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SECURITISATION NEWS AND DEVELOPMENTS - November, 2001
[This page lists news and developments in global securitisation markets - please do visit this page regularly as it is updated almost on a daily basis. Join our mailing list for regular news fed direct into your mailbox]
Read on for chronological listing of events, most recent on top:
To the knowledge of an outsider, there is no mortgage securitisation activity in Egypt to date, but a recent mortgage-related law seeks to create the legal environment permitting mortgage securitisation.
The Real Estate Finance Law effective end of September 2001, among other things, provides for securitisation. It permits a bank or mortgage financier to assign his interest in a mortgage, to issue securities and trade in the same. Article 11 of the new law deals with assignment and securitisation.
The said provision specifies that the assignee of the mortgage, which will be the SPV in case of securitisation, shall be responsible for interest and equity servicing of the securities of the SPV, out of such assigned rights. Servicing, however, may be retained by the financier.
There are punitive provisions for defaults on mortgages, which might reduce the time it takes to foreclose a mortgage.
In what is claimed as the first South African mortgage securitisation deal, SA Home Loans came out with a Rand 1.25 billion deal that securitises part of the mortgage portfolio of the mortgage lender.
The issuance is in form of floating-rate bonds which have been issued through a special purpose vehicle called the Thekwini Fund and are divided into a R1.15bn Triple A-rated tranche and a R100m Triple B mezzanine debt portion. The higher-rated bonds were priced at a spread of 70 basis points over the Johannesburg inter-bank rate.
According to SA Home Loans, the deal has been oversubscribed, and investors were increasingly interested in lower-rated bond deals.
Links For more on South African securitisation market, see our page here.
US federal banking regulatory bodies on Nov. 29 finally published their new regulatory capital rules relating to recourse, retained residual interests and risk mitigation devices in securitization and credit derivative transactios. The draft rules had been circulated before.
The new rule changes regulatory capital standards to address the treatment of recourse obligations, residual interests and direct credit substitutes that expose banks, bank holding companies, and thrifts (collectively, banking organizations) to credit risk. The rule synthesizes the capital treatment outlined in two notices of proposed rulemakings issued in 2000--"Recourse and Direct Credit Substitutes" and "Residual Interests in Asset Securitizations or Other Transfers of Financial Assets."
The new rule treats recourse obligations and direct credit substitutes more consistently than the agencies' current risk-based capital standards, and introduces a credit ratings-based approach to assigning risk weights within a securitization. The final rule also imposes a "dollar-for-dollar" capital charge on residual interests and a concentration limit on credit-enhancing interest-only strips, a subset of residual interests whereas the extant rules provided for a low-level rule, with a maximum set at the capital required to hold the asset in question.
The rule is effective on January 1, 2002. Any transactions settled on or after January 1, 2002, are subject to this final rule. Banking organizations that enter into transactions before January 1, 2002, may elect early adoption, as of November 29, 2001, of any provision of the final rule that results in a reduced capital requirement. Conversely, banking organizations that have entered into transactions before January 1, 2002, that result in increased capital requirements under the final rule may delay the application of this rule to those transactions until December 31, 2002.
RAMS Mortgage Corp has announced the launch of the biggest ever Australian residential mortgage backed securities. RAMS's current RMBS issue, its 12th, is about A$ 1.45 billion, and is the largest in Australian history. The issue from RAMS was priced at a weighted average margin over time of 38.38 basis points over the one month bank bill swap rate.
Australian domestic RMBS demand is deep enough, as demonstrated by this large domestic issuance. Rating agency Standard and Poor's says more than A$23 billion of Australian RMBS has been issued to date and that looking forward the market remains firmer heading into the next year. The pipeline for new RMBS deals remains strong for early 2002, with most Australian mortgage lenders now having established securitisation programs.
Links See our country page on Australia for more, updated with latest links.
With barely 4 weeks to the close of 2001, US ABS market may have yet another record year, the third one in a row and end up with an issuance volume of nearly USD 350 billion. Apart from the staple diet of the market - auto loans, HELs and credit cards, it is the sterling performance of the CDO segment that is accountable for this record performance in a year that otherwise marks gloom everywhere else.
CDO issuance in the USA continued to grow in the face of a growing percentage of high yield defaults. CDO issuance is expected to be down in terms of volume, but much higher in terms of number of issues which only indicates a broader base and augurs well for the future. The dip in volumes is accounted for by a lesser number of balance sheet structures which typically have a huge ticket size each deal.
The auto loan sector is likely to end up with more than 50% growth this year, which goes well with the downgrades of the auto majors in the country. With their corporate ratings down, auto majors tried to increase their presence in securitisation markets to gain a cost advantage. The classic case in point is that of Ford which brought a record deal to the market as it faced increased costs in the corporate bonds.
After 4 years of the passage of the securitisation law in Thailand, securitisation activity has not picked up in Thailand, and a survey by a local Thai rating agency indicates that activity levels may not pick up in the country.
Thai Rating and Information Services conducted a survey of their various clients to check their interest in securitising cashflows. However, Thai banks were reluctant to get into securitisation deals. High margins on retail lending, the bias toward shorter-dated maturities in bank funding structures and adequate capital bases have discouraged banks to look to securitise their loans. Internationally, the drive to securitise assets is partly accounted for by regulatory capital concerns, as securitisation structures are designed to free up regulatory capital.
Since the passage of the securitisation law in 1997, only two deals have been done in the country: Liquor SPV by a group led by Charoen Sirivadhanabhakdi and the Staso deal, involving the Lotus Novotel and Regency Park hotels. Banks who are major players in securitisation business internationally are conspicuous by their absence in Thailand.
Japan's four major banking groups: Mitsubishi Tokyo Financial Group Inc. , Sumitomo Mitsui Banking Corp , Mizuho Holdings Inc. and UFJ Holdings Inc., may be forced to go for major off balance sheet exercise this year to reduce their regulatory capital. These banks are reportedly facing new pressures on their capital on account of large loan losses.
Securitisation of loans to the tune of Yen 7 -8 trillion or USD 60 billion is expected to take place by these major banks. Japanese securitisation has been growing fast over the last 4 years, at triple digit growth rates, but this year's compelled securitisation drive may surpass the growth record in the past.
The Sept. 11 event has pushed up the cost of insurance and more so, reinsurance, with the result that the so-long sleeping beauty of the risk securitisation business - insurance securitisation - may now be woken up.
An article in Business Insurance of 5 Nov says that as insurance markets harden, the role of capital markets and other alternative risk transfer vehicles will likely remain a supplement to traditional coverage. Of course, insurance securitisation may not lead to any substantial disintermediation in the insurance markets. The article quotes several practitioners from the market who affirm that they are seeing lot of potential deals since Sept 11.
Yet another article in the same journal confirms that reinsurance world had changed on Sept. 11, which has been universally described by reinsurance brokers as a defining moment. The rates will go north effective Jan 1, particularly on items like terrorism coverage and workmen's compensation.
ART has far remained a beautiful idea thanks easy capacity and rates in the traditional reinsurance market. However, with increasing reinsurance rates, there will be a definitive activity in this segment.
Links For more on risk securitisation including links to several external sites, see our page here.
If activity in Hong Kong, Korea, Malaysia, and Singapore is any indication, Asian securitisation scenario is heating up fast and may soon be catching up with the rest of the World.
An article in Finance Asia 4th Nov. says Singapore's DBS is planning a synthetic CLO. There have been very few synthetic CLOs in Asia - the one which is known is ABN Amro's synthetic securitisation of RMBS in Hong Kong.
The indication from the article is that it will be a fully collateralized USD 165 million deal, through which the bank will sell risk on an equal amount of its portfolio. Fully collateralized synthetic CLOs should give 100% capital relief to the originator. The Monetary Authority of Singapore has come out with rules on both securitisation and credit derivatives, and they are genereally in line with those by FSA, UK.
The proposed offering is likely to have an average life of three-and-a-half years and will be multi-tranche.
DBS is a known name in Singapore securitisation scene - it has so far been well known for its CMBS deals, which have been reported on this site.
Links For more on securitisation in Singapore, see our page here. For full text of Singapore's MAS guidelines, see our page here. For MAS guidelines on credit derivatives, see our website here. For more on CLOs, see our page here.
Securitization sees the light of diamonds, as diamond securitization sees the light of the day. We had reported about this deal before - see here. Now the deal is in the market.
A report in Financial Times of 6th Nov says that the originator named Rosy Blue, a diamond company based in Antwerp, launched a USD 100 million bond backed by its entire stock of rough and polished diamonds, in a deal brought to the market by Nomura International. The deal was launched on 5ht Nov. The issue was priced at a spread of 95 bps over 3 Ml and has reportedly been bought mostly by banks in Belgium, France and Switzerland, with a few London branches of Asian banks.
The bond is set to mature in July 2008.
This is one more of the whole business variety of securitization deals being structured by Nomura. The whole business structure uses the entire cashflows of an operating business to pay off the investors and is distinct from traditional asset-backed structures.
Links For more on whole business securitization, see our page here.
In Oct 2001, BIS put up a working paper on asset securitisation, seeking comments by Nov. 15. The working paper is an elaboration of the IRB approach earlier outline in Jan 2001, and gives details for synthetic securitisations in particular.
The guiding principles of the approach detailed in the working paper are:
Full text of the working paper is at this link.
Earlier this year, BIS had decided to defer the implementation of Jan 2001 proposals to be refined and re-presented by Jan 2002. See our news item here.
Mycal Corp., one of Japn's leading national chain retailers, filed for civil rehabilitation proceedings on Sept. 17, 2001. A number of ABS offerings in Japan are directly connected with Mycal and rating agency Fitch has expressed concerns that Mycal's failure has shaken the fast growing ABS market in Japan.
In an article in Global Securitization Quarterly of Oct. 2001, Fitch analysts say that Mycal's failure will affect several CDOs where Mycal's corporate bonds represented a large share of the collateral. Besides, there were some CMBS deals which were based on sale and leaseback of commercial properties owned by Mycal or its subsidiaries. These transactions were rated above the rating of Mycal itself, and in theory, the failure of the originator should not have affected the rating of the deal. However, these CMBS transactions were put on rating watch negative.
Fitch contends that the CMBS rating methodology Fitch uses underscores the fact that anchor tenant or operator of the property is a key factor and unless the rating of such operator is above investment-grade, Fitch will not grant investment-grade rating to the CMBS.
One of the distinctive features of UK securitisation practice is that a number of securitisation transactions, and almost every whole business securitisation transaction, has been structured on the basis of a secured loan by the SPV to the originator, rather than a true sale as in most other countries. The basis of this practice is the typical structure of the UK insolvency law which allows appointment of an administrative receiver by a secured creditor/s having floating charge over all the assets of the borrower company. The appointment of an administrative receiver takes away the jurisdiction of the Courts to sit over the estate of the bankrupt company.
In July this year, the government has put up a white paper titled Insolvency -A Second Chance. Amid concerns that the existing provisions of law are inclined to favour a section of secured creditors to the prejudice of other creditors, the white paper proposes that "on the grounds of both equity and efficiency, the time has come to make changes which will tip the balance firmly in favour of collective insolvency proceedings proceedings in which all creditors participate, under which a duty is owed to all creditors and in which all creditors may look to an office holder for an account of his dealings with a company's assets. It follows that we believe that administrative receivership should cease to be a major insolvency procedure."
Commenting on these proposals, Ian Field and Jennifer Marshall of Allen and Overy, London write in International Financial Law Review Oct 2001 that the proposed changes will adversely affect the securitisation industry whic in UK increasingly makes use of the secured loan structure, as true sales in UK context involve several legal difficulties and compliance costs. Even though the White Paper does propose exemption from the new regime for certain capital market transactions [Para 2.18], which are not yet detailed, the authors feel that the exception may even create greater uncertainty, one, since the scope of exempt transactions is not known as of date, and two, as to whether a given transaction will qualify for the exemption or not.
Vinod Kothari adds: To my mind, what is more important is plead for a certain true sale regime, free from notification obligations and the stamp duty irritant. UK had an exceptionally creditor-friendly insolvency law and the reform will bring it more in line with international practice. That certain securitisation transactions that relied on these exceptional legal provisions will be put to problems is not a reason to thwart a larger cause.
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