SECURITISATION NEWS AND DEVELOPMENTS – August, 2001

/in /by

[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 newsletters

July, 2001, .June, 2001, May, 2001,… April 2001…  March 2001 ..Jan. and Feb.2001  Nov. and Dec.2000  Sept. and Oct. 2000  July and August 2000 May 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.

 

 

 

Fleet uses ABCP route to arrange mega funding for restructuring of Finova: vulture funding?

In an unusual transaction, FleetBoston Financial's Fleet Securities has used the ABCP route to raise a mega sum of USD 6 billion for Berkadia LLC.

Berkadia is the joint entity formed by Warren Buffet's Berkshire Hathaway and Lucadia National Corp. for the specific purpose of funding troubled finance company Finova out of bankruptcy. Finova had filed for Chapter 11 bankruptcy in March this year, when Berkadia outbid GE Capital for the restructuring funding. The use of the ABCP proceeds will go towards repaying the loan Berkadia gave to Finova. In other words, the present ABCP transaction is used for funding the restructuring of Finova. The market place contends that after paying off the existing creditors of Finova to the extent of 70%, Berkadia will start liquidating the assets of Finova which are expected to be worth much more than the liabilities. In Altman's language, therefore, the ABCP deal is essentially a securitised vulture funding.

An article in Investment Dealers Digest of 6th August quotes market practitioners who agree that this kind of funding using ABCP route is unusual. Also unusual is the huge size of this transaction, even though there have been larger ABCP issuances.

The ABCP market in the USA has been booming. Market data on abalert.comshows the latest outstanding ABCP volume at more than USD 650 billion, which rose up from less than USD 400 billion in Jan 1999.

Links See for more on ABCP our page here.

Swedish municipality CMBS to stir up activity in the country

The vast Swedish mortgage market that has so far mainly fed itself on traditional European mortgage funding instruments is now likely to see increasing volume of securitisation. Recently, a CMBS transaction originated by a Swedish municipality achieved AAA rating from Standard and Poor's, which may prompt more mortgage funding to migrate to securitisation.

The originator in question is Framtiden, a municipal housing company wholly owned by the City of Gothenburg, the second largest city in Sweden. The transaction will use a special-purpose entity, Framtiden Residential Housing Finance No. 3 AB. The collateral is loans granted to subsidiaries of the originator. The loans are secured on pledges of Pantbrev (traditional mortgage funding instrument in Sweden, comparable to German pfandbriefe) in three predominantly residential portfolios comprising a total of 9,268 apartments in 143 modern apartment blocks in Gothenburg.

Links There is more content and number of links on the Swedish securitisation market on our country page.

Asia's first whole business securitisation completed in Malaysia

This is certainly a very creditable achievement for Malaysia because whole business securitisation is a complicated and esoteric securitisation method that has been perfected in the UK. But no wonder, since the transaction was handled by Nomura Securities which has to its credit several such deals.

Nomura International completed in mid-June this year a USD 250 million bond issue for 1st Silicon (Labuan) Inc., a special-purpose subsidiary of 1st Silicon (Malaysia) Sdn. Bhd., a state-of-the-art wafer foundry located in Kuching, Sarawak, and Malaysia's first 200mm silicon wafer processing plant. This transaction was talked about for quite some time.

The whole-business financing will be used to repay a syndicated bridge loan from Nomura of USD 180 million.

The asset-backed bonds have also been guaranteed by Sarawak Economic Development Corporation, which is an agency of the State Government of Sarawak. The Bonds have achieved BBB/Baa3 ratings from Standard & Poor's and Moody's Investors Service Ltd. respectively. This is the first time that a Malaysian corporate bond issue has achieved investment-grade ratings without having an explicit link to the Malaysian Sovereign.

The floating-rate notes have a seven-year maturity, with a put and call option on the fifth anniversary. They are being issued at par and carry a coupon of Libor plus 275 bps.

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

Malaysian securitisation market is ready for trigger

Malaysia has been talking about securitisation for quite some time now, but it seems now the stage is finally set for some hot action. The curtains are finally rising.

Several CBO transactions are at various stages right now. Arab-Malaysian Merchant Bank Bhd has reported launched a CBO recently – see our report below. Yet another CBO of a managed portfolio is in the offing from CIMB. This transaction will use an SPV called CBO One Berhad and would raise RM 385 million in two tranches, the senior 7 year tranche being RM 360 million, rated AAA. Besides, there will be a subordinated interest of an amount not yet decided, held by the originator.

Both AMMB and CIMB deals will be offered to domestic investors which is natural given the low rates of interest prevailing in the country.

In the meantime, Malaysian media is replete with securitisation stories – The Star, for example, on 23rd August carried extracts of a press briefing by Copernican Securities, and Business Times on the same date published an interview with RAM official – and Malaysian conference rooms are abuzz with securitization classes. Speaking of the conferences, Rating Agency Malaysia (RAM) is holding end-August conference with both domestic and international speakers, and IBBM continues with its three workshops on securitisation each year. Private event producers are also reported to have offered securitisation events.

Links: See our country page on Malaysia.

Gibralter passes protected cell company law

A law to allow formation of protected cell companies (PCCs) was passed by Gibralter in early July 2001. The House of Assembly passed a bill for a Protected Cell Companies Ordinance on 3 July 2001.

A protected cell company is a new concept in corporate legislation which allows the setting up of a multi-part company containing different cells, with each cell having its own assets, liabilities, debtors and creditors with mutual independence from other cells as also from the core capital of the company. The law allows both incorporation of PCCs as also conversion of existing companies into PCCs.

Each cell may have its own cellular capital, cellular shares and distribute cellular dividends.

Cellular companies are expected to be particularly useful for captive insurance companies, securitisation SPVs and collective investment conduits. The advantage of a PCC is that a single cellular company may act as an SPV for several transactions while still maintaining protected assets of the cell. This is a huge saving on incorporation and administration costs.

Links For more on protected cell companies along with article links, click here.

 

Ginnie Mae may get legislative booster

According to a report on Reuters Ginnie Mae, the US government agency that is engaged in issuing mortgage backed securities may get a legislative support to help it emerge larger than its cousins – the Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are private sector mortgage securitization agencies, but are referred to as GSEs or government-supported enterprises, due to an implicit credit support of the government. Ginnie Mae, on the other hand, is a part of the Department of Housing and Urban Development and its guarantee bears the full faith of the Federal government.

Ginnie Mae is older and has to its credit the first MBS issued in 1970 [see for more in the history of securitisation], but the GSEs have grown larger than Ginnie Mae. During 2000, Ginnie Mae issued USD 105.5 billion of mortgage-backed securities while Fannie Mae issued USD 211.6 billion, and Freddie Mac issued USD 166.9 billion in MBS.

The legislative amendments being thought of include allowing Ginnie Mae to participate in high LTV loans, and to increase Ginnie Mae's current limit of lending for a single mortgage.

Links: For more on the RMBS market, click here.

Australian rugby body may securitise world cup revenues

According to reports in Australian press, including the Australian Financial Review, the Australian Rugby Union may decide to issue asset backed securities using the revenue from the 2003 World Cup as a collateral. There were reports that this proposal is being considered by the Board of the Union among other alternatives.

As a justification, a spokesman of the Union has been quoted as saying: ""There's money that could be better spent now than later". Securitisation of future revenues is obviously seen as a way of preponing the money flows.

The 2003 world cup is to be co-hosted by Australia and New Zealand. The last world cup in 1999 yielded a net profit of some A$ 131 million.

Links For similar news item relating to football body in England, see here.

Korea: volumes dip but asset diversity displays maturity

The data on securitisation issuance in the first half of 2001 were recently released by Financial Supervisory Service, which indicates that though the volumes have taken a beating this year, compared to last year, the diversity and complexity of transactions is comparable to any advanced market.

Credit card backed ABS showed an impressive growth, with its issuance reaching 7.3 trillion won, as compared to mere 300 billion won last year.

However what was a star performer last year – secondary collateralized bond obligations (CBOs) [see our news item here], plunged to a level of only 300 billion won compared to 16 trillion won last year.

All in all, the total issuance of ABSs reached 22.77 trillion won during the first half of the year, down 3.7 percent from the same period last year.

Another key feature of the Korean market was securitization of non-performing loans. The trend towards securitisation of problem loans in Korea is visible in the current half. Some days ago, Seoul Bank announced plans to raise ABS against 470 billion won of problem loans.

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

India: Trade body calls for comprehensive code

According to a report in Hindustan Times of 19th August, Assocham, an all-India trade body, has advocated setting up of an apex regulatory authority for laying down prudential norms, promotion of special purpose vehicles to provide a level playing field and credit rating for securities instrument.

The nine-member core group, headed by JM Morgan Stanley vice chairperson Naina Lal Kidwai has also recommended an umbrella legislation, which recognizes the rights of the investors in securities paper or their trustees to effectively recover their dues. The group feels the new regulatory authority would go a long way in avoiding differences of opinion between multiple regulators and in assigning accountability. On the issue of formation of special purpose vehicle for securitization, the group is of the opinion that non-banking companies should be allowed to act as such subjects to certain specified norms.

Links See our country page on India here.

Accounting rule EITF 99-20 bleeds many US banks and corporates

An innocuous-looking accounting rule that requires credit sensitive tranches of asset-backed and mortgage-backed securities to be fair valued and the resulting gains or losses to be taken to the revenue statements is bleeding a large number of US corporates. There are quite a few to carry gains to revenue; many have taken heavy losses.

The first prize might go to American Express [see our story here] which took a loss of some USD 826 million on CDO junior tranches. But it has many to keep company – Bank One Corp., Citigroup Inc. [loss of USD 116 million], Lincoln National Corp., Torchmark Corp. , Conseco, Phoenix, to name a few.

International Accounting Standard IAS 39 and comparable US GAAP FAS 115 require "available for sale" assets to be fair valued, but the gains or losses may be reported into equity rather than to affect current earnings. EITF 99-20 takes the impact directly to revenue, which leads to volatility. Martin Rosenblatt explains that EITF 99-20 sets forth very strict tests to determine when an unrealized loss is an other-than-temporary impairment of a securitized beneficial interest. It is whenever there has been a decline in the present value of the estimated cash flows, which virtually requires entities to do the exercise quarterly.

Investors in the ABS/ MBS market would be concerned with this requirement, particularly while buying subordinate tranches. Recently there was a marked interest in demand for subordinate tranches, but the accounting rule may force investors to rethink.

Links: We have an article on this site by Martin Rosenblatt explaining EITF 99-20 – click here. For more on securitization accounting, click here.

Risk securitisation deals of 2000-1 analysed

A very informative article in Risk Management of August 2001 takes stock of the level of activity and trends in the risk securitization market during April 2000 to March 2001. The authors Morton N. Lane and Roger Beckwith note that even though the number of deals and the amount of securities issued have both marginally come down, the market displays more of experimentation and more types of perils covered. The authors also note more use of securitisation in direct underwriting of risk.

During 2000-1 (April 2000 to March 2001), there were 10 deals with a total security issuance of USD 1126.0 million, as compared to 11 deals with security issuance of USD 1219.4 during the same period in 1999-2000. The authors discuss the salient features of all of these deals.

The authors talk of the trends shown by these data. One noticeable trend was lower ratings of the tranches. During the whole period under review, only one tranche was rated above BB, which indicates that in risk securitisation, it is a good policy to stay humble and get the securities rated at humbler ratings.

In terms of the exposure periods, more and more securities are going for commitment periods longer than 12 months. More than 60% of the issuance during the review period went for more than 12 months' cover. The authors attribute this to the economics of security issuance as also investors' demand for longer term securities.

Links This highly readable article is available online at http://www.rmmag.com. For more on risk securitisation, see our page here.

 

European securitisation body working on common legal framework

IThe European Securitisation Forum, a body of securitisation professionals in Europe, is working on a standard legal framework for securitisation in Europe. In its Newsletter for Summer, 2001, the body says that harmony and consistency in the various regulatory regimes governing asset securitisation in Europe will help stimulate the growth of the market and will lower borrowing and financing costs for con-sumers and businesses.

The current legal framework in Europe is fragmented. France has a law dealing with Fondos, Italy has a more modern and promotional securitisation law, while Belgium and Portugal have adopted their own laws. Germany works on the basis of bank regulatory guidelines with no basic law on securitisation. UK too has prudential supervisory guidelines from the FSA, but no basic law.

The Forum has set up a sub-committee that will publish a white paper on the legal framework. The white paper will provide a blue print for lawmakers in various European countries. Some of the specific objectives of the Framework include the enforcement of security interests, remedies against the originator, and the true sale issue.The framework will also provide for harmonious accounting treatment.

The Framework will also propose laws and regulations that do not restrict ownership of classes of assets (or their servicing) to residents or nationals or to a specific class of persons. The Framework will call for securitisation vehicles that are fiscally transparent and achieve tax neutrality for securitisation without the requirement of exhaustive compliance with general tax laws applicable to corporate entities.

The framework is expected to be completed in early 2002.

Links The website of European Securitisation Forum is here.

European CMBS market getting active

It may still be too premature to compare the European CMBS market with USA, but it is clear from recent deals that the European CMBS market is getting more active and more innovative, says Liz Jones in a recent issue of International Financial Law Review.

The author speaks of some recent deals: the synthetic CMBS issue called Europe Two and the latest ELOC transaction, the impressive ProLogis deal and British Land Company's Werretown supermarkets securitization to drive home the point that the European CMBS market is opening up fast..

Europa Two, a synthetic CMBS structure, involving the issuance of Euro1.528 billion fixed and floating rate amortizing credit-linked notes, originated from Germany. The most highly rated notes were secured by an issuance of AAA Pfandbriefe. The lower rated notes were secured by unsecured and unsubordinated notes issued by Rheinische Hypothekenbank. The return on notes is linked with the performance of the underlying portfolio of commercial mortgages and the Pfandbriefe/other notes forming the secured assets. The underlying commercial mortgages relate to properties located in six different jurisdictions: France, Germany, Ireland, Spain, Switzerland and the UK.

Looking forward, the author says that "banks with large commercial property loan books or with particular concentrations of risk are likely to continue to find CMBS an invaluable tool with respect to managing regulatory capital requirements and general exposure levels. It may be that the idea of using a commercial property finance programme or conduit will also catch on where sufficiently large volumes of loans are being generated. "

Links For more on CMBS, see our page here.

Whole income of a private hospital securitised in Europe

The whole business revenue securitization device continues to find new applications in Europe. The latest to use this home grown innovation was a UK-based private hospital chain.

General Healthcare Group is a private hospitals group in UK. It raised GBP 975 million by securitization of its operating income. The collateral for the deal is recurring patient fees and a GBP 1.1 billion property portfolio that includes General Healthcare's 44 hospitals throughout the UK.

The deal is broken into 6 tranches. The two senior tranches, both rated AAA, include a GBP 350 million floating rate note with an expected maturity of July 2009, and a GBP 150 million fixed rate note expected to mature in July 2018. Both of these are wrapped by an insurance cover from Ambac, UK, and apparently borrow Ambac's rating.

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

CDOs emerge as the largest asset class in European securitisation

It is no secret, as we have come out with several stories on the fast growth of CDOs in Europe. So this one reiterates the theme that CDOs have outgrown any other asset class in Europe. Standard and Poor's reports that in the first half of 2001, CDOs accounted for 43% of total volumes. The CDO market showed an increase in the number of transactions as well, compared with the first six months of 2000, underscoring the depth to which the European market has embraced CDO methodology.

Most European CDOs are balance sheet CDOs, as European banks are more driven by capital relief considerations. Besides, the market for high yield bonds is not all that deep in Europe for arbitrage conditions to exist. Nevertheless, in the first half of 2001, there were 3 arbitrade CDOs from Europe: Panther CDO 1 B.V.; Duchess 1 CDO SA; and Mayfair Euro CDO 1 B.V. These deals contained a range of assets including European and U.S. high-yield bonds, European investment grade bonds, and leveraged loans. Further arbitrage transactions are expected in the second half of the year.

Links For more on CDOs, see our page here.

Sharp rise in repackaging transactions

Rating agency Standard and Poor's reports a sharp increase in repackaging transactions. This goes very well with the increasing attempts to create new CDO asset classes in form of private equity, convertible debentures and hedge funds [see below].

Though every CDO is essentially a repackaging, a repackaging CDO refers to those where investments in asset-backed and mortgage-backed transactions, quite often in their subordinate tranches, are repackaged into further asset-backed securities. See for more details our page here.

Standard and Poor's data below shows CBOs of ABS as well as CMBS more than doubling in volume. The rating agency says that "Repackaging vehicles have now become a viable, in fact dominant, liquidity source for subordinate and mezzanine tranches of structured products. The repackaging of structured finance and real estate securities in 2001 has become one of the fastest growing sectors of the CDO universe." Three types of CDOs have emereged in the market – CDOs of CMBS, REITSs, etc., CDOs of ABS transactions, and CDOs of CDOs.

The economics of repackaging transactions lies in the fact that the market for ABS is mostly illiquid and therefore, there are higher premiums particularly for the subordinate tranches which makes it an ideal candiadate for CDO transactions.

Links See for more our page on repackaging.

Global CDO volumes rise in first half 2001

Rating agency Standard and Poor's recently released global first half data for CDOs to point to the strong growth in volumes as also the trends. The Table below shows the growth data for the first half of 2001 compared with the first half of 2000.

Evidently, arbitrage CDOs are growing far faster than balance sheet CDOs, which have, in fact, shown a negative trend. This is inspite of the fact that the global economy is passing through tough times and corporate defaults are increasing. The rating agency's analysts say that "collateral managers and investors are becoming increasingly cautious of higher defaults, lower recoveries, increased credit migration, and distressed trades" and that "investors and issuers are more closely scrutinizing various default and recovery assumptions prior to making investment decisions".

The US accounting rule EITF 99-20 has also been responsible for substantial write offs by a number of investors in their portfolios of CDOs. American Express was recently in limelight for writing off something like USD 826 million. Conseco Finance in Q2 wrote down more than USD 25 million.

In the wake of increasing defaults particularly in the constituents of high yield CDOs, investors are placing increased stress on choice of CDO managers – seasoned managers are in increased focus.


Table 1   Global CDO Sector Roundup
First Six Months (Excludes Market Value CDOs and CDS*)        
 


2000


2001
Type of transaction Number of transactions Bil. $ Number of transactions Bil. $
Arbitrage CBO 19 5.00 34 11.70
Arbitrage CLO 14 5.99 10 3.79
EMCBO 1 0.27 2 0.34
Balance sheet 13 9.92 5 3.41
Project finance 1 0.47 0 N/A
Real estate CBO 4 1.14 7 2.39
CBO of ABS 3 1.08 12 2.93
Total CDOs 55 23.88 70 24.65

*CDS—Credit default swaps.

Source: Standard and Poor's

Links For more on CDOs, see our page here.

Deutsche to try new CDO to invest in convertibles

We recently reported a unique CDO by Prime Edget which would invest in private equity, and another one where J P Morgan is working on a CDO of Hedge funds. This was hailed as a major innovation in CDO technology which converts equity investments into debt. The signals are already apparent – the idea is going to find larger application.

The journal Credit Magazine reports of a proposed securitization of convertibles that Deutsche Bank in London is working on. The differentiating feature of convertibles is that they usually pay low or no coupon and only give capital appreciation when they get converted into equity. When repackaged into a CDO, they may require either a higher portion as equity, or a part of the capital flows may have to be used to pay off income using the equity portion as a support class.

Convertibles in Europe are booming with some USD 30 billion worth convertibles issued in 2000, and the first half of 2001 has already seen USD 20 billion worth issuance.

Links For more on repackaging, see our page here.

India moots security interests perfection law: to grant enforcement powers to securitisation SPVs

This is certainly a major step forward in revamping the existing archaic and delay-ridden system of enforcement of financial claims: India's financial regulator Reserve Bank of India has proposed a new look law on creation, registration and enforcement of security interests on a wide array of properties. Not surprisingly since the craftsman of the law was also the person who participated in the making of the draft securitisation law, securitisation SPVs are also being given special powers of enforcement.

Titled Creation and Enforcement of Security Interest by Banks and Financial Institutions Bill, 2001 it is the Indian version of Article 9 of the UCC in United States. The law moots the creation of a Central Registry of security interests which will replace the present system of multifarious registrars under the Companies Act, Motor Vehicles Act, Transfer of Properties Act, etc. Registration of security interests under the new law shall not be mandatory, but shall take away the application of the new law.

If the security interest is registered, the secured creditor may require the borrower to meet the claim in 60 days, failing which the secured creditor may repossess the secured article. The judicial machinery will not be involved in the process of repossession, but the secured creditor may seek the help of the judicial magistrate for smoothening the repossession.

The properties on which security interests may be created and enforced under the new law include all movable and immovable property, actionable claims, and all other intangible rights.

Secured creditor for the purpose of the new law includes a securitization SPV. The law, however, does not talk about the transfer of security interests and whether the security interest can be enforced by a transferee of the security.

Links For full text of the proposed law, click here.

Malaysia's first CBO soon

They either talk about it, or do it. In Malaysia, it is still the former. But that by itself is interesting, because now they are talking about something which is the hot flavour of the US and European markets – a CBO.

According to reports in Business Times of 6th Augst, Arab -Malaysian Merchant Bhd (AMMB) has announced a CBO programme of RM 255 million (approximately USD 67 million), consisting of senior and subordinate tranche bonds of RM225 million and RM30 million, respectively. In order to undertake the programme, a bankruptcy remote special purpose vehicle Prisma Assets Bhd, which is independant from the merchant bank, has been set up.

The senior tranche which will receive an indicative "AAA" rating from Rating Agency Malaysia Bhd and a subordinate tranche, which will not be rated and will be held by the merchant bank. The bonds for both tranches will carry a legal life for five years with a bullet repayment upon maturity. The underlying asset for the transaction will be a pool of diversified corporate bonds issued by companies in Malaysia. Based on the structure and size of the senior tranche bonds, the merchant bank expects them to be fully subscribed for by investors, AMMB said in a statement.

This will be the first CBO from Malaysia. Very few CBOs have been originated from Asia, mimus Japan. The distinguishing features of CBOs from usual balance sheet securitisations is that here, the originator is not necessarily the one having a portfolio of loans to sell: he acquires a portfolio from the market, supports it with his own subordinate participation called the equity tranche, and sells the rest of the senior securities at finer spreads, thereby making a sizeable return on the equity contribution. Thus, CBOs are aggressively used as arbitraging vehicles. In the high yield segment, arbitraging by CBOs is fairly common.

Links For more on CBOs, see our page here. For more on securitisation in Malaysia, see here. Vinod Kothari is a regular tutor of securitisation training programs in Malaysia – see our securitisation workshops page for forthcoming securitisation event in Malaysia.

Portugese regulators seek to remove legal impediment: securitisation free of withholding tax

The securitisation market is not very well developed in Portugal, but the regulators are taking proactive steps to make the way for market forces. With the securitisation law passed in late 1999, a recent proposal to amend the tax statutes will clear up withholding tax problems for securitisation.

The proposed amendment, according to a commentary, will remove withholding taxes for payments made by a local SPV to offshore investors, or for local originators to offshore SPVs. The law is currently in its waiting period and will soon be enforced.

Current Portugese tax law stipulates a 20% withholding tax on all interest payments to non-residents. If an SPV is domiciled outside the country, the payment of interest by the originator to the SPV will be an offshore payment, and like so, if the SPV is local but the bonds/ notes are bought by offshore investors. The market players are currently finding it hard to avoid these deductions, except by the tedious process of having Lisbon-subsidiaries licensed as full-fledged banks, which currently escape these provisions.

Links See our country page on Portugal here. See full text of Portugese securitisation law here.

Emerging market securitisations sail through stress to mature

It is very important for any financial instrument to pass through a full cycle that includes inception, euphoria, stable growth and stress before it could mature. Emerging market securitisations, particularly from Asia and Latin America have recently passed through several situtations of stress which they could withstand..

A recent article by Greg Kabance in Fitch's Global Securitisation QuarterlyJuly 2001 recounts some of the experiences with emerging market securitisations in the recent past. Most of the emerging market securitisations are future flow securitisations, in which performance risk as well as country risks are high.

Turkey passed through sovereign downgrades and economic crisis linked with political instability. Fitch has a dozen outstanding securitisations originated from Turkey, most of which are net payment inflows into Turkey from hard currency countries. Of these 2 were downgraded in the 2001 crisis, and of these two, one has been fully paid up. The other one has strong collections being trapped outside the country and is expected to be fully paid.

Another country to face crisis was Pakistan. Pakistan Telecom had originated a future flow securitisation of net settlement telephone revenues in 1997 which was then rated BBB-, higher than the sovereign rating of Pakistan. Later, with Pakistan's rating suffering setback and the political instability including the Kargil conflict, the deal was downgraded to BB. Fitch says that it does not rate Pakistan, but the current rating of the transaction is 5 -6 notches above what the rating of Pakistan is likely. Inspite of reducing net tariff collections, the transaction has not been downgraded any further as the rating agency believes that the reserves and the legal stregths of the transaction will sail it through when it matures in 2003.

Coming to the Indonesian crisis, Fitch believes that Bunas, an existing company, gives a strong example of an existing asset securitisation which continues to perform under adverse local conditions. Bunas securitised auto receivables in early 1997, rated BBB. During the 1997 crisis, Bunas went down under and ultimately went bankrupt, but the transaction paid off. The true sale of receivables was never challenged, and Bunas was not actually liquidated: as it continues to service its other defaulted loans, it continues to service the securitisation transaction as well.

Yet another example of Asian securitization is that by the Philippine Airlines which securitised ticket receivables in 1997 in an unrated transaction. In June 1998, the airlines filed for bankruptcy protection and all its other obligations were stayed; however, there was no embargo on the securitization payments as they were believed to be diverted outright by way of a true sale. In March 99, the company got an order for restructuring and it is a fact that ABS investors were among those who got the most favourable treatment.

 

CDOs continue to default, and grow

The CDO market continues to grow stronger by the day, even as more and more CBOs, particularly in the high yield segment, continue to default. There has been an estimated USD 40 billion on new CDO issuance in the first half of year 2001, excluding synthetic securitisations. And this is inspite of rising corporate bankruptcies and defaults which continue to affect the ratings of existing CDOs.

An example of the inherent weakness in CDOs is the recent announcement by American Express that its subsidiary will write down fair value losses to the extent of USD 826 million on account of investments in mezzanine and junior CDO tranches. The Chairman of American Express, Kenneth Chenault admitted that his company did not fully comprehend the risks of investing in the whizz-bang portfolio of CDOs.

To an extent, Alan Greenspan contributed to the CDO boom. Greenspan was addressing the annual meeting of the Bond Market Assocation via satellite. He was talking about the dwindling market in treasuries and was talking of replacements, which he enumerated as swaps, agency debt and, most intriguingly, a high-grade CDOs. He cited "a senior tranche of a CDO backed by high-grade corporate debt" as an example of riskless security. When Greenspan speaks, Wall Street reads not only between the lines, it is actually between the words. The market found lot of cheers for the CDO segment in Greenspan's remarks.

With the risk-based capital standards having been put off for a while, bankers might still be drawn into investing in subordinate CDO tranches, but needless to stress, it is very important to understand the risks inherent in such investments.

Links For more on CDOs, click here.