SECURITISATION NEWS AND DEVELOPMENTS

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

Deutsche Bank comes out with a slew of securitization deals

During May and June, Deutsche Bank came out with a series of securitization or synthetic CLOs aimed at managing its balance sheet size and releasing its capital.

During May, 2000, the Bank launched a global CLO, which is a leveraged synthetic CLO transaction. The Euro 280million of bonds convey the bottom layer of risk on Euro 2 billion of loans originated by Deutsche Bank's Luxembourg branch. The upper layer of risk is protected by a credit default swap. The portfolio covers some 124 loans to 94 obligors, with an average rating is in the triple-B band.

Besides the above, the Bank's New York office is marketing the second Blue Stripe transaction – a leveraged, synthetic structure that will reference USD 3billion of loans from the bank's global banking division. The pool comprises around 300 companies, of which around half are in the US and the rest spread around the world. The transaction will offer around USD 450 million of bonds.

In Europe, Deutsche is preparing to launch its second CAST securitisation, backed by Euro 4 billion of loans to German companies from its corporate and real estate division. The CAST structure does not use an SPV.

French Consumer credit companies love to securitize

Securitization is the in-thing for consumer credit companies in France as they find this to be a convenient route to diversify their resources, free up their capital and gain liquidity. A report in Les Echos 29th June says that Finaref (of the PPR group) and Cofidis (3 Suisses), the French consumer credit companies, have announced the launch of securitisation operations.

Another consumer finance company called Cetelem is believed to be the leader in the sector and has been securitizing since June 1990. Today it has amount of securitised credit outstanding at FFr 13 billion.

Other companies that have used securitization are Credit Lyonnais, Societe Generale, Banques Populaires, and Diac (on car loans).

Links For more on securitization in France, click on our country profile.

Agencies oppose US regulators' capital adequacy proposals

Mortgage securitization agencies Freddie Mae and Fannie Mae are opposed to the regulators' proposal to require capital against securitized products based on their credit rating, irrespective of their parentage. The proposal, circulated by bank and thrift agencies regulators in the US, seeks to allocate risk weightage based on ratings, while under the current practice, agency-backed securities have an advantage over private label securitizations. A report in American Banker of 30th June says that "Fannie Mae and Freddie Mac are up in arms over a proposed rule that could reduce investors' demand for their mortgage-backed securities, but Wall Street and private mortgage-backed issuers favor it."

The agencies' response was by way of comments on the proposed regulations, for which the last date for comments was June 7.

In its comments, Fannie Mae has said that, though it supports the proposal's attempt to align regulatory capital more closely with transaction risk, the rule does not account for the credit risk differences between AA and AAA securities. Fannie recommended that its own securities and AAA-rated corporate bonds be assigned lower credit risk weightings than AA-rated bonds.

Fannie also said regulators should keep in mind that private-label MBS currently require a higher risk weighting because mortgages carry higher interest rate risk. It recommended that the rule require that securities with long-duration collateral, such as fixed-rate mortgages and manufactured housing, carry higher risk weights than those with shorter-duration collateral, such as credit card debt.

Inspite of these comments, it is quite likely that the proposed regulation would be implemented, as it is broadly in line with the recommendations of the Bank for International Settlements.

Fitch reviews European securitization: expects record volumes for 2000

Though the volume to date in Europe is lesser than last year, rating agency Fitch expects a record issuance this year. European new issuance volume totaled USD 24 billion to 15th June.

40% of the market issuance is still concentrated in residential mortgage transactions, while mortgage lenders are faced with a shrinking primary deposit market. Innovative mortgage products are being brought into the market. One innovation, recently securitized, is a flexible mortgage plan where the borrower has the option to prepay instalments, which would then be held by the lender as a line of credit to be redrawn when needed, thus giving the borrower almost a cash-credit kind of facility. Mortgage lenders from Spain, Germany, Ireland and the Netherlands have also been active in securitization, and given the fact that most of them are securitizing for the first time, there is a strong likelihood of sustained growth.

Fitch also expects mortgage originators from Portugal, Austria, Greece, and the Nordic countries to enter securitization markets.

UK is still the largest securitization market to date. The market break up by country for year 2000 to 15th June shows the following market shares: Ireland 1% Italy 9% Multi 9% France 2% Germany 13% Portugal 1% Netherlands 4% Spain 11% Switzerland 3% UK 47%.

Going by asset-type, the break up is as follows: CMBS 18% RMBS 40% Nonperforming Loans 8% ABS 13% CDO 17% Whole Business 4%.

J P Morgan launching index for credit derivatives

This may well be a historical step towards commoditisation of credit. J P Morgan will be launching, on Wednesday, 29th June, the first index for credit derivatives.

More of this news item can be seen on our credit derivatives website – click here.

Pay scales for insurance securitisation pros hit new highs

It pays, and pays bountifully, to be an insurance securitization professional, as the pay scales for this sector have just gone berserk. A report in Financial Times of 24th June says that demand for new skills has driven salaries in the insurance sector up to levels never seen before.

Professionals specialising in alternative risk transfers such as cat bonds and insurance-linked securities and derivatives are being offered annual pay packets of GBP 300000 in London.

The reasons for this sharp upsurge are not difficult to understand. Insurance securitisation is a new innovation and is being seen as a new challenge by the insurance companies. This market innovation has created a strong demand for analysts, actuaries, statisticians, risk modellers and research and development staff. It has attracted specialists from both the capital and insurance markets. It has also brought the insurance and investment banking sectors into competition as banks set up specialist insurance derivatives units.

Swiss company launches synthetic securitization

Swiss companyUBS AG is to launch a synthetic securitisation transaction called Helvetic Asset Trust, which securitises part of the risks attached to Swiss corporate loans and turns them into tradable instruments. UBS will securitise part of the credit risks attached to a SFR 2.5 bln portfolio of loans to Swiss small and medium-sized enterprises.

It is the first transaction in the domestic capital market involving the transfer to the capital market not of the credit itself, but of the loan loss risks alone.

Notes Synthetic securitization is a kind of a credit derivative that combines financing with transfer of credit risks.Generally carried in form of credit linked notes, the investors in such notes agree on a compensation to the originator should specified credit events take place. For more on credit derivatives including credit linked notes, click on Vinod Kothari's Credit Derivatives site – click here.

UK's largest port operator proposes property securitization

Associated British Ports, UK's largest port operator, is mulling securitization of a portion of its multifarious properties. Associated British Ports is UK's largest port operator and holds plentiful properties. If the company is able to encash its properties through securitisation, it would be a major restructuring of its finances.

The company holds apporox USD 760 million worth of commercial properties.

Securitisation is just beginning to hit UK's maritime industry. Last year, Wightlink, the Isle of Wight ferry specialist, became the first UK maritime company to issue securitised bonds when it raised Pounds 135m.

Outside the water transport segment, securitisation has been used for liquidating shopping complexes, pubs and various other commercial properties. Recently, Bupa, a healthcare group, raised GBP 235 million by securitising future revenue from care homes.

Links For more on securitisation in general in UK, click on our UK country page.

Pullman completes securitisation of Isley Brothers' music securitisation

David Pullman of Pullman Company specialising in music royalty securitisation has completed another eight figure Pullman Bond(TM) music royalty securitization with Rudolph Isley, Ronald Isley and the estate of O'Kelley Isley. This transaction was announced around September last year [see news report on this site – click here, but was held up in legal hassles including a bidding war organized by singer Michael Bolton and a lawsuit launched by EMI Music Publishing who wished to buy the catalogue. The Isley and Pullman team also won an approximately $7 million copyright infringement case against Michael Bolton for "Love is a Wonderful Thing," an Isley hit song from the 60's

David Pullman [click here for David Pullman's website] is specialised in music royalty securitization. He made international news when he securitized David Bowie's music tapes, with a USD 55 million offering. Since then, his company has issued Holland Dozier Holland (Motown Hitmachine) Bonds, Ashford & Simpson Bonds and James Brown Bonds.

The Isley Pullman Bond(TM) transaction was rated at the single A level by two nationally recognized rating agencies. Rudolph Isley and Ronald Isley are the founders, creators and 100% owners of the Isley Brothers catalogue and co-owners of the estate of O'Kelley Isley, the third founder and equal member of their companies Three Boys Music Corp. and Triple Three Music.

Link For more on intellectual property securitization, click here.

Summitomo Corp proposes firm to securitise e-commerce credits

E-commerce is soon becoming a phenomenon, and so there would be opportunities to handle e-commerce credits, which presumably will have significant differences from usual business credits. Realising this, Summitomo Corp. with its affiliated companies (Sumitomo Bank, Sumitomo Trust and Banking Co., Sumitomo Marine and Fire Insurance Co. and Sumisho Lease Co) has proposed to set up a specialised company to buy and securitise e-commerce credits.

Tentatively to be named Digital Nonbank, the company will shoulder risks that clients face in business-to-business electronic transactions by offering securitization services for sales credits involved. The joint company will be capitalized at about 100 million yen.

Sumitomo Corp., a general trading house, will be in charge of building a credit assessment system and Sumitomo Bank will provide fund settlement functions. Sumitomo Trust will offer expertise in securitization services, while Sumitomo Marine will provide credit functions. Sumisho Lease will offer a database. Digital Nonbank will take over sales credits from clients with fees that will vary according to risks involved and sell the credits in the form of securities with high credit ratings.

The new company aims at handling 1.5 trillion yen worth of sales credits a year in five years.

Korea to promote bank CDOs to boost credit supply

In a bid to ease the flow of credit to companies badly affected by present credit squeeze, Korean financial supervisor the Financial Supervisory Service will resort to securitization of bank loans by collateralised debt obligations (CDOs). A report in the Korea Heraldof 20 June says that the supervisor will streamline procedures for issuance of CDOs and remove bottlenecks.

One of the measures proposed is to cut the time involved in filing of registration statements etc. so as to allow originating banks to make use of the money raisedy by securitisation within 2-3 days as against the present system which takes about 15 days. Besides, the supervisor is also expected to clear issuance of asset-backed commercial paper.

Links: For more on securitization in Korea, see our country page – click here. For text o the Korean law on securitization, click on our laws page – click here. For more on CDOs, see our section on bank loan securitization – click here.

Japanese insurer to improve solvency ratio by securitisation

Japan's largest life insurer, Nippon Life Insurance Co., is planning a major increase in its solvency ratio by securitization. The transaction could not be understood properly, but press reports suggest that the insurer will raise Yen 180 billion by securitising its future flows. The transaction is being marketed by Nomura Securities, and Sumitomo Bank. Policyholders of Nippon would need to approve the scheme which is scheduled for July 4.

The fixed-rate securities are expected to have maturities of three to five years, according to Daiwa. Sumitomo's involvement will be in the marketing of the securities. The transaction will require the approval of the Financial Supervisory Agency. For Nippon Life, the infusion of cash will bolster what is the equivalent of a capital balance, although it is not legally called capital because the company is a mutual insurer.

Nippon Life's solvency ratio, the measure of policy liabilities to assets held, was 1,095.8% as of March, vs. a minimum safe level designated by regulators of 200%.

Swedish bank securitises housing mortgages

Swedish bank SEB is to raise EUR 1 billion through securitization of a part its housing mortgage loans to SPV Osprey Mortgage Securities Limited. The transaction will achieve off-balance sheet treatment for SEB and lead to more effective utilisation of capital by the bank.

In Swedish securitisation market, SEB is a forerunner with regard to securitization and has carried out several such transactions previously.

The bonds are being placed on the Euro market through SEB Debt Capital Markets and Goldman Sachs International. The bonds have been given the highest rating by the Fitch IBCA, Moody's and Standard & Poor's rating institutes.

Links For more on securitisation in Sweden, refer to our country page – click here.

Bankers actively buying risk securitisation products

Bankers, who are busy transferring their own balance sheet risks to others, are actively picking up securitised risk transactions. A risk securitisation transaction implies one where the originator transfers risk, such as insurance risk, weather risk or the like, through securitisation conduits over to capital market investors. See for details our page on risk securitisation.

A recent article in American Banker 26th May says that investment bankers such as Citigroup's Salomon Brothers, Chase Securities, and Credit Suisse First Boston are actively marketing securitised risk products, and investing banks are eagerly picking up these portfolios.

Yet another article in the Financial Times 6th June by Gerry Dickinson ("Insurance finds a blend of innovation and tradition") traces the history of evolution of insurance. Talking about securitisation of insurance products, the author feels "risk securitisations are likely to expand in the future and companies may, to some extent, switch from bond-based to equity-based instruments – the greater risk appetite of equity markets makes them a natural bearer of corporate risks. Since the mid-1990s, the cost of insurance and reinsurance has been below its long-term economic cost, mainly because of market oversupply. Thus the cost of risk securitisation products has appeared high when compared to that of underpriced insurance and reinsurance contracts. A more appropriate balance between risk securitisation and conventional insurance will come about when insurance markets rise to their natural economic level, as the cycle in insurance prices corrects itself."

Links Our page on insurance risk securitisation carries lot of resources and a large number of links on the topic. Also see our page on weather risk securitization.

Japanese accounting body proposes accounting norms for securitization

A report in JIJI press 1 June says Japanese Institute of Certified Public Accountants has drawn up accounting guidelines for real estate securitization out of concern that companies have been removing bad assets from their balance sheets inappropriately. Understandably, the concern is triggered by the spate of commercial real estate securitization in Japan as also banks passing on bad loans to securitisation SPVs.

One of the prime features of the proposal is that if the originator buys back or retains 5% or interest in the securitised receivables, the transaction will not be recorded as off-the-balance sheet. The sames applies to assets sold with repurchase agreement.

A subsidiary's purchase of asset-backed securities also amounts to buying by the parent.

The association will seek public comments on the guidelines until June 30 and hopes to adopt them from Aug. 1.

Link to the JICPA website for full text

The Institute wrote as follows, saying that they do not have an English text of the proposed guidelines but they do have a Japanese text: In response to your request, we would like to inform you of how to address Japanese version as follows; Firstly, please click 「ニュース・フラッシュ」 on the top page of our home page and please click the following sign of html document on top page of next stage. http://www.hp.jicpa.or.jp/ and then click one which would you like to at next stage, http://www.hp.jicpa.or.jp/ 

Can some one help to translate the substance of the new Guidelines?

Your comments: Do you have comments on these guidelines? Do you have more knowledge/ full text of the proposed guidelines? Do write and we will appreciate your contribution.

Canary Wharf gets clean liquidity through securitisation

UK property owner Canary Wharf has used securitization not merely as a device of selling out cashflows, but also obtaining a sort of an on-tap liquidity facility, similar in effect to a bank credit. The GBP 475 million issue was announced towards end of May.

Canary Wharf, owner of prime commercial properties close to City of London, let out mostly to large banks and investment bankers, issued notes in several tranches: A1 notes rated AAA totaling £240.0 million, A2 notes also rated AAA Eur102.5 million, class B bonds rated AA totaling £85.0 million, class C notes rated A totaling £45.0 million and class D notes rated BBB totaling £45.0 million. However, the most interesting feature of the issuance is the R bonds, tranched as R1 and R2, both totaling £ 250 million, which will initially be bought back by the issuer, but will be available for issuance at any time. The R bonds will serve as a kind of ready liquity for the Canary Wharf for fresh property acquisitions or development.

The transaction structure involves a loan taken by the property owning subsidiaries of Canary Wharf. The loan will be given by a specially-created lending SPV, which will acquire as security for the repayment of the loan fixed and floating charge over the properties owned by the companies. The loan receivables will then be assigned to the issuing SPV, which in turn will issue notes to the investors. The issuer has also arranged for a liquidity facility to cover shortfall in payments.

More on this transaction: A detailed pre-sale report on the transaction and the rating given by Standard and Poor's is available on the latter's website. Click : www.standardandpoors.com/ratings. Under Presale Reports, select Structured Finance, then Commercial Mortgage-Backed Securities.

Pakistan innovates multi-issuer securitization instrument

This effort may surely be helpful for smaller leasing companies in Pakistan which may not, of themselves, have the critical mass required for stand-alone securitization. Though full details of the instrument were not available, this seems like a multi-issuer securitized note.

According a news item in Business Recorder, the instrument has been developed by a brokerage house called AMZ Securities. Christened multi-issuer term finance certificate, the idea is essentially to acquire receivables originated by several leasing companies, and issue bonds or term finance certificate backed thereby.

Vinod Kothari comments: multi-issuer securitizations are common in several countries: for emerging markets where securitization of receivables originated by a single issuer may not make economic sense, it is an excellent device. Economies apart, the concept also represents pooling of risks and hence is more attractive to investors.

Links Pakistan has issued rules about securitization quite some time back, but in its present state of politico-economic instability, not much has really happened. For more on securitization market in Pakistan, refer to our country page – click here. For text of securitization rules in Pakistan, refer to securitization laws page – click here.

South African bank securitizes credit card receivables

Firstrand Bank, one of South Africa's big four banks, recently securitized its dollar-denominated receivables from credit card usage. Credit Suisse First Boston helped to successfully place the issue with a range of European institutional investors. The offer is structured in two tranches. MBIA, an international financial guarantee company, provided external credit enhancement.

Standard & Poors, Moodys and FitchIBCA have assigned triple-a ratings to the certificates, pending the review of final documentation by the rating agencies. The certificates are issued by FirstRand 2000-A Receivables Trust with maturities of July 2004 and 2007 respectively. The certificates are secured by future claims that FirstRand will have on future Visa and MasterCard income. FirstRand indicated its great satisfaction with the terms of the issue and stated that this issue would be the first of several international fund-raising exercises.

Vinod Kothari comments: I am fresh with the experience of interacting with a number of South African securitization professionals in course of the two workshops we offered there. There is a great deal of interest in South Africa when it comes to securitization. However, the law, drafted much before there was any securitization activity in the country, is highly inflexible and is certainly bereft of the developments that have taken place recently. The kind of restrictions that are commonly found in regulatory statements of bank regulators seem to be part of the law itself, which means what is normally rejected as off-balance sheet securitization for RAP is just not permitted in South Africa. Besides, tax and stamp duty implications are not at all clear. The country is sitting on a huge potential for domestic as well as cross border securitization, but the regulators need to update their laws.

Links: For more on securitization in South Africa, see our country page – click here.

Auto major Fiat in major securitization deal

Italian car maker Fiat is launching a major securitization deal. Under the transaction, Fita will raise over Euro 1 billion by securitizing performing credits granted by it linked to the purchase of its cars.

The transaction is believed to be the largest on performing credits in Europe, and is being carried out on the retail portfolio of Fiat Sava. Euro Capital Structures will be the structuring adviser. Euro Capital Structures was created by Fiat with Italian bank Unicredito Italiano.

Credit rating agency Standard & Poors Securities Inc has awarded a preliminary AAA rating to the Euro 1,084bn offer.

Links and comments: The Italian securitization market has gathered tremendous pace and interest. For more on securitization in Italy, refer to our country page – click here. Much of the success owes to the Italian securitisation law – click here for text of the Italian law.

US bank regulators propose revised reporting for securitization

US bank regulators have proposed revised reporting statements from banks. A proposal in this regard was issued on 1st June for comments. The revised report seeks details of securitization activity by banks.

Apparently triggered by several instances of malpractices recently, the revised reporting format asks as many as 80 new questions on securitization activity of banks.

Here is the extract from the proposal:

"Under this proposal, banks involved in securitization and asset sale activities would report quarter-end (or year-to-date) data for seven loan categories similar to the manner in which they report their loan portfolios. These data would cover 1-4 family residential loans, home equity lines, credit card receivables, auto loans, other consumer loans, commercial and industrial loans, and all other loans. For each loan category, banks would report: (1) The outstanding principal balance of assets sold and securitized with recourse or seller-provided credit enhancements, (2) the maximum amount of credit exposure arising from recourse or credit enhancements to securitization structures (separately for those sponsored by the reporting bank and those sponsored by other institutions), (3) the past due amounts and charge-offs and recoveries on the underlying securitized assets, (4) the amount of any commitments to provide liquidity to the securitization structures, (5) the outstanding principal balance of assets sold with recourse or seller-provided credit enhancements that have not been securitized, and (6) the maximum amount of credit exposure arising from assets sold with recourse or seller-provided credit enhancements that have not been securitized. A limited amount of information would also be collected on bank credit exposures to asset-backed commercial paper conduits.

For the home equity line, credit card receivable, and the commercial and industrial loan categories, banks would also report the amount of any ownership (or seller's) interests in securitizations that are carried as securities and the past due amounts and charge-offs and recoveries on the assets underlying these seller's interests. The agencies request comment on whether these proposed items for ownership (or seller's) interests in securitizations should also include seller's interests not in security form that continue to be carried as loans on the balance sheet or whether information on these non-security seller's interests should be collected separately. Expanding the proposal to incorporate data on seller's interests that are not in security form would provide the agencies a complete picture of this element of banks' securitization activities. The agencies also request comment on whether banks are engaging in transactions in which they retain ownership (or seller's) interests in asset securitizations that involve loans outside of the three categories included in the proposal (i.e., home equity lines, credit card receivables, and commercial and industrial loans).

In addition, the agencies request comment on the manner in which banks' internal management reports capture information on asset securitization activities. In particular, do bank management reports primarily furnish information on the basis of whether the bank provides recourse or credit enhancements (which is the basis upon which proposed Schedule RC-S is structured, consistent with the agencies' risk-based capital requirements) or do these reports primarily furnish information on the basis of whether the bank performs the servicing on the underlying assets? "

For the text of the proposed reporting format, click on this link:
http://www.fdic.gov/news/news/financial/2000/fil0035.html

In securitization market, change is the only constant, says Citibank's securitization head

Al Hageman, Citibank's Global Securitization Head recently wrote a sort of a memoir of his 2 decade-long association with the securitization market [Investment Dealers' Digest May 22, 2000]. Recounting the developments that have taken place in this market segment over these years, Hageman says that the only constant in the market is change. Over last 2 decades motivations of the originators coming into securitization have changed significantly from pure funding to risk management. Hageman thinks securitization would continue to evolve into a purer form of risk transfer. Here is a small extract from Hageman's write up:

"Another thing that has changed during the last 20 years is the motivation for companies to secure this type of financing. For the most part, what began as a way to provide off-balance sheet financing has evolved into a vehicle that is increasingly used to transfer real risk and create economic capital. This will continue to become the growing focus. When we started, most of our clients were old-line industrial firms with some sort of term receivables that were easy to isolate. The realization in the mid-'80s that nearly ANY type of business- airlines, auto makers, credit card processors, etc.-could participate in this type of financing was probably the single most important intellectual development over the past 20 years of this business.

This leap forward was made possible by two very important developments: 1) Technology: A major breakthrough in this business occurred when, thanks to technological developments, we obtained the ability to track and value a company's receivables on a daily basis. This in turn enabled us to create AAA securities at significantly lower costs. Suddenly the walls that had limited potential securitizers came down, making nearly every large corporate or financial company a prospect for this type of financing. 2) Capital markets replaced bank funding: The ability to structure issues with investment-grade ratings enabled us to distribute in both the commercial paper and term markets. Today, global investors can now correctly value the diversified risk that an ABS transactor brings.

So what lies ahead? For starters, the innovation will surely continue-new assets, new distributions and new geographies. As the markets evolve into the 21st century and companies' financing needs and revenue models evolve, so too will the market for asset-backed securities. This business will continue to evolve toward a purer transfer of risk. And the mechanisms for doing this will continue to become more sophisticated as we find new ways to isolate different elements of risk and package it in a way that is appealing and useful to both funded and synthetic investors."

ABS activity picks up in Singapore with two recent deals

Singapore's ABS market saw some activity recently with two ABS transactions to hit the markets. Some pros believe that these two deals are the first case of domestic rated securitizations to originate from Singapore.

The originators are Diners Club, Singapore and Development Credit Bank Singapore.

Diners Club raised S$100m with a revolving securitisation of credit card receivables, arranged by ABN Amro in the US asset backed commercial paper (ABCP) market. DBS Bank created a $2bn domestic short term note programme to parcel highly rated loans and bonds on its balance sheet. Diners Club's deal is the first securitisation of consumer assets in Singapore, and the first time that a Singaporean transaction has been placed through a US conduit.

On the other hand, Development Bank of Singapore has been an active player in securitisation for quite some time. Recently it created a S$2bn domestic short term note programme to parcel highly rated loans and bonds off its balance sheet.

Links: For more on the general developments in Singaorean securitisation market, do visit our country page – click here. Also, for the text of the regulatory statement of the Monetary Authority of Singapore, do visit our Securitisation Laws page.

US ABS activity likely to drop: first half 2000 shows dismal performance

The first half year of the new millennium has obviously not augured well for the ABS markets. For the first time in last 5 years, there is likely to be a sharp drop in new issuance. The first half of 1999 saw some USD 130 billion worth of new issuance, while this year's half-way total, though uptil the first week of June, 2000, is only USD 91.9 billion. It is unlikely that the half year total will be anywhere near the last year's figures.

US ABS market has been registering positive growth rates year after year, but this year is exceptionally bad.

There has also been substantially repositioning of the intermediaries. This half year will see Salomon Smith Barney at the top of the league, up from second best position last year. Credit Suisse First Boston, topper last year, is likely to be at the third position.

Securitization one of the most notable aspects of financial evolution: Henry Kaufman

Henry Kaufman recently came out with his latest book: On Money and Markets: A Wall Street Memoir where he regards securitization of credits as one of the most notable developments in financial evolution, but also highlights the need for regulation.

Kaufman, who headed research in Salomon Brothers in 1970s and 1980s is respected by Wall Street for his incisive and experienced analysis of market developments. Kaufman was in thick of the machinations of Wall Street for over two decades. Known widely as the guru of economic and financial forecasting, Kaufman was believed to be a person who moved the markets particularly when it came to predicting interest rate movements.

Kaufman's book above reviews Wall Street's evolution over last two to three decades. Talking about evolution of financial markets, Kaufman regards securitisation of credit –the conversion of nonmarketable assets, such as credit-card receivables or mortgage obligations, into marketable assets that can be priced to market and traded, as one of the most significant developments. The trend has created a bewildering array of derivative instruments that have fueled what Kaufman believes to be a dangerous explosion of credit. He says that economic conditions have favored the growth of these derivatives but that no one knows how they will perform in an economic downturn or what their broader economic consequences will be.

Hence, Kaufman sees an urgent need for regulatory and supervisory reform at home and abroad, as financial innovation and global integration outpace an already obsolete regulatory structure. He exposes shortcomings of the Federal Reserve and offers proposals for reforming international regulation, including the reorganization of the International Monetary Fund and the World Bank into a “Board of Overseers of Major Institutions and Markets.''

Kaufman's 388 page book has been published by McGraw Hill.

JP Morgan refines its Sequils model

In the first week of May, JP Morgan London launched the 4th of its innovative Sequils program for loan securitisation. This time, the structure was further refined to attract risk-averse investors.

What is the Sequils structure The Sequils structure was first used in April 99 by JP Morgan. The basic innovation here was that JP Morgan securitised a portfolio of BB- and B+ loans, backed them up by its own credit swap, transferred the credit swap to the investors through a separate SPV, and thereby, separated the funding and the credit risk on the loan portfolio into two separate pools of investors. The interesting structure used two SPVs, one for the funding of the portfolio, and the other for the securitisation of the credit risk in the loan portfolio.

The first SPV, called Sequils, bought from the originator a portfolio of loans worth USD 712.5 million. The loans were rated BB- to B+. The portfolio was backed by a credit swap provided by Morgan Guarantee Trust. As a result, the notes issued by Sequils were rated AA.

On the other hand, Morgan Guarantee Trust bought credit swap from another SPV, called MINCs. MINCS was capitalised with USD 114 million worth notes. The proceeds were invested in AAA rated securities. Thus, investors were protected against loss of principal as their principal was fully backed by AAA rated investments. At the same time, MINCS had provided a credit swap to Morgan Guarantee Trust which was 6 times its capital. Therefore, the yield on the notes issued by MINCS was enhanced to the extent of 6 times of the credit swap premium over LIBOR. As a result, the securities issued by MINCS were rated BBB.

In sum, a portfolio of BB- to B+ loans was repackaged into AA and BBB notes.

This classical innovation has been used by JP Morgan recently in a USD 565 million securitisation. The structure is almost the same as in the original Sequils-Mincs deal, with the added attraction that the notes issued by Sequils are stratified, so that some of the tranches have got AAA rating.

Indian banking panel suggests draft securitisation law

An expert committee set up by the Government to look into changes required in the banking laws has suggested wide-ranging modifications in the legal framework. Besides, the panel has also suggested a draft securitisation law. Headed by former Solicitor General of India, Mr. T.R. Andhyarujina, the Committee submited its report on 10th May.

Apparently, the draft law has also suggested amendments to the Income-tax law to facilitate securitisation transactions.

In another recent development in India, the Parliament amended the constitutional law of the National Housing Bank, India's apex housing finance institution, to permit the Bank to securitise the portfolio of mortgages that it might acquire. This way, the Bank, currently a fund-based refinancier of mortgage loans, could slowly change its character into a Fannie-Mae kind of body facilitating securitisation.

The first securitisation of RMBS in India may be out shortly: with the legislative changes in place, National Housing Bank may acquire and securitise a portfolio of housing loans originated by HDFC.

For more on securitisation in India, click on India page.

Predatory lending continues to bother securitisation deals

The issue of predatory lending practices by loan originators, and its impact on subsequent securitization of such loans, continues to bother securitization transactions. On this page, we had recently covered this problem briefly – click here to see.

American Banker on 15th May carried a story quoting US govt. officials who warned capital markets against encouraging predatory lending by banks. In the third of five joint regional forums on predatory lending, the government officials said large Wall Street firms should be held accountable for the terms of loans that go into securitized pools. Andrew Cuomo, secretary of Housing and Urban Development is reported to have said that it would not be enough for securitisation firms to contend that they were not aware of the lending practices.

In a related development, New York bank regulators are reportedly working on measures to prevent banks from getting into predatory lending practices. American Banker of 16th May reports that New York State regulators are writing guidelines to help banks steer clear of packaging and selling predatory mortgage loans to investors. If required, the regulators will work in tandem with the SEC to ensure that investment banks are also covered.

Investment banks are under fire for assisting the fast growth of a subprime lending market. According to data published by Moody's, about $100 billion of the roughly $240 billion in outstanding subprime mortgage loans have been securitised.

In the meantime, in early May, charges have been filed against Lehman Brothers as an underwriter for the alleged predatory loan practices of First Alliance Mortgage Co., whose portfolio was securitised. First Alliance filed for protection under Chapter 11 in March this year. The loan practices of the company came for public criticism including under popular TV programs in the US. Lehman was reportedly running a fairly large conduit operation with First Alliance, resembling the structures set up by subprime players ContiFinancial or Amresco.

Singapore pledges to promote securitization

The Monetary Authority of Singapore (MAS)on 2 May 2000 announced several decisions relating to debt securities including government securities. Second finance minister Lim Hng Kiang, who announced these measures on behalf of the MAS also outlines the Government's proposal to create securitization market in the country.

Mr. Lim talked of the impact of the e-revolution on bond markets world over and said Asian markets could not remain untouched by these developments. Talking of measures to broaden and deepen debt market activities in Singapore, he proposed the development of asset-backed securitization in Singapore, and in particular the promotion of mortgage-backed securities and the setting up of a mortgage corporation. He said: "The rapid advances in electronic-bond technologies have led to a proliferation of e-bond trading systems in US and Europe. Asian bond markets, while still in relatively nascent stages of development, would not be immune to the e-revolution. Proprietary bond distribution and trading systems in US and Europe will soon find their way to Asia, and it is important for Asian market participants to anticipate these developments."

Singaporean securitization market is still in its infancy. There have been very few securitization transactions in the country still, despite of a common law framework generally receptive to securitizations.

Links On our site, we have a general market overview of securitization in Singapore – click here. We also have the text of the regulatory guidelines of the MAS – click here.

Do banks need fundamental relook at their profit models?

The age of securitization meant at least one significant change in bank's profit models: the customer was seen as a commodity, created today, and packaged and sold tomorrow. The age of the internet has brought in a new way of looking at values based on relationships: the very thing that securitization demolishes. Does this mean banks need to revisit their fundamental profit models?

A recent article in American Banker 1st May said investors are questioning banks' basic profit model. Quoting an analyst, the report said that the banking "industry's standard business model of the past decade is being rejected by investors because it is strikingly at odds with the practices of Internet companies, which are the market's darlings".

Citing several reasons, the report says that securitization of mortgages and other loans may be fine for the balance sheet but has the effect of separating the institution from the customer, who often sees only the name of the servicer. Cross-selling opportunities are lost. By contrast, technology companies like AOL and Yahoo are willing to even carry on seemingly unprofitable businesses at the prospects of making profits by cross selling opportunities in future.

Comments : If this issue forces you to think, may be you can contribute a line or two. We will be too happy to carry your contribution on this site.

Bank of Scotland applies revolving model to mortgage securitization

Bank of Scotland in late April launched a new securitization deal with revolver structure, normally used in credit card and consumer loans securitization, to the mortgage market. The Euro 745 million deal broke new ground by offering most of its AAA notes with legal maturities much shorter than the lifetime of the underlying mortgages.

The revolving structure uses excess collateral placed in the SPV. The bank has assigned some 23,700 mortgages, worth Euro 1.731bn, in a trust, with the beneficial interest shared between the originator and the investors. Since the amount of assets is far greater than the notes, principal collections over a short period are sufficient to redeem a bullet note. When principal payments are not being accumulated to pay off a tranche of notes, they flow back to Bank of Scotland, and can be replaced with new mortgages. Conceptually, the deal also tides over a difficulty of mortgage-backed transactions – that of lower weighted average maturities because of a fast-depleting outstanding principal, but opting for bullet payments.

The multi-tranched transaction has first three which are dollar soft bullets – a USD 208 million 3 year tranche, a USD 200 million five year tranche, and a USD 200 million seven year tranche. Each has a legal maturity two or three years after the expected redemption.

Links : For more on revolving structure, see our section devoted to credit card securitization – click here.