHML 2010-1 and the A1 and A2 notes of AHML 2011-2 and AHML 2012-1.