TotalSecuritization_article

TOTAL Global ABS
The Capital
Requirements
Directive
Recent Changes: Common
Sense or Nonsense?
PAGE 14
Still Sidelined
A Look At The New
Investor Landscape
PAGES 12
Together Again: A
Look Back Since
The Last Global ABS
The Bumpy Road
Behind
PAGES 8-9
NEWS
Creating Transparency In
The European Markets 4
Finding Distressed
Opportunities 5
The Slow March Back
For CMBS 6
Basel II And Double
Counting Risk 16
Bye-Bye Barca; See Ya, Cannes:
Conference Takes A Sober Look
At Regulation, Restart
By Olivia Thetgyi
C
onference-goers at Global ABS 2009 are in for a serious, all-business
conference focused on regulation and restarting the market. About 2,000
market players are scheduled to converge on the Hilton Metropole in
London for this year’s annual confab.
Even more so than last year, the spotlight will be on regulation, with not just
one but five keynote speakers, all regulators: Francesco Papadia, director general
of the general market operations directorate at the European Central Bank;
Paul Sharma, director of wholesale and prudential policy at the Financial
Services Authority; Eddy Wymeersch, chairman of the Committee of
European Securities Regulators; Greg Medcraft, co-chair of the International
(continued on page 19)
Q&A With
The ESF
I
t would be hard to find an industry
that has taken a sounder beating in
the current recession than the
securitization market. In addition to
dealing with structural reform and
pending regulatory waves, the industry
has a public relations problem. TS
Senior Reporter Cristina Pittelli
quizzed Rick Watson, managing
director, and Marco Angheben,
director of the European
Securitisation Forum, on the
challenges that lay ahead.
What will the securitization market
look like in the future?
Watson: I think it will be smaller. It
will be dominated by products which I
would call real economy products,
which are residential mortgages,
commercial mortgages, leveraged
loans, [small-to-medium] enterprise
loans, auto loans, credit card loans –
those types of things. We do think
Issuance Patterns
Unclear In Era of
Repos
By Olivia Thetgyi
T
he retention of securitized
products in Europe has skewed
issuance patterns. Merrill
Lynch researchers estimated that
97.5% of the €600 billion ($835.33
billion) of European structured finance
securities issued last year was retained.
This year, the vast majority of issuance
will also be retained, market
commentators have said. With so little
new paper actually finding its way into
investors’ hands, what makes its way
into the primary market no longer
reflects true demand. “Issuance is a
reflection of both access to the
[repurchase agreement] facilities
themselves and the banks’
interpretation of how much liquidity
they need,” said Gareth Davies, head
of European ABS research at
totalsecuritizationandcredit.com
London, England
Tuesday, June 2, 2009
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Tuesday, June 2, 2009 Total Global ABS 3
www.totalsecuritizationandcredit.com
A G E N D A
7:30
Registration and Breakfast
8:00
Welcome & Opening Remarks by the European Securitisation
Forum and Information Management Network
Richard Ensor, Chief Executive Officer, EUROMONEY PLC
Rick Watson, Managing Director, EUROPEAN
SECURITISATION FORUM
Mark Hickey, Chairman, EUROPEAN SECURITISATION
FORUM, Head of Fixed Income Debt Capital Markets,
THE ROYAL BANK OF SCOTLAND
8:30 – 9:20
Global Macroeconomic Overview and Securitisation
Moderator: Christopher Walsh, Partner,
CLIFFORD CHANCE LLP
9:20 - 9:50
Keynote Address:
Francesco Papadia, Director General, Directorate General
Market Operations, EUROPEAN CENTRAL BANK (ECB)
9:50 – 10:40
Restoring Confidence and Rebuilding the Industry:
The Role of Securitisation
Moderator: Kevin Ingram, Partner, CLIFFORD CHANCE LLP
10:40- 11:10
Keynote Address:
The Reform of Financial Regulations —Implications
for Securitisation and Broader Capital Markets
Paul Sharma, Director, Wholesale and Prudential Policy,
FINANCIAL SERVICES AUTHORITY
11:10 – 11:30
Refreshment Break in Exhibit Hall
CONCURRENT STREAMS "A - D"
11:30 – 12:20
Stream A
What Does the Financial Crisis Mean for the Future
of Mortgage Funding?
Moderator: Karolina Popic, Partner, CLAYTON UTZ
11:30 – 12:20
Stream B
Navigating the Changing Environment of the European
Consumer Securitisation Market
Moderator: Phil Adams, Senior Analyst, Securitisation
Strategy, RBS GLOBAL BANKING & MARKETS
11:30 – 12:20
Stream C
Determining How New Transparency Initiatives
Impact Securitisation
Moderator: Hans Vrensen, Director, Securitisation Research,
BARCLAYS CAPITAL
11:30 – 12:20
Stream D
European ABS Regulation: Impact of CRD and Basel II
Amendments
Moderator: Kevin Hawken, Partner,
MAYER BROWN INTERNATIONAL LLP
12:20-12:25
Panel Transit Time
12:25 – 13:15
Stream A
Impact of EU and US Loan Modifications on the Market
Moderator: Tom Deutsch, Deputy Executive Director,
AMERICAN SECURITIZATION FORUM
12:25 – 13:15
Stream B
Funding Challenges Facing Automakers and
the Future of Auto ABS
Moderator: Dietmar Helms, Partner, BAKER & MCKENZIE
12:25 – 13:15
Stream C
Taking Advantage of Recent Changes to Deal
Surveillance and Investor Reporting
Moderator: Jamie Harper, Vice President, LEWTAN
TECHNOLOGIES, LTD.
12:25 – 13:15
Stream D
Distressed Debt Investment Strategies:
What Does the Future Hold?
Moderator: Conor O'Toole, European Securitisation
Research, Global Markets, DEUTSCHE BANK AG
13:15 - 14:15
Luncheon for all Delegates
14.15 – 14.45
Keynote Address:
The Future Role of Securities Regulation in Europe
Eddy Wymeersch, Chairman, COMMITTEE OF EUROPEAN
SECURITIES REGULATORS (CESR)
14:45 – 14:50
Panel Intermission
14:50 – 15:40
Stream A
Assessing the Impact of Global Bank Deleveraging
on European ABS
Moderator: James Finkel, Chief Executive Officer,
Managing Member, DYNAMIC CREDIT PARTNERS, LLC
14:50 – 15:40
Stream B
Finding Relative Value in Illiquid Markets:
Buy and Hold vs. Active Trading Strategies
Moderator: Dr. Markus Herrmann, Vice President, Risk
Management Securitizations/ Asset Backed Securities,
LANDESBANK BADEN-WUERTTEMBERG
14:50 – 15:40
Stream C
Current European CMBS and Property Market Dynamics
Moderator: Michael Cox, Real Estate Strategist,
RBS GLOBAL BANKING & MARKETS
14:50 – 15:40
Stream D
Future Prospects for Global ABCP
Moderator: Nigel Batley, Global Head of Asset Backed
CP Finance, HSBC BANK PLC
15:40 - 16:00
Refreshment Break in Exhibit Hall
16:00 - 16:50
Stream A
Restoring Securitisation and Covered Bond Markets
Moderator: Peter Voisey, Partner,
CLIFFORD CHANCE LLP
16:00 - 16:50
Stream B
Rating Agency Surveillance and Rating Actions: Investors'
and Regulators' Roundtable
Moderator: Ian Bell, Managing Director,
STANDARD & POOR'S
16:00 - 16:50
Stream C
Redefining the Role of the Trustee in Workouts
and Distressed Scenarios
Moderator: Morgan Krone, Partner, ALLEN & OVERY
16:00 - 16:50
Stream D
Unlocking Liquidity in Secondary ABS Markets:
Traders’ and Investors’ Roundtable
Moderator: Alexander Lazanas, Co-Head of ABS Sales &
Trading, EVOLUTION SECURITIES LIMITED
16:50 - 16:55
Panel Intermission
16:55 - 17:45
Stream A
Supporting the SME and Corporate Securitisation Market:
Managers and Arrangers Speak Out
Moderator: Alessandro Tappi, Head of Guarantees &
Securitisation, EUROPEAN INVESTMENT FUND
16:55 - 17:45
Stream B
Rating Agency Response: Outlining the Implications
of Recent Changes to ABS Rating Methodologies
Moderator: Zeshan Ashiq, Founding Partner,
SHOOTERS HILL CAPITAL LTD
16:55 - 17:45
Stream C
Optimising Portfolio Management And Risk Assessment
Strategies In a Difficult Trading Environment
Moderator: Douglas Long, Executive Vice President -
Business Strategy, PRINCIPIA PARTNERS LLC
16:55 - 17:45
Stream D
Structuring Transactions Under the ECB Repo Programme
Moderator: Stephen Moller, Partner,
SIMMONS & SIMMONS
17:45 - 18:45
Networking Cocktail Hour for All Attendees
Commences in Exhibit Hall

Total Global ABS | Tuesday, June 2, 2009
4 www.totalsecuritizationandcredit.com
REGULATION
E
uropean regulators and industry
groups are ramping up efforts to
reduce the opacity that shrouds
the region’s securitization market. For
the most part, the initiatives are being
welcomed by dealers, investors and
other market participants, who cite
the need to navigate the current
financial crisis and gird for a time
when credit markets thaw in earnest.
“Improvements in collateral and deal
structure transparency are important,”
said Hans Vrensen, co-head of
securitization research at Barclays
Capital in London. Without it,
European markets will remain at a
“competitive disadvantage” to their
U.S. and global counterparts.
Vrensen is scheduled to moderate
a panel today discussing the impact of
several transparency initiatives aimed
at the European securitization market,
including some already in place and
others in the works. One topic likely
to be discussed is the European
Securitisation Forum’s guidelines or
RMBS Issuer Principles for
Transparency and Disclosure released
in December. Among other things,
those guidelines aim to standardize
and digitize both pre-issuance and
post-issuance information
disseminated to investors, as well as
make it more accessible.
Elana Hahn, a partner at Mayer
Brown International in London, who
is scheduled to sit on the panel, led a
Mayer Brown team that advised the
ESF in developing the guidelines.
Hahn wrote in a recent e-mail that
changes to the securitization process
are necessary to address “current
market conditions.”
The widespread credit freeze and
unprecedented government
interventions “underline the need for
changes to the securitisation process
and the need for enhancing the
securitisation process to be used as a
tool in addressing the financial crisis,”
she wrote.
Hahn wrote that the ESF’s
initiatives are aimed at improving
transparency to investors and credit
agencies and the due diligence
performed on assets. And ultimately,
they’re aimed at “improving the
structures and processes for
identifying and removing poor assets
from securitisations,” she added.
Hahn noted that Mayer Brown is
currently working on “version 2” of
the ESF principles. ESF has described
the principles as “living documents”
that will continue to evolve with
changing markets. The latest version is
due out later this year.
Vrensen said some of the
transparency initiatives go too far and
others need to be stronger. In the
latter group is one of ESF’s pre-
issuance guidelines, which
recommends that issuers “consider”
providing loan-by-loan information.
The wording, according to Mr.
Vrensen, is typical of the European
quest for compromise and does not
reach “far enough.”
Vrensen described the EU’s
initiative on credit ratings as “quite
positive,” but said the fact it would
require structured finance ratings to
be differentiated from other kinds of
ratings casts them in a “negative” light.
Putting structured finance in a
“separate corner” is very likely to
discourage new investors, he said.
Meanwhile, the CRD directive that
would require issuers to retain 5% of
the bonds they issue has an ongoing
stress testing requirement for credit
institutions that Vrensen said could
force smaller players to drop out of the
market. “In general these are sensible
rules, but smaller investors will
probably find it’s not worth their time
to invest further money into the
extensive due diligence infrastructure,
and they may consider either
outsourcing or selling their ABS
portfolios.”
Will Howard Davies, a portfolio
manager at Axial Investment
Management, a division of the Pearl
Group in London, and another
scheduled panelist, said he will be
watching the various transparency
initiatives closely to see how they
impact trading. “We don’t want
information for information’s sake.
We’re looking at ways to improve the
market,” Howard Davies said. “This is
about providing liquidity and better
information and the two should go
hand in hand, and if they don’t maybe
it’s not in the market’s interest to have
that information out there.”
Creating Transparency In The
European Markets
By Niamh Ring
Hans Vrensen

www.totalsecuritizationandcredit.com 5
I
nvestors eyeing the distressed debt
sector have a myriad of issues to
sift through to mine the gems they
are hoping to find. Finding the value
in underlying assets, getting a price
where sellers are willing to move and
targeting various tranches in the deal
structure are some of the issues
expected to be discussed at today’s
“Distressed Debt Investment
Strategies: What Does the Future
Hold?” panel.
Arne Kluewer, Frankfurt,
Germany-based partner at law firm
Clifford Chance, noted that billions of
dollars will need to be refinanced over
the next few years and lenders must
decide if they want to extend loans,
allow borrowers time to refinance or
enforce the terms and security of the
loans. “This creates the potential for
arbitrage scenarios in which
borrowers will start buying back debt
at a discount—to the extent that that
debt is trading at a discount and is
available,” he said.
Some investors, holding debt in the
form of loans or a securitized product,
are assuming that borrowers will
eventually pay up, especially if the
underlying assets come back. “From
the borrowers’ side, the opportunity is
to buy back their debt, but from the
lenders side…the strategy is risk
mitigation,” Kluewer noted. Lenders
may also choose to invest in the asset
itself by entering into debt-to-equity
swaps. Additionally, third-party
investors may look to buy the debt at a
discount or buy the underlying asset at
the current market price. “There are
legal challenges and market challenges
to that, but those two approaches will
surely be discussed,” Kluewer said.
In the European commercial
mortgage backed securities market,
there is about €130 billion of CMBS
outstanding and in the next 15 to 18
months there will be about €10 billion
of underlying loans that will reach
maturity, said Paul Severs, partner, at
London-based law firm Berwin
Leighton Paisner. Between now and
2013, another €90 billion will reach
maturity, so either the vehicles are
going to need to be restructured or
there will be sales of collateral.
“Because of the way the capital
structure works on a lot of these deals,
there will be pressure to sell the
underlying asset, be it an office
building, retail park or shopping
malls,” he said. Sellers will then be
faced with the question of whether to
sell at the bottom of the market
or hold onto the asset with the
hope that the asset value comes
back in the next two to three
years. “That is a problem for
everyone: Will credit spreads
tighten and yields on properties
tighten, creating some value
again?” said Severs.
Kluewer said one issue in the
market is that some investors
are not willing to sell their
Making Lemons From Lemonade In the
Distressed Market
By Leslie Kramer
bonds at market price, preferring to
hold them until the underlying assets
increase in price and increase the value
of their investment. Speaking generally
about finding a price in the market,
Severs said: “My experience is that the
sellers are not selling at the prices the
buyers are willing to buy; there has
been some trading, but asset values
have not stabilized.”
Carolyn Aitchison, managing
director at GSO Capital Partners, said
that a topic she will be focusing on
during the panel is investing in AAA-
rated CLO securities in light of the
rating agencies’ methodology changes
and underlying loan portfolio
performance. Defaults and the amount
of CCC-rated securities are increasing
in the underlying leveraged loan
portfolios in CLOs, and that is causing
cash flows to be diverted from the
lower tranches of CLOs to more senior
tranches, including the AAA
securities, as some transactions are
seeing prepayments, she said. “We
think as a result, AAA CLO securities
are actually an interesting potential
hedge from a credit perspective in a
portfolio, because as defaults increase
in the underlying loan portfolios, the
returns on the AAA CLO securities
potentially improve as the duration
shortens,” she added.
Carolyn Aitchison
Paul Severs
DISTRESSED

CMBS
T
he slow revival of the
commercial mortgage-backed
securities market in the U.K.,
the importance of rating agency
downgrades and which sectors will
emerge the strongest are the topics up
for discussion at today’s “Current
European CMBS and Property Market
Dynamics” panel. Michael Cox, panel
moderator and real estate strategist
with RBS Global Banking & Markets,
said the panel will focus on the general
state of the CMBS market in Europe,
where it is headed and whether it has
reached the bottom, as well as credit
issues and refinancing risk.
While there hasn’t been a huge rally
in pricing and the market remains
relatively illiquid, Cox said buyers and
sellers in the U.K. have been moving
closer in terms of pricing
expectations—which has led to greater
confidence in the market. Well-
located, prime properties with long
leases, particularly in the office sector,
will lead the pack in terms of trading,
said panelist Caroline Philips, head of
securitisation at Eurohypo AG, Debt
Capital Markets.
Indeed, this is already happening,
with multiple bidders emerging for
high-quality, well-leased offices, said
Mat Oakley, director of research at
Savills in London. There is a
significant difference in yields on
prime properties and similar
properties that are located just a block
or two away that may have a slightly
less desirable tenant roster. “That’s the
dream scenario: A good quality tenant
with a long lease which would offer
the greatest security,” Cox added.
The overall sentiment is that prime
office properties in the U.K. have
reached the bottom and come off the
quickest in terms of pricing, while
retail still has a way to go, Philips said.
“Retail has its own particular
challenges at the moment,” she added.
Tenant defaults remains the top
concern in the retail and industrial
sectors, particularly for secondary
properties which are the most difficult
to re-let, Cox said.
The London office market is
expected to lead the way in terms of
asset sales,
although Cox
noted that activity
has been slow
since the sale of 1
Fleet Place in
London earlier
this year. Other
top-notch
properties are
rumored to be on
the market but
haven’t sold, such as London’s Bishop
Square, but Cox said activity will likely
pick up as pricing continues to
tighten. Oakley noted that the most
activity is being seen for properties of
£50 million or less because it is easier
for borrowers to obtain financing on
these lot sizes. There are also a few
well-capitalized institutional buyers
such as Henderson Global Investors,
which is raising a London-dedicated
office fund, and AEW Europe, which
The Slow March Back For CMBS
By Marianne Nardone
plans to buy London offices via an
existing investment fund.
The panel will also discuss multi-
loan conduits — which have lost favor
over single-loan properties that are
easier to analyze but are still
presenting attractive opportunities —
as well as the positive effects of recent
rating agency downgrades on the
market. Malcolm Frodsham, director
of research at IPD, will discuss how
the rating agencies have been more
thorough and realistic in analyzing the
credit problems of CMBS deals in the
last few months. This improved
transparency from the rating agencies
has resulted in tighter pricing between
buyers and sellers, which should lead
to more trading, Cox noted.
In terms of sectors, retail and
industrial properties will continue to
lag compared to the office and multi-
family sectors, panelists said. Panelists
will discuss growth in the German
CMBS market, as well as strong
concerns about Ireland and Spain,
particularly in the office and industrial
sectors, as these countries are still
suffering from property overvaluation.
“There are very few deals with Irish
exposure. I think they’ll continue to
see significant price corrections and
tenant defaults as well,” Cox said.
Michael Cox
“That’s the dream scenario: A
good quality tenant with a long
lease which would offer the
greatest security.”
—Michael Cox,
RBS Global Banking & Markets

eventually there will be a return to
secondary trading activity because the
structures will be simpler and
probably larger, but it is going to take
some time for the legacy positions to
wind their way down.
Angheben: We are probably not going
to see structures as we have seen
developing in the beginning of 2007,
which might be a bit cumbersome and
not straightforward to understand. We
are going towards a simpler world
where everything is streamlined and
there is improved disclosure in terms
of the amount of information that is
provided into the market.
When do you think the market will
come back?
Angheben: Probably towards the end
of 2009, maybe 2010. It also very
much depends if we see some
guarantee schemes being put forward
from various jurisdictions. There are a
lot of expectations from the industry
regarding what can be done from an
institutional perspective.
What are the regulatory issues most
affecting the securitization
community?
Angheben: The key one is the [Capital
Requirements Directive], the other
one is the
accounting
changes of how
the securities
are marked
from an
accounting
perspective
(that is
undergoing
consultation
right now).
There is the
new potential post-trade transparency
regime which is being considered with
[the Committee of European
Securities Regulators] together with
[the International Organization of
Securities Commissions]. There are
also the regulations that will affect the
rating agencies.
How has the way the ESF carries out
its mission changed since the credit
crisis started?
Watson: I think if anything, our
relationship with the regulators has
been strengthened because we are
talking to
them more
often on a
variety of
issues, and
certainly the
industry
recognises that
regulation of
securitization
must change
in a number of
different ways.
I’m actually pretty pleased to see that
the policy community is aware of how
important it is to restart at least some
part of the securitization market.
We’re in active conversations with a
growing number of ABS investors and
they are looking at a variety of issues.
For example, the new RMBS
transparency initiatives are the kinds
of things investors like to see because
there is more consistency on what
they are getting from a variety of
different participants. So we are
encouraging European originators to
use those initiatives and to endorse
them.
Angheben: We’ve been trying to be
proactive in reaching out to
regulators. We have also been very
engaged in all of the discussions and
in all of the consultations that have
been going on from the regulators
themselves. I think it made it also
relatively easier for the regulators to
interact with us because they know
that we were not only representing
one side.
The regulators have been much
more open and I think that there has
clearly been an increase in the number
of meetings between the regulators
and the industry. One issue that we
are trying to always be mindful of is
there should be no rush in
implementing the regulation. There
should be also some time for the
implementation [and] some very
thorough cost and benefit analysis of
all the measures that are to be
introduced.
One of the challenges in Europe is
that there is not a unique regulator to
deal with. So not only are we dealing
with the European Commission, we
are also talking to a number of pan-
European bodies, bodies at the
national level for the 27 member states
plus the U.K., as well as their own
central banks and securities
regulators.
How has the investor community
changed as a result of the credit
crisis?
Angheben: The investor base has
become much more vocal and unified
in terms of views and what needs to
be done to restore confidence. Lately
we have seen much more cohesion
between the different types of
participants.
One of the interesting things we
have seen is a lot of the investors who
believe in the product have actually
had huge opportunities to ramp up
their operations. You have seen a lot of
people move from the structuring side
to the buyside, and from the research
side to the buyside. I think that is a
very positive sign because it means
that investors are investing.
Q&A
(continued from page 1)
Rick Watson
Marco
Angheben

Together Again
Much has happened since the industry gathered in Cannes last year. The banking system was remade as some of the
largest and most well-known institutions went bankrupt or became acquired. The past six months have also seen the
launch of the most ambitious programs to date by national governments to restart the securitization market. We note here
some of the more memorable events that occurred since the last Global ABS.
TIMELINE
2 0 0 8
July 7
The Securities Industry and Financial
Markets Association, the European
Securitisation Forum and the American
Securitization Forum launch the Joint
Securitization Markets Working Group to
create and publish industry-developed
recommendations designed to help revitalize
the securitization and structured credit
markets, as well as bolster investor and
broader public confidence in those markets.
August 29
German banking giant WestLB says it will
resecuritize about €18 billion ($24 billion)
worth of assets from a giant fund composed
of two structured investment vehicles, one
asset-backed commercial paper conduit and
other structured securities. The move is
expected to be followed by other market
players as a way to protect banks from
assets tainted by the credit crisis.
September 15
Lehman Brothers files for Chapter 11
bankruptcy protection.
September 15
Bank of America says it will buy Merrill
Lynch in a deal worth $50 billion.
September 19
U.S. Treasury Secretary Henry Paulson
proposes the $700 billion Troubled Asset
Relief Program, or TARP, to allow the
federal government to buy mortgages and
other troubled assets owned by financial
institutions.
October 7
The Icelandic Financial Supervisory
Authority takes control of Iceland’s two
largest banks, Glitnir Bank and
Landsbanki. Kaupthing Bank, the third
largest bank, is taken over on Oct. 9.
September 21
Investment banks Goldman Sachs and
Morgan Stanley convert to traditional
bank holding companies.
November 25
The Securities Industry and Financial
Markets Association launches the
European Covered Bond Dealers
Association to represent European dealers
and tackle issues affecting the covered
bond sector. The group aims to address
how to restart the market and what shape
it should take when conditions improve.
November 3
The Spanish government announces a
partial mortgage payment moratorium for
unemployed, self-employed and pensioner
borrowers. The aid is expected to eventually
affect residential mortgage-backed securities
transactions in the country.

TIMELINE
2 0 0 9
April 22
The U.K. government’s £50 billion ($78
billion) residential mortgage-backed
securities guarantee goes into effect. The
state will offer either a credit guarantee or
a liquidity guarantee to RMBS investors to
stimulate mortgage lending in the country.
April 2
Fitch Ratings notes that several large
Spanish residential mortgage securitizations
are likely to deplete their reserve funds by
the end of the year as defaults in the
underlying loans continue to rise. The
securitizations have reserve funds they can
tap in order to cover missing payments
stemming from defaults. RMBS deals with
riskier portfolios, including higher
percentages of loans on second homes and
loans to foreigners, will be more susceptible
to downgrades and reserve fund draws,
analysts with the agency say.
February 19
The European Securitisation Forum
unveils residential mortgage-backed
securities principles, including new
documentation criteria for rating agency
submissions. The aim is to restore
confidence in the sector through an
improvement in disclosure standards.
March 23
The Federal Reserve and the Federal
Deposit Insurance Corporation announce
the Public-Private Investment Program,
or PPIP, to tackle the issue of troubled real-
estate related assets in the U.S. The
program, which aims to restore the
balance sheets of financial institutions
stuck with the assets on their books, is to
provide as much as $700 billion for legacy
loan assets and about $400 billion for
legacy securities.
March 4
Moody’s Investors Service announces it
will downgrade nearly all of the
collateralized debt obligations it rates
globally, amounting to about $100 billion
worth of notes. The cuts, which were to
take place in two stages, were due to rising
corporate defaults that were expected to
far surpass historical levels.
May 5
The International Organisation of
Securities Commissions’ releases its
recommendations on regulating the
securitization market. The
recommendations include risk retention
and greater transparency.
May 6
The European Parliament approves
changes to the Capital Requirements
Directive requiring originators to retain a
5% exposure to the securitizations they
originate or sponsor.
May 7
The European Central Bank announces it
will buy up to €60 billion ($81.6 billion) in
covered bonds to ease liquidity conditions
for the sector. The market responds
positively, prepping a flurry of deals off the
back of the news.
May 13
The German cabinet agrees to a “bad
bank” scheme allowing financial
institutions to shed troubled assets from
their balance sheets. The scheme would let
the firms swap the assets for government-
backed bonds in order to free up lending
to customers and each other.

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MARKET VIEW
T
rading patterns in the
securitization markets have
changed dramatically during
the current economic crisis. Volumes
are markedly down, uncertainty in
collateral performance is up, and
observable market prices are largely
absent. Investors in this market rely
heavily on quantitative models that
assume dramatic losses and continued
deterioration as a “base case”. Still,
actual trade execution levels tend to
be even lower than modeled
valuations for a variety of reasons:
• Buyer-base erosion, driven in large
part by the exit of certain “natural”
structured products buyers
• Asset foreclosures and related forced
sales encourage weak bidding
• Liquidation auctions often occur
under unreasonably tight time-
frames
• Risk aversion to current credit
environment, especially with regards
to thin tranches of securitizations,
which could result in zero recoveries
upon default
• Continued uncertainty surrounding
governmental intervention
Buyer-Base Erosion;
Impact Of Forced Sales
The path taken by the financial
markets in recent times has
significantly altered the investor
landscape, rendering it practically
unrecognizable from a few years ago.
Many of the original investors in
securitized products no longer
participate in the space. While some
have changed their investing strategy
or gone out of business, many of these
investors were tied to the continued
success of the structured products
market. Consider a High Grade ABS
CDO: the super-senior bonds were
typically sold to investors seeking
AAA-rated securities while the issuer
or underwriter might retain the equity
piece. Natural demand for the
mezzanine tranches, which carried an
investment grade rating but only
benefited from a tiny slice of
subordination, was quite limited.
Underwriters would sell these
products into the warehouses of other
ABS CDOs and CDO2s that they were
planning to bring to market. Today,
this contrived demand has ceased to
exist, and few other buyers have filled
the void. This lack of natural buyers
for the mezzanine tranches results in
extremely low execution prices.
The securitization market, more
than any other product area within
fixed income and equities, first
benefited and now suffers from having
catered to buyers whose investment
decisions were often based on specific
criteria such as rating, maturity date
and yield, and not on qualitative credit
views (e.g., CDO2s, SIVs). This had
the effect of driving in spreads during
the boom in previous years; now that
these vehicles are themselves
experiencing defaults and liquidations,
and can no longer support the market
they essentially created, it has the
effect of grinding prices down below
the natural floor.
CDO liquidations also suffer from
an ailment common to distressed
markets in foreclosure: market
participants are aware that assets must
be sold. Not unlike when a residential
property is foreclosed upon, auction
participants bid lower to take
advantage of the distressed sale. If bids
are requested on a portfolio level, this
could result in some very low prices
for undesired assets that the winning
bidder is forced to buy as part of the
take-it or leave-it trade. The
controlling party’s appetite to buy
back these assets also impacts the
auction prices at which they might
trade (evidenced in the Whistlejacket
liquidation discussed below, where
nearly half the portfolio was retained).
Time Between Bid
Solicitation And Trade
Execution
The time available to market securities
is critical in determining ultimate
execution levels. First, a lack of time
to reach out to prospective buyers
reduces the list of potential accounts
looking at these securities. Second,
those that submit bids with little time
to analyse the security typically do so
without appropriate due diligence and
analysis, resulting in lower bid levels.
Evidence from recent trades
supports this viewpoint and helps to
quantify the impact this might have.
In early March, a money manager
liquidated what was believed to be the
portfolio of a large Asian client.
Around 5pm in New York, a
$1.3 billion BWIC (bid wanted in
competition) was released to dealers
that listed 64 non-agency RMBS
securities, primarily comprised of
Alt-A, Option ARMs and sub-prime
bonds from the 2006-07 vintages. Bids
were due back at 7:30pm, a deadline
that was eventually extended to 11pm.
Clearly this was insufficient time to
reach a wide buyer base, or to allow
prospective buyers time to do a
rigorous analysis. As a result, although
(or maybe because) the entire
portfolio traded, it did so at price
levels reflecting a 25-30% discount to
A Buyer’s Market, But Many Still On The Sidelines
By Zach Buchwald & Kunal Mahajan, BlackRock Solutions

MARKET VIEW
analytical prices.
Contrast this with the Whistlejacket
liquidation in late April. Although the
$5 billion portfolio comprised a varied
range of asset types (including aircraft
leases, CDOs of ABS and bank trust
preferreds, corporate bonds, student
loans, U.S. and non-U.S. RMBS) and
only $2.7 billion traded, the levels
were in line with analytical levels. The
auction was marketed for three weeks,
processes were well-defined and
described to the potential bidders. The
transparency of the process increased
the participation of end-buyers and
also gave them time to run in-depth
analyses, resulting in overall higher
bid values. The controlling class was
also willing to take down securities,
which helped to bolster trading levels.
Risk Aversion Given
Challenging Economic
Environment
We believe the bottom of the market
has been called often enough in the
past year to justify the current risk
aversion. In 2008, several distressed
real estate funds started to purchase
mortgages at deep discounts. While
they bought portfolios at what seemed
like great levels at the time, most of
these funds have only seen prices fall
below their purchase levels. Having
been burnt before, these investors as
well as others learning from the
experiences of these early entrants, are
wary of catching a falling knife.
As such, when most distressed
trades occur, the only bidders that
participate tend to be those pricing in
cash flows based on a much more
severe credit scenario. These bidders
seek high unlevered yields and give no
credit to the upside-optionality of
realising a base-case (or more
optimistic) credit scenario.
Furthermore, investors now realise
that structured credit products behave
very differently from vanilla bonds in
an adverse credit environment such as
exists today. While one would
typically expect a variety of possible
recoveries on a corporate bond or
residential loan that defaults, this is
not true for structured products built
on top of these same assets. Given the
thinness of tranches, a mezzanine
RMBS structure or a CDO tranche in
a defaulting structure is much more
likely to have a binary outcome – i.e.
either worthless or money-good. This
effect is evident with CDO pricing,
where mezzanine tranches of High
Grade ABS CDOs that are likely to
experience significant interest and
principal payments throughout their
lives, are currently being priced in the
20s with nearly no liquidity to account
for the risk of a complete loss if
collateral performance is worse than
expected.
Government Regulation
This brings us to another big driver of
both prices and the willingness of
investors to participate in these
markets: the uncertainty of
government legislation and regulatory
actions. While we believe that
government intervention is necessary
in the current environment, the form
that it takes can unnerve investors.
Bankruptcy cram-down, although it
did not come to fruition, was
considered by investors to be a “game-
changer” – i.e. that it could radically
alter the assumptions that investors
used to price the securities at the time
of investment. The “X” factor of future
actions being detrimental to investors
continues to result in lower bids.
Although the recently introduced
Term Asset-Backed Securities Loan
Facility (TALF) and Public-Private
Investment Partnership (PPIP)
programs bode well for the markets,
investor participation might be lower
than expected because they are wary
of restrictions being introduced later
(similar to the compensation
restrictions for Troubled Asset Relief
Program (TARP) recipients imposed
after distributing the funds). Recent
congressional hearings that have
scrutinized compensation and profits
in the securities industry have been no
comfort in this regard. Above all,
investors receiving bailout funds are
wary of buying assets at highly
distressed prices, because it may result
in a popular outcry if the investors
profit too handsomely.
Additionally, investors do not want
to be perceived as defying government
proposals that they see as unfair to
their senior position in the capital
structure, as exemplified by
bondholders in the Chrysler situation.
The Home Affordable Modification
Program (HAMP) had its own share of
controversy too as several investors
believed that it benefited second liens
more than first liens, reversing the
seniority of claims. Furthermore,
investors are also realising that their
access to recourse (such as recoveries
through bankruptcy proceedings) is
limited or non-existent. For example,
regulations such as the Servicer Safe
Harbor Act, provisionally approved by
both the U.S. House and Senate,
diminish the rights of investors with
respect to litigation actions against the
servicers of mortgage trusts.
In many of the above examples,
governmental interventions may have
a long-lasting, negative impact if they
are perceived as interfering with a
well-established and accepted capital
structure. Uncertainty of how this
might play out has dramatically
reduced the investor base for these
products.
Conclusions; Looking
Ahead
All of the idiosyncrasies of the
securitization market discussed
herein have helped create an
environment of extreme risk
aversion. Investors almost universally

MARKET VIEW
“On the now famous ‘5% retention’ for
securitization, I’m pleased to see that
the Parliament has resisted the call
from industry to do away with what
they had only last year characterized as
complete nonsense. I am delighted to
say that the retention rule has emerged
as something that is not nonsense but
plain ‘common sense’. It is now
recognised by the G20 as a key measure
to strengthen the financial system.”
—excerpt from an EP plenary session
speech on May 6 by Charlie
McCreevy, European Commissioner
for Internal Market and Services.
On May 6, 2009, the European
Parliament approved significant
amendments to the Capital
Requirements Directive (comprised of
Directives 2006/48/EC and
2006/49/EC). While the relevant
changes touch on a number of
different aspects of the existing
regime, some of the most hotly
debated items relate to securitization.
In particular, new requirements will
effectively require originators to retain
a 5% exposure with respect to
securitizations originated or
sponsored by them (the so-called
“skin in the game requirement”) and
to provide enhanced loan-level
disclosure on an ongoing basis if they
wish European Union credit
institutions to invest in those
securitizations. The requirements
clearly reflect the current political and
regulatory desire to deal with factors
perceived to have contributed to the
credit crunch – in this instance,
perceptions of misaligned interests
between originators and investors, and
a lack of product transparency.
Unfortunately, it is not clear that the
new requirements will meet their lofty
objectives and/or assist in finding a
way out of the currently constrained
market conditions.
Why The Fuss?
Following is a short summary of the
new requirements related to retention
and due diligence:
Retention: The requirements will
effectively restrict the ability of certain
EU third-party credit institutional
investors to hold securitization
positions unless the originator,
sponsor or original lender has
explicitly disclosed that it will retain a
net economic interest of (currently)
not less than 5% in related exposures.
While initial drafts referred to the
retained interest being held via a
vertical slice of the deal only, the
approved text indicates that the
interest may be held via various
different means – including through
retained amounts in each of the
tranches sold to investors, or through
holding certain exposures (including
certain randomly selected exposures
or, in the case of securitizations of
revolving exposures, the securitized
exposures) or the first loss tranche
(and, if necessary to reach the
required level, other tranches having
the same or more severe risk profile).
It should be noted that the
requirements apply in respect of
securitization positions under the
CRD only and so positions to which
the securitization framework does not
apply (e.g. those relating to certain
untranched structured products) are
not within its scope. In addition,
limited carve-outs apply to exempt
certain securitization positions. Such
carve-outs refer to, amongst other
things, positions backed by certain
relatively low-risk (generally sovereign
or sovereign-like) exposures and
nonsecuritization-related syndicated
loans, purchased receivables and
credit default swaps. Provision is
included to guard against double-
counting in respect of different
securitization positions. Helpfully, it
appears that the amendments will not
apply in the case of retained deals –
although this will not be the case if
the purchaser of the notes is not the
same entity as the originator, sponsor
or originator lender. While the CRD
amendments are strictly relevant with
respect to certain credit institution
investors only, it is intended that
similar retention-focused restrictions
will, via amendment to the relevant
directives, be applied to other
investors including EU insurers and
alternative investment fund managers.
Due diligence: Seemingly added in
response to industry comments that a
retention requirement could result in
reduced incentives for the
performance of thorough due
diligence by investors, the
amendments also include
requirements related to investor due
diligence. In short, EU credit
institution investors are required to
meet certain initial and ongoing due
diligence requirements in respect of
Recent Changes To The Capital Requirements
Directive: Common Sense Or Nonsense?
By David Shearer, partner, and Nicole Rhodes, consultant,
both of Allen & Overy’s securitization practice

MARKET VIEW
any securitization positions held by
them. In particular, investors will be
required to demonstrate to their
regulator that for each of their
securitization positions they have a
comprehensive understanding of, and
formal policies and procedures for
analyzing certain information in
respect of, the relevant positions,
including the risk characteristics, the
loss experience on earlier
securitizations by the same originator,
the due diligence performed on the
underlying assets and the valuation
methodology used. In addition,
investors will be required to perform
their own stress tests, which may be
based on rating agency models,
provided the investor understands
such models. It is worth noting that
the new requirements will arguably
determine the type and level of
information, including asset-level
information, required to be disclosed
by originators and/or servicers to
investors going forward in prospectuses
and ongoing asset performance reports.
It should be noted that if investors do
not demonstrate compliance with the
requirements, an additional risk weight
will be applied to the relevant
positions. The additional risk weight is
set as not less than 250% of the risk
weight (capped at 1,250%) which
would otherwise apply. Helpfully, an
earlier version of the relevant penalty
provision that referred to an additional
risk weight of 1,250% (the so-called
“death penalty”) is not included in the
approved text.
It should be noted that a number of
other approved changes to the CRD
are potentially significant from a
securitization perspective.
Open Questions
Leaving aside the fundamental
question of whether the requirements
described above will thwart the
chance of a market revival, we note
that the requirements raise interesting
considerations and beg a number of
key questions:
Does retention align originator and
investor incentives? The new retention
requirement assumes this but no
research seems to have been carried
out to try to establish the answer to this
question. This is unfortunate, given
that “common sense” has a long history
of turning out to be wrong. It is
certainly notable that the U.S. Savings
& Loan crisis of the 1980s and the
banking crises in Japan and Sweden in
the 1990s took place when almost all of
the exposures of those institutions were
self-originated and retained rather than
acquired through securitization. In
adopting a retention requirement, the
EU authorities appear to be focusing
on the mechanical aspects of the
much-debated originate-to-distribute
model, rather than the mispricing and
over-availability of credit, which were
arguably more fundamental concerns
in the recent credit boom. Certain
other authorities have called for
“consideration” of retention
requirements (namely the G20 and, in
response, the International
Organization of Securities
Commissions) but have acknowledged
the need for consultation and careful
consideration. Related requirements
are under consideration in the U.S. in
the context of recent proposals for
mortgage finance reforms, although
there are significant differences in the
way the relevant draft provisions are
framed (e.g. as a direct originator
requirement rather than an investor
restriction and as a requirement to
retain a certain level of credit risk in
respect of certain originated mortgage
loans) and full details in respect of the
proposed requirements have not been
fleshed out. Significantly, the Basel
Committee has not yet signed up to
retention—notwithstanding increasing
pressure from the European
Commission.
What will the due diligence
requirements mean in practice? How
the due diligence and capital penalty
provisions are implemented (including
the level of diligence required in
practice) will be of significant concern
to EU credit institution investors. If
there is uncertainty as to how to
comply with the due diligence
requirements, then such investors may
think it easier not to invest in ABS at
all, rather than face the possibility of
an unanticipated increase in the
capital cost of investing in ABS due to
regulatory action. This, in turn, seems
unlikely to encourage a speedy return
of a robust securitization market.
What are the competing considerations
with respect to disclosure of more loan-
level information? While enhanced due
diligence requirements make for a
good sound bite, corresponding
disclosure of the loan level information
necessary to meet such requirements
raises complicated legal considerations
as such disclosures may conflict with
data protection and bank secrecy laws.
Moreover, market abuse considerations
may also arise in circumstances where
non-public material information is
selectively disclosed (i.e. is not made
publicly available to all). These
considerations are not new to the
securitization market but the nature of
the new requirements is likely to
require fresh thinking about how to
balance the competing requirements.
What Lies Ahead?
Member States have until the end of
October 2009 to implement the
changes. The retention and due
diligence requirements will apply to
new securitizations from the start of
2011 and to existing deals involving a

MARKET VIEW
R
ecent Basel II proposals in
response to the financial crisis
provide enhancements that will
further strengthen the effectiveness
and rigor of the Basel II capital
framework. However, specific aspects
could have unintended effects on the
risk-sensitivity of capital requirements
for structured finance exposures. In
particular, there is potential overlap
between Fitch’s tightened SF CDO
rating criteria and proposed increases
in Basel II risk-weights on ‘re-
securitization’ exposures held by
banks, which could result in the
‘double-counting’ of risks within SF
CDO capital charges.
The Basel Committee, in seeking to
address weaknesses revealed by the
financial market crisis, has proposed
several enhancements to the Basel II
capital framework, including targeted
changes to the calculation of Pillar 1
minimum capital ratios that primarily
address various aspects of structured
finance.
The primary objective of these
Pillar 1 proposals is to tighten the
regulatory capital treatment of those
exposures and activities which
performed adversely or posed
heightened risks during the financial
market stress. The proposals focus in
particular on “re-securitizations,”
which notably encompass SF CDOs.
The regulatory rationale for
imposing higher capital charges on SF
CDOs is that potential risk
concentrations, thin tranches of the
underlying structured finance
securities, and the contingent nature
of SF CDO performance make SF
CDOs inherently more volatile and
complicated than stand-alone asset-
backed securities, particularly under
adverse market conditions.
A prudent, enterprise-wide capital
framework addresses concentration
risk within and across credit
portfolios and is able to withstand
potential losses on concentrated
exposures in a stressed environment.
Along similar conceptual lines, Fitch’s
efforts in developing its new SF CDO
ratings criteria focused on: identifying
and capturing the portfolio impact of
risk concentrations; implementing
conservative recovery assumptions to
reflect the elevated risks associated
with thinly-tranched collateral assets;
and ensuring that enhancement
levels, particularly at the higher
investment grade rating levels, are
calibrated to withstand collateral
default rates well in excess of
observed historical experience for
poorly performing sectors of
structured finance.
Fitch’s SF CDO criteria
redevelopment can be viewed as a
microcosm of the broader and more
complicated challenge for financial
institutions to capture enterprise-wide
risk concentrations and to establish an
appropriate capital buffer for these
risks at a portfolio level, which banks
are expected to address under Pillar 2
of Basel II. For Basel II to provide a
robust regulatory capital framework,
banks will need to identify, manage,
and hold capital against risk
concentrations that potentially overlap
securitization; consumer, commercial,
and mortgage lending; and
counterparty and credit exposure to
other financial institutions.
“Re-securitization”: The
Basel II Perspective
The fundamental rationale behind the
Basel II proposal to assign higher
Pillar 1 charges on re-securitizations is
to better capture unexpected loss
(UL), which regulators treat as being
intrinsically higher for SF CDOs
relative to stand-alone SF assets. More
specifically, the financial performance
of SF CDOs is viewed as inherently
more volatile or non-linear than that
of other SF instruments, with SF
CDOs experiencing below average
losses during “normal” times but more
extreme losses during market stress.
By this account, the higher UL of SF
CDOs is driven by elevated sensitivity
to systematic risk. During a financial
market or economic stress event,
correlated defaults and losses amongst
consumer or mortgage borrowers
reach levels that breach the protection
supporting the underlying SF CDO
bond collateral (particularly if the
structured finance bonds within the
collateral pool have similar risk
attributes, relatively limited credit
enhancement, and thin tranches), in
turn leading to credit deterioration
across the SF CDO capital structure.
Recent SF CDO ratings volatility
and impairments are explained in
large part by thin tranches and sector
risk concentrations (e.g. same asset
classes, geographic exposure, and
vintages or period of issuance) within
the SF CDO collateral pool.
Adverse market or economic
conditions drive correlated losses
within the underlying, concentrated
SF CDO collateral pool that are then
Basel II And The Potential ‘Double-Counting’ Of
Risks Within Re-Securitization Capital Charges
By Martin Hansen and Stuart Jennings, Fitch Ratings

MARKET VIEW
magnified at the SF CDO level,
particularly if enhancement levels for
the more senior SF CDO bonds are
not sufficiently robust to weather a
severe systematic stress scenario or a
peak in default rates on the collateral
pool. It is this observed pattern of
above-average credit performance
during periods of relative stability
punctuated by more extreme
deterioration during recent market
stress that would suggest that SF
CDOs have a non-linear risk profile.
Prior to the release of Basel II’s
proposed enhancements, Fitch
published revised SF CDO ratings
criteria that provide a more
comprehensive and conservative
treatment of the risks of re-
securitization transactions, in
particular risk concentrations and the
potential for correlated defaults on SF
CDO collateral under stress.
Concentration Risk In SF
CDOs: Fitch’s Approach
Fitch has analyzed the performance of
a broad range of assets and entities
that performed adversely during
recent financial market stress, with a
view to identifying and building on
lessons learned in order to enhance
the assessment of credit risk. In
evaluating the drivers of the extreme
ratings volatility and impairment rates
impacting SF CDOs originated in
2006 and 2007, Fitch has incorporated
a number of findings and new insights
about the risk profile and collateral
performance of SF CDOs within
ratings criteria.
One of the main variables or factors
driving negative credit performance
for SF CDOs has been the presence of
risk concentrations within the
underlying collateral pools of
structured finance assets. The onset of
stressed market conditions exacerbated
the portfolio impact of these risk
concentrations, increasing the
sensitivity of collateral performance,
and hence of SF CDO performance, to
negative market conditions. Correlated
performance of collateral assets under
stress was more pronounced within
portfolios containing significant risk
concentrations.
The most influential sources of risk
concentration were asset class and
vintage. In other words, SF CDOs
referencing the same types of assets
originated at the same point in time
were particularly vulnerable to credit
deterioration under stress. SF CDO
enhancement levels were not
commensurate with the higher
observed correlations in the
performance of collateral assets during
stressed market conditions,
particularly for portfolios with elevated
risk concentrations or exposure to a
narrow, common set of risk factors.
By applying a new approach to
estimating and incorporating asset
correlations (and, in turn, default
correlations) amongst collateral assets,
Fitch’s revised SF CDO ratings
methodology provides more rigorous
treatment of risk concentrations and
establishes more conservative overall
credit enhancement levels. More
specifically, Fitch’s ratings
methodology uses correlation as a
“top-down” calibration parameter to
generate appropriately conservative
enhancement levels for SF CDOs
generally that are consistent with
Fitch’s fundamental view of the credit
risk associated with the asset class.
Correlation values are calibrated
such that, for SF CDOs concentrated
in a single sector and single vintage,
investors at the ‘A’ and above rating
stresses would be protected against the
historically-observed peak default rate
for a concentrated portfolio of
structured finance assets. The
historically-observed peaks reflect the
extent to which risk concentrations
can increase the variability of a
portfolio’s default rate relative to the
long-term average default rate.
Structured finance default rate data
for select poorly performing sectors
historically illustrate the greater
variability in credit performance of
sector-concentrated structured finance
portfolios under stress conditions. The
greater observed volatility and
clustering of defaults is indicative of
the high correlation inherent in
concentrated portfolios of structured
finance assets. Fitch’s SF CDO
calibration therefore reflects this
experience. At the ‘A’ rating level, the
SF CDO enhancement levels for
single-vintage, single-sector portfolios
are set to be at or above the historical
observed peak default rate for poorly
performing structured finance sectors.
The correlation parameter within
Fitch’s SF CDO ratings methodology
is designed to be sensitive to risk
concentrations within the underlying
collateral pool of SF assets, with
concentrations to specific sectors or
asset classes, vintages and countries
requiring higher correlation inputs.
The outcome of Fitch’s revised SF
CDO criteria is that the resulting
enhancement levels are considerably
higher than under the prior
methodology, particularly for collateral
pools characterized by risk
concentrations and thinner tranches.
One way of quantifying the increased
rigor and conservatism of Fitch’s SF
CDO enhancement levels is by
comparing the Basel II capital charges
on sample SF CDO transactions under
the prior versus the revised Fitch
ratings criteria. In evaluating three
sample SF CDO transactions, it is
evident that the prior “arbitrage” (i.e.
where the total Basel II charges on the
SF CDO structure were less than the
total Basel II charges on the underlying
collateral pool of structured finance
assets) has been dramatically reversed
solely by the application of Fitch’s

18 Total Global ABS Tuesday, June 2, 2009
assume dramatic losses and
continued deterioration in their
baseline analytics, and actual trade
execution levels tend to be even lower
than modeled valuations. In
summary, various factors have
contributed to this dynamic:
• Diminishing buyer base, near-
extinction of the natural CDO
mezzanine buyer
• Technical dynamics in the market
that encourage weak bidding
• Undesirable structural factors of the
securities
• Other uncertainties including
governmental intervention
Having said that, our research
suggests that new investors may soon
appear on the horizon, as evidenced
by the increase in clients that are using
BlackRock’s analytics to review
potential investments. BlackRock
Solutions, which performs risk
reporting for external clients totaling
over $7 trillion, has experienced
unprecedented usage of our mortgage
browser in 2009 from clients of all
stripes. Newcomers are taking the
time to analyse and understand the
products, leading us to believe that,
given the right encouragement or set
of circumstances, they may convert to
being actual buyers. As and when this
new source of demand firms up, we
can expect higher transparency and
better execution pricing; and with
these factors, along with greater
investor participation, we can look
forward to a healthier, more stable
market environment.
Zach Buchwald, managing director in the
Financial Markets Advisory group of
BlackRock Solutions, advises financial
institutions on securitized and structured
product exposures. Kunal Mahajan
specializes in portfolio strategies and
structured credit valuations.
A Buyer’s Market
revolving pool from the start of 2015.
It should be noted that the
approved amendments include
provision for consideration by the
European Commission of an increase
in the 5% minimum retention level by
Dec. 31, 2009. Earlier proposals
mooted retention levels of 10% and
15% and so the possibility of the level
being increased cannot be dismissed
out of hand. Any increase may
present significant further obstacles to
the restart of the market by further
reducing the necessary economic
incentives to securitize.
In addition, it appears that further
changes to the CRD are on the way.
On March 25, the Commission
published a further staff working
document on possible additional
changes to the directive. Following
on in part from the consultative
papers published by the Basel
Committee in January 2009, the
proposals set out in the working
document refer to significant
increases in capital requirements for
trading book positions and
“resecuritization” exposures and
enhanced Pillar 3 disclosure
requirements in respect of
securitization positions.
Final Thoughts
The full impact on the market of the
changes to the CRD remains to be
seen. The absence of significant
market activity may mean that it is
some time before it becomes
apparent. However, the changes
cannot be ignored and many in the
market are now considering how best
to comply with the requirements. The
EU has certainly legislated with haste;
it remains to be seen whether it will
repent at leisure. Only time will tell
whether these changes are common
sense or nonsense.
Recent Changes
revised ratings criteria.
It is noteworthy that the recent
Basel II proposal to increase the Pillar
1 re-securitization charges
exacerbates this difference. The
combined impact of Fitch’s revised,
more conservative criteria and the
increase in the Basel II SF CDO
capital calibration is that the Basel II
capital charge on the entire SF CDO
structure is potentially several
multiples higher than the Basel II
capital charge on the underlying
portfolio of structured finance
collateral (a more detailed analysis of
the potential Basel II capital impact on
SF CDOs can be found in Annex 2 of
Fitch’s recent special report ‘Basel II’s
Proposed Enhancements: Focus on
Concentration Risk’). This disparity in
Basel II charges would result even
though the total credit risk on the two
exposures (i.e. the entire SF CDO
capital structure and the entire
underlying collateral pool of
structured finance assets) is
essentially the same; it is only the
form of the risk exposure that differs.
The potential ‘double-counting’ of
risks within the Basel II capital
charges on SF CDOs is in part a
reflection of Fitch’s tightened ratings
criteria; it therefore depends on a
rating agency having revised its
ratings methodology to reflect the
unique risk attributes of SF CDOs.
Martin Hansen is a senior director in Fitch
Ratings’ U.S. credit market research group.
Stuart Jennings is the structured finance
risk officer for EMEA and Asia-Pacific at
Fitch Ratings.
Basel II

Tuesday, June 2, 2009 Total Global ABS 19
Organization of Securities
Commissions’ task force on regulated
markets and products; and Svein
Andresen, secretary general of the
Financial Stability Board. “There’s a
real sense that [changes in the
securitization market] will flow from
regulation – from changing
accounting standards, to Basel II, it
will impact on nearly all aspects of a
business,” said Douglas Long, the
London-based executive v.p. of
business strategy at structured finance
software provider Principia Partners.
“One of the key things at the
conference is that it is evident
everyone is trying to prepare
themselves for the impact of
forthcoming regulation.”
Rebuilding the market will be
another key topic of discussion, with
panels such as, “Restoring
Securitisation and the Covered Bond
Markets” and “Lessons Learned in the
CLO Market and the Way Forward”
lined up. “I think the primary market
and the ability to get bonds that people
want will be the main topic of interest,”
said Gareth Davies, head of European
asset-backed securities research at
JPMorgan in London. “There’s a high
degree of consensus in the investor
community around preferrred
programs and issuers, which makes it
more challenging to source that paper.”
Of course, investors make up the
other side of the equation. “Do people
expect the pre-2006 market to come
back? We know the investor base has
been partly removed,” noted Benedicte
Pfister, team managing director in
ABS at Moody’s Investors Service.
“You’re back to a stage where
structured finance investors are really
quite specialized,” Long commented.
“They’re spending more time getting a
clear understanding of what they’re
buying. Once they have assets on their
books, they’re dedicating more time to
their ongoing risk surveillance and
monitoring efforts. There are a lot of
discussions over ‘How do I practically
deal with what I’ve got,’ or ‘If I’m
getting into the market, what internal
controls and investor reporting
requirements do I have?’”
Despite the European focus of the
conference, much attention will be
directed at how initiatives in the U.S.
can be adapted to Europe, especially as
the Term Asset-Backed Securities Loan
Facility has started to help price
discovery and new issuance. For
example, some members of the
European securitization community
will be looking to see if collateralized
loan obligations will be included under
TALF, and if so, what impact on
issuance and secondary market trading
that would have, said Carolyn
Aitchison, managing director at GSO
Capital Partners in London.
Importing such programs to Europe
faces a host of logistical issues,
however. “With Europe being
fragmented across different borders,
while still under the same umbrella, it’s
more difficult to get clarity across
regions - a lot of programs are country
focused. But securitization is Europe-
wide and solutions will have to marry
those two together,” Long pointed out.
With scrutiny heavy over the
activities of the banking community, it
seems conference-goers will have to
forego the respite provided by previous
conference destinations. “It will be
very much more business-like…I
think everybody is cost-conscious and
aware of not only doing the wrong
thing but seen to be doing the wrong
thing,” Davies said. Market
participants agreed that bringing the
conference to London, where the
heart of the European securitization
market is located, makes sense, and
hopefully would allow for more
dealers, managers and investors to
participate.
Conference Takes
EDITOR
Tom Lamont
DEPUTY EDITOR
Steve Murray
MANAGING EDITOR
Olivia Thetgyi
REPORTERS
Cristina Pittelli
Hugh Leask
CONTRIBUTORS
Marianne Nardone, Niamh Ring,
Mark Malyszko, Leslie Kramer
PRODUCTION
Dany Peña
PUBLISHER
Elayne Glick
ASSOCIATE PUBLISHER
Pat Bertucci
MARKETING DIRECTOR
Mike Fergus
MARKETING MANAGER
Laura Pagliaro
EUROPEAN MARKETING MANAGER
Ania Tumm
US ACCOUNT MANAGER
Brian Llido
EUROPE ACCOUNT MANAGER
Mark Goodes
CHAIRMAN & CEO
Gary Mueller
PRESIDENT
Christopher Brown
CHIEF OPERATING OFFICER
Steve Kurtz
DIRECTOR/CENTRAL OPERATIONS &
FULFILLMENT
Robert Tonchuk
TOTAL Global ABS
JPMorgan. Even then, however, the
patterns of issuance are murky.
One such major repo facility was the
Special Liquidity Scheme the Bank of
England launched on April 21 last
year. The scheme, which closed at the
end of January, lent out £185 billion
pounds ($297.02 billion) in exchange
for £287 billion ($460.84 billion) in
illiquid securities, most of which are
residential mortgage-backed securities
Issuance Paterns

20 Total Global ABS Tuesday, June 2, 2009
or residential mortgage covered bonds.
U.K. issuance in the beginning of the
year, therefore, should be front-loaded
to take advantage of the scheme before
it closed, Davies noted. However, U.K.
RMBS for 2009 so far actually comes
up short at €9.51 billion ($13.25
billion) at the beginning of the year,
compared with €29.65 billion ($41.3
billion) for the same period last year.
Whether that captures the rush in the
beginning to take advantage of the SLS
is hard to tell, he said.
Another major factor affecting
issuance this year is the tightening of
criteria for collateral eligible under
the European Central Bank’s
repurchase agreement program. On
Feb. 1, the ECB raised the haircut for
all asset-backed securities to 12%
from a range of 2-12%. In addition, in
January the central bank announced
that ABS issued on or after March 1,
2009 would have to have a AAA
rating at issuance, and that the A
rating would have to be retained over
the deal’s lifetime. “We should see a
slight fall in the amount of bonds
being presented to the ECB,” Davies
predicted, as a result. Year-to-date,
issuance of ABS is already down from
where it was last year for most of the
major issuing jurisdictions: Spain’s
issuance is down to €3.01 billion
($4.19 billion) from €6.08 billion
($8.44 billion) over the same period
last year, while France and Germany
are also lower, albeit to a lesser extent:
€3.80 billion ($5.30 billion) from €4.2
billion ($5.85 billion) and €2.98
billion ($4.15 billion) from €3.89
billion ($5.42 billion).
Commercial mortgage-backed
securities are one of the sectors where
issuance is up across the board. Some
countries that did not see any issuance
in 2008 here came to market this year,
and others that had little issuance last
year did more. Germany has rocketed
ahead of last year’s figures at €9.49
billion ($13.21 billion) from a mere
€77.85 million ($108.44 million) last
year. In the U.K., CMBS issuance has
risen to €4.29 billion ($5.97 billion) so
far this year from €284.39 million
($396.06 million) the year before. And
France has €559.15 million ($778.86
million) of issuance and Italy has
€663.30 million ($923.86 million);
both countries had not seen any
issuance in this sector as of this time
last year. “We’re getting to the point
now where if you’ve securitized
everything else, then you can
securitize commercial loans,” Davies
said. He noted that the banks’ largest
holdings are in RMBS, and surmised
that repurchase agreement schemes
may be relatively more stringent on
CMBS because of the smaller number
of underlying assets, unlike the more
granular RMBS.
The US Distressed Credit Investing Summit September New York, NY
The 15th Annual ABS East Conference October 4-6 Miami, FL
Covered Bonds - The Americas October 6 Miami, FL
The 7th Annual South African Securitisation &
Debt Capital Markets Summit November 5-6 Cape Town, South Africa
UPCOMING CONFERENCE SCHEDULE 2009
STRUCTURED FINANCE
For More Information, Please Visit: www.imn.org/sf_gdaily
IMN ~ Call: +1 212/768-2800 | Fax: +1 212/768-2484 | Email: mail@imn.org

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