Contents

RMBS

Euro RMBS activity picking up

Activity has picked up in the European RMBS market. Primary issuance is being well received while BWICs circulating in the secondary market are also meeting with good execution.

"A strong growth area has been in UK mezzanine non-conforming RMBS where the government's Help-To-Buy scheme has sparked a rally (SCI 11 October). We are seeing higher prices there and we are also seeing a lot of interest in Dutch RMBS," reports one trader.

The trader points to ABN Amro's Dolphin Master Issuer Series 2013-2 deal from last month and also to Lunet RMBS 2013-1, which priced last week. While van Lanschot has previously used its Citadel RMBS programme, the Lunet issuance is part of the bank's strategy to more clearly differentiate between future public and retained issuances.

"The Lunet programme is going to be used for the public selling of bonds with a completely separate programme for retained deals. The deal has relatively low LTVs, which were just north of 70% and so it will qualify for LCR purposes when those come into effect," says the trader.

He adds: "As the first Lunet deal to be issued there was a bit of a premium paid and the A2s priced at 108bp, which is about 25bp above where other deals have priced. Since then it has done very well in the secondary market and those notes are now on the brink of 100bp."

Activity in the secondary market has generally been high and has picked up noticeably since the summer. "Execution has been really good. It feels like the market is back and risk on again after a slow summer where there was a bit of widening, particularly around June," notes the trader.

Yesterday's session was no exception, with SCI's PriceABS data showing Dutch paper such as HERME 11 D covered at 93.62, HERME 12 B covered at 95.25 and HERME 12 D covered at 91. There were also many peripheral bonds out for the bid.

Spanish tranches such as AYTGH VII B, HIPO HIPO-10 B and UCI 17 B were all covered. There were also covers for Italian bonds such as BPMO 2007-1 C, FEMO 1 C and MECEN 2 C.

JL

Structured Finance

SCI Start the Week - 11 November

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

Pipeline
The pace of deals joining and exiting the pipeline last week was brisk. After a particularly busy five days, the week ended with 12 new ABS, four new RMBS, four new CMBS and four new CLOs remaining.

Among the North American ABS to be announced last week were: US$185.87m Academic Loan Funding Trust Series 2013-1; US$446m Chrysler Capital Auto Receivables Trust 2013-B; US$203m CLI Funding V series 2013-3; US$825m CNH 2013-D; US$225m Diamond Resorts 2013-2; Master Credit Card Trust II Series 2013-4; US$517.85m Pennsylvania Higher Education Assistance Agency Student Loan Trust 2013-3; and US$1bn Santander Drive Auto Receivables Trust 2013-5.

The European ABS joining the pipeline were: Bilkreditt 5; €192.3m DFB Master Compartment Germany 2013; €2.04bn FTA PYMES Santander 7; and €686.2m Private Driver Espana 2013-1 FTA.

The RMBS consisted of: Fastnet Securities 9; US$85m Fortress Opptys Residential Transaction 2013-1; £163.75m Precise Mortgage Funding No.1; and US$324.98m Sequoia Mortgage Trust 2013-12. Meanwhile, the CMBS were: US$465m COMM 2013-FL3; US$208.7m COMM 2013-RIAL4; £485m Intu Metrocentre Finance; and US$200m TPG Opportunities Partners 2013-LTR1.

Also added to the pipeline were four CLOs: US$695.73m Babson CLO 2013-II; US$400m Blue Hill CLO; US$623.5m JFN Revolver CLO; and Shackleton 2013-IV CLO.

Pricings
A great many pricings were also observed last week. As well as 16 ABS, two RMBS, three CMBS and five CLOs printed.

The US ABS new issues were: US$632.14m American Express Credit Account Master Trust series 2013-2; US$500m American Express Credit Account Master Trust series 2013-3; US$1.08bn AmeriCredit Auto Receivables Trust 2013-5; US$380.3m Appalachian Consumer Rate Relief Funding; US$750m CIT Equipment Collateral 2013-VT1; US$250m First Investors Auto Owner Trust 2013-3; US$250m Global SC Finance II series 2013-2; US$450m LATAM 2013-1; US$203m Seacube Container 2013-3; US$995.1m SLMA 2013-6; US$268.7m TAL Advantage 2013-2; and US$1.5bn Volkswagen Auto Loan Enhanced Trust 2013-2.

The other ABS to price were A$151m Liberty Series 2013-1 Auto Trust, €741m Secucor Finance 2013-I, €1bn Silver Arrows Compartment 4 and £270m Temese Funding 1. Meanwhile, the RMBS prints consisted of A$395.2m Firstmac Series 2E-2013 and US$630m STACR 2013-DN2.

The three CMBS pricings comprised US$493.78m ACRE 2013-FL1, US$1.55bn FREMF 2013-K34 and £185m Unite (USAF) II. Finally, the CLO new issues were US$515m Avery Point CLO III, €310.75m Avoca Capital CLO X, US$413m Keuka Park CLO, US$351m Saranac CLO I and €556.5m St Paul's CLO III.

Markets
US ABS secondary spreads were mixed last week, with FFELP student loan shorter-duration triple-A spreads widening but longer-duration triple-As and subordinated subprime auto ABS both tightening. Wells Fargo ABS analysts note that student loan spreads remain substantially wider than they were a year ago and expect consumer ABS spreads to tighten through Thanksgiving, with the potential to widen afterwards.

US non-agency RMBS supply stayed reasonably elevated throughout the week, as SCI reported on 8 November. SCI's PriceABS data captured a number of Alt-A and subprime names, with many covers during Thursday's session as tranches such as NHEL 2003-4 A1, CWL 2005-1 MF2, AMSI 2006-R² M1 and LXS 2007-15N AF2 were all out for the bid.

Secondary activity in both the US and European CLO markets slowed down last week, according to Bank of America Merrill Lynch securitised products strategists. US 1.0 spreads were unchanged from the previous week's levels and 2.0 spreads tightened by 10bp-20bp at the single-A and double-B levels, while European single-As widened about 5bp but were otherwise stable.

Deal news
• Moody's last week downgraded and withdrew its provisional ratings of four classes of notes to be issued by Temese Funding 1. The agency says these actions are driven by a correction to one key input of the rating model it used for the transaction.
• At least 28 RMBS serviced by Chase (EMC) took losses related to past forbearance modifications, according to the October remittance. The affected transactions come from the BALTA, BSABS, BSMF, GPMF, HMBT, PRIME and SAMI shelves.
• The extraordinary resolution to approve the sale of the remaining claims against LBSF and LBHI and an associated restructuring proposal was approved by all classes of Eurosail UK 2007-5NP notes on 31 October (SCI 8 October). The resolution will now be implemented by the issuer.
• Spirit has released the results of its tender offer for its class A1 and A3 bonds (SCI 22 October), with £126.2m tendered in the A1s (87% of the outstanding) and £107.8m of the A3s (92% of the outstanding). The pubco will accept 80% of those tendered for the A1s and 54% for the A3s to reach the original target acceptance ratio of 70% for the A1s and 50% for the A3s.
• Cira SCM (formerly known as Strategos Capital Management) intends to resign as collateral manager on Libertas Preferred Funding I. The firm has provided 90 days' written notice of its intention.

Regulatory update
• FINRA has filed a proposed rule change with the US SEC to amend the TRACE dissemination protocols to include additional ABS transactions and to reduce the reporting periods for such securities. The agency also proposes to re-name as 'securitised products' the broad group of securities currently defined as 'asset-backed securities' and to redefine the term asset-backed security more narrowly.
• The Boston, Chicago and Indianapolis Federal Home Loan Banks and two Cranberry Park entities have dropped their objection to the US$8.5bn Countrywide settlement (SCI passim). However, many other objectors remain.
• ING has reached an agreement with the Dutch state to unwind the Illiquid Assets Back-Up Facility (IABF), which was established in 2009 to reduce the risk and uncertainty for the bank from a portfolio of US Alt-A RMBS. The bank says that market developments now allow for the securities to be sold, with a cash profit for the Dutch state.
• The US SEC has charged RBS Securities with misleading investors in a 2007 subprime RMBS offering. RBS has agreed to settle for US$150m without admitting or denying the allegations.
• ISDA has submitted a letter to the Monetary Authority of Singapore (MAS) on behalf of 20 industry participants to drive trade reporting of OTC derivatives in Singapore ahead of the mandatory reporting timeline of 1 April 2014. The signatories to the letter are committed to begin trade reporting of OTC derivatives by 3 February 2014 for standardised interest rate and credit derivatives transactions.

Top stories to come in SCI:
European CMBS issuance trends
Emergence of single-family rental securitisations

ABS

ABS leader brought in

Guggenheim Securities has appointed Cory Wishengrad as a senior md to focus on developing the firm's ABS capabilities. He joins from Barclays Capital, where he was co-head of securitised products origination for the Americas and he has previously served as head of the esoteric ABS group at Lehman Brothers.

Structured Finance

Aviation specialist jets in to London office

DLA Piper has appointed Tony Lopez as a structured finance partner, based in London. He previously worked for Clifford Chance in both London and New York.

Lopez specialises in high yield bonds and aviation finance. Before that he worked at Cahill Gordon & Reindel.

Structured Finance

Distressed pair join credit team

Cantor Fitzgerald has added Jose Contreras and David Coffey to its credit fixed income sales and trading team in London. Contreras will focus on high yield, distressed securities and ABS in Spain and Portugal, while Coffey will focus on sales and sourcing for investment grade, high yield, leveraged, distressed and aircraft bonds and loans.

Contreras joins from Yorvik Partners and has also worked at BNP Paribas, Lehman Brother and Bankia. Coffey joins from Ria Capital Markets and has also worked at Barclays, Deutsche Bank, Citi and JPMorgan.

Structured Finance

Partner joins London law firm

Sullivan & Worcester has appointed Simon Cook as a partner in London. He will focus on structured trade and commodities finance in emerging markets.

Cook was most recently at Dentons, where he worked in the London and Dubai offices, and will rejoin Geoff Wynne, who serves as head of Sullivan & Worcester's London office. Cook specialises in structured finance, trade and commodities finance, project finance, receivables finance and borrowing-base facilities in Africa, the Middle East and the CIS.

CDS

Final confirmation for merger

IntercontinentalExchange now has all regulatory approvals needed to complete its acquisition of NYSE Euronext (SCI 31 October). ICE and Euronext intend to close the transaction on 13 November.

CLOs

CLO chief moves on

Florian Bita has joined RBC Capital Markets in New York as a trader, specialising in CDOs and CLOs. He was previously head of CLO trading at Cantor Fitzgerald (SCI 16 May) and before that held a similar role at UBS. He has also worked for Deutsche Bank, Goldman Sachs and Salomon Brothers.

CMBS

Islamic bank hires for European push

Gatehouse Bank has appointed Natale Giostra as evp and head of real estate finance. He will be based in London and strengthen the Shariah-compliant investment bank's new focus on UK and European jurisdictions.

Giostra joins from CBRE, where he led the UK debt advisory team. He has over a decade of debt origination and syndication experience, specialising in senior and mezzanine real estate loans and distressed commercial real estate loans, and has also worked for Goldman Sachs, Citigroup, Enel and Credem Private Equity.

CMBS

CMBS lending JV formed

Walker & Dunlop has entered into a joint venture with an affiliate of a fund managed by Fortress Investment Group to form a CMBS lending platform. The new venture - Walker & Dunlop Commercial Property Funding - will provide first mortgage loans on all commercial property types and will originate high yield whole loans, mezzanine debt and preferred equity.

The joint venture will be headquartered in New York and led by Tim Koltermann, who was previously at PineBridge Investments and before that worked at Knight Capital Group, Longacre Fund Management, Institutional Credit Partners and Bear Stearns. Loan applications are expected to be issued from January 2014 and an initial origination target of US$1bn has been set for the first year of operation.

Risk Management

ICAP, IDC in OTC partnership

ICAP and Interactive Data have announced a collaboration between the firms for OTC data distribution. The agreement will give Interactive Data clients access to ICAP's Consolidated Feed, which includes credit and fixed income data.

The agreement will also provide Interactive Data clients with greater pre-trade transparency through real-time price discovery across a range of asset classes and the ability to access ICAP data via multiple Interactive Data desktop platforms and data feed offerings.

RMBS

RBS settles subprime RMBS charge

The US SEC has charged RBS Securities with misleading investors in a 2007 subprime RMBS offering. RBS has agreed to settle for US$150m without admitting or denying the allegations.

RBS is alleged to have failed to mention that nearly a third of the loans backing the RMBS failed to meet the lender's underwriting guidelines. Further, RBS is alleged to have performed only a cursory review of the loans as it "cut corners and failed to complete adequate due diligence" before receiving US$4.4m for its work as lead underwriter.

RMBS

Southwest adds RMBS pro

Southwest Securities has added Martin Baxter as svp in its RMBS sales group. He brings more than 25 years of experience to the role and will be based in Washington, DC.

Baxter was most recently at Gleacher and Company. He has also worked at Amherst Securities, Raymond James & Associates and Paine Webber.

ABS

Ratings withdrawn on equipment ABS

Moody's has downgraded and withdrawn its provisional ratings of four classes of notes to be issued by Temese Funding 1. The agency says these actions are driven by a correction to one key input of the rating model it used for the transaction.

The £226m class A notes have been downgraded from Aaa to A2 and the £16m class B notes have been downgraded from Aa2 to Baa3. The class C notes have been downgraded from A2 to Ba2 and the £9m class D notes have been downgraded from Baa3 to B2.

ABS

UK credit card improvement continues

UK credit card ABS performance in the third quarter was the strongest since 2008-2009, says Fitch. Charge-off and delinquency rates continued to decline from the historical lows reached in 2Q13 and payment rates continued to improve.

The strong performance is a result of both an uptick in the UK economy and the continuing long-term impact of tighter underwriting. Fitch's latest credit card index reveals that the 60-180 day delinquency index improved from 1.7% to 1.5%, the lowest level since 2006.

The FCA's CPP mis-selling investigation (SCI 30 August) is not thought to be detrimental to UK credit card trusts. Growth forecasts for the UK have been upgraded and the credit card sector is expected to remain stable until the end of the year.

ABS

Aussie ABS index rolled out

Fitch has published its first Australian Dinkum ABS Index report. The index is designed to enable investors track the arrears and losses of prime auto loans and leases collateralising Australian auto ABS, of which there is currently A$9bn outstanding.

Australian prime auto ABS issuance slowed this year, arguably due to the uncertainty surrounding the federal government's announcement in July to limit fringe tax benefits (FTB) for novated leases. However, this proposal was reversed by the new government in September.

Australian auto ABS performance has been solid, with 30-plus days and 60-plus days delinquency rates averaging 0.88% and 0.36% respectively over the past three years. As at September, the 30-plus days and 60-plus days delinquency rates stood at 0.93% and 0.4% respectively, reflecting the country's strong macroeconomic environment and seasonal lower spending in the second half of the year.

Defaults and losses have been low and below Fitch's expectations: cumulative defaults and net losses since closing have usually trended to 1.6% and 0.8% respectively at 36 months after closing. Recoveries have been strong in the 40%-60% range over the past three years.

Repayment rates are strong, usually leading to transactions reaching the 10% clean-up call option in three to four years after closing. As of September, the average absolute payment rate across all transactions was 27%.

Meanwhile, the annualised net loss rate remains low - although it has shown a slight upward trend, reflecting the increasing cost of living and unemployment rate. Fitch projects that the unemployment rate will rise to 6.2% in 2014, potentially posing a risk to losses.

ABS

AIFMD exemption clarified

The Central Bank of Ireland has published a clarification of the exemption for securitisation vehicles from AIFMD.

According to law firm Matheson, the central bank has clarified that securitisation companies registered as 'financial vehicle corporations' pursuant to ECB Regulation No24/2009 and/or funded by debt or other non-equity instruments are outside the scope of the Alternative Investment Fund Managers Directive. As a transitional arrangement, entities which are either registered financial vehicle corporations or financial vehicles engaged solely in activities where economic participation is by way of debt or other corresponding instruments that do not provide ownership rights in the financial vehicle do not need to seek authorisation as, or appoint, an AIFM.

A number of general conditions need to be satisfied before an Irish company can elect to use the section 110 securitisation framework, including that the company must be Irish tax resident, enter into all transactions on an arm's-length basis and only carry on a business of holding and/or managing qualifying assets. Following the clarifications, it is now clear that AIFMD and the AIFM regulations do not apply to section 110 companies, Matheson notes.

ABS

Solar ABS debuts

SolarCity Corp's inaugural solar securitisation has hit the market via Credit Suisse. Rated triple-B plus by S&P, the US$54.43m SolarCity LMC Series I (series 2013-1) is secured by 5,033 photovoltaic (PV) systems.

The transaction's cashflows depend on a number of key inputs, some of which were derived from contractual terms, while others were modelled based on historical performance, rating-dependent economic scenarios and expectations of market dynamics. S&P says it incorporated a variety of stresses in its analysis by periodically reducing solar energy production estimates, customer contract reassignments and renegotiations, as well as increases in operating and capital expenditures.

The pool's weighted average customer agreement initial term is 223 months, with the weighted average customer agreement remaining initial term standing at 201 months. The weighted average price per kWh of energy under the agreements is 15 cents, while the weighted average customer agreement price per kWh fee escalator is 2.07%. Finally, the weighted average FICO score among residential customers is 762.

In determining whether to enter into a power purchase agreement or lease agreement with a potential customer, SolarCity determines: the suitability and structural integrity of the site, analyses the potential customer's historical utility bill and energy consumption, evaluates the potential customer's credit quality and considers any available federal, state or local incentives. For commercial and governmental contracts, the firm focuses more on the PV system design at the point of sale.

For residential customers, the current credit underwriting policy requires a FICO score of at least 680 and that the potential customer has not filed for bankruptcy within the five years preceding the credit evaluation. For commercial or governmental customers, customers are required to have at least an investment grade rating and to provide SolarCity with organisational formation documents, as well as the last two years of CPA-audited financial statements.

S&P says it segments the solar industry into three sectors: utility scale, commercial and industrial, and residential. From 2010-2012, the aggregate installed capacity of the residential sector almost doubled, from 246 MW-DC to 488 MW-DC. The commercial and industrial sector's growth tripled during the same period, from 336 MW-DC to 1,043 MW-DC.

Over the next three years the agency expects distributed solar generation to continue to grow rapidly, fuelled by declining PV system costs and policies aiming to increase the use of distributed solar generation. The outlook for sustained long-term growth is tempered by possible policy changes, however.

ABS

SLABS ARS repurchased

Approximately US$10.95m of outstanding auction rate securities (ARS) have been repurchased and cancelled from Pennsylvania Higher Education Assistance Agency's (PHEAA) 1997 student loan ABS trust. The student loan receivables balance will decrease by US$8m as those loans are sold and released from the lien of the trust. The amount of the loan sale combined with past loan sales for this trust will exceed the loans remaining in the 20% selected pool, Fitch notes.

The repurchase and cancellation of ARS and sale of related collateral will result in a slight increase in the total and senior parity ratio of the 1997 trust. Total parity will increase from 107.31% to 107.53% and senior parity will increase from 113.21% to 113.48%. However, the release levels will be maintained at total parity of 102% and senior parity ratio of 106%.

Fitch compared the balance sheet of the 1997 trust pre-financing and post-refinancing and determined the change to be immaterial. The agency has therefore confirmed the existing ratings on the affected notes.

Structured Finance

Italian project bonds gaining traction?

Legislation introduced last year by the Italian government could see the use of bond financing for infrastructure projects take off in the country, according to S&P. The agency says that new laws promoting the development of an Italian public-private partnership (PPP) programme and ready access to the capital markets should encourage institutional investors to participate in the country's project finance market.

"We believe the new laws introduce a more innovative and benign legal and fiscal regulatory regime - one that could support the development of a project bond market," comments S&P credit analyst Manuel Dusina. "This should enable Italy to tap into the increasing demand, confidence and appetite among European and worldwide institutional investors for infrastructure assets that we've observed in other European markets."

The new legal regime should also help to reduce some of the costs previously associated with infrastructure investments. For example, prior to the approval of the First Growth and Development Decree on 8 August 2012, unlisted issuers issuing bonds in excess of a 2-to-1 debt-to-equity ratio were charged a withholding tax on interest payable.

The Decree also identifies international and national financial institutions that can provide project guarantees, including CDP and Italian export credit agency Servizi Assicurativi del Commercio Estero, along with foundations and private funds. The guarantee is understood to be only available for a specific period, likely during a project's construction phase or until such time as the project is picked up by the concession holder. Such guarantees are expected to further support infrastructure investments funded through the capital markets because they address investors' reluctance to invest directly in projects that are pre-completion.

However, S&P believes any shift to bond financing from bank loans is likely to be gradual. Investors have up to now been reluctant to invest in infrastructure projects due the lack of data and their inexperience of this asset class. Additionally, the Italian project bond market remains untested and market participants will likely take some time to get acquainted with the new legislation.

Structured Finance

Swap linkage approach finalised

Moody's has updated its approach to assessing the rating impact of swap counterparties in structured finance cashflow transactions, following the publication of an updated RFC this summer (SCI 23 July). The agency says that the new methodology is rating-neutral for most structured finance transactions, but will result in rating actions to a limited number of deals, particularly those with large exposures to lower-rated counterparties. Where applicable, rating review actions will be released over the next few days.

Under Moody's approach, the rating impact of the swap counterparty depends on the following key factors: the rating of the swap counterparty; the transfer trigger provisions in the swap documents; the collateral provisions in the swap documents; the type and tenor of the swap; the amount of credit enhancement supporting the notes; the size of the relevant tranche; and the rating of the notes before accounting for the effect of swap exposure. Additional factors - like the presence of a guarantee, the legal environment, the existence and enforceability of structural provisions and automatic termination - may have a further impact. The combination of these factors may lead to different rating outcomes for cashflow structured finance transactions with swap exposures and in certain circumstances may cause the transaction's ratings to be the same as the rating of the swap counterparty.

The application of Moody's approach involves four interconnecting reference tables. Although the tables give a good approximation of rating impact for most transactions, they do not cover all of the circumstances that are contemplated. Moody's has therefore developed an Excel tool as a way of applying its methodology in a more customised fashion.

Structured Finance

APRA plots securitisation overhaul

The Australian Prudential Regulation Authority (APRA) plans to reform its securitisation rules by 2015. Charles Littrell, executive general manager of APRA's policy, research and statistics division, yesterday said in a speech given to the Australian Securitisation Forum that the authority intends to publish a consultation paper on APS 120 to further this goal.

In particular, APRA is considering adding a number of new principles to the standard. These include: the securitisation prudential regime explicitly allowing for both funding-only and capital relief structures; credit risks in securitisations being both clearly assigned and properly capitalised; securitisation credit and liquidity risks being distributed in a fashion that reduces rather than increases systemic risk; and the maturity profile of securitisations appropriately matching the maturity profile of the underlying assets.

Littrell stressed in the speech that APRA "would like to see a large and liquid securitisation market supporting competition in Australian home lending". The authority intends to base APS 120 on the concept of funding-only securitisations, while continuing with a framework that accommodates capital relief securitisations.

For funding-only securitisations, a two-class structure is considered most appropriate. The A class may contain a number of tranches, including bullets and pass-throughs. The B class will be a single instrument, in which essentially the entirety of the credit risk associated with the underlying assets is concentrated, and must be held in its entirety by the originator.

The current 20% holding limit on instruments will be rescinded under the proposals and a date-based clean-up call will be allowed. APRA also proposes to allow soft bullet arrangements within master trust structures, with the seller share ranking at least equal to the most senior instruments.

Structured Finance

Hedge fund returns rising

Hedge fund returns rose by an average of 1.5% in October, according to eVestment. The industry is on pace to return 8.6% on an annualised basis for the year, ahead of 2012's 7.5% increase.

Credit strategies were up by 0.85% in October (and by 6.18% year to date), with a rise in deviation of returns observed. While the universe in aggregate showed good performance for the month, higher-end gains appear to be primarily from the distressed segment, with some losses stemming from arbitrage strategies - particularly those focused on sovereign rate markets - and long/short credit trading.

MBS-focused funds once again posted positive results, with returns averaging 0.71% since June (7.5% year to date), versus the 1.4% during the sixteen months prior. "The universe's performance has been consistently positive, but also consistently lower than the span before the US rate spike in May," eVestment observes.

Distressed funds were up by 2.34% last month (12.53% year to date).

CDO

RFC CDO auctions scheduled

Auctions have been scheduled to take place on 2 December for RFC CDO II and RFC CDO III. In each case, the trustee shall sell the collateral debt securities only if the sale would result in sale proceeds, together with the balance of all eligible investments and cash in the accounts, greater than or equal to the redemption amount.

CDO

Trups CDO defaults decline again

Combined US bank Trups CDO defaults and deferrals declined to 27.4% at the end of September, according to Fitch. The total had stood at 27.7% at the end of August.

There was only one new default in September, although Trups CDOs had a large exposure to the First National Bank Group which totalled US$116m across 10 CDOs. The total notional of defaulted collateral at the end of September was US$6.511bn.

There was a total notional of US$116.3m from nine issuers across 17 CDOs cured in the month. That outweighed the US$55m of notional from one issuer which re-deffered.

The total number of bank issuers outstanding across Fitch-rated US Trups CDOs stood at 1,428 at the end of 3Q13, compared with 1,434 at the end of 2Q13. Of that total, 222 bank issuers are in default and 282 are in deferral.

CDS

OTC stats show counterparty breakdown

The BIS has released OTC derivatives statistics at end-June 2013. For the first time, CDS data includes a regional breakdown of foreign counterparties.

Counterparties based in the home country of the dealer accounted for 19% of notional CDS outstanding, while contracts with foreign counterparties headquartered in Europe accounted for another 53%. Contracts with counterparties headquartered in the United States accounted for 21% and business with Latin American counterparties accounted for about 2%, which was larger than that with Asian counterparties.

The data shows that OTC notional amounts increased substantially in the first half of the year to reach US$693trn, with interest rate contracts accounting for the bulk of that total. CDS were particularly scarce in emerging markets.

CDS

FCPA concerns drive Avon widening

Avon Products' senior five-year credit default swap spreads have spiked, underlining investor concerns aroused by penalties resulting from violating the Foreign Corrupt Practices Act (FCPA) as well as accelerating declines in North America, says Fitch. The agency has downgraded Avon's long-term ratings and placed them on rating watch negative.

Avon's spreads have widened 26% in a month whereas the broader North American consumer goods industry has tightened 3%. CDS liquidity has increased to now rank in the sixth regional percentile, further emphasising the uncertainty on future CDS pricing.

CDS

Credit option analytics offered

SuperDerivatives has launched a market data and analytics package to support the growing demand for credit index options from the buy-side. The service offers volatility surfaces for a wide range of credit indices, including the iTraxx Main, Crossover and Senior Financials indices, as well as the CDX IG and High Yield indices.

David Ezra, head of credit derivatives at SuperDerivatives, comments: "Over the last year we have seen a significant demand from the buy-side for accurate market data and analytics to enable more effective hedging and management of credit index options and other credit derivatives products. In the current market conditions, companies are acutely aware of the need to monitor and manage the risk associated with these complex products very closely. So far over 20 asset managers and hedge funds are already using the service for pricing and revaluation."

CDS

Bankruptcy credit event called

ISDA's Americas Credit Derivatives Determinations Committee has resolved that a bankruptcy credit event occurred in connection with OGX Petroleo e Gas Participacoes, after the firm filed a judicial recovery request due to its challenging financial situation. An auction will be held in due course in respect of outstanding CDS transactions on the entity.

CLOs

Euro CLO 1.0 call candidates highlighted

With over 80% of Moody's-rated European CLO 1.0 deals entering their reinvestment periods by the end of this year, diminishing equity returns and strong leveraged loan performance are expected to motivate equity holders to call transactions. In its latest CLO Interest publication, Moody's has identified 11 CLO 1.0 deals that are currently prime candidates for such redemptions.

For its analysis, a potential call candidate needs to meet three specific conditions: the collateral commands enough market value - on average, 90% - to fully pay off all of the CLO liabilities; the deal has an expected equity return of less than 10%; and the deal is in its amortising period. By selling loans to finance redemptions, the 11 transactions could contribute nearly €2.9bn of loan supply for new European CLO 2.0 deals, which the agency says is a credit positive.

The loans in the CLO 1.0 call candidates are largely domiciled in the UK, France, Germany and the Netherlands. Over half (53%) of the loans are in the business service, retail, telecommunications, broadcasting & subscription media and healthcare & pharmaceuticals sectors. These assets have an average life of three years and an average rating of B3.

CMBS

Apartment prices buck trend

US apartment prices decreased by 0.2% in September - the first decline in nearly four years, according to the latest Moody's/RCA CPPI report. Apartment prices had been climbing steadily since the November 2009 trough, driven by ample liquidity and healthy fundamentals.

The report also shows that the national all-property composite index increased by 1.8% in September, driven by a 2.6% increase in core commercial prices. Additionally, prices of hotels in non-major markets increased by 28.3% over the last 12 months, far outpacing the 10.4% gain in hotel prices in major markets.

"Changes in net operating income (NOI) for hotels align with changes in hotel prices," comments Moody's director of commercial real estate research Tad Philipp. "Even though hotel transaction prices reflect the same availability and cost of capital considerations as other property segments, the near-daily re-pricing of room rates ties hotel NOI to the health of the economy."

CMBS

Rise seen in non-traditional properties

While traditional property types continue to represent the majority of collateral in US CMBS deals rated by Fitch, the agency notes that there has been a steady increase in the number of non-traditional properties over the last four years. In particular, the inclusion in pools of manufactured housing communities (MHC) and self-storage properties has increased of late.

MHC in Fitch-rated CMBS deals grew from less than 1% of deals in 2010 to 2.5% in 2011, 3.2% in 2012 and 5.9% as of 30 September. Part of this increase can be attributed to larger loans backed by pools of MHC assets. Historically, defaults on loans for this sector have been low, at less than 1%.

Typically, MHC loans are secured by the pad sites only, as residents usually own their homes and rent the pads. But Fitch highlights a recent loan that also included mobile homes as collateral.

The issuer's underwritten cashflow included the rental income from both the pads and the homes. Fitch says it views this as more volatile because the home value can deteriorate quickly. As a result, the agency will limit the credit given to any rental income coming from homes.

Meanwhile, self-storage assets have accounted for just over 4% of Fitch-rated CMBS collateral year-to-date. They have also performed well, with a less than 1% default rate. But the agency views these assets cautiously as many are located in areas with limited barriers to entry.

Although not necessarily non-traditional, lodging assets have historically represented around 10% of US multi-borrower CMBS collateral. The hotel contribution in 2010 was under 5%, but this has grown to over 10% in 2011, 13.5% in 2012 and 14.5% YTD in 2013.

Fitch's current outlook for the hotel sector remains stable, with continued revenue growth expected in 2014. However, some hotels are now at, or close, to their previous revenue and income peaks, so the agency says it will be looking closely at new hotel loans to ensure that their current performance is sustainable over the next ten years.

CMBS

CMBS balloon payoffs slip slightly

The percentage of US CMBS conduit loans paying off on their balloon date slipped last month to 68.6% by balance, says Trepp, having hit 74.5% - the highest level since December 2008 (SCI 4 October) - the month before. The payoff percentage for last month is still above the 12-month moving average.

By loan count, 68.1% of loans paid off, which again is slightly lower than in September but also higher than the 12-month average. The September count was 70.1% and the moving average is now 67.5%.

Insurance-linked securities

Vitality Re rating upgraded

S&P has raised its ratings on Vitality Re II Series 2011-1 class B notes to triple-B minus from double-B plus. At the same time, the agency affirmed its triple-B plus rating on the Vitality Re 2010-1, Vitality Re II Series 2011-1 and Vitality Re III class A notes, as well as its double-B plus rating on the Vitality Re III Series 2012-1 class B notes.

S&P says it has received annual modelled reset results for each series of the notes from Milliman Inc. The upgrade reflects the improved claims experience and lower probability of attachment on the covered business that Health Re Inc ceded to the issuer.

The medical benefit ratio attachment for the 2011-1 class B notes is 100% and the updated baseline attachment probability is 12bp. The agency then reviewed the various stress tests, with the rating reflecting the impact of those tests. The ratings on the 2010-1 and 2011-1 class A notes are subject to a triple-B plus ratings cap.

NPLs

Opportunities eyed in German NPLs

CORPUS SIREO expects non-performing loans to generate a market potential in real estate asset management services worth more than €2bn in Germany over the next two years. Commercial real estate financing in the country currently stands at between €250bn-€300bn, about one-tenth of which has been securitised in CMBS.

Given the sheer volume of the loans coming due, the redemption of non-performing loans remains difficult, despite the favourable interest environment and steady recovery of the real estate markets. Nevertheless, the buoyant investment market means that assets are increasingly being sold at prices that are acceptable to financing banks and credit servicers.

Tim Brückner, client group leader financial institutions at CORPUS SIREO Asset Management Commercial, comments: "We expect to see sustained pressure on banks and servicers to find solutions for non-performing commercial real estate financings, and a persistently high potential for asset management services."

The share of non-performing commercial real estate loans in Germany is estimated to be around 10% (approximately €25bn-€30bn). When surveyed about solutions for distressed loans, more than one in three bank insiders stated their intention to bring third-party asset managers in or else to sell the non-performing loans, a recent EBS analysis suggests.

The analysis is backed up by a number of factors: pressure on cost and margins, tightening regulatory requirements and the inferior refinancing terms connected to the poor ratings that result from high NPL holdings have increased the willingness to sell. The recovery of the real estate market - even outside the metro regions - and lower discounts on book values have also made it easier to sell properties and to clean up bank balance sheets.

Ingo Hartlief, ceo of CORPUS SIREO Asset Management, says: "Banks reduce commercial real estate NPL on the back of strong investment markets. The properties behind such loans are usually not prime assets, but management-intensive properties well away from the metropolises."

He adds: "Successful asset management and sales activities require local market know-how - available at the large, experienced providers of real estate asset management services in Germany. We expect an increasing market for real estate asset management services."

Risk Management

'Push-out' revision approved

The US House of Representatives last month approved HR 992, a revision to the Dodd-Frank Act that would revert the Dodd Frank Act's 'push-out' rule by allowing banks with access to deposit insurance and discount borrowing to trade a greater variety of derivatives. The House bill amends the Dodd-Frank Act to allow those banks to trade plain vanilla derivatives, but not complex asset-based derivatives, according to SFIG.

The push out provision requires banks with access to deposit insurance or the Federal Reserve discount window to move their derivatives business to separately capitalised affiliates. Critics say that this provision could increase risks by incentivising banks to move derivatives trading to affiliates that are less regulated.

Risk Management

ISDA considers short-term suspensions

ISDA has responded to a request from the FDIC, Bank of England and others to consider amending its master agreement to include a short-term delay in contract closings in the event that a large bank fails. The association says it supports efforts to create a more robust financial system and developing a standard provision in which counterparties agree to a short-term suspension "will continue to be a primary focus".

RMBS

Countrywide objections dropped

The Boston, Chicago and Indianapolis Federal Home Loan Banks and two Cranberry Park entities have dropped their objection to the US$8.5bn Countrywide settlement (SCI passim). However, many other objectors remain.

Those objectors include AIG, FHLB Pittsburgh, Triaxx CDOs, CIFG Assurance, American Fidelity Assurance, certain small banks and insurance companies, Retirement Board of Policemen's Annuity & Benefit Fund of City of Chicago and a number of pension funds. The hearing will resume this month, with the objectors presenting witnesses and closing arguments and Barclays Capital analysts viewing a payout in the first half of 2014 as an upside scenario and a payout in late 2014 or early 2015 as a base case.

RMBS

US home price rises 'unsustainable'

Several US cities are approaching inflated bubble-year price peaks, according to Fitch. US home prices have risen 13% and the rating agency views this as unsustainable.

According to Fitch's sustainable home price model, house prices are now 17% overvalued, with Californian cities such as San Francisco seeing prices rise fastest. That city and San Jose are on course to set new home price records within six months.

Other Californian cities such as Oakland, San Diego and Los Angeles also feature prominently on the list of cities approaching bubble-year price peaks. Fitch uses this data for its US RMBS loan loss model.

RMBS

QM exposure draft released

Fitch expects the Bureau of Consumer Financial Protection's (CFPB) Ability-to-Repay (ATR) and Qualified Mortgage (QM) Rule to have wide-reaching implications for both the primary and secondary US mortgage markets. The agency has consequently published a report outlining how the rule is expected to impact its analysis and rating approach for mortgage loans originated on or after 10 January 2014.

Among the changes Fitch is considering to its rating approach are: requests for QM loan designations for any mortgage loan securing a RMBS it is asked to rate; a greater focus on originator compliance and due diligence reviews; and representations and warranties addressing ATR and QM compliance. "RMBS backed by higher-priced QM and non-QM loans face litigation risk and will require additional protections, such as focused originator reviews, expanded due diligence and higher loss severity assumptions," explains Fitch md Roelof Slump.

The agency has released an exposure draft on the proposed changes, which is open for comment until 9 December.

RMBS

Dutch mortgage market changes examined

Recent actions by the Dutch government will likely reduce origination of NHG-backed mortgages, chiefly through reducing the maximum guaranteed loan value, according to Fitch. The agency suggests that increasing the cost of the guarantee to borrowers would probably have less impact, although it is unclear how banks will adjust mortgage pricing to account for the risk-sharing provisions introduced for new loans.

The changes, announced on 31 October, are said to be consistent with the government's aim to gradually reduce state support for the mortgage market - as indicated by other changes, such as the phased reduction of mortgage interest tax deductibility. Fitch's initial analysis of Dutch mortgage market origination data from 2012 shows that the reduction in the maximum guaranteed loan size, from €350,000 to €290,000, would have cut the proportion of originations eligible for a guarantee from 83% to 77% if transaction size were the only criteria.

The government has announced further scheduled annual reductions in maximum loan size that, 2012 data suggest, would steadily reduce the proportion of NHG-eligible mortgages. The proportion of 2012 originations eligible falls to 71% next year and 66% in 2015 as the NHG ceiling is lowered.

From 2017, the limit will be adjusted each year to match the average house price in the Netherlands. Using today's average (€215,000) as the ceiling, 54% of 2012 originations would have been eligible.

In reality, the proportion of loans eligible will be even lower due to other criteria, such as tighter affordability tests and the prohibition on second-property guarantees. Lowering the guarantee ceiling therefore looks set to achieve the government's aim of bringing NHG originations closer to their typical pre-crisis level of around a third of total originations.

The one-off fee borrowers pay for the NHG guarantee has also been increased again, from 0.85% to 1%, having previously been raised from 0.7%. This may be insufficient to eliminate the appeal of guaranteed mortgages to borrowers if lenders maintain the current pricing differential of 40bp-50bp between guaranteed and unguaranteed loans.

But pricing may be affected by the introduction of a loss-sharing mechanism for new originations, under which lenders take 10% of losses if a mortgage defaults. This could further restrict new originations.

Fitch says it will factor loss-sharing into its assessment of losses upon default of new originations. The agency also plans to adjust recovery calculations for new originations, although it does not expect major changes in outcome. The newly introduced 10% loss piece will be offset by the almost perfect match between the guarantee amount and the outstanding loan amount, it concludes.

RMBS

Loss severity improvements lagging

US RMBS loss severities have not improved at the rate that might be expected from recent home price gains, Fitch notes. Home prices have increased by roughly 14% nationally and by 30% in California since 4Q11, while loss severities have only improved 5% over the same timeframe.

The key factor offsetting home price gains has been extending liquidation timelines, according to the agency. "Longer timelines translate to higher servicer advancing and property maintenance costs, which cut into the higher liquidation proceeds afforded by the home price environment," says Fitch director Sean Nelson.

On average, distressed loans that liquidated in 3Q13 hadn't made a payment in 32 months. This is nearly twice as long as the average liquidation timeline in 2008.

Fitch does not expect rapid improvement in loss severities in the short term as timelines continue to increase. However, the agency projects lower severities for loans that are currently performing and may default in the future.

As the inventory of distressed properties declines to a more manageable level, timelines are expected to improve. "Lower loan-to-value ratios and shorter liquidation timelines should lead to meaningfully lower severities for loans that liquidate two to three years from now," Nelson continues.