SECURITISATION NEWS AND DEVELOPMENTS – December, 2001

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UK: whole business structure used for ferry revenues securitisation

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

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

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

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

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

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

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

India's new foreclosure norms will help securitisation

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

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

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

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

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

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

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

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

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

 

US securitization trade body to be launched soon

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

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

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

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

Bank of America subsidiary launches largest subprime home equity deal

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

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

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

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

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

Scope discussion on Accounting interpretation SIC 12 deferred

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

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

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

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

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

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

Securitization of government revenues booms in Italy

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

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

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

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

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

Links For more on Italian securitisation market, click here.

Colombia passes securitization law

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

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

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

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

    Philippines to push securitization law

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

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