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.