[This page lists news and developments in global securitisation markets – please do visit this

page regularly as it is updated almost on a daily basis. Join our mailing list for regular news

fed direct into your mailbox]

Read on for chronological listing of events, most recent on top:

Previous news pages

August 04 onwards.July 03 – Nov 03.Mar 03 – June 03.Nov02- Feb 03.Sept-Oct 02 ...June-Aug 02 ...May 02 ...Apr 02 ...Mar 02 .Feb 02 .Jan 02 .Dec., 01.Nov, 01 . Oct.,2001.Sep.,2001., Aug 2001… July, 2001.June, 2001May, 2001,… April 2001… March 2001 ..Jan. and Feb.2001 Nov. and Dec.2000 Sept. and Oct. 2000 July and August 2000May and June 2000 April 2000  Feb and March 2000   
For all news added before 21 January, 2000, please 
click here   
For all news added before 9th November, please 
click here   
For News items added prior 3rd August, 1999, 
click here.

European structured finance grows in volume and diversity: S&P

Giving its report card for the first half of 2004, rating agency Standard and Poor's says European structured finance transactions in first half of 2004 have grown both in volume and diversity. Both the scale and scope of European securitisation market has grown.

From oil to telecom receivables, the range of assets securitized in Europe in the first half of 2004 continued to broaden," said credit analyst Chris Such, a director in the Structured Finance group. "In addition, the mainstays of autos, credit cards, and leasing deals increased their use of the market in 2004 compared with 2003."

S&P expects the pipeline of transactions for the rest of the year to remain strong for most of the major European ABS sectors, such as leases, credit cards, and auto loans. While the established players in Europe continue to securitize more and diverse assets, new players are preparing to enter the market. Greece remains a potential source of future transactions and interest in structured financing is growing in previously untapped regions such as Eastern Europe and Scandinavia.

Issuance so far this year has proved strong. Funded European ABS issuance rose to €24.1 billion in the first half of 2004 from €14.9 billion in the corresponding period of 2003, with Italy accounting for approximately 43% of the total.

Links For more on European securitisation market, see our page here.

The Malaysian government to raise RM 25 billion by securitisation

In our recent write up, we wrote that governments World-over were awakening to the potential of securitisation; we also mentioned about Malaysia's plans for securitisation of housing loans. The plans are now firm.

Malaysian press recently cited Second Finance Minister Tan Sri Nor Mohamed Yakcop having said that the Govt is keen to securitise some RM 25 billion (approx USD 5.5 billion) worth staff housing loans. The move was to further develop the Malaysian bond market, in particular asset backed securities (ABS).

Cagamas, the government-promoted housing securitisation body would be used to carry out this securitisation. 

While the move could be a simply liquidity exercise for the govt and a device to cut its budgetary gaps, the government has been trying to find various justifications for the move. Nor Mohamed said the securitisation exercise would contribute to create a yield curve for MBS with longer maturities that will serve as a benchmark for other ABS issues and put in place a price discovery mechanism to enable investors to price more accurately other types of ABS. The move is also to foster a viable and active secondary market for the ABS issue and promote Malaysia as an issuer of Islamic ABS as the government's housing loan portfolio also constitutes Islamic financing debts.

Links For more on Malaysia, see our page here.

Training courses in Malaysia We hold regular training courses in Malaysia. For our forthcoming training course schedule, see here

Whole business securitisation wasn't 3 cheers for M&C

In our training sessions, when we used to talk about whole business and inventory securitisation, Marne et Champagne was always discussed as a unique example. The deal that won several prizes in 2000 as a landmark securitisation transaction claimed to have used a device that was discovered in 200 years' old French law of pledges. However, the transaction was almost about to hit the avalanche, leading to a near bankruptcy of Marne et Champagne (M&C), the world's second largest champagne producer, before it was rescued.

The rescue did not come free -Caisse Nationale des Caisses d'Epargne (CNCE), a French mutual savings bank took a 44 per cent stake and provided €410m ($508m) in new financing with which M&C could pay its securitisation noteholders. The holdings of the Mora family that owned M&C has been considerably diluted in the process.

A report in Financial Times [10th July] put it thus: "Its (M&C's) problems stemmed from its inability to repay a ground-breaking four-year asset-backed bond it had issued amid much fanfare in March 2000. In a securitisation designed by Nomura, it had over-borrowed, raising €396m against its stock of 60m bottles of champagne in various stages of production…Nomura spotted that wine in production – like many other esoteric assets – could provide attractive collateral for cheap longer-term finance and encouraged M&C to abandon its long-standing reliance on more costly bank finance. Four years later, however, in March 2004, projections made at the height of the stock market bubble had long been discarded. Investor confidence had also been shaken by overstocking prior to the millennium and an accountancy scandal that bankrupted the Bricout- Delbeck champagne house. Unable to roll over the securitisation facility, the Moras found themselves facing the loss of their company."

Since the entire stock of wine bottles had been pledged to trustees for the noteholders, the family could lose the entire stock. Usually there are also covenants in whole business deals for replacement of the servicer of the business – in this case, the existing management would have been removed.

Whole business securitisation device, a mid-way between loans and securitisation, could, in situations of adversity, prove to be noose round the neck for the operator of the business. In terms of ratings, as it does not often provide a ratings-arbitrage, the motives of a business to go for whole business securitisation should be examined carefully.

M&C is not the only example of whole business securitisation deals going sour – there are more examples in London.

Links For more on whole business securitisation, see our page here.

Securitisation growing fast in China

China might soon emerge as the new growth centre of Asian securitisation. According press reports in Chinese papers, Wu Xiaoling, vice-governor of the People's Bank of China addressed a forum on MBS in China and said that China is gathering pace in the development of asset securitization to provide new financial and investment tools for domestic institutions and foreign investors. She said that the central bank had submitted a proposal on the MBS pilot programme to the State Council.The programme is being reviewed, she said at a forum on MBS in Beijing.

The official was well aware of the fact that current state of Chinese legislation is grossly incomplete to allow securitisation to happen. There is no law on assignment of receivables.

Law or no law, China is already making headway on securitisation of non-performing loans. China has already started some pilot programmes on asset securitization to help State-owned banks and asset management companies (AMC) dispose of non-performing loans (NPLs), including a pioneering deal by China Huarong AMC to repackage 13.2 billion yuan (US$1.6 billion) worth of NPLs into a trust programme last year. But the scale is very limited and MBS programmes are still not generally allowed.

However, the market potential is huge. Being the most populous country on planet earth, China must tap securitisation potential for housing programs.By the end of 2003, China's outstanding individual housing loans were close to 1.2 trillion yuan (US$144.9 billion).

Links For more on securitisation in China, see our country page here. Also, you might be interested to see the China page on our leasing site.

Structured product CDOs a rage in first half 2004

The first half of 2004 has witnessed approximately 20% increase in issuance of asset backed securities in general, but the structured finance CDO market is where the action lay. The issuance of structured finance CDOs, also sometimes known as CDO squared, was up 90% compared to the corresponding period over the previous year. Structured finance CDOs were only 20% of the total CDO issuance last year, but this year, they take about 50% space.

Structured finance CDOs are CDOs that invest, either in cash or synthetically, in other structured products such as CDOs, ABS, MBS or even REITs. They are also sometimes known as resecuritisation.

Structured finance CDOs, like all CDOs, try to capture the pricing inefficiencies of the structured products market.

A report by Nomura Research looking at the future growth potential of structured finance CDOs says: "While this trend (growing numbers) is likely to continue into the second half, we expect the new CDO sub-category to lose some luster in the latter part of the year. Here are two reasons for our skepticism: (1) Arbitrage opportunities may rapidly disappear as more deals get done, and (2) The inevitable rise in interest rates is likely to cause supply of structured debt to ebb in coming months. On the other hand, synthetic SF CDOs might come into vogue as a means of diversification for CDO investors, as liquidity improves and credit default swaps (CDS) referencing ABS become standardized."

Links For more on structured product CDOs, see our page here.

Abu Dhabi bank uses securitisation structure for power project funding

The National Bank of Abu Dhabi has structured what is called " power bonds" to finance a power project. The structure, as it appears from press reports, is either the same as securitisation, or close to it. The instrument is called "participation notes", which seems to be equivalent of participation certificates in syndicated lending.

The power project in question is the Taweelah A2 Power Project, and the total amount of funding raised is approximately AED 500 million (US $ 133.75 million).

The bond issue achieves maturities of 4, 7 and 8 years (three tranches). It is not clear whether typical structured finance principles of subordination or other forms of credit enhancement have been used for the project.

Press reports also suggest that the bond launch is expected to set the ball rolling for subsequent issues related to the power projects set up under the Abu Dhabi Water & Electricity Authority (ADWEA) Privatization Programme. The Issue shall open a new avenue for the pension funds, insurance companies and other institutional investors to participate in ADWEA power project credits which are otherwise limited to Banks. 

Basle II is here !

Travelling by road from Frankfurt to Interlaken, Switerland, and from there to Munich, on en route, you pass through Basle. You never get to realise that this not-so-busy place is abuzz with activity that would sleepless nights to many banks and banking regulators, and tons of cash to technology companies that would invariably be required to compute capital for banks under the new capital requirements. Finally, after 4 years of drawing, detailing, re-drawing, Basle II is here. End-June 2004, the final rules have been laid.

The new framework is to be implemented by year-end 2006, however, for certain advanced approaches one more year is allowed.

As for securitisation transactions, the rules are substantially similar to those in Consultative paper 3, as refined in Jan 2004.

We include a note explaining the capital provisions in Vinod Kothari's article here. In the said page, we also give link to the full text of the BIS II.

More to come Please do follow this page. We will be putting more industry opinions, articles and links on this most important regulatory development of the year.

Philippines bank may launch unique SME securitisation program

Securitisation of SME loans by synthetic transactions is quite common in Germany, but some Asian nations are creating a cash market for SME loans securitisation. Recently, we had reported a similar initiative in Singapore. In Philippines, where a securitisation legislation was passed recently, the state-owned Development Bank of the Philippines (DBP) is in the process of setting up an electronic marketplace where receivables of small and medium enterprises (SMEs) can be sold, thereby creating a secondary market for SME loans.

There is a significant difference between the Filippino model, and those in other countries. In other countries, banks sell SME loans to a central agency, such as KfW in Germany. Under the Filippino model, SME's would sell their receivables to DBP.

90% of Filippino business is SME-based.

The particular securitisation exercise is called Market for SME Receivable Purchases (M4SME-RP). M4SME-RP is an electronic trading facility where SME receivables could be securitized and sold to retail investors and financial institutions. Arguaby, the cost of lending to SMEs will come down thereby, in addition to channelising capital market flows towards the SME sector. Under the M4SME-RP program, accredited SME's could use the facility to auction out their receivables to large company clients, who, in turn, could securitize them into financial instruments that could be sold to investors.

Thus, M4SME-RP serves as a clearing-house, where commercial documents are electronically passed, authenticated, and digitally signed conversion of these securities. The facility allows the exchange of commercial documents using electronic infrastructure. Under the program, SME's would act as sellers of their receivables, large company clients issuers of receivable-backed securities, with the buyers investor participants such as insurance companies, preneed firms, and financial institutions and their roster of retail investors and trust entities.

Governments fidgetting to fill fiscal holes: securitisation to the fore

The Hong Kong government recently securised toll revenues in a transaction that proved highly successful. Not that the message would have been as loud as to be heard in Germany, but there is a sudden awakening of governments to the power of securitisation, with at least 2 governments currently making noise about using securitisation to fill their fiscal holes – Germany and Malaysia.

Take the case of Germany first. The German government wants to raise close to Euro 5 billion by way of securitising Germany loan assistance to Russia. Later, officials deflected the number of Euro 5 billion and said, they don't know how much would the market be willing to offer for this debt, but it is clear that Germany's Paris Club debt to Russia would be securitised. The Berlin government obviously is fill up a fiscal hole – Germany's federal budget for 2004 originally envisaged a deficit of €29.3bn but last month the government said tax revenue for the year, which makes up 80 per cent of total revenues, would be €10bn lower than expected.

Since Margaret Thatcher's privatisation exercise about 20 years ago, governments World-over have used privatisation as the means to shore up government's finances. Securitisation is, in terms of fiscal impact, similar to privatisation. As a matter of fact, governments such as Lebanon perceive securitisation and privatisation as alternatives.

Press reports are not clear as to whether the German securitisation would be a cash securitisation or a synthetic one. Synthetic ecuritisation may only provide fractional funding.

The other government that might seriously considering securitisation is Malaysia. Malaysian press carried reports about Rating Agency Malaysia chief C Rajandram suggesting that the Malaysian government might raise RM 20 billion (approx USD 5.3 billion) by securitising the government's housing loan receivables. The Malaysian government is also facing the problem of successive budgetary deficits, which it has promised to balance out by 2006.

The question of how governments account for the proceeds of securitisation is tricky one. Eurostat has defined rules about securitisation of future flows by governments – that they should form a part of government's borrowing. IMF has also come out with an article that generally criticises collateralisation of future revenues by governments – see our page on future flows here. However, securitisation of existing revenues such as loans may be different. Privatisation accounting principles may apply here and the flows may be taken as a part of capital budget of governments.

Links For more on securitisation of government revenues, see our page here.

First CMBS deal in Taiwan flies

Taiwan had recently enacted a real estate securitization law, and in retrospect, the law has been quite successful. One of the very first issues of CMBS paper sold out on the very first day.

Reports in Taipei Times of June 11 say that the securitized seven-year bonds backed by rent from an office building in downtown Taipei owned by Tong Yang Chia Hsin International sold out on the very first day of the offer. Industrial Bank of Taiwan acted as the sole arranger.

The building is owned by Tong Yang Chia Hsin International Corp, an affiliate of Chia Hsin Cement Corp, and tenants include International Business Machines Corp, ABN Amro Holding NV and J.P. Morgan Chase & Co. Obviously, the building is in posh office area of the city.

The real estate securitisation law in Taiwan was passed in July 2003.

Links For more on securitization in Taiwan, see our country page here. For more on CMBS, click here.

SEC publishes disclosure document for ABS/MBS

The SEC has published the disclosure document that is to introduce a new regime of disclosures for issuers of mortgage backed securities (MBS) and asset backed securities (ABS). The paper is much shorter than expected – about 200 pages in HTM ormat. There is a 60 day period for comments.

The SEC says: "We are proposing new and amended rules and forms to address comprehensively the registration, disclosure and reporting requirements for asset-backed securities under the Securities Act of 1933 and the Securities Exchange Act of 1934. Principally, we are proposing to: update and clarify the Securities Act registration requirements for asset-backed securities offerings, including expanding the types of asset-backed securities that may conduct delayed primary offerings on Form S-3; consolidate and codify existing interpretive positions that allow modified Exchange Act reporting that is more tailored and relevant to asset-backed securities; provide tailored disclosure guidance and requirements for Securities Act and Exchange Act filings involving asset-backed securities; and streamline and codify existing interpretive positions that permit the use of written communications in a registered offering of asset-backed securities in addition to the statutory registration statement prospectus."

Among the major changes, there is a new definition of "asset backed security", which enhances the scope but still does not seem to include synthetic securitization. The document says: "Under our proposal, the basic definition of “asset-backed security” would be “a security that is primarily serviced by the cash flows of a discrete pool of receivables or other financial assets, either fixed or revolving, that by their terms convert into cash within a finite time period, plus any rights or other assets designed to assure the servicing or timely distributions of proceeds to the securityholders; provided that in the case of financial assets that are leases, those assets may convert to cash partially by the cash proceeds from the disposition of the physical property underlying such leases.” There are specific proposals relating to lease-backed ABS and the relevance of residual values thereto.

Master trusts have very commonly been used for several collateral classes. "Our proposal would allow master trust structures to meet the definition of “asset-backed security” without any pre-determined limits".

There are enhanced requirements as to disclosures in prospectus.

The proposal calls for disclosure of static pool data "if material to the transaction to aid in an investor's analysis of current and prior pool performance." The proposal covers the subject extensively under the topic of disclosure about a transaction's sponsor. More specifically, the proposal calls for three years of static pool data. The proposal for static pool data appears to include vintage performance data for revolving asset pools."

Mark Adelson of Nomura Research says: "The proposal includes nearly all of what we hoped to see, but not everything. A little room for improvement remains."

Link For the full text of the SEC document, click here

For detailed articles on the SEC disclosure document, please see our page on US securitization rules.

SEC to present 400 page disclosure document for securitisation

We had recently reported that the SEC might enhance disclosure requirements for MBS/ ABS issuances. And the proposal is shortly forthcoming. On 28th April, the SEC held a meeting wherein the Commissioners unanimously voted for publication of a proposal related to the enhanced disclosures. The publication, expected to run over 400 pages, is expected next week.

Some of the significant changes being proposed are:

  • ABS/MBS disclosure would include static pool performance data.
  • ABS/MBS issuers would be permitted to distribute loan-level data to investors.
  • ABS/MBS disclosure would include expanded information on transaction participants, such as sellers and servicers.
  • The proposal would broaden the definition of "asset-backed security"1 to include securities backed by more kinds of assets, including auto leases.
  • Shelf registration (Form S-3) would be available to the newly expanded class of "asset-backed securities."
  • Shelf registration would be more readily available to foreign ABS/MBS issuers.

In addition, it was indicated that the proposal calls for changes in the periodic reporting framework for ABS/MBS. Quarterly reports would emphasize changes in pool composition. The proposal would codify the annual certification requirements for ABS/MBS under § 302 of the Sarbanes-Oxley Act and would establish principles-based criteria for assessing servicing compliance.

The SEC paper is likely to have a 60 day comment period.

Watch out We would be watching out developments as they take place in this front; so, stay connected.

Chinese bank to securitise bad loans

In a novel deal from China, Industrial & Commercial Bank of China (ICBC) has signed up with Credit Suisse First Boston Corp whereby the latter will act as ICBC's adviser in a securitisation backed by non performing loans and sub performing loans valued at 2.6 billion yuan. Securitisation is yet to take off in China to any material extent.

Securitisation of non performing loans is not uncommon globally, but it is largely based on the legal environment for enforcement of security interests backing up the bad loans. Chinese non performing loans have been of global interest way of private sales, but this transaction makes a remarkable difference being by way of securitisation.

Chinese financial institutions had a total of CNY2.44 trillion in bad loans on their books at the end of 2003, or an average of 17.8% of outstanding lending. At 21.3%, ICBC's end-year nonperforming loan ratio was somewhat higher than average.

Links For more on securitisation of bad loans, see our page here.

FASB concerned about isolation: seeks opinions

The US standard setter has set in motion yet another discussion on pre-conditions for off-balance sheet accounting – this time, on the legal certainty of isolation. This relates to the obligor's right of set off, or similar other legal infirmities that might quarrel against the unconditional rights of securitisation investors to transferred assets.

Set off right is essentially a right of netting off. If A owes B an amount, and B owes A an amount, A may net off his obligation aginst his receivable. In context of securitization, a transferor transfers a financial asset representing a claim against an obligor. If the obligor has a corresponding receivable from the transferor, the first receivable is subject to the potential netting off against teh second one. If that is the case, it would be wrong to treat the transfer of the first receivable as a sale. FASB has sought opinions on this issue. A FASB release of 9th April says that "the Board has become aware of an issue related to the isolation of transferred assets that apparently was not explicitly considered when Statement 140 was issued—the ommon-law right of debtors and creditors to set off (net) amounts due to one another if one of the parties defaults, becomes insolvent, or enters into bankruptcy or receivership." If the obligor's right of set off exists, the buyer of receivables buys the same subject to the potential netting off of the claims of the obligor against the originator.

One of the commonest examples of a right of set off is deposit a borrower from a bank holds in the lending bank. The borrower may require the bank to adjust the deposit against the loan.

The scope of the FASB request is not limited to set off – it goes into all the factors that might undermine a sale: "there may be other unidentified legal factors or conditions that transferors and their auditors should consider in reaching conclusions about isolation of transferred assets." The last date for the comments is 30th May.

Links For more on legal issues relating to securitization, click here. For more on accounting issues, click here.

US SEC seeks more disclosures for asset backed securities

We reported about Bowie bonds and similar future flows yesterday. That surely could not have triggered the following, but the nexus is interesting: an SEC official has stated that the SEC would like more disclosures in case of asset-backed securities (ABS). ABS firms would have to disclose more about their past performance under rule changes being considered by regulators. Paula Dubberly, associate director, said As part of an effort to formalize regulations that have grown up with the $1.7-trillion asset-backed market, the SEC staff plans to recommend requiring more disclosure so investors know more about the risks of these unconventional securities. 

The SEC staff plans to recommend disclosure of past performance by both asset-backed securities sponsors and servicers. Sponsors originate or buy assets and then sell them to trusts. Servicers collect the payments from, for example, car buyers and homeowners. 

Recently, the ABS landscape has been marred by frauds, lax servicers, and asset collateral collapse. Investors have also been increasingly concerned that the collateral being pumped into the ABS market is subprime.

European securitisation markets surge

During the first quarter of 2003, Eurpean ABS market surged by some 26 per cent, on the back of a 38 per cent increase last year. A news item in Financial Times, quoting Deutsche Bank, says that this year, securitisation volumes will be bigger than regular bond issuance.

Much of the surge in the first quarter can be attributed to some mega issues during March. Abbey, the UK bank, sold £4bn of mortgage-backed securities. Before this, Volkswagen, the German motor vehicle manufacturer, issued nearly €1bn of securities, backed by vehicle leases.

The European securitisation market expanded by 26 per cent to €54bn in the first quarter of the year, compared with the same period last year, according to preliminary figures from the Forum. Residential mortgage backed-securities account for the majority of the market, with €34bn, or 63 per cent, of the first-quarter issuance having been backed by property mortgages.

The growth extended the trend from 2003, a year in which overall securitisation issuance reached a record level of €217.2bn.

Links For more on European market, see our page here.

Supreme Court of India upholds securitisation law

In a litigation challenging the legal validity of a recent legislation challenging the Constitutional validity of a law called Securitisation Act (briefly, the actual name is much longer), the Supreme Court in an order passed today, upheld the validity of the law.

Lest there should be mistakes, this law does not hold much about securitisation, and securitisation transactions were not the subject matter of the legal debate. The legal debate centered provisions relating to enforcement of security interests (similar to Article 9 of UCC, USA or the PPSA legislation in Canada and New Zealand). These provisions allowed a creditor being a bank to seize collateral in case of a defaulted loan without going to a court. These provisions have been upheld by the Supreme Court.

The law is known as securitisation law because the 3-part legislation also has a part dealing with securitisation transactions. That part, in market parlace, has been largely ineffective because most transactions in the marketplace circumvent the regulatory tone of those provisions.

Links For more on the enforcement of security interest provisions of this law, see our page here. For securitisation in India, see here

Bowie bonds grounded, does it spell tough time for similar future flows?

Bowie bonds, at one time regarded as a brilliant new idea to hit Wall Street, have been grounded. The rating agencies recently reduced them to near-junk grade. Is it just a limited problem, or does it signal tough time for bonds backed by similar cashflows out of assets such as lotteries, music, beauty parlours, food chains, etc?

Bowie bonds, backed by royalty income of rock star David Bowie made headlines in 1997 when USD 55 million was raised against securitisation of future cashflows. David Pullman claimed authorship of the idea, though that claim itself was later dismissed in legal proceedings. Recently, Moody's downgraded the bonds to just one step above junk, citing reasons such as depleting sales and the situation in the music royalty industry.

The trouble with future flows of this nature is that it is almost like equity investment by the investors as they take all the operational risks of an operating business, but it does not have any of the upsides of equity investment. Bond investors get into future flows investments lured by higher returns, but the experience has been quite mixed. While in straight forward asset backed bonds, one is backed by identified pool of assets, future flows are backed by income which is to arise in future, with no certainty today.

Links For more on securitisation of cashflows backed by intellectual property, with several new articles on Intellectual property securitization, see our page here. For more on future flows, see here.

Market ripe for upward securitisation growth curve in India

Indian investment banks have been talking about it for years now, but securitisation was still the mental sport of a very limited coterie of investors, primarily the insurance companies and some mutual funds. But now it seems the commercial banks with their huge liquidity position are ready to accept securitisation. Thus, 2004 may see both increase in volume as also, and more significantly, a growing investor class.

Recently, Citibank wrapped an SME working capital securitisation. The idea of an SME loan securitisation is not new: several countries have done it already. But working capital, which does not have identified cash inflows and works like a revolving credit, is structurally a new thought.

The best part is that not only are institutional investors flocking into the securitisation market, even larger corporate treasurers are finding it interesting. In a recent mortgage backed securitisation issue, for example, a corporate making cables is said to have made investment.

There are several tax infirmities yet to be cleared to enable securitisation to reach a safe harbour – the government made an enactment which is more like a statement of good intentions rather than of any legilative use to securitisation transactions.

Links For more on Indian securitisation market, including recent article by Vinod Kothari, see our page on India here.

Japanese securitisation market looking for new asset classes

The Japanese securitisation market is prepared to look out for new asset classes this year, as interest rates seem to be rising, and hungry for yield-pickups, investors might be prepared to lap up new transactions.

During 2003, the biggest asset backed class in Japan was CDO/ CLOs. According to a recent Moody's report on the state of the Japanese securitisation market, CDOs took Y4,400bn ($42bn) of the Y8,300bn total market last year. Of notable transactions in this segment, Mizuho came out with a mega CLO transaction involving 150 obligors. Most of the CLOs were done more for risk management than for liquidity, and therefore, as problem of bad loans becomes a bit easier, the need for risk management through CLOs might be bit less intensive this year.

Leaving the CDO segment, there were deals of about Y 2200 bn in the asset-backed market, involving lease payments, auto loans and consumer loans.

However, with interest rates of nearly zero, investors are looking for riskier assets. The investor universe is fast expanding: the investors include insurers, mega banks and even shinkin, rural credit associations at home, and hedge funds and investment banks from overseas. There have already been pilot deals in non-traditional classes, involving future flows. For example, annual membership fees of English-language schools and even beauty parlours have been securitised. Bowie Bonds might have been grounded elsewhere in the World, but Japanese investors are still wanting to take a loot at these.

Links For more on the Japanese market, see here

FASB to rewrite FAS 140 on qualifying SPEs

Accounting for securitisation seems to have become a familiar mental sport at the FASB, and it seems it would years before the complexities, not all of which are warrantd, and certainly not wanted, of this accounting standard would be resolved. End-March 2004, the FASB staff has undertaken yet another project to rewrite accounting rules on qualifying SPEs and the condition for isolation of assets, required for off balance sheet treatment to securitization transactions.

A FSAB press release says that the objective of this project is to amend FAS 140, to (1) specify the conditions under which a qualifying special-purpose entity (SPE) is permitted to issue beneficial interests with maturities that are shorter than the maturities of the assets held by the qualifying SPE and roll over those beneficial interests at maturity; (2) clarify or amend other requirements of Statement 140 related to commitments by transferors, their affiliates, and their agents to provide additional assets to fulfill obligations to the beneficial interest holders; and (3) address other issues related to transfers of financial assets that arose during deliberations.

The FASB has reached the following decisions related to legal isolation and accounting for undivided interests:

1. Legal isolation requirements would be applied only to those affiliates included in the consolidated financial statements in which a transferor is reporting the results of a transfer. In some circumstances, the accounting for a transfer in the financial statements of a parent company would be different from the accounting in the separate financial statements of a subsidiary (September 24, 2003 Board meeting).

2. Paragraphs 80–84 and various related paragraphs of Statement 140 would be amended to require that an entity that issues either beneficial interests or undivided interests be a qualifying SPE in order to satisfy the criteria in paragraph 9(b) of that Statement. The Board noted that one implication of its decision would be that a qualifying SPE would be required for any transfer of a portion of a financial asset, not just for multiple-step transactions (October 1, 2003 Board meeting).

The Board has reached the following decision related to transferor support commitments and derivatives:

1. If transferors of financial assets provide support commitments or derivatives either directly to beneficial interest holders or in connection with the beneficial interests, those obligations should be considered in the same manner as if they were provided directly to the qualifying SPE for purposes of evaluating legal isolation. That requirement would include support commitments entered into with third parties who provide “back-to-back” guarantees to beneficial interest holders (October 1, 2003 Board meeting).

Links For more on accounting for securitisation, see our page here

Singaporean firm to promote securitisation for SME funding

Action Crucible for Financing, a private initiative that focuses on SME development, is trying to use the securitisation template for promoting SME funding in Singapore. Singapore is known for its multinationals and global investment banks, but not for its approach to development of SMEs.

Singapore's approximately 100,000 SMEs face difficulties getting loans from banks which, although flush with cash, can be conservative in their lending to untested companies. The government is also keen to promote entrepreneurship to reinvigorate an economy which is struggling to get back onto its feet.

Currently, the government typically supports smaller firms through the Local Enterprise Financing Scheme, under which the government guarantees 80% of qualifying bank loans. The exact form which the Action intends to use is not clear for now.

Vinod Kothari comments: One of the best examples of use of securitisation for SME funding is the German KfW template. Using either synthetic or cash securitisation structures, KfW does not provide refinance and the developmental agencies in most countries do – KfW merely facilitates the ultimate securitisation of pools of qualifying SME loans.

Links For more on SME funding by way of securitisation, see our page here.

E&Y report identifies securitisation as key real estate trend

A recent report by accounting and consulting major Ernst and Young went into the developments in the global real estate market. Titled Real Estate: The Global Local Economy, E&Y states that in an otherwise globalised economy, real estate is still a local market as there are several factors still inhibiting the globalisation of real estate.

There are, however, several factors contributing to the globalisation of real estate, and securitisation is one. Securitisation and REITs are permitting commoditisation of the ownership of real estate. "One of the key trends prompting increased global investment is the steady march of securitization and transparency in real estate ownership. In fact, REIT legislation — often along the lines of the very successful US format — is now common in both developed and developing nations around the world. In the last three years, France, Korea, Japan, Singapore and Taiwan have all adopted legislation allowing creation of REIT-style investment structures. In addition, the European Union has proposed creation of a EuroREIT and the UK government is also mulling REIT legislation. Not only is this legislation spurring expansion of commercial real estate markets in these countries, it's also promoting more offshore investment by US REITs. This trend is leading to the creation of important joint ventures with local owners and investors. Simon Property Group has entered into a joint venture with Italy's Rinascente Group to develop malls in Italy. Maguire Office Trust, an Australian-listed property trust, and Brandywine Realty Trust, a US REIT, have agreed to invest in office properties on the US East Coast", says the report.

The securitisation of non performing real estate loans is also highlighted as a significant development.

Links For more on securitisation of commercial real estate, see our page here.

Islamic securitisation making headway in the Gulf

Several recent events suggest that Islamic finance in general is gathering strength, and that Islamic securitisation seems like a reality.

On March 10, Beirut (Lebanon)-based BSEC Investment Bank, and the Bahrain based Shamil Bank announced today the groundbreaking launch of a SR 102 Million Shariah compliant investment Sukuk. Caravan I Limited is the region's first inventory fleet securitisation transaction. The three-year maturity Shariah compliant transaction offers investors a right of recourse to the underlying assets. The SR 102 Million Sukuk is backed by a pool of vehicles and vehicle lease agreements purchased from Hanco Rent A Car, a leading Saudi Arabian car leasing and rental company. BSEC acted as the deal arranger and structurer, while Shamil Bank was the underwriter. 

Bemo Securitisation is one the few securitisation-focused entities in the MENA region. Bemo's managing director Iyad Boustany is also the author of a treatise on securitisation written for this market, in French.

Apart from securitisation, other Islamic finance products are also making a strong headway. In a recent Islamic finance meet in Dubai, bankers and investment bankers from all over the World stressed the relevance of Islamic finance, not merely as a theological concept but as one that truly goes near to the concept of asset-based financing known to the entire world.

Islamic finance is based on contracts which do not have interest, and is usually based on sharing of risks and/or rewards.

Links On this site, we have interesting articles on Islamic finance. See our page here.

Are SPEs a risk to credibility of securitisation?
Vinod Kothari

As the Parmalat scandal unfolds, special purpose entities are under a scanner once again. There are lots of similarities between Enron and Parmalat, except for the fact that unlike Enron where US standards did not require consolidation of the special purpose entities, lots of Parmalat SPEs formed a part of the group balance sheet under IAS 27. However, the issues are not limited to consolidation – at stake is a larger issue as to whether special purpose vehicles are inevitable in securitisation, or their existence does damage to the credibility of securitisation.

Writing at, Tony McAuley writes: "the fragile situation shows how abuse of SPEs has undermined public confidence, putting development of securitisation markets, one of the great capital markets phenomena of the last two decades, at risk."

Special purpose vehicles imply separation of legal entities, which is presumably required for two purposes: bankruptcy remoteness and off-balance sheet accounting. Bankruptcy remoteness is a concept of law and there is no reason this has to necessarily and permanently depend on legal isolation. Off balance sheet accounting is a means to an end – which is quite often capital relief or higher gearing. If the latter objectives can be achieved by on-balance sheet means, there is no need to devise structures that result into off balance sheet funding. Therefore, SPVs are not quint-essence of securitisation.

On the contrary, SPVs do a lot of damage. As assets and underwritings shift from the balance sheet of the parent bank, the bank's manuals, procedures and discipline becomes less relevant. Much as a bank might see the SPV as a mere extension of the bank's books, the very change of entity does result into relaxed credit. It is a fact that most bankers would agree that bank-sponsored ABCP conduits end up with lots of assets that would have never found their way on the bank's balance sheet. It is not a surprise if it is proved that Parmalat's bankers knew of bogus receivables being sold to the ABCP conduits. It is not that non-existing assets are not funded by banks – but internal controls developed over centuries save the bank – which are unknowingly or deliberately relaxed in case of the conduits. Off balance sheet is off the radar, and therefore, off the discipline, and that makes a tremendous difference. Sleazy assets are funded by securitisation vehicles – doing a double damange – promoting undesirable funding or over-capitalising larger clients, and posing a long-term challenge to the very credibility of securitisation.

So, it is time to think hard whether these phantom entities are required at all?

Links There are several SPV-related materials and links on our page here. For more on accounting for securitisation, click here.

IAS 39 rouses mixed reactions: more bad than good

While accounting experts and securitisation practitioners across the world are still trying to understand what the revised IAS 39 means to them, the initial feedback has more tears than cheers.

The revised IAS 39 was issued recently by the International Accounting Standards Board, and replaces the existing IAS39. The revised standard contains accounting rules for financial instruments in general, including derivatives, securitisation, etc. The revised standard has changed the basic approach to one in which a transfer is reviewed under various steps in a hierarchy, including transfer of risk and rewards, surrender of control and continuing involment. The last approach arises where there is no surrender of control, and the latter arises where there is no complete transfer of risk and rewards. Accounting professionals carry a feeling that the last condition of continuing involvement, coupled with consolidation rules of IAS 27/ SIC 12 will block off balance sheet accounting for several real life transactions.

Martin Rosenblatt, international accounting expert, along with Jim Mountain, published a recent article detailing the revised derecognition requirement. Martin feels that revolving transactions would particularly seem to fail the required derecognition tests: "Provision (c) above will likely have the effect of causing all revolving structures to fail to qualify for derecognition. Although it has been argued that revolving structures effectively represent the investors' purchasing new assets with the proceeds of those that have been collected, the new assets would not be investments in cash or cash equivalents. Also, transactions in which the transferor receives the float from temporary investments will not qualify for derecognition."

Accounting firm Price Waterhouse Coopers also recently released a publication titled Financial Instruments under IFRS. In case of securitisation transactions, the publication claims that "The new derecognition model will probably have a significant impact on securitisation structures. A classic receivables securitisation programme, where a company sells its receivables
to a multi-seller vehicle on a revolving basis, is likely to encounter .. difficulties"

Links For more on the revised IAS 39 including Vinod Kothari's quick notes, Martin Rosenblatt's article and link to the PWC publication, see our page on accounting issues.

Rating volatility in Q4 much lesser

Rating agency Standard and Poor's recently produced its customary tally of ratings activity during the 4th quarter of 2003, as also for 2003 as a whole. Though the picture on a holistic basis is mixed, Q4 was much more comfortable than the rest of 2003.

CDOs: The major source of ratings volatility is the CDO sector. In Q4 of 2003, the US CDO market had a total of 103 downgrades, which is considerably less than the nearly-250 downgrades in the previous quarters. This reflects the reduced extent of ratings downgrades of the corporates whose obligations these CDOs buy. Across the Atlantic, European CDOs registered both upgrades and downgrades, the former largely due to transaction seasoning. In the downgrades, a major contributor was the bankruptcy of Parmalat, which was a reference entity for several CDOs. The S&P report says that Parmalat was a reference entity in some 80 CDO transactions (note, not classes) which reiterates the high degree of correlation existing in the CDO market. Parmalat affect not merely European CDOs but those in the Pacific – 12 CLNs from Australia and New Zealand got lowered due to Parmalat.

Defaults: From the viewpoint of defaults, 2003 was particularly a bad year. This year alone accounted for nearly 33% of all defaults to date in US ABS/CDO transactions. There was a total of 48 defaults across 40 transactions from 7 issuers in the US market. Most defaults (37) during 2003 emanated from the manufactured housing segment, followed by synthetic CDOs (4) and franchise loans (4).

CMBS and RMBS The US CMBS market registered a record number of upgrades in the 4th quarter. The RMBS continued to have a great year with 319 performance-related upgrades. "The outstanding rating performance of RMBS securities during 2003 was largely due to a record level of prepayments that resulted from unprecedented low mortgage rates in the U.S. In addition, while there is concern about many areas of the economy, the housing market has been, and continues to be, very strong", notes the rating agency. Upgrades were noted in the European market as well.

Basle II on securitisation: BIS makes changes in proposals

As the Bank for International Settlements continues to inch its way toward finalising Basle II, set to replace the way in which and extent to which banks around the world maintain capital, there is already a quick idea of the far reaching changes related to securitisation. This is possibly the n-th time the proposals relating to securitisation have been amended. The initial draft of Basle II that came in mid 1999 had only a few paragraphs on securitisation, culminating in the latest consultative paper CP 3 which contained pages and pages dealing with securitisation. Implicitly indicating that the global banking supevisor does not have a handy tool to regulate the complex and highly innovative securitisation market, the latest set of proposals on securitisation indicate a high degree of acceptance of the demands made by securitisation industry.

In the consultative paper CP3, the computation of capital and capital relief in case of securitisation transactions where the underlyng assets were risk weighted under the internal ratings-based (IRB) approach was unduly complicated particularly in case of unrated exposures. There was a complex and recursive formula for working out the capital charge in such cases called supervisory formula (SF). The present changes simply the supervisory formula, and introduce a new approach called Internal assessment approach (IAA) in case of credit enhancements and liquidity support to ABCP conduits.

In addition, the changes also seek to introduce consistency between capital treatment applicable to an originating bank and that for the investing bank.

The proposals fortify the principle found in CP3 that the capital relief in case of securitisation will be applicable only where there is a risk mitigation by the originating bank.

The BIS has promised to "shortly" come out with the details of the changes.

Links For Vinod Kothari's article on the proposed changes, see here.

For full text of the BIS press release, click here.

Reading material A methodical discussion of the Basle II and other regulatory standards (upto CP3) is available in Vinod Kothari's book on securitisation. See here for details and orders.

Europe CDO volumes go synthetic

The European synthetic market has registered strong growth in 2003, and very largely, due to synthetic structures.

About 93% of European CDOs in 2003 were synthetic – up from 85% in 2002. Of that too, most synthetic CDOs were arbitrage transactions – with balance sheet transactions taking merely 5% of all.

Another prominent fact that underscores European arbitrage CDO growth is the prevalence of single-tranche synthetic CDOs – approximately 64% of the arbitrage issuance used single-tranche methodology. These trends, according to a recent report by Standard and Poor's, are likely to continue.

CDOs are essentially leveraged investment vehicles that invest in specific debt assets, either bonds or loans or similar obligations, with the objective of making arbitrage returns on the equity investment in the vehicle. Synthetic CDOs acquire these assets synthetically – that is, by selling protection under credit derivatives trades [see more on our site]. When a CDO acquires the assets off the balance sheet of a specific seller, it is a balance sheet transaction; where the assets are pooled from the market, it is an arbitrage deal. Single tranche synthetic CDOs are a relatively new product where the CDO issues only a specific tranche of investment product (credit linked notes) transferring risk of a particular level, and manages the rest of the risk using its own risk-management policy.

Another notably developing segment is the CDO of ABS, also sometimes called CDO squares. There were several issuances of CDO squares in both the cash and the synthetic segment.

A major concern in the CDO investments is the rating volatility – which is understandably for a highly leveraged product. The rating performance of European synthetic CDO transactions improved in 2003, with increasing numbers of upgrades toward the end of the year. To the end of November, 84 classes of synthetic CDOs were downgraded, representing 18% of the classes outstanding at the beginning of the year. This compares favorably with 28% for 2002. Moreover, 4% of classes received upgrades, compared with only 1% in the previous year. Overall, this brought the downgrade-to-upgrade ratio to 5.6x for the year to date, an improvement on 38.7x for 2002. It is noteworthy that this ratio improved to 2.5x for the second half of the year from 18.0x for the first half.

Links For more on synthetic CDOs, see our site here. For more on CDOs, see our page here

Workshops: Vinod Kothari offers standard as well as customised training courses, public and private, on CDOs. See our calendar of courses and contact us for any privately-tailored course.

CMBS company launched in the Gulf

A joint venture between three leading UAE banks has created a consortium for commercial real estate securitisation and mortgage lending. Dubai Islamic Bank, Istithmar and Island Capital Group have launched a major initiative which will draw in $1 billion in the next six months to boost mortgage lending and the local property sector.

The trio have linked up to set up Emirates National Securitisation and Finance Corporation (ENSFC). ENSFC will issue commercial mortgage backed securities (CMBS) that are listed and traded on regional and international markets, including the US and Europe.

Currently, mortgage securitisation, either residential or commercial, is conspicuous by its absence in the Gulf. There have been stray attempts at Islamic securitisation, but nothing to be of a globally noticeable scale. This itself should be surprising, given the fact that enormous amounts are invested by high net worth individuals based in the Gulf into US CDOs and private equity funds.

Asian securitisation market for 2004 look impressive: S&P

Rating agency Standard and Poor's (S&P) in its customary outlook of securitisation for 2004 evinced optimism. "Asia's debt markets will continue to be transformed in 2004 by securitization using innovative products for raising capital, alternative risk transfer, and the creation of customized investment opportunities. Moreover, Asia-Pacific, excluding Japan, has reached the stage in which the markets are finally primed to fully exploit the benefits of structured financings, especially synthetic structures and CDOs," says Diane Lam.

Talking specifically of the pockets of growth, S&P sees a revival of activity in Hong Kong, once viewed as the mecca of Asian securitisation, where the Lion Synthetic deal (synthetic securitisation of bus and taxi receivables) and several RMBS deals from HKMC were noted in 2003. The REIT activity, promoted by the recent law, might spur CMBS deals in the country.

The focus of attention in Asia was, however, Taiwan, where recent legislation resulted into clear spurt of activity all around – CLOs, RMBS, credit cards, etc. "Taiwan's securitization is quickly scaling the learning curve, and numerous new asset types are being considered", says S&P.

Singapore continues to be the hub of Asian securitisation, particularly in the synthetic sphere. Several CDO transactions hit the market in 2003 -, with OCBC Asset Management, UOB Asset Management, DBS Asset Management, ST Asset Management, and HVB Asset Management sponsoring transactions.

Philippines with some introductory transactions and the Malaysian market also look promising. 

A sad spot in this picture is the Korean credit card market where credit problems have already stranded some transactions.

Links For more on securitisation in Asia, see our page here.

Parmalat probe covers Citibank's ABCP conduit

If there is a fallen corporate or financial debacle, there might be a securitisation angle somewhere or the other. Enron exposed the special purpose vehicles, and Parmalat, it seems, is going to do a damage to asset backed commercial paper (ABCP) conduits. The Parmalat probe is examining whether there were sham sales of receivables by Parmlat affiliates to Eureka Securitization Plc, an ABCP conduit being run by Citibank.

Parmalat is the Italian dairy company that recently filed for bankruptcy – this case is popularly dubbed as the Enron of Europe. There are apprehensions that several billions of Euros are missing from Parmalat assets. At least 10 arrests have been made by Parmalat investigators so far.

Asset backed commercial paper conduits typically buy trade receivables of corporates. They are backed, and often liquidity-supported by banks, but most ABCP conduits are off the balance sheet (leave aside FIN 46) of the sponsoring bank. Eureka Securitization Plc and Eureka Securitisation Ltd are European ABCP conduits sponsored by Citibank.

The ABCP angle in Parmalat debacle is as under: there are apprehensions that Parmalat affiliates raised inflated invoices to create dummy trade receivables which were then sold to Eureka. This funding was used by the affiliates to create paper profits in Parmalat. There are reports of some 30 such affiliates having sold receivables to Eureka.

The Parmalat probe, in a brief period after Enron, exposes the susceptibility of securitisation conduits to sham deals. Truly, Citibank or Eureka would most likely be victims rather than perpetrators or accomplices in this fraud but the issue that would remain is one of vulnerability. Since ABCP conduits or securitisation vehicles are not banks and are not covered by mainstream banking discipline, can they be used by unscrupulous clients, possibly with the help of optmistic or aggressive bank officers, to acquire debts that the bank wouldn't have bought itself.

In the meantime, the BIS is currently meeting in Basle, Switzerland to complete the process of finalising BIS-II, which is likely to be affected by the shadow of Parmalat.

International accounting standard on de-recognition changed

There is an all-new accounting standard now that deals with accounting for financial instruments, and hence, rules relating to acconting for securitisation have also been changed.

Securitisation accounting in many countries earlier followed an international accounting standard called IAS 39, issued by International Accounting Standards Board. Proposals were issued several months back in form an of exposure draft for re-writing of IAS 39 (and a related accounting standard on presentation, IAS 32). The revised IAS 39 was issued in late December. The revised standard is applicable for accounting periods beginning on or after 1st Jan 2005.

IAS 39 deals with both derivatives accounting and de-recognition. De-recognition is applied for most securitisation transactions, as these transactions relate to sale of financial assets. De-recognition principles determine whether and when financial assets should be removed from books on their sale.

The rules relating to securitisation partly introduce a new approach, and partly amplify the existing guidance on fractional transfers, computation of gains on sale, etc. A significant change is the synthesis of the approach based on transfer of risks and rewards, characteristic of the UK standard FRS 5, and that based on surrender of control, found in the US standard FAS 140. The revised IAS 39 applies both these approaches, in a step function.

A quick note by Vinod Kothari on the provisions relating to securitisation is here. We will come out with more material in due course.

Links For more on accounting for securitisation, click here.

Revised FIN 46 issued

The US standard setters have re-issued accounting interpretation FIN 46 applicable to variable interest entities. The full text of the revised interpretation is available on FASB website – click here

The accounting standard on variable interest entities has been as obscure as variable interest entities themselves. Shortly after its promulgation, various doubts began to appear leading to several clarifications in form of staff positions. Lots of issues were debated and discussed, and finally the Board decided to reissue the interpretation.

The Board explains the revised statement as intended to provide more guidance required on the subject. The revised statement runs over 92 pages including 6 appendices.

Links For more on FIN 46, see our page here.

FIN 46 in for a rewrite

Neither the standard-setters nor the standard-followers have had any sleep at all on accounting for special purpose entities. With several FSPs relating to several issues on FIN 46, we are going to have a new FIN 46, to be called FIN 46-R.

At its recent meeting, FASB decided by a 5 to 2 vote to proceed towards issuance of an FASB Interpretation which will be called FIN 46-Revised (FIN 46-R), by the end of December. There was open acknowledgment that the SEC strongly urged fasb that fin 46-R be effective this year-end for public companies, with the exception of small business issuers.

Public companies who are not small business issuers must apply the provisions of either fin 46 or fin 46-R, at their choice, to all variable interest entities of the type that would have been considered to be “SPEs” under EITF D-14, 96-12, etc. at the end of the first interim or annual period ending after December 15, 2003 (in other words, 12/31/03 for calendar year public companies who are not small business issuers). If the company elects to apply fin 46, rather than fin 46-R, there would have to be a true-up at the end of the first quarter of 2004.

Public companies who are not small business issuers would have to apply the provisions of fin 46-R to all variable interest entities of the type that would not have been considered to be “SPEs” under EITF D-14, 96-12, etc. (i.e. operating entities that do not qualify as voting interest entities) no later than the end of the first interim or annual period ending after March 15, 2004 (in other words, 3/31/04 for most public companies who are not small business issuers).

Earlier application is encouraged and restatement of prior period financial statements is permitted but not required.

The transition rules applicable to public companies who are small business issuers and to private companies will be described in a notice to be posted to the FASB website. [Source: Martin Rosenblatt]

We will be tracking and putting a link to the notice on this site.

Vinod Kothari comments: I am aware that it is not for the first time that I am saying this, but it is important to say. In the labyrinth of rules relating to special purpose entities, we seem to have lost track of some very basic issues. "Do we need those special purpose entities at all?", is a more fundamental question than "do we need separate set of rules for special purpose entities". After all, special purpose entities are not structurally different from other business entities. If they are needed, it is time to create a separate orgainsational structure called "special purpose entities". If they are not structurally different from other entities, there is no scope for a discrimination in the rules that apply to these and other business entities. For example, if the accounting rules recognise, as FIN 46 seeks to do, that beneficial interest in the company is different from its legal equity, then the legal equity is a myth and should be ignored for all purposes, not merely for accounting purposes. At the same time, if the legal equity in commercial entities does not represent its beneficial ownership, there is no reason why the legal equity should still be the basis for consolidation of those entities.

Joint stock companies emerged sometime in the 16th century: and since then, we have still had the same forms of business organisations. If a new organisational forms such as special purpose entities are needed, they need to be created as distinct organisational forms, not merely a company that is treated differently for accounting purposes.

Links For more on FIN 46, see our dedicated page here. For more on accounting issues, see our page here.