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

FASB issues implementation guide to FAS 140

The Financial Accounting Standards Board on 27th Oct. put up on its site a preliminary draft of an implementation guide to the new accounting standard on securitisation, FAS 140. FAS 140 replaces the existing accounting standard FAS 125 – see news item below.

The FASB states: "The FASB staff is preparing a new Special Report, A Guide to Implementation of Statement 140 on Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities: Questions and Answers, That report will be an updated version of its earlier Special Report about Statement 125, the third edition of which was published in July 1999. A draft of the updated Special Report is provided here for information and comment". The FASB has invited comments on the draft of the guide by Nov., 20 and hopes to come out with the final version of the implementation guide in December.

Text of the draft implementation guide is available on FASB site at:

Among other issues being analysed, the draft of the implementation guide provides that if the originator retains a clean up call option with regard to a portion of the portfolio transferred, then sale accounting will precluded only in respect of that portion for which the call option is retained. In other words, the sale accounting will still be applicable on the portfolio, minus the portion subject to the clean up call.

Martin Rosenblatt, a leading expert on securitization accounting, comments: "Issuers who have abandoned gain on sale accounting by increasing the optional call from a 10% cleanup call to a 20% call will have to go back to the drawing board.". Martin's comment relates to the securitisers opting out of gain-on-sale accounting by retaining clean up calls in excess of 10%.

Thrifts supervisor cautions against investment in risky CLO tranches

In a memo dated 23rd October, the Office of Thrift Supervision cautioned savings associations against investments in riskier tranches of CLOs and other structured offerings.

Focusing on investments in non-standard or unrated investments such as residual securities in CLOs, the regulator states: "The lowest priority tranche, or the residual interest tranche, is generally not rated. It is typically subordinated not only to senior tranches, but also to expenses of the issuing trust. These residual tranches are typically difficult to value and are illiquid investments by themselves. To make the residual tranche more marketable, the CLO issuer or trustee may swap the residual interest tranche for certificates guaranteed by a AAA-rated counterparty as to the principal amount at maturity (generally up to 12 years).

"While the swap creates a guarantee of the full principal at maturity, the amount guaranteed must be discounted to its present value if terminated early. In that respect, the guaranteed portion of the security is similar to a zero-coupon Treasury bond. Therefore, the credit support provided by the guarantor may cover less than 50% of the face amount of the certificate at purchase. Unlike zero-coupon bonds, however, these certificates are generally sold at par. Investors must rely on the performance of the reference asset (the residual tranche in this case) to return the remaining portion of their investment and provide any yield. The performance of the reference asset is not, however, guaranteed. Therefore, these investments are not, and should not be considered, fully rated.

"Apparently, the motivation to purchase such certificates is the high yield projected if the CLO collateral pool (and thereby the reference asset) performs well. However, there is no guarantee of residual cash flows, and the certificates will not be in default if no cash flows are paid to the investors. These investments are speculative, and are clearly not intended to hedge interest rate risk or credit risk. Based on discussions with ratings agencies, and the lack of supporting cash flow analysis, it is difficult to assess the likelihood that a particular return could be achieved on these investments. In essence, an institution should not be misled by split ratings where only a part of the security is either guaranteed or rated investment grade."

Mortgage securitisation fails to yield results in South Africa

A report in Business Day of 20th Oct. says the government is not happy at the fact that the government's securitisation initiatives have failed to yield any results, particularly in terms of making funds available to the lower-end of the market. The government through National Housing Finance Corporation had promoted Gateway Home Loans to buy housing loans from the market and to securitise the same.

However, during the first year of its operations, Gateway failed to buy any loans, says the report. Gateway has not been able to convince banks and housing lenders to sell their portfolios to it. Gateway feels that unless there is a primary market in housing loans, there is no scope for creating a secondary market.

Government has been struggling to find a way around banks reluctance to take on the risk and costs associated with lending into the lower end of the market. The banks counter that this segment of the market is unattractive to them due to retrenchments and the high risk of default.

Unemployment and retrenchment continue to dog the lower end of the housing market in the country.

Vinod Kothari comments: Initiatives to promote housing finance internationally come in form of a package of measures: strong mortgage foreclosure laws, a congenial and cost effective securitisation market, and generally active debt market. Based on my interactions, it seems the mortgage foreclosure procedure in South Africa needs to be strengthened. Obviously enough, housing needs cannot wait till development, and thereby, employment, picks up.

Developments in Italian securitisation

Rating agency Standard and Poor's is optimistic about development of Italian securitisation market, as per an article in the October issue of Structured Finance. The article summarises deliberations at a recent conference in Milan.

One positive legislative development in the offing is a new Notary Law which will shorten the time currently being taken in foreclosure of mortgages. In Italy, the foreclosure process may take anywhere between 4 to 7 years while 2 years is the European average. Speedier recovery process backed by strong legal framework obviously promote securitisations.

An area where securitisation in Italy is bound to grow is lease securitisation. Leasing is quite strong in Italy, particularly in the field of automobiles. Leasing companies would realise that releasing capital via securitisation is the sure shot way to growth, and hence better rating.

Links For more on securitisation in Italy, click here.

Securitisation rules in Malaysia by year-end

The securities regulator in Malaysia, Securities Commission (SC) has proposed to come out with securitisation rules by the end of the year. Malaysian newspaper Business Times quotes the SC chairman Ali Tan Sri Abdul Kadir as saying that commission has established a consultative committee comprising market professionals to find what is required to facilitate the process and submit recommendations to the Government. The process is almost reaching its end now.

Vinod Kothari comments: Securitisation market in Malaysia is virtually non-existent save for the bonds issued by Cagamas, the Govt.-sponsored body for secondary market in mortgages. As a matter of fact, the debt market for private securities itself is very dull in the country. Banks and financial intermediaries do not face strong pressures on capital adequacy: hence, there is no urgency to push for off balance sheet financing.

Nevertheless, as the country's legal position on securitisation is far from clear, a set of rules will help the market to grow.

Links For more on securitisation in Malaysia, click on our country page here.

Europe likely to have record issuance in 2000

European markets are going high on securitization. It is clear that year 2000 will go down in history as a year of record issuance, even while the US market will most likely close with a substantial negative growth [as we analyse in another story].

Till the end of third quarter, Europe has already recorded USD 60 billion of issuance, which is already ahead of 1998's total issuance and is close to USD 72 billion of issuance in 1999. With at least USD 25 billion worth issuance in the pipeline, there are firm indications of year 2000 volume being the highest so far.

One of the bold-going European types is synthetic securitisation, a device that does not put the assets off the balance sheets but gives the originator cover against risk, thus obviating "true sale" concerns. [For more on synthetic securitisation, see our page here.] Synthetic securitisations were originally well-accepted in Germany, but now they seem to have a much wider acceptance all over Europe.

Christopher O'Leary in a recent article in The Investment Dealers' Digest notes that "what will most define the openness of the European securitization market is whether government-sponsored deals from the likes of Italy and Spain will be accepted by investors. European governments have tried to offer deals in the past, to indifferent reception. Should the upcoming government deals price well, however, players believe that will be a sign that the European investor base is hungry enough to tackle anything on the menu."

Credit quality of US ABS depletes

There have been almost 122 downgrades by rating agencies in the US ABS market in the first half of 2000, as against few upgrades, reflecting a trend that began in 1997.

Rating agency Moody's in a report notes that one of the major reasons for the downgrades is the downgrading of some popular credit enhancers. For example, the rating of Conseco Finance Corp. went down in April 2000 resulting in downgrades of 59 subordinated tranches that were guaranteed by Conseco and backed by manufactured housing and home equity loans.

But credit enhancer downgrade is not the only reason: poor asset performance also resulted in over 40% of the downgrades that occurred in the first half.

Moody's is not exactly optimistic about teh future downgrades: it expects that the future will see more downgrades during the next economic downturn. More so in case of poor quality or subprime assets, but higher quality assets-backed deals may also be affected.

Since the market's inception in 1986, there have been 320 upgrades affecting $16.8 billion in ABS and 480 downgrades covering $47.4 billion.

The aboe is based on a report of Moody's titled “Rating Changes in the U.S. Asset-Backed Securities Market: 2000 First Half Update

Citibank's recent credit card ABS marks a new innovation

Citibank is the originator of the largest bank credit card portfolio in the United States and has been a frequent entrant in the securitisation market. However, after remaining out of the securitisation market for nearly a year, in September, it came out with a USD 2.8 billion credit card ABS.

Using a vehicle called Citibank Credit Card Issuance Trust,

The innovative part of the structure is that it allows Citibank to issue subordinated notes, without having to issue senior notes. The natural sequence in any structured offering is to have a junior class to make the senior class senior. Rating agency Standard and Poor's notes in a Press Release that issuing subordinate notes not tied to any senior debt gives Citibank flexibility in the type of debt it can issue and allows it to capitalize on current market conditions. Additionally, Citibank has added flexibility to issue ABS paper in the size, maturity, and coupon terms that will enable Citibank to meet investors' demands quickly.

This is not the first time Citibank has introduced a revolutionary structure into the credit card securitization market. In 1995, Citibank established a unique structure under its trademarked Dakota Program. Other credit card issuers have since replicated this structure, which allows the issuance of extendible notes with terms similar to the note issuance in the commercial paper market.

Links For more on securitisation of credit cards, see our page here.

Cat bonds volume down, but Fitch is optimistic

In year 2000, activity in the catastrophe-linked bond market has been slower than last year, and also slower than predictions made before. But Michael J. Barry of Fitch [article in the National Underwriter newsletter, 9th Oct., 2000] is optimistic. In year 2000, till the third quarter, only five syndicated deals have been brought to market. The 5 deals are

  • Atlas Re: a three-tranche $200 million offering (rated "triple-B," "triple-B-minus," and "B-minus") that provided 3-year protection for the sponsor, SCOR, a French reinsurer, against U.S. and Japanese earthquake and European windstorm.
  • NeHi Inc.: a $41.5 million offering (rated "double-B") that provided 3-year protection for the sponsor, Vesta Fire Insurance Corp. in Birmingham, Ala., against Northeast U.S. hurricanes and Hawaii hurricanes and tropical storms.
  • Residential Re 2000, the latest of four deals sponsored by San Antonio, Texas-based USAA;
  • Alpha Wind 2000, sponsored by Arrow Re in Bermuda;
  • and Seismic Ltd, sponsored by Lehman Re in Bermuda.

There were 9 syndicated deals in year 1999.

Michael Berry sees positive trends developing in the catastrophe-bond marketplace that should have a favorable impact on issuance levels. One of the major motivations in cat bonds issuance has been pricing. If pricing in traditional reinsurance markets is fine enough, there is not enough of motivation in securitisation. Fitch sees the prices hardening of late.

The cat bond issuance is also correlated with the capacity levels of traditional insurance providers. This could be another reason for increased activity in the cat bonds field. Third, the heavy level of consolidation in the reinsurance arena has left the major players with limited counterparty choices. Michael Berry feesl that the market has matured considerably since its early days, with deals being structured to the liking of a more savvy, better educated investor base. "There has been a noticeable trend towards model-indexed and parametric deals", he says.

Michael Berry's article makes a very interesting – we highly recommend it.

Links For more on cat bonds, do refer to our page on risk securitisation,where you will find links to more news items and articles.

Japanese earthquake not likely to affect cat bond investors

International rating agency Fitch does not see any need to review the rating of cat bonds issued by Parametric Re, Ltd., Concentric Ltd. and Circle Maihama Ltd as a result of the recent earthquake in Japan, as per a press release of Fitch.

On Friday, Oct. 6, 2000, an earthquake with an estimated magnitude of 7.3 (according to the Japan Meteorological Agency) occurred in the western Tottori region of Japan. The epicenter of the earthquake is approximately 315 miles southwest of Tokyo.

Cat bonds provide reinsurance cover to insurance companies against losses due to catastrophe events. As per terms of these bond issues, if the losses faced by the insurance companies based on certain parameters lead to a trigger event, the bond holders would suffer a loss of interest, or loss of principal, or both. As per initial analysis by Fitch, it does not appear that losses to any of the parametric earthquake bonds rated by Fitch would be triggered by the event.

However, the rating agency will continue to monitor the development of losses to determine if those bonds are impacted.

Links For more on cat bonds, please see our page on risk securitisation – click here.

FAS 140 on securitization accounting issued

The US Financial Accounting Standards Board (FASB) has issued a new accounting standard on securitizationg accouting, FAS 140 which replaces the existing accounting standard FAS 125. The new accounting standard was issued on 3rd October.

Most of the provisions of Statement 125 were carried forward to Statement 140 without reconsideration, and some were changed only in minor ways. It is effective for transfers after March 31, 2001. It is effective for disclosures about securitizations and collateral and for recognition and reclassification of collateral for fiscal years ending after December 15, 2000.

Vinod Kothari comments: The revised statement continues to adopt the "financial components approach" that allows various fractions of a securitization transaction being itemized and valued independent of each other, retaining only those which are retained by the originator. The basic gain on sale accounting and removal of asset accounting, though subject matter of intensive criticism by investors and equity analysts, has not been changed. The statement provides more detailed guidance than before on isolation, qualifying SPVs, conditions that constrain a transferee, conditions for an entity to be a qualifying SPE, accounting for transfers of partial interests, measurement of retained interests, servicing of financial assets, securitizations, transfers of sales-type and direct financing lease receivables, securities lending transactions, repurchase agreements including "dollar rolls," "wash sales," loan syndications and participations, risk participations in banker's acceptances, factoring arrangements, transfers of receivables with recourse, and extinguishments of liabilities, etc.

With its 364 paras, the new standard is 1 1/2 times as heavy as the existing one.

German RMBS market deepening

International rating agency Standard & Poor's say in a report that the German residential mortgage-backed securities (RMBS) market has significantly deepened in 2000 backed by lenders increasingly striving for efficient balance-sheet management.

Apart from additional issuances by traditional players, a large number of first-time issuers have additionally entered the market and the industry expects them to retap it again now that a framework is in place. Unlike other European RMBS sectors, the German transactions more typically use synthetic structures rather than true sales because of the benefits they accrue to the originator. As German lenders use securitization for balance-sheet management, the synthetic approach is much more practical, says an S&P official. Notwithstanding the slowdown in the mortgage lending sector this year, it is expected that originators still have large stocks of mortgage loans that can be securitized. This is one of the positive features of German mortgage portfolios as the pool seasoning in the transactions is typically higher than other countries, such as the U.K.

Links For more materials and links on German securitization, visit our country page – click here. For more on synthetic securitisation, see our page here.

FAS 125 being replaced by FAS 140

The US accounting standards setter Financial Accounting Standards Board (FASB) met on 13th Sept. and intends to issue a final accounting standard on securitisations as statement no. 140 to supersede FAS 125 by the end of september. Highly informed sources say that the effective date for the new expanded disclosures will be December 2000 for calendar year-end companies and the effective date for the rest of the provisions will be delayed three months from the exposure draft proposed date– it will be effective for transactions occurring after march 31, 2001.

Significant statement FAS 125 is a crucial accounting standard for securitisations – accounting being a key issue in securitisation, FAS 125 affects not only the accounting treatment for securitisations but the very economics and motivations of issuers. Technically FAS 125 is applicable for US companies, but practically it affects securitisation accounting world-over. Canadian accounting standard setter has expressly stated that it would almost replicate the revised FAS standard. International Accounting Standards Committee has also followed the FAS approach as far as securitisation accounting is concerned.

What the new standard might contain: Going by the exposure draft previously circulated and the comment letters and previous discussions of the Board, it is likely that the revised standard will carry important provisions dealing with the following:

  • Will the financial components approach be changed?: It seems unlikely that the Board will shift its approach from the present financial components approach to control or linked presentation approach. It is notable that in March 29, 2000 meeting, the Board "decided not to adopt any of several constituent suggestions that would have reduced gain recognized on securitizations in which the transferor retains subordinated interests".
  • Enhanced disclosures: Very likely, the FAS 140 will enhance disclosure requirements on the lines proposed in the Exposure draft.
  • Qualifying SPV: This issue has engaged a lot of attention in course of deliberations in the past and it seems that the new statement will contain voluminous details on what the SPV may do and may not. Consolidation issue is also likely to be clearer.

Earlier related stories on our site:

We will get you more on FAS 140 – follow stories on this page regularly. Do you have any views or suggestions in the matter? Do write them.

European banks join ABCP bandwagon

More and more European banks are joining the ABCP bandwagon as banks try to retain their customers. The banks woo their customers off their own balance sheets and over to their conduits selling asset-backed paper.

To wit, the outstanding asset-backed commercial paper in European conduits totaled USD 61 billion by end-March, 2000. This increased approximately 280% from USD 22 billion asset-backed commercial paper outstandings in 1997.

Recently, three European banks announced formation of ABCP conduits – Landesbank Baden-Wurttemberg (USD 1 billion), Norddeutsche Landesbank (USD 1 billion) and , Skandinaviska Enskilda Banken (USD 2 billion).

Links: For more on ABCP, click here.

Risk transfer securitization to be high growth business, says S&P

International rating agency Standard & Poor's Richard Gugliada said transfer of risk by the device of securitisation will continue to be the mainstay of securitisation business in time to come. Thus, CBOs, CLOs and other credit-risk transfer devices will continue to be a very high-growth business.

Richard Gugliada is the managing director of Standard & Poor's CBOs/CLOs, Market Value, and Derivatives/Structured Investment Vehicles division. Richard made these comments while addressing Strategic Research Institute's Forum on Risk Securitization in New York on 11th Sept.

There have been several risk transfer based securitisation transactions recently, for example, J.P. Morgan & Co. Inc.'s Broad Index Structured Trust Offering (BISTRO) series of transactions. Other notable transactions have been Morgan Stanley's Sequils transaction, Citibank's strategic asset redeployment program, etc. For more details on such risk transfer devices, click here.

Risk securitization is similar in theory to credit derivatives: the assets remain on companies' balance sheets and the issuers do not aim at the typical accounting benefits of traditional securitizations. Highly rated financial institutions can use this financing method to efficiently and cost-effectively manage credit risk to specific assets. The seller transfers its risk on a reference pool of assets by creating marketable securities and selling them in the capital markets.

Links See our page on synthetic CLO and other CLO/ CDO structures. For Vinod Kothari's site on credit derivatives, click here.

Railtrack Group proposes to raise Stg. 10 billion by securitisation

This could well be the mega deal of all times. Last year, we had carried a news report about Railtrack's proposal to securitise arches. Now, it proposes to securitise its income and raise the largest amount ever sourced by securitisation – Stg 10 billion.

As per a report in The Independent on Sept. 10, Railtrack will securitise the income it receives from the train-operating companies. The proposal could take a more firm shape by end of the calendar year.

The City will eagerly await this news as apart from being a mega deal of all times, the transaction is likely to get a very good rating.

UK power utilities mull securitization finance

Several power utilities in the UK are planning to securitise receivables to raise finance. Among the names doing rounds in the market are TXU Europe, which is considering recouping part of the GBP310 million ($456 million) it paid to acquire Norweb Energi by securitizing receipts from Norweb’s retail customers.

Market practitioners in UK believe that power companies are becoming more interested in securitization because consolidation within the industry is putting greater pressure on companies to raise capital for investments, as well as to increase shareholder value. Securitization would be advantageous to a power company because it would lower its cost of funding, diversify funding sources and improve the balance sheet.

Links For more on securitization by utilities, click here.

Financial institutions in SA yet to tap securitization fully

An article by Greta Steyn in Business Day August 29 says that South African mortgage lenders are yet to realise the full potential of securitisation, though hopes are high that it would succeed in bringing down mortgage costs.

Mortgage-backed securitisation holds the promise of being the panacea for unlocking private finance for low cost housing. Gateway Home Loans, a low-cost housing arm of the parastatal National Housing Finance Corporation (NHFC), plans to launch mortgage-backed securities but has yet to succeed. Investors still find it hard to lap up securitized products in absence of an assuring guarantee, like the Fannie Mae in the USA. Market practitioners demand that the National Housing Finance Corporation, created by the govt. for housing finance promotion, should get into this role.

SA Home Loans intends of offer a mega MBS issue in the country of Rand 1 billion, once it collects that kind of a corpus.

An interesting development is Kiwane, a repackaging SPV. Kiwane buys illiquid corporate debt and converts the same into relatively liquid, highly rated, asset-backed bonds. Kiwane, which is managed by Gensec and Real Africa Durolink, invests in SA companies with investment grade rated debt. Kiwane was able to tap IFC Washington for Rand 70 million of mezzanine bonds.

Links Our country page on South Africa offers a number of links and articles on South African securitization – click here.

Deutsche Bank buys stake in Lewtan Technologies

Deutsche Bank AG has entered into an agreement with Lewtan Technologies, Inc. to buy a stake in the latter. Lewtan is a software solutions provider for securitization business and owns and runs ABSnet, a popular website for securitization deal information. Lewtan is based in Boston, USA.

Under the terms of the agreement Deutsche Bank has taken an equity stake in Lewtan, and the bank's Corporate Trust & Agency Services (CTAS) business will work with Lewtan to develop new applications for servicing the structured finance markets globally. The agreement will lead to the introduction of innovative web-based solutions for the securitization industry as early as the fourth quarter of 2000.

India's first MBS offer oversubscribed

India's first RMBS transaction, to securitise housing finance receivables originated by housing finance companies HDFC and LIC Housing Finance, was oversubscribed. The receivables were securitised through the agency of National Housing Bank which got legal powers to act as a conduit by virtue of recent amendment to its constitutional law.

The offer involved a deal size of Rs. 103.54 crores [USD 24 million] comprising 11,106 individual housing loans of Housing Development Finance Corporation Ltd (HDFC) and LIC Housing Finance Ltd (LICHF). The issue, which closed on August 29, has been marketed at a coupon range of 11.35 per cent to 11.85 per cent on book-building basis. The issue has drawn the interest of institutional investors, including insurance companies, mutual funds, financial institutions and commercial banks.

The transaction involves issuance of pass through certificates. The SPV is a trust settled by NHB. The deal, in the news for quite some time, passed through a checkered history first because of legal snags and thereafter due to interest rate hike.

Links Click here for previous news reports on this transaction.

Real estate securitisation soaring in Japan

A report in Jiji press of 4th Sept. says that real estate securitisation activity is soaring in Japan. As of now, MBS forms only 1% of the total bond market in Japan, but the signals are clear that the demand for MBS will keep growing due to strong investor demand for higher returns on investment amid the continuation of low interest rates and legal revisions to facilitate the establishment of special purpose companies and pave the way for the launch of real estate investment trusts.

Companies are also resorting to securitisation to clear up their balance sheets of real estate portfolios built during the go-go years of the past.

Some of the notable securitisation transactions in Japan in the recent past are securitisation of Seibu department stores which reflects the increasing trend towards CMBS transactions, securitisation of non-performing loans by Morgan Stanley reflecting the trend to get rid of non performing portfolios, mega securitisation by Dai-Chi, etc.

The Construction Ministry's also plans to securitize loans held by Housing Loan Corp. to the tune of Yen 50 billion next March and Yen 200 billion in fiscal 2001. This is expectedc to become a regular feature. The ministry has already picked Credit Suisse First Boston Securities (Japan) Ltd. as arranger of the securitization program. Terms of the scheme, including lead manger, yield and maturity, will be determined at the end of this year.

Links For more on securitisation in Japan, click our country page here.

Interest in ART increasing, says FT survey

With hardening of traditional reinsurance markets, interest in alternative methods of risk transfer, including securitisation of risk, is increasing, says a Survey in Financial Times, 4th Sept., 2000. Alternative risk transfer (ART) is the collective name to the devices such as securitisation, captive renting, etc. through which insurance companies or the protection buyers transfer insurable risk other than through traditional reinsurance. See our section on securitisation of risk for more on such devices.

Alternative risk transfer through catastrphe bonds has been common in risk cover for natural calamities. To date, about USD 5 billion worth cat bonds have been issued. Market practitioners feel that with hardening of traditional reinsurance markets, more such activity might be noted in time to come.

According to the Survey, banks have taken the early lead in developing ART techniques, but international reinsurers are trying to ward off competition by putting up their own ART conduits mostly in tax havens. A particular area of interest is weather derivatives – a number of power companies such as Koch Industries have used weather derivatives to hedge against income exposures affected by weather changes. See our page on weather derivatives for more info.

Much of motivation for ART will, however, depend upon simple economics. The prices of traditional reinsurance are still not high enough to warrant securitization. However, the prices are expected to harden in next 12-18 months, which will give a boost to risk derivatives.

Debate heats up on withdrawal of govt support to Fannie and Freddie

Rep. Baker's proposal to withdraw inherent US govt. support to giant secondary mortgage lenders Fannie Mae and Freddie Mac is on hot seat of controversy. The upcoming debate on the proposed regulatory changes in this regard is expected to be charged. We on this site carried news report on the proposal – click here.

Currently, Fannie Mae and Freddie Mac are two shareholder-owned securitization agencies supervised by the Department of Housing and Urban Development. The Office of Federal Housing Enterprise Oversight, an independent agency under HUD, is responsible for ensuring that the lenders are operated in a financially safe and sound manner.

Under Rep. Baker's plan, Fannie and Freddie will be subject to the same capital rules for banks that hold their securities and will remove any implied financial risk to the federal government. The draft of the proposed regulatory overhaul was made by Baker who is the main advocate of the changes. It is also noted that In his letter to Rep. Baker, Fed Chairman Alan Greenspan has indicated his support for measures proposed by Baker.

Fannie Mae and Freddie Mac, on the other hand, have represented vehemently to retain their current status as champions of home ownership in the U.S. to record levels. Fannie Mae models is followed world-over.

Links: Visit site which leads the debate against the government support to the agencies. Also see our site on US securitization market which briefly discusses the role of the agencies.

Teething troubles bother Italy's government dues securitization

Call it teething troubles or the infirmities of infancy. Or call it bureaucratic bungling, but unconfirmed reports suggest that the much-publicized government dues securitisation from Italy – the securitization of social security contributions by INPS – is fraught with some initial collection problems, and it seems that the first tranche due in Jan 2001 may not be paid in time. Click here to read about the INPS securitization.

Reports from market operators suggest that the deal's performance is disappointing at the point where it is feared that series 1 will not be called in January 2001 due to cash shortfall. Market operators stress that such an event would have a very negative domino effect on series 2 and 3. There are reports from the fiduciary in Italy suggest that during the first 8 months the appointed collectors (concessionari) didn't collect any funds at all, as the governement had not set the commissions for their remuneration. The seller INPS, however, did collect some funds.

Updated 3rd Sept., 2000 A report in Euroweek of 25th Sept. quoting Chase Manhattan's performance report and Italian press news reports says that investors and dealers are viewing the transaction with great anxiety. A report from Merrill Lynch also confirms that the cash collections for investors's servicing are far below expectations and it is quite likely that Series 1 AAA bonds will have an extended maturity. It is also reported that the servicing is being done by INPS, not by the concessionari who have not started collecting as yet.

Links For more about securitisation in Italy click here. For more about securitisation of government revenues, click here.


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


US asset-backed market likely to end 2000 with marginal growth

It has not been a very good year for US abs markets. While the first half showed a negative growth rate after a long time, the volumes picked up in the second half. With just two weeks to go, it now seems the volume for the calendar year will only be marginally up from the last year's, nowhere near the impressive double digit growth rate it was maintaining for a long time in the past.

As of end of the last week, volumes for year 2000 output stood at USD 263 billion, about 2% behind the 1999 volume of USD 269 billion. Taking expected deals during the holiday season into account, market analysts do not expect the aggregate year 2000 volume to be very better than that last year. The decline in volumes is attributed to lesser of 144A deals coming to the market, while public offers showed an impressive performance.

Market analysts are also busy making yearly tallies of lead investment bankers. It is likely that Salomon Smith Barney will end up as the top underwriter with Lehman Brothers at number 2 position.The two together will hold more than a quarter of the market.

Links For data of the volumes in the ABS and MBS market upto 30th June, 2000, click here.

Guy Hands continues to make news

With the focus on financing potential of securitisation for infrastructure projects in London, Guy Hands of Nomura continued to be in the news.

The Independent of 16th December carried the following comment:

"IF GUY Hands at Nomura can do it, then so can the fusty old managements who run the utility businesses that he seems so keen to get his hands on. PowerGen has became the first UK utility to mortgage some of its future revenues to pay down a chunk of its present debts [see news item below]. Peter Hickson, PowerGen's finance director, has parceled up about one year's worth of gas and electricity bills and sold them to Bank of America for pounds 300m. The resulting cash inflow will both help to reduce PowerGen's debts and cut around half a per cent from its interest payments.


Will other utilities follow where PowerGen has led? The most obvious candidate is Railtrack. Like electricity and gas bills, its track access revenues are secure and reliable. And if electricity and rail companies can do it, then why not water companies? Securitisation is one of the mechanisms Nomura would have used to make its takeover of Welsh Water stack up financially. This is just the kind of instrument water companies may now have to look at if, as looks likely, their exotic restructuring plans are blocked by the regulator. "

Who is Guy Hands

Head of the Principal Finance division of Nomura Securities at London is one of the most talked-about financiers in the City and in the securitisation world, he has the reputation of being the one who pulled securitisation out of its mainstream applications and intermixed venture capital approach into it to introduce to the world a wholly new range of asset classes such as pubs, real estate, plant and infrastructure assets.


French bank in mega CLO deal

French banking group Natexis Banques Populaires has announced that it has securitized a portfolio of loans to a number of companies under French control, for a total value of Euro 2 billion, as per a report in La Tribune of 20th December.

Following the launch of Natix in June 2000, this operation, which has been named Igloo, is the second securitization operation concerning a portfolio of loans to French companies by the Bank. The operation was jointly managed by Natexis Banques Populaires and Merrill Lynch International.

World Football body to securitise receivables

Federation Internationale de Football Authority [FIFA] wants to securitise future receivables to raise as much as USD 1 billion by way of securitisation, thus catapulting securitisation from the limited mainstream of banks and financial intermediaries to the sports arena. FIFA would be the first international sports body to use securitisation to raise resources. According to a report in The Times London, FIFA will cover its costs in the run-up to the next two World Cup tournaments. The organisation is working with Credit Suisse First Boston to prepare the securitisation for subscription by the middle of next year.

This would be the second notable instance of securitisation in the sports field, and the first of its own kind. Before this, Formula 1, the TV-based car sports organisation, has used securitisation to raise resources.

The securitisation deal banks o potential marketing contracts and television revenues surrounding the 2002 World Cup.

UK electricity company to securitise receivables

Powergen, the third largest electricity company in the UK, has decided to raise resources by securitising its future receivables. Reports suggested that Powergen will raise £300 milion against its customers' future payments of gas, electricity and telecoms bills.

Securitisation is seen as the right funding device to reduce the huge funding the company currently holds from banks. The company justified securitisation saying it would entail lesser funding costs as compared to straight bonds.

Links For more on securitization in the UK, see our country page here.

Securitisation makes headlines in London: The Tube mulls it for revitalisation funding

For a last few days, securitisation as an infrastructure funding option has been making headlines in London newspapers as it has been suggested as a mode of funding the essential revitalisatin of London's underground train system.

An agency called Transport for London has suggested securitisation as the device, whereby the Tube can raise Euro 3.8 billion to part-finance its requirements. The Times on 16th Dec. carried a commentary titled Securitisation is the right route by Patience Wheatcroft which projects securitisation among other options as a straightforward and cleaner option. The commentary cites the various ventures where Guy Hands of Nomura has used securitisation as a funding device: "Guy Hands has made Nomura a major player in such diverse sectors as train leasing companies, housing and pubs. There is no magic involved. Those who are prepared to put up the cash need to be assured that the income will be there to service the bonds and the coupon they demand is determined by the level of security they feel on that front. Pubs proved an easy deal for Hands, for instance, since he had no difficulty in persuading investors that the drinking public would continue to take refreshment in his establishments".

IFC promoting securitisation in emerging markets

International Finance Corporation, Washington (IFC) is promoting securitisation in emerging markets. IFC has the task and reputation of spreading new financial instruments in emerging markets.

Currently, IFC is on various projects involving mortgage-backed securitisation in several emerging markets. In the past two years the IFC has helped set up new financial institutions in Argentina, South Korea and Colombia that are designed to buy up mortgages in the secondary market. The model adopted is similar to US Fannie Mae.

One of the institutions where IFC has participated as a promoter is KoMoCo, Korea. KoMoCo has already come out with three issues of mortgage-backed bonds. Click here for more about KoMoCo. In Argentina, IFC has helped in the promotion of a body called Banco de Credito & Securitizacion.

IFC's forthcoming projects could be Mexico, Russia and the Middle East.

First Islamic securitisation to hit the market

The first Islamic securitisation is likely to hit the market soon. The transaction will emanate from Saudi Arabia and is backed by leases on military property. The transaction will be lead-managed by Credit Suisse First Boston. We reported on this site recently that CSFB has opened an office in UAE to promote securitisation in the Middle East. Soon, another commercial mortgage backed securitisation may be launched from Bahrain.

The transaction is aimed at attracting Islamic funds into investing in a deal which is compliant with Islamic principles. Islam debars charging or paying of interest: but risk-participation is permitted.

A report in Investment Dealers Digest said that the upcoming Saudi Arabian transaction will likely not resemble what Western investors consider a typical asset-backed security. The issuer would have to sell the assets to a third-party, special- purpose vehicle, which in turn would have to hold on to at least 51% of the assets securitized.

Links There is an article on Islamic securitisation in our articles section – click here.

Securitisation workshop in Bahrain Vinod Kothari Consultants along with Bahrain Institute of Banking and Finance will be offering a course on Securitisation and Credit Derivatives in Bahrain in March, 2001. For details, click here.

ABN Amro to hit the market with largest ever synthetic CLO

ABN Amro is reportedly preparing what would be the largest-ever CLO in history – a USD 15 billion deal. A report in Euroweek of Dec. 1 says that this would be a synthetic transaction, partly funded. As is the case with synthetic CLOs, the deal might aim to raise a part funding to provide credit risk swap to the USD 15 billion worth portfolio. The portfolio would comprise of North American corporate loans.

In the meantime, ABN Amro is already in market with Euro 8.5 billion synthetic securitisation of European corporate loans. Named Amstel CLO 2000-1, the offer consists of 4 tranches.

Vinod Kothari comments: Taking into account the above with Deutsche Bank's synthetic CLO named CAST 2000-2, European synthetic CLO activity seems to be at its peek.

Links For more on synthetic CLOs and CLOs in general, refer to our page on bank loan securitisation here.

Alternative risk transfer forum notes increasing convergence between insurance and financial products:
nsurance seen as a source of capital

Speakers at the the 10th annual World Captive and Alternative Risk Financing Forum held in Palm Beach Gardens, Fla., USA noted increasing trend towards convergence of financial and insurance products.

Erwin Zimmermann, divisional chief executive of Swiss Re New Markets saw insurance as an essential tool of risk management. It has become increasingly important for corporates to manage their volatility. The role that insurance solutions can play, therefore, is by helping to minimize that volatility and providing a source of contingent capital, which unlike debt or equity, is not reflected on a client company's balance sheet. However, unfortunately, the traditional financial markets do not see insurance as a financial product. "Rather than seeing it as a financial product that can provide a value, it instead is seen as a cost. A key attraction of using insurance as a source of contingent capital is that it can lower a company's cost of capital". The present-day corporate ought to see insurance as an essential building block of the company's capital structure, just like equity and debt. . "This shift in view means the risk manager is no longer the ruler of sprinklers and loss control, but also the owner of this financial area," said Zimmermann.

Zimmermann proposed insurance as a source of contingent capital.

Within the insurance product, according to Zimmermann, one has either the choice of speaking in terms of a traditional vs. alternative risk transfer, or one can talk in a more pragmatic sense: an optimally structured convergent financial instrument, where insurance is an element in a financial instrument. The financial instrument approach would require insurers to provide more modeling, a more complex structure and capital markets innovation.

Links For more on alternative risk transfer, see our insurance risk securitisation page here. A very good site on alternative risk transfer is here.

Why do investors flock to securitisation products: S&P highlights investor perspective

International rating agency Standard and Poor's (S&P) has highlighted the advantages of securitisation from investors's perspective. A commentary titled The Investor Perspective: The Benefits of Buying Securitized Bonds appeared on Ratingsdirect on 28th Nov.

Securitization is being embraced the world over by pension funds, life insurers, and other types of investors because of key highlights of securitised instruments : their comparatively high quality and low volatility, their relative value, their ability to cope with unexpected events, and the opportunities they offer for portfolio diversification.

As regards low volatility of structured instruments, studies by the rating agencies show that the migration of the ratings, that is, downgrades or upgrades to the initial rating, are less frequent in case of securitised instruments than for other instruments. On this site, we carried a report on this study – click here. Over 1978 to 1999, S&P has rated 3269 ABS transactions with 4685 classes, of which only 2 have defaulted and only 2% have been downgraded. This is a remarkable evidence of stability and quality of ABS transactions.

Securitisation structures are designed to mitigage event risk, that is, impact of adverse economic scenarios on the performance of the transaction. S&P cautions investors against investing in transactions that look like securitisations, but truly speaking are not – "A lot of transactions look like securitizations on the surface but they ultimately depend on the ability of the underlying originator to generate more assets, in contrast to a true securitization".

Another strong investor incentive in investing in securitised products is portfolio diversification.

Lack of liquidity might be an adverse factor on a number of securitised instruments.

Economic stability brightens securitisation prospects in Russia

As the once-trouble-torn Russian economy is gradually recuperating, securitisation deals are being noted around, particularly future flows deals. Future flows deals have proved particularly handy for bringing down funding costs in emerging markets with low sovereign credit ratings.

Report in Euroweek 24th Nov. suggest that the EBRD and Standard Bank are finalising the underwriting of an asset backed loan that will provide financing for some half dozen Russian goldmines. More such deals are in the pipeline, says the report. A similar deal was struck last year – not exactly securitisation but a loan paid off by the sale proceeds of gold exported from the country. In view of the lower credit rating of the country, these deals are essentially bullet payment small tenure loans.

Links For more on securitisation of future flows, click on our page here.

Munich Re might enter the market with a catastrophe bond

Reinsurance company Munich Re might come to the market with a USD 500 cat bond against US hurricane and earthquake risk and European windstorm risk. The deal is expected to be arranged by Lehman and Goldman Sachs Munich’s subsidiary American Re will also play as a third manager on the deal.

The issue is expected to be tranched into two classes: a USD 250 million, three-year tranch dedicated to hurricane risk expected to be priced at 600-675 basis points over LIBOR and the other tranche for earthquake and windstorm risk expected to be priced at 675-750 basis points over LIBOR. The deal will be linked to a parametric measure, unlike an index-based or indemnity-based deal.

Links To learn more about cat bonds, click on our page here.

Swiss Re's insurance credit-enhances franchise royalty securitisation

Swiss Re has provided first loss reinsurance on a securitization of intellectual property for Arby's(R), the fast-food chain best known for roast beef sandwiches. It was a private placement by a newly-formed special purpose vehicle of $290 million of non-recourse fixed rate insured notes.

The transaction is backed by rights to collect franchise royalties and fees from current and future Arby's(R) branded franchise owners throughout the U.S. and Canada, and is believed to be a cutting-edge transaction. — The execution hinges on an innovative insurance and reinsurance platform in which a Swiss Re Group company takes the first loss position, and Ambac Assurance Corporation takes the excess risk position and provides a AAA financial guaranty policy for the $290 million issue of asset-backed securities.

Swiss Re feels that the transaction will lead to a further convergence of insurance and securitisation markets.

ABN Amro bank launches first Asian synthetic securitisation deal

ABN Amro bank took the laurels to become the first originator of a synthetic securitisation in Asia. The transaction, called HK Synthetic MBS Co. Ltd, seeks to transfer the credit risk inherent in mortgages originated by ABN Hong Kong.

The HK Synthetic MBS, a Cayman Island companuy, is the SPV used for the purpose, will write a credit default swap with ABN. The proceeds of the notes will be put up in deposits to be held by the SPV. The amount so deposited will be used in case of losses suffered by ABN which need to be compensated by the SPV in terms of the default swap.

Rating agency Standard and Poor's expects to give a AA rating to the class A notes to be issued. The transaction has as many as 5 classes running from A to E. A class forms the largest part , HK$ 1124 out of a total issuance of HK$ 1261. Class A notes get a subordination of approximately 10.8% due to the combined impact of classes B through E.

The reference portfolio consists of a pool of 1168 mortgages originated by ABN Amro. The principal outstanding under the mortgages equals the amount of notes issued by the SPV.

Links To know more about synthetic securitisation, click here.

Greece securitises dividend income

Aptly naming it as Hellenic Securitisation, a Greek government body on 17th Nov securitised government receivables in a novel deal. The receivables in question are the dividends being paid to the Government every year by the state-owned Consignment and Deposit Loan Fund. The government has thus raised upfront cash to the tune of USD 633 million. Market reports say that this is the first public issuance of asset-backed securities in Greece, but two deals are closely following – one, that of lottery ticket receivables, and the next will be the Italian-type social security receivables.

The Hellenic Securitisation deal carried two tranches. The first tranche, having a maturity of 4.3 years, was priced at 18 basic points over Euribor, and the second tranche, with expected maturity of 10.3 years, was priced 24 basis points over Euribor. Investment managers have claimed that the issue was oversubscribed twice.

Your comments Securitisation of government revenues is becoming quite a cult in Europe, with Italy doing as many as 3 transactions over last year or so, and Greece doing or proposing three. Where do you think this is leading to? Do you have any views on this tendency? Do write back and we will be glad to publish your views on this site.

Links For more on securitisation in Greece, refer to our country site here. For news relating to the social security revenues, click here.

FDIC staff issues draft memorandum on securitisation of predatory loans

The issue of banks investing in predatory loans either directly or through the securitisation route has been causing concern of bank regulators in the USA, as covered earlier on this site. There have even been court cases against banks that bought

What are predatory loans:

Predatory loans are not just subprime loans. The FDIC draft guide lists the following features of predatory loans:

  • Misleading or fraudulent marketing
  • Loan fees and interest rates higher than necessary to cover profit and risk
  • Excessively priced products, such as single premium credit life insurance
  • Large prepayment penalties that make it difficult to refinance affordably.
  • Balloon payments likely to result in default and foreclosure
  • Abusive collection and aggressive foreclosure practices
  • Mandatory arbitration provisions
  • Underwriting based on the value of collateral rather than a borrower’s ability to repay

or underwrote such mortgages –see report here. The FDIC staff has now proposed a memorandum to guide banks into staying clear of buying or investing in predatory loans. The draft memorandum was issued on 17th Nov., and the FDIC has sought public comments on it. The memorandum provides suggestions on how to avoid purchasing or funding predatory mortgage loans and investing in securities backed by such loans. These activities may be the most common means by which financial institutions and other investors unknowingly help to fund predatory loans, incurring several risks.

Apart from buying subprime loans, the draft guides includes a section on how to refrain from investing in MBS secured by subprime loans.

The FDIC draft document is available at:

The site also allows electronic comments to be filed with the FDIC.


Philippines president passes order for securitisation regulations

Philippines president Joseph Estrada has ordered the goveernment agencies concerned to develop a legal and regulatory framework. The President passed an order to this effect on November 17 [E.O. No. 318]. The order is effective immediately.

Earlier on this site, we carried news about trade and industry in the country pleading for facilitative regulatory framework for securitisation. Responding quickly, the Presidential order instructs the Department of Finance, the Bureau of Internal Revenue, and the Securities and Exchange Commission, as well as the Housing and Urban Development Coordinating Council (HUDCC), to form top-level teams which will develop the administrative and regulatory framework in their respective departments for the development of a market for assetbacked securities, in consultation with the private sector.

Besides clarifying the regulatory, tax and securities regime relating to securitisation, it is expected that the Order will also achieve the following:

Other provisions of the E.O, include the following:

1. The SEC shall issue the revised rules on securitization and shall recognize the creation of Special Purpose Vehicles as the recipient of assets and issuer of asset-backed securities and securitization transactions, if determined to be within the current legal and regulatory framework.

2. The Insurance Commission shall study and, if possible, implement the expansion of the coverage of admitted assets for insurance companies to include investments in assetbacked securities.

3. The above listed agencies shall coordinate and seek the assistance of the BSP regarding policy, administrative and regulatory issues in securitization where coordination with BSP is necessary.

4. The HUDCC, in coordination with the SEC and DOF, shall initiate the formation of a private sector Secondary Institution (SMI) for assetbacked securities with priority to the housing industry.

5. The Board of Investments shall consider the inclusion of SMIs for asset-backed securities in the Investment Priorities Plan as among those eligible for tax and other incentives under the 1987 Investments Code.

Mexican government wants securitisation push

President-elect Vicente Fox who broke the 71-year old single-party reign in Mexico and will assume the presidency from Dec 1 wants to give a big push to securitisation. To carry the idea to reality is Mr. Jose Luis Romero Hicks, who is overseeing housing policy as a part of the President's team.

To begin with, Hicks wants to set up a body similar to the Fannie Mae for securitisation of mortgages. Hicks plans to undertake a series of steps to make this possible. Although twenty-three of the country's 32 states have adopted laws making it easier for mortgage lenders to foreclose on the homes of delinquent borrowers, the country does not have a secondary mortgage corporation. Title insurance does not exist.

Hicks' plan is to securitise mortgages worth USD 2.5 billion out of Mexico every year. Towards this, he has discussed his plans with Wall Street investors at firms such as Citibank and Merrill Lynch. [based on the Dallas Morning News 19th Nov.]

Korean mortgage body to get technical and equity support from global majors

Internationally-known mortgage-market-maker Fannie Mae, mortgage lender Countrywide International Holding, and global investment banking firm Merrill Lynch have tied up with Korea Mortgage Corporation (KoMoCo) as foreign technical partners to assist KoMoCo in various aspects of its mortgage securitisation business.

KoMoCo is the Fannie-Mae-type body to securitise mortgages in Korea. KoMoCo's website is here.

Under the contract signed on 31st Oct., IFC takes over equity stake in KoMoCo equal to KRW 15 billion. Besides, Merril Lynch will provide assistance in capital market development, Countrywide in business development & operations, and Fannie Mae in IT Development & Treasury Functions.

KoMoCo has already begun issuance of mortgage backed securities. In September this year, KoMoCo issued 500 billion won worth of mortgage-backed securities which was its second issuance.

Links For more on securitisation in Korea, click on our country profile. For KoMoCo's website, click here.

Dutch tax reforms set markets worrying:
Eurotunnel revises SPV structure

The recent proposed tax reforms in Holland which seek to treat the junior tranches of securitisation paper as equity for tax purposes has set the markets aflutter. While this website has been getting several mails of concerned market players, there are even news reports of several recent securitisation structures trying to protect themselves from being adversely affected by the proposed changes.

For example, the recent securitisation deal of Eurotunnel had an SPV set up in Netherlands. The transaction will now also be using an SPV in Luxembourg. The transaction can use either of the two SPVs to issue the notes. The obvious plan of action is to shift the jurisdiction avoiding Netherlands.

What do you think of the Dutch tax reforms? We have initiated a discussion on the Dutch tax reforms – have a look at it and post your views – click here.

S&P cautions of risks inherent in Japanese finance company securitisation

Securitisation by finance companies forms a predominant part of Japanese securitisation, and Standard and Poor's expects this to grow particularly among small to midsize players, given the potential for securitization to help finance companies' assets become self- funding. To date, finance companies in Japan have securitized a wide array of asset types, including lease receivables, installment sales receivables, unsecured loan receivables, and other types of trade receivables.

While appreciating the motivations for finance companies to securitise, S&P is cautious of the risks securitisation carries. In a report on Ratingsdirect, S&P discusses the following risks inherent in finance companies' use of securitisation:

  • Credit risk, retained by the originator, in form of a reserve account funded by the originator, and/or the purchase of subordinated tranches of notes.
  • Liquidity risk stemming from early amortization triggers in revolving structures. Early amortization events in asset-backed issuance are often tied to the performance of the securitized asset pool. As such, if the asset pool performs significantly below expectations, the transaction might not be able to fund the purchase of new assets, and/or a wind-down of the transaction might be triggered prior to expected maturity. Usually the originator has incentive to avoid triggering early amortization events, and in some cases can do so by adding better-performing assets to the securitized portfolio, although this practice varies depending on the individual structure of the deal and the incentive for the originator to do so.
  • Variability of cash flow. In many structured transactions, originators receive cash from the receivables only after certain obligations under the notes have been paid, such as interest on the senior notes, various fees, and the establishment of required cash reserves. In essence, the remaining excess servicing income from the securitized assets amounts to a variable income stream, which has to be incorporated into the company's asset liability management strategy as if the assets remained on balance sheet.
  • Accounting risk. Under new accounting rules adopted in April of this year in Japan, originators will record up-front gains from the sale of receivables in securitizations. These gains are essentially the present value of future cash flows expected from the excess spread generated by the assets and servicing fees. If assumptions regarding gains prove to be unrealistic, companies may be required to write down recorded gains. Moreover, because future income streams are being recognized up-front, any slowdown in up-front gains through securitization activity could lead to a precipitous drop in income, as occurred in the U.S. in 1998.

Currently, the risks associated with securitization are insignificant for Japanese finance companies rated by Standard & Poor's, because the practice of recording up-front gains from securitized assets is relatively limited, as is the extent to which these companies rely on securitization as a funding technique. Nonetheless, because of the growing popularity of structured issuance, Standard & Poor's will continue to monitor the impact of asset securitizations on the overall credit quality of finance companies in Japan.

Mortgage securitisation in Portugal likely to grow, says S&P

Rating agency Standard and Poor's is of the view that mortgage securitisation in Portugal is likely to grow, enabled by a growing market for mortgage funding, facilitative law and low interest rate environment.

Securitisation law was passed in Portugal in November last year. On the securitisation laws section of this site, we have the full text of the Portugese securitisation law – click here. The law has established and simplified procedures for the transfer of mortgages and substantially reduced the associated costs, opening up the door to the development of an RMBS market in Portugal. Under the new law, a transfer of mortgages for the purpose of securitization does not require a public deed, making the process virtually free of charges or costs. A transfer agreement contracted under private law between the assignor and the assignee is sufficient to make the transfer valid and enforceable.

S&P officials also feel that the low interest rate regime is conducive to securitisation. The steady decrease in interest rates, which fell to 3% at year-end 1999 from 13% in 1990 and strong economic growth (on average 1% above the E.U. 15-year average between 1996 and 1998) augment the new Law to stimulate the Portuguese mortgage market further and assist in the growth of securitization.

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

Synthetic securitisation spurts in Europe

Reuters report quotes Merril Lynch as saying that synthetic securitisations have shown an amazing growth from almost nowhere in 1999 to constitute about 1/4 of all securitization in the current year.

Merril Lynch estimates the year-to-date volume of synthetic securitisation at around USD 19 billion, as compared to USD 65 billion for funded securitisation. Synthetic securities had a negligible presence last year.

Synthetic deals are popular because they enable institutions to get assets off their books for regulatory purposes, thus freeing up capital, without selling them to vehicles that issue asset-backed bonds.

Links Our page on CBOs/ CLOs provides an interesting reading, and further links on synthetic securitisation. Click here.

Credit Suisse First Boston puts up securitisation unit in UAE

Credit Suisse First Boston (CSFB) has allied with Strategic Capital, a UAE based company to set up a commercial real estate finance and securitisation operation in the Gulf. This is the first dedicated attempt to initiate securitization in the Gulf region. The securitisation unit was inaugurated on 5th Nov.

Speaking at the inaugural function, Jonathan Davie, vice-chairman of Credit Suisse First Boston said that while the UAE has rapidly grown and diversified from an oil-dominated to a modern, service-oriented economy, the next natural step in its progress is the integration of its financial system to the global capital markets, so that its private sector may benefit from long-term international investment. Real estate securitisation will benefit the UAE since it will introduce international institutional investors to the country and provide it with a benchmark credit framework, which in turn facilitates the issuance of corporate bonds or equity.

China to get into mortgage securitisation

According to a report in Reuters of Nov. 7, China is studying the introduction of securities backed by housing mortgages. The Reuters report is based on the official China Securities newspaper. Dai Genyou, director of the monetary policy department of the central People's Bank of China, was quoted as saying the government had been studying the instrument since last year. No definitive time table for the mortgage securitisation was given. Dai said the central bank had identified two possibilities, setting up a specialised institution for securitising mortgages, or selling mortgages directly.

News reports about the Australian bank Macquarie Bank Ltd tying up with China Construction Bank for mortgage securitization has been around for quite some time. Click here for a news on this site.

Links Do visit our country page on China here.

Bank of Italy requires banks to ensure independent handling of securitisation funds

The Bank of Italy has recently issued rules that require banks getting into securitisation to ensure that the funds on account of securitised accounts are not comingled with those of the bank, and there is greater transparency is administration of securitised portfolios.

According to a write up in Corporate Finance October, 2000, these rules require the securitising bank to (i) ensure the constant separation of the portfolios of different securitization transactions with their own assets, (ii) ensure the transparency of each transaction to investors and the market, (iii) ensure entering into exclusively transactions which pertain to the administration of each securitization transaction on a mutually exclusive basis.

The central bank has also required that the sums relating to each transaction must be deposited in specific bank accounts, expressly identified or separated for each transaction. The special purpose vehicles will also have to keep accurate accounting notations separate for each transaction. The notations will have to be continuously updated and would need to permit to (i) reconstruct at any time the aggregate of the transactions entered into in connection with each securitization, (ii) give concrete application as to the provisions on the segregations of the portfolios, assuring the separations of the assets of the vehicle from those of other transactions. In this respect, Bank of Italy requires that it receives the offering circulars, periodical information and statistical updates on the basis of forms to be subsequently distributed by Bank of Italy for each transaction.

Links For securitisation in Italy in general, please do see our country link here.

Dutch tax reforms to adversely hit securitisation

Tax law amendments proposed in Holland called the Dutch Tax Reform 2001 would adversely hit securitisation business. The new tax proposals will have the following serious implications: (a) tax deduction to the issuer will not be available on subordinate tranches of Dutch ABS ; (b) at the same time, investors could become liable for withholding tax. It seems that the tax laws would treat the subordinate tranches at par with payments to equity, having both the above consequences.

The tax measures above are not targeted at securitisation per se, but for hybrid debt instruments which conceal features of equity in debt instruments. What adds to the injury is that these proposals are to be given retrospective effect from January, 2000.

As per the proposed amendment, a debt instrument will be treated as a quasi-equity if two of the following three conditions are satisfied: (a) if the coupon or compensation is contingent on profits or can be postponed; (b) if the loan is perpetual or has a maturity over 30 years; or (c) if the loan is subordinated to one or more non-preferential loans. Condition (a) and (c) could easily be satisfied by subordinate securitisation tranches.

Vinod Kothari comments: With increasingly complicated financial instruments being designed, it is always a dilemma to distinguish between payments on equity and payments on debt for tax purposes. The former are appropriation of income; the latter are a charge against income. The Dutch tax reforms only are a pointer to what might be a larger concern over time in other countries too.

Malaysia scraps stamp duty on securitisation

While presenting his Budget 2001 before the Parliament recently, Finance minister Tun Daim Zainuddin proposed to scrap stamp duty on securitisation transactions completely.

He also proposed to scrap the real property gains tax on securitisation.

This may be a major incentive for securitisation transactions to take place in Malaysia. In the past, Malaysia has been depending on notifications exempting stamp duty having a limited effective period. The Budget proposal will change the law and abolish stamp duty on securitisations completely. The property gains tax is also on issue on mortgage securitisations, as it may be contended that transferring a mortgage is akin to transferring real estate.

Securitisation market has still been been in its infancy in Malaysia, with very little activity on the domestic front apart from the purchase of mortgage loans by Cagamas.

Links For more on securitisation in Malaysia, check here.

Greece follows Italy's footsteps: to securitise social security receipts and others

Following the landmark securitisation of government's social security dues in Italy, Greece will be shortly coming out with securitisation of delinquent social security contributions. According to a report inEuroweek, the social security payments to IKA that were to be originally securitised this year will now most likely land in the first quarter of 2001. The issue will raise between Euro 2-3 billion, and is being arranged by BNPP, National Bank of Greece and Salomon.

The government is also likely to securitise future Greek lottery receivables and raise Euro 900 million. That deal is mandated to Morgan Stanley, Schroder Salomon Smith Barney, Warburg and two Greek banks.

Links: For more on securitisation in Greece, please see our country page on Greece here.

Italy set to launch securitisation of industrial compensation insurance

After being successful in raising upfront cash against its social security receivables, Italy is all set to lauch another first – securitisation of insurance receivables against mandatory industrial compensation insurance. A report on news portal by Piers Townsend says that this deal may be launched next week.

Workmen's compensation insurance payments are mandatory payments required by employers and self-employed to an agency called Istituto Nazionale per l'Assicurazione contro gli Infortuni sul Lavoro (Inail) which compensates the participants for accidents or injuries at workplace. Inail is going to securitise these receivables in a USD 1.14 billion transaction that will rated AAA. Like the government social security contributions securitisation last year, this deal also consists of delayed payments. The notes will have an expected maturity of 2.5 years.

BNP Paribas and JP Morgan are lead managing the deal with Banca di Roma and Finanziaria.

Links: Our country page on Italy consists of comprehensive materials, articles and links – click here.

Philippines: Trade body pleads for securitisation law

Leaders of the Federation of Philippine Industries (FPI) have urged monetary authorities to put securitisation laws in place to revive the economy and spur credit and lending. FPI has also suggested that Bangko Sentral ng Pilipinas, should encourage securitisation by providing its stampon the face of the instruments created by securitisation.

FPI explained that this program can also be used by the banks to liquidate their non-performing assets (NPAs).

The banks may create a "special purpose vehicle" that would pool these non-performing assets and issue securities against these assets to convert their real estate inventories into cash.

FPI leaders presented this program in a meeting with Trade and Industry Secretary Mar Roxas II at the BOI building early this week.

Through this asset backed securities program, the government may be able to enhance the credibility of these instruments by adding their guarantee to these securities with the condition that part of the proceeds of this investment scheme would be allocated to the financially distressed but economically-viable institutions.

It is notable that the country's economy is currently in serious problems and the peso is fast depreciating against dollar.

S&P transition study reveals
European securitisation rating show great resilience

Ratings of securitised instruments in Europe have been very stable, indicating that the risk of an ABS being downgraded, after it is bought, is comparatively much lesser. In respect of the lower end of structured products, rated A or below, the chances of downgrades are very very low, almost nil. This is evident from a listing of ratings transition published by international rating agency Standard and Poor's. [European Asset-Backed Transactions' Transition Study, dated 26th Oct.]

Rating transition is an important tool in risk evaluation of securities. The transition table lists the number of cases that have been downgraded or upgraded, and migrated up or down, over a past number of years. Based on the transition study, analysts compute the probabilities of a certain rating to stay through the life of the security. The S&P study takes into ABS rated by S&P from 1987 till the first half of 2000.

Some of the highlights of the study are:

  • No European asset-backed transactions have defaulted since the market's inception;
  • As of the first half of 2000, all European asset-backed transaction downgrades occurred as a result of supporting party downgrades, that is, downgrades of credit enhancers or guarantors: 73% of these were a direct result of one single factor, the downgrading of a number of major insurance companies in the early 1990s; 21% from downgrades of third parties to the transaction; and 6% were as a result of the introduction of EMU when the ratings on six of the 'AAA' local currencies converged in the 'AA' category affecting asset-backed transactions’ ratings where the respective sovereign was a supporting party;
  • The European asset-backed market has reduced its reliance on third-party credit support through the introduction of a number of new structural features;
  • A remarkable fact brought out by the study is that the lower rated classes -A or below, have proven to have been the most stable to date. For example, in case of A rated paper, out of 145 issues, 4 have been upgraded and only 2 have been downgraded. (S&P however cautions that lower rated paper did not exist in any great number until 1997, and have existed only through very favorable economic conditions and generally are not affected by the rating level of supporting parties);
  • and Since the beginning of 1999, there has been a marked increase in the number of upgrades reflecting the performance of the underlying collateral, testifying to market’s increasing maturity.

Full text of this important study is available on S&P website – under Structured Finance, look for Commentary

Italy going ahead with second securitisation of social security contributions

Last year, Italy stole international limelight when it securitised delinquent social security contributions. The transaction, named INPS, has since been in problems as collections were delayed.

Unfazed by problems in INPS-I, Italy is going ahead with INPS-2. The mandate for INPS 2 has been awarded to the houses that arranged the first tranche. The government is apparently in a hurry and wants to complete the deal before the end of the year to meet is budgetary deficit targets.

INPS 1 ran into trouble three months ago when it became clear that payments had not been collected as expected. The problem stemmed from a lack of communication between the government and the various debt collectors. On this site, we have carried reports about these problems – click here.

Links For more on Italian securitization scene, click here.

European Investors migrate to asset-backed securities

European investors are showing a distinct preference to asset-backed securities. While bond markets in general are in shambles, investors equate asset-backed securities with government bonds and German pfandbriefes in terms of risk perception.

One of the most important factors that has boosted demand for ABS in Europe is the fact that there has not been a single case of default ever since the inception of the market in late 1980s. During year 2000, there has not been a single case of rating downgrade of an AAA-rated European ABS paper, while downgrades abound in other debt securities.

Post August 2000, there has been plenty of issuance in Europe, and issues have met with liberal response from investors. Several market professionals state the most remarkable fact: not only is there strong demand, there is demand from investors who are new to the ABS market.

Vinod Kothari adds: Apart from the resilience of ratings and the fact that there has not been a default, there also seems to be working a usual S-curve phenomenon. The market is on the steep-slope-up part of the S-curve, while the US market has come to flat plateau stage. European investors are still honey-mooning with asset-backed securities. Hope the honey moon lasts long!


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

S&P downgrades Hollywood 4, retains 
AAA for Lexington Capital

The Lexington Capital – Hollywood Funding controversy continues. In a press release of 30th March, Standard and Poor's (S&P) downgraded Hollywood Funding 4 from AAA to BB, as Lexington Capital, the insurer, continues to maintain that it had a valid defence on account of failure of warranties.

Lexington's position is that its policy is identical in all material respects to the policy interpreted in the U.K. case known as HIH Casualty and General Insurance Ltd. v. New Hampshire Insurance Company and others, in which the court held that breach of warranty issues, coverage issues, and fraud can properly be raised as defenses to payment. The decision is on appeal before the Court of Appeal.

The rating agency, however, "believes that the policies are absolute and unconditional, that there are no conditions or warranties that need to be satisfied in order to draw on the policies (other than the money in the escrow account being insufficient), that Lexington has waived all of its defenses to payment on the policies, and that the policies meet the standards of the capital market for credit enhancement of financial market instruments."

In another press release of 30th March, S&P affirmed the rating of Lexington as AAA. The affirmation follows "a review prompted by the recent position taken by Lexington on the insurance policies issued in connection with the Hollywood Funding No. 5 and No. 6 film finance transactions rated by Standard & Poor's and the resulting commercial dispute regarding policy coverage. The ratings on these transactions were recently lowered (see press release of Feb. 2, 2001). Should the dispute be resolved in favor of the insured, Standard & Poor's expects that Lexington would honor its obligations under those policies. In view of this, Standard & Poor's believes that AIG's market position is not adversely affected by these coverage disputes. "

Korean company in first cross-border performing asset securitisation

Korean finance company Samsung Capital will securitise auto loan receivables in an interesting transaction credit-enhanced by Financial Security Assurance (FSA). Standard and Poor's has assigned AAA rating to the transaction, which it says "marks the first Korean cross-border securitization of auto loans" to originate from Korea.

The USD 187.5 million transaction follows this structure: the loans are originated by Samsung and sold to Credit Creator, a limited liability SPV formed in Korea. Credit Creator has issued a credit linked note to Credit Creator Ltd., a Cayman Islands company. The Cayman Islands company has been guaranteed by FSA.

Foreign currency exchange and interest rate risks associated with the Korean won-denominated auto loan pool have been hedged through a Korean won/U.S. dollar cross-currency swap provided by ING. This type of swap is difficult to obtain: illiquidity in the swap market has long been an impediment to the successful launch of cross-border transactions originating from Korea.

Non-performing loans have been securitised from Korea on cross-border basis – see Kamco transaction reported on this site.

Links See our country page on Korea.

Real Estate Roundtable seeks time to apply FAS 140

The Real Estate Roundtable, "an organization comprised of the principals of the leading real estate companies as well as the elected leaders of many of the major real estate trade associations", has a written a letter to the Financial Accounting Standards Board seeking deferral of FAS 140 to commercial mortgage-backed securitizations by at least 90 days to clarify ambiguity relating to powers of SPVs.

FAS 140, the new accounting standard on securitizations, is to apply to all transfers made after 31st March, 2001, that is, from Monday next. One of the new conditions inserted in the accounting standard is the limitations on the powers of the SPV. These limitations substantially limit the powers of the SPV on sale of the assets transferred to them. Paras 42/43 and Paras 189/190 of the Accounting Standard deal with these limitations. Importantly, the SPV cannot choose to either sell or retain the assets, if certain trigger events take place, e.g., obligor default.

The CMBS industry is upset by this rule. The industry argues, and apparently understandably, that servicing a pool of commercial mortgage-backed securities or commercial loan obligations could be more complex and involve a higher degree of discretionary activities than in case of other classes. Interestingly, the accounting industry as a whole seems to be caught off guard by this ruling. Because it would require QSPE to dispose of assets in an automatic response to certain events outlined in the FASB rule, the proposed rule would adversely affect the accounting requirements. It would also materially impair the special servicers' discretion in the disposition of assets and could lead to higher loss rates on specially serviced loans.

So, either the CMBS industry re-invents itself in line with the new rules, or it negotiates a way out to live with on-the-balance-sheet accounting.

Links For more on accounting under FAS 140, see our Encyclopaedia page here.

AIG-group insurance company's legal disputes put make securitization investors jittery

First it was LTV, and now it is the refusal of AIG-group insurance company to honour its insurance commitment that covered a film-financed backed securitization deal. They all prove one thing- the securitization market is not immune from defaults, delays and downgrades that rock the rest of the fixed income market. The litigation discussed below could be particularly a problem for emerging market future flow deals.

The background of the American International Group Inc. (AIG) story is like this: Lexington Capital is a part of the AIG Group. A certain SPV called Flashpoint Inc. had securitised future receivables from Hollywood film productions. The deal was credit enhanced by an insurance cover from Lexington Capital, which is a AAA-rated insurer. As is the convention, when a transaction is backed by a AAA guarantor, the asset-backed transaction itself is rated AAA. Most of the money in the transaction was put in by a single investor called Quadrant Capital, a UK-based structured investment vehicle. These films are unlikely to be made, and Lexington Capital has refused to honour its commitment under the insurance contracts.

Lexington, on its part, distinguishes betweeen a guarantee contract and an insurance contract. The credit enhancement in question was an insurance and not a guarantee, and according to Lexington, the money is not payable as the films were never made. As a matter of fact, Lexington claims support of a British court ruling, presently in appeal, in a similar case.

Vinod Kothari comments: An insurance contrat is a contract of indemnity, different from a guarantee, and the distinction between the two is well understood- so Lexington might have a good case in law. The point is: securitization markets, and rating agencies in particular, have to understand out of experience that an insurance policy is not at par with a financial guarantee, and that from a multiline and monoline insurer does not go on the same footing. If the market keeps responding to a go-go call of optimistic investment bankers, such problems are bound to recur, and one cannot blame securitisation structure for such failure.

Future flow deals will particularly be affected by this controversy – as that is where the legal tangle between claiming a damage on account of non-performance of the obligor, and that of the originator, becomes important.

BIS overburdens mortgage loans and MBS

A senior economist attached with the Office of Thrift Supervision in the USA demonstrates in a paper as to how the BIS risk weightages on mortgage lending are more than what they should be, and on commrecial loans, they are less than what they should be. In other words, MBS is safer than the BIS thinks, and commercial loans are riskier than the BIS thinks.

The current regulatory risk weightages of the Bank for International Settlements (BIS) were promulgated way back in 1988 and are based on arbitrary percentages worked out based on observation/experience. They suffer from the "error of the average", and BIS recently proposed a complete rewriting of its regulatory standards moving from the present system to one of risk rating of each individual loan – see our article here.

The present BIS standards attach a 50% risk weightage to mortgage loans. In his conclusions based on data over years, the author finds: "Annual cross-sectional histograms reveal that real estate in general, and 1-4 family mortgages in particular, consistently pose the least credit risk of the six loan categories considered. Commercial and consumer loans typically pose the greatest risk. The Basel risk weights do not appear to price risk consistently across loan types."

DownloadFull text of the article here (PDF file)

US ABS celebrates highest volume quarter

If volumes in year 2000 were not as enthusing, Q1 of 2001 shows that the current year has cheers in store. Volume in the first quarter of 2001 have broken all records in history. With a week still to go, the volume upto 23rd March has already reached USD 92.4 billion. The data is available on

The figures show a substantial increase in public issuance and a decline in 144a issuance. Data to date (23rd March) already shows an increase of over 30% over corresponding period last year.

Analysts say that in general, there is a lot of money flowing out of equities and into debt, and ABS is the investors' favourite. The traditional MBS investors are also migrating over to the ABS market as prepayments build up due to consistently declining interest rates.

Links For more about securitization in the USA, click on our country page here.

Telecom Italia ready to securitise receivables

In some of our previous reports, we talked about the increasing interest of European telephone giants in securitization: some have gone ahead and done it and some have on the drawing board. We also referred to the proposal by Telecom Italia to securitise its receivables.

Telecom Italia's proposal to securitise seems to have reached an advanced stage. Italian media Il Sole 24 Ore of 24th March reported that Telecom Italia will raise some euros 750 million by securitisation of phone receivables. This will be the first purely corporate user of securitization under Italian securitisation law which is currently dominated by banks, leasing companies and the like.

The issue will be arranged by BNP Paribas SA, Finanziaria Internazionale and WestLb.

It is set to sell millions of bills, possibly 10 million, to a special issue vehicle named "TI Securitisation Vehicle Srl". The bond will be sub-divided into tranches with different ratings from the maximum possible, "AAA".

Links: For more on securitisation in Italy, refer to our country pageThis page was recently updated.

European Securitisation Forum recommends disclosures in offer documents

The European Securitisation Forum, a body of securitisation professionals in Europe and affiliated to the Bond Markets Association, USA, has finalised disclosure requirements in offer documents for securitisation. The new recommendations overwrite on the standards finalised in June 1999.

The recommended disclosures should:

(a) Be clearly identified under a separate heading or subheading within the disclosure document.

(b) Set forth the principal categories, fields and individual items of data, at both the collateral level and security (bond) level, that will be contained in post-issuance reports;

(c) Set forth definitions of key data items to be presented in such reports, to facilitate analysis and comparison;

(d) Specify the timing (e.g., monthly, quarterly or other periodic schedule) that will be observed in the production and dissemination of post-issuance reports;

(e) Identify and provide contact information for the transaction participant(s) (e.g., trustee, administrative agent) that will have principal responsibility for preparing and disseminating post-issuance reports;

(f) Identify specific underlying transaction documents (e.g., indenture, pooling and servicing agreement) that contain more detailed information concerning the content of post-issuance reports, including details concerning how those documents may be accessed or obtained;

(g) Set forth the specific format that will be used in assembling and transmitting reporting data (e.g., text, spreadsheet or other database format); and

(h) Specify the communication and distribution channels that will be used to disseminate post-issuance reports, or from which such reports may be obtained (e.g., internet websites, third-party information vendors, other electronic media outlets).

Links See the website of the Forum here.

Professionals form securitization trust company in South Africa

A lawyer and a chartered accountant joined hands to serve the fledgling securitization market in South Africa, and thus, Steinway Trustees, the first independent trust company for securitization in South Africa, came into existence.

The company was formed by Peter Ditz, a lawyer, and Don Guthrie, chartered accountant. Steinway will provide services of independent trustee for securitizations. An independent SPV is required under South African regulations – see for text here.

Market professionals said the exact volumes of securitization in South Africa were not known but it could reach Rand 20 billion in three years.

The stress for bank funding by way of securitization has increased in South Africa ever since exchange controls were relaxed: more money is now going out of the country.

Related links See our country page on South Africa here. For a forthcoming workshop on accounting for financial instruments, to be conducted by Vinod Kothari in South Africa, click here.

Philippine government plans future flow securitisation to bridge budget gap

According to report on Philstar the Philippine government might be considering a bond scheme securitized by future income from state-controlled agencies and might raise about P56 billion. The amount would help the Government to bridge the country's spanning budget gap. Such a proposal has been sounded long time back and we have carried a news report earlier – click here.

The government was looking at issuing debt instruments backed by future earnings of the Philippine Amusement and Gaming Corp. (PAGCOR), Subic Bay Metropolitan Authority and Clark Development Corp.

The plan to securitize government’s future income from state-run corporations was first hatched by former finance secretary Edgardo Espiritu. His predecessor, Jose Pardo also wanted to implement theh plan but it never pushed through.

Link: For text of securitisation law in Philippines – click here.

The art of ART spans broad field of corporate finance

Alternative risk transfer (ART) devices are becoming the buzzword of high finance and risk management in 2001. ART has lied low over last few years, and as we commented in our write up below, it has been more talked about than practiced. However, with insurance costs rising, there is a distinctive surge of interest in ART. However, more importantly, ART devices are now being seen as a complement to the traditional sources of corporate finance – equity and debt.

First, about the increasing cost of insurance and the rise of interest in ART. A report by the Insurance Information Institute based in New York expects insurance costs to go up by about 10% during 2001. There is more incentive than ever before, therefore, to explore new avenues of risk transfer.

Coming to the use of ART devices as a part of an integrated approach to corporate finance, companies like Swiss Re New Markets are now looking at an integrated approach to corporate finance. The company sometime back proposed risk capital as a building block of corporate capital – click here for a report. An article in a recent issue of journal Risk Management March 2001 quotes John Gantz of Swiss Re New Markets as saying: . "ART isn't just financial solutions or nontraditional solutions to hazard risks. We're not focused so much on hazard risk as we are on the earnings and financial statements of our clients. In effect, we don't have an insurance approach, but an insurance-based corporate finance approach."

Corporate finance is a remarkable word, in the world of insurance. What Gantz is proposing, in essence, is that after all, equity is a source of the ultimate risk capital in a corporate. If external risk support is available in form of a business risk transfer, the need for equity support is reduced, thereby making equity more efficient.

Links Do visit our Risk securitization page for additional materials and links. Several articles on ART are linked on website Artemis – click here. Swiss Re's new markets website is here.

Deutsche Telekom to securitise receivables

A report in Financial Times of 21st March says Deutsche Telekom, the German telephone utility proposes to securitise its telephone revenues to raise resources and restructure its finances. We have earlier carried similar report – see here.

European telephone utilities have been looking at looking at securitisation option to repay the costly debt they incurred while building capability for third generation mobile telephony. Telecom Italia and France Telecom are among the telephone companies who have been making similar noises in the past. The telecom companies hope to reduce their cost of funding due to better ratings normally featured in structured finance deals.

Under the proposal, Deutsche Telekom would transfer future telephone flows into an offshore vehicle, an SPV for the transaction, and raise anywhere between Euros 1.5 billion to Euros 2 billion.

Canadian market grows 8 fold in 5 years

An article in Financial Post of 21st March, quoting a study by Dominion Bond Rating Service, says Canadian asset-backed market has growh 8 fold in just 5 years and the value of securities outstanding as at end 2000 stands at Canada $ 79.4 billion. This volume compares with Canada $ 66.4 billion as at end 1999, and something like $ 10 billion 5 years ago.

As a feature that cannot be missed, Canadian market is predominantly funded by asset backed commercial paper – to the extent of $60.6 billion, and it is only the balance which is backed by term paper in form of bonds or notes.

The asset classes are also becoming more diversified, says the report. Commercial mortgages and credit card receivables, apart from banking assets, are now being securitised. Recently, we carried a report about CMBS market gaining momentum – click here.

Links For more on Canadian securitization, see our country page here.

Sidley and Austin awarded top law firm for CMBS market

In the latest annual rankings of CMBS law firms released by Commercial Mortgage Alert, Sidley placed Number 1 in 2000 among law firms used by underwriters, and tied for first among those used by issuers of registered and Fannie Mae guaranteed commercial mortgage-backed securities.

Of the nearly $29.5 billion in public commercial mortgage-backed securities issued last year, Sidley accounted for around 28% of the underwriting market, representing underwriters in nine of the 35 public and Fannie Mae offerings in 2000.

The CMBS market covers a broad spectrum of commercial real estate financings, everything from multi-family housing to industrial, retail, hospitality, health care and other forms of commercial real estate. Mortgage-backed securities play a significant role in the financing of large commercial real estate in the U.S., from shopping malls to office parks.

In 1999 Sidley was at the second position, preceded by Cadwalader Wickersham which has slipped to the 4th position this yeare.

Tokyo government helps securitise small business loans

This is a remarkable example of a government authority using securitisation to further its developmental objective. According to a report on Dow Jones, last week, the Metropolitan government of Tokyo arranged to issue to investors some Y32 billion in collateralized loan obligations, securitizing loans extended by most of the nation's big banks to 952 Tokyo-based small and midsize companies. This comes at a time when Japan's small business is starved for cash and banks, scared of losses and failures of large Japanese banks, have put brakes on lending.

Under the specially-designed scheme, small firms get access to capital, borrowing up to Y500 million each without putting up collateral. The loans are guaranteed by the Credit Guarantee Corp. of Tokyo. The loans are thereafter pooled and securitised. The three-year bonds are being issued through Tokyo Kirari Corp., a Cayman Island-based special purpose vehicle, and are being launched via joint lead managers Sanwa Securities and Tokai International Securities.

The bonds are broken into 4 tranches and it is only the two subordinate tranches which have the benefit of the guarantee of Tokyo government. Tranche C and D, thus enhanced by the guarantee, are targeted at retail investors.

Other governments may take a leaf from out of the book of Tokyo experiment.

Strong interest in securitization in Spain, says Standard and Poor's

Rating agency Standard and Poor's in a Release dated 13th March says it has noted a very strong interest by financial institutions to use securitization as a mechanism to transfer risk, and thereby manage their balance sheets more efficiently. In addition, Spanish corporates have started looking at securitization as a new source of financing. For the remainder of this year, Standard & Poor's expects to see increased growth in the use of fondos de titulización de activos (securitization funds) to securitize corporate loans and small to midsize loans, as well as the expansion of the securitization of consumer loans, future flows, and trade receivables.

The securitization of trade receivables, using either a foreign asset-backed CP conduit or a fondo de titulización de activos, may prove an attractive source of funding for Spanish corporations.

Securitization is becoming a relatively common financial product in the Spanish debt market. It has been used as an alternative source of financing in Spain since the early 1990s. Since then, the market has been relatively active, with a peak of 14 and 13 transactions in 1999 and 2000, respectively. Of the 13 securitizations seen in Spain during last year, three were FTPYME (fondo de titulización pequeñas y medianas empresas) transactions, six involved residential mortgages, and four involved asset-backed securities, which, by volume, account for 21%, 36%, and 43%, respectively, of the total market.

Although mortgage-backed securities remain a very strong asset in this market, in contrast to previous years collateralized loan obligations (CLOs) have been the main contributor to the recent growth of the Spanish market. The loans used in Spanish CLOs have typically consisted of loans to big corporates, loans to municipalities, and loans to small and midsized enterprises (SMEs). It is not surprising that this type of asset was new to the market in 2000.

In 1999, the Spanish government implemented a program through which the Spanish Treasury gives partial guarantees for qualifying securitizations of SME loans (see the May 28, 1999 Ministerial Order to facilitate the access to finance SMEs). The portfolios that qualify for this type of guarantee must meet the following conditions: At least 40% of the loans in the portfolio must meet the European Commission's definition of SMEs; The maturity of the loans must be greater than one year; The transferor of the loans to a fondo de titulización de activos must reinvest at least 40% of the proceeds of the sale to grant new loans to SMEs; The transferor must sign an agreement with the Ministry of Finance; The SME cannot be a financial institution; and The SME must be domiciled in Spain. For these types of transactions the treasury will irrevocably and unconditionally guarantee 80% of the 'AA' rated securities, 50% of the 'A' rated securities, and 15% of the 'BBB' rated securities.

Although the Spanish legal securitization framework creates two types of fondos–fondos de titulización hipotecaria (mortgage securitization fondos, under law 92/1992) and fondos de titulización de activos (assets securitization fondos, under royal decree 926/1998)–that can be used for the purpose of securitization in Spain, originators will likely also look at new types of offshore structures, for example, for credit default swaps and Pan-European transactions.

Links See our country page on Spain here.

Risk securitisation volume may grow in 2001

Risk securitization or alternative risk transfer looked a beautiful idea, but over last 2-3 years, it was more talked about than practiced. An article in Business Insurance March 12 says that the volume of risk securitization might pick up in 2001.

The volume of risk securitization over last three years has been almost flat at USD 1. 2 billion but it might double this year, says the article. The reasons are increasing reinsurance costs and the growing investor interest in insurance-linked securities.

There have been two significant deals so far during this year – Munich Re's USD 300 million notes, and USD 100 million issuance for California Earthquake Authority structured by Swiss Re. These deals evidence the increasing flow of business, according to market practitioners. The reasons for the flurry of activity are increasing reinsurance cost and reducing scope for retrocessional cover.

Practitioners say that the market for risk securitisation is seeing increasing issuer interest to hedge risks for which traditional insurance covers are not available such as credit risk and commodity risk. Swiss Re pioneered talking about risk capital as a source of managing the liability side of the balance sheet.

Another path-breaking deal of year 2000 was Arby's securitisation of franchise fees. While franchise fees have been securitised in the past as well, the unique thing about this deal was its insurance link, involving a financial guarantee insurance policy from Ambac Assurance Corp., reinsured on a first-loss basis by Swiss Re Group subsidiary European Reinsurance Co. of Zurich, Bermuda Branch, with Ambac taking an excess-risk position. Notes worth USD 290 million were finally issued by the SPV.

Not only in the USA, even Europe seems enthusiasticly growing in alternative risk transfers. One insurance broker reported a fee of as much as USD 37.3 million, an increase of 65% over 1999 earnings.

European tax haven Guernsey has already enacted enabling legislation for incorporation of protected cell companies. For more on protected cell companies, see our report here.

Link See our page on risk securitisation here.

Canadian CMBS market gets a boost

According to reports in Financial Post of 12th March, the Canadian commercial mortgage-backed securities market is set to receive a major boost with the news that at least three deals are in the making.

Caisse de depot, through N-45 Degree First CMBS Issuer Corp., is set to securitise some of its commercial mortgage assets. That deal is expected to come to the market near month-end, and is likely to touch about $350-million. CIBC World Markets is the lead agent.

Merrill Lynch Mortgage Loans will act as a conduit for yet another mortgage securitisation for a transaction approximated at $ 300 million. Merrill will be acting merely as a conduit for mortgages originated by others.

The third deal, expected to be scheduled in early May, is a $275-million offering by Solar Trust, an entity associated with TD Bank.

Links For more on securitisation in Canada, refer to our Country page here.

Shipping pool receivables securitised in India

In line with the spate of securitisations hitting the market in India, newspapers on 13th March carried a tombstone advertisement of a securitisation of shipping pool receivables, for an amount of Rs. 280 million [approx. USD 6.2 million].

The originator is Varun Shipping and the deal has been structured and financed by Infrastructure Leasing and Financial Services Limited.

Do you know more about this transaction – if so, please do write.

Links For more on securitisation market in India, click on our country page.

European CDO activity surges

The European collateralized debt obligations (CDO) market, which includes collateralized bond/loan obligations (CBO/CLO), ended February 2001 a massive 76.5% higher at $3.0 billion, compared with $1.7 billion in the same period a year earlier, says a release by rating agency Standard and Poor's.

According to analysts from S&P, the upsurge has been prompted by European banks' and fund managers' increased use of CDO technology as a balance-sheet management tool and for arbitrage purposes. Besides the traditional centres as UK, a lot of activity is coming from Germany, The Netherlands, France, and Spain.

A report in Deutsche Bank's Securitisation Monthly says that the unusual increase in CBO/CLO sector is accounted for largely by Melrose Financing, a UK CLO. Having a size of Euro 2.4 billion, this is regarded as the largest ABS transaction in Europe to date. Melrose securitised a portfolio of 559 U.K. mid-market corporate loans (250 borrowers) originated by Bank of Scotland. This was the second CLO (after Clover Funding, issued April 2000) using a master trust structure, which also became popular for MBS transactions last year.

February issuance also included three operating assets deals. sector, including Euro 1.5 billion deal from debt for Eurotunnel, the Euro 1 billion RHM issue that securitises the whole business of Ranks Hovis McDougall, a U.K. flour, bread and groceries producer. The RHM transaction by intangible assets being trade marks and business rights.

Electrification finance compay in India securitises receivables

Of late, there is quite a lot of activity in securitization market in India, and the activity got a further boost when Rural Electrification Corporation (REC) reported having securitised its receivables. On March 7th, REC reported having successfully securitised receivables worth Rs 2060 million [USD 46 million approx.] from Aptransco, the distribution utility in the state of Andhra Pradesh. REC provides financial assistance by way of loans to power infrastructure projects in rural areas.

ICICI was the advisor to the issue with ICICI Securities, SBI Capital Markets, Allianz Securities, and ABN Amro Securities acting as lead arrangers to the deal.

This is the first securitization in the power sector in India. The receivables are to accrue over 61 months time. The coupon rate for the deal has been pegged at 11 per cent on an annualised rate. The amount will be payable in equated monthly instalments. Most of the buyers are nationalised banks. The largest investor in this securitisation issue is Punjab National Bank, which has bought Rs 1000 million, UTI, Rs 400 million Central Bank of India, Rs 250 million; Corporation Bank, Rs 150 million; Union Bank, Rs 100 million; etc.

The issue has been rated `AAA(SO)' by Crisil.

The transaction is with full recourse as it is based on an irrevocable and unconditional undertaking executed by REC, assuring full and timely payment on the pass through certificates (PTCs). The payment security mechanism includes a default mechanism wherein, if there is any default by Aptransco, all other payments from the accounts of the transmission utility in the State Bank of Hyderabad will be stopped until REC installments are paid-off.

Vinod Kothari comments: The structure is closer to collateralised lending than securitisation. It is structurally wrong to call the instrument a "pass through" when it hinges on the credit of the originator. However, with this and similar deals coming up, there would be a lot of supply of securitisation paper in India and market activity will pick up, leading to more refinement in practices.

Links For more on securitisation market in India, click here.

Chrysalis raised GBP 60m by securitising future royalty income

Reuters reported on March 1 that London-based media firm Chrysalis Group Plc was reaping GBP 60 million pounds from the future income of its global music catalogue, which includes songs by the Beatles and David Bowie. Funded by U.S.-based MUSIC Finance Corp. and arranged by Royal Bank of Scotland, the Chrysalis deal represents about 40 percent of the estimated current value of the firm's music publishing catalogue over next 15 years.

The earliest known example of music royalty securitization is David Bowie in 1997, but there have been a number of other deals thereafter.See our page on intellectual property securitisation for details.

Argentinan mortgage securitisation agency issues political-risk-insured paper

Argentinan mortgage securitization agency Banco de Credito y Securitizacion (BACS) recently issued USD 95 million worth mortgage securitisation paper that was insured for politcal risk by Sovereign Risk Insurance Ltd. BACS is the Fannie-Mae-type mortgage securitization agency created in Argentina with the support of IFC – see our news report on this site here.

This issue is the first securitization by BACS.

The issue was tranched in senior bonds of USD 95 million, forming part of USD 115.8 million mortgage bonds.

The political risk insurance provided by Sovereign helped the transaction to achieve significantly higher ratings. Moody's assigned an "A1" rating to the senior bonds, which is the highest rating that can be assigned to a cross border bond supported by Argentine assets, while Fitch Inc. rated the transaction "A+". These ratings are 9 notches above Argentina's sovereign ceiling for Moody's and 7 notches for Fitch Inc.

The 12-year political risk insurance policy covers up to 15 months of interest payments on the notes against the risks of currency inconvertibility and currency nontransfer. Bear, Stearns & Co. Inc. served as sole placement agent for the senior bonds pursuant to a Rule 144A /Regulation S private placement.

Links For more on securitization in Argentina, see our country page here.

LTV case gets new twist with DIP petition

ImportantSee also Editorial on this issue.

The truth shall prevail, if the petition by LTV filed on 5th March is admitted. The truth of the securitization transactions, we mean.

The LTV case involves determination of a very significant question by the US Bankruptcy Court of the Northern District of Ohio: whether the accounts receivables securitization facility used by LTV, now under Chapter 11 protection, was a true sale or disguised funding. The case caused strong ripples in the securitization markets, seeing several industry representatives filing an amicus curae motion which was admitted by the Court.

However, even as the case was scheduled for hearing on 7th March, LTV filed, on March 5, motions seeking to replace the securtisation facilities by two alternative Debtor-in-possession (DIP) facilities. The precondition, however, for both the DIP facilities is that the bankruptcy Court gives a verdict approving the securitization transactions as true sales and not disguised funding transactions. The DIP facilities proposed by LTV seek to replace the existing securitization transactions. The participants in the erstwhile securitization transaction will enter into a DIP facility with LTV with which the participants will buy out the receivables held by the SPV.

If the Court approves the DIP option, it would have expressly resolved that the transfer of receivables and stocks by LTV to the SPV was a true sale and such resolution would save the multi-trillion dollar securitization industry from a crucial legal controversy.

With the new motion by filed by LTV, the true-sale question has been adjourned to March 14. Mayer Brown and Platt, who are representing the amici curae in the case expect the hearing to further adjourned.

Contentions of the amici curae

Mayer Brown and Platt's gives the full text of the motion and the background memorandum filed on behalf of the amici. The 41 page backrounder is an excellent document on the significance of securitization industry in US economy and how it is benefiting all connected parties, as also a crisp account of the legal strength of securitization transactions.

The memorandum says that US securitization industry is USD 5.9 trillion strong (the value of securities outstanding, including mortgage-backed paper and asset-backed commercial paper). Approx. USD 1 trillion worth securities were issued in 2000 alone. It says that issuers have increasingly been resorting to securitization to reduce cost of funds, attain liquidity and greater access to funds and resources.

The memorandum contends that the economic and legal rationale of securitization, in isolating the assets of the originator and thereby protecting investors from the generic business risks of the originator, are well founded. The investors who see greater security in such investments are willing to subscribe at lower rates, thereby bringing down the cost of funds for the originator, which benefits everyone including consumers. It is customary to use a subsidiary as an SPV in securitizations, as was done by LTV, but US Courts have consistently approved commercial transactions with subsidiaries. [Comstock v. Group of Investors 335 US 211]. There cannot be any doubt as to the "good faith" nature of a securitization, in that it does not amount to assets being stripped off the originator, as the originator retains equity control on the subsidiary or gets paid in cash for what he transfers.

There is no doubt that LTV benefited from the transfer of accounts made by it, which is what it now challenges as being not a true sale. The amici are concerned about the generic and frontal attack LTV makes against securitization structures in general, and the ripple impact the case will have on the securitization industry. LTV has cited several reasons for consolidation of the SPV with by lifting the corporate veil, such as no separate office space for the SPV, no separate employees, sweeping of cash balances back to LTV, settling of interparty transactions by accounting entry rather than cash transfers, etc. The amici contend that these are usual facts in intra-group transactions and using such grounds as the basis for consolidation would completely demolish the separation of corporate entities.

Amici also cite several rulings of bankruptcy courts in the past where securitizations have been respected by Courts. Amici refer to Allied/Department Stores and Carter Hawley Hale to their benefit.

Amici refer to the history of the Octagon Gas Systems in which case a securitization transfer was recharacterised which met with the disapproval of the UCC Permanent Editorial Board and subsequently led to the law of Art.9 of Oklahama commercial code. [For the amendment to UCC art. 9 and more about the Octagon ruling, this article by Prof. Steven Schwarcz on this site here. ] Amici also remind the Court of the disruption the Octagon ruling had, and that the high profile case of LTV is likely to cause a similar disruption.

More updates and comments We will be bringing more updates and comments on this case soon – stay tuned. Also see the editorial on the issue. For more on the true sale question, see our page here.

UK's first reverse mortgage securitization rated by S&P

UK's first ever reverse mortgage securitization was recently rated by rating agency Standard and Poor's (S&P). A S&P release said the agency assigned its preliminary ratings to the GBP 222.5 million fixed- and floating-rate mortgage-backed notes to be issued by special-purpose entity Equity Release Funding (No.1) PLC. The originator for the mortgages is Norwich Union Equity Release Ltd.

Reverse mortgages are peculiar mortgages designed for old-age people, who essentially want to encash upon the equity in a house owned by them, and supplement their income during their old age, and finally aim at giving up their house when they die. For more details on reverse mortgages, see our section here.

Reverse mortgages have so far been popular only in the USA. This is the first case of a reverse mortgage securitisation in the UK. The mortgages being securitised were created by the originator between December 1998 and November 2000. The average age of the borrowers under these mortgages is 70 -74.

The offer has been given a preliminary rating of AAA by S&P.

Links For more on reverse mortgages, click here. For more on RMBS, click here. For securitization in UK, click here.

Second rated RMBS offer in India

Even as the Finance Minister promised a comprehensive securitization legislation [see below], India's RMBS market got a fresh supply – the second such offering – in form of pass through certificates (PTCs) from National Housing Bank. The PTCs are backed by portfolios of loans acquired by NHB from two originators – Canfin Homes and LIC Housing Finance. The size of LIC Housing Finance's offering is Rs. 468 million of Class A notes, and that of Canfin Homes is Rs. 448 million Class A.

The substantial amount of credit enhancement comes in form of subordinated PTCs retained by the originators, which, in case of LIC Housing Finance, was almost Rs. 274 million.

Both the offerings got a AAA rating.

Vinod Kothari comments: In this year's budget, National Housing Bank, the apex housing finance institution, will lose its tax free status. NHB is acting as SPV for this and other transactions. The way these deals have been structured, the loose PTC structure might not be regarded as a clean pass through, exposing NHB to tax in a representative capacity.

Links See our country page on India – click here.

Swiss Re structures insurance-linked bond for Californian authority

The California Earthquake Authority (CEA) and two leading financial service companies have used a combination of reinsurance and investment capital to arrange $100 million that will be available to CEA policyholders in the event of one or more major earthquakes over the next 23 months. As part of the transaction, the CEA signed a $100 million reinsurance contract with Swiss Reinsurance Company. Subsequently, Swiss Re Capital Markets Corporation (SRCM) and Goldman, Sachs & Co. co-led a private offering and jointly placed $97 million of floating rate notes and $3 million of preference shares that, in effect, will replenish Swiss Re's capital should such an earthquake occur.

The transaction is similar, though not exactly the same as the cat bond device prevailing for past few years.

The floating rate notes were rated BB+ by Standard & Poor's and Ba2 by Moody's. The issuer, Western Capital Limited, is a Bermuda special purpose company whose common shares are held in trust. Payout of the floating-rate notes is linked to an index of California earthquakes as determined by the Property Claim Services (PCS). Earthquake risk analysis was provided by Oakland, CA-based EQECAT Inc. A unit of Swiss Re New Markets, SRCM structured and placed the first California earthquake bond and the first insurance industry loss indexed bond (SR Earthquake Fund) in 1997.

Thanks This news item was contributed by Adrian Leonard, an specialised financial freelance writer risk related issues.

Links Please do see our risk securitization page – click here.

Truth-in-sale question question in LTV bankruptcy worries industry

In good times in securitization industry, a "true sale" opinion from the lawyers might only mean days spent on lengthy legal conferences, a one-inch thick securitization document, and finally, a big hole in the pocket on account of legal fees. But once in a while, bankruptcy of the originator could expose a seldom thought-of question : was the sale of cashflows from the originator to the SPV a sale in fact?

While a US bankruptcy court is currently seized of this issue, the entire securitisation industry is watching the proceedingly anxiously. The case in point is the bankruptcy of LTV Corporation. LTV, a Ohio-based steel company, filed for protection under Chapter 11 on 29th December last year. The bankruptcy court allowed LTV to use its receivables to maintain its staff payments, etc. However, this is where Abbey National stepped in – contending that LTV had no right to the cashflows, as the same had already been securitised. Way back in 1994, LTV had transferred, on a revolving basis, receivables to its SPV called LTV Sales Finance Co., and Abby had bought interest in such receivables.

LTV's lawyers contended that the sale of receivables by LTV is nothing but a disguised financing.

Even as the hearings go, the securitisation industry is worried. Revealing the worry is the fact that several concerned parties, including Bond Market Association, MBNA Corp., GE Capital Corp., Residential Funding Corp. and the Consumer Mortgage Coalition have prayed before the Court to be included as amicus curae and have pleaded that the true sale character of the receivables should not be disturbed. The list of those pleading to be included as amicus curae runs to 23 top names in the securitization industry, represented by Mayer Brown and Platt. Mayer Brown and Platt emphasize that securitization is based on century-old concepts of absolute transfers among affiliated entities and corporate separateness that have been long recognized under federal bankruptcy law, that securitization has become a $5.9 trillion market, benefitting all segments of the U.S. economy (including locally important segments such as the auto industry), that securitization transactions have been routinely respected in other bankruptcy cases, and that accepting LTV's frontal attack on securitization could cause a seismic disruption of the financial markets.

There have been cases in the past where purported securitization or receivables transfer agreements have been characterized as loans: the issue depends almost entirely on the facts and the strength of documentation. The case is scheduled for hearing on 7th March. On this site, we will be covering further developments in this case.

In yet another unrelated development, US airline company TWA filed for Chapter 11 protection in Jan. this year. TWA has originated several securitizations in the past, and is the obligor for several other aviation related securitisations. There are as many as 7 operating leases to TWA that have been securitised by the respective lessors. Rating agencies do not expect much problem for operating lease securitizations, as the leases, if cancelled, can only result into release of the aircraft to the lessor which can be redeployed.

But the bigger problem is for future ticket sales deals securitised by TWA. This is a ticket sale securitisation through Constellation Finance LLC Series 1997-1. This deal, worth around $100m, was rated BB and sold in December 1997 and is collateralised by ticket sales being paid by specified credit cards. The deal does have a cash reserve, and fast amoritisation trigger, but quite possibly, will be affected by the bankruptcy.

No airline originated deal has defaulted in the past.

Links Our article on true sale in securitization covers the true sale question as also major cases in the past – click it here. See the comment on Mayer Brown and Platt-sponsored website on the LTV case – click here.

Indian Finance Minister promises securitisation law

Finance Minister Yashwant Sinha presented a reforms and growth-oriented Budget for 2001-2. The Budget has been hailed as bold and beautiful, though it contains some fine prints which might hit the financial services sector. [See Vinod Kothari's financial services website for a detailed commentary]

Proposing several measures to invigorate the debt market, Yashwant Sinha listed a proposed comprehensive securitization legislation too. Though no time frame has been laid, it is expected that the Bill may be placed in the next session of the Parliament.

Draft of the securitization legislation proposed by the Andhyarujina panel is already on this site – click here. The draft law is almost like the wish-list of the securitization industry – it is just too good.

Link For more on securitization in India, click on our country page.

Malaysian securities regulator places capital market masterplan

Malaysia's securities regulator, Securities Commission (SC) recently prepared a Capital Market Masterplan (CMM) whichi aims to turn Malaysia into an international Islamic capital market centre by introducing more Islamic capital products and services.

The CMM also includes proposal to create a new securitization instrument – new class of debt securities can be created through the securitisation of real estate held by Wakaf, Baitul Mal and other Islamic institutions. Wakafs are Islamic endowments.

Currently, Cagamas, a mortgage securitization body in Malaysia, buys and securitises the mortgage loans of Malaysian banks and financial institutions, but with recourse to the originators. Other than securitisation by Cagamas, there is not much of activity in the field of securitisation, either by banks or by others.

The Securities Commission is also vested with the task of preparing Guidelines on securitization, which as per last available information are still in the process of being drafted.

Links See our country page on Malaysia here.

US insurance regulators agree on model SPV law

Ina meeting in Atlanta on Feb. 6, the National Association of Insurance Commissioners' Securitization Working Group has agreed in principle to a model act that would allow insurers to use onshore special purpose reinsurance vehicles to securitize risk. The meeting was attended by regulators from 11 states.

The law will facilitate setting up securitization SPVs for insurance securitization in the US. Presently, securitization SPVs are being exported to off-shore jurisdictions primarily because of lack of an enabling legislation. Consequently, insurance risk securitization has not gathered the pace otherwise thought of.

Due to this, most of the insurance risk securitization activity is carried in tax haven jurisdictions. Analysts estimate that so far, over last 7-8 years of the history of risk securitization, there have been almost 56 offshore special purpose vehicle deals, as compared to only 2 that were domiciled in the United States.

After incorporating the SPV law in the country, the next task will be to seek IRS clarifications on the tax treatment of the vehicles. The market expects that the pass-through principles applicable to other securitisation SPVs will apply here too.

Links For our page on insurance securitisation, click here.

South African furniture vendor to securitise debts

A report in Business Day, South Africa, of 27th Feb says that Profurn, a furniture and electronics vendor might be raising something like Rands 800 million by securitising its debts. The debts are essentially the credit sales made by the vendor.

The report says that financial institutions and investment bankers were keenly interested in structuring the deal for Profurn. They expect a good appetite among investors too, as there is a dearth of properly rated debt securities in the South African market.

Securitisation had been hindered in the SA market to date partly because of restrictions on the practice contained in the regulations section of the Banks Act, analysts explained. Although private placements are permitted, any public issues by nonbanks must adhere to a series of restrictions that makes them more difficult, although not impossible, to structure. The Reserve Bank is drafting revised regulations that will make securitisations easier to complete and more accessible for all lenders. Some analysts expect these to be completed within three to four months.

Links For more on securitization in South Africa, see our country page here. We have also handled several securitization-related workshops in South Africa. For details of forthcoming and past events, see our page here.

Fannie and Freddie should grow up

An article by AMITY SHLAES in Financial Times UK reiterates the case so very often made by others that the US Government should withdraw its support to mortgage securitization agencies Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are two of the three agencies used by the US government to securitise mortgages [ see for details on our country page here and our page on RMBS here]. Of these, Ginnie Mae continues to be government-owned, but Fannie Mae and Freddie Mac have been privatised over time.

Though privatised, the agencies continue to carry government support. Examples include: The president appoints members to their boards. The Treasury secretary may invest up to Dollars 2.25bn in their securities. Both companies are exempt from state and local taxes. And, most significantly, there is the general feeling that because of their social value and their size, the pair must not be allowed to fail. [Citing Peter Wallison and Bert Ely in Nationalizing Market Risk; American Enterprise Institute].

On this site, we have earlier carried glimpses of this debate – see our news report here, and a further news link on this link.

The article talks of the possible distortions that this implicit government support to the agencies creates – "For one thing, the pair may already be distorting markets – luring Americans into homebuying when they might better invest elsewhere. For another, the pair are growing so fast that they now threaten to consume the entire mortgage market, doing the damage of classic monopolies". Alan Greenspan has also expressed concern that the agencies might be "diverting real resources from other market-determined uses".

Links The debate continues. This website is dedicated to the Fannie Mae debate –


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


Eurotunnel raises GBP 892 million by securitisation

According to a report in Les Eschos France of 23 Feb., 2001, Eurotunnel has securitised receivables to raise GBP 892 million from the capital markets. The issue was lead managed by Merrill Lynch and Dresdner Kleinwort Wasserstein to refinance part of Franco-British channel tunnel operator Eurotunnel's junior debt, and has attracted numerous investors.

A notable feature of the offering is that not only the senior tranches totaling GBP232 million and 365 million euros were well received, but even the junior tranches worth GBP230 million were easily placed. The senior tranche was rated AAA and the junior tranches were rated A-, BBB and BB-.

Indonesia to securitise future flows on gas sales

According to a report in Business Times of Singapore of 26th Feb., Indonesia has invited global financial institutions to handle a proposed securitisation of bonds collateralised by natural gas sales from its West Natuna field to Singapore. A couple of Singapore banks, including DBS Bank, are expected to have joined global institutions like Goldman Sachs, Merrill Lynch, Warburg and Morgan Stanley in submitting their proposals.

In what the Indonesian government called "structured export notes", the notes will be backed by future export sales. The amount could go upto USD 500 million.

The Indonesian government also did not state what the money would be used for, but it is understood that it would be used to settle part of its massive foreign debts totalling US$134 billion. Jakarta is also likely to securitise its proposed natural gas sales to Singapore Power from the Asamera gas fields in South Sumatra. Indonesia will generate over US$7 billion over 20 years starting from the year 2003 from this contract.

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

Grateful thanks This and the following newsfeed was provided by Mr G N Setty from Sydney. We appreciate this, and similar contributions by visitors from all over.

Indian aviation company uses securitisation to raise USD 355 million

According to a news report appearing in Business Line of 24th Feb., India's private aviation company Jet Airways has raised USD 355 million (Rs. 1600 crores) from domestic investors.

The report says that Standard Chartered Bank has, along with UTI Bank, as lead arrangers, placed credit-enhanced pass through certificates (PTCs) of Rs 1,600 crore with UTI, LIC, Bank of Maharashtra and HDFC Bank. State Bank of India has credit-enhanced the PTC by guaranteeing the principal and interest on the PTCs.

It appears from the Press Reports that Jet Airways will be using an SPV to give these aircraft on hire purchase to Jet Airways, and the hire purchase rentals will be securitised by the SPV, thus raising the funds needed to buy the aircraft. Hire purchase is an type of financial lease. With the proceeds of the rentals, the SPV will provide to Jet Airways on hire purchase 10 new Boeing 737 aircraft.

The transaction is guaranteed by US Exim Bank and the rupee part is the single-largest securitisation deal in the domestic market. It was also the first US Exim-backed transaction which raises rupees, the release said. The door-to-door tenor of the PTCs is 12 years (seven year average) and a draw-down period of 30 months. Interest rates will float in a band of 60 basis points until the time of draw- down of each of the 10 tranches. They would be fixed at a margin over the 7-year Government security. Jet Airways had struck a deal with Boeing to buy 10 new 737s at a total cost of $420 million. US Exim agreed to guarantee 85 per cent of the funding. The US Exim guarantee was used to raise dollar funds and placed with SBI as collateral against which SBI issued a guarantee to investors in PTCs. The aircraft will be acquired by an overseas special purpose vehicle and given to Jet on hire purchase. The future hire purchase rentals of the airline denominated in rupees were securitised to issue PTCs for raising rupee funds. The deal allowed Jet to have only rupee obligations avoiding dollar risk and US Exim to avoid rupee risk.

Links For more on securitisation scenario in India, see our country page here.

Canadian mortgage securitization agency to use bonds to buy mortgages

The Canadian mortgage securitisation agency, Canadian Mortgage and Housing Corporation (CMHC) will soon use bonds to buy mortgages. The bonds are designed to convert the monthly cash inflows from mortgages into non-amortising bonds that will provide attractive investment opportunity to investors. The principal on the bonds will be paid only on maturity, while pass through certificates amortise every month.

Canada Mortgage Bonds represent the latest evolution for mortgage funding in Canada. They provide an attractive fixed income investment opportunity featuring semi annual interest payments, repayment of principal at maturity, and a CMHC timely payment guarantee, backed by the Government of Canada. The bonds will be issued through a newly created special purpose trust known as the Canada Housing Trust. The Trust sells bonds to investors and uses the proceeds to purchase mortgages. Under the CMB program, the Trust transforms monthly cash flows from NHA MBS pools into non-amortizing bond cash flows. CMHC guarantees the mortgages to the SPV.

It is expected that the bonds will allow for more retail and institutional investment in Canadian residential mortgages, while providing investors with high quality, easily tradable guaranteed investments.

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

Securitisation, with IFC backing, to fund IT education in India

It is a potent case of securitisation being used to fund one of the most important capital asset of our times – knowledge. Citibank has tied up with software education company NIIT to fund IT education in India. The deal is the first case of use of securitisation for education funding in India, and also the first major organised attempt to fund IT education in a country that commands global edge in the field.

Under the proposed deal, Citibank will provide funds of USD 90 million to students fo NIIT under NIIT's flagship three-year IT training program, christened iGNIIT. NIIT is one of the IT education majors in the country.

The program uses a structured risk sharing pattern with the first loss risk of 11% being absorbed by NIIT as the originator. IFC will absorb mezzanine risk to the extent of next 10%. The balance of the funding to come from capital markets is virtually risk free, with 21% of the risk having been hived off already.

Gain-on-sale accounting, or how to make unhatched chickens fly

A recent article in Forbes (Feb. 19, 2001 issue) gives an example of the arbitrary gain-on-sale accounting for securitisations. Earlier, on this site, we have carried several reports and comments on gain-on-sale accounting.

Essentially, US securitization accounting standard FASB 140, which is the most detailed set of accounting principles for securitization and has coloured the approach of IAS 32/39 as well, provides for a securitization originator to account for on books retained interests in securitizations. These retained interests would primarily be the value of (a) any liabilities on account of recourse; and (b) retained interests in form of subordinate or interest-only or any other fraction of the transaction, not sold off to investors. Generally, the originator is also the first-loss protection provider, and therefore, would have the right to share the residuary cashflows after all fixed-income investors are fully serviced. The accounting standard permits the value of such retained interests to be captured on the books of the originator. Since the value of the retained interests, and the resulting gain-on-sale of receivables, is subject to the actual portfolio performance, losses, defaults and prepayments, there is a great degree of subjectivity in the valuation of retained interests.

The Forbes article gives an example of this arbitrary profit-booking. It talks of an Atlanta-based company called CompuCredit which issues Aspire Visa cards to consumers with marginal credit histories. The interest rate on these cards is 28%. Despite the rate, the company has had no trouble finding customers who want the cards. It has 1.9 million accounts with a collective $1.3 billion balance.

The article says that in CompuCredit's case, 10% of its pretax profits comes from gain-on-sale accounting and nearly 90% comes from the interest-only strips, the value of which is also based on securitization accounting standards. "To calculate profits that are still to come, the card issuer makes guesses about future losses from bad loans and about how long the average account will stay on the books throwing off interest. The resulting hypothetical earnings are discounted back into today's dollars and called profit", says the article. "How do you foretell the future when you don't know when or if a recession will hit? Let's just say this kind of profit-and-loss statement is more art than science. "

In the meantime, the Financial Accounting Standards Board is seeming undeterred by such critique. While it recently replaced the securitization accounting standard by a new-look FASB 140, it did not re-examine its gain-on-sale policy. Recently [on Jan 30, 2001], the FASB staff has put on its website a worksheet that shows how securitization accountants are expected to compute fair value of gain on sale. The spreadsheet advises accountants to assign probability values to bad, unfavourable, most likely and favourable scenarios and compute present values of cash flows under either case, and thus work out a probability-weighted value of the retained interest.

However, analysts feel that since the entire work is still based on future-gazing, it is violative of one basic principle that accountants have learnt over years: conservatism, which advises accountants not to book a profit based on guesswork, though losses are to be provided for based on anticipation.

Links See articles on gain-on-sale accounting by Martin Rosenblatt and others in our articles section. Also there are several news reports on news pages about arbitrary profit booking by gain-on-sale including failure/closure of some banks on such grounds.

Ernst and Young is optimistic about CMBS markets

Ernst and Young (EY), international accounting firm, recently put up a report which expresses optimism about the growth of international CMBS markets. According to EY, "the overriding goal behind the creation of the commercial mortgage backed securities (CMBS) market – to provide a stable source of liquidity to the commercial real estate industry in the United States in all economic cycles – has been achieved".

EY is optimistic about the growth of CMBS outside of the United States. In year 2000, CMBS issuance outside the U.S. reached USD 12 billion, up from USD 9.8 billion in 1999 and only USD 600 million in 1998. On the other hand, issuance within the United States has leveled off at about USD 50 billion.

Here are the key highlights of the CMBS market's activity in 2000:

  • Issuance of new mortgage backed bonds in the U.S. fell for the second straight year, from a high of $77.7 billion in 1998 to $58.5 billion in 1999 and $48.9 billion in 2000.
  • However, the rate of the decline in 2000 was less than in 1999 and was in line with market expectations.
  • About 20% of all outstanding commercial and multifamily mortgages in the U.S. have now been securitized.

Links For more on commercial mortgage backed securities, please do see our page here.

Munich Re issues cat bonds

Munich Re has issued USD 300 million worth cat bonds that protect it against super-catastrophes such as exposure to hurricanes in Florida and New York, earthquakes in California and windstorms in Europe.

The deal is based on parametric triggers: that is triggers which are based on objective parameters and not the actual loss suffered by the insurance company. For example, in greater Miami and greater New York, triggers are based on the central pressure of hurricanes making landfall along specified sections of coastline. For the San Francisco Bay and greater Los Angeles areas, triggers are based on earthquake magnitudes within several areas surrounding sources of major tectonic activity. The European windstorm trigger is a weighted index calculated from wind speeds measured at 600 stations across five countries in Western Europe.

Risk modeling company Risk Management Solutions provided the risk analysis, and Goldman Sachs, Lehman Brothers and American Re Securities Corp. placed the bonds.

Links: For more on cat bonds, click on our page on risk securitisation here.

German tax law proposals may spell problems for SPV taxation

One of the prime reasons for locating an SPV in an offshore jurisdiction, normally a tax haven, is to avoid double tax on the residuary income, that is, the income that remains after paying off interest on the notes. However, to escape the tax, the SPV should be treated as a non-resident for tax purposes. To be treated as non-resident, tax rules normally require that the SPV should not have a business in the host country.

Certain German states are now proposing that since securitization SPVs carry servicing functions in the host country, they should be treated as residents in Germany, and hence, subject to German taxation.

A recent report by Standard and Poor's analysed this eventuality and felt that the proposed change may not affect synthetic securitisations, which are incidentally quite popular with German banks, but may affect several deals.

US law firms to securitise tobacco settlement legal fees

Last year, when we commented on this: we said – why wait for years, if you can have it today. In our age of impatience, waiting is the biggest sin. Realising this, US law firms have decided to securitise their legal fees in the multi-billion tobacco settlement and raise cash upfront from Wall Street.

The first offering, of USD 295 million, might be hitting the market in February. The SPV is called called "Litigation Settlement Monetized Fee Trust" (LSMFT). The offering will be a 144a offer: and will consist of two classes of notes — a $250 million five-year tranche and a $45 million 10-year tranche. Deutsche Bank Securities will be the underwriter. Investor roadshows have already begun. The offering's five-year tranche will likely be rated Aa3 by Moody's Investors Service and single-A by Fitch and Standard & Poor's. The 10-year tranche will likely be rated A2 by Moody's and single-A by Fitch and S&P.

Market practitioners agree that this is the first time that legal fees are being securitised. Before this, David Pullman has introduced bonds backed by revenues of musicians and the like.

Links: There are several news items on our previous news pages about the tobacco bonds in the US – click herehere and here.

European telecom utilities increasingly look at securitisation

A report in Financial Times 1 Feb. 2001 says that European telecom utilities, seeking to fund billions of Euros, are all set to make the most of securitization markets. Telecom Italia will be the first to test this market, with marketing due to start in the coming weeks for Euros 1bn worth of debt backed by telephone bill receipts.

A similar proposal is at advanced stage of consideration by France Telecom.

Deutsche Telekom has set up a joint venture with Morgan Stanley Dean Witter and Corpus, a real estate company that aims to release cash from the telecoms group's real estate portfolio. This will be achieved through the sale of properties, the creation of real estate funds and asset-backed securitisation.

Links For news items on similar deals from electricity and railway companies, click here.

Europe set for strong securitisation growth

A report in Financial Times, London, 26th Jan., 2001 predicts a strong growth in securitisation volumes in Europe. Investors have growth nervous with increasing number of defaults in straight coporate debt, and are looking for a shelter in securitisation markets where there have been no defaults till date.

In the meantime, rating agency Standard and Poor's reports an 86% surge in ABS volumes in Europe, recorded at USD143 billion. With growing supply of ABS paper, the demand has also been growing correspondingly. One of the interesting features is the bouyant demand for low-rated paper, where spreads are good and there have been no defaults as yet.

The use of credit derivatives emerged as even a stronger feature of European securitisation growth in 2000. The S&P report records a 32% of the total issuance to be based on use of credit derivatives. European securitisation practice makes use of synthetic securitisation [for details see our page here] where the reference portfolio for which the risks are transferred is several times the amount of actual funding raised. These unfunded transfers are not included in the volume of securitisation reported.

Which are the main growth pockets for securitisation in Europe? The S&P report says that while the U.K. remains the principal engine room of the European securitization market, 2000 saw a significant leap in volumes from the continent–Germany and Italy being particularly active. The continental European securitization market has expanded significantly, supported by improving legislation, the single currency environment, and the drive for opportunities provided by credit derivative technology.

Deloitte Touche sweeps accounting firm awards

International Securitization Report's best accounting firm for securitization awards have been swept by Deloitte Touche Tohmatsu (DTT). DTT swept all three First Place categories for Best Securitisation Accounting Firm in Europe, North America and Asia-Pacific.

Deloitte Touche Tohmatsu is a provider of global securitization services such as: due diligence, cash flow modeling, collateral stratification analysis, accounting and tax advice, surveillance, technology support, and financial statement audits. The group's practitioners have worked on over 7,000 securitization transactions in over 20 countries. In anticipation of increased securitization activity throughout the world, Deloitte has established a network of seasoned professionals in 41 countries to meet the specific needs and expectations of its clients.

International Securitization Report (ISR) annually gives awards in several categories to agencies involved in securitisation practice. This year, ISR polled over 11,000 securitization professionals including: subscribers, issuers, investors and other securitization service providers.

The award relating to accounting firm in Asia Pacific is a new feather in DTT's cap as this is the first year that DTT has won this award. As far as Europe is concerned, it is the third consecutive year, and the second consecutive year for North America.

Vinod Kothari adds: Congratulations, DTT! DTT's contribution to the news and articles on this site, particularly from Marty Rosenblatt, has been very helpful. We wish DTT all the best.

Reverse mortgages in forward gear

Reverse mortgages are growing fast in the US and many market players expect this market to have a sustained growth as senior citizens use it as a decent way of adding to their social security payments. A reverse mortgage is one where a borrower, typically a citizen over 60, receives payments every month from the mortgage lender against the value of the house he or she owns, and when he or she dies or moves from the house, the house is taken over by the lender. It is called a reverse mortgage, because unlike in a normal mortgage loan where the borrower makes monthly payments to the lender, here the lender makes monthly payments to the borrower. The concept of reverse mortgage is explained in our page here.

A recent article in Barron's Jan 8, 2001 kicks off with the story of a US lady who took a reverse mortgage loan 3 years ago at the age of 71 against her house valued USD 88000. She has been receiving payment of USD 283 from the lender. Mother of 12 and grandmother of many more, she is keeping herself perfectly fit and active, and hopes she will live to be 95. That is exactly what her bankers hate about it, because in a reverse mortgage, the longer the borrower lives, the bank loses.

The growing popularity of reverse mortgages is evident from the fact that over last 15 years, about 50000 such loans have been written, of which 40000 were written over last 5 years.

Among many others, Lehman is optimistic about the prospects of reverse mortgages, based on simple data. There are more than 12.6 million households in the age group of 65 plus. There are also 16.7 million homeowners under 65 who have little or no mortgage debt. Ultimately, many of them could become tempted to sign up for a reverse mortgage. This represents a pool of home equity of between $3 trillion and $4 trillion that might be used as collateral for reverse mortgages.

Lehman in August 1999 securitised reverse mortgage loans.

Links See our page on reverse mortgage loans here. See our page generally on RMBS here.

US ABS market ends 2000 with 9% growth

It seemed as if year 2000 will go into red and break the record of sustained positive growth by US securitisation market, but the last quarter of the year came as face-saver, or rather, grace-saver. According to Thomson Financial Securities Data, the year ended with USD 299 billion of new-issue volume, a 9% jump over the USD 275 billion recorded in 1999.

The last quarter showed a very strong performance with USD 78 billion volume.

Earlier, there were apprehensions that year 2000 would not augur too well for securitisation industry – see our report here.

With Citibank's pioneering position, Salomon SB was at the top of the league of securitization arrangers. J.P. Morgan/Chase Manhattan combine was at number two and Credit Suisse First Boston/Donaldson, Lufkin & Jenrette at number three.

Korean airlines securitises future ticket sales

South Korean airline Asiana raied USD 65 million in first securitisation of future flows to emanate from South Korea. The transaction, closed on 29th Dec., was lead managed by Chase Manhattan.

The transaction has only one tranche, and is backed by present and future ticket sales revenues denominated in dollars, arising from the US. The SPV has been domicilined in Ireland to receive payments from American Express, Diners Club and Pacific Union Bank from passengers booking tickets in the US. Pacific Union will make payments on behalf of Visa and MasterCard.

Fitch rated the deal BB, one notch above Asiana's unsecured rating. The notes have a five year maturity and an average life of 2.6 years. The coupon is 8.92% with an issue price of 97.40.

The other ticket sale securitisation to emanate from Asia was Philippine Airlines. Philippine Airlines went for debt restructuring, default of rentals on leased aircraft, etc., but securitisation investors have remained unimpaired.

Links For more on future flow securitisation, click on our page here.

Where are the cats: enthu for cat bonds is dying down

Where are all the cats? A market that seemed promising enough in 1996 and 1997 so that many observers predicted the end of the traditional reinsurance business, now seems to be a non-starter. An article by Perry DeFontaine in Best's Review Jan 2001 says that the cat bonds market is not picking up any further and traditional reinsurance continues to be the standard.

Perry says: "When the first cat bonds were issued, there was tremendous enthusiasm. For insurers, transferring catastrophe risk to the estimated $30 trillion-plus global capital markets could solve capacity and credit-risk concerns, as well as ultimately reduce the overall costs of reinsurance. Investors were attracted by the opportunity for higher yields plus diversification due to the noncorrelated nature of catastrophic risks. Excitement was so high there were even predictions of the end of the catastrophe reinsurance market; these reinsurers were stating that if the cat bond market took off, they would simply transform themselves from premium-based risk takers to fee-based catastrophe risk consultants."

But then, cat bonds no more have the same appeal that they had when they first appeared. Perry sees the reason in the high costs of cat structures, which are a complicated process involving legal costs, SPV costs, etc. On the other hand, traditional reinsurance has ample capacity as of now, having low costs.

The other difficulty is model risk of catastrphes, which was an essential feature in the success of securitisation as the risk was easily defined.

Vinod Kothari adds: Cat bond issuance in year 2000 has been at a very low level as compared to the past, but the cat technology has quickly been grabbed by several other asset classes which continue to use it increasingly. For example, synthetic securitisations involving risk transfers. Securitisation as a device of risk transfer in other fields also continues to hold a promise. A survey by Dentonhall Wilde Saptetitled The ART Survey 2000 concludes based on a survey of market participants: "Credit products – especially where banks are end users – are clearly the fastest growing area of the ART marketplace. According to respondents, they will continue to be the fastest growing area for near future. Risk financing products – in the form of finite products – were a clear second".

Links For more cat bonds and risk securitisation, see our page here.

BIS reconstructs regulatory proposals for securitisation

The Basle-based international bank regulatory body Bank for International Settlements (BIS) on 16th Jan. published revised proposals for securitisation regulation by financial supervisors. These proposals are a part of the revised capital adequacy framework that has been suggested by the BIS.

Earlier, in June last year, the BIS had published proposed capital adequacy framework, to replace the existing standard based on a 1988 concordat. The June 2000 proposals were put for public comment. BIS was expected t to finalise the regulatory proposals in this January, but "reflecting those comments and the results of ongoing dialogue with the industry and supervisors worldwide", BIS decided to frame a more detailed, more concrete set of proposals.

The proposals include a detailed set of regulations for securitisation transactions spanning over 32 pages. While the June 2000 proposals were based on investing banks' perspective, the present set of proposals include regulatory proposals for originating banks, investing banks and sponsoring banks. There is also a set of regulatory proposals for synthetic securitisation.

A write up on the revised regulatory proposals by Vinod Kothari is here on this site.

The revised proposals are now for public comment by end-May. They are expected to be finalised by end of 2001 and implemented by beginning of 2004.

Links For text of the securitisation regulatory proposals, click here. For text of the complete proposals on capital adequacy, click here. For an article by Vinod Kothari on the proposals, see here.


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Malaysian bad loans recovery agency considers securitization

Malaysia recently put in place securitization guidelines – see our news report below. Even before the ink could dry on the rules, there are a number of possible candidates, including the bad loans recovery agency Danaharta.

At the recent Malaysian Debt Conference, Danaharta's managing director said he is taking concrete steps to securitize and dispose some of its rehabilitated and performing loans later this year. He said Danaharta believes that asset-backed securitization will not only result in better recovery, but also assist in the widening and deepening of the ringgit bond market.

He went on to clarify that as at 31 December 2000, Danaharta had within its portfolio approximately RM5.45 billion of rehabilitated (and now performing) loans; of which approximately RM3.71 billion had been performing for more than 12 months (thereby indicating the robustness of their restructured cash flows). This (RM3.71 billion) would form the feedstock for the securitization venture as the loans could be offered in tranches.

A comment by a Communications officer of Danaharta dated 25th April 2001 affirms that Danaharta has requested and received proposals from a number of financial institutions – to help formulate the securitization mechanism and structure. There is still a bit of work left, for instance on structure and documentation.

Links See our country page on Malaysia – click here. For text of Malaysian law on securitization, click here.

Government Housing Loan Corp's debutante securitization likely to spur Japanese RMBS market

Japan could well be the securitization giant that it deserves, if this particular deal is a trend setter. Securitization markets in other countries contain a large component of RMBS transactions, which have been unseen in Japanese market due to lack of a Fannie Mae kind of body. But with the Government Housing Loan Corp (GHLC) making a recemt debut, that could well be history.

GHLC stepped into the RMBS market in March with a debut issue that raised USD 406 million. The offer was jointly led by CSFB, Goldman Sachs and Sanwa Securities. GHLC's plans include continuance of its securitization exercise raising some Yen 200 billion every year.

The GHLC series 1 secured passthrough notes will mature in 2036. The securities were priced at par with a coupon of 1.75 % – a spread of 45 basis points over 10-year swaps. They were supported by 2,831 residential mortgage loan contracts dated between April and June 2000.

In the typical structure, there is no true sale of the receivables by GHLC which continues to hold the loans, and has issued bonds directly to investors. The notes represent an undivided interest in the portfolio of loans held by GHLC, which is the legal equivalent of a floating charge. There is, however, an agreement with Mitsubishi trust that allows the transaction to be converted into a true sale, should it be so required.

Why not true sale? There was earlier a tax on transfer of receivables, which has since been removed, but Japanese lenders still have a taboo against transfers. They cite problems such as existing guarantee of a sister bank, which holds a first charge over the loans, etc. Are you aware of the reasons why Japanese home loan banks do not prefer a true sale? Are you aware of how would the transaction be accounted for in absence of a true sale, which is a requirement under FAS 140, or BIS capital standards as proposed? If so, please do write your comments.

Thai SEC finalises amendments to SPV law

It has almost been a couple of years since Thailand put in place the SPV law, but not of much avail as securitization is still a non-starter in the country. The Securities and Exchange Commission has recently approved amendments to the Securitisation Act in a bid to develop the debt market. The amendments are expected to be proposed to the Legal Reform Panel for consideration later.

The amendments are aimed at allowing establishment of SPVs with a multi-tiered structure as prevailing in the United States. Taxation has been a major problem area in Thai securitization – the Revenue Department also sees a possibility of tax incentives for SPVs. Value-added, corporate and special business taxes for SPVs are proposed to be waived for securitization SPVs.

Links: See our country page on Thailand for details

Securitization of timber plantation by Australian company sets good template

This deal is a quite small in international terms, but its structure may well set an example for those who would like to use securitization to promote plantation and farm finance. Timbercorp Finance has raised USD 16.9 million to securitise a portfolio of loans which will be repaid by plantation income.

The structure of the deal is as follows: Timbercorp invests approximately A$ 50 million in developing a certain plantation which includes land and infrastructure. It then provides a loan to individual investors who would buy a portion of this plantation. The purchase of plantation is funded to the extent of average 75% by the plantation company by way of a loan to the investors. In essence, therefore, the investor contributes 25% to the cost of development, and the 75% funding arranged by Timbercorp is what it uses for securitisation. So, the receivables being securitised by Timbercorp are receivables from portfolio of loans extended by it.

It has been extending such loans since 1992. The loans are 3 to 5 years amortising loans given to individual investors. The plantations are managed by a sister company of Timbercorp. The loans are secured by plantation – that is, timber, that has a value after 10 years or so. Because of this attractive backend value, investors are unlikely to default.

Vinod Kothari comments An attractive template for those who would think of funding plantations with involvement of retails investors. Makes a developmental use of securitization device.

Recession and credit card losses not to affect securitisation, says S&P

The U.S. economy is softening and could be headed for recession. The credit card industry, meanwhile, has not seen an economic downturn in a decade and, even with the economy strong, has been suffering high losses. If the economy turns down, will the securitisation investors be affected? Rating agency Standard and Poor's (S&P) says in a commentary dated 5th April that though credit card charge offs are expected to rise in 2001 and 2002, the same may not affect securitisation.

Recession might cause consumers to spend less. A slowdown in consumer spending will mean reduced borrowings and a lower supply of newly originated loans for securitization. Still, ABS new issuance volume is expected to increase in 2001. Relative to the cost of securitization, the cost of unsecured funds for finance companies has been on the rise and the ABS market has become a more attractive source of funding for many. The securitization rate jumped from only 13% a decade ago to 54% at the end of 2000. Large issuers are securitizing as much as 70% of their assets.

On the key question whether the increasing rate of charge offs means potential problems for securitisation investors, the report feels the charge off rate on credit cards to be around 6.1%, higher by 60 bps over the rate last year. However, a 60-basis-point increase in credit card charge-off rates will not have a major impact on the credit card-backed securities market in general.

Asian Pulp bankruptcy not to affect securitisation investors, says insurer

Financial risks insurer Centre Solutions does not expect any problems for the investors in a trade receivables transaction, totalling USD 250 million, originated by Asia Pulp & Paper Co Ltd (APP). Centre Solution is a unit of Zurich Finanical Services, and had provided financial risks insurance cover for the transaction. APP is based in Singapore and listed in NY, and is passing through one of the biggest debt workouts in Asia.

The securitisations were issued in 1999 and 2000 and are maturing only in 2003 and 2005 respectively. Though the rating of APP was CCC at the time of the issuance, the rating was hiked to AA on account of the enhancement provided by the insurer. The transaction represented trade receivables of APP from its forestry projects in Indonesia.

As usual for future flows transactions, there is a trapping mechanism for the cashflows which will be used for early amortisation of the investors' notes. However, recovery of the receivables is likely to be affected by claims of other creditors as also those of Indonesian restructuring agency IBRA. The case could be a crucial test for the legal strength of securitisation of future flows in Asia.

First European port revenue securitisation

According to a report by Rebecca Bream in Financial Times of 10th April, the Port of Tees and Hartlepool has become the first European port to securitise its revenues. The transaction allowed the Port to raise GBP305 million in an asset-backed bond issue.

The bonds are backed by the cash flows generated by Tees and Hartlepool's position in the bulk cargo, petrochemicals, container and oil and gas markets. Proceeds will refinance bank debt incurred when Nikko Securities' principal finance arm bought engineering and ports group Powell Duffryn, the port's owner.

Malaysia issues securitisation guidelines
Issuance to require prior approval of SC

Securities regulator in Malaysia, the Securities Commission, on 10th April issued the much awaited guidelines on offering securitised instruments. The report below captures the essential features of the Guidelines as also contains comments of Vinod Kothari.

A press release of the SC says that the Guidelines serve to set out clear and transparent criteria so that market participants are able to understand the SC's requirements. As a notable feature, prior approval of the SC will be required for any securitisation offer, which will also require the approval under the existing guidelines relating to issue of private debt securities. However, the SC is committed to a speedy clearance of such applications and will not take more than 28 days to clear the applications.

The assets that are eligible to be securitised must generate cash flow. The Originator must also have a valid and enforceable interest in the assets and in the cash flow of the assets prior to any securitisation transaction. Apparently, this seems to apply only to existing assets and future flows may not be securitisable at all.

The Guidelines, in essence, look backwards instead of looking forward. The SC has taken considerable time in issuing these guidelines and it is understood that a task force comprising of market practitioners joined the SC's staff in formulating these. However, the Guidelines have not kept up with the latest developments in the market such as synthetic securitisations and unfunded credit-derivative based transactions. The guidelines require the transfer of assets to the SPV to be fully non-recourse. The Guidelines state that any transfer of assets by an Originator to the special purpose vehicle must, in addition, comply with the "true sale" criteria. This, by itself, takes away the possibility of any credit-linked notes or synthetic securitisation, for which the scope in a country like Malaysia should have been phenomenal.

The Guidelines require the Originator to effectively transfer all rights and obligations in the assets to the special purpose vehicle and not retain any residual beneficial interest in these assets. As a limited credit enhancement by the Originator is almost a rule in securitisations, market practice will perhaps evolve on the style of US securitisations – two tier SPVs with the first transfer to the SPV being without recourse and without any enhancement, but the second transfer to be with required enhancement.

The Guidlines also eliminate the scope for offshore securitisation: in that the SPV is required to be a Malaysia-resident. The Guidelines provide stamp duty and real property gains tax exemption to SPVs, but are silent on income-tax exemption – which again might remain a grey area in case of bond/note structures.

Links For more on securitisation in Malaysia, click here.

More developments We will come back with more analysis of the guidelines soon on this site.

Workshop in Malaysia Vinod Kothari will offer a 3-day workshop in Malaysia to analyse legal, regualatory, tax and accounting issues,including the latest SC Guidelines on May 14-15-16, 2001. See details here.

CDO activity surges 500% in Europe
Overall securitization volume grows 60%

The tremendous surge in CDO activity in Europe was visible as the volume in the first quarter of 2001 increased 500% over corresponding period in 2000. A press release by Standard and Poor's says that the volume in Q1 of 2001 was USD 15.2 billion compared to USD 2.3 billion in the same three months last year.

The volumes were largely propelled by European banks' and fund managers' increased use of CDO technology as a balance-sheet management tool and for arbitrage purposes. Typically, European banks have used CDOs for funded as well as unfunded transactions.

Among other securitization segments, overall rate of growth in 2001 1st quarter was 60% higher than same period last year. The RMBS market sustained its solid growth pattern in the first quarter of 2001, ending a strong 39% higher at $7.9 billion compared with $5.7 billion a year earlier.

In the CMBS segment, volumes ended at USD 179.7 million compared with USD 3.1 billion in the same period last year. However, the rating agency sees the European CMBS market as still pegged as a prominent growth area in 2001.

The total securitization volume in Europe ended massive 60% higher at $29.9 billion compared with $18.7 billion in the same quarter of 2000.



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INPS-II is most likely over-subscribed, as Europe goes strong on asset-backeds

The unique securitisation of delinquent social security contributions by the Italian government agency Istituto Nazionale per la Previdenza Sociale [INPS] hit the market once again on 29th May. Today, that is, on 30th May, London-based newspapers already gave signals that the issue is likely to be oversubscribed.

The Euros 1.7 billion offer by SPV called SCCI has an expected maturity of mid-2004. The Triple A rated bonds offer investors a 30 basis point spread over Euribor.

[We have earlier reported extensively on the INPS-II and INPS-I. See story below and more links. INPS-I was mired in controversy till late last year; however, the redemptions due in January this year were duly made. The performance report of INPS is available in Italian and English on INPS website at The report says that not only have Series 1 notes been redeemed without recourse to the Debt Service Reserve, in fact, the overall balance of the S.C.C.I account (including DSR) increased by over ITL 100 billion.]

The European ABS market had a record month in April when USD 7.5 billion worth issuance was recorded. May is set to achieve a volume of approximately USD 4 billion, says a story in Financial Times of 30th May, quoting a Merril Lynch research.

Canary Wharf is another issuer likely to enter the market next week with GBP 875 million deal. Other prominent stories in British press today were those of British Land which proposes to raise GBP 600 millions by securitising its real estate holdings.

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

Consumer spending bolstered by securitised products

Notwithstanding Greenspan, notwithstanding recession, American consumers can continue to spend in the midst of looming clouds of recession. A report by Gary Silverman in Financial Times of 11 May puts it as follows: "These are trying times for US consumers. Layoffs are rising, investment has stalled and falling stock prices have dramatically reduced personal wealth. But Americans keep spending – so much, so far, to stave off a recession – not least because of the availability of cheap credit. The supply of credit has in turn been boosted by investor demand for bonds backed by payments on consumer borrowings such as credit cards, auto loans and "subprime" second mortgages."

That is to say, even in the face of a weakening economy, asset-backed market constantly feeds substantial amounts in the domestic market for consumer binge. The's sister site points to a number of dismal data starting from dumped trucks to vacant hotel rooms to paint the full picture of the recesssion, and yet there is no decline in consumer spending. Consumer debt burdens are at their highest since 1987. Mortage debts, including second mortgages used to pay off other debts, are the highest on record.

Analysts feel that one of the reasons for the growth in asset-backed securities is growth by default – the federal government is issuing lesser bonds and investors need something to invest in.

The worry is that if the Fed's rate cuts fail to spur the economy and asset backed investors have to bite the bullet of increased consumer delinquency, the market will lose its confidence which will hasten the process of a vicious cycle. Any thoughts?

Investors flock to ABCP, as corporate credits deteriorate

With corporate credit scene turning dismal and little chances of any betterment in the short run, investors prefer investment in senior tranches of asset-backed commercial paper (ABCP) to either clean paper or to corporate bonds.

ABCP volumes have grown sharply over the past few years. The latest data on issuance volume may be found at Asset backed Alert . The amount of ABCP outstanding in the US is now at $653 billion, representing 42% of all outstanding commercial paper, up from 27% or $285 billion three years ago. The latest data on the above website shows 23rd May volume as USD 656 – of course, this is only US paper, while other active ABCP markes incluce Canada, Australia and parts of Asia and Europe.

A Moody's report [US money market fund holdings of ABCP skyrocketing, 15th May] confirms the above. It says US money market fund holdings of ABCP have skyrocketed in the past three years, with money market funds now holding more than $307 billion, or over 47% of all outstanding ABCP as of March 31, 2001.

ABCP represents a high-quality alternative to the unsecured commercial paper issued by corporations, and at the same time, ABCP’s favorable spreads over traditional CP, which averaged 7.4 basis points from August 1997 through April 2001, continue to be a prime motivator for investors. Multi-issuer ABCP programs are also more insulated from certain event and credit risks compared to traditional corporate CP. These risks include individual company defaults or event risk in a specific industry or corporation.

ABCP’s performance since its inception in the early 1980s has been exceptional, as evidenced by its 100% no-default record.

For more on ABCP, see our page here.

CDO ratings historically stable, but 2001 may be volatile, warns Moody's

While CDO tranches have historically been safer than corporate bonds, Moody's cautions that year 2001 may see more of volatility. Balance sheet CDOs may see higher volatility than other segments. This is because of higher risk of corporate credits being downgraded.

Historically, of the four segments of the CDO market, the study found market value CDO notes to be the most stable, followed by balance sheet CDOs, and then by arbitrage cash flow CDOs. Emerging market CDOs came in last. During the period 1996-2000, covered by the Moody's transition study, there were no CDO defaults, however, the report expects some defaults during this year.

Moody's CDO rating transition study documents the frequency at which credit ratings for particular CDO instruments change over the course of time. Moody's findings confirm that CDO ratings are historically less volatile than those of corporate bonds, both for upgrades and downgrades.

Links For more on CDOs, see our page here.

FASB issues technical bulletin to clear problems in single step securitisations

The US Financial Accounting Standards Board (FASB) on 17th May issued a draft Technical Bulletin no. 01-a that seeks to clear the problems created by a recent staff interpretation that virtually ruled out off balance sheet treatment to securitisation using the single-step SPV format.

Read more about the staff interpretation given on 19th April that created the problem here. The problem pertains to isolation which is required for off-balance sheet treatment, and isolation is interpreted as the legal impossibility of the liquiditor of the originator from clawing back the assets transferred in a securitisation program. According to FASB staff interpretation, such impossibility did not exist in case of single step securitizations in FDIC-insured banks, due to an inherent power to beneficially re-acquire the assets.

The draft technical bulletin now issued for public comment by FASB does two things: (a) it defers the applicable date of the new rules to FDIC-insured banks doing single-step securitization to 31st Dec., 2001, such that assets transferred after this date will be affected by the new rules; and (b) it also makes certain relaxations to transfer of assets to master trusts. For full text of the FASB draft, click here.

Links For more on accounting for securitization, see our article here – the article also gives a number of further links.

Clementi opposes new BIS norms

David Clementi, Deputy Governor of Bank of England, recently criticised BIS proposals that seek to link the capital required by banks to the riskiness of assets held by them. According to Clementi, the new rules may precipitate banking crises.

The new BIS rules seek to replace the 1988 concordat. According to the existing regulatory norms, the minimum capital required by banks is linked with the risk-weightages of assets held by them and the weightages are arbitrarily fixed by the nature of the asset – such as a claim on a sovereign, claim on another bank, etc. The new rules, first proposed in June 2000 and later revised in January this year, seek to replace these weightages by those based on the risk, as indicated by the rating, inherent in the assets. Hence, riskier the asset, more the capital required to hold such asset.

The new draft rules have accordingly sought to revise applicable regulatory norms to securitisation transactions as well – see our report here and an article and a graphic here.

Clementi's opposition is that the accord linking the amount of capital to risk could amplify the economic cycle. Downturns would be accentuated if bank credit dried up because the increased risk of loan default required banks to hold more regulatory capital. Clementi says that the evidence of this could be seen during the Asian crisis of 1997.

Clementi suggests that risk-adjusted capital requirements should be based on long-term measures that include the possibility of future economic downturns in assessing credits.

Clementi also criticised the fact that the new rules could lead to arbitrage by simply securitising assets or entering into credit derivatives. [Vinod Kothari adds: Clementi's opposition to credit derivatives and securitisation is no more a secret – see news report on our credit derivatives site here. ]

Not only Clementi, several other leading banks have either criticised the BIS proposals or sought for more time and clarification. A report in Financial Times of 22 May said heads of leading European, Japanese and US banks have wanted more time to understand teh BIS proposals, raising the possibility that final proposals from the Basle committee could be delayed. In a letter to William McDonough, chairman of the Basle committee of international financial regulators, banks asked for more detailed information on seven key areas. The letter was signed by heads of the US, European and Japanese banking associations.

Links For an article on the regulatory proposals of the BIS, click here.


Japanese restructuring body to securitise bad loans

Securitisation seems to be launched as the laundry machine to wash the sins of the banking system – in other words, securitise bad loans and convert them into marketable securities. Morgan Stanley has already done it in Japan, and KAMCO has done it in Korea. Malaysian Danaharta has announced intents, and the same with Chinese Huarong.

So, as if it is all a part of life, the latest one to try the laundry machine is the Resolution and Collection Corp of Japan. (RCC), the Japanese bad loans restructuring body. RCC, a subsidiary of the Deposit Insurance Corp intends to sell, as a first step, the former headquarters building of the failed Long-Term Credit Bank of Japan, now relaunched as Shinsei Bank.

With Daiwa Securities SMBC Co as its adviser on the LTCB headquarters securitization dea, the property will be transferred to a special-purpose company, which will issue a total of Yen 40 billion in bonds.

Links For more on securitisation in Japan, see our country page – click here. For more on securitization of non-performing loans, click here.

INPS II from Italy comes to the market

The landmark securitization of delinquent social security contributions from Italian government agency INPS is coming to the market for its second tranche. This is what The Times international business editor (7th May 2001) reacted: "ITALY is coming to the City of London this week to ask investors to fill a 2 billion euro (£1.2 billion) hole in its state pension scheme".

INPS is the Italian government agency's securitization of delinquent receivables that made global headlines in 1999. We have earlier commented on the problems on INPS -I and the proposal for INPS-II. See our news reports here and here.

The second tranche of some Euro 2 billion will be managed by Morgan Stanley, San Paolo-IMI, the Italian bank, and UBS Warburg.

The Times editorial continues: "Italy’s ramshackle state pension is owed 45 billion euros in unpaid contributions, mainly because of a past failure by the Italian Government to organise an efficient scheme to collect the money. Much of it will never be recovered. Faced with a mounting pension burden and the need to cut the country’s borrowing requirement, the Government created a debt collection agency that is expected to realise a large portion of the missing funds. The investment banks realised that these debts could form the basis of a novel securitisation scheme. "

Links For more on securitization in Italy, click here.

First non-agency securitization in Malaysia to hit soon

A report in Malaysian newspaper New Straight Times of 8th May says that the first Malaysian securitization, other than by the agency of Cagamas, is likely to hit the market soon. This offer, of RM 1 billion, has been proposed by Moccis Trading Sdn Bhd and most likely, this would be the first offering since the introduction of the Securities Commission's new guidelines on debt securities.

The issuer's plan is to issue up to RM 1 billion in Islamic Murabahah papers sometime this year, backed by the company's assets, namely consumer receivables which currently total about RM 600 million in its books. The company has appointed Amanah Short Deposits Sdn Bhd, a subsidiary of Amanah Capital Group, as its lead manager.

Links For more securitization news relating to Malaysia, browse through our news page – for example see a news about a proposed NPL securitization by Danaharta here. For more about securitization in Malaysia, see our page here. For text of securitization laws in Malaysia, click here.

A training workshop on securitization in Malaysia will be held on May 14-16 at Kuala Lumpur where Vinod Kothari is the sole facilitator. Click here for details.

Guy Hands leaving Nomura

It is not only financial press in London which is full of stories of Guy Hands leaving Nomura. Guy Hands, so far the Head of the Principal Finance division of Nomura Securities at London is one of the most talked-about financiers in the City and in the securitisation world, he has the reputation of being the one who pulled securitisation out of its mainstream applications and intermixed venture capital approach into it to introduce to the world a wholly new range of asset classes such as pubs, real estate, plant and infrastructure assets. We carried a story about Guy Hands – last year – click here. Guy Hands will set up a GBP 2 billion private equity fund, in which Nomura may invest.

According to a report in the Daily Telegraph 7th May, Nomura is concerned that Mr Hands has invested too heavily in his principal finance group and that his personal profile eclipses the bank's.

Among creditable deals concluded by Hands were the 5,500 British pubs that he acquired and securitised, 64,000 German railway workers' houses. At one time, he also bid for the the Millennium Dome which he ducked because he thought the risks were unquantifiable. And closely before his decision to quit, he was negotiating to bail out the Le Meridien hotel chain.

Why need a vehicle 
if you can walk your way without it, asks Moody's

It is no news to securitization industry that an increasing number of securitizations in Europe, particularly in UK and Germany are turning synthetic, and for many of these securitization transactions, SPVs are not required. Moody's led the thinking process by releasing its report recently titled Non-Bankruptcy-Remote Issuers In Asset Securitisation dated March 22, 2001.

Essentially, the use of SPVs in securitization is for three essential purposes: isolation of assets to the exclusion of the originator or his claimants/liquidatory, for bankruptcy-remoteness by housing the receivables in a vehicle which does nothing except such housing, and for off-balance sheet accounting.

Moody's feels that the legal isolation of assets by actual true sale to an SPV may not be necessary in countries like UK, and those following the Anglo-Saxon legal system, including Cayman Islands, Hong Kong, Singapore, Australia, Malaysia and Bermuda.

The Moody's report is based on bankruptcy laws of UK which enable creation of a fixed charge and a floating charge. A fixed charges attaches to a property, and acts as a bar against transfer of the property by the borrower; even if it is transferred, it will move along with the property. A floating charge over the entire assets of the borrower might permit the chargeholder to appoint an administrator to preempt the Court from appointing one.

Though it is a worthwhile thought to think of ways of expanding securitization markets improving upon existing practices, it is unlikely that the way suggested by Moody's will go a long distance. Secured bonds have been prevalent since times immemorial, and so also fixed and floating charges under English law. The method suggested by Moody's is no categorical improvement over the traditional secured bonds, to give any better rights to investors than secured bonds do. In bankruptcy, even if the bondholders carry a fixed charge, the claims are still subject to preferential debts, and in most bankruptcies, preferential claims eat up a substantial part. The assets securitised will not be out of the purview of bankruptcy estate, and therefore, stays and injunctions on payment to investors will be unavoidable, as bankruptcy courts are unlikely to be much concerned about interests of capital market investors opposed to workers and such claimants.

Isolation by way of fixed charge and isolation by way of transfer are very different in common law, and it is unlikely, either that an operating company securitising assets as Moody's suggests will not go bankrupt, or that the Court will afford the same protection to a fixed charge holder as to the owner of an isolated portfolio.

Most significantly, Moody's suggested method will not qualify for off-balance sheet funding.

If off-balance-sheet treatment is not important, there is yet another possible way of avoiding an SPV -declaration of trust by the originator himself. Bankruptcy laws do not apply to assets held by the originator in trust. However, declaration of trust itself, in many countries might attract stamp duties.

Updated 10th May by Vinod Kothari Having written the above peace yesterday, I read today a write up in Corporate Finance April 2001 and I see some legal experts, disagreeing with Moody's view. The article quotes UK lawyers saying: "We see nothing to suggest that the Moody's report will have any effect on the way in which porfolios of assets are securitized or on deal costs". The lawyers say that the Moody's method could work on something like whole business securitization where the structure is similar to a secured loan, but for discrete assets, capital relief and accounting treatment could be crucial questions.

Tamara Adler of Deutsche even says that by eliminating the SPV, the impact on costs is also not dramatic -hence, not great motivation.

Links: For more on why an SPV is required for securitizations, click here.

Chinese asset management company wants to securitise non-performing loans

The China Huarong Asset Management Corporation (CHAMC) wants to do for China what Kamco has done for Korea, and what Danaharta wants to do for Malaysia – securitise non-performing receivables. In other words, a whole lot of Asian asset recovery companies are waiting in the wings to use the new-found way of converting bad apples into good apples.

CHAMC has invited KAMCO itself to teach the former the latter's first hand experience in parceling a bunch of bad loans. KAMCO might work as its advisor in asset-based securities, according to a report in People's Daily Online of 27th April. KAMCO company will help Huarong select several portfolios from its 407.7-billion-yuan in assets and provide consultation for securities structure design, credit-rating and securities issuance. When all the preparation work is finished, Huarong plans to securitise its non-performing loans.

Links For more on securitization on non-performing loans, click here. For more on securitization in China, click here.

Primary market CBOs: a new trend in Korea

This may well be a lesson for emerging markets with tight banking liquidity. Korean experiment that allows companies with lower credits to raise resources directly from capital markets has succeeded and there have been several issuance of "primary market CBOs". The term "primary CBO" refers to a CBO which will subscribe to primary bond issues of entities, as opposed to common CBOs which pick up bonds from the market. A primary CBO essentially serves as a lending device to the bond issuers.

Earlier this year, Daewoo Securities entered the securitization market with a CBO that packages corporate bonds issued by 52 smaller domestic companies. The Won 160 billion deal (USD 124.8 million) has been jointly promoted by Daewoo with the Small and Medium Industry Promotion Corporation to promote this means of raising funds for smaller corporates. The collateral consists of bonds rated locally between B and BB-plus entities, having maturities of one to two years.

To allow investors to walk in, the transaction was split into a senior class of Won 130 billion a junior class of the balance that will be held by the small industry promotion corporation as credit enhancement. Thus, while the market funds the essential credit creation, the risk is parked with the promotional agency – a true splitting of roles rather than a common model of the State attempting to provide all funding and no risk absorption.

The senior tranche itself was sequenced into one-year bonds two-year paper, for finer pricing.

This is not the only primary CBO in Korea, but is schematically designed as a part of the financial markets stabilisation package by the Govt. Banks face a liquidity sqeeze, which leaves small and medium enterprises high and dry. The primary CBO format allows smaller firms to draw from the CBO vehicle, the vehicle in turn benefits from economies of scale, and investors get both diversification and credit enhancement.

LG Investment and Securities launched the first offering in August 2000 amounting to Won 1.55 trillion for 60 companies via four SPVs. During year 2000, there have been CBOs worth about Won 5 trillion.

Links To read more about CBOs, see our page here. For more on securitization in Korea, see our page here.

CDO market in Q1 2001 grows 200%
Non-US growth outstanding

A recent report by Moody's titled "First Quarter 2001 Global CDO Review: Healthy Pace of Activity Across All CDO Subsectors" says issuance of CDOs in the first quarter of 2001 increased more than 200% over last year.

Issuance outside the US climbed to 45% of the total, up from an average 29% last year. The growth levers in 2001 suggest a record-breaking year in 2001, caused by arbitrage opportunities, introduction of new collateral types, and increased investor appetite for CDO paper. Of particular note, says Moody's, is the continued growth of less traditional collateral types, including CDOs collateralized by investment grade corporate bonds and resecuritizations. Talking of the arbitrage opportunities, Moody's report says that of the 58 transactions completed during the first quarter, 47 were motivated by arbitrage.

The global CDO markets expanded to USD 18.2 billion across 58 transactions — up from USD 6 billion across 14 transactions in the first quarter of 2000.

The Japanese CDO volumes are a remarkable feature of this quarter. Six deals were ated in Japan, the country's highest quarterly total in two years. The synthetic securitization trend has caught up in Japan – almost all the transactions were synthetic and referenced pools of bonds – typically issued by non-Japanese obligors.

Even as volumes grow, rating downgrades were the highlight in the high yield CBO segment. Rating agency Standard and Poor's press release of 3rd May says it placed its ratings on 12 tranches of cash flow CDO transactions on CreditWatch with negative implications, bringing the total number of CDO ratings on CreditWatch negative to 14 by the end of the quarter. In addition, the ratings on 10 tranches of notes issued by CDO transactions were lowered, while none were raised.

Links For more on CDOs, see our page here.

LTV controversy resolved, but true sale trail remains

The LTV controversy that threatened the foundations of the USD 6 trillion securitization industry is over, but the trail remains, even though some securitization practitioners try to shrugg off the case as a non-issue. The LTV controversy ended with the bankruptcy court admitting the DIP funding, and recording, as was a precondition to the DIP funding, that the transfer of collateral from LTV to the SPVs was indeed a true sale.

Moody's, for example, recently came out with a report titled "True Sale Assailed: Implications of In re LTV Steel for Structured Transactions". Alexander Dill and Letitia Hanson writing this report contend that the LTV case does not have much of a precedent value, but surely has quite a few lessons to teach the securitization industry. The authors say that in the banruptcies in the past, DIP financings have come as a succour for beleagured securitization investors as DIP financiers replaced securitizations. The lessons are in terms of evaluating the the seller’s own capitalization and its sources of working capital outside of the structured financing. LTV had securitized virtually all of its liquid working capital assets, thereby making DIP funding a faint possibility.

The authors also contend that usually for an originator, disincentives against assailing true sale in securitizations will prevail. These are: high legal hurdles in ultimately prevailing on the merits; first priority security interests of securitization lenders; higher interest rates on take-out debt; and difficulty in future capital market access.

The authors, however, have not considered the fact that the LTV case left a number of significant questions open, and unresolved questions are dangerous. LTV's motion had challenged true sale based on facts which are not absolutely uncommon. The Court did not go into the merits of these contentions. There was no substantive hearing on the merits of either LTV's motion or those of the opponent or amicus curae. There were several facts stated in LTV's motion, which apparently take the transaction closer to a funding transaction than securitization. So, if the facts in a potential banruptcy in future resemble those of LTV, there will be a temptation to question true sale. Let us not forget that the attack need not necessarily come from the seller: it could be a voluntary decision of the facts on examination of facts.

With the bankruptcy index rising, securitisation transactions must increasingly both be true sales and look like true sales. The LTV case cannot be underplayed.

Links For more on true sale, see our page here.

FASB staff answer questions on isolation, make single-step transfers disqualified

On April 19th, the staff of the Financial Accounting Standards Board recently answered some questions relating to "isolation" criteria. The text of the isolation criteria is here.

The isolation criteria is a key to off-balance sheet treatment for securitisations. The condition requires that a transfer of assets in a securitization must so isolate the assets that such assets are put beyond the originator and the creditors and liquidator of the originator, presuming a bankruptcy or other claim against the originator. The questions and answers deal with the isolation criteria.

In answering these questions, FASB staff has taken a steep technical view of the isolation criteria and has envisaged a theoretical possibility where an FDIC-insured bank goes bankrupt and the FDIC under its statutory powers can re-acquire the assets using what is called "equitable power of redemption". The equitable power is a special power granted under FDIC statute to recall, in its capacity as the receiver/ conservator for FDIC-insured banks, assets including assets securitised by the bank.

The FASB in answer to Q. 3 in the questions and answers says that in case of a single-tier transfer by a bank insured under FDIC, the FDIC's equitable power of redemption goes counter to the isolation criteria, as the FDIC may recover the assets transferred.

The FDIC staff also concedes that this opinion of the FDIC may not have been expected, and has therefore, promised to come out with a technical bulletin on isolation conditions, but pending that issuance, it was not inclined to defer the application of the above opinion, to transfers made after 31st March 2001.

Securitization accounting experts agree that FASB has taken a hypertechnical view of the never-used equitable redemption power. They also contend that the FASB view will cause a disruption in single-tier securitization practices. Deloitte Touche, for example, in their publication Heads Up remark: "The decision will cause a seismic shift in the way future bank securitizations are structured. But equally important, some deals maturing beyond 2001 will have to be structurally reconfigured if they are to remain off-balance sheet."

Links For a general write up on accounting for securitization, see our page here.

Synthetic structure used to lay off residual risk in securitizations

In what is claimed as a new application of the synthetic securitizationtechnique, Lehman has recently laid off residual risk in prevoius securitizations of home equity loans by a US bank.

Provident Bank is the issuer in question, which has used an SPV called Sherpas Ltd for the purpose. Provident Bank has done several home equity loan securitizations in the past, and it has used the residual risk in 9 previous securitizations as the feedstock of the present transaction. The residual risk normally represents the spread account of the originator, which is retained as a collateral to bear the first loss of the securitised portfolio. The modus operandi is as follows: Sherpas Ltd issues credit linked notes, proceeds of whicih are invested in an investment account. Sherpas also does a total rate of return swap with Provident, with the residual risk retained whereby Provident is promised a certain rate of return on the residual portion retained by it. As a result, if a loss is faced by the securitized home equity transactions, Provident's spread account suffers a loss, which is compensated in terms of the swap by Sherpas, in turn claiming a set off against the amount payable to the credit linked note investors.

Effectively, therefore, Provident has been able to displace whatever risk was retained by it in form of residual risk on its earlier securitization. The transaction achieves the purpose of releasing economic capital of Provident, which rating analysts normally reduce by the amount of cash collateral provided by a securitization originator.

Lehman expects that the deal will a groundbreaking innovation and will find many buyers in time to come.

Links For more on synthetic securitization structure, click here.

Conference shows optimism for risk-linked securities

There are any number of instances of optimism relating to volumes of cat bonds and other risk-linked securities, but this one, coming under the auspices of one of the most important fixed-income bodies of America, merits special attention.

In a conference on risk-linked securities organised by the Bond Market Association on March 21-23 in Aventura, Fla., USA, both issuers and investors showed interest in increasing the size of the market. This was the first such conference organised by the Association.

Noting the size and scope of the risk-linked market, speakers said since 1994, there have been 47 transactions by 31 different issuers in the World, representing USD 6 billion in risk transferred to capital markets investors. This is still quite small, compared to other market segments and the size of the reinsurance market itself. At present, about 100 investors are active in the cat bond market, of which about 30 are core investors. The investors include life insurers, pension funds, reinsurers, hedge funds, banks and investment advisers. The motive of these investors is both yield appreciation and reduction of portfolio variability: the latter referring to lack of correlation between capital market securities in general and risk-linked securities. Talking of returns, the average returned earned in cat bonds over past few years have been around 12%.

There are a number of issues facing the cat bonds market. These include the need for investor information; the high cost of risk-linked securities transactions, particularly when the deals are structured on an indemnity rather than an index basis; and tax consideration and the deals' present offshore focus.

Links For more on cat bonds, see our insurance risk securitization page – click here. For recent news items relating to growing cat bonds market, see our newsletter for April 2001 here.


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European equity analysts don't know what is securitisation

Though a larger majority understands it and would like to recommend it, more than 25% of equity analysts recently surveyed by Price Waterhouse Coopers (PwC) do not know what is securitization. Of those who knew about, 75% confessed not to have a good understanding of the process. The PwC survey is the result of about 300 equity analysts interviewed between 26th March to 19th April 2001. The results of the survey were recently published as a booklet by the intenational accounting major.

The important findings of the survey are:


  • Securitisation is viewed very positively by equity analysts with 2 out of 3 claiming that they would recommend this source of funding. Securitisations may well replace traditional bank lending as the preferred funding option for many companies in the future.
  • Securitisation practices were thought to be on the increase. On average it was thought that 32% more companies will be securitising over the next 5 years. It was also felt that more non financial companies would participate in securitisations. Innovative structures will help this trend.
  • Securitisation is perceived to be an important source or funding and not considered to be detrimental to the reputation of a company. Telecom companies in particular might look to securitisations to provide their funding requirements.
  • Over a third of analysts felt securitisation was too complex for most companies and 16% said the impact of securitisation on a company’s reputation would depend on how it was carried out. This highlights the need for good project management within a securitisation process and professionals who can be “user friendly” to the majority of company executives.
  • One in four equity analysts had no awareness of securitisation and, of those that did, 75% felt they did not have a good understanding of the process. There is clearly a need for those companies embarking on a securitisation to educate the analysts covering their sector.

Links For more on securitisation in Europe, click on this page.


The agencies do lower mortgage costs, finds Federal Reserve study

In a paper titled GSEs, Mortgage Rates, and the Long-Run Effects of Mortgage Securitization by Wayne Passmore, Roger Sparks,, and Jamie Ingpen, it was contended that US mortgage securitisation agencies have in fact resulted into lower costs.

The paper comes in the midst of a controversy raging over whether the tacit US government support to the agencies should be withdrawn. For our earlier story and some important links, click here.

The paper finds that "GSEs [govt-supported entities, such as Fannie Mae, Freddie Mac – Ginnie Mae is a Govt entity itself, not a govt-supported entity] generally–but not always–cause mortgage rates to be lower in the long-run than they would be with private securitization because the GSEs have implicit public backing. When GSEs securitize mortgages, their implicit government-backing allows them to sell securities without holding the capital or purchasing the credit enhancements needed in the private sector."

Links Full text of the paper is available for download here.

Peugeot launches major securitisation of car loans

The French car company Peugeot has launced a major securitization issue totaling to Euro 1 billion. Credit Agricole Indosuez is the lead manager with Deutsche Bank.

The collateral for this mega transaction is 215,868 car loans granted to private individuals in France by two subsidiaries of Banque PSA Finance for 1.097bn euros. The issue is broken in two tranches, a Euro 950 million senior tranche and the balance junior tranche.

Vinod Kothari comments: With this issue, the already bouyant French securitization market gets a further boost. In year 2000, France had recorded a volume of some Euro 15 billion. This year, both synthetic as well as funded securitizations are likely to boost volumes. For more on securitization in France, see our recently updated page here.

Telekom Italia phone revenues securitization is a success

The Euro 700 million securitization of telephone revenues by Telekom Italia has been sold successfully, and Financial Times of 27th June quoted Telekom Italia's finance director as saying that "the asset-backed market is the best way to raise money compared with the other markets we have used".

The three tranche securitization transaction is collateralised by short-term bill receivables from Telecom Italia's domestic fixed-line voice and data customers.

Even though all major telecos in Europe have made noises about using securitisation for their ambitious funding plans, Telekom Italia is one of the very first to do so. Others who have expressed interest are KPN, France Telecom and Deutsche Telekom.

Telekom Italia has affirmed intent of tapping the securitization market once again later this year.

Links For connected stories, click here. There are more links at this story.

Bye bye Basle, see you soon!

The Bank for International Settlements (BIS) on 25th June announced that it had received more than 250 comments on its proposed revision of the capital adequacy framework, and as such, has decided to come out with a revised, "fully specified" version in early 2002 and aim at implementation of the revised framework from beginning of 2005, which delays its implementation by at least one year.

The revised capital adequacy framework has been kept boiling for quite some time. First draft of the revised framework was issued first in June 1999 with 60 odd pages of text, and then, a revised package was released in Jan 2001 with more than 500 pages of text. The third version may only be expected to be more elaborate, and who knows, more complicated.

Bankers over the world had expressed concern about the provisions in BIS-II. David Clementi, Deputy Governor of Bank of England also expressed concern – see our story here.

The BIS proposals has made fairly detailed provisions relating to securitization and credit derivatives. Even while Basle-II was under consideration, some regulators, for example, South Africa, went ahead and incorporated BIS-II norms into its local regulations.

Links For article and further links on the BIS proposals relating to securitization, click here.

Securitisation law in India: Whose baby is it?

It is bureaucracy at play again. India is one of the few remaining Asian countries to have a securitization regulation in place. Malaysia has done it earlier this year. Pakistan did it nearly 2 years ago. And so also Singapore, Hong Kong, Korea, Thailand, Philippines et al.

However, the Indian regulator is still to decide the right father for the securitization baby. The draft securitization law was recommended by the Andhyrujina panel quite some time back and even the RBI's report on securitization is almost one year old now. However, as per a report in Economic Times of 25th June says that the banking division of Finance Ministry was earlier thinking of piloting a separate securitisation bill in the reconvened session of Parliament. But the thinking now is that securitization could be permitted by notifying it under the Securities Contracts law and let the securities regulator SEBI regulate it. The report says that finance secretary Ajit Kumar took this view at a recent meeting on securitisation entrusted the task to J Bhagwati, joint secretary, capital markets division to work out the modalities.

Vinod Kothari comments: If experience with earlier products is of any indication, it would be a mistake to entrust the lawmaking to SEBI, a body which is known for its adhoc style of regulating – 10 uncertain, unclear laws today and 20 clarifications every one month hence. SEBI has a role in public issuance of securitised debt, but SEBI obviously cannot take care of private issuance, which will presumably form a bulk of securitization transactions. SEBI also cannot take care of the Transfer of Property law, Stamp law and income-tax law in which amendments were conceived of in the draft bill.

An umbrella all-pervasive securitization law, as done by Italy, Korea, France, etc. is the best bet.

Links For full text of the draft securitization law, see our legal page here. For country profile of India, click here.

Philippine govt. defers plans to securitise royalty income

The Philippine government has been talking about securitization of royalty income from the Palampaya natural gas fields for quite some time now, but it seems the plan is now deferred until the next year. The published proposal earlier was to set up a power sector SPV called Power Sector Asset and Liabilities Management (PSALM) Corporation, to which the royalty income will be transferred to pay off the debts of the National Power Corporation.

The government expects a royalty income of about USD 9 billion from the gas project which it shares with Shell.

Links Securitization law in Philippines was recently enacted. See full text on our laws section here.

Spanish securitization poised to grow fast, says Moody's

Securitisation, or titulizacion as they would call it, is about to complete a decade of existence in Spain and rating agency Moody's expects it to grow fast. Moody's recently released a report titled A Review of The Spanish Securitisation Market: 1991 – 2001.

Securitization issuance in Spain in 2000 reached Euro 7,320 million, about 9.3% higher than 1999. However, what is more important is the introduction of new asset classes such as CLOs, ABCP, and innovative ABS applications. Moody's expects these developments to enliven the Spanish market in 2001 and stimulate future issuance.

Though the Participación Hipotecaria law was passed in August 1991 to enable true transfers of credit (enforceable in the event of an issuer's bankruptcy), it was really not until the introduction of Spain's Securitisation Market Law and the concepts of Fondos de Titulización Hipotecaria and the Sociedad Gestoras (management company) that the market was able to see marked growth.

Links For more on securitization in Spain, see our page here. This page features a new article link.

Fitch cautions on use of insurance to support securitisations

The use of insurance to provide a cover and enhance the credit of securitization transactions recently came under sharp attacks following the controversy surrounding structured investment vehicle Hollywood Funding. Hollywood Funding enjoyed insurance cover from insurer Lexington Insurance Co., which denied its liability to the insured relying on a ruling of a UK court in a different case : see more of this story here along with more links.

Following this, the use of insurance policies as credit enhancement came under review and market practitioners were divided on whether insurance covers from monoline insurers were more effective or those from multiliners. Rating agency Fitch has recently issued a special report titled Use of Insurance Policies as Credit Enhancement in Structured Finance. Fitch says that it is normally believed that under traditional insurance from multiline insurance companies, insurers generally maintain the right to adjust a claim and, if warranted, litigate the validity of a claim before actual payment is made. Such actions are common and ordinary in the world of the multiline insurers. Even if the policy terms cover the necessary items, this approach does not meet the requirements of structured finance transactions, under which the timeliness of the payment of debt service obligations is of the utmost importance. On the other hand, monoline insurers are closer to financial guarantees and their covenants under the policy normally restrain them from delaying the claims even if they intend litigating the same.

However, as the market place distinction between monoline and multinline insurers has gradually got blurred, it is more important to look at the nature of the insurance cover rather than its source. Fitch says that there are three signficant provisions that are necessary to provide the required enhancement:


  • An unconditional obligation to pay the claim, if the premia are paid and there is basic performance by the insured.
  • A clear and straightforward method for the submission and payment of the claim.
  • A clear and unconditional waiver of any and all rights and defenses to payment available to the insurer under law or equity, including: set-off, counterclaim, fraud, etc.


Synthetic securitisations continue to dominate as new applications emerge in Europe

Synthetic securitisation is becoming synonymous with European securitisation scenario as these structures continue to dominate. However, new innovative applications of the synthetic securitisation method contine to evolve.

Fitch newsletter [European Securitisation News, June 2001] talks of the innovative applications of synthetic securitisation. One remarkable deal in April this year was the Leonardo Synthetic Aircraft CDO.

In the sphere of aircraft securitisation, the common devices used in the past have been enhanced equipment trust certificate (EETC) and asset lease portfolio securitisation (ALPS). For more on these methods, see our page here. However, Leonardo was the first case of a synthetic CDO in the aviation segment. The originator was IntesaBCI which used a combination of credit default swap and total return swaps [for details, see our site on credit derivatives here] to transfer the risks in about USD 1 billion of portfolio of aircraft leases and loans. The leases and loans remain on the books of the originator. Fitch says that "Leonardo evidences the growing trend in the use of synthetic structures in securitisation across a range of asset classes."

Links For more on synthetic securitisations, see our page here.

Under-construction houses securitised in Singapore

Indicating the fast pace of developments in securitisation markets in the region, a builder has securitised houses under construction in a deal believed to be first of its kind in Singapore. We have reported earlier about a mortgage securitisation by Raffles – this deal was sold recently.

Close on the heels came yet another deal: Business Times of 12th June reported Capitaland Residential's Sing $ 200 million asset-securitised bond issue which was launched recently and attracted very good response. This is described as the first of their kind in Singapore. Senior bonds of $160 million, or 80 per cent, of the six-year bonds have been given the highest rating of AAA by Fitch.

CapitaLand Residential is a unit of property giant CapitaLand. The bonds are backed by money collected through progress payments – the typical method of payment for uncompleted homes in Singapore – on uncompleted CapitaLand Residential projects. The projects include Sun Haven, Palm Grove and The Loft, each of which are 70 per cent sold.

Links For more on securitisation in Singapore, click here.

Technogy merger to make it happen: origination to securitisation of mortgages automated

Ultraprise Corporation and LoanTrader, Inc., two US based technology companies in the mortgage industry, have merged to form a new company, Ultraprise Loan Technologies, Inc. Consequently they have combined their solutions: Ultraprise and LoanTrader.

With the merger, the new firm will be in a unique position as the only mortgage technology company providing e-commerce infrastructure and application software for processing loans and other related assets from origination to securitization.

The mortgage market looks at technology as a significant source of savings. Linking the primary and secondary markets also holds significant value. The ability to reuse information already gathered during the origination process when creating loan pools for sale or securitization as well as the ability to communicate quickly and accurately the appetites of investors in the secondary market to origination channels brings sizable potential savings.

More info is available on the website of the company at

Swiss Re study sees 10 fold growth in insurance securitisation

A Swiss Re Capital Markets study went into the growth potential of insurance securitisation and came with results which do not sound strartling: given the fact that similar noises have been made time and again: it predicts a 10 fold growth in securitisation of risk by year 2010.

Approximately USD 12.6 billion of these capital market insurance solutions have been issued since 1996. Some of the important findings of the study are:


  • To date, the issuance of catastrophe bonds has accounted for nearly half of insurance risk securitisation transactions.
  • Annual issuance of catastrophe bonds, now about USD 1 billion, is expected to reach USD 10 billion by 2010.
  • Capital market insurance solutions linked to non-catastrophic risks have an even greater market potential. Promising areas include life and automobile insurance.

The study examines capital market insurance solutions in the context of the global wave of financial innovation that has occurred since the 1970s. A variety of forces have stimulated this innovation: the need to protect against market risk; technological progress facilitating the innovation process; and a desire to minimise the costs imposed by taxes and regulation.

Links Full text of the Swiss Re study is available here. For a page on insurance risk securitization and lot of links from there, click here.

Islamic securitisation in Singapore

The Islamic Religious Council of Singapore intends to finance 75% of the cost of acquiring a S$32m commercial building in Singapore through a bond issue. Muis will shoulder the remainder of the total cost. The move marks the first time that a bond has been issued in Singapore in accordance with Islamic laws on financing. The planned purchase is part of Muis' restructuring and upgrading of its property portfolio. The Council is a statutory board to advise the government of Singapore on Islamic matters.

The above news item appeared in Business Times Singapore 11 Jun. No details were apparent on the website of the Council. However, the Business Times report compliments the deal as such: "The issue will be a significant breakthrough for the local bond market as it will be the first bond instrument to comply with Islamic laws on financing. This would open the gates for the bond to be marketed to Islamic markets around the world, and for other Islamic institutions to raise funds through such instruments in Singapore."

Islamic securitization is an idea that has not picked up as it should have. Last year, there was an Islamic securitization concluded in Saudi Arabia [report on this site is here], but that is perhaps the only deal still.

Links There is an article on Islamic securitization by Tariqullah Khan on the articles section of our website – click here.


IFC makes first investment in KoMoCo securities; intends to play active role in emerging market MBS

International Finance Corporation (IFC) Washington has made its debutante investment in emerging market MBS by USD 41 million worth mortgage backed securities issued by KoMoCo, the Korean MBS agency. AN IFC press release of 7th June says that the move marks the beginning of IFC's stronger participation in emerging mortgage markets and "will stimulate more affordable long-term loans to homebuyers and develop a modern, transparent, and efficient housing finance sector in Korea". Quite some time back on this site, we had reported about the in-principle accord signed by KoMoCo for this issuance – click here for our previous news report.

KoMoCo, Korea's first specialized secondary home mortgage market entity, was established in September 1999 with IFC's assistance. The current MBS offering, christened as MBS 2001-1, consisting of a senior tranche of USD 174.4 million and a subordinated tranche of USD 7.4 million, both denominated in local currency, is backed by Won-denominated mortgage loans and collateralized by residential properties located in Korea. This is the fourth MBS issued by KoMoCo over a twelve month period which saw KoMoCo arranging about USD 1.2 billion equivalent MBS, listed on the Korea Securities Exchange.

Links For more on securitization in Korea, click here.

S&P issues model documents for revised Article 9 of US UCC

The revised Article 9 of the Uniform Commercial Code of the United States will become effective in some 40 states from 1st July 2001. The revised article deals with the creation, perfection, and priority of security interests in personal property including receivables and intangibles. As securitisation transactions are based on transfers of assets or creation of security interests therein, securitisation documents need to comply with the revised article.

As the representations and warranties in the transfer agreements need to comply with the new rules, rating agency Standard and Poor's has put up a set of model representations and warranties for various clauses of collateral. These models are available on the rating agency's websitehere.

The rating agency has also decided that under the revised Art. 9 it will not insist upon a "first priority perfected security interest" opinion that it has been asking so far for securitisation transactions.

Links For more on article 9, click here.

First rated securitisation of a private equity fund to open new funding doors

This sounds as a logical, and simple, extension of the concept of CDOs and structured product funds which have been around for quite some time, but most remarkable innovations that make so far reaching changes are invariably based on so simple ideas. Rating agency Standard and Poor's recently rated the first offer of structured notes by a private equity fund. A release of 4th June by the rating agency says that it rated the first structured notes issued by a leveraged fund and backed by pools of private equity investments. The transaction, Prime Edge Capital PLC, totaled Euros 150 million; the rated senior notes have a stated maturity of 12 years and the unrated junior notes have a maturity of 24 years.

The senior notes have been credit-enhanced by insurance wrap by Allianz Risk Transfer N.V. Prime Edge will use the proceeds it receives from this public transaction to make investments in more than 20 different private equity funds. Prime Edge Management Ltd., as the investment advisor, will be responsible for allocating these funds based on certain established investment parameters and diversification guidelines, monitoring the performances, and reporting the valuations of its investments.

The Wall Street Journal of 5th June described this transaction as "a move expected to have a far-reaching effect on money managers, making venture-capital and buyout funds available to bond investors". Securitisation of private equity funds marks the coming together of debt and equity -reinforcing the dictum that as markets develop, more and more things tend to converge.

European securitisation volume grows 100%

The early growth trend in securitisation volumes in Europe established this year [see our news report here and here] continues to get even stronger. Rating agency Standard and Poor's reports that the new issue volumes in Europe doubled on the same period a year earlier. The new issuance in May totaled USD 14.3 billion, which compares with USD 7.5 billion in May 2000, and USD 7.5 billion in April.

During May, a total of 22 transactions closed, including some mega issues such as INPS II. The European CDOs market continued on its whirlwind growth pattern ending 59% higher on the same period a year earlier at USD 4.6 billion compared with USD 2.8 billion last year.

The rating agency expects the growth rate to be maintained, looking at the pipeline which has some big issues from London, and a number of CBOs from both England and other countries. Arbitrage CBOs are likely to remain a dominant theme as many were delayed from the beginning of 2001. Credit default swaps and credit-linked notes backed by pools of corporate and asset-backed bonds are also expected to maintain their high volume throughout the rest of the year.

The European CMBS market ended at USD 832.42 million after two transactions closed, as compared to no transactions closed in May 2000. The European RMBS market commanded the largest market share, accounting for 30.4% of overall volumes, ending at USD 4.7 billion.

One of the most remarkable features is the rise of Italy as the prime player, which toppled the U.K. from its traditional premier spot with volumes there ending at USD3.6 billion. This is, of course, a transient feature due to INPS II during the month, and two other prominent transactions.

Links For more on Europe, click our page here. For individual country pages, go here.

New securitisation rules proposed 
in South Africa

Last month, the South African Reserve Bank proposed and put up for public comment a new set of rules for securitisation transactions in the country. Comments are due by 15th June.

The new regulations have been shaped by the BIS proposals in the revised capital adequacy framework, which is yet to be implemented, and is already facing lot of criticism all over. The new regulations will evolve a new risk weighting system in case of securitised tranches, with senior securities carrying a far lower risk weightage than junior tranches. Junior tranches, particularly those providing first loss protection, will be a straight reduction from capital of the issuer or the investor.

For detailed comments of Vinod Kothari on the guidelines, see here. Also see the above link for a detailed commentary by Eugene Van den Berg of Decillion, South Africa.

Do you have a comment on the proposed regulations? Please do write.

Links For our page on South Africa, click here. For full text of the existing guidelines as also the proposed regulations, click here. For comments by Vinod Kothari and Eugene Van den Berg, click here.

Singapore company to securitise prime shopping complex

If you have been to Singapore, you might have shopped at Raffles City, but now, if you have deep enough pockets, you can shop Raffles City itself.

As per a report in Financial Times of 5th June, Raffles Holdings, the Singapore-based property company, proposes to raise USDollars 547 million from the securitisation of a 55 per cent stake in its landmark Raffles City shopping complex.

The securitisation transaction will be achived by a bond issue by an SPV named Tincel. Tincel in turn will issue bonds to investors, partly by way of public offer and partly privately.

Proceeds from the deal will be used to cut debt and fund international expansion.

Vinod Kothari adds: With activity levels already high in Korea, lot of noise in Malaysia, signs of interest in Thailand, and meaningful portents from Singapore, it seems the erstwhile Asian tigers are back in business.

Links For more on securitisation in Singapore, click here. For more on Asian securitisation, click here.

Securitisation activity to speed up in Thailand with proposed law changes

Securitisation industry needs clear and practical law: it becomes evident in Thailand. The country has had the SPV law for last 2 years but no signs of any securitisation activity so far. Now, just as the SEC announced legal changes to make the law more industry-friendly [see news report here], the market players have jumped up in action.

Here is an example: Bangkok Post reported on June 1 that Trinity Advisory 2001 Company Limited, a unit of Trinity Securities Group, has teamed up with Devonshire Capital Limited and Allen & Overy to provide securitisation services for small and medium enterprises. Devonshire has experience in securitisation in the Asia-Pacific region and Allen & Overy is a well-known law firm with securitization familiarity.

Although the Securitisation Act in Thailand has been effective for about two years [see text of the law on securitization laws page on this site], securitisation activities have been limited due to some unclear points in the law and high expenses. In the future, the situation will improve with the proposed changes. The proposed amendments include allowing the setting up of multi-tier SPVs express legal provisions for bankruptcy remoteness.

In particular, there is a lot of potential in Thailand for securitisation by SMEs who need funds to expand their businesses.

Links For more on securitization in Thailand, see our page here.

Securitization residual value accounting to blame for debacle of Superior Bank

Change of assumptions can cause significant depletion of asset values under securitization accounting stipulated by FAS 140, and such write downs may even result into severe financial problems. The example below is not the only one – there have been more from the United States in the past – see our reports and further links here.

The recent example is of Superior Bank FSB, a thrift institution based in Oakbrook Terrace, Chicago. Superior Bank faced a substantial write down in its residual interests as well as the value of overcollateralisation account, totalling to some USD 238 million, resulting into the bank being undercapitalised as per regulatory norms.

Superior Bank had to run for a bail out. Alvin Dworman and the Pritzker family subsequently injected a USD 350 million sum into the bank and its holding company, to keep it afoat. This was based on the negotiations with the Office of Thrifts Supervision.

Analysts report that the write down was a result of the discouting rate being hiked up to find the fair value of retained interests in securitisation. It is notable that securitisation accounting requires the carrying value of the asset being securitised to be split in the ratio of the fair values of sold assets and retained assets. While the value of the sold asset is easy to come from what the securitiser gets therefrom, the value of the retained interest is an approximation of future or residual cashflows, which are discounted at an appropriate rate to get their value today. Accounting differences arise due to both the estimation of the residual cashflows, as also the discounting rate.

Chicago Tribune of 25th May said: "At the heart of the bank's troubles this time is an arcane but often used banking practice called securitization, by which banks routinely convert the mortgage loans they make to customers into cash that can be used for more lending". This is how the newspaper described the accounting problem: "Using a different set of accounting methods than the bank, the government concluded that Superior had essentially counted some of the assets twice and also had failed to discount the value of these assets for the fact that it would be several years before they could all be collected. Prepayments of loans and lower interest rates also affected the value of the mortgage-backed assets. "

Links For more on accounting for securitization, more articles, and more links to similar news items, see our page here.


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Q 2 rating scenario: upgrades dominate in RMBS, downgrades affect arbitrage CDOs

Rating agency Standard and Poor's has reported that rating upgrades in the US RMBS segment far exceeded the downgrades during this period. There were 184 upgrades and only 14 downgrades on a total of 111 transactions. The prime reason was the improved collateral performance. Transactions collateralized by prime mortgage loans received the majority of RMBS raised ratings.

In the ABS segment, there were 115 rating actions consisted of 73 lowered ratings (affecting 89 classes) and 42 raised ratings (affecting 43 classes), and affected transactions across seven different asset classes, including franchise loans, CBO, manufactured housing, auto, motorcycle, synthetics, and retail credit card. Bulk of the upgrades came from the auto and two-wheeler finance segment.

In contrast, there were increased downgrades in the CDO segment. Increased defaults among obligors in the high-yield debt markets (and lower recovery rates for defaulted collateral) continued to filter through to CDO transactions. The effect was most visible in transactions backed by high-yield bonds. During the second quarter, Standard & Poor's lowered its ratings on 17 tranches within 12 domestic CDO transactions, and placed its ratings on 28 tranches within nine transactions on CreditWatch with negative implications. The majority of these rating actions were made on arbitrage CBO transactions.

Links For a copy of the report of Standard and Poor's, click here.


First Jamaican future flow transaction rated

Standard & Poor's (S&P) assigned its triple-'A' rating to the first future flow transaction to emanate from Jamaica. Originated by the National Commercial Bank Jamaica Ltd (NCB), this USD 125 million transaction is backed by credit card voucher payments coming into the country. The variable funding certificates are due after 5 years.

The rating is credit-enhanced by a financial guarantee insurance policy provided by XL Capital Assurance Inc. which is rated AAA. The insurer guarantees timely payment of interest and principal when due.

NCB is the only financial institution in Jamaica that can process its own vouchers and has a strong market share (more than 80%) in the Jamaican international voucher acquisition business.

The transaction is also characterised by structural features that enhance the likelihood of payments. These include the offshore collection account and agreements by VISA and MasterCard to make payments directly to such account.

Links For more on securitisation in Latin America, please see our page here.

Belgian company to add sparkle to securitisation business: to securitise stock of diamonds

If the Marne et France's securitisation of champagne bottles added three cheers to securitisation, here comes the sparkle: A Belgian diamond wholesaler Rosy Blue N.V wants to raise USD100 million by issue of floating rate notes which will be backed by stock of rough and polished diamonds at different stages. The transaction has been assigned an expected rating of A by Fitch.

The modality of the transaction will be as thus: a a special purpose company will be incorporated in Luxembourg whose business will be limited to purchase of diamonds for refinancing the stock thereof. The stock of rough and polished diamonds will be sold to the Luxembourg company on consignment sale basis, to be resold to the wholesaler whenever a real end-buyer is found. Payments of interest and principal to noteholders are backed by the cash flows from the ongoing sale to final buyers. The transaction is based on a revolving pool of assets.

The noteholders' security arises from the fact that the physical stock of diamonds, subject to stress tests applied by the rating agencies, with the SPV will always be more than the accrued interest plus principal of the noteholders.

Antwerpse Diamantbank N.V will act as a backup servicer in this transaction, and will sell the stock of diamonds on behalf of the SPV, if the wholesaler is disqualified in terms of the servicing arrangement.

Italian cooperative bank launches Italy's largest RMBS offer

Banca Popolare di Milano, a cooperative bank, will be launching Italy's largest RMBS offer to raise approx. Euro 1.34 billion. Of this, as much as Euro 1.262 billion has been rated AAA by Fitch. The mezzanine tranche of Euro 54 million has been rated AA and the balance of Euro 27 million has been rated BBB by the agency. The offering will be the largest Italian RMBS so far.

The collateral for the transaction is 29,928 first lien residential mortgage loans, classified as in bonis (i.e. performing), originated by Banca Popolare di Milano. BPM is the fourth largest co-operative bank in Italy with a strong market presence in Lombardy and headquarters in Milan.

Links For more on securitisation activity in Italy and several connected articles, see our page on Italy here.

Mobile telephone company to make the largest Japanese securitisation offer

KDDI Corp., Japan's second- largest mobile-phone company, plans to raise an equivalent of USD 1.6 billion by securitisation of its office buildings and offer what might be the largest securitisation issue in Japan.

The securities will be backed by 5 office properties owned by the mobile phone company. The company has about 1 trillion yen worth debt to pay and the present securitisation exercise is aimed partly at restructuring its balance sheet.

Vinod Kothari adds: Japanese securitisation market in the second quarter of 2001 showed a small dip in volumes and should stand out on a steep growing growth curve. However, a Standard and Poor report says that the Japanese market is poised for growth and the dip in volumes might have been because of larger volume of private placements.


UK property company to securitise receivables as UK ABS activity heats up

British Land, the UK's third largest property company, is to securitise its investment in Meadowhall Shopping Centre outside Sheffield and raise GBP 900 million. Market reports indicate that the company has appointed Morgan Stanley Dean Witter, Citigroup and Royal Bank of Scotland to co-manage the offering.

It is notable that an earlier securitisation by the company had led it to serious problems with its existing shareholders and debtholders complaining. With the present securitisation, British Land will have nearly GBP 3 billion in oustanding securitised products.

In general, it is clear that an ever increasing number of UK corporates are resorting to securitisation. A feature in Financial Times of 12th July said "securitisation has become a mainstream financing technique for companies in the UK this year. Abbey National, Canary Wharf, Marks and Spencer, British Land, Rank Hovis McDougal, and General Healthcare have all recently used or soon plan to use securitisations of future cashflows to raise finance."

The half-year's tally of UK ABS issuance adds up to some GBP 19 billion, which compares with some GBP 28 billion for the whole year in 2000.


UK football club to securitise receivables

Leeds United football club is planning to raise some GBP 50 million by securitisation of its gate receipts.

Leeds has an estimated GBP 15.5 million in gate receipts annually, including GBP10 million from season tickets and Premiership matches. Of these, it will spin off GBP 5 million per year for the proposed securitisation plan to raise upfront money. The money will be used partly to reduce its bank debt and partly for development purposes.

This is not for the first time securitisation has been talked about in the sports arena. Even the international soccer body FIFA was to have securitised its receivables but the proposal got scuttled due to internal controversy.

Korean tyre company to securitise

Evidencing the wave of securitisation activity currently in Korea, Korea's largest tyre maker Kumho Industrial announced plans to issue 200 billion won (USD 154.5 million) in asset-backed securities on July 13. The securities are backed by trade receivables.

ABN Amro, Arthur Andersen and Kookmin Bank were selected as lead managers for the deal. The collateral is receivables owed by Hyundai Motor, Kia Motors and Shinsegae Department Store .

Korea emerged as the largest issuer of asset-backed paper in Asia, minus Japan for year 2000. The trend continues for this year as brisk activity is noticed both in terms of domestic placements as well as offshore issuance. Recently IFC Washington participated in an RMBS transaction – see news report here.

The won 200 billion issue will be broken into 2 tranches: 110 billion won will be senior, and the balance 90 billion won will be subordinated.

Links See our page on Korea here.

S&P outlines rating criteria for whole business securitisation

In view of the growing significance of whole business securitisation particularly in Europe, Standard and Poor's recently put up an article outlining the rating criteria for whole business securitisations. Click here for the text of the article.

Whole business securitisation is a hybrid between a plain corporate loan and a traditional asset-backed security. Whole business or operating revenue securitisation views the operating company as an operator of the business, and the business as a series of cashflows, and backed by credit enhancements and structuring, it aims at attaining better ratings for the instrument than a traditional corporate borrowing. The major motivations of a whole business securitisation are better rating and therefore cheaper funding, and higher extent of funding than permitted by traditional loans. Off-balance sheet treatment is not applicable to these securitisations : therefore, motivations that spring from off-balance sheet treatment do not apply.

As better rating is the key feature, S&P talks of the determinants in rating of a whole business securitisation. "A detailed cash flow model of assets and their matching to the debt liabilities is stressed and the results analyzed. Structural support in the form of a liquidity facility and/or cash reserve is common and often crucial to the ratings outcome. Both types of transactions entail debt tranching and structural subordination, although smaller deals often require a single tranche. Sequential repayment of debt tranches is frequently taken into consideration. More critical in hybrids than in many standard asset-backed deals is the discipline imposed on the business operator to adhere to specified behavior and minimum level of performance. This is accomplished by means of features of the transaction structure, in particular through:


  • Continuous vetting and supervision of information, accounts, as well as the legal and regulatory framework;
  • Covenants, both to constrain the behavior of parties to the transaction and to provide for possible early termination of the debt;
  • The record of judicial enforcement in the relevant jurisdiction; and
  • The performance and incentives of the servicer. "

Links See our page on whole business securitisation here.


Asian securitisation awards: Kamco is the best

Journal The Asset Online recently announced its Asset Asian Awards 2001. In securitisation transactions, the Kamco deal was awarded the best deal with Paliburg CMBS being the runner up.

Kamco in July 2000 raised USD 367 million by securitisation of non-performing loans of Korean banks that Kamco has been picking up over time. The deal was the first foreign-currrency denominated NPL securitisation from Asia, minus Japan. The deal was also the largest Korean securitisation offered offshore.

On this site, we have covered the Kamco deal well – see our page on NPL securitisation here. We have also done a web-chat on this deal with representatives from Deutsche Bank and Duff and Phelps (now Fitch).

The runner up deal was the CMBS offer from property and hotel group Paliburg Holdings. This was the first CMBS from Hong Kong in 2000. This US$179.49 million equivalent issue was offered without an insurance wrap, was broken into 7 tranches, including five floating rate notes totaling HK$1.17 billion, a HK$77 million fixed rate note and a HK$153 million zero coupon note.

Links See our page on Asia here.

Securitisation of hedge funds is the latest hot stuff

Some days back, we reported a securitisation deal by Prime Edge involving packaging of private equity investments which Wall Street Journal described as a path-breaking innovation. The transaction was based on an apparently simple idea – repackaging of investments in several private equity funds. The CDO conduit is to spread its investments in 20 different private equity funds. See Standard and Poor's press release here.

Financial Times of July 5 contains a story titled : New asset-backed security linked to hedge funds: Collateralised fund obligations are part of a growing product area. This feature says that JP Morgan and Deutsche Bank are both working on creating these CDO products that will make investments in hedge funds and that the fund of funds warrant that Bear Stearns was developing could double as the basis for a securitisation. The Financial Times feature strikes the chord when it says: "The securitisation of hedge funds brings together two of the hottest areas of finance. Securitisation technology is now commonly applied to any area of finance that generates fairly predictable cash flows – there is now a massive market in repackaged bonds and bank loans. Hedge funds have become red hot since the equity markets stopped producing stellar returns."

On the other side of the Atlantic, the Wall Street is showing tremendous interest in CDOs of CDOs, that is, CDOs that repackage investments in other CDOs. At a New York CDO summit recently held under the auspices of Institute For International Research, market playeres went gung ho. Some one remarked: . "CDOs of CDOs are the greatest thing. It helps everybody. We can turn it around in a few hours. We love this market right now."

Bond Week reported that Triton Partners is marketing its first collateralized debt obligation backed by other CDOs. The deal, called Triton CDO Opportunities I will total $300 million and will be lead managed by Morgan Stanley and TD Securities in New York.


FASB staff answers questions on servicing

The Financial Accounting Standards Board (FASB) staff on 3rd July gave answers to 8 questions relating to servicing activities in a qualifying SPV. These answers will subsequently be a part of the implementation guide on FAS 140 to be issued by FASB.

Commenting on the answers, noted expert on securitization accounting Martin Rosenblatt said: "Although the industry did not get everything it wanted (e.g. NPV), all changes from the draft Q&A are improvements and there are no negative surprises."

Among the questions answered in this guide, FASB says that for activities not permitted for the SPV, a nominee of the SPV cannot do the same on behalf of the SPV. Another answer relates to circumstances in which a loan restructuring by a qualifying SPV might amount to fresh lending, not permitted the SPV.

The answers permit the SPV as a servicer to sell defaulted loans, only if "if the servicing agreement in effect at the time the SPE was established describes specific conditions in which a servicer of a defaulted loan is required to dispose of the loan and the servicer has no choice but to dispose of the defaulted loan when the described conditions occur, then such a loan disposal is a permitted activity of a qualifying SPE."

Links For more on accounting issues, click here.

Australia looks forward to a record-breaking year

The level of activity in the Australian securitization market is seeing a record rise and rating agency Standard and Poor's expects that Australia is in for a never-before year. In a press release of 3rd July the rating agency says that the securitisations rated by it during the first half total A$16.8 billion which is up 34 per cent on the same time last year.

Residential mortgage-backed securities have increased in volume this year by more than 45 per cent for the same period in 2000. All four major Australian banks now have established securitisation programs. A notable feature of Australian securitization this year is the rise in offshore issuance. Offshore issuance has accounted for 71 per cent of total issuance volume so far in 2001.

In an unrelated feature published in Asiamoney, JP Morgan wrote that as far as RMBS volumes in Australia are concerned, they have already exceeded the entire volume for 2000.

With more than USD 40 billion in oustanding securities, Australia is taken to be the second largest securitisation market in the World.

Links Our country page on Australia has just been updated with new content including the consolidation issue. Click here.

First half ABS volume surges to expectations

Global asset-backed securitization volumes in the 1st half of 2001 have surged, which was much expected given the trend established earlier this year.

The website of Asset-backed Alert which regularly tracks ABS data showed that upto the end of the half year, the total global securitization volume in year 2001 stood at USD 216 billion, compared to USD 172.2 billion for the same period in the previous year. This shows a growth of more than 25%.

Of the above, non-US securitization volume stood at USD 58.8 billion compared to USD 40 billion last year, showing a growth of nearly 46%. Thus, growth in securitization volumes outside the US is far higher, which is only expected given the fact that number of European and Asian markets are still honeymooning with securitization, while it is already a graying lady i the US.

It is expected that the trend of growth will be maintained in the second half and the year will end with a far higher rate of growth than the last year. The last year, it may be recalled, was not a year of high growth as far the US markets are concerned.

Links See our global securitization page.

US mortgage securitisation grows nearly 300% in first half 2001

Thanks to reduced rates of interest, there has been a deluge of mortgage origination in the US markets, resulting into substantially higher mortgage securitisation volumes in the first half of 2001. Data released by Thomson Financial Securities show that the mortgage backed bond issuance volume for the period upto June 30th was USD 208 billion, up from from USD 78 billion in the first half of 2000.

The substantial jump in volume is associated with a similar increase in mortgage origination volumes, which in turn has happened due to consecutive interest rate cuts by the Fed.

The data shows that Credit Suisse First Boston was the top underwriter in the first half of this year, managing 169 offerings worth $29.9 billion. Then comes Bearn Stern and UBS Warburg.



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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 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*)        


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.


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Terror on the Street: securitization markets might see some lasting impact

Even though rating agencies are constantly re-assuring that the WTC-related CMBS transactions that closed just about a month before the terrorists attack are covered by insurance and that there is no reason for instant worries, investors are still unnerved.

CMBS transactions have a substantial exposure on New York property. The total exposure of CMBS universe on downtown NY properties is close to some USD 20 billion, which includes the two single-property deals on the WTC by GMAC and Bank of America [see below]. Rating agency Standard and Poor's admits that it is keeping a close watch on CMBS transactions which are passing through "an unprecedented situation – one that will surely test the structures and criteria upon which the industry was built and investors have come to rely".

The other casualty of the sordid episode is that insurance companies are likely to suffer heavy damage. A report in The Independent 21 Sept said Munich Re and Swiss Re, the largest reinsurers in the world, are likely to suffer losses of USD 3.25bn. This might usher in changes in the view the insurance industry is organised. Currently, even though catastrophe reinsurance securitization has been around for quite some time, it has not been able to find a strong base and the technlogy has been exported away to other markets such as credit risks and weather risks. The current magnitude of losses will surely push up substantially the cost of reinsurance, which will create new interest in insurance risk securitization. The Indepedent article talks of the possibility that "the use of the increasingly global reinsurance companies may decline and insurers may instead try to offload their liabilities by securitising them via catastrophe bonds in the capital markets".

In fact, the securitization industry, as the rest of the capital market, is likely to get into a re-examination and introspection mode in the coming few months.

WTC damage may percolate down to several securitisation deals

Thanks to the ever-increasing role of capital markets in distributed funding and risk sharing, every major loss is a shared loss. In the bygone era, a natural or manmade calamity would affect those directly under its influence, and a handful of banks and insurance companies. In today's complex world, both funding and risk transfer operate through a variety of capital market instruments where the funding as well as the risk protection comes from capital market investors. So all losses leave a long trail.

The unfortunate terrorist attacks on what used to be the World Trade Centre on September 11 is likely to affect several securitisation investors. The World Trade Center's office area was only recently taken on lease by Lloyd Goldman and Silverstein Properties from the Port Authority. Silverstein took a loan of USD 563 million from GMAC, and the latter issued CMBS backed by the loan and the lease to a select group of institutional investors, in an issue that closed only in August, 2001.

Though the lease is covered against an insurance policy, there are doubts floating around that as President Bush has repeatedly referred to the terrorist attacks as an act of war against the United States, insurance policies have an exception against an act of war. There is no exception against an act of terrorism, and therefore, rating agency Fitch issued a press release on 18th Sept hoping that the insurance cover will be available. Unnerved investors, however, still have fears which are not entirely unfounded.

Bank of America had given yet another loan to Blackstone Real Estate Advisors against Seven World Trade Center, which was also securitised into a USD 383 million CMBS.

So in all, the securitization market has more than a USD 1 billion at stake.


Prepayment rates rise in US mortgage markets: 
IO strips and subordinate tranches suffer

The several consecutive rate cuts by the Fed have brought the inevitable impact on US mortgage markets: increasing prepayment rates. The terrorists struck on 11th September, and to maintain the stability of the financial markets, the Fed further cut interest rates by 1/2 per cent on 17th September. These events together are likely to further worsen the prepayment scenario, spelling surest trouble for the IO and other CMO investors.

The US mortgage market is estimated at some USD 2.6 trillion. These investments are sensitive to interest rates: if prepayment speed increases due to declining interest rates, mortgage investors whose yield assessment was based on a particular prepayment speed will get lesser of interest in future, and hence, their values suffer. Particularly sensitive to interest rates are the IOs and subordinate tranches of CMOs.

The prepayment speed in August climbed up by some 1 to 6 percentage points, on a CPR basis. A recent S&P report, issued before the terrorist attacks, quoted mortgage analysts who "predicted that prepayment rates will continue their ascent into October, as herds of homeowners are expected to refinance their existing mortgages at lower interest rates to cut their monthly payments or tap into the equities of their homes, which have appreciated as a result of a robust real estate market."

This scenario can only worsen in the wake of the terrorist attacks, and consequent global financial uncertaintly, followed by a further rate cut by the Fed.

It is notable that in terms of EITF 99-20, mortgage investors will be required to devalue interest-rate sensitive tranches while preparing their financial reports as at end-September.

Korean lease securitisation gets AAA rating with AMBAC cover

Hanareum International Funding Ltd., a subsidiary of Korean Deposit Insurance Corporation recently got a US$278 million guaranteed floating rate notes issue rated by Standard and Poor's. The isse was rated AAA with a wrap cover from AMBAC. The notes are backed by a portfolio of performing leases and loans originated by 16 failed Korean merchant banks and purchased from Hanareum Mutual Savings and Finance Co.

The transaction represents AMBAC's first involvement in a Korean transaction.

The leases in this transaction owe their origin to 16 failed Korean merchant banks. The portfolio consists of a carefully selected subset of well-seasoned, performing assets that have been sample audited to confirm that they meet specified legal and eligibility criteria. The transaction is also supported by a letter of commitment by KDIC relating to certain asset representations and warranties

The transfer of assets in this transaction is perfected against third-party claims under Korea's ABS act. Note payments ultimately depend on collections from the underlying loans and leases, and on the surety bond provided by AMBAC. The servicing of the underlying receivables will be performed by KDB Capital Corp., with Deutsche Bank AG contracted as back-up servicer.

Links For more on the Korean securitization market, see our country page here. For text of Korean ABS law, click here.


Italy plans to liquidate real estate via securitisation

In June 2000, Italy made history by securitisation of non-performing social security contributions in a securitisation transaction known as INPS. With the success of INPS and INPS-II this year, the Italian government wants to go ahead with more securitisation to reduce its budget deficits.

A report in Financial Times of Sept 11 has quoted Giulio Tremonti, the treasury minister, as saying that the government wanted to raise some GBP 3.8 to 4.8 billion equivalent by securitisation of its real estate holdings.

Under proposals, which are still not very clear, the government will set up SPV or SPVs that will acquire billions of euros worth of real estate assets that are directly and indirectly owned by the public sector. The SPVs will then launch a programme of bond issues over forthcoming years that are secured against the value of the property portfolio. This model has been used by Canary Wharf and several others in the UK, and has been on for last several years in the USA. Nevertheless, the Italian government sees in it some highly innovative plan.

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

ABS lives on after death, says S&P

The asset-backed investment is dead, long live the same! There are defaults galore in the bond market in the USA, and many CDOs tranches of 1997 and 1998 vintage are badly affected, but then, defaulted bonds do not necessarily mean a loss as far as asset-backed investors are concerned. Even after rating agencies give a D rating to a structured finance investment, it might still continue to pay both principal and interest.

The findings of this study are very important for the ABS market. S&P says that as of the second quarter of 2001, there were 116 defaults among structured finance securities, which means the relevant security has received a rating of D. S&P is obviously talking of the US market, as in Europe, there is no default to date.

Residential mortgage-backed securities (RMBS) accounted for 83 of those defaults; commercial mortgage-backed securities (CMBS), 14; and asset-backed securities (ABS), 19. Their recoveries averaged 61%, 66%, and 29%, respectively. The fact that there are higher number of defaults in RMBS does not mean there is higher probability of default – in fact, there have simply been higher RMBS issuance. Since 1978, there have been 6361 RMBS classes rated by S&P.

But a 61% recovery rate is simply remarkable. The recovery rate simply means the total amount the investor receives, as a percent of the original principal, cumulatively. The percentage is the reciprocal of cumulative loss percentage.

There have been lesser defaults in ABS, but the loss experience is not consistent. For example, there are 12 classes of credit card issuance by a single issuer which were found fraudulent and are therefore subject to bankruptcy court.


Taiwan proposes new law on securitization

As per reports in Financial Times of 5th Sept., Taiwanese Finance Ministry has proposed a new law on securitization. The prime purpose of securitization laws in the erstwhile Asian tigers such as Korea and Taiwan is to put the larger chunks of bad bank loans back into circulation through the device of securitization of non-performing loans. Korea has done it and Taiwan is obviously impressed.

The new legislation is proposed to put in place by December. Taiwanese finance minister described the effort as one occupying the top priority for his government. Bank overdues have reached over 7% of the assets of Taiwanese banks.

Links For more securitisation in Taiwan, see our country page here.