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

• FASB deliberates on removing SPV/operating company distinction for consolidation rule
  Added Oct 25, 2002
  One of the very significant deliberations by FASB involves applying consolidation guidelines to all entities, including SPVs on uniform basis..
• Malaysian regulator proposes changes in securitisation guidelines
  Added Oct 25, 2002
  The Securities Commission in Malaysia recently put up proposals for minor changes in securitisation guidelines.
• Philippines to exempt securitisation from documentary stamp tax
  Added Oct 22, 2002
  Even while the securitisation law is in the making, there is a move to exempt securitisation transactions from stamp tax.
• Korean securitisation volumes fall
  Added Oct 22, 2002
  For the first 9 months of 2002, Korean securitisation volumes have fallen, in line with other financial instruments in the country.
• Securitisation law in India portalled into the Supreme Court
  Added Oct 22, 2002
  The curious mix of securitisation, security enforcement and NPL management has gone into the highest Court in the country, even before the Parliament has had any chance of looking at it.
• State to securitise future flows in India
  Added Oct 22, 2002
  Starved of funds, the West Bengal State government in India is planning to raise money by securiitising future petroleum cess revenues.
• CMBS deals to emanate from Malaysia
  Added Oct 19, 2002
  There are several CMBS deals in the making in Malaysia - as securitisation is apparently becoming a hot product in the market.
• ABS downgrades in Q3 break all records
  Added Oct 17, 2002
  The plundering spate of downgrades in the ABS sector continued in Q3 wherein downgrades broke all previous records for a 3-month period.
• CMBS performance continues to attract investors
  Added Oct. 5, 2002
  Despite problems on a few trophy deals, CMBS performance as a whole continues to interest investors.
• Taiwan market livens up securitisation scene in Asia: S&P
  Added Oct. 5, 2002
  A recent S&P release places high hopes on the fast developing securitisation market in Taiwan, post the new law.
• Thanks to securitisation, banks abdicate credit, and investors do not know credit
  Added Oct. 2, 2002
  A recent Business Week article puts some basic questions on securitization and banking - the systemic risks of banks originating credits where they do not absorb the risks.
• Greenspan praises securitisation, credit derivatives
  Added Oct. 2, 2002
  Fed Chairman Alan Greenspan in a series of lectures in London recently praised securitisation and credit derivatives in making the economy immune from risks.
• AmeriCredit drops gain on sale accounting
  Added Sept 25, 2002
  US subprime lender AmeriCredit recently joined the no-gain-on-sale club by moving over from off-balance sheet accounting for securitization portfolios.
• Debutante CLO soon in Taiwan
  Added Sept 25, 2002
  Like the Korean counterpart, the Taiwan securitisation market may soon see a flood of activity if interest levels showing now are an indication.
• Defaults history of ABS: One is more than 13
  Added Sept 13, 2002
  While comparatively, asset-backed transactions are still much safer and recovery rates are very high, a recent S&P report indicates that the defaults over last 1 year exceed those over last 13 years.
• American Securitization Forum unhappy with SPE exposure draft
  Added Sept 4, 2002
  The American Securitization Forum is concerned that the ARB 51 - exposure draft of proposed accounting rules on SPEs could adversely affect securitization transactions.

FASB deliberates upon removing SPV/operating company distinction for consolidation rules

The Financial Accounting Standards Board of the USA, which is currently discussing a proposed technical rule on consolidation for special purpose entities, is deliberating on a fundamental change of approach whereby the consolidation rule will be applicable to all entities, and no distinction will be made based on whether the entity is a special purpose entity or a substantive operating company.

The proposed approach was to make a distinction between a substantive operating company and an SPE. The voting control approach, as globally applicable, is to apply to operating companies, while a new, proposed variable interest approach was to apply to SPEs. Now, in a major departure, the Board deliberated if uniform criteria be applied to all companies, and certain guidelines be fixed whereby to decide, either for the entity as a whole or for a section of assets of the entity, to apply the voting control approach or the variable interest approach. Martin Rosenblatt, who is watching the developments from a very close range, was prompted to remark: "the entity formerly known as SPE", indicating thereby that the term SPE will be all history as far as accounting rules go.

Some of the interim decisions of the Board include:

• To include discussion of common types of variable interest in the final Interpretation.
• That the evaluation of variable interests will be primarily based on expected losses but also will consider the ability to receive or obtain benefits from the enterprise's activity.
• That an enterprise should be deemed the primary beneficiary of an entity subject to consolidation based on variable interests if it holds a majority of the variable interests.
• That all parties involved with an entity subject to consolidation based on variable interests should reconsider consolidation if the governing documents or contractual arrangements among the parties change. The primary beneficiary also should reconsider consolidation if it reduces its interest in the entity. Also, if another entity acquires some or all of the primary beneficiary's interest, it should reconsider consolidation.
• That for nonqualifying SPEs, a transferor that holds a subordinated retained interest in the assets transferred to an entity is considered to be a variable interest holder.

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

Malaysian regulator proposes changes

The Securities Commission of Malaysia has recently issued a consultation note for proposed changes in its guidelines relating to securitisation.

The changes are not a recast of the earlier guidelines issued in April last year. In fact, the proposed changes only revamp a few of the interpretation difficulties in the existing guidelines.

For instance, it is proposed, in order to avoid risk of co-mingling, that the originator must maintain a distinct account in the name of the SPV and put in the collections in the separate account. For clean up calls, some of the difficulties of the language earlier are being removed.

Vinod Kothari comments: Having approved 7 securitisation deals over the last 1 1/2 years, the SC has had enough of occasion to see if the existing guidelines meet the needs of the trade. Specifically, the need to promote arbitrage, synthetic and future flow transactions could have been addressed.

Links The consultative note is open for comments. The full text of the note is at http://sc.com.my For more on Malaysia, including text of SC's original guidelines, see our page here and here.

Philippines decides to keep securitisation free of stamp tax

While the securitisation law is still in the making, Philippine press on Sunday carried story that the House of Representatives has approved on third and final reading a measure seeking to exempt secondary trading of financial instruments from payment of documentary stamp tax. This will also keep securitisation transactions free of the tax as the Bill provides It also no stamp tax shall be collected on asset-backed securities and other derivatives or secondary-traded instruments where underlying asset or primary financial instrument was already subjected to the tax on the first issuance.

Documentary stamp tax, also known as stamp duty in several countries, is a nuisance for securitisation transactions which market players seek to avoid by resorting to various curious ways.

Philippines is about to enact separate laws that provide for asset management companies, called special purpose asset vehicles, and securitisation companies by enacting appropriate legislation. The legislations are almost in their final shape.

Korean securitisation volumes fall

Korea is considered to be the largest securitisation market in ex-Japan Asia and held out high hopes, but the first 9 months of 2002 have registered a steep fall over corresponding period last year. This, however, is in tune with the rest of the financial instruments and therefore, does not signal any unpopularity of securitised paper.

As per data recently revealed by the Financial Supervisory Service, Issuance of asset-backed securities fell 43.1 percent upto Sept 2002, to 15.26 trillion won, as fewer primary collateralized bond obligations were floated and non-performing loans were cleared up.

It is notable that the Korean market primarily depended on NPLs and primary market CDOs. NPLs are being securitised by the central AMC Kamco as also by other private AMCs, but most of the real-estate backed loans have been sold off or securitised over the last 2-3 years. Primary market CDOs are an essential Korean innovation where loans to SMEs are structured as bonds and funded by the primary market. This activity has come down to liquidity with the corporates.

Links For more on Korea, see our page here.

Securitisation law in India sleep-walks into Supreme Court

The recent ordinance in India which clubbed securitisation, restructuring of NPLs and enforcement of security interests into a skeletal, casually-drafted statute has reached the Supreme Court. Plea is being made to the apex Court to transfer to itself various litigation pending against this law in different High Courts in the country.

If you are wondering as to what could be so objectionable to a benign securitisation law, securitisation in India has been mixed up with enforcement of security interests, that is, foreclosure action against defaulted bank loans. All this is due to the recent Ordinance which mixed up these unrelated issues and put them together into a common law and was enacted through a Presidential ordinance. While the Parliament did not even discuss the ordinance, the Ordinance had to be re-enacted once again.

The banks are using the Ordinance as the enforcement tool to enforce their security interests on defaulted loans. Brushing aside complicated questions of priorities, preferential claims, distinction between the right of foreclosure and the right of sale, the banks have shot unspecific notices on defaulting borrowers wielding threat of wide-ranging action permitted by the Ordinance. While the vires of the Ordinance will be tested in the Courts, it is becoming more and more obvious that the Government's move of clubbing securitisation with enforcement of security interests has boomranged.

Links A dedicated page to discuss this new Ordinance has been put up on our other site here.

State to securitise future flows in India

Facing acute funds crunch, the State government of West Bengal, eastern India proposes to securitise future petroleum cess to raise Rs 15 billion from the market. Apparently, this is not by issuing any capital market securities, but by using the collateralisation and trapping devices characteristic of a future flow securitisation.

Financial press in India today carries story that SBI Capital Market, the merchant banking subsidiary of State Bank of India, has been mandated to raise this money. The collateral for the funding will come from the cess on petroleum, diesel and LPG imposed by the State in last August. This money will be routed through an escrow mechanism after building a cash reserve equal to 3 months' payments. In addition, the cess on LPG, which is not being discounted, will serve as the over-collateral.

Structurally the deal is similar to a future flow securitisation, but evidently, a full-fledged future flow technique, with a power to accelerate payments on breach of certain triggers, would have yielded better results.

There have been other future flow deals from the States in India - Maharashtra raised funding to make good for sales-tax deferment, which is essentially a deferred sales-tax revenue.

A future flow device, in terms of impact, is close to collateralised borrowing, but structured properly it can provided investor protection far better than lending. While Argentinan future flow transactions which survived the recent sovereign problems are an evidence of the strength of future flows, the tendency of governments to reduce their fiscal deficits by selling future flows came in for criticism recently by Eurostat, the EEC's regulatory body.

Links For more on future flows, see our page here.

CMBS deals emanate from Malaysia

Several CMBS deals are emanating from Malaysia and the interest in securitisation is rising across all sectors in the country.

Local press carried reports of a proposal by real-estate company Sunway City Bhd proposing to raise up to RM450 million cash against a portfolio of properties, assets and shares worth RM892 million, to be sold to a special purpose vehicle known as ABS Real Estate Bhd. The deal will be managed by Deutshche Bank.

The overall interest in securitisation in Malaysia is on an all-time high as all sorts of instruments from consumer-loan backed ABS, CMBS, asset-backed commercial paper, CDOs etc are being worked upon. Some Malaysian companies are also reportedly working on whole business securitisation as Malaysian law is believed to be amenable to such transactions.

Though debt securities is still a very small market in Malaysia, with equities not faring all that well, investor interest in debt securities continues to grow. Besides, international investors are also keen on the Malaysian market as the country has emerged quickly from the 1997 crisis. The total debt securities in 2001 were at RM 60.2 billion compared with RM 47.4 billion in 2000, and a larger part of this was private debt securities, including mortgage bonds issued through mortgage securitisation agency Cagamas. In 2002, this number is expected to grow sizeably.

The Malaysian securitisation market is currently operating under Securities Commission guidelines. Bank Negara has reportedly already issued its regulatory paper for comments - this is largely in line with the MAS Singapore approach.

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

Q3 downgrades break all records

A round-up of rating activity by Standard and Poor's for the third quarter of 2002 reveals that the downgrades in ABS classes for the quarter has exceeded all previous records for a 3-month period.

The rating agency has marked 280 downgrades across 158 US ABS transactions during the third quarter, more than doubling the previous record of 132 downgrades across 74 transactions established in the second quarter of 2002. This quarter's surge of downgrades in the ABS sector also exceeds the record number of downgrades experienced by ABS during the entire year of 2001. There were a total of 245 downgrades across 116 deals during 2001.

Manufactured housing led the pack with 113 downgrades, follwed by synthetics with 82 downgrades and CDOs with 46 downgrades.

2002 is apparently promising to be a very bad year from the viewpoint of rating downgrades - the 513 downgrades by end of Q3 is more than double the downgrades for the whole of the previous year.

On the other hand, the scenario in Europe and Australia was reasonably stable.

CMBS performance impressive

Though defaults and downgrades mar the overall ABS scene, commercial mortgage-backed securities have continued to attract investor interest. Inspite of major bankruptcies, which includes some prime commercial mortgage customers such as K-mart, the overall CMBS performance has been quite investor-friendly.

Besides sluggish property prices, there have been problems of low occupancy and insurance concerns relating to terrorism risk cover necessarily insisted upon after 9-11. However, S&P default study for 2001-2 reveals that investment-grade commercial mortgage bonds have been some of the best performers in the U.S. bond market. Through a week ago, high-grade CMBS have earned a year-to-date return of 13.1 percent, beating all other types of bonds with the exception of long-dated Treasury and agency bonds, according to Lehman Brothers. CMBS have been safer alternatives than corporate bonds that have been hammered this year by weak profits and accounting frauds.

S&P has high hopes on Taiwan

A recent release by Standard and Poor's places high hopes on the fast-developing securitisation market in Taiwan, particularly after the recent legislation. The legislation was passed in June 2002. The release says that the Asian structured finance community expects Taiwan to be the next South Korea.

To begin with, RMBS market could be the start point. The size of the residential mortgage market in Taiwan is estimated at about USD 125 million. Though there is no central mortgage securitization agency in Taiwan like HKMC in Hong Kong or Cagamas in Malaysia, that should not impede the RMBS deals emanating in Taiwan.

Taiwanese transactions are expected to be domestic, since there is a 6% withholding tax on cross border interest payments.

Links On this site, we have been covering developments in Taiwan - see for example report below. Also see our page on Taiwan.

Thanks to securitization:
Banks abdicate credit, investors do not know credit

A Business Week article (issue dated 27th Sept.) raises some very critical questions on the health of the present-day banking system, with increasing convergence of investment banking and commercial banking, increasing loan and risk transfers through securitization and credit derivatives, etc. "Banks are indispensable links in the flow of money, and they must be perceived as honest players. Yet after a year of revelations about their questionable practices and conflicts of interest, investors have become increasingly skeptical of everything Wall Street sells", say the bureau writers of Business Week.

Securitization is a USD 7 trillion business today - large part of which is the loans, credit card debt, subprime debt and mortgage loans written by banks which are converted into securities and sold off into the capital market. The spin-off of this process is that banks do not absorb the risks of the credits they create. The authors of the article say: "By selling off their loans, banks were able to lend to yet more borrowers because they could reuse their capital over and over. But it also meant that they made lending decisions based on what the market wanted rather than on their own credit judgments. The wholesale offloading of risk made the banking system less of a buffer and more of a highly streamlined transmitter of the whims of the market."

Besides re-use of capital thus creating excessive leverage on a whole, there is an inevitable question of moral hazard - creation of credit without enough at stake. This leads to "a temptation for banks to scrutinize borrowers less carefully than when their own money was at stake. "The banks abdicated credit judgment, and the people to whom they sold the paper had no credit judgment," says Martin Mayer, a guest scholar at the Brookings Institution and author of The Bankers."

Greenspan praises securitisation and credit derivatives

Every word that he says is interpreted under the microscope. Recently, Alan Greenspan was on a tour of England and praised credit derivatives and securitisation for making the global economy immune from risks. For full report, see our credit derivatives site here. Essentially, Greenspan saw a shock-proofing impact of securitisation and credit derivatives, and urged regulators not to interfere in the development of the market.

AmeriCredit drops gain-on-sale accounting

American subprime lender AmeriCredit recently moved over from off-balance sheet accounting to on-balance sheet accounting for securitization transactions, thus eliminating any gain on sale accounting. Gain on sale accounting reflects the accelerated and upfronted residual profits from securitized assets being the excess of the interest inherent in the portfolio over the weighted average funding cost. Under US FAS 140, as securitization transactions go off the books, they leave behind an accelerated profit which is treated as a gain on sale of the portfolio.

AmeriCredit was, in the past, adopting the gain-on-sale accounting, but also simultaneously producing a parallled proforma statement without the gain-on-sale which has been objected to by the SEC. Following the objections, the company adopted the standard practice of retaining a premium call option which violates the conditions of off-balance sheet accounting, and hence, would result into an on-balance shee treatment.

Gain-on-sale is a controversial accounting treatment for securitization prescribed by the US FAS 140, though corresponding practice under the UK FRS 5 does not allow any gain on sale to be captured, albeit with a near-off-balance sheet impact.

Links There are several articles and write ups on the accounting rules for securitisation on our accounting page. Some articles are reserved in the Premium section - for which you need to subscribe to the premium mailing list.

Taiwan: CLO activity likely to pick up soon

The Taiwanese securitisation market is waiting in the wings to fly The Taiwanese securitisation law was passed recently - in June 2002. Earlier this month, Industrial Bank of Taiwan was reportedly planning to issue T$4 billion (US$116 million) of bonds backed by corporate loans in November. Apparently, this would be Taiwan's first CLO under the new law. The unlisted bank said in a statement it signed contracts with eight other institutions to enter the virgin market.

The five-year collateralised loan obligation (CLO) bonds, backed by quality corporate loans, are expected to secure ratings by Taiwan Ratings Company, a local parter of Standard & Poor's

In addition, global financial groups such as Citibank, J.P. Morgan Chase, ABN AMRO and Societe Generale have already begun talks for potential issues in Taiwan. In yet another press source, the Taiwan Future Exchange chief was quoted saying that the issuance volume in Taiwan could soon reach T$ 1 trillion. Citing an estimate by the Salomon Smith Barney, the official said in the first year after the legislation is approved, the market could be valued at NT$100 billion. Each securitization case could be worth between US$2 billion and US$5 billion.

Links For more on securitization in Taiwan, see our page here

One is more than 13: ABS defaults shoot up over last year

If you see this data, it is hardly surprising. But it is a bit to hard to swallow the fact that ABS defaults over the last one year (July 2001 - June 2002) have exceeded the entire 13 year history.

Standard and Poor's (S&P) have earlier published a default study from 1978 upto June 2001. The current study goes up June 2002. While the total defaults over Over this one year defaults have gone up substantially over all the 3 main classes, RMBS, CMBS and ABS. While there was 114 defaults out of over 15,000 credit classes rated during the 1978-2001 period, the ensuing 12 months from July 2001-June 2002 had nearly 3,500 new credit classes rated, and an additional 64 credit classes were downgraded to 'D' or default level. Thus, the total default cases to date have come upto 178.

One of the significant features of the defaults during 2001-2 is that several AAA classes have also defaulted. For example, in the ABS segment, there are 2 AAA classes which defaulted, though with a recovery rate of 93%. In the RMBS segment, there were 3 AA classes that defaulted with 91% recovery. The number of defaults was very high in the ABS segment, with 27 defaults. The highest contributor was franchise loans with 16 defaults. Synthetic CDOs defaulted in 6 classes and all of these were referenced to Enron.

To conclude, the analysts state: "In the midst of extensive press coverage on downgrades and defaults of fixed-income securities, it is important to point out the relative scarcity of defaults among structured finance securities. Among more than 18,500 U.S. structured finance credit classes rated by Standard & Poor's over the past nearly 25 years, cumulatively only 178 have defaulted. More significant, this report has confirmed the resiliency of structured securities in that most defaulted credit classes are still very much alive, with the potential of receiving respectable amounts of interest and principal cash flows."

Links Full text of the default study is here. See our news report on the earlier default study here. See our page on benefits of securitization here.

American Securitization Forum concerned about ARB 51

Responding to the exposure draft of the proposed interpretation on Consolidation of certain SPEs, the American Securitization Forum, the leading representative body of the US securitization industry, expressed concern that the interpretation may stifle the growth of certain securitization asset classes.

The Forum is concerned about the impact of the interpretation on CDOs, multi-seller commercial paper conduits, and synthetic securitization transactions.

Apart from the sectoral difficulties, the Forum is in general opposed to consolidation based on the variable interests approach. The variable interests approach is based on presumption that if the ownership interest in an SPE cannot be identified, then the SPE is consolidated with the party holding the largest variable interest. This position will be exacerbated by the various possible meanings of "variable interests". The variable interest definition will cause concerns of possible consolidation to investors buying subordinated pieces. The Forum suggests that instead of relating consolidation to the holder of the highest of the variable interests, the FASB should relate it to the holder of majority of variable interests, as in case of voting stock for non-SPEs.

The Forum has also requested the FASB to review the current restrictions on qualifying SPEs under FAS 140, particularly as regards derivatives including synthetic assets. The original purpose of restrictions on derivatives activities of SPEs was to ensure that entities do not parcel out their derivatives activities to SPEs to avoid FAS 133.

Links Full text of the Forum's representation is on the Forum's website here. For more on accounting for securitization and SPEs, see our page on accounting here. For more on SPEs, see our page on SPEs here.

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