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BANKERS TALK UP ROBUST START ON CLO ISSUANCEPlayers in the collateralized loan obligation market are getting bullish on newissuance, with one CLO banker projecting about $5 billion in deals to hit in thefirst quarter. That figure is a sizable jump from about $4.2 billion in total CLO volume for all2010, according to Citigroup data.Wells Fargo and JPMorgan in recent weekshad estimated $10-15 billion in volume for the entire year.

“Mandates are being signed,” the banker told TS. “It’s just [CLO managers]haven’t gone out officially with their deals.” (continued on page 12)

Ready To RunSTREET WAITS FLURRY OF AUTO, CMBS PAPERMarket officials expect the asset-backed securitiesmarket to come out of the gate strong in 2011,with auto deals and commercial mortgage-backed securities tipped to lead the way.“We expect the auto sector to continue togrow because it has emerged from the crisis withits reputation intact,” Michael Millette, head

(continued on page 12)

Jobs Report Jolts Agency MBS Trading: See story, page 3.

INDEX

U.S. SecuritizationNew Equipment Lease

Deal Prepped 3Middle Market CLO Hits Market 3Secondary CMBS Sees

Heavy Trading 3Private Label Putbacks Look

Far Off 4PCAOB Sounds Warning

On Legal Suits 4

European SecuritizationSpanish Bank Retains New

ABS Trade 5U.K. Turbo Finance Sees New

Timeline 5Bancaja Retains

RMBS Deal 5U.K. Blanketed With New

Covered Bonds 5Euro CLO Margins Hold 6

New Year Rally For Secondary Euro ABS 6

People & FirmsEx-Highland Tax Vet Heads

To PwC 6

DepartmentsExcess Spread 7Learning Curve: John Joshi,

Capital Fusion Partners 9

VOL. 3, NO. 1 JANUARY 10, 2011

BOE: SECURITIZATIONBOLSTERING HOME LENDINGA flight to quality among investors insecuritizations is evident in a Bank ofEngland survey released Thursday thatshows a spike in cash securitizations forsecured lending to U.K. households. PhilAdams, director of securitization strategy atthe Royal Bank of Scotland, said residentialmortgage-backed securities and otherconsumer loan assets are finding favor withinvestors. “In terms of securitization usage,as the market starts to slowly recover, therecovery is going to take place first in areas


BANKS LINE UP BUYERSFOR B-PIECESBlackRock and a small cadre of yield-chasinginvestors have inked agreements to buy theB-pieces on about $8 billion of commercialmortgage-backed securities deals slated forthe first quarter. BlackRock is anchoringJPMorgan Chase’s roughly $1.5 billionconduit deal and is also scooping up thefirst-loss tranche of the massive $2.9 billionoffering from Deutsche Bank and UBS (TS,1/4) on behalf of a high-yield debt fund.

Meanwhile, H/2 Capital Partners isbuying the B-piece on a $1.8 billion dealfrom Morgan Stanley and Bank of America,while Rialto Capital is buying the B-piece


TS011011 1/7/11 1:18 PM

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Arena Dutch RMBS To Kick Off 2011 IssuanceA new €700 million ($908.5 million) issue of Dutch residential mortgage-backed securities from Delta Lloyd Bank’s Arena securitization vehicle is beingprepped. The transaction, know as Arena 2011-I B.V., is backed with primeresidential mortgages originated by Delta mortgage subsidiary AmstelhuysN.V. to borrowers across the Netherlands. The Royal Bank of Scotland is saidto be arranging the transaction, with RBS and Rabobank acting as leadmanagers, according to a London-based asset-backed securities trader.

The issuance comprises six tranches of notes, rated Aaa through Baa1,according to Moody’s Investors Service. The mandate was announced Fridaymorning, though no details on the coupon size or closing date could be gleaned bypress time. But a head of a U.K. syndicate desk with knowledge of the deal saidArena 2011-I will be marketed to investors across Europe from the “back-end ofnext week.” Price talk is expected in the third or fourth week of this month.

“There is not going to be any info on pricing, or even whispers on that, untilafter [the roadshow],” the syndicate head said. “This is the transaction to openthe market—the Arena program is well sought-after, and there have beensuccessful deals from it before.”

The structure boasts a non-amortizing reserve fund that provides 1.5% ofthe deal’s total notes. Total credit enhancement for the Aaa-rated notes is set at9.5%, Moody’s analysts said. The deal also features an excess margin of 50 basispoints provided through the swap agreement, with Rabobank Internationalacting as swap counterparty.

Rate Flux Drives Hybrid ARM DemandAn uncertain rates environment is driving investors to Hybrid Adjustable RateMortgage paper, market officials say, with spreads expected to continuetightening. “There’s a strong demand for hybrid ARM paper,” a JPMorgananalyst told TS Friday. “It’s fixed for a certain amount of time, and then itfloats. That fits a certain rates profile.” ARM 3% coupon 5–1 bonds, which arefixed-rate for five years then float for one, are trading at about 60 basis pointsover Treasurys, versus high 70s to low 80s three months ago, he said.

Investors moving to Hybrid ARMs now would imply they view rates—whileclimbing—will lower over a longer timeline and sync up with the Hybridbond’s shift to floating. The Federal Reserve’s move to “anchor” rates will alsomatch up with the shift to floating. They would be betting that today’s spikesare short-lived, the analyst explained. “The demand for straight floating-rateisn’t as strong as you’d think,” he added.

A recent research note from Barclays Capital, however, underscored thepositive floating-rate note environment. “Issuers have tapped into [the floatingrate] demand, with more than $5.5 billion of FRNs issued this week,” JeffreyMeli and his team wrote. “New issue FRNs have generally performed well, withGE FRNs, which have tightened nearly six bps since issuance, trading insidethree-year fixed-rate notes.”

Non-agency traders in December said pricing on Hybrid ARM paper spikedwhen rates jumped during that period (TS, 12/10).

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TS011011 1/7/11 1:18 PM

AXIS To Issue Equipment ABS This YearAmur Capital Management, run by ex-UBS honchos MostafiShahMohammed and Cecilia Park, has bought Nebraska-basedAXIS Capital, which plans to issue an equipment lease assetbacked-securities deal in 2011.

“They will be doing the first deal relatively soon,”ShahMohammed told TS Thursday. “AXIS plans to be afrequent issuer of ABS from that platform in the future.”

ShahMohammed declined to give details on the deal’s size orthe planned launch date. It will be backed with small to mid-ticket equipment finance leases, he said, meaning loans in the$50,000-150,000 range. The company had not yet selected abank to arrange the transaction.

The duo launched Amur in 2008, after leading UBS’ creditand transportation finance businesses, respectively (TS, 5/28/08).ShahMohammed said the team has been monitoring the marketand has seen improvement in equipment lease transactions.

Agency Trading Jolted By Jobs Number Trading in agency mortgage-backed securities is seeing a bumpyweek, with an unexpected spike in a Wednesday jobs reportigniting a huge selloff in the sector.

“We’ve seeing something like a 100-point selloff across thebelly of the curve,” a head of agency trading at a globalinvestment bank told TS. The shakeup is being attributed to oneof the largest increases ever recorded for one of the benchmarkindustry trackers.

The Automatic Data Processing, or ADP, report showed297,000 new jobs added to the economy. While this is a goodsign for the macroeconomy, the boost came as a shock to themarket, with players scrambling to readjust positions, traderssaid.

Fannie Mae 6s and 6.5s—both considered premium bonds—were down five ticks Wednesday afternoon. A trader at a broker-dealer put them at 108 mid-day. Fannie 4’s went down 28 tickssince earlier in the week, giving them a price of 98.

But more volatility is expected. The head trader warnedagainst monthly unemployment numbers, due to hit Friday. “Itwill be the mother of all whipsaws if we see weak unemploymentnumbers,” he said.

The broker-dealer official was also bracing for volatility,noting the Street had expected an ADP number closer to150,000. “The ADP number came out really high,” he said.

“Now everyone’s waiting to see what the unemployment numberon Friday is.”

Freeport Rolls Out Middle Market CLO UBS has rolled out a $297 million middle-market collateralizedloan obligation on behalf of collateral manager FreeportFinancial, a first for the Chicago-based investment firm since thefinancial crisis.

The cash-flow CLO, Freeport Offshore 2010-1/FreeportOnshore 2010-1 LLC, consists of a static portfolio of seniorcorporate loans to middle-market borrowers.

Standard & Poor’s rated the bulk of the deal’s $143 millionpreliminary notes AAA. The seven-year transaction’s total notebalance is expected to reach $297 million.

The deal’s $45 million A1-a bond priced at 225 basis pointsplus three-month LIBOR. So has its $45 million A1-b note.Both are considerably tighter than Golub Capital’s seniormiddle-market tranche, which priced in July at 240 bps (TS,7/20). The new deal’s senior $30 million A-2 bond priced at 250bps, while the subordinate $23 million AA+ rated B tranchepriced at 350 bps.

The transaction has a six-month non-call period. The notesare slated to close Jan. 6. Officials at Freeport did not return calls.UBS officials declined comment.

CMBS Secondary Market Heats Up FastThe commercial mortgage-backed securities secondary market isbuzzing, with more than $1 billion of bid lists hitting desksThursday. Traders at multiple firms said spreads on AMs and AJsbonds, the mezzanine and junior AAA tranches of recent deals,are about 40 basis points tighter than they were at the start of theweek, with significant one-day jumps. “Everyone who has AMsseems to just be pumping them out there,” one trader said.

There are several reasons behind the activity, including firmsre-opening their books with fresh positions and generalbeginning-of-the-year optimism, one trader said. Some investorshave made profits of as much as 6%, which is considered adecent annual return. “The year is over,” he quipped. Also, theNational Association of Insurance Commissioners has releasedthe CUSIPs of the CMBS bonds that are subject to its newregulatory capital requirements. That clarification, combinedwith a perception that fundamentals are recovering, may becompelling insurers to seek yield further down the capital stack,

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an investor said. Traders gave several examples of spread tightening, including

an AJ bond from CSFB 2005-C6. “I thought it was going tocover in the mid-300s. It covered at 295 basis points,” one tradersaid. Meanwhile, the super-senior, AAA-bonds from GS MortgageSecurities Trust 2007-GG10, considered a benchmark deal, arebeing shopped at swaps plus 215, about 30 basis points tighterthan Monday. The AM bonds from that deal tightened by 20basis points to swaps plus 390 on Wednesday alone, traders said.

Another trader said this level of spread movement isworrisome. “I think it’s too fast. Five or 10 basis point a daymoves are a good thing. But when things move this fast, you haveto be worried that it’s just going to stop. Trees don’t grow to thesky, and we’ve already started seeing evidence of that,” he said.

Private Label Claims No BrighterPost-Freddie, Fannie Deals Investors in soured private label residential mortgage-backedsecurities should not expect the same success rate recently seen bymortgage giants Fannie Mae and Freddie Mac, according tomarket officials.

Agency putback rights differ significantly from private labelputback rights, explained Jonathan Wishnia, partner atLowenstein Sandler, stressing that agency contracts provide moreexplicit remedies than non-agency issuers.

Bank of America this week settled nearly $2.8 billion inclaims brought by both Fannie and Freddie, while Fanniereached another settlement last week with Ally Financial. A hostof private label investors in B of A/Countrywide FinancialRMBS have already been pursuing putback claims (TS, 10/22).B of A Spokesman Jeremy Dubrowski said the settlement termswith Fannie and Freddie do not have any bearing on otherdiscussions the bank is having with investors.

Major pricing fluctuations are expected in the RMBS marketshould non-agency putback lawsuits result in settlement payouts(TS, 10/22), but the Freddie and Fannie outcome, so far, hasn’tshaken the market.

“There’s not a meaningful effect in agency or non-agency,” atrader speaking with TS said Monday about the recentsettlement. “I don’t think that because they cut big checks toFreddie and Fannie it’s any more likely they’ll do it on privatelabel deals,” he added.

Wishnia pointed out that non-agency investors looking forputbacks are running out of time to pursue those remedies. Hesaid many are scrambling to do what they can in the time left.Wishnia estimates only one-to-two years remain for most 2005-2007 deals, even though statutes of limitations are deal andjurisdiction specific. “There’s a lot of frustration,” he said. “There

is no question that within the $5 trillion RMBS market partiesshould be able to enforce putback rights. It’s just a question offiguring out how that’s to be done.”

Auditor Reg Warns On LawsuitsThe Public Company Accounting Oversight Board last monthsent a wake-up call to professionals about their responsibilitieswhen auditing loss contingencies and disclosures. The Boardissued a notice following reports alleging that some firms mayhave misrepresented the quality of loans sold for securitizationand may be forced to repurchase the affected mortgages,creating an exposure for the banking industry of up to $52billion, officials said in a related filing. There have also beenreports that alleged irregularities in foreclosure processes maylead to further losses.

This week Bank of America agreed to pay $2.8 billion toFreddie Mac and Fannie Mae to settle claims over bad mortgages(see story below).

The Board advised auditors that such mortgage- andforeclosure-related activities or exposures may have implicationsfor audits of financial statements or of internal control overfinancial reporting. These implications might include accountingfor litigation or other loss contingencies and related disclosures,officials said.

The PCAOB notice does not include rules, but efforts by theFinancial Accounting Standards Board to require issuers todisclose potential losses from lawsuits have met fierce resistancein the industry. Attorneys and auditors fear that releasing suchinformation risks helping plaintiff lawyers.

A PCAOB spokeswoman said: “The PCAOB staff hasclosely followed the FASB’s issuance of its exposure draft oncontingencies and the related constituent responses. Similar tothe [Securities and Exchange Commission] letter sent tocertain CFOs reminding companies of the accounting anddisclosure requirements relating to contingencies, the staffPractice Alert reminds auditors of their responsibilitiesregarding auditing these same matters which often requiresignificant judgment by management.”



Tell Us What You Think!Questions? Comments? Criticisms? Do you have something tosay about a story that appeared in TS? Or is there informationyou’d like to see published? Managing Editor JoyWiltermuth can be reached at (212) 224-3202 [email protected].

TS011011 1/7/11 1:18 PM

BBVA Retains Consumer Loan ABS TradeSpanish lender BBVA has retained a €900 million ($1.18 billion)cash securitization of consumer loans made to borrowers inSpain. The deal, known as BBVA Consumo 5 FTA, is backedwith unsecured debt used for, among other things, new and usedcar purchases and property improvements.

The single tranche deal carried a coupon of three-monthEURIBOR plus 30 basis points and was rated AAA by bothMoody’s Investors Service and Standard & Poor’s. Europea deTitulización arranged the deal, while BBVA and BBVA Finanziawere lead managers.

The transaction comprises a seven-quarter revolving structure,with the portfolio comprising over 90,000 obligors with aborrower concentration of 0.01%., according to a Moody’sresearch note. The weighted average life of the debt is three years.

Société Générale analysts noted the deal was wrapped upshortly before the end of the year. Calls to BBVA officials inBilbao were not returned.

U.K. Auto Deal Jumpstarted ForJanuary CloseBNP Paribas and UBS are looking to resurrect the stalled£399 million ($625 million) U.K. Turbo Finance, the firststerling denominated auto loan securitization to be publicallyissued by Carlyle Finance, a subsidiary of FirstRand Bank, sincethe financial crisis.

A syndication official told TS the deal is expected to settle thismonth. It was initially slated for mid-December (TS, 11/26).The official declined to offer price guidance or elaborate on thetransaction’s delay.

A London-based hedge fund investor said he looked at the£63.6 million ($99.7 million) AAs in early December, butthat absolute yields were not high enough for funds hemanages. “The AAs were publicly for sale, but the spread wasnot there and it was short dated paper,” he said. He hadn’tseen any further price guidance since the early part ofDecember. Generic double As are trading at the low-to-mid100 basis points over one-month LIBOR, according to aLondon-based analyst.

It could not be determined whether the deals AAAs havealready been placed. Officials at the banks either declined toelaborate or did not return calls.

The analyst speculated that Turbo Finance may have beenheld back as investors closed up their books early this year. “It

would make sense to keep it on balance sheet if they weren’t ableto do it at year-end,” he said. “That’s not uncommon in theEuropean space.”

About 80% of the loans were originated by Carlyle throughcar dealers for the purchase of mainly (90%) used autos,according to a presale report from Fitch Ratings. The offeringwas also rated by Moody’s Investors Service.

Officials at Carlyle did not respond to requests for comment.

Spanish Bancaja Spins RMBS DealCaja de Ahorros de Valencia, Castellón y Alicante (Bancaja) hasarranged and issued a new €450 million prime residentialmortgage-backed securitization, MBS Bancaja 8.

The €274.5 million A bond is expected to be priced at par witha spread of three-month EURIBOR plus 30 basis points, accordingto market officials. Pricing is in line with the issuer’s prior deal,MBS Bancaja 7, (TS, 8/20). Both were retained by the issuer.

Moody’s Investors Service has assigned a majority of notesAaa. The remainder, a €175.5M B bond assigned Caa2, providesthe deal’s senior notes with a 44% credit enhancement, accordingto a presale report.

The mortgage portfolio is largely a pool of prime Spanishhome loans originated by the bank, with debt on commercialproperties adding 5% to the mix.

Calls to the bank were not returned.

U.K. Covered Bond Pipeline FlowsA surge in new issue euro-denominated U.K. residentialmortgage-backed covered bonds is slated to hit the market thisweek, with Lloyds TSB Bank, Barclays Capital and the RoyalBank of Scotland all rolling out deals.

Lloyds, Natixis, UBS and Unicredit are lead managers on thefirst offering, which is a12-year euro-denominated covered bond,according to a syndicate official. The deal is set to price Friday orMonday and will be “benchmark” sized, the official said, butdeclined to elaborate further. Moody’s Investors Service andFitch Ratings are rating the offering.

Barclays Wednesday priced its €1 billion covered bond at mid-swaps plus 85 basis points. “That is a lot tighter than Lloyds orRBS [pricing] will be,” the syndicate official said. “It’s a heavypipeline early in January and people are looking to get marketingmaterials out.”

The RBS bond is a similar “benchmark” sized bond, but witha shorter tenor of about five to seven years. Further specificscould not immediately be learned.

Despite the heavy pipeline in the next few days the



European Securitization

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syndication head did not expect investors to be overwhelmed.“No one thus far has articulated that sentiment,” he told TS,indicating some issuers may be looking to get ahead of newcounterparty swap guidelines by Standard & Poor’s that areeffective Jan. 17 (TS, 12/22).

Credit Suisse debuted in November the first-ever euro-denominated covered bond transaction (TS, 11/11).

Officials at the banks either declined to elaborate further ordid not respond to calls.

Lack Of European CLO Capital KeepsMargins SteadyThe dearth of new collateralized loan obligations hitting theEuropean market will keep term loan margins steady,Henderson Global Investors said in a note Monday, despitethe market’s expectations for them to fall. The absence ofnew CLO issuance in the European market, along with newcapital costs incurred with regulatory shifts, will balance outmarket expectations that margins would be lowered bystrong loan demand.

The Royal Bank of Scotland sold the year’s most notableEuropean CLO, Intermediate Capital Group’s €840 million($1.07 billion) offering in August (TS, 8/20). It sold to a singleinvestor, while a recent spate of Spanish and Portuguese CLOsare expected to be largely retained (TS, 12/10).

The margin on new issued term loans in Europe is LIBORplus 5% for loans maturing in six to seven years, according toanalysts at Henderson. They pointed to similar U.S. loans havinga margin of LIBOR plus 4–4.5%, a feature they attribute to U.S.loans having a LIBOR floor. The report predicts LIBOR floors tobecome less common in 2011.

Secondary Euro ABS Enjoys New Year RallySecondary European asset-backed securities have rallied in thefirst trading week of the year. A London-based ABS trader at aFrench investment bank told TS Friday that 2011 has kicked offwith a flurry of secondary activity across the board, with U.K.and Dutch prime residential securities “firming up” in particular.

Spreads on prime AAA Dutch paper reached around 140 basispoints, a tightening of around 3-5 bps this week compared toyear-end, the official said. U.K. prime RMBS rallied to 145-150bps, about 10 bps tighter in the same period.

Securities in Northern Rock’s Granite and Bradford &Bingley’s Aire Valley, two seasoned U.K. RMBS deals, accountfor much of the early trading. “On Granite, the BBBs haverallied about five points since the end of the year, while the AAAsjoined in to a much lesser extent, rallying about 40 cents,” the

London-based trader said. The activity on Granite is said to beStreet-driven. “There’s one bank in particular, not as much clientinvolvement. There is also talk of U.S. hedge fund involvementin buying up Granite paper, but it’s not clear,” he noted. “Myfeeling is that one dealer here is loading up—it could be theythink it is cheaper versus some other product, or perhaps theyhave a large position they are trying to support.”

Client participation, however, remains slight, with investors stilldrifting back slowly to the market following the holidays. “Thisyear it is tough to say whether things will be tighter or wider,” thetrader said, citing a number of headline themes, such as a potentialinterest rate hike in the U.K. and problems in peripheral eurozonecountries, including Spain, Ireland and Portugal.

Spreads in European securitizations have outflanked otherfixed-income products last year, according to Citigroup data.Euro ABS saw an average spread change of -28% compared to-71% for other sectors. “Most markets widened from year-over-year, as the indexes fell from 31–79 bps, or 42% and104%, respectively,” bank analysts wrote in a memo Friday.“[But] European securitized products showed a wide range ofperformance, from a 150 bps tightening to a 375 bpswidening. This ranges from a 32% improvement to a 136%fall. On a comparable basis, European sectors earned a 43%better spread.”

People & FirmsHighland Vet Ciavarra Jumps To PwCVeteran tax advisor Kevin Ciavarra has joined the New Yorkoffice of PwC as a principal in the asset management practice.He most recently co-managed a $1 billion portfolio of mostlydistressed commercial asset-backed securities for CapitalSourceFinance. Before that, Ciavarra was the general counsel and headof tax at Highland Management.

Ciavarra told TS the distressed asset portfolio was windingdown when PwC contacted him with an offer. “I started mycareer at PwC in ’97,” he said. “I certainly kept in touch with mycolleagues at PwC, and they reached out to me.”

Ciavarra’s specialty is securitizations, control distressed debtfunds and closed-end credit-based funds. He said an increase inaudits over recent years has prompted investors to takecompliance issues much more seriously. “Back in the heyday, Iqueried whether managers were even reading indentures andguidelines they were signing,” he said. “Now with deals [closed inthe past], we’re getting people asking us, ‘can you help usunderstand what we agreed to?’”

CapitalSource did not immediately respond to requests forcomment.



TS011011 1/7/11 1:18 PM



• The delinquency rate of loans in U.S. commercial mortgage-backed securities rose 27 basis points to a record 9.2% inDecember, according to Trepp. (Trepp, 1/5)

• The U.S. banking industry is expected to remain stable in2011, according to Fitch Ratings. (Fitch, 1/5)

• Permanent loan modifications by mortgage lenders faroutnumbered foreclosure sales last year by 65% throughNovember, according to Hope Now. (Housing Wire, 1/5)

• European issuers of commercial mortgage-backed securities aresaid to be testing the waters for CMBS as they see the recovery inthe U.S. market taking hold. (International Financing Review, 1/5)

• Norway’s Sparebank 1 Boligkreditt is said to have decidedagainst proceeding with a sale of a 10-year euro-denominatedcovered bond. Sources provided no explanation for the decision.(Bloomberg, 1/5)

• U.S. Bank National has completed the acquisition of theBank of America’s domestic and European-based securitizationtrust administration business. (U.S. Bancorp, 1/4)

• Bank of America’s agreement to buy back bad loans it sold toFannie Mae and Freddie Mac may put pressure on other banksto settle with the government-sponsored enterprises, according toMF Global. (Housing Wire, 1/4)

• The collateral performance measures of U.S. credit card asset-backed securities continue the improving trend that began lastsummer, according to Fitch Ratings. (Fitch, 1/4)

• Big corporate borrowers are expected to face higher costs asbanks charge them for additional expense of complying with newregulations. (Wall Street Journal, 1/3)

• The mortgage market is underestimating the potential fordefault on performing and non-performing loans whenprojecting future losses on these loans, according to AmherstSecurities Group. (Housing Wire, 1/3)

• Keefe, Bruyette & Woods has sharply lowered its estimate ofhow much banks may lose as a result of troubled mortgage buybacks from Fannie Mae and Freddie Mac. (Housing Wire, 1/3)

• Annaly Capital Management plans to raise an estimated $1.3billion in a share offer with part of the proceeds earmarked forpurchasing mortgage-backed securities. (Annaly CapitalManagement, 1/4)

• The European Union is proposing that regulators in the 27-member bloc be given the authority to limit products andactivities by banks considered too big to fail as a way ofpreventing another financial crisis. (Bloomberg, 1/4)

• Remortgaging approvals in the U.K. rose more than 13% inNovember from the preceding month, according to the Bank ofEngland. (Mortgage Introducer, 1/4)

• Gross mortgage lending by U.K. mutuals was flat inNovember, remaining in the same holding pattern as in October,according to the Building Societies Association. (BuildingSocieties Association, 1/4)

• Australia’s four largest lenders grabbed an even bigger share ofthe mortgage-lending market in 2010, according to data fromthe Australian Prudential and Regulatory Authority. (MoneyAU, 1/3)

• New foreclosures surged 31.3% in the third quarter of 2010from the preceding three-month period, according to the Officeof the Comptroller of the Currency and the Office of ThriftSupervision. (Mortgage Orb, 1/3)

• OTP Bank Nyrt plans to sell up to 1 trillion forint ($4.7billion) of mortgage-backed securities through the Hungarianlender’s mortgage unit. (Bloomberg, 12/30)

• Moody’s Investors Service has downgraded a combined $7.7billion in residential mortgage-backed securities issued byWachovia and IndyMac. (Dow Jones Newswires, 12/30)

• Mid-sized banks are likely to be most negatively impacted bynew liquidity rules imposed by the Basel Committee onBanking Supervision. (Financial Times, 12/30)

• Three industry groups have called on the Department ofHousing and Urban Development to exempt warehouse lendingfrom the Real Estate Settlement Procedures Act. (NationalMortgage News, 12/30)

Excess SpreadExcess Spread includes stories from staff reports and other news sources from around the market. TS does not guarantee the completeness oraccuracy of the stories gleaned from other sources, though they are believed to be reliable.

TS011011 1/7/11 1:18 PM



The U.S. has about 44million single family homes

and millions more commercial buildings allreadily suitable for the application of solarinstallations. The challenge for home ownersand business has been financing theequipment and installation in a cost-effectivemodel. The economics of solar power havebeen dropping over the last decade and are now approaching gridparity with non-renewable energy sources.

The advancement in panel efficiency, technology and coststructures make solar energy a viable peak-load energy source.Local, state and federal regulatory and tax policy hasencouraged the development and deployment of solar energy ina distributed model. Twenty nine states have renewableportfolio standards that require the state’s utilities to generate aportion of their energy portfolio from renewable energy sourcesor pay a cost for non-compliance of the RPS guidelines. Fortyfour states offer some type of financial incentives for solarenergy/distributed provisions. Federal policies provide variousstructural and policy incentives, including a cash-grant in lieuof tax-credit, residentialenergy conservationsubsidy, accelerated andbonus depreciation (bonusdepreciation was effectivefrom 2008-2010 only) andother credits. The effectivecost of deploying a solarsystem varies by state andlocal incentives butupfront cost has been aroad-block for most home owners and small business.Traditionally, the choice of financing available for solar systemsused to be limited to unsecured personal loans, home-equityfinancing, personal cash outlay, credit-cards and installerfinancing, which has been a road-block to large scale adoptionof solar systems in the consumer market. In this paper we willreview the development and benefits of solar lease structuresand solar power purchase agreements that have developed as analternative to the traditional financing techniques. We will closewith some thoughts on application of securitization technology

in financing SLS and SPPA assets.Starting in 2006 an innovative new structure was applied to

residential and commercial solar lease projects to provideconsumers an alternative structure to finance and install solarequipment on their property and take advantage of sustainableclean energy. Over the last four years about 100,000 systems havebeen installed that have used a form of SLS or SPPA. Thebenefits of distributed solar energy systems include:

• A predictable electricity cost over the life of the system,which can be 25 years or longer

• Provide back-up power security in the event of a blackout

• Reduce the load on the utility and provideenvironmentally safe clean energy

• Flexibility to grow with demand and technologyimprovements

• Generate local jobs for the community

The SPPA structureFor a typical SPPA installation the system integrator is responsiblefor the financing, designing, installing, monitoring, and operationand maintenance of the system that is installed at a host site. The

host does not pay any of thecost for installation, butbuys the electricity thesystem generates. The utilityin this case is on your ownroof and you buy to powerfrom the system integratorjust as you would from yourlocal utility.

The cost of the poweris predetermined upfront

so you know what the cost will be over the life of the system.Typically the contracts are for 15 to 20 years. SPPA may havea small escalation percentage over the life of the contract andcan range from 1-2%. The benefit of the SPPA structure isthat you don’t have unexpected price fluctuations as a result ofprice volatility in the commodities markets. The idealcustomer for a SPPA are commercial customers that use alarge amount of electricity, generally 200,000 kilowatt-hourannually, controls their own property, have a strong creditprofile, have adequate roof space and are in a pro-solar

L E A R N I N G C U R V E ®

Solar Leasing and SPPA Contracts a New Asset Class

��

Total Securitization is now accepting submissions from industry professionals for the Learning Curve® section. For details and guidelines on writing a Learning Curve®,please call Joy Wiltermuth at (212) 224-3202.

John Joshi

“The standardized structures can bepooled and can benefit from diversificationof the portfolio. Financing structures canbe pooled and securitization structures for“SolarBonds” could potentially be createdfrom the pools. ”

TS011011 1/7/11 1:18 PM



policies regions.The benefits of SPPA structures in summary allow the host to

benefit from:

• No upfront expense in order to buy the equipment forsolar power

• Negotiated electricity rates for the term of the contract,typically 15 to 20 years

• Production monitoring and metering by the systemintegrator

• System integrator/investor owner responsible foroperation and maintenance

• Supports local RPS standards and provides for greenpolicy certification

• Energy production guarantee provided by systemintegrator

• Option to purchasethe system at fairmarket value atcontract expiration

The Solar LeaseStructure Similar to a SPPA structurethe system integrator forSLS, is responsible for thedesign, integration, financing, operation and maintenance ofthe system. The solar lease model is typically used for aresidential customer (the host) to reduce the cost of electricitybut can have commercial applications as well. Instead ofpurchasing a solar system for an upfront cost, the host agrees tolease the system from the system integrator/investor and pay asyou go on a lease basis. This allows the host to pay a lowmonthly rate and also reduce its monthly electricity cost fromthe local utility. In most situations the Host starts saving moneyfrom the first day. The system integrator takes responsibility forthe performance of the system and guarantees the system willproduce the amount of power they projected. They track theperformance and can fine tune the system for optimalefficiency. If the system produces more power than the systemintegrator had estimated, it only benefits the host by reducingthe amount of utility energy they use. The solar lease/SPPAmarket has grown considerably and about 70% of newinstallations use a lease/SPPA structure. Cost savings can rangeup to 30% depending on the region where the system isinstalled. Typical characteristics of a SLS/SPPA system are:

• Residential system – $25,000-50,000; commercialsystem - $1.5 million+

• 25-year performance warrantees

• Mature technology

• Host agreements contract length ranges from 10-20-yearrcontracts for monthly lease/SPPA payments

Capital Markets ApplicationsSolar energy is an effective source of clean, sustainable andrenewable energy and can reduce the cost and price volatility for ahost customer. Distributed development of solar energy on existingroof tops can help manage peak demand loads for local utilities andhelp provide a reliable source of energy for the host. The systemscan be monitored and tuned remotely for optimal efficiency. Theavailability of SLS and SPPA structures allows the host customer toincorporate solar energy without high upfront equipment andinstallation cost. Investors can benefit from a new asset class that

utilizes a mature technologywith a history of operatingexperience. Typically, SLSand SPPA structuressegregate the investor entityinto a special purpose entitythat isolates the assets andcash flow from the systemintegrator and other stakeholders. The standardizedstructures can be pooled andcan benefit from

diversification of the portfolio. Financing structures can be pooledand securitization structures for “SolarBonds” could potentially becreated from the pools. Tranches can be customized according toinvestor risk appetite or the pools can be sold on a whole-loan basis.

ConclusionSolar SLS and SPPA structures are a new asset class which is atthe early stage of development. The growth potential is vast, withonly 100,000 systems deployed out of potential 50 million plusresidential and commercial systems. We expect local, state andfederal policy to continue to favor renewable energy deploymentand expand the renewable energy portfolio requirements to ahigher percentage of utilities total energy generating portfolio.Distributed generation of solar energy is an efficient way forutilities to meet the requirements for RPS standards. The marketis poised to grow rapidly over the next few years and couldbecome a core alternative asset for investors with a good creditand yield profile. Application of securitization and structuredfinance techniques can provide greater amounts of capital to thesector and help develop the market for “SolarBonds.”

John Joshi is managing director at CapitalFusion Partners,FinCap Solutions and a senior advisor at Seacrest InvestmentManagement.

“Solar SLS and SPPA structures are a newasset class which is at the early stage ofdevelopment. The growth potential is vast,with only 100,000 systems deployed out ofpotential 50 million plus residential andcommercial systems.”

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ts-Uage house ad 12/21/10 11:07 AM Page 1


where investors feel more comfortable,” Adams said.The quarterly BoE survey of U.K. bank and non-bank lenders

revealed an 11.9% increase in the fourth quarter, despite forecastsfor a 5.7% drop. A third quarter rally for originators resulted in a17.4% jump in lending to households.

Adams told TS investors are hunting for “good quality, prime,consumer-based assets that are well-diversified, with soundorigination and presumably new and tighter underwritingcriteria.” The continued recovery in residential mortgage-backedsecurities and covered bonds has contributed to the uptick forhousehold lending, analysts said. European MBS rounded outthe year at $74.12 billion (TS, 12/23).

A London-based analyst at a European investment bank saidthe findings chime with a recent flurry of U.K. issuance—primarily in mortgages. He pointed to an uptick in auto loans,and a recent Barclays Capital credit card securitization. “That’shelped as well,” he said.

Cash securitization for corporate lending remained flat,

BOE: SECURITIZATION(continued from page 1)

however, with no change seen in the past 12 months, which hasheld at -1.5%. Corporate lending fuelled by syntheticsecuritizations and derivatives also fell during the period. Thestudy recorded a 3.1% drop in the third quarter, with anadditional 2.7% dip in the fourth.

The bad news marks a fifth successive quarterly drop inderivatives-fueled corporate lending, according to BoE stats.Lenders predict a sixth at around 2.7% next quarter. “It’s areflection of the type of securitization that was done synthetically,”Adams said, adding that synthetic structures involve riskier assets,which investors have shied away from after the financial crisis.

The BoE commentary pointed to a regulatory overhangthat continues to plague the market. The survey predictedno change in securitization-related consumer lending activityand cash securitization activity for corporate lending over thenext quarter. “Though it was difficult to assess theprospective impact of Basel III, lenders commented thatcapital would constrain net new lending to some extent goingforward,” the report said.

The survey quizzes U.K. institutions on lending activitiesto non-bank financial institutions, non-financial corporations

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TS011011 1/7/11 1:18 PM



Quote Of The Week“We expect the auto sector to continue to grow because it has emergedfrom the crisis with its reputation intact.”—Michael Millette, headof structured finance at Goldman Sachs, on his projections for asset-backed issuance over the next 12 months (see story, page 1).

on the $1.7 billion securitization from Wells Fargo Bank, RBS,Basis Real Estate and Natixis. The B-pieces were all awardedwithin a 48-hour time frame, according to one marketparticipant.

All of the deals are larger than any multi-borrower dealcompleted in 2010. Bigger deals mean bigger profits forsecuritization shops, an analyst noted, adding that a larger loanpool allows issuers to achieve economies of scale onunderwriting fees and other fixed costs. Additionally, a largerpool typically bolsters a deal’s Herfindahl-Hirschman Indexscore, which is used by Moody’s Investors Service, FitchRatings and Standard & Poor’s to judge propertyconcentration and assign ratings.

It is uncertain which deal will come to market first. Some areexpected to launch in time for major upcoming conferences,with the CRE Finance Council’s Washington, D.C., conferencethis month and the American Securitization Forum’s Orlando,Fla., conference in February, but the slowdown around theupcoming national holidays also will be factored in.

—Joy Wiltermuth & Graham Bippart

BANKS LINE(continued from page 1)

Ares Management recently tapped Bank of America MerrillLynch to arrange a $402 million CLO. The equity slice is said tobe retained by Ares, with the notes expected to price mid-January. Officials at both the bank and issuer declined comment.Separately, Citi is said to be pre-marketing the equity portion ofthe CLO it is arranging for WCAS Fraser Sullivan.

Spreads on AAA primary paper are coming in around LIBORplus 160 basis points on recent deals (see CLO Pipeline). Butmarket players said bonds still have room to tighten.

“If you can get inside of a [LIBOR plus] 150 or 125 rangethat enables significantly more issuance than we’ve seen today,”said Sara Bonesteel, managing director at Prudential FixedIncome Management. To get there she said more AAAinvestors are needed. “We are in a world where a lot of oldbuyers don’t exist anymore. You don’t have SIVs, you don’thave the banks. We are back to real money buyers who look tobuy and hold—and that’s a much smaller universe of buyersthan there used to be.”

Another issue dogging the sector is balancing the demandsof debt and equity investors. “We are now seeing the marketemerge from a state where equity sponsors were driving thetransactions to, hopefully, more open, regular-way deals,”Bonesteel said. —Joy Wiltermuth

BANKERS TALK(continued from page 1)

of structured finance at Goldman Sachs told TS. “It is the lowestcost of capital for many lenders, and auto sales are increasing.”

Bankers are expecting deals from the big issuers, includingNissan, Volkswagen, Ford Motor Credit and Ally Financial. Anhead of ABS syndicate at a major investment bank expected somevolume to flow ahead of the upcoming Commercial Real EstateFinance Council conference on Jan. 24 and the AmericanSecuritization Forum on Feb. 6.

JPMorgan analysts agreed, projecting the auto sector to see$65 billion versus $54 billion in 2010. “Autos will likely be themost active ABS sector in 2011 in terms of issuance, as it was in2010,” Amy Sze, ABS researcher at JPMorgan told TS. “Expectthe usual suspects to bring new deals soon.”

In CMBS, nearly $8 billion in new securities are being rolledout in the coming weeks (see story, page 1).

New ABS paper has yet to hit screens this year, but secondary

STREET WAITS(continued from page 1)

and small businesses. It also examines secured and unsecuredlending to households. Lenders were asked about recent creditconditions changes, with results being weighted according toa firm’s market share. The latest survey was carried outbetween Nov. 12 and Dec. 7. A BoE spokesman declinedfurther comment. —Hugh Leask

trading roared back to life in the first days of 2011. Traderspointed to the CMBS benchmark GS Securities Trust 2007-GG10 A4 bond being bid out. The GG10 was at 215 basispoints over swaps at end-of-day Wednesday, in from 245 bps onMonday, according to traders (see related story page, 3). Agencyresidential mortgage-backed securities spreads also tightenedearlier this week, but a selloff hit Wednesday when a new jobsreport jolted the market (see story, page 3).

Investors can expect steady deal volume increases, officialssaid, but warned issuance could be uneven in 2011, as some assetclasses face new hurdles. Credit card ABS deals are still findingaccounting and regulatory changes a major snag and private labelissuance RMBS remains elusive.

Volkswagen officials had no comment on future issuances.Nissan, Ford Motor Credit and Ally officials did not return callsrequesting comment. —Amelia Granger

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