Archive for month: November, 2016

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

• Rating upgrades dominate RMBS while CDOs affected by downgrades
  Added on July 19, 2001 
  Rating agency Standard and Poor's reports much higher rating upgrades in the RMBS segment during the second quarter of 2001, in contrast to arbitrage CDOs where obligor defaults resulted into downgrades.
• First future flow transaction from Jamaica rated
  Added on July 18, 2001 
  The National Commercial Bank of Jamaica is to originate the first rated securitization issue backed by future flows from Jamaica.
• Belgian company to securitise stock of diamonds
  Added on July 18, 2001 
  In a novel deal, a Belgian company is seeking to securitise a stock of diamonds at different stages of production.
• BPM offering largest RMBS deal in Italy
  Added on July 18, 2001 
  Banca Popolare di Milano is offering Euro 1.34 billion worth RMBS which is the largest such offering from Italy.
• Japan's mobile telephony to make the largest securitisation offer in Japan
  Added on July 18, 2001 
  KDDI Corp, a mobile telephone company is Japan wants to use securitisation to restructure its financings and might end up with a record securitisation deal in the country.
• UK property company to securitise real estate as UK ABS activity heats up
  Added on July 18, 2001 
  UK's leading property company British Land is to securitise its investments in a shopping property. The asset-backed activity is heating up in the UK as an ever increasing number of companies
• UK property company to securitise real estate as UK ABS activity heats up
  Added on July 18, 2001 
  UK's leading property company British Land is to securitise its investments in a shopping property. The asset-backed activity is heating up in the UK as an ever increasing number of companies are resorting to it.
• UK football club to securitise receivables
  Added on July 9, 2001 
  Leeds United football club proposes to raise some GBP 50 million by securitisation of its gate receipts.
• Korean tyre company to securitise receivables
  Added on July 9, 2001 
  The tempo of securitization activity is all geared in Korea – the latest to join the fray was a tyre maker planning to securitise trade receivables.
• S&P outlines criteria for whole business securitisation
  Added on July 6, 2001 
  The rating agency put up an article on rating of whole business securitisation.
• Asian securitisation awards announced: Kamco NPL voted the best
  Added on July 6, 2001 
  Journal The Asset Online announced its 2000-1 Asian awards and voted the Kamco's NPL securitization as the best deal, with Paliburg Holdings CMBS being the runner up.
• The latest hot thing: securitisation of hedge funds
  Added on July 5, 2001 
  The fund of funds device that we reported sometime back is suddenly the most talked about issue in securitisation market, and it seems we are in for a major advancement in securitisation technology.
• FASB answers servicing-related questions
  Added on July 4, 2001 
  The FASB staff put up answers to 8 questions relating to servicing rights of qualifying SPVs. Accounting experts say that they are happy there were no "negative surprises".
• Australia in for a record year of securitisation
  Added on July 3, 2001 
  A release by Standard and Poor's shows substantial increase in volumes particular of offshore issues. We also report on yet another article published in Asiamoney.
• First half ABS volume surges as expected
  Added on July 3, 2001 
  ABS data for first half shows a 25% growth in global securitization, and the growth outside the US is much higher at 46%.
• US mortgage securitisation grows near 300% in 1st half 2001
  Added on July 2, 2001 
  Data for the 1st half shows mortgage securitisation has grown nearly 3 times in the first half.

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.

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securitisation markets – please do visit this page

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

• ABCP used for restructuring finance in a mega transaction
  Added on Aug 24, 2001 
  The use of ABCP for restructuring Finova in a mega transaction of USD 6 billion is an unusual innovative precedent.

• Swedish municapality looks to securitisation for cheaper funding
  Added on Aug 24, 2001 
  Departing from the traditional mortgage funding instruments, a Swedish municipality looks to securitisation with AAA rating for cheaper funding.

• Asia's first whole business securitisation completed in Malaysia
  Added on Aug 23, 2001 
  It is Malaysia once again – some days ago, Asia's first whole business securitisation was completed in Malaysia, a very creditable achievement indeed.

• Malaysian market is ready for the trigger
  Added on Aug 23, 2001 
  Having talked about securitization hotly for quite some time now, it now seems the Malaysian securitisaction market is finally ready for action – with several CBOs being launched shortly.

• Protected cell companies legislation passed in Gibralter
  Added on Aug 22, 2001 
  Gibralter in early July passed a law that facilitates formation of protected cell comanies, a new concept on corporate legislation, specially to be used as SPVs.

• Ginnie Mae may get a legislative booster 
  Added on Aug 22, 2001 
  It is likely that after the summer recess, a legislation to boost Ginnie Mae may be introduced in the US congress..

• Australian Rugby Union may securitise world cup revenues
  Added on Aug 22, 2001 
  Among measures to prepone the revenues of the 2003 world cup, securitisation is being considered.

• Korea: volumes suffer in first half, but market displays maturity
  Added on Aug 22, 2001 
  The securitization volumes have dipped in the first half of 2001 in Korea, but going by the diversity and motives, it is certainly comparable to any advanced market.

• India: trade body calls for regulatory code for securitisation
  Added on Aug 21, 2001 
  All-India trade body Assocham's special group on securitisation has recommended to the Government that an umbrella code for securitisation be promulgated.

• Accounting rule EITF 99-20 unnerves securitisation investors 
  Added on Aug 14, 2001 
  FASB's accounting rule EITF 99-20 is bleeding US ABS investors heavy sums off their revenue statements.

• Risk securitisation issues in 2000-1 analysed
  Added on Aug 14, 2001 
  An article in Risk Management takes stock of the activity and portents in the risk securitization market during April 2000 to March 2001.

• European securitisation body working on common legal framework
  Added on Aug 14, 2001 
  The European Securitisation Forum is working on developing a standard framework for securitisation in Europe.

• CMBS market getting active in Europe
  Added on Aug 14, 2001 
  An recent article in International Financial Law Review contends that the CMBS market in Europe is fast becoming active.
• Private hospital group in UK goes for whole business securitisation
  Added on Aug 9, 2001 
  A private hospitals group in UK raised nearly GBP 1 billion by securitisation of its operating revenues.
• CDOs grow to be the largest component of European ABS
  Added on Aug 9, 2001 
  In the first half of 2001, CDOs have overgrown any other segment of European ABS.
• Sharp rise in repackaging activity 
  Added on Aug 9, 2001 
  Repackaging of ABS transactions has witnessed a sharp rise in the first half of 2001.
• Global CDO volumes rise in first half of 2001
  Added on Aug 9, 2001 
  A recent article by Standard and Poor's compares CDO volumes in the first half of 2001 with relative period last year to point to the strong growth taking place in global CDO market.
• Convertible bond CDOs to be new asset class in securitizations
  Added on Aug 8, 2001 
  The recent CDO backed by private equity opened up new vistas and there are apparently quite a number of takers – Deutsche is trying to formulate a new CDO backed by convertibles.

• India moots perfection of security interests law: to give enforcement powers to securitisation SPVs 
  Added on Aug 6, 2001 
  In a bid to completely revamp the existing archaic system of enforcement of security interests, India has proposed a new look law that provides for registration, perfection and enforcement of security interests in a wide array of objects including movable, immovable and intangible property.

• Malaysian bank readying the country's first CBO 
  Added on Aug 6, 2001 
  They are still talking about it, not doing it – a Malaysian merchant bank has proposed a CBO of RM 255 million, which will be the first CBO to originate from the country, and certainly an interesting innovation after the Securities Commission's latest guidelines.
• Legal amendments in Portugal seek to clear impediments
  Added on Aug 6, 2001 
  Though not with much of securitisation activity, Portugese regulators are still trying to clear legal impediments on the way: a recent amendment removed the withholding tax problem for securitisation investors.

• Looking back: emerging market securitizations pass through stress to mature
  Added on Aug 3, 2001 
  Over past couple of years or so, emerging market securitisations have passed through several scenes of stress to mature. In a recent article, a Fitch analyst narrates some instances of emerging market securitisations that that withstood adverse local economy.

• CDOs continue to default, and grow
  Added on Aug 2, 2001 
  Rating agency Standard and Poor's reports much higher rating upgrades in the RMBS segment during the second quarter of 2001, in contrast to arbitrage CDOs where obligor defaults resulted into downgrades.

Fleet uses ABCP route to arrange mega funding for restructuring of Finova: vulture funding?

In an unusual transaction, FleetBoston Financial's Fleet Securities has used the ABCP route to raise a mega sum of USD 6 billion for Berkadia LLC.

Berkadia is the joint entity formed by Warren Buffet's Berkshire Hathaway and Lucadia National Corp. for the specific purpose of funding troubled finance company Finova out of bankruptcy. Finova had filed for Chapter 11 bankruptcy in March this year, when Berkadia outbid GE Capital for the restructuring funding. The use of the ABCP proceeds will go towards repaying the loan Berkadia gave to Finova. In other words, the present ABCP transaction is used for funding the restructuring of Finova. The market place contends that after paying off the existing creditors of Finova to the extent of 70%, Berkadia will start liquidating the assets of Finova which are expected to be worth much more than the liabilities. In Altman's language, therefore, the ABCP deal is essentially a securitised vulture funding.

An article in Investment Dealers Digest of 6th August quotes market practitioners who agree that this kind of funding using ABCP route is unusual. Also unusual is the huge size of this transaction, even though there have been larger ABCP issuances.

The ABCP market in the USA has been booming. Market data on abalert.comshows the latest outstanding ABCP volume at more than USD 650 billion, which rose up from less than USD 400 billion in Jan 1999.

Links See for more on ABCP our page here.

Swedish municipality CMBS to stir up activity in the country

The vast Swedish mortgage market that has so far mainly fed itself on traditional European mortgage funding instruments is now likely to see increasing volume of securitisation. Recently, a CMBS transaction originated by a Swedish municipality achieved AAA rating from Standard and Poor's, which may prompt more mortgage funding to migrate to securitisation.

The originator in question is Framtiden, a municipal housing company wholly owned by the City of Gothenburg, the second largest city in Sweden. The transaction will use a special-purpose entity, Framtiden Residential Housing Finance No. 3 AB. The collateral is loans granted to subsidiaries of the originator. The loans are secured on pledges of Pantbrev (traditional mortgage funding instrument in Sweden, comparable to German pfandbriefe) in three predominantly residential portfolios comprising a total of 9,268 apartments in 143 modern apartment blocks in Gothenburg.

Links There is more content and number of links on the Swedish securitisation market on our country page.

Asia's first whole business securitisation completed in Malaysia

This is certainly a very creditable achievement for Malaysia because whole business securitisation is a complicated and esoteric securitisation method that has been perfected in the UK. But no wonder, since the transaction was handled by Nomura Securities which has to its credit several such deals.

Nomura International completed in mid-June this year a USD 250 million bond issue for 1st Silicon (Labuan) Inc., a special-purpose subsidiary of 1st Silicon (Malaysia) Sdn. Bhd., a state-of-the-art wafer foundry located in Kuching, Sarawak, and Malaysia's first 200mm silicon wafer processing plant. This transaction was talked about for quite some time.

The whole-business financing will be used to repay a syndicated bridge loan from Nomura of USD 180 million.

The asset-backed bonds have also been guaranteed by Sarawak Economic Development Corporation, which is an agency of the State Government of Sarawak. The Bonds have achieved BBB/Baa3 ratings from Standard & Poor's and Moody's Investors Service Ltd. respectively. This is the first time that a Malaysian corporate bond issue has achieved investment-grade ratings without having an explicit link to the Malaysian Sovereign.

The floating-rate notes have a seven-year maturity, with a put and call option on the fifth anniversary. They are being issued at par and carry a coupon of Libor plus 275 bps.

Links For more on whole business securitisation, see our page here. For more on Malaysia, see our country profile here.

Malaysian securitisation market is ready for trigger

Malaysia has been talking about securitisation for quite some time now, but it seems now the stage is finally set for some hot action. The curtains are finally rising.

Several CBO transactions are at various stages right now. Arab-Malaysian Merchant Bank Bhd has reported launched a CBO recently – see our report below. Yet another CBO of a managed portfolio is in the offing from CIMB. This transaction will use an SPV called CBO One Berhad and would raise RM 385 million in two tranches, the senior 7 year tranche being RM 360 million, rated AAA. Besides, there will be a subordinated interest of an amount not yet decided, held by the originator.

Both AMMB and CIMB deals will be offered to domestic investors which is natural given the low rates of interest prevailing in the country.

In the meantime, Malaysian media is replete with securitisation stories – The Star, for example, on 23rd August carried extracts of a press briefing by Copernican Securities, and Business Times on the same date published an interview with RAM official – and Malaysian conference rooms are abuzz with securitization classes. Speaking of the conferences, Rating Agency Malaysia (RAM) is holding end-August conference with both domestic and international speakers, and IBBM continues with its three workshops on securitisation each year. Private event producers are also reported to have offered securitisation events.

Links: See our country page on Malaysia.

Gibralter passes protected cell company law

A law to allow formation of protected cell companies (PCCs) was passed by Gibralter in early July 2001. The House of Assembly passed a bill for a Protected Cell Companies Ordinance on 3 July 2001.

A protected cell company is a new concept in corporate legislation which allows the setting up of a multi-part company containing different cells, with each cell having its own assets, liabilities, debtors and creditors with mutual independence from other cells as also from the core capital of the company. The law allows both incorporation of PCCs as also conversion of existing companies into PCCs.

Each cell may have its own cellular capital, cellular shares and distribute cellular dividends.

Cellular companies are expected to be particularly useful for captive insurance companies, securitisation SPVs and collective investment conduits. The advantage of a PCC is that a single cellular company may act as an SPV for several transactions while still maintaining protected assets of the cell. This is a huge saving on incorporation and administration costs.

Links For more on protected cell companies along with article links, click here.

Ginnie Mae may get legislative booster

According to a report on Reuters Ginnie Mae, the US government agency that is engaged in issuing mortgage backed securities may get a legislative support to help it emerge larger than its cousins – the Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are private sector mortgage securitization agencies, but are referred to as GSEs or government-supported enterprises, due to an implicit credit support of the government. Ginnie Mae, on the other hand, is a part of the Department of Housing and Urban Development and its guarantee bears the full faith of the Federal government.

Ginnie Mae is older and has to its credit the first MBS issued in 1970 [see for more in the history of securitisation], but the GSEs have grown larger than Ginnie Mae. During 2000, Ginnie Mae issued USD 105.5 billion of mortgage-backed securities while Fannie Mae issued USD 211.6 billion, and Freddie Mac issued USD 166.9 billion in MBS.

The legislative amendments being thought of include allowing Ginnie Mae to participate in high LTV loans, and to increase Ginnie Mae's current limit of lending for a single mortgage.

Links: For more on the RMBS market, click here.

Australian rugby body may securitise world cup revenues

According to reports in Australian press, including the Australian Financial Review, the Australian Rugby Union may decide to issue asset backed securities using the revenue from the 2003 World Cup as a collateral. There were reports that this proposal is being considered by the Board of the Union among other alternatives.

As a justification, a spokesman of the Union has been quoted as saying: ""There's money that could be better spent now than later". Securitisation of future revenues is obviously seen as a way of preponing the money flows.

The 2003 world cup is to be co-hosted by Australia and New Zealand. The last world cup in 1999 yielded a net profit of some A$ 131 million.

Links For similar news item relating to football body in England, see here.

Korea: volumes dip but asset diversity displays maturity

The data on securitisation issuance in the first half of 2001 were recently released by Financial Supervisory Service, which indicates that though the volumes have taken a beating this year, compared to last year, the diversity and complexity of transactions is comparable to any advanced market.

Credit card backed ABS showed an impressive growth, with its issuance reaching 7.3 trillion won, as compared to mere 300 billion won last year.

However what was a star performer last year – secondary collateralized bond obligations (CBOs) [see our news item here], plunged to a level of only 300 billion won compared to 16 trillion won last year.

All in all, the total issuance of ABSs reached 22.77 trillion won during the first half of the year, down 3.7 percent from the same period last year.

Another key feature of the Korean market was securitization of non-performing loans. The trend towards securitisation of problem loans in Korea is visible in the current half. Some days ago, Seoul Bank announced plans to raise ABS against 470 billion won of problem loans.

Links: For more on securitisation in Korea, see our page here.

India: Trade body calls for comprehensive code

According to a report in Hindustan Times of 19th August, Assocham, an all-India trade body, has advocated setting up of an apex regulatory authority for laying down prudential norms, promotion of special purpose vehicles to provide a level playing field and credit rating for securities instrument.

The nine-member core group, headed by JM Morgan Stanley vice chairperson Naina Lal Kidwai has also recommended an umbrella legislation, which recognizes the rights of the investors in securities paper or their trustees to effectively recover their dues. The group feels the new regulatory authority would go a long way in avoiding differences of opinion between multiple regulators and in assigning accountability. On the issue of formation of special purpose vehicle for securitization, the group is of the opinion that non-banking companies should be allowed to act as such subjects to certain specified norms.

Links See our country page on India here.

Accounting rule EITF 99-20 bleeds many US banks and corporates

An innocuous-looking accounting rule that requires credit sensitive tranches of asset-backed and mortgage-backed securities to be fair valued and the resulting gains or losses to be taken to the revenue statements is bleeding a large number of US corporates. There are quite a few to carry gains to revenue; many have taken heavy losses.

The first prize might go to American Express [see our story here] which took a loss of some USD 826 million on CDO junior tranches. But it has many to keep company – Bank One Corp., Citigroup Inc. [loss of USD 116 million], Lincoln National Corp., Torchmark Corp. , Conseco, Phoenix, to name a few.

International Accounting Standard IAS 39 and comparable US GAAP FAS 115 require "available for sale" assets to be fair valued, but the gains or losses may be reported into equity rather than to affect current earnings. EITF 99-20 takes the impact directly to revenue, which leads to volatility. Martin Rosenblatt explains that EITF 99-20 sets forth very strict tests to determine when an unrealized loss is an other-than-temporary impairment of a securitized beneficial interest. It is whenever there has been a decline in the present value of the estimated cash flows, which virtually requires entities to do the exercise quarterly.

Investors in the ABS/ MBS market would be concerned with this requirement, particularly while buying subordinate tranches. Recently there was a marked interest in demand for subordinate tranches, but the accounting rule may force investors to rethink.

Links: We have an article on this site by Martin Rosenblatt explaining EITF 99-20 – click here. For more on securitization accounting, click here.

Risk securitisation deals of 2000-1 analysed

A very informative article in Risk Management of August 2001 takes stock of the level of activity and trends in the risk securitization market during April 2000 to March 2001. The authors Morton N. Lane and Roger Beckwith note that even though the number of deals and the amount of securities issued have both marginally come down, the market displays more of experimentation and more types of perils covered. The authors also note more use of securitisation in direct underwriting of risk.

During 2000-1 (April 2000 to March 2001), there were 10 deals with a total security issuance of USD 1126.0 million, as compared to 11 deals with security issuance of USD 1219.4 during the same period in 1999-2000. The authors discuss the salient features of all of these deals.

The authors talk of the trends shown by these data. One noticeable trend was lower ratings of the tranches. During the whole period under review, only one tranche was rated above BB, which indicates that in risk securitisation, it is a good policy to stay humble and get the securities rated at humbler ratings.

In terms of the exposure periods, more and more securities are going for commitment periods longer than 12 months. More than 60% of the issuance during the review period went for more than 12 months' cover. The authors attribute this to the economics of security issuance as also investors' demand for longer term securities.

Links This highly readable article is available online at http://www.rmmag.com. For more on risk securitisation, see our page here.

European securitisation body working on common legal framework

IThe European Securitisation Forum, a body of securitisation professionals in Europe, is working on a standard legal framework for securitisation in Europe. In its Newsletter for Summer, 2001, the body says that harmony and consistency in the various regulatory regimes governing asset securitisation in Europe will help stimulate the growth of the market and will lower borrowing and financing costs for con-sumers and businesses.

The current legal framework in Europe is fragmented. France has a law dealing with Fondos, Italy has a more modern and promotional securitisation law, while Belgium and Portugal have adopted their own laws. Germany works on the basis of bank regulatory guidelines with no basic law on securitisation. UK too has prudential supervisory guidelines from the FSA, but no basic law.

The Forum has set up a sub-committee that will publish a white paper on the legal framework. The white paper will provide a blue print for lawmakers in various European countries. Some of the specific objectives of the Framework include the enforcement of security interests, remedies against the originator, and the true sale issue.The framework will also provide for harmonious accounting treatment.

The Framework will also propose laws and regulations that do not restrict ownership of classes of assets (or their servicing) to residents or nationals or to a specific class of persons. The Framework will call for securitisation vehicles that are fiscally transparent and achieve tax neutrality for securitisation without the requirement of exhaustive compliance with general tax laws applicable to corporate entities.

The framework is expected to be completed in early 2002.

Links The website of European Securitisation Forum is here.

European CMBS market getting active

It may still be too premature to compare the European CMBS market with USA, but it is clear from recent deals that the European CMBS market is getting more active and more innovative, says Liz Jones in a recent issue of International Financial Law Review.

The author speaks of some recent deals: the synthetic CMBS issue called Europe Two and the latest ELOC transaction, the impressive ProLogis deal and British Land Company's Werretown supermarkets securitization to drive home the point that the European CMBS market is opening up fast..

Europa Two, a synthetic CMBS structure, involving the issuance of Euro1.528 billion fixed and floating rate amortizing credit-linked notes, originated from Germany. The most highly rated notes were secured by an issuance of AAA Pfandbriefe. The lower rated notes were secured by unsecured and unsubordinated notes issued by Rheinische Hypothekenbank. The return on notes is linked with the performance of the underlying portfolio of commercial mortgages and the Pfandbriefe/other notes forming the secured assets. The underlying commercial mortgages relate to properties located in six different jurisdictions: France, Germany, Ireland, Spain, Switzerland and the UK.

Looking forward, the author says that "banks with large commercial property loan books or with particular concentrations of risk are likely to continue to find CMBS an invaluable tool with respect to managing regulatory capital requirements and general exposure levels. It may be that the idea of using a commercial property finance programme or conduit will also catch on where sufficiently large volumes of loans are being generated. "

Links For more on CMBS, see our page here.

Whole income of a private hospital securitised in Europe

The whole business revenue securitization device continues to find new applications in Europe. The latest to use this home grown innovation was a UK-based private hospital chain.

General Healthcare Group is a private hospitals group in UK. It raised GBP 975 million by securitization of its operating income. The collateral for the deal is recurring patient fees and a GBP 1.1 billion property portfolio that includes General Healthcare's 44 hospitals throughout the UK.

The deal is broken into 6 tranches. The two senior tranches, both rated AAA, include a GBP 350 million floating rate note with an expected maturity of July 2009, and a GBP 150 million fixed rate note expected to mature in July 2018. Both of these are wrapped by an insurance cover from Ambac, UK, and apparently borrow Ambac's rating.

Links For more on whole business securitization, see our page here.

CDOs emerge as the largest asset class in European securitisation

It is no secret, as we have come out with several stories on the fast growth of CDOs in Europe. So this one reiterates the theme that CDOs have outgrown any other asset class in Europe. Standard and Poor's reports that in the first half of 2001, CDOs accounted for 43% of total volumes. The CDO market showed an increase in the number of transactions as well, compared with the first six months of 2000, underscoring the depth to which the European market has embraced CDO methodology.

Most European CDOs are balance sheet CDOs, as European banks are more driven by capital relief considerations. Besides, the market for high yield bonds is not all that deep in Europe for arbitrage conditions to exist. Nevertheless, in the first half of 2001, there were 3 arbitrade CDOs from Europe: Panther CDO 1 B.V.; Duchess 1 CDO SA; and Mayfair Euro CDO 1 B.V. These deals contained a range of assets including European and U.S. high-yield bonds, European investment grade bonds, and leveraged loans. Further arbitrage transactions are expected in the second half of the year.

Links For more on CDOs, see our page here.

Sharp rise in repackaging transactions

Rating agency Standard and Poor's reports a sharp increase in repackaging transactions. This goes very well with the increasing attempts to create new CDO asset classes in form of private equity, convertible debentures and hedge funds [see below].

Though every CDO is essentially a repackaging, a repackaging CDO refers to those where investments in asset-backed and mortgage-backed transactions, quite often in their subordinate tranches, are repackaged into further asset-backed securities. See for more details our page here.

Standard and Poor's data below shows CBOs of ABS as well as CMBS more than doubling in volume. The rating agency says that "Repackaging vehicles have now become a viable, in fact dominant, liquidity source for subordinate and mezzanine tranches of structured products. The repackaging of structured finance and real estate securities in 2001 has become one of the fastest growing sectors of the CDO universe." Three types of CDOs have emereged in the market – CDOs of CMBS, REITSs, etc., CDOs of ABS transactions, and CDOs of CDOs.

The economics of repackaging transactions lies in the fact that the market for ABS is mostly illiquid and therefore, there are higher premiums particularly for the subordinate tranches which makes it an ideal candiadate for CDO transactions.

Links See for more our page on repackaging.

Global CDO volumes rise in first half 2001

Rating agency Standard and Poor's recently released global first half data for CDOs to point to the strong growth in volumes as also the trends. The Table below shows the growth data for the first half of 2001 compared with the first half of 2000.

Evidently, arbitrage CDOs are growing far faster than balance sheet CDOs, which have, in fact, shown a negative trend. This is inspite of the fact that the global economy is passing through tough times and corporate defaults are increasing. The rating agency's analysts say that "collateral managers and investors are becoming increasingly cautious of higher defaults, lower recoveries, increased credit migration, and distressed trades" and that "investors and issuers are more closely scrutinizing various default and recovery assumptions prior to making investment decisions".

The US accounting rule EITF 99-20 has also been responsible for substantial write offs by a number of investors in their portfolios of CDOs. American Express was recently in limelight for writing off something like USD 826 million. Conseco Finance in Q2 wrote down more than USD 25 million.

In the wake of increasing defaults particularly in the constituents of high yield CDOs, investors are placing increased stress on choice of CDO managers – seasoned managers are in increased focus.

Links For more on CDOs, see our page here.

Deutsche to try new CDO to invest in convertibles

We recently reported a unique CDO by Prime Edget which would invest in private equity, and another one where J P Morgan is working on a CDO of Hedge funds. This was hailed as a major innovation in CDO technology which converts equity investments into debt. The signals are already apparent – the idea is going to find larger application.

The journal Credit Magazine reports of a proposed securitization of convertibles that Deutsche Bank in London is working on. The differentiating feature of convertibles is that they usually pay low or no coupon and only give capital appreciation when they get converted into equity. When repackaged into a CDO, they may require either a higher portion as equity, or a part of the capital flows may have to be used to pay off income using the equity portion as a support class.

Convertibles in Europe are booming with some USD 30 billion worth convertibles issued in 2000, and the first half of 2001 has already seen USD 20 billion worth issuance.

Links For more on repackaging, see our page here.

India moots security interests perfection law: to grant enforcement powers to securitisation SPVs

This is certainly a major step forward in revamping the existing archaic and delay-ridden system of enforcement of financial claims: India's financial regulator Reserve Bank of India has proposed a new look law on creation, registration and enforcement of security interests on a wide array of properties. Not surprisingly since the craftsman of the law was also the person who participated in the making of the draft securitisation law, securitisation SPVs are also being given special powers of enforcement.

Titled Creation and Enforcement of Security Interest by Banks and Financial Institutions Bill, 2001 it is the Indian version of Article 9 of the UCC in United States. The law moots the creation of a Central Registry of security interests which will replace the present system of multifarious registrars under the Companies Act, Motor Vehicles Act, Transfer of Properties Act, etc. Registration of security interests under the new law shall not be mandatory, but shall take away the application of the new law.

If the security interest is registered, the secured creditor may require the borrower to meet the claim in 60 days, failing which the secured creditor may repossess the secured article. The judicial machinery will not be involved in the process of repossession, but the secured creditor may seek the help of the judicial magistrate for smoothening the repossession.

The properties on which security interests may be created and enforced under the new law include all movable and immovable property, actionable claims, and all other intangible rights.

Secured creditor for the purpose of the new law includes a securitization SPV. The law, however, does not talk about the transfer of security interests and whether the security interest can be enforced by a transferee of the security.

Links For full text of the proposed law, click here.

Malaysia's first CBO soon

They either talk about it, or do it. In Malaysia, it is still the former. But that by itself is interesting, because now they are talking about something which is the hot flavour of the US and European markets – a CBO.

According to reports in Business Times of 6th Augst, Arab -Malaysian Merchant Bhd (AMMB) has announced a CBO programme of RM 255 million (approximately USD 67 million), consisting of senior and subordinate tranche bonds of RM225 million and RM30 million, respectively. In order to undertake the programme, a bankruptcy remote special purpose vehicle Prisma Assets Bhd, which is independant from the merchant bank, has been set up.

The senior tranche which will receive an indicative "AAA" rating from Rating Agency Malaysia Bhd and a subordinate tranche, which will not be rated and will be held by the merchant bank. The bonds for both tranches will carry a legal life for five years with a bullet repayment upon maturity. The underlying asset for the transaction will be a pool of diversified corporate bonds issued by companies in Malaysia. Based on the structure and size of the senior tranche bonds, the merchant bank expects them to be fully subscribed for by investors, AMMB said in a statement.

This will be the first CBO from Malaysia. Very few CBOs have been originated from Asia, mimus Japan. The distinguishing features of CBOs from usual balance sheet securitisations is that here, the originator is not necessarily the one having a portfolio of loans to sell: he acquires a portfolio from the market, supports it with his own subordinate participation called the equity tranche, and sells the rest of the senior securities at finer spreads, thereby making a sizeable return on the equity contribution. Thus, CBOs are aggressively used as arbitraging vehicles. In the high yield segment, arbitraging by CBOs is fairly common.

Links For more on CBOs, see our page here. For more on securitisation in Malaysia, see here. Vinod Kothari is a regular tutor of securitisation training programs in Malaysia – see our securitisation workshops page for forthcoming securitisation event in Malaysia.

Portugese regulators seek to remove legal impediment: securitisation free of withholding tax

The securitisation market is not very well developed in Portugal, but the regulators are taking proactive steps to make the way for market forces. With the securitisation law passed in late 1999, a recent proposal to amend the tax statutes will clear up withholding tax problems for securitisation.

The proposed amendment, according to a commentary, will remove withholding taxes for payments made by a local SPV to offshore investors, or for local originators to offshore SPVs. The law is currently in its waiting period and will soon be enforced.

Current Portugese tax law stipulates a 20% withholding tax on all interest payments to non-residents. If an SPV is domiciled outside the country, the payment of interest by the originator to the SPV will be an offshore payment, and like so, if the SPV is local but the bonds/ notes are bought by offshore investors. The market players are currently finding it hard to avoid these deductions, except by the tedious process of having Lisbon-subsidiaries licensed as full-fledged banks, which currently escape these provisions.

Links See our country page on Portugal here. See full text of Portugese securitisation law here.

Emerging market securitisations sail through stress to mature

It is very important for any financial instrument to pass through a full cycle that includes inception, euphoria, stable growth and stress before it could mature. Emerging market securitisations, particularly from Asia and Latin America have recently passed through several situtations of stress which they could withstand..

A recent article by Greg Kabance in Fitch's Global Securitisation QuarterlyJuly 2001 recounts some of the experiences with emerging market securitisations in the recent past. Most of the emerging market securitisations are future flow securitisations, in which performance risk as well as country risks are high.

Turkey passed through sovereign downgrades and economic crisis linked with political instability. Fitch has a dozen outstanding securitisations originated from Turkey, most of which are net payment inflows into Turkey from hard currency countries. Of these 2 were downgraded in the 2001 crisis, and of these two, one has been fully paid up. The other one has strong collections being trapped outside the country and is expected to be fully paid.

Another country to face crisis was Pakistan. Pakistan Telecom had originated a future flow securitisation of net settlement telephone revenues in 1997 which was then rated BBB-, higher than the sovereign rating of Pakistan. Later, with Pakistan's rating suffering setback and the political instability including the Kargil conflict, the deal was downgraded to BB. Fitch says that it does not rate Pakistan, but the current rating of the transaction is 5 -6 notches above what the rating of Pakistan is likely. Inspite of reducing net tariff collections, the transaction has not been downgraded any further as the rating agency believes that the reserves and the legal stregths of the transaction will sail it through when it matures in 2003.

Coming to the Indonesian crisis, Fitch believes that Bunas, an existing company, gives a strong example of an existing asset securitisation which continues to perform under adverse local conditions. Bunas securitised auto receivables in early 1997, rated BBB. During the 1997 crisis, Bunas went down under and ultimately went bankrupt, but the transaction paid off. The true sale of receivables was never challenged, and Bunas was not actually liquidated: as it continues to service its other defaulted loans, it continues to service the securitisation transaction as well.

Yet another example of Asian securitization is that by the Philippine Airlines which securitised ticket receivables in 1997 in an unrated transaction. In June 1998, the airlines filed for bankruptcy protection and all its other obligations were stayed; however, there was no embargo on the securitization payments as they were believed to be diverted outright by way of a true sale. In March 99, the company got an order for restructuring and it is a fact that ABS investors were among those who got the most favourable treatment.

CDOs continue to default, and grow

The CDO market continues to grow stronger by the day, even as more and more CBOs, particularly in the high yield segment, continue to default. There has been an estimated USD 40 billion on new CDO issuance in the first half of year 2001, excluding synthetic securitisations. And this is inspite of rising corporate bankruptcies and defaults which continue to affect the ratings of existing CDOs.

An example of the inherent weakness in CDOs is the recent announcement by American Express that its subsidiary will write down fair value losses to the extent of USD 826 million on account of investments in mezzanine and junior CDO tranches. The Chairman of American Express, Kenneth Chenault admitted that his company did not fully comprehend the risks of investing in the whizz-bang portfolio of CDOs.

To an extent, Alan Greenspan contributed to the CDO boom. Greenspan was addressing the annual meeting of the Bond Market Assocation via satellite. He was talking about the dwindling market in treasuries and was talking of replacements, which he enumerated as swaps, agency debt and, most intriguingly, a high-grade CDOs. He cited "a senior tranche of a CDO backed by high-grade corporate debt" as an example of riskless security. When Greenspan speaks, Wall Street reads not only between the lines, it is actually between the words. The market found lot of cheers for the CDO segment in Greenspan's remarks.

With the risk-based capital standards having been put off for a while, bankers might still be drawn into investing in subordinate CDO tranches, but needless to stress, it is very important to understand the risks inherent in such investments.

Links For more on CDOs, click here.

[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

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

• Sept 11 events put CDOs under strain, more downgrades likely
  Added on Oct. 22, 2001 
  Rating agency Moody's recently put up a report on rating downgrades in the CDO sector which sees more CDO downgrades following the Sept 11 incidents.
• European securitisation continues surge; Italy and Spain in focus
  Added on Oct. 22, 2001 
  Rating agency S&P recently put up data showing substantial increase in securitisation activity in Europe in the 3rd quarter.
• Life insurance securitisation to look up, says Swiss Re analyst
  Added on Oct. 17, 2001 
  Life may not be all that secure, but analysts are already talking optimistic about life securitization – on the lines of catastrophe risk securitisation.
• Cat bonds issuance to shoot up: Fitch
  Added on Oct. 16, 2001 
  Fitch expects that with the rise in reinsurance costs, cat bonds issuance will shoot up substantially.
• Fitch analyses Sept.11 risk on RMBS transactions
  Added on Oct. 16, 2001 
  Rating agency Fitch recently published a report analysing impact of Sept. 11 and its aftermath on securitisation transactions.
• British property company to launch UK's mega CMBS
  Added on Oct. 15, 2001 
  Inspite of the recent events affecting the US CMBS market, UK's largest quoted property company Land Securities is planning UK's largest CMBS deal.
• First securitisation deal in Israel
  Added on Oct. 15, 2001 
  Bank of America recently assisted an agro chemicals producer to securitise accounts receivables.
• Car rentals and air-travel-related ABS to suffer
  Added on Oct. 9, 2001 
  The Post-Sept.11 developments will adversely affect air travel and car rental industry, and consequently, securitizations drawing upon that collateral.
• Indian securitisation scene sees a flurry of activity
  Added on Oct. 9, 2001 
  The Indian securitisation market has recently seen a lot of noise and some deals coming to the market, though regulatory initiatives are still being blamed as the neck of the bottle.
• Philippines sees securitisation as key instrument to re-ignite its economy
  Added on Oct. 9, 2001 
  Two measures to re-ignite the economy were listed: residential housing and securitisation of non-performing bank loans.
• ICICI readying India's first balance sheet CLO
  Added on Oct. 9, 2001 
  Premier term lender ICICI is apparently all set to launch India's first CLO and raise Rs. 4.75 billion (approx. USD million) from the market.
• Accounting charges in 3rd quarter may pare securitisers' profits
  Added on Oct. 5, 2001 
  If Conseco's 3rd quarter charge offs are any indication, the write downs in IOs and CDOs may pare securitisers' earnings.
• Italian securitisation may reach Eur 30 billion this year
  Added on Oct. 5, 2001 
  It is going to be a record upsurge in the history of European securitisation, and given the fact that Italian securitisation is practically only 3 years old, it is a remarkable development.
• Expert cautions against risks in Intellectual property securitisation
  Added on Oct. 5, 2001 
  Straightforward receivables such as loans and mortgages are fine but something like intellectual property receivables may be too complicated, warns Peter Banyard.
• S&P sees potential in fund of funds CDOs
  Added on Oct. 5, 2001 
  Recent success of fund of funds CDOs has prompted rating agency S&P to declare its willingness to rate funds of hedge funds for which it sees vast potential.
• French ruling casts doubt on securitization of future flows
  Added on Oct. 1, 2001 
  A recent ruling by French Supreme Courts casts doubt on transferability of future flows.
• First securitization deal in Bolivia concluded 
  Added on Oct. 1, 2001 
  A deal by Nacional Financiera Bolivianan marks the first rated securitisation deal in Bolivia.
• Leeds football club closes securitisation
  Added on Oct. 1, 2001 
  A leading football club in UK has securitised next 25 years' ticket sales in a landmark transaction.
• CMBS: investors get jittery on trophy property securitisations
  Added on Oct. 1, 2001 
  Investors in the coming months may be more selective in terms of CMBS collateral and may opt for vanilla transactions with a spread out portfolio.

Moody's foresees more CDO downgrades

Rating agency Moody's put up on 19th Oct a report titled CDO Rating Transitions; Year-To-Date Review — August 2001. Apart from reviewing the downgrades in the CDO sector upto August, the report also gives the agency's views on likely downgrades following the Sept. 11 incidents. This is what the rating agency has to say:

• The events of September 11h will further stress the CDO market. The extent and duration of the stress will depend primarily on the economic impact resulting from those events.
• Several market value CDOs have seen their overcollateralization and/or minimum net worth test cushions erode to the point of violating or just barely passing these tests. Yet other market value deals had been repositioned earlier this year to a more defensive posture. Those deals continue to have a cushion in these tests.
• Should the economy deteriorate in the wake of the disaster, CDOs on Watchlist would be most vulnerable to rating downgrades, while deals that are on the cusp may be pushed over the edge. CDOs exposed to cyclicals, especially those industries that have been the hardest hit, will undergo the greatest deterioration in credit quality in the current environment.
• Lack of liquidity in the high-yield market could also pressure CDOs, should investors continue to lighten their allocation to high-yield.
• Should the U.S. economy — or the high-yield market — prove to be resilient, the spread-widening of the past couple of weeks will be viewed as a buying opportunity. Furthermore, some argue that there has been some dislocation in the market thereby offering potential relative value opportunities for some managers.

Vinod Kothari adds: A Deutsche Bank publication of 10th October has also gone into the ABS and CDO downgrades in the 3rd quarter. Deutsche Bank analysts say: "With over $50 billion in negative rating actions [this is for ABS and CDOs together] in the third quarter (a record we are not proud to advertise), it seems like ancient history to talk about ABS as immune to rating volatility. But to be fair, that reputation was built in the days when the market was smaller and more concentrated in a handful of asset classes, such as autos and cards, which performed exceedingly well in good times and bad. The structured products market of the 21st century is not as homogenous as it once was."

Links For more on CDOs, see our page here.

European securitisation activity continues surge: Italy and Spain in focus

Recent surveys put up by rating agency Standard and Poor's show impressive performance by Italy and Spain in a surging European securitisation market. The third quarter issuance in leading European countries is given in our page on Europe – click here.

In Italy, volumes surged to a record USD 15.4 billion at the end of the third quarter 2001; almost three times the USD 5.5 billion tally recorded in the same period last year. S&P expects the market to hit USD 20 billion by year-end. The asset-class-based break up of volume during this 9-month period is as under:

In Spain, the issuance upto Sept 2001 has been USD 5.7 billion which is marginally lower than the USD 6.0 billion recorded over the same period last year, but S&P says that looking at the depth of the pipeline, the issuance could well exceed USD 10 billion for the whole year. "Standard & Poor's expects to see increased growth in the use of fondos de titulización de activos (assets securitization funds, under Royal Decree 926/1998) to securitize loans to corporates and loans to small to midsize enterprises (SMEs), as well as the expansion of the securitization of consumer loans, future flows, and trade receivables."

Links For more on securitization in Europe, see our Europe page here. See our page on Italy here and Spain here.

Life Insurance securitisation to look up

With terrorism and anthrax scares and all that stuff, life may not be all that secure, but analysts are talking optimistically about life insurance securitisation. In a recent interview with KPMG Industry Insiders, Brian Lo, associate director of Swiss Re New Markets spoke of the prospects of life insurance securitization.

Insurance securitization itself, though a very promising innovation, has not had any significant volumes over the last 6-7 years, and has mainly been concentrated in catastrophe insurance segment. However, life insurance securitization works with a different motive. Brian Lo says that a life insurance company is looking at life premium securitization essentially from the viewpoint of funding and capital relief, similar to banks and other fund-based securitisers.

The method of premium securitization is, however, different from the usual transfer of receivables. Brian says that an insurer cannot sell premium receivables directly out of the operating company, therefore, it is often most efficient to use a reinsurer as an intermediary, typically offshore. If reinsurance is used, risk transfer must be demonstrated. Also, if the issuer goes insolvent, state regulators effectively shut down the company, making it difficult to secure an interest in the assets backing the policies.

Brian expects that the market will see two or three deals next year.

Links For more on risk securitization, click here.

Cat bonds issuance to shoot up

The increase in reinsurance costs due to Sept.11 events, and the insistence of corporates to seeking full fledged insurance cover would prop up the demand for catastrophe bonds, expects rating agency Fitch.

In a press release of Oct. 15, the agency said that the next year's issuance may even exceed USD 2 billion mark. Cat bonds were a wonderful innovation of risk transfer, but their issuance never got off to a commercial start due to prevailing lower costs of reinsurance.

Cat bonds are alternative risk transfer tools, and they compete with the traditional reinsurance markets. The desirability of cat bonds versus traditional insurance depends primarily on insurance rates, insurance capacity and the perceived financial strength of (re)insurers versus the reliability of funds held in trust with cat bonds. Fitch expects significant increases in traditional insurance rates, significant declines in available capacity and modest declines in perceived insurer financial strength as a result of the disaster. The changes in these three factors will tend to make cat bonds a more competitive alternative, quite simply because traditional insurance is becoming more expensive and less available.

On the pricing front however, bond spreads have also increased in the wake of the disaster, which partially offsets the increase in (re)insurance prices. Cat bonds tend to trade at wider spreads than traditional corporate bonds with similar credit ratings. This premium (to compensate for the exotic or esoteric nature of the bonds) has increased since the disaster and reflects the general market trend of a flight to quality. Fitch believes rising rates in the cat bond market will somewhat dampen sponsors' enthusiasm but, overall, the forces behind increased cat bond issuance outweigh the forces against it.

Further, Fitch expects the higher spreads offered by cat bonds relative to similarly rated alternatives will attract additional investors, especially since it is the 'smart' money that understands the fundamentals of property risk related to wind and ground shake have not changed as a result of recent events. Fitch notes that the share prices of publicly traded property/casualty insurers have risen markedly as investors anticipate higher returns from rising premium rates. Fitch believes investors will similarly be drawn to the cat bond market in anticipation of these higher returns.

One important item to note is that Fitch believes the potential surge in cat bond issuance relates only to property exposed to natural catastrophes such as earthquake or hurricane risk. In order for cat bonds to work, independent modelers must be able to estimate a probability of loss that both the sponsor and investors accept as reasonable. Such models for earthquake and wind risk are well accepted and have been in use by both the traditional insurance and cat bond markets for a number of years. However, Fitch believes it is nearly impossible to credibly model the human behavior element as it relates to events like those of Sept. 11.

Links For more on insurance risk securitisation, see our page here.

Fitch analyses impact of Sept.11 aftermath on RMBS deals

Just as the whole world is busy analysing the variegated effect of the Sept. 11 attack on their respective piece of business or life, Fitch has come out with a comment on the likely impact on RMBS transactions. RMBS is not directly involved in the World Trade Center tragedy, but since the aftermath might have broad-ranging impact on the US and global economy in general

In a Press release of 15th Oct., Fitch said economic repercussions will be varied across the country but the adverse affects on residential mortgage-backed securities (RMBS) ratings would be limited, and short term. Contractionary forces including the immediate disruptions in travel and business operations and the dramatic declines in consumer confidence are leading to reductions in consumer spending, less certain corporate spending in response and an anticipated softening of the housing market. Counterbalancing these effects are the U.S. government's fiscal and monetary policies, relief agencies, insurance proceeds and declining mortgage rates.

Some RMBS pools may be affected by a combination of vulnerable industries and real estate markets. Vulnerable industries include aircraft and parts, air transport including ground services, travel agents and tour operators, hotels, passenger car rental and amusement parks. Metro areas with the highest exposures to these industries combined with overheated real estate markets prior to the attacks include Las Vegas, Orlando, Seattle, San Francisco and Miami. In terms of RMBS pools' exposure to these regions, the Northern California/San Francisco area represents the most significant concentration in prime jumbo RMBS, approaching 20% of mortgaged properties in typical pools.

Fitch will closely monitor outstanding RMBS default rates and losses in these areas as well as the in greater New York City area during the next year.

Going forward, credit enhancement requirements for pools with relatively high exposure to regions at risk will be moderately higher at speculative-grade ratings and potentially slightly higher for lower investment-grades.

Links: For more on RMBS, see our page here.

UK property company launching Britain's mega CMBS

According to a report dated 14th Oct., on independent.co.uk, Land Securities, Britain's largest quoted property company, is planning to issue CMBS adding to GBP 1.8 billion, which is among the largest single CMBS offers in UK so far. The purpose of the CMBS is reportedly to fund its acquisition of 6,700 properties owned by BT.

Canary Wharf and British Land are known for their mega CMBS offers in UK market. The present proposed deal will be a close rival to the largest reported CMBS so far – that by Welsh water company Glas Cymru, which raised just under GBP 2 billion bn earlier this year.

At the present juncture, the complete blue print is not available but reports suggest the the originator will seek a monoline insurance wrap to get a AAA rating on the senior tranche.

Links For our report titled European CMBS getting active, click here. For a report on British Land's securitisation of commercial property, click here. For securitisation markets in UK, click here. For general coverage on CMBS, click here.

Workshops For details of Vinod Kothari's 3-day workshop on securitisation in Europe, click here.

First securitisation deal in Italy

According to a report in Jesualem Post 15th Oct., Bank of America and agrochemicals producer Makhteshim-Agan Industries have closed a securitization deal for securitising the latter's accounts receivables. This is reportedly the first securitisation deal to originate from Israel.

The USD 150 million transaction is based on the revolving transfer of the accounts receivables of the originator. The accounts are generated both in Israel and other marketing locations in Europe and global subsidiaries. It is not clear from the report whether the deal will be sold to international investors or to domestic ones. It is also not clear whether the offer will be rated or not.

Car rentals, airlines-related ABS may suffer

Air travel may be a casualty of the post Sept 11 developments; car rentals which are related to air travels are very likely to suffer, as per experts.

Deutsche Bank's Securitization Monthly for Oct 2001 discusses the impact of the recent global disturbance on car rentals industry. The genesis of the problem is air travel, which has reportedly already suffered by something like 30%. USA has already begun its military offensive, but as things stand, it does not seem like international business travel, apart from travels to and from certain locations in Asia, is directly affected. Therefore, the 30% dip in passenger traffic may not worsen, and may take sometime to restore partly. Analysts expect the restoration to be only partial: to an extent, air travel will remain affected.

During the 1991 gulf war, air travel showed a substantial negative growth: however, the Gulf War ended after some 45 days, and air traffic remained affected for some 6 months. The current conflict, as being predicted by the politicians as well as others, may last longer. Therefore, a milder but more long lasting effect is being predicted on air travel.

A large part of car rentals are directly connected with air travel, and therefore, might suffer as well.

India sees a flurry of securitisation activity

A lot of noise, and some deals coming to the market – this describes the Indian securitisation scenario post Sept-11.

The most significant noise, in terms of the decibel volume it carries, is the one that has been heard 50 times over the last several years: securitisation of electricity dues, and power sector funding. The power sector needs a funding of Rs. 800 billion [approx USD 17 billion] over the next 10 years, and securitisation has been named as one of the key funding devices by several experts.

At a recent meeting of Indian Electrical & Electronics Manufacturers Association, a Power Ministry official said central power utilities have been directed to securitise their delinquent receivables from the State electricity boards. This adds up to some Rs. 35 billion.

Among the deals that recently came to the market was a Citibank-arranged securitization of auto loan receivables originated by Ashok Leyland Finance. Worth Rs 630 million, this was claimed to be the first deal where POs and IOs have been sold separately. Citibank has used its conduit Peoples Financial Services as the SPV for this securitisation, as also for several of its earlier securitisations.

The other deal that is reportedly in offing is CLO by ICICI –see below.

Links For more on securitisation in India, see our country page here.

Securitisation a key tool for Philippine economic re-ignition

According to reports in Manila Bulletin of 7th Oct., Philippine House Speaker Jose de Venecia announced yesterday a strategy to relaunch the government's mass housing program and re-ignite the economy through a large-scale securitization program and the creation of an SPV that would convert non-performing loans and assets into development capital. The Speaker said he has already submitted to President Gloria Macapagal Arroyo his proposal for the country's first large-scale Securitization Act and the Special Purpose Vehicle measure as part of the strategy to turn around the economy.

In essence,what the Philippine government is proposing is two unrelated things but both have a common factor – the securitization methodology. Residential housing being promoted by securitisation is by now an established fact and many governments have used secondary mortgage markets as the basis for fulfilling the housing needs of citizens.

The other target is securitization of non-performing loans held by banks. The Philippine government sees role models in Korea, Thailand and Mexico.

Links For text of a 1998 securitization law in Philippines, see our laws section.

ICICI is all set to launch India's first CLO

According to reports in Financial Express of 8th Oct., premier term lending institution ICICI is all set to mop up some Rs 4.75 billion (approx USD 100 million) from the market by securitisation of its term loans. This would be the first CLO in India and the first transaction to use a bond structure instead of a traditional pass through structure.

The tenure of the bonds may be like 4-5 years and the pricing may be around 11 per cent, which, in view of the likely AA- rating is quite a good spread for the investors. From the newspaper report, it appears as if ICICI itself will be the trustee for the investors, which seems unlike the independent-SPV and indpendent-trustee structures globally used.

With the demand for fixed income securities increasing, there is certainly a very good potential for a new breed of fixed income securities in the market. This would be the first CLO in India: previous securitisations have used either residential mortgages or car loans as the collateral.

Not only balance sheet CLOs, India apparently has a very good potential for arbitrage CDOs as well, with a wide variety of corporate bonds in the market. However, the regulatory structure for reinvestment-oriented SPVs is not yet clear, not to speak of the tax treatment of such SPVs. A draft securitisation bill is gathering dust as more politically sensitive matters continue to occupy the attention of the government.

Links For more on securitisation in India, see our country page here. For more on CLOs and CDOs, see our page here.

Accounting charges in 3rd quarter may pare securitiers' income

Call it paring or plundering, but if Conseco's 3rd quarter write downs are any representation of what is in store for other frequenters to securitisation market, it is going to be a very quarter indeed.

October 2, Gary Wendt of Conseco Finance wrote his customary investor memo, in which he listed two major items of write downs – the values of IOs and CDOs aggregating to about USD 350 million.

Under securitisation accounting standards, the values of IOs are based on assumed rates of default, prepayments and other credit sensitive factors. Declining interest rates, increasing rates of default, etc would have led to reassessment of the values of IOs for Conseco. The revalued IO would reduce the balance sheet value for Conseco from USD 459 million to USD 193 million, that is, a write down of 58% in just 3 months! This results into a charge of USD 225 million on the income statement.

The other item of write down is the value of the CDO portfolio, which is subject to accounting rule EITF 99-20. The outlook is not certainly positive: "The downturn in the economy increases the likelihood of default in certain types of CDOs. We also will write down certain below-investment-grade securities, primarily fixed maturities, which in our view are especially susceptible to the expected downturn in the economy".

The last quarter also saw substantial write downs in CDO portfolio by many securitisers, notably American Express – see our story here.

Italian securitisation may reach Eur 30 billion this year, says Moody's

It is going to be a record upsurge in the history of European securitisation, and given the fact that Italian securitisation is practically only 3 years old, it is a remarkable development. A Moody's report titled "Veni, Vidi, Securitizi: Crossing the Market's Rubicon: The Italian Structured Finance Market First Half 2001 Review" lauds the market development in Italy.

As against 25 deals worth EUR 10.1 billion in year 2000, some 60 deals crossing Eur 30 million are expected by the end of the year, says Moody's. While during the first six months of 2001, 30 publicly rated term deals closed, valued at EUR 11.6 billion, breaking all Italian structured finance records and placing Italy just behind the United Kingdom, as the number two European securitisation market. And since July, another seven transactions closed, worth an estimated EUR 4.9 billion.

Mortgage portfolios of banks and NPA deals are big drivers of the market. However, NPLs as a percentage of the total securitization volume is declining as the related tax benefits expired this May.

Vinod Kothari adds: The government is already on record putting securitization on the priority list for liquidation of the government's real estate holdings, and reduction of budgetary deficits.

Links For more on Italy, see our page here.

Expert cautions against risks in intellectual property securitisation

In Oct 2001 issue of Credit Management, a journal of the Institute of Credit Management, Peter Banyard has cautioned against the risks of investing in complicated and contentious cashflows such as intellectual property securitisation.

"At some stages over the last few years I have dealt with the securitisation of debt. If you have a good, reliable income stream from your lending and need to realise that asset, it can make sense to sell it", says the author. However, if the cashflows are as complicated as in intellectual property securitisations, investors could be heading in for trouble.

"The first problem is working out how much intellectual property is worth. Then there is the problem of finding a buyer and, if all goes well there, working out the legal side of things." The author says: " Securitisation may be easy enough if it is uncomplicated; perhaps the income from a straightforward contract or loan. It's fiendishly difficult when it comes to little legal quarrels over who owns what and, in the case of IP, there are usually a number of claimants to a share in it."

Talking of David Pullman's appetite in promoting intellectual property securitisation, the author says that the celebrities in intellectual property securitisation have a number of lawsuits around them. "My own advice to anyone thinking that negotiation by lawsuit is a reasonable way of doing business is to think again. Unless you have Mr Pullman's unusual gifts I feel sure it will prove a bitter and disagreeable experience", says the author.

Link For more on intellectual property securitisation, click here.

S&P sees vast potential in hedge funds CDOs

If there are enough takers for rating agency Standard and Poor's recent release that it is prepared to rate CDOs of hedge funds, or "fund of funds" as it has been called, the world of CDOs might increasingly see new brand of collateral – hedge fund investments. There have already been on state some CDOs to invest in private equity and hedge funds – see our reports here.

S&P release of Oct 1 says that it is developing criteria for rating debt secured by the market value of hedge funds of funds. Prima facie, the rating of hedge fund CDOs will use the same approach as it has used for other CDOs. The release says the approach will be the same as for market value collateralized debt obligations (CDOs), in which the rated debt is backed by the market value of "eligible assets" discounted to reflect their inherent riskiness. This approach requires that the portfolio of assets conform to strict valuation, documentation, reporting, and monitoring guidelines.

In rating these transactions, Standard & Poor's will review the fund of fund's investment strategies, underlying asset characteristics, risk measurement and management processes, and level of liquidity. Particularly important will be the level and quality of management, the correlation of returns among underlying funds or strategies, the use and extent of leverage, and the structure of ownership in the underlying funds.

S&P is optimistic of hedge fund CDOs as it sees securitization potential in the $300 billion hedge fund market. There are takers already: the release says that it is already examining some of these proposals.

There are estimated to be as many as 5,000 hedge funds worldwide holding in excess of $300 billion in assets. Many of the funds of funds participating in this vast market may find securitization an attractive option. Standard & Poor's Micropal, a funds analytic system, contained information on 1,362 hedge funds as of May 31, 2001. At that time, 964 of these funds had reported combined net assets of $152 billion within the last quarter. This comprised about $126 billion in actual invested assets — a figure that excludes the net assets of the 233 hedge funds of funds.

French Ruling casts doubt on future flow securitization

A ruling by French Supreme Court has cast doubt on assignment of future flows, which in turn forms the basis of a number of securitization deals known as future flow securitizations. A future flow deal is distinct from an existing asset deal as the receivables in the former case do not exist on the date of the transaction; and will be created and transferred in future. Several legal systems regard a future flow as a future asset, transferable only in future, though the promise for its transfer can be made now. Hence, if the transferor, before completing the transfer goes bankrupt, it is questionable as to whether the transferee will have claim over such receivables which had not been created and transferred before bankruptcy.

Legal experts contend that the French law, Articles L 313 to 23 of the French Monetary and Financial Code (also known as the Dailly Law) specifically permits this. However, in a decision of April 26 2000 the commercial section of the French Supreme Court held that a transferee of receivables assigned under the Dailly Law was not allowed to recover the sums due by the transferor's debtors pursuant to the continuation of an ongoing contract after the opening judgment of insolvency proceedings against the transferor.

There have been similar fears based on an Italian supreme court ruling and an old English case law – see our site here.

Links For more on the above ruling, see article by Gide Loyrette Nouel here. Also see our page on future flow securitization here.

First securitization deal concluded in Bolivia

Nacional Financiera Bolivianan (NAFIBO) through an SPV labeled COBOCE-NAFIBO 001, on September 26 sold in the Bolivian market for the first time in country's history a securitization deal worth USD 4 million, according to a news contributed by NAFIBO's securitization manager.

The cash flow securitisized comes from 60 promissory notes issued by the municipality of Cochabamba. NAFIBO is a second tier bank located in La Paz.

The originator from this deal is Cooperativa Boliviana de Cemento (COBOCE). On this deal COBOCE sold to the SPV the 60 promissory notes, which in turn were securitisized an sold in the market. The deal was rated AA- by FITCH. The securities sold have a maturity of 3.5 years and yield 10%. Interest is paid every 90 days and capital starts amortizacing every three months starting on month 18.

UK football club securitises future ticket sales

According to reports in Financial Times of 1st October, Latham & Watkins has closed a GBP 60 million securitisation for Leeds United FC by assigning their future ticket sales.

It is the biggest securitisation of its kind by a Premier League football club. The club issued two tranches of bonds secured against 25 years of ticket sales.

The present deal has been talked about for quite some time and we put up a report earlier on this site. There have been other football securitizations in UK by Ipswich Town and Southampton football clubs, but this one is the largest and the most remarkable.

Investors get jittery on trophy property securitisations

The commercial real estate industry had come to rely heavily on securitisation transactions, but the Sept. 11 event has hit it, at least to the extent investors are far more shy today than ever before in investing in "trophy" property securitisations, that is, where one prime commercial property formed all or a substantial part of the collateral for a transaction.

The lease of WTC itself was funded by two major securitisation deals, reported on this site before. The Rockfeller Center is funded by some more than USD 1 billion of securitisation money. Though, in case of WTC damage, rating agencies have been holding that the insurance claims will take care of investor paydown, it is clear that being paid out of insurance proceeds was not something that the investors aimed at.

The market expects investors will be more choosy about the composition of the CMBS portfolio in time to come and it will be difficult to sell trophy asset securitisations. In Europe, where this trend was only catching up of late has already seen some of the major securitisers deferring their plans. CMBS spreads have gone up by some 10 bps post Sept. 11.

Links For more on CMBS in general, see our page here.

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

• Ferry revenues securitised in UK using whole business structure
  Added on Dec. 26, 2001 
  JP Morgan recently raised GBP 43 million for Red Funnel Ferries using whole business securitisation structure.
• New foreclosure norms in India to help securitisation
  Added on Dec. 26, 2001 
  National Housing Bank's new foreclosure regulations will help speed up securitisation in India which holds potential for Rs. 200 billion per year.
• Bond Market Association to discuss "notching" 
  Added on Dec. 21, 2001 
  The Bond Market Association announced plans to have industry roundtable on notching as Moody's has hinted at independent research on the issue.
• Corrigendum to news item on SIC 12
  Added on Dec. 20, 2001 
  Please see this important corrigendum to the news item posted yesterday.
• American Securitization Forum to be launched soon
  Added on Dec. 20, 2001 
  According to a report in Asset backed Alert, a trade body of the World's largest securitization market may be launched early next year.
• Largest rated subprime home equity loan securitisation launched
  Added on Dec. 20, 2001 
  Standard and Poor's have rated a USD 7 billion subprime home equity loan securitisation of loans originated by a Bank of America subsidiary.
• Accounting interpretation SIC 12 dropped
  Added on Dec. 19, 2001 
  This accounting interpretation was highly unfriendly for securitisation transactions – the International Accounting Standards Board decided to drop it.
• Securitization of government revenues booms in Italy 
  Added on Dec. 19, 2001 
  With securitization of gaming receivables recently and now real estate, securitization of government revenues booms in Italy like nowhere else.
• Colombia passes securitization law 
  Added on Dec. 6, 2001 
  The Latin American country which holds substantial potential for securitization has recently enacted the required legal framework.
• Philippines to push securitization law 
  Added on Dec. 6, 2001 
  The Philippines government has taken securitization law as one of the items requiring urgent attention.

UK: whole business structure used for ferry revenues securitisation

Yet another whole business securitisation deal was completely recently in the UK when JP Morgan Chase raised GBP 43 million for Red Funnel Ferry. The transaction completes the financing for JPMorgan Partners which acquired Red Funnel from Associated British Ports last year.

The transaction incorporates a comprehensive covenant package, which is consistent with existing whole business securitisations. It was lead managed by JPMorgan, which was also the bookrunner; Lloyd's TSB provided liquidity and working capital facilities.

Whole business securitisation is a typical UK structure, based on UK insolvency laws, where an intermediate SPV gives a loan to the operating company and acquired a fixed and floating charge on all the assets of the operating company. Thereby, the lending company is able to prevent the assets of the operating company from being administered by a Court-appointed liquidator, as UK laws empower a charge-holder to appoint an administrative receiver instead.

UK's insolvency laws are due for a recast – a white paper was presented sometime back. The proposal will replace the current administrative receiver structure. But the proposal excludes "certain capital market" transactions details of which are yet not notified.

There have been several whole business securitisations in UK for businesses ranging from museums to car racing to auto garages to nursing homes and pubs.

Links See for more on whole business securitisations here. See for securitisation in UK here.

Workshops Vinod Kothari holds two workshops a year in London. See details of the forthcoming workshop in London here.

India's new foreclosure norms will help securitisation

India will shortly move into a new regulatory regime of foreclosure of residential mortgage property with the National Housing Bank's (NHB) regulations. These regulations received legislative approval with the passage of the NHB Amendment Act of 2000, but have still not been put in place by the NHB. In a recent meeting of Ficci, Finance Minister Yashwant Sinha gave indication that these norms will be cleared soon.

Reportedly, the norms have been framed by NHB but are pending clearance by the Government. For more details on the NHB Act relating to recoveries, see our page here.

Links See our country page on India here. There are some recent articles on Indian securitisation scenario by management students.

Training event: Vinod Kothari offers a world-class training event on securitisation and credit derivatives in Mumbai, India on Jan 24-25, 2002. See details here.

Notching issue heats up: BMA, Moody's propose discussions

When a rating agency gives ratings to a CDO or ABCP, the portfolio held by the conduit consists of several bonds or securities, which may have been rated by other rating agencies. Presumably to align these other ratings to the rating standards of the rating agency, the rating agency adjusts these other ratings, more often than not by adjusting down by a notch or two. This practice is referred to as "notching" in rating industry jargon.

Rating agency Moody's is concerned but because ratings assigned by it to securities have been notched down by competing agencies such as Fitch. On 10th Dec., Moody's issued a press release saying it will sponsor an independent study comparing analytical methodologies and credit assessment accuracy across a range of asset types used in collateralized debt obligations (CDO), structured investment vehicles (SIV) and asset backed commercial paper (ABCP) programs globally. Moody's said the study will review differences in ABS ratings from a number of perspectives, including differences in rating meanings and methodology, differences in ratings on jointly rated collateral, differences in rating transitions, and differences in monitoring practices and investor loss experience. Comparative market share by sector and level of subordination will also be examined, with the goal of understanding why different rating agencies have markedly different market shares in particular asset classes or at particular subordination levels.

Competing rating agencies who have been blamed for notching down Moody;s rating ratings were understandably concerned by Moody's release. However, now it seems the issue has gathered interest of the entire industry and the Bond Market Association has declared intent of organising industry roundtable to discuss the issue. A Bond Market Association release of 19th Dec says notching is an important and topical issue in the structured finance marketplace. The Association says a wide range of views have been expressed by various market partici-pants regarding the need, merits and justification for the specific notching policies and practices that are presently applied by each of the major rating agencies to CDOs, SIVs and the collateral securities that underlie them. Certain of these policies and practices have been criticized, among other reasons, on the grounds that they are not sufficiently justified by empirical data or other evidence that would suggest corresponding differ-ences in the actual credit profile of instruments not directly rated by the agency in question.

The Association has expressed intent of initiating broader industry dialogue on the issue.

US securitization trade body to be launched soon

A trade body for the World's largest securitization market may be launched soon, according to a report in Asset backed Alert of 17th Dec. The body, likely to be called American Securitization Forum, will be an independent affiliate of the Bond Market Association.

There are industry bodies elsewhere in the World – the European Securitisation Forum is a body under the Bond Markets Association itself. The Asian Securitization Forum is an independent trade body. The Australian Securitisation Forum is yet another industry body.

The American trade body will represent players in both North and South America. Indications are that Greg Medcraft, global securitization chief at Societe Generale in New York; Jason Kravitt, a partner at Chicago law firm of Mayer Brown; and Vernon Wright, vice chairman at credit card giant MBNA America of Wilmington, Del will take up offices in the new Forum. The Forum may be launched early next year when annual industry meets are organised by SRI and IMN

Vinod Kothari comments: Once the American trade body is formed, let us also look forward to an international council of these bodies.

Bank of America subsidiary launches largest subprime home equity deal

A Standard and Poor's press release says that it has rated Bank of America's Dec. 14 launch of an approximately USD 7 billion transaction collateralized by fixed-rate loans, originated by its wholly owned subsidiary, EquiCredit Corp. This is a part of disinvestment process by Bank of America which is coming out of subprime home equity market.

EquiCredit, the fourth-largest originator of subprime loans in 2000 and one of the largest subprime originators and servicers in the history of the subprime market, ceased its securitization program in August 1999. Prior to that, EquiCredit had completed 39 transactions dating back to 1991. Since August 1999, EquiCredit has originated subprime mortgage products and retained the loans in its portfolio.

Bank of America had previously announced that it was exiting the subprime origination and servicing business and that its approximately USD 23 billion servicing portfolio and platform located in Jacksonville, Fla., would be sold to Fairbanks Capital Corp.

The present transaction will consist of four loan groups. Each will collateralize one of four triple-'A'-rated senior bonds,'A-1' through 'A-4.' All classes are wrapped by Ambac Assurance Corp. bond insurance policy that will guarantee bondholders timely receipt of interest and ultimate payment of principal. Credit enhancement prior to Ambac's obligation will be in the form of excess spread and overcollateralization.

Links For more on securitisation of home equity loans, see our page here.

Scope discussion on Accounting interpretation SIC 12 deferred

Corrigendum 20th Dec. 2001 I am sorry for the wrong information relating to SIC 12 carried in the news item put up yesterday. The original news item is below and the corrected information is here: It appears that in meeting of the SIC on 9-11 May 2001, it was decided to review issues relating to the scope of SIC 12 and the difficulties arising out of its application to securitisation transactions. A report from SIC on the May meeting says: "The Committee discussed some scope issues and recent developments arising from the application of SIC-12. The Committee agreed to consider certain aspects further."

The proposed discussion was apparently aimed at giving relief to securitisation transactions. However, the recent news item, as cited in the original piece below, states that such reconsideration has been deferred. In the meantime, the SIC is being reconstituted, and therefore, the proposed reconsideration may be put on the backburner for quite sometime. The issue is: in the meantime, will SIC 12 continue to apply as before? The answer, sadly, is yes.

Do you have any comments on SIC 12 relating to securitisation transactions? Do write to me for publication on this site.

Original item: An accounting interpretation by the interpretation committee of the International Accounting Standards Board (IASB) (formerly Committee) which was seen as very unfriendly for securitisation transactions – SIC 12 – has been dropped. A message on the IASB's website says: "The Committee planned to discuss some scope issues and recent developments arising from the application of SIC-12. In light of recent proposals to amend the mandate and operating procedures of the SIC, further consideration of this issue has been deferred until an agenda committeee has been established."

SIC 12 provided for consolidation of special purpose vehicles, and gave illustrations of situations where an SPV will be treated as a putative subsidiary of an originator. The circumstances included credit support, subordinate bonds participation, etc.

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

Securitization of government revenues booms in Italy

No other government in the World has as skillfully used securitization as a means of upfronting government revenues as Italy. It made headlines last year with the first securitizatio of social security receivables in the INPS deal: recently the Italian government has been in the market with two large securitization offers backed by gambling receivables and real estate.

The Euro 3 billion securitization of gaming receivables and the Euros 2.3 billion securitization of real estate receivables hit the market recently and sold like hot cakes. The property securitisation deal was highly over-collateralised: the two tranches of Triple A rated floating-rate bonds sold through SPV Societa Cartolarizzazzione Immobili Pubblici funding vehicle on behalf of seven state agencies, were backed by a portfolio of property assets worth about Euros 5bn. Domestic banks took a larger part of the issue.

According to an article in Financial Times of 18th Dec., this year should end up with a volume of about Euros 29 billion worth transactions from Italy. Playesr expect that if this trend continues, Italy might well end up as number 1 in Europe. Italy is currently led by UK as the largest player.

There are many signals of the maturity of the market – the number of repeat issuances, wide variety of asset classes ranging from NPLs to the exotic deals originated by the government as above. The Italian law has gone a great length in facilitating securitization transactions while a number of European jurisdictiosn remain hamstrung by incoherent laws.

Finance Minister Tremonti has publicly declared his optimism about the use of securitisation instrument to reduce the government's reliance on deficit financing.

Links For more on Italian securitisation market, click here.

Colombia passes securitization law

• Colombia has put in place regulatory structure for securitization. According to reports in Colombian paper La Republica, Resolution 775, issued on November 9 by the securities regulator, provides for the issue and trading of securitized mortgages in Colombia's financial system.

  Mortgages can be backed up with collateral in the form of rights over the borrower's home and life insurance as well as property. Financial institutions engaged in the issue of securitized mortgage bonds are required to provide detailed information on the assets of each mortgage so that bondholders are aware of the risk of their investment. The information must be made available in a printed format as well as via the Internet.

  Securitization promises to reduce spreads on mortgages from 400-500 base points to around 350 base points, according to market practitioners in the country. The new system also injects greater liquidity into the market by making mortgage loans tradable financial instruments.

  Vinod Kothari comments: I have been to Colombia for a workshop and was surprised to see that many Colombians have been investing in paper backed by animals, lotteries, viatical life settlements etc. There is plenty of money with investors, and securitization of traditional collateral can only provide the needed outlet for investible resources.

  Philippines to push securitization law

  According to reports in Philippine press today, the government has committed to expedite the passage of several economic measures pending in Congress, that are aimed at attracting more investors to put in their money in the economy. According to National Economic and Development Authority these are the Special Purpose Vehicle Act and Securitization Act, envisioned to speed up the sale of non-performing asset of banks.

  Philippines has been making noises about the proposed securitisation law for quite some time now. See our previous report here.