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For all news for November and December, 2000, please click here
Read on for chronological listing of events, most recent on top:
FASB issues implementation guide to FAS 140
Added on 30th Oct., 2000
The US Financial Accounting Standards Board has put up a preliminary draft of an implementation guide to FAS 140, the new accounting standard that replaced FAS 125.
US Thrifts supervisor cautions against investments in riskier CLO tranches
Added on 30th Oct., 2000
The Office of Thrifts Supervision recently cautioned savings associations against investment in riskier tranches of CLOs.
Mortgage securitisation fails to pick up in South Africa
Added on 27th Oct., 2000
The government in South Africa is not happy at the fact that securitisation initiatives have failed to make any impact on housing finance particularly for the lower end of the market.
Developments in Italian securitisation market
Added on 27th Oct., 2000
Rating agency Standard and Poor's is optimistic about development of the Italian securitisation market, in view of some legislative and market developments.
Securitisation rules in Malaysia by year-end
Added on 27th Oct., 2000
Securities Commission of Malaysia has proposed to come out with securitisation rules by the end of the year.
Europe likely to end 2000 with record issuance
Added on 20th Oct., 2000
Indications are that Europe will close year 2000 with record volumes of ABS issuance.
Credit quality of US ABS depletes
Added on 19th Oct., 2000
There have been more downgrades than upgrades in year 2000, reflecting the depleting credit quality of US ABS.
Citibank's recent credit card structure marks a new innovation
Added on 19th Oct., 2000
Citibank's recent credit card ABS names Citiseries marks a new model for credit card securities, notes Standard and Poor's.
Cat bonds volume in 2000 down, but Fitch is optimistic
Added on 18th Oct., 2000
Based on current levels of activity and expected deals, it seems year 2000 will end up with lesser activity in cat bonds issuance, but rating agency Fitch is optimistic..
Japanese earthquake not likely to affect cat bond investors
Added on 18th Oct., 2000
The recent earthquake in Japan is not likely to affect repayments to investors in cat bonds, says rating agency Fitch..
FAS 140 issued
Added on 4th Oct., 2000
The US Financial Accounting Standards Board on 3rd Oct issued the revised accounting standard on securitization, one of the world's most important statements in securitization accounting.
German RMBS market deepening
Added on 25th Sept., 2000
Standard and Poor's report that the German RMBS market is deepening significantly of late.
FASB 125 will be replaced
Added on 14th Sept., 2000
FASB has decided to replace accounting standard on securitisation by a new look FASB 140 to be opened to public by end of September.
European banks join ABCP bandwagon
Added on 12th Sept., 2000
More and more European banks are trying to woo their customers off themselves, and over to their ABCP conduits.
Risk transfer securitisation to be high growth business, says S&P
Added on 12th Sept., 2000
Richard Gugliada, Standard & Poor's senior official said in a recent industry forum that risk securitisation will be mainstay of securitisation business in time to come.
UK railway company proposes to raise Stg 10 billion by securitization
Added on 11th Sept., 2000
UK's railway company Railtrack Group proposes to raise Stg 10 billion by securitization.
UK power utilities mull securitisation
Added on 8th Sept., 2000
Several of UK's power utilities are planning to plunge into securitisation to raise money.
South Africa: securitization yet to make big dent in mortgage costs
Added on 8th Sept., 2000
An article in Business Day says financial institutions in South Africa are yet to tap full potential of securitisation.
Deutsche Bank buys stake in securitization technology and website
Added on 6th Sept., 2000
Deutsche Bank has bought stake in securitization software provider and ABSnet website owner Lewtan Technologies.
First Indian RMBS transaction over-subscribed
Added on 6th Sept., 2000
The issue of mortgage-backed securities through the agency of National Housing Bank was oversubscribed.
Real estate securitization soaring in Japan
Added on 5th Sept., 2000
A report in Jiji Press of 4th Sept. says that real estate securitisation activity is soaring in Japan..
Interest in alternative risk transfer increasing: FT survey
Added on 4th Sept., 2000
With hardening of traditional reinsurance markets, interest in ART methods including securitisation is increasing, says an FTsurvey published today.
Debate regarding govt. support to Fannie Mae and Freddie Mac heats up
Added on 1st Sept., 2000
Debate is heating up on government support to the two securitization agencies.
Italian INPS securitization dogged by initial delays
Added on 31st August, 2000, updated 3rd Sept., 2000
The much publicised securitisation of social security contributions by INPS might apparently not be able to redeem the first tranche in time, based on unconfirmed reports.
The Financial Accounting Standards Board on 27th Oct. put up on its site a preliminary draft of an implementation guide to the new accounting standard on securitisation, FAS 140. FAS 140 replaces the existing accounting standard FAS 125 – see news item below.
The FASB states: "The FASB staff is preparing a new Special Report, A Guide to Implementation of Statement 140 on Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities: Questions and Answers, That report will be an updated version of its earlier Special Report about Statement 125, the third edition of which was published in July 1999. A draft of the updated Special Report is provided here for information and comment". The FASB has invited comments on the draft of the guide by Nov., 20 and hopes to come out with the final version of the implementation guide in December.
Text of the draft implementation guide is available on FASB site at:
Among other issues being analysed, the draft of the implementation guide provides that if the originator retains a clean up call option with regard to a portion of the portfolio transferred, then sale accounting will precluded only in respect of that portion for which the call option is retained. In other words, the sale accounting will still be applicable on the portfolio, minus the portion subject to the clean up call.
Martin Rosenblatt, a leading expert on securitization accounting, comments: "Issuers who have abandoned gain on sale accounting by increasing the optional call from a 10% cleanup call to a 20% call will have to go back to the drawing board.". Martin's comment relates to the securitisers opting out of gain-on-sale accounting by retaining clean up calls in excess of 10%.
In a memo dated 23rd October, the Office of Thrift Supervision cautioned savings associations against investments in riskier tranches of CLOs and other structured offerings.
Focusing on investments in non-standard or unrated investments such as residual securities in CLOs, the regulator states: "The lowest priority tranche, or the residual interest tranche, is generally not rated. It is typically subordinated not only to senior tranches, but also to expenses of the issuing trust. These residual tranches are typically difficult to value and are illiquid investments by themselves. To make the residual tranche more marketable, the CLO issuer or trustee may swap the residual interest tranche for certificates guaranteed by a AAA-rated counterparty as to the principal amount at maturity (generally up to 12 years).
"While the swap creates a guarantee of the full principal at maturity, the amount guaranteed must be discounted to its present value if terminated early. In that respect, the guaranteed portion of the security is similar to a zero-coupon Treasury bond. Therefore, the credit support provided by the guarantor may cover less than 50% of the face amount of the certificate at purchase. Unlike zero-coupon bonds, however, these certificates are generally sold at par. Investors must rely on the performance of the reference asset (the residual tranche in this case) to return the remaining portion of their investment and provide any yield. The performance of the reference asset is not, however, guaranteed. Therefore, these investments are not, and should not be considered, fully rated.
"Apparently, the motivation to purchase such certificates is the high yield projected if the CLO collateral pool (and thereby the reference asset) performs well. However, there is no guarantee of residual cash flows, and the certificates will not be in default if no cash flows are paid to the investors. These investments are speculative, and are clearly not intended to hedge interest rate risk or credit risk. Based on discussions with ratings agencies, and the lack of supporting cash flow analysis, it is difficult to assess the likelihood that a particular return could be achieved on these investments. In essence, an institution should not be misled by split ratings where only a part of the security is either guaranteed or rated investment grade."
A report in Business Day of 20th Oct. says the government is not happy at the fact that the government's securitisation initiatives have failed to yield any results, particularly in terms of making funds available to the lower-end of the market. The government through National Housing Finance Corporation had promoted Gateway Home Loans to buy housing loans from the market and to securitise the same.
However, during the first year of its operations, Gateway failed to buy any loans, says the report. Gateway has not been able to convince banks and housing lenders to sell their portfolios to it. Gateway feels that unless there is a primary market in housing loans, there is no scope for creating a secondary market.
Government has been struggling to find a way around banks reluctance to take on the risk and costs associated with lending into the lower end of the market. The banks counter that this segment of the market is unattractive to them due to retrenchments and the high risk of default.
Unemployment and retrenchment continue to dog the lower end of the housing market in the country.
Vinod Kothari comments: Initiatives to promote housing finance internationally come in form of a package of measures: strong mortgage foreclosure laws, a congenial and cost effective securitisation market, and generally active debt market. Based on my interactions, it seems the mortgage foreclosure procedure in South Africa needs to be strengthened. Obviously enough, housing needs cannot wait till development, and thereby, employment, picks up.
Rating agency Standard and Poor's is optimistic about development of Italian securitisation market, as per an article in the October issue of Structured Finance. The article summarises deliberations at a recent conference in Milan.
One positive legislative development in the offing is a new Notary Law which will shorten the time currently being taken in foreclosure of mortgages. In Italy, the foreclosure process may take anywhere between 4 to 7 years while 2 years is the European average. Speedier recovery process backed by strong legal framework obviously promote securitisations.
An area where securitisation in Italy is bound to grow is lease securitisation. Leasing is quite strong in Italy, particularly in the field of automobiles. Leasing companies would realise that releasing capital via securitisation is the sure shot way to growth, and hence better rating.
Links For more on securitisation in Italy, click here.
The securities regulator in Malaysia, Securities Commission (SC) has proposed to come out with securitisation rules by the end of the year. Malaysian newspaper Business Times quotes the SC chairman Ali Tan Sri Abdul Kadir as saying that commission has established a consultative committee comprising market professionals to find what is required to facilitate the process and submit recommendations to the Government. The process is almost reaching its end now.
Vinod Kothari comments: Securitisation market in Malaysia is virtually non-existent save for the bonds issued by Cagamas, the Govt.-sponsored body for secondary market in mortgages. As a matter of fact, the debt market for private securities itself is very dull in the country. Banks and financial intermediaries do not face strong pressures on capital adequacy: hence, there is no urgency to push for off balance sheet financing.
Nevertheless, as the country's legal position on securitisation is far from clear, a set of rules will help the market to grow.
Links For more on securitisation in Malaysia, click on our country page here.
European markets are going high on securitization. It is clear that year 2000 will go down in history as a year of record issuance, even while the US market will most likely close with a substantial negative growth [as we analyse in another story].
Till the end of third quarter, Europe has already recorded USD 60 billion of issuance, which is already ahead of 1998's total issuance and is close to USD 72 billion of issuance in 1999. With at least USD 25 billion worth issuance in the pipeline, there are firm indications of year 2000 volume being the highest so far.
One of the bold-going European types is synthetic securitisation, a device that does not put the assets off the balance sheets but gives the originator cover against risk, thus obviating "true sale" concerns. [For more on synthetic securitisation, see our page here.] Synthetic securitisations were originally well-accepted in Germany, but now they seem to have a much wider acceptance all over Europe.
Christopher O'Leary in a recent article in The Investment Dealers' Digest notes that "what will most define the openness of the European securitization market is whether government-sponsored deals from the likes of Italy and Spain will be accepted by investors. European governments have tried to offer deals in the past, to indifferent reception. Should the upcoming government deals price well, however, players believe that will be a sign that the European investor base is hungry enough to tackle anything on the menu."
There have been almost 122 downgrades by rating agencies in the US ABS market in the first half of 2000, as against few upgrades, reflecting a trend that began in 1997.
Rating agency Moody's in a report notes that one of the major reasons for the downgrades is the downgrading of some popular credit enhancers. For example, the rating of Conseco Finance Corp. went down in April 2000 resulting in downgrades of 59 subordinated tranches that were guaranteed by Conseco and backed by manufactured housing and home equity loans.
But credit enhancer downgrade is not the only reason: poor asset performance also resulted in over 40% of the downgrades that occurred in the first half.
Moody's is not exactly optimistic about teh future downgrades: it expects that the future will see more downgrades during the next economic downturn. More so in case of poor quality or subprime assets, but higher quality assets-backed deals may also be affected.
Since the market's inception in 1986, there have been 320 upgrades affecting $16.8 billion in ABS and 480 downgrades covering $47.4 billion.
The aboe is based on a report of Moody's titled “Rating Changes in the U.S. Asset-Backed Securities Market: 2000 First Half Update”
Citibank is the originator of the largest bank credit card portfolio in the United States and has been a frequent entrant in the securitisation market. However, after remaining out of the securitisation market for nearly a year, in September, it came out with a USD 2.8 billion credit card ABS.
Using a vehicle called Citibank Credit Card Issuance Trust,
The innovative part of the structure is that it allows Citibank to issue subordinated notes, without having to issue senior notes. The natural sequence in any structured offering is to have a junior class to make the senior class senior. Rating agency Standard and Poor's notes in a Press Release that issuing subordinate notes not tied to any senior debt gives Citibank flexibility in the type of debt it can issue and allows it to capitalize on current market conditions. Additionally, Citibank has added flexibility to issue ABS paper in the size, maturity, and coupon terms that will enable Citibank to meet investors' demands quickly.
This is not the first time Citibank has introduced a revolutionary structure into the credit card securitization market. In 1995, Citibank established a unique structure under its trademarked Dakota Program. Other credit card issuers have since replicated this structure, which allows the issuance of extendible notes with terms similar to the note issuance in the commercial paper market.
Links For more on securitisation of credit cards, see our page here.
In year 2000, activity in the catastrophe-linked bond market has been slower than last year, and also slower than predictions made before. But Michael J. Barry of Fitch [article in the National Underwriter newsletter, 9th Oct., 2000] is optimistic. In year 2000, till the third quarter, only five syndicated deals have been brought to market. The 5 deals are
- Atlas Re: a three-tranche $200 million offering (rated "triple-B," "triple-B-minus," and "B-minus") that provided 3-year protection for the sponsor, SCOR, a French reinsurer, against U.S. and Japanese earthquake and European windstorm.
- NeHi Inc.: a $41.5 million offering (rated "double-B") that provided 3-year protection for the sponsor, Vesta Fire Insurance Corp. in Birmingham, Ala., against Northeast U.S. hurricanes and Hawaii hurricanes and tropical storms.
- Residential Re 2000, the latest of four deals sponsored by San Antonio, Texas-based USAA;
- Alpha Wind 2000, sponsored by Arrow Re in Bermuda;
- and Seismic Ltd, sponsored by Lehman Re in Bermuda.
There were 9 syndicated deals in year 1999.
Michael Berry sees positive trends developing in the catastrophe-bond marketplace that should have a favorable impact on issuance levels. One of the major motivations in cat bonds issuance has been pricing. If pricing in traditional reinsurance markets is fine enough, there is not enough of motivation in securitisation. Fitch sees the prices hardening of late.
The cat bond issuance is also correlated with the capacity levels of traditional insurance providers. This could be another reason for increased activity in the cat bonds field. Third, the heavy level of consolidation in the reinsurance arena has left the major players with limited counterparty choices. Michael Berry feesl that the market has matured considerably since its early days, with deals being structured to the liking of a more savvy, better educated investor base. "There has been a noticeable trend towards model-indexed and parametric deals", he says.
Michael Berry's article makes a very interesting – we highly recommend it.
Links For more on cat bonds, do refer to our page on risk securitisation,where you will find links to more news items and articles.
International rating agency Fitch does not see any need to review the rating of cat bonds issued by Parametric Re, Ltd., Concentric Ltd. and Circle Maihama Ltd as a result of the recent earthquake in Japan, as per a press release of Fitch.
On Friday, Oct. 6, 2000, an earthquake with an estimated magnitude of 7.3 (according to the Japan Meteorological Agency) occurred in the western Tottori region of Japan. The epicenter of the earthquake is approximately 315 miles southwest of Tokyo.
Cat bonds provide reinsurance cover to insurance companies against losses due to catastrophe events. As per terms of these bond issues, if the losses faced by the insurance companies based on certain parameters lead to a trigger event, the bond holders would suffer a loss of interest, or loss of principal, or both. As per initial analysis by Fitch, it does not appear that losses to any of the parametric earthquake bonds rated by Fitch would be triggered by the event.
However, the rating agency will continue to monitor the development of losses to determine if those bonds are impacted.
Links For more on cat bonds, please see our page on risk securitisation – click here.
The US Financial Accounting Standards Board (FASB) has issued a new accounting standard on securitizationg accouting, FAS 140 which replaces the existing accounting standard FAS 125. The new accounting standard was issued on 3rd October.
Most of the provisions of Statement 125 were carried forward to Statement 140 without reconsideration, and some were changed only in minor ways. It is effective for transfers after March 31, 2001. It is effective for disclosures about securitizations and collateral and for recognition and reclassification of collateral for fiscal years ending after December 15, 2000.
Vinod Kothari comments: The revised statement continues to adopt the "financial components approach" that allows various fractions of a securitization transaction being itemized and valued independent of each other, retaining only those which are retained by the originator. The basic gain on sale accounting and removal of asset accounting, though subject matter of intensive criticism by investors and equity analysts, has not been changed. The statement provides more detailed guidance than before on isolation, qualifying SPVs, conditions that constrain a transferee, conditions for an entity to be a qualifying SPE, accounting for transfers of partial interests, measurement of retained interests, servicing of financial assets, securitizations, transfers of sales-type and direct financing lease receivables, securities lending transactions, repurchase agreements including "dollar rolls," "wash sales," loan syndications and participations, risk participations in banker's acceptances, factoring arrangements, transfers of receivables with recourse, and extinguishments of liabilities, etc.
With its 364 paras, the new standard is 1 1/2 times as heavy as the existing one.
International rating agency Standard & Poor's say in a report that the German residential mortgage-backed securities (RMBS) market has significantly deepened in 2000 backed by lenders increasingly striving for efficient balance-sheet management.
Apart from additional issuances by traditional players, a large number of first-time issuers have additionally entered the market and the industry expects them to retap it again now that a framework is in place. Unlike other European RMBS sectors, the German transactions more typically use synthetic structures rather than true sales because of the benefits they accrue to the originator. As German lenders use securitization for balance-sheet management, the synthetic approach is much more practical, says an S&P official. Notwithstanding the slowdown in the mortgage lending sector this year, it is expected that originators still have large stocks of mortgage loans that can be securitized. This is one of the positive features of German mortgage portfolios as the pool seasoning in the transactions is typically higher than other countries, such as the U.K.
The US accounting standards setter Financial Accounting Standards Board (FASB) met on 13th Sept. and intends to issue a final accounting standard on securitisations as statement no. 140 to supersede FAS 125 by the end of september. Highly informed sources say that the effective date for the new expanded disclosures will be December 2000 for calendar year-end companies and the effective date for the rest of the provisions will be delayed three months from the exposure draft proposed date– it will be effective for transactions occurring after march 31, 2001.
Significant statement FAS 125 is a crucial accounting standard for securitisations – accounting being a key issue in securitisation, FAS 125 affects not only the accounting treatment for securitisations but the very economics and motivations of issuers. Technically FAS 125 is applicable for US companies, but practically it affects securitisation accounting world-over. Canadian accounting standard setter has expressly stated that it would almost replicate the revised FAS standard. International Accounting Standards Committee has also followed the FAS approach as far as securitisation accounting is concerned.
What the new standard might contain: Going by the exposure draft previously circulated and the comment letters and previous discussions of the Board, it is likely that the revised standard will carry important provisions dealing with the following:
- Will the financial components approach be changed?: It seems unlikely that the Board will shift its approach from the present financial components approach to control or linked presentation approach. It is notable that in March 29, 2000 meeting, the Board "decided not to adopt any of several constituent suggestions that would have reduced gain recognized on securitizations in which the transferor retains subordinated interests".
- Enhanced disclosures: Very likely, the FAS 140 will enhance disclosure requirements on the lines proposed in the Exposure draft.
- Qualifying SPV: This issue has engaged a lot of attention in course of deliberations in the past and it seems that the new statement will contain voluminous details on what the SPV may do and may not. Consolidation issue is also likely to be clearer.
Earlier related stories on our site:
- Link to an article in American Banker that criticised gain on sale accounting
- FASB issues technical bulletin on consolidation
- FASB proposes amendments
- Several articles on our articles page
We will get you more on FAS 140 – follow stories on this page regularly. Do you have any views or suggestions in the matter? Do write them.
More and more European banks are joining the ABCP bandwagon as banks try to retain their customers. The banks woo their customers off their own balance sheets and over to their conduits selling asset-backed paper.
To wit, the outstanding asset-backed commercial paper in European conduits totaled USD 61 billion by end-March, 2000. This increased approximately 280% from USD 22 billion asset-backed commercial paper outstandings in 1997.
Recently, three European banks announced formation of ABCP conduits – Landesbank Baden-Wurttemberg (USD 1 billion), Norddeutsche Landesbank (USD 1 billion) and , Skandinaviska Enskilda Banken (USD 2 billion).
Links: For more on ABCP, click here.
International rating agency Standard & Poor's Richard Gugliada said transfer of risk by the device of securitisation will continue to be the mainstay of securitisation business in time to come. Thus, CBOs, CLOs and other credit-risk transfer devices will continue to be a very high-growth business.
Richard Gugliada is the managing director of Standard & Poor's CBOs/CLOs, Market Value, and Derivatives/Structured Investment Vehicles division. Richard made these comments while addressing Strategic Research Institute's Forum on Risk Securitization in New York on 11th Sept.
There have been several risk transfer based securitisation transactions recently, for example, J.P. Morgan & Co. Inc.'s Broad Index Structured Trust Offering (BISTRO) series of transactions. Other notable transactions have been Morgan Stanley's Sequils transaction, Citibank's strategic asset redeployment program, etc. For more details on such risk transfer devices, click here.
Risk securitization is similar in theory to credit derivatives: the assets remain on companies' balance sheets and the issuers do not aim at the typical accounting benefits of traditional securitizations. Highly rated financial institutions can use this financing method to efficiently and cost-effectively manage credit risk to specific assets. The seller transfers its risk on a reference pool of assets by creating marketable securities and selling them in the capital markets.
This could well be the mega deal of all times. Last year, we had carried a news report about Railtrack's proposal to securitise arches. Now, it proposes to securitise its income and raise the largest amount ever sourced by securitisation – Stg 10 billion.
As per a report in The Independent on Sept. 10, Railtrack will securitise the income it receives from the train-operating companies. The proposal could take a more firm shape by end of the calendar year.
The City will eagerly await this news as apart from being a mega deal of all times, the transaction is likely to get a very good rating.
Several power utilities in the UK are planning to securitise receivables to raise finance. Among the names doing rounds in the market are TXU Europe, which is considering recouping part of the GBP310 million ($456 million) it paid to acquire Norweb Energi by securitizing receipts from Norweb’s retail customers.
Market practitioners in UK believe that power companies are becoming more interested in securitization because consolidation within the industry is putting greater pressure on companies to raise capital for investments, as well as to increase shareholder value. Securitization would be advantageous to a power company because it would lower its cost of funding, diversify funding sources and improve the balance sheet.
Links For more on securitization by utilities, click here.
An article by Greta Steyn in Business Day August 29 says that South African mortgage lenders are yet to realise the full potential of securitisation, though hopes are high that it would succeed in bringing down mortgage costs.
Mortgage-backed securitisation holds the promise of being the panacea for unlocking private finance for low cost housing. Gateway Home Loans, a low-cost housing arm of the parastatal National Housing Finance Corporation (NHFC), plans to launch mortgage-backed securities but has yet to succeed. Investors still find it hard to lap up securitized products in absence of an assuring guarantee, like the Fannie Mae in the USA. Market practitioners demand that the National Housing Finance Corporation, created by the govt. for housing finance promotion, should get into this role.
SA Home Loans intends of offer a mega MBS issue in the country of Rand 1 billion, once it collects that kind of a corpus.
An interesting development is Kiwane, a repackaging SPV. Kiwane buys illiquid corporate debt and converts the same into relatively liquid, highly rated, asset-backed bonds. Kiwane, which is managed by Gensec and Real Africa Durolink, invests in SA companies with investment grade rated debt. Kiwane was able to tap IFC Washington for Rand 70 million of mezzanine bonds.
Links Our country page on South Africa offers a number of links and articles on South African securitization – click here.
Deutsche Bank AG has entered into an agreement with Lewtan Technologies, Inc. to buy a stake in the latter. Lewtan is a software solutions provider for securitization business and owns and runs ABSnet, a popular website for securitization deal information. Lewtan is based in Boston, USA.
Under the terms of the agreement Deutsche Bank has taken an equity stake in Lewtan, and the bank's Corporate Trust & Agency Services (CTAS) business will work with Lewtan to develop new applications for servicing the structured finance markets globally. The agreement will lead to the introduction of innovative web-based solutions for the securitization industry as early as the fourth quarter of 2000.
India's first RMBS transaction, to securitise housing finance receivables originated by housing finance companies HDFC and LIC Housing Finance, was oversubscribed. The receivables were securitised through the agency of National Housing Bank which got legal powers to act as a conduit by virtue of recent amendment to its constitutional law.
The offer involved a deal size of Rs. 103.54 crores [USD 24 million] comprising 11,106 individual housing loans of Housing Development Finance Corporation Ltd (HDFC) and LIC Housing Finance Ltd (LICHF). The issue, which closed on August 29, has been marketed at a coupon range of 11.35 per cent to 11.85 per cent on book-building basis. The issue has drawn the interest of institutional investors, including insurance companies, mutual funds, financial institutions and commercial banks.
The transaction involves issuance of pass through certificates. The SPV is a trust settled by NHB. The deal, in the news for quite some time, passed through a checkered history first because of legal snags and thereafter due to interest rate hike.
Links Click here for previous news reports on this transaction.
A report in Jiji press of 4th Sept. says that real estate securitisation activity is soaring in Japan. As of now, MBS forms only 1% of the total bond market in Japan, but the signals are clear that the demand for MBS will keep growing due to strong investor demand for higher returns on investment amid the continuation of low interest rates and legal revisions to facilitate the establishment of special purpose companies and pave the way for the launch of real estate investment trusts.
Companies are also resorting to securitisation to clear up their balance sheets of real estate portfolios built during the go-go years of the past.
Some of the notable securitisation transactions in Japan in the recent past are securitisation of Seibu department stores which reflects the increasing trend towards CMBS transactions, securitisation of non-performing loans by Morgan Stanley reflecting the trend to get rid of non performing portfolios, mega securitisation by Dai-Chi, etc.
The Construction Ministry's also plans to securitize loans held by Housing Loan Corp. to the tune of Yen 50 billion next March and Yen 200 billion in fiscal 2001. This is expectedc to become a regular feature. The ministry has already picked Credit Suisse First Boston Securities (Japan) Ltd. as arranger of the securitization program. Terms of the scheme, including lead manger, yield and maturity, will be determined at the end of this year.
Links For more on securitisation in Japan, click our country page here.
With hardening of traditional reinsurance markets, interest in alternative methods of risk transfer, including securitisation of risk, is increasing, says a Survey in Financial Times, 4th Sept., 2000. Alternative risk transfer (ART) is the collective name to the devices such as securitisation, captive renting, etc. through which insurance companies or the protection buyers transfer insurable risk other than through traditional reinsurance. See our section on securitisation of risk for more on such devices.
Alternative risk transfer through catastrphe bonds has been common in risk cover for natural calamities. To date, about USD 5 billion worth cat bonds have been issued. Market practitioners feel that with hardening of traditional reinsurance markets, more such activity might be noted in time to come.
According to the Survey, banks have taken the early lead in developing ART techniques, but international reinsurers are trying to ward off competition by putting up their own ART conduits mostly in tax havens. A particular area of interest is weather derivatives – a number of power companies such as Koch Industries have used weather derivatives to hedge against income exposures affected by weather changes. See our page on weather derivatives for more info.
Much of motivation for ART will, however, depend upon simple economics. The prices of traditional reinsurance are still not high enough to warrant securitization. However, the prices are expected to harden in next 12-18 months, which will give a boost to risk derivatives.
Rep. Baker's proposal to withdraw inherent US govt. support to giant secondary mortgage lenders Fannie Mae and Freddie Mac is on hot seat of controversy. The upcoming debate on the proposed regulatory changes in this regard is expected to be charged. We on this site carried news report on the proposal – click here.
Currently, Fannie Mae and Freddie Mac are two shareholder-owned securitization agencies supervised by the Department of Housing and Urban Development. The Office of Federal Housing Enterprise Oversight, an independent agency under HUD, is responsible for ensuring that the lenders are operated in a financially safe and sound manner.
Under Rep. Baker's plan, Fannie and Freddie will be subject to the same capital rules for banks that hold their securities and will remove any implied financial risk to the federal government. The draft of the proposed regulatory overhaul was made by Baker who is the main advocate of the changes. It is also noted that In his letter to Rep. Baker, Fed Chairman Alan Greenspan has indicated his support for measures proposed by Baker.
Fannie Mae and Freddie Mac, on the other hand, have represented vehemently to retain their current status as champions of home ownership in the U.S. to record levels. Fannie Mae models is followed world-over.
Call it teething troubles or the infirmities of infancy. Or call it bureaucratic bungling, but unconfirmed reports suggest that the much-publicized government dues securitisation from Italy – the securitization of social security contributions by INPS – is fraught with some initial collection problems, and it seems that the first tranche due in Jan 2001 may not be paid in time. Click here to read about the INPS securitization.
Reports from market operators suggest that the deal's performance is disappointing at the point where it is feared that series 1 will not be called in January 2001 due to cash shortfall. Market operators stress that such an event would have a very negative domino effect on series 2 and 3. There are reports from the fiduciary in Italy suggest that during the first 8 months the appointed collectors (concessionari) didn't collect any funds at all, as the governement had not set the commissions for their remuneration. The seller INPS, however, did collect some funds.
Updated 3rd Sept., 2000 A report in Euroweek of 25th Sept. quoting Chase Manhattan's performance report and Italian press news reports says that investors and dealers are viewing the transaction with great anxiety. A report from Merrill Lynch also confirms that the cash collections for investors's servicing are far below expectations and it is quite likely that Series 1 AAA bonds will have an extended maturity. It is also reported that the servicing is being done by INPS, not by the concessionari who have not started collecting as yet.