Reuters IFR: ASF 2012 - ASF sees Europe looking to secured funding

LAS VEGAS, Jan 23 (IFR) - 

    Many European institutions are looking to secured funding -- both securitization and covered bonds -- to fund themselves, according to Robert Plehn, managing director and head of ABS Solutions at Lloyds Bank Corporate Markets, speaking Monday about the impact of the European debt crisis at the annual American Securitization Forum (ASF) conference in Las Vegas. 

   With nearly 5,000 market participants in attendance this year, the conference is seeing conversation focused on the sovereign debt crisis. 

   "Secured funding is replacing unsecured funding as a way for institutions to fund themselves," Plehn said, while cautioning: "You can't make generalizations about asset classes anymore. You have to look through to the assets." 

   Vishwanath Tirupattur, managing director at Morgan Stanley, said that from a secondary market perspective, the reason for the sale of secured finance assets by banks in Europe is risk-weighting, not asset quality. 

   Therefore, he said, the European assets being sold by banks are the "ultimate value play" for investors willing and able to tolerate some shorter-term volatility. 

   At the conference's opening general session, attendees were cautiously optimistic about a slowly improving US economy over the next 12 months. However, the general consensus was for global ABS issuance to remain flat in 2012. 

   One panelist, Reginald Imamura, executive vice president at PNC, was encouraged by the liquidity beginning to flow back into the mainstream economy.  

   He said he has seen "pockets of improvement", including auto spreads returning to pre-crisis levels and CLOs beginning to re-develop. But he also noted that the struggles of private-label non-agency RMBS will linger throughout the year. 

   Doug Murray, managing director at Fitch Ratings and moderator of the panel, said Europe is the "ultimate wild card" in how the year plays out. 

   The recovery in the U.S. is much more solid than in Europe, added Ganesh Rajendra, head of international asset and mortgage-backed strategy at RBS Securities in London. 

   The European region is likely to contract for two straight quarters, leading it back into a recession, he said. However, the United Kingdom would remain recession-free and only contract one quarter, with moderate growth later in the year. 

   The continental European recession will be caused by the trouble spots of Greece, Portugal, Ireland, and "the big elephant in the room, Italy", he said. 

   Rajendra believes Greece will technically avoid a default but said that even if it did occur, it has already been priced in by most in the market. 

   High-quality vanilla European ABS transactions should not be affected by the turmoil, he said. 

   When asked what the major discussions of ASF 2013 will be, panelist answers varied. Ronald Mass, a portfolio manager at Western Asset Management, wants to see investor rental housing loan transactions. He sees a real market developing as homeowners sell off property and begin to rent.  

Amy Resnick, Charles Williams, Adam Tempkin

Reuters IFR: ASF 2012 - Feel good story for U.S. auto ABS

LAS VEGAS, Jan 24 (IFR) -  
    A good story coupled with a solid 2012 outlook highlighted the annual "Auto Loan and Lease ABS Sector Review" panel at ASF. Mark Stancher of JPM Investment Management referred to 2012 as the "start to normalization" as regulations start falling into place. There could also be a buildup in warehouse facilities that could provide the beginning for new issuers both domestic and abroad to enter.

     Panelists are estimating new vehicles sales to be anywhere from low 13m to 14.5m this year. Used car prices are also strong and are expected to remain that way throughout the year.

 

    Matthew Peters, a MD of securitization at BMO Capital Markets, referred to autos as "the benchmark class" with plenty of access to credit. As credit card issuance dwindles and student loan transactions conform to new changes, autos have become the establishment of U.S. ABS. Mark Stancher expects a 10% increase in new issue auto-related volume, which totals between $75-80bn or 60% of total market volume. Historically, autos have accounted for only 25%, but that is now a thing of the past. 

 

    The success of the sector can be attributed to a strong consistency of quality loans. The dealer floorplan segment was also highly recommended as inventory has become more carefully managed. Although the market came out of the crisis in good shape, Peters believes sponsors of autos have become a lot smarter than they were pre-2007-2008.

 

    While 2011 was highlighted by demand for short term paper, panelists feel this year will see an increasing bid for A3 and A4 classes. 2011 was also a good year for auto leases, which were supported by strong residual values. Stancher was also encouraged by credit enhancement provided by subprime or "high yield" autos as it is becoming to be known. Both issuers on the panel, Eric Gebhard of World Omni Financial Corp. and Jason Behnke of Ford Motor Credit Company, expect subordinate bonds to be an important part of the capital structure. Ford's recently completed retail transaction sold both seniors and subs for the first time in about a year.

 

    In terms of regulation, Rule 193, which relates to the due diligence process is not considered to be a major impediment for autos. Behnke said the main difference is they now use pool specific contract testing, which does increase cost. As an investor, Stancher believes the document language won't be much different. Gebhard felt in addition to driving up costs, the regulation is too complex. In terms of loan level disclosure in Reg AB II versus the old grouped data, opinions were varied as to what was most beneficial. On the issue of risk retention, issuers feel a vertical slice retention is too redundant. Ford already takes a first loss position on its deals.

 

    Stuart Litwin, moderator and Partner at Mayer Brown, thinks over-regulation is not necessary in a safe haven sector such as autos. Rule 17-g-7 regarding rating agency reports was his prime example.

 

charles.williams@thomsonreuters.com

Reuters IFR: ASF 2012 - Bankers discuss unintended consequences of complex regulations

LAS VEGAS, Jan 24 (IFR) -   

      Participants in the asset securitization market warned yesterday that the complexity of the regulatory regime being implemented from the Dodd Frank Act and by European regulators could stymie the recovery of the US mortgage market, despite that recovery being their goal.

    Speaking at the Asset Securitization Forum 2012 conference at the Aria in Las Vegas on Monday, the group of attorneys, bankers and policy advisors suggested that regulators would be more successful if they focused on getting a broad brush framework on the books, rather than write rules specifically aimed at preventing the last crisis.

     Reed Auerbach, a partner at law firm Bingham McCutchen, said regulators should "leave deals alone that worked."

     "Many would (work),  if regulators did not put all asset classes in the same boat as the mortgage business,” he added,  pointing to the ongoing functioning of securitization for auto loans and other assets.

    He warned, “Markets that are functioning can become dysfunctional” when subject to regulation tailored for problems they did not experience.

    Several speakers referred to a recent paper by Karen Petrou, co-founder and managing partner of Federal Financial Analytics, which analyses regulations for banking and other clients. Petrou’s paper, published in November, outlined the significant costs of complexity risk.

    "Complexity risk creates unintended consequences and so much uncertainty that banks have largely headed for the bunker, fearful that the next rule will contradict the last proposal and pose capital, liquidity, legal and reputational risks compounding those already facing the firm under current, tough market conditions," Petrou wrote.

    "We have concluded that what we call complexity risk – the burden on financial institutions and regulators of complex, cross-cutting and sometimes incomprehensible rules – may well now be the most significant impediment to financial-market recovery and robust economic growth."

    Such risks, said panelist Lydia Foo, an executive director at Morgan Stanley, could result in banks and other issuers turning to other markets outside of securitization for financing.

    "The regulatory burden must be weighed against other ways of financing those assets," she said. "We need to make sure it works for issuers."

amy.resnick@thomsonreuters.com

Reuters IFR: ASF 2012 - Regulations, data, high costs prevent full return of private RMBS

LAS VEGAS, Jan 24 (IFR) -

    As Tom Petty wrote in one of his many popular songs, “The waiting is the hardest part.”

     Waiting is exactly what the market will have to do before private-label non-agency RMBS can once again become fully functional, according to panelists at the “RMBS RESTART” panel at ASF 2012 at the Aria in Las Vegas. The panel was designed to look at the prospects for and impediments to the next iteration of RMBS transactions.

    From a legal perspective, John Arnholz, partner at Bingham McCutchen, believes the RMBS market is in the final stages of re-regulation. He referred to risk retention as the “grand daddy” of regulation, which is still taking shape at the present time. Dodd/Frank, as well as GSE reform, are other issues to be watched, he said.

     From an economic point of view, only plain vanilla loans, whose performance is easy to predict, will come to market in the near term. “The economics of the execution of the market” must be right for a full recovery, according to Peter Sack, Managing Director (MD) at Credit Suisse. At this time rating agency models, as well as updated loan level analysis, have not yet been completed, leaving risk unclear for marginal loans, he added.

     Pamela Westmoreland of GE Asset Management was the sole investor on the panel. She said investor confidence in the market is broad-ranging. Some investors need a lot of reassurance while others are more focused on strictly risk versus return.

     As with Arnholz and Sack, the investor base also has to deal with regulatory issues. Westmoreland acknowledged that the mechanics of the deal must be clearly labeled in the documents and all parties involved with the transaction need to know who is taking what steps on behalf of whom.

     Patrick Greene, a MD at RiskSpan, Inc., is a proud supporter of ASF’s “Project Restart,” which in addition to the main goal of reigniting issuance, aims to solve the issue of how data is perceived and found among participants.

     Deal data means different things to different people and on top of that, finding the loan-level data on the SEC website is almost impossible. The latest RMBS transaction, Redwood Trust's Sequoia deal, which priced last week, began taking the incremental steps needed to address these issues. Only three or four deals are likely to tap the market in 2012.

     While open dialogue amongst the market is generally healthy, the unsolicited comments that can be offered from a rating agency not involved in a transaction could lead to anger from several parties and delay deal pricing. Investors who committed to the deal are likely to hesitate before final orders are placed, panelists said.

      The cost of doing deals will be higher than the peak issuance years of 2005-2006 and one of the key reasons is because of the infrastructure involved in creating a proper platform. Deal papers must also address repurchase issues and new proposed regulation may make private deals subject to the same procedures as public offerings.

     Westmoreland believes that problems of future RMBS transactions will not be the loose, freewheeling underwriting of 2005-2006, but something else that is yet to be known.

charles.williams@thomsonreuters.com

Reuters IFR: Bankers decry Fed's secrecy in Maiden Lane auction

LONDON, Jan 19 (IFR) -

• Fed chooses secrecy in new Maiden Lane II bidding process
• Strictly confidential, limited auction angers those left out ; Credit Suisse wins

A new, privately arranged process used by the Federal Reserve Bank of New York this week to accept highly confidential bids from only four broker-dealers for US$7bn of its Maiden Lane II portfolio raised the ire of other market players shut out of what they call a glaringly non-transparent strategy.
    Credit Suisse ultimately won the auction today, buying US$7.014bn in face value from the approximately US$20bn remaining in the MLII portfolio of distressed RMBS assets formerly owned by AIG. The portfolio originally had a face value of more than US$30bn, but about US$9.5bn was sold in a public auction process last spring that eventually fizzled and was halted indefinitely.
    "I am pleased with the strength of the bids and the level of market interest in these assets," said William C. Dudley, President of the New York Fed, in a prepared statement on Thursday.
    The latest auction was prompted by an initial reverse inquiry from Goldman Sachs, but the Fed opted to honor an original commitment it laid out in March 2011 to adhere to a competitive process to dispose of the former AIG-owned distressed securities. It therefore opened up the bid to a limited pool of market players.
    As IFR first reported last Friday, America’s largest regional Federal Reserve Bank took bids on the MLII parcel from only four banks: Goldman Sachs, Barclays Capital, Bank of America Merrill Lynch, and Credit Suisse. The auction was tightly under wraps when it started today, as the Fed required the dealers, as well their investor accounts, to sign strict non-disclosure agreements (NDAs) regarding the specific bonds and prices on the bid list.
    "I just don't see how running a limited participation secret auction ensures that the taxpayer receives maximum proceeds for their bonds,"; said Adam Murphy, the president of Empirasign Strategies LLC, a capital markets data provider. "This auction seems inconsistent with the more open Fed that Bernanke espouses.";
    At the height of the financial crisis, the Fed bought the securities in order to rescue AIG. It was Goldman Sachs' collateral calls on CDS insured by AIG that sunk the company. Even though it didn't ultimately win the auction, Goldman is viewed as the bank driving the latest burst of interest in MLII, given its initial reverse inquiry.
    The Fed's abrupt change of course towards a non-disclosed process irked many who were left out in the cold, according to several traders and asset managers. The strategy is in stark contrast to the more public tack taken last spring.
    The Fed sold US$9.5bn, or about one-third, of the more than US$30bn portfolio via nine auctions that took place between April 6 and June 9 of last year, but interest started to wane as the increased supply drove bond prices down and global macroeconomic volatility led to a vast de-risking event as investors dumped spread product.
    The Fed has long indicated that it never committed to any timetable or schedule for winding down the portfolio of former AIG assets, and was only looking to achieve the best execution possible.
    But now, secondary non-agency RMBS paper is on average 30 cents cheaper than last spring, spurring demand for the product once again.
     "This MLII thing is a mess,"; said one securitization specialist away from the four bidding banks canvassing the market in a struggle to find the bonds on the list. "(It's) A complete insider deal orchestrated by those responsible for AIG's collapse in the first place. Hedge funds have to sign an NDA just to see the bonds on the list."
    A spokesman for the Fed declined comment. However, a press release stated that the pricing for each bond will be disclosed three months after the last ML II asset is sold, "ensuring timely accountability without jeopardizing the ability to generate maximum sale proceeds for the public."

adam.tempkin@thomsonreuters.com

Reuters IFR: Miramax revives movie-backed securitization

   by Adam Tempkin
    NEW YORK, Nov 4 (IFR) - Global capital markets may resemble
a horror movie of late, but that has not stopped film studio
Miramax from resurrecting a film-backed securitization
technique.
    The studio, founded by brothers Bob and Harvey Weinstein in
1979, is launching the first-ever US term securitization of a
standalone film library next week, for about US$550m, to
refinance its outstanding debt.
    The deal will also securitize all cashflow from existing
contracts associated with the licensing of those films. That
includes cashflows from the movies' different distribution
channels (television, digital, and DVD/BluRay), and all future
sales associated with the unsold inventory related to the
library -- in other words, all cashflows associated with their
future licensing and distribution.
    The library consists of well known existing films that were
quite popular during their run, including "Pulp Fiction", "Good
Will Hunting", "Reservoir Dogs", and "No Country for Old Men".
    Miramax was acquired by Disney <DIS.N> in 1993, but the
Weinsteins left the company in 2005. Disney eventually
considered the studio a non-core asset, and sold it to a
holding company in 2010. Therefore, while most film libraries
are embedded in major studios, this one is a standalone
entity.
    Barclays Capital, the structurer and arranger, is
roadshowing the 144A deal across the US starting on Monday,
according to market sources.
   
    A NEW SPIN
    Film-related securitization is certainly not a new concept,
but previous US deals, including more recent privately placed
conduit financings, have not looked quite like this.
    Prior uses of structured finance technology in the film
space have involved the future production of new films. In the
past, cashflows would rely on the success or failure of either
movies that were just released, or movies that were in queue to
be produced -- quite a gamble for investors if a film didn't do
well at the box office.
    The most recent film-backed securitization to be completed
was a US$975m ABS for Village Roadshow Films, which closed in
August 2010. However, that deal was more of a hybrid, as it
financed the projected cashflows from some existing films, some
that were recently out of the box office, and some that are yet
to be made.
    A seminal US$1bn deal from Dreamworks in 2002 kicked off
this film financing trend in the US.  That transaction relied
on movies that were already made, but they were brand new.
    About two months after the movie release date, the
financing would advance to investors against future film
receipts and distribution rights, which were largely based on
how much the movie made in the original box office.
    After the Dreamworks deal, the technology started to be
used to finance the production of new movies -- so-called
"slate" financings.
    Many of these used monoline wraps from Ambac <ABKFQ.PK> or
MBIA <MBI.N>, so when the Triple A ratings on those companies
disappeared in 2007 and 2008, the slate financings went south
pretty quickly.
    For example, a US$465m film-backed ABS for Marvel Studios,
launched in September 2005, titled MVL Film Finance, was
downgraded from Aaa to Baa3 by Moody's in early 2009. The
ratings were subsequently withdrawn. 
    The Aaa class of a similar deal, Relativity Media Holdings
I LLC 2007-1, was downgraded several times, and was lowered to
Ba2 by Moody's this past June; the ratings were then withdrawn
"for business reasons", the rating agency said in a press
release. The US$375m deal was originally created to acquire an
interest in future films to be produced by Sony Pictures
Entertainment.
    From a credit perspective, the Miramax transaction seems a
lot safer: all of the movies have already been made and were
quite successful. Moreover, the contracts to license the movies
via various distribution channels for specific time periods are
already in place. These time periods are known as
availabilities, or "avails", within the film finance industry.
    Moreover, monoline wraps for ABS do not exist anymore, so
like other recent so-called operating-asset securitizations,
the top grade on the Miramax deal will be in the low
investment-grade range, typically either Triple B or Single A.
    The deal uses the same construct as the famed "Bowie bonds"
from 1997, which securitized future royalties.
    While new in the US, the Miramax film-library offering may
have a predecessor in Europe: In March 1998, Italian media
group Cecchi Gori priced a ITL475bn film-library ABS for a
catalogue of 1,200 Italian films.
    However, unlike Miramax, the Cecchi Gorri transaction
wasn't a pure library deal; it was a multi-picture distribution
financing, which included some library movies but some new
films as well.
    Additionally, the Italian deal was launched into a motion
picture industry that was materially different than the one
that exists today - i.e., before the advent of digital
technology, Netflix, and Hulu.
    (Adam Tempkin is a senior IFR analyst; Editing by Ciara
Linnane)

Reuters IFR: CMBS slowdown hobbles real estate lending

By Adam Tempkin

NEW YORK, Oct 11 (IFR) - Investors' gradual retreat from the commercial mortgage-backed securities (CMBS) market since July -- and the corresponding swoon in issuance it caused -- has crippled a key financing source for commercial real estate (CRE) owners and lenders.

The move has been felt acutely in secondary and tertiary real estate markets that have relied solely on CMBS for more than 15 years.

With more than US$1trn in CRE loans maturing between 2012 and 2016, owners of office buildings, shopping malls, large grocery stores and apartment complexes in medium-sized and smaller cities across the country are increasingly finding that they are unable to refinance.

Some have had to sell the properties at a loss or take out a new loan at unattractive terms out of desperation. Others may have to pay exorbitant fees to convince lenders to extend the loans for two more years. Yet others may default.

Meanwhile, CRE projects are being put on hold. Real estate investment trusts, or REITs, which are often dependent on CMBS to fund acquisitions, have had to look for alternative financing options.

And lenders that rely on securitization to fund themselves -- so-called "CMBS lenders" -- have to charge higher interest rates to borrowers in order to account for the less-economic terms they are receiving on the more conservatively structured CMBS that started hitting the market over the past year.

As a result, these lenders are becoming less competitive compared with more conventional lenders, such as life insurance companies, which can offer lower interest rates to borrowers. Insurance companies typically keep the loans in portfolio rather than securitize them.

The only problem: life insurance companies typically only lend in primary and gateway cities, such as New York and Washington DC, and mainly concentrate on trophy assets in other cities. If you are a real estate borrower somewhere else, or own a smaller property, you are out of luck.

What's more, the wild spread widening and extreme volatility on commercial mortgage bonds over the past two months has made it nearly impossible for originators to accurately quote new loans. So as a result, they just have not.

Last week, the Barclays Capital CMBS AAA Super Duper Index widened out to 323bp, the highest level in more than 18 months, meaning that investors are extremely wary of risk in commercial mortgages.

"This is more than just a momentary pause in CMBS issuance and lending," said Jeffrey Lenobel, a partner at Schulte Roth & Zabel LLP, who represents CRE lenders across the country. "This is serious. Buyers need to refinance. They need money now.

"If you can't sell the bonds, you can't originate the loans."

SUMMER PULLBACK

The CMBS market looked comparatively rosy at the beginning of the year.

The post-crisis brand of more conservatively underwritten CMBS, dubbed CMBS 2.0, was on a very positive trajectory.

This spring, the market was claiming that "CMBS is back" as investors scooped up new issues and risk premiums began to narrow. Deal arrangers were becoming slightly more daring with collateral -- putting in more debt-laden properties compared to similar 2010 deals -- since bond investors were eager for exposure to the juicier yields the product offered.

Some optimistic observers even predicted as much as US$50bn in issuance for 2011, compared to roughly US$12bn in 2010. The market peaked at US$230bn in 2007 before the financial crisis caused CMBS to seize up.

In late July, however, a shocking ratings-criteria snag from S&P caused a deal from Goldman Sachs and Citigroup to get pulled from the market, post-pricing, shattering confidence in the sector. Perhaps more significantly, CMBS further fell out of favor in August amid an aversion to risky spread product due to the deepening European debt crisis, S&P's separate downgrade of the US's credit rating, and a sputtering US economic recovery.

Now, 2011 full-year issuance has been revised to approximately US$30bn. The expected pipeline for the remainder of the year has decreased by half.

BORROWERS ARE STUCK

Recently, CMBS issuers have had to offer a super-safe 30% Triple A credit enhancement and split their deals into public and private offerings in order to get transactions done and attract a larger pool of investors. And although the Triple A portions of recent deals have been a reasonably easy sell, the riskier, privately-rated slices have not fared so well.

"Investors are not only worried about credit risk; they're worried about funding risk," said Julia Tcherkassova, a CMBS analyst at Barclays. "The recent news from Europe means that counterparty risk is getting higher. The funding situation in cash CMBS may change; it will become more expensive. Investors want to be compensated for that risk."

Investors don't typically finance their CMBS purchases with just their own cash; they take out a so-called repurchase agreement, or "repo" loan, from the bank that sells them the security.

Based on the loan-to-value and other factors of the underlying mortgages, banks can sometimes lend as much as 80% of the value in a short-term financing, in exchange for a certain increase in interest rate. In the current volatile environment, however, when the short-term loan matures, borrowers are not sure if they can roll the loan at the same terms as before.

"The repo terms are getting worse," Tcherkassova said. "Moreover, loan originators don't know what their execution levels will be. Volatility has thrown everything under the table."

Meanwhile, CMBS lenders' rates are no longer competitive: they are quoting 6.5% to 6.75% on new 10-year loans, while life insurance companies are quoting 3.5% to 4.5%.

"Borrowers whose only option is CMBS due to either lack of interest from life companies to lend on their projects or their need for higher leverage and longer amortizations are in a bind," said James DuMars, a Phoenix-based managing director at Northmarq Capital, which helps arrange financing for CRE owners.

CMBS lenders may be able to offer higher leverage than life insurance companies - sometimes lending up to 10% more - but that comes at a steep price.

"If an insurance company is lending US$9m on a property, for example, a CMBS lender may be able to lend US$10m; but look at what you're paying for that extra US$1m. It could be another 150bp added to your rate for that extra US$1m," DuMars said. "That's 15% interest on a US$10m loan. But many of the owners have no other choice; it's painful, and expensive."

Moreover, if borrowers have loans maturing and they cannot refinance, their options are either to sell, or to work out an extension with a special servicer. However, the servicer will want a fee for that extension.

One of DuMars' clients, for instance, had to raise an additional US$1m on a US$5m loan in order to receive a maturity extension from the lender. Another client, an owner of an anchor grocery store in Phoenix, was forced to sell the property to a wealthy operator who had the ability to reposition the property.

Yet another client, an owner of a US$50m office building, is seeing the writing on the wall, and is beginning to put cash aside for an impending loan maturity.

"He is losing sleep because he realized we don't have a functioning securitization market," DuMars said. "Moreover, with CMBS loans, you now have to add in lender legal fees running at least $25,000, as all the loan documents have been modified 'to restore confidence'. Add in other legal fees, and a CMBS loan can cost a borrower an extra $50,000; maybe an extra $100,000 at the end of the day."

Still, other borrowers have increasingly taken out Libor-based loans, instead of fixed-rate loans, in order to decrease their interest rate. Then they swap out the loan in the derivatives market through interest rate swaps -- called a 'reverse swap' in the industry -- and wind up with an even lower rate, said Schultz Roth's Lenobel, the lenders' attorney.

"CMBS had created a mechanism for secondary and tertiary markets to be financed since 1996," he said. "When life insurance companies wouldn't look at a US$10m loan in Denver, or San Antonio, for example, CMBS gobbled that up. That's not happening now, and it's only going to get worse."

(Adam Tempkin is a senior IFR analyst)