Contents

CMBS

Creative structuring

Semi-corporate, conduit-style CMBS diverging

The European commercial real estate debt market has this year been characterised by its creativity. A divergence is emerging between semi-corporate and conduit-style CMBS transactions, however.

The European CMBS market has seen 11 deals so far this year, versus three in 2012, with one or two more expected to launch by year-end - including an Italian transaction secured by the MSREF portfolio. Conor Downey, partner at Paul Hastings, confirms that the CRE debt market more generally has been noteworthy for its creativity around embracing alternative structures.

He cites as an example high yield bonds being included in capital structures, such as with Annington Finance No. 5. "High yield bonds are complementary to CMBS because they can be issued in conjunction with a securitisation: they're serviced with residual cashflow not needed by the securitisation. Investors can be more relaxed about high yield covenants because they're protected at a higher level."

Other deals, such as Bruntwood Investments' partial refinancing in July, tapped the retail bond market via the issuance of real estate-backed debentures. Another alternative is the issuance of German Schuldschein.

But Downey notes that a divergence is appearing between semi-corporate and conduit-style transactions, with the former - including Tesco Property Finance, Intu (SGS) Finance and UNITE (USAF) II - adopting simpler structures and documentation. "The semi-corporate deals are characterised by being single tranches of notes, without any CMBS 2.0 innovations," he explains. "I expect them to look increasingly different from conduit-style deals going forward. At the same time, conduit-style issuance is likely to migrate from being issued on a principal basis to being issued on a purely arranged basis, due to the diminishing appetite for risk among banks and increased capital costs."

Arrangers are said to still want compensation in the form of class X notes or an equivalent. However, there seems to be broad agreement that this compensation should be turned off in certain circumstances, including in default scenarios.

Of note, DECO 2013-CSPK and Taurus 2013 (GMF 1) adopted unusual compensation arrangements. The former featured deferred payments from excess spread, subordinated to the other notes. The latter included DACs, ranked pari passu to interest payments on the class A note for the first three years.

Meanwhile, given the onerous regulatory capital treatment of liquidity facilities, few banks are willing to provide them. As a result, two CMBS - DECO 2013-CSPK and Debussy - were issued without them. Instead, the former featured an expense facility and the latter a reserve.

"The transactions were refinancings and so were familiar to investors, which were happy to make a trade-off in favour of higher margins," Downey observes.

One CMBS 2.0 innovation adopted by the DECO 2013-CSPK, GRF 2013-1, Debussy and Monnet deals is the ability of the servicer/special servicer to sell a loan. Taurus 2013-1, DECO 2013-CSPK and Monnet also allow for the servicer/special servicer to borrow money to pay for expenses - such as property refurbishments - relating to the loan or property.

"It's important to ensure that special servicers have the right tools available to them to maximise recoveries, including the ability to sell a loan and enforce in accordance with the servicing standard," Downey notes.

He adds that note maturity plans are becoming the most common way of addressing what happens if a loan isn't fully realised during the tail period, with UNITE (USAF) II the only deal not to implement one so far this year. Under a note maturity plan, a special servicer must publish alternative proposals for servicing a loan upon note maturity, with senior noteholders having the right to direct the action of the special servicer in light of these proposals.

These provisions always provide that one of the proposed strategies must be for the appointment of an insolvency practitioner to wind up the issuer post-maturity. If no alternative to this is agreed by the noteholders, the trustee would be deemed to direct the appointment of this insolvency practitioner.

In addition, creativity is being demonstrated in the way that risk retention is organised. Four different methods are applicable under Article 122a: retaining 5% via the first loss piece or in a vertical slice, with either option being available at the loan or bond level. Downey confirms that all options have been used this year.

Issuers are also being creative about where to list offering circulars, according to Downey. For instance, Utrecht Funding 1 and Taurus 2013-1 opted for private listings on the Channel Islands Stock Exchange and Irish Stock Exchange GEM markets respectively.

A lack of consensus on disclosure remains, however. Downey points out that all Debussy and Monnet documentation is available for inspection by investors, while some documentation is available to varying degrees for the remainder of the CMBS issued this year.

"Historically, it has been difficult to get hold of documentation in Europe - it's a sensitive issue because most borrowers don't like this level of transparency and in Germany and France they have legal rights not to disclose such information. As we move towards a conduit market, this will become increasingly more of a problem," he adds.

While issuance in 2013 has been dominated by German multifamily deals and refinancings, the hope is that newly originated assets will feature more next year. Downey confirms that loans are increasingly being originated with a securitisation exit in mind, especially for trophy properties.

A slow and steady increase in issuance is forecast for 2014, with potentially 10-15 deals closing during the year. A couple of German transactions are anticipated within the next 6-9 months, as well as a multi-loan deal before next summer. Securitisations of high-profile UK trophy assets are also expected to continue on an arranged basis.

CS

Structured Finance

Invitation to begin

First deal heralds arrival of SFR securitisation

The arrival of Invitation Homes 2013-SFR1 - the first-ever single-family rental (SFR) securitisation (SCI 1 November) - has finally provided the spark for the long-mooted REO-to-rental asset class in the US. Further issuances are expected, although the sector's success in the long-term will depend on several factors, not least changing home prices.

"Single-family rental securitisations could become a considerable market. We were all watching Invitation Homes 2013-SFR1 to see whether it could be a viable financing alternative," says Brian Grow, RMBS md at Morningstar Credit Ratings.

He continues: "This is an asset class that investors have shown interest [in]. It took a while to get this first deal ready because there were obstacles to overcome, but the investors are there and we as a rating agency are comfortable with it."

Invitation Homes could serve as a blueprint to other SFR transactions. Arranged by Deutsche Bank, Credit Suisse and JPMorgan, the US$479.1m deal securitises a loan to Blackstone subsidiary Invitation Homes that is secured by first priority mortgages on over 3,000 SFR homes. In the event of a default, the trust is able to acquire the properties.

The scale of properties needed to make REO-to-rental securitisations work was previously seen as an obstacle to the development of the asset class, as there has not been much experience of operating SFR properties on a national scale. The Invitation Homes 2013-SFR1 transaction will be managed by THR Property Management, a subsidiary of Invitation Homes, leveraging management expertise from Riverstone Property Management.

REO-to-rental transactions are particularly reliant on the managers of the underlying properties, who take responsibility for tasks such as maintenance and rent collection. Using SFR properties from concentrated metropolitan areas allows for more efficient management.

"Those observers who suggest that the recent interest in the REO-to-rental market may serve to 'professionalise' that market often focus on the role of property managers. Many believe that the success or failure of large-scale REO-to-rental programmes will hinge on whether it will be possible to replicate on a regional or national scale the 'local touch' brought by the local 'mom and pop' property managers that have historically dominated the market," notes SFIG in one of its recent newsletters.

Becky Cao, RMBS md at Morningstar Credit Ratings, adds: "Invitation Homes is a newer company, but it has a strong relationship with Riverstone Residential, an established property management firm. Invitation Homes invested a substantial amount of money into the upfront property rehab in the SFR1 deal."

The upfront renovation cost on average is 14.2% of the total pre-rehab cost basis, Cao notes. Along with this investment, Invitation Homes has been quick to expand into the hot housing areas that have seen significant home price declines. Indeed, there is a high geographic concentration in the deal: the underlying properties are located in 10 regional areas, with 46% in California and a further 34% in Arizona.

REO-to-rental securitisations pay investors through rental income and sales proceeds, with the latter likely supplying the majority of amounts to be paid on the notes. To generate sale proceeds from the rental properties, transactions are likely to contain a so-called 'monetisation feature', which may take the form of a loan with a due date, a put agreement or some other device that requires the properties to be sold by a certain date.

"It is expected that the tenor of these transactions will be in the three- to five-year range based primarily on the monetisation feature. As a result of property sale proceeds being expected to furnish the lion's share of the source of funds, investors in these transactions will be taking the risk of future housing prices, arguably in a more direct way than they do in RMBS transactions," says SFIG.

Rising house prices could therefore reduce the number of SFR deals that are executed if it becomes more profitable and less risky to simply sell properties directly rather than relying on securitisation. Moreover, with recent warnings that house prices may be unsustainable - particularly in California (SCI 7 November) - any housing bubble burst would be a significant concern for SFR securitisations.

"We have stress tested the single-family rental market and believe house prices are still well below the historical peak. The current increases are from a very low base," says Grow.

He continues: "In our opinion, house prices were artificially low and the prices today are in general justified. When institutions came in and looked at the rent potential, this brought house prices back to a more rational level."

Given such exposure to future house prices, it may be advisable for investors in SFR securitisations to examine the stability of net operating income - which will require making assumptions on gross rent trends, rental fees, maintenance fees, insurance and taxes. Demand for SFR homes will also be affected by local demographics and broader consumer sentiment regarding the desirability of home ownership.

Another challenge for all concerned has been working out whether to treat SFR deals as RMBS or CMBS, as the asset class is characterised by elements of both disciplines. "We are traditionally a CMBS rating agency and have more recently built up our RMBS practice. Single-family rental securitisations are a hybrid of the two," says Grow.

He continues: "We rate the asset class out of our RMBS group; however, a lot of the structural dynamics were taken from CMBS. Therefore, we were able to leverage Morningstar's experience in this area by utilising its CMBS multifamily underwriting framework to forecast property-level net cashflow, while using RMBS-related stresses as part of our property-level value forecast."

Prospects for the sector emerging as a distinct asset class currently appear strong, given the warm reception for the Invitation Homes deal. The US$278.7m triple-A rated class A notes priced at 135bp over Libor on 5 November (see SCI's new issue database).

Other REO-to-rental transactions are expected to follow in its wake. American Homes 4 Rent and FeatherStone Investment Group, for instance, are said to be prepping deals.

"The future development of single-family rental securitisation could go in any direction, but there is a lot of demand for housing sector exposure and only a limited supply of traditional RMBS. The Invitation Homes deal shows that single-family rental framework can work and, with a huge number of borrowers unable to enter the housing market, both tenant and investor demand are there," Grow concludes.

JL

Morningstar declined to comment on any pending SFR transactions.

ABS

Cards, autos lead ABS charge

US ABS BWIC volume picked up considerably yesterday to reach around US$200m. Much of that supply was driven by credit card bonds, but some auto names were also out for the bid.

SCI's PriceABS data recorded covers for both CHAIT 2012-A4 A4 and DCENT 2012-A6 A6. The CHAIT tranche had only appeared in the PriceABS archive once before - on 31 October, when it was talked at plus 42.

The tranche was talked yesterday at plus 43 and covered at plus 42. The DCENT tranche was talked at plus 45 and also covered at plus 42, which is the same level it was covered at one week earlier.

As for the auto paper out for the bid yesterday, AMOT 2012-5 A made its first appearance in the PriceABS archive. The tranche was talked at plus 63 and covered at plus 57.

FORDF 2012-2 A was also another PriceABS debutant. That bond was both talked and covered at plus 43.

Also available during the session were a pair of Lease Investment Flight Trust tranches - LIFT 1 A1 and LIFT 1 A2. They were each talked in the low/mid-70s.

The A1 tranche was covered last week in the low/mid-70s and at 71 handle on 22 August, having first appeared in the archive on 5 April, when it was also talked in the low/mid-70s. The A2 tranche traded in June, when it was talked in the mid/high-60s, and first appeared in the archive in October 2012 as a DNT.

JL

ABS

Autos dominate varied ABS session

US ABS BWIC volumes came close to US$150m yesterday, with auto paper leading the charge. Several credit card, equipment, student loan and container bonds were also out for the bid.

Auto paper constituted the bulk of supply. The session saw a number of round-lot bonds circulating, with mixed offering levels.

There were four separate AMCAR tranches out for the bid yesterday, all of which were covered. SCI's PriceABS data shows that AMCAR 2011-2 A3 was covered at 100.03, while the AMCAR 2012-4 B tranche was covered at 100.13, having previously been covered in the low-70s in June.

AMCAR 2013-3 A2 was covered at 32 and AMCAR 2013-5 C was covered at 100.27, while a pair of CARMX tranches - CARMX 2013-3 A2 and CARMX 2013-4 A4 - were also covered. The 2013-3 A2 tranche was covered at 17, having been talked at plus 17 on 5 November, when it was also covered at plus 19. The 2013-4 A4 tranche was one of many to be covered at par.

Also covered at par was the FCAT 2013-2 A tranche, while FORDL 2013-A A2 was covered at 21 - which is the same level, at which it was covered last week. WOLS 2013-A A2B was covered at 99.95, while a trio of HAROT tranches also traded.

HAROT 2012-4 A2 was covered at 100.03, having been talked last month in the high-singles and at plus 9. Meanwhile, HAROT 2013-1 A2 was covered at 8 and HAROT 2013-4 A2 was covered at 13.

The MBALT 2013-A A2 tranche was talked and covered at plus 19, the same level at which it was covered last week. At the start of the month, it was covered at plus 12.

NAROT 2013-A A2 was covered at 11. Last month it was being talked in the high-singles and at plus 10, while PILOT 2013-1 A2 was covered at 100.07. VFET 2012-1A C was talked at around 70 and VFET 2013-1A C was talked at around 100 during the session.

Credit card levels fell off a little yesterday, with a mix of odd-lot and round-lot bonds available. Three American Express tranches made their first appearance in the PriceABS archive: AEITT 2013-2 A, AMXCA 2013-1 A and AMXCA 2013-3 A were covered at 100.15, 100.09 and 100.14 respectively.

Among the other credit card ABS names seen during the session were CHAIT 2007-A2 A2 (which was covered at 99.11) and CHAIT 2013-A2 A2 (which was covered at 99.93). The CCCIT 2013-A6 A6, CCCIT 2013-A7 A7 and CCCIT 2013-A8 A8 tranches were covered at 101.13, at 100 and at 100.02 respectively.

Offering levels were unchanged to slightly lower in the student loan space, where activity was muted. NCSLT 2005-2 C and NCSLT 2005-3 C were both talked at around zero and in the very low-singles.

NCSLT 2004-2 A4 was talked in the low/mid-90s and covered at mid/high-94. The tranche previously traded in July and was covered in June at 92.9.

The NCSLT 2006-1 A4 tranche was talked in the high-80s and at around 90 yesterday, before being covered at around 89. It was previously covered at 84.28 on its first appearance in the PriceABS archive on 12 June.

Meanwhile, container ABS paper was snapped up during the session. CLIF 2013-2A NOTE was talked at around 200 and covered at plus 199, while SEACO 2013-1A A was talked at around 220 and covered at plus 210 and TAL 2013-2A A was talked in the high-190s and covered at plus 194.

Another container tranche - CRNN 2013-1A A - was talked in the very low-200s and covered at plus 200. That tranche was covered at plus 202 on 7 August and at 207 on 24 April.

Finally, PriceABS also captured a pair of equipment ABS tranche in the form of GEET 2013-1 C and GEET 2013-2 A3. The former bond was talked at around 90 on its first PriceABS appearance, while the latter - which is also a first-time listing - was yet another tranche to be covered at 100.

JL

CMBS

Secondary CMBS stuck in neutral?

The US secondary CMBS market appeared to be stuck in neutral for a third straight day yesterday, with spreads largely remaining unchanged. Volumes failed to breach the US$200m level for the fourth day in a row, with about US$170m out for the bid, up from around US$150m the previous session.

A mixed bag of securities from various vintages and from across the capital stack was circulating yesterday. While CMBS 3.0 bonds ended the day a basis point or so tighter, that was offset by a similar level of widening in legacy super seniors, according to Trepp. In particular, the GSMS 2007-GG10 A4 tranche underperformed the broader market, ending 3bp wider at plus 176bp.

Of the CMBS 3.0 bonds out for the bid, the COMM 2013-CR9 B and CGCMT 2013-SMP XA tranches made their first appearance in SCI's PriceABS archive. The former was covered at 174, while the latter was covered at 91.

From the 2005 vintage, the CSFB 2005-C3 C bond was talked at mid-80s and covered at low/mid-80s during the session. According to SCI's PriceABS data, it was previously covered but did not trade in August.

Other 2005 names circulating yesterday included MSC 2005-T17 A5 (which was covered at 125, having previously been recorded as a DNT in September), WBCMT 2005-C20 A7 (which was covered at 90, having been covered last month at 98/e) and JPMCC 2005-LDP3 AJ (which was covered at 195, having been covered last month at 165).

The 2006 vintage was also well represented yesterday. Of note, the BSCMS 2006-PW11 and 2006-PW12 A4 tranches were talked at 75 and 83 respectively. SCI's PriceABS data shows that the bonds were previously covered at 79 in October and 75 in February respectively.

In addition, names such as CWCI 2007-C3 AM and JPMCC 2007-CB19 ASB were out for the bid. The former was talked in the low-200s (versus very low-200s last month), while the latter was covered at 70 (versus 77/e last month).

Finally, several agency CMBS tranches were on offer during the session. For example, FHMS K017 A2 and FHMS K024 X1 were covered at 49 and 145 respectively.

Meanwhile, among the BWICs scheduled to trade today is a circa US$44m 2006-2007 vintage AJ list that had been pre-announced.

CS

RMBS

Slow session for non-agency RMBS

The US RMBS secondary market was dominated by agency paper yesterday, with non-agency BWIC supply remaining light. SCI's PriceABS data reveals a range of non-agency names out for the bid, although several were recorded as DNTs.

Non-agency supply was mainly driven by senior adjustable-rate hybrids, with little in the way of fixed-rate or subprime paper. Despite the high number of DNTs, there were some successful covers during the session.

BAFC 2012-R4 A was talked in the very high-90s and covered at 98.14, having been previously talked in the low-90s in June. BAFC 2012-R5 A, meanwhile, was also talked in the very high-90s and was covered at 98.63.

The CSMC 2009-8R 2A1 tranche, which had not previously appeared in the PriceABS archive, was also traded during the session, as was CSMC 2009-3R 25A1. That latter tranche was previously talked at 100 handle on 29 July.

CWALT 2005-3CB 1A10 was another PriceABS debutant and was covered at 95 handle. There was also a cover at 83 handle for WAMU 2007-HY4 5A1, which had previously been talked in the low/mid-80s during a September session.

However, the number of tranches which failed to trade outnumbered those successful trades. Among them were BAFC 2009-R6 3A1, which was previously talked at around 100 in July, and BCAP 2009-RR² A1, which was talked at 100 handle almost a year ago on 5 December 2012.

A pair of CMLTI tranches - CMLTI 2006-4 2A1A and CMLTI 2009-6 4A1 - failed to trade, as did CWALT 2005-46CB A14, which was talked in the mid/high-80s earlier in the month. JPMMT 2006-S4 A8, which was talked in the mid/high-60s in May, was another DNT from the session.

Among the other DNTs were JPMRR 2009-5 2A1, RALI 2006-QS5 A6 and RAST 2006-A14C 1A2. The JPMRR tranche was talked at around 100 as recently as last week, while the others were most recently talked in the low/mid-80s and in the mid/high-70s, respectively.

JL

ABS

Value seen in Unique juniors

Enterprise Inns disclosed in its full-year 2013 results that it placed a £97m convertible bond, the proceeds of which were used to cancel £70m of its forward start bank facility. The issuance has been welcomed for creating subordination for the pubco's securitisation.

European securitisation analysts at Barclays Capital suggest that the convertible bond issue is positive for Enterprise Inns' debentures and securitisation for a number of reasons. First, the company demonstrated a further source of funding available for the refinancing of the 2018 debenture.

Second, the convertible is unsecured debt if unconverted and is to be used partially to refinance the £60m 2014 bond, which in turn will release these pubs previously secured to the plc. The remaining debentures have a second lien charge over the assets at the group level, thereby improving their recovery prospects.

Third, Enterprise Inns' equity price is now around the conversion price of 141.5p and if converted to equity would improve further the debentures recovery prospects.

Consequently, the Barcap analysts believe that value remains in the long-end debentures and junior Unique bonds. "The Unique class Ns have an 8x debt-to-EBITDA multiple and offer a 9.25% yield. The class Ns will benefit over the next few years from the repayment in the class As and, as a result, we expect leverage to fall to 7x over the next three years - making a 9% return look attractive, in our view."

The long-end debentures (ETILN 6.375 31) trade on a yield of 7.7%, with an offer price of 90. While leverage is relatively high in the debenture at 10.5x EBITDA, the analysts reckon that this debenture should benefit from the ongoing de-gearing at the group level and stabilisation in the group's performance.

The majority (94%) of the Enterprise Inns estate is due for a rent review/renewal over the next five years, which represents an opportunity for the pubco to increase the pace of managed conversions, if it has the capital available for the conversions. The analysts suggest that on one hand such a high proportion of rent reviews/renewals is negative, given historical performance of the pub sector. On the other hand, a real estate company in a recovering economy with a high proportion of rent reviews/renewals may view this as an opportunity.

Finally, the analysts note the significant write-downs experienced over the year: 138 pubs held for sale were written down by £109m. "Although the write-down as a proportion of property assets is an acceptable 6%, the scale of the write-down for non-current assets held for sale - at circa £790,000 per pub - is substantial and remains a cause for concern."

CS

Structured Finance

SCI Start the Week - 18 November

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

Pipeline
The number of deals joining the pipeline declined a little last week. However, there were still five new ABS, one ILS, one RMBS, three CMBS and three CLOs which were added and yet to price at the weekend.

The ABS were: €696m Cars Alliance Auto Loans Germany V 2013-1; US$878m Education Loan Asset Trust I Series 2013-1; €516.7m Globaldrive Auto Receivables 2013-A; US$400m Hertz Fleet Lease Funding Series 2013-3; and US$158.67m Welk Resorts 2013-A. The ILS was US$70m Residential Reinsurance Series 2013-II and the RMBS was US$330.8m VOLT 2013-NPL5.

The CMBS were US$867m CGCMT 2013-GC17, US$3.5bn Hilton USA Trust 2013-HLT and C$330.4m IMSCI Series 2013-4. Lastly, the CLOs were Cathedral Lake CLO 2013, €408m FTA PYMES Santander 6 and US$614.5m Venture XV.

Pricings
Once again it was a bumper week for issuance. There were 18 ABS prints as well as two RMBS, three CMBS and five CLOs pricing last week.

The US ABS were: US$185.87m Academic Loan Funding Trust 2013-1; US$131.46m Axis Equipment Finance Receivables 2013-1; US$247.16m California Republic Auto Receivables Trust 2013-2; US$750m Capital One Multi-asset Execution Trust 2013-3; US$446m Chrysler Capital Auto Receivables Trust 2013-B; US$825m CNH Equipment Trust 2013-D; US$750m Comet 2013-A3; US$225m Diamond Resorts Owner Trust 2013-2; US$2.75bn Penarth Master Issuer 2013-1; US$517.85m Pennsylvania Higher Education Assistance Agency Student Loan Trust 2013-3; US$1.548bn Santander Drive Auto Receivables 2013-5; US$40.5m Settlement Fee Finance 2013-1; and US$54.43m SolarCity LMC Series 2013-1.

The non-US ABS were: €575m Bilkreditt 5; €296.3m DFP Master Compartment Germany; A$493m Driver Australia One; C$1bn Master Credit Card Trust II Series 2013-4; and £363m Turbo Finance 4.

The RMBS were RUB3bn ITB 2013 and US$324.98m Sequoia Mortgage Trust 2013-12. The CMBS were US$1.1bn GSMS 2013-GCJ16, £485m Intu Metrocentre Finance and US$1.14bn JPMCC 2013-C16.

Finally, the CLOs were: US$519m Blue Hill CLO; €335m Euro Galaxy III; US$516m Jamestown CLO III; US$438.6m Shackleton 2013-IV; and US$419m Sudbury Mill CLO 2013-1.

Markets
The US CMBS market spent much of last week stuck in neutral, as SCI reported on Friday (SCI 15 November). BWIC volumes were consistently below US$200m but SCI's PriceABS data shows Thursday's session did contain a varied mix of bonds, with 2005- and 2006-vintage paper circulating alongside CMBS 3.0 names.

US ABS volumes were low at the start of the week, but picked up on Wednesday (SCI 14 November). Much of the midweek session's supply came from credit card paper, but PriceABS also listed a number of auto bonds among the other tranches available.

The US CLO market was fairly muted, with Bank of America Merrill Lynch analysts reporting weekly volume of less than US$200m. "Despite the presence of a fair amount of DNTs this week, bidding levels remained healthy. Amid the light activity, US 1.0 and 2.0 spreads stayed unchanged from last week," they comment.

Execution was good in the European RMBS market, as SCI reported (SCI 13 November). One trader notes that the UK market has rallied, while interest in Dutch paper is particularly strong. ABN Amro's recent Lunet RMBS 2013-1 issuance shows that this is true in the primary market as well as in secondary.

Deal news
• CWCapital last week released the modification template for the US$678m Skyline portfolio. The Skyline loan is placed pari passu in three deals - US$271.2m in BACM 2007-1, US$203.4m in JPMCC 2007-LDPX and US$203.4m in GECMC 2007-C1.
• 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.

Regulatory update
• ISDA is set to release a pre-publication draft of the 2013 ISDA Credit Derivatives Definitions. This will mark the first time that the association has circulated detailed implementation language for the proposals.
• US District Court Judge Charles Breyer has issued an order in the Bank of New York Mellon v. City of Richmond, California and Mortgage Resolutions Partners LLC case. The plaintiff sought to block Richmond from using its eminent domain authority to seize and restructure underwater mortgage loans.
• 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.
• 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.
• 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.
• 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.

Deals added to the SCI New Issuance database last week:
A10 Term Asset Financing 2013-2; ACRE 2013-FL1; American Express Credit Account Master Trust series 2013-2; American Express Credit Account Master Trust series 2013-3; AmeriCredit Auto Receivables Trust 2013-5; Appalachian Consumer Rate Relief Funding; Auto ABS2 FCT Compartiment 2013-A; Avery Point III CLO ; Avoca Capital CLO X; Benefit Street Partners III; BMW Vehicle Owner Trust 2013-A; CarMax Auto Owner Trust 2013-4 ; Chase Issuance Trust 2013-8; CIT Equipment Collateral 2013-VT1; Citibank Credit Card Issuance Trust 2013-A10; Citibank Credit Card Issuance Trust 2013-A11; Citigroup Mortgage Loan Trust 2013-J1; CLI Funding V series 2013-3; ConQuest series 2013-1 Trust; First Investors Auto Owner Trust 2013-3; Flatiron CLO 2013-1; FREMF 2013-KF02; Global Container Assets 2013 ; Global SC Finance II series 2013-2; Gosforth Funding 2012-2; Grosvenor Place 2013-1; GSMS 2013-GCJ16; Guanay Finance series 2013-1; Heathrow Funding; Invitation Homes 2013-SFR1; Keuka Park CLO; Liberty Series 2013-1 Auto Trust; Lunet RMBS 2013-I; Navitas Equipment Receivables Series 2013-1; Porsche Innovative Lease Owner Trust 2013-1; Residential Mortgage Securities 27; Saranac CLO I; Secucor Finance 2013-I; Sierra Timeshare 2013-3 Receivables Funding; Silver Arrow Compartment 4 ; SLM Student Loan Trust 2013-6; St Paul's CLO III; STACR 2013-DN2; Sunrise; TAL Advantage V series 2013-2; Telereal Secured Finance; Temese Funding 1; UNITE (USAF) II (tap); Volkswagen Auto Loan Enhanced Trust 2013-2; WFRBS 2013-C17

Deals added to the SCI CMBS Loan Events database last week:
BACM 2005-2; BACM 2006-4; BACM 2007-4, BACM 2007-5, BACM 2008-1 & MLMT 2008-C1; BSCMS 2007-PW15; CD 2005-CD1; CD 2007-CD5; CD 2007-CD5 & CGCMT 2008-C7; COMM 2003-LB1; COMM 2006-8; CSFB 2004-C5; CSFB 2005-C2; CSMC 2006-C1; CSMC 2007-C3; CSMC 2007-C4; CWCI 2007-C2; CWCI 2007-C3; DECO 2006-C3; DECO 2006-E4; DECO 2007-E6; DECO 2007-E7; ECLIP 2006-3; EMC 3; EMC VI; EURO 23; EURO 25; EURO 28; FOX 1; GCCFC 2004-GG1; GCCFC 2006-GG7; GCCFC 2007-GG11; GECMC 2005-C4; GECMC 2006-C1; GSMC 2005-GG4; GSMS 2004-GG2; GSMS 2007-GG10; GSMS 2012-ALOH; GSMS 2013-GC16; INFIN SOPR; JPMCC 2004-C2; JPMCC 2005-CB13; JPMCC 2006-CB15; JPMCC 2006-CB16; JPMCC 2006-LDP7; JPMCC 2007-CB18; JPMCC 2007-LD12; JPMCC 2007-LDPX; LBFRC 2007-LLF C5; LBUBS 2001-C3; LBUBS 2005-C5; LBUBS 2005-C7; LBUBS 2006-C1; MLCFC 2007-5; MSC 2005-HQ7; MSC 2006-HQ9; MSC 2007-T25; NEMUS 2006-2; OPERA METC; TAURS 2006-1; TITN 2005-CT2; TITN 2006-2; TITN 2006-5; TITN 2007-3; TITN 2007-CT1; WBCMT 2004-C12; WBCMT 2004-C15; WBCMT 2005-C20; WBCMT 2006-C26; WBCMT 2007-C33; WFRBS 2012-C9; WINDM X; WINDM XI; WINDM XII; WINDM XIV

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

CDS

Updated definitions set for review

ISDA is preparing to release a pre-publication draft of the 2013 ISDA Credit Derivatives Definitions at the end of this week. This will mark the first time that the association has circulated detailed implementation language for the proposals.

A detailed description of the proposals in connection with the bail-in asset package, succession events and qualifying reference obligations had previously been distributed to ISDA members in May (SCI 24 May). The association then published a high-level overview of the proposals in July, without any detailed implementation language (SCI 16 July).

There will be a one-month comment period following the release of the pre-publication draft, with the final publication date depending on feedback received from the market but expected to be in January. ISDA says it welcomes comments on clarifications or any aspects of the draft that are unclear.

"We're not expecting any big conceptual changes, as the proposals were put together by ISDA's credit steering committee, which represents the most active players in the market. The major aspects of the proposals have already been released to members in concept form and we've received positive feedback," observes Mark New, assistant general counsel at ISDA.

The aim is to finalise the new definitions ahead of the 20 March 2014 index roll date. ISDA intends to introduce an implementing protocol before the deadline. While the way that CDS contracts trade aren't expected to change as a result of the updated definitions, firms will need to be operationally ready for implementation.

"The purpose of the review is to learn from 10-plus years of experience since the launch of the 2003 ISDA Credit Derivatives Definitions, as well as to reflect the changes that the credit market has undergone in recent years. We also hope that the updated definitions will ultimately encourage more participants to enter the market," New concludes.

CS

CMBS

Unusual mod raises recovery uncertainty

CWCapital last week released the modification template for the US$678m Skyline portfolio (see SCI's CMBS loan events database). The unusual treatment of a loan provided by Vornado Realty Trust under the modification introduces a level of uncertainty for A-note recovery.

The Skyline loan is placed pari passu in three deals - US$271.2m in BACM 2007-1, US$203.4m in JPMCC 2007-LDPX and US$203.4m in GECMC 2007-C1. The modification provides for a US$350m A-note and a US$325m B-note split.

The interest rate on the A-note is unchanged at 5.743%, while the B-note will not pay any coupon. The loan was also extended by five years to February 2022.

The borrower has remitted US$35m of net operating cashflow and Barclays Capital CMBS analysts note that US$32m of that was used to repay outstanding interest payments. That should be enough to repay servicer advances, but not most of the outstanding ASERs borne by the trust.

Presently the DSCR is reported as 0.5x, with occupancy at 61%. A US$150m unsecured credit agreement has been funded by parent company Vornado, which will cover tenant improvement and leasing commission costs for the next seven years. That loan accrues 10% interest and could jeopardise A-note recovery, according to the Barcap analysts.

The monthly cashflow waterfall will pay tax and insurance escrows, followed by expenses and A-note debt service in that order. Remaining funds will then go towards additional reserves.

In a capital event, the analysts note that net proceeds will be determined based on the fair market value minus 3% assumed refi costs, which they view as an improvement on previous hope-note modifications. In the event of a sale or refi, the cashflow waterfall will be lender fees, A-note accrued interest, A-note principal balance, repayment of the Vornado loan interest and principal and then a 50% split between Vornado and the B-note, with Vornado's return capped at 20% IRR.

In the event of a foreclosure sale, A-note principal and interest would come before Vornado loan principal and interest (again with return capped at 20% IRR) and lastly B-note principal and deferred interest. Significantly, an exception to this would occur when the lender has the winning bid but a third party submits a bit in excess of the A-note principal. In that case, the Vornado loan would precede the A-note in cashflow priority.

The analysts describe the exception as "very non-standard" and are unsure whether the scenario is feasible. Prioritising borrower interest ahead of A-note recovery appears to add a level of uncertainty to the latter.

The position of the A-note already looked uncertain, as the modification was structured with a credit line rather than significant equity, which increases the chances of Vornado failing to fund the full amount if the turnaround process does not go to plan. Whether or not the turnaround is successful, the fact that the Vornado loan accrues 10% interest significantly reduces the likelihood of recovery on the B-note, the analysts observe. They calculate that valuations would have to rise to US$700m before the B-note could start receiving principal.

JL

RMBS

JPM settlement is RMBS positive

JPMorgan has agreed to make a payment of US$4.5bn to the 330 non-agency RMBS trusts issued by JPMorgan, Bear Stearns and Chase to settle mortgage repurchase and servicing claims (SCI 18 November). The settlement appears positive for senior mezzanine and subordinated triple-A tranches.

Morgan Stanley RMBS analysts note that the settlement re-affirms the notion that put-back optionality is valuable in legacy non-agency RMBS, which is a positive for broader residential credit investors. As the second institutional investor settlement from Gibbs & Bruns, it also suggests future settlements will follow a consortium-style approach rather than being based on loan-by-loan forensic analysis.

An obvious comparison is with the first consortium-style settlement - the US$8.5bn Bank of America/Countrywide settlement (SCI 29 June 2011). The analysts calculate that investors are receiving a lower percentage of estimated losses in the JPMorgan settlement, although the Bank of America settlement does not include discounts related to multi-originator deals, which the JPMorgan settlement does.

As well as the US$4.5bn payment, JPMorgan will also implement certain servicing changes to mortgage loans in the trusts, which will release all repurchase and servicing claims that they have - or could have - asserted. Any direct individual claims for securities fraud or other alleged disclosure violations that an investor may wish to asset are not released as part of the settlement.

The settlement has not yet been finalised and trustees have until mid-January to accept the offer. Depending on whether or not the trustees go for a court approval process the issue could be resolved fairly speedily or could take years, as the Bank of America settlement - which has sought court approval - has so far done.

Just as with the Bank of America settlement, all investors will participate in the settlement and not just those investors which negotiated it. Losses associated with certain third-party originators in the multi-originator Trusts with prefixes JPALT, JPMAC and JPMMT will be discounted to account for the fact that those trusts retain direct repurchase claims that could be asserted against those originators.

For these multi-originator deals, those originators other than JPMorgan which have provided representations and warranties for part of the collateral are not covered by the agreement. The Morgan Stanley analysts reckon that 77 trusts are affected.

"We do not have any information at this point on who the third-party originators are (some of who may not be around), the proportion of the collateral in these 77 trusts that has the rep and warranties provided by them, and what their claim paying abilities might be. However, the notion of discounting introduces the possibility that, depending on the extent of the discount applied, the trusts that are not subject to such discounting have the prospect of receiving higher settlement payments, depending on the extent of the discounting," they say.

As well as re-affirming the value of put-back optionality, the settlement also means there is more upside to legacy non-agency bonds than simply the present value of expected principal and interest payments from the underlying mortgages. The fact that consortium-style settlements appear set to prevail over loan-by-loan analysis also means they are more likely to be based on current and projected future losses rather than concentration of potential representation and warranty breaches.

The analysts reckon the settlement is particularly positive for senior mezzanine and subordinated triple-A tranches. "As the cash is unlikely to flow through the trusts waterfall in the near future - the 60 days the trustees have to decide is only the first in a series of steps before payments can be made - today's current pay tranche may not be the current pay tranche when these payments are actually realised," they say.

JL

RMBS

GSE reduction targets met?

The retained portfolios of Fannie Mae and Freddie Mac stand at well below their US$552.5bn limit for year-end 2013. The GSEs are also believed to have already achieved their 2013 targets for reducing their non-agency mortgage-related assets.

Per the GSEs' quarterly statements, the targeted reduction amount for non-agency mortgage-related assets was US$15.7bn for Freddie Mac and US$21.1bn for Fannie Mae. Through Q3, the former reduced its portfolio by US$11.7bn and the latter by US$18.9bn.

Hence, the total amount left to unwind for Q4 is a combined US$6.2bn. But structured product analysts at Wells Fargo estimate that the GSEs had already achieved their 2013 targets by about halfway through the quarter, suggesting that sales were front-loaded to be completed well before year-end.

"Given the GSEs' reported non-agency mortgage-related assets reduction amounts thus far and how well the non-agency market continues to be bid due to the lack of supply, we speculate the GSEs could try to take advantage of this positive market sentiment and sell more of their non-agency RMBS holdings at the beginning of next year," the Wells Fargo analysts note.

For the first nine months of 2013, Freddie Mac's and Fannie Mae's retained portfolios decreased by 11% and 18% respectively. The decrease is due to a combination of securitisations, scheduled and unscheduled principal payments, repurchases, cash shortfalls (principal losses) and sales.

Meanwhile, Freddie Mac's non-agency RMBS portfolio has decreased by 18% over the course of the past nine months, while Fannie Mae's has decreased by 37%. During the year to end-Q3, Freddie Mac sold approximately: US$8.5bn (unpaid principal balance) CMBS; US$1.6bn Alt-A and other private-label securities; US$349m subprime securities; US$48m option ARM securities; US$530m mortgage revenue bonds; and US$635m other types of mortgage securities. Fannie Mae only reports fair value sales, recording about US$2.6bn in Alt-A and about US$1.26bn in subprime sales.

"Given that subprime is the largest component of both of the GSEs' non-agency RMBS portfolios, it would make sense that the GSEs would work to try to reduce those exposures early next year, assuming they continue to have goals to reduce such assets in 2014," the analysts observe. "We think demand for non-agency RMBS securities is still robust and it could be a good time to start disposing of subprime assets as well as Alt-A and option ARMs in 2014. At that point, however, it will be unknown whether the execution on non-agency RMBS will be as tight as this year, as it may be competing with ING's IABF portfolio - approximately US$8.8bn worth of Alt-A securities that are supposed to be unwound over the course of 2014."

CS

ABS

Structured salesman joins in NY

Brian Bowes has joined StormHarbour Securities in a structured products sales role in New York. He covers ABS, CLOs, CMBS and RMBS in the US as well as ABS and RMBS in Europe.

Bowes was previously head of non-agency mortgage trading at KGS-Alpha Capital Markets. He has also worked for Hexagon Securities and UBS, where he focused on residential mortgages.

ABS

Asset-based vet appointed

BM Structured Finance has appointed Simon Belton as director of broking in London. He has over 25 years of experience in asset-based lending and has previously worked at Scottish Pacific Benchmark, Bibby Financial Services, Allianz Finance, Factoring UK, IBM Global Financing and International Factors.

ABS

Structured trade finance md added

The Bank of Tokyo-Mitsubishi UFJ has appointed Michael Oka as md in its commodities and structured trade finance group. He will expand the product offerings and customer base with the Brazilian trade finance business and report to head of structured trade finance Erich Michel.

Oka was previously at Banco Bilbao Vizcaya Argentari. He has also worked at Citibank in Brazil and New York.

Structured Finance

Securitisation chief appointed

VEB Capital's former head of debt capital markets, Sergei Kaduk, has joined Sberbank CIB as debt capital markets director in charge of securitisation and structured products. In previous roles he has also served as head of research at RuMAC and as a senior associate at KPMG.

Structured Finance

Credit pro joins info firm

Algomi is growing its European credit capabilities with the appointment of Stefano Vaccino as sales manager. The firm provides information-matching solutions to optimise liquidity and Vaccino will use his technology background and experience of working in the credit space to support Algomi's team in working with clients to change their approach to trading fixed income and credit products.

Vaccino joins from Goldman Sachs, where he was executive director in the credit sales team, and will be based in London, working with head of European sales Neil Murray. He has also worked in derivatives at JPMorgan.

Structured Finance

Law firm further strengthens structured group

Sullivan & Worcester has appointed Mark Norris as a partner in its London office, focusing on structured export credit finance, structured trade and commodity finance in emerging markets and acquisition finance. The firm also appointed Simon Cook to the team last week (SCI 8 November).

Norris joins from Squire Sanders and advises on domestic and cross-border structured finance throughout Europe, the Middle East and Africa. He has also worked in London, Moscow, Dusseldorf and Frankfurt for Simmons & Simmons and in London and Prague for Clifford Chance.

CDO

Synthetic CDO transferred

Swiss Re Portfolio Advisors Corporation has assigned its rights and obligations as manager to Ghisallo to BlueMountain Capital Management (BMCM). Under the terms of the assignment, BMCM agrees to assume all the duties and obligations of the collateral manager.

Moody's has determined that the move will not adversely impact any of the synthetic CDO's ratings. In reaching its conclusion, the agency considered the experience and capacity of BMCM to perform duties of manager to the issuer.

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

CDS

Post-merger ICE execs announced

IntercontinentalExchange Group has completed its acquisition of NYSE Euronext. The stock-and-cash transaction had a total value of approximately US$11bn, with the company having a combined market capitalisation of US$23bn.

The combined company operates 16 global exchanges and five central clearing houses. ICE and NYSE Euronext businesses will continue to operate under their respective brand names, although the company expects to conduct an IPO for the Euronext group of Continental European exchanges as a stand-alone entity.

Jeffrey Sprecher will continue as chairman and ceo of the IntercontinentalExchange Group, with Chuck Vice serving as president and coo. Of the new senior management team, Mayur Kapani will serve as svp, derivatives trading systems technology.

Duncan Niederauer continues as ceo of NYSE, while also taking on the role of president of ICE. Thomas Farley, currently svp financial markets at ICE, will become coo of NYSE. Dominique Cerutti, currently deputy ceo of NYSE Euronext, will serve as ceo of Euronext.

Chris Edmonds, currently president of ICE Clear Credit & TCC, will become svp financial markets at ICE. Stan Ivanov, currently chief risk officer at ICE Clear Credit, will become president of ICE Clear Credit & TCC. Paul Swann will serve as president and md of ICE Clear Europe, while Thomas Hammond will serve as president and coo of ICE Clear US.

Four members of the NYSE Euronext board have joined the board of IntercontinentalExchange Group - Sylvain Hefes, Jan-Michiel Hessels, James McNulty and Robert Scott - which now comprises 14 members. The company will be dual-headquartered in Atlanta and New York.

CLOs

Golub adds executive director

Ross Van der Linden has joined Golub Capital as an executive director, based in Charlotte, North Carolina. He was previously at StormHarbour Securities and spent over a decade at Wachovia. He specialises in securitisation, derivatives, CDOs and CLOs.

CLOs

Mid-market financing firm adds three

NXT Capital has grown its direct originations team by hiring Doug Vitek, John Mills and Daniel Green. They will focus on providing structured finance solutions to the middle-market.

Vitek was most recently svp at Dougherty & Company in Minneapolis. He has also worked for GE Capital and Norwest Bank Minnesota.

Mills joins from JPMorgan Chase in Kansas City. He has also worked for GE Capital, Bank of America, US Bank and Garmin International.

Green joins from GE Antares Capital Corporation, where he was an avp in the senior secured loan group. Before GE Antares he was part of GE Capital and has also worked for LaSalle Bank and Deloitte & Touche.

Insurance-linked securities

New ILS manager appoints ceo

XL Group has appointed Chris McKeown as ceo of New Ocean Capital Management. New Ocean was recently established by XL and funds managed by Stone Point Capital to provide investors with access to the ILS market.

McKeown has worked in reinsurance for three decades. He has previously held senior positions at Guy Carpenter, ACE Tempest Reinsurance Company, CIG Reinsurance and Pillar Capital.

Risk Management

OTC trade data team-up announced

Clarus Financial Technology is set to distribute ICAP's benchmark OTC derivative pricing data within its SDRView service. The offering will overlay ICAP's pre-trade data with Clarus' post-trade reporting to provide enhanced trade transparency and help to meet new regulatory requirements.

RMBS

Record settlement for RMBS claims

JPMorgan has agreed to a settlement of US$13bn with the US Department of Justice to resolve federal and state civil claims arising from RMBS issued by JPMorgan, Bear Stearns and Washington Mutual prior to 1 January 2009. It is the largest settlement with a single entity in American history.

The resolution also requires JPMorgan to provide relief to underwater homeowners and potential homebuyers and does not absolve JPMorgan or its employees from facing criminal charges. It follows a separate settlement JPMorgan reached with RMBS investors last week (SCI 18 November).

JPMorgan acknowledges that it falsely informed RMBS investors that mortgage loans in various securities complied with underwriting guidelines. Of the US$13bn resolution, US$9bn will be paid to settle federal and state civil claims and US$4bn will be paid out in the form of relief to aid consumers.

The settlement only resolves civil claims arising from RMBS by JPMorgan, Bear Stearns and Washington Mutual. It does not release individuals from civil charges, nor does it release JPMorgan or any individuals from criminal prosecution.

The Justice Department also required language in the settlement agreement to prohibit JPMorgan from demanding indemnification from the FDIC. Further, larger settlements with Bank of America, Wells Fargo and others are expected to follow.

RMBS

JPM, Bear Stearns RMBS claims settled

JPMorgan has reached a US$4.5bn agreement with 21 institutional investors to make a binding offer to the trustees of 330 RMBS. The institutional investors have committed to support the settlement and requested that the trustees accept the settlement offer.

The cash payment will settle all representation and warranty claims as well as servicing claims that have been or could have been asserted by the 330 trusts for RMBS issued by JPMorgan and Bear Stearns between 2005 and 2008. However, the settlement does not resolve claims on trusts issued by Washington Mutual.

RMBS

Single-family space targeted

Blackstone has established B2R Finance to provide residential buy-to-rent mortgages for property investors, focusing exclusively on single-family home investors. Blackstone intends to securitise the loans provided.

Blackstone has appointed John Beacham as president of B2R. He was previously head of single-family rental home finance at Deutsche Bank.

Jeff Tennyson will serve as B2R's ceo. He has 20 years of experience in residential mortgages, including as ceo at EquiFirst.

RMBS

Credit manager adds RMBS director

400 Capital Management has appointed Jason Yeung as agency RMBS trading director. He will lead the firm's efforts in analysing, trading and managing investment opportunities in the space.

Yeung was previously at Amherst Securities, where he was md for new issue and secondary agency-backed structured derivatives trading. He has also worked at Bank of America Merrill Lynch, where he traded strip IOs and POs, synthetic indices, excess servicing rights and structured derivatives.

ABS

Debut Russian consumer ABS discussed

Moody's discusses in its latest Credit Insight publication the innovative features of Home Credit & Finance Bank's recent HC Finance transaction. The deal is the first rouble-denominated Russian consumer loan ABS issued in Russia.

The principal innovation highlighted by Moody's is the absence of FX and interest rate risks. The assets are fixed-paying rouble loans, so the transaction's ability to issue fixed-paying rouble bonds eliminates FX risk and facilitates the removal of interest rate risk from the rated bonds.

Owing to the transaction's dual SPV structure - which allows for issuance within Russia, despite the assets being purchased offshore - the borrower is also able to tap a wider investor base that is willing to buy rouble assets. The assets are purchased offshore by a separate Dutch SPV in order to protect against the potential insolvency of the Russian issuer.

The Russian issuer lends the bond proceeds to the Dutch purchaser, which uses the loan to buy a pool of receivables from the originator. Pledges from the issuer and purchaser to the security trustee provide security under Dutch law, allowing for the repayment of investors even when the issuer is insolvent.

The transaction also benefits from a simple and robust liquidity mechanism without exposure to a counterparty. At each payment date, the cash manager holds back from the waterfall sufficient principal proceeds to cover six interest payments.

In addition, the structure exploits high asset excess spread for simpler mitigation of set-off and default risks. Set-off exposure in excess of 5% is provisioned for through the early capture of excess spread, Moody's notes.

Any set-off exposure above this level will be offset by the reinvestment of excess spread in new receivables so as to provide collateral against the exposure. Failure to maintain collateral equal to this exposure for more than three months constitutes an amortisation event.

Using the same mechanism as for set off, delinquencies are provisioned for by reinvesting excess spread such that, in the final month before recognition of default, new receivables equal to 90% of the defaulting asset's principal balance will already have been purchased.

However, Moody's says that the structure of HC Finance also introduces two additional legal uncertainties compared to previous transactions. The first risk is the insolvency of the Russian issuer, because Russian issuers are not insolvency remote.

"If the Russian issuer entered into insolvency, the bonds might be cancelled prior to the legal final maturity, with the potential to eliminate the claim of investors in their capacity as bondholders," the agency explains. "We believe that the likelihood of the issuer's insolvency is limited by its charter, which can only be changed by its Dutch owners and limits its activities to those related to the transaction. Furthermore, the Dutch law security allows for the repayment of the bondholders even if the Russian issuer is insolvent and if the bonds are cancelled, thereby reducing the impact of such an event."

The second risk relates to the potential consequences of breaches in disclosures. The use of a Russian issuer with contractual security provided offshore increases the risk of a breach of the disclosure requirements under Russian securitisation law in relation to the security provided and the possible consequences if the regulator considered the transaction to have been in breach of such requirements.

However, Moody's believes the transaction documents provide valid disclosures. This is based on the registration of the bonds; certain precedent examples of such levels of disclosure, with respect to Russian bond issuances benefitting from contractual security; and discussions with, and opinions from, the transaction counsel.

ABS

GE split-off 'credit negative'

Moody's says that General Electric Company's decision to split off its North American retail finance business - which includes its credit card operations - in 2015 is credit negative for the GE Capital Credit Card Master Note Trust. However, the agency is not placing the trust's notes under review at this time as it believes GE is incentivised - from an economic and a reputational standpoint - for the business to be a financially strong standalone entity post-split.

GE has supported the trust in the past by removing low credit score receivables and adding credit enhancement to the transactions. Moody's believes it is likely that GE will take actions to support the trust in connection with the split off.

The agency nonetheless says it will analyse the specific details of the split off as they emerge and assess their potential impact on performance of the trust's asset pool. Moody's will also assess whether the sponsor's ability and willingness to maintain card utility under stress scenarios are consistent with the current credit enhancement and ratings on the ABS.

Although details of the split-off are currently unknown, a new sponsor post-split that is not as financially strong as GE Capital would be a credit negative and bondholders could face increased risk as a result. From a securitisation perspective, the financial strength of the sponsor is an important consideration in Moody's credit evaluation of the related ABS, as a sponsor's ongoing willingness and ability to maintain card utility is a significant driver of trust collateral performance in an early amortisation scenario.

Moody's currently expects trust performance in the range of 6%-8% for charge-offs, 26%-29% for yield and 12%-15% for the principal payment rate.

Structured Finance

Asian market prospects 'steady'

The strong performance of the ABS, CLO, CMBS and RMBS markets in Asia ex-Japan will continue next year, Moody's predicts. However, issuance volumes are not expected to pick up significantly.

Tight government regulation of credit card companies in Korea is expected to benefit credit card ABS by limiting the growth in credit card receivables, thus lowering the risks in the sector, the rating agency says. The number of personal credit cards in circulation has fallen since the country's financial supervisory service imposed lending limits in June 2011.

Korean residential mortgage loans in 2014 are expected to be of good and stable credit quality, with underlying pools containing a higher quantity of fixed-rate loans. National guidelines also encourage average LTVs of below 70% for the majority of residential loans in bank portfolios, which will further benefit RMBS.

Delinquency rates are not expected to rise significantly for either Korean ABS or RMBS. The most recent 30-day plus delinquency rate for credit card ABS was below 0.6% and the 90-day plus delinquency rate for RMBS transactions was below 1%.

Credit card ABS issuance will mainly be for refinancing purposes, so only a limited number of transactions are expected, says Moody's. RMBS issuance is also anticipated to be limited in 2014, while covered bond issuance is expected to increase.

The Singaporean CMBS market, meanwhile, will benefit from high-quality properties, low LTVs and high DSCRs. Strong sponsorship from Singapore REITs will also encourage stable collateral performance.

Rental rates related to properties in Singapore CMBS deals are expected to remain at current levels with high occupancy rates, with shopping malls exhibiting greater rental stability next year. However, issuance is expected to remain low as bank loan and debt capital markets continue to provide abundant and cheap liquidity.

CLO credit quality remains good but is deteriorating in some regions. This is because of the increasing costs of borrowing for corporations in India and China and the depreciation of the Indian rupee.

However, CLO tranches will benefit from the portfolio diversification of corporate loans in various countries and industries. Projected default rates will remain stable next year, with global speculative grade corporate default rates expected to trend down.

Increased regulatory costs mean that issuance expectations for Asian balance sheet CLOs are limited. Regulators have increased the capital charges placed on investors holding structured finance securities, which will offset the benefit of lowering such charges for originators and so discourage them from arranging new transactions.

Structured Finance

Soft landing predicted for Canadian home prices

Nominal home prices in Canada would fall by no more than 10% over the next five years in a down scenario, after taking into account momentum and inflation, Fitch suggests. Though the agency projects a decline in home prices in the country, there are several factors that could point to a soft landing, where nominal prices simply flatten out or experience a relatively small reduction.

In real terms, however, long-term fundamentals - as evaluated by Fitch's sustainable home price model (SHP) - identify the Canadian housing market as being 21% overvalued. Canadian national home prices have rapidly increased by over 130% since 2001, outpacing income growth over the same period by over 80%. The story is the same for Canadian regions, such as Ontario (overvalued by 21%), Alberta (15% overvalued) and British Columbia and Quebec (both overvalued by 26%).

The Canadian economy has a high level of exposure to increasing home prices, according to Fitch director Stefan Hilts. "Canadian buyers reaching for homes at high prices are pushing household leverage to record levels, leaving borrowers susceptible to interest rate shocks," he says. "With a high level of employment and individual net worth tied to the value of the housing stock, a housing downturn could have serious consequences for the overall economy in Canada."

Nonetheless, several factors could point to a soft landing, despite the 21% overvaluation in real home prices. "The Canadian government has been very proactive, with numerous policies specifically targeting a soft landing, which augurs for nominal home prices simply flattening out or seeing relatively small reductions," adds Hilts.

Structured Finance

Ratings reviewed for swap linkage

Moody's has placed on review for downgrade the ratings of 150 notes in 48 RMBS, 17 notes in 14 ABS and four notes in two CMBS due to swap counterparty exposure. At the same time, it has placed on review for upgrade three tranches in two RMBS transactions. The move follows the finalisation of the agency's swap linkage approach (SCI 13 November).

The majority of the affected notes are in transactions issued out of Italy, Spain, the Netherlands and the UK. While affected transactions in Italy and Spain have swap counterparties rated Baa2 and below, most of the affected Dutch and UK transactions benefit from swap counterparties rated in the medium to low A range, providing significant hedging support such as cross-currency swaps or fixed/floating swaps under swap contracts. Moody's assumes that UK master trusts have isolated loss swaps and so, following a swap counterparty default, the relevant FX note bears the full loss.

The transactions on upgrade review already incorporated an assessment of the swap counterparty exposure, which was more conservative than Moody's updated approach.

As part of its review, the agency says it will incorporate the risk of additional losses on the notes in the event of them becoming unhedged following a swap counterparty default. Moody's will take into account structural features of the transactions that may reduce the impact of such disruption and any remedies or protection mechanisms implemented during the review period.

Structured Finance

Positive outlook for Aussie ABS, RMBS

Moody's expects Australia's securitisation market to continue performing well in 2014, with issuance levels likely to remain similar to those seen in 2013. Specifically, RMBS will carry into next year the steadiness seen this year, as losses will remain low - even though delinquencies are anticipated to rise incrementally.

The agency bases this view on its expectation for modest GDP growth in 2014, Australia's low interest rate environment and broadly stable unemployment. "With the RMBS sector, the expected small rise in delinquencies generally and drop in the credit quality of 2013 mortgages will be prompted by a limited rise in interest rates. But even if the cash rate increases to 3% from the current 2.5%, it will remain at a historically low level, helping keep delinquencies low," says Irene Kleyman, a Moody's vp and senior analyst.

Moody's expects 2014 unemployment to settle between 5% and 6%, supported by GDP growth of 2%-3%. Underemployment and a slowing job market, despite this economic growth, will contribute to mortgage defaults. However, in general RMBS pool losses will remain low, as most loans are seasoned - benefiting from house price appreciation - and the mortgage market will continue to benefit from ongoing deleveraging among borrowers.

As at 31 October, RMBS issuance volume stood at A$24bn across 26 transactions, the highest level since 2007. Four non-conforming RMBS, amounting to A$1.4bn, were issued.

The ABS sector will also continue to perform well in 2014, with a small rise in delinquencies anticipated. The credit quality of new ABS is expected to slip as a result of a reduction in novated leases and an increase in non-auto assets in portfolios. Despite a small rise in delinquencies and defaults, Moody's expects overall net losses on existing ABS to improve due to higher recovery rates on defaulted auto loans.

Moody's expects ABS issuance in 2014 to remain at levels similar to 2013, given the continued presence of regular issuers, such as SMART, REDS, Liberty and Flexigroup. As at 31 October 2013, issuance in the sector stood at A$3.9bn, down from A$5.2bn in 2012.

Structured Finance

Investor optimism highlighted

Results from Fitch's 4Q13 European fixed income investor survey suggest that investors are slightly more optimistic than they were earlier this year. Only 40% of survey respondents see a prolonged recession as a high risk to the European credit markets - down from 71% in July and less than half the all-time-high of 86% in April.

Eurozone debt problems and reduced monetary stimulus are seen as the main risks, at 57% and 56% respectively, although both are ranked lower than they were in the last survey. However, survey respondents are concerned about emerging markets, with 60% of those polled expecting EM sovereign fundamental credit conditions to deteriorate. This is only marginally lower than in the July survey and closely followed by the EM corporate segment at 50% (down from 62%).

By contrast, sentiment remained buoyant for another risk sector, as 28% voted for high yield as their favourite marginal investment choice - completing its unchallenged preferred status throughout this year. A less negative view on credit fundamentals for the sector emerged, with respondents now more balanced in their opinions on future direction. Views on new issuance volumes and spread tightening are the most bullish of all sectors.

Fitch's 4Q13 survey was conducted from 1 October to 4 November. It represents the views of managers of an estimated €7trn of fixed income assets.

CDO

CSOs reviewed on methodology update

Moody's has updated its approach to rating CSOs, resulting in a more conservative view of rated notes in the sector. Approximately US$1.76bn of securities are affected by the move.

The updates to the methodology primarily include lowering the average recovery rate assumptions for all types of debt other than subordinated bonds, increasing the number of asset correlation states with varying probabilities of occurrence and adjusting default probabilities to match historical corporate performance and to mitigate risk of portfolio adverse selection. These updates introduce additional negative scenarios in Moody's rating considerations and enable a more robust credit assessment, the agency says. It has also removed the 30% macro default probability stress for corporate credits that was applied to CSOs in 2009.

The methodology update affects the ratings in six CSOs in the US, as well as 13 CSOs in Europe, impacting less than 13.5% of outstanding transactions in the sector. The ratings for each of these transactions will be placed on review for possible downgrade, with the exception of two, which will be placed on review for possible upgrade.

Moody's will complete its review of these transactions within six months. A ratings impact of generally one to three notches is expected on the majority of the affected transactions.

In conjunction with the CSO methodology update, the agency has also released a new version of MOODY'S CDOROM software, v2.10-15. The MOODY'S CDOROM data feed will be updated to reflect the new methodology in early December.

CDO

Trups CDO defaults, deferrals flat

Combined defaults and deferrals for US bank Trups CDOs declined to 27.3% at end-October from 27.4% at the end of the previous month, according to Fitch's latest index results for the sector. Five issuers, with a total notional of US$58.5m, cured in October and the cumulative cure balance was retroactively increased for a September cure with a notional amount of US$22m.

Two previously cured issuers, with a total notional of US$10m, redeemed their Trups in October. Meanwhile, one issuer - representing US$20m in collateral - deferred on its Trups during the month.

The September cumulative deferral balance was retroactively increased by US$11m, representing the re-deferral by an issuer that had cured in June. There were no new defaults during the month.

Year-to-date, there have been 14 new deferrals and defaults compared to 45 over a comparable period last year. Cures continue to trend higher, according to Fitch, with 59 cures year to date compared to 40 last year.

Across 79 Trups CDOs, 222 bank issuers have defaulted and remain in the portfolio, representing approximately US$6.5bn. Additionally, 276 issuers are currently deferring interest payments on US$3.8bn of collateral. This compares to 351 deferring issuers totalling US$5bn of collateral at this time a year ago.

CLOs

Prepayments drive Euro CLO upgrades

Moody's has upgraded the ratings on 66 tranches in 29 European CLOs, totalling approximately €1.9bn outstanding. The move is primarily a result of the substantial deleveraging of senior notes and increases in the overcollateralisation levels in the affected CLOs, which improved the credit enhancement levels of outstanding tranches.

The magnitude of the upgrades range generally between one and three notches. The ratings of all tranches upgraded, except for those already upgraded to Aaa, remain on review for upgrade. Moody's also placed on review for upgrade the ratings of an additional 27 tranches in 20 CLOs, totalling approximately €852.1m outstanding.

The deleveraging and OC improvements primarily resulted from high prepayment rates of leveraged loans in CLO portfolios. In particular, Moody's observed a significantly high rate of prepayment during the summer of 2013.

The agency notes that all of the affected CLOs have exited their reinvestment periods and either cannot or have only limited capacity to reinvest loan repayment proceeds. As a result, these transactions have applied and are expected to apply most repayment proceeds to amortise their liabilities.

CMBS

Skyline mod drives late-pays lower

US CMBS late-pays fell by 25bp in October to 6.32% from 6.57% a month earlier, according to Fitch's latest index results for the sector. The modification of the US$678m Skyline Portfolio loan, which closed on 30 October (see SCI's CMBS loan events database), drove the decline.

The Skyline Portfolio is securitised in three CMBS transactions - BACM 2007-1, JPMCC 2007-LDP10 and GECMC 2007-C1. Key terms of the modification included a US$350m/US$328m A/B note split and a five-year extension through February 2022, with an additional one-year option. Resolution of the Skyline loan contributed 12bp to the delinquency rate drop.

Meanwhile, the real estate owned US$468m Two California Plaza, securitised in GSMSC 2007-GG10, has moved into second place in Fitch's late-pay rankings (behind Peter Cooper Village/Stuyvesant Town). However, the asset seems likely to be part of CWCapital's announced US$2.5bn asset sale. A sale of the property would contribute 11bp towards a drop in Fitch's delinquency rate.

In total, the CWCapital asset sales could drive the agency's CMBS delinquency rate another roughly 50bp lower to around 5.8%, which would be the rate's lowest level since December 2009. While the list of assets to be included in the asset sale is unconfirmed, Fitch highlights the largest CWCapital-specially serviced assets in its rated portfolio that are likely to be disposed of in the near future, based on recent servicer commentary and/or loan status. These include: US$363m Bank of America Plaza (securitised in JPMCC 2006-CIBC17 and JPMCC 2006-LDP9), US$360m Solana (BACM 2007-1 and JPMCC 2007-LDP10), US$190m StratReal Industrial Portfolio I (BACM 2007-1), US$190m Montclair Plaza (WBCMT 2006-C28), US$175m Four Seasons Resort and Club - Dallas, TX (WBCMT 2006-C28), US$160m 119 West 40th Street (GSMS 2007-GG10), US$136m Citadel Mall (CD 2007-CD4), US$126m Northwest Arkansas Mall (CD 2007-CD4), US$117m Loews Lake Las Vegas (CD 2007-CD4) and US$104m Maguire Anaheim Portfolio (GSMS 2007-GG10).

Other large CWCapital-serviced assets include the US$3bn Peter Cooper Village/Stuyvesant Town loan and the US$225m Riverton Apartments (CD 2007-CD4), both of which are not expected to be marketed until mid- to late-2014. Additionally, the US$187m Four Seasons Aviara Resort (WBCMT 2007-C30) and US$140m Westin Casuarina Hotel & Spa (WBCMT 2005-C22) are also specially serviced by CWCapital. However, those loans are both reported as 90-plus days delinquent and the most recent servicer commentary does not suggest near-term dispositions as imminent.

In October, resolutions of US$1.4bn outpaced new additions to Fitch's index of US$697m. Additionally, Fitch-rated new issuance volume of US$4.3bn far exceeded the less than US$1bn in portfolio run-off, causing an increase in the index denominator.

The office sector led resolutions last month thanks to the Skyline modification, driving the office late-pay rate 46bp lower and below the 7% mark for the first time in two years. The office improvement would have been even larger if not for the US$146.5m COPT Office Portfolio loan (securitised GCCFC 2007-GG9). The loan entered Fitch's delinquency index in October, as foreclosure (via a deed-in-lieu) appears increasingly likely.

The retail sector also saw a sharp improvement in its rate last month, falling by 32bp, thanks mostly to the sale of Gwinnett Place (securitised in MLMT 2007-C1). Hotel and industrial delinquencies pushed a bit higher in October, while the multifamily late-pay rate was mostly flat on the month.

Current and previous delinquency rates are: 9.68% for industrial (from 9.57% in September); 7.64% for hotel (from 7.52%); 6.98% for multifamily (from 6.95%); 6.95% for office (from 7.41%); and 5.79% for retail (from 6.11%).

CMBS

B-note may complicate Lincoln Square resolution

Morningstar says it is not currently projecting a loss on the US$220m Lincoln Square A-note, following the CMBS loan's transfer to special servicing (see SCI's loan events database). However, the B-note debt may complicate the ultimate resolution of the loan.

The Lincoln Square loan - US$160m of which is securitised in CD 2007-CD5 and US$60m is in CGCMT 2008-C7 - transferred to special servicing (LNR) this month for 'imminent default' due to potential negative cashflow issues. In addition, the loan had a US$65m subordinate B-note at issuance.

The property is current, 97% occupied and operating with a 1.26x NCF DSCR as of end-2012, according to Morningstar. While the rating agency has been unable to determine the specific reason for transfer, it is believed to be lease/tenant-related.

The building's largest tenant Latham & Watkins (accounting for 57% of GLA) has a lease expiring in January 2016. Per the CD 2007-CD5 prospectus, an L&W trigger event occurs if the firm fails to renew its lease prior to the date occurring 21 months prior to the lease expiration or if it provides notice that it is terminating any portion of its lease.

The building's second largest tenant, the General Services Administration (12% of GLA), has a lease expiring in December. The timing of the transfer suggests that either or both of the tenants have given notice that existing lease provisions may not be renewed.

The ten-year interest-only note is sponsored by Ralph Dweck. The borrower consists of four SPEs with a tenant-in-common structure.

Morningstar is not currently projecting a loss on the senior A-note based on the asset's strong location and satisfactory cashflow to date. However, while leverage on the senior debt stands at US$542/sf, all-in leverage stands at US$702/sf. Applying a 6% capitalisation rate to the most recent full-year NCF suggests a value of US$678/sf.

CMBS

Mixed metrics seen for CMBS

Legacy US CMBS market metrics are continuing to improve, while several key indicators for new issuance finished the quarter somewhat mixed, according to Fitch's latest quarterly index report for the sector.

Delinquencies of Fitch-rated CMBS fell by 61bp quarter over quarter in 3Q13, compared with 45bp between the first and second quarters. Similarly, the volume of loans in special servicing fell by 11% on the quarter, compared with 8% for the quarter ended 30 June.

Downgrades for 3Q13 continued to affect mostly distressed (rated triple-C and below) bonds. Fitch has stable rating outlooks for approximately 93% of investment grade rated classes, as of 30 September 2013.

However, new issuance metrics were mixed last quarter. Interest rates have risen along with Fitch stressed loan-to-value ratios, while the percentage of interest-only loans was stable versus the prior quarter (albeit up from a year ago).

The percentage of CMBS loans having or allowing subordinate debt continued to increase, up by over five percentage points on the quarter. But Fitch notes that this metric varied substantially across deals.

CMBS

Italian CMBS marketing

Goldman Sachs is in the market with Gallerie 2013, a €363m Italian CMBS. The transaction securitises a loan granted to real estate fund Krypton, to enable it to acquire 13 shopping centres and one retail park located across Italy.

Rated by DBRS and Fitch, the deal comprises €271m single-A rated class A notes, €50m single-A minus class Bs and €42m triple-B minus class Cs. The property portfolio comprises 624 retail units, with the top-10 tenants providing around a quarter of total passing rent. While the weighted average lease length to first break for the portfolio is short at 3.2 years, the occupancy ratio of 94% indicates the portfolio's appeal to retailers.

All the shopping centres benefit from an adjoining hypermarket area owned and operated by Auchan. While these grocery areas are not part of the collateral securing the loan, they nevertheless anchor footfall, according to Fitch.

Auchan has provided a 10-year rental guarantee to Krypton to mitigate occupational market risks. Should Auchan dispose of any of the stores, there would be a step-up in the payment liability it has assumed for the related collateral under the rental guarantee.

The portfolio purchase was financed by a five-year senior securitised loan, a €107m unsecured subordinated junior loan and by an equity investment made by the fund's unit holders (approximately €98m contributed by Morgan Stanley Real Estate Fund VII and approximately €92m by Goldman Sachs). Goldman provides integrated property management services for the combined estate.

The closing reported loan-to-value ratio is 58%, which is scheduled to reduce by loan maturity to 55% following annual amortisation of 1% of the starting loan balance. Fitch notes that semi-annual revaluations and strong interest coverage ratio (ICR) and LTV trap covenants (at 1.6x and 65% respectively) should enable performance deterioration to be detected well before loan default.

The transaction features a seven-year tail period between loan scheduled maturity (2018) and legal final maturity of the notes (2025). While the structure envisages a 'mandate to sell' upon loan default (whereby a sales agent is responsible for out-of-court liquidation within certain covenants), residual risk over its enforceability in case of fund insolvency has not been eliminated to Fitch's satisfaction. Therefore, the agency has assumed a forced liquidation of the fund, which typically entails additional work-out costs and a prolonged resolution.

Risk Management

Funding margin index debuts

Bloomberg Indexes has launched the Bloomberg European Banks Funding Margin Index, a new benchmark that provides what the firm describes as the first market-driven measurement of credit risk and funding rates of high-quality European banks. The index calculates the average spreads of Euro currency bonds to ensure transparency in risk assessment and is intended to be licensed to financial institutions throughout Europe.

The benchmark evaluates the credit risk of banks based on bond market prices, as opposed to the credit derivatives market. To provide an accurate reflection of the borrowing costs of major European banks, the index measures a six-month moving average of asset swap spreads of the bonds from 20 highly-rated European banks.

The Bloomberg European Banks Funding Margin Index's constituent bonds are a subset of the Bloomberg EUR Investment Grade European Corporate Bond Index. All index pricing is calculated independently by Bloomberg.

Risk Management

SIDCO rules finalised

The CFTC has finalised rules to establish additional standards for systemically important derivatives clearing organisations (SIDCOs). The rules, together with the existing derivatives clearing organisations rules, establish Commission regulations that are consistent with the Principles for Financial Market Infrastructures (PFMIs) and would allow SIDCOs to continue to be qualifying central counterparties for purposes of international bank capital standards.

The final rules include substantive requirements relating to governance, financial resources, system safeguards, special default rules and procedures for uncovered losses or shortfalls, risk management, additional disclosure requirements, efficiency, and recovery and wind-down procedures. In addition, they include procedures by which derivatives clearing organisations other than SIDCOs may elect to become subject to these additional standards.

Risk Management

Inaugural research publication released

A new S&P Capital IQ bimonthly research publication aimed at credit risk professionals shows that risk levels as a whole have dropped off in the last year, although certain industries and regions remain higher risk areas. Dubbed Credit Market Pulse, the six-page research note aims to help those seeking deeper understanding of the risks and opportunities underlying their investment or lending decisions, as well as those looking to compare how their portfolios perform against the market.

Each issue of Credit Market Pulse will offer a broad overview of the health of and credit trends within the global capital markets, leveraging S&P Capital IQ's analytical intelligence. The current issue, for example, illustrates how several companies and industries with significant risk profiles are topping the charts for highest probability of default and credit deterioration.

"Industry and country benchmarks for credit risk are sought after by the entire credit risk community and everybody knows that existing credit indices, that are based on CDS data, do not reflect the whole market sentiment and are often just the tip of the iceberg," says Marcel Heinrichs, director, market development at S&P Capital IQ. "We hope Credit Market Pulse - which leverages credit risk indicators from 30 times more companies than exist in the liquid CDS market - will become an important new benchmark for credit risk officers, investment managers, the debt capital market community, corporations and others looking to bring additional credit risk metrics and forecasting capabilities into their financial decision making."

Risk Management

CVA enhancement rolled out

SuperDerivatives has expanded its eValueX, CorporeX and SDX services with the ability to perform credit value adjustment (CVA) for OTC derivatives portfolios. The firm says the move is in response to significant demand from corporate treasurers and auditors for a solution to the complex challenge of evaluating counterparty credit risk. The solution aims to allow users to define a CVA method that suits their bespoke valuation requirements and enable the adjustment of mark-to-market valuations and pricing of new contracts to reflect the inherent counterparty credit risk associated with trades that are not fully collateralised.

Risk Management

Disclosure recommendations released

ESMA has published a review of the comparability and quality of disclosures in 2012 IFRS financial statements of listed financial institutions. The review makes recommendations aimed at enhancing the transparency of financial statements through the improvement of disclosures in certain key areas, including credit risk and impact of forbearance practices, liquidity and funding risk, asset encumbrance and fair value measurement of financial instruments.

While finding that the required disclosures under IFRS were generally observed, the authority also identified broad variations in the quality of the information provided and found some cases where that was insufficient or insufficiently structured to allow comparability among financial institutions. The review was based on a sample of 39 large European financial institutions from 16 jurisdictions, mostly consisting of banks that were included in the latest EBA stress-test exercise, most of which will move under ECB supervision in 2014.

Some financial institutions provided disclosures that were not specific enough, lacked links between quantitative and narrative information or provided disclosures that could not be reconciled to the primary financial statements, according to ESMA. In particular, the authority found that in many cases financial statements did not include sufficient information on the use of derivatives. The link between the business purpose and the classification in the financial statements was often unclear.

As a result of the conclusions and recommendations included in this review, ESMA expects enhanced disclosures to be provided in 2013 on exposures to credit risk, its mitigation, analysis of specific concentrations of credit risk and disclosure of impairment policies in order to enable investors to assess the overall credit risk.
Although some progress has been made in the disclosures relating to forbearance practices, the authority expects financial institutions to provide more granular quantitative information on the effects of forbearance. This would enable investors to assess the level of credit risk related to forborne assets and their impact on the financial position and performance.

National competent authorities are expected to take appropriate enforcement actions where material breaches of the IFRS requirements have been identified as part of the review. ESMA will also provide suggestions to the IASB on those areas where it believes additional IFRS guidance can improve the quality and transparency of financial statements.

Risk Management

Non-EU counterparty rules drafted

ESMA has issued final draft regulatory technical standards (RTS) related to derivative transactions undertaken by non-EU counterparties under EMIR. EMIR provisions regarding central clearing and risk mitigation techniques also apply to those OTC derivatives entered into by two non-EU counterparties that have a direct, substantial and foreseeable impact on EU financial markets.

The draft RTS clarify that OTC derivative contracts entered into by two counterparties established in one or more non-EU countries, for which a decision on equivalence of the jurisdiction's regulatory regime has not been adopted, will be subject to EMIR where certain conditions are met. The first condition is that one of the two non-EU counterparties to the OTC derivative contract is guaranteed by an EU financial for a total gross notional amount of at least €8bn and for an amount of at least 5% of the OTC derivatives exposures of the EU financial guarantor. Alternatively, the two non-EU counterparties execute their transactions via their EU branches and would qualify as a financial counterparty if established in the EU.

The draft RTS also specify cases of transactions aimed at evading EMIR's regulatory requirements, which would be the case for derivatives contracts or arrangements concluded without any business substance or economic justification and in a way to circumvent the clearing obligation and risk mitigation provisions.

ESMA's draft RTS have been submitted for endorsement to the European Commission. The Commission has three months to decide whether to endorse the final draft RTS and must then submit the endorsed RTS to the European Parliament and the Council.

RMBS

GSE profitability set to continue

Fannie Mae and Freddie Mac are expected to show strong profitability over the next few years, as their asset quality continues to improve. Moody's suggests that the GSEs will continue to benefit from the improved US housing market and increased top-line growth in guarantee fee income.

"Lower provisions for loan losses have been the primary driver of the GSEs' recent strong earnings and will continue to support their profitability through the second half of 2013," says Moody's svp Brian Harris. "However, this contribution to net income will gradually decline as provisioning begins to normalise."

The agency expects the dramatic rise in guarantee fees - and resultant profitability - to drive future performance. In addition, GSE market share remained at historic highs with lenders choosing GSE guarantees for the vast majority of new loan originations due to the GSEs' continued cost advantage versus private capital. The success of the FHFA's attempt to contract the GSEs' dominance of the housing market remains an open question, according to Moody's.

The agency notes that despite their increased profitability, the GSEs still rely on the US Treasury for future capital needs, while GSE reform remains elusive. Moody's believes that the longer the stalemate regarding GSE reform continues, the more likely the GSEs will remain entrenched in the mortgage finance market.

RMBS

Further Richmond case dismissed

US District Court Judge Charles Breyer last week issued an order in the Bank of New York Mellon v. City of Richmond, California and Mortgage Resolutions Partners LLC case. The plaintiff sought to block Richmond from using its eminent domain authority to seize and restructure underwater mortgage loans.

The order grants Richmond's motion to dismiss without prejudice, stating that the case is "not prudentially ripe for consideration", according to a SFIG memo. Judge Breyer dismissed a similar motion on 17 September in the Wells Fargo Bank, National Association, as Trustee, et. al. v. City of Richmond, California and Mortgage Resolution Partners LLC case, finding that the suit was also "not yet ripe".

RMBS

Dutch servicing strategies maturing

Fitch reports that more effective mortgage servicing strategies originally developed in the UK are being adopted in the Netherlands in response to rising arrears. These sophisticated servicing strategies often focus on more timely and targeted intervention to prevent or remedy arrears, although factors such as cost concerns and data availability mean it is not clear that Dutch servicers can replicate all the strategies developed in the UK and so the full effect of these changes remains to be seen.

One example is the use of default probability models based on historical data to identify potential problem loans earlier. Another is borrower and loan segmentation, where different servicing strategies are applied to loans with different risks or to different categories of borrower. Income and expenditure analysis is also increasingly used to underpin payment plans or forbearance, or even enforcement proceedings.

These strategies have been embraced by Dutch servicers over the last 18-24 months and can have a positive impact on portfolio performance, according to Fitch. More recently, Dutch servicers have also increasingly been using loan modifications, although this depends on their remit and on lender agreement.

Additionally, high-volume servicers are emulating UK equivalents in the development of dialler strategies that reflect borrower or loan segmentation and respond to changes in mortgage performance. Although this is at a very early stage in the Netherlands, it could yet be extended to include measures such as the 'right time to call' analysis used in the UK, which helps maximise borrower contact and ultimately cash collected.

However, it is not yet certain that Dutch servicers can fully employ UK-style strategies that rely on up-to-date and detailed credit reference data. The Dutch national credit bureau BKR provides a less complete picture of a borrower's recent credit history than its UK equivalents, which have access to more frequently updated information with greater reference to non-mortgage debt.

It is not clear that Dutch borrower data can be legally collected and disseminated without borrower consent to the same extent as in the UK. And Dutch servicers still rely primarily on information from the borrower, as in some early arrears prevention pilot schemes where they contact high-risk borrowers directly.

Dutch mortgage arrears are still low in absolute terms, but they have increased in recent years. As of 3Q13, borrowers in arrears by more than three months had grown to a new peak of 0.83%. Fitch expects further increases as the Dutch housing market correction continues.