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`This page contains old news items on Vinod Kothari's securitisation site. For recent items, click on the News page here.

Joint working group framing accounting standard on financial instruments

Reps of IASC and 9 national standard setters combine

 

The International Accounting Standards Committee, together with nine other national standard-setters, is participating in the Financial Instruments Joint Working Group (JWG), which is developing proposals for an accounting standard that comprehensively addresses recognition and measurement of financial instruments. The aim is to develop an internationally harmonised accounting approach to financial instruments.

The intention is that, when the JWG has finalised its proposals, they will be published by each of the
participating standard-setters.  Each standard-setter will preface the proposals with an explanation of its views on the proposals and of how it plans to take them forward. It is hoped that standards based on the approach developed by the JWG will eventually replace interim standards such as IAS 39 'Financial Instruments: Recognition and Measurement' and FAS 133 'Accounting for Derivative Instruments and Hedging Activities'.

The IASC favours internationally harmonised solutions to worldwide accounting problems, and believes there is an urgent need for a comprehensive approach to the recognition and measurement of financial instruments. It therefore strongly supports the JWG's efforts. Furthermore, as the JWG's main working hypothesis - that all financial instruments should be carried in the balance sheet at fair value - is the conclusion the IASC has reached.

BIS issues credit risk management guidance

 

The Bank for International Settlements last week issued a comrehensive guidance note on credit risk management. The bank has invited comments on the paper after which it is proposed to be issued as a generalised guide on credit risk management by banks and financial institutions.

The text of the BIS document could be downloaded from the BIS website at http://www.bis.org/press/index.htm

You will also find, at the above site, BIS consultative document on Loan accounting by banks. Lending, in BIS parlance, includes direct financial instruments such as financial leases.

First cat bonds issue by French re-insurer

First time use of Netherlands SPV

 

Sorema, the French reinsurance company has issued USD 17 million worth cat bonds using an SPV based in Netherlands. The deal is the first from a French reinsurance company and the first transaction to use a European SPV. Cat bonds are mostly issued using SPVs in Cayman Islands.

The SPV Halyard Re BV provided reinsurance contracts to Sorema for its windstorm risks and Japanese typhoon and earthquake risk policies. The trigger event for Sorema's protection will be a loss to the company's own account.

For more on insurance risk securitisation, click here. Plus, there are several news reports about cat bonds and alternative risk transfers on this page. For what are cat bonds, click here.

India readying for umbrella regulation for securitisation

Work on full stream with joint body of RBI and SEBI

 

Given the interest being evinced by top brass in India's financial regulatory circles, India may soon have its own "umbrella" legislation for securitisation transactions - one that irons out stray legal hurdles here and there and sets out disclosure norms and the structure, role and responsibilities of the SPV.

Currently, the financial sector regulator, Reserve Bank of India (RBI), has formed a special working group which constitutes of senior RBI officials as also representatives of the capital markets regulator Securities and Exchange Board of India, and leading financial institutions, notably ICICI and SBI Capital Markets.

According to a report in Economic Times the regulations could be out within a month from now. Recently, two of senior officials of the RBI who attended a securitisation workshop by Vinod Kothari in Delhi also confirmed the on-going work.

India is generally a securitisation friendly market, since it follows common law principles. Indian law does not require notice to debtors for a securitisation assignment. Stamp laws of some significant states have already considerably relaxed duty on securitisation. However, some tax laws are still unclear. Besides, as is usual, there are some stray irritants here and there.

More significantly, the RBI regulations should focus on the impact of securitisation on the selling and the investing bank's capital adequacy requirements. SEBI should be more concerned about disclosures and reporting requirements.

For more on securitisation in India, click here. For other news items about Indian securitisation, click here and here.

Selling window-dressing products costs Credit Suisse subsidiary dear

The Tokya-based company sold products similar to securitisation

 

Credit Suisse Financial Products (CSFP), the Tokyo-based subsidiary of Credit Suisse, has been been delicensed by Japan's Financial Supervisory Agency. The action follows enquiries which established that the company sold dozens of deals by which Japanse banks either window-dressed their accounts or staved off their losses.

One popular scheme was to issue "credit transfer notes" which essentially  was the temporary transfer by a bank of 100% risk weighted assets to CSFP. CSFP in turn issue certificate of having accepted transfer of credit for the given period. Thus, the original credit would appear on CSFP's books and the originating bank would have a claim against CSFP, which was recognised as a claim against another banking institution, carrying only 20% risk weightage. Thus, the originating bank swapped a 100% risk-weighted asset against a 20% risk weighted asset. The transaction would be done close to December, since Japanese banks prepare their accounts on 31st December, and reversed before March when CSFP's financial year was to close.

Another popular product amounted to a sale of a credit transaction to CSFP so that the selling bank accelerated upfront income on the sale of the receivables.

These transactions were carried at huge scales. Not only has the Financial Supervisory Agency revoked CSFP's license, it has also threatened initiating criminal action. [Based on report in Financial Times, London, 30th July, 1999]
 

Japanese securitisation grows 80% first half  1999

The volumes grow, so also the number of deals

 

Japan might have been a late entrant in securitisation markets, but is registering brisk progress in securitisation deals. According to a report published by Moody's, the volume in the first half of 1999 was USD 15.5 billion, which exceeds the 1998 volume during the same period by 80%.

The number of transactions has also grown from 23 to 42. The variety of transactions also increased with the first CMBS transaction, RMBS deals, promissory note securitisation, shopping loans, auto loans and lease securitisations. According to Moody's, the growth is expected to continue.

European securitisation grows 36% first half  1999

Deutsche Bank remains top underwriter

 

The European ABS issuance recorded in the first half of 1999 reached USD 35.7 billion registering a growth of 36% over volume during the same time in previous year. The whole year issuance in 1998 was USD 39 billion. As per a report in Asset-backed Alert it is likely that Deutsche Bank will remain the lead underwriter of ABS issues, with a market share of about 29%, way above the nearest rival Goldman Sachs. The European data includes both ABS and MBS issuance but excludes CMBS issuance.

The European securitisation growth comes mainly from United Kingdom, France, Germany and Italy, that latter having become important after the securitisation law was passed recently.

For more on securitisation in Europe, visit our Europe profile - click here.

Australian securitisation issues surge in first half of 1999

Mortgage-backed securities dominate, but ABS growing faster

 

The data for securitised instruments originated in first half of 1999 in Australia indicate a growth of  about 48% over the same period previous year. A report from Moody's says the overall volumes in the first half of current year were A$ 7.2 billion, up from about A$4.9 billion in the first half of 1998.

While 82% of the total issuance came still from mortgage-backed securities, there is a definitive increase in the market share of asset-backed securitisation. Asset-backed securities volume almost doubled to A$1.3 billion in first half of 1999 from A$0.8 billion in first half 1998. This sharp increase comes mainly from equipment lease and auto loan securitisation.

For more on securitisation in Australia, visit our country profile - click here.

FASB proposes changes in FAS 125

Changes to enhance disclosures; iron out the problems with the present standard

 

The Financial Accounting Standars Board on June 28, 1999 released an Exposure Draft of the amendments it proposes to FAS 125, the World's most comprehensive accounting standard on securitisation transactions. The Board has invited comments upto Sept. 27, 1999. The amendments, if finalised, would apply in December 2000.

The main thrust of the proposed amendments is to (a) amplify the meaning of "surrender of control" over assets transferred by the transferor; (b) establish new conditions for an SPV to be a "qualifying SPV"; and (c) require additional disclosures about accounting policies, volume, cash flows, key assumptions made in determining fair values of retained interests, and sensitivity of those fair values to changes in key assumptions.

The key condition for according a sale treatment under FAS 125 is surrender of control over the transferred assets. While International Accounting Standards no. 32 and 39 and FRS 5 hinge on retention of risks and rewards in the transferred assets, FAS treats the retained risk of the transferor as no different from a risk undertaken in an independent transaction, say, a guarantee or credit derivative, if the transferor has otherwise transferred effective control over the receivables. Para 9 of the Standard sets the general conditions for determination as to whether there is a surrender of control by the transferor. The thrust of the conditions is (a) whether the transfer will be regarded as a "true sale" for legal purposes, so as to put the assets beyond the reach of the transferor or a liqudator in bankruptcy of the transferor; and (b) whether the acquiring SPV gets a free hand in further selling or pledging the receivables without conferring to the transferor any benefit. The proposed amendments amplify the situations in which a "removal of accounts" provision in a transfer agreement may or may not indicate retention of control by the transferor. The amendments also enable the transferor, without forsaking sale treatment, to put constraints on the transferee's ability to sell or pledge the transferred assets, if such constraint does not enure more than a trivial benefit to the transferor.

Para 26 of the Standard sets the conditions for a qualifying SPV. The proposed amendments have completely rewritten the conditions. The scope of the activities of the SPV, currently limited to the specific securitisation activity, has considerably been enlarged. While currently, a qualifying SPV is entitled to hold only the financial assets transferred to it, the proposed changes permit the SPV to hold 5 other types of assets: (a) derivatives entered into at the time of transfer of the assets; (b) rights to service the financial assets; (c) financial assets for the purpose of credit enhancements; (d) temporary non-financial assets; and (e) cash pending distribution.

The additional disclosure requirements about securitisations focus on two objectives: the results of securitization transactions entered into during the period and the valuation of retained interests in past securitizations that are still outstanding at the end of the period.

The text of the proposed amendments, as also a marked and unmarked text of the relevant paras of FAS 125 is downloadable from FASB website at www.fasb.org .

 Wilde Sapte sees capital markets as vehicle for alternative risk transfer

Respondents see future in non-cat risk securitisation; "virtual insurance" still a distant thought

 

Wilde Sapte, an international law firm based in City of London has recently published an extensive research paper on alternative risk transfer. Based on surveys of a number of respondents, the research paper makes a strong case for securitisation of catastrophe risks. "Although swaps of portfolio risk are viewed as favourable in the short-term because of cost and speed advantages, in the long-term, the case for securitisation is stronger because of credit advantages, widened investor access and the ability to raise more capital."

The research paper stresses on the likely development of the non-catastrophe insurance securitisation market, which to date remains sparse. According to the survey, the most likely first area for non-catastrophe risk securitisation is auto insurance.

On the direct access to securitisation by corporates seeking risk cover, the major impediment is the current low price of traditional insurance cover. Besides, unwillingness of corporates to part with detailed information about their business risks through securitisation SPVs to a larger base of investors is also a problem.

On the emergence of a "virtual insurance" concept, where the risk of a corporate entity is insured by an insurance conduit which is a collection of capital market investors, on the lines of other securitisation conduits, a significant minority of the respondents saw this as an instant possibility. However, with increasing stress on capital efficiency of insurance companies, this move could gather strength.

Links: Wilde Sapte's website access: http://www.wildesapte.com - search for the text of the above research paper under Banking and Finance section.

There are several news items on alternative risk transfer on this page - click here and here and here.

Also visit our page on Insurance risk securitisation - click here.

Mexican company's

future dollar receipts ssecuritised

First access of a Mexican company to international markets in last 3 years; highest rating for future flows securitisation so far

 

Banco Mercantil del Norte, a part of Mexican financial group GFNorte has securitised its future dollar receivables in a USD 350 million deal. Banc of America Securities LLC, a subsidiary of Bank of America Corporation managed the transaction. The transaction represents the first access of a Mexican company since 1997 when the devaluation of the Mexican currency led to ebbing of investor sentiment in Mexico, a phenomenon dubbed as "Tequila effect" (after the name of a Mexican apperitif).

The transaction is broken in two tranches. The first part of USD 200 million is backed by a syndicate of international insurance companies. The second tranche is a junior unsecured part. The first tranche goes for a  7 year final maturity. The first tranche, rated AAA by DCR is said to be the highest rating so far for a future flows securitisation transaction.

Grupo Financiero Banorte, ranks among the largest financial groups in Mexico with an 8.7% national market share and total consolidated assets of Ps 92.5 billion.

In another unconnected deal (contributed by Juan Alberto), Banamex, Grupo Financiero Banamex-Accival main subsidiary, announced on 14th July completion of USD 200 million floating rate notes backed by remittances from USA. This deal has two tranches, a regular monthly paying tranche of USD 170 million, and te balance of pay-on-maturity tranche. The trustee is Harris Trust Company from New York and the Bank of New York will be the payments agent.
 

Pegasus aviation lease securitisation over-performs

Higher returns attributed to lease renewals and resale of off-lease aircraft

 

Operating leases of aircraft were securitised by Pegaus Aviation Inc., a San Francisco based company in 1997. In hindsight of 2 years, these leases have paid off USD 600000 more than projected, pushing up the investors' returns by 4%.The additional revenue and expense savings are attributed to lease extensions and timely remarketing of five aircraft contained in the securitization.  It is notable that operating leases project a certain revenue during projected lease period which is cancellable. The lessee is given end-of-term options, which could include a renewal option, buy-back option or return option.

If the lessee renews the equipment for an extended term, the lessor has an additional revenue. Likewise, if the lessor is able to sell an off-lease equipment at a price better than projected, there is a profit.

For more on aircraft lease revenues securitisation, please see our Aircraft Lease Securitisation page - click here.
 
 

China's first mortgage securitisation soon

Australian bank to securitise China Construction Bank's loans

 

This would be the first mortgage securitisation deal in China. Macquarie Bank, Australia's only listed investment bank, is poised to become the first western bank to launch a mortgage securitisation business in China. The bank would acquire home loans originated by China Construction Bank, one of the biggest banks in the mainland.

China Construction Bank shares 74% of the national home loan market with outstanding home loans worth USD 13.7 billion. However, only 5% of the Chinese own their home, which leaves massive potential for home loans.

Earlier, there have been some future flows securitisations in China, but overall the framework for securitsations in China is not very supportive.

For more on securitisation in China, click on our country page.
 

Pakistan publishes draft Securitisation rules

SPVs to be licensed; independent of originator

 

There has been no appreciable securitisation activity in Pakistan so far, but the SEC of Pakistan, which is also vested with supervision of corporate laws, has come out with draft rules for regulating securitisation transactions.

The draft rules were put up on 29th June, and a 15 day time frame was allowed for comments. Given the fact that there has not been much of securitisation activity, it is difficult to appreciate the impact the rules will have on possible securitisation business in the country. However, the overall tone of the Rules is regulatory rather than promotional - for example, the rules do not make any statement on whether a notice to obligors will be required, and duties, taxes and procedures for transfer of receivables. The focal point in the Rules is the independence, duties and regulation of the SPV.

We have put up a brief commentary on the Rules on the Pakistan page - click here to visit.

The full text of the Rules has been reproduced on our Securitisation laws page - click here to visit.

Securitisation to catch up in Sri Lanka

First rating agency sets shop

 

Though they have been talking about securitisation for quite some time, there have really not been any securitisation deals in Sri Lanka barring a limited one-off transaction (for example, one by Lanka Orix Leasing Company). However now that the first rating agency has been set up in the country, the market looks at a few rated securitisation deals taking place.

Duff and Phelps Credit Rating (DCR) became the first rating  agency to be set up in Sri Lanka recently. Headed by Ravi Abbesuriya, DCR's Sri Lanka wing is expected to make difference on the capital markets in the country. Sri Lanka's resurgent economy  has massive capital needs, presently being served by medium term commercial paper and bonds, apart from public deposits which only regulated finance companies can source.

Sri Lanka has a variety of financial intermediaries: leasing companies, finance companies, housing finance entities, banks, development financial institutions, etc. Rated securitisations by these entities is likely to find good reception in the market.

DCR has international experience in rating structured finance products, particularly emerging market issues.

From securitisation viewpoint, Sri Lanka is a civil law country, and there are no stumbling blocks under the Goods and Services Tax on securitisation deals. Pass throughs or pay thoughs using the corporate SPV may be ideal for Sri Lanka.
 

"Securitisation" of Hollywood on Hollywood Stock Exchange

A unique internet-based market takes off

 

The Hollywood Stock Exchange has launched a screen-based trading platform for "stocks" representing the popularity of stars, music artists, movies, etc. You may not find "Hollywood Stock Exchange" in the list of exchanges Wall Street knows of, but it exists on the Internet - click http://www.hsx.com . There are prices indicated by Hollywood Dollars for stars, movies and artists. If you think your popular star is "undervalued", you can buy it, and if you think you are getting the right price, you can "sell" your stars.

The market is complete with "starbonds", "moviestocks" and "artiststocks". In fact, it also has options and futures in Hollywood products.
 

US ABS markets to have USD 15 billion deals this week

Large issues by Ford Motor Credit and Honda Motor Co to dominate the market

 

The week beginning July 19th will see a flurry of activity in the US ABS market with total issuance nearing USD 15 billion. This includes both public and private issues, and the volume is nearly triple of the average weekly volume.

Ford Motor Credit will be issuing auto-receivables backed notes worth about USD 2.6 billion, of which it will retain about USD 600 million as its own subordinated claims. Honda Motor Co will be issuing auto ABS worth about USD 3.1 billion.

Other major deals include an offering by Bank of America (credit cards), MBNA Corp (credit cards), American Residential Investment Trust (home equity loans), Harley Davison (motor cycle receivables), DVI Inc (lease receivables), etc.

Also notable are stranded costs receivables by a Boston based utility, and oil receivables by a Mexican company.

Insurance risk securitisation at forefront

Article in Best's Review sees increasing use by non-insurance issuers

 

The issue of cat bonds by Japan based Tokyo Disneyland was the first issue of risk securitisation by a non-insurance company [see coverage in this page - click here also see another report on alternative risk transfer here] but this is unlikely to be the last. There is an increasing number of issuers looking forward to seek insurance by securitisation SPVs.

The report, based on interviews of a number of insurance professionals predicts an increasing interest in this field of activity. Among possible users of the market could be US utilities trying to seek insurance cover against interruption of business due to hurricanes, a season fast approaching.

Cat bonds as a device of transferring insurance risk to capital market investors has already gained tremendous popularity. Curiosity about using the capital markets to protect against risk or increase the capacity to provide insurance has begun to grow after a slow start. So far, insurers have issued about $2.7 billion in risk-based offerings.

In the meantime, the cat bonds technology has been tried, for the first time, in France. French reinsurer Sorema SA, Paris, became the first issuer to shift a part of its catastrophe exposure to the capital markets in the first fully funded securitization by a French insurer or reinsurer.

For more on insurance risk securitisation, visit our Risk Securitisation page - click here.

 

US banks weakened by securitisation

Article in The Economist analyses reasons why US banks

are not as healthy as they look

 

US banks may be far more creaky than they seem to be, apprehends an article in the July 10 issue of the The Economist. There are several reasons for erosion of the internal health of US banks, including the calamitous impact of the bursting of Japanese banks. But among the reasons which many realise but few talk about is also securitisation

"Banks have also securitised better-quality loans (ie, packaged them up along with the collateral that backs them as tradable securities). This takes the loans off their balance-sheets, so the remaining, riskier assets generate higher returns. Substantial amounts are involved", claims the article.

Quoting a study by Bank for International Settlements, the article suggests: "Thus, in March 1998, according to a recent paper from the Basle committee, outstanding non-mortgage securitisations of the ten largest bank holding companies amounted to about $200 billion—over a quarter of their risk-weighted loans. For some banks, the combined issuance of asset-backed securities and commercial paper (short-dated securities) amounted to about half of all their loans. The authors put this down to significant and rapidly growing "regulatory arbitrage", especially among the largest banks. "In many cases the effect is to increase a bank’s apparent capital ratio relative to the riskiness of its actual book." Translation: securitisation, encouraged by the way regulators treat different sorts of assets, has increased banks’ riskiness. "

The Bank for International Settlements paper quoted in the above article was published in April 99. The article establishes, with several examples, that securitisation whether with recourse or without recourse increases the capital to risk ratios of banks, and therefore, encourages banks to securitise healthier assets. This phenomenon was referred to as "regulatory arbitrage" by the authors. The article is available on the BIS site - click here to go to the article.
 

First Italian securitisation under new law

Banca di Roma securitises loans and NPAs

 

More on Italian securitisation market

Italian securitisation law 

Italian Banca di Roma became the first bank to to take advantage of the securisation law issued by Italy in April 99. On 8th July, the bank issued 1 billion euros worth securitised paper by putting off the balance sheet wobbly loans consisting mainly of normal debts, but partly bad real estate loans.

The total book value of the loans at billion 1.596 euros was securitised in two tranches of floating rate notes. The first tranche, Class A was priced 140 basis points above six-month Uribor and Class B was priced at 240 basis points. Class C, junior notes, has been retained by the bank itself, but later will be collateralised with high grade bonds and sold off.

In April 99, when Italy passed its new securitisation law, the potential of securitisation in Italy was estimated at around 100 billion euros. The present transaction sets the trend and more issues are soon likely to catch up.

In another significant development, the Italian stock exchange has decided to start screen-based trading in securitised notes effective November this year.

Global ABS issuance grows in first quarter

Europe's share increases

The volume of asset-backed securities (the data includes non-mortgage-backed securities in the USA but all securitised issues outside USA) grew by over 21% in first quarter of 1999. According to a report published in Asset-backed Alert, 184 issuances in first quarter made for USD 88.4 billion, up from USD 72.8 billion for the same period last year.

As has been the history, USA remains largest, in fact, the most predominant issuer of securitised paper. However, Europe is fast growing to become a major player. In first quarter of 1999, the share of US-originated issues was about 73%, while that of Europe was 20% - European share going up from 14% last year.

Trade receivables securitisation in USA

A company based in Toronto, Ontario, USA has used a methodology normally used in emerging markets to securitise its trade receivables. Rio Algom Limited  has entered into a revolving asset securitization program through CIBC World Markets. Under terms of the agreement, which involves the sale of accounts receivable in Rio Algom's metals distribution business, the company will receive initial proceeds of $160 million.

Transactions like this have mostly been limited to export receivables from emerging markets with the basic idea of limiting the sovereign risk and the exchange rate risk.

Tobacco bonds securitisation nearing fruition

The securitisation of tobacco settlement proceeds in the USA is nearing fruition as far as some  of the States are preparing to securitise their receivables.

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

Several States are proposing to securitise these receivables and raise upfront cash. New York was the first to talk about it, followed by San Francisco. Oregon is reportedly close to brining USD 400 million worth receivables to securitisation. Maine is also seriously moving ahead. Several other states are in different stages of taking the proceeds to securitisation which would cushion the states against the uncertainties involved in the payments.

Not only the States, even the law firms involved in the settlement are planning to securitise their legal fees.

US MBS volume declines in first half 1999

Second quarter decline is even more disturbing

The reasons may not be easily analysed, but there has been a sharp decrease in securitisation issuance in the second quarter of 1999 over the same quarter in the previous year. The position for the first half of 1999 also shows a decline.

The quarter ended June 99 registered a total issuance of $72.2 billion as compared to $113.1 billion in the previous year. The data takes into account public issues and issues under rule 144A of SEC rules.

Even if one looks at the first half of 1999, the total volume of MBS issued was $178.3 , lower than $206.1 billion during the same period in 1998.

The data showed Lehman Brothers as the top underwriter in MBS market.
 

Securitisation as device of alternative risk transfer getting popular

Direct risk transfers by industrial firms: some deals already concluded; many in the offing

We have earlier carried the news of Oriental Land, the Disneyland operator from Japan which insured itself against risk of earthquake by a direct insurance risk securitisation SPV - click here for the news and the related links/ details.

A report in Financial Times London, 25th June, 1999 indicates that the deployment of securitisation as a device of "alternative risk transfer" by non-insurance companies has given a completely new dimension to the concept. The concept of alternative risk transfer, meaning a device other than a traditional insurance contract to manage risks is a few decades old, but all that it meant so far was to set up a captive insurance company in the Cayman Islands. But it is securitisation that has really taken the risks from the insured company to the capital markets.

Examples have already been set by at least two noteworthy deals in the past. The Oriental Land issue has been dealt with elsewhere on this page. The other is a lease residual value risk securitisation, originated by Toyota Motor. This was also briefly discussed on our insurance risk securitisation page and our equipment lease securitisation page. The Toyota issue was the first application of cat bonds technique for securing the residual value in leases of cars by the company. Worth USD 566 million, this issue would be used to meet the shortfall over a guaranteed residual value.

Freddie Mac, the US home loan securitisation agency, has also issued USD 243 million bonds against its guarantees for mortgages.

Cat bonds are already traded in 4 exchanges of the World - Chicago Board of Trade, Bermuda Commodities Exchange, Bermuda Catex, and New York. Besides, there is a brisk over the counter trading.

Computerised risk quantification models help securitisation

There is an increasing tendency among businesses to simulate data on computers to assess the risk of earthquake or windstorm. A new element in this trend is the elaborate use of powerful risk landscaping models to assess such esoteric risks as the impact of weather on the profitability of a business or political risks on a project. The clear trend is towards quantification of risk, whatever be its source.

This has led to a development of a new insurance concept called Enterprise Risk Management, where the insurer undertakes not just "silos" of risk such as fire, property or third party liability, but the entire risk in the enterprise as a single block. Since these risks are uncorreleted, the cost of insuring all of these together is lesser than insuring against each risk individually.

Mathematical techniques such as Monte Carlo simulations are used to forecast loss expectancy and the probability of deviation from the expected, allowing the ERM buyer to agree an with its insurer what optimum level of risk it will retain. The arrival of ERM solutions brings with it an expanding role for the corporate risk manager and risk managers are using computer models to leverage their influence across the range of business activities.

The advantage with quantified risk is that it can be placed either in the insurance market, or in the capital market through the device of securitisation. Once you can understand a risk, you can transfer it. [Based on a report in Financial Times, London, 25th June, 1999]

India to give tax-free status to securitised power sector overdues

There may be various uses of the securitisation technique, but the one that appeals to the Govt.-owned suppliers, Coal India and National Thermal Power Corporation, is that they would be able to encash their receivables from the State Electricity Boards (SEBs) which have long overdue.

Under the proposal that is shortly going to be forwarded to the Cabinet for final approval, Coal India and NTPC would transfer their overdue receivables from SEBs to an SPV, which would issue bonds to the public collateralised upon these receivables. The bonds will be guaranteed by the Govt of India and would also be given a tax free status.

In other words, if the SEBs do not pay to the SPV as per the revised schedule of payments, the Government under its own guarantee will have to pay the SPV for repayment and servicing of the bonds. This amounts to giving a deferment plan for the SEBs and enabling the suppliers to raise financing on the strength of the Govt.-guarantee, in absence of which the overdue receivables would not have been any meaningful asset for the investors to buy.

It is expected that in the process of implementation of this proposal, the remaining bottlenecks to securitisation in India would get ironed out - say the stamp duty issue in States other than those which have reduced the duty, the taxation status of the SPV itself, etc.

 

Thailand to activate FNMA-type secondary mortgage market body

The US-originated concept of a secondary market body for mortgage loans is fast catching up in Asian markets. Thailand recently [report in Bangkok Post, 24th June, 1999] announced plans for its Secondary Mortgage Corporation (SMC) to pick up housing loans from commercial banks, securitise them and offer them, backed by government guarantee, to the public.

SMC has been sponsored by the Finance Ministry for creating securitisation markets in housing loans. Bank of Asia has reportedly already sold Baht 1 billion worth of loans to SMC for onward securitisation.

The concept of a govt. agency to promote secondary markets in mortgage financing was originated in USA in the 1970s. [See for more on the role of the US agencies in residential mortgage securitisation our page on RMBS - click here.] The concept has been imported into Hongkong, Malaysia, Australia, etc.

First public offer of RMBS from Japan

The first ever public offer of residential mortgage backed securities, based on single family mortgages originated by Sanwa Bank, was recently made. This USD 450 million offering is collateralised by about 5000 single family mortgage loans granted by Sanwa Bank. Sanwa Bank would continue to be the primary servicer, while GMAC- Commercial Mortgage Saiken Kanri Kaishu, K.K is the backup servicer in the transaction.

The deal was publicly offered in the United States and European markets, and was privately placed in Japan.

 

  European Securitisation Forum adopts reporting standards

One of the problems of securitisation markets is the lack of a regulation that requires reporting by the securitisation SPV to the investors in such products. The European Securitisation Forum, a body of the Bond Markets Association, in its recent convention adopted voluntary minimum reporting requirements for securitisation transactions. The aim of these requirements is to ensure that the investors in securitised products are given basic information about the performance of their portfolio on a regular basis.

It is necessary to have such voluntary standards in place as in case of securitised products, reporting requirements such as those applicable in case of equities are not applicable.

A report issued by the Forum says: "The European Securitisation Forum has adopted the following minimum recommended post-issuance reporting standards for European securitisation transactions. These standards were developed and have been endorsed by a broad cross-section of the Forum’s membership, which includes securities firms, banks, institutional investors, rating agencies, trustees, law firms, accounting firms and other securitisa-tion market participants.

The issuance of these standards represents a continuation of the Forum’s efforts to promote the
growth and development of efficient European securitisation markets. Members of the Forum believe that improvements in post-issuance transaction reporting are critical to the success of these efforts. Such report ing constitutes the basic source of information needed to analyze, price, trade and settle mortgage-backed (both residential and commercial) and asset-backed securities in the primary and secondary markets. As a consequence, the collection and dissemination of timely, accurate and uniform post-issuance transaction reporting data are essential to developing more liquid and efficient European securitisation markets."

The reporting requirements adopted by the Forum include copies data about the performance of the portfolio, underlying collateral, etc. Full text of the standard adopted by the Forum is available on the Forum's website at http://www.europeansecuritisation.com
 

Moody's see new BIS proposals boosting demand for quality securitised paper

In a recent securitisation convention at Montreux, Brian Clarkson, Moody's managing director for structured finance, contended that the new BIS proposals on rating-based risk weightage for securitisation [for details, see Report below on this page] would boost demand for high-quality securitised paper.

Under the current capital adequacy requirements, even a AAA-rated paper is treated with 100% risk weightage, requiring the investing bank to set aside 8% capital (presuming 8% to be the capital adequacy requirement) for such investment. High-grade securitised paper will now be given only 20% risk weightage, which brings down the capital requirement to its1/5th.

Of course, the new proposals will also widen the gap in prices, and hence, yields, based on different ratings.

While the new rules would put rating agencies as part of the regulatory mechanism for financial sector, it would also mean additional responsibility. Such a situation is not desirable because when regulation depends upon ratings, ratings ought to be virtually foolproof. To quote Clarkson, "What the regulator wants is a magic model you can feed numbers into. We use quantitative models for analysis but when assigning ratings we also use our judgement."

Securitisation-driven profits to blame for fall of Newcourt Capital

Newcourt Capital, Canada's largest financial company that was to be taken over by CIT Group is witnessing a steep fall in its share prices for last 3 months. Many predict that Newcourt is likely to be another instance of the collapse of a Canadian financial giant.

A report in Financial Times London reports: "The trouble is Newcourt's avid use of securitisation. It was a pioneer in the practice of bundling its commercial loans and selling them to bond market investors, thus freeing up capital to support further rapid asset growth. But this virtuous circle depends on a continued appetite in the capital markets. The company also employs aggressive accounting. Newcourt immediately takes the entire gain from the sale of securities into revenue, boosting quarterly earnings. This is perfectly legal. But as appetite for its securitisations waned this spring, the company suddenly found itself badly exposed."
 

Malaysia going optimistic on securitisation

In a seminar in Malaysia on May 11, 1999, Suresh Menon, the Executive Director of Rating Agency of Malaysia revealed that Bank Negara Malaysia, the Malaysian central bank and bank regulator, is soon coming out with guidelines on securitisation. The legal framework for securitisation is not very clear in Malaysia, even though Malaysia follows largely the British model of common laws. The participants in the seminar concurred that there was a lot of interest in securitisation activity in Malaysia.

A page on securitisation in Malaysia was recently added: click here.

 

First Cat bonds issuance by a non-insurance company from Japan

This is based on a report in Risk Professional, June 1999:

The Oriental Land Co. became the first Japanese non-insurance company to protect itself against earthquake risk by issuing Cat bonds. This may also be the first non-insurance company issuer of cat bonds in the World.
  

What are Cat bonds  
Cat bonds or catastrophe bonds are securities that provide for transfer of risk to the investors in the event of a specified catastrophe happening. In other words, the investors take the position of virtual insurers to the bond issuer. 
There have been many cat bonds transactions involving passing of re-insurance risk: click here for another news item on cat bonds. 
Click here for more on insurance risk securitisation.

                                    Oriental Land Co. is the owner and operator of Tokyo-based amusement park called Tokyo Disneyland. It placed two bond transactions which provide the company earthquake protection of USD 200 million.

As is usual with such transactions, the structure employs a Cayman Islands SPV. In first transaction which employs a parametric structure, there will be a payment from the SPV to the originating company if the specified event, viz., the earth quake, satisfies certain parameters (hence the name parametric structure). In the second issue, Oriental will have the right to place another USD 100 million worth bonds in case of an earthquake taking place , and there will be an interest moratorium for next 5 years.

The transaction was placed by Goldman Sachs. The first issue was rated BB by Standard and Poor.

 

New Capital adequacy proposals propose rating-based risk weightage to securitised products

The Bank for International Settlements (BIS) recently published a consultative draft of a new Capital Adequacy standard that would, when implemented, mean major changes in the bank supervisors' approach to capital adequacy requirements and risk management. The new standard would replace the Capital Adequacy requirements in force since 1988. The BIS concordat forms the basis upon which central banks over the World form their own capital adequacy standards for banks and other financial intermediaries.

Among other major amplifications and changes, there is a section devoted to risk-weightage for securitisation transactions. The text of the proposals relating to securitisation is as follows:

33. The Committee recognises that asset securitisation can serve as an efficient way to redistribute credit risks of a bank to other banks or non-bank investors. In this respect, securitisation is providing better risk diversification and is enhancing financial stability. Nevertheless, the Committee has become increasingly concerned with some banks' use of structured financing or asset securitisation to avoid maintaining capital commensurate with their risk exposures. Furthermore, the current Accord lacks consistency in that the same economic risk may result in substantially different capital requirements depending on the type of transaction that a bank employs. Thus, through such techniques, a bank may be able to achieve an overall risk-based capital ratio that is nominally high but which may obfuscate capital weakness in relation to the actual economic risks inherent in the bank's portfolio.

34. To address these concerns, the Committee is now proposing a revision to the Accord that makes use of ratings by eligible external credit assessment institutions for setting capital charges for asset securitisations. In this regard, the proposal is primarily addressing transactions that result in a special purpose vehicle (SPV) issuing paper secured on a pool of assets. The Committee notes that the securitisation market is a global market, in which a significant number of internationally active banks participate. Furthermore, asset-backed securities issued in the international market typically have a credit rating. Thus, using external credit assessments for assessing capital against risks arising from securitisation transactions would further promote the Accord's objective of ensuring competitive equality.

35. The Committee is proposing that securitisation tranches

· rated AAA or AA- (using, for example Standard & Poor's methodology) would be risk weighted at 20%;

· rated A+ to A- would be risk weighted at 50%;

· rated BBB+ to BBB- would be risk weighted at 100%;

· rated BB+ to BB- would be risk weighted at 150%; and

· rated B+ or below or unrated would be deducted from capital.

36. In addition, in the case of revolving facilities, when, in the opinion of the supervisor, uncontrolled early amortisation or master trust agreements may pose special problems to the originating bank, off-balance-sheet securitised receivables (i.e. managed assets) could be.converted, at the discretion of the national supervisor, to a credit equivalent amount at 20% and risk weighted based on the obligor's weighting.

What does the new standard mean:

It is difficult to understand the purport of these changes. From the discussions in Para 33, it seems as if the BIS is concerned about the absence of requisite capital, after transfer, with the bank that transferred its portfolio by securitising it. In other words, Para 33 expresses capital adequacy concerns about the originating bank. However, from the way the risk weightages are structured, it seems they are intended for the bank investing in the portfolio, rather than the originating bank. Or else, what could be the rationale of assigning 150% weightage, or providing for 100% provision, against a portfolio rated below investment grade? The obvious reasoning is that no portfolio can be worse after transfer than it was before.

For instance, take the case of Bank A transferring its portfolio by securitisation, which is taken over by Bank B. As it is, the assets are a part of the bank's books, and hence, risk-weighted 100%. If the bank takes out this portfolio from its books and securitises it, it cannot lead to higher capital requirement than at present, as that would be totally illogical. Obviously, the risk does not increase when the portfolio is transferred, than when it is carried on the balance sheet.

So, by way of reconciliation, one might interpret these weightages as being applicable to the investing bank, that is Bank B. That is, the bank which is investing a below-investment-grade portfolio, is penalised by a higher capital requirement than as applicable in usual banking assets. While that is understandable, the question is, what happens to the originating bank? BIS could not have intended making no provision at all for the originating bank.

There is apparently something wrong or missing somewhere. Or is it a case of me not understanding what the new proposals mean?

Do you know what these proposals mean? Or do you agree with me? I will be obliged for your answer. You can either contribute to the Securitisation Forum or write to me. Your opinion will be appreciated.

For full text of the BIS consultative statement, click here.

 

Pfandbrief: the German securitisation instrument

Pfandbriefe are asset-backed bonds. But unlike US-style securitizations, the underlying assets remain on the issuing bank's balance sheet. There is no special-purpose vehicle. The Pfandbrief institution is like one big SPV. Its designated mortgage or public-loan assets serve as an undifferentiated pool of collateral for all mortgage or public Pfandbriefe at once. The bank has to manage that pool to make sure its value and cashflows cover all Pfandbrief liabilities.

A trustee appointed by the federal banking supervisor BaKred checks periodically that the collateral is adequate and registers all the assets in the pool. The bank needs the trustee's approval to sell any of those assets.

If the Pfandbrief issuer defaults, Pfandbrief holders have preferential access to the assets in the pool. If the registered collateral is inadequate to meet Pfandbrief liabilities, Pfandbrief holders get equal status with the highest creditors in the queue for the rest of the bank's balance sheet.

In fact, there hasn't been a Pfandbrief default since the instrument was created by executive order of Frederick the Great of Prussia in 1769. In 1897, the sector had its worst crisis. Three Hypotheken banks which had participated in, as well as financed, housing developments went bankrupt when property prices collapsed. Deutsche Grundschuldbank defaulted on its bonds - it had issued no Pfandbriefe. Preußische and Pommersche Hyp met their Pfandbrief liabilities, but shareholders lost all their capital.

So popular are jumbo Pfandbriefe among international investors nowadays that the Pfandbrief market is the seventh-biggest bond market in the world. About Dm1.8 trillion ($1 trillion) in Pfandbriefe are outstanding. [This report is based on an article in Euromoney April 99 issue].

 

Bank of America securitises housebuilding loans

Creates a new class of securitised assets

Banc of America Securities recently (May-end, 1999) structured and lead managed a $129.5 million securitization of residential construction, acquisition and development loans made by Amresco to homebuilders across the United States. As this is the first transaction of this kind, it adds a new class of securitised products in the market.

Rated by Duff & Phelps Credit Rating Co. and Fitch IBCA, Inc., the offered Notes were structured into three classes: Class A Notes, rated triple-A, were $100.4 million; Class B Notes, rated double-A, were $5.2 million; and Class C Notes, rated single-A, were $5.8 million. All three classes have a four-year term revolving structure followed by a 13-month pay down period. AMRESCO is the first company to securitize this asset class.

Securitisation market engaging attention in India

In a recent securitisation workshop in India (May 28-29, 1999), the first of its kind, the surging interest in securitisation activity was evident.

Inspite of the fact that there is no regulation or code relating to securitisation, India is considered to be by-and-large securitisation friendly, since the rich history of Anglo-Saxon laws, efforts by major State governments to reduce stamp duty on securitisations, and Govt initiatives to formalise securitisation regulations are signaling a vast market potential.

Citibank's issuance of Pass through certificates with Peoples Financial Services Ltd as a conduit has been the only instance of listed securitisation offers in India so far. However, in the housing sector, National Housing Bank is keenly promoting the first pilot project to initiate an on-going securitisation of residential mortgage loans.

Certain taxation issues are still not clear: for example, the circumstances in which securitisation deals will be liable for tax deduction at source. Besides, there are some nagging questions on the ability of the bank originators to have their remedies for a special enforcement of bank debts before Debt Recovery Tribunals, once the debt is transferred to the securitisation conduits.

The largest gray area, or say, a hole in the system, is the fact that the Institute of Chartered Accountants has not issued any statement on accounting for securitisations. International Accounting Standards have been there for some years, but unless buttressed by a local statement, these are not followed in India. The result is a free field where originators could book accounting profits on securitisations and push assets off-the-balance-sheet while retaining significant risks in such assets.

 

Australian securitisation market rapidly growing

Australia is supposed to be the World's second most active market in securitisation after the United States, and a report from Standard and Poor indicates that the market is witnessing rapid growth in volumes, innovative deals and expanded coverage in first quarter of 1999. The report indicates that for the three months ended March 31, 1999, new deals pushed total securities outstanding above A$52 billion. Market participants embraced new assets, new structures and a more liquid market, helping to fuel the growth in Australian securitization

Among prominent transactions were securitisation of factored receivables, a multi-seller commercial paper securitisation using a Delaware based conduit, etc. Citibank applied the master trust structure, familiar in US credit card securitisations, to securitise home equity lines of credit.

 

Another innovative IP securitisation deal

Securitisation of intellectual property transactions are getting increasingly innovative. After successful offerings of securitised products based on David Bowie, Rod Stewart and Iron Maiden's music tapes, a Monte Carlo-based company is now offering products based on Scorpions' music.

In the first deal of its kind from Monaco Records, the cash flows from Intellectual Property rights owned or administered by the record label will go to repay investors who can exercise their right to 'buy into' profits when they reach a pre-determined level.

Although similar to a securitization deal, the main difference with this latest innovative financing from the entertainment industry is, that investors can realise their profit and a higher interest rate in a much shorter time frame than with a traditional Asset-Backed Bond issue, which will normally take between 10 to 15 years to mature. Besides, the product will be offered to retail investors in the capital market while earlier IP securitisation products have been lapped up mostly by insurance companies on private placement.

 

Italy enacts a new securitisation law

Towards end-April, 1999, Italy enacted a new law relating to securitisation. The purpose of the new law is to tap the potential of securitisation in the country.

The new law defines securitisation, lays down requirements for securitisation SPVs, and clarifies that the issuance of securitisation instruments will not be treated as sourcing of public funds.

The new also clarifies the tax treatment of securitisation instruments - they will be taxed at par with corporate bonds.

The details of the new law are available on our report on Securitisation in Italy.

Italy, as it was noted in a previous news on this page, has not only used securitisation for mortgage and other markets, but also made an innovative use for bridging government deficits - see news below.

 

Sports arena securitisation - the World's largest deal in an interesting area

A $315 million transaction for the STAPLES Center in Los Angeles marks second use of asset-backed securities for a U.S. sports facility. Bear, Stearns & Co. Inc. packaged this transaction which is the largest-ever financing for a professional sports arena and marks the second time that the asset-backed market has been tapped for building a major sports facility in the United States.

The future revenue streams used for the securitization come from contractually obligated fees from the arena's naming rights, a portion of the luxury suite and premier seat licenses, the concession leases, the ten Founding Partner corporate sponsorships and an exclusive ticket sales agreement with Ticketmaster-California Inc. Because the securitization structure dedicates only a portion of the arena's revenue streams, it creates significant financing flexibility, leaving other income sources at the company's disposal.

"Asset-backed securitization provides a less costly and more flexible way to fund sports facilities compared to conventional financing techniques," said John Gillespie, a Bear Stearns managing director. "The higher credit ratings and broader distribution allowed in the ABS market provide key advantages compared to more expensive and shorter duration project finance loans or high yield bonds that have been used in the past."

 

Securitisation to help government to bridge fiscal deficit

Italy triggers what others might soon catch up

 

 

 

 

This report has been contributed by Mr. Bharat Patel [BJP@wildesapte.com], a lawyer based in London. We gratefully acknowledge the contribution and would expect similar contributions from other readers across the World. 

For more on securitisation in Italy, click here. 

Being able to convert into instant hard cash what would be a revenue over years to come would sound like a dream for every Finance Minister, but if Italian experience is of any precedent value, the dream has already come true!! Italy plans to issue securitised instruments backed by unpaid social security contributions.

This is a report appearing in the Financial Times, London, today, viz., 22 April 1999 -

The Italian government has devised a radical new way to plug its budget deficit with plans to issue L8,000bn ($4.4bn) of bonds backed by unpaid social security contributions. The move would reduce Italy's fiscal deficit by 0.3 per cent of gross domestic product - a vital step if the government is to keep within the Maastricht criteria for the single currency.

It would also mark the first occasion a European government has securitised so-called "delinquent" payments to boost current revenues, and is likely to have a strong impact on Europe's rapidly growing bond markets.

Under the plan, Italy's social security body, the INPS, would offload the risk of full repayment of the arrears. The repaid debt would service the interest payments on the bond. Under a standard transaction of this type, the assets would be sold at a discount to persuade investors to take on the risk.

Each year, INPS receives social security contributions from Italian employers and employees and pays benefits to retired people and the unemployed, which normally runs into a deficit. This new measure, which is already accounted for in the government's budget forecasts, means that the Treasury can reduce transfers to INPS.

Although European governments have securitised future income streams in the past, these have been small and have not involved tax or social security arrears. However, other European countries are thought to be planning to follow Italy's lead.

Spain is hoping to securitise future electricity surcharge payments that were imposed to pay for the decommissioning of its nuclear industry.

 

Cat bonds - opening doors to a big world of insurance securitisation

Cat bonds, short for catastrophe bonds, do not "literally" sound very comforting, but market in cat bonds has been growing very fast. A recent article in Best's Review, a journal devoted to
 
 
 
 

Click here for more on insurance securitisation.

insurance financing issues, indicates that insurers only recently may have grown comfortable with catastrophe bonds, but financiers say these products soon will be a small piece of the world of securitized insurance products. So far, securitisation technique has been tried only towards casualties and catastrophe insurance, but credit risk and political risk, as well as product liability, casualty, and life insurance, all are areas the Best's Review article says are ripe for securitization.

Insurance risk securitisation is one of the latest interesting applications of securitisation. Trading in insurance risk has been common among insurers for centuries, but securitisation takes insurance risk from the limited realm of insurance markets and puts it as a vended commodity in capital markets. For a general discussion and details of insurance securitisation, click here.

The volume in cat bonds issuance in USA has been estimated to be about $ 2.7 billion so far. These are presently being held mostly be institutional investors but the time has now come for lay investors to share a piece of the interesting world of insurance.

Find a link to the article in Best's Review on our Insurance securitisation page -click on the left box above.

 

Interpretation of IAS-27 causes jitters in securitisation markets

The International Accounting Standards Committee (IASC) had issued International Accounting Standard no. 27 (IAS 27) on Consolidation of Financial Statements and accounting for Investments in Subsidiaries years ago - almost a decade back. Guess what could have possibly been so irritating about a standard that has been around for that long ! And guess what could be the connection between securitisation and this accounting standard, which has to do with preparation of consolidated accounting statements for holding and subsidiary companies !
 
 
 
 

_____IAS-27_____ 

IAS-27 provides that a parent will present consolidated financial statements including those of its subsidiaries. A "subsidiary" is defined not in the legal sense, but as an entity over which the parent has "control". Control means "power to govern financial and operating policies of an enterprise so as to obtain benefit from its activities.

Yet, the fact is that securitisation markets, particularly in Europe, are greatly concerned about this standard. So much so that the April 1999 issue of International Securitisation Report runs a story captioned "Does European Securitisation have any future?" and the story relates to this accounting standard.

The genesis of the whole confusion is an interpretation of IAS 27 by the Standard Interpretations Committee (SIC), a cell under IASC that gives official interpretations of accounting issues. SIC's interpretation no. 12 (SIC 12) seeks to interpret IAS-27 to clarify when would a subsidiary or special purpose vehicle (SPV) be consolidated with the accounts of the parent company. See Box on IAS-27.

The provisions of this standard have been interpreted by SIC-12. The issue raised before the Committee was whether special purpose entities (SPEs, or special purpose vehicles, SPVs) created for a limited purpose such as securitisation will also be treated as subsidiaries of the parent so as to necessitate consolidation of the financial statements of the SPV with those of the securitisation originator. In response to the issue, the SIC opined as follows: "An SPE should be consolidated when the substance of the relationship between an enterprise and the SPE indicates that the SPE is controlled by the reporting enterprise. Control may arise through the predetermination of the activities of the SPE (operating on "autopilot") or otherwise. An enterprise has control over an SPE and obtains the benefits if it is exposed to the significant risks and rewards incident to the activities of the SPE. The application of the control concept requires, in each case, professional judgement in the context of all relevant factors." The above interpretation is effective from July 1999.
 
 
 

IASC's official abstract of SIC 12: 

http://www.iasc.org.uk/frame/cen12_1.htm#SIC12

 

 It should be noted that securitisation involves setting up of an SPV to hold the portfolio of receivables. Normally, the SPV does not have any operations as such and its activities are defined and regulated by the formation documents. It is apprehended that securitisation SPVs will come within the purview of "control" as defined in the interpretation.
Securitisation professional are unnerved by this development. If the assets/receivables, which have been put off the balance-sheet of the originator by the fact of securitisation, are to be brought back to the balance sheet of the originator, then the very ostensible reason for securitisation will be lost.
 

Your views on SIC-12

Do you think IASC's interpretation that securitisation SPVs would be treated as "subsidiaries" for the purpose of IAS-27 and their accounts should be consolidated with the originator's? Contribute your views at the Securitisation Forum by clicking here.

IASC's accounting standard on consolidation differs a bit with FASB's - the latter defines " control" to mean ability to control the profits of the enterprise.

 

 

Accounting for financial instruments - latest standard from IASC

The International Accounting Standards Committee (IASC) has recently issued IAS-39 on accounting for financial instruments. Financial instruments include conventional financial assets and liabilities, such as cash, trade receivables and payables, investments in debt and equity securities, and notes, bonds, and loans payable. Financial instruments also include derivatives such as futures, forwards, swaps, and option contracts

As regarding securitisation, the provisions in the new Standard are supplementary to those of IAS-32. The latter prescribes detailed accounting treatment for securitisation. The present Standard imposes requirement of disclosure of securitisation agreements and repurchase obligations, if any.

Securitisation - the latest buzzword in India

This news item appeared in Economic Times of 17th March -

L&T inks securitisation deal worth Rs 409 cr for new unit

LARSEN & Toubro has completed a securitisation deal to raise Rs 409 crore from banks, financial institutions and mutual funds to finance the construction of a co-generation power plant to be leased to IPCL.
L&T had received an order from IPCL for building and leasing a 2X45 MW gas turbine-based co-generation captive power plant at its Gandhar complex in Gujarat.
L&T has floated a company called India Infrastructure Developers Ltd (IIDL) to implement this order. L&T would first be the EPC contractor to IIDL and IIDL would own and lease the power plant to IPCL. The lease rentals are denominated in US dollars and rupees. Future lease rentals receivables by IIDL from IPCL have been securitised to raise funds for the construction of the power plant, said an official release from L&T.

Here is another news item from Economic Times from Economic Times, 2nd April -

Chennai College securitises fees for Rs. 4 cr.

India's first ever future school fee receivables securitisation has got underway with the Chennai-based Valliammai Society securitising future fee receivables of the SRM Engineering College for a total sum of Rs. 4 crore.

The key note is simple: securitisation is the latest buzz word in Indian financial markets. As has been the history, Indian markets are easily taken by the bandwagon approach, and any new financial innovation is marked with feverish activity which soon takes the pr