[This page lists news and developments in

International securitisation markets – please

do visit this page regularly as it is updated

almost on a daily basis.]


All news added on or after 9th November has been posted in a separate page – click here 

For News items added prior 3rd August, 1999, click here to access

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

  • Largest franchise loans securitisation deal 
    Added on 5th Nov., 1999 
    Franchise Finance Corporation of USA recently closed a franchise loan securitisation deal which is the largest issue of its kind so far.
  • Malaysia to scrap stamp duty on securitisation 
    Added on 5th Nov., 1999 
    In a bid to encourage securitisation, Malaysian Budget 2000 proposes to scrap stamp duty on real estate securitisation from Oct 31 onwards.
  • Securitisation changing the face of retail lending in Europe 
    Added on 28th Oct., 1999 
    The decision of Abbey National to securitise large part of its mortgage portfolio is only a signal of the changes securitisation is surely and steadily causing to mortgage lending in Europe.
  • Lehman Re pools catastrophe risk for securitisation 
    Added on 28th Oct., 1999 
    This is a further remarkable development in the risk securitisation market – Lehman Re has acquired catastrophe risks, and intends developing a portfolio, similar to Fannie Mae in the USA, for securitisation.
  • After cat bonds, it is weather bonds now 
    Added on 28th Oct., 1999 
    Two US companies, Enron and Koch Industries, are in the market with bonds that seek to protect against weather risks. Though they are finding it difficult to market the offer, it surely indicates a move that would lead to development of risk securitization.
  • New York launches tobacco bonds 
    Added on 28th Oct., 1999 
    As was predicted in the news item yesterday, New York has announced USD 700 million worth tobacco bonds.
  • Pakistan Telecom deal downgraded 
    Added on 27th Oct., 1999 
    Political uncertainty in Pakistan has led to downgrading of the Pakistan Telecom future flows securitisation transaction by Duff and Phelps..
  • Mortgage securitisation takes off in Hong Kong 
    Added on 27th Oct., 1999 
    Securitisation of mortgage loans by Hong Kong Mortgage Corporation has taken off with an inaugural issue of mortgages originated by Dao Heng Bank..
  • US Tobacco bonds rated A by S&P 
    Added on 27th Oct., 1999 
    The tobacco bonds to be issued by various US states have been rated A by Standard and Poor – this will now clear the way for issue of tobacco bonds.
  • UK infrastructure owner to securitise rent income 
    Added on 27th Oct., 1999 
    Railtrack, railway infrastructure owner in the UK, proposes to securitise rental income from arches it has rented out.
  • Abbey National to launch 4 billion stlg MBS issue 
    Added on 12th Oct., 1999 
    Abbey National, a UK-based mortgage bank, is to launch a 4 billion pound mortgage-backed bond issue to take approximately 10% of its mortgage portfolio off its books.
  • Barclays Bank to launch European credit card securitization 
    Added on 12th Oct., 1999 
    Barclays PLC is to launch a credit card securitisation bond issue of 1 billion pounds, close to 1.66 billion USD, which would be the largest issue by a European issuer.
  • Fully electronic mortgage lending closes legal documentation in 5 hours 
    Added on 8th Oct., 1999 
    This could well be a major innovation leading to e-commerce – legal documents leading to creation of mortgages and lending thereon can now be completed in totally electronic format and the whole process would take just 5 hours, instead of 45 days in the manual mode.
  • New York to issue tobacco settlement bonds in November 
    Added on 8th Oct., 1999 
    The New York City's the Tobacco Settlement Asset Securitization Corp. proposes to issue USD 680 million bonds backed by tobacco settlement dues in November this year..
  • Model Cat bonds law approved in USA 
    Added on 7th Oct., 1999 
    A report says that the National Association of Insurance Commissioners have approved a model law for Catastrophe bonds for the USA.
  • Pakistan to have SPV law by end of October 
    Added on 4th Oct., 1999 
    A report in Business Recorder, a Pakistani financial paper says Pakistan's securities regulator has constituted a body to finalise securitisation SPV law by end-October.
  • Ever heard of securitisation of air? 
    Added on 1st Oct., 1999 
    This really has nothing to do with securitisation in the sense capital markets view it, but next time, someone talks about securitisation of air, you should not be stunned.
  • Italian bank to securitise all its non-performing assets 
    Added on 1st Oct., 1999 
    Italian securitisation market continues to be 4th gear with major securitization deal by yet another bank – Italfondiario SpA.
  • Mexican steel company defaults on future flow securitization 
    Added on 29th Sept., 1999 
    This is apparently the first case of default on future flow securitization – Ahmsa, a Mexican company recently defaulted on a future flow securitization of export receivables.
  • Obligations fonciers in France on recent legal support 
    Added on 28th Sept., 1999 
    The French mortgage securitisation product, obligations foncieresis coming of age. In this report, we discuss salient features of this market, the law that backs them, and compare them with US pass throughts and German pfandbriefe.
  • CIBC World Markets named best securitisation bank in Asia 
    Added on 28th Sept., 1999 
    Journal Global Finance  has named CIBC World Markets the best bank for securitisation and was handed over an award at the IMF/World Bank meeting in Washington on 27th Sept.
  • Securitisation of exchange risks holds potential: Peter Drucker 
    Added on 25th Sept., 1999 
    The noted management and business economics expert, Peter Drucker, sees potential in securitisation of foreign exchange risks and in outsourcing financial arrangements for mid-sized firms. Drucker stresses on the need for innovation in financial services, in an article in The Economist, Sept. 25, 1999.
  • Yet another bank goes bust on securitisation accounting lapses 
    Added on 25th Sept., 1999 
    The reasons for the collapse of First National Bank of Keystone included, according to FDIC, wrong accounting for residuary interests in securitised loans.
  • CRIIMI MAE applies for reorganisation 
    Added on 25th Sept., 1999 
    CRIIMI Mae, the US commercial mortgage securitisation company that filed for protection under Chapter 11 has now applied for reorganisation.
  • David Pullman securitises Ron Isley catalogs 
    Added on 25th Sept., 1999 
    The father of music industry securitisation, David Pullman, has pulled Ron Isley's catalogs into his Pullman Bonds series, with over 200 songs in it.
  • DCR sees potential in Indian securitisation market; identifies problem areas 
    Added on 23nd Sept., 1999 
    Duff and Phelps Credit Rating recently released a report on securitisation market in India: a market that has a lot of potential but still constrained by several trifling problems.
  • Bank closed for securitisation accounting fraud 
    Added on 22nd Sept., 1999 
    A bank that did not remove from its balance sheets loans which had been securitised has been closed by US bank regulators.
  • First tax ruling on FASIT law 
    Added on 22nd Sept., 1999 
    This is the first-ever ruling on the US FASIT law, and it would have far reaching impact on tax treatment of investors in FASIT-based securitizations.
  • First soccer revenues securitisation 
    Added on 22nd Sept., 1999 
    In the first reported case of soccer club revenues, a UK football club sold its future ticket sales and corporate hospitality receipts.
  • Pakistan International Airlines in the first domestic future flows securitisation 
    Added on 21th Sept., 1999 
    In a remarkable development, Pakistan International Airlines has signed a Rs. 3 billion future flows securitisation with Citibank.This is reportedly a local future flows securitisation of aviation revenues.
  • First securitisation of personal credit receivables in Canada 
    Added on 21th Sept., 1999 
    Bank of Nova Scotia, Canada will use a special purpose trust to securitise its personal credit receivables in a transaction priced at $ 905 million.
  • World Bank to promote securitisation in Bangladesh 
    Added on 21th Sept., 1999 
    The World Bank on 20th Sept. announced a USD 46.9 million credit to Bangladesh for development of financial institutions in the country – this includes a proposal to promote securitisation by such institutions.
  • FASB issues technical bulletin on consolidation of SPVs 
    Added on 21th Sept., 1999 
    The US FASB has issued the draft of a Technical Bulletin to clarify situations in which consolidation of securitisation SPVs will be made with the originator. This report also gives link to the FASB site for downloading the FASB document.
  • Philippines to securitise amusement park revenues 
    Added on 20th Sept., 1999 
    The Philippines government proposes to issue asset-backed notes in the last quarter with revenues from an amusement park and a gas project under implementation.
  • Massive bank securitisation deal in Italy 
    Added on 20th Sept., 1999 
    Reports indicate that an Italian bank Banca Nazionale Del Lavoro is planning securitisation of Lira 3000 billion – this would certainly be the largest deal in Italy, and perhaps the largest single transaction in Europe.
  • Explosive growth in Japanese securitisation 
    Added on 20th Sept., 1999 
    Japanese securitisation market is witnessing explosive growth and analysts contend that the level of interest is even higher than was seen in USA in early 1990s.
  • Gain on sale accounting confounding finance companies' accounts 
    Added on 17th Sept., 1999 
    A recent article in American Banker Online claims that upfront recognition of gains on securitisation as per FASB 125 is confounding financial statements of companies that are regularly into securitisation.
  • US MBS issuance in first half '99 exceeds USD 400 billion 
    Added on 16th Sept., 1999 
    Volumes in agency mortgage-backed securities in the USA surged in first half of 1999 to over USD 400 billion, registering a 29.6% increase over comparable period in the previous year.
  • Charles Schwab to set up mutual fund to invest in asset-backed market 
    Added on 16th Sept., 1999 
    Indicating the increasing investor demand for diversified ABS portfolio, Charles Schwab, the noted US fund manager, has unveiled plans to set up a mutual fund to invest in mortgage and asset-backed securities..
  • Thailand Secondary Mortgage Corporation starts buying mortgage loans 
    Added on 16th Sept., 1999 
    The Secondary Mortgage Corporation of Thailand, modelled on the pattern of US Fannie Mae, has started acquiring mortgage loans for the purpose of securitising them.
  • Asian securitisation yet to gather pace 
    Added on 10th Sept., 1999 
    The securitisation market was completely snuffed out in the Asian crisis of 1997, and while there are strong recovery signals in equity and debt markets, securitisation is yet to emerge from the shadows where it was consigned..
  • Re-insurers in securitisation 
    Added on 10th Sept., 1999 
    A report in Financial Times recently discussed how re-insurance companies are taking increased exposures in credit risk insurance thereby helping securitisation.
  • And securitisers in re-insurance 
    Added on 10th Sept., 1999 
    Read this news with the one right above, and you see a fusion of insurance and capital markets – a recent article in Financial Timestakes a look at how securitisation is serving a notice to traditional reinsurers.
  • Italy the new mecca of securitisation 
    Added on 22nd August, 1999 
    A feature on CNN recently carried a detailed report on how securitisation is capturing tremendous interest in Italy.
  • India's apex housing finance body to try pilot mortgage securitisation 
    Added on 18th August, 1999 
    National Housing Bank, India's apex mortgage finance body, may soon come out with a pilot project of mortgage securitisation, as various taxation bottlenecks are being removed.
  • Downgrades galore in US ABS markets 
    Added on 18th August, 1999 
    The rate of downgrades in US ABS market is alarming, and there is a new trend visible – downgrades due to internal weaknesses in the portfolio.
  • US mortgage financiers taking over UK market 
    Added on 17th August, 1999 
    David Pullman, the father of intellectual property securitisation who first brought Bowie Bonds to the Wall Street considers his own IPO.
  • David Pullman to bring IPO 
    Added on 16th August, 1999 
    David Pullman, the father of intellectual property securitisation who first brought Bowie Bonds to the Wall Street considers his own IPO.
  • First ABS transaction in Poland 
    Added on 14th August, 1999 
    BRE Bank, based in Warsaw, Poland recently launched the first ABCP deal in Poland. This is also reportedly the first ABS transaction in the country.
  • Why mortgages do not attract capital in China 
    Added on 13th August, 1999 
    In sharp contrast to United States, lenders in mainland China do not love mortgage lending – this article in South China Morning Postexplores reasons which include poor mortgage foreclosure laws.
  • Hong Kong Mortgage Corporation to issue RMBS 
    Added on 10th August, 1999 
    The Fannie-Mae type body set up by the Hong Kong authorities has already begun acquiring mortgage receivables and is likely to issue RMBS in last quarter.
  • New political insurance product to boost emerging market investments 
    Added on 10th August, 1999 
    Overseas Private Investment Corporation has launched a political risk insurance which will enable emerging market corporates to substantially eliminate sovereign risk.
  • US ABS volumes rise marginally in first half of 1999 
    Added on 6th August, 1999 
    The ABS volume in USA grew about 4.5% in first half of 1999, while growth outside USA has been very impressive.
  • CMBS volumes are falling 
    Added on 6th August, 1999 
    There is a fall in volume of commercial mortgage backed securities and the total issuance is 1999 is expected to end up about 25% lower than volumes last year. 


Largest franchise finance securitisation

Franchise Finance Corporation of America priced and sold approximately $607 million of secured franchise loan asset-backed securities. The securities are backed by 996 loans originated by FFCA, all of which were held in a loan sale facility with a third party pending securitization. The loans, having an outstanding aggregate principal balance of approximately $674 million, include 929 chain store mortgage loans, 61 chain store equipment loans, and six commercial loans secured by real estate, equipment or other property related to the operation of chain store facilities.

This is the largest reported transaction in franchise loans segment.

Malaysia to scrap stamp duty on securitisation

Malaysian government presented Budget 2000 which is hailed as expansionary and growth oriented. Among a number of measures to boost capital markets, there is a proposal to encourage companies to opt for securitisation.

Securitisation involves transfer of receivables for which the instrument of assignment to be executed is currently subject to stamp duty at ad valorem rates and if the asset involves real property, real property gains tax (RPGT). Budget 2000 proposed that the instrument used in the transfer of assets be exempted from stamp duty and RPGT from October 30 1999 to December 31 2000.

For details of securitisation activity in Malaysia, see our country profile – link on the Index page.

Securitisation changing the face of retail lending in Europe

Abbey National recently decided to securitise a large chunk of its mortgage loans portfolio – see news item below. This was only an indication of the steady but sure change securitisation is bringing about in mortgage lending in Europe. A report in European Report of 27th Oct says that to keep their low-cost competitive edge, direct mortgage lenders are being impelled towards securitisation to raise their funding. Also, retail banks will be pushed in the same direction. They have traditionally raised much of their funds for retail lending by taking retail deposits. But recent entrants into the personal deposit market – particularly with the emergence of banking activities by non-bank operations with high consumer throughput, such as supermarkets – are absorbing much of the traditional banks' traditional deposit sources, forcing them to raise their interest rates to attract savers, or to seek alternative funding sources. In addition, the booming consumer credit market across much of Europe is also pushing banks to clean up their balance sheets as much as possible so they can take advantage of the boom – and securitisation offers them a way to do this.

With the advent of the Euro, the potential for securitisation has tremendously gone up in Europe – the size of the potential Pan-European market is now being estimated at 1 1/2 times that of USA.

This site has comprehensive resources on securitisation in Europe. An editorial is devoted to Europe – see the front page. See also the Index page for country profiles and a special write up on Europe. 

Lehman Re to pool and securitise risks

This is application of the mortgage-backed securitisation technique to cat bonds, and the result is a unique product that would be securitisation of a bundle of risks, not just one risk. In a ground-breaking move for the Lloyd's market, a syndicate has reinsured a substantial property catastrophe exposure with Lehman Re, based in Bermuda, for onward securitisation in the capital markets.

Due to its structure as a reinsurance company, unlike many corporate finance players involved in such deals, Lehman Re does not have to transform the risks which it underwrites into a capital market product immediately in order to pass it on to investors. Instead, it can hold risk like a conventional reinsurer and gather together a portfolio of similar risks from different cedants until sufficient scale has been achieved to warrant a securitisation. In this way, Lehman Re is using a similar concept to that which was used by US mortgage lenders in the very early to mid-1980s and British mortgage lenders in the mid- to late-1980s, when mortgage-backed securitisations first started to take off.

For references to further materials on cat bonds, see the news item exactly below this.

After cat bonds, it is now weather bonds

Some say they are in rough weather as they have not been finding investors. But it surely indicates a new development in risk securitisation technlogy that was first developed in the catastrophe risk insurance market.

Two US companies, Enron and Koch Industries are in the market with weather bonds, which pass on to the investors weather-related risks. The technlogy is the same as has been used in case of cat bonds some years ago. [See the Risk securitisation section of this website for more article and links on cat bonds. See also several news items on this page].

Enron, based in Houston, provides weather risk management services to clients such as snowmobile manufacturer, an ice-cream maker and a computer services company. Koch is based in Kansas.

Enron's Dollars 105m deal is being underwritten by Merrill Lynch. Koch Industries' USD 200 million offer is underwritten by Goldman Sachs.

Reports in Financial Times 27th Oct. indicate that both the issues have not found active investors interest, perhaps due to a complex set of instrument features, and possibly because they are in the market at almost the same time.   

 New York announces tobacco bonds

A groundbreaking deal in issue of tobacco bonds has been announced by New York to open on 3rd November. We predicted yesterday (see news item below) that with S&P rating already in place, New York may be the first to issue the bonds.

Tobacco bonds represent securitisation of the sums that major tobacco companies in the USA will pay to the governments of 46 States as a settlement of the court suits against the tobacco companies. This site contains more details of tobacco bonds – click here and here.

The issue, which would be the first of its kind, is likely to be followed shortly by Nassau County in New York state, which desperately needs the funds to plug a hole in its finances.

Pakistan Telecom securitisation downgraded

The political uncertainty has taken its toll on the only future flow deal already transacted so far by Pakistan Telecom. Duff and Phelps has downgraded the transaction from BB+ to BB with rating watch down.

The downgrade reflects the increasing financial pressures that could arise out of the current political situation in Pakistan, namely the potential loss of multilateral loan disbursements, as well as the uncertainty regarding the government's ongoing debt reschedulings.

The rating agency believes that the transaction might weather the current stress through which Pakistan is passing.

This website contains ample resources about securitisation activity in Pakistan – see Pakistan country profile on the Index page and the draft rules for securitisation on the Securitisation laws page.

Mortgage securitisation takes off in Hong Kong

The Hong Kong Mortgage Corporation has begun securitisation of mortgages. The inaugural transaction was launched on 23rd October with the Corporation buying mortgages originated by Dao Heng Bank. Under the agreement, Dao Heng will sell eligible mortgages on a back-to-back basis to the corporation, which will transfer them to a special-purpose company, the HKMC Funding Group. The company will then issue the securities to Dao Heng Bank, with a guarantee from the corporation for timely payment of principal and interest. Dao Heng can keep the securities as part of its investment portfolio or trade them with professional institutional investors.

The corporation has plans to issue USD 5 billion worth of securities collateralised on mortgage loans next year.

Click here for an earlier news about RMBS issues in Hong Kong.

Tobacco bonds rated A by S&P

The tobacco bonds that securitise the tobacco settlement proceeds payable by 4 leading tobacco companies to various US states have been rated A by Standard and Poor. 46 US states are to receive USD 205 billion in tobacco settlements.

See earlier reports on tobacco bonds – click here and here.

Nassau County in New York state and New York City are expected to be the first to issue the tobacco-backed bonds, with many of the 46 states involved in the settlement waiting in the wings. Nassau County urgently needs the funds to plug a gap in its finances, and is already said to be marketing a Dollars 275m offering to investors.

UK infrastructure owner to securitise rent income

Railtrack, owner of the UK's rail infrastructure, is studying plans to raise up to pounds 400 million by parcelling up the rents it receives from 6,000 arches in south-east England and swapping that income stream for a lump sum.

Rents from the arches traditionally used by motor mechanics, small engineers and businesses unconcerned by condensation and lack of light total around pounds 40m a year. The money raised in the form of a securitised bond would be used for improving the rail network.

Abbey National in 6.5 billion USD MBS issue

Mortgage-securitisation wave hitting UK market

Abbey National, a leading mortgage bank in the UK, is to launch a 4 billion pounds mortgage-backed securitisation issue, in a bid to free up about 10% of its balance sheet portfolio of mortgages.

The bank is planning to bring a series of MBS issues spread over the year. The bond issues will allow Abbey to free up extra capital and reduce the cost of funding mortgages. Abbey is understood to be planning to use securitisation, which is widely used in America, to allow it to offer a range of new and more competitive products, reports The Sunday Telegraph.

The trend to securitise mortgage loans is catching up fast among British housing financiers. Last month Northern Rock, the former building society turned bank, launched a £600m mortgage securitisation, giving it a new source of funding and the chance to increase its share of new lending. Woolwich has also announced a joint venture with Countrywide Credit, the American lender, to securitise mortgages. 

Barclays Bank to launch largest European credit card securitisation

British banking group Barclays Plc is set to launch a bond secured against debt owed by customers of its credit card subsidiary, based on a report in the Financial Times.

The bond issue is likely to be 1 billion pounds, or 1.66 billion USD which makes it the largest issue by a European issuer.

Market analysts feel that this is only the first of what will be a series of securitisation issues by European banks.

Fully electronic mortgage lending announced

Legal documents completed over the Net in 5 hours

eOriginal Inc. announced on 7th October the implementation of a fully electronic creation, processing, recording and closing of a mortgage transaction that takes 5 hours flat, whereas the same process in the manual mode takes 45 days and costs USD 750 per deal more.

This patented legal documentation procedure creates legally enforceable mortgage rights and completes the required public recording of documents, in a completely electronic form, via the Net. The pilot project was carried out in Florida, USA and is the first electronic creation of a mortgage document.

The pilot program envisages an Electronic Original mortgage paper. The mortgage documentation was delivered via the Internet to the consumer who signed all the traditional forms for the mortgage and conveyance of the home, but the signing was performed online–not with pen and ink. The deed and mortgage instruments were then transmitted on the Internet to the Broward County Recorder's Office where they were registered. Once recorded, the Electronic Original documents were returned to the consumer and instantly accessible on the mortgage recording  system, via the Internet, to secondary market participant GMAC-RFC. While all homebuyers elected to receive a paper copy of loan closing documents, the authoritative Electronic Original documents were stored digitally in a trusted repository.

For more about e-original's Internet-based work, click on their website – 

 New York to issue tobacco bonds in November

The New York City local body formed specially for the purpose of securitizing tobacco settlement proceeds,  Tobacco Settlement Asset Securitization Corp. , proposes to issue USD 680 million worth bonds in mid to late November this year. The agency is likely to issue circulars regarding the forthcoming offer today, that is, 8th October. The agency will hold road shows during the third week of October.

Salomon Smith Barney will serve as book-running senior manager on the agency's initial bond issue. Bear, Stearns &Co., J.P. Morgan & Co. will be co-senior managers on a rotating basis. In addition, the designated senior co-managers are Goldman, Sachs & Co., Morgan Stanley Dean Witter and PaineWebber Inc.

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

For more news on the tobacco bonds, click here.

Model Cat bonds law approved in the USA

A report on BestWire says that the National Association of Insurance Commissioners have approved, recently in Kansas City, a model law for catastrophe bonds. This law is a model law, supposed to be enacted by individual states.

The law would make it possible for US insurance companies to use securitisation SPVs to sell re-insurance contracts to the capital markets using the catastrophe bond instrument. The model law among other things also clarifies the tax issues on such bonds.

Reports indicate that the model law is similar to the one already enacted by Illinois in July.

Catastrophe insurance securitisations originate from the United States but are mostly carried through jurisdictions like Cayman Islands for tax reasons.

This site has comprehensive resources on insurance risk securitisation.Click here to visit section on insurance risk securitisation. Click here to read briefly about what are cat bonds.

Pakistan to have SPV laws by month-end

Business Recorder dated 4th October 1999 reports that Pakistan's Securities Exchange Commission (SECP) has constituted a board under the chairmanship of the head of Pakistan Credit Rating Agency to finalise securitisation rules for the country by the end of October '99.. Under these rules, it is likely that securitisation SPVs will be organised as companies under the Companies Ordinance and will issue debt securities in the nature of term finance certificates to investors. Withholding tax will also be applicable to the payments made by the SPVs. The securities issued by the SPVs will be allowed to be listed on recognised stock exchanges.

Analysts see a Rs. 16 billion potential in securitisation business in the country, taking care of receivables of modarbas, leasing companies, credit cards, housing finance etc. Obviously, the volume does not take into account the tremendous potential in bank securitisation and future flows securitisation.

More on securitisation in Pakistan: Draft rules earlier framed by the SEC Pakistan are on our securitisation laws section  – click here to visit. See also our country profile on securitisation in Paksitan – click here. News about Pakistan International airlines securitising its receivables was flashed on this site – click here

Securitisation of air !

Exchanges trading in securitised "rights to pollute"

About a couple of years ago, a journalist said – Wall Street can securitise anything! He did not mean air, but it is a fact that clean air and environment are being securitised and traded on commodities exchanges.

The concept goes something like this -the State or a private initiative makes investments in forests. The investment is funded by issuing emission credits or sequestration credits in form of units or securities. Typically, one credit certificate allows the holder to pollute the environment equal to 1 ton of carbon dioxide. These credits are bought by highly polluting industries. Therefore, the more the required emission by an industry, the more the number of certificates it exhausts. The purchase of credits or creation of credits by investing in forests is the creation of a "pollution asset" or the right to pollute, and the actual emission of gases into air is the consumption of the credits. Hence, there is placed in the market a security representing clean air, used by leaving unclean air.

Recently, the Sydney Futures Exchange announced plans to allow trading of such certificates. Already, trading in these certificates is on on the Chicago Board of Trade.

A few years ago, Costa Rica, by agreeing to protect a portion of its rainforest from logging, issued certificates that bestow the right to pollute.

So, in some time, clean air will be a product to be traded in, hoarded and speculated!

Italian bank to securitise its non-performing loans

Earlier on this page, we have reported fervent activity in securitization taking place in Italy. The Italian newspaper IL SOLE 24 ORE reports that Italfondiario SpA, the Italian bank that deals with credit and leasing, is to securitise all of its non-performing credits, worth around L2,500bn, with the assistance of Greenwich Natwest Ltd.

More on securitisation of non-performing assets in Italy  – On our Italian securitisation page, new inputs have been added dealing specifically with securitisation of non-performing assets in Italy. 
Click here to visit.

Mexican company defaults on future flow securitization in a first noted case of default

No securitization structure is iron-clad, and investors must appreciate the risks, particularly the legal fragility of the structure, before exposing themselves.

This is a loud and clear signal from the recent case of default on a securitization of future flows. Ahmsa, a Mexican steel company had securitised future export receivables in a transaction worth USD 300 million. The company recently defaulted on the deal. This was an unrated securitisation transaction.

Generally speaking, in asset-backed securitization, investors would not be concerned with the default or distress of the originator – however, not so in case of future flow securitization. In future flows deal, investors are exposed to risk of performace of the originator, as also possible action, deliberate or forced, in diverting the exports to an entity which has not affirmed the deal. Typically, in export receivables securitization, the originator assigns future revenue from export proceeds from importers. The importers abroad sign an acknowledgment of the assignment thus binding them to pay to the overseas collection account. If the exporter diverts the exports to other importers, who have not given any such acknowledgement, legally they cannot be bound to pay into the collection account as the assignment of a future flow takes place only prospectively and does not create rights of the investors against the obligors.

The irony is that in such a situation, the investors may not even have a fall-back option against the originator's assets.

The above case of default is the first reported instance of a future flow securitization deal going bust, and may be it is only such difficult situations that the legal strength of such transactions can be tested.

Oligations fonciers developing in France

Recent legislation responsible for the development

Obligations fonciers (OFs) are French mortgage-backed securities. These on-balance sheet debt securities are essentially mortgage-backed bonds, with the important feature that the bondholders have a issuer-bankruptcy-protected right to the mortgages. OFs are issued by Societé de Crédit Foncier (SCF), a specialised lending institution. SCFs have a restricted sphere of operation to acquiring and granting of mortgage loans only. OFs are essential debt securities and they appear on the books of the SCF, unlike the US mortgage pass throughs. In this sense, OFs are similar to German pfandbriefes.

The legal framework for SCFs and OFs is set out in Law 99-532 of June 25, 1999 relating to savings and financial security, published in the Journal Officiel on June 29.

The quality of the loans originated by SCFs is tightly regulated by law: for example the loans have to be secured by first mortgage on real estate, with a certain minimum loan-to-value ratio. Regulations are also in place to control the asset liability mismatches, reporting, real esatate valuation, etc.

SCF under law is a separate entity, distinct from its owner or manager. The law provides a protection that the bankruptcy of the owner of the SCF cannot lead to the bankruptcy or liquidation of the SCF. Upon the bankruptcy of the manager of the SCF, the management contract can be assigned to another manager. The bondholders are priority creditors and other creditors have a suboridinated claim over the assets of the SCF.

The supervision of SCF is primarily with the bank supervisory body, Commission Bancaire.

Two issues of OFs are notable in France: Crédit Foncier de France and Crédit Foncier et Communal d'Alsace et de Lorraine.

For more on securitization in France, refer to the country profile on our Index page – click here to visit.

CIBC named best securitisation bank in Asia

Global Finance has named CIBC World Markets the "Best Bank in Securitization in Asia". The award was made to David Bonsall, Head of International Securitization on behalf of the firm at a ceremony held today at the IMF/World Bank meeting in Washington. Global Finance canvassed its readers and did extensive research among major users of banking services and analysts who follow the banking sector in order to select CIBC.

CIBC set up its Singapore office in 1998 and currently has over 100 professionals looking after securitisation.

Securitisation of exchange risks holds potential: Peter Drucker

Visionary guru laments lack of innovation in financial services

The noted management guru Peter Drucker has written an article in The Economist [25th Sept., 1999]  where he feels there is tremendous potential for someone assimilating exchange rate risks and securitising the same.

Innovate or die, says Drucker, who is going to celebrate his 90th birthday this November. The guru of what he calls "creative self-destruction" ( a modification of the famous phrase coined by Schumpeter)  laments the fact that over past 30 years in the financial services industry, there has been no major innovation except the euro-dollar and the euro-bond, which were essentially forced by regulation. Credit card was the third major innvoation of our times. Drucker, however, does not regard derivatives as any sustainable innovation, since these are "not designed to provide a service to customers. They are designed to make the trader’s speculations more profitable and at the same time less risky—surely a violation of the basic laws of risk and unlikely to work. In fact, they are unlikely to work better than the inveterate gambler’s equally "scientific" systems for beating the odds at Monte Carlo or Las Vegas—as a good many traders have already found out."

Talking of the opportunities for innovation, the visionary management thinker gives examples of 3 possible areas of innovation: 2 out of the three involve securitisation.

Drucker sees potential in outsourcing the financial management of medium sized enterprises. These enterprises form the backbone of most economies, and it is common today for most of them to outsource their EDP, housekeeping, routine personnel management, etc. "How long will it be before they are ready to outsource the management of the money in their business?", asks Drucker.

There lies an opportunity: "The rewards for building a firm providing these medium-sized businesses with financial management might be enormous—not only from fees but also through substantial profits from "securitising" the financial needs of the clients, ie, converting them into investment products that should be particularly attractive to the ageing middle-class "retail" investor."

The other opportunity lies in assimilating catastrophic exchange risks and securitising them: devising "financial instruments that protect a business against catastrophic foreign—exchange losses by converting currency risks into an ordinary cost of doing business, with an affordable and fixed premium, maybe no more than 3-5% of a firm’s currency exposure." A firm that provides such catastrophe risk protection "would also be able to "securitise" its portfolio and thereby create attractive investments for the new financial retail market."

For full text of the article, go to The Economist website: click here.

Yet another bank goes bust: securitisation accounting lapse cited as reason

We had recently carried, on this site (click here), news of a bank forced to close by regulators due to a faulty securitisation accounting practice. We had also carried extracts from an article that US banks are not as healthy as they look, as they have securitised their prize assets and are possibly sitting on inferior quality assets. A similar concern was expressed in case of finance companies.

Here is yet another case of bank going bust: First National Bank of Keystone. In this failure that is going to cost the government upto USD 800 million, the FDIC blamed the unusually high losses on the disappearance of $512 million of loans that bank officials had counted as assets, and on the bank's inflated estimate of the value of its residual interest in loans it securitized and sold. 

What is residuary interest in loans sold?: In most CLO/ CBO structures (see our section on CBOs/CLOs – click here), the originating bank issues bonds collateralised on the loan portfolio that it transfers, but retains residuary interest in the portfolio, essentially a subordinated, equity-type interest. The size of the retained residuary interest depends upon the level of rating for the senior notes. According to accounting standards, the bank is supposed to retain on its books the fair value of the retained interest, and remove the rest of the loan portfolio. As the valuation is subjective, it is likely that a bank may place unfair values to the retained interest. 

Recommendations from BIS, still under consultative state, suggest that if the retained interest is either unrated or rated below B+, it should be completely deducted from the bank's capital. This, however, is regulatory accounting and may not be followed in the general financial statements of the bank.


CRIIMI MAE applies for reorganisation

CRIIMI MAE, the US commerical mortgage securitisation company that applied for protection under Chapter 11 of Bankruptcy Code last October has now applied for re-organisation.The Plan contemplates recapitalization financing of approximately $910 million consisting of $50 million  of a new series of convertible preferred stock to be purchased by an affiliate of Apollo Real Estate Advisors IV, approximately $435 million of debt financing, a portion of which would come from certain existing debtholders, and $425 million of additional amounts, the bulk of which would result from the sale of certain commercial mortgage-backed securities (CMBS).

Before applying for protection against potential bankruptcy, the company was engaged in acquisition and securitisation of commercial mortgages. Named after US govt.-backed residential mortgage securitisation agencies (Ginnie Mae and Fannie Mae), the company ran into problems due to bad assets.

This website has a separate section devoted to CMBS: click here.

 David Pullman securitises Ron Isley catalogue

David Pullman, the father of securitisation in entertainment industry, announced on 24th Sept. the signing of Ron Isley and his Isley Brothers catalog. Isley joins the band of music-securitised bonds created by Pullman: others who have signed by Pullman before include David Bowie, Holland Dozier Holland, Ashford & Simpson and James Brown.

David Pullman created sensation in capital markets when he introduced, for the first time, bonds backed by music royalties. David Bowie was his first case in 1997. Since then, Pullman did not have to look back. In 1999, he claims to have finalised deals worth USD 1 billion.

This website contains a special section on intellectual property securitisation: click here. 

DCR comments on Indian securitisation potential

Duff and Phelps Credit Rating (DCR) issued on Sept. 22 a report on securitisation in India. The following is largely an extract from DCR press release. Please see Vinod Kothari's comments below.

India's securitization market is in a nascent stage, exhibiting only elements of established securitizations, according to DCR. To date, all completed transactions have utilized onshore assets and distributed into the domestic market; no international capital markets securitization has yet come to fruition.

The regulatory constraints, as well as overall sluggish Indian international-capital-markets issuance over the last two to three years, have been a barrier to the growth of cross-border securitization in India. The Reserve Bank of India (RBI) has strict rules for companies that would like to borrow from abroad, and the lack of a well-developed swap market prevents the long-dated swaps necessary for certain cross-border transactions.

The relaxation of regulatory guidelines and a focus by issuers to explore securitization financing alternatives–once they realize its benefits — should provide a boost to cross-border securitizations. This is in light of the fact that although cross-border securitization is possible within the current ambit of the legal environment, the existing regulations restrict the universe of companies that can securitize.

Though still in a developmental stage, DCR believes international securitization in India holds potential. "India's credit rating is not investment-grade, but the same structures used in Latin America (i.e., future-flow transactions, preferred-creditor transactions and political risk insured transactions) could pave the way for Indian issuers to achieve investment-grade ratings," said Gregory J. Kabance, a DCR vice president.

There have been several completed domestic securitizations in the Indian market, but these structures do not incorporate all the characteristics a typical securitization structure used in developed markets. A large proportion of domestic transactions involves the direct sale of receivables to a single buyer. This variant of traditional securitization structure is utilized, as the traditional route of forming a special-purpose vehicle (SPV) and issue of securities is yet to be widely recognized in India due to regulatory and tax constraints.

The market is dominated by consumer finance securitization — particularly auto loan receivables. Infrastructure receivables such as electricity and tolls are also being increasingly securitized. Mortgage-backed securitization, though holding vast potential, has yet to gain a firm foothold in Indian markets due to regulatory difficulties such as inadequate foreclosure norms and high stamp duty on immovable assets.

Though it is possible to achieve a true-sale structure, most transactions remain linked to the credit quality of the originator. This linkage stems from issues including the lack of backup servicers and the co-mingling risk inherent in these structures. This reliance on the originator could cause potential problems in the event of an originator's bankruptcy. Therefore, transactions should be done with only creditworthy originators. This dependence on the originator could limit the depth of the market as the benefits of securitization cannot be realized by all potential originators.

While there remains certain legal and regulatory constraints, the market should be a securitization-friendly environment. The Indian legal system is based on a common law system primarily derived from English law, and is more securitization-friendly than civil law countries. The issue of true sale and bankruptcy remoteness is well accepted by Indian laws. Due to the growing interest in securitization, the regulatory authorities are drafting guidelines that should reduce some of the existing hurdles that prohibit the full development of the product. Included in the outstanding issues that should be addressed are:

The difficulties and uncertainty regarding the registration of charge on the underlying assets; Further clarification on the legal nature of the SPV; Uncertainty surrounding the SPV's ability to act as a receiving and paying agent and its ability to file legal suits in certain circumstances; and Foreclosure of mortgage-backed loans remains difficult and thesecurity of the underlying asset is not available for practical purposes.

In addition to these legal issues, there are certain tax issues as well as the lack of accounting standards that properly address the treatment of securitization. DCR notes that certain Indian states have reduced stamp duty on securitization transactions. However, to facilitate greater participation, the initiative should be extended to other states as well. In regard to international issuance, the hurdles are more on the economic side and, with the lack of a developed swap market, dollar-funded existing asset transactions will be a challenge. Rather than the traditional asset-backed transaction, the market is more conducive to future flow transactions, preferred-creditor transactions, and political risk guaranteed transactions. Each of these transactions can allow the originator to achieve investment-grade ratings that could be a way for these companies to access long-term low cost funding.

The depth of the future-flow market is limited because these transactions rely on the generation of offshore receivables and are dependent on the originator's performance risk. There are not that many companies with turnover that is large enough for these transactions. For some of these companies with the requisite size, the performance risk could be an issue.

But for certain strong Indian corporates with large exports, future flow can be a very attractive financing option. From a legal perspective, DCR has performed initial reviews of some cross-border future-flow transactions and believes structuring should be achievable with the Indian legal framework.

Vinod Kothari comments:

True, Indian securitisation market is still nascent but tremendous interest is being shown in various parts of the country. The only SPV structure has been 1997 Citibank's securitisation of auto loans. Privately, there have been number of deals but most of them border on secured lending. The State electricity monopolies are soon likely to securitise their revenues.

Mortgage foreclosure laws in India are essentially the same as in common law countries, but enforcement is a great hassle. However, inspite of these snags, there have been rare instances where housing financiers have had to legally foreclose a mortgage: moral persuasion is found to be a better way. What stifles mortgage securitisation in India is the fact that there are limited mortgage financiers existing today, the Govt.-sponsored housing finance body National Housing Bank prefers to see itself as a financier rather than facilitator of securitisation.

As a common law country, the legal framework is generally supportive and there are no serious tax or legal issues that should hamper securitisations. Future flows documentation should be very careful to prevent the investors from being eventually worse than even a secured lender.

Bank closed for alleged securitisation accounting fraud

First National Bank of Keystone, West Virginia was closed by US bank regulators after finding evidence of an apparent fraud that had depleted the bank's capital.

The Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency took the action after finding $515 million in loans still being carried on the bank's books that should have been removed after they were securitized and sold.

First tax ruling on FASIT investor tax treatment

District court contrasts FASIT with a mutual fund

A US District Court has contrasted a Financial Asset Securitization Investment Trust (FASIT) with a mutual fund and has framed principles that would affect the tax treatment of a FASIT investor. The case is significant as this is the first ever ruling on tax treatment of securitisation investors in FASITs. 

What is a FASIT

A FASIT is essentially a securitisation SPV under the US Financial Assets Securitization Investment Trust law. The law is basically certain sections in the Inland Revenue Code (sections 860H onwards) The law was enacted to create tax transparent entities for non-mortgage securitizations, similar to real estate investment trusts (REITs).

In Community Trust Bancorp, Inc. v. U.S., Civ. Act. No. 98-249, (US DC ED Ky. 1999), the Kentucky Court considered whether a bank which invested in mutual fund scrips could claim the loss on sale thereof as a business loss rather than capital loss. The bank's contention was that the mutual fund in turn had invested in debt securities, and the mutual fund was nothing but a collection of various investors: therefore, the nature of the loss suffered by the mutual fund would determine the loss suffered by the fund investors.

Disallowing the bank's claim, the Court contrasted a mutual fund from a FASIT: the court held that the two were distinct as that is the reason why the Congress created a separate law for FASITs while the regulated investment company law (for mutual funds) already existed. By implication, this means that in case of FASITs, the tax treatment would be applied to investors based on the nature of their own activity. A FASIT for tax purposes would be taken as a mere conduit: therefore, the loss suffered on FASIT securities by a bank or an investment company would be a trading loss while a corporate would take it as a capital loss.

UK soccer club securitises revenues:

First securitisation of its kind

You have read about securitisation of revenues from songs to be sung, or races to be run: the ever-increasing application of securitisation now reaches the sports arena. A UK soccer club is arguably the first to securitise its future ticket sales.

According to a report in Financial Times London, dated 21st September '99, Newcastle United has become the first club in football to securitise its commercial revenue streams by issuing a £55m bond that will be backed by income from future ticket sales and corporate hospitality receipts.

The financing will help pay for the reconstruction of the club's St James Park stadium, which is already under way. Previously funded by a £40m bank loan, the development will increase the stadium's seating capacity from 38,000 to 51,000 by next August.

Note that Formula -1 was among the first cases of securitisation of receivables in the sports area. However, sports businesses are regarded as promising vehicles for securitisation issues because their revenues from TV rights and sponsorship deals tend to be secured by long-term deals. Ticket sales are also seen as a dependable source of income.

The 17-year Newcastle United bond has a weighted average fixed interest rate of 7.43 per cent and is repayable in annual instalments of £6m – initially representing £4m of interest and £2m of capital – between 2001-2016.


Pakistan International Airlines signs first domestic future flows deal

[This report was contributed by Dr Tariqullah Khan from Saudi Arabia]

According to a report in Business Recorder, Pakistan International Airlines on Monday 20th September signed with Citibank Pakistan for a Rs. 3 billion future flows securitisation deal. This is the first local current future sales receivables securitisation in Pakistan and banking circles believe that such structured finance facilities will go a long way in developing securitisation and 
factoring in Pakistan.

The United Bank is the lead manager and Muslim Commercial Bank and Citibank are the co-lead managers. Other participants include ANZ Grindlays Bank, Askari Commercial Bank, Bank Al-Falah, Saudi Pak Investment Company, Pakistan Kuwait Investment Corporation and Mashreq Bank.   

More on securitisation in Pakistan  
This website has rich resources about securitisation in Pakistan: 

For a profile of the transactions done, etc., see country profile of Pakistan on the Index page. For the securitisation rules of SEC, Pakistan, click our securitisation laws page

The facility is structured so that all ticket and cargo sales of PIA in Karachi and Lahore, for a three-year period, will be assigned and routed through a collection account with the agent bank of the syndicate.

Vinod Kothari  comments: 
The deal is remarkable from many viewpoints:

  • Pakistan is quite a novice in securitisation market: the only reported transaction so far is the international future flows securitisation by Pakistan Telecom.
  • It is only in June this year that SEC, Pakistan announced draft securitisation rules. Securitisation activity is yet to gather pace in Pakistan: in this backdrop, a future flows securitisation is an outstanding achievement.
  • Domestic future flows securitisation itself is a rarity. International flows are securitised using a trapping mechanism in a foreign country. But in  a local transaction, it is the laws of the country that will matter. Given the fact that Pakistan is a common law country, assignability of a future flow itself is a serious legal issue, and it would be interesting to know how the local lawyers have viewed the transaction. But then, chalti kaa naam gari (what is a car? – well, what runs is a car), as they say.

First securitisation of personal credit receivables in Canada

Bank of Nova Scotia will be issuing $ 905 million worth notes to securitise its receivables from personal credit loans. According to a report in Financial Post, Canada, the Bank will use Hollis Receivables Term Trust, a special purpose trust created to securitize portfolios for this purpose.

The issue was a public offer and was led by ScotiaMcLeod.

From the bank's perspective, the financing helps it achieve some of its securitization goals of facilitating greater access to funding and liquidity; of optimizing its capital structure and of being pro-active about the management of its balance sheet. 

 World Bank gives credit to promote securitisation in Bangladesh

The World Bank on 20th September announced USD 46.9 million credit for Bangladesh for development of financial institutions in the country. Called the a Financial Institutions Development Project, the credit aims at improving financial intermediation in banks, non-bank financial institutions, and capital markets in general.

The Facility granted by the World Bank will also support issuance of bonds and securitised instruments by the banks and financial institutions participating in the scheme. The government has also agreed, as a preliminary requirement, to create a suitable regulatory framework for regulation of financial institutions in the country.

The facility will seek to encourage financial institutions to stand on their own by either a direct debt issue or by securitisation, but provide a standby support till the market is able to accept the securitised instruments. Total project costs are US$57.69 million. The US$46.9 million equivalent credit is provided by the International Development Association (IDA), the World Bank's concessionary lending arm, on standard IDA terms with 40 years to maturity and a 10 year grace period. The Government of Bangladesh will contribute US$5.41 million. Financial Intermediaries will also contribute US$5.08 million to the project costs. Assistance has also been provided by the International Monetary Fund for the development of the government bond market that will have a positive impact on the project.

FASB issues bulletin on consolidation of securitisation SPVs

[I have been a little in catching up with this news, but it is important. ]

The US Financial Accounting Standards Board (FASB) the draft of a Technical Bulletin no 99-a on Classification and Measurement of Financial Assets Securitized Using a Special-Purpose Entity.

Issued on August 11, 1999, the FASB has invited comments on the draft Bulletin. The last date for comments is September 25, 1999.

Essentially the draft deals with situations in which transfers of securitised assets to SPVs will be treated as transfers, or will retain their original character. The bulletin talks of 4 situations with various parameters.

Full text of the proposed bulletin is available for download upto 25th Sept – click here for download.

Philippines proposes to ses to securitise amusement park revenues

Securitisation is gathering lot of interest in Philippines. The government of Phiippines itself has evinced interest in using securitisation to partly cover its budgetary shortfall. The government proposes to issue asset-backed securities in the fourth quarter to raise up to USD 500tfall. The government proposes to issue asset-backed securities in the fourth quarter to raise up to USD 500 million, reports  Inquirer daily, quoting Finance Secretary Edgardo Espiritu.

Among the options being looked at are the future earnings of the Philippine Amusement and Gaming Corp and potential revenues from the Malampaya natural gas project, which the government is implementing in partnership with the Shell Group.

Massive bank securitisation transaction in Italy

Banca Nazionale Del Lavoro proposes the largest ever issue in Italy

We had commented sometime back on this page that Italy is fast emerging as the mecca of European securitisation (see here) . The recent spate of transactions and the levels of interest in Italy reaffirm the statement.

According a report in Corriere della Sera 17 Sept., 1999, the Italian banking group Banca Nazionale Del Lavoro SpA (Bnl) is looking to perform a massive securitisation operation for a value of around L3,000bn. This would understandably be the largest securitisation issue in Italy and arguably the largest single issuance in Europe.

It is notable that Italy had passed an enabling law on securitisation in April this year, and since then, there has been tremendous interest in securitisation both among bank as well as non-bank issuers.

This website has comprehensive resources about Italian securitisation. For a country profile on Italy, click here. For text of Italian securitisation law, click here. For several news items on Italian securitisation, browse the present page and the previous securitisation page.

Do you know more about the above transaction, or about securitisation in Italy? Your contributions will be appreciated: click here to send an e-mail.

Explosive growth in Japanese securitisation

Analysts compare the rate of growth with US early 1990s

The Japanese securitisation market is growing at an amazing pace. Though Japan was a late starter, the present levels of interest have even belittled the US growth rates in the early 1990s. The Ministry of International Trade and Industry (MITI) has put annual issuance during financial year 1998-99 at USD 15.5 billion which is still a fraction of the US annual volumes, but given the fact that the Japanese volumes have grown at the rate of over 80%, all eyes are drawn to the Japanese market.

The burgeoning market for asset-backed securities is a sign of the times in Japan: With bank lending on the decline, companies and financial institutions are starting to explore ways to wean themselves from reliance on bank credit. Those firms are turning to the asset-backed market for their capital lifeblood.

Among those who are particularly interested in securitisation in Japan are the Japanese banks. These banks' needs for regulatory capital relief and corporates' needs for non-bank liquidity have led to record issuance of securitized transactions in the Japanese capital market. First-time issuers and new asset classes are emerging as issuers and arrangers innovate.

This rapid development can primarily be attributed to regulatory support, the urgent need for financial institutions to meet capital guidelines, and companies’ demand for alternative source of funds.

Gain-on-sale accounting on securitisation making finance companies' accounts unreadable

Article comes down heavily on FASB 125

A recent article in American Banker Online [16th Sept., 1999] has come down heavily on the gains-on-sale accounting for securitisation transactions by finance companies. Lawrence M. Benveniste, the author, says: "After a series of missteps and failures by several specialty finance companies that depended on asset-backed securitization as their primary funding source and "gain-on-sale" accounting, the equity markets have become wary of the quality of earnings reported by these companies". The author seemingly agrees to some analysts who favour the view of "forcing all finance companies to account for profit on a "flow" or "portfolio" basis (and perhaps even stop funding their business via securitization)" as this  is the only way to accurately represent earnings and restore investor confidence.  

What is gain-on-sale accounting:  
The accounting method talked about in this article is the one prescribed by FASB 125 on securitisations: accourding to FASB 125, if certain conditions are fulfilled, a securitisation of assets should result into removal of the assets from the balance sheet and recognition of upfront gain/loss on the transfer of assets. The conditions have to do with whether the originator has retained any significant control on the assets, and whether the transfer is to a qualifying SPV. 

The other accounting standard relevant to securitisation is IAS 32/39 which adopts retention of risks/rewards approach. FASB is considered to be more liberal in allowing originators to book upfront gains as compared to IAS.


The author claims that securitizers that apply gain-on-sale accounting have the power to fool the markets (and themselves) by booking illusory profits based on error-plagued and unrealistic assumptions and projections about future losses and prepayments. But, as we have seen recently in the specialty finance industry, investors can quickly identify and punish these companies. When their investors withheld capital, several of these companies failed and are no longer in business.

US MBS issuance exceeds USD 400 billion in first half 1999

While the asset-backed securities market remained dull, there was a surge in volumes for agency-backed mortgage backed securities. The first half of 1999 data recorded an issue of USD 420.3 billion, marking an increase of over 29% over the comparable period in the 1998. The total volume for 1998 was USD 726.9 billion: the second half of 1999 may not see a very impressive business due to Y2K concerns, but there is a good potential to cross the issuance levels of 1998.

Data published in a research paper of the Bond Market Association state that all the three agencies, Fannie Mae, Ginnie Mae and Freddie Mac registered double digit gains in their issuance levels. Fannie Mae led the way, with $185.0 billion in issuance in the first half of the year, a 30.2% increase over the $142.1 billion sold in the year-ago period. Issuance by Freddie Mac rose 34.4%, to $152.2 billion, as compared to the $113.2 billion issued in the same period last year. Ginnie Mae reported a 20.7% increase over year-earlier levels, with issuance totaling $83.1 billion in the first half of this year, up from the $68.8 billion sold in the first half of 1998.

Another interesting side of the story is the secondary market activity. Trading in mortgage-related securities remained vibrant in the first half of this year, with daily trading volume averaging $73.7 billion in the period, a 9.9% increase over the $67.1 billion average reported for the first half of last year.

Charles Schwab setting up mutual fund to invest in asset-backed instruments

Charles Schwab and Co. proposes to introduce on Oct 1, 1999 a mutual fund that will in part invest in asset-backed and mortgage backed investments. Schwab, managing a USD 66.8 billion of funds, targets initially raising a corpus of USD 100 million for asset-backed investments for this mutual fund.

The YieldPlus fund is a step away from Schwab’s usual money-market funds, dealing with slightly larger risks and more diversity. Until now, Schwab’s investment strategists have shied away from asset-backeds outside the commercial-paper market, and have focused primarily on commercial mortgage-backed securities. Asset-backed securities are riskier than money market instruments, but investors do not perceive them as equal risk since the average life in small maturity instruments is one year or less.

Thailand Secondary Mortage Corporation starts buying mortgage loans

The Secondary Mortgage Corporation (SMC) of Thailand has started buying mortgage loans with the intent of securitising them. SMC expects strong interest among local financial institutions in its four-billion-baht securitisation deal to purchase mortgage loans. The scheme is part of the August 10 economic stimulus package of the government.

The sale of the mortgage loans by the loan originators, mainly banks and financial companies, will be a swap against government bonds. Thus, on one hand, SMC does not have to shell off any cash for the loans, on the other hand, the selling institutions get a long term government paper which helps them to take care of their maturity mismatches as well as capital adequacy requirements.

The loans to bonds swap scheme is an innovative exercise as it frees up regulatory capital for the selling institutions, and at the same time does not allow the selling institution any freed liquidity to be used at its discretion.

SMC, modelled on the US Fannie Mae pattern, will be shortly going for securitisation of the loans thus acquired.

Securitisation in Asia still feeble

The securitisation market was snuffed out completely in the SE Asian crisis of  1997 and while there are strong recovery signals in equity and debt markets, securitisation is yet to come out of the shadows where it was consigned. During the haydays of Asian boom, investment banks, institutions and law firms had sent securitisation experts to settle in Hong Kong: they have now been relocated to Japan or simply called back, says a report in Financial Times August 31.

Apart from a smattering of deals, mainly in Hong Kong, all the recent Asian issuance has come from Japan. The problem with Asian countries is the complexity of local laws – unlike Europe, or say, even Latin America,  most of the governments are yet to take any positive measures to promote securitisation by legislative action.

The development has been feeble inspite of the fact that the crisis was the surest proof of securitisation ring fencing. Transactions in Thailand and Indonesia have survived the crisis. Analytics quoted in the report look at China as the next most important securitisation stop for Asia, after Japan.

For more about securitisation in Asia, see our country profile – click on the Index page where you find country links. 

Re-insurers in securitisation

Credit risk reinsurance is a big business and these companies guarantee repayments on secuiritisation structures, particularly in case of banks CLO/ CBOs. A report in Financial Times Sept. 3, 1999 says that the turmoil in capital markets last year as a result of the continuing Asian crisis, Russia's default and the collapse of Long Term Capital Management's hedge fund led to a higher risk premium in bond markets – and a new role for reinsurers.

With conditions in the casualty insurance market remaining soft, re-insurers are likely to look at credit risk insurance. This is so inspite of the fact that most insurance companies know very little about credit markets.

And securitisers in re-insurance

Read this news item with the one directly above, and you see the strange way securitisation and re-insurance markets are making roads into one another. While insurance is providing a credit support to securitisation, securitisation is placing the reinsurance product in the capital market.

A recent article in the Financial Times Sept. 3, 1999 noted this trend when it said: "Reinsurers are waking up to the fact that far from being just one of the latest industry buzzwords, securitisation of insurance risk is here to stay. When, in April this year, the owners of Tokyo Disneyland bypassed the traditional insurance and reinsurance markets and sought earthquake protection in the form of catastrophe bonds, reinsurers were served another warning that insurance securitisation is a form of risk transfer that simply cannot be ignored."

Right as of now, casualty re-insurance rates are going soft and there is little incentive for reinsurance companies or other users to look at insurance securitisation, but most reinsurance companies are looking at the securitisation option in some way or the other.

Securitisation may not replace traditional reinsurance, but it is certainly a force to reckon with. Most of the risks securitised so far have been catastrophe risks, but motor risk, life insurance risk, and credit risk have also been taken to the capital markets.

On this website, a number of news stories on insurance risk securitisation have been carried. Also see our insurance risk securitisation page  – click here.

Italy the new mecca of securitisation

New law heightens interest, says CNN feature

Securitisation has been the money spinner of 1990s everywhere in the world, except Italy. But it is only after the new law was passed [see our Securitisation law page – click here] that Italy has joined the bandwagon. In fact, a feature on CNN August 20, 1999 described Italy as the new mecca of securitisation activity.

The potential is enormous: raising cash on the back of anything from sports stadium receipts, rock stars' royalties or pub rents to film revenues, mortgages and catastrophe insurance — anywhere where there's a flow of money.

But the most exciting prospect for Italy right now is the simple securitisation of loans — giving banks with some of the highest non-performing debt in Europe the chance to clean up balance sheets at a critical time for sector consolidation.

Until now, a lack of legal framework for securitisation has seen Italy lag its euro-zone fellows. As a result, while the U.S. and Britain have been churning out deals since the 1980s, the first Italian bank securitisation came less than two years ago.

But a tax-friendly law passed in May gives issuers a new blueprint to work from. [See securitisation laws page] Now, a bank contemplating a loan securitisation can simply park a portfolio of loans in a new Italian company which then issues asset-backed securities.

Previously, the bank would have had to patch together its own complicated ad hoc rules which would have involved setting up a new company abroad and provided no tax perks.

The Italian government has valued the potential market at some 100 billion euros ($105.4 billion) and banks are already diving in.

Among non-bank issuers, the Italian government is leading the pack. [This news was featured on this website – click hereIn what is expected to be one of Europe's largest operations, Italy is planning to securitise delinquent social security receivables to help cut its mammoth deficit. In its 1999 budget, Italy promised to raise 5.3 trillion lire ($2.9 billion) from securitising outstanding pension contributions belonging to state pensions body INPS.

INPS had around 54 trillion lire of outstanding pensions contributions in 1998 and the Treasury expects to eventually recover 20 trillion of that.

For more on securitisation in Italy, refer to our country profile – click here.

For more news items on Italian securtisation, refer to our past securitisation news page – click here.

India's housing finance body plans mortgage securitisation

Stamp duty hurdles being cleared in most states

National Housing Bank (NHB), India's apex housing finance institution, plans to create a secondary market in mortgages by issuing mortgage backed bonds or pass through certificates. This will be the first mortgage backed securitisation in India.

NHB will buy mortgage loans originated by individual housing finance bodies, pool them and issue the securities. A team at the instance of NHB visited Fannie Mae, USA and other securitisers there to study their systems. However, it is stamp duties and legal hurdles back home that is holding NHB from coming out with the pilot project. Stamp duties apart, there are certain clarifications that NHB wants from tax authorities as well. This concerns the continuing eligibility of a housing finance customer to claim tax benefit for repayment of a housing loan, as post-securitisation, the loan gets transferred to an SPV which may not be an eligible housing finance body.

Stamp duties on securitisation in several states has been reduced to 0.1%.

Rate of downgrades in US ABS market increasing

Far more downgrades than upgrades

There has been an alarming rate of downgrades in US ABS market, according to a report by Moody's. Between August 1, 1998 and June 30, 1999, there have been 137 downgrades and 81 upgrades of asset-backed securities, according to the rating agency.

Of the 137 ABS downgrades, 69 were the result of poor asset performance. Downgrading of ABS due to weak asset performance continues a trend that began in 1997.

In the period surveyed, credit enhancer downgrades remained a significant factor, resulting in 57 of the 137 ABS downgrades.

Since the market's inception in 1986, there have been 234 upgrades affecting $14 billion in ABS and 311 downgrades covering $42 billion, according to Moody's.

US mortgage financiers capture UK markets

Technology and experience help the US firms

US companies such as Countrywise and HomeSide have made forays into the UK mortgage finance market and given their tremendous back office skills, technology and experience, they are likely to capture the UK mortgage market. A recent report in American Banker Online says that " U.S. lenders view the United Kingdom today in much the same way Britain once viewed its colonies — as a market for more civilized procedures and technology."

The entry of US majors has triggered competition in UK markets bringing down rates. At the same time, the US firms have started something that they practice widely back home, that is, subprime lending.

David Pullman considering IPO

The father of Bowie bonds eyes New York SE

DAVID Pullman, the Wall Street financier who brought the world "Bowie bonds", is planning to bring part of his star-studded business empire to the New York Stock Exchange, says a report in Financial Times, UK.

The 37-year-old millionaire caused a sensation two years ago by raising $55m by issuing bonds secured upon Bowie's future royalties. He has since secured similar deals for the Godfather of Soul James Brown, Motown songwriters Holland-Dozier-Holland and rhythm and blues duo Ashford & Simpson.

Mr Pullman says he has future deals lined up to securitise West End and Broadway shows and TV, films and literary assets.

He is also confident of further music deals, and says he has established good contacts with legendary names ranging from Michael Jackson to the Rolling Stones.

For more on intellectual property securitisation, click here.


First ABCP offer in Poland

BRE Bank launches the first issue

On 13th July 1999 Urtica Finanse S.A. launched via BRE BANK S.A. first issue of Asset – backed Commercial Papers under The PLN 50 Mio trade receivables securitisation programme.

URTICA Finanse SA is a bankruptcy-remote Special Purpose Company (SPC) established only for buying ("true sale") and administrating of trade receivables from URTICA SA. These receivables arise from delivery of medicines and drugs to hospitals located in Poland. In order to refinance the purchase of receivables, URTICA Finanse SA will issue asset backed CP. The ABCP are collateralized by trade receivables previously bought from URTICA SA. Proposed structure contains recommended by Standards and Poor's credit enhancements like: overcollateralisation, spread account, limited recourse to URTICA S.A. and liquidity enhancement like put option that gives SPC right to sell receivables to liquidity provider and liquidity line granted by BRE BANK S.A.

The ABCP has been granted short term credit rating – CP-1 (the highest domestic short term rating) by local rating agency – CERA S.A.- subsidiary of Thomson Financial BankWatch.

This information has been provided by Martin Tarnicki, Project Manager of the above Bank. Martin is a participant in our e-mail list.

Why lenders do not like mortgage funding in China

Mortgage funding is considered to be the safest in USA and most popular among small lenders, while lenders in mainland China do not value them much. Patrick Randolph in an article in South China Morning Post[12th August 1999] examined the reasons.

Apart from problems in enforcing mortgage foreclosures which involve anecdotal delays, there are other possible explanations. "The most obvious is market uncertainty. Lenders value security that is "counter-cyclical" – that it will have value precisely at the time that the economic fortunes of their borrowers have drooped", argues the author. This means that mortgage lenders look at real estate as a hedge against cyclical movements in industry.

Another significant reason is the lack of experience – "Western lenders have a long experience with the device, and rely upon armies of specialists who appraise, underwrite and, where necessary, seize and manage real estate security". This is lacking with lenders in China.

The author feels that a buoyant mortgage market is created out of financial crisis. For example, much of the development in US securitisation market came about with the efforts of the Resolution Trust Corporation taking over assets of failed lenders in 1980s.

RMBS issue likely by Hong Kong Mortgage Corporation

The Hong Kong Mortgage Corp, which was set up in March 1997 to acquire mortgage loans from banks and free up their books for new lending, had acquired HK$10.33 billion in mortgages as at end June 1999.

It will issue its first mortgage-backed securities of about HK$1 billion in size in the fourth quarter of this year.

In the meantime, there is a growing interest in mortgage funding both by the banks as also the non-banking finance companies such as  GE Capital and General Motors. Banks find mortgage funding one of their safest invesment options.

For more on securitisation in Hong Kong, see our Hong Kong country profile – click here. 

 New insurance product to cut political risk in emerging market investments

One of the reasons for development of emerging market future flows securitisation was the ability to eliminate sovereign risks by trapping cashflows outside the country of origin. Overseas Private Investment Corporation (OPIC) has launched an insurance product that would allow emerging market corporates to pierce their sovereign rating. The product entails the following methodology – an emerging market company wanting to issue debt securities to foreign investors would issue the securities to an SPV ( a trust) in an investment grade country. The trust in turn would issue its own securities to the investors. The trust buys an insurance with OPIC, which obliges OPIC to make payments that the original issuer could not make to the SPV on account of foreign exchange control or a debt moratorium slapped by the originator's sovereign. Thus, the investors continue to get serviced inspite of the sovereign's redirection or moratorium orders.

OPIC is an agency of the US government.

The insurance policy does not cover any credit risk. Investors bear the full risk of default because of credit reasons.

US ABS issue shows modest growth in first half 1999

Markets outside the USA take the shine

Growth of any financial innovation is seen to follow the S-curve – the evolutionary or introduction phase shows low growth rate; followed by abrupt increase in explosive growth phase, finally slowing down to a plateau in the stabilisation stage. Has US securitisation issuance reached its plateau? Not sure, but markets in Europe and Asia, also Latin America, have surely reached the explosive growth stage.

US ABS issue in the first half of 1999 grew about 4.6% to a volume of USD 101.1 billion, as compared to USD 96.7 billion during the same period in 1998 (as per data published in Structured Finance Monitor). As against this, there has been surge in volumes in Japan, Australia and Europe – see reports on our Securitisation news page.. US data traditionally exclude mortgage-backed securities.

The data reveals that the highest share in total ABS issuance (about 32%) is taken by home equity loans. About 22% each is shared by credit cards and auto finance receivables.

CMBS volumes seen declining sharply in 1999

Moody's Mortgage-Finance analysts project that 1999 commercial mortgage-backed securities (CMBS) will total around $60 billion, roughly 25% below last year's level. For the rest of 1999, they expect an active third quarter, with a possible fourth-quarter slowdown in reaction to Y2K-related concerns.

As deals have become smaller and the overall quality of credit has improved, commercial mortgage-backed securities (CMBS) volume for the first half of 1999 was down 20% from the volume of the first half of 1998, as deals became smaller and overall credit quality improved, say Mortgage Finance analysts in a recent report.