The European ABS Market

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The European ABS Market A Week in Review: 5 12 March 29 Markit Structured Finance Research 13/3/29 Financials and the Economy Many thought Lloyds TSB s recent acquisition of HBOS was proof that a

1 The European ABS Market A Week in Review: 5 12 March 29 Markit Structured Finance Research 13/3/29 Financials and the Economy Many thought Lloyds TSB s recent acquisition of HBOS was proof that a strong balance sheet that made it one of the safest banks within the UK. But a constant deterioration of its assets pushed Lloyds to request the help of the UK government in the same way that RBOS did. This quasi nationalisation has raised the following question: Why wait for the worst when the government has the ability to act at a cheaper cost by taking more aggressive measures initially? Or was that not the case? Some investors will not feel safe until the major banks are nationalised or their balance sheets are insured by governments. Many now wonder how strong the government is within banks and why they have not transferred governance to government Treasury departments, which would help change the limitations of their credit policies. More positive news came from the US. Citigroup was apparently profitable during the January/February period. Five-year CDS widened massively during the first part of the week on uncertainty surrounding financials before tightening on Wednesday after Citigroup s internal announcement. Markit Structured Finance indices moved in only one direction. Markit ABX.HE reached its widest spreads ever while Markit CMBX approached its record wide set in November 28. 2,2 Markit itraxx Europe Senior 2, Financials Series 7 Version 15Y 1,8 1,6 1,4 1,2 Markit ABX.HE.AAA Indices S6 V1 Markit CMBX.NA.AAA Indices-S3 1, Oct-7 Dec-7 Feb-8 Apr-8 Jun-8 Aug-8 Oct-8 Dec-8 Feb-9 8 M organ Stanley HB OS 7 Bradford & Bingley PLC JPM organ Chase & Co 6 Citigroup Inc Royal Bk Scotland Gp PLC Dec-8 16-Dec-8 31-Dec-8 15-Jan-9 3-Jan-9 14-Feb-9 1-Mar-9 Statistics The Halifax House Price Index s improvement in January 29 was an exception. February 29 levels are a better reflection of the current situation. Month-on-month growth in February declined to -2.2%, driving the year-over-year decline to -17.7%. This deterioration can be directly linked to the seasonally adjusted monthly lending secured on dwellings. We saw an important improvement in December, when 1,734 million was allocated, up from 741 million in November, according to the Bank of England. The measure declined to just 69 million in January. The Markit Construction PMI Index, at 27.8 in February, showed no sign of recovery. The housing activity and the commercial activity subindices were the worst performers at 24.4 and 25.4, respectively.

2 CIPS Housing Index Source:CIPS/Markit UK Construction PMI 5 = no change on previous 2 month 1 Jan-98 Jan- Jan-2 Jan-4 Jan-6 Jan CIPS Housing Index Source:CIPS/Markit UK Construction PM I 5 = no change on previous month Feb-8 Apr-8 Jun-8 Aug-8 Oct-8 Dec-8 Feb-9 Top 5 After the January/February period, when we saw both improvers and deteriorators, we have returned to a better representation of this credit crisis. The top five movers were all deteriorators. Top 5 ABS Deteriorators Deal Name Series Class Ccy Isin Change (bp) Rating Sector Avg Life(yr) Dutch Mtg Portfolio Lns Iv Bv 1 A EUR XS AAA RMBS 1.9 Fondo Titul Hipo UCI 12 1 A EUR ES AAA RMBS 4. Perm Fing No4 Plc 5 A2 GBP XS AAA PRMBS 2. Holmes Fing No 9 PLC 3 A1 EUR XS AAA PRMBS 1. Holland Mtg Backed Ser Hermes XI BV 11 A EUR XS AAA RMBS 4.2 Primary Market Originators have not taken advantage of an opportunity to price some deals during last two weeks, despite the fact that we entered March with relatively tight spreads. Primary Market Deal Country/Sector Class Av Rating Amount ( mn) Anaptyxi SME II 29-1 Greek/SME CLO A A 8 1,815 B n.r 95 1,485 Global Drive German Lease 29-A german/auto Lease A AAA n.p 692 B A n.p 26 C n.r n.p 152 Palladium Funding 1 German/CMBS A A 1 4,1 B BBB C n.r n.p 1,369 Quarzo Italian/ABS A AAA 1 69 B n.r 4 21 Rural Hipotecario Spanish/RMBS A AAA 3 2,113 B AA 5 25 C BBB 7 62 Scannan Finance UK/SPRMBS A A B n.r 3 29 Spessart 29-1 German/RMBS A AA 6 1,638 B n.r n.p 431 UBI Finance Italian/SME CLO A AAA 4 1,56 B n.r n.p 52 13/3/29 2

3 In terms of rating actions, Moody s Investors Service handed out a large number of downgrades and negative outlooks for CDOs and leveraged loan CLOs. From an ABS perspective, the focus was on the following deals: Deals Affected by Rating Actions Deal Cavendish Square Funding II Chester Asset Receivable Dealings EPIC Opera Foncaixa FTGENCAT 3 Force 25-1 Gazprombank MBS 26-1, 27-1 GC FTPYME Sabadell 4 and 5 Graeechurch Card Funding Landsdowne mortgage Securities 1 and 2 PREPS 24-2, 25-1, 25-2, 26-1, 27-1 TDA CAM 1 Country/Sector Interenational/CDO UK/Credit Card UK/CMBS Spanish/SME CLO German/SME CLO Russian RMBS Spanish/SME CLO UK/Credit Card Irisih/RMBS German/SME CLO Spanish/RMBS European CDS of ABS The rally we saw during January and February has ended and we are now in line with the same levels we saw for February month end, except for Granite and the Spanish names which widened significantly which were in part due to the Kingdom of Spain s downgrade. The most liquid AAA names trade at the following levels: Arkle Master Issuer at 35 basis point Holmes Master Issuer at 31 basis point Permanent Master Issuer at 42 basis points Delphinus at 29 basis points Bankinter 14 at 52 basis points Fondo Titul Activos Hipo 3 at 53 basis points. Granite Master Issuer at 51 basis points Interest Rate The European Central Bank and the BoE slashed rates by half a point, to 1.5% and.5%, respectively. This shows that their only concern is growth. With energy and house prices still at relatively low levels, inflation should continue to decline and begin to stabilise in the coming months. On the other hand, if private banks start to seriously react to the rate cuts of the last six months, we should see improvements in both the credit market and the real economy. If they continue to demand a massive spread between their borrowing costs and the rates they offer to consumers, the current situation will not change. Euribor week 1mo nt h 2.4 2month 3month month 12 mo nt h Apr-8 Jun-8 Aug-8 Oct-8 Dec-8 Feb-9 % GBP 2Y Swap Mar-8 May-8 Jul-8 Sep-8 Nov-8 Jan-9 Mar-9 13/3/29 3

4 European ABS Sector Curves Recent widening in the European CDS of ABS market is again perfectly correlated to the cash names. In general, a negative spread of 15-2 basis points exists between synthetic (fix cap) and cash. Because of this, all of our curves have widened. Almost all of the European CMBS AAA sector trades in the 1, basis points range, which means very low cash prices. This situation is due to the fact that the majority of buyers in this sector now are distressed funds. European AAA RMBS (3-5yr WAL) European AA RMBS (3-5yr WAL) 1,4 1,2 1, UK SPRM BS Spanish RM BS It alian RM BS Portuguese RM BS Aust ralian RM BS UK PRM BS Dutch RM BS Irish RM BS French RM BS 2,4 2, 1,6 1,2 8 UK SPRM BS Spanish RM BS UK PRM BS Dutch RM BS 2 4 Oct-7 Dec-7 Feb-8 Apr-8 Jun-8 Aug-8 Oct-8 Dec-8 Feb-9 Oct-7 Dec-7 Feb-8 Apr-8 Jun-8 Aug-8 Oct-8 Dec-8 Feb-9 European A RMBS (3-5yr WAL) 4, 3,5 UK SPRM BS UK PRM BS 3, Spanish RM BS Dutch RM BS 2,5 2, 1,5 1, 5 Oct-7 Dec-7 Feb-8 Apr-8 Jun-8 Aug-8 Oct-8 Dec-8 Feb-9 European BBB RMBS (3-5yr WAL) 8, 7, UK SPRM BS UK PRM BS 6, Spanish RM BS Dutch RM BS 5, 4, 3, 2, 1, Oct-7 Dec-7 Feb-8 Apr-8 Jun-8 Aug-8 Oct-8 Dec-8 Feb-9 4,8 4,4 4, 3,6 3,2 2,8 2,4 2, 1,6 1,2 8 4 CMBS (3-5 yr WAL) CM BS AAA CM BS AA CM BS A CM BS BBB Markit CMBX.NA.AAA Indices-S3 Markit CMBX.NA.BBB Indices-S3 Oct-7 Dec-7 Feb-8 Apr-8 Jun-8 Aug-8 Oct-8 Dec-8 Feb-9 UK P RM BS AAA 3,6 3,2 2,8 2,4 Holmes Master Issuer PLC A2 EUR Perm Master Issuer plc A EUR Granite Master Issuer plc A2 EUR Aire Vy Mtgs 251 plc 2 A2 EUR 2, 1,6 1,2 8 4 Oct-7 Dec-7 Feb-8 Apr-8 Jun-8 Aug-8 Oct-8 Dec-8 Feb-9 European Auto Loan/Equipment Lease ABS 2,4 Auto Loan AAA (1-4 yrs) Aut o Lease AAA (1-4 yrs) Equip Lease AAA (1-4 yrs) Aut o Lease A (1-4 yrs) 2, Auto Loan BBB (1-4 yrs) Equip Lease BBB (1-4 yrs) 1,6 1,2 8 4 Oct-7 Dec-7 Feb-8 Apr-8 Jun-8 Aug-8 Oct-8 Dec-8 Feb-9 European Credit Card ABS 3,2 2,8 Credit Card AAA (1-4 yrs) Credit Card A (1-4 yrs) 2,4 Credit Card BBB (1-4 yrs) 2, 1,6 1,2 8 4 Oct-7 Dec-7 Feb-8 Apr-8 Jun-8 Aug-8 Oct-8 Dec-8 Feb-9 13/3/29 4

5 ABS Performance Highlight: European CMBS As refinancing costs have risen and sources of finance have become less available, commercial mortgage borrowers have found themselves in difficult times. With many large loans due for refinancing, should existing lenders extend the loan period to a borrower with a sustainable business plan or call in special servicers to evaluate the workout process? This dilemma has impacted the performance of the European CMBS sector. With 29 European CMBS loans in default, the potential for credit losses has grown for CMBS investors. Once a loan has breached its terms and no remedy has been found, it can be transferred to the special servicer, whose role is to determine the best course of action to generate as much of a recovery as possible. These workouts are relatively new in European CMBS so there is little precedent for determining the right course of action. From the point of view of the special servicer, the right course of action is that which best serves the whole spectrum of investors, from the most senior to the equity holders. Each loan case is treated separately and is likely to have a different workout scenario. Knowing the details of each loan in a deal is important in determining the likely impact on investors. Below we can see Markit loan level information from a loan that has been in special servicing since May 28. It makes part of the Talisman 6 Finance plc transaction issued in April 27 for a value of just over 1 billion. Deal Name Talisman 6 Finance plc Talisman 6 Finance plc Date of Report 15 October January 29 Currency EUR EUR Name Of Loan The Cherry Loan The Cherry Loan Amount Outstanding 59,288,625 59,288,625 LT V Loan Maturity 15 October October 211 Interest For Period 745, 245,5 Property No Lease No Property Location Mostly Sachsen (72% of MV) Mostly Sachsen (72% of MV) Property Ty pe Mixed Use Mixed Use Property Valuation 5,2, 5,2, WA Lease Expiry Net Rent PQ Net Rent PA ICR DSCR Pct Occupancy With a loan in special servicing, the best workout scenarios differ depending on which tranche you are invested in. For senior noteholders, the preferred option would be to appoint a sales agent and liquidate the assets. Any accrued losses would be written down to the junior notes, whilst any principal generated would be used to pay off the senior notes. 13/3/29 5

6 In turn, the preferred course of action for junior noteholders would include further interest payments and the possibility of a new borrower taking on the loans. This would create extension risk for the more senior bonds and, with no standard precedent set for NPV of future cashflows, varying the discount rates used could create wildly different scenarios to support differing propositions. The impact of the above loan default can be seen in the price graph below. The graph shows the most junior note, which is now receiving no interest payments as of the last payment period. Price Talisman 6 Finance plc - Class F XS Dec-7 Feb-8 Apr-8 Jun-8 Aug-8 Oct-8 Dec-8 Feb-9 The impact of defaulted loans on European CMBS will continue to grow. It will be interesting to see how special servicers will work out the best approach for loans transferred to them and consequently which bonds will eventually be impacted and by how much. Special servicers will be subject to many opposing pressures from the differing classes of noteholders and will undoubtedly be earning their fees over the coming months. Philippe Pagnotta ABS Analyst, Structured Finance Markit David Bruce ABS Analyst, Structured Finance Markit Tel: Tel: philippe.pagnotta@markit.com david.bruce@markit.com For more information on Markit's ABS products, please contact: sfsales@markit.com 13/3/29 6

The European ABS Market

The European ABS Market A Week in Review: 3 1 December 29 Markit Structured Finance Research 11/12/29 European ABS Sectors Following the call of Leek 14 three weeks ago, last week Fortis decided to call