SECURITISATION NEWS AND DEVELOPMENTS – March 2002

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Yet another fund of funds hits market

CDOs that invest into hedge funds, private equity funds and such investments are seemingly in full gear. There are several takers, so it seems, for the Prime Edge type of investment vehicles. Call them CDOs, or CIOs (collateralized investment obligations) or CFOs (collateralized fund obligations), it seems the device is here to stay.

Investcorp has announced a securitisation of up to USD 500 million of a fund of hedge funds. The issue is claimed to be the first market value CFO issued in the European market, and one of the first public issues of this type anywhere.

Credit Suisse First Boston is acting as sole lead manager and bookrunner on the transaction. Managed by Investcorp, the Diversified Strategies CFO will invest in a broadly diversified fund of hedge funds, tracking the performance of Investcorp's established Diversified Strategies Fund. Investments will be heavily tilted towards relative value strategies, but will also include some more directional strategies. Road shows are now beginning. It is anticipated that the bulk of the equity (class D) will be placed by Investcorp with its Gulf investor base.

UK proposes to scrap administrative receivership but saves securitisations

The Enterprise Bill, acomprehensive Bill to revise the competition, insolvency and several other laws of UK was placed before the Parliament on 26th March. Among other things, the Bills seeks to scrap the procedure of administrative receivership which was the basis of several UK secured loan securtisations. However, there are exceptions for several capital and financial market transactions which includes, subject to conditions, securitisation transactions as well. In other words, UK can continue to use secured loan structure for securitizations.

As is common knowledge, UK originators can achieve ring fencing without making a true sale. This was based on the provisions in debenture issues in UK for appointment of administrative receivers which were legal under UK insolvency laws and which could pre-empt the Court getting administration of the assets charged to a trustee. UK had proposed a bankruptcy law reform under which this process was to be scrapped in favour of a US-like Court-assisted administration.

The Bill to give effect to these changes has now been presented. The Enterprise Bill is to insert sec. 72A in the Insolvency Act whereby administrative receiverships will not be applicable despite the provisions in the agreement or debenture. There are several exceptions to this bar: capital market transactions, public private partnerships, utilities, project finance, and financial transactions.

Securitization transactions will most likely get excluded under the capital market category. Transactions involving debt of GBP 50 million or above, involving a rated, listed or traded debt security, and involving grant of a security will be covered as a capital market transaction. Evidently, the exception is very widely worded, and securitisation transactions based on secured loan structure will get exempted. A possible issue that the debt is raised by one person while the security is issued by another (SPV) is also resolved by a permissive definition of "party".

Links Full text of the Enterpise Bill is available here. For our page on whole business securitisations, click here.

 

Securitisation SPVs are a feared lot, thanks to Enron

Even though the FASB is not directly gunning for securitisation SPVs, an inevitable fallout of the Enron debacle is that more and more corporates are shunning complex financial instruments involving use of off balance sheet funding devices. While investment bankers used to rave in their transaction flow charts with huge lot of boxes and arrrows, an article in Financial Times of 26th March reports that corporates are now clearly shunning use of SPVs.

One structuring specialist is quoted as having narrated his experience: "Company directors panic when we present them with funding options involving complex financing schemes which use SPVs, such as the sale of asset-backed securities".

Apart from asset-backed funding devices, asset backed commercial paper has gained tremendously in popularity in Europe. Regulatory attention is focused on the off balance sheet risks banks carry in supporting these conduits.

In the meantime, the FASB is presently drafting its interpretation on SPE accounting. From the discussions so far, it is apparent that the interpretation will provide guidance on indentifying the "primary beneficiary" of an SPE, and if the SPE lacks economic substance or does not have supporting risk capital, it will be consolidated with such beneficiary. While the rules are expected to exclude securitization QSOEs, it is feared that CDO vehicles may be put to a problem as they are not qualifyng SPEs in accounting definition.

Links There are more links on our page on SPVs – click here.

Malaysian loan reconstruction company to securitise again

Danaharta, the Malaysian loan reconstruction company, is planning to securitise once again, according to reports in Business Times, Malaysia.

Earlier on, Danaharta had launched its first ABS issue totalling RM593.964 million to repackage performing loans out of a portfolio of RM3.2 billion performing loans it holds. The deal, through an SPV named Securita ABS One, was jointly managed by Deutsche Bank (Malaysia) Bhd and Alliance Merchant Bank Bhd.

There were two classes: senior and junior. The senior class, rated AAA by RAM, amounted to RM 310 million and was sold to investors at a coupon rate of 4%. These notes mature in December 2005. The junior notes were retained by Danaharta.

Malaysian market takes a deep interest in securitisation, but it still an emerging market. There have been three securitisation deals so far, adding up to RM1.23 billion. The originators were Arab Malaysian Merchant Bank Bhd, Commerce International Merchant Bankers Bhd and Danaharta.

Links For more on securitisation in Malaysia, see our country page here. Also find links to the legal material relating to Malaysia.

Vinod Kothari has been regularly holding training workshops in Malaysia – see our training page for current schedule.

Macquarie floats JV for securitisation in China

Australian investment banking group Macquarie in a joint venture will Paul Keating, former Prime Minister of Australia, has announced the formation of a securitisation company in China called Macquarie Securitisation Shanghai. To begin with, the JV will take up advisory work for China Construction Bank, the largest provider of private housing loans on the mainland, on residential mortgage securitization.

In the meantime, China is supposed to get legislatively ready for securitization in course of this year. As it stands, Chinese commercial law has several shortcomings which will come in the way of securitization.

There has been a boom of private housing in Shanghai region. This is evident from the bulgeoning portfolio of China Construction Bank which has grown to USD 23 billion over a period of 6 years.

Link For more on securitization in China, see our page here.

Securitization is good, says Nomura

Suddenly, so many people have gone into the assertion mode. We have reported Banc One elsewhere. Moody's below. And here is Nomura. Never in the 30 years history of securitization so many people have needed to assert it.

Nomura Research has gone into the basics of securitization and recounts its benefits. Mark Adelson says that securitization is a good thing. On balance, it has produced far more benefit than harm. Unfortunately, in the wake of the Enron debacle, well-intentioned reforms could impair or discourage the use of securitization as a financing tool. To avoid unintended damage to a beneficial financing tool, policymakers must have complete and balanced information about securitization's role in the American financial system.

Full text of Nomura's write up is here on this site. We thank Mark Adelson for providing us the benefit of his very articulate writings.

 

Securitization is still good, says Moody's

Securitization is still good, and it has more gain than harm, and the vicarious bad name it has got due to Enron's SPEs is not warranted. This is the essence of a Moody's publication going into some 114 pages titled Moody's Perspective 1987 – 2002: Securitization and its Effect on the Credit Strength of Companies, released on 18th March.

Moody's emphasizes that there is an important distinction between the special-purpose vehicles (SPVs) used in the $305 billion asset-backed and mortgage-backed market and those used by Enron or by Boeing for off-balance sheet leases. Moody's is concerned that securtization is receiving undeserved negative attention. Indeed, more than 90% of structured finance ratings are unchanged over the course of one year and, moreover, the default rate of these types of transactions is miniscule.

Most structured transactions are highly creditworthy, primarily because of their three main requirements, according to the report: a pool of assets sold through a true sale to a bankruptcy-remote SPV; debt issued by the SPV, which is backed by the asset itself and the payment streams associated with it; and repayment of the debt, which comes strictly from the cash flow generated by the asset pool, not from the original company's cash flows. Moody's goes into the oft-repeated advantages of securitization.

Commenting on the market events over the last several months which have led to a closer examination of balance sheets and accounting practices of US corporations, Moody's says that their message to the market is that securitization continues to be a valid and viable financing method.

Links For more on SPVs and the current controversy, see our page here.

 

American Securitization Forum's leadership elected

The industry forum of the World's largest securitization market the American Securitization Forum (ASF) got on with the election of its executive leadership. A sponsorship group of nearly 40 industry repressentatives elected the leaders. Vernon Wright, senior vice chairman and chief corporate finance officer, MBNA America Bank, was elected as chairman. Greg Medcraft, global head of Securitisation at Societe Generale, will serve as deputy chairman; Jason Kravitt, senior partner, Mayer, Brown, Rowe & Maw, as secretary; and Joseph Donovan, managing director, Credit Suisse First Boston, will serve as the group's treasurer.

Besides the leadership above, the Forum will also have Management Com-mittee to oversee the day-to-day management and operations of the ASF. In addition to Messrs. Wright, Medcraft, Kravitt and Donovan, members of the Management Committee include Cameron Cowan of Orrick, Herrington & Sutcliffe; James Murray of Citigroup; Martin Rosenblatt of Deloitte & Touche, LLP; Daniel Stachel of State Street Global Advisors; Brian Clarkson of Moody's Investors Service; and Dianne Wold of GMAC-RFC.

Various sub-committees have also been formed for specific interest areas.