SECURITISATION NEWS AND DEVELOPMENTS -March 2003 to June 2003

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Government support to Fannie and Freddie should be withdrawn: expert

Wall Street Journal of 17th June 2003 carries an article by Thomas Stanton, who has authored a book titled Government Sponsored Enterprises (GSEs). Freddie Mac, Fannie Mae and Ginnie Mae are GSEs holding the bulk of the US RMBS market. Freedie Mac has recently been in problems – see our news item below.

The author states that the problem with GSEs is that taxpayers and the financial system are at risk, both because of the GSEs' immense size and because of perceived government backing of their obligations and the MBS. Fannie Mae and Freddie Mac together fund over $3 trillion of mortgages in their portfolios and through securitization. Compounding the risk, the government conveys a major benefit to the GSEs by allowing them to maintain significantly lower capital and higher leverage than other firms in the mortgage market.

The author finds no reason as to why GSEs should not be subjected to bank-type capital requirements. Doing so would reduce their leverage. In addition, they should be subjected to full supervision of the SEC, a view which Alan Greenspan seems to support.

"More fundamentally, it is time to begin unwinding the GSE model. Thanks to their government support, the two behemoths double in size every five years. One analyst has projected that the two GSEs could grow their portfolios to a total of $12 trillion by the year 2020, and their mortgage-backed securities by additional trillions of dollars. This creates a growing concentration of financial risk in two highly leveraged companies", says the author.

LinksFor more on the US securitisation market, see our page here.

Are whole business deals turning sour as a whole?

London press is abuzz with stories about Robin Saunders' securitisation deals going sour. Robin, one of the most talked about females in the Citi, isaid to be drawing, in good days, pay packets next after J K Rowling and Madonna, was the head of WestLB's London-based principal finance division, which structured whole business securitisation deals for the bank.

One such deal, Box Clever, went sour contributing heavily to WestLB's near USD 2 billion loss. The result: the 4th largest German bank was reprimanded by German regulators, resulting into the resignation of its CEO. The market expects that Robin might be the next one to resign.

Robin is credited with major whole business deals including Formula 1.

Earlier, we have reported JP Morgan's whole business division being disbanded. Are these isolated cases going bad, or is there a method? Structurally, whole business deals are more like corporate finance than securitisation. The securitisation methods such as liquidity support, SPVs, and structured funding are used in such deals, possibly more to fashion them as regular asset-backed transactions, but in essence, whole business deals are more like securitised LBOs. They depend on the residual value of a business: which is volatile.

At the beginning of the year, Moody's issued a report saying in year 2002, whole business deals were a whopping 28% of European ABS (exclusing MBS and CDOs), adding to Euro 10.4 billion. Moody's was bullish about the 2003 prospects of whole business deals.

However, with revelations about WestLB and the disbanding of JPM's principal finance unit. it is unlikely that whole business deals would continue to remain alluring for investors.

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

US CRE market might get worse before it gets better, warns FDIC article

An article in FDIC newsletter FYI, by Thomas Murray, a Senior Financial Analyst in the Economic Analysis Section of the Division of Insurance and Research, FDIC cautions of the declining occupancy rates in the commercial real estate (CRE) lending in the USA. Notably, about 18% of the CRE exposure is in form of CMBS.

The article explains that the office property segment is undergoing an adversity never seen in the past 20 years: "Performance in most U.S. office markets continues to deteriorate by almost all measures. During eight of the last nine quarters, U.S. office markets have experienced negative net absorption, a situation where the amount of space given up by existing tenants exceeds the amount of space occupied by new tenants. This development is unprecedented in the sense that, prior to 2001, U.S. office markets had never experienced negative net absorption in the 20 years for which comparable data are available".

The problem is not limited to office property alone: vacancies for industrial properties as of first quarter 2003 climbed to 11.3 percent, a record level eclipsing a previous high of 10.7 percent reached in 1992.

While CRE exposure is largest on bank balance sheets, a substantial part of it is in CMBS form. In the CMBS segment, though default rates are increasing, the same have not reached alarming levels as yet. A recent study performed by FitchRatings on fixed-rate CMBS transactions reports on the growing level of CMBS defaults and found that the cumulative default level on mortgage loans securing CMBS pools were 2.66 percent as of year-end 2002. The study noted that the default rate by loan balance "…has increased steadily since year-end 2000, growing from 1.07 percent at the end of 2000, to 1.75 percent as of year-end 2001, to the current 2.66 percent rate at year-end 2002.

Links For more on the CMBS market, see our page here.

FASB issues exposure draft of new QSPE rules

More rules and more rules and yet more rules. The burden of accounting rules on the securitization industry is mounting, and yet again, the FASB issued an exposure draft of proposed QSPE rules. QSPEs are qualifying special purpose entities: if an entity qualifies as QSPE, it escapes consolidation, escapes Variable interest entity rules under FIN 46, and its securities are not treated as a proxy for the assets transferred by the transferor.

The proposed amendments seek to limit the scope of QSPEs, in particular, to deny QSPE-treatment to those entities which survive on liquidity or credit support from the transferor. In case the liquidity support comes in form of acquisition of beneficial interests, it must come from the senior-most security holders, and must not come from the person holding more than a majority of the certificates.

QSPEs are now restrained from holding equity instruments: which would rule out the growing bank of CFOs from being recognised as QSPEs. [for more on CFOs, see our page here.]

The amendments also seek to add a para below Para 83 of FAS 140, whereby it would be necessary for the second SPE in a two-tier transfer [first transfer to a subsidiary, without credit enhancements, second transfer to the issuer SPE, with credit enhancements] to be a QSPE. If not, the condition of Para 9 (b) will be deemed to have been violated. Para 9 (b) requires that the transferee must have the right to re-sell the assets bought by it – this is not required if the transferee is a QSPE.

Links For full text of the exposure draft, click here. For Martin Rosenblatt's comments on the exposure draft, see our page here. For more on accounting issues in securitization, see our page here.

Securitization, or false sense of security?

In an article in CFO magazine, Tim Reason questions the legal robustness of securiitzation structures. Securitization structures rely on bankruptcy remoteness: which are bankruptcy remote except perhaps in the event of bankruptcy – he cites a joke by an industry practitioner.

Though for now the market is concerned mostly with accounting rules such as FIN 46, there might be more basic challenges to the legal framework on which securiitzation relies: one of hiving off of assets into legal vehicles. These legal vehicles, as accounting rules are getting to realise, are seldom independent or real, exposing them to legal challenges.

Apart from true sale related problems which have surfaced in major bankruptcies, each bankruptcy brings its own unique dimensions. In the case of Conseco Finance, which acted as a servicer in some USD 23 billion worth transactions, Conseco threatened to quit as a servicer unless its fees were increased and were made a prior item in the waterfall. Nextcard's bankruptcy brought a new front: when the bank was put into receivership by the Federal Deposit Insurance Corp. Unable to find a buyer for the bank' s credit-card portfolio, the FDIC shut it down. That turned the assets from a revolving pool to an amortizing one and, again, resulted in losses to bondholders.

"The fact that both the market and rating agencies are increasingly uncertain about the stability of asset-backed securities calls into question one of the most commonly cited market benefits of securitization — that is, that it converts illiquid assets into the sorts of safe, highly rated investment vehicles investors crave", says the author.

Links For more on true sale, the core issue raised in this article, see our page here.

Bank of Japan to buy asset backed paper

In a move which does not have a rival elsewhere, Bank of Japan sought to re-inflate its economy by pumping money into the banking sector. BoJ is willing to buy asset backed paper representing the loan assets of Japanese banks, upto a total of Yen 1 trillion.

These securities could have a rating of upto BB. At the least level, therefore, the securiites have a below-investment grade rating.

Bank lending in Japan is constantly coming down – now for 65 months in a row.

Though this decision has made international headlines, market players are not sure about is real impact, in view of the small amount involved. In addition, a securitisation exercise merely contributes to liquidity, which is not a problem in the Japanese economy.

Links For securitisation in Japan, see our page here.

Freddie Mac under potential misconduct probe

Federal prosecutors have opened a criminal investigation into possible misconduct at Freddie Mac. Federal Home Loan Mortgage Corporation or Freddie Mac is one of the 3 government-sponsored enterprises (GSEs) which are engaged in securitisation of residential mortgage loans in the USA. Freddie is the second largest, after Fannie Mae.

Freddie Mac's accounting is already under a probe relating to its accounting practices. The probe was launched when Freddie wanted to re-state its earnings for past 3 years due to derivatives-related valuation. This was expected to increase its earnings, but render more volatility. The Office of Federal Housing Enterprise Oversight (OFHEO) has deputed an oversight representative to review the re-audit. On 9th June, the company announces it fired President and Chief Operating Officer David Glenn, 59, for failing to cooperate with its board's audit committee counsel in a review of its earnings. It says Chairman and Chief Executive Leland Brendsel, 61, retired and Chief Financial Officer Vaughn Clarke, 48, resigned.

A day later, Alan Greenspan reportedly stated that the securities of Freddie should be registered with the SEC.

The present probe has further thickened the mystery over Freddie. The diaries of David Glenn, the company's president who was fired on Monday, are drawing interest. Wednesday's news of the criminal inquiry came two days after the government-sponsored company shook up its top leadership because of accounting problems, jolting the stock market and raising concern about a possible impact on the housing market. "The U.S. Attorney's Office in the Eastern District of Virginia has initiated an investigation involving Freddie Mac," U.S. Attorney Paul McNulty said.

Links For more on the US GSEs relating to RMBS market, see our page here.

Private equity CFOs boom as AIG raises USD 250million

Couple of years ago, securitisation of private equity investments seemed like an outlandish idea, but now it seems this market is booming. American International Group (AIG) recently raised USD 1 billion by way of collateralized financial obligations (CFOs) and there are suggestions that there are more deals in the pipeline.

CFOs are a device similar to CDOs or CLOs, with the difference that the collateral here is not a pool of debts or bonds but investments in private equity, hedge funds or similar venture financings.

AIG raised USD 250 million backed by revenues from a USD 1billion investment in private equity. It is for the first time that without an insurance wrap, the deal has been given a AAA rating. It is reported that the collateral consists of 64 private equity firms representing 910 underlying investments The AIG deal was structured by Swiss investment bank CapitalDynamics, which also was involved in one of the few previous private equity securitizations called Prime Edge.

Links For more on CFOs, see our page here.

JPM disbands whole business securitisation team

As per a news that made headlines on financial press World over, JP Morgan London office has disbanded its whole team that looked after operating revenues or whole business securitisation. The exact implications of this move or the reasons that prompted it are not clear.

According to press reports, JP Morgan said Tamara Adler, who was head of corporate structured finance, and two other managing directors, Richard Tray and Jeff May, have been redeployed elsewhere in the bank, though it declined to say if they had been offered specific roles.

Whole business securitisation emerged as an idea around 1997 when LBOs were converted into securiites by investment bankers. Guy Hands was often cited as the leading proponent of this idea. Over recent times, some of the whole business deals in the past have suffered downgrades, but overall, it is difficult to say whether the idea has flopped. Rating agencies have always seen whole business securitisation as closer to corporate finance than to securitisation. There were also fears that bankruptcy law reforms in the UK as also rulings of the House of Lords in Brumark and Cosslett have reduced the strength of the floating charges on while whole business securitisation was essentially based.

It is not clear as to whether the JPM move is at all associated with any difficulties in the whole business sphere or is just an organisational restructuring.

Links For more on whole business securitisation, see here.

OCC may consider capital relief for FIN 46

At a recent structured finance forum organised by Standard and Poor's, Greg Coleman of the Office of the Comptroller of the Currency, participating as a panelists, acknowledged that his agency and other regulatory bodies are likely going to put together a proposal during the next month outlining their plan to supply temporary capital relief to U.S. banks impacted by FIN 46. The regulatory capital relief would last either through year-end or through March 2004, Coleman said. Mr. Coleman also indicated that the existing regulatory treatment of banks' leverage ratios is unlikely to change, however.

This would be a short-term approach to how the OCC will address the issue of regulatory capital associated with the FIN 46 rule. According to Coleman, the regulatory bodies' long-term strategy will be a "risk-sensitive approach," seeking out risk-sensitive alternatives for asset-backed commercial paper conduits.

At this panel discussion dedicated to FIN 46, it was clear that the market was desperately looking for solutions to FIN 46. According to the panelists, the leading solution being proposed by members of the structured finance market for both ABCP and CDOs is the creation of an "expected loss tranche" that will be sold to a single entity, who will be exposed to the losses of the VIE. Other possible solutions for ABCP conduits include the formation of joint ventures, whereby each participating bank shares some of the risk, and the conversion of multiseller CP conduits to Qualified Special Purpose Entities (QSPEs).

For the CDO market, panelists agreed that the simplest solution would be for a collateral manager to find a willing buyer of the majority of the equity class of the CDO, who would then consolidate. While such a strategy is rare nowadays, there is an added incentive to find such a buyer now that consolidation under FIN 46 is mandatory, panelists said.

Links For more on FIN 46, see our page on accounting issues. Also see Vinod Kothari's article on FIN 46 here. There are more materials on FIN 46 in our premium section –click here to join. There are more FIN4-related news items below.

FASB reconsiders QSPE amendments

There is a partial reconsideration of earlier FASB decisions on amending the QSPE conditions and some other provisions of FAS 140. See the earlier news item below.

As per FASB Action alert of May 7, the FASB reaffirmed its decision to issue an Exposure Draft that would amend FAS 140, but changed its decisions about certain of the provisions that Exposure Draft. The Board decided that the comment period for the Exposure Draft would end on July 31, 2003, based on an expectation that the Exposure Draft will be issued by early June, and decided to hold public roundtable meeting or meetings shortly thereafter.

The Board reversed its earlier decisions about commitments to provide assets to make payments to beneficial interest holders and parties that made decisions about reissuing beneficial interests and decided replace them with the following:

  • A qualifying special-purpose entity (SPE) would be prohibited from being a party to a swap with the transferor (or its affiliates or agents) if such a swap transfers substantially all of the types of risks inherent in the assets back to the transferor. The apparent reference is to a total rate of return swap. For more on total rate of return swaps, see our site on credit derivatives.
  • A qualifying SPE would be prohibited from holding commitments from the transferor and its related parties to provide cash or other assets to make payments due to beneficial interest holders. Obviously, this is not to deny the servicer advances from the transferor who is also a servicer, but the idea is a liquidity or other firm commitmnet. Also excluded, apparently, is the initial credit enhancement provided by the transferor. The FASB also intends to put other limits on provision on liquidity facility in case the term of the securities is shorter than the term of the assets.

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

Basle II issues third consultative paper

On 29th April, the BIS came out with its Third, and presumably the last consultative paper before the new capital standards are finalised. The consultative paper gives 3 months for comments, and it is expected that the new standard will be finalised by the end of the calendar year, to be implemented by year-end 2006.

Despite vehement opposition by the industry and rating agencies, the BIS contiues to provide for higher capital for unrated and low-rated securitisation tranches as compared to direct credit exposures. The consultative paper says: "One noteworthy point is the difference in treatment of lower quality and unrated securitisations vis-à-vis comparable corporate exposures. In a securitisation, such positions are generally designed to absorb all losses on the underlying pool of exposures up to a certain level. Accordingly, the Committee believes this concentration of risk warrants higher capital requirements. In particular, for banks using the standardised approach, unrated securitisation positions must be deducted from capital."

Another notable change in CP3 is in relation to liquidity facilities for ABCP conduitsl Changes have been made to the securitisation framework concerning the treatment of liquidity facilities. Criteria for recognising eligible liquidity facilities have been amended. A further change to the capital treatment has been introduced for IRB banks. Such bank providers of liquidity facilities are required to calculate KIRB for exposures in the underlying pool on an ongoing basis.

Where a deduction from capital is required under the norms, the deduction is split 50:50 between Tier I and Tier II capital.

For more details of the new consultative paper, see our page here.

Delinquencies mount up in US CMBS; 
investor interest still strong

US CMBS segment is suffering from delinquencies and negative rating actions, but investor interest still continues to be strong.

Rating agency S&P released its first quarter 2003 review of US CMBS showing increasing delinquencies and declining property values. Continuing job losses, travel curtailment, and uncertainty regarding the economy's direction in the aftermath of the Iraq war are all factors influencing property performance and contributing to higher delinquency levels. Although not all property sectors and markets are feeling the stress equally, the overall decline is broad based.

During the first quarter, the delinquency rate in rated CMBS deals was 1.56%, 5 bps higher than that in the previous quarter. While the delinquencies were broad-based, the U.S. CMBS office delinquency rate remained at low levels despite the problems in the sector. The current rate, 0.70%, although an increase of 20% from last quarter, is the lowest delinquency rate of all property classes.

Inspite of the above, investors are still showing strong interest in CMBS. A recent survey by Barron's/John B. Levy & Company indicated that CMBS issuance was close to the levels seen in the go-go year of 1998. The first-quarter collateralized mortgage-backed securities volume was just short of $18 billion, up from $14.7 billion during the same period last year

Link: For more on CMBS, see our page here.

Italy sits on a massive pipeline in 2003

The Italian market is expected to be the centerpiece of securitisation activity in Europe in 2003, says a report in Reuters dated May 1.

The first quarter numbers reveal Italy occupies second place in Europe with a total securitisation volume of USD 10.7 billion (including synthetic deals), behind the UK with USD 26.6 billion. The 2003 remaining pipeline includes a whole lot of RMBS deals, deals from the Government, and a variety of other asset classes.

As for issues in the Government sector, there was a recent deal on April 28 of Euro 683 million, backed by water and water disposal and water transport assets. This 4-tranche deal is the 11th publicly rated asset-backed deal from government utilities.

U.S. investors have been actively investing in European ABS issues this year. This is good news for Italy, whose banks want to recapitalise and whose government would like to reduce its exposure to public sector assets

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

FASB proposes amendments to QSPE conditions

It is the FASB in action again. The Board has now decided, unanimously, to amend the conditions relating to QSPEs and make them a bit more elaborate. The FASB affirmed these amendments on 30th April, which will be in form of an amendment to FAS 140. According to Martin Rosenblatt of Deloitte, these amendments are likely to be issued in Exposure Draft form by end of May or early June, with a comment period to expire in next 30 days or so.

The proposed changes are as follows:

  • Paragraph 35.c. of FAS 140 which lists the types of assets, derivatives and guarantees that a QSPE may hold would be expanded to say that in transactions where reissuance of beneficial interests is required, a QSPE may only hold a financial asset such as a liquidity commitment that supports the repayment of the beneficial interests if such commitment is provided by parties OTHER THAN

    • (1) the transferor, its affiliates or its agents;
    • (2) parties who are responsible for making decisions regarding the reissuance of beneficial interests; and
    • (3) holders of subordinated classes of beneficial interests who would have a vested interest in whether the refinancing goes well or goes poorly.
  • Further, no single eligible party would be allowed to provide more than 50% of such a financial arrangement (eg liquidity commitment) to the entity.
  • The board also decided that a QSPE could not be a party to a swap with the transferor (or its affiliates or agents), if such swap transferred [substantially] all of the [types of] risks inherent in the assets back to the transferor. they referred to total return swaps, but will try to avoid using that term in the exposure draft.
  • A qualifying SPE may not hold assets without contractual maturities or with contractual maturities extending beyond the end of the planned life of the entity unless the governing documents include a prespecified date of sale within the entity's planned life. .
  • Paragraph 9(a) of Statement 140 will be amended to clarify that derecognition of transferred assets is appropriate only if the assets would be beyond the reach of a bankruptcy trustee or other receiver for the transferor or any other consolidated affiliate of the transferor that is not an SPE designed to make remote the possibility that it would enter bankruptcy or other receivership. .

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

FASB staff positions on FIN 46

Call them interpretations on the interpretation – FASB has come out with 6 FSPs on FIN 46. An FSP is the position that the FASB staff takes on a matter which is expected to be contentious. FIN 46 is the interpretation issued by FASB that relates to consolidation of certain SPVs based on variable interests, and not based on voting interests as is the common rule in case of consolidation.

The first of the FSPs is clarificatory – that a non-for-profit entity, usually exempt from FIN 46, would be subjected to the interpretation if it is used for running a business transaction.

The FASB staff also clarifies that the term "expected losses" as a criteria for identification of variable interest is not necessarily related to "losses" in financial accounting sense, but every loss of profit, that is, unfavourable variability of the results or asset values of the enterprise.

Another interpretation clarifies that where the variable interest that would absorb the expected losses of the enterprise can be identified, it would not be necessary to identify the beneficiary of the residual returns.

On a question to whether a group of assets withint a variable entity should be reported as a separate sub-entity, if such assets and related liabilities are isolated from other assets/liabilities of the entity, the FASB staff clarifies that that would be required only if the assets are "effectively separate", which should mean something similar to a protected cell company.

We have reported elsewhere that the structured finance community is already intrigued by FIN 46 and sees this more as an evil.

Links Full text of the FASB FSPs is here. On the premium section of our site, we have several presentations/ articles on FIN 46. The premium section is accessible to subscribers to the premium list, which only requires a nominal contribution.

India's central bank announces securitisation guidelines

A set of 6 notifications brought into force the securitisation guidelines in India on 23rd April, nearly 11 months after the promulgation of the law. These guidelines will regulate what in Indian jargon is called "securitisatio and asset reconstruction companies" (SARCs) (gladly different from either SARS, or even sharks).

A SARC under the Indian framework is supposed to be engaged in both securitisation and asset reconstruction – the latter term refers to concerted efforts at realisation of non-performing loans of banks. It is evident that the combined infrastructure would most likely be used for asset reconstruction rather than for securitisation of performing assets.

By look and structure, these guidelines have no semblance to bank regulatory guidelines anywhere else in the World – as the minds of the regulator was largely pre-occupied with the asset reconstruction activity.

An SARC can conduct securitisation activities by setting up trusts – this imparts a great deal of flexibility particularly for securitisation. The SARC itself needs a capital base of 15% of its risk weighted assets, or Rs 2 crores at least, but the trusts are exempted from such requirement. So, obviously, real-life transactions would be routed through the umbrella body SARC, which will act as a trustee to various trusts each of which will be an SPV.

The real difficulty created by the guidelines is for the transferring banks which must be paid for the assets transferred to the SARC either in cash, or in non-contingent securities such as bonds/debentures. The guidelines have at various places talked about paying for the consideration in form of pass-through certificates, but since it clearly prescribes an unconditional undertaking on the part of the SARC to pay for the same, it is evident that the transferring bank cannot be part-paid in form of junior securities. The consequence of this is that the transferring bank will suffer a write off, both in regulatory capital, as also in financial books, for the subordinated stake it holds in the SARC, as the only way the subordinated stake could be held under the guidelines is in form of profit-sharing.

Links For full text of the Guidelines, as also a dedicated page on SARC, see http://india-financing.com/arc/, or http://india-accounting.com/arc/. For a detailed comment by Vinod Kothari, see http://www.india-financing.com/ Vinod Kothari's book on securitisation and asset reconstruction discusses the Indian law at length – see here for details

KfW to steer Germany's largest multi-seller CLO

Under the aegis of KfW, 5 of the top German banks will pool a huge amount of their performing loans and come out with asset-backed securities. It is a plan that has made international headlines.

The banks that will participate in this "joint venture" are Deutsche Bank, Dresdner Bank, Commerzbank, HVB Group, and DZ Bank. All of these have participated in KfW's Promise or Provide programs earlier. However, the proposed multi-seller CLO is different. Here, these banks will initially raise a funding of some USD 5 billion, but over a period of time, the target is for USD 50 billion worth assets to go off the books of the transferring banks.

KfW, it may be noted, has the status of a sovereign in German law, and is rated AAA. The securities, though backed by the loans transferred by the banks, will bear the stamp of KfW which will increase their market acceptability. On the other hands, the transferring banks lighten their balance sheets with USD 50 billion worth assets over a period of time.

The move comes at a time when the health of German banking is at an all time since World War II.

Soon after the announcement of the move, there were signals from the European Commission that the Commission might be opposed to any kind of implicit or explicit guarantee put in by KfW for the securities. Some people also felt that the multi-seller conduit was the replica of the "bad bank" that German bankers were envisaging for a while – a bank that will pool bad loans of German banks.

The present transaction has drawn quick headlines all over the World. The BBC said German banks are huddling together for warmth.

In the meantime, some tax law changes making SPVs tax neutral are also reportedly in the offing – see our country page on Germany

Links KfW's synthetic deals have been discussed off and on on this site as also on our credit derivatives site. Use search to browse. For more on securitization in Germany, click here.

First Quarter 2003: rating downgrades decline, but certain sectors still in the woods: S&P

Rating agency S&P has come out with its quarterly round up of rating actions for 1st Quarter of 2003 and says that while negative rating activity decreased somewhat in the U.S. ABS and European ABS markets during the first quarter, there was no shortage of downgrades, as a few specific asset types continue to bear the brunt of a sluggish economy.

Of the sectors seemingly badly affected in the MBS segment, US and Canadian CMBS reported a total of 21 upgrades and 49 downgrades in the first quarter, which is the higest downgrade to upgrade ratio in the recent past.

In all, there were 133 downgrades in US ABS transactions. However, S&P draws comfort from an emerging trend: with 279 downgrades in Q3, 2002, lower to 176 downgrades in Q4, 2002 and is further lowered at 133 downgrades in Q1 of 2003.

In the ABS segment, the leader of the pack was CDOs with a total of 56 downgrades, comprised mainly of high yield cashflow CDOs with 41 downgrades.

Manufactured housing was another weak spot with 31 downgrades. There were 27 downgrades in the synthetic segment.

There were 18 ABS defaults from 4 issues during the quarter. This, again, is awesome if one looks at the past where there were only 12 defaults over all the years together before 2001, and 18 defaults during the whole of 2001. Larger part of these defaults (16) relate to subordinated tranches of Conseco's originations.

In Europe, 20 asset classes were downgraded. CDOs contributed to 11 downgrades, and of these, 10 were synthetic CDOs.

FIN 46 frustrates securitization professionals

If they could just borrow some strong words from a stronger personality, they would call it "weapons of mass destruction". We are referring to what the securitization industry thinks about the recent US accounting rules regarding SPE consolidation. Exaggeration? Okay, let us use better words, and quote S&P: "the majority of securitization professionals worldwide report that they are overwhelmingly frustrated, skeptical and confused by the new set of rules for off-balance-sheet financing, characterizing it as an unnecessary and costly burden on an otherwise healthy market."

FIN 46 is an accounting interpretation from the FASB that requires consolidation of certain SPEs on a basis other than voting control – which the normal basis for consolidation of subsidiaries. The structured finance world, which uses SPEs in almost every securitization deal, feels these rules are confusing, confused and would cloud out the purpose for which they were made. The purpose, unarguably, was to search for the real beneficiary of SPEs formed with thin capital where the voting control did not indicate the true ownership. So, the securitization world calls it "wrong solution for a right problem".

So strong is the concern of the structured finance industry, that Iraq is only a much smaller issue. The S&P survey indicates that more than two-thirds of participants consider the FASB proposals/rules to be the most significant current concern in the market, more important than rating transitions (32%), the role of servicers (21%), the impact of the war in Iraq (19%) and the role of trustees (16%).

When asked how well they understood the ramifications of FIN 46 for ABCP conduits, CDOs, and ABS, it was notable that there is still a distinct lack of clarity for the CDO sector: 60% of survey participants did not yet understand the exact impact of FIN 46 on CDOs, while 55% had an understanding of how ABCP would be affected. The level of comprehension for the ABS market was roughly split down the middle.

Links For more stories on FIN46, see below. Also see our page on accounting issuesThere is a detailed presentation on FIN 46 on the premium section of our website- click here to join as a premium member. For more on SPEs, click here.

Indonesia sees some securitisation deals

Indonesia is really nowhere in the Asian securitisation map, but if some recent deals are of any indication, it could be a welcome addition to the league of Asian nations that are going gung-ho on securitisation.

Rob Davies of Financeasia.com reports that news has emerged from Jakarta of two potential transactions by state-owned organisations. Pertamina, the oil and gas giant, and Bank Negara Indonesia (BNI), the largest publicly traded bank in Indonesia, have both held roadshows for potential ABS deals in the last couple of months, where both foreign and local houses have been invited to pitch in.

These deals will be the first one over the last 5 years or so. One of the first Indonesian ABS deals was when PT Astra International in August 1996 securitised auto loans with a $200 million issue backed via Barclays Capital. The currency crisis of 1997 punctured the Indonesian economy and so also the securitisation activity which has never picked up since then, except for the relieving news above.

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

FIN 46 forcing US firms to restructure SPEs

As major US financial and non-financial firms make disclosures about the possible impact of the new accounting interpretation on consolidation of SPEs, SPE structures seem to be heading for changes which will possibly prevent their consolidation with their putative parents.

For instance, JP Morgan Chase is associated with several SPEs for traditional asset-backed and mortgage backed securities, which, it holds, will not require consolidation since they are structured as QSPEs under FAS 140. However, the multiseller ABCP conduits do not so quality, and may be regarded as variable interest entities. "The Firm is analyzing restructuring options for the multi-seller conduits". Similarly Citigroup has entities which may be regarded as variable interest entities and their consolidation could bring back on the balance sheet as much as USD 55 billion of assets – but it is considering restructuring options.

At least some of them, like General Electric, are holding the view that "The complexity of the new consolidation rules and their evolving clarification make forecasting [their] effect impracticable." Even GE sees the restructuring possibility: "It is also clear that many alternative structures for sales of financial assets would continue to be reported as sales under FIN 46 with the assets qualifying for sale not consolidated. We are evaluating whether characteristics of those structures can cost-beneficially be applied to our arrangements before the July 1 effective date. "

Links For more on accounting for SPEs, see our page here. For more on SPEs, see our page here.

Canadian ruling affirms securitization true sale

In an extremely well-reasoned ruling, the Supreme Court of Justice of Ontario, Canada has given a ruling on the truth of the sale of receivables in a securitization transaction. The significance of the ruling lies in the fact that the Court had benefited itself from leading cases on both sides of the Atlantic. This ruling might be the reference point for future disputes on true sale all over the World.

The ruling in a case called BC Tel has analysed various factors such as the extent of recourse, retention of risks/rewards by the originator, continuation of servicing by the originator etc. The ruling concluded that if the intent of the transaction is visibly a transfer of assets by the originator, the transaction would be treated as such.

The ruling reviews caselaw in USA as well as UK.

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


SECURITISATION NEWS AND DEVELOPMENTS Dec 2003 to July 2004

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

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

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

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

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

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

The Malaysian government to raise RM 25 billion by securitisation

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

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

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

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

Links For more on Malaysia, see our page here.

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

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

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

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

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

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

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

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

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

Securitisation growing fast in China

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

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

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

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

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

Structured product CDOs a rage in first half 2004

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

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

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

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

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

Abu Dhabi bank uses securitisation structure for power project funding

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

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

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

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

Basle II is here !

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

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

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

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

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

Philippines bank may launch unique SME securitisation program

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

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

90% of Filippino business is SME-based.

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

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

Governments fidgetting to fill fiscal holes: securitisation to the fore

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

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

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

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

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

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

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

First CMBS deal in Taiwan flies

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

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

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

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

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

SEC publishes disclosure document for ABS/MBS

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

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

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

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

There are enhanced requirements as to disclosures in prospectus.

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

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

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

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

SEC to present 400 page disclosure document for securitisation

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

Some of the significant changes being proposed are:

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

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

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

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

Chinese bank to securitise bad loans

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

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

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

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

FASB concerned about isolation: seeks opinions

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

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

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

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

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

US SEC seeks more disclosures for asset backed securities

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

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

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

European securitisation markets surge

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

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

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

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

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

Supreme Court of India upholds securitisation law

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

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

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

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

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

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

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

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

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

Market ripe for upward securitisation growth curve in India

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

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

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

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

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

Japanese securitisation market looking for new asset classes

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

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

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

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

Links For more on the Japanese market, see here. 

FASB to rewrite FAS 140 on qualifying SPEs

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

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

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

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

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

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

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

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

Singaporean firm to promote securitisation for SME funding

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

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

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

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

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

E&Y report identifies securitisation as key real estate trend

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

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

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

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

Islamic securitisation making headway in the Gulf

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

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

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

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

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

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

Are SPEs a risk to credibility of securitisation?
Vinod Kothari

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

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

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

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

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

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

IAS 39 rouses mixed reactions: more bad than good

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

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

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

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

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

Rating volatility in Q4 much lesser

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

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

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

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

Basle II on securitisation: BIS makes changes in proposals

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

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

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

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

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

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

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

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

Europe CDO volumes go synthetic

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

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

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

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

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

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

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

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

CMBS company launched in the Gulf

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

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

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

Asian securitisation market for 2004 look impressive: S&P

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

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

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

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

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

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

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

Parmalat probe covers Citibank's ABCP conduit

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

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

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

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

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

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

International accounting standard on de-recognition changed

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

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

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

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

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

Links For more on accounting for securitisation, click here.

Revised FIN 46 issued

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

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

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

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

FIN 46 in for a rewrite

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

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

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

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

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

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

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

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

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

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

SECURITISATION NEWS AND DEVELOPMENTS

/in /by

April 2005 to March 2007

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

visit this page regularly as it is updated almost on a daily basis. Join our mailing

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

Previous news pages

April 07 onwards….Aug 04-March 05….Dec 03-July 04….July 03 – Nov 03….Mar 03 – June 03….Nov02- Feb 03….Sept-Oct 02 …June-Aug 02 …May 02 …Apr 02 …Mar 02 ….Feb 02 ….Jan 02 ….Dec., 01….Nov, 01 …. Oct.,2001., Sep.,2001., Aug 2001… July, 2001, .June, 2001, May, 2001,… April 2001… March 2001 ..Jan. and Feb.2001 Nov. and Dec.2000 Sept. and Oct. 2000 July and August 2000 May and June 2000 April 2000 Feb and March 2000
For all news added before 21 January, 2000, please click here
For all news added before 9th November, please click here
For News items added prior 3rd August, 1999, click here. 

Subprime debacle hardly surprising, says paper

Nomura Fixed Income Research’s Mark Adelson and team came out with a very timely paper on the subprime debacle. As may be common intuiation, the subprime lending spree of 2005 and 2006 ignored some very basic principles of money lending and therefore, foreclosures were bound to rise with house values declining. The brilliant is just brilliant, and we bring below the key conclusions of the paper:

There is no sub-prime surprise. High delinquencies and defaults are an inevitable result of the kinds of loans made in 2005 and 2006. Ignoring the Three C’s of lending could produce no other result. Moreover, the warnings were loud and clear. The warnings also were numerous and frequent. And they came from many diverse sources, including the general media.

The current flurry of activity to “do something” about the sub-prime mortgage situation is a day late and a dollar short. Policymakers and market participants who don’t like the current situation should
have acted sooner by taking obvious preventive measures. Both policymakers and market participants share responsibility for the current situation by having ignored the warnings and having failed to act sooner.

Unfortunately, some policymakers are trying to exploit the current situation by pandering to defaulted
borrowers. That conduct is counter-productive. Policymakers and market participants need to come to grips with reality. There likely will be an uncomfortably high level of foreclosures. Despite the best of intentions, rescue attempts on many loans probably will fail. And, lastly and most importantly, policymakers should refrain from taking drastic, ill-conceived actions that ultimately do more harm
than good by unduly reducing the availability of mortgage credit to American families.

Trade bodies release draft of self-regulatory non-mandatory guidelines
for retail structured products

While US congressmen continue to examine if things had indeed gone wrong in the way subprime mortgages were packaged and sold, trade bodies got into the act and released draft of self-regulatory non-mandatory guidelines for retail structured products.

The guidelines were released jointly by the Securities Industry and Financial Markets Association, European Securitisation Forum (ESF), the International Capital Market Association (ICMA), the International Swaps and Derivatives Association (ISDA), and the London Investment Bankers Association (LIBA).

The guidelines are applicable when structured products are delivered to retail investors. Retail structured products should always be distributed through distributors. The distributor should understand what he/she is distributing and should take responsibility for the contents of the term sheets. Product providers should likewise understand who the distributors are. Even the distributors should know who the product providers are. The essence is the same as in case of the general “know your counterparty” principles such that people do not hide behind their ignorance about the counterparty.

The guidelines are very general and do not say much that is not sheer commonsense. Like industry codes, they are perhaps overpowered by the desire not to restrictive at all. Like most self regulatory codes, they remain like holy principles of benign conduct which but for the code would be found in religious texts.

Links Full text of the guidelines in draft is here.

Home equity down surely,
but ABS volumes are almost unfazed in Q1, 2007

With all the turbulence in the home equity market and the resulting impact on several CDOs, the volumes of ABS issued in 1st quarter 2007 is not much lower than the same quarter last year. Data on abalert.com, which compiles global data, shows that the volume for the 1st quarter was Usd 267.6 billion , compared to last year’s 281.8 billion, roughly a decline of 5%. Given the fact that last year was an exceptionally good year, this decline is not very dampening. On the contrary, if one looks at the volume of CDO issuance for the 1st 3 months of 2007, it is USD 132.1 billion, as against only 69.9 billion last year.

A report on Bloomberg citing a Citibank source said the volume of home equity securitization was down sharply -with a decline of over 37%. This is clearly understandable, since, home was at no 1 position in asset backed segment last year, and this year seems to be the year of CDOs.

New Century files for bankruptcy

Even as New Century, one of the one-time leading lenders in the subprime mortgage market filed for bankruptcy protection, the key question in everyone’s mind is – is that the worst? While S&P ran a comparison between subprime deals of 2000 and 2006 vintage, and estimated expected losses of about 7.5%, the worry is if with the lowering house prices, will the defaults increase beyond that level?

New Century, which has been in the news below for almost 2 months now, finally succumbed and filed for Chapter 11. It has set up a new site http://www.ncenrestructuring.com/ where it intends to put further information on the restructuring plan. The company’s press release says it has entered into an agreement to sell its servicing assets and servicing platform to Carrington Capital Management, LLC and its affiliate, subject to the approval of the Bankruptcy Court. The purchase price for the assets is approximately $139 million. In addition, New Century has agreed to sell to Greenwich Capital Financial Products, Inc. certain loans originated by the company, as well as residual interests in certain securitization trusts owned by the company, for an aggregate price of $50 million.

The subprime market has seen several sad spots over the last couple of months or so – see our comments below.

In the meantime, the subprime credit derivatives index ABX.HE BBB- was quoting at 66.59. It is not the least that it has recorded – there was a bit of revival from the trough of 62.25 quoted earlier.

See more of our notes and coverage below.

Subprime mortgages – is it a mere correction or the start of apocalypse?

The start of the week saw shares of subprime mortgage lenders declining further, and the fate leading subprime mortgage lender New Century hang in balance.

New Century is reported to be the second largest subprime mortgage lender after Wells Fargo. On Monday evening, S&P placed New Century into CCC rating, implying high probability of the company filing a bankruptcy petition. Investigations into accounting irregularities have also been launched against the company. “In a residential mortgage market where investors and other participants are rapidly losing confidence, it could be a challenge for the company to work through current credit trends. The investigation and the damage it might do to the company’s reputation create concern about New Century’s ability to maintain its warehouse lending lines, which are necessary to fund mortgage originations”, said S&P. Some analysts commented that Morgan Stanley and UBS AG must continue to provide lines of credit to the company for it to sustain. If the lenders do not consent to renewal of credit lines, its auditor KPMG will possibly give a negative “going concern” opinion. The sharp loss of faith that New Century has seen is evident from its share price history – it traded at $52 last May, and is now about $10.09.

New Century is not the only one in the subprime segment – Fremont has received a cease and desist order on its lending business. Shares of Novastar, Countrywide and Accredited Home Lenders have been falling too, not to speak of a general decline in the financial sector stocks.

Meantime, the subprime securitization index ABX.HE showed a bit of recovery at BBB- levels. the price recovered from the lowest 62.25 to 68.89. However, with bad news about subprime mortgages making global headlines, it is likely that this price will slide once again.

Not only subprime index, even spreads for BBB tranches of CDOs, particularly the structured finance CDOs, have also sharply appreciated. In 2006, the arbitrage activity was particularly brisk in structured finance CDO segment, most of which have exposures in home equity deals. Reuters quoting a Lehmanreport said BBB CDO spreads have widened by 300 bps.

There are bad news, worried voices and negative sentiments litterred all over the place – Economist in 4th March issue apprehended: “In the next few weeks, they should be looking for signs of distress in some of the less liquid areas of the markets, such as high-yield bonds and credit derivatives”.

Warren Buffet in his letter dated 28 Feb 2007 commented on the affordability mortgages: “The slowdown in residential real estate activity stems in part from the weakened lending practices of recent years. The “optional” contracts and “teaser” rates that have been popular have allowed borrowers to make payments in the early years of their mortgages that fall far short of covering normal interest costs. Naturally, there are few defaults when virtually nothing is required of a borrower. As a cynic has said, “A rolling loan gathers no loss.” But payments not made add to principal, and borrowers who can’t afford normal monthly payments early on are hit later with above-normal monthly obligations. This is the Scarlett O’Hara scenario: “I’ll think about that tomorrow.” For many home owners, “tomorrow” has now arrived.”

As for the past couple of weeks or so, we will continue to develop this story – there are related stories below.

Junk mortgages now become a global worry

Fears of losses that major US banks will suffer as a result of the worsening subprime mortgage sector were exacerbated, as the week opened with losses in global stock markets. Financial stocks were the major losers.

While losses on Chinese equity markets added to create more impact, there were deep scars and scratches on financial stocks – Goldman Sachs tumbling more than 8 per cent, with total losses of 10.4% in three days. Lehman Brothers stock dropped nearly 5 per cent, and a total of almost10 per cent in the past three trading sessions. Bear Stearns was down 4 per cent.

In the meantime, despite Lehman recommending buying of the ABX.HE index, the steep fall in the lower tranches of the ABX.HE index continued unabated. The BBB- tranche, as we reported last, was quoting at 68.5 on 23rd Feb. It fell to 67.27 on 24th Feb, and then precipitated to 62.25 on Monday, the 27th Feb.

The fears of general decline in corporate health affected broader CDS indices too – The Dow Jones CDX North America Crossover Index of 35 U.S. and Canadian companies surged $36,000 per $10 million in bonds to $151,000, according to Deutsche Bank AG in New York. In Europe, contracts based on 10 million euros ($13.2 million) of debt in the iTraxx Crossover Index climbed 28,000 euros to 209,000 euros in extended trading in London.

The theory that the USD 1.3 trillion exposure in junk mortgages has been leveraged many times by credit derivatives trades and therefore, may cause jolts to the entire system, is getting credence as the developments are surfacing.

We will continue to develop this very important story. Please come back to this page.

Link see the news item exactly below.

Prices sink and worries soar in the home equity securitization market

It is not for the first time that there voices of worry on popular topics like credit derivatives, home equity funding, hedge funds and so on. By human nature, voices of apprehension always get more audience than those of optimism. But this around, there are signs of trouble in each of these segments, so that the worried voices get quite a substance.

First, the ABX.HE index continues to fall. We reported 10 days back that the price for BBB- was at 85.22. It is now down to 81.74 – in other words, a decline of hundreds of basis points in just about 7 days of trading.

Earlier this month, S&P put 18 sub prime RMBS transactions of 2006 vintage on rating watch negative, on account of poor collateral performance, with clear signals that there might be downgrades in near future. The reason for the collateral performance was cited as follows: :”Many of the 2006 transactions may be showing weakness because of
origination issues, such as aggressive residential mortgage loan underwriting, first-time home-buyer programs, piggyback second-lien mortgages, speculative borrowing for investor properties, and the concentration of affordability loans”. Quite obviously, these factors are not new reckonings of enlightenment and were very well known in 2006 itself. In just about few months, if there are indications of trouble in certain transactions, it is quite likely that the trouble might not be limited to just a few transactions.

Hedge funds are suppliers of equity to many of the home equity securitizations, CDOs and so on.Barron’s picked up a Dresdner Kleinwort 50-page report on hedge funds, warning of a “great unwind”.

There is no doubt that there are alarming levels of leverage created by many of the derivatives transactions that do not actually get into any funding but just take positions on actual transactions. ABX.HE deals are not necessarily hedging deals – the sheer volume of credit derivatives unarguably suggests that lots of transactions are merely for trading (read speculative) motive. Hence, there will be, without doubt, multiplied impact of a loss in the system. Not only will the loss be limited to the banking system, but will be widespread.

If things enter a vicious cycle, bad news will breed worse news. For instance, tons of global funding flows into the MBS market. Lot of it flows into more leveraged positions like CDOs and hedge funds. Withdrawal of liquidity from either of these may spell systemic trouble.

We will continue to bring more comments and news about what is happening in the high-finance market.

Updated 22 Feb 2007: We wrote the ABX.HE price as 81.74, but that was yesterday. Today, it was 78.59. This sharp drop was caused by reports of losses on 2006 securitizations by Novastar.

Updated 24 Feb 2007 The prices end of the week on 23 Feb closed at 68.5 – the last two days slide being the steepest slope in the price graph since the inception of the on-the-run index in Jan this year. In the meantime, the FDIC came with 4th quarter 2006 banking data. The magnitude of the situation may be evident from some numbers – the total amount of subprime mortgage debt is roughly USD 1.3 trillion, of which some 700 billion is in outstanding securitization deals. Even a fraction of this going bad, given the leverage levels, may cause a deluge.

Update 28th Feb – there is more news on this issue; see item immediatley above.

Link For a very readable article on the subprime worries causing system jolts, see Knowledge@Wharton article here. Robert J Samuelson, a Washington Times and Newsweek contributing editor also wrote a piece that takes a look at developments over several decades – read here.

Researcers claim securitization accounting used
for cosmetic quarterly results

Accounting professors of the Michigan University in a working paper claim that it is a commonplace practice among US companies to use securitization at the end of a quarter to improvise quarterly results. Prof Patricia Dechow and Catherine Shakespeare, both of the Michigan University, claim to have found this on study of quarterly results of several US companies.

In their paper, the professors claim, in sum: “Relative to recording securitizations as collateralized borrowings, the “gain on sale” treatment allowable under SFAS 125/140 has several accounting benefits such as reducing leverage,
increasing profits, and improving efficiency ratios. We argue that to maximize these accounting benefits managers will want to engage in securitizations at the end of the quarter. We document that securitization transactions occur with greater frequency in the last few days of the third month of the quarter. We also find that the end-of-quarter effect is stronger after the introduction of SFAS 125 that made it easier for firms to meet criteria for “gain on sale” treatment”.

The US securitization standard FAS 140, like its pervious version FAS 125 permits, or rather, requires, recognition of gain on sale if the securitization satisfies certain conditions. Essetially, if the conditions for off-balance-sheet are being satisfied, those for gain-on-sale are also satisfied.

It is not uncommon for securitizers to report profits out of a securitization, and later make revisions on the ground that losses were not properly apprehended – for instance, in the case of New Century below. The IASB’s IAS 39 has taken a far more conservative view on booking of profits on securitisation. Basle II also does not recognise gains-on-sale for regulatory capital treatment.

Links For more on accounting for securitization, see our page here. Get a copy of the above articles form SSRN here.

Apprehended home equity losses puncture ABX.HE index

While worries about the worsening health of US consumer finance and resulting poor performance of subprime loans have been coming since the beginning of this year (for instance, see the S&P report cited in www.vinodkothari.com), the alarm trigger was pressed hard this week with worrying signals from the major subprime lenders such as HSBC and New Century. The ABX.HE index for the BBB- tranche from a price of 92.01 to 85.22. See markit site with ABX.HE quotes here.

HSBC warned on Wednesday that its loss provisions are expected to be higher at USD 1.75bn. HSBC is one of the biggest subprime lenders in the US market. HSBC warned that not only the percentage of loans more than 60 days due is climbing up, even frauds are increasing.

Similarly, a Form 8K filed by New Century, another major home equity lender, said “During the second and third quarters of 2006, the company’s accounting policies incorrectly applied Statement of Financial Accounting Standards No. 140 – Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. Specifically, the company did not include the expected discount upon disposition of loans when estimating its allowance for loan repurchase losses”.

The ABX.HE index is reflective generally of the state of the US economy. In particular, the BBB and BBB- tranches are likely to suffer losses as excess spread levels in the 20 home equity deals are wiped out and the losses are debited to the lowest of the securities.

Links Also see our credit derivatives page for more reports and links

UK Court of Appeal discusses trustees’ rights in securitisation deals
Significant ruling for non-discretionary trusts

In a recent ruling, the UK Court of Appeal had the occasion to discuss the rights and obligations of the trustee in a securitisation transaction. As the Court itself has noted, this is one of the first cases dealing with the rights of trustees in securitisation deals. The case Citibank v. MBIA and another [2007] EWCA Civ 11 was decided on 22 Jan 2007.

The transction relates to the famous securitisation of Eurotunnel’s debt. Tier 3 debt of Eurotunnel was held by an SP called Fixed-Link Finance (FLF). Three classes of notes were issued in the transaction and it seems that some of these were guaranteed by MBIA. The subordinated notes were held, inter alia, by a hedge fund called QVT Financial (QVT). Citibank was a trustee for the noteholders – accordingly, Citibank held security interest on the assets of FLF. MBIA as a guarantor was called the Note Controlling Entity and had several powers in the documentation, including the trust deed. It was clear in the documentation that so long as MBIA continued to be the note controlling entity, it had power to give directions to the trustee, and the trustee would be obliged to abide by the same. The documentation also provided that if, Citibank acting on the directions of MBIA took any actions, it would not be liable to the beneficiaries.

The crux of the argument in the case related to whether Citibank as a trustee was bound to abide by such directions. It was argued that there is something called “irreducible core” in a trust, and the trustee cannot be reduced to a simple figurehead. If the trustee did not have basic obligations to ensure the beneficial interest, there was no trust at all.

The case ran through Cancery decision – Justice Mann held that

There is no doubt that while MBIA is the Note Controlling Party it is given a very large degree of control over the subject matter of the trust. It can give directions as to the taking or non-taking of enforcement action; it can direct the substitution of another debtor on the Notes; it can direct certain modifications of the Notes; and it can do a lot of other things, some of which one would expect that a trustee might decide to do, and others which would be more in the realm of matters for the beneficiaries to decide. However, even taken together, they do not contravene Millett LJ’s principle. The trust regime as a regime remains intact. The trust property is still held on identifiable trusts; Citibank still has functions as trustee; if MBIA does not give directions when entitled to, or when MBIA ceases to be the Note Controlling Party, Citibank will have even more functions. What has happened is that various powers have been surrendered to MBIA for the time being, but that was done as a matter of commerce. The position would look less unusual if the directions were to come from the G Noteholders (who are likely to have similar interests to MBIA), but would still be in substance the same. The Noteholders all take their commercial interests on terms that, and knowing that, MBIA wields the power that it wields. Whether or not this is good business, it is certainly not inimical to a trust structure. It is what the Noteholders have agreed should be the case.

Accordingly the Cancery Court held that Citi was bound to accept the directions of the insurance company.

The appeal court upheld the argument. The essential crux of the matter, that a trustee ceases to be of any relevance if all discretion was to be exercised by someone other than either the trustee or the beneficiary, was not discussed at length in the case, but the ruling hinged more on enforcing what the parties had agreed.

Vinod Kothari comments: In English law, trust is not a form of entity but a form of holding property. The trustee holds it for the benefit of someone else, viz., the beneficiary. If the beneficiary is the one who gives directions to the trustee and the trustee simply abides by the same, the trustee is not needed, because the very essence of the trust is that the beneficiary for whatever reasons was not able to exercise discretion, and therefore, the trustee was “entrusted” to do so for the benefit of the beneficiary. Trustees who do not have any discretion would possibly not have any obligation as well; if there is no obligation attached to property, there is no trust at all.

The case here was an intersting occasion to analyse the whole concept of non-discretionary trust – since the trust form not devised as a mere device of creating a facade that hides the real owner of the property. However, those key questions have unfortunately been skipped in the present case, possibly in view of commercial exigencies of the Eurotunnel restructuring.

Links For more caselaw on securitisation, see our page here.

London Heathrow to be pledged in the largest whole business securitisation deal

BAA plc., the World’s largest airport operator, has announced plans to go through a major whole business securitisation exercise, perhaps the largest in this collateral class. In its execution, properties at Heathrow, Gatwick and Stansed airports will be pledged.

The size of the deal is likely to exceed USD 12 billion. Late in 2006, Japanese Softbank had done a mega whole business securitisation deal – the BAA deal is going to beat the record.

Whole business securitisation [WBS], also known as corporate securitisation or operating revenes securitisation, repackages the residual profits of an operating enterprise, typically an oligopoly, into bonds which will be paid from out of such residual profits. The WBS device has so far been mainly used in UK owing to special features of UK insolvency law, but several people argue that it can be used in lots of other countries too.

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

Cracks in foundation for consumer credit

In the face of declining home prices, American consumers are still borrowing more, both in absolute terms as also as a percentage of their income. Rating agency S&P in a recent report sees cracks in the foundation of consumer credit. The household saving rate has remained negative for consecutively 6 quarters, and this is for the first time since 1933.

In the 3rd quarter of 2006, the average household debt was 136% of after-tax income. Nearly 76% of all debt is mortgage debt, which is apparently incurred to buy a home, but home financing data clearly show that large part of this borrowing is for investment homes and home equity lending.

S&P seems moderately worried by this data but the situation might become more alarming if the current trend towards declining home prices continues. The other reason for worry is the adjustable rate home loans which were aggressively sold by most mortgage lenders over the last 3-4 years. With rates of interest increasing, these loans will start costing more. Many of them had negative amortization feature, which necessarily entails growing payments over time.

While the performance of most rated securitisation deals over 2006 has been very satisfactory, the signals of weakening health of subprime transactions are already seen. The spreads on ABX.HE index consisting of BBB and BBB- tranches of credit default swaps on home equity deals has continued to zoom up over time..

US financial regulators issue statement on
Complex Structured Finance Transactions

Earlier this month, US financial regulators issued an inter agency statement on Complex structured finance transactions (CSFTs). The final statement is a culmination of a process that has been going on for over 2 years. US regulators gathered experience after Enron fall that several top US financial institutions were actively structuring products for clients which helped clients to dress up their financial statements. Ever since then, CSFT has been a regulatory buzzword.

Complexity is a relative term, but structured finance transactions other than mortgage backed securities, retail asset backed products, hedging-type derivatives and CLOs, may be seen as “complex” as per the statement. Not all that is complex is risky, but the aim of the statement is to require banks’ internal controls to identify the elevated risks caused by such complex structured finance deals. Examples of deals that lead to such elevated risks are deals that:

  • lackeconomic substance or business purpose;
  • Be designed or used primarily for questionable accounting, regulatory, or tax objectives, particularly when the transactions are executed at
    year end or at the end of a reporting period for the customer;
  • Raise concerns that the client will report or disclose the transaction in its public filings or financial statements in a manner that is materially
    misleading or inconsistent with the substance of the transaction or applicable regulatory or accounting requirements;
  • Involve circular transfers of risk (either between the financial institution and the customer or between the customer and other related
    parties) that lack economic substance or business purpose;
  • Involve oral or undocumented agreements that, when taken into account, would have a material impact on the regulatory, tax, or accounting treatment of the related transaction, or the client’s disclosure obligations;
  • Have material economic terms that are inconsistent with market norms (e.g., deep “in the money” options or historic rate rollovers); or
  • Provide the financial institution with compensation that appears substantially disproportionate to the services provided or investment made by the financial institution or to the credit, market or operational risk assumed by the institution.

The guidelines require banks to have internal processes, particularly audit checks that identify and avoid such transactions.

Links The text of the guidelines is here.

Mortgage backed securities start trading in Russia

While interest in securitization transactions in Russia has been there for sometime now, there seems to be lot of activity happening as of now. On Dec 8, 2006, the Moscow Interbank Currency Exchange started trading collateralized mortgage obligations. This is surely a new milestone in the development of securitization in the country.

Earlier this year, an IFC-assisted transaction Russian Mortgage Backed Securities 2006-1 S.A. was labelled as the first MBS transaction from the country. The transaction was originated by VTB, Russia’s second largest bank. The deal size was USD 88.3 million.

The MBS law was passed late in 2003; however, there have not been many transactions since then until recently.

Links See our country page on Russia here. Our earlier report on this is here.

There is nothing like true asset-backed security:
Moody’s report reveals sponsors do impact ratings

Asset backed securities are supposed to be asset-backed, and independent of originators’ risks or ratings. That is the key assumption on which securitization transactions are premised. But originator or sponsor risk continues to be of relevance to securitization transactions, as the recent Moody’s special report titled Deal Sponsor and Credit Risk of US ABS and MBS Securities says.

The Moody’s report is not a revelation. It would be difficult to believe that assets can perform on their own, as assets are inanimate and do not mean much absence of entities that drive them. There are entities that work on assets, service assets, at times, even nurse and nurture assets. There was an S&P report earlier that talked about commoditization of asset classes, and said in several collateral classes, servicer risk continues to be significant. In almost the same vein, Moody’s draws regression lines to find significant relation between the ratings of the sponsor/originator and the possibilities of downgrades of a securitization transaction.

Among the highlights of the study are:

  • While the data reveals some interesting correlations between credit performance and sponsor type, the analysis does not discriminate among the many possible explanations for the findings, which include:
    – Competitive forces may cause lower rated sponsors and specialty finance companies to be most active in market segments where collateral is risky and pool performance is hard to predict.
    – Collateral performance may be inversely related to the credit quality of the sponsor since the pool’s underlying obligors may be less likely to service their debts if the servicer is bankrupt.
    – Agency problems may be less severe for more highly rated sponsors and for some banks, security firms, and captive finance companies if their expected long-term participation in the securitization market makes them more likely to be consistent in their underwriting standards, selection of assets, and servicing.

An interesting fact that comes out from the report is that there are 8,914 US ABS and MBS transactions in the study, all issued during the period from 1993 to 2006H1. A total of 520 sponsors were identified for 8,377, or 94% of the total, transactions. Of the 520 sponsors, 210 had
Moody’s senior unsecured (or estimated) rating histories. Of the 520 rated sponsors, 55% were unrated, and 10% had speculative grade ratings. In fact, only 9% had ratings of Aa or above.

This poses an interesting question – is securitization the last resort of the laggards?

Declining home equity originations may cause ABS volumes to slide in 2007

Most of the participants at the ABS East conference at Florida seemed to agree that the volumes of asset backed securitizations in 2007 may decline due to declining volumes of home equity deals. Last year, the explosive growth in ABS issuance was caused largely by home equity deals. Panelists have predicted a 10% decline in volumes in 2007.

Data published by Thomson Financial show that upto the 3rd quarter of 2006, the volume of ABS issuance was nearly USD 880 billion, only 3.7% higher than what it was last year.

The downgrades in home equity loans, particularly the subprime one, have been growing rapidly. S&P’s rating movements history upto 3rd quarter of 2006 shows the downgrades in subprime home equity to hvae increased to 87 in the 3rd quarter, from 34 and 46 in the 1st and 2nd quarter respectively.

A recent report by UBS also has the same story to say. In fact, the price index for BBB ABX.HE has also consistently been falling.

Ramifications of housing price deflation worry securitization deals

One of the most intensively talked about worries of the recent past has been the bursting of the “housing bubble”. Several people contend that the bubble has already burst. Whether it is bursting of the bubble or its oozing out, there are enough indications of a slow down in mortgage origination and decline in housing prices. The ramifications of these trends on the existing securitization deals, and the volumes in the current year, may be widespread.

First, a quick look at the “bursting of the bubble” phenomenon. The Times, Aug 29, carried an article titled Housing Bubble is Finally at Bursting Point, wherein it reported about new house sales in July 2006 having come down by something like 11 – 23% as compared to last year. If the housing market is indeed in retreat, it might have long term implications for the entire US economy, since housing has been responsible for some 40% jobs taking into account various housing-related employments. Previous periods of weakness in the property market have been associated with widespread collapses in the banking segment – for example, the S&L crisis. Currently, as the risks are diffused through the securitization process, such casualties are less likely, but there will be strain on the balance sheets of lots of MBS investors.

The Center for Economic Policy Research has come up several articles on the housing bubble. A June 2006 paper came with 10 indicators which evidence that the bursting of the bubble impact.

While the declining house prices increase the default rates on mortgages, there is yet another impact which may be felt strongly over the coming months. This is the impact of the ARM products on the default rates. The latest issue of Business Week [Sept 11, 2006] comes out with an article titledNightmare Mortgages. The article contends that most ARMs, which were sold over the past few years on the lure of affordability, have actually taken borrowers by a shocking surprice as most of them have substantially reset their payments a year after they were originated. Option ARMs typically have a negative amortization feature – wherein the borrower pays lesser instalment than the interest on the loan, leading to an increase in the mortgage balance. Once a trigger of LTV ratios is hit, the payments are reset. Declining housing prices would only mean the triggers will be hit faster – either the banks reset the instalments or face increased losses on account of foreclosures.

Given the way ARM loans have been hard-sold, it is very likely that the picture that emerges actually will be much less beautiful than was imagined at the time of origination.

The levels of credit enhancements for RMBS transactions have come down to historically low levels in 2003 and 2004 – which was obvious as the rating agencies were getting bolder by the month with experience of past transactions. However, the past had a unilateral history of increase in house prices, which pulled down defaults and foreclosure losses. The key question that remains is – if LTV ratios worsen with reduced housing prices, would the credit enhancements modelled at the time of AAA ratings would still be enough? The future holds the answer to the question, and painfully, the answer may negative.

Links: For articles on the housing bubble on the site of Center for Economic Policy Research, see here.

Asian Securitisation markets poised for a sharp growth

Asian securitisation markets seem to be poised for a sharp growth, as most of the economies in the region are doing quite well. The situation easily reminds one of the environment that prevailed pre-1997 crisis.

Take a look at Thailand. For several years, no securitisation transactions were taking place in the country, and several factors, including taxation difficulties, were pointed as being responsible. In 2006, Thai securitisation market seems to be taking big strides. A recent article in Bangkok Post quoting an official of the Bond Electronic Exchange said the value of outstanding securitisation bonds is expected to reach 1.5 trillion baht within five years. The volumes in this year are likley to grow thanks to some mega transactions in the offing. Thailand’s Government Housing Bank (GHB), plans to raise at least Bt40bn ($1.06bn) in a deal that is likely to come to market in the first or second quarter of next year. This deal would beat that of China Network Communication Group, which sold a $1.01bn commercial mortgage backed deal at the start of April this year.

The Malaysian market is also seemingly doing well with the active support of the Government that pledges to promote Islamic financing. Securitisation transactions are being structured as Sharia-compliant sukuk or musharaka transactions and being sold as Islamic bonds.

A completely new wave of activity is discrenible in the Middle East region which had not hitherto tried securitisation to any substantial extent. With the amount of commercial real estate and project work in place in UAE and other countries in the region, securitisation seems to be just the right way to raise resources. These countries are also using Islamic

SECURITISATION NEWS AND DEVELOPMENTS

/in /by

[This page lists news and developments in

International securitisation markets – please

do visit this page regularly as it is updated

almost on a daily basis.]

IMPORTANT

All news added on or after 9th November has been posted in a separate page – click here 

For News items added prior 3rd August, 1999, click here to access

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

  • Largest franchise loans securitisation deal 
    Added on 5th Nov., 1999 
    Franchise Finance Corporation of USA recently closed a franchise loan securitisation deal which is the largest issue of its kind so far.
  • Malaysia to scrap stamp duty on securitisation 
    Added on 5th Nov., 1999 
    In a bid to encourage securitisation, Malaysian Budget 2000 proposes to scrap stamp duty on real estate securitisation from Oct 31 onwards.
  • Securitisation changing the face of retail lending in Europe 
    Added on 28th Oct., 1999 
    The decision of Abbey National to securitise large part of its mortgage portfolio is only a signal of the changes securitisation is surely and steadily causing to mortgage lending in Europe.
  • Lehman Re pools catastrophe risk for securitisation 
    Added on 28th Oct., 1999 
    This is a further remarkable development in the risk securitisation market – Lehman Re has acquired catastrophe risks, and intends developing a portfolio, similar to Fannie Mae in the USA, for securitisation.
  • After cat bonds, it is weather bonds now 
    Added on 28th Oct., 1999 
    Two US companies, Enron and Koch Industries, are in the market with bonds that seek to protect against weather risks. Though they are finding it difficult to market the offer, it surely indicates a move that would lead to development of risk securitization.
  • New York launches tobacco bonds 
    Added on 28th Oct., 1999 
    As was predicted in the news item yesterday, New York has announced USD 700 million worth tobacco bonds.
  • Pakistan Telecom deal downgraded 
    Added on 27th Oct., 1999 
    Political uncertainty in Pakistan has led to downgrading of the Pakistan Telecom future flows securitisation transaction by Duff and Phelps..
  • Mortgage securitisation takes off in Hong Kong 
    Added on 27th Oct., 1999 
    Securitisation of mortgage loans by Hong Kong Mortgage Corporation has taken off with an inaugural issue of mortgages originated by Dao Heng Bank..
  • US Tobacco bonds rated A by S&P 
    Added on 27th Oct., 1999 
    The tobacco bonds to be issued by various US states have been rated A by Standard and Poor – this will now clear the way for issue of tobacco bonds.
  • UK infrastructure owner to securitise rent income 
    Added on 27th Oct., 1999 
    Railtrack, railway infrastructure owner in the UK, proposes to securitise rental income from arches it has rented out.
  • Abbey National to launch 4 billion stlg MBS issue 
    Added on 12th Oct., 1999 
    Abbey National, a UK-based mortgage bank, is to launch a 4 billion pound mortgage-backed bond issue to take approximately 10% of its mortgage portfolio off its books.
  • Barclays Bank to launch European credit card securitization 
    Added on 12th Oct., 1999 
    Barclays PLC is to launch a credit card securitisation bond issue of 1 billion pounds, close to 1.66 billion USD, which would be the largest issue by a European issuer.
  • Fully electronic mortgage lending closes legal documentation in 5 hours 
    Added on 8th Oct., 1999 
    This could well be a major innovation leading to e-commerce – legal documents leading to creation of mortgages and lending thereon can now be completed in totally electronic format and the whole process would take just 5 hours, instead of 45 days in the manual mode.
  • New York to issue tobacco settlement bonds in November 
    Added on 8th Oct., 1999 
    The New York City's the Tobacco Settlement Asset Securitization Corp. proposes to issue USD 680 million bonds backed by tobacco settlement dues in November this year..
  • Model Cat bonds law approved in USA 
    Added on 7th Oct., 1999 
    A report says that the National Association of Insurance Commissioners have approved a model law for Catastrophe bonds for the USA.
  • Pakistan to have SPV law by end of October 
    Added on 4th Oct., 1999 
    A report in Business Recorder, a Pakistani financial paper says Pakistan's securities regulator has constituted a body to finalise securitisation SPV law by end-October.
  • Ever heard of securitisation of air? 
    Added on 1st Oct., 1999 
    This really has nothing to do with securitisation in the sense capital markets view it, but next time, someone talks about securitisation of air, you should not be stunned.
  • Italian bank to securitise all its non-performing assets 
    Added on 1st Oct., 1999 
    Italian securitisation market continues to be 4th gear with major securitization deal by yet another bank – Italfondiario SpA.
  • Mexican steel company defaults on future flow securitization 
    Added on 29th Sept., 1999 
    This is apparently the first case of default on future flow securitization – Ahmsa, a Mexican company recently defaulted on a future flow securitization of export receivables.
  • Obligations fonciers in France on recent legal support 
    Added on 28th Sept., 1999 
    The French mortgage securitisation product, obligations foncieresis coming of age. In this report, we discuss salient features of this market, the law that backs them, and compare them with US pass throughts and German pfandbriefe.
  • CIBC World Markets named best securitisation bank in Asia 
    Added on 28th Sept., 1999 
    Journal Global Finance  has named CIBC World Markets the best bank for securitisation and was handed over an award at the IMF/World Bank meeting in Washington on 27th Sept.
  • Securitisation of exchange risks holds potential: Peter Drucker 
    Added on 25th Sept., 1999 
    The noted management and business economics expert, Peter Drucker, sees potential in securitisation of foreign exchange risks and in outsourcing financial arrangements for mid-sized firms. Drucker stresses on the need for innovation in financial services, in an article in The Economist, Sept. 25, 1999.
  • Yet another bank goes bust on securitisation accounting lapses 
    Added on 25th Sept., 1999 
    The reasons for the collapse of First National Bank of Keystone included, according to FDIC, wrong accounting for residuary interests in securitised loans.
  • CRIIMI MAE applies for reorganisation 
    Added on 25th Sept., 1999 
    CRIIMI Mae, the US commercial mortgage securitisation company that filed for protection under Chapter 11 has now applied for reorganisation.
  • David Pullman securitises Ron Isley catalogs 
    Added on 25th Sept., 1999 
    The father of music industry securitisation, David Pullman, has pulled Ron Isley's catalogs into his Pullman Bonds series, with over 200 songs in it.
  • DCR sees potential in Indian securitisation market; identifies problem areas 
    Added on 23nd Sept., 1999 
    Duff and Phelps Credit Rating recently released a report on securitisation market in India: a market that has a lot of potential but still constrained by several trifling problems.
  • Bank closed for securitisation accounting fraud 
    Added on 22nd Sept., 1999 
    A bank that did not remove from its balance sheets loans which had been securitised has been closed by US bank regulators.
  • First tax ruling on FASIT law 
    Added on 22nd Sept., 1999 
    This is the first-ever ruling on the US FASIT law, and it would have far reaching impact on tax treatment of investors in FASIT-based securitizations.
  • First soccer revenues securitisation 
    Added on 22nd Sept., 1999 
    In the first reported case of soccer club revenues, a UK football club sold its future ticket sales and corporate hospitality receipts.
  • Pakistan International Airlines in the first domestic future flows securitisation 
    Added on 21th Sept., 1999 
    In a remarkable development, Pakistan International Airlines has signed a Rs. 3 billion future flows securitisation with Citibank.This is reportedly a local future flows securitisation of aviation revenues.
  • First securitisation of personal credit receivables in Canada 
    Added on 21th Sept., 1999 
    Bank of Nova Scotia, Canada will use a special purpose trust to securitise its personal credit receivables in a transaction priced at $ 905 million.
  • World Bank to promote securitisation in Bangladesh 
    Added on 21th Sept., 1999 
    The World Bank on 20th Sept. announced a USD 46.9 million credit to Bangladesh for development of financial institutions in the country – this includes a proposal to promote securitisation by such institutions.
  • FASB issues technical bulletin on consolidation of SPVs 
    Added on 21th Sept., 1999 
    The US FASB has issued the draft of a Technical Bulletin to clarify situations in which consolidation of securitisation SPVs will be made with the originator. This report also gives link to the FASB site for downloading the FASB document.
  • Philippines to securitise amusement park revenues 
    Added on 20th Sept., 1999 
    The Philippines government proposes to issue asset-backed notes in the last quarter with revenues from an amusement park and a gas project under implementation.
  • Massive bank securitisation deal in Italy 
    Added on 20th Sept., 1999 
    Reports indicate that an Italian bank Banca Nazionale Del Lavoro is planning securitisation of Lira 3000 billion – this would certainly be the largest deal in Italy, and perhaps the largest single transaction in Europe.
  • Explosive growth in Japanese securitisation 
    Added on 20th Sept., 1999 
    Japanese securitisation market is witnessing explosive growth and analysts contend that the level of interest is even higher than was seen in USA in early 1990s.
  • Gain on sale accounting confounding finance companies' accounts 
    Added on 17th Sept., 1999 
    A recent article in American Banker Online claims that upfront recognition of gains on securitisation as per FASB 125 is confounding financial statements of companies that are regularly into securitisation.
  • US MBS issuance in first half '99 exceeds USD 400 billion 
    Added on 16th Sept., 1999 
    Volumes in agency mortgage-backed securities in the USA surged in first half of 1999 to over USD 400 billion, registering a 29.6% increase over comparable period in the previous year.
  • Charles Schwab to set up mutual fund to invest in asset-backed market 
    Added on 16th Sept., 1999 
    Indicating the increasing investor demand for diversified ABS portfolio, Charles Schwab, the noted US fund manager, has unveiled plans to set up a mutual fund to invest in mortgage and asset-backed securities..
  • Thailand Secondary Mortgage Corporation starts buying mortgage loans 
    Added on 16th Sept., 1999 
    The Secondary Mortgage Corporation of Thailand, modelled on the pattern of US Fannie Mae, has started acquiring mortgage loans for the purpose of securitising them.
  • Asian securitisation yet to gather pace 
    Added on 10th Sept., 1999 
    The securitisation market was completely snuffed out in the Asian crisis of 1997, and while there are strong recovery signals in equity and debt markets, securitisation is yet to emerge from the shadows where it was consigned..
  • Re-insurers in securitisation 
    Added on 10th Sept., 1999 
    A report in Financial Times recently discussed how re-insurance companies are taking increased exposures in credit risk insurance thereby helping securitisation.
  • And securitisers in re-insurance 
    Added on 10th Sept., 1999 
    Read this news with the one right above, and you see a fusion of insurance and capital markets – a recent article in Financial Timestakes a look at how securitisation is serving a notice to traditional reinsurers.
  • Italy the new mecca of securitisation 
    Added on 22nd August, 1999 
    A feature on CNN recently carried a detailed report on how securitisation is capturing tremendous interest in Italy.
  • India's apex housing finance body to try pilot mortgage securitisation 
    Added on 18th August, 1999 
    National Housing Bank, India's apex mortgage finance body, may soon come out with a pilot project of mortgage securitisation, as various taxation bottlenecks are being removed.
  • Downgrades galore in US ABS markets 
    Added on 18th August, 1999 
    The rate of downgrades in US ABS market is alarming, and there is a new trend visible – downgrades due to internal weaknesses in the portfolio.
  • US mortgage financiers taking over UK market 
    Added on 17th August, 1999 
    David Pullman, the father of intellectual property securitisation who first brought Bowie Bonds to the Wall Street considers his own IPO.
  • David Pullman to bring IPO 
    Added on 16th August, 1999 
    David Pullman, the father of intellectual property securitisation who first brought Bowie Bonds to the Wall Street considers his own IPO.
  • First ABS transaction in Poland 
    Added on 14th August, 1999 
    BRE Bank, based in Warsaw, Poland recently launched the first ABCP deal in Poland. This is also reportedly the first ABS transaction in the country.
  • Why mortgages do not attract capital in China 
    Added on 13th August, 1999 
    In sharp contrast to United States, lenders in mainland China do not love mortgage lending – this article in South China Morning Postexplores reasons which include poor mortgage foreclosure laws.
  • Hong Kong Mortgage Corporation to issue RMBS 
    Added on 10th August, 1999 
    The Fannie-Mae type body set up by the Hong Kong authorities has already begun acquiring mortgage receivables and is likely to issue RMBS in last quarter.
  • New political insurance product to boost emerging market investments 
    Added on 10th August, 1999 
    Overseas Private Investment Corporation has launched a political risk insurance which will enable emerging market corporates to substantially eliminate sovereign risk.
  • US ABS volumes rise marginally in first half of 1999 
    Added on 6th August, 1999 
    The ABS volume in USA grew about 4.5% in first half of 1999, while growth outside USA has been very impressive.
  • CMBS volumes are falling 
    Added on 6th August, 1999 
    There is a fall in volume of commercial mortgage backed securities and the total issuance is 1999 is expected to end up about 25% lower than volumes last year. 

 

Largest franchise finance securitisation

Franchise Finance Corporation of America priced and sold approximately $607 million of secured franchise loan asset-backed securities. The securities are backed by 996 loans originated by FFCA, all of which were held in a loan sale facility with a third party pending securitization. The loans, having an outstanding aggregate principal balance of approximately $674 million, include 929 chain store mortgage loans, 61 chain store equipment loans, and six commercial loans secured by real estate, equipment or other property related to the operation of chain store facilities.

This is the largest reported transaction in franchise loans segment.

Malaysia to scrap stamp duty on securitisation

Malaysian government presented Budget 2000 which is hailed as expansionary and growth oriented. Among a number of measures to boost capital markets, there is a proposal to encourage companies to opt for securitisation.

Securitisation involves transfer of receivables for which the instrument of assignment to be executed is currently subject to stamp duty at ad valorem rates and if the asset involves real property, real property gains tax (RPGT). Budget 2000 proposed that the instrument used in the transfer of assets be exempted from stamp duty and RPGT from October 30 1999 to December 31 2000.

For details of securitisation activity in Malaysia, see our country profile – link on the Index page.

Securitisation changing the face of retail lending in Europe

Abbey National recently decided to securitise a large chunk of its mortgage loans portfolio – see news item below. This was only an indication of the steady but sure change securitisation is bringing about in mortgage lending in Europe. A report in European Report of 27th Oct says that to keep their low-cost competitive edge, direct mortgage lenders are being impelled towards securitisation to raise their funding. Also, retail banks will be pushed in the same direction. They have traditionally raised much of their funds for retail lending by taking retail deposits. But recent entrants into the personal deposit market – particularly with the emergence of banking activities by non-bank operations with high consumer throughput, such as supermarkets – are absorbing much of the traditional banks' traditional deposit sources, forcing them to raise their interest rates to attract savers, or to seek alternative funding sources. In addition, the booming consumer credit market across much of Europe is also pushing banks to clean up their balance sheets as much as possible so they can take advantage of the boom – and securitisation offers them a way to do this.

With the advent of the Euro, the potential for securitisation has tremendously gone up in Europe – the size of the potential Pan-European market is now being estimated at 1 1/2 times that of USA.

This site has comprehensive resources on securitisation in Europe. An editorial is devoted to Europe – see the front page. See also the Index page for country profiles and a special write up on Europe. 

Lehman Re to pool and securitise risks

This is application of the mortgage-backed securitisation technique to cat bonds, and the result is a unique product that would be securitisation of a bundle of risks, not just one risk. In a ground-breaking move for the Lloyd's market, a syndicate has reinsured a substantial property catastrophe exposure with Lehman Re, based in Bermuda, for onward securitisation in the capital markets.

Due to its structure as a reinsurance company, unlike many corporate finance players involved in such deals, Lehman Re does not have to transform the risks which it underwrites into a capital market product immediately in order to pass it on to investors. Instead, it can hold risk like a conventional reinsurer and gather together a portfolio of similar risks from different cedants until sufficient scale has been achieved to warrant a securitisation. In this way, Lehman Re is using a similar concept to that which was used by US mortgage lenders in the very early to mid-1980s and British mortgage lenders in the mid- to late-1980s, when mortgage-backed securitisations first started to take off.

For references to further materials on cat bonds, see the news item exactly below this.

After cat bonds, it is now weather bonds

Some say they are in rough weather as they have not been finding investors. But it surely indicates a new development in risk securitisation technlogy that was first developed in the catastrophe risk insurance market.

Two US companies, Enron and Koch Industries are in the market with weather bonds, which pass on to the investors weather-related risks. The technlogy is the same as has been used in case of cat bonds some years ago. [See the Risk securitisation section of this website for more article and links on cat bonds. See also several news items on this page].

Enron, based in Houston, provides weather risk management services to clients such as snowmobile manufacturer, an ice-cream maker and a computer services company. Koch is based in Kansas.

Enron's Dollars 105m deal is being underwritten by Merrill Lynch. Koch Industries' USD 200 million offer is underwritten by Goldman Sachs.

Reports in Financial Times 27th Oct. indicate that both the issues have not found active investors interest, perhaps due to a complex set of instrument features, and possibly because they are in the market at almost the same time.   
 

 New York announces tobacco bonds

A groundbreaking deal in issue of tobacco bonds has been announced by New York to open on 3rd November. We predicted yesterday (see news item below) that with S&P rating already in place, New York may be the first to issue the bonds.

Tobacco bonds represent securitisation of the sums that major tobacco companies in the USA will pay to the governments of 46 States as a settlement of the court suits against the tobacco companies. This site contains more details of tobacco bonds – click here and here.

The issue, which would be the first of its kind, is likely to be followed shortly by Nassau County in New York state, which desperately needs the funds to plug a hole in its finances.

Pakistan Telecom securitisation downgraded

The political uncertainty has taken its toll on the only future flow deal already transacted so far by Pakistan Telecom. Duff and Phelps has downgraded the transaction from BB+ to BB with rating watch down.

The downgrade reflects the increasing financial pressures that could arise out of the current political situation in Pakistan, namely the potential loss of multilateral loan disbursements, as well as the uncertainty regarding the government's ongoing debt reschedulings.

The rating agency believes that the transaction might weather the current stress through which Pakistan is passing.

This website contains ample resources about securitisation activity in Pakistan – see Pakistan country profile on the Index page and the draft rules for securitisation on the Securitisation laws page.

Mortgage securitisation takes off in Hong Kong

The Hong Kong Mortgage Corporation has begun securitisation of mortgages. The inaugural transaction was launched on 23rd October with the Corporation buying mortgages originated by Dao Heng Bank. Under the agreement, Dao Heng will sell eligible mortgages on a back-to-back basis to the corporation, which will transfer them to a special-purpose company, the HKMC Funding Group. The company will then issue the securities to Dao Heng Bank, with a guarantee from the corporation for timely payment of principal and interest. Dao Heng can keep the securities as part of its investment portfolio or trade them with professional institutional investors.

The corporation has plans to issue USD 5 billion worth of securities collateralised on mortgage loans next year.

Click here for an earlier news about RMBS issues in Hong Kong.

Tobacco bonds rated A by S&P

The tobacco bonds that securitise the tobacco settlement proceeds payable by 4 leading tobacco companies to various US states have been rated A by Standard and Poor. 46 US states are to receive USD 205 billion in tobacco settlements.

See earlier reports on tobacco bonds – click here and here.

Nassau County in New York state and New York City are expected to be the first to issue the tobacco-backed bonds, with many of the 46 states involved in the settlement waiting in the wings. Nassau County urgently needs the funds to plug a gap in its finances, and is already said to be marketing a Dollars 275m offering to investors.

UK infrastructure owner to securitise rent income

Railtrack, owner of the UK's rail infrastructure, is studying plans to raise up to pounds 400 million by parcelling up the rents it receives from 6,000 arches in south-east England and swapping that income stream for a lump sum.

Rents from the arches traditionally used by motor mechanics, small engineers and businesses unconcerned by condensation and lack of light total around pounds 40m a year. The money raised in the form of a securitised bond would be used for improving the rail network.

Abbey National in 6.5 billion USD MBS issue

Mortgage-securitisation wave hitting UK market

Abbey National, a leading mortgage bank in the UK, is to launch a 4 billion pounds mortgage-backed securitisation issue, in a bid to free up about 10% of its balance sheet portfolio of mortgages.

The bank is planning to bring a series of MBS issues spread over the year. The bond issues will allow Abbey to free up extra capital and reduce the cost of funding mortgages. Abbey is understood to be planning to use securitisation, which is widely used in America, to allow it to offer a range of new and more competitive products, reports The Sunday Telegraph.

The trend to securitise mortgage loans is catching up fast among British housing financiers. Last month Northern Rock, the former building society turned bank, launched a £600m mortgage securitisation, giving it a new source of funding and the chance to increase its share of new lending. Woolwich has also announced a joint venture with Countrywide Credit, the American lender, to securitise mortgages. 

Barclays Bank to launch largest European credit card securitisation

British banking group Barclays Plc is set to launch a bond secured against debt owed by customers of its credit card subsidiary, based on a report in the Financial Times.

The bond issue is likely to be 1 billion pounds, or 1.66 billion USD which makes it the largest issue by a European issuer.

Market analysts feel that this is only the first of what will be a series of securitisation issues by European banks.

Fully electronic mortgage lending announced

Legal documents completed over the Net in 5 hours

eOriginal Inc. announced on 7th October the implementation of a fully electronic creation, processing, recording and closing of a mortgage transaction that takes 5 hours flat, whereas the same process in the manual mode takes 45 days and costs USD 750 per deal more.

This patented legal documentation procedure creates legally enforceable mortgage rights and completes the required public recording of documents, in a completely electronic form, via the Net. The pilot project was carried out in Florida, USA and is the first electronic creation of a mortgage document.

The pilot program envisages an Electronic Original mortgage paper. The mortgage documentation was delivered via the Internet to the consumer who signed all the traditional forms for the mortgage and conveyance of the home, but the signing was performed online–not with pen and ink. The deed and mortgage instruments were then transmitted on the Internet to the Broward County Recorder's Office where they were registered. Once recorded, the Electronic Original documents were returned to the consumer and instantly accessible on the mortgage recording  system, via the Internet, to secondary market participant GMAC-RFC. While all homebuyers elected to receive a paper copy of loan closing documents, the authoritative Electronic Original documents were stored digitally in a trusted repository.

For more about e-original's Internet-based work, click on their website –http://www.eoriginal.com 

 New York to issue tobacco bonds in November

The New York City local body formed specially for the purpose of securitizing tobacco settlement proceeds,  Tobacco Settlement Asset Securitization Corp. , proposes to issue USD 680 million worth bonds in mid to late November this year. The agency is likely to issue circulars regarding the forthcoming offer today, that is, 8th October. The agency will hold road shows during the third week of October.

Salomon Smith Barney will serve as book-running senior manager on the agency's initial bond issue. Bear, Stearns &Co., J.P. Morgan & Co. will be co-senior managers on a rotating basis. In addition, the designated senior co-managers are Goldman, Sachs & Co., Morgan Stanley Dean Witter and PaineWebber Inc.

The tobacco settlement is the result of litigation against 4 major tobacco companies which resulted into a settlement on Nov 23, 1998. According to the temrs of the master settlement agreement, the tobacco majors are to pay $206 billion over the next 25 years to 46 US states.

For more news on the tobacco bonds, click here.

Model Cat bonds law approved in the USA

A report on BestWire says that the National Association of Insurance Commissioners have approved, recently in Kansas City, a model law for catastrophe bonds. This law is a model law, supposed to be enacted by individual states.

The law would make it possible for US insurance companies to use securitisation SPVs to sell re-insurance contracts to the capital markets using the catastrophe bond instrument. The model law among other things also clarifies the tax issues on such bonds.

Reports indicate that the model law is similar to the one already enacted by Illinois in July.

Catastrophe insurance securitisations originate from the United States but are mostly carried through jurisdictions like Cayman Islands for tax reasons.

This site has comprehensive resources on insurance risk securitisation.Click here to visit section on insurance risk securitisation. Click here to read briefly about what are cat bonds.

Pakistan to have SPV laws by month-end

Business Recorder dated 4th October 1999 reports that Pakistan's Securities Exchange Commission (SECP) has constituted a board under the chairmanship of the head of Pakistan Credit Rating Agency to finalise securitisation rules for the country by the end of October '99.. Under these rules, it is likely that securitisation SPVs will be organised as companies under the Companies Ordinance and will issue debt securities in the nature of term finance certificates to investors. Withholding tax will also be applicable to the payments made by the SPVs. The securities issued by the SPVs will be allowed to be listed on recognised stock exchanges.

Analysts see a Rs. 16 billion potential in securitisation business in the country, taking care of receivables of modarbas, leasing companies, credit cards, housing finance etc. Obviously, the volume does not take into account the tremendous potential in bank securitisation and future flows securitisation.

More on securitisation in Pakistan: Draft rules earlier framed by the SEC Pakistan are on our securitisation laws section  – click here to visit. See also our country profile on securitisation in Paksitan – click here. News about Pakistan International airlines securitising its receivables was flashed on this site – click here. 

Securitisation of air !

Exchanges trading in securitised "rights to pollute"

About a couple of years ago, a journalist said – Wall Street can securitise anything! He did not mean air, but it is a fact that clean air and environment are being securitised and traded on commodities exchanges.

The concept goes something like this -the State or a private initiative makes investments in forests. The investment is funded by issuing emission credits or sequestration credits in form of units or securities. Typically, one credit certificate allows the holder to pollute the environment equal to 1 ton of carbon dioxide. These credits are bought by highly polluting industries. Therefore, the more the required emission by an industry, the more the number of certificates it exhausts. The purchase of credits or creation of credits by investing in forests is the creation of a "pollution asset" or the right to pollute, and the actual emission of gases into air is the consumption of the credits. Hence, there is placed in the market a security representing clean air, used by leaving unclean air.

Recently, the Sydney Futures Exchange announced plans to allow trading of such certificates. Already, trading in these certificates is on on the Chicago Board of Trade.

A few years ago, Costa Rica, by agreeing to protect a portion of its rainforest from logging, issued certificates that bestow the right to pollute.

So, in some time, clean air will be a product to be traded in, hoarded and speculated!

Italian bank to securitise its non-performing loans

Earlier on this page, we have reported fervent activity in securitization taking place in Italy. The Italian newspaper IL SOLE 24 ORE reports that Italfondiario SpA, the Italian bank that deals with credit and leasing, is to securitise all of its non-performing credits, worth around L2,500bn, with the assistance of Greenwich Natwest Ltd.

More on securitisation of non-performing assets in Italy  – On our Italian securitisation page, new inputs have been added dealing specifically with securitisation of non-performing assets in Italy. 
Click here to visit.

Mexican company defaults on future flow securitization in a first noted case of default

No securitization structure is iron-clad, and investors must appreciate the risks, particularly the legal fragility of the structure, before exposing themselves.

This is a loud and clear signal from the recent case of default on a securitization of future flows. Ahmsa, a Mexican steel company had securitised future export receivables in a transaction worth USD 300 million. The company recently defaulted on the deal. This was an unrated securitisation transaction.

Generally speaking, in asset-backed securitization, investors would not be concerned with the default or distress of the originator – however, not so in case of future flow securitization. In future flows deal, investors are exposed to risk of performace of the originator, as also possible action, deliberate or forced, in diverting the exports to an entity which has not affirmed the deal. Typically, in export receivables securitization, the originator assigns future revenue from export proceeds from importers. The importers abroad sign an acknowledgment of the assignment thus binding them to pay to the overseas collection account. If the exporter diverts the exports to other importers, who have not given any such acknowledgement, legally they cannot be bound to pay into the collection account as the assignment of a future flow takes place only prospectively and does not create rights of the investors against the obligors.

The irony is that in such a situation, the investors may not even have a fall-back option against the originator's assets.

The above case of default is the first reported instance of a future flow securitization deal going bust, and may be it is only such difficult situations that the legal strength of such transactions can be tested.

Oligations fonciers developing in France

Recent legislation responsible for the development

Obligations fonciers (OFs) are French mortgage-backed securities. These on-balance sheet debt securities are essentially mortgage-backed bonds, with the important feature that the bondholders have a issuer-bankruptcy-protected right to the mortgages. OFs are issued by Societé de Crédit Foncier (SCF), a specialised lending institution. SCFs have a restricted sphere of operation to acquiring and granting of mortgage loans only. OFs are essential debt securities and they appear on the books of the SCF, unlike the US mortgage pass throughs. In this sense, OFs are similar to German pfandbriefes.

The legal framework for SCFs and OFs is set out in Law 99-532 of June 25, 1999 relating to savings and financial security, published in the Journal Officiel on June 29.

The quality of the loans originated by SCFs is tightly regulated by law: for example the loans have to be secured by first mortgage on real estate, with a certain minimum loan-to-value ratio. Regulations are also in place to control the asset liability mismatches, reporting, real esatate valuation, etc.

SCF under law is a separate entity, distinct from its owner or manager. The law provides a protection that the bankruptcy of the owner of the SCF cannot lead to the bankruptcy or liquidation of the SCF. Upon the bankruptcy of the manager of the SCF, the management contract can be assigned to another manager. The bondholders are priority creditors and other creditors have a suboridinated claim over the assets of the SCF.

The supervision of SCF is primarily with the bank supervisory body, Commission Bancaire.

Two issues of OFs are notable in France: Crédit Foncier de France and Crédit Foncier et Communal d'Alsace et de Lorraine.

For more on securitization in France, refer to the country profile on our Index page – click here to visit.

CIBC named best securitisation bank in Asia

Global Finance has named CIBC World Markets the "Best Bank in Securitization in Asia". The award was made to David Bonsall, Head of International Securitization on behalf of the firm at a ceremony held today at the IMF/World Bank meeting in Washington. Global Finance canvassed its readers and did extensive research among major users of banking services and analysts who follow the banking sector in order to select CIBC.

CIBC set up its Singapore office in 1998 and currently has over 100 professionals looking after securitisation.

Securitisation of exchange risks holds potential: Peter Drucker

Visionary guru laments lack of innovation in financial services

The noted management guru Peter Drucker has written an article in The Economist [25th Sept., 1999]  where he feels there is tremendous potential for someone assimilating exchange rate risks and securitising the same.

Innovate or die, says Drucker, who is going to celebrate his 90th birthday this November. The guru of what he calls "creative self-destruction" ( a modification of the famous phrase coined by Schumpeter)  laments the fact that over past 30 years in the financial services industry, there has been no major innovation except the euro-dollar and the euro-bond, which were essentially forced by regulation. Credit card was the third major innvoation of our times. Drucker, however, does not regard derivatives as any sustainable innovation, since these are "not designed to provide a service to customers. They are designed to make the trader’s speculations more profitable and at the same time less risky—surely a violation of the basic laws of risk and unlikely to work. In fact, they are unlikely to work better than the inveterate gambler’s equally "scientific" systems for beating the odds at Monte Carlo or Las Vegas—as a good many traders have already found out."

Talking of the opportunities for innovation, the visionary management thinker gives examples of 3 possible areas of innovation: 2 out of the three involve securitisation.

Drucker sees potential in outsourcing the financial management of medium sized enterprises. These enterprises form the backbone of most economies, and it is common today for most of them to outsource their EDP, housekeeping, routine personnel management, etc. "How long will it be before they are ready to outsource the management of the money in their business?", asks Drucker.

There lies an opportunity: "The rewards for building a firm providing these medium-sized businesses with financial management might be enormous—not only from fees but also through substantial profits from "securitising" the financial needs of the clients, ie, converting them into investment products that should be particularly attractive to the ageing middle-class "retail" investor."

The other opportunity lies in assimilating catastrophic exchange risks and securitising them: devising "financial instruments that protect a business against catastrophic foreign—exchange losses by converting currency risks into an ordinary cost of doing business, with an affordable and fixed premium, maybe no more than 3-5% of a firm’s currency exposure." A firm that provides such catastrophe risk protection "would also be able to "securitise" its portfolio and thereby create attractive investments for the new financial retail market."

For full text of the article, go to The Economist website: click here.

Yet another bank goes bust: securitisation accounting lapse cited as reason

We had recently carried, on this site (click here), news of a bank forced to close by regulators due to a faulty securitisation accounting practice. We had also carried extracts from an article that US banks are not as healthy as they look, as they have securitised their prize assets and are possibly sitting on inferior quality assets. A similar concern was expressed in case of finance companies.

Here is yet another case of bank going bust: First National Bank of Keystone. In this failure that is going to cost the government upto USD 800 million, the FDIC blamed the unusually high losses on the disappearance of $512 million of loans that bank officials had counted as assets, and on the bank's inflated estimate of the value of its residual interest in loans it securitized and sold. 
 

What is residuary interest in loans sold?: In most CLO/ CBO structures (see our section on CBOs/CLOs – click here), the originating bank issues bonds collateralised on the loan portfolio that it transfers, but retains residuary interest in the portfolio, essentially a subordinated, equity-type interest. The size of the retained residuary interest depends upon the level of rating for the senior notes. According to accounting standards, the bank is supposed to retain on its books the fair value of the retained interest, and remove the rest of the loan portfolio. As the valuation is subjective, it is likely that a bank may place unfair values to the retained interest. 

Recommendations from BIS, still under consultative state, suggest that if the retained interest is either unrated or rated below B+, it should be completely deducted from the bank's capital. This, however, is regulatory accounting and may not be followed in the general financial statements of the bank.

 

CRIIMI MAE applies for reorganisation

CRIIMI MAE, the US commerical mortgage securitisation company that applied for protection under Chapter 11 of Bankruptcy Code last October has now applied for re-organisation.The Plan contemplates recapitalization financing of approximately $910 million consisting of $50 million  of a new series of convertible preferred stock to be purchased by an affiliate of Apollo Real Estate Advisors IV, approximately $435 million of debt financing, a portion of which would come from certain existing debtholders, and $425 million of additional amounts, the bulk of which would result from the sale of certain commercial mortgage-backed securities (CMBS).

Before applying for protection against potential bankruptcy, the company was engaged in acquisition and securitisation of commercial mortgages. Named after US govt.-backed residential mortgage securitisation agencies (Ginnie Mae and Fannie Mae), the company ran into problems due to bad assets.

This website has a separate section devoted to CMBS: click here.

 David Pullman securitises Ron Isley catalogue

David Pullman, the father of securitisation in entertainment industry, announced on 24th Sept. the signing of Ron Isley and his Isley Brothers catalog. Isley joins the band of music-securitised bonds created by Pullman: others who have signed by Pullman before include David Bowie, Holland Dozier Holland, Ashford & Simpson and James Brown.

David Pullman created sensation in capital markets when he introduced, for the first time, bonds backed by music royalties. David Bowie was his first case in 1997. Since then, Pullman did not have to look back. In 1999, he claims to have finalised deals worth USD 1 billion.

This website contains a special section on intellectual property securitisation: click here. 
 

DCR comments on Indian securitisation potential

Duff and Phelps Credit Rating (DCR) issued on Sept. 22 a report on securitisation in India. The following is largely an extract from DCR press release. Please see Vinod Kothari's comments below.

India's securitization market is in a nascent stage, exhibiting only elements of established securitizations, according to DCR. To date, all completed transactions have utilized onshore assets and distributed into the domestic market; no international capital markets securitization has yet come to fruition.

The regulatory constraints, as well as overall sluggish Indian international-capital-markets issuance over the last two to three years, have been a barrier to the growth of cross-border securitization in India. The Reserve Bank of India (RBI) has strict rules for companies that would like to borrow from abroad, and the lack of a well-developed swap market prevents the long-dated swaps necessary for certain cross-border transactions.

The relaxation of regulatory guidelines and a focus by issuers to explore securitization financing alternatives–once they realize its benefits — should provide a boost to cross-border securitizations. This is in light of the fact that although cross-border securitization is possible within the current ambit of the legal environment, the existing regulations restrict the universe of companies that can securitize.

Though still in a developmental stage, DCR believes international securitization in India holds potential. "India's credit rating is not investment-grade, but the same structures used in Latin America (i.e., future-flow transactions, preferred-creditor transactions and political risk insured transactions) could pave the way for Indian issuers to achieve investment-grade ratings," said Gregory J. Kabance, a DCR vice president.

There have been several completed domestic securitizations in the Indian market, but these structures do not incorporate all the characteristics a typical securitization structure used in developed markets. A large proportion of domestic transactions involves the direct sale of receivables to a single buyer. This variant of traditional securitization structure is utilized, as the traditional route of forming a special-purpose vehicle (SPV) and issue of securities is yet to be widely recognized in India due to regulatory and tax constraints.

The market is dominated by consumer finance securitization — particularly auto loan receivables. Infrastructure receivables such as electricity and tolls are also being increasingly securitized. Mortgage-backed securitization, though holding vast potential, has yet to gain a firm foothold in Indian markets due to regulatory difficulties such as inadequate foreclosure norms and high stamp duty on immovable assets.

Though it is possible to achieve a true-sale structure, most transactions remain linked to the credit quality of the originator. This linkage stems from issues including the lack of backup servicers and the co-mingling risk inherent in these structures. This reliance on the originator could cause potential problems in the event of an originator's bankruptcy. Therefore, transactions should be done with only creditworthy originators. This dependence on the originator could limit the depth of the market as the benefits of securitization cannot be realized by all potential originators.

While there remains certain legal and regulatory constraints, the market should be a securitization-friendly environment. The Indian legal system is based on a common law system primarily derived from English law, and is more securitization-friendly than civil law countries. The issue of true sale and bankruptcy remoteness is well accepted by Indian laws. Due to the growing interest in securitization, the regulatory authorities are drafting guidelines that should reduce some of the existing hurdles that prohibit the full development of the product. Included in the outstanding issues that should be addressed are:


The difficulties and uncertainty regarding the registration of charge on the underlying assets; Further clarification on the legal nature of the SPV; Uncertainty surrounding the SPV's ability to act as a receiving and paying agent and its ability to file legal suits in certain circumstances; and Foreclosure of mortgage-backed loans remains difficult and thesecurity of the underlying asset is not available for practical purposes.

In addition to these legal issues, there are certain tax issues as well as the lack of accounting standards that properly address the treatment of securitization. DCR notes that certain Indian states have reduced stamp duty on securitization transactions. However, to facilitate greater participation, the initiative should be extended to other states as well. In regard to international issuance, the hurdles are more on the economic side and, with the lack of a developed swap market, dollar-funded existing asset transactions will be a challenge. Rather than the traditional asset-backed transaction, the market is more conducive to future flow transactions, preferred-creditor transactions, and political risk guaranteed transactions. Each of these transactions can allow the originator to achieve investment-grade ratings that could be a way for these companies to access long-term low cost funding.

The depth of the future-flow market is limited because these transactions rely on the generation of offshore receivables and are dependent on the originator's performance risk. There are not that many companies with turnover that is large enough for these transactions. For some of these companies with the requisite size, the performance risk could be an issue.

But for certain strong Indian corporates with large exports, future flow can be a very attractive financing option. From a legal perspective, DCR has performed initial reviews of some cross-border future-flow transactions and believes structuring should be achievable with the Indian legal framework.

Vinod Kothari comments:

True, Indian securitisation market is still nascent but tremendous interest is being shown in various parts of the country. The only SPV structure has been 1997 Citibank's securitisation of auto loans. Privately, there have been number of deals but most of them border on secured lending. The State electricity monopolies are soon likely to securitise their revenues.

Mortgage foreclosure laws in India are essentially the same as in common law countries, but enforcement is a great hassle. However, inspite of these snags, there have been rare instances where housing financiers have had to legally foreclose a mortgage: moral persuasion is found to be a better way. What stifles mortgage securitisation in India is the fact that there are limited mortgage financiers existing today, the Govt.-sponsored housing finance body National Housing Bank prefers to see itself as a financier rather than facilitator of securitisation.

As a common law country, the legal framework is generally supportive and there are no serious tax or legal issues that should hamper securitisations. Future flows documentation should be very careful to prevent the investors from being eventually worse than even a secured lender.

Bank closed for alleged securitisation accounting fraud

First National Bank of Keystone, West Virginia was closed by US bank regulators after finding evidence of an apparent fraud that had depleted the bank's capital.

The Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency took the action after finding $515 million in loans still being carried on the bank's books that should have been removed after they were securitized and sold.

First tax ruling on FASIT investor tax treatment

District court contrasts FASIT with a mutual fund

A US District Court has contrasted a Financial Asset Securitization Investment Trust (FASIT) with a mutual fund and has framed principles that would affect the tax treatment of a FASIT investor. The case is significant as this is the first ever ruling on tax treatment of securitisation investors in FASITs. 
 

What is a FASIT: 


A FASIT is essentially a securitisation SPV under the US Financial Assets Securitization Investment Trust law. The law is basically certain sections in the Inland Revenue Code (sections 860H onwards) The law was enacted to create tax transparent entities for non-mortgage securitizations, similar to real estate investment trusts (REITs).


In Community Trust Bancorp, Inc. v. U.S., Civ. Act. No. 98-249, (US DC ED Ky. 1999), the Kentucky Court considered whether a bank which invested in mutual fund scrips could claim the loss on sale thereof as a business loss rather than capital loss. The bank's contention was that the mutual fund in turn had invested in debt securities, and the mutual fund was nothing but a collection of various investors: therefore, the nature of the loss suffered by the mutual fund would determine the loss suffered by the fund investors.

Disallowing the bank's claim, the Court contrasted a mutual fund from a FASIT: the court held that the two were distinct as that is the reason why the Congress created a separate law for FASITs while the regulated investment company law (for mutual funds) already existed. By implication, this means that in case of FASITs, the tax treatment would be applied to investors based on the nature of their own activity. A FASIT for tax purposes would be taken as a mere conduit: therefore, the loss suffered on FASIT securities by a bank or an investment company would be a trading loss while a corporate would take it as a capital loss.

UK soccer club securitises revenues:

First securitisation of its kind

You have read about securitisation of revenues from songs to be sung, or races to be run: the ever-increasing application of securitisation now reaches the sports arena. A UK soccer club is arguably the first to securitise its future ticket sales.

According to a report in Financial Times London, dated 21st September '99, Newcastle United has become the first club in football to securitise its commercial revenue streams by issuing a £55m bond that will be backed by income from future ticket sales and corporate hospitality receipts.

The financing will help pay for the reconstruction of the club's St James Park stadium, which is already under way. Previously funded by a £40m bank loan, the development will increase the stadium's seating capacity from 38,000 to 51,000 by next August.

Note that Formula -1 was among the first cases of securitisation of receivables in the sports area. However, sports businesses are regarded as promising vehicles for securitisation issues because their revenues from TV rights and sponsorship deals tend to be secured by long-term deals. Ticket sales are also seen as a dependable source of income.

The 17-year Newcastle United bond has a weighted average fixed interest rate of 7.43 per cent and is repayable in annual instalments of £6m – initially representing £4m of interest and £2m of capital – between 2001-2016.

 

Pakistan International Airlines signs first domestic future flows deal

[This report was contributed by Dr Tariqullah Khan from Saudi Arabia]

According to a report in Business Recorder, Pakistan International Airlines on Monday 20th September signed with Citibank Pakistan for a Rs. 3 billion future flows securitisation deal. This is the first local current future sales receivables securitisation in Pakistan and banking circles believe that such structured finance facilities will go a long way in developing securitisation and 
factoring in Pakistan.

The United Bank is the lead manager and Muslim Commercial Bank and Citibank are the co-lead managers. Other participants include ANZ Grindlays Bank, Askari Commercial Bank, Bank Al-Falah, Saudi Pak Investment Company, Pakistan Kuwait Investment Corporation and Mashreq Bank.   
 

More on securitisation in Pakistan  
This website has rich resources about securitisation in Pakistan: 


For a profile of the transactions done, etc., see country profile of Pakistan on the Index page. For the securitisation rules of SEC, Pakistan, click our securitisation laws page. 


The facility is structured so that all ticket and cargo sales of PIA in Karachi and Lahore, for a three-year period, will be assigned and routed through a collection account with the agent bank of the syndicate.

Vinod Kothari  comments: 
The deal is remarkable from many viewpoints:

  • Pakistan is quite a novice in securitisation market: the only reported transaction so far is the international future flows securitisation by Pakistan Telecom.
  • It is only in June this year that SEC, Pakistan announced draft securitisation rules. Securitisation activity is yet to gather pace in Pakistan: in this backdrop, a future flows securitisation is an outstanding achievement.
  • Domestic future flows securitisation itself is a rarity. International flows are securitised using a trapping mechanism in a foreign country. But in  a local transaction, it is the laws of the country that will matter. Given the fact that Pakistan is a common law country, assignability of a future flow itself is a serious legal issue, and it would be interesting to know how the local lawyers have viewed the transaction. But then, chalti kaa naam gari (what is a car? – well, what runs is a car), as they say.

First securitisation of personal credit receivables in Canada

Bank of Nova Scotia will be issuing $ 905 million worth notes to securitise its receivables from personal credit loans. According to a report in Financial Post, Canada, the Bank will use Hollis Receivables Term Trust, a special purpose trust created to securitize portfolios for this purpose.

The issue was a public offer and was led by ScotiaMcLeod.

From the bank's perspective, the financing helps it achieve some of its securitization goals of facilitating greater access to funding and liquidity; of optimizing its capital structure and of being pro-active about the management of its balance sheet. 
 

 World Bank gives credit to promote securitisation in Bangladesh

The World Bank on 20th September announced USD 46.9 million credit for Bangladesh for development of financial institutions in the country. Called the a Financial Institutions Development Project, the credit aims at improving financial intermediation in banks, non-bank financial institutions, and capital markets in general.

The Facility granted by the World Bank will also support issuance of bonds and securitised instruments by the banks and financial institutions participating in the scheme. The government has also agreed, as a preliminary requirement, to create a suitable regulatory framework for regulation of financial institutions in the country.

The facility will seek to encourage financial institutions to stand on their own by either a direct debt issue or by securitisation, but provide a standby support till the market is able to accept the securitised instruments. Total project costs are US$57.69 million. The US$46.9 million equivalent credit is provided by the International Development Association (IDA), the World Bank's concessionary lending arm, on standard IDA terms with 40 years to maturity and a 10 year grace period. The Government of Bangladesh will contribute US$5.41 million. Financial Intermediaries will also contribute US$5.08 million to the project costs. Assistance has also been provided by the International Monetary Fund for the development of the government bond market that will have a positive impact on the project.

FASB issues bulletin on consolidation of securitisation SPVs

[I have been a little in catching up with this news, but it is important. ]

The US Financial Accounting Standards Board (FASB) the draft of a Technical Bulletin no 99-a on Classification and Measurement of Financial Assets Securitized Using a Special-Purpose Entity.

Issued on August 11, 1999, the FASB has invited comments on the draft Bulletin. The last date for comments is September 25, 1999.

Essentially the draft deals with situations in which transfers of securitised assets to SPVs will be treated as transfers, or will retain their original character. The bulletin talks of 4 situations with various parameters.

Full text of the proposed bulletin is available for download upto 25th Sept – click here for download.

Philippines proposes to ses to securitise amusement park revenues

Securitisation is gathering lot of interest in Philippines. The government of Phiippines itself has evinced interest in using securitisation to partly cover its budgetary shortfall. The government proposes to issue asset-backed securities in the fourth quarter to raise up to USD 500tfall. The government proposes to issue asset-backed securities in the fourth quarter to raise up to USD 500 million, reports  Inquirer daily, quoting Finance Secretary Edgardo Espiritu.

Among the options being looked at are the future earnings of the Philippine Amusement and Gaming Corp and potential revenues from the Malampaya natural gas project, which the government is implementing in partnership with the Shell Group.

Massive bank securitisation transaction in Italy

Banca Nazionale Del Lavoro proposes the largest ever issue in Italy

We had commented sometime back on this page that Italy is fast emerging as the mecca of European securitisation (see here) . The recent spate of transactions and the levels of interest in Italy reaffirm the statement.

According a report in Corriere della Sera 17 Sept., 1999, the Italian banking group Banca Nazionale Del Lavoro SpA (Bnl) is looking to perform a massive securitisation operation for a value of around L3,000bn. This would understandably be the largest securitisation issue in Italy and arguably the largest single issuance in Europe.

It is notable that Italy had passed an enabling law on securitisation in April this year, and since then, there has been tremendous interest in securitisation both among bank as well as non-bank issuers.

This website has comprehensive resources about Italian securitisation. For a country profile on Italy, click here. For text of Italian securitisation law, click here. For several news items on Italian securitisation, browse the present page and the previous securitisation page.

Do you know more about the above transaction, or about securitisation in Italy? Your contributions will be appreciated: click here to send an e-mail.

Explosive growth in Japanese securitisation

Analysts compare the rate of growth with US early 1990s

The Japanese securitisation market is growing at an amazing pace. Though Japan was a late starter, the present levels of interest have even belittled the US growth rates in the early 1990s. The Ministry of International Trade and Industry (MITI) has put annual issuance during financial year 1998-99 at USD 15.5 billion which is still a fraction of the US annual volumes, but given the fact that the Japanese volumes have grown at the rate of over 80%, all eyes are drawn to the Japanese market.

The burgeoning market for asset-backed securities is a sign of the times in Japan: With bank lending on the decline, companies and financial institutions are starting to explore ways to wean themselves from reliance on bank credit. Those firms are turning to the asset-backed market for their capital lifeblood.

Among those who are particularly interested in securitisation in Japan are the Japanese banks. These banks' needs for regulatory capital relief and corporates' needs for non-bank liquidity have led to record issuance of securitized transactions in the Japanese capital market. First-time issuers and new asset classes are emerging as issuers and arrangers innovate.

This rapid development can primarily be attributed to regulatory support, the urgent need for financial institutions to meet capital guidelines, and companies’ demand for alternative source of funds.



Gain-on-sale accounting on securitisation making finance companies' accounts unreadable

Article comes down heavily on FASB 125

A recent article in American Banker Online [16th Sept., 1999] has come down heavily on the gains-on-sale accounting for securitisation transactions by finance companies. Lawrence M. Benveniste, the author, says: "After a series of missteps and failures by several specialty finance companies that depended on asset-backed securitization as their primary funding source and "gain-on-sale" accounting, the equity markets have become wary of the quality of earnings reported by these companies". The author seemingly agrees to some analysts who favour the view of "forcing all finance companies to account for profit on a "flow" or "portfolio" basis (and perhaps even stop funding their business via securitization)" as this  is the only way to accurately represent earnings and restore investor confidence.  
  
 

What is gain-on-sale accounting:  
The accounting method talked about in this article is the one prescribed by FASB 125 on securitisations: accourding to FASB 125, if certain conditions are fulfilled, a securitisation of assets should result into removal of the assets from the balance sheet and recognition of upfront gain/loss on the transfer of assets. The conditions have to do with whether the originator has retained any significant control on the assets, and whether the transfer is to a qualifying SPV. 

The other accounting standard relevant to securitisation is IAS 32/39 which adopts retention of risks/rewards approach. FASB is considered to be more liberal in allowing originators to book upfront gains as compared to IAS.

 

The author claims that securitizers that apply gain-on-sale accounting have the power to fool the markets (and themselves) by booking illusory profits based on error-plagued and unrealistic assumptions and projections about future losses and prepayments. But, as we have seen recently in the specialty finance industry, investors can quickly identify and punish these companies. When their investors withheld capital, several of these companies failed and are no longer in business.



US MBS issuance exceeds USD 400 billion in first half 1999

While the asset-backed securities market remained dull, there was a surge in volumes for agency-backed mortgage backed securities. The first half of 1999 data recorded an issue of USD 420.3 billion, marking an increase of over 29% over the comparable period in the 1998. The total volume for 1998 was USD 726.9 billion: the second half of 1999 may not see a very impressive business due to Y2K concerns, but there is a good potential to cross the issuance levels of 1998.

Data published in a research paper of the Bond Market Association state that all the three agencies, Fannie Mae, Ginnie Mae and Freddie Mac registered double digit gains in their issuance levels. Fannie Mae led the way, with $185.0 billion in issuance in the first half of the year, a 30.2% increase over the $142.1 billion sold in the year-ago period. Issuance by Freddie Mac rose 34.4%, to $152.2 billion, as compared to the $113.2 billion issued in the same period last year. Ginnie Mae reported a 20.7% increase over year-earlier levels, with issuance totaling $83.1 billion in the first half of this year, up from the $68.8 billion sold in the first half of 1998.

Another interesting side of the story is the secondary market activity. Trading in mortgage-related securities remained vibrant in the first half of this year, with daily trading volume averaging $73.7 billion in the period, a 9.9% increase over the $67.1 billion average reported for the first half of last year.



Charles Schwab setting up mutual fund to invest in asset-backed instruments

Charles Schwab and Co. proposes to introduce on Oct 1, 1999 a mutual fund that will in part invest in asset-backed and mortgage backed investments. Schwab, managing a USD 66.8 billion of funds, targets initially raising a corpus of USD 100 million for asset-backed investments for this mutual fund.

The YieldPlus fund is a step away from Schwab’s usual money-market funds, dealing with slightly larger risks and more diversity. Until now, Schwab’s investment strategists have shied away from asset-backeds outside the commercial-paper market, and have focused primarily on commercial mortgage-backed securities. Asset-backed securities are riskier than money market instruments, but investors do not perceive them as equal risk since the average life in small maturity instruments is one year or less.



Thailand Secondary Mortage Corporation starts buying mortgage loans

The Secondary Mortgage Corporation (SMC) of Thailand has started buying mortgage loans with the intent of securitising them. SMC expects strong interest among local financial institutions in its four-billion-baht securitisation deal to purchase mortgage loans. The scheme is part of the August 10 economic stimulus package of the government.

The sale of the mortgage loans by the loan originators, mainly banks and financial companies, will be a swap against government bonds. Thus, on one hand, SMC does not have to shell off any cash for the loans, on the other hand, the selling institutions get a long term government paper which helps them to take care of their maturity mismatches as well as capital adequacy requirements.

The loans to bonds swap scheme is an innovative exercise as it frees up regulatory capital for the selling institutions, and at the same time does not allow the selling institution any freed liquidity to be used at its discretion.

SMC, modelled on the US Fannie Mae pattern, will be shortly going for securitisation of the loans thus acquired.



Securitisation in Asia still feeble

The securitisation market was snuffed out completely in the SE Asian crisis of  1997 and while there are strong recovery signals in equity and debt markets, securitisation is yet to come out of the shadows where it was consigned. During the haydays of Asian boom, investment banks, institutions and law firms had sent securitisation experts to settle in Hong Kong: they have now been relocated to Japan or simply called back, says a report in Financial Times August 31.

Apart from a smattering of deals, mainly in Hong Kong, all the recent Asian issuance has come from Japan. The problem with Asian countries is the complexity of local laws – unlike Europe, or say, even Latin America,  most of the governments are yet to take any positive measures to promote securitisation by legislative action.

The development has been feeble inspite of the fact that the crisis was the surest proof of securitisation ring fencing. Transactions in Thailand and Indonesia have survived the crisis. Analytics quoted in the report look at China as the next most important securitisation stop for Asia, after Japan.

For more about securitisation in Asia, see our country profile – click on the Index page where you find country links. 
 



Re-insurers in securitisation

Credit risk reinsurance is a big business and these companies guarantee repayments on secuiritisation structures, particularly in case of banks CLO/ CBOs. A report in Financial Times Sept. 3, 1999 says that the turmoil in capital markets last year as a result of the continuing Asian crisis, Russia's default and the collapse of Long Term Capital Management's hedge fund led to a higher risk premium in bond markets – and a new role for reinsurers.

With conditions in the casualty insurance market remaining soft, re-insurers are likely to look at credit risk insurance. This is so inspite of the fact that most insurance companies know very little about credit markets.

And securitisers in re-insurance

Read this news item with the one directly above, and you see the strange way securitisation and re-insurance markets are making roads into one another. While insurance is providing a credit support to securitisation, securitisation is placing the reinsurance product in the capital market.

A recent article in the Financial Times Sept. 3, 1999 noted this trend when it said: "Reinsurers are waking up to the fact that far from being just one of the latest industry buzzwords, securitisation of insurance risk is here to stay. When, in April this year, the owners of Tokyo Disneyland bypassed the traditional insurance and reinsurance markets and sought earthquake protection in the form of catastrophe bonds, reinsurers were served another warning that insurance securitisation is a form of risk transfer that simply cannot be ignored."

Right as of now, casualty re-insurance rates are going soft and there is little incentive for reinsurance companies or other users to look at insurance securitisation, but most reinsurance companies are looking at the securitisation option in some way or the other.

Securitisation may not replace traditional reinsurance, but it is certainly a force to reckon with. Most of the risks securitised so far have been catastrophe risks, but motor risk, life insurance risk, and credit risk have also been taken to the capital markets.

On this website, a number of news stories on insurance risk securitisation have been carried. Also see our insurance risk securitisation page  – click here.



Italy the new mecca of securitisation

New law heightens interest, says CNN feature

Securitisation has been the money spinner of 1990s everywhere in the world, except Italy. But it is only after the new law was passed [see our Securitisation law page – click here] that Italy has joined the bandwagon. In fact, a feature on CNN August 20, 1999 described Italy as the new mecca of securitisation activity.

The potential is enormous: raising cash on the back of anything from sports stadium receipts, rock stars' royalties or pub rents to film revenues, mortgages and catastrophe insurance — anywhere where there's a flow of money.

But the most exciting prospect for Italy right now is the simple securitisation of loans — giving banks with some of the highest non-performing debt in Europe the chance to clean up balance sheets at a critical time for sector consolidation.

Until now, a lack of legal framework for securitisation has seen Italy lag its euro-zone fellows. As a result, while the U.S. and Britain have been churning out deals since the 1980s, the first Italian bank securitisation came less than two years ago.

But a tax-friendly law passed in May gives issuers a new blueprint to work from. [See securitisation laws page] Now, a bank contemplating a loan securitisation can simply park a portfolio of loans in a new Italian company which then issues asset-backed securities.

Previously, the bank would have had to patch together its own complicated ad hoc rules which would have involved setting up a new company abroad and provided no tax perks.

The Italian government has valued the potential market at some 100 billion euros ($105.4 billion) and banks are already diving in.

Among non-bank issuers, the Italian government is leading the pack. [This news was featured on this website – click here] In what is expected to be one of Europe's largest operations, Italy is planning to securitise delinquent social security receivables to help cut its mammoth deficit. In its 1999 budget, Italy promised to raise 5.3 trillion lire ($2.9 billion) from securitising outstanding pension contributions belonging to state pensions body INPS.

INPS had around 54 trillion lire of outstanding pensions contributions in 1998 and the Treasury expects to eventually recover 20 trillion of that.

For more on securitisation in Italy, refer to our country profile – click here.

For more news items on Italian securtisation, refer to our past securitisation news page – click here.



India's housing finance body plans mortgage securitisation

Stamp duty hurdles being cleared in most states

National Housing Bank (NHB), India's apex housing finance institution, plans to create a secondary market in mortgages by issuing mortgage backed bonds or pass through certificates. This will be the first mortgage backed securitisation in India.

NHB will buy mortgage loans originated by individual housing finance bodies, pool them and issue the securities. A team at the instance of NHB visited Fannie Mae, USA and other securitisers there to study their systems. However, it is stamp duties and legal hurdles back home that is holding NHB from coming out with the pilot project. Stamp duties apart, there are certain clarifications that NHB wants from tax authorities as well. This concerns the continuing eligibility of a housing finance customer to claim tax benefit for repayment of a housing loan, as post-securitisation, the loan gets transferred to an SPV which may not be an eligible housing finance body.

Stamp duties on securitisation in several states has been reduced to 0.1%.



Rate of downgrades in US ABS market increasing

Far more downgrades than upgrades

There has been an alarming rate of downgrades in US ABS market, according to a report by Moody's. Between August 1, 1998 and June 30, 1999, there have been 137 downgrades and 81 upgrades of asset-backed securities, according to the rating agency.

Of the 137 ABS downgrades, 69 were the result of poor asset performance. Downgrading of ABS due to weak asset performance continues a trend that began in 1997.

In the period surveyed, credit enhancer downgrades remained a significant factor, resulting in 57 of the 137 ABS downgrades.

Since the market's inception in 1986, there have been 234 upgrades affecting $14 billion in ABS and 311 downgrades covering $42 billion, according to Moody's.



US mortgage financiers capture UK markets

Technology and experience help the US firms

US companies such as Countrywise and HomeSide have made forays into the UK mortgage finance market and given their tremendous back office skills, technology and experience, they are likely to capture the UK mortgage market. A recent report in American Banker Online says that " U.S. lenders view the United Kingdom today in much the same way Britain once viewed its colonies — as a market for more civilized procedures and technology."

The entry of US majors has triggered competition in UK markets bringing down rates. At the same time, the US firms have started something that they practice widely back home, that is, subprime lending.



David Pullman considering IPO

The father of Bowie bonds eyes New York SE

DAVID Pullman, the Wall Street financier who brought the world "Bowie bonds", is planning to bring part of his star-studded business empire to the New York Stock Exchange, says a report in Financial Times, UK.

The 37-year-old millionaire caused a sensation two years ago by raising $55m by issuing bonds secured upon Bowie's future royalties. He has since secured similar deals for the Godfather of Soul James Brown, Motown songwriters Holland-Dozier-Holland and rhythm and blues duo Ashford & Simpson.

Mr Pullman says he has future deals lined up to securitise West End and Broadway shows and TV, films and literary assets.

He is also confident of further music deals, and says he has established good contacts with legendary names ranging from Michael Jackson to the Rolling Stones.

For more on intellectual property securitisation, click here.

 



First ABCP offer in Poland

BRE Bank launches the first issue

On 13th July 1999 Urtica Finanse S.A. launched via BRE BANK S.A. first issue of Asset – backed Commercial Papers under The PLN 50 Mio trade receivables securitisation programme.

URTICA Finanse SA is a bankruptcy-remote Special Purpose Company (SPC) established only for buying ("true sale") and administrating of trade receivables from URTICA SA. These receivables arise from delivery of medicines and drugs to hospitals located in Poland. In order to refinance the purchase of receivables, URTICA Finanse SA will issue asset backed CP. The ABCP are collateralized by trade receivables previously bought from URTICA SA. Proposed structure contains recommended by Standards and Poor's credit enhancements like: overcollateralisation, spread account, limited recourse to URTICA S.A. and liquidity enhancement like put option that gives SPC right to sell receivables to liquidity provider and liquidity line granted by BRE BANK S.A.

The ABCP has been granted short term credit rating – CP-1 (the highest domestic short term rating) by local rating agency – CERA S.A.- subsidiary of Thomson Financial BankWatch.

This information has been provided by Martin Tarnicki, Project Manager of the above Bank. Martin is a participant in our e-mail list.



Why lenders do not like mortgage funding in China

Mortgage funding is considered to be the safest in USA and most popular among small lenders, while lenders in mainland China do not value them much. Patrick Randolph in an article in South China Morning Post[12th August 1999] examined the reasons.

Apart from problems in enforcing mortgage foreclosures which involve anecdotal delays, there are other possible explanations. "The most obvious is market uncertainty. Lenders value security that is "counter-cyclical" – that it will have value precisely at the time that the economic fortunes of their borrowers have drooped", argues the author. This means that mortgage lenders look at real estate as a hedge against cyclical movements in industry.

Another significant reason is the lack of experience – "Western lenders have a long experience with the device, and rely upon armies of specialists who appraise, underwrite and, where necessary, seize and manage real estate security". This is lacking with lenders in China.

The author feels that a buoyant mortgage market is created out of financial crisis. For example, much of the development in US securitisation market came about with the efforts of the Resolution Trust Corporation taking over assets of failed lenders in 1980s.


RMBS issue likely by Hong Kong Mortgage Corporation

The Hong Kong Mortgage Corp, which was set up in March 1997 to acquire mortgage loans from banks and free up their books for new lending, had acquired HK$10.33 billion in mortgages as at end June 1999.

It will issue its first mortgage-backed securities of about HK$1 billion in size in the fourth quarter of this year.

In the meantime, there is a growing interest in mortgage funding both by the banks as also the non-banking finance companies such as  GE Capital and General Motors. Banks find mortgage funding one of their safest invesment options.

For more on securitisation in Hong Kong, see our Hong Kong country profile – click here. 
 

 New insurance product to cut political risk in emerging market investments

One of the reasons for development of emerging market future flows securitisation was the ability to eliminate sovereign risks by trapping cashflows outside the country of origin. Overseas Private Investment Corporation (OPIC) has launched an insurance product that would allow emerging market corporates to pierce their sovereign rating. The product entails the following methodology – an emerging market company wanting to issue debt securities to foreign investors would issue the securities to an SPV ( a trust) in an investment grade country. The trust in turn would issue its own securities to the investors. The trust buys an insurance with OPIC, which obliges OPIC to make payments that the original issuer could not make to the SPV on account of foreign exchange control or a debt moratorium slapped by the originator's sovereign. Thus, the investors continue to get serviced inspite of the sovereign's redirection or moratorium orders.

OPIC is an agency of the US government.

The insurance policy does not cover any credit risk. Investors bear the full risk of default because of credit reasons.

US ABS issue shows modest growth in first half 1999

Markets outside the USA take the shine

Growth of any financial innovation is seen to follow the S-curve – the evolutionary or introduction phase shows low growth rate; followed by abrupt increase in explosive growth phase, finally slowing down to a plateau in the stabilisation stage. Has US securitisation issuance reached its plateau? Not sure, but markets in Europe and Asia, also Latin America, have surely reached the explosive growth stage.

US ABS issue in the first half of 1999 grew about 4.6% to a volume of USD 101.1 billion, as compared to USD 96.7 billion during the same period in 1998 (as per data published in Structured Finance Monitor). As against this, there has been surge in volumes in Japan, Australia and Europe – see reports on our Securitisation news page.. US data traditionally exclude mortgage-backed securities.

The data reveals that the highest share in total ABS issuance (about 32%) is taken by home equity loans. About 22% each is shared by credit cards and auto finance receivables.

CMBS volumes seen declining sharply in 1999

Moody's Mortgage-Finance analysts project that 1999 commercial mortgage-backed securities (CMBS) will total around $60 billion, roughly 25% below last year's level. For the rest of 1999, they expect an active third quarter, with a possible fourth-quarter slowdown in reaction to Y2K-related concerns.

As deals have become smaller and the overall quality of credit has improved, commercial mortgage-backed securities (CMBS) volume for the first half of 1999 was down 20% from the volume of the first half of 1998, as deals became smaller and overall credit quality improved, say Mortgage Finance analysts in a recent report.

SECURITISATION NEWS AND DEVELOPMENTS

/in /by

[This page lists news and developments in International

securitisation markets – please do visit this page regularly as it is

updated almost on a daily basis.]

IMPORTANT

For all news added before 9th November, please click here 
For News items added prior 3rd August, 1999, click here
For later news, click here.

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

 

 

NEC Japan to securitize office building

NEC Japan has decided to securitise its head office in Tokyo for Yen 90 billion. The building will be sold to Sumitomo Trust and Banking Corp which in turn will finance itself by issue of securities, backed by the ownership of the building. The building will, in turn, be leased to NEC to allow Sumitomo to service the investors.

The transaction will allow the ailing electronics giant to book a profit of Yen 60 billion on account of sale of the building. The transaction is likely to take place with the current fiscal year of NEC ending in March.

 

Three cheers for securitization industry 
French company proposes securitization of champagne bottles

The constantly expanding asset-classes in securitization transactions must have really got a "kick" as a French company proposed securitization of champagne bottles. Marne et Champgne, the originator, is the second largest champagne producer in France and the transaction seeks to raise euros 396 million through a bond issue that will be backed by 60 million bottles of champagne at various stages of production. The roadshows for the offer began on 17th Jan.

The bond issue is being led by Nomura Securities. It may be noted that Nomura has been responsible for similar innovative asset classes in Europe as pub revenues, TV channel (Formula One) income, etc.

Three types of bond will be issued, all with investment-grade rating. Two of them, accounting for 85 per cent of the total, are rated single-A, with the third triple-B. The proceeds will be used to replace bank funding being used by the company.

This innovative transaction was covered by Wall Street Journal in the following words: "This reflects a new trend in securitized debt, with deals on passenger train companies, Formula One racing teams and future sales of beer. Offerings from so many different sources are spreading across the Atlantic to the US, where companies are also discovering that future shareholder value is best assured by capitalization through the assumption of debt. In the future, corporate financiers might be able to look forward to securitized debt as a means of restructuring and raising finance for acquisitions."

Vinod Kothari comments: The transaction has a few unique features which are noteworthy. First of all, it represents a securitization of physical assets, rather than financial assets. The operating asset of the company, glass bottles though physically with the company still, have been offered as a collateral. In a sense, this amounts to securitization of working capital. If this form of financing is acceptable to investors, it gives a new dimension altogether to the trend towards disintermediation – more companies may substitute bank funding by such securities.

Do you have any comments to offer on this path-breaking transaction? If so, please do write to me and we would gladly publicise your views on this site.

Securitization activity heats up in Canada

The Canadian securitisation market is expected to have lot of activity in 2000. According to data from Dominion Bond Rating Service, the outstanding ABS amount as at end-1999 was C$67 billion, including asset-backed commercial paper. This compares with C$49 billion was outstanding at the end of 1998, C$27 billion in 1997, and C$13 billion in 1996.

The outlook for Canada's asset-backed securities in 2000 is very positive. The first issue to hit the market in 2000 was a C$1-billion deal from Canada Trust named Genesis Trust, seeking to securitise personal line of credits. The deal received a AAA rating. The issue has apparently received strong investor support.

Links: Please do see our Canada country page for more information on Canadian securitisation market.

Chinese bank to securitise

A Chinese bank, Chinese Construction Bank, appears to have lined up with an Australian Bank Macquarie for the former's proposal to securitise loans.

There have been very few securitisation transactions in China – notable was a shipping company's assignment of future flows.

Links Do visit our country profile on China for a detailed account of the legal system in China and why is it difficult to securitise there. Click here to visit.

Philippines economic body moots securitization

Though securitization is yet to catch up in Philippines in a big way, it is on the top of the agenda items of the government. The recently-constituted Economic Coordinating Council has recommended several measures to smart up the housing sector in Philippines. Among these measures is included a suggestion to promote securitisation by the Home Insurance and Guaranty Corp.

In another unrelated development, the State-owned Development Bank of Philippines indicated its resolve to play a larger role in securitisation of mortgage-receivables.

Links – For another news item on securitization in Philippines housing sector, click here.

Hanover Re continues securitisation of non-catastrophe transactions

Securitisation as a tool for alternative risk transfer was mostly limited to catastrophe transactions. However, Hanover Re has been active in non-catastrophe securitisations.

Towards end-December 1999, Hannover Re completed a third securitisation of life and health reinsurance business worth EUR50m ($51m). The deal transfers the acquisition costs of life, health and personal accident reinsurance and was designed for insurers in Asia's emerging markets. Hannover Re has now refinanced EUR230m of life and health acquisition costs in the capital markets.

Links: Our insurance securitization page – click here to access – contains lot of materials on insurance securitisation in both the catastrophe and non-catastrophe segments. There are a number of articles also on this website as well as others.

Europe is gung-ho on securitization prospects in year 2000

Participants at a recent seminar about European securitization appeared greatly enthused about the prospects for year 2000. It was also an occasion to take stock of developments in various parts of Europe.

Several interesting and innovative deals appear to be knocking the door. Paribas Bank is putting together a deal for securitization of rentals receivables from students who stay in the campus of UK's Keele University. Morgan Stanley is expected to securitize a sale and leaseback transaction by a UK retail group. The retailing giant Marks and Spencer has also appointed Morgan Stanley to securitize retail stores.

Securitization of non-performing loans is also likely to hit Europe. Morgan Stanley has bought some 4,000 loans originated by Banca Nazionale del Lavoro, and is likely to securitise them later this year.

In other European markets too, activity is expected to pick up. For example, in Ireland, First Active is expected to launch Celtic 5 in February, selling Eu300m of Irish MBS through Paribas.

In Netherlands, MBS issuer will emerge at the end of the first quarter or early in the second, in the shape of Achmea Hypotheekbank, a unit of the mutual insurance and banking company Achmea Holding. ABN Amro and CIBC World Markets will be joint bookrunners on the Eu500m issue, for which ABN provided funding over the year end.

Links: For a general overview of securitization activity in Europe, see our profile for Europe – click here to visit.

1999 volumes surge in Australia
Year 2000 to be brighter, says Moody's

Year 1999 was a busy year for Australian securitization. A report recently published by the credit rating agency Moody's says that volumes surged in both the asset-backed market as well as mortgage-backed market.

1999 volumes of Australian structured finance securities surged by almost 66 per cent to $A17.2 billion ($US11.28 billion), from around $A10 billion ($US6.56 billion) the previous year, says the report. If one were to look at the asset-backed market alone, the growth was even higher at some 121%. The prime asset-classes in 1999 were auto loans and equipment leases.

Year 2000 promises to be a brighter year, according to Moody's. The factors responsible would be growing need of banks to manage their liquidity as well as their balance sheets, and increased investor appetite for subordinate and below-investment grade securities.

Links: Do visit our Australia country profile for detailed information on securitisation activity in Australia – click here to visit.

 

Turkish leasing company assigns rentals

Garanti Leasing, an entity of the Garanti Bank Turkey assigned future rentals in favour of IFC Washington and Rabobank to raise USD 51 million. The financing will be accounted for on the balance sheet as a loan.

Within the leasing sector in Turkey, this would be the first case of securitisation. However, Garanti Bank itself has been engaged in some securitisation deals earlier.

Links: For a country profile on the securitisation market in Turkey, go for Turkey on our Index page.

Malaysia's CAGMAS bonds rated AAA

The Malaysian securitisation agency CAGMAS' bonds issued in December 1999 have been rated AAA. The Rating Agency Malaysia has assigned the highest rating to these bonds based on the underlying asset quality, etc.

The bonds have a 3-year tenure and carry a fixed rate of interest. The proceeds of the bonds will be used by CAGMAS to buy mortgages from Malaysian housing finance entities.

Links: For a profile of securitisation market in Malaysia, click on the country profile on our index page. We have been carrying news about Malaysian securitisation market off and on, including that on Cagmas.

1999 ABS issuance in USA declines

The volume of asset-backed securities in the USA in 1999 was lesser as compared to the previous year, basically due to the decline in the last quarter owing to Y2K worries.

A Thomson Financial Services Data release said the total issuance in 1999 including private placements as well as public offers was $260.2 billion compared with $271.1 billion in 1998. The drop was basically because of the 4th quarter dip.

Among investment bankers, Credit Suisse First Boston led the 1999 full year totals with $37.7 billion, while Salomon Smith Barney took second position with marginally over $35 billion. Lehman Brothers took third place for the full year leading $34.6 billion.

Electricity receivables securitised in India

The market does not wait for the regulator. Even as the RBI has suggested wide-ranging legislative reforms to enable securitisation transactions, the market continues to move ahead.

India's first transaction of electricity receivables was announced on 29th December. Newspaper reports [Economic Times 30th Dec.] quoted SBI Caps managing director as stating that a deal for sale of electricity receivables worth Rs 1.94 billion [USD 45 million approx] has been concluded between Karnataka Electricity Board as the originator and Housing and Urban Development Finance Corporation as the buyer. SBI Caps was the structuring and advising agent to the deal.

The deal represents transfer of overdue power receivables of the originator from various government companies. Credit enhancement was provided in form of a guarantee from the State government. The bonds have a 10 year tenure redeemable in 10 equal instalments.

European Securitisation Forum officials appointed

Appointment of officials for the European Securitisation Forum for year 2000 was finalised by the Bond Markets Association recently.

Ms. Tamara L Adler, managing director of the European Securitisation Group at Deutsche Bank, London, has been appointed chairman of the Forum. Joerg Dresen, head of the Fixed-Income Division of AXA Colonia Asset Management GmbH in Koelh, Germany, was appointed vice-chairman.

The European Securitisation Forum is a body of the Bond Markets Association. Website of Forum is located at http://www.europeansecuritisation.com/

Vinod Kothari comments: Would it not be a good idea to have a similar forum for Asia? Any takers?

 

NewState to issue RMBS in Korea

No sooner than the law permitting mortgage-backed securitisation was passed, NewState Capital Co, the Korean subsidiary of NewState Holdings, has announced plans to securitise residential mortgage loans worth USD 50 million. The issue would be timed in the first quarter 2000 in which NewState will retain servicing rights.

Headquartered in Seoul, NewState has been in home mortgage business since 1994.

The issue will be underwritten by Daewoo Securities. Daewoo is the third largest investment bank in Korea.

 

Korea passes mortgage securitisation law

The government of Korea recently enacted the Mortgage-Backed Securities Act on December 16, 1999. The Act permits the sale of mortgage loans to third parties without the consent of the borrower.

It may be noted that earlier this year, Korea has enacted a law for general securitisation of assets. The text of the law appears under the Securitisation laws section of our website.

Links: For a profile of securitisation market in Korea, go to country profile on the Index page.

For yet another news item relating to Korean banks securitising receivables, click here.

Working group of RBI in India suggests securitisation-friendly environment

An in-house working group appointed by India's central bank Reserve Bank of India (RBI) submitted its report to the Governor on 29th December. The group has suggested legislative changes to promote securitisation in the country.

The working group has appreciated need to launch securitisation product in India and has spotted immediate potential for securitisation with several financial intermediaries. The group has made several recommendations for legislative changes to support securitisation. Classified into short-term, medium-term and long-term changes, these suggestions relate to a cohesive definition in the Transfer of Property Act, tax law changes, stamp duty relaxation etc.

According to the working group, securitisation SPV structure may be left to the choice of the originator and may be a company, trust, association of persons, but the group recommends a mutual fund structure. The SPV should be registered with the Securities regulator, according to the group.

Here are Vinod Kothari's detailed comments on the working group report.

 

Catastrophe bonds in 1999 tabulation

Data about the 1999 issues of catastrophe bonds was recently published in Reinsurance:

INSURANCE-LINKED SECURITISATIONS – 1999

 

INSURED OR CEDANT

COMPLETED AND PERILS

DEAL STRUCTURE

LIMIT ($m)

TYPE

Horace Mann

Jan 

capital

CatEPut 

100

Contingent

Constitution Re

Jan

Cat XL

10

Risk transfer

St Paul Re/Mosaic Re II

Feb

Cat XL

45

Risk transfer

Kemper Insurance/Domestic Inc.

Mar 

– New Madrid quake

Cat XL

100

Risk transfer

Gerling Credit/SECTRS-1

Apr

Trade credit

494

Risk transfer

Sorema/Halyard Re

Apr

Aggregate XL-Europe & Japan

17

Risk transfer

Oriental Land/Concentric Re

May

Cat XL- Tokyo earthquake

100

Risk transfer

Oriental Land/CircleMaihama

May 

Cat XL – Tokyo earthquake

100 Contingent capital

 

Gerling Global Re

June

Cat XL – US cat

80

Risk transfer

USAA/Residential Re 3

June

Cat XL – US hurricane

200

Risk transfer

Undisclosed insurer

Sept

PCS index – New Madrid

50

Risk transfer

Koch Energy/Kelvin Ltd

Oct

US weatherderivative contracts

50

Risk transfer

Hannover Re

Oct

Life & healthacquisition costs

50

Risk transfer

American Re/Gold Eagle Capital

Nov

Cat XL – modelled losses

182

Risk transfer

Gerling Global Re/ Namazu Re

Nov

Cat XL – Japaneseearthquake

100

Risk transfer

 

Yet another bank dogged by securitisation accounting losses

Community West Bancshares in Goleta, California, USA was forced to write off USD 8 million of the USD 20 million worth securitisation residuary interests that stayed on its books after the loans it securitised during 1998 and 1999. Consequently, the bank will be reporting a loss of USD 3.8 million for the year.

This may be the n-th instance of arbitrary values in securitisation accounting. Residuary interests are the interests that a securitisation originator retains in assets that it sells: for example, residuary income in the SPV after paying off all external creditors. The FASB 125 requires such interests to be valued and reported on books. There have been several instances where arbitrary or inflated values were assigned to such interests. There have been quite a few cases of banks failing such as First National Bank of Keystone [ see for news on this site].

The bank plans to quit securitisation business.

Links and discussion on Accounting for securitisation : We have been actively pursuing issues relating to accounting for securitisation which we feel is very crucial to securitisation business. Recently, we published Martin Rosenblatt's views on the matter. Shortly we are going to publish more views. If you have any contribution to make, please do write to me.

 

Housing finance body in India finalises first mortgage-backed securitisation

National Housing Bank (NHB), apex housing finance body in India, has finalised plans for the country's first mortgage-backed securitisation program. This is in fact a pilot project, to draw up a template for such transactions in future. Newspaper reports [Economic Times 28th Dec] quoted NHB's Chairman as stating that there will be more MBS issues in time to come consisting of mortgages originated by several other housing finance companies.

The pilot will consist of mortgages originated by HDFC, one of India's premier housing finance entities. The issue will be arranged by SBI Caps and ICICI Securities.

Vinod Kothari comments: Does this issue mean NHB in future will re-invent itself into a Fannie-mae-kind of avatar? Looks unlikely, as in the present transaction, the role of NHB is more of a facilitator rather than guarantor.

Links: On the news page, we have carried several news items relating to NHB's proposed securitisation transaction as also other securitisation events in India. Readers will find country profile on India to be of great interest – go to the home page and look for India's country profile.

Home loan finance company in South Africa proposes securitisation

Securitisation is set to take off in South Africa next year. SA Home Loans, a non-bank lender that commenced operations in February this year is expected to launch its first securitisation transaction in February 2000.

The R300m deal will comprise some R277.5m of senior notes rated triple-A by Duff & Phelps and Fitch IBCA, R15m of unrated 'B' notes and a R7.5m retained first loss tranche.

Links – See country profile for South Africa on our Index page. The page also gives links to several South African securitisation issuers.

ABN Amro launches Europe's largest consumer loan securitisation

On 10th December, ABN Amro launched Europe's largest consumer loans securitisation: an EU1.376 billion issue representing securitisation of Dutch consumer loans. The collateral is a portfolio of revolving-type consumer loans granted by the Bank. The transaction will revolve for 3 years before it starts amortisation.

Oilfield development in Brazil funded by securitization

ABN Amro bank recently launched USD 200 million notes backed by oil income to part finance the development of an oilfield in the Rio de Janeiro region in Brazil. The issuer is a consortium of a project company called Companhia Petrolífera Marlim and Petrobas.

Links: See the country profile on Brazil – click on the Index page and go to Brazil.

First securitisation of life policy loans in Italy

Alleanza Assicurazioni, Italy's largest life assurance company, recently securitized the loans it granted under its life assurance policies. The transaction was offered on 10th December. Worth Eu278.3m, the deal was managed by Salomon Smith Barney.

The transaction is considered fully secure, as the loans are backed by the surrender value of the policies.

San Giorgio SpA, an Italian SPV, would be acting as a conduit for the transaction. The transaction would enable the assurance company to treat the cash raised by sale as a reserve, and would bolster its capital.

Pakistan issues securitisation rules

Final rules to allow securitisation transactions to happen in Pakistan were notified by the Securities Exchange Commission, Pakistan on 22 Dec, 1999.

The thrust of the new rules is to regulate the structure, functioning and taxation of SPVs. SPVs will be public limited companies, and they will be exempt from payment of income-tax. The securities issued by the SPV will be regarded as term finance certificate, or simply put, as debt securities.

The market has taken the new rules with optimism and it is expected that the country's debt market will get a new lease of life with the new rules. Potential issuers of securitised instruments in Pakistan include leasing companies, financiers, credit card issuers etc.

The draft rules were framed by the SEC in June this year.

For a full text of the new Securitization rules in Pakistan, click here.

For a profile of the securitization market in Pakistan, go the country profile on the Index page.

Italian banks continue to securitize bad loans

Markets World-over seem to have gone for X-mas-cum-new-millennium holiday, but Italian banks are busy cleaning up their balance sheets of bad loans.

In a recent transaction (Il Sole 24 Ore, 21 Dec., 1999), Banca Nazionale del Lavoro (BNL), finalised the securitisation of credits worth L3,500bn. It has chosen JP Morgan & Co Inc of the US to carry out the operation. It will involve the transfer of loans on a non-recourse basis. The bank continues to have negative net worth but this transaction will see it lesser deep in red.

Links – We have carried news items about securitization in Italy several times on this page. Also see the country profile for Italy on the Index page, which also has a write-up on the technique for securitisation of bad loans.

Pricewaterhouse advises India to create securitisation-friendly environment

In a recent report, Pricewaterhouse Coopers (PwC) advised the Indian government to create a legal environment congenial to securitisation transactions. The report related to infrastructure finance.

Stating that the creation of an appropriate legal framework for securitisation transactions was long overdue, PWC pointed out that the impediments in this were widely appreciated and it was necessary to undertake parallel reforms that address these issues.

These issues include the tax status of a special purpose vehicle (SPV) structured as a trust, allowing contractual savings institutions to invest in special purpose vehicles and developing appropriate accounting standards for securitisation transactions, the international consultancy firm said.

Vinod Kothari comments: More important than the legal changes suggested by PwC, which are anyway not any major stumbling block, is a clarity from the Reserve Bank of India, that banks can invest in securitisation transactions and the manner of computing capital adequacy requirements for banks that have securitised.

Hong Kong mortgage co. to securitise mortgages

Hong Kong Mortgage Corporation (HKMC) has plans to securitise HK $ 630 million worth of mortgage-backed securities which will be sold by American Express bank.

HKMC is a Fannie Mae-type body created by the government to activate secondary mortgage markets in Hong Kong.

HKMC has ambitious plans for year 2000 as it plans to come out with KH $ 2-3 billion worth of mortgage-backed securities.

Links: See also our country profile for Hong Kong on the Index page.

Tobacco bonds deal rated as "deal of the year"

Investment Dealers' Digest, a weekly publication in the USA, has selected the tobacco bonds issue as one of the hottest deals of 1999. Eighteen such deals were announced last week by the publication.

The awards are selected from issuance in various sectors such as healthcare, energy, emerging markets, real estate, etc.

The tobacco bonds deal has been selected in the Structured finance category, and the award goes to Salomon Smith Barney, investment bankers to the transaction. Details of the tobacco bonds issued by New York have appeared several times on this page – click here.

GMAC RFC's 1999 volume reaches USD 22 billion

GMAC – Residential Funding Corp., a unit of General Motors, is the largest securitisation originator in the World. It securitised loans worth USD 2.1 billion in November, taking its 1999 volume to USD 22 billion. Large part of loans securitised by the company consist of home equity or subprime loans.

Banca di Roma proposes securitisation of bad loans

Banca di Roma SpA, the Italian bank, has approved a securitization programme for its bad loans portfolio of worth a gross amount of 3.730 trln lire with a net book value of 3.100 trln.

When the securitisation law was passed in Italy earlier this year, Banca di Roma was among the first to launch a securitisation program. Click here for this piece of the news in July this year.

More links: Follow the Italy country page – see country profiles on the Index page.

 

US bank regulatory agencies issue precautionary guidelines on securitisation

Caveat bankers, say the agencies

This development may well be read as a precursor to tighter controls on securitisation activity of US banks. US banks have been going very optimistic on securitisation but recent failures of some banks attributable one way or the other to their securitisation business have created ripples in the market place, forcing the regulators to take this action.

On Monday, 13th December, the 4 bank regulatory agencies in the USA, viz., Federal Deposit Insurance Corporation, Board of Governors of Federal Reserve System, Office of Comptroller of Currency and Office of Thrift Supervision issued joint press release and guidelines on securitisation. The stance of the guidelines is mainly precautionary. For example, the Guidelines open with the following remark: " Recent examinations have disclosed significant weaknesses in the asset securitization practices of some insured depository institutions. These weaknesses raise concerns about the general level of understanding and controls among institutions that engage in such activities."

The problems pointed out by the agencies are primarily accounting-related problems. The agencies have pointed out the 4 major problems as under: (1) the failure to recognize and hold sufficient capital against explicit and implicit recourse obligations that frequently accompany securitizations, (2) the excessive or inadequately supported valuation of "retained interests," (3) the liquidity risk associated with over reliance on asset securitization as a funding source, and (4) the absence of adequate independent risk management and audit functions.

Full text of the Interagency Guidance has been placed on this site – click here to read (the file will open with Adobe Acrobat reader).

Vinod Kothari comments: We have been expressing concern about the accounting practices on securitisation for sometime on this website. We are also trying to elicit opinions of other experts in the matter, and have constituted a virtual roundtable to discuss this issue. Should you have a contribution to make, do write to me.

 

Philippines housing finance fund mulls securitization in phases

Philippines housing finance body Home Development Mutual Fund (Pag-IBIG Fund) plans to securitize its P54-billion loan portfolio on a per-project basis. Report in BusinessWorld said, quoting the CEO of the Fund that previous attempts at securitizing failed as the Fund tried taking the entire portfolio at a time. The Fund has about 240000 loans on its books.

Securitization of mortgage loans has become a hotly debated issue in Philippines. Critics lament the inability of the administration to handle housing finance, which they claim should have been a private sector domain. Another unrelated article in BusinessWorld of 1st Dec claims that "If recent developments are any indication, the Estrada administration may be tacitly admitting its mistake in reverting to the failed government interventionist scheme in financing the housing program".

Links: We have carried news about securitization activity in Philippines off and on. Besides, see the country profile on the Index page.

All-Internet loans securitized

Prudential Securities and Internet-based auto loan provider PeopleFirst.com announced on 1st Dec. securitization of auto loans originated entirely on the Internet. The offering of USD 116 million is backed by auto loans originated on the website on PeopleFirst, and marks the first securitization of loans entirely generated on the Net.

The transaction is credit-enhanced by an insurance provided by Financial Security Assurance and is rated AAA by S&P and Moody's. The weighted average coupon is 6.58%.

Do you know anything more on this transaction? Can you make any comments on the unique aspects in the rating of transactions originated on the Net? Your comments will be appreciated and published on this site – click here to write.

Housing finance body in India to securitize early next year

A report in The Economic Times of 30th November says that HUDCO, a premier housing finance body in India will securitize housing loans to the tune of Rs. 10 billion early next year. The deal was in the news for a long time and HUDCO was reportedly shortlisting agencies for the premier housing loans securitization program in India.

The report quoted the CEO of the company as saying that the transaction will be offered in two tranches of Rs 5 billion each.

India's premier financing body readying for mega securitization deal with GE Capital

A report in Financial Express on November 25 said Industrial Development Bank of India (IDBI) was on the verge of stitching together a mega securitization deal with GE Capital where the former will sell off loans worth Rs. 50 billion by way of securitization. This will be the first securitization by any public sector bank or financial institution in India, nay, the first securitization of corporate loans.

IDBI is a premier financial institution in India, created for development finance by the Government. Most of IDBI's loans will be in the nature of corporate project finance.

Vinod Kothari comments: The report does not clarify whether GE Capital is structuring the deal or is buying up the loans itself. If the latter be true, it would be ironical for India's financial sector where domestic banks themselves are flush with funds and the only reason why they would not buy up IDBI's securitised loans would be that the Reserve Bank of India has not clarified whether banks can invest in such deals. GE Capital, on the other hand, might itself borrow from these very banks to invest in the transaction.

Italian government launches unpaid tax bond

Securitisation of government social security dues totals USD 4.8 billion

Deal rated higher than Italy's sovereign rating

Italy made a history in the world of securitization by being the first in the World to securitize government revenues by taxation. A report in Financial Times London said this was a deal that "broke new ground in financial engineering".

We have talked about this deal several times on this site. See the news reports – here, and for further news reports, see links with the news item above.

This deal was offered to capital markets on 24th November by selling USD 4.8 billion worth of bonds. The bonds were over-collateralised (see our securitisation glossary on the Index page) to the extent of 10 times, and thereby, the bonds obtained AAA rating, which is higher than the sovereign rating of Italy.

Financial Times also says that the deal will be watched closely by other European governments as they might be planning similar issues.

According Paribas, lead manager of the issue, the issue was sold mainly to European and Asian banks.

Japan ABS market doubles as assets range from car loans to kimono bonds

Japan was a late entrant to securitization business, but recently, there has been a remarkable spurt in volume.

A report in Financial Times of 25th Nov., quoting practitioners in Japan says that the outstanding issuance in Japan this year has doubled in relation to the previous year to Y 2000 billion, and is likely to double again next year. Domestic investors are taking keen interest in securitisation issues.

Reflecting the variety of asset classes, recently a consumer finance company called Quoq issued bonds backed by kimono loans. Kimono is a traditional Japanese dress mostly populra among women of 40 and above. A kimono costs a fortune, anywhere between Y 200000 to 2 million. Small banks and finance companies grant loans to buy kimonos.

The other asset classes in Japan are 22% in car loans, 32% in leases, about 9% in shopping loans which includes kimono loans as well.

Relevant links: News reports about Japanese market have been often flashed on the news pages – see this and the other news page.

For a country profile of Japan, see the Japan page – follow the link on the Index page.

There is a fairly detailed article on Japanese securitisation – see the securitisation articles page.

Thailand body buys receivables; to securitize second quarter 2000

Secondary Mortgage Corporation, a Fannie-May-type body set up in Thailand, has started acquiring mortgage loans but would wait till the second quarter next year before it securitises them into the market. A report in The Nation said that the Corporation agreed with Government Housing Bank to buy Baht 400 million loans on 24th Nov.

Securitisation of housing loans in Thailand is a part of the Government's August-package to revive the economy which suffered heavily during the Asian currency crisis but is showing sure signs of revival. The revival of the economy would help the Corporation in being able to offload the mortgages to investors.

Relevant Links: We have covered news about securitisation in Thailand on various occasions – search this and the previous news pages.

The general securitisation environment in Thailand is covered on country profile – check the Index page for a country profile of Thailand.

 Company to use Internet and securitization to eliminate receivables

If this promise sees the light, companies may soon look forward to the day when their balance sheets will be lighter by trillions locked in receivables mainly due to the time the process of receivable posting, tracking, and settlement takes. eTime capital would make use of the Net and securitization of asset-backed receivables to provide companies cash against receivables instantly.

A company release explains the concept as thus: eTime Capital is using the Internet to revolutionize the financial supply chain for trade receivables. eTime Capital uses the Internet to integrate information across the seller, buyer, transportation service provider and financial institution comprising the web of trading parties into a single real-time system. By integrating real-time information with Internet-speed financial services, eTime Capital promises to create a new industry category that will virtually eliminate accounts receivable. Additionally, through its securitization of asset-backed trade receivables, eTime Capital will allow all companies to directly access the capital markets, regardless of their credit rating.

The inspiration for this venture comes from the realisation that "there has been tremendous innovation in the physical supply chain in recent years, yet the financial supply chain is fundamentally unchanged since the rise of modern banking-over 700 years ago".

Yet another bank goes bust on securitisation accounting lapse

A small bank in California went bust on Friday last week. Named Pacific Loan and Thrift, it was a small bank with just USD 118 million in assets. But its failure is expected to cost bank insurance fund some USD 50 million, says a report in American Banker of 23rd November.

The 11-year-old bank originated first and second residential mortgages to subprime borrowers over the Internet and via its 20 loan-production offices in 13 states. It then securitized and sold these loans on the secondary market. By the end of 1998, the institution had 541 full-time-equivalent employees, though the total shrank by more than half this year under pressure from regulators. Virtually all the bank's deposits were in certificates of deposit marketed via telephone.

The reason for the collapse is that a majority of the bank's USD 48 million in Interest only residuals out of loans securitised by the bank are worthless, says the report quoting FDIC officials.

Updation dated 25th Nov., 1999: A further report in American Banker of 24th Nov. says that the assets of the bank included clean-up calls on securitised loans which had been valued at ambitious figure by the bank but which would sell for a pittance. The FDIC it seems had already objected to the valuation and issued a cease and desist order, but an accounting firm ultimately frustrated the FDIC by accepting the bank's valuation based on assumptions about interest rates, etc.

Expressing concern about the method of valuation of retained interest in securitization, an interagency group of bank and thrift regulators wants to change the rules for valuing residuals. Members already agree that financial institutions should be limited in the amount of residuals they may count as capital.

Vinod Kothari comments: We have earlier reported on the failure of First National Bank of Keystone – click here to view.

Accounting for securitisation transactions by banks is apparently fraught with many problems. An article in Business Week in Oct. 1998 put it beautifully: " Securitizations are all about guesswork. First, companies guess how much revenue they can expect at a particular time. Then they guess how much of that money they will need to back their bonds safely. Finally, they guess how much cash will be left over–and book that as profit."

There are some serious issues about FASB 125 that we would like to discuss. We want to constitute a roundtable on this issue. If you have intimate understanding of accounting principles and practices, you are welcome to join the roundtable – by e-mailing me.

Countrywide securitises excess servicing fees on securitised mortgages

You may well call it the second round of securitization, or securitisation of securitised flows – Countrywide of USA has securitized the servicing fees on mortgages already sold to the agencies.

Excess service fees are the originators' residuary interest, normally his spread, in mortgages securitised by the originator but still being serviced by him. It is usual in securitisation transactions to break the servicing fees into normal fees and excess fees, with the latter representing originator profits.

Countrywide would have already raised upfront cash on mortgages at the time of their original sale to the agencies, viz., Fannie Mae or Freddie Mac. Securitisation of service charges would now mean even the profit on such securitised mortgages is being securitised.

A news report in American Banker 23rd Nov on this item said that in a market where new origination was at an ebb, Countrywide had little other choice.

Reverse mortgages securitization holds potential, says KPMG

A recent analysis by KPMG sees a potential in reverse mortgage securitization in US mortgage markets. A reflection of this trend may also be found in the remarks of Fed Chairman Alan Greenspan in a recent speech – see report on this site.

According to the KPMG report dated 19th Nov., the logic is quite simple. " Of the nearly $5 trillion in U.S. home equity today, about $1 trillion is owned by the elderly, a figure that will only increase as baby boomers retire (see story below). And some industry observers see a fundamental change in how retirees will treat that wealth tied to their homes, tapping the equity to supplement rather than leave it to inheritors. That trend could make the reverse mortgage market –and securitizations –explode. "

A reverse mortgage arises when a homeowner 62 years old and older borrows against the appraised value of his home, giving him a set amount each month. Homeowners don't have to make any payments until they die or leave their houses for an extended period of time due to illness. When one of these things occurs, the bank gets the principal and interest back on the loan, along with half the home's appreciated value.

Thus, a reverse mortgage serves as a source of earning for the old, to be repaid by the value of the house after their death.

Since 1990, about 52000 reverse mortgages have been written in the USA but the potential is still huge. The analysis says, quoting experts, that reverse mortgage generation could increase 10% to 15% a year as aging homeowners look for ways to supplement income. The potential market is unlimited: $4.8 trillion in U.S. residential mortgages were outstanding at the end of the first quarter, according to the Bond Market Association.

It is notable that Lehman Brothers was the first investment bank to securitize reverse mortgages in August this year.

In securitization arena, it is hockey bonds now!

About 2 years back, an article in Business Week said: Wall Street can securitize everything. Ever expanding array of asset classes being securitized proves this statement beyond doubt.

Though securitization of sports revenues is not new, this one is a sizeable transaction – New York Islanders proposes to raise USD 200 million by sale of bonds backed by fixed revenue streams the U.S. National Hockey League team gets from television cable contracts and advertisements at its home games. CAK Universal Credit Corp. of New York is said to be underwriting the deal for the New York metropolitan area team, which will be marketed as a private placement, probably in the first quarter of 2000.

Other instances of sports revenues securitization in the USA include the Staples Center in Los Angeles and the Pepsi Center of Denver which raised money through the sale of debt backed by expected revenues from license agreements for luxury suites and "other revenue producing arrangements." The Staples deal totaled $315 million and the Pepsi Center offering totaled $139.8 million. The bonds of both transactions had a life of about 20 years.

Links: For an earlier news item on a UK soccer club's securitisation, refer to this link: click here

 Tobacco bonds a sell out

Tobacco bonds issued recently by New York city sold like hot cake – though the name might sound like adding the smell of tobacco to the cake. A recent article in Business Week of 20th Nov. says that on the very first day of opening of the issue on Nov. 1, investors snapped USD 709 millions worth of securities. There was a huge demand and many investors were left empty-handed.

New York city was the first municipal government to securitise tobacco settlement dues. We have carried several news reports on this deal – click here and for further links, refer to the above-referred news item

The Business Week article also comments on the risks inherent in tobacco bonds. Observers doubt if tobacco companies would remain solvent to pay the settled amount in damages.

Korean banks planning ABS issues

Several banks in Korea have firmed up their plans for go for securitisation issues. A report in The KoreaHerald of 19th Nov. says that the Korea Exchange Bank going ahead with the issuance of 10-year asset-backed securities (ABS) worth 100 billion won. The issue will be backed by the bank's nonperforming loans made to companies under court receivership or bank management control. The issue will be credit enhanced by a deposit of 20 billion won with an SPV.

Meanwhile, Kookmin Bank and H&CB of Korea also plan to securitize their real estate holdings or assets below investment grade.

Links: This site has a special focus page on Korean market – see the Index page and look for the country profile of Korea.

As for bank securitisation, click here to go to the dedicated page on securitisation of bank loans.

Securitisation of non-performing assets has been discussed in the country profile page of Italy.

Japan to have REITs

Come January 2000, Japan will have real estate investment trusts (REITs) as Tokyo Stock Exchange proposes to allow trading in shares of trust funds investing in real estate. Trading in REITs is going to be allowed by the government shortly.

Real estate investment vehicles in corporate form are already being traded on the exchange. The trust form is popular in US markets and several other common law countries where trusts are preferred as they achieve a tax transparent status.

Fitch IBCA on securitisation for finance companies

Fitch IBCA on 15th Nov has put a report on impact of securitisation for finance companies. The report discusses the risks and rewards of securitisation for finance companies.

Fitch IBCA says that securitisation has proved to be a "double edged sword" for finance companies. With its several benefits, there are certain inherent risks for a finance company, particularly the moral imperative to save the transactions securitised by it which may not technically have any recourse obligation.

The foremost advantage of securitization is its use as a resilient mode of funding. Lower-rated companies have better access to securitised funds. However, "there are clear risks for any finance company that is over-reliant on securitization. The market has not been tested in a prolonged economic downturn and should not be viewed as impervious."

Excessive reliance on securitisation is not a wise option for most finance companies. According to the report, investment grade companies should keep options open to a broad array of funding sources and look at securitisation for a "contingency liquidity".

Accounting standards allow upfronting of gains on securitisation, resulting into higher profits for companies that have a consistent reliance on securitisation. In the process, there is a transfer of profits from future to present, which becomes a compulsion for companies resorting to this on a regular basis. In the process, the quality of earnings takes a backseat. If environment becomes unfavourable and securitisation activity declines, this would result into a sudden drop in profitability. [Newcourt Credit is an example.] As a result, many companies have become more conservative in securitisation accounting and have even resorted to changing securitisation structure so as to make it on-balance-sheet.

If regulatory capital relief and achieving reduction in funding costs is an objective, there might be a tendency to securitise high quality assets. "A tendency to securitize high-quality assets may lead to adverse selection, causing an overall decline in the on balance sheet portfolio. Loans that do not conform to standards set by securitization investors, perhaps due to missing documentation or early delinquencies, may be excluded. Issuers also may be tempted to "cherry pick" assets, keeping lower quality assets on the balance sheet to achieve lower securitization costs. A similar phenomenon occurs when issuers purchase underperforming loans out of pools to enhance the securitizations' performance."

Innovative securitisation deal by Italian bank

bank strips and retains credit, parcels the inherent risk

A report in CORRIERE DELLA SERA says that Italian merchant bank Banca Commerciale Italiana (COMIT), the Italian merchant bank, has just concluded a securitization of L8,000bn, the first of this kind in Italy (publication date 14 November 1999). The innovation lies in the fact that it is a synthetic operation, with only the risk being sold while the credits remain in the institution's assets.

Vinod Kothari comments: Credit derivatives are known to achieve transfer of risk: this transaction is a securitised derivative which results into creation of a marketable security representing risk in a portfolio of loans. In this sense, the transaction is application of the cat bonds technology to credit risks, and is an important milestone in development of securitisation. The risk securitisation technique has so far been limited to natural calamities such as catastrophes and weather: its application to credit where the risks are more systematic and definite is an achievement.

Do you have any views on this development? Or are you aware of any more such deals, either in the making or in the market? Please post them either on the securitisation forum [ click here ] or e-mail them to me.

Links: For detailed commentary (in Italian) on Italian securitisation law and markets, go to the articles section – click here. For country profile on Italy, click here. For text of Italian securitisation law, click here. Several news about securitisation in Italy have appeared on this page – browse the news pages.

Pakistan approves securitisation rules

The Securities and Exchange Commission Pakistan has approves rules on asset-backed securitisation. The draft rules were framed and put up for public comment in June this year. The draft rules were placed on our website along with our commentary thereon – see securitisation laws page and our commentary on the country profile for Pakistan.

A report in Business Recorder says that the rules on asset-backed securitisation, called Companies (Asset-backed Securitisation) Rules, 1999, were approved in a meeting on 13th November in Islamabad.

From the report published in Business Recorder, it seems that the broad structure of securitisation rules is the same as in the draft rules earlier posted.

NAIC working on model law for insurance securitisation

In an earlier report on this site, we had reported that the National Association of Insurance Commissioners in the USA was working on a model law on insurance securitisation.

In a recent meeting of the commissioners [ Fall National Meeting in Atlanta, Georgia, on October 2 – 6, 1999] it is reported that quite a headway has been made in formulating the model. It is reported that in the above meeting, the industry interested parties offered a draft Special Purpose Vehicle (SPV) Model Act for those interested in using an onshore SPV structure for catastrophe securitizations. In the draft, the SPV would be defined as an entity not affiliated with the ceding insurer, acting as an intermediary between investors and ceding insurers. The SPV and would be authorized and operated under a simplified and specialized regulatory structure. The SPV would sell securities to investors and be contractually bound with the ceding insurer to pay amounts upon the occurrence of a triggering event. Regulators did not have an opportunity to review the draft prior to the meeting. and are expected to have several questions regarding the draft model which are expected to be discussed in Aan interim conference call will be held to address questions from the Working Group. Additionally, separate tax legislation which is critical to efficient implementation is being developed by the industry Iinterested Pparties and is expected to be available in December. Finally, the American Academy of Actuaries and other interested parties made presentations regarding index-based insurance derivatives in hedging property/casualty insurance transactions.

Italian INPS securitisation going ahead

Deal to be one of the largest in the World

Securitisation by Italian treasury and state pension fund, of the unpaid contributions by companies to the INPS, is proceeding ahead. Key agencies for the transaction have been appointed. Banca Intesa SpA unit Caboto, Merrill Lynch International and Cie Financiere de Paribas will be managers to the unique transaction of its kind world over.

Earlier this year, Italian government announced its plans to securitise these contributions and thereby fill up a part of its budget gap. News about the proposal was flashed on this website – click here.

The securities are likely to be issued by an SPV called Societa di Cartolarizzazione dei Crediti INPS SpA and are expected to have a AAA rating from the four main rating agencies.

The size of the transaction, presently not confirmed, is likely to be around euro 4.5 billion (approx 4.5 billion USD) which would make it one of the largest single deal in the ABS segment.

This website has one of the most comprehensive resources on Italian securitisation. For a country profile on Italy, see the country link on the Index page. For full text of Italian securitisation law, see our securitisation laws page – click here. Lucia Mazzocco has recently contributed an elaborate commentary on the Italian securitisation law – click our articles section here.

 Morgan Stanley to securitise Japanese banks' NPAs

Deal to be first for Japan

Morgan Stanley Dean Witter & Co plans to securitise non-performing loans of Japanese financial institutions for sale to domestic and overseas investors. The US investment bank will be the first to attempt to securitise bad loans in Japan. The deal is expected to offer more than 20 billion yen worth of bonds with real estate as collateral. The terms of the issue are likely to be finalised by mid-November.

On this site, we have earlier carried news about securitisation of non-performing assets in Italy. Click here to visit this news. More about the methodology of securitisation of non-performing assets is available in the country profile on Italy – click on the Index page and go to Italy page. On securitisation of bank loans in general, click here.

For country profile of securitisation in Japan, go to the Index page and see the country profile of Japan. Also, there is an article by Roy True in the articles section.

Links: For securitization of non-performing loans, refer to the special section – click here

Bill Blass sells brand equity: sale funded by ABS

World renowned couturier and designed Bill Blass announced on 8th November the sale of his $700 million design and licensing empire to Haresh T. Harani, Chairman of the company's largest licensee, The Resource Club, Ltd., and Michael Groveman, Blass' Chief Financial Officer.

The sale, for an undisclosed amount, was funded by the apparel industry's first investment grade asset-backed securities. The securities are backed by the company's license fees and trade marks.

Alan Greenspan reviews mortgage financing in USA

In a recent speech [2 Nov., 1999], Federal Reserve Chairman Alan Greenspan reviewed the development and trends in mortgage banking in USA.

US mortgage markets are one of the most developed markets in the World. To quote Greenspan: " Your predecessors, and perhaps even some of you, championed the then-novel lower downpayment, long-term, conventional, amortizing, residential mortgage instrument that has become today's basic foundation of housing finance".

Greenspan reasoned why mortgage banking in time to come will be constrained by the growth rate in purchase of new houses, and will have to depend more on hands changing.

To access full text of Greenspan's speech, click here.

 Major property loan securitisation in France

French bank Paribas has launched a securitisation operation on property loans for UCB, a subsidiary of BNP Paribas, with the creation of the MasterDomos mutual credit fund, which is to acquire some 35,000 property loans for around 1.525 billion euros. Around 51 per cent of the loans are mortgages and 49 per cent depository loans, says a report in Les Echos.

Securitisation in France is growing quite fast, particularly after the recent legislation. See for details of securitisation activity in France our country profile on the Index page.

More news on France was published recently – click here

Do you have more news or materials about securitisation market in France? Send me a mail – I would be obliged for your contribution.

West Bengal reduces stamp duty on securitisation

Stamp duty is still a major hurdle to securitisation transactions in India but states are gradually removing this hurdle. West Bengal, the sleepy Eastern Indian state, became the latest among the 5 which have already reduced stamp duty on securitisation transactions. West Bengal reduced duty from 5% to 0.1%, in accordance to a promise in the last Budget.

The other states are Maharashtra, Gujarat, Karnataka and Tamil Nadu.

A copy of the West Bengal notification dated 7th July was available only recently. The West Bengal notification is generic and does not have the discrepancies found in the Maharashtra and other notifications earlier.

For the genesis of the stamp duty problem in India, see our section on Indian securitisation – click on the Index page for country profile of India.

Securitisation to reopen lending window in Philippines

Securitisation is likely to re-open the lending window in Philippines. The window was shut down by mounting loan defaults resulting from the currency crisis in 1997. " Two years later, securitization comes as a key for the possible reopening of the window and offer housing finance to more consumers." These views were expressed by participants at a recent conference on securitisation in Philippines.

Securitisation in Philippines was initiated in 1994 by State-owned housing finance outfit Pag-IBIG Fund. The Fund issued mortgage-backed securities in P500 million 1994 and then in P 430 million in 1997.

Thrift banks in Philippines have also become active in securitisation. 

Nursing home revenues securitised in Australia

Moran Health Care group, Australia, proposes securitisation of revenues from old age care homes owned and operated by its group companies. It is issuing A$93.6 million fixed-rate senior annuity bonds due Oct. 12, 2027, rated double-'A'; and A$34.3 million fixed-rate subordinated annuity bonds due Oct. 12, 2027, rated triple-'B'-plus. The bonds are backed by revenues from 40 nursing homes (residential aged care facilities), and eight assisted living apartment complexes, located throughout New South Wales, Victoria, Queensland and Western Australia. The facilities are operated by Moran Health Care (Australia) Pty. Ltd. (MHCA, a subsidiary of Moran Health Care Group Pty. Ltd.), and managed by Omega (Australia) Pty. Ltd.

The transaction is the first securitisation of nursing home revenues in Australia.

Lawyers prepare for securitisation of fees in tobacco suits

Deal to be first securitisation of legal fees

Why wait for years if you can eat today? In our age of impatience, who is prepared to wait for years to receive legal fees? The attorneys who are to receive legal fees out of the tobacco suits against 4 major tobacco companies are actively parleying with investment bankers to securitise their fees. Morgan Stanley Dean Witter is working with more than a dozen law firms to securitize a portion of their combined legal fees stemming from the $246 billion settlement reached between big tobacco companies and 46 states. The deal would represent the first securitization of legal fees.

The legal-fee bounty appears ripe for securitization, as the states' lawyers are guaranteed at least $10 billion over the next 20 years-payable in annual sums of $500 million-according to the master settlement agreement signed last November.

This report is based on BondWeek, a publication of Institutional Investor.

Year of securitisation in Korea

A Duff and Phelps Credit Rating report recently described 1999 as the year of securitisation in Korea. Securitisation made a late start in Korea – the first transaction was written only in lat 1998.

The Government in September 1999 passed a law on securitisation. For full text of the securitisation law in Korea, refer to our securitisation laws page – click here. The laws incorporated guidelines for 'true sale' and the ability to set up a special-purpose vehicle (SPV). The procedures for perfecting interest against third parties were simplified through the registration with the Financial Supervisory Commission.

1999 has been an active year for securitisation business in Korea where 16 transactions have been completed by the close of the third quarter. Not all of them can be said to be true securitisations, but they do display characteristics of securitisation transactions, says DCR report.

"Securitization continues to develop as arrangers begin to incorporate traditional elements such as backup servicers and trustees. Due to the sophistication of these ABS transactions, many have had recourse back to the originator or some third party," DCR report says. 

SECURITISATION NEWS AND DEVELOPMENTS

/in /by

[This page lists news and developments in International

securitisation markets – please do visit this page regularly as it

is updated almost on a daily basis.]

IMPORTANT

For all news added before 21 January, 2000, please click here 
For all news added before 9th November, please click here 
For News items added prior 3rd August, 1999, click here.

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

 

Insurance regulators review securitization developments

US insurance regulators recently reviewed the rapid pace of developments in insurance securitization. In their recent quarterly meeting in Chicago, the National Association of Insurance Commissioners reviewed one remarkable development that took place recently: index-based derivatives to hedge property/casualty risks.

 

Nissan Diesel to securitize its truck-making plant

Ailing Japanese truck maker Nissan Diesel Motor Co. will sell the land of its Ageo plant in Saitama Prefecture under sale-and-lease-back-cum-securitization deal, and thereby raise 25.5 billion yen. The deal is part of a business restructuring plan in which four of the company's main banks, including Industrial Bank of Japan are participating.

Nissan Diesel will use a profit of 22.1 billion yen from the sale to help reduce its group's 500 billion yen in interest-bearing liabilities.

The securitization deal will be preceded by a sale and lease-back – the company will transfer the 400,000-sq.-meter Ageo plant plot and an adjacent 32,000-sq.-meter unused land to a trust vehicle set up by Yasuda Trust & Banking Co. for 25.5 billion yen. Yasuda Trust & Banking will issue securities backed by beneficiary rights to the trust through a special-purpose company. The plant will be taken back on lease by Nissan Diesel which will continue to produce trucks at the Ageo plant.

Links A similar structure was recently used by NEC, Japan – click here for the news item.

 

Securitization is a buzzword in Italy

Italian securitization players are trying to use the new securitization law to the hilt. There have been several securitization deals over the past few months, and three deals in past 2 weeks.

The first notable deal is a securitization of a single-obligor sale and leaseback transaction. The obligor, Impregilo, has sold fixed assets to LeasingRoma, which in turn has leased the assets back to the obligor. The lease rentals out of this transaction have been securitized. This unrated Euro 40 million deal has been credit enhanced by a credit line of Euro 7.5 million by Banca di Roma, which is also the lead arranger of the deal. Essentially, the transaction represents securitization of fixed asset acquisition by a single obligor. The leasing company in question is owned by Banca di Roma. This will be the first securitization of a sale and leaseback deal under the 1999 Italian law.

In the second deal, Euro 36 million worth mortgage backed securities have been issued by Cassa di Risparmio di Chieti. The transaction is credit-enhanced by subordinated notes. Moody's have rated the senior notes Aaa.

In the third deal, Euro 110 million worth floating rate notes 110 EURO million, broken into Class A 20 million, and subordinated Class 90 millions have been issued by Cassa di Risparmio di Chieti. The collateral here consists of non-performing loans, which is evident in the massive subordination level. It is interesting to note that the senior class has been rated Aa2 by Moody's.

In our country profile on Italy, we have covered some recent market developments in Italy – click here to access.

HSBC Bank to issue CLO

HSBC Bank Plc claimed in a press release that its maiden CLO issue of USD 850 million scheduled to be launched in April 2000 will use the US-style master trust structure for the first time in UK. he CLO will be sold to professional investors by a special purpose vehicle, Clover Funding No. 1 plc ("Clover"). Clover will issue the CLO in the form of different classes of Floating Rate Notes due 2005 and will seek a listing for the Floating Rate Notes on the London Stock Exchange. HSBC Bank plc anticipates that the CLO will be priced and subsequently closed prior to the end of April 2000, subject to market conditions.

It is expected that the Class A notes, which will represent at least 90 per cent of the CLO, will be rated AAA by Standard & Poor's and Aaa by Moody's. It is intended that the mezzanine classes of notes will have lower ratings and the most junior class of notes will be unrated.

Links: For more on bank CLOs, click here. For more on securitization in UK, click here.

Australian MBS activity heats up with mega deals

A couple of mega MBS deals were announced this week in the Australian MBS market. St George Bank would launch $US364.5 million Crusade mortgage backed securities issue in the Australian domestic market. The issue will be lead managed by Deutsche Bank AG, with St George Bank as the sole Co-Manager. The issues includes a fixed rate bullet payment tranche on 15th October, 2002, and a floating rate tranche with an expected average life of 6.5 years. Both have been rated AAA by Standard & Poor's and Fitch IBCA.

Another mega deal, a global issuance, was launched by the Commonwealth Bank of Australia Ltd (CBA). Issued through the bank's special purpose vehicle, Medallion Trust, the deal includes a Class A1 of USD 955 million to be issued into the US and Euro markets. The Class A1 notes will be registered with the US SEC and listed on the London Stock Exchange. The issue also includes an A2 tranche and a B tranche.

Standard & Poor's has assigned preliminary ratings to the issues of AAA for Class A1 and A2, and AA for Class B.

Links : For a news report on the performance of the Australian securitization market in 1999, click here. For a generic coverage of the Australian securitization market, click here.

Study stresses need to promote property securitization in UK

A study sponsored jointly by the Investment Property Forum, the British Property Federation, the Royal Institution of Chartered Surveyors and the Corporation of London has stressed the need to promote property securitization in the UK, if necessary, by providing tax sops. The paper, titled Property Securitisation in the UK, concludes that "securitisation – trading property assets like tradeable shares – would cut transaction costs and boost trading, thus attracting capital back to property and improving the efficiency of the market and economy as a whole".

The study stresses the capital allocation in the property sector has suffered a setback due to double taxation of income arising on equity contribution. If investments are allowed to come in the form of tax efficient securitization conduits, it would duplicity of taxation, and invite capital markets to invest directly into the property segment.

If securitization were to be compared to direct property investment, then, to the extent that the income accruing to investors in such case might be a bond interest or a capital gain, securitization might be marginally tax-negative for the revenue. However, if securitization were to be compared with investing in the equity of a property company, it is a highly efficient tool as equities are subject to double taxation. [Based on a report in Financial Times, 17th March]

 

Argentinean MBS deal backed by political risk insurance

The largest MBS deal to be originated from Argentina has been backed by political risk cover provided by Zurich US. The USD 156 million bond issue is based on mortgage loans originated by Banco Hipotecario SA (BH). BH is the largest mortgage lender in Argentina and has been the pioneer in the field of mortgage securitization. The transaction, lead managed by Bear Sterns and Co. is supposed to be the largest mortgage securitization deal from the whole of Latin America.

This is also said to be the first instance of use of political risk cover for a mortgage-backed security. Political risk covers have earlier been used for future flows receivables, where political intervention has a direct bearing on the servicing of investors. In the present case, Zurich US has provided risk cover to investors against currency incovertibility and transfer owing to political reasons. The cover has enabled the senior notes to be rated A+, the highest ever rating for a Latin American MBS.

For details, refer to Zurich US Website.

Links: For more on securitization in Argentina, click here. Click here for a news item on setting up of a Fannie-mae-type body in Argentina.

 

Asian Securitization Forum launched

To promote the fast-growing business of securitization in Asia and the Pacific, securitization professionals have constituted a body called the Asian Securitization Forum. The Forum has been set up under a not-for-profit company registered in India.

The basic objective of the Forum is to provide a platform for interaction, sharing of information and propagation of securitization activity. The Forum will also lobby with regulators in different countries in the region to foster a congenial environment for securitization activity.

Headquartered in Mumbai, India, the Forum will have a region-wide presence.

Vinod Kothari, a leading securitization consultant and trainer has taken over as the Executive Director of the Forum. A Governing Body consisting of eminent securitization professionals from all over the region will be constituted soon.

Securitization is growing fast in Asia. The rate of growth in Japan has been spectacular, but in other Asian and Pacific countries, it is still facing a number of impediments. The Forum will use its collective strength to share information, focus opinion to remove environmental problems, standardize procedures, etc.

A full featured website of the Forum has also been launched at
http://www.asian-securitization.com

 

Korean company securitizes lease receivables

Korea French Banking Corp (Sogeko) has recently issued USD 81 million asset-backed securities, based on USD 40 million worth of equipment leases and term loans. Of the issuance, International Finance Corp will purchase USD 20 million worth securities, while the remaining amount will be placed in the capital market in form of floating rate notes.

The transaction is the first cross border securitization of Korean domestic assets. The deal was arranged and managed by Societe Generale Asia Ltd.

The trustee to look after the SPV will be the Seoul branch of Chase Manhattan Corp.

Links: For more on securitization in Korea, click here for our country profile. For another news item on Korean securitization, click here.

French reinsuer in largest European cat bonds issue

Scor, the French reinsurer, which is engaged in providing reinsurance coverage for Japanese and US earthquake and European windstorm risks, has mulled a USD 200 million cat bonds issue, which is believed to be the largest out of Europe so far. The cat bonds will provide the reinsurer with a retrocession cover for next 3 years.

Following the withdrawal of Australian reinsurers who provided retrocession, tapping the capital markets was considered as a good option. The price the reinsurance company pays for the cover is comparable with cover in the reinsurance market. Scor may further extend its use of catastrophe bonds, or invest in offerings by other insurers or reinsurers.

The cat bonds market, a device for putting reinsurance cover in capital markets in form of either cat bonds or cat-E-puts, continues to grow. Around 40 catastrophe bonds have been issued, providing capacity of about Dollars 3.5bn, with the US being the main area of activity. Scor's bonds were placed through Atlas Re, a reinsurer set up in Ireland for the purpose of the issue.

Links Our focused page on insurance securitization provides a large number of links on cat bonds, besides generic description. Click here.

 

FSA being taken over by French company

Financial Security Assurance (FSA), one of the leading credit enhancers in securitization deals, is being taken over by Dexia Group of Paris. FSA is engaged in providing insurance enhancement to bond issues, particularly from emerging markets, and has built a strong presence in securitization transactions.

FSA ranks in bond insurance, next to Ambac Assurance Corp., MBIA Insurance Corp., and Financial Guaranty Insurance Co., a unit of General Electric. The market share of FSA was approximately 23%.

Dexia, the acquirer, a USD 230 billion group, is engaged in asset banking and municipal credit. Dexia will pay USD 2.6 billion for the takeover.

 

Poaching antics continue
Credit Suisse raids Prudential; Prudential runs to Court

To an outsider looking it, it seems like jungle games. Credit Suisse (CSFB), which recently lost a dozen of its securitization team members, has quickly reacted. It has lured 10 persons from Prudential Securities to join it. The team it is poaching is led by Joe Donovan and Greg Richter, who are joining as managing directors and co-heads of the firm's US asset finance business. Donovan was head of asset finance at Prudential and Richter was head of trading and syndicate for all structured products there.

A later report in Financial Times of 16th March, citing Bloomberg, says that Prudential has run to the Court to seek injunction against CSFB and the individuals who left for having violated their job contracts. The suit filed by Prudential in New York State Supreme Court seeks to restrain Joe Donovan from soliciting further members of Prudential team. The application is likely to come for hearing on 24th March.

Your comments: Do you have any comment on the domino game being played by securitization investment bankers? Write your comments here or post them here.

 

Greenspan justifies revised regulatory standards for small banks in securitization

Greenspan recently spoke before a meeting of community banker and justified the revised risk-based capital adequacy requirements for small banks in securitization. Referring to the revised capital adequacy framework suggested by the BIS, Greenspan said he would not apply those complex standards to small community banks as doing so would be impractical and unnecessary. However, the Fed will continue to take a more sophisticated supervisory approach to small institutions engaging in more complex transactions such as securitization and investments in residual interest-only strips, he said.

Greenspan was addressing the Independent Community Bankers of America's convention in San Antonio, on March 8.

Greenspan's remarks become relevant in light of the recent regulatory exercise of re-drafting the norms for banks getting into securitization activities. Click here for the news item relating to the draft guidelines.

Micro loan securitization in South Africa

Mettle, a specialised finance house based in South Africa, has recently implemented a R430 million securitisation of the Unibank Group Limited ("Unibank"). The transaction represents securitization of micro loans originated by Unibank.

Micro loans are small loans extended to businesses which are not able to attain traditional funding due to lack of collateral or presentable financial statements. Thanks to Government promotion, micro finance has picked up significantly in South Africa, both among the banks and specialised finance companies. Unibank has been in micro finance since 1986.

The transaction, the first case of micro loan securitization in SA, will help Unibank achieve liquidity. The transaction is comprised of R. 300 million worth of senior notes rated AA, and the balance in form of a subordinated loan granted by Mettle, the arranger in the present case.

Besides, Unibank will also be creating a cash reserve of approx. R. 13 million. The transaction is to revolve for a certain period in that the SPV will be allowed to buy fresh micro loans instead of amoritising the principal.

Mettle has been in securitization business and has structured several transactions in the past. We have carried news report on Mettle – click here.

Links See our country profile on South Africa – click here.

 

Japan rating agency sees Asian securitization taking off

Japan Rating and Investment Information (R&I) sees securitization taking off in Asia outside of Japan. R&I says: "A securitization market in Asian markets outside Japan is starting to emerge. This year will see a further expansion, as well as diversification and deepening of the market. The background factors are that banks are moving to boost their BIS ratios and improve their asset quality, while companies are seeking to diversify fund sources. Securitization can help banks and companies to strengthen the balance sheet and create a more flexible economic structure and effective financial system. However, the development of a securitization market will require comprehensive reforms of the legal, tax, and accounting systems, and the speed of development may vary according to the country. R&I believes Korea and Hong Kong are in a comparatively strong position, while the rest of the countries may take some time to build up an adequate market infrastructure."

Securitisation will have multifarious impact on Asian capital markets. While it would have positive impact on ratings of corporates, governments and banks, banks will have leaner balance sheets. Securitization may also improve bonds markets which will be critical to reduce dependence on traditional funding sources.

The report prepared by Makoto Ikeya, Chief Analyst, goes into questions of cost-effectiveness of securitization. It admits that structures as well as the produce being new, it involves higher cost and there is a scope for reducing costs over time. "Moreover, finding investors for the subordinated part of securitization issues is difficult in Asia, even in Japan. So far, only a small group of investors such as distress funds in U.S. have made such investment in some cases", thereby requiring the originator to retain the subordinated part, reflecting upon the cost.

Full text of the report is available at www.r-i.co.jp

Links: For a general coverage on securitization markets in Asia, see our Asia page here. Also see specific country page – click here.

Office property securitization getting popular in Japan

In recent months, there have been a number of office property securitizations in Japan. On the news page on this site, we have carried some of these reports – click here for a report on supermarket chain securitization and click here for NEC's multi-billion office property securitisation.

Duff and Phelps (DCR) explains the increased activity in Japanese CMBS thus: "Property owners’ pressing need to refinance, coupled with the stabilizing supply/ demand fundamentals in Japan’s office markets (primarily the prime, Class A market in the metropolitan areas) has created much of the activity in the issuance of commercial mortgage-backed securities (CMBS). On the heels of lenders’ general unwillingness to support this sector after the "bubble" burst in 1991, the CMBS market also provides a much-needed alternative source of financing for the real estate sector."

Many of the Japanese CMBS transactions have been single-tenant properties. In other words, the cashflows from the property depend on the financial strength of the tenant. Quite a number of these transactions have been devised as sale and leasebacks where tenancy has been created on a previously owned building, for example, in the NEC transaction reported before. DCR comments about such transactions as follows: "However, most of these single/majority tenants also tend to be the owners attempting to securitize the buildings to bolster their balance sheets, and would typically (though not necessarily) have a weak financial position. Additionally, the lease structure may not be "bondable", in which case the rating of the tenant is used to determine the normalized vacancy rate and leasing costs (an investment-grade tenant implies a low vacancy rate compared to a higher vacancy rate for a sub-investment-grade tenant)."

DCR comments: Given the need of several non-real estate corporates to restructure their balance sheets (and focus on core businesses) and consequently the motivation to securitize properties, DCR expects several sale/lease-back transactions to be completed in the future (in line with the trend in the past). In addition, CMBS transactions backed by mortgages secured by office properties are also expected to provide an impetus to the further development of the CMBS market. Simultaneously, an increasing domestic investor appetite for such products should also help in the growth of the market.

Links: For more on securitization in Japan, click here. For more on securitization of commercial mortgages, click here.

 

Fitch IBCA and Duff and Phelps to merge

International rating agencies Fitch IBCA (Fitch) and and Duff & Phelps Credit Rating Co. (DCR) announced on 7th March that they have entered into a definitive merger agreement pursuant to which a subsidiary of Fitch IBCA will acquire Duff & Phelps Credit Rating Co. for $100 per share, for a total price of $528 million. Fitch is a subsidiary of FIMALAC, S.A., a diversified French operating company. The acquisition will be completed through a cash tender offer, followed by a cash merger.

The merger will create a rating company with combined annual revenues of $260 million and a staff of 1,100. Both the companies had strong capabilities in rating securitization products, with Fitch's key strengths being in the U.S. securitization markets, while DCR was stronger in international markets. The merger will allow the two to benefit by synergies, besides being stronger in both geographical presence and manpower. The two together will be able to accelerate investment in technology and Internet delivery needed to bring credit research and ratings to global markets.

Marc de Lacharrière, Chairman of Fitch, will become chairman of the new entity and has designated Robin Monro-Davies as CEO and Stephen W. Joynt as President and COO. Paul McCarthy, Chairman and CEO, and Philip Maffei, President, of Duff & Phelps will become directors of the new company. The new company will maintain major operations in London, New York, and Chicago.

 

French textiles unit to securitize stocks of wool

When the French are at it, it has to be something queer, something bold. Proving that the recent securitization of champagne bottles was not the last tango in Paris, French textiles producer Chargeurs SA announced plans to raise some Euro 300 million by securitizing stocks of wool. Reports in La Tribune said the company intended to convert a physical asset into a financial product.

The methodology of converting physical or operating assets into financial products is a new innovation in the world of securitization. Essentially partaking the legal (and accounting) character of a loan transaction, the methodology involves putting the physical stocks into the pledge of an SPV, and the SPV in turn funding itself by issue of securities to investors. The transaction is revolving in character, as the stocks sell and the proceeds are released to buy fresh stocks from the producer. The investors have a far stronger security interest than in a conventional commercial paper since the stocks are in the physical possession of the SPV which holds security interest in the stock.

 

15 years' history of US ABS shows interesting developments

Standard and Poor's (S&P) recently put up an interesting study that tracks the developments and changes in the 15 years' history of asset-backed securitization in the USA. Written by Dr. Joseph Hu, it is interesting to see how the ABS market has matured over time. Here are some of these trends

  • Lower-rated securities have become more acceptable. During the initial phases of ABS, a predominant majority of the securities were rated AAA and it was rare to come across a BBB rated security. For example, between 1985 to 1992, the proportion of BBB rated securities (based on ratings done by S&P) was just 3% while the same proportion during 1998 and 1999 was 16%. BB securities, almost NIL during the early phases, was a good 4% of the total rated securities during 1998 and 1999.
  • Methods of credit enhancement While a letter of credit or a corporate guarantee from the parent originator was the most common form of credit enhancement before, stratified cashflows became popular during the 1990s.
  • Rating resilience. The paper also demonstrates that ABS ratings have been highly resilient. Of the 3,270 long-term transactions rated over the 15-year period, only 173 transactions underwent rating changes. Of course, there were more downgrades than upgrades which is easily understandable because normally the quality of a collateral does to become better than it was originally with all the enhancements. The rating migration or frequency of downgrades was more in the A- and BBB category. In the BBB category, there were several instances of downgrades by two notches or more. This only means that though the chances of first loss increased but it was not intense enough to affect the senior classes.
  • Among the reasons for downgrading, downgrading of the creditenhancer is one of the most significant reasons.

Full text of the report is available on Standard and Poor's website : click http://www.standardandpoors.com/en_AP/web/guest/home

 

Deloitte Touche Tohmatsu rated best securitization accounting firm
Top in North America and Europe, runner up in Asia-Pacific

US-based international accounting firm Deloitte Touche Tohmatsu (DTT) was voted the best securitization accounting firm in North America as well as Europe, and runner up in Asia-Pacific. The recognition was based on votes collected by trade journal International Securitisation Report.

DTT was won these laurels for the second time in succession. Last year, it was adjudged the best firm for Europe and no awards were declared for USA.

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.

Vinod Kothari comments: Congratulations DTT! This site has to express sincere thanks to DTT, Marty Rosenblatt in particular, for continuing to contribute to this site. Several articles by Marty Rosenblatt and Sunil Gangwani appear on the articles section of this site, which, as I know from visitors' comments, have been very well read.

Related news : Chase was voted by the same trade journal as the best trustee for securitization – see news item below.

Basic instinct: Deutsche raids CSFB' senior team
Revenge, says the market

This was the news of the weak: Deutsche Bank is hiring a dozen members of Credit Suisse First Boston's (CSFB) senior asset-backed securitisation team in New York. Eight of the defectors, led by Jorge Calderon and Philip Weingord, have already resigned and the rest are expected to do so soon.

Financial Times 3rd March reported that this is most likely to be viewed as a revenge for CSFB poaching Deutsche's technology team a couple of years ago. The move is certainly a major blow to CSFB's securitization operations as it currently is Numero Uno in North America with about 14.5% of the markett. Deutsche, on the other hand, was at the 16th place. Deutsche is, however, number one in Europe where CSFB is at number 9.

Deutsche has announced plans to continue hiring.

At the same time, in CSFB, the exodus would probably continue. Some market commentators regarded this as the most significant departure where almost all the aspects of an investment banker's business leave in collusion. Some commentators tried to link the migration to bonus-related problems in CSFB.

Your comments please! As an industry professional, what are your views on this move? What ripples will it make? Is it likely to result into a poaching game when pay packets of securitization professionals will soar to crazy heights? Please post your views at the Discussion Forum.

 

Chase Manhattan voted as the best trustee

The Chase Manhattan Bank's Capital Markets Fiduciary Services division (CMFS) has received practitioners' acclaim as the best securitization trustee. The group has been voted as the `Best Trustee for North America', `Best Trustee for Europe' and `Runner-up Best Trustee for Asia Pacific' for 1999 by the International Securitisation Report.

With offices in 31 major cities across the globe, CMFS is a leading provider of corporate, municipal, and structured debt services to issuers, intermediaries and investors worldwide. The division has served the corporate and municipal markets for over 100 years and today provides traditional securities processing services, including trustee and agency services for corporations, municipalities and other issuers, as well as support services for a wide range of capital markets instruments. Product offerings include an array of services for structured finance products, including collateral agency, compliance testing, and analytics for collateralized bond and loan obligations. The global leader in its field, CMFS provides trust services for more than $3 trillion in principal debt.

 

Argentinean bank promoting 
Fannie-Mae-type Body

Banco Hipotecaro, Argentina's largest bank is proposing to team up with International Financial Corporation (IFC) to create a body for secondary mortgage markets in the country. The body, on the model of Fannie Mae, USA, is to be called Corporacion Financiera Hipotecaria. A real estate developer IRSA will also be joining the venture.

Fannie Mae in USA purchases mortgage loans originated by housing financiers and packages the same in fixed income securities, providing its own credit enhancement. Corporacion Financiera Hipotecaria will be capitalised with $50 million, to be provided 20% by IFC and the balance by the local partners. The company will be able to hold more than $400 million in assets. The company would operate on spreads of about 3% to 4%, by buying mortgages yielding 11% to 12%. IFC participation will ensure that the securities created by the company will have appeal to international investors too.

Links: For more on securitization in Argentina, click here. For text of securitization law in Argentina, click here.

 

Small business loans to be securitized in India

Indian Finance Minister Yashwant Sinha proposes to start securitization of small business loans. This is his proposal as a part of his Budget speech for year 2000-1, presented on 29th Feb.

In a slew of measures aimed at promoting small business finance, Minister Sinha proposed that the Small Industries Development Bank of India (SIDBI) will guarantee loans originated by commercial banks. These loans, upto a limit of Rs. 1 million, will be securitised with the credit enhancement provided by SIDBI.

The measure, if implemented, will be a welcome measure both to promote securitization markets in India as also to provide much-needed funding support to small industries, which constitute a bulk of India's industrial base.

Links: For more news items on securitisation in India, click here and here. Also see the country profile on India – click here. For a detailed article on securitization market in India, click here.

 

Securitization developing fast in Singapore

A recent Bloomberg report says that asset securitization is getting more popular as a means of selling property in Singapore, and is likely to give a boost to the fledgling bond market. Southeast Asia's largest bank, the Development Bank of Singapore has dominated the market here, having arranged about S$1.8 billion ($1.1 billion) worth of asset securitization transactions. The largest issue to be offered in the country is S$878 million ($520 million) worth of corporate bonds for DBS Land's Six Battery Road office building. 

Successful property securitizations are also setting the stage for other assets to be put to better use. For example, Overseas Union Bank, Singapore's fourth largest bank, has marketed S$1 billion ($592 million) worth of asset-backed commercial paper collateralised by longer-term bonds of a maximum maturity of 10 years. The bank said that it is currently exploring all asset classes including bonds, mortgages, property and credit card receivables. [Based on a report by Price Waterhouse Coopers]

Links: For more on securitization in Singapore, click here.

Japan government to securitize land

Japan's Ministry of Finance intends to obtain revenue worth 5 billion to 6 billion yen from national land sales under a securitization scheme. Later, this experience will be repeated to raise an expected amount of 220 billion yen from capital markets.

Reports in JIJI said the government will sell national land tracts to special-purpose companies, which in turn will then sell securities backed by relevant land plots to investors to raise funds for the construction of facilities such as condominiums and office buildings on the land.

Since the passage of the securitization law (SPC law) in Japan in Sept., 1998, a number of SPCs have already been registered. 34 SPCs have registered securities worth 1781 billion yen.

Links For more on securitization in Japan, see our country page – click here.

US bank regulators propose new rules to plug loopholes

The 4 US bank regulatory agencies: Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and Office of Thrift Supervision on 17th Feb. jointly issued a press release with which a draft of new rules to regulate securitization activities of banks were published.

The proposal by the agencies is purportedly intended to produce more consistent capital treatment for credit risks associated with exposures arising from securitization transactions. It would amend the risk-based capital requirements for asset-backed securities as well as recourse obligations and direct credit substitutes.

Public comment is requested by May 26, 2000.

In securitizations, assets such as residential and commercial mortgages, credit-card receivables and automobile loans are pooled and reconstituted into securities. Securitizations typically carve up the credit risks from underlying assets and redistribute them to different parties. Sellers of assets into a securitization may retain part of the risk of credit loss through recourse arrangements. Sellers also may arrange for a third party, such as a banking organization, to accept some of the credit risk through guarantees, referred to as direct credit substitutes.

The proposed revisions would:

  1. Assign a risk-based charge to positions in securitized transactions according to the relative credit risk of those positions, as measured by credit ratings received from nationally recognized rating agencies.
  2. Treat recourse obligations and direct credit substitutes more consistently under risk-based capital rules.
  3. Define "recourse" and revise the definition of "direct credit substitute."
  4. Permit the limited use of an institution's internal risk-rating system and other alternative approaches in determining the risk-based capital requirement for unrated direct credit substitutes associated with asset-backed commercial paper programs and other structured finance programs.
  5. Require banking organizations to hold additional risk-based capital against risks presented by the early amortization feature of revolving asset securitizations.

The agencies had earlier published the draft proposals in November 1997 [ See news report on this site – click here] . The revised guidelines incorporate the suggestions received by the agencies. In fact, the decision to relate the retained interests to the rating of the instrument is also echoed in a June 1999 proposal by the Basel Committee on Banking Supervision, which is to be finalised soon after March this year.

You can read/download the Preamble to the Agencies' statement here [PDF format] and the Regulatory draft here [PDF format] .

Do you have any comments on the Draft regulations? Please post them on the Discussion forum or write to me.

 

Securitization players in South Africa get active and profitable

Securitisation is still small business in South Africa, deterred by lack of understanding among the investors. But players in the business are reporting smart activity and profits in the recent past. Mettle, a specialised finance house, reported securitization volume of Rand 1.2 billion during past 14 months, says a report by South African Press Association.

To get an idea of the type of transactions being securitized, one of the recent transactions was the R430 million securitisation of a section of Unibanks microlending book, which was accorded an AA rating by Duff & Phelps and Fitch IBCA. In another recent deal, worth R140 million, Mettle securitised the debtors book of a South African company operating in Botswana. The securities were picked in part by local Botswana banks.

Mettle is currently negotiating securitisation deals in other developing countries, in Africa and in the Far East.

Links: Do visit our country page on South Africa which gives more details and links.

 

US banks take beating on residuary interests
to avoid regulatory flak

Accounting for retained interests by banks in the US, adopting FAS 125, continues to ensnare

 

Recommendations from BIS, still under consultative state, suggest that if the retained interest is either unrated or rated below B+, it should be completely deducted from the bank's capital. This, however, is regulatory accounting and may not be followed in the general financial statements of the bank.US banks. Recent probes by US bank regulators into the values banks have put to retained residuary interests in securitized loans have scared many, who are now writing off huge amounts on their revenue statements. Recently regulators have been chasing banks to shore up their Tier I capital as the value of retained interests. The concerns have been flared up by several instances of bank failures in the past – see stories on this site linked here.

A report in American Banker 14th Feb says that Charleston-based City Holding Co. wrote off $9.2 million in the fourth quarter against a revision of residual assets' cash-flow expectations.

This is not the only case. Community West Bancshares of Goleta, Calif., recently said it plans to write off $8 million and that it expects to report a 1999 loss of $3.8 million. Life Financial Corp. of Riverside, Calif., said on Feb. 1 that it swallowed a one-time, after-tax loss of $16.8 million in 1999 when it sold the residual assets and mortgage servicing rights remaining from mortgage-backed securities it had issued. BYL Bancorp in Orange, Calif., said it intends to leave the securitization business to escape regulatory pressures and possible new capital requirements

Links: This site has rich resources on accounting for securitization transactions – see articles by Martin Rosenblatt and others – click here. The site has reported several sensational news items on banks' accounting – click on the news item below which would carry you to other interesting links.

Korean company to securitize doubtful claims on Korean companies

Korean company Korea Asset Management Corp. (KAMCO) will securitize doubtful claims on Korean companies. KAMCO wants to become a world-class investment company by building expertise on handling distressed assets.

According to the company, the value of the world's total distressed assets is estimated at $4 trillion, including $500 billion in China, $900 billion in Japan and $1.8 trillion in Latin America and Eastern Europe. Only if 10% of this business could be handled, it would mean USD 4 billion in commission revenue.

For a starter, the company intends to buy claims of foreign banks on Daewoo group and securitize the same. According to a report in The Korea Herald 12 Feb, the foreign banks who have receivables against Daewoo will sell the same to domestic banks, from where Kamco will pick them up. Finally these claims will be securitised to be sold to local and international investors.

Links: For securitization in Korea in general, click here.

Risk securitization transgressing catastrophe

Though insurance securitization market developed to transfer catastrophe risks, it is today finding new applications and is growing beyond the catastrophe segment. Experts echoed this view at Hawksmere Alternative Risk Transfer and Financing Conference in London on Feb. 10. Experts predicted more use of different types of securitizations that provide contingent equity. New applications might include something like risks on extended warranty benefits by businesses.

On the possibility of capital markets completing eroding reinsurance markets, Bryan Joseph, an actuary with Price Waterhouse Coopers, said : "Reinsurance has quite a lot of advantages, and I don't think it will be replaced by capital markets products in its entirety. Securitization is an additive tool and an additive market, but so long as you can place your traditional reinsurance covers for less than you think that you should, people will stay in that market".

Links on insurance securitization See our devoted page – click here. This page gives several links on insurance securitization.

Another risk securitization instrument is weather risk securitization – this page too gives lot of links.

 

US IRS publishes FASIT regulations

The Inland Revenue Service (IRS) published last week draft regulations for Financial Assets (FASITs). FASITs are conduits to enable securitization of financial assets other than real estate receivables. The enabling legal provisions for FASITs were created some 4 years ago. FASITs were a non-starter all these years because the machinery provisions were yet to be created, which is what is being done now.

 

FASITs are investment conduits to invest in non-mortgage securitization transactions, like Real estate investment Trusts (REITs) invest in real estate credits. The purpose of FASIT law is to allow tax exemption to FASITs that satisfy the conditions set out in the IRS law.The proposed rules from IRS also contain an accounting angle – in that they provide for determination of gains on transfer of assets to a FASIT.

FASITs are generally able to hold only cash and cash equivalents, debt instruments (and the right to acquire such instruments), foreclosure property, interest and currency hedges (and rights to acquire such instruments) guarantees, regular interests in other FASITs, and regular interests in REMICs. However, in line with the market practices, the proposed regulations stipulate that a FASIT may hold fixed-rate debt instruments, specified floating-rate debt instruments, inflation-indexed debt instruments and credit card receivables. Additionally, FASITs may hold beneficial interests in, or coupon and principal strips created from, these types of instruments. The proposed regulations appear to exclude as a permissible asset, however, loans with contingent payments that were stripped outside of the pool.

The text of the proposed regulations can be downloaded from http://www.irs.ustreas.gov/prod/tax_regs/txts/irs-regs.htm

Euromoney article sees in frontiers in securitization

"The techniques of securitization, developed for shifting loans off your balance sheet or refinancing consumer lending, are being applied to a growing variety of tasks. The experts are marketing their box of tricks to anyone with a predictable cashflow. ", says an article in Feb. 2000 issue of Euromoney . The article reviews the development of securitization in USA and Europe and sees new innovative applications.

The article compares the US securitization market with that of Europe. The US market has been commoditised over years of practice – the issuer motivations are clear and the behavior of various asset classes is clearly understood by the investors. Mortgages, credit cards, auto loans and corporate loans are the staple diet of the US market. By contract, European market is yet to create a regularity of issuance. Europe is not primitive, but eclectic. " Investment bankers struggling for years with the absence of standard legal frameworks for securitization have developed a wide range of techniques, and without a constant flow of deals in the main categories they have sought out new and surprising places for one-off, customized securitizations", says the author.

While Europe might have originated interesting transactions as the Italian government receivables or the Rugby world-cup telecasting rights, Europeans transactions lack standardisation. Standardisation is necessary to provide investors liquidity: they can walk out of one bond and get into another without having to re-analyze the entire transaction.

The European mortgage finance product, Pfandbriefe is a prominent example of a standard mortgage financing alternative. France provided another alternative – obligations fonciers.

 

Standard and Poor's reviews US ABS market

Rating agency Standard and Poor's (S&P)recently reviewed the 1999 US asset-backed market and projected the developments in year 2000. According to the agency, total public ABS issuance, excluding home equity products, increased by about 18% from 1998 and reached US$133 billion at year end.

Commenting on the innovations in ABS market, S&P says that a new asset class emerged during the year – the auto retailer. In year 2000, the Internet could add to the supply in the ABS market and could become a fixture .

The sector to grow fast in 1999 was auto ABS with good collateral performance and increased demand for auto sales. One of the prominent auto ABS transactions in 1999 was PeopleFirst where the entire collateral was originated online. [We reported this transaction on our site – click here.]

S&P notes the increasing popularity of asset-backed commercial paper (ABCP). ABCP "conduits are being used as corporate finance tools, as investment vehicles that invest in securities for arbitrage purposes, and as a means of balance- sheet management for banks that want to offload their loans in the form of collateralized loan obligations (CLOs)" As of November 1999, ABCP accounted for nearly 40% all commercial paper in the USA.

Credit card ABS was also quite popular in 1999 as investors preferred short term liquid spread products.

In the CLO/CBO sector, the activity was mainly marked by arbitrage transactions. [Arbitrage transactions are those where the issuing banks buys loans and bonds at a higher discount, repackage them and sell them to investors making an arbitrage in the process. Where a bank securitizes its own loans, it is called a balance sheet CBO/ CLO].

According to S&P, there were fewer new asset classes in 1999 with the tobacco settlement securitization being a notable exception. [This was reported on our website – click here. ] Commenting on the new asset classes in 2000, S&P says: " The insurance/settlement niche, including lottery settlements, catastrophe bonds, and structured settlements, also should be very active in 2000. Securitization of mutual fund 12b-1 fees will also pick up speed. In addition, the market should once again see an influx of fresh new asset types."

The complete report is available on Standard and Poor's website – clickhttp://www.standardandpoors.com/en_AP/web/guest/home 

Indian government to securitize cess to fund infrastructure projects

India seems to be taking a lesson from Italy where government revenues were securitized. A report in Business Standard 9 Feb. 2000 says, quoting Planning Commission Dy Chairman K C Pant that the Task Force on Infrastructure has approved a proposal to securitize a cess on petrol and diesel that was imposed last year and the amount so raised will be used to finance infrastructure projects. Pant has been quoted as saying that a bill to empower such securitization has already been cleared by the law ministry and will be taken to cabinet for approval in 10 days.

For more on securitization in India, click here. 

European securitization grew 84% in 1999

International rating agency Moody's reported [Financial Times 8 Feb, 2000] that European ABS volumes in 1999 grew by 84% to USD 83 billion. The outstanding volume of European asset-backed securitization at end-1999 stands at USD 83 billion. With the global outstanding volume around USD 550 billion (this excludes mortgage-backed securitization), Europe accounts for about 15% of global volumes. However, since most securitization volumes are still centered in the USA, Europe accounts for more than half of non-US securitization volume.

The growth of the European market has also been helped by the easing of regulations in Italy, Spain and France. However, Moody's said legal, tax and accounting system differences between countries were still holding back the development of the market.

The past two years saw a number of the more unusual securitisations, including a œ230m bond backed by ticket sales from Tussauds Group, which comprises the world famous Madame Tussauds wax works museum and the Alton Towers theme park. Another interesting transaction was the securitization of champagne bottles [reported on this page –click here ].

More on this site – For a news report on global ABS volumes for 1999 and prospects for 2000, check here. And click here for an overview of the European securitization market. For another news report on the innovative deals expected in Europe shortly, click here.

Turkish leasing company innovates to get above-sovereign rating for onshore assets

We have earlier reported this transaction on this page – click here.  The transaction was in limelight recently as analysts claimed that this transaction could well be a benchmark for emerging market originators to breach the sovereign ceiling even in case of onshore assets.

One would easily imagine emerging market transactions being rated above the country's sovereign rating. But that is in case of offshore assets, where the receivables originate from hard currency countries, and are isolated in the country of origin itself and put beyond the regulatory reach of the originator's country. For example, if a Turkish company had receivables emanating from USA, those receivables would be assigned under New York law and put beyond the powers of the Turkish government, and hence be secure from exchange rate, convertibility and transfer risks. But this is not conceivable in case of onshore receivables, where the receivables originate within the country. Such receivables are appreciably subject to transfer and convertibility risks.

However, the securitization of receivables by Garanti Leasing amounting to USD 43 million uses an innovative device to obtain an above-sovereign rating. The transaction, managed by Rabobank NV, uses Turkish lease receivables which are assigned in favour of IFC Washington to repay a loan of USD 50 million taken by Garanti Leasing. The presumption here is that IFC is internationally recognised as a preferred lender, and Turkish government will not use its sovereign powers on payments due to IFC. Hence, the transaction avoids exchange rate, convertibility and transfer risks.

Hence, DCR has rated the issue BBB against country rating B+, and Moody's has rated the issue Baa2 against country rating of B1.

Links For securitization in Turkey in general, click here.

 

Weather risk securitisation market growing

No method has been found as yet to mitigate weather risks, but what financial jugglers are doing is to split weather into a tradeable commodity, so that the impact of an adversity is distributed to many, rather than affecting a few. The development is taking place in form of securitized weather risk, on the lines of securitization of catastrophe insurance securitization.

The weather derivatives market began in 1997 in the United States, with the European market getting under-way in 1999. The developing market is taking shape through both over-thecounter and exchange-traded vehicles. The bulk of the interest in weather derivatives to date has been from energy utilities, but market participants see the hedging instruments holding potential attractions for other industries as well.

The weather derivatives market, though based on the cat bonds technology, is a completely different concept. In the hands of an electricity company, the weather is a risk, because the potential consumption of electrical energy depends on the weather – if it too hot or too cold, the demand for air-conditioning energy goes up. Thus electricity energies faced tough business managing the risks of an unusually warm winter or cool summer.

Weather derivatives allow the originator to hedge against the risk of weather changes. Adverse weather changes are passed on the derivative holders in form of an interest remission or deferment of servicing. Typically, the weather derivatives are based on "heating degree days" or "cooling degree days"the difference between a day's average daily temperature and 65 degrees Fahrenheit-with the contracts written on the cumulative number of heating or cooling degree days over a set period.

Market participants are expecting other potential users to join weather derivatives market, such as agriculture-based industries, breweries, etc. [Based on Business Insurance Chicago, Jan 31, 2000]

Links: One of the first weather risk securitization issue, Koch Industries, was covered by our news page – click here. For a complete tabulation of catastrophe and weather derivatives issuance, click here. Also see our Insurance risk securitization page for more links and articles on risk securitization – click here.

Spanish bank to launch first ABS issue

Banco Bilbao Vizcaya Argentaria SA is proposing to launch what will be Spain first non-mortgage securitisation. It proposes to come out with Euro 1.250 billion worth bonds that will be secured by long term loans and credits to its corporate clients. The SPV, Fondo de Titulizacion de Activos BBVA-1, will issue five different types of bonds, with a maturity date of Nov 30, 2014. Each bond will have a nominal value of 200 mln eur and an annual interest rate which will vary according to the Euribor.

The Spanish securitization market is currently dominated by mortgage-backed securities.

Links: More on securitization in Spain is on our country profile on Spain where we have recently added data about Spanish securitization issues, as also an article on the Spanish securitization law – click here. Recently we carried a news item about MBS issue by regional banks in Spain – click here.

 

Global ABS issuance to grow 35% in 2000

Come the beginning of calendar year, and rating agencies are at the star-gazing exercise. We have been releasing various news items on expected growth in 2000 ABS issuance in various regions. Here is the forecast for the world as a whole. Moody's released on 7th Feb its expectations for 2000 – asset-backed issues (excluding mortgage-backed issues in USA) to grow by 35% to a record US$182 billion, on the heels of 1999's record $135 billion of new ABS deals growing by 79% over 1998 volume.

Moody's feels that banks will continue to shed assets through securitization as they look for funding alternatives, and for balance sheet and capital relief. However, in emerging markets, growth prospects will be constrained by availability and liquidity of currency swaps as the investors are mostly from outside the emerging markets who have a known preference for dollar, yen or euro denominated investments.

Moody's feels that securitization growth is still hampered by varying legal tax and accounting systems. In Europe, Italy, France and Spain have taken steps to harmonise the environment for securitizations.

 

Mutual funds in India to be allowed to invest in securitized products

Mutual funds in India are currently constrained by their inability to invest in securitisation transactions – for a technical glitch. The flaw in question is the definition of a "security" in securities laws which does not presently cover securitized transactions.

The securities regulator in India, Securities and Exchange Board of India (SEBI) is considering allowing mutual funds to invest in securitised products, according to a news report in Business Line 4 Feb., quoting SEBI official Ashok Kacker. The apex housing finance body, National Housing Bank, has been pressuring SEBI to do so, since a number of housing finance companies are on the verge of a public issuance of securitized products, either directly or through the intermediation of the Bank.

Public issuance of securitized products has not taken off in India as yet – several originators in the past have been talking about such issues and it is quite likely that year 2000 should see the inaugural MBS issue from National Housing Bank.

 

Bond Market Association survey indicates modest growth in securitization

If industry opinion is predictive, ABS market in 2000 should end up with a modest growth, indicating that securitization markets are maturing and are reaching the flat end of the S-curve of growth.

Bond Market Association, one of the most prominent industry associations in the USA, recently released data derived from a survey of the industry participants. While the industry in general expects aggressive overall economic growth during year 2000, it is less bullish on securitisation issues. This is what the survey has to say:

"Asset securitization, which has been cited in recent years' surveys as having the greatest growth potential, is still expected to grow, but not as significantly as predicted in the past. Nineteen percent of respondents expect asset securitization growth to be substantial, while just under two-thirds expect modest growth. This compares to 46% and 58% of respondents predicting substantial growth in the sector in the 1999 and 1998 surveys, respectively. The expectations are not surprising, however, as the pace of asset-backed issuance has moderated over the past few years. "

 

Japanese supermarket chain to securitize stores
First such deal in Japan

Jusco, the Japanese supermarket chain, proposes 5 of its planned stores to be securitised and thereby raise Yen 30 billion. The stores are yet to be built – in other words, securitisation will be used as a device for funding the construction of these stores.

The issue is expected to be managed by Dai-Ichi Kangyo Bank, Toyo Trust and Banking Co., Chuo Trust and Banking Co. and the governmental Development Bank of Japan. The issue wil be sold mainly to institutional investors. Jusco expects that the securitization will help it to diversify its fund-raising methods away from banks and thereby reduce interest-bearing debts on its balance sheet.

This will be the first transaction of its type for Japan where securitization of commercial properties, particularly those in construction phase, is yet to take off. But the market expects the transaction to easily lure other supermarket chains.

Links For securitisation in Japan in general, click here. For securitization of commercial mortgages, click here.

 

US bank regulators begin hearings on bank failures

US House Banking Committee Chairman Jim Leach would start hearing on Feb. 8 in the matter of recent bank failures. Securitization is cited as one of the three main factors responsible for successive failures of banks in the USA recently. The other two factors are subprime lending and frauds.

Those testifying are: Donna A. Tanoue, chairman of the Federal Deposit Insurance Corp.; John D. Hawke Jr., comptroller of the currency; Ellen Seidman, director of the Office of Thrift Supervision; and Laurence H. Meyer, Federal Reserve Board governor.

Related stories and materials on this site: First National Bank of Keystone was a prominent case of bank failure apparently triggered by accounting lapses on securitization transactions – reported here with details and related links. There were other cases too – we on this site have carried news and expressed concerns over these cases – click here for an article expressing concern on bank health being depleted by securitization, here US bank regulators cautioning originators on securitization activities. Full text of the Agencies' guidelines was placed on our site – click here to read (pdf file). The story of accounting losses due to securitisation in a Californian bank was carried here. Here is a story of another bank failure apparently caused by securitization.

For securitization of bank loans in general, click here.

 

Fitch IBCA releases 1999 overview of Australian securitization

Year 1999 witnessed a significant growth in Australian securitization, particularly due to the trend towards global issuance, inspite of a fall in volumes towards the end of the year, says rating agency Fitch IBCA in a yearly overview of Australian market. The year saw for first time issues denominated in Euros to rope in European investors. Fitch IBCA expects these trends to continue through 2000.

Noting the remarkable trends in 1999, the agency said a record number of 7 issues went offshore during the year. The year also saw first CMBS transaction with a single borrower.

On the expectations for year 2000, the agency expects the year to see more issuers going offshore to take advantage of European and US investor base. In the RMBS market, more non-conforming mortgages, with 100% loan-to-value ratios are likely to be securitised. The market should see strong growth in the CMBS segment with single borrowers. On the emerging asset classes, the agency "expects that other asset classes could also be securitised, ranging from credit card receivables, to stadium seat licensing fees, to infrastructure projects, such as toll road receipts or power generation. These transactions will appear as market conditions and investor appetite make them economically viable for securitisation."

Links: The report titled Australian Securitisation 1999 Year-end Summary is available on the Fitch IBCA website fitchibca.com -look for Info Centre – Latest Research. We recently covered a similar report on Australia by Moody's – click here. For a country profile of Securitisation activity in Australia , click here.

 

UK university securitises student rent receivables

Keele University of UK set a new path for funding by educational institutions when it raised Euro 69.4 million in bonds backed by rent receivable from students. Financial Times UK commented on this transaction in the following words: "Keele University yesterday [31st Jan, 2000] launched the first bond in Britain backed by rental income from its student accommodation. The bond … could transform the way universities fund themselves". [We have commented earlier about this transaction and other innovative applications of securitisation in Europe – click here] .

The transaction allows the University both cheaper and longer-term funds. The bonds, to mature in 30 years total maturity, were priced at 170 basis points over government securities of the same tenure. The bonds are guaranteed by Financial Securities Assurance, a monoline insurance company active in securitisation transactions.

Last year, a UK hospital raised Euro 92 million by securitisation.

Links : For more about the overall securitisation market in UK, click here.

 

Spanish banks join for MBS issue

Four Spanish regional savings banks recently launched the year’s first securitisation of prime European mortgages, with a Eu660.6m deal lead managed by Crédit Agricole Indosuez, Dresdner Kleinwort Benson and EBN Banco. Caja de Ahorros del Mediterráneo contributed 37.8% of the collateral to TDA 11; Caixa Tarragona 22.8%; Caixa Terrassa 21.5% and Caixa Manresa 18%.

The issue was broken into 3 tranches with the senior most getting Aaa rating from Moody's. The issue received very good response from mutual funds and other institutional investors from Europe.

Links: For general coverage on Spanish securitisation market, click here.

 

US MBS issuance data for 1999

The data for MBS issuance in the USA for 1999 was recently released. Classified into RMBS (agency and non-agency), CMBS and home equity loans, the data gives listing of the top 10 managers of MBS issues in the largest MBS market in the World.

 

Residential Agency Mortgage-Backed Securities

Rank

Manager

Proceeds $MM)

1

Salomon Smith Barney

$25,165

2

Lehman Brothers

25,073

3

Merrill Lynch

22,550

4

Bear Stearns

19,874

5

Credit Suisse First Boston

19,213

6

PaineWebber

18,616

7

Goldman Sachs

16,979

8

Greenwich NatWest

12,101

9

Nomura Securities

4,757

10 

Banc of America Securities

3,282 

Residential Non-Agency Mortgage-Backed Securities

113,135

 

 

 

2 

Lehman Brothers

11,430

 

3 

PaineWebber

8,294

 

4 

Merrill Lynch

6,799

 

5

Salomon Smith Barney

6,736

 

6 

Bear Stearns

6,620

 

7 

Credit Suisse First Boston

6,292

 

8 

Greenwich NatWest

5,988

 

9 

Banc of America Securities

4,903

 

10 

Morgan Stanley Dean Witter

1,455

  

Commercial Mortgage-Backed Securities
1
 
Morgan Stanley Dean Witter 
$10,591
 
2
 
Lehman Brothers              
9,307
 
3
 
Goldman Sachs                
8,983
 
4
 
Donaldson, Lufkin & Jenrette 
5,683
 
5
 
Banc of America Securities   
4,228
 
6
 
Merrill Lynch                
3,693
 
7
 
Deutsche Bank Securities     
3,373
 
8
 
First Union Capital Markets  
2,896
 
9
 
Prudential Securities        
2,808
 
10
 
Bear Stearns                 
2,759
 
Home Equity Loan Backed Securities
1
 
Lehman Brothers        
12,972
 
2
 
Merrill Lynch           
8,386
 
3
 
Prudential Securities   
7,673
 
4
 
Bear Stearns            
7,482
 
5
 
Salomon Smith Barney    
7,205
 
6
 
Banc of America Securities
 
6,441
 
7
 
Greenwich NatWest       
5,973
 
8
 
Credit Suisse First Boston
 
4,872
 
9
 
Morgan Stanley Dean Witter
 
3,510
 
10
 
PaineWebber             
2,868

Agency and Non-agency: Full credit to book manager; public issues; Source: Securities Data Co. 
CMBS: Full credit to book manager; public and private issues; Source: Commercial Mortgage Alert. 
HEL: Full credit to book manager; public and private issues; Source: Securities Data Co.

Links: For coverage on the US securitization market, see country profile on USA – click here. For coverage on RMBS in general, click here. For coverage on CMBS in general, click here.

 

Italian merchant bank ties up with US company for ABS structuring

Cofiri, the Italian state-controlled merchant bank, has signed a collaboration agreement with Bank One, the fifth largest bank in the US and one of the leading international players in asset backed securities, with around 2,000 outlets in 14 Midwest and Southwest states and numerous subsidiaries in 11 other countries.

The two will collaborate in the structuring of securitisation operations. Italian industrial and credit concerns and their European subsidiaries will benefit from the financial know-how and sophisticated security instruments.

Links: See our country profile for Italy – click here. The Italian securitization law is placed on our Laws section – click here. A very comprehensive article, in Italian, on the Italian law by Lucia Mazzocco is also on site – click here.

If you have any contribution to make about Italian securitization market, please do write to me.

Moody's expects Asian ABS volume to reach USD 2 billion

Asia's cross-border securitization issuance volume may reach US$2 billion in 2000, predicts Moody's Investors Service in its annual market outlook for the area. The volume in 1999 was USD 1.73 billion.

Moody's expects commercial mortgage-backed deals and CDOs to make up the bulk of the issuance, with many deals originating in Hong Kong, Korea, and to a lesser extent Singapore, and is on the lookout for the development of domestic ABS markets over the next 12 months.

The growth rate in 1999 was dramatic: from USD 750 million in 1998.

It is notable that the above data only includes international offerings and not domestic issuance.

Among the countries that have substantial potential for securitization, Moody's finds China as remarkable, because of its size and diverse types of asset classes.

Securitization enters the Internet era with first ABS issue sold online

Morgan Stanley heralded securitization markets into the e-commerce age with the first ABS issue being marketed online — a $526.316m credit card deal for its subsidiary Discover Financial Services. This was offered during 18th -20th January.

Incidentally, this coincides with a major e-commerce initiative by the World Bank where the Bank has offered USD 3 billion bonds on the Net. In fact, even the Fannie Mae is now offering its products online.

The Morgan Stanley Dean Witter offer was placed on the ClientLink section on its website where investors were able to lodge expressions of interest, and orders were firmed up on the same site after the deals were priced.

Analyst concerned about securitization depleting bank balance sheets

A recent article in   ABA Banking Journal [December 1999] published by the United States of America expresses concerns about the massive extent of "regulatory arbitrage" inherent in securitization transactions. Regulatory arbitrage refers to a bank trying to parcel out high grade assets, currently requiring 8% risk capital, and acquiring a small fraction of junior participation in the securitized debt, which, being much lesser than 8%, would give the bank a release of regulatory capital.

Author of this article Ed Blount, contributing editor, and Executive Director, The ASTEC Consulting Group, Inc., New York, N. Y, says that : "Securitization has become a crucial source of funding to the entire banking industry. By March 1998, Federal Reserve staffers working with the BIS committee reported that the ten largest U.S. bank holding companies had $200 billion outstanding in nonmortgage, securitized bonds-a value equal to 25% of their risk-weighted loans. A committee working paper pointed out, with unusual drama, that, "The securitization activities of these companies loom large in relation to their balance sheet exposures." Nor is the magnitude of securitization confined to U.S. banks. European regulators reported that over $40 billion in new securitized issues had been floated in 1997 by banks and nonbanks, up fivefold in Just two years.

"No one knows the total capital reduction in banks with securitized balance sheets, but BIS analysts have used succinct examples to dramatize their call for reforms. In one-example, an 8% capital charge for a bank's threemonth loans to a prime corporate account in its banking book is shown as cut to 0.25% when the same bank buys the same company's 90-day commercial paper to hold in its trading book. Quite apart from the implied threat of declining bank solvency, a release of capital on anything approaching this magnitude must have already had a profound impact on the economy through increased bank activity, since most securitizations are assumed to have resulted from regulatory arbitrage."

The article will be continued in the forthcoming issue of the Journal, and on this website, we will endeavour to bring you abstract of the next part as well.

More such reading materials : The Bank for International Settlements has produced an article that alleges regulatory capital arbitrage in securitisation transactions – click here to go to the article. We have also carried earlier on this site reference to an article in The Economistwhich made expressed similar concerns – click here to visit this item.

The class of 1999: mutual fund fee securitization

A new asset class with a substantial potential emerged in the asset-backed securitization market in 1999: securitization of fees for managing mutual funds.   Several issues of this class were noted in 1999: including the $91 million deal issued by Putnam, Lovell, deGuardiola & Thornton in July, a $200 million deal from Constellation Financial Management, via Bear, Stearns & Co. Further, BISYS Fund Service Inc. recently announced plans to embark on a series of deals in first-quarter 2000.

The typicality of these offering is that it is not the mutual fund itself which is the originator: banks buy the fees from the fund, and they in turn securitize the fees in the market. There are even potentials of a one originator buying fees from several mutual funds, pooling them together and securitizing the same.

 

Colombian coffee growers resort to securitization as sovereign ratings remain speculative

Use of securitization to pierce sovereign ratings is common in emerging market countries, particularly those with a poor country rating. As the sovereign rating of Colombia continues to be below investment grade, its coffee-exporters have to look at securitization as the means for cheaper international funding.

Federacin Nacional de Cafeteros de Colombia (Fedecafe) recently securitized its future coffee export proceeds and obtained an A- rating and priced its debt at least 200 basis points cheaper than the country's sovereign debt.

There are numerous such instances in Latin America – Mexico's Pemex, Venezuela's PDVSA and Colombia's Ecopetrol have all resorted to future flows securitization.

Fedecafe is a private, non-profit Colombian consortium that, in its capacity as national representative of the Colombian coffee growers, manages the Coffee Fund, a $1.3 billion parafiscal account that is comprised of public funds. The primary objective of the Coffee Fund is to stabilize coffee revenues in Colombia by reducing the effects of international coffee price fluctuations.

Links For more on securitization markets in Colombia, see our country profile – click here. For other Latin American countries, click the respective country pages. For general coverage on the Latin American market, click on the this page.

SECURITISATION NEWS AND DEVELOPMENTS

/in /by

[This page lists news and developments in

International securitisation markets –

please do visit this page regularly as it is

updated almost on a daily basis.]

IMPORTANT

For all news added before 25th March, please click here   
For all news added before 21 January, 2000, please click here   
For all news added before 9th November, please click here   
For News items added prior 3rd August, 1999, click here.

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

Pennsylvania electric company securitizes stranded costs

PECO Energy Company has put up USD1 billion in asset-backed transition bonds, its second securitized financing of debt in the last 14 months. Salomon Smith Barney is the lead underwriter. The AAA-rated Series transition bonds are all non-callable, fixed rate securities. The bonds are split into four classes with expected maturities ranging from 1.1 years to 9.3 years. The weighted average interest rate of the transition bonds is approximately 7.54 percent.

Prior to the present issue, PECO Energy securitized $4 billion of its recoverable stranded costs in March 1999, the largest securitization deal in the USA.

Stranded costs represent the costs incurred by electric utilities in course of their transition into competitive pricing. The issuance of transition bonds is allowed on case to case basis by electricity regulators.

Links For more on securitization by public utilities, click here.

Grab your future wealth today, via securitization of intellectual capital

A new book by Stan Davis and Christopher Meyer discusses the enticing new opportunity for musicians and magicians, preachers and performers, authors and artists: securitize your skill and get today what you can only hope to earn in future.

Titled Future Wealth (Harvard Business School Press, 201 pp., $39.95) the book is built around the famous case of securitization by David Bowie (click here for our intellectual property securitization for details). The authors, both of Ernst and Young Centre for Business Innovation in Cambridge, say that the Bowie bond deal may have more replicates in time to come. In an age where talent has become the rarest and most valuable commodity, it won't be long before high fliers from many other walks of life follow Bowie's lead by putting ownership of their abilities up for grabs.

The way intellectual property is being traded on the markets is also influenced by the most important technological event of our time: the internet. The authors assert that the rise of the Internet economy is completely rewriting all the rules governing wealth creation, and this, in turn, will dramatically change the way financial markets function in the future.

Latin America slowly cultivating securitization, says S&P

A recent write-up by Standard and Poor's [Structured Finance April 2000] reviews the growth of securitization in Latin America.

The report notes the two significant features of Latin American securitization: reliance on third party credit enhancements and development of local markets. Several Latin American issuances in the past have resorted to political risk insurance – for a news item on OPIC's political risk insurance for securitization from emerging markets, click here. These enhancements aim at reducing the sovereign risk associated with these countries. "Nevertheless, there are still hurdles to be overcome. Many major markets lack adequate information about loan perfor-mance and property values, and lenders have shown a reluctance to provide relevant information about borrowers", says the Report.

Reviewing some significant Latin American markets, the report notes that Argentina remains one of the active securitization markets, particularly for RMBS transactions. Argentinean market has a vast potential for securitization: the 10 largest private financial institutions still retain approximately US$9.037 billion in potentially securitizable assets. "However, there are challenges. Banks may be unwilling to share information about their customers with other banks. Also, because the concept of an independent trustee in Argentina is still developing, it can be difficult to find impartial third parties to represent investors," says S&P's report.

Talking about Mexico, the Mexican government housing agency, Financiamiento Bancario de la Vivienda (FOVI), received a loan from World Bank to promote RMBS securitization. FOVI has accordingly designed an inflation-adjusted mortgage securitization instrument. However, Mexican legal system still lacks the required flexibility for securitized transactions.

The report notes that in Brazil, enough securitizations are not done because the volumes are still not large enough. However, the country has allowed faster mortgage foreclosures in a bid to attract securitization investors.

Links: For a general discussion on securitization markets in Latin America, click here. Also see individual country profiles – click here.

European securitization: innovation and growth mark Q1, 2000

A report by Standard and Poor's recently reviewed European Securitization market. The securitization market is becoming the hottest debt market in Europe with increasing investor appetite.

In terms of volume, the report says the volume slid from the Q1 figure of the previous year: it is USD 14.5 billion this year, but the slide is nullified by two important factors: more deals, and more ecelectic deals. A total of 29 transactions were completed in Q1 of 2000, says Standard and Poor's.

Among one of the very innovative transactions this year was the champagne bottles securitization from France – click here for the news item on this site. Subsequently, the same technology was also used for securitization of stock of wool in France – click here. Both these transactions have used physical assets as a collateral for securities as against the traditional asset classes where receivables or financial assets back the securities.

Standard and Poor's also emphasizes the growth in standard pedestrian asset classes, as these provide the growth engine for securitization in any region. Among the traditional classes, credit card securitization issuance is still much slow in Europe as compared to the USA, but Q1 of 2000 saw Europe's largest deals so far: Royal Bank of Scotland's bumper USD1.6 billion issue sale.

RMBS transactions continue to be the mainstay of European securitization. The quarter registered USD 3.4 billion RMBS issues, with regular names such as Northern Rock PLC. However, notable activity was seen in the CMBS segment, where the first Pan-European issue by Europa One PLC, a ground-breaking US$1.345 billion securitization of assets from five European countries made its mark. Standard and Poor's expects good demand for Pan-European issues.

The report also notes activity in aircraft receivables, ABCP, and high yield CBOs.

[Note: this report is intermixed with my comments – VK]

Links: For more on securitization in Europe, see our review of Europe – click here. Also see individual country pages – click here.

China enters MBS age

Permits China Construction Bank to issue MBS

Financial Times of 25th April reported that the Peoples Bank of China has for the first time permitted issuance of mortgage-backed securities in the country. People's Bank of China, the central bank, had given permission to the China Construction Bank (CCB), one of the "big four" state banks, to start offering mortgage-backed debts.

From a financial policy perspective, permission for mortgage-backed securities opens the door to the idea of recapitalising China's badly impaired bank assets by issuing various types of securities. Non-performing loans in China's state banks account for around 25 per cent of the total.

Besides, mortgage-securitization as a means of promoting housing finance has long been needed in China. Hong Kong is well recognized as the hub of securitization activity. On the other hand, China is yet to initiate the instrument, though the country faces an acute shortgage of housing.

Earlier on of our pages on this site on this site, we have reported the intended securitization in China, which means the deal has been hanging for a very long time.

Links: For more on securitization in China, see our country page – click here.

 

 Banca di Roma in Italy's biggest securitization of non-performing loans

Banca di Roma of Italy recently launched a massive securitization transaction which includes the largest parceling out of non-performing loans in Italy so far. The Euro 1.7 billion transaction was reported in Il Sole 24 Ore on 14th April.

The four tranches offer partly consists of non-performing loans held by Banca di Roma and its subsidiary Mediocredito di Roma. Of the 4 tranches, class A and class B valued at Euro 850 million, which have been placed on the market. Classes C and D have been retained by the originator

This securitisation deal, named "Trevi 2", is Italy's biggest on-performing loan transfer. Lead manager for A and B tranches are ABN Amro and BNP-Paribas with Banca di Roma as Senior Co-Lead Manager. Classes A and B have been placed with a wide range of European investors. Class C, presently retained by the bank, will be listed at Luxembourg. Class D notes, also retained, will be collateralised by high-grade bonds.

Class A of Euro 650 million, with expected average Life: 3.5 years carries Euribor 6 months + 110 bps, and may be rated AA. Class A is also supported by liquidity line provided by ABN Amro.

Class B of Euro 200 million has expected average Life: 5.4 years and carries Euribor 6 months + 210 bps. This may be rated A-.

Thanks to Mr. Paolo Binarelli of Crops 'n Commodities for contributing this news as also number of other news items relating to Italy. Paolo has been a great help and would be eager to discuss Italian securitization with those interested – his e-mail id is cnc_uniroma1@yahoo.it

Securitization accounting: more accounts go more wrong

Even while the Financial Accounting Standards Board is re-writing the accounting standard for securitizations, there are more instances of imaginary assets on securitization being written down or written off.

American Banker of 18th April reports that Community West Bancshares of Goleta, California, was forced by bank regulators to revise its accounts for 1998 and 1999 to correct the values recorded for retained assets on securitised loans. The 1998 accounts of the bank initially showed a profit of USD 2.9 million, which was revised down to USD 0.45 million, that is, down 85%, after correct values of assets arising out of securitization were recorded.

Then again, in 1999, the bank showed a loss of USD 1.65 million for the same reason.

While reporting impairment of securitization assets is becoming more frequent, however, form 10-K filed by Conseco Finance recently beats the record. Here are some excerpts from the statement:



"During 1999 and early 2000 the Company reevaluated its interest-only securities and servicing rights, including the underlying assumptions, in light of loss experience exceeding previous expectations. The principal change in the revised assumptions resulting from this process was an increase in expected future credit losses …. We recognized a $554.3 million impairment charge ($349.2 million after tax) in 1999 to reduce the book value of the interest-only securities and servicing rights.

During the second quarter of 1998, prepayments on securitized loan contracts continued to exceed expectations and management concluded that such prepayments were likely to continue to be higher than expected in future periods as well. As a result of these developments, we concluded that the value of the interest-only securities and servicing rights had been impaired, and we determined a new value using current assumptions. …

In 1997, we conducted a review of the systems, financial modeling and assumptions used in the valuation of our interest-only securities. …We recognized a $190.0 million impairment charge in 1997 …."

Links:

  • Martin Rosenblatt's articles on gain-on-sale accounting are very thoughtful – click here to go to our articles page. Look for articles under Accounting issues.
  • Here is another interesting article on New Century Financial website – click here.

Poaching continues in European markets

Some time back, US securitization markets were rocked by concerted exodus of securitization teams from one player to the other. Now, it is Europe. On 14th April, Merrill Lynch & Co. reported having hired seven members of Deustche Bank AG's structured finance team in London. Michael Donahue will join as managing director, while David Mandel, Michael Jinn, Justin Fox, Rolf Steffens and Teimuraz Barbakadze will join as directors. Andrew Jarmolkiewicz will become a vice president.

Even as this news was still hot, on 17th April, Financial Timesreported that Credit Suisse First Boston, the investment bank, has poached a team of at least 10 from BNP Paribas to boost its European securitisation business. The top-rated team includes Maarten Stegwee and Adrian Carr in London.

Earlier news reported on this site – click here and here.

Do you have any views on this matter – write to me and we will be happy publishing your views.

Japanese government to sell land by securitization

Earlier on this site, we have reported the move by the Japanese govt. to securitize idle land owned by it – click here. The govt. has now identified land for this purpose. Reports in Asia Pulse of 18th April said the Govt. has selected 14 earmarked properties for sale to investors. This will mark the first time state-owned land will be securitized.

The properties, which include a former housing site for civil servants in Tokyo, will bring in an estimated total of about 10 billion yen (USD 95.87 million) through the deals.

The government plans to open competitive bidding to the public in late May.

Italian bankers contemplate securitization exchange

One of our list members from Italy (see below) has provided us this news feed. The Italian Bankers’ Association (ABI) is working on a very interesting project. Its goal is to create an organized financial market for securitisable assets in which asset owners can sell their assets, and buyers, as financial institutions, can buy either directly or as structured products. ABI believes that with the rapid popularity of securitization in Italy, such a forum will have tremendous scope. A listed and organized financial market for such assets will bring more standardization to the assets themselves and more guarantees for investors. Organized market also implies rated and healthier securities in the marketplace.

It is notable that Italian banks have been particularly vehement in sacking off their non-performing loans – see our country profile on Italyfor more details and news items.

ABI, however, is of the strong view that bankers should look at securitization not merely as a cleaning tool but as a funding instrument.

In the meantime, at a conference organised by Business International in Rome on 31st March, Moody’s forecast a great 2000 for Italian securitisation market: up to Euro12 billion, up and almost doubling from euro 6.5 billion in 1999.

[We are grateful to Mr. Paolo Binarelli of Crops 'n Commodities for feeding us with this news. We appreciate his continued support to disseminating important developments taking place in Italy.]

 Predatory loan practices may put securitization trustees to problems

A recent piece in American Banker 12th April says that consumer lawyers and other interest groups can put securitization trustees and investors into problems on account of predatory loan practices of the originators. "A spate of threats over the indirect financing of so-called predatory mortgage loans is the latest volley in a two-decade-long legal war that has put the financial community increasingly on the defensive. By brandishing Truth-in-Lending, fair-housing and anti-racketeering laws as hammers against large financial companies that buy, securitize, or help finance abusive loans, trial lawyers are applying a strategy many experts trace back to a 1980 law that made banks potentially liable for clients' environmental cleanup costs."

Predatory loan practices include unfair or illegal lending activities such as excessive origination fees, prepayment penalties, loan packing, that is, pricing of independent add-on services with a loan, loan flipping, that is, rescheduling of a loan such that it increases the profits of the lender, etc.

Evidently, predatory lending practices, more common in sub-prime lending and home-equity segments, might create legal problems for even the assignee of the loans, that is, the SPV and the trustee for the SPV. By implication, even the investors who buy such loans might be implicated. Under the US Home Owner Equity Protection Act, the assignee or buyer of a mortgage is also liable for the originators' offences. Based on these provisions, on Feb. 16, 2000, a plaintiff won a decision in a Pennsylvania bankruptcy court against the trustee for the securitization and the holder of a loan after the originator went out of business. The plaintiff, sought to rescind the loan, which was originated by Money-Line Mortgage and assigned to CityScape Corp. CityScape had filed for Chapter 11.

There have been more such cases, and a few of them successful. In December 1999 a group of investors in California sued Bank One Corp. and SunTrust Banks Inc. over their role as trustees for securities issued by First Lenders Indemnity Corp. The investors were claiming the banks should be held responsible for losses on what they said was a Ponzi scheme orchestrated by a man who had been convicted of bank fraud.

In another case, Bankers Trust Corp., which has since been bought by Deutsche Bank AG, has been named as a defendant in a class action against Delta Financial Corp. for its role as an underwriter for the subprime lender.

Do you have any comments or experience in the matter? Do write back – we will be happy to publish your comments here.

Insurance securitization optimistic on use of protected cell companies

Insurance securitization community is optimistic that protected cell companies, a new concept that avoids setting up of an SPV for securitization of insurance risk, will make things easier, faster and cheaper.

 

Links: Click here for an article by John E Langlois on protected cell companiesThe current approach in securitizations is to set up special purpose vehicles in tax haven jurisdictions that provide reinsurance cover to the insurance company and in turn transform the insurance risk into a capital market product.

On the other hand, if protected cell companies are used, there will be no need to set up SPVs for each transaction, as one cell company can have several cells in it and each cell can do a securitization transaction. The basic idea is not to proliferate legal entities.

Protected cell companies, it may be noted, can be used in asset securitization applications

Guernsey has already enacted a protected cell legislation. Some of the US states such as Illinois, Rhode Island and South Carolina have also passed protected cell laws. In fact, the National Association of Insurance Commissioners has also passed a model protected cell companies law. The concept has not been put to use as such but insurance market practitioners expect it would be lapped up by securitisers in due course.

 Greece drafting securitization laws

A report appearing in Asset-backed Alert recently says that the Greek government is working with three investment banks to draft a securitization measure that could become law by late summer. Obviously enough the Greek Govt. has drawn a cue from Italy.

Earlier this month, a Greek government agency called IKA hired National Bank of Greece, Paribas and Salomon Smith Barney to help draft legislation allowing for securitization of USD 1.9 billion of overdue social security payments. If the measures pass, the social security deal could hit the European market late this year or early in 2001.

The Finance Ministry is already planning to follow up the IKA transaction with a 1 billion-euro securitization of the country's future lottery receivables. Some of the proceeds of the lottery deal would be used to pay costs associated with Athens hosting the 2004 summer Olympics. A number of other departments of the Greek government are rumored to be interested in securitizing state-guaranteed mortgages and other receivables.

To date, securitization has been a non-starter in Greece. In 1997, Bear Stearns attempted to craft a series of mortgage-backed issues for National Mortgage Bank of Greece, but legal obstacles thwarted that effort.

Links: For more on securitization in Greece, click here.  

Index-based risk securitization marks new trend in insurance risk transfer

Cat bonds or other securitized risk products, which seek to transfer an event risk to capital market investors have been around for some time (see our detailed risk securitization page) but insurance markets are coming under increasing influence of capital market devices. Quite close to index-based derivatives in capital markets, recently, a new device of risk transfer was tried by American Re – risk transfer based on an index of insurance industry losses.

In a usual cat bonds issuance, the insurance company transfers risk to losses to be suffered by it on a specified trigger event. However, index-based risk transfer device works on a different basis – here, the risk transfer is based on an index of losses suffered by the insurance industry, not by a specific insurer. The recent issuance by American Re, called Modeled Index-linked Securities or ModILS, is based on Risk Management Solutions' CAT, that is, an index of catastrophe loss value and is powered by the company's Insurance Risk Assessment System (IRAS).

Apart from the basic difference that a normal catbond investor buys the risk of the particular investor whereas a ModILS investor buys the losses of the insurance industry as a whole, ModILS also have another interesting feature. A normal cat bond investor waits for a long time, sometimes years based on the insured event, before he comes to know whether he has lost his money. ModILS, on the other hand, is based on an index movement, and hence returns a loss determination in only 60 days. For this reason, cat bonds are very dificult to sell after some time, except as a heavy discount.

The first ModILS product is a $812 million bond issued by Gold Eagle Capital Limited, a Bermuda-based SPV.

How does the index, IRAS,  actually work? IRASis a complex application that takes variables from a number of different sources, including the National Hurricane Center, US Geological Service and RMS's database of insured exposures and calculates losses for events such as a hurricane or earthquake.  IRAS comes up with an industry loss estimate based on that data. Depending on the extent of the predicted losses, bond payments may be triggered. 
 

Australian MBS trade at better spreads than US MBS

A recent article in Investment Dealers' Digest [3rd April] regards Australian MBS as " prized by a coterie of investors as being perhaps the best quality mortgage securitizations available anywhere". Yet, Australian MBS trade at spreads higher than the US or UK counterparts. Australian MBS still "trades well above U.S. and U.K. mortgage deals and is barely trading through U.S. home-equity loan deals. According to Merrill Lynch & Co., Australian three-year MBS in mid-1999 traded at more than 30 basis points over LIBOR, compared with three-year U.S. credit card deals, for example, which traded at about 15 bps over LIBOR in the same period. Further, Australian six-year MBS in January 2000 traded at least 10 bps higher than comparable deals from Europe or the U.K. And Australian deals still have higher launch spreads than any international competitor and show no signs of tiering between issuers."

What accounts for the high quality of Australian MBS? It is the unique mortgage insurance system, dating back 35 years, which provides a strong level of coverage that makes defaults a rarity and gives lenders the freedom to offer a diverse array of product.

The insurance system, known as Lender's Mortgage Insurance, protects lenders from losses on residential properties, thus allowing lenders to move into offering up to 100% loan-to-value mortgages with the security that the entire venture is insured. As a result, Australian deals require little credit enhancement. Further, delinquencies are quite rare in Australia–less than 1%, according to S&P.

Links For more on securitization in general in Australia, click here.

India's securities regulator allows mutual funds to invest in mortgage-backed securities

India's investing institutions, who have been accustomed of living in a all-that-is-not-allowed-is-prohibited syndrome, got a green signal on 7th April to invest in mortgage-backed securities when the Securities and Exchange Board of India (SEBI) allowed mutual funds to invest in mortgage-backed securities. A Board meeting of the SEBI decided to amend mutual fund regulations to this effect. Click here for the full text of the Press Release. The proposal was being talked about for a long time – click here for an earlier report on this site.

Several MBS offers in India appear to be waiting in the wings. Apex housing finance institution, National Housing Bank, has time and again announced its proposed pilot securitization- click here for a news report on this site. Urban infrastructure finance company HUDCO has also been vehemently talking about securitization.

It is not sure whether this was the notification that was blocking the way of securitization deals happening in India, but certainly, the environment in turning positive on securitizations. Recently, a study group of the Reserve Bank of India submitted report on regulatory measures required for development of securitisation market –click herefor a report.

Vinod Kothari comments: Where letters rule the law, meaning takes a backseat. As Justice Krishna Iyer said: grammar is a good guide to meaning, but bad master to dictate. Evidently, mutual funds are formed to invest in securities, and securitization issues of all sorts result into creation of "securities" – so, in the first place, why should there have been any room for a confusion at all? Why was an amendment required to allow mutual funds to invest in MBS, while the fact is that they invest in all sorts of unquoted debt instruments which are no more than securitized loans? And the bigger question is: the present amendment allows mutual funds to invest in mortgage-backed securities. By implication, it does not, therefore, allow mutual funds to invest in other asset-backed securities, say, lease receivables backed securities?

A regulatory regime that depends too much on letter-work takes away every time it poses like giving – so the power to invest in MBS is given, and the power to invest in other ABS is taken back!

Telecom receivables securitization in India

A report in Financial Express of 3rd April said Global Tele-Systems Ltd has mopped up Rs 1.3 billion (approx USD 32 million) by securitising the receivables of its consumer telecom business to a special purpose vehicle christened Integrated Call Management Centre.

Finance company Tata Finance is the sole investor to the deal and will pick up the pass-through certificates issued by the SPV. The deal, struck last week, has been structured in such a way so as to enable the originator to receive funds from Tata Finance on an upfront basis. The spin-off of assets to the SPV marks GTL's exit from the consumer telecom business managed by the subscriber end terminal (SET) group of the company. Securitising the assets will result in savings of Rs 22 crore in interest costs to the software application and e-commerce service provider.

GTL plans to utilise the proceeds from this deal for developing business-to-business (B2B) applications and for future e-commerce acquisitions.

Vinod Kothari comments: This would probably be the first case of future flows securitization in India. Domestic future flows deals might legally be closer to lending than transfer, particularly in common law countries, but where the framework from which the income would flow is identifiable, such deals make lot of sense. Lot of eclectic future flows deals are likely from emerging markets. [Thanks for Victor Cherian for the news feed.]

Pegasus Aviation securitizes aircraft lease receivables

Pegasus Aviation Inc., the world's largest privately held commercial aircraft lessor, has raised USD 938 million by securitization of aircraft lease receivables for 28 commercial jet aircraft. The weighted average initial lease term remaining in the portfolio is approximately six years, while the weighted average initial age of the aircraft is approximately 7.5 years. Air Canada, Aeromexico, China Southern, GRUPO TACA, KLM and TWA are among the 22 airlines on four continents to become lessees.

Founded in 1988, Pegasus Aviation Inc. has become one of the top-tier operating lessors by delivering high-specification commercial passenger and cargo jet aircraft to the global airline industry. With more than 200 passenger and freighter aircraft on lease to 60 different airlines worldwide, Pegasus owns one of the largest fleets within the leasing industry.

Links: For more on securitization of aircraft leases or aircraft receivables, click here.

Korean leasing company securitizes receivables

Hong Kong office of Credit Lyonnais recently (31st March) closed the KDBC Leasing Receivables notes of USD 144.356 million in three tranches. The notes are backed by dollar-denominated equipment lease receivables of Korean obligors originated by KDB Capital Corporation in Seoul, Korea. The senior tranche of USD 101.0 million was offered to investors across Asia, Europe and the US while the remaining subordinated tranches were held by KDB Capital Corporation. The coupon on the senior notes was indexed to 3-month Libor with a margin of 140bps and an issue price of par. The Senior Notes have an average life of approximately 1.05 years with an expected final maturity of 2 years. The Senior Notes are rated Baa2/BBB by Moody's and Duff and Phelps.

KDBC is the largest leasing company in South Korea and is majority owned by Korean Development Bank, one of the largest government owned financial institution in South Korea

Sole arranger and lead manager is CREDIT LYONNAIS. Co-lead manager is Deutsche Bank. Co-manager is Bayerische Hypo-und Vereinsbank AG. Mandated in early December 1999, the transaction is one of the fastest completed ABS deals in ex-Japan Asia with both efficient pricing and credit enhancement. [This news was contributed by Gregory Park, Head of Securitization Group at Credit Lyonnais, Hong Kong, and was embellished by a Press Release of DCR, Hong Kong].

Links: For more on securitization in Korea, click here. For more news on securitization of lease receivables in Korea, click here.

IFC to buy equity in South African mortgage securitizer

IFC Washington's increasing involvement in development of mortgage securitization in developing markets became evident when it recently agreed to buy a 10% equity stake in South Africa's first home loans securitization vehicle, SA Home Loans. IFC Press Release of 3rd April announced the signing of such agreement.

Home loan finance in South Africa has traditionally been the domain of large retail banks. However, SA Home Loans is now purchasing existing home loans which it then securitizes by packaging them into a discrete pool of investment assets. Each pool is then credit rated and sold to investors, such as pension funds, mutual funds, and insurance companies. The process eventually aims at reducing the cost of housing finance to borrowers.

Other shareholders of SA Home Loans are Peregrine Holdings of South Africa, International Bank of Southern Africa (a joint venture of Dresdner Bank and Banque Nationale de Paris) as well as executives of SA Home Loans.

Important links: IFC recently agreed to join a securitization vehicle in Argentina – click here for the news item.

For more on securitization activity in South Africa, click here. This page also provides links to further material on securitization.

The website of Sotta Securitization has lot of details on South African securitization.

Also do not forget to see the details of two forthcoming training events on securitization in South African – click here.

 

Reverse mortgage securitization to get a boost

Recent regulatory measures by the US Department of Housing and Urban Development 
 

What are reverse mortgages

An interesting concept, a reverse mortgage allows an elderly person to earn a kind of a pension on the value of his/her house- the pension may continue till the "borrower" dies. As against a typical mortgage, here the mortgage financier pays money month after month -that is why the word "reverse" mortgage. Read more about reverse mortgages at this page. 

(HUD) might restore the interest in reverse mortgage securitization. The HUD has amended the origination-fee guidelines for its Home Equity Conversion Mortgage – another name for what the market calls reverse mortgages – and fixed a cap on the fee that lenders can charge.

Under the change, lenders will be able to charge new borrowers an origination fee not exceeding the greater of $2,000 or 2% of the FHA "maximum claim amount" (an amount that ranges based on the location of the property). Until now, borrowers could be charged an origination fee of any size.

The regulatory change may also propel the growing niche of securitization of reverse mortgage loans. The FHA insures 90% of all reverse- mortgage products, making it an ideal candidate for securitization. Currently, almost the entire volume of FHA-insured reverse mortgages are bought by Fannie Mae.

Links: See our page on reverse mortgage securitization – click here.

 

CMBS losing its lustre

The following is an extract from Wall Street Journal of 29th March:

"The need for commercial mortgage-backed securities has fallen dramatically after ten years of strong demand, leading to widespread expectations of an industry showdown as players compete for less business. As companies struggle to attract business, some are making high-risk decisions. Barry Reiner, real-estate financier for First Union Corp. noted: "There are a lot of people taking big bets and originating loans that don't make sense today on the hope that the market comes back their way." However, as sales continue to decline, the big question within the industry is who will decide to stay in the business. Closures and staff reductions have already begun and there is mounting speculation within the industry that most investment banks will decide to pull out of the business. Others believe the CMBS industry will consolidate along the same lines as the single-family home mortgage securitization sector did in the 1980s. The lack of business has been good for real-estate owners and borrowers, however, who have been taking advantage of the strong competition among underwriters. "

Links For more on CMBS transactions, click here.

Telecom revenues securitization planned in Italy

First in Europe involving telephone revenues

Telecom Italia is planning to raise at least USD 3.88 billion through what will be the first securitization program in Europe involving revenues from telephone calls. The transaction will be accomplished by a master trust which will issue bonds guaranteed by cashflows from call-charges to commercial and retail customers. The bonds might be stratified in several classes.

The deal will allow the highly-geared company to issue new debt with a high credit rating and cut its cost of borrowing. The issue is expected in summer and will be targeted at European investors.

It is likely that Telecom Italia will try to broaden its investor base to North America and Japan in subsequent deals. A report in Financial Times of 29th March said the market expects details about the deal in the current week.

Links: The Italian market has recently been buzzing with securitization -read more news, more articles and features in our country page on Italy – click here. There are links to articles, full text of Italian law and a host of other resources – perhaps the largest collection of material on Italian securitization in English and Italian.

Mexican consumer finance company to securitize receivables

Mexican specialty retailer and consumer financier Grupo Elektra S.A. de C.V. announced that its Elektrafin finance arm planned to securitize Ps. 350 million in accounts receivable through an offer of Ordinary Participation Certificates denominated in inflation indexed units of account. This is Elektra's sixth portfolio securitization carried out through the Mexican Stock Exchange. In line with the short maturity of the receivables, the transaction will revolve for 3 years after which it will be amortised in the 4th year. The issue will be placed by GBM Casa de Bolsa.

Grupo Elektra is Latin America's largest consumer finance outfit. The transaction has been assigned AAA rating (local) by Fitch IBCA. The company will utilize the funds to replace short-term debt.

Links: For more on securitization in Mexico, click here. This link also provides several articles on securitization in Mexico.

 

OPIC to be more aggressive in insuring emerging market securitization deals

The Overseas Private Investment Corporation (OPIC), a self-sustaining US government agency that sells political risk insurance, project finance and investment funds to American businesses expanding into emerging markets, announced recently that it will develop "bold and innovative" ways to apply its financing and insurance products to housing markets in developing countries. OPIC will take a leadership role in a sector which demands bold steps, declared OPIC President and CEO George Munoz, who pledged that housing now will be one of the agency's top two priority sectors. Securitization is on the top of OPIC-suggested models for development of housing finance.

OPIC is. Societas is an independent, nonprofit organization that provides research, education, and technical assistance services for all aspects of international real estate finance.

Links: For news report on political risk insurance for an Argentinean mortgage securitization, click here. For another news report on political risk insurance by OPIC for emerging market transactions, click here.

Spanish mortgage bank to securitize mortgages

Banesto SA, a subsidiary of Banco Santander Central Hispano (BSCH), is gong for a mortgage securitization deal of Euros 759 million involving first and prime mortgages. The transaction will consist of the credits being acquired by SPV fund, which will pay Banesto the corresponding value and then issues bonds guaranteed by these credits. The issue will be in two tranches: the amounts of each individual tranche has not been decided.

The issue will be placed to institutional investors. The issue will be handled by BSCH Titulizacion de Activos.

This will be the second securitization program for Banesto – its first one was worth 759m euros, and took place in July 1999.

Links: For more on securitization market in Spain, do visit our country page – click here. This link also provides a spreadsheet on securitization transactions so far concluded in Spain.

US regulators call for more disclosures on bank securitizations

Federal Reserve Bank of New York President William J. McDonough has called for more disclosures by banks about capital, risk concentrations, and transactions involving recourse such as asset securitizations. Asset securitization among other things has been on the top of the regulators' agenda recently following the failure of several US banks on alleged overvaluation of retained securitization interests.

McDonough said that "knowing a company's appetite for risk and its approach to, and methodologies for, managing risk is essential to understanding the risks of being a shareholder, a creditor, or a counterparty."

These remarks were made in a meeting hosted by the Monetary Authority of Singapore.

Securitization disclosures have been taken seriously by US regulators who recently issued revised guidelines for banks into securitization – click here for the news report and the text of the guidelines. Singapore has also indicated seriousness – the Monetary Authority recently issued guidelines for securitization – see here.

Brazilian company to securitize oil sales

A Brazilian company is making aggressive use of securitization, as a part of a slew of funding measures, to raise huge amount of cheaper debt repayable over longer maturities. .

Petrobras, Brazil's oil company, intends to securitise its future sales of oil outside Brazil, raising as much as $500m. The deal is a part of aggressive funding plans of the company to raise some USD 9.5 billion through different sources including sale and leaseback transactions. Petrobas is one of the largest oil companies in Brazil producing some 1.4 million barrels of oil every year.

Securitization of future flows by exporters has been used to raise cheaper overseas funding, by piercing the sovereign rating.

Links For more on securitization markets in Brazil, see our country profile – click here.


SECURITISATION NEWS AND DEVELOPMENTS

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

Deutsche Bank comes out with a slew of securitization deals

During May and June, Deutsche Bank came out with a series of securitization or synthetic CLOs aimed at managing its balance sheet size and releasing its capital.

During May, 2000, the Bank launched a global CLO, which is a leveraged synthetic CLO transaction. The Euro 280million of bonds convey the bottom layer of risk on Euro 2 billion of loans originated by Deutsche Bank's Luxembourg branch. The upper layer of risk is protected by a credit default swap. The portfolio covers some 124 loans to 94 obligors, with an average rating is in the triple-B band.

Besides the above, the Bank's New York office is marketing the second Blue Stripe transaction – a leveraged, synthetic structure that will reference USD 3billion of loans from the bank's global banking division. The pool comprises around 300 companies, of which around half are in the US and the rest spread around the world. The transaction will offer around USD 450 million of bonds.

In Europe, Deutsche is preparing to launch its second CAST securitisation, backed by Euro 4 billion of loans to German companies from its corporate and real estate division. The CAST structure does not use an SPV.

French Consumer credit companies love to securitize

Securitization is the in-thing for consumer credit companies in France as they find this to be a convenient route to diversify their resources, free up their capital and gain liquidity. A report in Les Echos 29th June says that Finaref (of the PPR group) and Cofidis (3 Suisses), the French consumer credit companies, have announced the launch of securitisation operations.

Another consumer finance company called Cetelem is believed to be the leader in the sector and has been securitizing since June 1990. Today it has amount of securitised credit outstanding at FFr 13 billion.

Other companies that have used securitization are Credit Lyonnais, Societe Generale, Banques Populaires, and Diac (on car loans).

Links For more on securitization in France, click on our country profile.

Agencies oppose US regulators' capital adequacy proposals

Mortgage securitization agencies Freddie Mae and Fannie Mae are opposed to the regulators' proposal to require capital against securitized products based on their credit rating, irrespective of their parentage. The proposal, circulated by bank and thrift agencies regulators in the US, seeks to allocate risk weightage based on ratings, while under the current practice, agency-backed securities have an advantage over private label securitizations. A report in American Banker of 30th June says that "Fannie Mae and Freddie Mac are up in arms over a proposed rule that could reduce investors' demand for their mortgage-backed securities, but Wall Street and private mortgage-backed issuers favor it."

The agencies' response was by way of comments on the proposed regulations, for which the last date for comments was June 7.

In its comments, Fannie Mae has said that, though it supports the proposal's attempt to align regulatory capital more closely with transaction risk, the rule does not account for the credit risk differences between AA and AAA securities. Fannie recommended that its own securities and AAA-rated corporate bonds be assigned lower credit risk weightings than AA-rated bonds.

Fannie also said regulators should keep in mind that private-label MBS currently require a higher risk weighting because mortgages carry higher interest rate risk. It recommended that the rule require that securities with long-duration collateral, such as fixed-rate mortgages and manufactured housing, carry higher risk weights than those with shorter-duration collateral, such as credit card debt.

Inspite of these comments, it is quite likely that the proposed regulation would be implemented, as it is broadly in line with the recommendations of the Bank for International Settlements.

Fitch reviews European securitization: expects record volumes for 2000

Though the volume to date in Europe is lesser than last year, rating agency Fitch expects a record issuance this year. European new issuance volume totaled USD 24 billion to 15th June.

40% of the market issuance is still concentrated in residential mortgage transactions, while mortgage lenders are faced with a shrinking primary deposit market. Innovative mortgage products are being brought into the market. One innovation, recently securitized, is a flexible mortgage plan where the borrower has the option to prepay instalments, which would then be held by the lender as a line of credit to be redrawn when needed, thus giving the borrower almost a cash-credit kind of facility. Mortgage lenders from Spain, Germany, Ireland and the Netherlands have also been active in securitization, and given the fact that most of them are securitizing for the first time, there is a strong likelihood of sustained growth.

Fitch also expects mortgage originators from Portugal, Austria, Greece, and the Nordic countries to enter securitization markets.

UK is still the largest securitization market to date. The market break up by country for year 2000 to 15th June shows the following market shares: Ireland 1% Italy 9% Multi 9% France 2% Germany 13% Portugal 1% Netherlands 4% Spain 11% Switzerland 3% UK 47%.

Going by asset-type, the break up is as follows: CMBS 18% RMBS 40% Nonperforming Loans 8% ABS 13% CDO 17% Whole Business 4%.

J P Morgan launching index for credit derivatives

This may well be a historical step towards commoditisation of credit. J P Morgan will be launching, on Wednesday, 29th June, the first index for credit derivatives.

More of this news item can be seen on our credit derivatives website – click here.

Pay scales for insurance securitisation pros hit new highs

It pays, and pays bountifully, to be an insurance securitization professional, as the pay scales for this sector have just gone berserk. A report in Financial Times of 24th June says that demand for new skills has driven salaries in the insurance sector up to levels never seen before.

Professionals specialising in alternative risk transfers such as cat bonds and insurance-linked securities and derivatives are being offered annual pay packets of GBP 300000 in London.

The reasons for this sharp upsurge are not difficult to understand. Insurance securitisation is a new innovation and is being seen as a new challenge by the insurance companies. This market innovation has created a strong demand for analysts, actuaries, statisticians, risk modellers and research and development staff. It has attracted specialists from both the capital and insurance markets. It has also brought the insurance and investment banking sectors into competition as banks set up specialist insurance derivatives units.

Swiss company launches synthetic securitization

Swiss companyUBS AG is to launch a synthetic securitisation transaction called Helvetic Asset Trust, which securitises part of the risks attached to Swiss corporate loans and turns them into tradable instruments. UBS will securitise part of the credit risks attached to a SFR 2.5 bln portfolio of loans to Swiss small and medium-sized enterprises.

It is the first transaction in the domestic capital market involving the transfer to the capital market not of the credit itself, but of the loan loss risks alone.

Notes Synthetic securitization is a kind of a credit derivative that combines financing with transfer of credit risks.Generally carried in form of credit linked notes, the investors in such notes agree on a compensation to the originator should specified credit events take place. For more on credit derivatives including credit linked notes, click on Vinod Kothari's Credit Derivatives site – click here.

UK's largest port operator proposes property securitization

Associated British Ports, UK's largest port operator, is mulling securitization of a portion of its multifarious properties. Associated British Ports is UK's largest port operator and holds plentiful properties. If the company is able to encash its properties through securitisation, it would be a major restructuring of its finances.

The company holds apporox USD 760 million worth of commercial properties.

Securitisation is just beginning to hit UK's maritime industry. Last year, Wightlink, the Isle of Wight ferry specialist, became the first UK maritime company to issue securitised bonds when it raised Pounds 135m.

Outside the water transport segment, securitisation has been used for liquidating shopping complexes, pubs and various other commercial properties. Recently, Bupa, a healthcare group, raised GBP 235 million by securitising future revenue from care homes.

Links For more on securitisation in general in UK, click on our UK country page.

Pullman completes securitisation of Isley Brothers' music securitisation

David Pullman of Pullman Company specialising in music royalty securitisation has completed another eight figure Pullman Bond(TM) music royalty securitization with Rudolph Isley, Ronald Isley and the estate of O'Kelley Isley. This transaction was announced around September last year [see news report on this site – click here, but was held up in legal hassles including a bidding war organized by singer Michael Bolton and a lawsuit launched by EMI Music Publishing who wished to buy the catalogue. The Isley and Pullman team also won an approximately $7 million copyright infringement case against Michael Bolton for "Love is a Wonderful Thing," an Isley hit song from the 60's

David Pullman [click here for David Pullman's website] is specialised in music royalty securitization. He made international news when he securitized David Bowie's music tapes, with a USD 55 million offering. Since then, his company has issued Holland Dozier Holland (Motown Hitmachine) Bonds, Ashford & Simpson Bonds and James Brown Bonds.

The Isley Pullman Bond(TM) transaction was rated at the single A level by two nationally recognized rating agencies. Rudolph Isley and Ronald Isley are the founders, creators and 100% owners of the Isley Brothers catalogue and co-owners of the estate of O'Kelley Isley, the third founder and equal member of their companies Three Boys Music Corp. and Triple Three Music.

Link For more on intellectual property securitization, click here.

Summitomo Corp proposes firm to securitise e-commerce credits

E-commerce is soon becoming a phenomenon, and so there would be opportunities to handle e-commerce credits, which presumably will have significant differences from usual business credits. Realising this, Summitomo Corp. with its affiliated companies (Sumitomo Bank, Sumitomo Trust and Banking Co., Sumitomo Marine and Fire Insurance Co. and Sumisho Lease Co) has proposed to set up a specialised company to buy and securitise e-commerce credits.

Tentatively to be named Digital Nonbank, the company will shoulder risks that clients face in business-to-business electronic transactions by offering securitization services for sales credits involved. The joint company will be capitalized at about 100 million yen.

Sumitomo Corp., a general trading house, will be in charge of building a credit assessment system and Sumitomo Bank will provide fund settlement functions. Sumitomo Trust will offer expertise in securitization services, while Sumitomo Marine will provide credit functions. Sumisho Lease will offer a database. Digital Nonbank will take over sales credits from clients with fees that will vary according to risks involved and sell the credits in the form of securities with high credit ratings.

The new company aims at handling 1.5 trillion yen worth of sales credits a year in five years.

Korea to promote bank CDOs to boost credit supply

In a bid to ease the flow of credit to companies badly affected by present credit squeeze, Korean financial supervisor the Financial Supervisory Service will resort to securitization of bank loans by collateralised debt obligations (CDOs). A report in the Korea Heraldof 20 June says that the supervisor will streamline procedures for issuance of CDOs and remove bottlenecks.

One of the measures proposed is to cut the time involved in filing of registration statements etc. so as to allow originating banks to make use of the money raisedy by securitisation within 2-3 days as against the present system which takes about 15 days. Besides, the supervisor is also expected to clear issuance of asset-backed commercial paper.

Links: For more on securitization in Korea, see our country page – click here. For text o the Korean law on securitization, click on our laws page – click here. For more on CDOs, see our section on bank loan securitization – click here.

Japanese insurer to improve solvency ratio by securitisation

Japan's largest life insurer, Nippon Life Insurance Co., is planning a major increase in its solvency ratio by securitization. The transaction could not be understood properly, but press reports suggest that the insurer will raise Yen 180 billion by securitising its future flows. The transaction is being marketed by Nomura Securities, and Sumitomo Bank. Policyholders of Nippon would need to approve the scheme which is scheduled for July 4.

The fixed-rate securities are expected to have maturities of three to five years, according to Daiwa. Sumitomo's involvement will be in the marketing of the securities. The transaction will require the approval of the Financial Supervisory Agency. For Nippon Life, the infusion of cash will bolster what is the equivalent of a capital balance, although it is not legally called capital because the company is a mutual insurer.

Nippon Life's solvency ratio, the measure of policy liabilities to assets held, was 1,095.8% as of March, vs. a minimum safe level designated by regulators of 200%.

Swedish bank securitises housing mortgages

Swedish bank SEB is to raise EUR 1 billion through securitization of a part its housing mortgage loans to SPV Osprey Mortgage Securities Limited. The transaction will achieve off-balance sheet treatment for SEB and lead to more effective utilisation of capital by the bank.

In Swedish securitisation market, SEB is a forerunner with regard to securitization and has carried out several such transactions previously.

The bonds are being placed on the Euro market through SEB Debt Capital Markets and Goldman Sachs International. The bonds have been given the highest rating by the Fitch IBCA, Moody's and Standard & Poor's rating institutes.

Links For more on securitisation in Sweden, refer to our country page – click here.

Bankers actively buying risk securitisation products

Bankers, who are busy transferring their own balance sheet risks to others, are actively picking up securitised risk transactions. A risk securitisation transaction implies one where the originator transfers risk, such as insurance risk, weather risk or the like, through securitisation conduits over to capital market investors. See for details our page on risk securitisation.

A recent article in American Banker 26th May says that investment bankers such as Citigroup's Salomon Brothers, Chase Securities, and Credit Suisse First Boston are actively marketing securitised risk products, and investing banks are eagerly picking up these portfolios.

Yet another article in the Financial Times 6th June by Gerry Dickinson ("Insurance finds a blend of innovation and tradition") traces the history of evolution of insurance. Talking about securitisation of insurance products, the author feels "risk securitisations are likely to expand in the future and companies may, to some extent, switch from bond-based to equity-based instruments – the greater risk appetite of equity markets makes them a natural bearer of corporate risks. Since the mid-1990s, the cost of insurance and reinsurance has been below its long-term economic cost, mainly because of market oversupply. Thus the cost of risk securitisation products has appeared high when compared to that of underpriced insurance and reinsurance contracts. A more appropriate balance between risk securitisation and conventional insurance will come about when insurance markets rise to their natural economic level, as the cycle in insurance prices corrects itself."

Links Our page on insurance risk securitisation carries lot of resources and a large number of links on the topic. Also see our page on weather risk securitization.

Japanese accounting body proposes accounting norms for securitization

A report in JIJI press 1 June says Japanese Institute of Certified Public Accountants has drawn up accounting guidelines for real estate securitization out of concern that companies have been removing bad assets from their balance sheets inappropriately. Understandably, the concern is triggered by the spate of commercial real estate securitization in Japan as also banks passing on bad loans to securitisation SPVs.

One of the prime features of the proposal is that if the originator buys back or retains 5% or interest in the securitised receivables, the transaction will not be recorded as off-the-balance sheet. The sames applies to assets sold with repurchase agreement.

A subsidiary's purchase of asset-backed securities also amounts to buying by the parent.

The association will seek public comments on the guidelines until June 30 and hopes to adopt them from Aug. 1.

Link to the JICPA website for full text

The Institute wrote as follows, saying that they do not have an English text of the proposed guidelines but they do have a Japanese text: In response to your request, we would like to inform you of how to address Japanese version as follows; Firstly, please click 「ニュース・フラッシュ」 on the top page of our home page and please click the following sign of html document on top page of next stage. http://www.hp.jicpa.or.jp/ and then click one which would you like to at next stage, http://www.hp.jicpa.or.jp/ 

Can some one help to translate the substance of the new Guidelines?

Your comments: Do you have comments on these guidelines? Do you have more knowledge/ full text of the proposed guidelines? Do write and we will appreciate your contribution.

Canary Wharf gets clean liquidity through securitisation

UK property owner Canary Wharf has used securitization not merely as a device of selling out cashflows, but also obtaining a sort of an on-tap liquidity facility, similar in effect to a bank credit. The GBP 475 million issue was announced towards end of May.

Canary Wharf, owner of prime commercial properties close to City of London, let out mostly to large banks and investment bankers, issued notes in several tranches: A1 notes rated AAA totaling £240.0 million, A2 notes also rated AAA Eur102.5 million, class B bonds rated AA totaling £85.0 million, class C notes rated A totaling £45.0 million and class D notes rated BBB totaling £45.0 million. However, the most interesting feature of the issuance is the R bonds, tranched as R1 and R2, both totaling £ 250 million, which will initially be bought back by the issuer, but will be available for issuance at any time. The R bonds will serve as a kind of ready liquity for the Canary Wharf for fresh property acquisitions or development.

The transaction structure involves a loan taken by the property owning subsidiaries of Canary Wharf. The loan will be given by a specially-created lending SPV, which will acquire as security for the repayment of the loan fixed and floating charge over the properties owned by the companies. The loan receivables will then be assigned to the issuing SPV, which in turn will issue notes to the investors. The issuer has also arranged for a liquidity facility to cover shortfall in payments.

More on this transaction: A detailed pre-sale report on the transaction and the rating given by Standard and Poor's is available on the latter's website. Click : www.standardandpoors.com/ratings. Under Presale Reports, select Structured Finance, then Commercial Mortgage-Backed Securities.

Pakistan innovates multi-issuer securitization instrument

This effort may surely be helpful for smaller leasing companies in Pakistan which may not, of themselves, have the critical mass required for stand-alone securitization. Though full details of the instrument were not available, this seems like a multi-issuer securitized note.

According a news item in Business Recorder, the instrument has been developed by a brokerage house called AMZ Securities. Christened multi-issuer term finance certificate, the idea is essentially to acquire receivables originated by several leasing companies, and issue bonds or term finance certificate backed thereby.

Vinod Kothari comments: multi-issuer securitizations are common in several countries: for emerging markets where securitization of receivables originated by a single issuer may not make economic sense, it is an excellent device. Economies apart, the concept also represents pooling of risks and hence is more attractive to investors.

Links Pakistan has issued rules about securitization quite some time back, but in its present state of politico-economic instability, not much has really happened. For more on securitization market in Pakistan, refer to our country page – click here. For text of securitization rules in Pakistan, refer to securitization laws page – click here.

South African bank securitizes credit card receivables

Firstrand Bank, one of South Africa's big four banks, recently securitized its dollar-denominated receivables from credit card usage. Credit Suisse First Boston helped to successfully place the issue with a range of European institutional investors. The offer is structured in two tranches. MBIA, an international financial guarantee company, provided external credit enhancement.

Standard & Poors, Moodys and FitchIBCA have assigned triple-a ratings to the certificates, pending the review of final documentation by the rating agencies. The certificates are issued by FirstRand 2000-A Receivables Trust with maturities of July 2004 and 2007 respectively. The certificates are secured by future claims that FirstRand will have on future Visa and MasterCard income. FirstRand indicated its great satisfaction with the terms of the issue and stated that this issue would be the first of several international fund-raising exercises.

Vinod Kothari comments: I am fresh with the experience of interacting with a number of South African securitization professionals in course of the two workshops we offered there. There is a great deal of interest in South Africa when it comes to securitization. However, the law, drafted much before there was any securitization activity in the country, is highly inflexible and is certainly bereft of the developments that have taken place recently. The kind of restrictions that are commonly found in regulatory statements of bank regulators seem to be part of the law itself, which means what is normally rejected as off-balance sheet securitization for RAP is just not permitted in South Africa. Besides, tax and stamp duty implications are not at all clear. The country is sitting on a huge potential for domestic as well as cross border securitization, but the regulators need to update their laws.

Links: For more on securitization in South Africa, see our country page – click here.

Auto major Fiat in major securitization deal

Italian car maker Fiat is launching a major securitization deal. Under the transaction, Fita will raise over Euro 1 billion by securitizing performing credits granted by it linked to the purchase of its cars.

The transaction is believed to be the largest on performing credits in Europe, and is being carried out on the retail portfolio of Fiat Sava. Euro Capital Structures will be the structuring adviser. Euro Capital Structures was created by Fiat with Italian bank Unicredito Italiano.

Credit rating agency Standard & Poors Securities Inc has awarded a preliminary AAA rating to the Euro 1,084bn offer.

Links and comments: The Italian securitization market has gathered tremendous pace and interest. For more on securitization in Italy, refer to our country page – click here. Much of the success owes to the Italian securitisation law – click here for text of the Italian law.

US bank regulators propose revised reporting for securitization

US bank regulators have proposed revised reporting statements from banks. A proposal in this regard was issued on 1st June for comments. The revised report seeks details of securitization activity by banks.

Apparently triggered by several instances of malpractices recently, the revised reporting format asks as many as 80 new questions on securitization activity of banks.

Here is the extract from the proposal:

"Under this proposal, banks involved in securitization and asset sale activities would report quarter-end (or year-to-date) data for seven loan categories similar to the manner in which they report their loan portfolios. These data would cover 1-4 family residential loans, home equity lines, credit card receivables, auto loans, other consumer loans, commercial and industrial loans, and all other loans. For each loan category, banks would report: (1) The outstanding principal balance of assets sold and securitized with recourse or seller-provided credit enhancements, (2) the maximum amount of credit exposure arising from recourse or credit enhancements to securitization structures (separately for those sponsored by the reporting bank and those sponsored by other institutions), (3) the past due amounts and charge-offs and recoveries on the underlying securitized assets, (4) the amount of any commitments to provide liquidity to the securitization structures, (5) the outstanding principal balance of assets sold with recourse or seller-provided credit enhancements that have not been securitized, and (6) the maximum amount of credit exposure arising from assets sold with recourse or seller-provided credit enhancements that have not been securitized. A limited amount of information would also be collected on bank credit exposures to asset-backed commercial paper conduits.

For the home equity line, credit card receivable, and the commercial and industrial loan categories, banks would also report the amount of any ownership (or seller's) interests in securitizations that are carried as securities and the past due amounts and charge-offs and recoveries on the assets underlying these seller's interests. The agencies request comment on whether these proposed items for ownership (or seller's) interests in securitizations should also include seller's interests not in security form that continue to be carried as loans on the balance sheet or whether information on these non-security seller's interests should be collected separately. Expanding the proposal to incorporate data on seller's interests that are not in security form would provide the agencies a complete picture of this element of banks' securitization activities. The agencies also request comment on whether banks are engaging in transactions in which they retain ownership (or seller's) interests in asset securitizations that involve loans outside of the three categories included in the proposal (i.e., home equity lines, credit card receivables, and commercial and industrial loans).

In addition, the agencies request comment on the manner in which banks' internal management reports capture information on asset securitization activities. In particular, do bank management reports primarily furnish information on the basis of whether the bank provides recourse or credit enhancements (which is the basis upon which proposed Schedule RC-S is structured, consistent with the agencies' risk-based capital requirements) or do these reports primarily furnish information on the basis of whether the bank performs the servicing on the underlying assets? "

For the text of the proposed reporting format, click on this link:
http://www.fdic.gov/news/news/financial/2000/fil0035.html

In securitization market, change is the only constant, says Citibank's securitization head

Al Hageman, Citibank's Global Securitization Head recently wrote a sort of a memoir of his 2 decade-long association with the securitization market [Investment Dealers' Digest May 22, 2000]. Recounting the developments that have taken place in this market segment over these years, Hageman says that the only constant in the market is change. Over last 2 decades motivations of the originators coming into securitization have changed significantly from pure funding to risk management. Hageman thinks securitization would continue to evolve into a purer form of risk transfer. Here is a small extract from Hageman's write up:

"Another thing that has changed during the last 20 years is the motivation for companies to secure this type of financing. For the most part, what began as a way to provide off-balance sheet financing has evolved into a vehicle that is increasingly used to transfer real risk and create economic capital. This will continue to become the growing focus. When we started, most of our clients were old-line industrial firms with some sort of term receivables that were easy to isolate. The realization in the mid-'80s that nearly ANY type of business- airlines, auto makers, credit card processors, etc.-could participate in this type of financing was probably the single most important intellectual development over the past 20 years of this business.

This leap forward was made possible by two very important developments: 1) Technology: A major breakthrough in this business occurred when, thanks to technological developments, we obtained the ability to track and value a company's receivables on a daily basis. This in turn enabled us to create AAA securities at significantly lower costs. Suddenly the walls that had limited potential securitizers came down, making nearly every large corporate or financial company a prospect for this type of financing. 2) Capital markets replaced bank funding: The ability to structure issues with investment-grade ratings enabled us to distribute in both the commercial paper and term markets. Today, global investors can now correctly value the diversified risk that an ABS transactor brings.

So what lies ahead? For starters, the innovation will surely continue-new assets, new distributions and new geographies. As the markets evolve into the 21st century and companies' financing needs and revenue models evolve, so too will the market for asset-backed securities. This business will continue to evolve toward a purer transfer of risk. And the mechanisms for doing this will continue to become more sophisticated as we find new ways to isolate different elements of risk and package it in a way that is appealing and useful to both funded and synthetic investors."

ABS activity picks up in Singapore with two recent deals

Singapore's ABS market saw some activity recently with two ABS transactions to hit the markets. Some pros believe that these two deals are the first case of domestic rated securitizations to originate from Singapore.

The originators are Diners Club, Singapore and Development Credit Bank Singapore.

Diners Club raised S$100m with a revolving securitisation of credit card receivables, arranged by ABN Amro in the US asset backed commercial paper (ABCP) market. DBS Bank created a $2bn domestic short term note programme to parcel highly rated loans and bonds on its balance sheet. Diners Club's deal is the first securitisation of consumer assets in Singapore, and the first time that a Singaporean transaction has been placed through a US conduit.

On the other hand, Development Bank of Singapore has been an active player in securitisation for quite some time. Recently it created a S$2bn domestic short term note programme to parcel highly rated loans and bonds off its balance sheet.

Links: For more on the general developments in Singaorean securitisation market, do visit our country page – click here. Also, for the text of the regulatory statement of the Monetary Authority of Singapore, do visit our Securitisation Laws page.

US ABS activity likely to drop: first half 2000 shows dismal performance

The first half year of the new millennium has obviously not augured well for the ABS markets. For the first time in last 5 years, there is likely to be a sharp drop in new issuance. The first half of 1999 saw some USD 130 billion worth of new issuance, while this year's half-way total, though uptil the first week of June, 2000, is only USD 91.9 billion. It is unlikely that the half year total will be anywhere near the last year's figures.

US ABS market has been registering positive growth rates year after year, but this year is exceptionally bad.

There has also been substantially repositioning of the intermediaries. This half year will see Salomon Smith Barney at the top of the league, up from second best position last year. Credit Suisse First Boston, topper last year, is likely to be at the third position.

Securitization one of the most notable aspects of financial evolution: Henry Kaufman

Henry Kaufman recently came out with his latest book: On Money and Markets: A Wall Street Memoir where he regards securitization of credits as one of the most notable developments in financial evolution, but also highlights the need for regulation.

Kaufman, who headed research in Salomon Brothers in 1970s and 1980s is respected by Wall Street for his incisive and experienced analysis of market developments. Kaufman was in thick of the machinations of Wall Street for over two decades. Known widely as the guru of economic and financial forecasting, Kaufman was believed to be a person who moved the markets particularly when it came to predicting interest rate movements.

Kaufman's book above reviews Wall Street's evolution over last two to three decades. Talking about evolution of financial markets, Kaufman regards securitisation of credit –the conversion of nonmarketable assets, such as credit-card receivables or mortgage obligations, into marketable assets that can be priced to market and traded, as one of the most significant developments. The trend has created a bewildering array of derivative instruments that have fueled what Kaufman believes to be a dangerous explosion of credit. He says that economic conditions have favored the growth of these derivatives but that no one knows how they will perform in an economic downturn or what their broader economic consequences will be.

Hence, Kaufman sees an urgent need for regulatory and supervisory reform at home and abroad, as financial innovation and global integration outpace an already obsolete regulatory structure. He exposes shortcomings of the Federal Reserve and offers proposals for reforming international regulation, including the reorganization of the International Monetary Fund and the World Bank into a “Board of Overseers of Major Institutions and Markets.''

Kaufman's 388 page book has been published by McGraw Hill.

JP Morgan refines its Sequils model

In the first week of May, JP Morgan London launched the 4th of its innovative Sequils program for loan securitisation. This time, the structure was further refined to attract risk-averse investors.

What is the Sequils structure The Sequils structure was first used in April 99 by JP Morgan. The basic innovation here was that JP Morgan securitised a portfolio of BB- and B+ loans, backed them up by its own credit swap, transferred the credit swap to the investors through a separate SPV, and thereby, separated the funding and the credit risk on the loan portfolio into two separate pools of investors. The interesting structure used two SPVs, one for the funding of the portfolio, and the other for the securitisation of the credit risk in the loan portfolio.

The first SPV, called Sequils, bought from the originator a portfolio of loans worth USD 712.5 million. The loans were rated BB- to B+. The portfolio was backed by a credit swap provided by Morgan Guarantee Trust. As a result, the notes issued by Sequils were rated AA.

On the other hand, Morgan Guarantee Trust bought credit swap from another SPV, called MINCs. MINCS was capitalised with USD 114 million worth notes. The proceeds were invested in AAA rated securities. Thus, investors were protected against loss of principal as their principal was fully backed by AAA rated investments. At the same time, MINCS had provided a credit swap to Morgan Guarantee Trust which was 6 times its capital. Therefore, the yield on the notes issued by MINCS was enhanced to the extent of 6 times of the credit swap premium over LIBOR. As a result, the securities issued by MINCS were rated BBB.

In sum, a portfolio of BB- to B+ loans was repackaged into AA and BBB notes.

This classical innovation has been used by JP Morgan recently in a USD 565 million securitisation. The structure is almost the same as in the original Sequils-Mincs deal, with the added attraction that the notes issued by Sequils are stratified, so that some of the tranches have got AAA rating.

Indian banking panel suggests draft securitisation law

An expert committee set up by the Government to look into changes required in the banking laws has suggested wide-ranging modifications in the legal framework. Besides, the panel has also suggested a draft securitisation law. Headed by former Solicitor General of India, Mr. T.R. Andhyarujina, the Committee submited its report on 10th May.

Apparently, the draft law has also suggested amendments to the Income-tax law to facilitate securitisation transactions.

In another recent development in India, the Parliament amended the constitutional law of the National Housing Bank, India's apex housing finance institution, to permit the Bank to securitise the portfolio of mortgages that it might acquire. This way, the Bank, currently a fund-based refinancier of mortgage loans, could slowly change its character into a Fannie-Mae kind of body facilitating securitisation.

The first securitisation of RMBS in India may be out shortly: with the legislative changes in place, National Housing Bank may acquire and securitise a portfolio of housing loans originated by HDFC.

For more on securitisation in India, click on India page.

Predatory lending continues to bother securitisation deals

The issue of predatory lending practices by loan originators, and its impact on subsequent securitization of such loans, continues to bother securitization transactions. On this page, we had recently covered this problem briefly – click here to see.

American Banker on 15th May carried a story quoting US govt. officials who warned capital markets against encouraging predatory lending by banks. In the third of five joint regional forums on predatory lending, the government officials said large Wall Street firms should be held accountable for the terms of loans that go into securitized pools. Andrew Cuomo, secretary of Housing and Urban Development is reported to have said that it would not be enough for securitisation firms to contend that they were not aware of the lending practices.

In a related development, New York bank regulators are reportedly working on measures to prevent banks from getting into predatory lending practices. American Banker of 16th May reports that New York State regulators are writing guidelines to help banks steer clear of packaging and selling predatory mortgage loans to investors. If required, the regulators will work in tandem with the SEC to ensure that investment banks are also covered.

Investment banks are under fire for assisting the fast growth of a subprime lending market. According to data published by Moody's, about $100 billion of the roughly $240 billion in outstanding subprime mortgage loans have been securitised.

In the meantime, in early May, charges have been filed against Lehman Brothers as an underwriter for the alleged predatory loan practices of First Alliance Mortgage Co., whose portfolio was securitised. First Alliance filed for protection under Chapter 11 in March this year. The loan practices of the company came for public criticism including under popular TV programs in the US. Lehman was reportedly running a fairly large conduit operation with First Alliance, resembling the structures set up by subprime players ContiFinancial or Amresco.

Singapore pledges to promote securitization

The Monetary Authority of Singapore (MAS)on 2 May 2000 announced several decisions relating to debt securities including government securities. Second finance minister Lim Hng Kiang, who announced these measures on behalf of the MAS also outlines the Government's proposal to create securitization market in the country.

Mr. Lim talked of the impact of the e-revolution on bond markets world over and said Asian markets could not remain untouched by these developments. Talking of measures to broaden and deepen debt market activities in Singapore, he proposed the development of asset-backed securitization in Singapore, and in particular the promotion of mortgage-backed securities and the setting up of a mortgage corporation. He said: "The rapid advances in electronic-bond technologies have led to a proliferation of e-bond trading systems in US and Europe. Asian bond markets, while still in relatively nascent stages of development, would not be immune to the e-revolution. Proprietary bond distribution and trading systems in US and Europe will soon find their way to Asia, and it is important for Asian market participants to anticipate these developments."

Singaporean securitization market is still in its infancy. There have been very few securitization transactions in the country still, despite of a common law framework generally receptive to securitizations.

Links On our site, we have a general market overview of securitization in Singapore – click here. We also have the text of the regulatory guidelines of the MAS – click here.

Do banks need fundamental relook at their profit models?

The age of securitization meant at least one significant change in bank's profit models: the customer was seen as a commodity, created today, and packaged and sold tomorrow. The age of the internet has brought in a new way of looking at values based on relationships: the very thing that securitization demolishes. Does this mean banks need to revisit their fundamental profit models?

A recent article in American Banker 1st May said investors are questioning banks' basic profit model. Quoting an analyst, the report said that the banking "industry's standard business model of the past decade is being rejected by investors because it is strikingly at odds with the practices of Internet companies, which are the market's darlings".

Citing several reasons, the report says that securitization of mortgages and other loans may be fine for the balance sheet but has the effect of separating the institution from the customer, who often sees only the name of the servicer. Cross-selling opportunities are lost. By contrast, technology companies like AOL and Yahoo are willing to even carry on seemingly unprofitable businesses at the prospects of making profits by cross selling opportunities in future.

Comments : If this issue forces you to think, may be you can contribute a line or two. We will be too happy to carry your contribution on this site.

Bank of Scotland applies revolving model to mortgage securitization

Bank of Scotland in late April launched a new securitization deal with revolver structure, normally used in credit card and consumer loans securitization, to the mortgage market. The Euro 745 million deal broke new ground by offering most of its AAA notes with legal maturities much shorter than the lifetime of the underlying mortgages.

The revolving structure uses excess collateral placed in the SPV. The bank has assigned some 23,700 mortgages, worth Euro 1.731bn, in a trust, with the beneficial interest shared between the originator and the investors. Since the amount of assets is far greater than the notes, principal collections over a short period are sufficient to redeem a bullet note. When principal payments are not being accumulated to pay off a tranche of notes, they flow back to Bank of Scotland, and can be replaced with new mortgages. Conceptually, the deal also tides over a difficulty of mortgage-backed transactions – that of lower weighted average maturities because of a fast-depleting outstanding principal, but opting for bullet payments.

The multi-tranched transaction has first three which are dollar soft bullets – a USD 208 million 3 year tranche, a USD 200 million five year tranche, and a USD 200 million seven year tranche. Each has a legal maturity two or three years after the expected redemption.

Links : For more on revolving structure, see our section devoted to credit card securitization – click here.

SECURITISATION NEWS AND DEVELOPMENTS – JULY AND AUGUST, 2000

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IMPORTANT

For all news for Sept., 2000, please click here 
For all news for May and June, 2000, please click here 
For all news added before May, 2000, please click here 
For all news added before 25th March, please click here   
For all news added before 21 January, 2000, please click here   
For all news added before 9th November, please click here   
For News items added prior 3rd August, 1999, click here.

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

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.

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

Bowie Bond not a Pullman innovation, holds court

David Pullman, who has all along been claiming as the innovator of the bonds secured on David Bowie's music royalty, called Bowie Bonds, suffered a major setback when the New York Supreme Court held that it was the Rascoff/Zysblat Organization which actually developed the product and Pullman's erstwhile employer was only employed as a marketing agent for the bond. Pullman claimed, among other things, that he and not Bowie business managers R.Z.O. created the concept of the Bowie Bond, and only he had the rights to utilize trade secrets derived from the transaction. In her ruling, New York State Supreme Court Justice Beatrice Shainswit stated, "Neither the Pullman Group nor Pullman developed, or ever owned this alleged intellectual property." Notwithstanding Pullman's relentless advertising as creator of the bonds, he was unable to show any evidence to support his claims. Documents presented clearly established that R.Z.O. were the creators of the Bowie Bond concept. R.Z.O. then retained Pullman's employer Gruntal & Co (and later Fahnestock & Co.) to act as placement agent for this, first ever, securitization.

In response to other documents presented to the Court, Justice Shainswit further states that "Pullman concedes that his role…was as an employee hired to work on structured assets." She continues, "The Complaint is dismissed in it's entirety against all defendants" and the Court, "finds the … claims to be without merit."

This loss to Pullman comes on the heels of the United States Patent and Trademark Office's refusal to allow Pullman use of or representation that the "Bowie Bond" mark is a trademark of his or of The Pullman Group.

Links: For more on securitization of music royalty and other intellectual property, see here.

Securitization of leased assets in Brazil
First case of rated existing-asset securitisation

MSF Holding, a Brazilian equipment leasing company has raised USD 80 million by securitisation of equipment leases and loans in a deal which is supposed to be the first existing and "hard" asset securitisation in the country. DVI, a Pennsylvania-based medical equipment finance company has a majority stake in the leasing company. Other partners in it include the Netherlands Development Finance Corporation, Philadelphia International Equities and the International Finance Corporation, the private sector financing arm of the World Bank.

The transaction is regarded by industry professionals to be an important milestone for securitisation in Brazil. Brazilian market is currently dominated by future flows securitisations.

Deutsche Banc Alex. Brown acted as sole bookrunner and joint underwriter with Credit Suisse First Boston.

Links Do visit our country profile on Brazil.

Provident Financial to dump gain-on-sale accounting

US company Provident Financial Group, Inc. announced that effective the third quarter, the company will change the accounting of its securitizations in order to discontinue the use of gain-on-sale accounting. Henceforth, the company will account for the securitizations of loans as secured financings.

The company commented that while the performance of its residual assets has been excellent, other companies utilizing securitization structures requiring gain-on-sale accounting have experienced problems and consequently, the market has penalized all companies using gain-on-sale accounting. Although gain-on-sale accounting is in compliance with GAAP, the investment community has clearly signaled its dissatisfaction with this accounting method and the company believes that this sentiment has been factored into its stock price.

Additionally, the newly proposed regulatory guidelines regarding securitization activity discourages the use of gain-on-sale accounting by limiting the amount of residual assets that can be included as part of its regulatory capital.

Do you think the recent regulatory changes will prompt more companies to switch over from gain-on-sale to secured loan accounting? Write your views.

See the Chat archives (index page) for chat on gain on sale accounting.

Portugese consumer finance companies kick-start securitization

Portugal witnessed some activity in asset-backed securitization recently as Banco Portugues de Negocios securitized consumer credit receivables of its three subsidiaries raising Euro 200 million. The receivables include those arising from credit contracts, leases and long term rentals. The underlying assets mostly include cars, and to some extent other equipment and consumer goods.

The offering was arranged by Credit Suisse First Boston. The transaction included a AA tranche (Euro 180 million), A tranche (Euro 10 million) and BBB class (Euro 10 million) received very good response inviting 1 1/2 times oversubscription, from 20 investors in 8 countries. The transaction was priced at spreads ranging from 45bp to 175 bp.

Portugese passed a securitization law towards late last year. The first MBS transaction under the new law might emerge sometime this year.

Links: For more on securitization in Portugal, see our country page – click here. For text of securitization law in Portugal, click here.

Morgan Stanley acquires Italian bank to gain more space in securitization market

Morgan Stanley Dean Witter's (MSDW) bid to acquire Italian bank Credito Fondiario & Industriale SpA (Fonspa) has received assent of more than 40% signalling that the takeover will be completed. After takeover, MSDW will redirect the company into securitization business.

The Rome-based bank would be acquired from Italian banking group Comit-UniCredito, following a number of failed attempts to sell Fonspa and disastrous results in 1999, Comit and UniCredito.

MSDW's stress on increasing its presence in the European securitization market is easily understandable. The investment banker easily leads innovative asset classes such as whole business revenues securitization, non-performing loans, etc. It has been active in several Italian securitizations.

Hong Kong mortgage corporation now offers mortgage insurance cover

Hong Kong Mortgage Corporation, the mortgage securitization conduit in Hong Kong set up on the lines of Fannie Mae, would now offer an expanded insurance cover for mortgages. A press release of the Corporation dated 17th August said that the new product that will provide insurance cover for mortgage loans with loan-to-value (LTV) ratio of up to 90%. Following the approval of the product by the HKMC Board on 27 July, the HKMC has signed the reinsurance agreements with the Approved Re-insurers and has briefed the staff of the participating banks on the eligibility criteria and the processing procedures.

A total of 44 banks will take part in the expanded Mortgage Insurance Programme to provide the 90% LTV product. Starting from 18 August, interested homebuyers may contact any one of the participating banks to apply for mortgage loans with loan-to-value ratio up to 90%.

Securitization professionals regard this new step as benevolent for the domestic asset securitization market in Hong Kong. Hong Kong, regarded by many as the mecca of Asian securitization (minus Japan), is essentially focused on cross-border transactions.

Links: See our page on Hong Kong – click here.

Korean NPL securitization obscures NPL problem
Standard and Poor's comment on Kamco transaction

Rating agency Standard and Poort's (S&P) recently commented on the Korean non-performing loans securitization. S&P says that the headlong rush to securitize nonperforming assets among Korean banks and investment trust companies may be obscuring lingering asset-quality problems at Korea's financial institutions. There is a scanty effort to transfer the burden of the non-performing loans, as the ultimate risk is stil being retained with the originating banks.

Korean restructuring agency Kamco had recently done Korea's first offshore securitization of non-performing loans. Click here for the story on this site. See here transcript of a chat on Kamco transaction here.

In the Kamco transaction, the originating banks that have sold their NPLs to Kamco have an obligation to buy back the same as Kamco has a put option. Besides, the Korean Development Bank has given a substantial put option to investors in the bonds, which, as is apparent from Fitch-IBCA's rating report, has been responsible for the rating of the bonds at par with the rating of KDB.

S&P in its comment says that while Korea's rapid acceptance of structured issuance can be applauded on the whole, financial institutions continue to hold a significant portion of their mountain of bad debt in the form of subordinated notes, even after the debt is securitized. This could rather aggravate the bad debt problem in the country, as banks would only disguise their bad loans while still carrying the brunt.

The report says: "The primary motivation behind these transactions is to sweep nonperforming assets out the door, and off financial institutions' balance sheets. In light of the very poor quality of distressed assets in Korea, however, these securitizations require substantial credit support in the form of large tranches of subordinated notes: the W22.9 trillion of issuance as of June 2000 includes roughly W8.05 trillion worth of subordinated tranches, which have a lesser claim on the underlying assets and as a result carry more risk. These junior notes, usually repurchased by banks or ITCs, are backed by essentially insolvent assets, and as such are less likely to be repaid. In short, securitizations involving large subordinated tranches are leaving financial institutions holding on to the worst of their bad assets."

Links See our special page on securitization on non-performing loans – click here.

Japanese department store securitization opens up new avenues

Seibu Department Stores recently completed the largest ever commercial mortgage backed securitisation in Japan of Yen 108.1billion. The Store securitized its flagship property in Western Tokyo on the Ikebukuro station, which serves about 3m passengers every day. The store belongs to the Seiyo Kankyo Kaihatsu group, a property developer that collapsed last month with Y550bn in liabilities

The methodology is a simple sale and leaseback device: the company will transfer the store in Tokyo to a special purpose vehicle set up by Yasuda Trust and Banking. This vehicle will lease the store back to Seibu, and issue Y78.1bn of bonds guaranteed by the revenues.

Commercial mortgage-backed securitization has been attracting great interest in Japan. Offices, market complexes, multi-storied buildings, vacant land, etc. have been securitized using simple sale and leaseback to other complex devices, basically drawing upon the value of the property not so much the cashflows therefrom. The Japanese authorities expect securitization to enable Japanese corporations to repair their balance sheets by raising money on the back of their property assets and future income.

Links For more on securitization in Japan, see our Japan page.

Regulators propose higher capital for riskier interest in securitizations

US bank regulators might propose higher capital requirements for securitization originator who retain either a subordinated interest in their securitized portfolio, or interest-only strip, cash collateral, or other interests which carry more than a proportionate risk in the underlying collateral. The Federal Deposit Insurance Corporation proposed these new rules on Monday this week. The proposal would require banks to hold $1 of capital for each $1 of residual interests – that is, 100% capital, in pools of high-risk securitized loans. However, these assets could account for no more than 25% of Tier 1 capital

100% capital, as proposed in the rules, is equivalent to a straight reduction from capital, or a loss of capital.

The current proposal picks up where interagency guidelines issued in December left off; those guidelines urged banks to limit their residuals but did not specify any limits. For news report on these guidelines, click here.

According to FDIC staff, the proposal would address certain residual interests that have generated supervisory concern and resulted in large losses–those that are structured to absorb more than a pro rata share of credit loss related to the securitized assets through subordination provisions or other credit enhancement techniques. Residual interests include subordinated security interests, receivables in cash collateral accounts, interest-only strips receivables, as well as any other assets that provide credit protection to securitizations. According to the FDIC, these residual interests can expose an institution to a larger than pro rata share of credit risk and generally are unrated or below investment grade instruments that serve as "first-loss" credit support for the senior tranches of a securitization.

The fact that the proposal is triggered by recent bank failures attributable to illusory securitization interest accounting is quite obvious. See, for example, the following extracts from a speech of FDIC chairman Donna Tanouen before a meeting of State Bank Supervisors on 12th May, 2000:

"You may recall that both First National Bank of Keystone and Pacific Thrift and Loan engaged in a significant level of asset securitization. Both grew quickly — using the ability to record immediate earnings from their securitization activities, thus growing their capital accounts. In both situations, the financial institutions retained an interest in the securitizations they sold. The legal structure of the transactions greatly affected the realizable value of the residual assets. Both retained first loss positions. And both maintained a concentration of residual assets.

In both of these cases, the external valuation models were inadequate and neglected to incorporate actual performance versus original assumptions. The banks' residual interests were subsequently determined to have significantly less value and are worth mere pennies on the dollar. So their reported capital levels were completely illusory.

Because of these failures – and because of concerns arising from subsequent examinations of other institutions with similar residual interests – the Federal regulators last December issued guidance on what institutions holding retained interests as capital should do to avoid exposure to loss. It requires that the recorded value of these assets must be objectively supported, using reasonable assumptions. And the guidance also requires that residual interests that are not well supported be classified as "Loss" — and not counted by the regulators as capital. That guidance was a good – and necessary — first step. But it is not sufficient to completely address the issue.

Other changes are needed to ensure that institutions will hold adequate capital to cover the risk inherent in residual interests — and to discourage institutions from holding excessive concentrations. So, in December, we also said that we were thinking about limiting – or eliminating – residual interests that could be recognized in regulatory capital.

We are working toward issuing for public comment in the not-too-distant future a joint proposal to toughen the capital requirements for those institutions holding these highly volatile assets. It is anticipated the proposal would require that "dollar-for-dollar" capital be held against the value of residual interests resulting from securitization – and would cap the amount of residual assets a bank can hold for regulatory capital. Why? Because today, we have a number of institutions on our problem list precisely because of this issue. And because we have a good number of other institutions – that are not on our problem list – but that do hold more residual interests in securitized assets than we believe is prudent.

I'm asking you today to support this effort. And to work with us to develop a sensible proposal and to make sure that the reported value of residual interests reflects reality and does not represent an undue concentration." [ full text on https://www.fdic.gov/ ]

FDIC issues final rule re. securitization revocation

The US Federal Deposit Insurance Corporation issued 11th August a final rule regarding its resolve not to revoke transfer of assets involved in securitization. See report below for a background of this move – click here.

The final rule states as follows:

"360.6 (b) The FDIC shall not, by exercise of its authority to disaffirm or repudiate contracts under 12 U.S.C. 1821(e), reclaim, recover, or recharacterize as property of the institution or the receivership any financial assets transferred by an insured depository institution in connection with a securitization or participation, provided that such transfer meets all conditions for sale accounting treatment under generally accepted accounting principles, other than the ‘‘legal isolation’’ condition as it applies to institutions for which the FDIC may be appointed as conservator or receiver, which is addressed by this section.

(c) Paragraph (b) of this section shall not apply unless the insured depository institution received adequate consideration for the transfer of financial assets at the time of the transfer, and the documentation effecting the transfer of financial assets reflects the intent of the parties to treat the transaction as a sale, and not as a secured borrowing, for accounting purposes.

(d) Paragraph (b) of this section shall not be construed as waiving, limiting, or otherwise affecting the power of the FDIC, as conservator or receiver, to disaffirm or repudiate any agreement imposing continuing obligations or duties upon the insured depository institution in conservatorship or receivership.

(e) Paragraph (b) of this section shall not be construed as waiving, limiting or otherwise affecting the rights or powers of the FDIC to take any action or to exercise any power not specifically limited by this section, including, but not limited to, any rights, powers or remedies of the FDIC regarding transfers taken in contemplation of the institution’s insolvency or with the intent to hinder, delay, or defraud the institution or the creditors of such institution, or that is a fraudulent transfer under applicable law.

(f) The FDIC shall not seek to avoid an otherwise legally enforceable securitization agreement or participation agreement executed by an insured depository institution solely because such agreement does not meet the ‘‘contemporaneous’’ requirement of sections 11(d)(9), 11(n)(4)(I), and 13(e) of the Federal Deposit Insurance Act (12 U.S.C. 1821(d)(9), (n)(4)(I), 1823(e)."

Decline in ABS volumes a sign of maturity, says analyst Volumes expected to grow in second half

An article in Investment Dealers' Digest 7th August says that the decline in ABS volumes in the first half of 2000 is a sign of maturing markets. ABS volumes which have been growing relentlessly for last 15 years declined some 9% during first half of 2000 – we carried a report on this – click here.

The article says that market players attribute the decline in volumes to consolidation taking place: for example, in home-equity lending, one-time independents like The Money Store Inc. and Green Tree Financial Corp. have been gobbled up by large financial service companies. Smaller once have disappeared: leaving, in result, lesser number of participants. Some large players like Citibank have not come out with a single securitization this half year, for which upwardly mobile interest rates may be the reason.

Market players expect the third quarter to be quite positive. As it is, there are number of mega deals doing rounds during August. However, the article stresses that with consolidation leaving lesser players in the marketplace, there will be lesser incentive for players to grow fast, and hence, reduced need for securitization.

In the process, a number of securitization specialists are looking at growth pockets outside the US such as Europe and emerging markets where securitization still continues to hold strong potential.

FDIC resolves not to rewind securitization transfers

The US Federal Deposit Insurance Corporation (FDIC) on 27th July last resolved not to revoke securitization contracts where assets were sold by one insured bank to another insured person. A report in American Banker 10th August says the final rule in this regard is likely to be published on 11th August. The rule will clarify that FDIC will not revoke securitization transfers, other than exceptional cases such as those involving fraud, or those that did not follow proper accounting standards.

The relevance of the above proposed rule arises in the context of bankruptcy of a bank that has securitised its assets. Under law, FDIC is entitled to accept appointment as a receiver or conservator of a failed depository institution that is insured by it. If it does, it has the power to ask for a judicial stay of all contracts or revoke all transfers. In the context of securitisation, this would mean that if it so chooses, the FDIC may annul a transfer of assets that took place to an SPV, and thus reinstate within the depository institution that assets transferred by it.

As a matter of credence to securitization transactions, the FDIC has already proposed some rules: some of these are resolutions of the FDIC and some are rulings laid by Courts such as Supreme court ruling inD’Oench, Duhme & Co. v. FDIC.

The present proposed rule will minimize the gray areas relating to securitizations using true sale method by FDIC-insured depository institutions.

Important: See final rule report above.

Dai Chi proposes mega securitization

According to reports in Jiji press, Dai-ichi Mutual Life Insurance Co. will securitize about Yen 240 billion worth of its housing loan assets late this month.

The transaction is expected to be one of the largest-ever securitization of mortgage-backed assets. The insurer will use the proceeds for reinvestment in corporate bonds in an effort to boost portfolio flexibility to better deal with interest rate fluctuations.

Morgan Stanley prices second Japanese NPL securitization

Morgan Stanley Dean Witter (MSDW) on 8th August launched and priced Japan's largest securitisation of non-performing real estate loans, which is the second Japanese NPL securitization by MSDW. We had carried on this site news about the first securitization of Japanese NPLs by MSDW – click here. The last deal was Yen 21 billion.

The present issue of Yen 31 billion is based on a portfolio of non-performing loans backed by 441 properties bought by MSDW from Japanese financial institutions. Using an SPV called International Credit Recovery – Japan II, the transaction has been broken into 4 tranches: Class A Floating-Rate Structured Notes ¥ 20,billion, due August 2005; Class B Floating-Rate Structured Notes ¥ 5,5 billion due August 2005, Class C Floating-Rate Structured Notes ¥ 4. 5 billion due August 2005 Class D Floating-Rate Structured Notes ¥ 1 billion due August 2005.

The MSDW deal has been regarded by analysts as indicating a rapidly growing potential for profits in Japan. Japanese banks are cash strapped and would be more than willing to sell off their illiquid property portfolios. The totak amount of the potential could be as high as USD 46 billion.

MSDW is supposed to have got 2 times oversubscription for the issue from investors in US, Japan and Europe. After the MSDW transaction, other investment banks – both domestic and foreign – are also understood to be interested in Japan's real estate securitisation market.

Links – See also our page on securitization of non-performing loans – click here. The page gives link to Edward Altman's article on this site on Japanese NPL securitisation.

Securitization retained interest write down acconts for Delta's losses

Delta Finance Corp. reported a loss of USD 3.5 million for the second quarter. The company sought to explain the loss as arising out of write down of residual interests in securitization transactions, forced by rising rates of interest.

Besides, reflecting the uncertainty surrounding the magnitude of potential interest rate increases by the Federal Reserve, asset-backed investors demanded wider spreads over treasuries than we have historically experienced on newly issued asset-backed securities. In addition, during the recent period of sharply rising interest rates (prompted by concerns that the Federal Reserve would raise short-term interest rates, which it eventually did), the Company, like most subprime lending institutions, was unable to raise interest rates on new originations fast enough to offset its increased funding costs.

We have carried stories on this site before about securitization accounting – see below. If you have any thoughts to contribute on this, do write back.

Banker's Trust is the top securitization trustee

Bankers Trust, a unit of Deutsche Bank, was the top trustee for asset-backed and mortgage-backed issues during the first half of 2000. Banker's Trust seized this position after a gap of nearly 2 years. Banker's Trust was at third place last year, behind Bank of New York and Bank One. Deutsche Bank had acquired Bankers Trust in June 1999.

Bankers Trust got trustee assignments on 57 deals totaling USD 30.9 billion during the first half of 2000, commanding a 19.9% share of the market.

During the first half of 2000, Bank of New York finished at the second position with Bank One following. Others are Chase Manhattan at fourth, Wells Fargo number five.

Vagaries of securitization accounting: several firms report huge write downs

Recent financial results of several US securitization originators show huge write downs on account of retained interests or gains on securitization transactions, raising a question as to whether something is seriously wrong with FAS 125.

Take Amresco Inc for instance. The financials for the quarter ended 30th June show a USD 70 million write-down on home equity retained interests, besides losses on several other retained interests or impairment in securitization-related assets, adding up to a loss of USD 93.6 million for the quarter.

In the case of Advanta Corp., the Office of the Comptroller of Currency forced it to do a massive write down on retained interests in securitization transactions. Owing to an agreement Advanta reached with the OCC, its second-quarter pro forma operating profit of 65 cents per diluted share was wiped out; and it is now reporting a net loss of $7.64 a share. The agreement provides that the retained interests be calculated based on an 18% discount rate on the interest-only strip and subordinated trust assets, a 15% discount rate on the contractual mortgage servicing rights, a prepayment rate that represents the average prepayment experience for the six months ended February 29, 2000 and cumulative loss rates as a percentage of original principal balance of 6% on closed end mortgage loans and 8% for HELOC (open end) mortgage loans. The net impact of these write downs is to hit the profit statement by at least USD 201 million.

Chat on securitization accounting Very soon, we are planning to have a chat on the contentious issue of gain-on-sale accounting. Would you like to participate? Do you have a celebrity to suggest for the chat? Do write .

Links There are several articles on accounting for securitization – get them on our articles section. Click here.

Japanese accounting body finalises securitization accounting guidelines

Japanese accounting body Japanese Institute of Certified Public Accountants finalised accounting guidelines for securitization transactions last Monday. It has enforced a stricter accounting rule that is intended to prevent companies from putting off the books their bad assets, even though they retain significant interests in such assets.

The final guidelines come after a draft proposal was published in June. On this site, we carried this news – click here, along with a link to the Japanese text of the proposal. In its final guidelines, the Institute caps the originators' retained interests to 5 %, beyond which the assets sold will not be put off the books. The industry had demand the cap to be extended to 10%, which was rejected. However, the Institute has postponed the introduction of the new rule until April 2001, rather than August 2000 as initially proposed. As a transitional measure good through April 2001, it allows companies to purchase up to 10 pct of asset-backed securities.

ANZ and others spice up Australian securitization

ANZ Banking Group this week closed a USD 232.6 million securitization of housing loan mortgages. The issue will comprise both senior and junior notes, expected to be rated AAA and AA-minus respectively by Standard & Poor's Corp. The bank officials did not see much cost saving in the transaction, but it was more for capital efficiency. This apart, the bank sees larger funding pools available this way in time to come.

The transaction will be lead managed by ANZ Investment Bank while Deutsche Bank AG and Macquarie Bank have been appointed lead managers.

As per another report in Australian Financial Review 3 August, ANZ has emerged as Australia's largest home lender as it wrote 25 per cent of all new home loans in Australia, followed by Westpac Banking Corporation Limited 22 per cent, National Australia Bank Limited 14.4 per cent and Commonwealth Bank of Australia Limited 12.8 per cent.

In Australia, most of the mortgage financiers, with the exception of a few such as National Australia Bank Ltd, are engaged in securitization.

As per yet another report, Wide Bay Capricorn Building Society Limited recently issued $A200 million in mortgage backed securities, with its underlying collateral having the highest loan-to-value ratio seen in the market, at 102.2 per cent. The first tranche of this transaction was rated AAA.

Links: For more on securitization in Australia, visit our country page – for reports, articles, text of regulatory statement, etc. – click here

Abbey National's mega mortgage securitization a trendsetter in European securitization

Abbey National's recent mega issuance of GBP 2.25 billion mortgage backed securities marks a new milestone in the market development in Europe. Market analysts say that the Abbey mega deal is not triggered by capital adequacy considerations as with most CLOs originating from Europe. Rather, it establishes that mortgage funding and securitisation is a worthy business by itself.

Mega deals of this size are not very common in Europe, but the Abbey deal gives a good hint of the vast potential of money flowing into Europe, if MBS issuers could open up the gates to European mortgage market.

The Abbey National deal used the master trust structure which Citibank/Salomon Smith Barney devised for Bank of Scotland. The device carves out soft bullet bonds out of long maturity mortgages is seen as a breakthrough in mortgage securitisation. The master trust structure requires a much higher volume of assets being transferred into the trust: Abbey in the present case transferred GBP 6.2 billion worth mortgages into Holmes Trust, the SPV.

The structure used in the transactions is briefly as follows: Abbey the originator transfers the mortgages to a trust company which holds it in trust for both the originator and the SPV 1, in their relative shares. The shares would change over time based on extent of funding raised by the originator. SPV 1 receives an intercompany advance from SPV 2, and agrees to repay this advance in periodicities exactly matching with those of the Notes issued by SPV 2. With the advance it receives, SPV 1 buys the proportionate share of the mortgages held by the trust company.

Abbey holds a mortgage portfolio of about GBP 65 billion, of which approximately 7% would have been securitised, in 4 deals including the present one.

Brazilian company securitises export receivables

Samarco Mineracao, the Brazian iron ore exporter, recently closed a USD 135.5 million securitization of export receivables. The deal was completed by BNP Paribas and Banco BBA.

The securitisation is Samarco's second. Earlier, in 1995, the company had securitized export receivables with US insurance companies, pension funds and a Japanese leasing company. The 1995 deal had no SPV as 6 specific export receivables were sold to separate investors.

The present transaction involves a master trust set up in New York, and is classed into 3 tranches. The first tranche of USD 33.5 million has been exchanged against notes from the previous securitization. The second and the third tranche of USD 32 million and USD 70 million respectively have an average life of 2.8 years and mature in May 2005, and are rated BBB- by Fitch.

Tranche two pays 300bp over three month Libor and tranche three has a coupon of 10.04%, corresponding to 350bp over Treasuries at pricing.

The right to the receivables is transferred first to a Cayman SPV and then to the master trust through two back-to-back receivables sale agreements. Customers have been asked to make payments direct to an account at Bank of New York. So far, customers representing 78% of the eligible exports (and 99% of those in single-A and higher rated countries) had agreed to do so.

Links: For more on securitization in Brazil, see our country page -click here.

Securitization: the new mantra of dot com companies

Having taken Wall Street equities by storm, dot com companies are now looking at securitization markets. According to an article in Investment Dealers' Digest of 31st July, a slew of internet companies have approached rating agencies with securitization proposals during the last few months. Companies that have been floating the idea include Gateway Inc., Dell Computer Corp., Mindspring (now part of EarthLink Inc.), Gobi, Inc. and DirectWeb, etc.

The possible securitization flows for ISP companies would be the fees these companies receive from internet users. Rating companies are concerned that the rate of mortality is far very high among internet companies and the fees stream itself is contingent upon the operations and services of the ISP.

While there might be problems in such securitisation, it is clear that such deals are on the radar screens of securitization professionals.

Korean financial reconstruction agency securitizes non performing loans
The transaction is the first in Asia, minus Japan

The Korea Asset Management Corporation (KAMCO), a special vehicle for restructuring the financial sector, has successfully placed USD 367 million of asset-backed securities to international investors. This is the first case of securitization of non-performing loans in Asia, other than Japan.

The offering was co-managed by Deutsche Securities and UBS Warburg, and was priced at 6- month London Inter-Bank Offered Rate plus 200 basis points with a 8.5-year maturity.

The bonds are secured by a pool of $419 million of bad loans purchased by the KAMCO from banks, largely including loans to financially ailing companies. The transaction rides piggy-back on the credit rating of Korea Development Bank whihc has provided a 30 percent credit facility, as also provided bulk of the put options which together account for some 60% of the face value of the bonds.

The offering was rated Baa2 by Moody's and BBB+ by Fitch IBCA.

The interesting and heartening feature in the offering is that investor interest was evinced by not only securitization specialists but also by investors new to the asset-backed sector but familiar with Korean bank credits.

Related links: See our specialised section on non-performing loans.For a very detailed article on securitization of non-performing loans in Japan, click here. For news report on Morgan Stanley's first securitization of non-performing loans in Japan, click here. For securitization of non-performing loans in Italy, click here. We also held a chat on the Kamco transaction – see the transcript of the chat here. See above for a comment on Standard and Poor's on the transaction.

Florida jury's tobacco ruling may jeopardise securitization deals

The recent ruling by a Florida jury that made headlines all over the world may be little less damaging for tobacco securitizations than cigarette smoking is. The jury had held last week that tobacco companies in the US owe USD 145 billion in damages to smokers.

The ruling might cause its impact on securitization transactions where certain of the States had sold their right to receive the tobacco settlement money against upfront cash. The settlement receivables refer to the USD 206 billion settlement that 46 of the US states and counties made with big tobacco companies in 1998, under which the tobacco companies are to pay damages over next 25 years in lieu of the States not litigatinng against the companies. For details about the settlement, click here.

Some of these governments have already securitized their receivables, for example, New York. However, the terms of the settlement provide that if the cigarette companies go bankrupt, they will not be liable to pay any damages any further. That is where the Florida ruling may create a problem – if the tobacco companies are required to pay the punitive damages as ordered, it is very likely that they will go bankrupt.

To get a perspective of the amount ordered in damages, if the USD 145 billion in damages were to be paid in 10 dollar bills, the bills placed end to end would circle the earth 17 times ! Or if the damages were to be paid in 100 dollar bills, the total amount would weigh some 1480 tons, and a stack of the bills would go 10 miles high !

The Florida verdict is currently in appeal.

Links For more on securitization of tobacco receivables, see our section on securitization of government revenues.

Pressure grows for withdrawal of government support to Fannie and Freddie

As pressure continues to mount to reconsider the Federal government's support to Fannie Mae and Freddie Mac, the government appointed a special task force of the House Budget Committee to consider issues relating to financial risk, safety and soundness surrounding the two securitization agencies.

The major issues being discussed by the task force are:

  1. Whether to eliminate the government's conditional credit lines to both entities
  2. Whether to limit, as with other classes of securities, how much of these issues a bank can hold in a portfolio
  3. Whether to consolidate the regulatory authority for Fannie, Freddie and the Federal Home Loan Bank System.

Fannie Mae (formerly known as Federal National Mortgage Association) and Freddie Mac (formerly known as Federal Home Loan Mortgage Corporation) are two of the three agencies created by the US government for promotion of secondary markets in mortgages. Fannie Mae is the largest mortgage securitization agency in the world, and is admired as the role model for many other countries.

Fannie Mae was set up way back in 1938, but it got into mortgage securitization business only after 1968, when the government split the agency into two separate entities: Ginnie Mae (Government National Mortgage Association) and Fannie Mae. Ginnie Mae was the actual originator of securitizations, but over time, Fannie Mae, which become a publicly owned company in 1970 became far more active. See our country page on USA for relative market shares of the agencies.

Freddie Mac also started life as a fully owned government agency, but was turned into a publicly owned company in 1989 under the Financial Institutions Reform Recovery and Enforcement Act.

The securities issued by the two agencies are not legally guaranteed by the Federal govt., but the market attaches a quasi-governmental backing to the agency securities. The agency securities also receive preferential treatment for banks holding them – see our earlier report on this issue.

Besides, the government has also extended a line of credit to the two agencies, though it is miniscule: a USD 2.5 billion line of credit as against approx USD 2 trillion of Fannie Mae and Freddie Mac securities outstanding.

Reports indicate that Under Treasury Secretary Gensler supports the view that the government should withdraw the preferential treatment to the agency securities for banks, as also the line of credit.

Links For links to the websites of the agencies, see our links page.

CMBS: S&P analyses reasons for delinquency

In a recent quarterly review of commercial mortgage-backed securities in the United States, rating agency Standard and Poor's reviewed the reasons for delinquency in this segment.

As of May 2000 the total amount delinquent was $708.6 million on a base of $92.2 billion of rated CMBS transactions. Going into the reasons for delinquency in larger of these mortgages, concentration in the mortgage portfolio seems to be one of the prominent reasons. S&P observes as under:

"As a result of this analysis, certain risk-based conclusions can be affirmed. First, borrower and property operator/lessee concentrations pose quantifiable additional credit risk. Second, certain property types, generally outside of multifamily, office, retail, and industrial, have borne the impact of bankrupt operators, lessees, and borrowers. Although hotel loans are apparent in three of the transactions, they were not all limited service. Consequently, the five transactions listed above [not listed here] can attribute their high delinquent balances directly to the weakening of health care and certain single-tenant, stand-alone retail properties. Limited-service and full-service hotels continue to suffer from competitive pressures. Thirdly, real estate values can protect against tenant or borrower problems.

Even though some of the previously mentioned delinquencies are large, not all transactions were downgraded because property values were considered to be adequate relative to loan balances. For example, even if Service Merchandise goes out of business, the appraisals of the stores are in excess of the loan balances. Even though diversified CMBS transactions continue to perform well, those pool transactions with little or no exposure to either nursing homes, single-tenant retail, or limited-service hotels should continue to benefit from the strong, if not slowing, economy and their strong credit characteristics. "

Nomura to try whole-business securitisation for Malaysian wafer plant

Nomura is known for innovation in securitisation – it perfected a whole-business or operating-revenues securitisation methodology in Europe. Now for the first time, this methos would be tried to fund Malaysia's first silicon wafer plant, which would raise USD 180 million approx. through bonds backed by sales revenues of wafers.

The hi-tech plant based in Kuching, Malaysia, has been initially financed by syndicated bank credit, and would be refinanced by securitisation once sufficient production was under way.

In Europe, Nomura is credited with securitising operating revenues of a French champagne maker, in a transaction that made headlines world-over. Click here for more on this transaction.

Nomura has also been associated with several securitisation of pub revenues in the UK.

What is operating business securitisation: Unlike asset-backed securitisation, operating receivables securitisation captures the entire revenues of a business based on its past operations. Generally, the SPV will have some trapping of the receivables either by a control on the sales or production. For example, in the case of champagne bottles securitisation, the SPV was given physical pledge of the entire stock of bottles at different stages of production.

Links For more on securitisation in Malaysia, click here.

Second securitization of all-Net loans

PeopleFirst.com, the the first Internet finance company to securitise loans generated exclusively over the Net early last year [click here for our news item] has closed its second offering of securitised loans originated fully on the Net. The present transaction is exclusively via the Internet. This transaction is more than double the size of the first offering, is backed by similar credit quality automobile and motorcycle loans. Prudential Securities and Barclays Capital are the manager and co-manager respectively of this offering.

The transaction was composed of four classes of asset-backed notes which are rated Triple-A by Standard & Poor's and Moody's Investor Service Inc. The notes are credit-enhanced by a bond insurance policy from Financial Security Assurance Inc.

PeopleFirst is the first Internet company to offer loans for the purchase of vehicles from individuals. Through an exclusive agreement with Mail Boxes Etc., PeopleFirst is able to provide customers with a convenient way for completing a private-party transaction.

S&P reviews developments in Latin American securitisation

International rating agency Standard and Poor's recently reviwed Latin American securitization. The special report titled Securitization in Latin America: Growth in Story Times was carried in the July 2000 issue of Structured Finance.

According to the report, "over the past three years, a combination of changes in the region’s regulatory systems and a deeper understanding of securitization by regulators and key participants has caused a sizable increase in the number and types of existing asset-backed transactions."

The report expects that "in the near term, investors will continue to reinvest their capital in Latin America. As a result, the securitization market will grow in amount and in asset types. Issuers will continue issuing future flow transactions to lower their financing costs relative to those of corporate issues. However, the issuing market must adapt to different economic and financial scenarios such as recurrent volatility and political instability. The market must also cater to the demands imposed by international investors, who will be more selective and choose only transactions with very solid structures. Multilateral institu-tion guaranties, such as the IFC and IADB, and companies pro-viding insurance against credit or political risk will provide their services to help the region’s companies and banks mitigate sovereign risks.".

The report contains country-specific developments. We have incorporated Standard and Poor's comments in the country profiles. See the following country pages for details:

Cagamas has helped Malaysian mortgage market, says CEO

Cagamas (National Mortgage Corporation – www.cagamas.com.my), the Malaysian secondary mortgage market agency, was created by the govt. in 1986 and has since then been engaged in buying housing loans from banks and housing finance companies, and issuing bonds secured thereon. Cagamas CEO Tan Wai Kuen recently wrote in Banker's Journal, a publication of Institut-Bank-Bank-Malaysia on the securitisation experience in Malaysia.

For development of a securitisation market in Malaysia, there is a need to remove the various obstacles that are hindering its progress, apart from convincing loan originators to change the perception of their role from financier to loans servicer, says Tan.

Cagamas performed the vital role of providing liquidity to financial institutions by purchasing their mortgage portfolio and ensuring continuous supply of mortgage funds. As such, Cagamas, as a special vehicle to provide liquidity, had contributed towards the easy availability of housing loans offered by financial institutions. to have access to medium and long-term funds which matched the tenure of their long-term housing loan assets more closely than their traditional source of funds, that is, deposits which were primarily of less than one-year tenure.

The success of Cagamas speaks for itself – banks and housing financiers in Malaysia today lend for anywhere between 15 to 30 years, while before, the tenures were much smaller. The spreads have also substantially come down. In totality, this made housing more affordable.

Cagamas has also contributed towards developing a market for private debt securities.

Vinod Kothari comments: I have been able to interact with several key professionals in Malaysian securitisation market in course of the workshop I did there. Apart from mortgage loans, both commercial and residential, Malaysian banks did not seem to be immediately interested to securitise, as reducing the balance sheet size was not one of their immediate priorities. Rather, they are more keen to retain the assets on the balance sheet, and they fear that with introduction of IAS 39, banks would be required to put assets off the books if they securitise. Besides, debt instruments are not very marketable, since the prime rates as well as the spreads are very low. In my view, what would interest Malaysian banks more would be a synthetic securitisation or a credit derivative instrument, with the promise of a higher return for the investors, and risk reduction for the originating banks.

Malaysian central bank is currently finalising prudential norms for securitisation – this site will publish the prudential norms soon as they are finalised.

Links For more on securitisation in Malaysia, click here.

New capital rules to boost ABS demand; create more pressure for securitization know-how, says KPMG

Accounting and consulting firm KPMG feels that proposed capital adequacy rules of Federal bank regulators will boost demand for asset-backed securities, but banks will have to beef up their expertise and overhaul their systems. The new capital rules seek to align risk weightage for securitized products to their ratings, in line with BIS proposals. For related stories on this site, click here .

KPMG observes that with the passage of the regulatory proposal by year end, the market will find more and more banks buying asset-backed securities instead of Treasury bills. ABS have a higher incremental return than Treasuries, but banks have minimized their asset-backed securities holdings because federal regulations currently have higher capital requirements. Those capital requirements would be greatly lowered if changes, proposed by the federal regulatory agencies are approved.

However, in the new era of rating-based capital controls, banks will be required to put stress on asset evaluation skills. There is hardly any need to evaluate risks while buying treasuries, but not the same when it comes to asset-backed securities. Consequently, banks will have to hire specialists with ABS experience and spend on systems and trading platforms.

For another story, on a different note, as to why mortgage-market agencies are opposed to the proposed rules, click here.

Market players oppose US FASIT rules

US market players are not happy with the propsed FASIT rules that were formed by the US inland revenue service some time back. [See related story on this website and a link to the full text of the proposed regulations here.] FASITs are conduits created for securitisation of financial assets other than those based on real estate – they were proposed on the same lines as REITs but have been a non-starter from the very time proposed more than 4 years ago.

Some time ago, the Bond Markets Association sent a letter to the IRS asking it to revise its proposed Fasit ruling, which would tax the gains of issuers based on an artificial formula instead of a market price. The Association complains that FASITs have been severely underutilised in the past (only 3 deals have been done so far) because of uncertain tax structure. According to the proposed regulations, taxation of gains is to be done based on an index of gains announced by Federal register.

Most market practitioners do not think of FASITs as a viable option for asset-backed securities. An article in International Financial Law Review May 2000 by Charles M Adelman [New FASIT regulations pose hurdles for securitization industry] also exposes the problems in the proposed FASIT norms. This article also carries a detailed explanation of FASIT rules.

South African conduit to securitise IT supplier's future receivables

Mettle [http://www.mettle.net] , a specilised finance house based in South Africa, has finalised a R200m securitisation deal with Siltek, the information technology supply-chain group, reports Business Day 12th July.

The transaction involves transfer of Siltek's trade receivables to an SPV set up and controlled by Mettle -Xavier Trading – which will purchase on an ongoing basis trade receivables fo Siltek created over a period. Senior notes in the deal for three years maturity have been acquired by Rand Merchant Bank.

According to Mettle officials, this is one of the first trade receivables future flow transactions to be concluded in South Africa. And it is one of the first times that a major SA bank has taken up the senior debt tranche in its totality. The deal highlights the increasing acceptability of securitised notes with banks, a feature which should augur well for the South African securitisation market.

Duff and Phelps has reportedly given a AAA rating for the deal.

Links For more on securitisation in South Africa, click here.

Bermuda protected cell legislation on track

Protected cell legislation, which will make it easy to float a single SPV for multiple securitization transactions, is on track in Bermuda. The law is expected to be introduced later this year. The law, titled The Segregated Accounts Act 2000 has been submitted to the minister of finance for approval after more than a dozen drafts. The minister will introduce the legislation into the Parliamentary agenda before year's end.

A protected cell company is a special corporate structure which allows a company to have several protected cells within the company, so that a single company can act have several subsets of assets and liabilities within itself, each protected from the claims of creditors of other cells. We have briefly explained the concept of protected cell companies earlier on this website – click here. Also Click here for an article by John E Langlois on protected cell companiesThe

Bermuda is currently allowing formation of protected cell companies, but under specific acts of parliament. This is a costly and time taking process, but a number of market participants are prepared to go this route rather than wait for the specific law to be enacted. The NAIC in the USA is also in favour of a protected cell legislation in the USA.

NHB triggers India's first RMBS transaction

National Housing Bank (NHB), India's premier housing refinance body, signed up with HDFC and LIC Housing Finance for acquisition of a section of the portfolio of the latter two, and its securitization. HDFC has sold of Rs. 895 million worth loans, and LIC Housing Finance Rs. 475 million.

Officials of NHB, HDFC and LIC Housing Finance have been working on the transaction for over 3 years now. In the process, several legal and quasi-legal snags had to be cleared, including, importantly, an amendment of the NHB's constitutional law that limited its sphere of activities.

The securitisation process will be a simple pass through operation, but stratified into class A and class B. The senior class, rated AAA by Crisil, will be offered by way of private placement in the market, while the junior one will be bought back by the originators. Class A securities will be listed on the National Stock Exchange.

SBI Capital Markets and ICICI Securities are co-managers for the issue. The coupon is yet to be fixed.

It is expected that soon, the Reserve Bank of India will formalise the capital adequacy norms for securitised products.

Vinod Kothari comments: Agency-backed pass throughs in the USA are presently assigned a lower risk weightage for capital adequacy purposes, but it is proposed that the risk weightage will now be changed to be relative to the rating of the instrument.

Belgian bank comes out with largest synthetic CLO ever

Brussels-based KBC Banking & Insurance Holding Company unit KBC Bank NV [http://www.kbc.com] announced having placed a Euro 4.3 billion issue securitizing its international loan portfolio. The issue is regarded as the largest synthetic CLO so far.

Synthetic CLOS become very popular, particularly among European banks, as they provide capital relief without having to go through hassles of true sales and assignments, issues over which most European laws are not all that clear. We have covered synthetic CLOs on our bank loan securitization page.

The issue is in two parts: a Euro 3.952 billion privately placed credit default swap representing the most senior portion of the credit risk and a 4-tranche issue of asset-backed bonds representing the first 8.1 pct of the credit risk

KBC's first CLO, Orion Commercial Loan Master Trust, was a USD 1.5 billion true sale transaction backed by US corporate loans and lead managed by Lehman Brothers in April 1999. Lehman is the co-manager in the present transaction too. KBC has securitised mortgages in the past, and reportedly holds further securitization proposals up its sleeves.

Links For more on synthetic securitization, click here. For a website dedicated to credit derivatives, click here. For more on securitization in Belgium, click here. The Belgium page was last revised 6th July, 2000.

US securitization volumes drop sharply

First half of the first year of the new millennium reflects slowed activity in securitization, something that has happened for the first time after 5 years. It is not securitization alone, but it seems as if Wall Street is putting brakes on all kinds of underwriting and issuance activity.

Issuance of collateralized securities were adversely impacted by rising interest rates. Issuance of mortgage-backed securities fell by better than 61 percent in the first half of 2000 as only $73.5 billion in deals were completed compared to over $186 billion in the year-earlier period. Similarly, asset-backed deal volume dropped though by not as great a magnitude. ABS volume totaled $129 billion in the first six months of the year compared to $141 billion in the first half of 1999.

Do you think year 2000 will end up with lower volumes than last year? Do write your views either at the discussion forum or to me.

UNCITRAL meeting in New York to discuss model securitization law

The 33rd Session of UNCITRAL is currently meeting in New York to discuss the model law on assignment of trade receivables which, when finalised and ratified by different countries, will standardise the law on securitisation in cross border transactions.

Uncitral (United Nations Commission on International Trade Law) has proposed the draft of a model law on assignment of receivables in cross border transactions. The draft model is on our site –click here. The draft has been discussed in several meetings in the past too.

Assignment of receivables is a key legal step in securitization transactions. The law relating to securitization differs from country to country, but the biggest difficulty is faced in Civil law countries where assignments require notification of obligors, sometimes, even their prior consent. It is due to these legal difficulties that some of the banks these days are finding it easier to do on-balance-sheet securitization in form of synthetic CLOs – click here to go to our site on bank securitization.

UNCITRAL was formed in 1966, and since then, it has finalised model laws for several trade related matters, the most prominent among which is the arbitration and intellectual property laws, which have been adopted by several countries.

French bank comes out with CBO

A report in La Tribune of 3rd July says that Natexis Banques Populaires, the French bank, has launched its first securitisationoperation on a portfolio of bonds mostly issued by US companies. This operation co-arranged with Lehman Brothers uses a synthetic structure to remove the credit risks on the bonds without removing the bonds from the balance sheet.

The transaction, which is reference on a portfolio of USD 412.5 million, involves two credit default swaps jointly guaranteeing the cover of the bond portfolio. The first, described as senior, represents 89.2 per cent of the total portfolio, and has been concluded with a banking counterpart. The second is subordinated in risk to the first, is on 10.8 per cent of the amount, and has been concluded with Natix Plc.

Links: Synthetic securitization is becoming increasingly popular among banks – click for a write up on synthetic securitization on our site – click here. For a write up on securitization market in France, click here.

SECURITISATION NEWS AND DEVELOPMENTS – Sept.- Oct., 2000

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IMPORTANT

For all news for November and December, 2000, please click here 
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For all news for May and June, 2000, please click here 
For all news added before May, 2000, please click here 
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For all news added before 21 January, 2000, please click here   
For all news added before 9th November, please click here   
For News items added prior 3rd August, 1999, click here.

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:
http://www.rutgers.edu/

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 fmwatch.com 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.