SECURITISATION NEWS AND DEVELOPMENTS – June, 2001

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

 

European equity analysts don't know what is securitisation

Though a larger majority understands it and would like to recommend it, more than 25% of equity analysts recently surveyed by Price Waterhouse Coopers (PwC) do not know what is securitization. Of those who knew about, 75% confessed not to have a good understanding of the process. The PwC survey is the result of about 300 equity analysts interviewed between 26th March to 19th April 2001. The results of the survey were recently published as a booklet by the intenational accounting major.

The important findings of the survey are:

 

  • Securitisation is viewed very positively by equity analysts with 2 out of 3 claiming that they would recommend this source of funding. Securitisations may well replace traditional bank lending as the preferred funding option for many companies in the future.
  • Securitisation practices were thought to be on the increase. On average it was thought that 32% more companies will be securitising over the next 5 years. It was also felt that more non financial companies would participate in securitisations. Innovative structures will help this trend.
  • Securitisation is perceived to be an important source or funding and not considered to be detrimental to the reputation of a company. Telecom companies in particular might look to securitisations to provide their funding requirements.
  • Over a third of analysts felt securitisation was too complex for most companies and 16% said the impact of securitisation on a company’s reputation would depend on how it was carried out. This highlights the need for good project management within a securitisation process and professionals who can be “user friendly” to the majority of company executives.
  • One in four equity analysts had no awareness of securitisation and, of those that did, 75% felt they did not have a good understanding of the process. There is clearly a need for those companies embarking on a securitisation to educate the analysts covering their sector.

Links For more on securitisation in Europe, click on this page.

 

The agencies do lower mortgage costs, finds Federal Reserve study

In a paper titled GSEs, Mortgage Rates, and the Long-Run Effects of Mortgage Securitization by Wayne Passmore, Roger Sparks,, and Jamie Ingpen, it was contended that US mortgage securitisation agencies have in fact resulted into lower costs.

The paper comes in the midst of a controversy raging over whether the tacit US government support to the agencies should be withdrawn. For our earlier story and some important links, click here.

The paper finds that "GSEs [govt-supported entities, such as Fannie Mae, Freddie Mac – Ginnie Mae is a Govt entity itself, not a govt-supported entity] generally–but not always–cause mortgage rates to be lower in the long-run than they would be with private securitization because the GSEs have implicit public backing. When GSEs securitize mortgages, their implicit government-backing allows them to sell securities without holding the capital or purchasing the credit enhancements needed in the private sector."

Links Full text of the paper is available for download here.

Peugeot launches major securitisation of car loans

The French car company Peugeot has launced a major securitization issue totaling to Euro 1 billion. Credit Agricole Indosuez is the lead manager with Deutsche Bank.

The collateral for this mega transaction is 215,868 car loans granted to private individuals in France by two subsidiaries of Banque PSA Finance for 1.097bn euros. The issue is broken in two tranches, a Euro 950 million senior tranche and the balance junior tranche.

Vinod Kothari comments: With this issue, the already bouyant French securitization market gets a further boost. In year 2000, France had recorded a volume of some Euro 15 billion. This year, both synthetic as well as funded securitizations are likely to boost volumes. For more on securitization in France, see our recently updated page here.

Telekom Italia phone revenues securitization is a success

The Euro 700 million securitization of telephone revenues by Telekom Italia has been sold successfully, and Financial Times of 27th June quoted Telekom Italia's finance director as saying that "the asset-backed market is the best way to raise money compared with the other markets we have used".

The three tranche securitization transaction is collateralised by short-term bill receivables from Telecom Italia's domestic fixed-line voice and data customers.

Even though all major telecos in Europe have made noises about using securitisation for their ambitious funding plans, Telekom Italia is one of the very first to do so. Others who have expressed interest are KPN, France Telecom and Deutsche Telekom.

Telekom Italia has affirmed intent of tapping the securitization market once again later this year.

Links For connected stories, click here. There are more links at this story.

Bye bye Basle, see you soon!

The Bank for International Settlements (BIS) on 25th June announced that it had received more than 250 comments on its proposed revision of the capital adequacy framework, and as such, has decided to come out with a revised, "fully specified" version in early 2002 and aim at implementation of the revised framework from beginning of 2005, which delays its implementation by at least one year.

The revised capital adequacy framework has been kept boiling for quite some time. First draft of the revised framework was issued first in June 1999 with 60 odd pages of text, and then, a revised package was released in Jan 2001 with more than 500 pages of text. The third version may only be expected to be more elaborate, and who knows, more complicated.

Bankers over the world had expressed concern about the provisions in BIS-II. David Clementi, Deputy Governor of Bank of England also expressed concern – see our story here.

The BIS proposals has made fairly detailed provisions relating to securitization and credit derivatives. Even while Basle-II was under consideration, some regulators, for example, South Africa, went ahead and incorporated BIS-II norms into its local regulations.

Links For article and further links on the BIS proposals relating to securitization, click here.

Securitisation law in India: Whose baby is it?

It is bureaucracy at play again. India is one of the few remaining Asian countries to have a securitization regulation in place. Malaysia has done it earlier this year. Pakistan did it nearly 2 years ago. And so also Singapore, Hong Kong, Korea, Thailand, Philippines et al.

However, the Indian regulator is still to decide the right father for the securitization baby. The draft securitization law was recommended by the Andhyrujina panel quite some time back and even the RBI's report on securitization is almost one year old now. However, as per a report in Economic Times of 25th June says that the banking division of Finance Ministry was earlier thinking of piloting a separate securitisation bill in the reconvened session of Parliament. But the thinking now is that securitization could be permitted by notifying it under the Securities Contracts law and let the securities regulator SEBI regulate it. The report says that finance secretary Ajit Kumar took this view at a recent meeting on securitisation entrusted the task to J Bhagwati, joint secretary, capital markets division to work out the modalities.

Vinod Kothari comments: If experience with earlier products is of any indication, it would be a mistake to entrust the lawmaking to SEBI, a body which is known for its adhoc style of regulating – 10 uncertain, unclear laws today and 20 clarifications every one month hence. SEBI has a role in public issuance of securitised debt, but SEBI obviously cannot take care of private issuance, which will presumably form a bulk of securitization transactions. SEBI also cannot take care of the Transfer of Property law, Stamp law and income-tax law in which amendments were conceived of in the draft bill.

An umbrella all-pervasive securitization law, as done by Italy, Korea, France, etc. is the best bet.

Links For full text of the draft securitization law, see our legal page here. For country profile of India, click here.

Philippine govt. defers plans to securitise royalty income

The Philippine government has been talking about securitization of royalty income from the Palampaya natural gas fields for quite some time now, but it seems the plan is now deferred until the next year. The published proposal earlier was to set up a power sector SPV called Power Sector Asset and Liabilities Management (PSALM) Corporation, to which the royalty income will be transferred to pay off the debts of the National Power Corporation.

The government expects a royalty income of about USD 9 billion from the gas project which it shares with Shell.

Links Securitization law in Philippines was recently enacted. See full text on our laws section here.

Spanish securitization poised to grow fast, says Moody's

Securitisation, or titulizacion as they would call it, is about to complete a decade of existence in Spain and rating agency Moody's expects it to grow fast. Moody's recently released a report titled A Review of The Spanish Securitisation Market: 1991 – 2001.

Securitization issuance in Spain in 2000 reached Euro 7,320 million, about 9.3% higher than 1999. However, what is more important is the introduction of new asset classes such as CLOs, ABCP, and innovative ABS applications. Moody's expects these developments to enliven the Spanish market in 2001 and stimulate future issuance.

Though the Participación Hipotecaria law was passed in August 1991 to enable true transfers of credit (enforceable in the event of an issuer's bankruptcy), it was really not until the introduction of Spain's Securitisation Market Law and the concepts of Fondos de Titulización Hipotecaria and the Sociedad Gestoras (management company) that the market was able to see marked growth.

Links For more on securitization in Spain, see our page here. This page features a new article link.

Fitch cautions on use of insurance to support securitisations

The use of insurance to provide a cover and enhance the credit of securitization transactions recently came under sharp attacks following the controversy surrounding structured investment vehicle Hollywood Funding. Hollywood Funding enjoyed insurance cover from insurer Lexington Insurance Co., which denied its liability to the insured relying on a ruling of a UK court in a different case : see more of this story here along with more links.

Following this, the use of insurance policies as credit enhancement came under review and market practitioners were divided on whether insurance covers from monoline insurers were more effective or those from multiliners. Rating agency Fitch has recently issued a special report titled Use of Insurance Policies as Credit Enhancement in Structured Finance. Fitch says that it is normally believed that under traditional insurance from multiline insurance companies, insurers generally maintain the right to adjust a claim and, if warranted, litigate the validity of a claim before actual payment is made. Such actions are common and ordinary in the world of the multiline insurers. Even if the policy terms cover the necessary items, this approach does not meet the requirements of structured finance transactions, under which the timeliness of the payment of debt service obligations is of the utmost importance. On the other hand, monoline insurers are closer to financial guarantees and their covenants under the policy normally restrain them from delaying the claims even if they intend litigating the same.

However, as the market place distinction between monoline and multinline insurers has gradually got blurred, it is more important to look at the nature of the insurance cover rather than its source. Fitch says that there are three signficant provisions that are necessary to provide the required enhancement:

 

  • An unconditional obligation to pay the claim, if the premia are paid and there is basic performance by the insured.
  • A clear and straightforward method for the submission and payment of the claim.
  • A clear and unconditional waiver of any and all rights and defenses to payment available to the insurer under law or equity, including: set-off, counterclaim, fraud, etc.

 

Synthetic securitisations continue to dominate as new applications emerge in Europe

Synthetic securitisation is becoming synonymous with European securitisation scenario as these structures continue to dominate. However, new innovative applications of the synthetic securitisation method contine to evolve.

A Fitch newsletter [European Securitisation News, June 2001] talks of the innovative applications of synthetic securitisation. One remarkable deal in April this year was the Leonardo Synthetic Aircraft CDO.

In the sphere of aircraft securitisation, the common devices used in the past have been enhanced equipment trust certificate (EETC) and asset lease portfolio securitisation (ALPS). For more on these methods, see our page here. However, Leonardo was the first case of a synthetic CDO in the aviation segment. The originator was IntesaBCI which used a combination of credit default swap and total return swaps [for details, see our site on credit derivatives here] to transfer the risks in about USD 1 billion of portfolio of aircraft leases and loans. The leases and loans remain on the books of the originator. Fitch says that "Leonardo evidences the growing trend in the use of synthetic structures in securitisation across a range of asset classes."

Links For more on synthetic securitisations, see our page here.

Under-construction houses securitised in Singapore

Indicating the fast pace of developments in securitisation markets in the region, a builder has securitised houses under construction in a deal believed to be first of its kind in Singapore. We have reported earlier about a mortgage securitisation by Raffles – this deal was sold recently.

Close on the heels came yet another deal: Business Times of 12th June reported Capitaland Residential's Sing $ 200 million asset-securitised bond issue which was launched recently and attracted very good response. This is described as the first of their kind in Singapore. Senior bonds of $160 million, or 80 per cent, of the six-year bonds have been given the highest rating of AAA by Fitch.

CapitaLand Residential is a unit of property giant CapitaLand. The bonds are backed by money collected through progress payments – the typical method of payment for uncompleted homes in Singapore – on uncompleted CapitaLand Residential projects. The projects include Sun Haven, Palm Grove and The Loft, each of which are 70 per cent sold.

Links For more on securitisation in Singapore, click here.

Technogy merger to make it happen: origination to securitisation of mortgages automated

Ultraprise Corporation and LoanTrader, Inc., two US based technology companies in the mortgage industry, have merged to form a new company, Ultraprise Loan Technologies, Inc. Consequently they have combined their solutions: Ultraprise and LoanTrader.

With the merger, the new firm will be in a unique position as the only mortgage technology company providing e-commerce infrastructure and application software for processing loans and other related assets from origination to securitization.

The mortgage market looks at technology as a significant source of savings. Linking the primary and secondary markets also holds significant value. The ability to reuse information already gathered during the origination process when creating loan pools for sale or securitization as well as the ability to communicate quickly and accurately the appetites of investors in the secondary market to origination channels brings sizable potential savings.

More info is available on the website of the company at www.ultraprise.com

Swiss Re study sees 10 fold growth in insurance securitisation

A Swiss Re Capital Markets study went into the growth potential of insurance securitisation and came with results which do not sound strartling: given the fact that similar noises have been made time and again: it predicts a 10 fold growth in securitisation of risk by year 2010.

Approximately USD 12.6 billion of these capital market insurance solutions have been issued since 1996. Some of the important findings of the study are:

 

  • To date, the issuance of catastrophe bonds has accounted for nearly half of insurance risk securitisation transactions.
  • Annual issuance of catastrophe bonds, now about USD 1 billion, is expected to reach USD 10 billion by 2010.
  • Capital market insurance solutions linked to non-catastrophic risks have an even greater market potential. Promising areas include life and automobile insurance.

The study examines capital market insurance solutions in the context of the global wave of financial innovation that has occurred since the 1970s. A variety of forces have stimulated this innovation: the need to protect against market risk; technological progress facilitating the innovation process; and a desire to minimise the costs imposed by taxes and regulation.

Links Full text of the Swiss Re study is available here. For a page on insurance risk securitization and lot of links from there, click here.

Islamic securitisation in Singapore

The Islamic Religious Council of Singapore intends to finance 75% of the cost of acquiring a S$32m commercial building in Singapore through a bond issue. Muis will shoulder the remainder of the total cost. The move marks the first time that a bond has been issued in Singapore in accordance with Islamic laws on financing. The planned purchase is part of Muis' restructuring and upgrading of its property portfolio. The Council is a statutory board to advise the government of Singapore on Islamic matters.

The above news item appeared in Business Times Singapore 11 Jun. No details were apparent on the website of the Council. However, the Business Times report compliments the deal as such: "The issue will be a significant breakthrough for the local bond market as it will be the first bond instrument to comply with Islamic laws on financing. This would open the gates for the bond to be marketed to Islamic markets around the world, and for other Islamic institutions to raise funds through such instruments in Singapore."

Islamic securitization is an idea that has not picked up as it should have. Last year, there was an Islamic securitization concluded in Saudi Arabia [report on this site is here], but that is perhaps the only deal still.

Links There is an article on Islamic securitization by Tariqullah Khan on the articles section of our website – click here.

 

IFC makes first investment in KoMoCo securities; intends to play active role in emerging market MBS

International Finance Corporation (IFC) Washington has made its debutante investment in emerging market MBS by USD 41 million worth mortgage backed securities issued by KoMoCo, the Korean MBS agency. AN IFC press release of 7th June says that the move marks the beginning of IFC's stronger participation in emerging mortgage markets and "will stimulate more affordable long-term loans to homebuyers and develop a modern, transparent, and efficient housing finance sector in Korea". Quite some time back on this site, we had reported about the in-principle accord signed by KoMoCo for this issuance – click here for our previous news report.

KoMoCo, Korea's first specialized secondary home mortgage market entity, was established in September 1999 with IFC's assistance. The current MBS offering, christened as MBS 2001-1, consisting of a senior tranche of USD 174.4 million and a subordinated tranche of USD 7.4 million, both denominated in local currency, is backed by Won-denominated mortgage loans and collateralized by residential properties located in Korea. This is the fourth MBS issued by KoMoCo over a twelve month period which saw KoMoCo arranging about USD 1.2 billion equivalent MBS, listed on the Korea Securities Exchange.

Links For more on securitization in Korea, click here.

S&P issues model documents for revised Article 9 of US UCC

The revised Article 9 of the Uniform Commercial Code of the United States will become effective in some 40 states from 1st July 2001. The revised article deals with the creation, perfection, and priority of security interests in personal property including receivables and intangibles. As securitisation transactions are based on transfers of assets or creation of security interests therein, securitisation documents need to comply with the revised article.

As the representations and warranties in the transfer agreements need to comply with the new rules, rating agency Standard and Poor's has put up a set of model representations and warranties for various clauses of collateral. These models are available on the rating agency's websitehere.

The rating agency has also decided that under the revised Art. 9 it will not insist upon a "first priority perfected security interest" opinion that it has been asking so far for securitisation transactions.

Links For more on article 9, click here.

First rated securitisation of a private equity fund to open new funding doors

This sounds as a logical, and simple, extension of the concept of CDOs and structured product funds which have been around for quite some time, but most remarkable innovations that make so far reaching changes are invariably based on so simple ideas. Rating agency Standard and Poor's recently rated the first offer of structured notes by a private equity fund. A release of 4th June by the rating agency says that it rated the first structured notes issued by a leveraged fund and backed by pools of private equity investments. The transaction, Prime Edge Capital PLC, totaled Euros 150 million; the rated senior notes have a stated maturity of 12 years and the unrated junior notes have a maturity of 24 years.

The senior notes have been credit-enhanced by insurance wrap by Allianz Risk Transfer N.V. Prime Edge will use the proceeds it receives from this public transaction to make investments in more than 20 different private equity funds. Prime Edge Management Ltd., as the investment advisor, will be responsible for allocating these funds based on certain established investment parameters and diversification guidelines, monitoring the performances, and reporting the valuations of its investments.

The Wall Street Journal of 5th June described this transaction as "a move expected to have a far-reaching effect on money managers, making venture-capital and buyout funds available to bond investors". Securitisation of private equity funds marks the coming together of debt and equity -reinforcing the dictum that as markets develop, more and more things tend to converge.

European securitisation volume grows 100%

The early growth trend in securitisation volumes in Europe established this year [see our news report here and here] continues to get even stronger. Rating agency Standard and Poor's reports that the new issue volumes in Europe doubled on the same period a year earlier. The new issuance in May totaled USD 14.3 billion, which compares with USD 7.5 billion in May 2000, and USD 7.5 billion in April.

During May, a total of 22 transactions closed, including some mega issues such as INPS II. The European CDOs market continued on its whirlwind growth pattern ending 59% higher on the same period a year earlier at USD 4.6 billion compared with USD 2.8 billion last year.

The rating agency expects the growth rate to be maintained, looking at the pipeline which has some big issues from London, and a number of CBOs from both England and other countries. Arbitrage CBOs are likely to remain a dominant theme as many were delayed from the beginning of 2001. Credit default swaps and credit-linked notes backed by pools of corporate and asset-backed bonds are also expected to maintain their high volume throughout the rest of the year.

The European CMBS market ended at USD 832.42 million after two transactions closed, as compared to no transactions closed in May 2000. The European RMBS market commanded the largest market share, accounting for 30.4% of overall volumes, ending at USD 4.7 billion.

One of the most remarkable features is the rise of Italy as the prime player, which toppled the U.K. from its traditional premier spot with volumes there ending at USD3.6 billion. This is, of course, a transient feature due to INPS II during the month, and two other prominent transactions.

Links For more on Europe, click our page here. For individual country pages, go here.

New securitisation rules proposed 
in South Africa

Last month, the South African Reserve Bank proposed and put up for public comment a new set of rules for securitisation transactions in the country. Comments are due by 15th June.

The new regulations have been shaped by the BIS proposals in the revised capital adequacy framework, which is yet to be implemented, and is already facing lot of criticism all over. The new regulations will evolve a new risk weighting system in case of securitised tranches, with senior securities carrying a far lower risk weightage than junior tranches. Junior tranches, particularly those providing first loss protection, will be a straight reduction from capital of the issuer or the investor.

For detailed comments of Vinod Kothari on the guidelines, see here. Also see the above link for a detailed commentary by Eugene Van den Berg of Decillion, South Africa.

Do you have a comment on the proposed regulations? Please do write.

Links For our page on South Africa, click here. For full text of the existing guidelines as also the proposed regulations, click here. For comments by Vinod Kothari and Eugene Van den Berg, click here.

Singapore company to securitise prime shopping complex

If you have been to Singapore, you might have shopped at Raffles City, but now, if you have deep enough pockets, you can shop Raffles City itself.

As per a report in Financial Times of 5th June, Raffles Holdings, the Singapore-based property company, proposes to raise USDollars 547 million from the securitisation of a 55 per cent stake in its landmark Raffles City shopping complex.

The securitisation transaction will be achived by a bond issue by an SPV named Tincel. Tincel in turn will issue bonds to investors, partly by way of public offer and partly privately.

Proceeds from the deal will be used to cut debt and fund international expansion.

Vinod Kothari adds: With activity levels already high in Korea, lot of noise in Malaysia, signs of interest in Thailand, and meaningful portents from Singapore, it seems the erstwhile Asian tigers are back in business.

Links For more on securitisation in Singapore, click here. For more on Asian securitisation, click here.

Securitisation activity to speed up in Thailand with proposed law changes

Securitisation industry needs clear and practical law: it becomes evident in Thailand. The country has had the SPV law for last 2 years but no signs of any securitisation activity so far. Now, just as the SEC announced legal changes to make the law more industry-friendly [see news report here], the market players have jumped up in action.

Here is an example: Bangkok Post reported on June 1 that Trinity Advisory 2001 Company Limited, a unit of Trinity Securities Group, has teamed up with Devonshire Capital Limited and Allen & Overy to provide securitisation services for small and medium enterprises. Devonshire has experience in securitisation in the Asia-Pacific region and Allen & Overy is a well-known law firm with securitization familiarity.

Although the Securitisation Act in Thailand has been effective for about two years [see text of the law on securitization laws page on this site], securitisation activities have been limited due to some unclear points in the law and high expenses. In the future, the situation will improve with the proposed changes. The proposed amendments include allowing the setting up of multi-tier SPVs express legal provisions for bankruptcy remoteness.

In particular, there is a lot of potential in Thailand for securitisation by SMEs who need funds to expand their businesses.

Links For more on securitization in Thailand, see our page here.

Securitization residual value accounting to blame for debacle of Superior Bank

Change of assumptions can cause significant depletion of asset values under securitization accounting stipulated by FAS 140, and such write downs may even result into severe financial problems. The example below is not the only one – there have been more from the United States in the past – see our reports and further links here.

The recent example is of Superior Bank FSB, a thrift institution based in Oakbrook Terrace, Chicago. Superior Bank faced a substantial write down in its residual interests as well as the value of overcollateralisation account, totalling to some USD 238 million, resulting into the bank being undercapitalised as per regulatory norms.

Superior Bank had to run for a bail out. Alvin Dworman and the Pritzker family subsequently injected a USD 350 million sum into the bank and its holding company, to keep it afoat. This was based on the negotiations with the Office of Thrifts Supervision.

Analysts report that the write down was a result of the discouting rate being hiked up to find the fair value of retained interests in securitisation. It is notable that securitisation accounting requires the carrying value of the asset being securitised to be split in the ratio of the fair values of sold assets and retained assets. While the value of the sold asset is easy to come from what the securitiser gets therefrom, the value of the retained interest is an approximation of future or residual cashflows, which are discounted at an appropriate rate to get their value today. Accounting differences arise due to both the estimation of the residual cashflows, as also the discounting rate.

Chicago Tribune of 25th May said: "At the heart of the bank's troubles this time is an arcane but often used banking practice called securitization, by which banks routinely convert the mortgage loans they make to customers into cash that can be used for more lending". This is how the newspaper described the accounting problem: "Using a different set of accounting methods than the bank, the government concluded that Superior had essentially counted some of the assets twice and also had failed to discount the value of these assets for the fact that it would be several years before they could all be collected. Prepayments of loans and lower interest rates also affected the value of the mortgage-backed assets. "

Links For more on accounting for securitization, more articles, and more links to similar news items, see our page here.