SECURITISATION NEWS AND DEVELOPMENTS – July, 2001

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

 

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

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

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

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

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

 

First Jamaican future flow transaction rated

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

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

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

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

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

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

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

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

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

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

Italian cooperative bank launches Italy's largest RMBS offer

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

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

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

Mobile telephone company to make the largest Japanese securitisation offer

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

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

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

 

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

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

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

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

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

 

UK football club to securitise receivables

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

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

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

Korean tyre company to securitise

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

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

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

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

Links See our page on Korea here.

S&P outlines rating criteria for whole business securitisation

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

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

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

 

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

Links See our page on whole business securitisation here.

 

Asian securitisation awards: Kamco is the best

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

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

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

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

Links See our page on Asia here.

Securitisation of hedge funds is the latest hot stuff

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

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

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

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

 

FASB staff answers questions on servicing

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

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

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

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

Links For more on accounting issues, click here.

Australia looks forward to a record-breaking year

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

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

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

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

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

First half ABS volume surges to expectations

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

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

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

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

Links See our global securitization page.

US mortgage securitisation grows nearly 300% in first half 2001

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

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

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