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Read on for chronological listing of events, most recent on top:
US asset-backed market likely to finish with marginal growth
Added on Dec 21, 2000
While there were apprehensions that the ABS market will see a negative growth this year, it is likely to end up with a marginal growth up.
Guy Hands continues to make news in London
Added on Dec 21, 2000
With the series of infrastructure financings by securitisation, Guy Hands continued to be in the limelight in London press.
French bank in mega CLO deal
Added on Dec 21, 2000
French banking group Natexis announced a major securitisation deal worth Euro 2 billion.
World Football governing body to securitise
Added on Dec 21, 2000
FIFA, international football governing body, would raise USD 1 billion by securitisation.
Electricity company in UK to securitise receivables
Added on Dec 19 , 2000
Powergen, the third largest electricity producer in the UK has decided to securitise future receivables.
Securitisation makes headlines in London as the Tube mulls it for revitalisation
Added on Dec 19 , 2000
London's underground railway system, Tube, considers securitisation as it makes headlines in London newspapers.
IFC promoting securitisation in emerging markets
Added on Dec 12 , 2000
International Finance Corporation, Washington, is promoting securitisation in emerging markets.
First Islamic securitisation hits the market
Added on Dec 12 , 2000
Emanating from Saudi Arabia, this is the first securitisation complying with Islamic principles.
ABN Amro likely to come out with largest ever synthetic CLO
Added on Dec 12 , 2000
The market grapevine is that ABN Amro may hit the market with the largest ever synthetic CLO ever.
Alternative risk forum sees increasing convergence of insurance and securitisation products
Added on Dec 4 , 2000
A forum on captive and alternative risk transfer in the USA noted increasing convergence of insurance and financial instruments. The forum propounded insurance as a source of contingent capital.
S&P highlights investor perspective on securitisation
Added on Dec 4 , 2000
International rating agency Standard and Poor's highlights the advantages of securitisation for investors.
Stability brightens prospects of securitisation in Russia
Added on Dec. 1, 2000
As economic stability gradually returns to Russia, securitization deals are visible.
Munich Re to come out with cat bond
Added on Nov 30, 2000
Munich Re may enter the market with a USD 500 million catastrophe bond later this year.
Swiss Re provides insurance cover for franchise royalty securitisation
Added on Nov 29, 2000
In a recent transaction, Swiss Re provided insurance protection to credit-enhance a securitisation transaction for franchise royalties.
ABN Amro launches debutante Asian synthetic securitisation
Added on Nov 22, 2000
ABN Amro took the laurels in launching the first ever Asian synthetic securitisation in by selling the credit risk inherent in a mortgage portfolio.
Greece launches Hellenic securitisation: government dividend income securitised
Added on Nov 21, 2000
Greece securitised revenues being received by it in form of dividends from a State fund.
US FDIC staff issues draft memorandum on avoiding securities backed by predatory loans
Added on Nov 21, 2000
Advising banks to stay clear of either investing in or purchasing predatory mortgages, the FDIC staff issues a draft guidance memo.
Philippines president passes order for regulatory framework of securitisation
Added on Nov 21, 2000
President Estrada has signed an order directing several concerned agencies to develop a facilitative regulatory framework for securitisation in Philippines.
Mexican government proposes securitisation push
Added on Nov 21, 2000
The new government in Mexico wants to update its mortgage market and give a push to securitisation.
Korean Mortgage Corporation gets technical assistance of global majors
Added on Nov 10, 2000
The mortgage securitisation body in Korea has sought technical and equity collaboration with Fannie Mae, IFC, Countrywide and Merril Lynch.
Dutch tax reforms worry markets:Eurotunnel adopts new SPV structure
Added on Nov 10, 2000
The Dutch tax reforms that seek to treat junior tranches of securitised instruments as equity for tax purposes have already set the markets aflutter – the Eurotunnel securitisation deal has modified its SPV structure to avoid problems.
S&P cautious of risks associated with Japanese finance company securitisation
Added on Nov 9, 2000
There might be strong motivations for finance companies to securitise their assets, but this might hide significant risks, as rating agency S&P cautions.
Portugese securitisation market to grow, feels S&P
Added on Nov 9, 2000
Thanks to low interest rate environment, facilitative law and growing mortgage funding, securitisation of mortgages in Portugal is going to grow, says rating agency Standard and Poor's.
Synthetic securitisation spurts in Europe
Added on Nov 8, 2000
Synthetic securitisation volume in Europe has spurted to constitute almost 25% of the total ABS market.
Credit Suisse puts up securitisation unit in UAE
Added on Nov 8, 2000
CSFB has allied with a local partner to offer securitisation and real estate finance business for the UAE.
China to get into mortgage securitisation
Added on Nov 8, 2000
A newspaper report quotes Chinese monetary authorities saying China would soon launch mortgage securitisation.
Bank of Italy issues rules on administration of securitisation portfolios
Added on Nov 8, 2000
The Italian central bank has notified rules requiring banks to ensure independent administration of securitised portfolios.
Dutch tax reforms to hit securitisation
Added on Nov 7, 2000
Holland has proposed tax law changes that might treat junior tranches of securitization vehicles as equity rather than debt.
Malaysia exempts securitisation from stamp duty
Added on Nov 7, 2000
In the Government's Budget 2001, stamp duty payable on securitisation transactions was completely scrapped.
Greece follows Italy: to securitise social security contributions
Added on Nov 3, 2000
Greece is trying to repeat the Italian experience: in the 1st quarter of 2001, Greek social security contributions are expected to be securitised..
Italy to launch workmen's compensation insurance securitisation
Added on Nov 2, 2000
After successfully selling its social security contributions, Italy is all set to launch securitisation of industrial compensation insurance payments.
Pressure on for securitisation law in Philippines
Added on Nov 2, 2000
Federation of Philippine Industry has appealed for creation of securitisation regulations in the country which will spur the credit market and reinvigorate the economy..
European securitisation ratings show great resilience, shows S&P study
Added on Nov 1, 2000
Ratings transition, that is, downgrading or upgrading of a rating after the issuance of the security, is comparatively much less in case of asset-backed securities, shows a S&P study, implying ABS is a much safer bet.
Italy going ahead with second securitization of delinquent tax collections
Added on Nov 1, 2000
Italy is going ahead with INPS-II, the second securitisation of delinquent social security contributions.
European investors migrate over to ABS
Added on Nov 1, 2000
Investors in Europe are showing a distinct preference to asset backed securities even as bond markets are limping.
It has not been a very good year for US abs markets. While the first half showed a negative growth rate after a long time, the volumes picked up in the second half. With just two weeks to go, it now seems the volume for the calendar year will only be marginally up from the last year's, nowhere near the impressive double digit growth rate it was maintaining for a long time in the past.
As of end of the last week, volumes for year 2000 output stood at USD 263 billion, about 2% behind the 1999 volume of USD 269 billion. Taking expected deals during the holiday season into account, market analysts do not expect the aggregate year 2000 volume to be very better than that last year. The decline in volumes is attributed to lesser of 144A deals coming to the market, while public offers showed an impressive performance.
Market analysts are also busy making yearly tallies of lead investment bankers. It is likely that Salomon Smith Barney will end up as the top underwriter with Lehman Brothers at number 2 position.The two together will hold more than a quarter of the market.
Links For data of the volumes in the ABS and MBS market upto 30th June, 2000, click here.
With the focus on financing potential of securitisation for infrastructure projects in London, Guy Hands of Nomura continued to be in the news.
The Independent of 16th December carried the following comment:
"IF GUY Hands at Nomura can do it, then so can the fusty old managements who run the utility businesses that he seems so keen to get his hands on. PowerGen has became the first UK utility to mortgage some of its future revenues to pay down a chunk of its present debts [see news item below]. Peter Hickson, PowerGen's finance director, has parceled up about one year's worth of gas and electricity bills and sold them to Bank of America for pounds 300m. The resulting cash inflow will both help to reduce PowerGen's debts and cut around half a per cent from its interest payments.
Will other utilities follow where PowerGen has led? The most obvious candidate is Railtrack. Like electricity and gas bills, its track access revenues are secure and reliable. And if electricity and rail companies can do it, then why not water companies? Securitisation is one of the mechanisms Nomura would have used to make its takeover of Welsh Water stack up financially. This is just the kind of instrument water companies may now have to look at if, as looks likely, their exotic restructuring plans are blocked by the regulator. "
Who is Guy Hands
Head of the Principal Finance division of Nomura Securities at London is one of the most talked-about financiers in the City and in the securitisation world, he has the reputation of being the one who pulled securitisation out of its mainstream applications and intermixed venture capital approach into it to introduce to the world a wholly new range of asset classes such as pubs, real estate, plant and infrastructure assets.
French banking group Natexis Banques Populaires has announced that it has securitized a portfolio of loans to a number of companies under French control, for a total value of Euro 2 billion, as per a report in La Tribune of 20th December.
Following the launch of Natix in June 2000, this operation, which has been named Igloo, is the second securitization operation concerning a portfolio of loans to French companies by the Bank. The operation was jointly managed by Natexis Banques Populaires and Merrill Lynch International.
Federation Internationale de Football Authority [FIFA] wants to securitise future receivables to raise as much as USD 1 billion by way of securitisation, thus catapulting securitisation from the limited mainstream of banks and financial intermediaries to the sports arena. FIFA would be the first international sports body to use securitisation to raise resources. According to a report in The Times London, FIFA will cover its costs in the run-up to the next two World Cup tournaments. The organisation is working with Credit Suisse First Boston to prepare the securitisation for subscription by the middle of next year.
This would be the second notable instance of securitisation in the sports field, and the first of its own kind. Before this, Formula 1, the TV-based car sports organisation, has used securitisation to raise resources.
The securitisation deal banks o potential marketing contracts and television revenues surrounding the 2002 World Cup.
Powergen, the third largest electricity company in the UK, has decided to raise resources by securitising its future receivables. Reports suggested that Powergen will raise £300 milion against its customers' future payments of gas, electricity and telecoms bills.
Securitisation is seen as the right funding device to reduce the huge funding the company currently holds from banks. The company justified securitisation saying it would entail lesser funding costs as compared to straight bonds.
Links For more on securitization in the UK, see our country page here.
For a last few days, securitisation as an infrastructure funding option has been making headlines in London newspapers as it has been suggested as a mode of funding the essential revitalisatin of London's underground train system.
An agency called Transport for London has suggested securitisation as the device, whereby the Tube can raise Euro 3.8 billion to part-finance its requirements. The Times on 16th Dec. carried a commentary titled Securitisation is the right route by Patience Wheatcroft which projects securitisation among other options as a straightforward and cleaner option. The commentary cites the various ventures where Guy Hands of Nomura has used securitisation as a funding device: "Guy Hands has made Nomura a major player in such diverse sectors as train leasing companies, housing and pubs. There is no magic involved. Those who are prepared to put up the cash need to be assured that the income will be there to service the bonds and the coupon they demand is determined by the level of security they feel on that front. Pubs proved an easy deal for Hands, for instance, since he had no difficulty in persuading investors that the drinking public would continue to take refreshment in his establishments".
International Finance Corporation, Washington (IFC) is promoting securitisation in emerging markets. IFC has the task and reputation of spreading new financial instruments in emerging markets.
Currently, IFC is on various projects involving mortgage-backed securitisation in several emerging markets. In the past two years the IFC has helped set up new financial institutions in Argentina, South Korea and Colombia that are designed to buy up mortgages in the secondary market. The model adopted is similar to US Fannie Mae.
One of the institutions where IFC has participated as a promoter is KoMoCo, Korea. KoMoCo has already come out with three issues of mortgage-backed bonds. Click here for more about KoMoCo. In Argentina, IFC has helped in the promotion of a body called Banco de Credito & Securitizacion.
IFC's forthcoming projects could be Mexico, Russia and the Middle East.
The first Islamic securitisation is likely to hit the market soon. The transaction will emanate from Saudi Arabia and is backed by leases on military property. The transaction will be lead-managed by Credit Suisse First Boston. We reported on this site recently that CSFB has opened an office in UAE to promote securitisation in the Middle East. Soon, another commercial mortgage backed securitisation may be launched from Bahrain.
The transaction is aimed at attracting Islamic funds into investing in a deal which is compliant with Islamic principles. Islam debars charging or paying of interest: but risk-participation is permitted.
A report in Investment Dealers Digest said that the upcoming Saudi Arabian transaction will likely not resemble what Western investors consider a typical asset-backed security. The issuer would have to sell the assets to a third-party, special- purpose vehicle, which in turn would have to hold on to at least 51% of the assets securitized.
Links There is an article on Islamic securitisation in our articles section – click here.
Securitisation workshop in Bahrain Vinod Kothari Consultants along with Bahrain Institute of Banking and Finance will be offering a course on Securitisation and Credit Derivatives in Bahrain in March, 2001. For details, click here.
ABN Amro is reportedly preparing what would be the largest-ever CLO in history – a USD 15 billion deal. A report in Euroweek of Dec. 1 says that this would be a synthetic transaction, partly funded. As is the case with synthetic CLOs, the deal might aim to raise a part funding to provide credit risk swap to the USD 15 billion worth portfolio. The portfolio would comprise of North American corporate loans.
In the meantime, ABN Amro is already in market with Euro 8.5 billion synthetic securitisation of European corporate loans. Named Amstel CLO 2000-1, the offer consists of 4 tranches.
Vinod Kothari comments: Taking into account the above with Deutsche Bank's synthetic CLO named CAST 2000-2, European synthetic CLO activity seems to be at its peek.
Links For more on synthetic CLOs and CLOs in general, refer to our page on bank loan securitisation here.
Speakers at the the 10th annual World Captive and Alternative Risk Financing Forum held in Palm Beach Gardens, Fla., USA noted increasing trend towards convergence of financial and insurance products.
Erwin Zimmermann, divisional chief executive of Swiss Re New Markets saw insurance as an essential tool of risk management. It has become increasingly important for corporates to manage their volatility. The role that insurance solutions can play, therefore, is by helping to minimize that volatility and providing a source of contingent capital, which unlike debt or equity, is not reflected on a client company's balance sheet. However, unfortunately, the traditional financial markets do not see insurance as a financial product. "Rather than seeing it as a financial product that can provide a value, it instead is seen as a cost. A key attraction of using insurance as a source of contingent capital is that it can lower a company's cost of capital". The present-day corporate ought to see insurance as an essential building block of the company's capital structure, just like equity and debt. . "This shift in view means the risk manager is no longer the ruler of sprinklers and loss control, but also the owner of this financial area," said Zimmermann.
Zimmermann proposed insurance as a source of contingent capital.
Within the insurance product, according to Zimmermann, one has either the choice of speaking in terms of a traditional vs. alternative risk transfer, or one can talk in a more pragmatic sense: an optimally structured convergent financial instrument, where insurance is an element in a financial instrument. The financial instrument approach would require insurers to provide more modeling, a more complex structure and capital markets innovation.
International rating agency Standard and Poor's (S&P) has highlighted the advantages of securitisation from investors's perspective. A commentary titled The Investor Perspective: The Benefits of Buying Securitized Bonds appeared on Ratingsdirect on 28th Nov.
Securitization is being embraced the world over by pension funds, life insurers, and other types of investors because of key highlights of securitised instruments : their comparatively high quality and low volatility, their relative value, their ability to cope with unexpected events, and the opportunities they offer for portfolio diversification.
As regards low volatility of structured instruments, studies by the rating agencies show that the migration of the ratings, that is, downgrades or upgrades to the initial rating, are less frequent in case of securitised instruments than for other instruments. On this site, we carried a report on this study – click here. Over 1978 to 1999, S&P has rated 3269 ABS transactions with 4685 classes, of which only 2 have defaulted and only 2% have been downgraded. This is a remarkable evidence of stability and quality of ABS transactions.
Securitisation structures are designed to mitigage event risk, that is, impact of adverse economic scenarios on the performance of the transaction. S&P cautions investors against investing in transactions that look like securitisations, but truly speaking are not – "A lot of transactions look like securitizations on the surface but they ultimately depend on the ability of the underlying originator to generate more assets, in contrast to a true securitization".
Another strong investor incentive in investing in securitised products is portfolio diversification.
Lack of liquidity might be an adverse factor on a number of securitised instruments.
As the once-trouble-torn Russian economy is gradually recuperating, securitisation deals are being noted around, particularly future flows deals. Future flows deals have proved particularly handy for bringing down funding costs in emerging markets with low sovereign credit ratings.
Report in Euroweek 24th Nov. suggest that the EBRD and Standard Bank are finalising the underwriting of an asset backed loan that will provide financing for some half dozen Russian goldmines. More such deals are in the pipeline, says the report. A similar deal was struck last year – not exactly securitisation but a loan paid off by the sale proceeds of gold exported from the country. In view of the lower credit rating of the country, these deals are essentially bullet payment small tenure loans.
Links For more on securitisation of future flows, click on our page here.
Reinsurance company Munich Re might come to the market with a USD 500 cat bond against US hurricane and earthquake risk and European windstorm risk. The deal is expected to be arranged by Lehman and Goldman Sachs Munich’s subsidiary American Re will also play as a third manager on the deal.
The issue is expected to be tranched into two classes: a USD 250 million, three-year tranch dedicated to hurricane risk expected to be priced at 600-675 basis points over LIBOR and the other tranche for earthquake and windstorm risk expected to be priced at 675-750 basis points over LIBOR. The deal will be linked to a parametric measure, unlike an index-based or indemnity-based deal.
Links To learn more about cat bonds, click on our page here.
Swiss Re has provided first loss reinsurance on a securitization of intellectual property for Arby's(R), the fast-food chain best known for roast beef sandwiches. It was a private placement by a newly-formed special purpose vehicle of $290 million of non-recourse fixed rate insured notes.
The transaction is backed by rights to collect franchise royalties and fees from current and future Arby's(R) branded franchise owners throughout the U.S. and Canada, and is believed to be a cutting-edge transaction. — The execution hinges on an innovative insurance and reinsurance platform in which a Swiss Re Group company takes the first loss position, and Ambac Assurance Corporation takes the excess risk position and provides a AAA financial guaranty policy for the $290 million issue of asset-backed securities.
Swiss Re feels that the transaction will lead to a further convergence of insurance and securitisation markets.
ABN Amro bank took the laurels to become the first originator of a synthetic securitisation in Asia. The transaction, called HK Synthetic MBS Co. Ltd, seeks to transfer the credit risk inherent in mortgages originated by ABN Hong Kong.
The HK Synthetic MBS, a Cayman Island companuy, is the SPV used for the purpose, will write a credit default swap with ABN. The proceeds of the notes will be put up in deposits to be held by the SPV. The amount so deposited will be used in case of losses suffered by ABN which need to be compensated by the SPV in terms of the default swap.
Rating agency Standard and Poor's expects to give a AA rating to the class A notes to be issued. The transaction has as many as 5 classes running from A to E. A class forms the largest part , HK$ 1124 out of a total issuance of HK$ 1261. Class A notes get a subordination of approximately 10.8% due to the combined impact of classes B through E.
The reference portfolio consists of a pool of 1168 mortgages originated by ABN Amro. The principal outstanding under the mortgages equals the amount of notes issued by the SPV.
Links To know more about synthetic securitisation, click here.
Aptly naming it as Hellenic Securitisation, a Greek government body on 17th Nov securitised government receivables in a novel deal. The receivables in question are the dividends being paid to the Government every year by the state-owned Consignment and Deposit Loan Fund. The government has thus raised upfront cash to the tune of USD 633 million. Market reports say that this is the first public issuance of asset-backed securities in Greece, but two deals are closely following – one, that of lottery ticket receivables, and the next will be the Italian-type social security receivables.
The Hellenic Securitisation deal carried two tranches. The first tranche, having a maturity of 4.3 years, was priced at 18 basic points over Euribor, and the second tranche, with expected maturity of 10.3 years, was priced 24 basis points over Euribor. Investment managers have claimed that the issue was oversubscribed twice.
Your comments Securitisation of government revenues is becoming quite a cult in Europe, with Italy doing as many as 3 transactions over last year or so, and Greece doing or proposing three. Where do you think this is leading to? Do you have any views on this tendency? Do write back and we will be glad to publish your views on this site.
The issue of banks investing in predatory loans either directly or through the securitisation route has been causing concern of bank regulators in the USA, as covered earlier on this site. There have even been court cases against banks that bought
What are predatory loans:
Predatory loans are not just subprime loans. The FDIC draft guide lists the following features of predatory loans:
or underwrote such mortgages –see report here. The FDIC staff has now proposed a memorandum to guide banks into staying clear of buying or investing in predatory loans. The draft memorandum was issued on 17th Nov., and the FDIC has sought public comments on it. The memorandum provides suggestions on how to avoid purchasing or funding predatory mortgage loans and investing in securities backed by such loans. These activities may be the most common means by which financial institutions and other investors unknowingly help to fund predatory loans, incurring several risks.
Apart from buying subprime loans, the draft guides includes a section on how to refrain from investing in MBS secured by subprime loans.
The FDIC draft document is available at:
The site also allows electronic comments to be filed with the FDIC.
Philippines president Joseph Estrada has ordered the goveernment agencies concerned to develop a legal and regulatory framework. The President passed an order to this effect on November 17 [E.O. No. 318]. The order is effective immediately.
Earlier on this site, we carried news about trade and industry in the country pleading for facilitative regulatory framework for securitisation. Responding quickly, the Presidential order instructs the Department of Finance, the Bureau of Internal Revenue, and the Securities and Exchange Commission, as well as the Housing and Urban Development Coordinating Council (HUDCC), to form top-level teams which will develop the administrative and regulatory framework in their respective departments for the development of a market for assetbacked securities, in consultation with the private sector.
Besides clarifying the regulatory, tax and securities regime relating to securitisation, it is expected that the Order will also achieve the following:
Other provisions of the E.O, include the following:
1. The SEC shall issue the revised rules on securitization and shall recognize the creation of Special Purpose Vehicles as the recipient of assets and issuer of asset-backed securities and securitization transactions, if determined to be within the current legal and regulatory framework.
2. The Insurance Commission shall study and, if possible, implement the expansion of the coverage of admitted assets for insurance companies to include investments in assetbacked securities.
3. The above listed agencies shall coordinate and seek the assistance of the BSP regarding policy, administrative and regulatory issues in securitization where coordination with BSP is necessary.
4. The HUDCC, in coordination with the SEC and DOF, shall initiate the formation of a private sector Secondary Institution (SMI) for assetbacked securities with priority to the housing industry.
5. The Board of Investments shall consider the inclusion of SMIs for asset-backed securities in the Investment Priorities Plan as among those eligible for tax and other incentives under the 1987 Investments Code.
President-elect Vicente Fox who broke the 71-year old single-party reign in Mexico and will assume the presidency from Dec 1 wants to give a big push to securitisation. To carry the idea to reality is Mr. Jose Luis Romero Hicks, who is overseeing housing policy as a part of the President's team.
To begin with, Hicks wants to set up a body similar to the Fannie Mae for securitisation of mortgages. Hicks plans to undertake a series of steps to make this possible. Although twenty-three of the country's 32 states have adopted laws making it easier for mortgage lenders to foreclose on the homes of delinquent borrowers, the country does not have a secondary mortgage corporation. Title insurance does not exist.
Hicks' plan is to securitise mortgages worth USD 2.5 billion out of Mexico every year. Towards this, he has discussed his plans with Wall Street investors at firms such as Citibank and Merrill Lynch. [based on the Dallas Morning News 19th Nov.]
Internationally-known mortgage-market-maker Fannie Mae, mortgage lender Countrywide International Holding, and global investment banking firm Merrill Lynch have tied up with Korea Mortgage Corporation (KoMoCo) as foreign technical partners to assist KoMoCo in various aspects of its mortgage securitisation business.
KoMoCo is the Fannie-Mae-type body to securitise mortgages in Korea. KoMoCo's website is here.
Under the contract signed on 31st Oct., IFC takes over equity stake in KoMoCo equal to KRW 15 billion. Besides, Merril Lynch will provide assistance in capital market development, Countrywide in business development & operations, and Fannie Mae in IT Development & Treasury Functions.
KoMoCo has already begun issuance of mortgage backed securities. In September this year, KoMoCo issued 500 billion won worth of mortgage-backed securities which was its second issuance.
The recent proposed tax reforms in Holland which seek to treat the junior tranches of securitisation paper as equity for tax purposes has set the markets aflutter. While this website has been getting several mails of concerned market players, there are even news reports of several recent securitisation structures trying to protect themselves from being adversely affected by the proposed changes.
For example, the recent securitisation deal of Eurotunnel had an SPV set up in Netherlands. The transaction will now also be using an SPV in Luxembourg. The transaction can use either of the two SPVs to issue the notes. The obvious plan of action is to shift the jurisdiction avoiding Netherlands.
What do you think of the Dutch tax reforms? We have initiated a discussion on the Dutch tax reforms – have a look at it and post your views – click here.
Securitisation by finance companies forms a predominant part of Japanese securitisation, and Standard and Poor's expects this to grow particularly among small to midsize players, given the potential for securitization to help finance companies' assets become self- funding. To date, finance companies in Japan have securitized a wide array of asset types, including lease receivables, installment sales receivables, unsecured loan receivables, and other types of trade receivables.
While appreciating the motivations for finance companies to securitise, S&P is cautious of the risks securitisation carries. In a report on Ratingsdirect, S&P discusses the following risks inherent in finance companies' use of securitisation:
- Credit risk, retained by the originator, in form of a reserve account funded by the originator, and/or the purchase of subordinated tranches of notes.
- Liquidity risk stemming from early amortization triggers in revolving structures. Early amortization events in asset-backed issuance are often tied to the performance of the securitized asset pool. As such, if the asset pool performs significantly below expectations, the transaction might not be able to fund the purchase of new assets, and/or a wind-down of the transaction might be triggered prior to expected maturity. Usually the originator has incentive to avoid triggering early amortization events, and in some cases can do so by adding better-performing assets to the securitized portfolio, although this practice varies depending on the individual structure of the deal and the incentive for the originator to do so.
- Variability of cash flow. In many structured transactions, originators receive cash from the receivables only after certain obligations under the notes have been paid, such as interest on the senior notes, various fees, and the establishment of required cash reserves. In essence, the remaining excess servicing income from the securitized assets amounts to a variable income stream, which has to be incorporated into the company's asset liability management strategy as if the assets remained on balance sheet.
- Accounting risk. Under new accounting rules adopted in April of this year in Japan, originators will record up-front gains from the sale of receivables in securitizations. These gains are essentially the present value of future cash flows expected from the excess spread generated by the assets and servicing fees. If assumptions regarding gains prove to be unrealistic, companies may be required to write down recorded gains. Moreover, because future income streams are being recognized up-front, any slowdown in up-front gains through securitization activity could lead to a precipitous drop in income, as occurred in the U.S. in 1998.
Currently, the risks associated with securitization are insignificant for Japanese finance companies rated by Standard & Poor's, because the practice of recording up-front gains from securitized assets is relatively limited, as is the extent to which these companies rely on securitization as a funding technique. Nonetheless, because of the growing popularity of structured issuance, Standard & Poor's will continue to monitor the impact of asset securitizations on the overall credit quality of finance companies in Japan.
Rating agency Standard and Poor's is of the view that mortgage securitisation in Portugal is likely to grow, enabled by a growing market for mortgage funding, facilitative law and low interest rate environment.
Securitisation law was passed in Portugal in November last year. On the securitisation laws section of this site, we have the full text of the Portugese securitisation law – click here. The law has established and simplified procedures for the transfer of mortgages and substantially reduced the associated costs, opening up the door to the development of an RMBS market in Portugal. Under the new law, a transfer of mortgages for the purpose of securitization does not require a public deed, making the process virtually free of charges or costs. A transfer agreement contracted under private law between the assignor and the assignee is sufficient to make the transfer valid and enforceable.
S&P officials also feel that the low interest rate regime is conducive to securitisation. The steady decrease in interest rates, which fell to 3% at year-end 1999 from 13% in 1990 and strong economic growth (on average 1% above the E.U. 15-year average between 1996 and 1998) augment the new Law to stimulate the Portuguese mortgage market further and assist in the growth of securitization.
A Reuters report quotes Merril Lynch as saying that synthetic securitisations have shown an amazing growth from almost nowhere in 1999 to constitute about 1/4 of all securitization in the current year.
Merril Lynch estimates the year-to-date volume of synthetic securitisation at around USD 19 billion, as compared to USD 65 billion for funded securitisation. Synthetic securities had a negligible presence last year.
Synthetic deals are popular because they enable institutions to get assets off their books for regulatory purposes, thus freeing up capital, without selling them to vehicles that issue asset-backed bonds.
Links Our page on CBOs/ CLOs provides an interesting reading, and further links on synthetic securitisation. Click here.
Credit Suisse First Boston (CSFB) has allied with Strategic Capital, a UAE based company to set up a commercial real estate finance and securitisation operation in the Gulf. This is the first dedicated attempt to initiate securitization in the Gulf region. The securitisation unit was inaugurated on 5th Nov.
Speaking at the inaugural function, Jonathan Davie, vice-chairman of Credit Suisse First Boston said that while the UAE has rapidly grown and diversified from an oil-dominated to a modern, service-oriented economy, the next natural step in its progress is the integration of its financial system to the global capital markets, so that its private sector may benefit from long-term international investment. Real estate securitisation will benefit the UAE since it will introduce international institutional investors to the country and provide it with a benchmark credit framework, which in turn facilitates the issuance of corporate bonds or equity.
According to a report in Reuters of Nov. 7, China is studying the introduction of securities backed by housing mortgages. The Reuters report is based on the official China Securities newspaper. Dai Genyou, director of the monetary policy department of the central People's Bank of China, was quoted as saying the government had been studying the instrument since last year. No definitive time table for the mortgage securitisation was given. Dai said the central bank had identified two possibilities, setting up a specialised institution for securitising mortgages, or selling mortgages directly.
News reports about the Australian bank Macquarie Bank Ltd tying up with China Construction Bank for mortgage securitization has been around for quite some time. Click here for a news on this site.
Links Do visit our country page on China here.
The Bank of Italy has recently issued rules that require banks getting into securitisation to ensure that the funds on account of securitised accounts are not comingled with those of the bank, and there is greater transparency is administration of securitised portfolios.
According to a write up in Corporate Finance October, 2000, these rules require the securitising bank to (i) ensure the constant separation of the portfolios of different securitization transactions with their own assets, (ii) ensure the transparency of each transaction to investors and the market, (iii) ensure entering into exclusively transactions which pertain to the administration of each securitization transaction on a mutually exclusive basis.
The central bank has also required that the sums relating to each transaction must be deposited in specific bank accounts, expressly identified or separated for each transaction. The special purpose vehicles will also have to keep accurate accounting notations separate for each transaction. The notations will have to be continuously updated and would need to permit to (i) reconstruct at any time the aggregate of the transactions entered into in connection with each securitization, (ii) give concrete application as to the provisions on the segregations of the portfolios, assuring the separations of the assets of the vehicle from those of other transactions. In this respect, Bank of Italy requires that it receives the offering circulars, periodical information and statistical updates on the basis of forms to be subsequently distributed by Bank of Italy for each transaction.
Links For securitisation in Italy in general, please do see our country link here.
Tax law amendments proposed in Holland called the Dutch Tax Reform 2001 would adversely hit securitisation business. The new tax proposals will have the following serious implications: (a) tax deduction to the issuer will not be available on subordinate tranches of Dutch ABS ; (b) at the same time, investors could become liable for withholding tax. It seems that the tax laws would treat the subordinate tranches at par with payments to equity, having both the above consequences.
The tax measures above are not targeted at securitisation per se, but for hybrid debt instruments which conceal features of equity in debt instruments. What adds to the injury is that these proposals are to be given retrospective effect from January, 2000.
As per the proposed amendment, a debt instrument will be treated as a quasi-equity if two of the following three conditions are satisfied: (a) if the coupon or compensation is contingent on profits or can be postponed; (b) if the loan is perpetual or has a maturity over 30 years; or (c) if the loan is subordinated to one or more non-preferential loans. Condition (a) and (c) could easily be satisfied by subordinate securitisation tranches.
Vinod Kothari comments: With increasingly complicated financial instruments being designed, it is always a dilemma to distinguish between payments on equity and payments on debt for tax purposes. The former are appropriation of income; the latter are a charge against income. The Dutch tax reforms only are a pointer to what might be a larger concern over time in other countries too.
While presenting his Budget 2001 before the Parliament recently, Finance minister Tun Daim Zainuddin proposed to scrap stamp duty on securitisation transactions completely.
He also proposed to scrap the real property gains tax on securitisation.
This may be a major incentive for securitisation transactions to take place in Malaysia. In the past, Malaysia has been depending on notifications exempting stamp duty having a limited effective period. The Budget proposal will change the law and abolish stamp duty on securitisations completely. The property gains tax is also on issue on mortgage securitisations, as it may be contended that transferring a mortgage is akin to transferring real estate.
Securitisation market has still been been in its infancy in Malaysia, with very little activity on the domestic front apart from the purchase of mortgage loans by Cagamas.
Links For more on securitisation in Malaysia, check here.
Following the landmark securitisation of government's social security dues in Italy, Greece will be shortly coming out with securitisation of delinquent social security contributions. According to a report inEuroweek, the social security payments to IKA that were to be originally securitised this year will now most likely land in the first quarter of 2001. The issue will raise between Euro 2-3 billion, and is being arranged by BNPP, National Bank of Greece and Salomon.
The government is also likely to securitise future Greek lottery receivables and raise Euro 900 million. That deal is mandated to Morgan Stanley, Schroder Salomon Smith Barney, Warburg and two Greek banks.
Links: For more on securitisation in Greece, please see our country page on Greece here.
After being successful in raising upfront cash against its social security receivables, Italy is all set to lauch another first – securitisation of insurance receivables against mandatory industrial compensation insurance. A report on news portal efinancialnews.com by Piers Townsend says that this deal may be launched next week.
Workmen's compensation insurance payments are mandatory payments required by employers and self-employed to an agency called Istituto Nazionale per l'Assicurazione contro gli Infortuni sul Lavoro (Inail) which compensates the participants for accidents or injuries at workplace. Inail is going to securitise these receivables in a USD 1.14 billion transaction that will rated AAA. Like the government social security contributions securitisation last year, this deal also consists of delayed payments. The notes will have an expected maturity of 2.5 years.
BNP Paribas and JP Morgan are lead managing the deal with Banca di Roma and Finanziaria.
Links: Our country page on Italy consists of comprehensive materials, articles and links – click here.
Leaders of the Federation of Philippine Industries (FPI) have urged monetary authorities to put securitisation laws in place to revive the economy and spur credit and lending. FPI has also suggested that Bangko Sentral ng Pilipinas, should encourage securitisation by providing its stampon the face of the instruments created by securitisation.
FPI explained that this program can also be used by the banks to liquidate their non-performing assets (NPAs).
The banks may create a "special purpose vehicle" that would pool these non-performing assets and issue securities against these assets to convert their real estate inventories into cash.
FPI leaders presented this program in a meeting with Trade and Industry Secretary Mar Roxas II at the BOI building early this week.
Through this asset backed securities program, the government may be able to enhance the credibility of these instruments by adding their guarantee to these securities with the condition that part of the proceeds of this investment scheme would be allocated to the financially distressed but economically-viable institutions.
It is notable that the country's economy is currently in serious problems and the peso is fast depreciating against dollar.
Ratings of securitised instruments in Europe have been very stable, indicating that the risk of an ABS being downgraded, after it is bought, is comparatively much lesser. In respect of the lower end of structured products, rated A or below, the chances of downgrades are very very low, almost nil. This is evident from a listing of ratings transition published by international rating agency Standard and Poor's. [European Asset-Backed Transactions' Transition Study, dated 26th Oct.]
Rating transition is an important tool in risk evaluation of securities. The transition table lists the number of cases that have been downgraded or upgraded, and migrated up or down, over a past number of years. Based on the transition study, analysts compute the probabilities of a certain rating to stay through the life of the security. The S&P study takes into ABS rated by S&P from 1987 till the first half of 2000.
Some of the highlights of the study are:
- No European asset-backed transactions have defaulted since the market's inception;
- As of the first half of 2000, all European asset-backed transaction downgrades occurred as a result of supporting party downgrades, that is, downgrades of credit enhancers or guarantors: 73% of these were a direct result of one single factor, the downgrading of a number of major insurance companies in the early 1990s; 21% from downgrades of third parties to the transaction; and 6% were as a result of the introduction of EMU when the ratings on six of the 'AAA' local currencies converged in the 'AA' category affecting asset-backed transactions’ ratings where the respective sovereign was a supporting party;
- The European asset-backed market has reduced its reliance on third-party credit support through the introduction of a number of new structural features;
- A remarkable fact brought out by the study is that the lower rated classes -A or below, have proven to have been the most stable to date. For example, in case of A rated paper, out of 145 issues, 4 have been upgraded and only 2 have been downgraded. (S&P however cautions that lower rated paper did not exist in any great number until 1997, and have existed only through very favorable economic conditions and generally are not affected by the rating level of supporting parties);
- and Since the beginning of 1999, there has been a marked increase in the number of upgrades reflecting the performance of the underlying collateral, testifying to market’s increasing maturity.
Full text of this important study is available on S&P website – under Structured Finance, look for Commentary
Last year, Italy stole international limelight when it securitised delinquent social security contributions. The transaction, named INPS, has since been in problems as collections were delayed.
Unfazed by problems in INPS-I, Italy is going ahead with INPS-2. The mandate for INPS 2 has been awarded to the houses that arranged the first tranche. The government is apparently in a hurry and wants to complete the deal before the end of the year to meet is budgetary deficit targets.
INPS 1 ran into trouble three months ago when it became clear that payments had not been collected as expected. The problem stemmed from a lack of communication between the government and the various debt collectors. On this site, we have carried reports about these problems – click here.
Links For more on Italian securitization scene, click here.
European investors are showing a distinct preference to asset-backed securities. While bond markets in general are in shambles, investors equate asset-backed securities with government bonds and German pfandbriefes in terms of risk perception.
One of the most important factors that has boosted demand for ABS in Europe is the fact that there has not been a single case of default ever since the inception of the market in late 1980s. During year 2000, there has not been a single case of rating downgrade of an AAA-rated European ABS paper, while downgrades abound in other debt securities.
Post August 2000, there has been plenty of issuance in Europe, and issues have met with liberal response from investors. Several market professionals state the most remarkable fact: not only is there strong demand, there is demand from investors who are new to the ABS market.
Vinod Kothari adds: Apart from the resilience of ratings and the fact that there has not been a default, there also seems to be working a usual S-curve phenomenon. The market is on the steep-slope-up part of the S-curve, while the US market has come to flat plateau stage. European investors are still honey-mooning with asset-backed securities. Hope the honey moon lasts long!