[This page lists news and developments in
global securitisation markets – please do visit
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Read on for chronological listing of events, most recent on top:
Mar 02 ...Jan 02 .…Dec., 01.…Nov, 01 .… Oct.,2001.,Sep.,2001., Aug 2001… July, 2001, .June, 2001, May, 2001,…April 2001… March 2001 ..Jan. and Feb.2001 Nov. and Dec.2000 Sept. and Oct. 2000 July and August 2000 May and June 2000 April 2000 Feb and March 2000
Securitization SPVs to be out of FASB's new consolidation norms
Added on Feb 28, 2002; updated March 1
Finally, the ghost of Enron is not going to hit accounting for securitisation: the FASB's decision for now is not to include securitisation SPVs under the new consolidation norms.
Indian Budget hints at measures to speed up securitisation
Added on Feb 28, 2002
The Indian Finance Minister presented Union Budget for 2002-3 fiscal year, and spoke of securitisation and security foreclosure legislation.
FASB meeting today for SPE consolidation draft
Added on Feb 27, 2002
The FAS board meets today to discuss a proposed draft for consolidation of SPEs.
Superior Bank's residual interests fetch almost half the book value
Added on Feb 27, 2002
As yet another example of the presumptive values put on residual servicing interests in securitization deals, the failed Superior Bank's residual interests sold for about half of the written down book value.
Add scotch to your securitisation bar
Added on Feb 27, 2002
If you had champagne-backed bonds before, fill your bar with scotch-bonds now!
Bankruptcy professionals do not want securitization safe harbour
Added on Feb 25, 2002
An on-going poll on the site of US bankruptcy institute does not want safe harbour to securitization transactions in section 912.
World Bank opposes gas reserves securitisation in Philippines
Added on Feb 25, 2002
World Bank alleges contractual violations if the Philippine government goes ahead with the oilfield revenue securitisation.
Gain on sale accounting is tricky business: analysts
Added on Feb 25, 2002
Analysts continue to point their guns to securitization accounting: this piece in Forbes says Washington Mutual is inflating profits upfronting imaginary profits on securitization.
Securitisation can obfuscate and cheat
Added on Feb 18, 2002
As the Enron saga unfolds, complex financial instruments such as securitization are coming under fire.
European ABS rating transition shows resilience
Added on Feb 15, 2002
Though there were several downgrades, the market on the whole shows resilience, Rating transitions also show some pattern on CDO downgrades.
India's first CDO to take a mutual fund route
Added on Feb 14, 2002
India's leading financial institution ICICI announced plans for a Rs 5.02 billion CDO, structured through a mutual fund.
Consolidation accounting standard likely soon
Added on Feb 14, 2002
As a first casualty of the Enron collapse, the US FASB may soon promulgate accounting standard on consolidation of SPEs.
More on securitization and bankruptcy reform
Added on Feb 14, 2002
We give more references to the raging controversy on the Bankruptcy Reform relating to securitization true sale.
European telcos see flexible funding option in securitization
Added on Feb 8, 2002
Going for corporate debt in current volatile markets may not be just right; so European telecoms operators are eying securitization markets.
Philippine railway developer to get securitization funding
Added on Feb 7, 2002
In a deal to originate from Philippines after nearly 5 years, a railway development project will get funding from securitising build-lease-transfer payments.
US ABS market prepares for rough ride
Added on Feb 6, 2002
After years of continued surge, the ABS market is keeping fingers crossed for a rough ride.
Operating revenues securitisation to be tried in USA
Added on Feb 6, 2002
A device mostly limited to UK and allied legislations is making its advent in the USA in two projected deals.
More on the Bankruptcy Reform on securitisation
Added on Feb 5, 2002
We bring to you the comments of Prof. Steven Schwarcz, one of the top academics on securitization regarding the Bankruptcy Law reform on securitization.
Enron brings true sale issue to the fore?
Added on Feb 1, 2002
As was apprehended in our last news piece, the true sale in asset securitisations is very much in forefront thanks to Enron..
As per decisions reached at the meeting on 27th Feb (tentative and unofficial), the new accounting standards on consolidation are intended to exclude qualifying SPVs under securitization accounting. FAS 140 puts certain conditions in order for an SPV to be treated as a qualifying SPV. For details, refer to our page on accounting.
The new consolidation norms are being made in the wake of Enron which used several SPVs to hive off assets and liabilities and thereby made the balance sheet illusory.
Under the new norms under making, a primary beneficiary will consolidate an SPV unless it can establish itself to be "sufficiently independent". The sufficient independence criteria will be satisfied if the SPV has the ability to fund or finance its operations without reliance on the Primary Beneficiary or a related party for guarantees or other forms of support. Besides, at least 10% of the total funding of the SPV, meaning debt and equity, should be form of legal equity which is subordinated to all other funding. Such substantive equity must not be guaranteed or protected and must carry uncapped risks and rewards.
Update on March 1 One of the conditions for an SPV to be a qualifying SPV is business restrictions. SPVs should be completely brain-dead and should not have a power to decide.
CDO conduits, which are managed by conduit managers, often have a power to add to the collateral, replace collateral etc. Many of actively managed vehicles which are run like hedge funds based on certain triggers. Certainly, CDO vehicles will not be QSPEs under FAS 140 and therefore, they might be affected by the new accounting rules. However, the most difficult thing would be to identify the "primary beneficiary" for a typical arbitrage vehicle as the equity ownership of a CDO is likely to be dispersed. So, even if it is hit by the new consolidation norms, it will not be easy to identify the entity with whom it should be consolidated.
Indian Finance Minister Yashwant Sinha presented his Budget 2002-3 today before the Parliament, and among other banking sector reforms, hinted at a forthcoming legislation that would enable banks to securitise their loans.
Sinha talked about a banking reform legislation which will allow banks to securitise their loans, as also provide for foreclosure of private property security interests. There was no time specified for introduction of the Bill. However, a related proposal for which he fixed 30th June 2002 as the time limit was the setting up an asset reconstruction company which will buy NPLs from Indian banks and securitise the same. Assuming that the proposed securitisation legislation will also be needed for the NPL securitisation, it may be likely that the proposed bill may be moved in the current sesssion itself.
Besides, though Sinha talked about the foreclosure law and the securitisation law, the impact of both is not limited to banks only.
A draft securitisation law has been around for quite some time -see the text on my site here.
The foreclosure of private security interest law refers to a special legislation whereby enforcement of security claims on movable property will be allowed through recovery officers rather than through Courts – we have commented on this draft law on this site.
Asset reconstruction companies are specialised bodies that buy bad loans from banks with the sole brief of resolving the same. There are similar bodies in Korea (Kamco), Malaysia (Danaharta), China (Huarong) etc.
Links For more on securitisation in India, click here.
Workshops For a 2-day securitisation training on legal, regulatory and acccounting issues in New Delhi, click here.
The FASB is meeting today to revise its interpretation on consolidation of SPVs. It is expected that the Board will finalise a draft interpretation on consolidation of SPVs that will cover the scope of the interpretation, the meaning of SPVs and the tests to identify an SPV as different from an operating company, tests for identification of the primary beneficiary (sponsor) of an SPV, laying down the test of sufficient independent economic substance, substantive equity investment at risk and substantive risks and rewards of ownership of an SPV.
The interpretation is expected to increase the present required minimum of 3% independent at-risk investment in the SPV to 10%.
We will post you more news on this issue we get to know developments.
Links For meaning of an SPV in the context of securitization and other deals, as also for brief of the existing accounting rule, click here.
Superior Bank's failure was blamed partly on wrong accounting for residual values in form of servicing and end-period interests in securitised mortgage portfolios – see story on our site here for details. Now inspite of several forced write downs, the servicing rights recognised in books at a value of USD 800 million have actually fetched only USD 471 million, leave aside an earning of USD 46 million received during the intervening servicing period.
Superior Bank, a thrift, went bust last year and the FDIC took over its assets. Out of a securitized subprime mortgage portfolio of USD 3.7 billion, the bank had recognised residual interests of USD 800 million, after a series of regulator-forced write downs. Subprime residual interests are obviously more credit risk sensitive and therefore, their valuation has to be very cautious, but the Superior Bank's track record proves that when it comes to securitization accounting, accountants have long forgottten the age-old rule of conservatism.
Links Securitisation accounting has been a hotly debated issue, particularly after Enron. See discussion, several links and articles on our page here.
Let us say three cheers to the innovative pace at which securitisation markets are growing. The other day, a US inventor wanted to use a mix of the Bowie Bonds method and the cat bonds device to securitising lottery jackpots.
With Marne et Champagne deal, where you buy bonds backed by champagne stocks, it is only but natural that you will like to add scotch, and may, over time, wine, vodka and tequila as well.
Evening Standard UK reported that Glasgow-based Kyndal International, maker of Whyte and Mackay, is preparing to raise GBP 188 million by securitising inventory of scotch maturing in its cellars. The issue might be in the market by mid-April or so.
The funding is being raised to repay a loan of an equal amount taken from WestLB for taking over the distilleries from a US company. Thus, you have leveraged buyout in a different form.
The methodology of the deal is apparently sounding similar to the Marne et Champagne deal. Stocks of scotch at various stages of making will be pledged to a security trustee who would realease the same against sale proceeds. The sale proceeds will be used partly to pay off investors in the bonds and the balance to buy fresh stocks from the company.
If a poll running on the website of the American Bankruptcy Institute (abiworld.org) is an indication, the Congress may be forced to scrap the safe harbor protection it intends to provide against true sale question in bankruptcy proceedings to securitization transactions.
At the time of visit early today, 48% of the visitors were opposed to any such safe harborm while only 25.6% favored it.
The question for the poll was: Section 912 of the pending legislation creates a safe harbor from bankruptcy for certain borrowing transactions that are recast as sales and structured in a securitized SPV. In your opinion, this provision would:
- appropriately increase legal certainty in the event of a bankruptcy for legitimate asset securitizations, got 125 or 25.61% clicks.
- lead to sham and/or secret transactions that inappropriately shield assets from other creditors, got 236 or 48.36% clicks; and
- don't know/no opinion got 127 clicks.
The poll is still on.
While the size of the polling visitors is not large enough to be reflection of a popular mood, it needs to be realised that the subject is extremely specialised and not too many people could be visiting ABI's site, or voting on the technical issue. Besides, it is also natural that the visitors to the site are mostly bankruptcy professionals, lawyers or legal professionals, whose views are anyway known in the matter.
Cast your vote The ABI website is understandably visited mostly by bankruptcy professionals. Let us take the views of the securitization industry – go to the Index page and cast your vote on this very important issue concerning securitization.
According to news reports in BusinessWorld (Philippines), the World Bank (WB) is opposing government's plan to use earnings of the Malampaya Gas Project which has been talked about for quite some time now. According to the WB, such a plan will relegate the WB to the status of a less preferred creditor while the country has promised a preferred creditor status to the WB.
According to the WB, WB's general loan conditions bar member countries from supporting state borrowings with collateral since the bank itself extends loans without security. The securitization scheme aims to convert the Malampaya Gas Project's revenues into collateral. This will violate the WB's 'negative pledge' clause which is a part of general lending documents, under which no other creditor could be put at a better status by charge over the public property..
The Philippine government was planning to raise something like USD 500 million by securitisation of the gas revenues from the Malampaya project. The project itself is a USD 5 billion investment.
There were such voices all the time, but Enronitis has only brought it to fore: the possibility of imaginary gains on sale sitting on the balance sheets of frequent securitizers.
For example, a recent article in Forbes March 4 titled Is Accounting Dead lists 4 stocks to avoid, which includes Washington Mutual: the largest thrift (Savings and Loans Assocation) in the USA. It has a market capitalisation of USD 31 billion. and asses of USD 243 billion. As for many other mortgage players, the company adopts the gain-on-sale approach to accounting its securitization profits, which in a layman sense means somewhat as follows: the company writes mortgages that it would service for up to 30 years, and yet books some of the profit up front when it sells the future income stream by way of securitization. While this sounds perfectly normal and legitimate for any securitizatio professionals, the analysts smell a rat in this. In the case of Washington Mutual, these upfronted gains more than tripled last year to just shy of USD 1 billion, or 22% of pretax earnings before extraordinary items. .
As the yearly gains on sale went up, so also did the value of retained servicing and residual interests, an asset under FAS 140. In this case, the cmmpany has booked a USD 6.2 billion in such assets, which is up more than sixfold in a year and equal to 44% of shareholder equity.
The analyst compares this with a patent company booking its future stream of income on the patent the day it is issued. There is no question of the legimacy of the gain-on-sale practice under the current GAAPs: but it the GAAPs itself which are under fire right now.
"Calling future profits an asset is a tricky business", says the analyst. To reflect the volatility of these pre-supposed earnings, the analyst points to the revaluation of the retained interests which in the current scenario almosts invariably leads to write down there was USD 1.7 billion by the company last year.
Links There is quite a lot of material on this site on gain on sale accounting and accounting rule EITF 99-20 under which firms like Washington Mutual might have had to write down retained interests.See our page on accounting issues.
The biggest casualty of the Enron debacle is that analysts, journalists and social thinkers have pointed their guns at complex financial instruments. On our credit derivatives site, we have carried news of the opprobrium building against derivatives in general and credit derivatives in particular. Securitization is no better – as the following shall reveal.
Martin Hutchinson, Business and Economics Editor of the United Press International wrote last Friday that securitization has a very wholesome purpose, but it can be used to obfuscate and cheat, and in the 1990s, it was too often employed for that purpose. Martin's peace ends with the bottomline: "reforms are urgently needed".
Martin goes into the history of securitization into the 1970s where it was invented as a device for affording tradability to government-guaranteed mortgages, that is, prime mortgage loans. The device was later used for selling down prime credit cards, and further down, subprime mortgage loans, and then subprime credit cards. Evidence is clear that more and more originators have used securitisation to create and sell the assets that they would not like on their balance sheets. "The two principles of sound securitization, of diversification of securitized assets and of first class securitized asset quality, have been violated time and again in the last 10 years, for transactions involving hundreds of billions of dollars. Consequently, the balance sheets of many of the largest banks, and of heavy participants in the securitization market such as GECC, have hidden deposits of financial "toxic waste" — risk exposures that, in a deep recession, are far more concentrated and more intense than might be expected from a casual reading of the balance sheet and knowledge of the institution's overall loan portfolio", says the author.
According to the author, there must be stringent regulatory checks before securitised portfolios are allowed to go off the books. First, the quality of the portfolio, clear of any credit enhancements, must be good to stand on its footing. Two, if the portfolio is undiversified, it must be sold as in bilateral deals with no participation of the seller.
The author is also in favour of restricting off balance sheet treatment and adopting something similar to the UK's linked presentation approach.
Rating agency Standard and Poor's came out with a rating transition history for European asset-backed issuance covering period from 1987 to 2001. While there have been several downgrades in year 2001, the overall scene is still one of resilience, and the rating agency expects the trend to continue through 2002.
The major highlights of the study are:
- The market expanded substantially in 2001. At the end of the year, there were 1,299 rated classes and 702 transactions remained outstanding.
- Though Europe has traditionally been an RMBS-dominated market, for the first time in 2001, CDOs took over RMBS on year-to-year basis. CDOs took 32%of the total classes rated. See more on our page on Europe here.
- No European ABS transaction rated by S&P has defaulted since the market's inception. Market information is that no other Euoprean ABS has defaulted.
- There were several downgrades during the previous year and some of them were related to collateral deterioration.The number of ABS classes downgraded in 2001 was the highest since 1992, a period when the majority were caused by the downgrade of U.K. insurers providing credit enhancement to U.K. RMBS issuances.
- The majority of ABS downgrades affected CBO/CLOs and the majority of upgrades were of RMBS transactions. The CBO downgrades took 72% of the total downgrades, affecting 8 out of 13 classes.
As regards the CDO market in Europe, S&P reports that a number of features are beginning to emerge although the market both in numbers and maturity is too small to give definitive signals:
- CBO/CLO tranches backed by portfolios containing a small number of assets are likely to exhibit higher ratings volatility than those backed by large, well-diversified assets.
- Active management of portfolios–-recently introduced in some CBOs–-gives the CBO asset manager the ability to reduce this potential volatility, but it remains to be seen how successful managers will be in achieving this.
- On the evidence of the small number of downgrades to date, CLOs have remained almost entirely unaffected, although one revolving pool CLO transaction was subject to downward rating action in 2001. This is a direct result of most CLOs being backed by large, well-diversified pools of corporate loans.
As for outlook for 2002, S&P expects that the themes apparent in 2001 will continue in 2002. It is likely that there will be further downgrades of CBO/CLOs as they are affected by negative rating movements in their underlying assets. With the increase in managed transactions, the effectiveness of collateral managers in maintaining the quality of their portfolios may be a developing theme
Links For more on European market, see our page here.
India's leading financial institution ICICI has lined up a Rs 5.02 billion [approx USD 105 million] CDO that will be structured as a mutual fund scheme. To called Indian Corporate Collateralised Debt Obligation Fund , the mutual fund would be regulated just like any other mutual fund by the securities regulator.
According to the proposal, a pool of debentures and loans of ICICI and ICICI Bank originating from 24 accounts would be sold to the mutual fund. The fund, would in turn issue units with a face value of Rs 5 million each to qualified institutional investors.
The securities will have a tenure of two years and will be available in two options the growth and dividend option.
Though structured as a mutual fund, the scheme will have a tranching similar to a usual CDO. In a usual CDO fund, debt securities are collateralised based on a pool of bonds, supported by an equity tranche. The debt is itself classed into multiple tranches with the senior tranches getting a higher rating on the enhancement provided by the subordinated tranches. The very basic economics of a CDO lies in the cost advantage given by a structured funding.
The CDO will be tranched in 3 tranches. The first tranche of Rs 3.74 billion (AAA) would be sold to institutional investors. The mezzanine tranche of Rs 0.59 billion would be sold to the International Finance Corporation. The third tranche of Rs 0.70 billion would retained by ICICI.
The issue is expected to be in the market in March.
The use of special purpose entities (SPEs or SPVs) by financial institutions and others, for hiving off assets or operations into a separate vehicle so designed as not to be consolidated with the parent has been a core issue raised by the Enron debacle. The accounting standard body FASB in the USA is at present in the process of finalising a new accounting standard on consolidation of SPEs. 13th Feb, the FASB met and discussed issues relating to identifying and consolidating SPEs.
As an offshoot of the SPE discussion, the Board is likely to meet again on 20th Feb to discuss measurement and disclosure of guarantees. Financial guarantees are not treated as derivatives under current accounting standards and are not measured and disclosed as assets/liabilities. The guarantee project is a separate project, unrelated to SPE consolidation.
It is likely that the consolidation accounting rule (interpretation) would be ready in draft form by 27th Feb. The rule is likely to provide for consolidation with the "primary beneficiary" of entities that lack sufficient independent economic substance.
SPEs accounting rule is not limited to securitization SPEs – there are SPEs for synthetic lease transactions [see more on Vinod Kothari's leasing website], reinsurance, derivatives, etc.
Apropos the raging controversy regarding the proposed Bankruptcy Reform legislation that seeks to give a safe harbour to securitization transactions [see our item below], we give you more materials.
Our page on the Bankruptcy Reform Act of 2001 gives details of what is the proposed reform all about. After the collapse of Enron, the legal academia consisting of 35 law professors and deans wrote a letter of Jan 23 to the Senate group opposing the proposed reform which seeks to give a safe harbour to securitization transactions. The text of the letter is here. Yet another letter was sent by some more, on Jan 28 – it is here.
The Bond Market Association, representing the fixed income industry, opposed the letter and supported the intended reform of bankruptcy laws, claiming that such safe harbour would be in the interest of securitization transactions, which are premised on bankruptcy remoteness, and securitization is essential to capital markets. The BMA letter is here.
On Feb 1, the professors gave a rejoinder, replying to the contentions of the BMA. Here is this letter. This letter pleads that sec. 912 of the Bankruptcy Reform Act would insulate any nominal securitization from a substantive judicial review. On Feb 5, yet another letter was shot by another professor, supporting the views of the 35. Here is this letter, contending that sec 912 results into an unlevel field between different modes of capital raising. This letter, among others, also contends that the lower cost advantage in case of securitisation is merely shifting of costs and not reduction.
The success of Telecom Italia's Euros 700 million securitization last year is not the only reason which makes European telecom operators bullish on securitization: it has to do with the volatile and difficult corporate debt markets across Europe. Rating agency Standard and Poor's recently released a report according to which telecom operators will continue to look at the ABS market for financial flexibility. Investors in telecom ABS appreciate the well-established, long-term operating assets of telcos, such as fixed-line networks of the incumbent (former state-owned) telecoms operators, in particular, which continue to generate very strong, relatively stable, and predictable cashflows.
Among the telcos looking at securitization funding are: France Telecom which is planning to securitise cashflows from its fixed-line business, and has appointed SG and Deutsche Bank as arrangers, and Deutsche Telekom, which is working on a deal with ABN Amro and Dresdner Kleinwort Wasserstein.
Rob Davies writing for Financeasia.com reports [7 Feb] that a Philippine deal to fund the development of a railway track on build-lease-transfer basis will be the first securitisation deal to emerge from Philippines after nearly 5 years. HypoVereinsbank is going to raise the funding of approximately USD 170 million.
The structure of the deal is likely to be as follows: MRTC is a consortium comprising Anglo-Philippine Holdings Corp, Allante Realty and Development, DBH, Fil-Estate and Ramcar which is building a 16.8 kilometer railway that runs over the EDSA highway in Metro Manila. MRTC has a 25 year build-lease-transfer contract with Department of Transportation and Communication (DOTC).
The rental payments under the build-lease-transfer contract are being assigned to HypoVereinsbank which in turn is taking the securities to the capital market. Payments by DOTC are equivalent of a sovereign guarantee, which will act as a strength factor for the deal.
The deal is likely to be broken into a 5-year tranche paying a nominal coupon with a bullet repayment, and two zero coupon tranches, one of which will mature between 2008 and 2014, and the other in 2025, with amortization from 2015.
Philippine ABS law is still in the making but the present deal is not likely to have to wait for the new law.
Links: See related links here.
An article in Investment Dealers' Digest [4th Feb.] by Adam Tempkin beautifully sums up the present scene of the ABS market in the USA. "As consumer credit continues to deteriorate and unemployment spikes to alarming levels in the midst of recession and the events of September, the 16-year-old asset-backed sector-for the first time as a mature, diverse and large capital market, reaching a record- breaking supply of $350 billion in 2001-has been swiftly kicked out of its comfort zone", says Tempkin.
It is everyone's knowledge that ABS market has been responsible for much of the riskier part of originated funding such as subprime credit cards, manufactured housing loans, high-yield bonds, etc. Where bankers were wary of putting assets on their balance sheets, they chose to do it through the ABS markets. Now when unemployment rates are scaling new heights, delinquencies in these riskier asset classes are unavoidable, as already reflected in the downgrades history in 2001 [see our report here] As a matter of fact, there have been more defaults in 2001 than in 16 years of ABS history together. Of course, Enron has been responsible for many of these, but exactly that name might also lead to some adverse regulatory developments in the current politically charged scenario against off-balance sheet funding. That the legal academy has used Enron as the alibi to plead against securitisation safe harbour is clear from the reports below; adverse accounting and regulatory developments therefore cannot be ruled out.
ABS analysts compare the current scene with what prevailed in 1991 – securitization fared through the recessionery pressues in 1991. But clearly investors are not willing to take that risk. This has led to steep yield differentiations in ABS tranches.
The lull in activity is visible from Jan 2002 issuance: it ended with only USD 19 billion compared to USD 31 billion for the same period last year.
Links For more on US ABS market, see our page here.
These would be among the very few, if not the first, whole business securitisations to be tried under the US laws. Bondweek of 5th Feb reports that two US companies are preparing to raise a total of USD 550 million via securities backed by projected future cash flows of their respective operating businesses.
The whole business cashflows or operating revenues securitization is a device mostly limited to UK or countries with similar bankruptcy laws. The bankruptcy laws in these countries uses the secured loan structure that allows for appointment of an administrative receiver by the lending SPV in case of certain trigger events. US securitizations, based on true sales, have not used the future flows device, except for some rare instances such as Arby's deal closed last year.
The reference deals are being underwritten by SG Cowen, a subsidiary of Société Générale. One of the two companies is a communications service provider, which will securitize its future flows from voice mail and such other services. The other is a construction company which will securitise its revenues from building toll plazas, power plants and pollution control equipment.
The report says that the underwriting fees here are 10 to 20 times the usual fees.
Links For more stuff on whole business securitizations, please see our page here.
In response to our news story below, we got the comments from Prof Steven L. Schwarcz, Professor of Law, Duke Law School & Prof. (Adj.) of Business Administration, The Fuqua School of Business; Founding Director, Global Capital Markets Center. Prof Schwarcz is one the World's most respected academics on securitization and structured finance and has several books and articles to his credit. See more on our site here.
Prof. Schwarcz favours the safe harbour proposed in the Bankruptcy Reform Act of 2001. As a matter of fact, Prof Schwarcz has written a letter to the senate judiciary committee saying he is troubled by the January 23 letter by the law professors. "The suggestion that section 912 would encourage the types of off-balance sheet financings that Enron abused is misleading for two reasons. First, section 912 addresses only securitization transactions, which are not the types of off-balance sheet financings that caused the problems in Enron. Second, the problems in Enron do not appear to have been caused by the creation and use of special purpose entities, per se, but rather by the off-balance sheet accounting treatment of such entities and their specially lobbied exemptions from the investment company act. Accounting treatment is governed exclusively by generally accepted accounting principles, promulgated by the Financial Accounting Standards Board and having nothing whatsoever to do with section 912."
While using Enron as the alibi for opposing sec. 912 is clearly wrong, what about the idealogical basis behind section 912 itself? Does he favour the idea of safe harbour which is essentially in a way scuttling the scope for judicial review by mutual agreement between parties to a contract, to the exclusion of the rest of the interested or concerned parties? Prof. Schwarcz says – he supports the safe harbour.
Detailed article on Bankruptcy Reform on securitization by Prof Schwarcz is here [word file].
Links See our page devoted to the Bankruptcy Reform on securitization transctions. This page gives you all that you would need to know about the proposed reform.
In our last piece on the previous newsletter, we had carried the apprehension that the Enron debacle will rake up the true sale issue in securitisation transactions, as was done in LTV Steel. In fact it is turning out to be worse, as several law professors have jointly pleaded with the Congress to relook at the true sale involved in securitisations generically.
On Jan 23, several law professors wrote letter to the congress representatives pleading the Congress to reject a proposed amendment in US Bankruptcy law under which an asset transfer in a securitization transaction could not be challenged in bankruptcy proceedings. This amendment is sought to be made by sec. 912 of proposed bankruptcy law amendment.The purpose of the amendment is to give a safe harbour to securitization transactions.
The law professors allege that in number of securitization transactions, lenders are seeking to reclassify themselves as buyers, so as to stay out of the bankruptcy court's jurisdiction. "Not every asset securitization is a disguised loan transaction, and asset securitization is a valuable financial tool. Yet it is essential that the Bankruptcy Code not be amended to open a massive loophole so that parties interested in dealing with certain assets who simply rename a “loan” a “sale” will be exempt from bankruptcy because the property was no longer part of the debtor’s estate", claim the professors.
The professors claim that if working assets of corporations are securitised and hence moved out of the bankruptcy court's regime, any possibility of reorganisation of the corporation will be ruled out, as was the case with LTV Steel. A number of airlines have securitised their receivables, and if the cashflows into their business belongs to securitization investors, "we could face the spectacle of the government giving the airlines billions in tax dollars, only to have substantial assets of the business removed from the company in “off-book” transactions for which no one would be held accountable."
Enron itself has some USD 4.2 billion worth assets which are off the balance sheet. If the proposed regulatory regime were in place, these assets will be out of the purview of the bankruptcy judge.
As could be expected the Bond Market Association has reacted to the professors' letter. In a letter of 31st Jan, the Bond Market Association claims that the amendment would define circumstances in which assets conveyed for purposes of certain securitizations are removed from the transferor's bankruptcy estate. These amendments have been debated in Congress for a number of years. The BMA harps on the need to give predictability to properly structured securitization transactions. It builds upon the benefits of securitization for the global economy as a whole: "The multi-trillion dollar securitization market has played a significant role in the growth of the American economy. Companies that use securitization have been able to significantly reduce their cost of funds, increase liquidity, and obtain greater and more diversified access to the capital markets. The market efficiencies created through securitization are passed on to both consumers and businesses, in the form of lower interest rates for home mortgage loans, automobile, student and home equity loans, credit card debt, and other extensions of credit. Absent an efficient securitization market, the cost of obtaining this credit would likely increase, as would be more costly for lenders to finance their activities."
What do you think? Do you agree with the law professors that the right to question a purported sale as a true sale should be vested in Courts and we should trust them for coming out with a just answer?Write your views.